<PAGE>
As filed with the Securities and Exchange Commission on July 16, 1998
Registration No. 333-33733
Post-Effective Amendment No. 1 to
Registration Statement No. 333-33733
===============================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
POST-EFFECTIVE
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
--------------------------
CHEVY CHASE BANK, F.S.B.
(Exact name of the registrants as specified in its charter)
UNITED STATES 52-0897004
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
(301) 986-7000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
-----------------------
Stephen R. Halpin, Jr.
Executive Vice President, Secretary and Chief Financial Officer
Chevy Chase Bank, F.S.B.
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
(301) 986-7000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-----------------------
Copies to:
Joshua E. Raff, Esq. Gary D. Roth, Esq.
Orrick, Herrington & Sutcliffe LLP Shaw Pittman Potts & Trowbridge
666 Fifth Avenue 1675 Broadway
New York, New York 10103-0001 New York, New York 10019
Approximate date of commencement of proposed sale to the public: From time
to time 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
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, 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. [_]
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.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. These securities may not be sold nor may +
+offers to buy be accepted without the delivery of a final prospectus +
+supplement and accompanying prospectus. This prospectus shall not constitute +
+an offer to sell or the solicitation of an offer to buy nor shall there be any+
+sale of these securities in any State in which such offer, solicitation or +
+sale would be unlawful prior to registration or qualification under the +
+securities laws of any such State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
FORM OF PROSPECTUS SUPPLEMENT
(To Prospectus Dated __________ __, 1998)
$
-----------
Chevy Chase Home Loan Trust 199_-_
Mortgage-Backed Pass-Through Certificates, Series 199_-_
$__________ Class [A-I] [Fixed] [Adjustable] Rate Certificates
$__________ Class [A-II] [Fixed] [Adjustable] Rate Certificates
Chevy Chase Bank, F.S.B.
as Seller and Servicer
--------------
The Mortgage-Backed Pass-Through Certificates, Series 199_-_ (the
"Certificates") will consist of the Class [A-I] Certificates and Class [A-II]
Certificates (collectively, the "Class [A] Certificates"), the Class [S]
Certificates and the Class [R] Certificates. Only the Class [A] Certificates
are offered hereby. It is a condition to their issuance that the Class [A]
Certificates be rated "___" by ______________________ ("___") and "___" by
________________________ ("____"). The Certificates will evidence in the
aggregate the entire beneficial ownership interest in a trust fund (the "Trust
Fund"), to be created by Chevy Chase Bank, F.S.B. ("Chevy Chase") as seller (in
such capacity, the "Seller"), consisting primarily of a pool (the "Mortgage
Pool") of conventional, [fully-amortizing], [adjustable-rate] mortgage loans
[(some of which may have conversion options, as more fully described herein)]
(the "Mortgage Loans") secured by [first] liens on one- to four-family,
residential real properties and certain other collateral and other property held
in trust for the benefit of the holders of the Certificates (the
"Certificateholders"). [The Mortgage Pool consists of two groups of Mortgage
Loans ("Loan Group I" and "Loan Group II"; each, a "Loan Group"), designated as
the "Group I Loans" and "Group II Loans". The Class [A-I] Certificates will
correspond to the Group I Loans and the Class [A-II] Certificates will
correspond to the Group II Loans.] The Mortgage Loans were originated by or
acquired by Chevy Chase [or its wholly owned subsidiary B.F. Saul Mortgage
Company]. The Mortgage Loans are more fully described under "Description of the
Mortgage Loans".
(Continued on following page.)
There currently is no secondary market for the Class [A] Certificates. The
Underwriter intends to make a secondary market in the Class [A] Certificates,
but has no obligation to do so. There can be no assurance that any such
secondary market for the Class [A] Certificates will develop, or if it does
develop, that it will continue. The interests of the owners of the Class [A]
Certificates will be represented by book entries on the records of The
Depository Trust Company ("DTC") and participating members thereof.
Prospective investors should consider, among other things, the information
set forth under "Risk Factors" commencing on page ___ herein and in the
Prospectus on page __.
THE CERTIFICATES WILL REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND WILL
NOT EVIDENCE A SAVINGS ACCOUNT OR DEPOSIT WITH, OR OTHER OBLIGATION OF, OR
INTEREST IN, AND ARE NOT GUARANTEED BY, CHEVY CHASE OR ANY AFFILIATE THEREOF.
NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY THE SAVINGS ASSOCIATION INSURANCE FUND, THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The Class [A] Certificates will be offered by ___________________________
(the "Underwriter") from time to time in negotiated transactions, or otherwise,
at prices to be determined at the time of sale. The Class [A] Certificates are
being offered by the Underwriter subject to prior sale, when, as and if
delivered to and accepted by the Underwriter and subject to certain conditions.
It is expected that the delivery of the Class [A] Certificates will be made in
book-entry form through the facilities of DTC on or about _____ __, 199_,
against payment in immediately available funds.
--------------
[Underwriter]
--------------
The date of this Prospectus Supplement is __________ __, 199_.
<PAGE>
(Continued from preceding page)
[On each Distribution Date, payments on the Class [S] Certificates will be
subordinated to the payment of principal and interest, in the manner described
herein, on the Class [A] Certificates.
The yield to investors in the Class [A] Certificates will depend, among
other things, on the rate and timing of principal payments (including
prepayments, defaults and liquidations) on the Mortgage Loans [in the applicable
Loan Group]. See "Certain Yield and Prepayment Considerations."
[An election will be made to treat certain assets in the Trust Fund as a
"real estate mortgage investment conduit" (a "REMIC") for federal income tax
purposes. The Class [A] Certificates and the Class [S] Certificates will
constitute "regular interests" in the REMIC and the Class [R] Certificates will
constitute the sole class of "residual interests" in the REMIC.] See "Certain
Federal Income Tax Consequences" herein and in the Prospectus.
[The Class [A] Certificates will be available to investors only in book-
entry form through the facilities of DTC. Beneficial interests in the Class [A]
Certificates will be shown on, and transfers thereof will be effected only
through, records maintained by DTC and its participants. Physical certificates
for the Class [A] Certificates will be available only under certain limited
circumstances described herein. See "Description of Certificates--Book-Entry
Registration."]
[Full and complete payment of the Insured Amount (as defined herein) on
each Distribution Date and of the unpaid Certificate Principal Balance on the
Final Distribution Date is unconditionally and irrevocably guaranteed pursuant
to a financial guaranty insurance policy (the "Policy") to be issued by
____________________ (the "Certificate Insurer").]
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS AND PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE CERTIFICATES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED A FINAL PROSPECTUS SUPPLEMENT AND
THE FINAL PROSPECTUS. TO THE EXTENT ANY STATEMENTS IN THIS PROSPECTUS
SUPPLEMENT CONFLICT WITH STATEMENTS IN THE PROSPECTUS, THE STATEMENTS IN THIS
PROSPECTUS SUPPLEMENT SHALL CONTROL.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS [A] CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
S-2
<PAGE>
REPORTS TO CERTIFICATEHOLDERS
[Unless and until Definitive Certificates are issued (which will occur
under the limited circumstances described herein), unaudited monthly and
unaudited annual reports concerning the Trust will be sent by the Trustee to
Cede & Co., as the nominee of DTC and registered holder of the Class [A]
Certificates. See "Description of the Certificates--Book-Entry Registration"
herein and "The Agreements--Reports to Holders" and "--Book Entry Securities" in
the accompanying Prospectus. Such reports will not constitute financial
statements prepared in accordance with generally accepted accounting principles.
None of the Seller, the Servicer [or the Certificate Insurer] intends to send
any of its financial reports to Certificateholders.] The Servicer, on behalf of
the Trust, will file with the Securities and Exchange Commission (the
"Commission") periodic reports concerning the Trust to the extent required under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules and regulations thereunder.
This Prospectus Supplement contains a number of defined terms, the meanings
of which are necessary for potential investors to understand in order for them
to evaluate an investment in the Class [A] Certificates. See the "Index of
Principal Definitions" in this Prospectus Supplement for the locations of the
definitions of certain capitalized terms. See the "Glossary of Terms" in the
Prospectus for the definitions of capitalized terms not otherwise defined in
this Prospectus Supplement.
S-3
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY OF TERMS
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus Supplement and in the accompanying Prospectus. Certain capitalized
terms used herein are defined elsewhere in this Prospectus Supplement or in the
Prospectus. Reference is made to the Index of Principal Terms herein and the
Glossary of Terms in the Prospectus for the definitions of certain capitalized
terms.
Issuer................... Chevy Chase Mortgage Loan Trust 199_-_ (the
"Trust"), to be formed pursuant to a Pooling and
Servicing Agreement (the "Agreement"), dated as of
__________ __, 199_, between Chevy Chase, as seller
(in such capacity, the "Seller") and servicer (in
such capacity, the "Servicer"), and the Trustee.
Seller and Servicer...... Chevy Chase Bank, F.S.B. ("Chevy Chase"), a
federally chartered stock savings bank, with its
principal executive offices located at 8401
Connecticut Avenue, Chevy Chase, Maryland 20815, and
a telephone number of (301) 986-7000. See "The
Seller and the Servicer" herein and "The Seller" in
the Prospectus.
Certificate Insurer...... ______________________. See "The Certificate
Insurer."
Trustee.................. ______________________________, a [national banking
association]. The Trustee's principal corporate
trust office is located at
______________________________. See "Description of
the Certificates--The Trustee."
Certificates Offered..... $___________ (approximate) Certificate Principal
Balance (as defined herein) of Class [A-I]
Certificates. [The Certificate Principal Balance of
the Class [A-I] Certificates initially will equal
the aggregate Principal Balance (as defined herein)
of the Group I Loans as of the Cut-off Date.] The
Class [A-I] Certificates are "Senior Certificates"
as described in the Prospectus.
$___________ (approximate) Certificate Principal
Balance (as defined herein) of Class [A-II]
Certificates. [The Certificate Principal Balance of
the Class [A-II] Certificates initially will equal
the aggregate Principal Balance (as defined herein)
of the Group II Loans as of the Cut-off Date.] The
Class [A-II] Certificates are "Senior Certificates"
as described in the Prospectus.
Other Classes of
Certificates............. In addition to the Class [A] Certificates, the
Certificates will include the Class [S] Certificates
and the Class [R] Certificates, which are not
offered hereby. [The Class [S] Certificates will
have no principal balance and will be entitled,
subject to the priority of payments and to the
Reserve Fund provisions described herein, to receive
each month interest at a rate equal to one-twelfth
of ____% of the aggregate Principal Balance of the
Mortgage Loans as of the Due Date immediately
preceding the related Due Period.]
S-4
<PAGE>
The Class [S] Certificates are "Subordinated
Certificates" as described in the Prospectus. [The
Class [R] Certificates will have no principal
balance.]
Trust Fund............... The property of the Trust (the "Trust Fund") will
consist of (i) certain residential mortgage loans
(the "Mortgage Loans"), (ii) collections in respect
of the Mortgage Loans received on and after
__________ __, 199_ (the "Cut-off Date"), (iii) the
Policy, (iv) the interest of the Trust in certain
hazard insurance policies maintained by the
borrowers with respect to the Mortgaged Properties,
(v) the proceeds of the foregoing and (vi) any
property that secured a Mortgage Loan and is
acquired by foreclosure or deed in lieu of
foreclosure, and (vii) certain other property as
described more fully herein and in the Prospectus.
The Mortgage Loans will have an aggregate unpaid
principal balance as of the Cut-off Date of
approximately $__________ after giving effect to all
payments of principal thereon received prior to the
Cut-off Date (the "Original Pool Balance"). [The
Reserve Fund will not be an asset of the Trust Fund
but will be maintained for the benefit of the
Certificateholders and the Certificate Insurer.]
See "Description of the Mortgage Loans" herein and
"The Trust Funds" in the Prospectus.
Terms of the Certificates The principal terms of the Certificates will be as
follows:
A. Delivery Date....... On or about __________ ___, 199___.
B. Distribution Date... The [25th] day of each month (or if such [25th] day
is not a Business Day, the next succeeding Business
Day), commencing __________ __, 199_. A "Business
Day" is a day other than a Saturday, Sunday or other
day on which banking institutions in the states of
__________, New York or Maryland (or such other
state in which the Corporate Trust Office of the
Trustee is located) are required or authorized by
law to be closed.
C. Record Date......... The day prior to each Distribution Date if the
Certificates are Book-Entry Certificates, and the
last day of the month preceding the month of the
related Distribution Date if the Certificates are
Definitive Certificates.
D. Available
Distribution Amount. The "Available Distribution Amount" with respect to
the Mortgage Loans [in a Loan Group] for any
Distribution Date will equal [(a) the sum of (i)
scheduled payments of principal and interest (net of
the Servicing Fee and the Trustee Fee) due on the
Mortgage Loans in the applicable Loan Group on the
related Due Date (as defined herein) and received on
or prior to the related Determination Date (as
defined herein), (ii) principal prepayments and
other unscheduled collections of principal received
during the related Prepayment Period (as defined
herein) on the Mortgage Loans in the applicable
S-5
<PAGE>
Loan Group, (iii) any Advances (as defined herein)
made by the Servicer for such Distribution Date with
respect to the Mortgage Loans in the applicable Loan
Group, (iv) amounts transferred from the Reserve
Fund in an amount equal to the interest portion of
any Realized Losses together with any
Collateralization Deficit (as defined herein) which
remain outstanding after the application of amounts
otherwise payable to the Class [S] Certificates and
(v) any Insured Payments (as defined herein) payable
pursuant to the Policy and related to the Mortgage
Loans in the applicable Loan Group, less (b) the
Certificate Insurer Premium Amount (as defined
herein) and amounts representing reimbursements for
previously unreimbursed Insured Payments by the
Certificate Insurer, Nonrecoverable Advances by the
Servicer and certain expenses incurred by the
Servicer. All amounts listed in clauses (a) and (b)
of the preceding sentence shall be as related to the
applicable Loan Group; however, because amounts on
deposit in the Reserve Fund and amounts otherwise
payable to the Class [S] Certificates are available
as credit enhancement for either the Class [A-I]
Certificates or the Class [A-II] Certificates, as
necessary, it is possible that interest from one
Loan Group otherwise payable to the Class [S]
Certificates or deposited in the Reserve Fund will
be applied towards payments of interest and
principal with respect to the class of Class [A]
Certificates that relates to the other Loan Group.]
The "Due Date" for each Mortgage Loan is the [first]
day of each month. The "Due Period" with respect to
any Distribution Date commences on the [second] day
of the month preceding the month in which such
Distribution Date occurs and ends on the Due Date in
the month in which such Distribution Date occurs.
The "Prepayment Period" with respect to any
Distribution Date is the calendar month preceding
the month in which such Distribution Date occurs.
The "Determination Date" with respect to any
Distribution Date is the [15th] day of the month in
which such Distribution Date occurs (or, if such day
is not a Business Day, the preceding Business Day).
E. Interest
Distributions....... Interest on the Certificates will be calculated
and payable on the basis of a 360-day year divided
into twelve 30-day months.
On each Distribution Date, holders of the Class [A-
I] Certificates will be entitled to receive, to the
extent of the [corresponding] Available Distribution
Amount, distributions allocable to one month's
interest in an amount (the "Class [A-I] Interest
Distribution Amount") equal to (i) one-twelfth of
the product of the Certificate Principal Balance of
the Class [A-I] Certificates immediately preceding
such Distribution Date multiplied by a rate (the
"Group I Certificate Rate") equal to [____%] [the
weighted average of the Net Mortgage Rates (as
defined herein) of the Group I
S-6
<PAGE>
Loans, weighted by the aggregate Principal Balance
of the Group I Loans as of the Due Date immediately
preceding the related Due Period,] minus (ii) the
sum of [(a) the related Certificate Insurer Premium
Amount, (b) Prepayment Interest Shortfalls, if any,
relating to Loan Group I and (c) Civil Relief Act
Shortfalls, if any, relating to Loan Group I during
the related Due Period. Neither the Servicer nor
the Certificate Insurer nor any other entity will be
required to pay any compensating interest with
respect to such Prepayment Interest Shortfalls or
Civil Relief Act Shortfalls.]
On each Distribution Date, holders of the Class [A-
II] Certificates will be entitled to receive, to the
extent of the [corresponding] Available Distribution
Amount, distributions allocable to one month's
interest in an amount (the "Class [A-II] Interest
Distribution Amount") equal to [____%] [(i) one-
twelfth of the product of the Certificate Principal
Balance of the Class [A-II] Certificates immediately
preceding such Distribution Date multiplied by a
rate (the "Group II Certificate Rate") equal to the
weighted average of the Net Mortgage Rates (as
defined herein) of the Group II Loans, weighted by
the aggregate Principal Balance of the Group II
Loans as of the Due Date immediately preceding the
related Due Period,] minus (ii) the sum of [(a) the
related Certificate Insurer Premium Amount, (b)
Prepayment Interest Shortfalls, if any, relating to
Loan Group II and (c) Civil Relief Act Shortfalls,
if any, relating to Loan Group II during the related
Due Period. Neither the Servicer nor the
Certificate Insurer nor any other entity will be
required to pay any compensating interest with
respect to such Prepayment Interest Shortfalls or
Civil Relief Act Shortfalls.]
To the extent that any portion of the interest due
on any class of the Class [A] Certificates is not
paid on a Distribution Date, such interest will be
payable on future Distribution Dates to the extent
of available funds, but no additional interest will
be paid on such unpaid interest.
See "Description of the Certificates--Distributions
in Respect of Interest and Principal."
F. Principal
Distributions....... Holders of the Class [A-I] Certificates will be
entitled to receive a distribution of principal on
each Distribution Date, in the amount and priority
set forth herein, to the extent of the portion of
the [related] Available Distribution Amount
remaining after the Class [A-I] Interest
Distribution Amount has been distributed to the
Class [A-I] Certificates.
Holders of the Class [A-II] Certificates will be
entitled to receive a distribution of principal on
each Distribution Date, in the amount and priority
set forth herein, to the extent of the portion of
the [related] Available Distribution Amount
S-7
<PAGE>
remaining after the Class [A-II] Interest
Distribution Amount has been distributed to the
Class [A-II] Certificates.
See "Description of Certificates--Distributions in
Respect of Interest and Principal."
[Certificate Guaranty
Insurance Policy........ The Certificate Insurer will issue the Policy as a
means of providing additional credit enhancement for
each class of the Class [A] Certificates. Under the
Policy, the Certificate Insurer will, subject to the
terms of the Policy, pay to the Trustee, for the
benefit of the holders of each class of the Class
[A] Certificates on each Distribution Date, as
further described herein, an amount equal to [the
sum of (i) any shortfall in the related Available
Distribution Amount to pay the Class [A-I] Interest
Distribution Amount or the Class [A-II] Interest
Distribution Amount, as applicable, and (ii) the
related Collateralization Deficit]. The Policy does
not guarantee the Class [A] Certificates any
specified rate of prepayments [or the payment of the
amount of any Realized Loss with respect to a
Mortgage Loan on the Distribution Date which
immediately follows such Realized Loss unless and
only to the extent such loss results in a
Collateralization Deficit and there is a shortfall
in the Available Distribution Amount to pay such
Collateralization Deficit. A "Collateralization
Deficit" with respect to a Distribution Date and a
Loan Group is the amount, if any, by which (x) the
Certificate Principal Balance of the related class
of Class [A] Certificates, after giving effect to
all distributions to be made on such Distribution
Date, exceeds (y) the aggregate Principal Balance of
the Mortgage Loans in such Loan Group as of the
close of business on the related Due Date.] A
payment by the Certificate Insurer under the Policy
is referred to herein as an "Insured Payment". See
"Description of the Certificates--Certificate
Guaranty Insurance Policy" and "The Certificate
Insurer."]
The Mortgage Loans....... The Mortgage Loans are conventional, [fully-
amortizing], [adjustable-rate] Mortgage Loans
secured by [first] liens on one-to four-family
residential real properties.
[Except as otherwise indicated, all percentages of
the Group I Loans, Group II Loans or Mortgage Loans
described herein are approximate percentages (except
as otherwise indicated) of the aggregate Principal
Balance of the Group I Loans, Group II Loans or
Mortgage Loans, as applicable, as of the Cut-off
Date.]
[The Group I Loans consist of _____ [adjustable-
rate] Mortgage Loans with an aggregate Principal
Balance as of the Cut-off Date of approximately
$___________. The Group I Loans have individual
Principal Balances as of the Cut-off Date of at
least $______ but not more than $_______, with an
average Principal Balance as of the Cut-
S-8
<PAGE>
off Date of approximately $_______, original terms
to stated maturity of not more than [30] years
(except for __ Group I Loans with original terms to
stated maturity of not more than [40] years), and a
weighted average remaining term to stated maturity
of approximately ___ months as of the Cut-off Date.
As of the Cut-off Date, the Group I Loans bore
interest at Mortgage Rates of at least ____% per
annum but no more than _____% per annum, with a
weighted average Mortgage Rate of approximately
____% per annum. The original Loan-to-Value Ratio
of each of the Group I Loans was not more than
____%, with a weighted average original Loan-to-
Value Ratio of approximately ____%. "Loan-to-Value
Ratio," as used in this Prospectus Supplement, is
calculated as the original Mortgage Loan amount,
divided by the lesser of (i) the appraised value of
the related Mortgaged Property at origination and
(ii) if the Mortgage Loan is a purchase money loan,
the sales price of the related Mortgaged Property.
The Group I Loans will have different Adjustment
Dates, Note Margins and limitations on the Mortgage
Rate adjustments, as described herein.]
[The Group II Loans consist of _____ [adjustable-
rate] Mortgage Loans with an aggregate Principal
Balance as of the Cut-off Date of approximately
$___________. The Group II Loans have individual
Principal Balances as of the Cut-off Date of at
least $______ but not more than $_________, with an
average Principal Balance as of the Cut-off Date of
approximately $_______, and original terms to stated
maturity of not more than [30] years (except for __
Group II Loans with original terms to stated
maturity of not more than [40] years), and a
weighted average remaining term to stated maturity
of approximately ___ months as of the Cut-off Date.
As of the Cut-off Date, the Group II Loans bore
interest at Mortgage Rates of at least ____% per
annum but no more than _____% per annum, with a
weighted average Mortgage Rate of approximately
____% per annum. The original Loan-to-Value Ratio
of each of the Group II Loans was not more than
____%, with a weighted average original Loan-to-
Value Ratio of approximately ____%. The Group II
Loans will have different Adjustment Dates, Note
Margins and limitations on the Mortgage Rate
adjustments, as described herein.]
[The Mortgage Rate on ___% of the Group I Loans and
_____% of the Group II Loans will adjust annually on
the Adjustment Date specified in the related
Mortgage Note, commencing in some cases after an
initial period of years following origination during
which the interest rate accruing thereon is fixed,
to a rate equal to the sum of the weekly average
yield on U.S. Treasury securities adjusted to a
constant maturity of one year (the "One-Year
Index"), as further described herein, and the fixed
percentage set forth in the related Mortgage Note
(the "Note Margin"), subject to the limitations
described herein. The Mortgage Rate on
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<PAGE>
____% of the Group II Loans will adjust every three
years on the Adjustment Date specified in the
related Mortgage Note, commencing after an initial
period of three years following origination during
which the interest rate accruing thereon is fixed,
to a rate equal to the sum of the weekly average
yield on U.S. Treasury securities adjusted to a
constant maturity of three years (the "Three-Year
Index"), as further described herein, and the Note
Margin, subject to the limitations described herein.
The Mortgage Rate on ____% of the Group II Loans
will adjust every five years on the Adjustment Date
specified in the related Mortgage Note, commencing
after an initial period of five years following
origination during which the interest rate accruing
thereon is fixed, to a rate equal to the sum of the
weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of five years (the
"Five-Year Index"), as further described herein, and
the Note Margin, subject to the limitations
described herein. Each of the One-Year Index,
Three-Year Index and Five-Year Index is referred to
as an "Index."]
[The Mortgage Rate on _____% of the Group I Loans
(the "Three/One Group I Loans") will be fixed for a
period of three years after the origination thereof,
and thereafter will adjust annually in accordance
with the One-Year Index. The Mortgage Rate on the
remaining ____% of the Group I Loans (the "One/One
Group I Loans") will adjust annually in accordance
with the One-Year Index, but at origination such
Mortgage Loans bore an initial annual interest rate
which was lower than the applicable rate based on
the One-Year Index and Note Margin; because of
Periodic Rate Caps (as defined herein), some of
these Mortgage Loans continue to bear interest at
rates which are lower than the applicable rate based
on the One-Year Index and Note Margin.]
[The Mortgage Rate on _____% of the Group II Loans
(the "Five/One Group II Loans") will be fixed for a
period of five years after the origination thereof,
and thereafter will adjust annually in accordance
with the One-Year Index. The Mortgage Rate on
_____% of the Group II Loans (the "Seven/One Group
II Loans") will be fixed for a period of seven years
after the origination thereof, and thereafter will
adjust annually in accordance with the One-Year
Index. The Mortgage Rate on ____% of the Group II
Loans (the "Three/Three Group II Loans") will be
fixed for a period of three years after the
origination thereof, and thereafter will adjust
every three years in accordance with the Three-Year
Index. The Mortgage Rate on ____% of the Group II
Loans (the "Five/Five Group II Loans") will be fixed
for a period of five years after the origination
thereof, and thereafter will adjust every five years
in accordance with the Five-Year Index.]
[Because the Mortgage Rate effective on any
Adjustment Date can not exceed the maximum rate set
forth in the
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related Mortgage Note and the amount of any increase
or decrease on any Adjustment Date can not exceed
the Periodic Rate Cap set forth in the related
Mortgage Note, the Mortgage Rate on any Adjustment
Date may not equal the applicable rate based on the
related Index and Note Margin. The monthly payment
on each Mortgage Loan will be adjusted on the Due
Date in the month following the month in which any
Adjustment Date occurs to the amount necessary to
pay interest at the then applicable Mortgage Rate
and to fully amortize the outstanding Principal
Balance of the Mortgage Loan over its then remaining
term to stated maturity.]
None of the Mortgage Loans will be guaranteed by any
governmental agency or instrumentality, Chevy Chase
or any affiliate thereof, or any other person. For
a further description of the Mortgage Loans, see
"Description of the Mortgage Loans."
[Conversion of Mortgage
Loans................... Approximately _____% of the Group I Loans and
approximately ____% of the Group II Loans provided
at origination that the adjustable interest rate
thereon may be converted to a fixed interest rate at
the option of the related Borrowers, provided that
certain conditions have been satisfied. The Seller
will have the right to purchase any Mortgage Loan
that has converted if the Seller so elects, but none
of the Servicer, the Seller, the Trustee or any
other party will be obligated to purchase any
converting Mortgage Loan. Accordingly, if the
Mortgage Rate on any Mortgage Loan converts to a
fixed interest rate and the Seller does not elect to
purchase such Mortgage Loan, the related Loan Group
will then include both fixed-rate and adjustable-
rate Mortgage Loans. See "Certain Yield and
Prepayment Considerations."]
[Credit Enhancement...... The credit enhancement provided for the benefit of
the holders of each class of the Class [A]
Certificates primarily consists of the subordination
provided by the Class [S] Certificates, the Reserve
Fund and the Policy, in each case in the manner and
to the extent described herein.
Subordination and the Reserve Fund: On each
Distribution Date, payments on the Class [S]
Certificates will be subordinate to the payment of
principal and interest, in the amounts described
herein, on the Class [A] Certificates. In addition,
certain payments otherwise distributable to the
Class [S] Certificates will be deposited in a
reserve fund (the "Reserve Fund") to be held by the
Trustee for the benefit of the Certificate Insurer
and the Certificateholders. The Reserve Fund
initially will have a zero balance, and will be
funded from such payments on the Class [S]
Certificates to the extent of the Required Reserve
(as defined herein). Once the amounts on deposit in
the Reserve Fund equal the Required Reserve, the
retention of amounts otherwise
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distributable to the Class [S] Certificates will
cease, unless necessary to maintain the Required
Reserve.
Pursuant to the Pooling and Servicing Agreement, the
Required Reserve may, subject to certain triggers
and a minimum amount, decrease from time to time,
and may, under certain circumstances, increase. In
addition, certain triggers or conditions may cause
the Required Reserve to be increased. Funds on
deposit in the Reserve Fund may be withdrawn to make
payments of interest and principal on the Class [A]
Certificates. Amounts on deposit in the Reserve
Fund will be invested in certain eligible
investments, as set forth in the Pooling and
Servicing Agreement. See "Description of the
Certificates--Reserve Fund" herein and "Credit
Support--Reserve Fund" in the Prospectus.
The Certificate Guaranty Insurance Policy: Each
class of the Class [A] Certificates will be entitled
to the benefit of the Policy to be issued by the
Certificate Insurer, which, subject to its terms,
will protect the holders of each class of the Class
[A] Certificates against (i) any shortfall in the
related Available Distribution Amount to pay the
Class [A-I] Interest Distribution Amount or the
Class [A-II] Interest Distribution Amount, and (ii)
any related Collateralization Deficit. See
"Description of the Certificates--Certificate
Guaranty Insurance Policy."]
Yield and Maturity
Considerations.......... The yield to maturity on each class of the Class [A]
Certificates will be sensitive to the rate and
timing of principal payments (including prepayments,
defaults and liquidations) on the Mortgage Loans [in
the applicable Loan Group], and may fluctuate
significantly from time to time. Because the
Mortgage Rates on the Mortgage Notes will be based
on the related Index (which may not rise and fall
consistently with prevailing mortgage rates) plus
the related Note Margin (which may be different from
the prevailing margins on other mortgage loans), and
may be limited by the Maximum Mortgage Rate, Minimum
Mortgage Rate and Periodic Rate Caps, the Mortgage
Rates on the Mortgage Loans at any time may not
equal the prevailing rates for other adjustable rate
mortgage loans, and the rate of prepayment may be
lower or higher than would otherwise be anticipated.
[In addition, to the extent that the Mortgage Rate
on a Mortgage Loan is converted by the related
Borrower to a fixed rate and the Seller does not
elect to purchase such Mortgage Loan, the yield to
investors may be adversely affected to the extent
such Mortgage Rate reduces the interest rate on the
applicable Class [A] Certificates from the level
that would otherwise be in effect.] In addition, to
the extent that Prepayment Interest Shortfalls or
Civil Relief Act Shortfalls occur, such shortfalls
will adversely affect the yield to investors in the
applicable Class [A] Certificates.
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<PAGE>
In general, if a Class [A] Certificate is purchased
at a premium and principal distributions thereon
occur at a rate faster than anticipated at the time
of purchase, the investor's actual yield to maturity
will be lower than that assumed at the time of
purchase. Conversely, if a Class [A] Certificate is
purchased at a discount and principal distributions
thereon occur at a rate slower than that assumed at
the time of purchase, the investor's actual yield to
maturity will be lower than that assumed at the time
of purchase. See "Certain Yield and Prepayment
Considerations" herein and "Yield Considerations"
and "Maturity and Prepayment Considerations" in the
Prospectus.
The yield on each class of the Class [A]
Certificates will be less than the yield that
otherwise would be produced by the applicable
Certificate Rate [minus the applicable Certificate
Insurer Premium Amount] and the applicable purchase
price because distributions of interest in respect
of any month will be made on the [25th] day of the
following month or, if such day is not a Business
Day, then the next succeeding Business Day. See
"Yield Considerations" in the Prospectus.
Servicing Fee............ The Servicer will be entitled to receive each month
a servicing fee (the "Servicing Fee") equal to [(i)]
one-twelfth of _____% per annum (the "Servicing Fee
Rate") [plus (ii) in the case of Lender-Paid MI
Loans (as defined herein), one-twelfth of the
additional interest rate payable thereon by the
related Borrower, which additional rate ranges from
____% to ____%,]] on the Principal Balance of each
Mortgage Loan as compensation for servicing the
Mortgage Loans.
Trustee Fee.............. The Trustee will be entitled to receive each month a
fee (the "Trustee Fee") equal to one-twelfth of
_____% per annum (the "Trustee Fee Rate") on the
Principal Balance of each Mortgage Loan as
compensation for acting as trustee of the Trust Fund
under the Pooling and Servicing Agreement.
Advances................. The Servicer will be obligated to advance delinquent
installments of principal and interest on each
Mortgage Loan (net of the related Servicing Fee) at
any time prior to the commencement of foreclosure
proceedings with respect to such Mortgage Loan, but
only to the extent the Servicer believes that the
amount advanced will be recoverable from subsequent
payments or collections (including insurance
proceeds and liquidation proceeds net of liquidation
expenses) in respect of the related Mortgage Loan.
See "Servicing--Advances."
Prepayment Interest
Shortfalls............... In the event of a prepayment in full of a Mortgage
Loan on any day other than the last day of a
Prepayment Period, the related Borrower will be
required to pay interest on the amount prepaid only
to the date of such prepayment and not thereafter.
In the event of a prepayment in part of a
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Mortgage Loan, any partial prepayment will be
applied to the Principal Balance of such Mortgage
Loan as of the first day of the month of receipt,
will be passed through to Certificateholders in the
following month, and will reduce the aggregate
amount of interest distributable on the Certificates
in such following month in an amount equal to 30
days of interest on the amount of such prepayment.
Neither the Servicer[, the Certificate Insurer] nor
any other entity will be required to pay any amounts
in excess of the amount of interest paid by the
Borrower, if any, in connection with such
prepayments. The amount by which one month's
interest exceeds the amount of interest paid by the
Borrower in connection with such prepayment (the
"Prepayment Interest Shortfall") will not be covered
by the Policy and will be allocated to the Class [A]
Certificates as described above under "Terms of the
Certificates--Interest Distributions."
Civil Relief Act
Shortfalls............... The Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Civil Relief Act") limits the
amount of interest that may be charged to a Borrower
who enters military service after the origination of
such Borrower's Mortgage Loan. For each Loan Group,
shortfalls in the collection of interest due to the
application of the Civil Relief Act (the "Civil
Relief Act Shortfall") will not be covered by the
Policy and will be allocated to the related class of
Class [A] Certificates as described above under "--
Interest Distributions". See "Certain Legal Aspects
of the Mortgage Loans and Contracts--Soldiers' and
Sailors' Relief Act" in the Prospectus.
Certificate Registration. Each class of the Class [A] Certificates will be
represented by one or more certificates registered
in the name of Cede & Co., as nominee of DTC. No
beneficial owner will be entitled to receive a Class
[A] Certificate in fully registered, certificated
form (a "Definitive Certificate"), except under the
limited circumstances described herein. See
"Description of the Certificates--Book-Entry
Registration."
Optional Termination..... The Trust Fund may be terminated and the
Certificates retired on any Distribution Date on or
after the date on which the aggregate Principal
Balance of the Mortgage Loans has been reduced to or
below [5]% of the aggregate Principal Balance of the
Mortgage Loans as of the Cut-off Date pursuant to
procedures described herein. See "Description of
the Certificates--Optional Termination."
Representations and
Warranties............... Chevy Chase will have made certain limited
representations and warranties as to the status of
the mortgages securing the Mortgage Loans, the
payment status of the Mortgage Loans and certain
other information described herein. In the event
that any such representation or warranty is breached
in respect of any Mortgage Loan in a manner that
materially and adversely affects the interests of
Certificateholders or the
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<PAGE>
Certificate Insurer and is not thereafter cured,
Chevy Chase will be required to purchase such
Mortgage Loan from the Trust Fund, or, during
certain specified periods after the date of issuance
of the Certificates, at its option and subject to
certain conditions, to substitute a qualifying
mortgage loan or loans in place of the affected
Mortgage Loan. See "Description of Certificates--
Repurchase or Substitution of Mortgage Loans."
Certain Federal Income
Tax Consequences........ [A REMIC election will be made with respect to
certain assets in the Trust Fund for federal income
tax purposes. Upon the issuance of the
Certificates, __________________, counsel to the
Seller, will deliver its opinion generally to the
effect that, assuming compliance with all provisions
of the Pooling and Servicing Agreement, for federal
income tax purposes, certain assets in the Trust
Fund will qualify as a REMIC under Sections 860A
through 860G of the Code.
For federal income tax purposes, (i) the Class [A-
I], Class [A-II] and Class [S] Certificates will be
the "regular interests" in, and generally will be
treated as debt obligations of, the REMIC and (ii)
the Class [R] Certificates will be the sole class of
"residual interests" in the REMIC.]
For further information regarding the federal income
tax consequences of investing in the Class [A]
Certificates, see "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
Legal Investment......... [Upon issuance, the Class [A] Certificates will
constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so long as
they are rated in one of the two highest rating
categories by at least one nationally recognized
statistical rating agency. Accordingly, the Class
[A] Certificates will be legal investments for
certain entities to the extent provided in SMMEA.]
See "Legal Investment" in the Prospectus.
ERISA Considerations..... Any Plan fiduciary or other investor that proposes
to use Plan Assets to effect the purchase and
holding of the Class [A] Certificates should consult
with its legal counsel with respect to the potential
applicability to such investment of the fiduciary
responsibility and prohibited transaction provisions
of ERISA and Section 4975 of the Code. See "ERISA
Considerations" herein and in the Prospectus. [The
United States Department of Labor has issued an
individual prohibited transaction exemption to the
Underwriter, which generally exempts from the
application of certain of the prohibited transaction
provisions of Section 406 of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"),
and the excise taxes and civil penalties imposed on
such prohibited transactions by Section 4975(a)
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<PAGE>
and (b) of the Code and Section 502(i) and (l) of
ERISA, transactions relating to the purchase, sale
and holding of certificates underwritten by the
Underwriter, such as the Class [A] Certificates, and
the servicing and operation of asset pools such as
the Mortgage Pool, provided that certain conditions
are satisfied.] See "ERISA Considerations" herein
and in the Prospectus.
Ratings.................. It is a condition to their issuance that the Class
[A] Certificates be rated "___" by ___ and "___" by
_______. Such ratings are based upon [the claims
paying ability of the Certificate Insurer]. 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
agency. In addition, a security rating does not
address the frequency of prepayments of Mortgage
Loans, or the corresponding effect on yield to
investors. There can be no assurance that the rating
assigned to the Certificates on the Closing Date
will not be reduced, suspended or withdrawn by a
rating agency in the future. See "Risk Factors--
Rating of Certificates; Possibility of Withdrawal or
Downgrading" herein and "Risk Factors--Ratings Are
Not Recommendations" in the Prospectus.
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<PAGE>
RISK FACTORS
Prospective investors should consider, in addition to the factors described
under "Risk Factors" in the accompanying Prospectus, the following additional
risk factors in connection with a purchase of the Class [A] Certificates.
Yield and Prepayment Risks
The weighted average life of each class of the Class [A] Certificates will
be affected by the rate of principal payments (including prepayments) of the
Mortgage Loans [in the related Loan Group]. All of the Mortgage Loans may be
prepaid in whole or in part at any time. Certain of the Mortgage Notes contain
terms requiring payment of a penalty by the Borrower in the event the related
Mortgage Loan is prepaid in full. The prepayment experience on the Mortgage
Loans may be affected by a wide variety of factors, including general economic
conditions, interest rates, the availability of alternative financing and
homeowner mobility. In addition, a substantial portion of the Mortgage Loans
contain due-on-sale provisions; the Servicer generally will enforce such
provisions unless such enforcement is not permitted by applicable law, the
permissibility of enforcement is in doubt, or such enforcement would materially
and adversely affect the interests of Certificateholders or the Certificate
Insurer. See "Certain Legal Aspects of the Mortgage Loans--Enforcement of "Due-
on-Sale" Clauses" in the Prospectus. In addition, prepayments may result from
liquidations due to default, the receipt of Insurance Proceeds, repurchases by
the Seller or purchases by the Servicer as a result of certain breaches of
representations and warranties made by the Seller in the Agreement or certain
changes in the terms of the related Mortgage Loan, [the exercise by the Seller
of its option to repurchase any Convertible Mortgage Loan upon its conversion to
a fixed-rate loan] or the exercise by the Servicer of its option to purchase all
of the outstanding Mortgage Loans in the Mortgage Pool pursuant to the optional
termination provision in the Agreement.
As a result of the interaction of the foregoing factors, it may be
difficult to predict the weighted average life of, and the resulting yield to
maturity on, each class of the Class [A] Certificates. None of the Seller, the
Servicer, the Trustee, the Certificate Insurer or the Underwriter makes any
representation as to the weighted average life of, or yield to maturity on, the
Class [A] Certificates.
Geographic Concentration
As of the Cut-off Date, borrowers with respect to ____%, ____%, ____%,
____%, ____%, ____%, and ____% of the Mortgage Loans (based on the Original Pool
Balance of the Mortgage Loans and billing addresses of the borrowers thereon as
of the Cut-off Date) were located in __________, __________, __________,
__________, __________, __________ and __________, respectively. Adverse
economic conditions in __________, __________, __________, __________,
__________, __________ or __________ may affect the delinquency, loan loss and
foreclosure experience of the Trust with respect to the Mortgage Loans. No
predictions, however, can be made regarding future economic conditions in
__________, __________, __________, __________, __________, __________, or
__________ or any other jurisdictions where the borrowers reside. See
"Description of the Mortgage Loans."
[Book-Entry Registration; Effect on Liquidity
Issuance of the Certificates in book-entry form may reduce the liquidity of
such Certificates in the secondary trading market, because investors may be
unwilling to purchase Certificates for which they cannot obtain physical
securities.
Because transactions in the Certificates can be effected only through DTC,
participating organizations, indirect participants and certain banks, the
ability of a Certificate Owner to pledge a Certificate to persons or entitles
that do not participate in DTC, or otherwise to take actions in respect of such
Certificates, may be limited due to lack of a physical security representing the
Certificates.
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<PAGE>
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Certificates since such
distributions will be forwarded by the Trustee to DTC, and DTC will credit such
distributions to the accounts of its participating organizations which will
thereafter credit them to the accounts of Certificate Owners, either directly or
indirectly through indirect participants. See "Description of the Certificates-
- -Book-Entry Registration."]
Rating of Certificates; Possibility of Withdrawal or Downgrading
The rating of the Certificates will depend primarily on assessment by each
assigning rating agency [of the claims-paying ability of the Certificate
Insurer]. Any reduction in a rating assigned to the claims-paying ability of
the Certificate Insurer below the rating initially given to the Certificates may
result in a reduction in the rating of the Certificates. The rating by a rating
agency of the Certificates is not a recommendation to purchase, hold or sell the
Certificates, inasmuch as such rating does not comment as to the market price or
suitability for a particular investor. There is no assurance that the ratings
will remain in effect for any given period of time or the ratings will not be
lowered or withdrawn by the assigning rating agency. In general, the ratings
address credit risk and do not address the likelihood of prepayments.
Insolvency-Related Matters
Transfer of Mortgage Loans. The Seller intends that the transfer of all of
the Seller's right, title and interest in the Mortgage Loans to the Trust be
treated as a sale by the Seller to the Trust and, accordingly, that such
Mortgage Loans will not be included in the assets of the Seller in the event of
the appointment of a receiver or conservator for the Seller and will not be
available to the creditors of the Seller. In the event of an insolvency of the
Seller, however, it is possible that a receiver or a conservator for, or a
creditor of, the Seller may assert that the transaction between the Seller and
the Trust was a pledge of each such Mortgage Loan in connection with a borrowing
by the Seller, rather than a sale. The Seller will cause the Mortgage Loans to
be assigned to the Trustee for the benefit of the Certificateholders and the
Certificate Insurer. In addition, the Seller will deliver or cause to be
delivered to the Trustee each Mortgage Note endorsed to the order of the
Trustee, each Mortgage with evidence of recording indicated thereon (except for
any Mortgage not returned from the public recording office, in which case the
Seller will deliver a copy of such Mortgage together with a certificate to the
effect that the original of such Mortgage was delivered to such recording
office) and an assignment of the Mortgage in recordable form. Assignments of
the Mortgage Loans by the Seller to the Trustee will be recorded in the
appropriate public office for real property records. If the transfer by the
Seller to the Trust of the Mortgage Loans is deemed to be a grant to the Trust
of a security interest in the Mortgage Loans, the Trust should have an
enforceable first priority perfected security interest in the Mortgage Loans.
If a receiver or conservator were appointed for the Seller, certain
administrative expenses of the receiver or conservator may have priority over
the Trust's (and therefore, the Certificateholders') right, title and interest
in the Mortgage Loans. For so long as the Seller is the Servicer, cash
collections on the Mortgage Loans may be held by the Seller and commingled with
its funds until transferred to the Custodial Account or Certificate Account, and
in an insolvency proceeding or receivership or conservatorship of the Seller, or
in certain circumstances, the lapse of certain time periods, the Trust (and
therefore, the Certificateholders) may not have a perfected interest in such
commingled collections.
Chevy Chase as Servicer. In addition, while Chevy Chase is the Servicer,
cash collections held by Chevy Chase may, subject to certain conditions, be
commingled and used for the benefit of Chevy Chase prior to the date on which
such collections are required to be deposited in the Custodial Account as
described under "Description of the Certificates-Custodial and Certificate
Account." In the event of the conservatorship, receivership or insolvency of
Chevy Chase or, in certain circumstances, the lapse of certain time periods, the
Trustee may not have a perfected interest in such collections and, in such
event, may suffer a loss of all or part of such collections, which may result in
a loss to Certificateholders.
Certain Matters Related to Receivership. To the extent that the Seller's
transfer of the Mortgage Loans to the Trust is deemed to constitute the creation
of a security interest in the Mortgage Loans in favor of the Trust, and to the
extent such security interest was validly perfected before the Seller's
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insolvency and was not taken in contemplation of insolvency of the Seller, or
with the intent to hinder, delay or defraud the Seller or the creditors of the
Seller, the Federal Deposit Insurance Act ("FDIA"), as amended by the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989, as amended
("FIRREA"), provides that such security interest should not be subject to
avoidance by the Federal Deposit Insurance Corporation (the "FDIC"), as receiver
or conservator for the Seller. Positions taken by the FDIC staff prior to the
passage of FIRREA do not suggest that the FDIC, as receiver or conservator for
the Seller, would interfere with the timely transfer to the Trust of payments
collected on the related Mortgage Loans. If, however, the FDIC were to assert a
contrary position, such as requiring the Trustee to establish its right to those
payments by submitting to and completing the administrative claims procedure
under the FDIA, or the conservator or receiver for the Seller were to request a
stay of proceedings with respect to the Seller, as provided under the FDIA,
delays in payments on the Certificates and possible reductions in the amount of
those payments could occur. In addition, the FDIC, if it were appointed as
receiver or conservator for the Seller, also would have the power under the FDIA
to repudiate contracts, including the Seller's obligations under the Agreement
to repurchase certain Mortgage Loans. In addition, in the case of an Event of
Default relating to the receivership, conservatorship or insolvency of the
Servicer, the receiver or conservator may have the power either to terminate the
Servicer and replace it with a successor Servicer or to prevent the termination
of the Servicer and its replacement with a successor Servicer if no Event of
Default exists other than the receivership, conservatorship or insolvency of the
Servicer.
DESCRIPTION OF THE MORTGAGE LOANS
General
The Trust will acquire the Mortgage Loans from Chevy Chase and will cause
the Mortgage Loans to be assigned to ______________________________, as trustee
(the "Trustee"). Chevy Chase, in its capacity as servicer (the "Servicer"),
will service the Mortgage Loans pursuant to a Pooling and Servicing Agreement
dated as of March 1, 1998 (the "Agreement") among Chevy Chase, as Seller and
Servicer, and the Trustee. See "The Trust Funds--The Mortgage Pools" in the
Prospectus.
The Mortgage Pool
The description of the Mortgage Loans set forth in this Prospectus
Supplement is based on the characteristics of the Mortgage Loans as of the Cut-
off Date. Unless the context otherwise requires, all percentages used herein
are based on the aggregate Principal Balance of the [Group I Loans, Group II
Loans or] Mortgage Loans, as applicable, as of the Cut-off Date.
Each Mortgage Loan, at the time of origination, was represented by the
related Borrower to be owner-occupied[, except for approximately ____% of the
Group I Loans, which were represented by the related Borrowers to be investment
properties]. As of the Cut-off Date, none of the Mortgage Loans were more than
30 days delinquent in scheduled payments of principal and interest. No Mortgage
Loan provides for deferred interest or negative amortization. The Mortgage
Loans were originated by or acquired by Chevy Chase [or its wholly owned
subsidiary, B.F. Saul Mortgage Company], in the normal course of its business
and will be purchased by the Trust from Chevy Chase.
[The Group I Loans consist of _____ [adjustable-rate] Mortgage Loans, with
an aggregate Principal Balance as of the Cut-off Date of approximately
$___________ and original terms to stated maturity of not more than [30] years,
except for __ Group I Loans with original terms to stated maturity of not more
than [40] years. The Group I Loans had individual Principal Balances as of the
Cut-off Date of at least $______ but not more than $_______, with an average
Principal Balance as of the Cut-off Date of approximately $_______. The Group I
Loans have a weighted average remaining term to stated maturity of approximately
___ months as of the Cut-off Date. As of the Cut-off Date, the Group I Loans
bore interest at Mortgage Rates of at least ____% per annum but no more than
_____% per annum, with a weighted average Mortgage Rate of approximately ____%
per annum. The original Loan-to-Value Ratio of each of the Group I Loans was
not more than ____%, with a weighted average original Loan-to-
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Value Ratio of approximately _____%.] "Loan-to-Value Ratio", as used in this
Prospectus Supplement, is calculated as the original Mortgage Loan amount,
divided by the lesser of (i) the appraised value of the related Mortgaged
Property at origination and (ii) if the Mortgage Loan is a purchase money loan,
the sales price of the related Mortgaged Property.
[The Group II Loans consist of _____ [adjustable-rate] Mortgage Loans, with
an aggregate Principal Balance as of the Cut-off Date of approximately
$___________ and original terms to stated maturity of not more than [30] years,
except for _ Group II Loans with original terms to stated maturity of not more
than [40] years. The Group II Loans had individual Principal Balances as of the
Cut-off Date of at least $______ but not more than $__________, with an average
Principal Balance as of the Cut-off Date of approximately $_______. The Group
II Loans have a weighted average remaining term to stated maturity of
approximately ___ months as of the Cut-off Date. As of the Cut-off Date, the
Group II Loans bore interest at Mortgage Rates of at least ____% per annum but
no more than _____% per annum, with a weighted average Mortgage Rate of
approximately ____% per annum. The original Loan-to-Value Ratio of each of the
Group II Loans was not more than ____%, with a weighted average original Loan-
to-Value Ratio of approximately ____%.]
[As of the Cut-off Date, approximately ____% of Group I Loans and ____% of
Group II Loans were temporary Buy-Down Loans, under which Chevy Chase pays a
portion of the monthly interest payments for up to the first two years after
origination. For the temporary Buy-Down Loans in Loan Group I, the portion of
the interest rate paid by the related Borrower will not increase by more than
one percentage point for each one-year period, and no Mortgage Rate may exceed
the "bought down" rate by more than two percentage points. For the temporary
Buy-Down Loans in Loan Group II, the portion of the interest rate paid by the
related Borrower will not increase by more than one percentage point for each
one-year period, and no Mortgage Rate may exceed the "bought down" rate by more
than two percentage points.]
[As of the Cut-off Date, approximately ____% of Group I Loans and ____% of
Group II Loans were Lender-Paid MI Loans. A "Lender-Paid MI Loan" is a Mortgage
Loan with an original Loan-to-Value Ratio greater than 80% where the interest
rate payable by the related Borrower is increased by 20 to 65 basis points
relative to the interest rate on the related Mortgage Note for so long as the
Loan-to-Value Ratio exceeds 80%, with the proceeds of such increase used by the
Seller to purchase mortgage insurance on such Mortgage Loan. The Servicing Fee
on a Lender-Paid MI Loan has been increased by the amount of the increase in the
interest rate payable by the related Borrower for so long as the related Loan-
to-Value Ratio exceeds 80%; as a result, the Net Mortgage Rate for a Lender-Paid
MI Loan will be reduced by the amount of such increase during such period.]
[The Mortgage Rate on ___% of the Group I Loans and _____% of the Group II
Loans will adjust annually, commencing in some cases after an initial period of
years following origination during which the interest rate accruing thereon is
fixed, on the Adjustment Date specified in the related Mortgage Note to a rate
equal to the sum (rounded as specified in the related Mortgage Note) of (i) the
weekly average yield on U.S. Treasury securities adjusted to a constant maturity
of one year, as published by the Federal Reserve Board in Statistical Release
H.15 (519) (the "One-Year Index") and (ii) the fixed percentage set forth in the
related Mortgage Note (the "Note Margin"), subject to the limitation that the
Mortgage Rate will not exceed the maximum Mortgage Rate as specified in the
related Mortgage Note and any increase or decrease on any Adjustment Date will
be limited by the amount set forth in the related Mortgage Note (the "Periodic
Rate Cap").
The Mortgage Rate on ____% of the Group II Loans will adjust every three
years, commencing after an initial period of three years following origination
during which the interest rate accruing thereon is fixed on the Adjustment Date
specified in the related Mortgage Note to a rate equal to the sum (rounded as
specified in the related Mortgage Note) of the weekly average yield on U.S.
Treasury securities adjusted to a constant maturity of three years, as published
by the Federal Reserve Board in Statistical Release H.15 (519) (the "Three-Year
Index"), and the Note Margin, subject to the limitation that the Mortgage Rate
will not exceed the maximum Mortgage Rate as specified in the related Mortgage
Note and the Periodic Rate Cap.
S-20
<PAGE>
The Mortgage Rate on ____% of the Group II Loans will adjust every five
years, commencing after an initial period of five years following origination
during which the interest rate accruing thereon is fixed, on the Adjustment Date
specified in the related Mortgage Note to a rate equal to the sum (rounded as
specified in the related Mortgage Note) of the weekly average yield on U.S.
Treasury securities adjusted to a constant maturity of five years, as published
by the Federal Reserve Board in Statistical Release H.15 (519) (the "Five-Year
Index"), and the Note Margin, subject to the limitation that the Mortgage Rate
will not exceed the maximum Mortgage Rate as specified in the related Mortgage
Note and the Periodic Rate Cap.
With respect to ___ Mortgage Loans, representing approximately ____% of the
Group I Loans, the Mortgage Rate will adjust annually in accordance with the
One-Year Index commencing approximately one year after origination (the "One/One
Group I Loans"). With respect to _____ Mortgage Loans, representing
approximately _____% of the Group I Loans, the Mortgage Rate will adjust
annually in accordance with the One-Year Index commencing approximately three
years after origination (the "Three/One Group I Loans").
With respect to ___ Mortgage Loans, representing approximately _____% of
the Group II Loans, the Mortgage Rate will adjust annually in accordance with
the One-Year Index commencing approximately five years after origination (the
"Five/One Group II Loans"). With respect to ___ Mortgage Loans, representing
approximately _____% of the Group II Loans, the Mortgage Rate will adjust
annually in accordance with the One-Year Index commencing approximately seven
years after origination (the "Seven/One Group II Loans"). With respect to __
Mortgage Loans, representing approximately ____% of the Group II Loans, the
Mortgage Rate will adjust every three years in accordance with the Three-Year
Index commencing approximately three years after origination (the "Three/Three
Group II Loans"). With respect to __ Mortgage Loans, representing approximately
____% of the Group II Loans, the Mortgage Rate will adjust every five years in
accordance with the Five-Year Index commencing approximately five years after
origination (the "Five/Five Group II Loans").
The monthly payment on each Mortgage Loan will be adjusted on the Due Date
of the month following the month in which the related Adjustment Date occurs
(subject to the related Periodic Rate Cap, as described in the related Mortgage
Note) to equal the amount necessary to pay interest at the then-applicable
Mortgage Rate and to fully amortize the outstanding Principal Balance of such
Mortgage Loan over its then remaining term to stated maturity. As of the Cut-
off Date, less than ____% of the Group I Loans and less than ____% of the Group
II Loans had reached their first Adjustment Date. Due to application of the
Periodic Rate Cap, the Mortgage Rate on a Mortgage Loan may be less than the sum
of the applicable Index and Note Margin, even following the Adjustment Date for
such Mortgage Loan. The Mortgage Loans will have various Adjustment Dates, Note
Margins and limitations on the Mortgage Rate adjustments, as described below.
The Mortgage Rate on a Mortgage Loan may not exceed the maximum Mortgage
Rate (the "Maximum Mortgage Rate") or be less than the minimum Mortgage Rate
(the "Minimum Mortgage Rate") specified for such Mortgage Loan in the related
Mortgage Note. The Minimum Mortgage Rate for each Mortgage Loan is equal to the
Note Margin. As of the Cut-off Date, the Minimum Mortgage Rates on the Group I
Loans ranged from ____% to ____%, with a weighted average Minimum Mortgage Rate
of ____%, and as of the Cut-off Date, the Maximum Mortgage Rates on the Group I
Loans (other than 2 Group I Loans which have no Maximum Mortgage Rate) ranged
from ____% to _____%, with a weighted average Maximum Mortgage Rate of _____%.
As of the Cut-off Date, the Minimum Mortgage Rates on the Group II Loans ranged
from ___% to ___%, with a weighted average Minimum Mortgage Rate of ____%, and
as of the Cut-off Date, the Maximum Mortgage Rates on the Group II Loans (other
than __ Group II Loans which have no Maximum Mortgage Rate) ranged from ____% to
_____%, with a weighted average Maximum Mortgage Rate of _____%.]
The tables below set forth certain additional statistical characteristics
of the Mortgage Loans as of the Cut-off Date. Percentages are approximate and
are stated by Principal Balance of the Mortgage Loans as of the Cut-off Date,
and have been rounded in order to add to 100%.
S-21
<PAGE>
DISTRIBUTION OF CURRENT MORTGAGE RATES [FOR GROUP I LOANS]
<TABLE>
<CAPTION>
Range of Current Number of Aggregate % of Aggregate
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
- ---------------- -------------- ----------------- -----------------
<C> <S> <C> <C>
4.01% - 4.50% ........
4.51% - 5.00% ........
5.01% - 5.50% ........
5.51% - 6.00% ........
6.01% - 6.50% ........
6.51% - 7.00% ........
7.01% - 7.50% ........
7.51% - 8.00% ........
8.01% - 8.50% ........
8.51% - 9.00% ........
9.01% - 9.50% ........
9.51% - 10.00% ........
11.01% - 12.00% ........
------- ------- ------
Total............. $ 100.00%
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate [on the Group I
Loans] was ____% per annum.
DISTRIBUTION OF MORTGAGE LOAN PRINCIPAL BALANCES [FOR GROUP I LOANS]
<TABLE>
<CAPTION>
Range of Cut-off Date Number of Aggregate % of Aggregate
Principal Balances Mortgage Loans Principal Balance Principal Balance
- ------------------ -------------- ----------------- -----------------
<C> <S> <C> <C>
Up to $50,000
$ 50,000.01 - $100,000.00 ....
$100,000.01 - $150,000.00 ....
$150,000.01 - $200,000.00 ....
$200,000.01 - $250,000.00 ....
$250,000.01 - $300,000.00 ....
$300,000.01 - $350,000.00 ....
$350,000.01 - $400,000.00 ....
$400,000.01 - $450,000.00 ....
$450,000.01 - $500,000.00 ....
$500,000.01 - $550,000.00 ....
$550,000.01 - $600,000.00 ....
$600,000.01 - $650,000.00 ....
$650,000.01 - $700,000.00 ....
$700,000.01 - $750,000.00 ....
Over $750,000.00..............
------- ------- ------
Total................... 100.00%
</TABLE>
As of the Cut-off Date, the average Principal Balance [of the Group I
Loans] was approximately $_______.
S-22
<PAGE>
DISTRIBUTION OF MORTGAGED PROPERTY TYPES [FOR GROUP I LOANS]
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Property Type Mortgage Loans Principal Balance Principal Balance
- ------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Single-Family Detached..
Condominium.............
Townhouse...............
Duplex..................
------- -------- ------
Total.............. 100.00%
</TABLE>
DISTRIBUTION OF MORTGAGE LOAN PURPOSE [FOR GROUP I LOANS]
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Purpose Mortgage Loans Principal Balance Principal Balance
- ------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Refinancing...........
Purchase..............
Cash-Out Refinancing..
-------- --------- -------
Total............ 100.00%
</TABLE>
S-23
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES [FOR GROUP I LOANS]
Number of Aggregate % of Aggregate
State Mortgage Loans Principal Balance Principal Balance
- ----- -------------- ----------------- -----------------
Arizona...............
Colorado..............
Connecticut...........
Delaware..............
District of Columbia..
Florida...............
Georgia...............
Illinois..............
Maine.................
Maryland..............
Massachusetts.........
Michigan..............
Minnesota.............
Missouri..............
New Hampshire.........
New Jersey............
New York..............
North Carolina........
Ohio..................
Oregon................
Pennsylvania..........
Rhode Island..........
South Carolina........
Tennessee.............
Texas.................
Virginia..............
Washington............
Wyoming...............
------- ------- -------
Total.......... 100.00%
[DISTRIBUTION OF LOAN TYPE [FOR GROUP I LOANS]
Number of Aggregate % of Aggregate
Loan Type Mortgage Loans Principal Balance Principal Balance
- --------- -------------- ----------------- -----------------
One/One...............
Three/One.............
-------
Total.......... 100.00%]
S-24
<PAGE>
[DISTRIBUTION OF PERIODIC RATE CAP [FOR GROUP I LOANS]
Number of Aggregate % of Aggregate
Periodic Rate Cap Mortgage Loans Principal Balance Principal Balance
- ----------------- -------------- ----------------- -----------------
0.000%................
1.500%................
2.000%................
3.000%................
------- ------- -------
Total.......... 100.00%]
[DISTRIBUTION OF NOTE MARGINS AND MINIMUM MORTGAGE RATES
[FOR GROUP I LOANS]
Range of Number of Aggregate % of Aggregate
Note Margins Mortgage Loans Principal Balance Principal Balance
- ------------ -------------- ----------------- -----------------
1.51% - 2.00%.........
2.01% - 2.50%.........
2.51% - 3.00%.........
3.01% - 3.50%.........
3.51% - 4.00%.........
Above 5.00% ..........
------- ------- -------
Total.......... 100.00%
As of the Cut-off Date, the weighted average Note Margin and Minimum
Mortgage Rate [on the Group I Loans] was approximately ____% per annum.]
DISTRIBUTION OF REMAINING TERM TO STATED MATURITY [FOR GROUP I LOANS]
Number of Aggregate % of Aggregate
Range of Months Mortgage Loans Principal Balance Principal Balance
- --------------- -------------- ----------------- ------------------
0 - 250..............
251 - 300.............
301 - 350.............
351 - 400.............
Above 400.............
------- ------- -------
Total.......... 100.00%
As of the Cut-off Date, the weighted average remaining term to stated
maturity [for the Group I Loans] was approximately ___ months.
S-25
<PAGE>
[DISTRIBUTION OF MAXIMUM MORTGAGE RATES [FOR GROUP I LOANS]
Range of Number of Aggregate % of Aggregate
Maximum Rates Mortgage Loans Principal Balance Principal Balance
- ------------- -------------- ----------------- -----------------
Uncapped..............
9.01% - 9.50%.........
9.51% - 10.00%........
10.01% - 11.00%.......
11.01% - 12.00%.......
12.01% - 13.00%.......
13.01% - 14.00%.......
14.01% - 15.00%.......
15.01% - 16.00%.......
23.01% - 24.00%.......
------- ------- -------
Total.......... $ 100.00%
As of the Cut-off Date, the weighted average Maximum Mortgage Rate [of the
Group I Loans] was approximately _____% per annum.]
DISTRIBUTION OF ORIGINAL LOAN-TO-VALUE RATIOS [FOR GROUP I LOANS]
Range of Original Number of Aggregate % of Aggregate
Loan-to-Value Ratios Mortgage Loans Principal Balance Principal Balance
- -------------------- -------------- ------------------ -----------------
0.00% - 50.00%.......
50.01% - 55.00%.......
55.01% - 60.00%.......
60.01% - 65.00%.......
65.01% - 70.00%.......
70.01% - 75.00%.......
75.01% - 80.00%.......
80.01% - 85.00%.......
85.01% - 90.00%.......
90.01% - 95.00%.......
95.01% - 100.00%......
------- ------- -------
Total.......... 100.00%
Original Loan-to-Value Ratio is calculated as the original Mortgage Loan
amount, divided by the lesser of (i) the appraised value of the related
Mortgaged Property at origination and (ii) if the Mortgage Loan is a
purchase money loan, the sales price of the related Mortgaged Property.
The weighted average Loan-to-Value Ratio at origination [of the Group I
Loans] was approximately ____%.
S-26
<PAGE>
[DISTRIBUTION OF CURRENT MORTGAGE RATES [FOR GROUP II LOANS]
Range of Current Number of Aggregate % of Aggregate
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
- -------------- -------------- ----------------- -----------------
5.01% - 5.50%.........
5.51% - 6.00%.........
6.01% - 6.50%.........
6.51% - 7.00%.........
7.01% - 7.50%.........
7.51% - 8.00%.........
8.01% - 8.50%.........
8.51% - 9.00%.........
9.01% - 9.50%.........
9.51% - 10.00%........
10.01% - 11.00%.......
------- ------- -------
Total.......... $ 100.00%
As of the Cut-off Date, the weighted average Mortgage Rate [on the Group II
Loans] was ____% per annum.
DISTRIBUTION OF MORTGAGE LOAN PRINCIPAL BALANCES [FOR GROUP II LOANS]
<TABLE>
<CAPTION>
Range of Cut-off Date Number of Aggregate % of Aggregate
Principal Balances Mortgage Loans Principal Balance Principal Balance
- ------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
Up to $50,000.00................
$ 50,000.01 - $100,000.00.......
$100,000.01 - $150,000.00.......
$150,000.01 - $200,000.00.......
$200,000.01 - $250,000.00.......
$250,000.01 - $300,000.00.......
$300,000.01 - $350,000.00.......
$350,000.01 - $400,000.00.......
$400,000.01 - $450,000.00.......
$450,000.01 - $500,000.00.......
$500,000.01 - $550,000.00.......
$550,000.01 - $600,000.00.......
$600,000.01 - $650,000.00.......
$650,000.01 - $700,000.00.......
$700,000.01 - $750,000.00.......
Over $750,000.00................
------- ------- -------
Total.................... $ 100.00%
</TABLE>
As of the Cut-off Date, the average Principal Balance [of the Group II
Loans] was approximately $_______.
S-27
<PAGE>
DISTRIBUTION OF MORTGAGED PROPERTY TYPES [FOR GROUP II LOANS]
Number of Aggregate % of Aggregate
Property Type Mortgage Loans Principal Balance Principal Balance
- ------------- -------------- ----------------- -----------------
Single-Family Detached..
Condominium.............
Townhouse...............
Duplex..................
------- ------- -------
Total............ $ 100.00%
DISTRIBUTION OF MORTGAGE LOAN PURPOSE [FOR GROUP II LOANS]
Number of Aggregate % of Aggregate
Purpose Mortgage Loans Principal Balance Principal Balance
- ------- -------------- ----------------- -----------------
Refinancing...........
Purchase..............
Cash-Out Refinancing..
------- ------- -------
Total............ $ 100.00%
S-28
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES [FOR GROUP II LOANS]
Number of Aggregate % of Aggregate
State Mortgage Loans Principal Balance Principal Balance
- ----- -------------- ----------------- -----------------
Arkansas..............
California............
Connecticut...........
Delaware..............
District of Columbia..
Florida...............
Georgia...............
Illinois..............
Maryland..............
Massachusetts.........
Minnesota.............
New Jersey............
New York..............
North Carolina........
Ohio..................
Oregon................
Pennsylvania..........
Rhode Island..........
South Carolina........
Texas.................
Utah..................
Virginia..............
Washington............
Wyoming...............
------- -------- -------
Total.......... $ 100.00%
[DISTRIBUTION OF LOAN TYPE [FOR GROUP II LOANS]
Number of Aggregate % of Aggregate
Loan Type Mortgage Loans Principal Balance Principal Balance
- --------- -------------- ----------------- -----------------
Five/One..............
Seven/One.............
Three/Three...........
Five/Five.............
------- -------- -------
Total.......... $ 100.00%]
S-29
<PAGE>
[DISTRIBUTION OF PERIODIC RATE CAP [FOR GROUP II LOANS]
Number of Aggregate % of Aggregate
Periodic Rate Cap Mortgage Loans Principal Balance Principal Balance
- ----------------- -------------- ----------------- -----------------
0.000%...............
2.000%...............
3.000%...............
------- -------- -------
Total............ $ 100.00%
[DISTRIBUTION OF NOTE MARGINS AND MINIMUM MORTGAGE RATES
[FOR GROUP II LOANS]
Range of Number of Aggregate % of Aggregate
Note Margins Mortgage Loans Principal Balance Principal Balance
- ------------- --------------- ----------------- -----------------
2.01% - 2.50%.........
2.51% - 3.00%.........
3.01% - 3.50%.........
3.51% - 4.00%.........
------- -------- -------
Total.......... $ 100.00%
As of the Cut-off Date, the weighted average Note Margin and Minimum
Mortgage Rate [on the Group II Loans] was approximately ____% per annum.]
DISTRIBUTION OF REMAINING TERM TO STATED MATURITY
[FOR GROUP II LOANS]
Number of Aggregate % of Aggregate
Range of Months Mortgage Loans Principal Balance Principal Balance
- --------------- -------------- ----------------- -----------------
0 - 250..............
251 - 300.............
301 - 350.............
351 - 400.............
------- -------- -------
Total.......... $ 100.00%
As of the Cut-off Date, the weighted average remaining term to stated
maturity [for the Group II Loans] was approximately ___ months.
S-30
<PAGE>
[DISTRIBUTION OF MAXIMUM MORTGAGE RATES [FOR GROUP II LOANS]
Range of Number of Aggregate % of Aggregate
Maximum Rates Mortgage Loans Principal Balance Principal Balance
- ------------- -------------- ----------------- -----------------
Uncapped..............
9.51% - 10.00%........
11.01% - 12.00%.......
12.01% - 13.00%.......
13.01% - 14.00%.......
14.01% - 15.00%.......
15.01% - 16.00%.......
21.01% - 22.00%.......
Above 24.00%..........
------- -------- -------
Total.......... $ 100.00%
As of the Cut-off Date, the weighted average Maximum Mortgage Rate [of the
Group II Loans] was approximately _____% per annum.]
DISTRIBUTION OF ORIGINAL LOAN-TO-VALUE RATIOS [FOR GROUP II LOANS]
Range of Original Number of Aggregate % of Aggregate
Loan-to-Value Ratios Mortgage Loans Principal Balance Principal Balance
- -------------------- -------------- ----------------- -----------------
0.00 - 50.00%.........
50.01% - 55.00%.......
55.01% - 60.00%.......
60.01% - 65.00%.......
65.01% - 70.00%.......
70.01% - 75.00%.......
75.01% - 80.00%.......
80.01% - 85.00%.......
85.01% - 90.00%.......
90.01% - 95.00%.......
95.01% - 100.00%......
------- -------- -------
Total.......... $ 100.00%
The weighted average Loan-to-Value Ratio at origination [of the Group II
Loans] was approximately ____%.
Original Loan-to-Value Ratio is calculated as the original Mortgage Loan
amount, divided by the lesser of (i) the appraised value of the related
Mortgaged Property at origination and (ii) if the Mortgage Loan is a purchase
money loan, the sales price of the related Mortgaged Property.
S-31
<PAGE>
Approximately __% [of the Group I Loans and none of the Group II Loans]
contain terms requiring the payment of a penalty by the Borrower in the event
such Mortgage Loan is prepaid prior to its maturity.
[The Index
The Mortgage Rate on ___% of the Group I Loans and _____% of the Group II
Loans will adjust annually on the Adjustment Date specified in the related
Mortgage Note, commencing in some cases after an initial period of years
following origination during which the interest rate accruing thereon is fixed,
to a rate equal to the sum of the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity of one year (the "One-Year Index"),
as further described herein, and the fixed percentage set forth in the related
Mortgage Note (the "Note Margin"), subject to the limitations described herein.
The Mortgage Rate on ____% of the Group II Loans will adjust every three years
on the Adjustment Date specified in the related Mortgage Note, commencing after
an initial period of three years following origination during which the interest
rate accruing thereon is fixed, to a rate equal to the sum of the weekly average
yield on U.S. Treasury securities adjusted to a constant maturity of three years
(the "Three-Year Index"), as further described herein, and the Note Margin,
subject to the limitations described herein. The Mortgage Rate on ____% of the
Group II Loans will adjust every five years on the Adjustment Date specified in
the related Mortgage Note, commencing after an initial period of five years
following origination during which the interest rate accruing thereon is fixed,
to a rate equal to the sum of the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity of five years (the "Five-Year
Index"), as further described herein, and the Note Margin, subject to the
limitations described herein. Each of the One-Year Index, Three-Year Index and
Five-Year Index is referred to as an "Index."
The One-Year Index, Three-Year Index and Five-Year Index are based on
weekly average yields on U.S. Treasury securities adjusted to a constant
maturity of one year, three years and five years, respectively, as published by
the Federal Reserve Board in Statistical Release No. H.15 (519) or any similar
publication, or if not so published, as reported by any Federal Reserve Bank or
by any U.S. Government department or agency and made available to the Servicer
as of a date prior to each Adjustment Date for such Mortgage Loan as specified
in the Mortgage Note. Should the applicable Index not be published or become
otherwise unavailable, the Servicer will select a comparable alternative index
reasonably acceptable to the Trustee.
The following table sets forth the monthly averages of the One-Year, Three-
Year and Five-Year Indexes for each of the last five calendar years or portions
thereof, based on information published by the Federal Reserve Board in
Statistical Release No. H.15 (519). Such monthly averages are not necessarily
indicative of the related Index on any given date in the relevant month since
significant week-to-week fluctuations in the related Index may occur in any
month as well as over longer periods. In addition, such monthly averages do not
purport to be a prediction of the value of the related Index on any Adjustment
Date or for the lives of the Mortgage Loans.
S-32
<PAGE>
One-Year Index
Month 1998 1997 1996 1995 1994
- ----- ---- ---- ---- ---- ----
January............... 5.24% 5.61% 5.09% 7.05% 3.54%
February.............. 5.31% 5.53% 4.94% 6.70% 3.87%
March................. - 5.80% 5.34% 6.43% 4.32%
April................. - 5.99% 5.54% 6.27% 4.82%
May................... - 5.87% 5.64% 6.00% 5.31%
June.................. - 5.69% 5.81% 5.64% 5.27%
July.................. - 5.54% 5.85% 5.59% 5.48%
August................ - 5.56% 5.67% 5.75% 5.56%
September............. - 5.52% 5.83% 5.62% 5.76%
October............... - 5.46% 5.55% 5.59% 6.11%
November.............. - 5.46% 5.42% 5.43% 6.54%
December.............. - 5.53% 5.47% 5.31% 7.14%
Three-Year Index
Month 1998 1997 1996 1995 1994
- ----- ---- ---- ---- ---- ----
January............... 5.43% 6.16% 5.20% 7.66% 4.48%
February.............. 5.38% 6.03% 5.14% 7.25% 4.83%
March................. - 6.38% 5.79% 6.89% 5.40%
April................. - 6.61% 6.11% 6.68% 5.99%
May................... - 6.42% 6.27% 6.27% 6.34%
June.................. - 6.24% 6.49% 5.80% 6.27%
July.................. - 6.00% 6.45% 5.89% 6.48%
August................ - 6.06% 6.21% 6.10% 6.50%
September............. - 5.98% 6.41% 5.89% 6.69%
October............... - 5.84% 6.08% 5.77% 7.04%
November.............. - 5.76% 5.82% 5.57% 7.44%
December.............. - 5.74% 5.91% 5.39% 7.71%
Five-Year Index
Month 1998 1997 1996 1995 1994
- ----- ---- ---- ---- ---- ----
January............... 5.42% 6.33% 5.36% 7.76% 5.09%
February.............. 5.49% 6.20% 5.38% 7.37% 5.40%
March................. - 6.54% 5.97% 7.05% 5.94%
April................. - 6.76% 6.30% 6.86% 6.52%
May................... - 6.57% 6.48% 6.41% 6.78%
June.................. - 6.38% 6.69% 5.93% 6.70%
July.................. - 6.12% 6.64% 6.01% 6.91%
August................ - 6.16% 6.39% 6.24% 6.88%
September............. - 6.11% 6.60% 6.00% 7.08%
October............... - 5.93% 6.27% 5.86% 7.40%
November.............. - 5.80% 5.97% 5.69% 7.72%
December.............. - 5.77% 6.07% 5.51% 7.78%
S-33
<PAGE>
The initial Mortgage Rate in effect with respect to a Mortgage Loan
generally will be lower, and may be significantly lower, than the Mortgage Rate
that would have been in effect based on the related Index and Note Margin.
Therefore, unless the related Index declines after origination of a Mortgage
Loan, the related Mortgage Rate generally will increase on the first Adjustment
Date following origination of such Mortgage Loan, subject to the Periodic Rate
Cap. The repayment of the Mortgage Loans will be dependent on the ability of
the Borrowers to make larger monthly payments following adjustments of the
Mortgage Rate. Mortgage Loans that have the same initial Mortgage Rate may not
always bear interest at the same Mortgage Rate because such Mortgage Loans may
have different Adjustment Dates (and the related Mortgage Rates therefore may
reflect different Index values), Note Margins, Maximum Mortgage Rates and
Minimum Mortgage Rates. The Net Mortgage Rate with respect to each Mortgage
Loan as of the Cut-off Date will be set forth in the Mortgage Loan Schedule
attached to the Pooling and Servicing Agreement. The "Net Mortgage Rate" on
each Mortgage Loan will be adjusted on each Adjustment Date to equal the
Mortgage Rate thereon, subject to the Periodic Rate Cap, minus (i) the rate per
annum at which the servicing fee accrues thereon (the "Servicing Fee Rate"),
minus (ii) the rate per annum at which the trustee fee accrues thereon (the
"Trustee Fee Rate"), minus (iii) ___% per annum, [minus (iv) in the case of a
Lender-Paid MI Loan, the additional interest rate payable thereon by the related
Borrower]; provided, however, that the Net Mortgage Rate on such Mortgage Loan
may not exceed the Maximum Mortgage Rate minus the sum of the Servicing Fee
Rate, Trustee Fee Rate, ___% per annum [and, if such Mortgage Loan is a Lender-
Paid MI Loan, the additional interest rate payable by the related Borrower] (the
"Maximum Net Mortgage Rate") or be less than the Minimum Mortgage Rate minus the
sum of the Servicing Rate Fee, the Trustee Fee Rate, ___% per annum [and, if
such Mortgage Loan is a Lender-Paid MI Loan, the additional interest rate
payable by the related Borrower] (the "Minimum Net Mortgage Rate") for such
Mortgage Loan.]
[Conversion of Mortgage Loans
Approximately _____% of the Group I Loans and ____% of the Group II Loans
(the "Convertible Mortgage Loans") provided at origination that the adjustable
interest rate on such Mortgage Loan may be converted to a fixed interest rate at
the option of the related Borrower. Upon the conversion of a Convertible
Mortgage Loan, the related Mortgage Rate will be converted to a fixed interest
rate determined in accordance with the formula set forth in the related Mortgage
Note, which formula is intended to result in a Mortgage Rate which is not less
than the then current market interest rate for similar loans (subject to
applicable usury laws). After any such conversion, monthly payments of
principal and interest on the Mortgage Loan will be adjusted to provide for full
amortization over the remaining term to scheduled maturity. The Seller will
have the option to purchase each Convertible Mortgage Loan upon its conversion,
but neither the Seller nor any other entity will be obligated to do so. Any
Convertible Mortgage Loan that is converted but not purchased by the Seller will
remain in the Mortgage Pool as a fixed-rate Mortgage Loan and will result in the
related Loan Group having both fixed-rate and adjustable-rate Mortgage Loans.
See "Certain Yield and Prepayment Considerations."]
Loan Underwriting
All of the Mortgage Loans were originated or purchased by Chevy Chase [or
its wholly owned subsidiary, B.F. Saul Mortgage Company], in the normal course
of its business. The representations and warranties of Chevy Chase in respect
of the Mortgage Loans, which will be assigned to the Trustee in connection with
the issuance of the Certificates, will be made by Chevy Chase as of the Closing
Date. See "The Agreements--Assignment of Primary Assets--Repurchase and
Substitution of Non-Conforming Primary Assets" in the Prospectus.
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DESCRIPTION OF THE CERTIFICATES
General
The Mortgage-Backed Pass-Through Certificates, Series 199_ (the
"Certificates") will be comprised of the Class [A-I] Certificates and Class [A-
II] Certificates (collectively, the "Class [A] Certificates"), the Class [S]
Certificates and the Class [R] Certificates. Only the Class [A] Certificates
are offered hereby. The Class [R] Certificates are sometimes referred to herein
as the "Residual Certificates".
The Certificates will be issued pursuant to the Agreement. Reference is
made to the accompanying Prospectus for important additional information
regarding the terms and conditions of the Agreement and the Certificates. 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 Agreement.
When particular provisions or terms used in the Agreement are referred to, the
actual provisions (including definitions of terms) are incorporated by
reference.
Each Certificate will represent the right to receive payments of interest
and principal as described herein. Principal and interest will be payable on
the Certificates monthly on the [25th] day of each month or, if such [25th] day
is not a Business Day, the next succeeding Business Day (each a "Distribution
Date"), beginning with the __________ 199_ Distribution Date, in each case
calculated as described herein. "Business Day" means a day other than a
Saturday, Sunday or other day on which banking institutions in the states of
__________, New York or Maryland (or such other state in which the Corporate
Trust Office of the Trustee is located) are required or authorized by law to be
closed.
Each of the Class [A] Certificates will have the original principal balance
shown on the cover of this Prospectus Supplement (the "Initial Certificate
Principal Balance"). Following the Closing Date, the "Certificate Principal
Balance" of each such class will equal the Initial Certificate Principal Balance
thereof, minus the aggregate amount of distributions allocable to principal
previously distributed to Certificateholders of such class. See "Description of
the Certificates" in the Prospectus.
Distributions on the Certificates will be made by the Trustee by check or,
if so instructed by a holder of Certificates representing at least $5,000,000,
by wire transfer, except that with respect to Certificates registered on a
Record Date in the name of Cede & Co., payments will be made by wire transfer in
immediately available funds to the account designated by DTC. Notwithstanding
the foregoing, the final distribution on the Certificates will be made after due
notice by the Trustee of the pendency of such distribution and only upon
presentation and surrender of Certificates at the office or agency maintained
for that purpose by the Trustee in the City of __________, __________.
Distributions will be made on each Distribution Date to the holders of
record as reflected in the certificate register maintained by the Trustee on the
day prior to such Distribution Date if the Certificates are Book-Entry
Certificates, and on the last day of the month preceding the month of the
related Distribution Date, if the Certificates are Definitive Certificates each
such day, a "Record Date"), except that the final distribution in respect of any
Certificate will be made only upon presentation and surrender of such
Certificate at the office or agency appointed by the Trustee for that purpose.
[Book-Entry Registration
Each class of the Class [A] Certificates will be book-entry certificates
(the "Book-Entry Certificates"). Any person acquiring an interest in any Class
[A] Certificate (each such person, a
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"Beneficial Owner") will hold its Class [A] Certificate through DTC, if it is a
participant in such system, or indirectly through organizations that are
participants in such system. The Book-Entry Certificates will be issued in one
or more certificates the aggregate Certificate Principal Balance of which will
equal the aggregate Certificate Principal Balance each class of the Class [A]
Certificates and initially will be registered in the name of Cede & Co.
("Cede"), the nominee of DTC. Except as described below, no person acquiring a
Book-Entry Certificate will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate"). Unless and until
Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of each class of the Class [A] Certificates will be Cede &
Co., as nominee of DTC. Beneficial Owners will be permitted to exercise their
rights only indirectly through DTC participants and DTC.
A Beneficial Owner's ownership of a Book-Entry Certificate will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC or, if such Financial Intermediary is not a DTC participant, on
the records of the firm that acts as agent for the Financial Intermediary and
whose ownership of such Book-Entry Certificate will in turn be recorded on the
records of DTC.
Beneficial Owners will receive all distributions of principal of and
interest on the Class [A] Certificates from the Trustee through DTC and DTC
participants. While the Class [A] Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among DTC participants on whose behalf it acts with
respect to the Class [A] Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Class [A] Certificates. DTC
participants and indirect participants make book-entry transfers and receive and
transmit such distributions on behalf of their respective Beneficial Owners.
Accordingly, although Beneficial Owners will not possess certificates
representing their respective interests in the Class [A] Certificates, the Rules
provide a mechanism by which Beneficial Owners will receive distributions and
will be able to transfer their interests.
Beneficial Owners will not receive or be entitled to receive certificates
representing their respective interests in the Class [A] Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Beneficial Owners who are not DTC participants may
transfer ownership of such Certificates only through DTC participants and
indirect participants by instructing such participants and indirect participants
to transfer Class [A] Certificates, by book-entry transfer, through DTC for the
accounts of the purchasers of such Certificates, which accounts are maintained
with their respective DTC participants or Financial Intermediaries. Under the
Rules and in accordance with DTC's normal procedures, transfers of the interests
in the Class [A] Certificates will be executed through DTC and the accounts of
the related DTC participants at DTC will be debited and credited appropriately.
Similarly, the participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Owners.
Transfers between DTC participants will occur in accordance with the Rules.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the Rules, as
in effect from time to time.
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Distributions on Book-Entry Certificates will be made on each Distribution
Date by the Trustee to DTC. DTC will be responsible for crediting the amount of
such payments to the accounts of the applicable DTC participants in accordance
with DTC's normal procedures. Each DTC participant will be responsible for
disbursing such payments to the Beneficial Owners of the Book-Entry Certificates
that it represents and to each Financial Intermediary for which it acts as
agent. Each such Financial Intermediary will be responsible for disbursing
funds to the Beneficial Owners of the Book-Entry Certificates that it
represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a Beneficial Owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the DTC system,
or otherwise take actions in respect of such Book-Entry Certificates, may be
limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in book-
entry form may reduce the liquidity of such Certificates in the secondary market
because certain potential investors may be unwilling to purchase Certificates
for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede, as
nominee of DTC, and may be made available by Cede to Beneficial Owners upon
request in accordance with the Rules and to the Financial Intermediaries to
whose DTC accounts the Book-Entry Beneficial Owners of such Certificateholders
are credited.]
[Definitive Certificates
The Class [A] Certificates will be issued as Definitive Certificates to
Certificateholders or their nominees, rather than to DTC or its nominee, only if
(i) the Seller advises the Trustee in writing that DTC is no longer willing or
able to discharge properly its responsibilities as depository with respect to
the Book-Entry Certificates and the Trustee and the Seller are unable to locate
a qualified successor, (ii) the Seller, at its option, elects to terminate the
book-entry system through DTC or (iii) after the occurrence of an event of
default under the Agreement, holders of Book-Entry Certificates evidencing not
less than 66% of the aggregate outstanding Certificate Principal Balance advise
the Trustee and DTC through DTC Participants in writing that the continuation of
a book-entry system through DTC (or a successor thereto) is no longer in the
best interests of the holders of such Certificates.
Upon notice of the occurrence of any of the events described in the
preceding paragraph, DTC is required to notify all DTC Participants of the
availability of Definitive Certificates. Upon surrender of the global
certificate for each class of the Class [A] Certificates and receipt from DTC of
instructions for re-registration, the Trustee will issue such Certificates in
the form of Definitive Certificates, and thereafter the Trustee will recognize
the holders of such Definitive Certificates as Certificateholders under the
Agreement.]
Distributions in Respect of Interest and Principal
[On each Distribution Date, payments on the Class [S] Certificates will be
subordinate to the payment of principal and interest, in the amounts described
herein, on the Class [A] Certificates.]
[Distributions on each class of the Class [A] Certificates in respect of
interest and principal on each Distribution Date will be made from the Available
Distribution Amount with respect to the corresponding Loan Group.
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The "Available Distribution Amount" with respect to the Mortgage Loans in a
Loan Group for any Distribution Date will equal (a) the sum of (i) scheduled
payments of principal and interest (net of the Servicing Fee and the Trustee
Fee) due on the Mortgage Loans in the applicable Loan Group on the related Due
Date (as defined herein) and received on or prior to the related Determination
Date, (ii) principal prepayments and other unscheduled collections of principal
received during the related Prepayment Period on the Mortgage Loans in the
applicable Loan Group, (iii) any Advances with respect to the Mortgage Loans in
the applicable Loan Group made by the Servicer for such Distribution Date, (iv)
amounts transferred from the Reserve Fund in an amount equal to the interest
portion of any Realized Losses together with any Collateralization Deficits
which remain outstanding after the application of amounts otherwise payable to
the Class [S] Certificates for such Distribution Date and (v) any Insured
Payments payable pursuant to the Policy and related to the Mortgage Loans in the
applicable Loan Group, less (b) the Certificate Insurer Premium Amount and
amounts representing reimbursements for previously unreimbursed Insured Payments
by the Certificate Insurer, Nonrecoverable Advances by the Servicer and certain
expenses incurred by the Servicer. All amounts listed in clauses (a) and (b) of
the preceding sentence will be as related to the applicable Loan Group; however,
because amounts on deposit in the Reserve Fund and amounts otherwise payable to
the Class [S] Certificates are available as credit enhancement for either the
Class [A-I] Certificates or the Class [A-II] Certificates, as necessary, it is
possible that interest from one Loan Group otherwise payable to the Class [S]
Certificates or deposited in the Reserve Fund will be applied towards payments
of interest and principal with respect to the class of Class [A] Certificates
that relate to the other Loan Group. The Available Distribution Amount, when
used without reference to a particular Loan Group, refers to the sum of the
Available Distribution Amounts for both Loan Groups.]
The "Due Date" for each Mortgage Loan is the [first] day of each month.
The "Due Period" with respect to any Distribution Date commences on the [second]
day of the month preceding the month in which such Distribution Date occurs and
ends on the Due Date in the month in which such Distribution Date occurs. The
"Prepayment Period" with respect to any Distribution Date is the calendar month
preceding the month in which such Distribution Date occurs. The "Determination
Date" with respect to any Distribution Date is the [15th] day of the month in
which such Distribution Date occurs (or, if such day is not a Business Day, the
preceding Business Day).
The "Principal Balance" of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date,
minus all amounts allocated to principal that have been distributed to
Certificateholders with respect to such Mortgage Loan on or before such date of
determination as further reduced to the extent any Realized Loss thereon has
been allocated to one or more classes of Certificates on or before such date of
determination.
The "Certificate Insurer Premium Amount" with respect to any Distribution
Date and Loan Group is the amount payable on such Distribution Date to the
Certificate Insurer as a premium on the Policy with respect to the Mortgage
Loans in such Loan Group.
Interest Distribution Amounts
On each Distribution Date, holders of the Class [A-I] Certificates will be
entitled to receive, to the extent of the Available Distribution Amount,
distribution allocable to one-month's interest in an amount (the "Class [A-I]
Interest Distribution Amount") equal to (i) one-twelfth of the product of the
Certificate Principal Balance of the Class [A-I] Certificates immediately
preceding such Distribution Date multiplied by a rate (the "Group I Certificate
Rate") equal to [____%] [the weighted average of the Net Mortgage Rates of the
Group I Loans, weighted by the aggregate Principal Balance of the Group I Loans
as of the Due Date immediately preceding the related Due Period,] minus (ii) the
sum of [(a) the related
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Certificate Insurer Premium Amount, (b) any related Prepayment Interest
Shortfalls occurring during the related Prepayment Period and (c) any related
Civil Relief Act Shortfalls occurring during the related Due Period].
On each Distribution Date, holders of the Class [A-II] Certificates will be
entitled to receive, to the extent of the Available Distribution Amount,
distribution allocable to one-month's interest in an amount (the "Class [A-II]
Interest Distribution Amount") equal to (i) one-twelfth of the product of the
Certificate Principal Balance of the Class [A-II] Certificates immediately
preceding such Distribution Date multiplied by a rate (the "Group II Certificate
Rate") equal to [____%] [the weighted average of the Net Mortgage Rates of the
Group II Loans, weighted by the aggregate Principal Balance of the Group II
Loans as of the Due Date immediately preceding the related Due Period] minus
(ii) the sum of [(a) the related Certificate Insurer Premium Amount, (b) any
related Prepayment Interest Shortfalls occurring during the related Prepayment
Period and (c) any related Civil Relief Act Shortfalls occurring during the
related Due Period].
[The "Class [S] Interest Distribution Amount" with respect to any
Distribution Date will equal one-twelfth of ____% multiplied by the aggregate
Principal Balance of the Mortgage Loans as of the Due Date immediately preceding
the related Due Period. On any Distribution Date with respect to which there
are Realized Losses, the Class [S] Interest Distribution Amount, to the extent
of such Realized Losses, shall be allocated between the Class [A-I] and Class
[A-II] Certificates in proportion to the principal portion of Realized Losses on
the related Loan Group for the related Distribution Date.]
Interest on the Certificates will be calculated and payable on the basis of
a 360-day year divided into twelve 30-day months.
Principal Distribution Amounts
On each Distribution Date, the holders of the Class [A-I] Certificates will
be entitled to receive the "Class [A-I] Principal Distribution Amount", which is
equal to the sum of (i) the portion of the Available Distribution Amount related
to Loan Group I that is attributable to scheduled payments of principal of the
Mortgage Loans in Loan Group I received by the Trustee, (ii) the portion of the
Available Distribution Amount related to Loan Group I that is attributable to
unscheduled payments of principal of the Mortgage Loans in the Loan Group I
received by the Servicer, [(iii) that portion, if any, of the Class [S] Interest
Distribution Amount for such Distribution Date allocated to the Class [A-I]
Certificates (as provided in the definition of Class [S] Interest Distribution
Amount) in respect of the principal portion of Realized Losses on Group I Loans
in the related Prepayment Period, (iv) draws on the Reserve Fund in respect of
the principal portion of Realized Losses on Group I Loans (to the extent such
Realized Losses exceed the amount paid pursuant to clause (iii)) and (v) any
amounts paid in respect of a Collateralization Deficit with respect to Loan
Group I pursuant to the Policy].
On each Distribution Date, the holders of the Class [A-II] Certificates
will be entitled to receive the "Class [A-II] Principal Distribution Amount",
which is equal to the sum of (i) the portion of the Available Distribution
Amount related to Loan Group II that is attributable to scheduled payments of
principal of the Mortgage Loans in Loan Group II received by the Trustee, (ii)
the portion of the Available Distribution Amount related to Loan Group II that
is attributable to unscheduled payments of principal of the Mortgage Loans in
the Loan Group II received by the Servicer, [(iii) that portion, if any, of the
Class [S] Interest Distribution Amount for such Distribution Date allocated to
the Class [A-II] Certificates (as provided in the definition of Class [S]
Interest Distribution Amount) in respect of the principal portion of Realized
Losses on Group II Loans in the related Prepayment Period, (iv) draws on the
Reserve Fund in respect of the principal portion of Realized Losses on Group II
Loans (to the extent
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such Realized Losses exceed the amount paid pursuant to clause (iii)) and (v)
any amounts paid in respect of a Collateralization Deficit with respect to Loan
Group II pursuant to the Policy].
[Insured Payments relating to payments of principal are not made in respect
of the principal portion of Realized Losses until such time as the principal
portion of Realized Losses for a Distribution Date exceeds (i) the Class [S]
Interest Distribution Amount for such Distribution Date plus (ii) amounts then
on deposit in the Reserve Fund, creating a Collateralization Deficit. A
"Collateralization Deficit" with respect to a Distribution Date and a Loan Group
is the amount, if any, by which (x) the Certificate Principal Balance of the
related class of Class [A] Certificates, after giving effect to all
distributions to be made on such Distribution Date, exceeds (y) the aggregate
Principal Balance of the Mortgage Loans in such Loan Group as of the close of
business on the related Due Date.]
Order of Distributions
On each Distribution Date, amounts in the Certificate Account will be
distributed in the following order of priority:
(a) [to the Certificate Insurer, the Certificate Insurer Premium
Amount (with such amount allocated to each Loan Group pro rata based on the
aggregate Principal Balance of the Mortgage Loans in such Loan Group)];
(b) to the Trustee, the Trustee Fee [(with such fee allocated to each
Loan Group pro rata based on the aggregate Principal Balance of the
Mortgage Loans in such Loan Group)];
(c) to the Servicer, the Servicing Fee [(with such fee allocated to
each Loan Group pro rata based on the aggregate Principal Balance of the
Mortgage Loans in such Loan Group)];
(d) [to the Certificate Insurer, the aggregate amount of Insured
Payments which have not been previously reimbursed to the Certificate
Insurer, together with interest thereon (with such amount allocated to the
related Loan Group)];
(e) concurrently,
(i) to the holders of the Class [A-I] Certificates, to the
extent of the related Available Distribution Amount, the Class
[A-I] Interest Distribution Amount, and any portion of such
amount remaining unpaid from any preceding Distribution Date; and
(ii) to the holders of the Class [A-II] Certificates, to the
extent of the related Available Distribution Amount, the Class
[A-II] Interest Distribution Amount, and any portion of such
amount remaining unpaid from any preceding Distribution Date;
(f) concurrently,
(i) to the holders of the Class [A-I] Certificates, to the
extent of the related Available Distribution Amount remaining,
the Class [A-I] Principal Distribution Amount and any portion of
such amount remaining unpaid from any preceding Distribution
Date, until the Certificate Principal Balance thereof has been
reduced to zero; and
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(ii) to the holders of the Class [A-II] Certificates, to the
extent of the related Available Distribution Amount remaining,
the Class [A-II] Principal Distribution Amount and any portion of
such amount remaining unpaid from any preceding Distribution
Date, until the Certificate Principal Balance thereof has been
reduced to zero;
(g) [to the holders of the Class [S] Certificates, or to the Reserve
Fund to the extent the Required Reserve has not been satisfied, to the
extent of the Available Distribution Amount remaining, the Class [S]
Interest Distribution Amount in the following order of priority:
(i) first, to the Reserve Fund, any Reserve Fund Increase
Amount; and
(ii) second, to the holders of the Class [S] Certificates, the
remaining portion, if any, of the Class [S] Interest Distribution
Amount]; and
(h) [to the holder of the Class [R] Certificates, the balance, if
any, of the Available Distribution Amount].
Within a class of Certificates, distributions of interest or principal will
be made in accordance with the Percentage Interest represented by each
Certificate of such class.
Custodial and Certificate Account
Within two Business Days of receipt by the Servicer, all payments and
collections in respect of the Mortgage Loans will be deposited in an account
(the "Custodial Account") established and maintained by the Servicer with a
depository institution, which may be the Servicer, and in a manner acceptable to
the applicable rating agencies [and the Certificate Insurer]. No later than the
second Business Day prior to each Distribution Date, the Servicer will remit to
an account (the "Certificate Account"), to be maintained by the Trustee, all
funds on deposit in the Custodial Account that are required to be distributed on
such Distribution Date. Such funds, together with the Advances, if any,
required to be deposited in the Certificate Account by the Servicer, will be
available to make distributions of interest on, and in reduction of the
Certificate Principal Balance of, the Certificates on each Distribution Date[,
to make any required payments to the Reserve Fund] and to pay certain other fees
and expenses. See "The Agreements--Payments on Mortgage Loans; Accounts" in the
Prospectus.
[Reserve Fund
The Reserve Fund will be a segregated trust account held by the Trustee for
the benefit of the Certificate Insurer and the Certificateholders. The required
level of the Reserve Fund on a given Distribution Date (the "Required Reserve")
may vary. Withdrawals from the Reserve Fund will be allocated between the Loan
Groups in proportion to Realized Losses on each Loan Group. The initial Required
Reserve and the subsequent determination thereof are as described in the
Agreement. The Certificate Insurer may at its sole discretion modify the
provisions of the Agreement relating to the Reserve Fund or reduce or eliminate
the Required Reserve at any time.
On any Distribution Date, the excess of the Required Reserve as of such
Distribution Date over the amount on deposit in the Reserve Fund as of such
Distribution Date is a "Reserve Fund Increase Amount."
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In the event that the Required Reserve is permitted to decrease or "step
down" on a future Distribution Date, a portion of amounts on deposit in the
Reserve Fund may be withdrawn. As of any Distribution Date, the "Reserve Fund
Decrease Amount" is equal to the excess, if any, of the amount on deposit in the
Reserve Fund (after taking into account any withdrawals to be made therefrom) on
such Distribution Date over the Required Reserve as of such Distribution Date.
The Reserve Fund Decrease Amount, on any Distribution Date on which it is, or
after taking into account all other distributions to be made on such
Distribution Date (including payments from the Reserve Fund in respect of
Realized Losses) would be, greater than zero, will be distributed to the holders
of the Class [S] Certificates on such Distribution Date.]
Allocation of Realized Losses
Realized Losses on the Mortgage Loans [in either Loan Group] will be
allocated [first to the Class [S] Certificates to the extent of the Class [S]
Interest Distribution Amount for the applicable period. In the case of Realized
Losses in excess of the Class [S] Interest Distribution Amount for the
applicable period in either Loan Group, the Trustee will transfer to the
Certificate Account from, and to the extent of, the funds on deposit in the
Reserve Fund an amount sufficient to cover such outstanding Realized Losses.
Subject to the terms thereof, the Policy requires a payment to the holders of
each class of the Class [A] Certificates to the extent that the related Realized
Losses result in a Collateralization Deficit or shortfall in the related Class
[A] Interest Distribution Amount (to the extent such Realized Losses are not
covered by the Class [S] Interest Distribution Amount or amounts on deposit in
the Reserve Fund). Notwithstanding the foregoing, if payments are not made as
required under the Policy, Realized Losses will be allocated to the related
class of Class [A] Certificates.
In order to maximize the likelihood of distribution in full of amounts of
interest and principal to be distributed to holders of the Class [A]
Certificates on each applicable Distribution Date, holders of the Class [A]
Certificates will have a right to receive distributions of the related Available
Distribution Amount that will be prior to the rights of the holders of the Class
[S] Certificates to such Available Distribution Amount. In addition, the
Reserve Fund, together with the availability of the Class [S] Interest
Distribution Amount to cover the interest and principal portion of current
Realized Losses on the Mortgage Loans, will also increase the likelihood of
distribution of full amounts of interest and principal to the holders of Class
[A] Certificates on each Distribution Date.]
"Realized Loss" means (i) with respect to any Liquidated Loan, the excess
of the Principal Balance of each Liquidated Loan immediately prior to
liquidation, together with accrued and unpaid interest thereon, over the
liquidation proceeds, if any, received in connection with such Liquidated Loan,
less liquidation expenses and any unreimbursed Advances made with respect
thereto, (ii) with respect to any Mortgage Loan whose related Mortgaged Property
has been valued (such valuation, a "Deficient Valuation") at less than the then
current Principal Balance of such Mortgage Loan by a court of competent
jurisdiction as a result of a proceeding (a "Bankruptcy Proceeding") under the
Bankruptcy Code, the excess of the Principal Balance of such Mortgage Loan over
the principal amount as reduced in the Deficient Valuation or (iii) with respect
to any Mortgage Loan as to which the amount of the scheduled payment has been
reduced in a Bankruptcy Proceeding (a "Debt Service Reduction"), the present
value of all monthly Debt Service Reductions on such Mortgage Loan, assuming
that the Borrower pays each scheduled payment on the applicable Due Date and
that no principal prepayments are received with respect to such Mortgage Loan,
discounted monthly at the applicable Mortgage Rate.
"Liquidated Loan" means a Mortgage Loan that has been liquidated through
deed in lieu of foreclosure, sale in foreclosure, trustee's sale or other
realization as provided by applicable real property law to which the related
Mortgage is subject and any security agreements, or with respect to which
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payment under related hazard insurance and/or from any public governmental
authority on account of a taking or condemnation of any such property has been
received and as to which, in the best judgment of the Servicer, no further
proceeds will be received.
[Certificate Guaranty Insurance Policy
The following information has been supplied by the Certificate Insurer for
inclusion herein.
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of the Policy, thereby unconditionally and irrevocably
guarantees to any Owner that an amount equal to each full and complete Insured
Payment will be received by the Trustee, or its successor, as trustee for the
Owners, on behalf of the Owners from the Certificate Insurer, for distribution
by the Trustee to each Owner of each Owner's proportionate share of the Insured
Payment. The Certificate Insurer's obligations under the Policy with respect to
a particular Insured Payment shall be discharged to the extent funds equal to
the applicable Insured Payment are received by the Trustee, whether or not such
funds are properly applied by the Trustee. Insured Payments shall be made only
at the time set forth in the Policy, and no accelerated Insured Payments shall
be made regardless of any acceleration of the Class [A] Certificates, unless
such acceleration is at the sole option of the Certificate Insurer. The Policy
does not cover Prepayment Interest Shortfalls or Civil Relief Act Shortfalls.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Trust Fund, the REMIC
or the Trustee for withholding taxes, if any (including interest and penalties
in respect of any such liability).
The Certificate Insurer will pay any amounts payable under the Policy no
later than 12:00 noon, New York City time, on the later of the Distribution Date
on which the related Deficiency Amount is due or the third Business Day
following receipt in New York, New York on a Business Day by
______________________ as the Certificate Insurer's fiscal agent or any
successor fiscal agent appointed by the Certificate Insurer (the "Certificate
Insurer's Fiscal Agent") of a Notice; provided, that if such Notice is received
after 12:00 noon New York City time on such Business Day, it will be deemed to
be received on the following Business Day. If any such Notice received by the
Certificate Insurer's Fiscal Agent is not in proper form or is otherwise
insufficient for the purpose of making a claim under the Policy it shall be
deemed not to have been received by the Certificate Insurer's Fiscal Agent for
purposes of this paragraph, and the Certificate Insurer or the Certificate
Insurer's Fiscal Agent, as the case may be, shall promptly so advise the Trustee
and the Trustee may submit an amended Notice.
Insured Payments due under the Policy, unless otherwise stated therein,
will be disbursed by the Certificate Insurer's Fiscal Agent to the Trustee on
behalf of the Owners by wire transfer of immediately available funds in the
amount of the Insured Payment.
The Certificate Insurer's Fiscal Agent is the agent of the Certificate
Insurer only and the Certificate Insurer's Fiscal Agent shall in no event be
liable to the Owners for any acts of the Certificate Insurer's Fiscal Agent or
any failure of the Certificate Insurer to deposit, or cause to be deposited,
sufficient funds to make payments due under the Policy.
As used in this section and in the Policy, the following terms shall have
the following meanings:
"Agreement" means the Pooling and Servicing Agreement, dated as of _____ ,
199_, among Chevy Chase, as Seller and Servicer, and the Trustee, as trustee for
the Owners, without regard to any
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<PAGE>
amendment or supplement thereto unless such amendment or supplement has been
approved in writing by the Certificate Insurer.
"Business Day" means any day other than a Saturday, a Sunday or a day on
which banking institutions in New York City or in the city in which the
corporate trust office of the Trustee or the Servicer under the Agreement or the
Certificate Insurer is located are authorized or obligated by law or executive
order to close.
"Deficiency Amount" means, with respect to each class of the Class [A]
Certificates for any Distribution Date, (i) any shortfall in the related
Available Distribution Amount to pay the Class [A-I] Interest Distribution
Amount or Class [A-II] Interest Distribution Amount, as applicable, and (ii) the
related Collateralization Deficit.
"Insured Payment" means, as of any Distribution Date, any Deficiency
Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed in
writing by fax substantially in the form of Exhibit A attached to the Policy,
the original of which is subsequently delivered by registered or certified mail
from the Trustee specifying the Insured Payment which shall be due and owing on
the applicable Distribution Date.
"Owner" means each Holder (as defined in the Agreement) of any Class [A]
Certificate who, on the applicable Distribution Date, is entitled under the
terms of the Class [A] Certificates to payment thereunder.
Capitalized terms used in the Policy and not otherwise defined in the
Policy shall have the respective meanings set forth in the Agreement as of the
date of execution of the Policy, without giving effect to any subsequent
amendment to or modification of the Agreement unless such amendment or
modification has been approved in writing by the Certificate Insurer.
Any notice under the Policy or service of process on the Certificate
Insurer's Fiscal Agent may be made at the address listed below for the
Certificate Insurer's Fiscal Agent or such other address as the Certificate
Insurer shall specify to the Trustee in writing.
The notice address of the Certificate Insurer's Fiscal Agent is
____________________________, Attention: ______________________________________,
or such other address as the Certificate Insurer's Fiscal Agent shall specify in
writing to the Trustee.
The Policy is being issued under and pursuant to and shall be construed
under the laws of the State of [New York], without giving effect to the conflict
of laws principles thereof.
[The insurance provided by the Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.]
The Policy is not cancelable for any reason. The premium on the Policy is
not refundable for any reason including payment, or provision being made for
payment, prior to maturity of the Class [A] Certificates.]
S-44
<PAGE>
Optional Termination
On any Distribution Date on or after the date on which the aggregate
Principal Balance of the Mortgage Loans has been reduced to or below [5]% of the
aggregate Principal Balance of the Mortgage Loans as of the Cut-off Date, the
[Servicer] will have the right to purchase, in whole, but not in part, all of
the Mortgage Loans and any property acquired in respect of the Mortgage Loans at
a purchase price equal to the sum of (a) the greater of (i) the aggregate
principal amount of each Mortgage Loan plus, in each case, interest accrued
thereon at the sum of the applicable Net Mortgage Rate and the Trustee Fee Rate
to the last day of the month of purchase, plus any unreimbursed Advances made
with respect to the Mortgage Loans and (ii) the fair market value of the
Mortgage Loans as determined by the Servicer; (b) the appraised value of any
property acquired in respect of the Mortgage Loans; [and (c) all amounts due to
the Certificate Insurer; provided, however, that if such purchase will cause a
draw on the Policy, the consent of the Certificate Insurer shall be necessary
prior to the exercise of such option]. The proceeds of any such purchase will
be treated as a payment of principal and interest on the Mortgage Loans for
purposes of distributions to Certificateholders and any such purchase will
effect an early retirement of the Certificates and payment to the Certificate
Insurer of all amounts due to it. [Any such purchase will be made only in
connection with a "Qualified Liquidation" of the REMIC within the meaning of
Section 860F(a)(4)(A) of the Code.]
The Trustee
______________________________, a [national banking association], will act
as Trustee for the Certificates pursuant to the Pooling and Servicing Agreement.
The Trustee's principal executive offices are located at
________________________________________, Attention: __________________, and its
telephone number is (___) __________.
Voting Rights
Each Certificate will be allocated voting rights for purposes of certain
actions that may be taken pursuant to the Agreement. __% of all voting rights
will be allocated to the Class [A] Certificates in proportion to their
Certificate Principal Balances. [__% of all voting rights will be allocated to
the Class [S] Certificates in proportion to their percentage interests. ___% of
all voting rights will be allocated to the Class [R] Certificates.]
Repurchase or Substitution of Mortgage Loans
On the Closing Date, the Seller will make certain representations and
warranties as to the completeness of the mortgage files and the accuracy in all
material respects of certain information furnished to the Trustee with respect
to each Mortgage Loan, including the Principal Balance of such Mortgage Loan as
of the Cut-off Date and the Mortgage Rate of each such Mortgage Loan. In
addition, the Seller will represent and warrant that, as of the Cut-off Date, no
Mortgage Loan was 30 or more days contractually delinquent. In the event there
is a breach of any representation or warranty made by the Seller in the
Agreement as to a Mortgage Loan that materially and adversely affects the
interest of the Certificateholders [or the Certificate Insurer] in such Mortgage
Loan, the Seller will be required either to (i) repurchase the related Mortgage
Loan from the Trust or (ii) provided such substitution occurs within two years
from the date of delivery of the Certificates, substitute an Eligible Substitute
Loan therefor, in each case in the manner described below.
Any Mortgage Loan required to be repurchased from the Trust by the Seller
pursuant to the Agreement as a result of a defect, omission or breach of a
representation or warranty (each, a "Defective
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<PAGE>
Loan") will be repurchased in exchange for the deposit by the Seller of an
amount equal to such Mortgage Loan's unpaid principal balance as of the end of
the Collection Period immediately preceding the date of repurchase, plus accrued
and unpaid interest thereon at the Mortgage Rate less, for so long as Chevy
Chase is the Servicer, the Servicing Fee Rate through the end of the Collection
Period in which the repurchase occurs (the "Repurchase Deposit Amount"). The
Repurchase Deposit Amount will be deposited into the Custodial Account on the
Business Day preceding the Determination Date following expiration of the
related cure period.
As to any Eligible Substitute Loan, the Seller will deposit into the
Custodial Account the amount, if any, by which the unpaid principal balance of
such Eligible Substitute Loan at the end of the Collection Period in which the
events giving rise to the related substitution occurred is less than the unpaid
principal balance of the related Mortgage Loan being removed from the Trust at
the end of such Collection Period (the "Substitution Adjustment Amount"). The
Seller will substitute any Eligible Substitute Loan and deposit any such
Substitution Adjustment Amount into the Custodial Account on the Business Day
preceding the Determination Date in the month following such Collection Period.
Upon substitution, each Eligible Substitute Loan will be subject to the terms of
the Agreement and the Seller will be deemed to have made, with respect to such
Eligible Substitute Loan, as of the date of substitution, the representations
and warranties made by the Seller with respect to all other Mortgage Loans in
the Trust. Upon receipt by the Trustee of written notification of any such
repurchase or substitution, subject to certain conditions set forth in the
Agreement, the Trustee will execute and deliver an instrument of transfer or
assignment necessary to vest in the Seller legal and beneficial ownership of the
repurchased Mortgage Loan (including any property acquired in respect thereof or
proceeds of any insurance policy with respect thereto). The obligation of the
Seller to repurchase or replace any such Defective Loan will be the sole remedy
against the Seller available to Certificateholders or the Trustee. See "The
Agreements--Assignment of Primary Assets--Assignment of Mortgage Loans" in the
Prospectus.
To the extent that Chevy Chase elects to deliver one or more Eligible
Substitute Mortgage Loans for a Deleted Mortgage Loan, such Eligible Substitute
Mortgage Loan or Loans must, collectively, on the date of substitution: (a) have
an outstanding Principal Balance, after the deduction of payments due in the
month of substitution, not in excess of the Principal Balance of the Deleted
Mortgage Loan; (b) have a Net Mortgage Rate not lower than the Net Mortgage Rate
on the Deleted Mortgage Loan; (c) have a Loan-to-Value Ratio calculated as of
such date no higher than the Loan-to-Value Ratio of the Deleted Mortgage Loan;
(d) have a remaining term to maturity no greater than (and not more than one
year less than) that of the Deleted Mortgage Loan; (e) be of the same or better
credit quality classification as that of the Deleted Mortgage Loan; and (f)
comply with each representation and warranty with respect to the Mortgage Loans.
Upon any such substitution, Chevy Chase will deliver the mortgage file relating
to the Eligible Substitute Mortgage Loan to the Trustee and the Trustee will
release the Deleted Mortgage Loan (or any property acquired in respect thereof)
from the Trust Fund.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
Factors Affecting Prepayments on the Mortgage Loans
The yields to maturity of each class of the Class [A] Certificates and the
aggregate amount of distributions on each class of the Class [A] Certificates
will be related, among other things, to the rate and timing of payments of
principal on the underlying Mortgage Loans [in the related Loan Group]. The
rate of principal payments on the Mortgage Loans will be affected by the
amortization schedules of the Mortgage Loans and by the rate of principal
prepayments thereon. For this purpose, the term "prepayment" includes
prepayments and liquidations due to defaults or other dispositions of the
Mortgage
S-46
<PAGE>
Loans or the Mortgaged Properties, including application of insurance proceeds
or condemnation awards, or the purchase of the Mortgage Loans by the Servicer
under the circumstances described under "Description of the Certificates--
Optional Termination" herein. No assurance can be given as to the rate or
timing of principal payments or prepayments on any of the Mortgage Loans.
All of the Mortgage Loans may be prepaid in whole or in part at any time.
Certain of the Mortgage Notes contain terms requiring payment of a penalty by
the Borrower in the event the Mortgage Loan is prepaid in full. Prepayments,
liquidations and purchases of the Mortgage Loans will result in (a) principal
distributions to Certificateholders that otherwise would be distributed over the
remaining terms of the Mortgage Loans and (b) the termination of ongoing
interest distributions with respect to such Mortgage Loans to the
Certificateholders. See "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
The rate of principal prepayments on mortgage loans is influenced by a
variety of economic, geographic, social and other factors, including the level
of mortgage interest rates and the rate at which borrowers default on their
mortgages. In general, if prevailing interest rates fall significantly below
the Mortgage Rates on the Mortgage Loans, the Mortgage Loans (and the applicable
Class [A] Certificates) are likely to be subject to a higher incidence of
prepayment than if prevailing rates remain at or above the Mortgage Rates on the
Mortgage Loans. Conversely, if prevailing interest rates rise significantly
above the Mortgage Rates on the Mortgage Loans, the Mortgage Loans (and the
applicable Class [A] Certificates) are likely to be subject to a lower incidence
of prepayment than if prevailing rates remain at or below the Mortgage Rates on
the Mortgage Loans. The Depositor makes no representation as to the expected
rate of prepayments on the Mortgage Loans. See "Description of the Mortgage
Loans" herein and "Maturity and Prepayment Considerations" in the Prospectus for
additional information about the effect of the rate of prepayments on the yield
on and maturity of the Class [A] Certificates.
[The "Convertible Mortgage Loans" provide that the Borrowers may, during a
specified period of time, convert the adjustable interest rate of such Mortgage
Loans to a fixed interest rate. The Seller is not aware of any publicly
available statistics that set forth principal prepayment, conversion experience
or conversion forecasts of adjustable-rate mortgage loans over an extended
period of time, and its experience with respect to adjustable-rate mortgages is
insufficient to draw any conclusions with respect to the expected prepayment or
conversion rates on the adjustable-rate Mortgage Loans. As is the case with
conventional, fixed-rate mortgage loans originated in a high interest rate
environment which may be subject to a greater rate of principal prepayments when
interest rates decrease, adjustable-rate mortgage loans may be subject to a
greater rate of principal prepayments due to their refinancing or conversion to
fixed interest rate loans in a low interest rate environment. For example, if
prevailing interest rates fall significantly, adjustable-rate mortgage loans
could be subject to higher prepayment and conversion rates than if prevailing
interest rates remain constant, because the availability of fixed-rate or other
adjustable-rate mortgage loans at competitive interest rates may encourage
borrowers to refinance their adjustable-rate mortgages to "lock in" a lower
fixed interest rate or to take advantage of the availability of such other
adjustable-rate mortgage loans, or, in the case of convertible adjustable-rate
mortgage loans, to exercise their option to convert the adjustable interest
rates to fixed interest rates. The conversion feature also may be exercised in
a rising interest rate environment as borrowers attempt to limit their risk of
higher rates. Such a rising interest rate environment also may result in an
increase in the rate of defaults on the Mortgage Loans. If any Borrower chooses
to convert its Convertible Mortgage Loan to a fixed interest rate, and the
Seller does not elect to purchase such Mortgage Loan, the related Loan Group
will then include fixed-rate Mortgage Loans, which will have the effect of
limiting the extent to which the Class [A-I] Interest Distribution Amount or
Class [A-II] Interest Distribution Amount, as applicable, can increase or
decrease in accordance with changes in the Indexes and, accordingly, may affect
the yield to the Class [A-I] or Class [A-II] Certificateholders, as applicable.]
S-47
<PAGE>
[Temporary Buy-Down Loans provide for escalating or variable payments by
the related borrower. Such mortgage loans are underwritten on the basis of a
judgment that borrowers will have the ability to make monthly payments in later
years as scheduled payments become larger. In some instances, however, a
borrower's income may not be sufficient to permit continued loan payments as
such payments increase. These types of mortgage loans also may be underwritten
primarily upon the basis of Loan-to-Value Ratios or other favorable compensating
factors. Furthermore, temporary Buy-Down Loans in the Mortgage Pool may
experience a rate of principal prepayments different from the principal
prepayment rate for conventional fixed-rate mortgage loans or from other
adjustable-rate mortgage loans having different characteristics.]
[The yield to investors on each class of the Class [A] Certificates will be
sensitive to fluctuations in the Index applicable to each Mortgage Loan in the
related Loan Group and may be adversely affected by the application of the
Maximum Mortgage Rates on the Mortgage Loans. The prepayment of Mortgage Loans
with higher Mortgage Rates and the existence of any Convertible Mortgage Loans
which have been converted into fixed interest rate mortgage loans, may result in
lower Class [A-I] Interest Distribution Amounts or Class [A-II] Interest
Distribution Amounts, as applicable, with respect to subsequent Distribution
Dates. Investors in the Class [A] Certificates also should be aware that
although the Mortgage Rates on the Mortgage Loans will adjust periodically, such
increases and decreases will be limited by the applicable Periodic Rate Caps,
Maximum Mortgage Rates and Minimum Mortgage Rates thereon. In addition, the
initial Mortgage Rates borne by the Mortgage Loans may be lower than the rate
that would result based on the sum of the current applicable Index and the Note
Margin. In addition, the Mortgage Rates on the Mortgage Loans will be based on
the related Index (which may not rise and fall consistently with prevailing
mortgage rates) plus the related Note Margin (which may be different from the
prevailing margins on other mortgage loans). As a result of these factors, the
Mortgage Rates on the Mortgage Loans at any time may not equal the prevailing
rates for other adjustable rate mortgage loans and the rate of prepayment may be
lower or higher than would otherwise be anticipated.]
Investors in the Class [A] Certificates should consider the risk that rapid
rates of prepayments on the Mortgage Loans, and therefore of principal
distributions on the Class [A] Certificates, may coincide with periods of low
prevailing interest rates. During such periods, the effective interest rates on
securities in which an investor in Class [A] Certificates may choose to reinvest
amounts received as principal distributions on such Class [A] Certificates may
be lower than the interest rate borne by such Certificates. Conversely, slow
rates of prepayments on the Mortgage Loans, and therefore of principal
distributions on the Class [A] Certificates, may coincide with periods of high
prevailing interest rates. During such periods, the amount of principal
distributions available to an investor in the Class [A] Certificates for
reinvestment at such high prevailing interest rates may be relatively low.
All of the Mortgage Loans will contain "due-on-sale" clauses. The sale of
Mortgaged Properties encumbered by non-assumable Mortgage Loans will result in
the prepayment of such Mortgage Loans and a corresponding decrease in the
weighted average life of the applicable class of Class [A] Certificates. See
"Maturity and Prepayment Considerations" in the Prospectus.
The assumed final Distribution Date for the Class [A-I] Certificates and
Class [A-II] Certificates is ________, ____, which is the Distribution Date
occurring in the 12th month following the month in which the latest stated
maturity of any Mortgage Loan in the Mortgage Pool.
No event of default, change in the priorities for distribution among the
classes or other provision under the Agreement will arise or become applicable
solely by reason of the failure to retire the entire Certificate Principal
Balance of any Class [A] Certificates on or before its assumed final
Distribution Date.
S-48
<PAGE>
Modeling Assumptions
For purposes of preparing the table below, indicating the percentage of
initial Certificate Principal Balance outstanding and the weighted average life
of the Class [A] Certificates under certain prepayment scenarios, the following
assumptions, among others, (the "Modeling Assumptions") have been made:
[(a) the Mortgage Loans consist of ____ groups with the following
characteristics:
<TABLE>
<CAPTION>
Weighted Weighted Weighted Weighted
Average Average Net Average Average Rate Payment Weighted
Loan Cut-off Date Mortgage Mortgage Gross Remaining Adjustment Adjustment Mortgage
Group Balance Rate Rate Margin Index Term Frequency Frequency Rate
- ------- -------------- ---------- ----------- ---------- ------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total
<CAPTION>
Mortgage Rate Periodic
Adjustment Mortgage
Date Rate Cap
- --------------- ----------
<S> <C>
%
%
%
%
%
%
</TABLE>
S-49
<PAGE>
(b) there are no repurchases of the Mortgage Loans;
(c) the Certificates will be purchased on _____ __, 199_;
(d) distributions on the Certificates will be made on the [25th] day
of each month (or, if such day is not a Business Day, on the following
Business Day), commencing in _____, 199_;
(e) no Mortgage Loan is delinquent and there are no Realized Losses
while the Certificates are outstanding;
(f) there are no Prepayment Interest Shortfalls or shortfalls of
interest with respect to the Mortgage Loans;
(g) throughout the life of the Mortgage Loans, the One-Year Index is
equal to ____%, the Three-Year Index is equal to ____% and the Five-Year
Index is equal to ____%; and
(h) there is no optional termination of the Trust Fund by the
Servicer.]
The Modeling Assumptions have been based on the weighted average
characteristics or aggregate characteristics, as applicable, of the Mortgage
Loans. The actual characteristics of many of the Mortgage Loans may vary
significantly from the Modeling Assumptions.
The prepayment model used in this Prospectus Supplement, the Constant
Prepayment Rate model ("CPR"), assumes that the outstanding principal balance of
a pool of Mortgage Loans prepays at a specified constant annual rate. In
generating monthly cash flows, this rate is converted to an equivalent constant
monthly rate. To assume CPR of __% or any other CPR percentage is to assume
that the stated percentage (in this example __%) 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 that rate or any other rate.
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the tables set forth below,
which are hypothetical in nature and are provided only to give a general sense
of how the principal cash flows might behave under varying prepayment scenarios.
For example, it is very unlikely that the Mortgage Loans will prepay at the same
rate until maturity or that all of the Mortgage Loans will prepay at a constant
rate until maturity or that all of the Mortgage Loans could produce slower or
faster principal distributions than indicated in the tables at the various
assumptions specified, even if the weighted average remaining term to stated
maturity of the Mortgage Loans is assumed. Any difference between such
assumptions and the actual characteristics and performance of the Mortgage
Loans, or actual prepayment experience, will affect the percentage of initial
Certificate Principal Balance outstanding over time and the weighted average
life of the Class [A] Certificates.
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<PAGE>
Percent of Initial Certificate Principal Balance Outstanding of the Class [A-I]
Certificates
at the Indicated Percentages of CPR
------------------------------------------------
Distribution Date % % % % %
- ----------------- ------------------------------------------------
Initial Percentage............... 100.00 100.00 100.00 100.00 100.00
Weighted Average Life (years)**...................
- ---------------
* Indicates a number greater than zero but less than 0.50%.
** The weighted average life of a Certificate is determined by (i) multiplying
the net reduction, if any, of the Certificate Principal Balance by the
number of years from the date of issuance of the Certificate to the related
Distribution Date, (ii) adding the results and (iii) dividing the sum by
the aggregate of the net reductions of Certificate Principal Balance
described in (i) above.
This table has been prepared based on the assumptions described in the
fourth paragraph preceding this table (including the assumptions regarding
the characters and performance of the Mortgage Loans, which differ from the
actual characteristics and performance thereof) and should be read in
conjunction herewith.
S-51
<PAGE>
Percent of Initial Certificate Principal Balance Outstanding of the Class [A-II]
Certificates
at the Indicated Percentages of CPR
------------------------------------------------
Distribution Date % % % % %
- ----------------- ------------------------------------------------
Initial Percentage............... 100.00 100.00 100.00 100.00 100.00
Weighted Average Life (years)**..................
- -------------------
* Indicates a number greater than zero but less than 0.50%.
** The weighted average life of a Certificate is determined by (i) multiplying
the net reduction, if any, of the Certificate Principal Balance by the
number of years from the date of issuance of the Certificate to the related
Distribution Date, (ii) adding the results and (iii) dividing the sum by
the aggregate of the net reductions of Certificate Principal Balance
described in (i) above.
This table has been prepared based on the assumptions described in the
fourth paragraph preceding this table (including the assumptions regarding
the characters and performance of the Mortgage Loans, which differ from the
actual characteristics and performance thereof) and should be read in
conjunction herewith.
S-52
<PAGE>
THE SELLER AND THE SERVICER
Certain Financial Information With Respect to the Seller
Based on [unaudited] results, at ________ __, 199_, Chevy Chase had
consolidated assets of approximately $___ billion, deposits of approximately
$___ billion and stockholders' equity of approximately $_____ million. As a
savings bank chartered under the laws of the United States, the Seller is
subject to certain minimum regulatory capital requirements imposed under FIRREA.
At __________ __, 199_, the Seller's tangible, core, tier 1 risk-based and total
risk-based regulatory capital ratios were ____%, ____%, ____% and _____%,
respectively. As of such date, the Seller's capital ratios exceeded the
requirements under FIRREA as well as the standards established for "well-
capitalized" institutions under the prompt corrective action regulations
established pursuant to the Federal Deposit Insurance Corporation Improvement
Act of 1991. The OTS has the discretion to treat a "well-capitalized"
institution as an "adequately capitalized" institution for purposes of the
prompt corrective action regulations if, after notice and an opportunity for a
hearing, the OTS determines that the institution (i) is being operated in an
unsafe or unsound condition or (ii) has received and has not corrected a less
than satisfactory examination rating for asset quality, management, earnings or
liquidity.
Delinquency and Foreclosure Experience
As of ________ __, 199_, the Servicer provided servicing for approximately
$_____ million aggregate principal amount of residential mortgage loans. The
Mortgage Loans are being serviced in Laurel, Maryland.
The following table sets forth the delinquency and foreclosure experience
by aggregate principal balance of the residential mortgage loans funded and
serviced by Chevy Chase, as a percentage of all such mortgage loans, as of the
dates indicated.
Chevy Chase Residential Loan Portfolio
Delinquency and Foreclosure Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
As of As of
----------------------------------------- -----------------
199 199 199 199 199 199
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio /(1)/
30-59 Days Past Due /(2)/
60-89 Days Past Due /(2)/
90 or more Days Past Due /(2)/
Total Delinquencies as a % % % % % %
Percentage of Total Portfolio
Foreclosures Pending /(3)/
</TABLE>
-----------------------------------------
(1) Excluding Real Estate Owned.
(2) Contractually past due.
(3) Are included in the appropriate delinquency bucket.
There can be no assurance that delinquency and foreclosure experience on
the Mortgage Loans will be similar to that set forth above. The information
should not be considered to reflect the credit quality of the Mortgage Loans
included in the Mortgage Pool, or as a basis for assessing the likelihood,
amount or severity of losses on the Mortgage Loans. The statistical data in the
table is based on all of the residential mortgage loans in Chevy Chase's
servicing portfolio. The Mortgage Loans may have
S-53
<PAGE>
characteristics which distinguish them from the majority of the loans in Chevy
Chase's servicing portfolio.
SERVICING
Servicing Compensation and Payment of Expenses
The Servicer will be entitled to receive each month a Servicing Fee equal
to one-twelfth of _____% per annum on the Principal Balance of each Mortgage
Loan. The Servicing Fee relating to each Mortgage Loan will be retained by the
Servicer from payments and collections (including insurance proceeds and
liquidation proceeds) in respect of such Mortgage Loan. The Servicer will also
be entitled to retain as additional servicing compensation all investment income
earned on amounts on deposit in the Custodial Account and the Certificate
Account, all default charges and all prepayment, late payment and assumption
fees and certain other fees payable by a Borrower pursuant to the related
Mortgage Note.
The Servicer will pay all expenses incurred in connection with its
responsibilities under the Pooling and Servicing Agreement (subject to
reimbursement as described herein and in the Prospectus), including all fees and
expenses payable to any Servicer and the various expenses discussed in the
Prospectus. See "The Agreements--Servicing Compensation and Payment of
Expenses" in the Prospectus.
Advances
On each Distribution Date, the Servicer will be obligated to advance (each,
an "Advance") any scheduled payments of principal and interest (net of the
related Servicing Fee) that are delinquent as of the close of business on the
preceding Determination Date at any time prior to the commencement of
foreclosure proceedings with respect to such Mortgage Loan, but only if the
Servicer determines that the amount so advanced will be recoverable from
subsequent payments or collections (including insurance proceeds and liquidation
proceeds net of liquidation expenses) in respect of the affected Mortgage Loan.
Advances will be reimbursable from recoveries on the affected Mortgage Loan and,
to the extent the Servicer determines that Advances will not be ultimately
recoverable from related recoveries, from any funds on deposit in the Custodial
Account and the Certificate Account. The Servicer will also be obligated to
advance certain taxes and insurance premiums not paid by Borrowers on a timely
basis, but only to the extent deemed recoverable from the related Mortgage
Loans. The Servicer's right of reimbursement out of such recoveries will be
prior to the rights of the Class [A] Certificateholders to receive any amounts
recovered with respect to such Mortgage Loans. See "Description of the
Certificates--Advances" in the Prospectus.
[THE CERTIFICATE INSURER
The following information has been supplied by __________________________
(the "Certificate Insurer") for inclusion in this Prospectus Supplement.
The Certificate Insurer is domiciled in the State of __________ and
licensed to do business in and subject to regulation under the laws of [all 50
states, the District of Columbia, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United
States and the Territory of Guam]. ____________________ has laws prescribing
minimum capital requirements, limiting classes and concentrations of investments
and requiring the approval of policy rates and forms. State laws also regulate
the amount of both the aggregate and individual risks that may be
S-54
<PAGE>
insured, the payment of dividends by the Certificate Insurer, changes in control
and transactions among affiliates. Additionally, the Certificate Insurer is
required to maintain contingency reserves on its liabilities in certain amounts
and for certain periods of time.
The consolidated financial statements of the Certificate Insurer and its
subsidiaries as of December 31, 199_ and December 31, 199_ and for the three
years ended December 31, 199_, prepared in accordance with generally accepted
accounting principles, included in the Annual Report on Form 10-K of the
Certificate Insurer for the year ended December 31, 199_ and the consolidated
financial statements of the Certificate Insurer and its subsidiaries as of
September 30, 199_ and for the periods ending September 30, 199_ and September
30, 199_ included in the Quarterly Report on Form 10-Q of the Certificate
Insurer for the period ending September 30, 199_ are hereby incorporated by
reference into this Prospectus Supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated by reference herein
shall be modified or superseded for purposes of this Prospectus Supplement to
the extent that a statement contained herein or in any other subsequently filed
document which also is incorporated by reference herein modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus
Supplement.
All financial statements of the Certificate Insurer and its subsidiaries
included in documents filed by the Certificate Insurer pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchanges Act of 1934, as amended,
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Class [A] Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The tables below present selected financial information of the Certificate
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP").
SAP
--------------------------------------
, 199 , 199
----------------- ------------------
(Audited) (Unaudited)
(in millions)
Admitted Assets...... $ $
Liabilities..........
Capital and Surplus..
GAAP
--------------------------------------
, 199 , 199
----------------- ------------------
(Audited) (Unaudited)
(in millions)
Assets................ $ $
Liabilities...........
Shareholder's Equity..
Copies of the financial statements of the Certificate Insurer incorporated
by reference herein and copies of the Certificate Insurer's 199_ year-end
audited financial statements prepared in accordance with statutory accounting
practices are available, without charge, from the Certificate Insurer. The
address
S-55
<PAGE>
of the Certificate Insurer is ______________________________________. The
telephone number of the Certificate Insurer is (___) ________.
The Certificate Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Policy and the Certificate Insurer set forth
under the headings "Description of the Certificates-Certificate Guaranty
Insurance Policy" and "The Certificate Insurer." Additionally, the Certificate
Insurer makes no representation regarding the Class [A] Certificates or the
advisability of investing in the Class [A] Certificates.
[Moody's Investors Service, Inc.] rates the claims paying ability of the
Certificate Insurer "___."
[Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc., rates the claims paying ability of the Certificate Insurer
"___."
[Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.)] rates
the claims paying ability of the Certificate Insurer "___."
Each rating of the Certificate Insurer should be evaluated independently.
The ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Certificate Insurer and its ability to pay claims on its
policies of insurance. Any further explanation as to the significance of the
above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Class
[A] Certificates, and such ratings may be subject to revision or withdrawal at
any time by the rating agencies. Any downward revision or withdrawal of any of
the above ratings may have an adverse effect on the market price of the Class
[A] Certificates. The Certificate Insurer does not guaranty the market price of
the Class [A] Certificates nor does it guaranty that the ratings on the Class
[A] Certificates will not be revised or withdrawn.]
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
[A REMIC election will be made with respect to certain assets in the Trust
Fund for federal income tax purposes. Upon the issuance of the Certificates,
__________________________________, counsel to the Seller, will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the Agreement, for federal income tax purposes, certain assets in the Trust Fund
will qualify as a REMIC under Sections 860A through 860G of the Code.
For federal income tax purposes, (i) the Class [A-I], Class [A-II] [and
Class [S] Certificates] will be the "regular interests" in, and generally will
be treated as debt obligations of, the REMIC and (ii) the [Class [R]]
Certificates will be the sole class of "residual interests" in the REMIC.
For federal income tax reporting purposes, the Class [A] Certificates will
not be treated as having been issued with original issue discount. The
prepayment assumption that will be used in determining the rate of accrual of
original issue discount, market discount and premium, if any, for federal income
tax purposes will be based on the assumption that, subsequent to the date of any
determination the Mortgage Loans will prepay at a rate equal to __% CPR. No
representation is made that the Mortgage Loans will prepay at that rate or at
any other rate. See "Certain Federal Income Tax
S-56
<PAGE>
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount" in the Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the "OID
Regulations") under sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. Purchasers
of the Class [A] Certificates should be aware that Section 1272(a)(6) of the
Code and the OID Regulations do not adequately address certain issues relevant
to, or applicable to, prepayable securities bearing a variable rate of interest
such as the Class [A] Certificates. In the absence of other authority, the
Servicer intends to be guided by certain principles of the OID Regulations
applicable to variable rate debt instruments in determining whether such
Certificates should be treated as issued with original issue discount and in
adapting the provisions of Section 1272(a)(6) of the Code to such Certificates
for the purpose of preparing reports furnished to Certificateholders and the
IRS. Because of the uncertainties concerning the application of Section
1272(a)(6) of the Code to such Certificates and because the rules relating to
debt instruments having a variable rate of interest are limited in their
application in ways that could preclude their application to such Certificates
even in the absence of Section 1272(a)(6) of the Code, the IRS could assert that
the Class [A] Certificates should be governed by some other method not yet set
forth in regulations or should be treated as having been issued with original
issue discount. Prospective purchasers of the Class [A] Certificates are
advised to consult their tax advisors concerning the tax treatment of such
Certificates.
The Servicer believes that, if the Class [A] Certificates were determined
to have been issued with original issue discount, a reasonable application of
the principles of the OID Regulations to the Class [A] Certificates generally
would be to report all income with respect to such Certificates as original
issue discount for each period, computing such original issue discount (i) by
assuming that the value of the applicable Index will remain constant for
purposes of determining the original yield to maturity of each such class of
Certificates and projecting future distributions on such Certificates, thereby
treating such Certificates as fixed rate instruments to which the original issue
discount computation rules described in the Prospectus can be applied, and (ii)
by accounting for any positive or negative variation in the actual value of the
applicable Index in any period from its assumed value as a current adjustment to
original issue discount with respect to such period. See "Certain Federal
Income Tax Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" in the Prospectus.
In certain circumstances the OID Regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that used by the issuer. Accordingly, the holder of a Class [A] Certificate may
be able to select a method for recognizing original issue discount that differs
from that used by the Servicer in preparing reports to the Certificateholders
and the IRS.
The Class [A] Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Class [A] Certificates will
be treated as "interest on obligations secured by mortgages on real property"
under Section 856(c)(3)(B) of the Code generally to the extent that such Class
[A] Certificates are treated as "real estate assets" under Section 856(c)(4)(A)
of the Code. Moreover, the Class [A] Certificates will be "qualified mortgages"
within the meaning of Section 860G(a)(3) of the Code. However, prospective
investors in Class [A] Certificates that will be generally treated as assets
described in Section 860G(a)(3) of the Code should note that, notwithstanding
such treatment, any repurchase of such a Certificate pursuant to the right of
the Servicer to repurchase such Class [A] Certificates may adversely affect any
REMIC that holds such Class [A] Certificates if such repurchase is made under
circumstances giving rise to a Prohibited Transaction Tax. See "Pooling and
Servicing Agreement--Termination" herein and "Certain Federal
S-57
<PAGE>
Income Tax Consequences--REMICs--Characterization of Investments in REMIC
Certificates" in the Prospectus.
New Withholding Regulations
The Treasury Department has issued new regulations (the "New Regulations")
which make certain modifications to the withholding, backup withholding and
information reporting rules described in the Prospectus. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will generally be effective for payments made after December 31,
1998, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
For further information regarding federal income tax consequences of
investing in the Class [A] Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
For further information regarding the federal income tax consequences of
investing in the Class [A] Certificates, see "Certain Federal Income Tax
Consequences--REMIC Trust Funds" in the Prospectus.]
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA or Section 4975 of the Code (a "Plan"), any insurance company
(whether through its general or separate accounts) or any other person investing
Plan Assets of any Plan, as defined under "ERISA Considerations--Plan Asset
Regulations" in the Prospectus should carefully review with its legal advisers
whether the purchase or holding of Class [A] Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Code. The purchase or holding of the Class [A] Certificates by or on
behalf of, or with Plan Assets of, a Plan may qualify for exemptive relief under
the Underwriter's Exemption, as described under the "ERISA Considerations--
Underwriter's Exemptions" in the Prospectus. However, the Underwriter's
Exemption contains a number of conditions which must be met for the
Underwriter's Exemption to apply, including the requirement that any such Plan
must be an "accredited investor" as defined in Rule 501(a)(1) of Regulation D of
the Securities and Exchange Commission under the Securities Act of 1933, as
amended.
Insurance companies contemplating the investment of general account assets
in the Class [A] Certificates should consult with their legal advisors with
respect to the availability of exemptive relief under the Underwriter's
Exemption and Sections I and III of PTCE 95-60 and the applicability of Section
401(c) of ERISA, as described under "ERISA Considerations--Insurance Company
General Accounts" in the Prospectus. The DOL issued proposed regulations under
Section 401(c) on December 22, 1997, but the required final regulations have not
been issued as of the date hereof.
Because the exemptive relief afforded by the Underwriter's Exemption (or
any similar exemption that might be available) will not likely apply to the
purchase, sale or holding of the Class [S] Certificates (due to the subordinate
nature thereof) or the Residual Certificates, transfers of such Certificates to
a Plan, to a trustee or other person acting on behalf of any Plan, or to any
other person using "Plan Assets" to effect such acquisition will not be
registered by the Trustee unless the transferee provides the Seller, the Trustee
and the Servicer with an opinion of counsel satisfactory to the Seller, the
Trustee and the Servicer, which opinion will not be at the expense of the
Seller, the Trustee or the Servicer, that the purchase of such Certificates by
or on behalf of such Plan is permissible under applicable law, will not
S-58
<PAGE>
constitute or result in a non-exempt prohibited transaction under ERISA or
Section 4975 of the Code and will not subject the Seller, the Trustee or the
Servicer to any obligation in addition to those undertaken in the Agreement.
In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of the Class [S]
Certificates by or on behalf of such Plan is permissible under applicable law,
will not constitute or result in a non-exempt prohibited transaction under ERISA
or Section 4975 of the Code, will not subject the Seller, the Trustee or the
Servicer to any obligation in addition to those undertaken in the Agreement and
the following conditions are satisfied: (i) the transferee is an insurance
company and the source of funds used to purchase the Class [S] Certificates is
an "insurance company general account" (as such term is defined in Prohibited
Transaction Class Exemption ("PTCE") 95-60), and (ii) the conditions set forth
in Sections I and III of PTCE 95-60 have been satisfied.
Any fiduciary or other investor of "Plan Assets" that proposes to acquire
or hold the Class [A] Certificates on behalf of or with "Plan Assets" of any
Plan should consult with its counsel with respect to the potential applicability
of the fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and Section 4975 of the Code to the proposed
investment. See "ERISA Considerations" in the Prospectus.
USE OF PROCEEDS
[The net proceeds to be received from the sale of the Certificates will be
paid to the Seller and the Seller will use such proceeds for its general
corporate purposes.]
PLAN OF DISTRIBUTION
[The Depositor has entered into an underwriting agreement (the
"Underwriting Agreement") with ______________________________________, as
underwriter (the "Underwriter"). The Underwriting Agreement provides that the
obligations of the Underwriter are subject to certain conditions precedent, and
that the Underwriter will be obligated to purchase all of the Class [A]
Certificates if any are purchased.
The Underwriter has advised the Depositor that it proposes to offer the
Class [A] Certificates from time to time for sale in one or more negotiated
transactions or otherwise at prices to be determined at the time of sale. The
Underwriter may effect such transactions by selling the Class [A] Certificates
to or through dealers and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriter and any
purchasers of the Class [A] Certificates for whom the Underwriter may act as
agent.
The Underwriter and any dealers that participate with the Underwriter in
the distribution of the Class [A] Certificates may be deemed to be underwriters,
and any discounts or commissions received by them and any profit on the resale
of Class [A] Certificates by them may be deemed to be underwriting discounts or
commissions, under the Securities Act of 1933, as amended.
S-59
<PAGE>
The Depositor has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or contribute to payments which the Underwriter may be required to make in
respect thereof.]
[EXPERTS
The consolidated financial statements of the Certificate Insurer and its
subsidiaries as of December 31, 199_ and 199_ and for each of the three years in
the period ended December 31, 199_ incorporated by reference into this
Prospectus Supplement have been audited by ________________________, independent
accountants, as set forth in their report thereon, incorporated by reference
herein in reliance upon the authority of such firm as experts in accounting and
auditing.
LEGAL MATTERS
The legality of the Class [A] Certificates and the material federal income
tax consequences of the Class [A] Certificates will be passed upon for the
Seller by __________________________________. The legality of the Class [A]
Certificates will be passed upon for the Underwriter by ____________________.
RATINGS
It is a condition to the issuance of the Class [A] Certificates that they
be rated "___" by ___ and "___" by _______. Such ratings are based on [the
claims paying ability of the Certificate Insurer}. The ratings on mortgage pass-
through certificates address the likelihood of the receipt by certificateholders
of all distributions on the underlying mortgage loans to which they are
entitled. Such rating opinions address the structural and legal aspects
associated with the certificates, including the nature of the underlying
mortgage loans. Ratings on mortgage pass-through certificates do not represent
an assessment of the likelihood that principal prepayments will be made by
borrowers or the degree to which such prepayments might differ from those
originally anticipated, and do not address the possibility that
certificateholders might suffer a lower than anticipated yield.
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
organizations. Each security rating should be evaluated independently of any
other security rating. In addition, a security rating does not address the
frequency of prepayments of Mortgage Loans or the corresponding effect on yield
to investors. See "Certain Yield and Prepayment Considerations."
S-60
<PAGE>
INDEX OF TERMS
Advance....................................................................S-54
Agreement.......................................................S-4, S-19, S-43
Available Distribution Amount.........................................S-5, S-38
Bankruptcy Proceeding......................................................S-42
Beneficial Owner...........................................................S-36
Book-Entry Certificates....................................................S-35
Business Day....................................................S-5, S-35, S-44
Cede.......................................................................S-36
Certificate Account........................................................S-41
Certificate Insurer...................................................S-2, S-54
Certificate Insurer Premium Amount.........................................S-38
Certificate Insurer's Fiscal Agent.........................................S-43
Certificate Principal Balance..............................................S-35
Certificateholder..........................................................S-36
Certificateholders..........................................................S-1
Certificates..........................................................S-1, S-35
Chevy Chase............................................................S-1, S-4
Civil Relief Act...........................................................S-14
Civil Relief Act Shortfall.................................................S-14
Class [A-II] Interest Distribution Amount.............................S-7, S-39
Class [A-II] Principal Distribution Amount.................................S-39
Class [A-I] Interest Distribution Amount..............................S-6, S-38
Class [A-I] Principal Distribution Amount..................................S-39
Class [A] Certificates................................................S-1, S-35
Class [S] Interest Distribution Amount.....................................S-39
Collateralization Deficit.............................................S-8, S-40
Commission..................................................................S-3
Convertible Mortgage Loans...........................................S-34, S-47
CPR........................................................................S-50
Custodial Account..........................................................S-41
Debt Service Reduction.....................................................S-42
Defective Loan.............................................................S-45
Deficiency Amount..........................................................S-44
Deficient Valuation........................................................S-42
Definitive Certificate...............................................S-14, S-36
Determination Date....................................................S-6, S-38
Distribution Date..........................................................S-35
DTC.........................................................................S-1
Due Date..............................................................S-6, S-38
Due Period............................................................S-6, S-38
ERISA......................................................................S-15
Exchange Act................................................................S-3
FDIA.......................................................................S-19
FDIC.......................................................................S-19
Financial Intermediary.....................................................S-36
FIRREA.....................................................................S-19
Five-Year Index................................................S-10, S-21, S-32
Five/Five Group II Loans.............................................S-10, S-21
S-61
<PAGE>
Five/One Group II Loans..............................................S-10, S-21
GAAP.......................................................................S-55
Group I Certificate Rate..............................................S-6, S-38
Group I Loans...............................................................S-1
Group II Certificate Rate.............................................S-7, S-39
Group II Loans..............................................................S-1
Index................................................................S-10, S-32
Initial Certificate Principal Balance......................................S-35
Insured Payment.......................................................S-8, S-44
IRS........................................................................S-57
Lender-Paid MI Loan........................................................S-20
Liquidated Loan............................................................S-42
Loan Group..................................................................S-1
Loan Group I................................................................S-1
Loan Group II...............................................................S-1
Loan-to-Value Ratio...................................................S-9, S-20
Maximum Mortgage Rate......................................................S-21
Maximum Net Mortgage Rate..................................................S-34
Minimum Mortgage Rate......................................................S-21
Minimum Net Mortgage Rate..................................................S-34
Modeling Assumptions.......................................................S-49
Mortgage Cut-off Date.......................................................S-5
Mortgage Loans.........................................................S-1, S-5
Mortgage Pool...............................................................S-1
Net Mortgage Rate..........................................................S-34
New Regulations............................................................S-58
Note Margin.....................................................S-9, S-20, S-32
Notice.....................................................................S-44
OID Regulations............................................................S-57
One-Year Index..................................................S-9, S-20, S-32
One/One Group I Loans................................................S-10, S-21
Original Pool Balance.......................................................S-5
Owner......................................................................S-44
Periodic Rate Cap..........................................................S-20
Plan.......................................................................S-58
Policy......................................................................S-2
Prepayment Interest Shortfall..............................................S-14
Prepayment Period.....................................................S-6, S-38
Principal Balance..........................................................S-38
PTCE.......................................................................S-59
Qualified Liquidation......................................................S-45
Realized Loss..............................................................S-42
Record Date................................................................S-35
REMIC.......................................................................S-2
Repurchase Deposit Amount..................................................S-46
Required Reserve...........................................................S-41
Reserve Fund...............................................................S-11
Reserve Fund Decrease Amount...............................................S-42
Reserve Fund Increase Amount...............................................S-41
Residual Certificates......................................................S-35
S-62
<PAGE>
Rules......................................................................S-36
SAP........................................................................S-55
Seller.................................................................S-1, S-4
Senior Certificates.........................................................S-4
Servicer..............................................................S-4, S-19
Servicing Fee..............................................................S-13
Servicing Fee Rate...................................................S-13, S-34
Seven/One Group II Loans.............................................S-10, S-21
SMMEA......................................................................S-15
Subordinated Certificates...................................................S-5
Substitution Adjustment Amount.............................................S-46
Three-Year Index...............................................S-10, S-20, S-32
Three/One Group I Loans..............................................S-10, S-21
Three/Three Group II Loans...........................................S-10, S-21
Trust.......................................................................S-4
Trust Fund.............................................................S-1, S-5
Trustee....................................................................S-19
Trustee Fee................................................................S-13
Trustee Fee Rate.....................................................S-13, S-34
Underwriter...........................................................S-1, S-59
Underwriting Agreement.....................................................S-59
S-63
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ Information contained herein is subject to completion or amendment. A +
+ registration statement relating to these securities has been filed with the +
+ Securities and Exchange Commission. These securities may not be sold nor +
+ may offers to buy be accepted without the delivery of a final prospectus +
+ supplement and accompanying prospectus. This prospectus shall not constitute+
+ an offer to sell or the solicitation of an offer to buy nor shall there be +
+ any sale of these securities in any State in which such offer, solicitation +
+ or sale would be unlawful prior to registration or qualification under the +
+ securities laws of any such State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PROSPECTUS
Mortgage Loan Trusts
Mortgage Pass-Through Certificates
(Issuable in Series)
---------------------------
Chevy Chase Bank, F.S.B.
(Seller and Servicer)
---------------------------
The Mortgage Pass-Through Certificates (the "Certificates") described
herein may be sold from time to time in one or more series (each, a "Series") in
amounts, at prices and on terms to be determined at the time of sale and to be
set forth in a supplement to this Prospectus (a "Prospectus Supplement"). Each
Series of Certificates will include one or more separate classes (each, a
"Class") that represent interests in specified percentages of principal and/or
interest with respect to the assets in the related Mortgage Pool (as defined
herein), as more fully set forth herein, and will evidence the undivided
interest, beneficial interest or notional amount specified in the related
Prospectus Supplement
(cover continued on next page)
CERTIFICATES OF A SERIES EVIDENCE BENEFICIAL INTERESTS IN THE RELATED
TRUST FUND ONLY AND ARE NOT GUARANTEED BY ANY GOVERNMENTAL
AGENCY OR BY THE SELLER, THE TRUSTEE, THE SERVICER OR BY
ANY OF THEIR RESPECTIVE AFFILIATES OR, UNLESS OTHERWISE
SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, BY ANY
OTHER PERSON OR ENTITY. THE SELLER'S ONLY OBLIGATIONS
WITH RESPECT TO ANY SERIES OF SECURITIES WILL BE
PURSUANT TO CERTAIN REPRESENTATIONS AND
WARRANTIES SET FORTH IN THE RELATED
AGREEMENT AS DESCRIBED HEREIN OR IN
THE RELATED PROSPECTUS SUPPLEMENT.
--------------------
See "RISK FACTORS" beginning on page __ for certain factors to be
considered in purchasing the Certificates.
--------------------
THESE CERTIFICATES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE
PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of securities offered hereby unless accompanied by a
Prospectus Supplement.
The date of this Prospectus is __________ __, 1998.
<PAGE>
(continued from previous page)
in one of a number of trusts (each, a "Trust Fund"), each to be created by Chevy
Chase Bank, F.S.B. (the "Seller") from time to time. Each Trust Fund will
consist of (a) Primary Assets, which may include one or more pools (each, a
"Mortgage Pool") of (i) one- to four-family residential mortgage loans, loans
made to finance the purchase of certain rights relating to cooperatively owned
properties secured by a pledge of shares of a cooperative corporation and an
assignment of a proprietary lease or occupancy agreement on a cooperative
dwelling, loans secured by unimproved land, mortgage participation certificates
evidencing participation interests in such loans that are acceptable to the
nationally recognized statistical rating organization or agencies rating the
related Series of Certificates (collectively, the "Rating Agency") for a rating
in one of the four highest rating categories of such Rating Agency (such loans
and participation certificates being referred to collectively hereinafter as the
"Mortgage Loans"), or (ii) certain conventional mortgage pass-through
certificates (the "Mortgage Certificates") and related property, (b) certain
monies received or due thereunder on or after the date specified in the related
Prospectus Supplement (the "Cut-off Date") net, if and as provided in the
related Prospectus Supplement, of certain amounts payable to Chevy Chase Bank,
F.S.B., as servicer (the "Servicer") of the Mortgage Loans, (c) if specified in
the related Prospectus Supplement, funds on deposit in one or more pre-funding
accounts and/or capitalized interest accounts and (d) reserve funds, letters of
credit, surety bonds, insurance policies or other forms of credit support as
described herein and in the related Prospectus Supplement. The Mortgage Loans
may be conventional mortgage loans, conventional cooperative loans, mortgage
loans insured by the Federal Housing Administration (the "FHA"), or mortgage
loans partially guaranteed by the Veterans Administration (the "VA"), or any
combination of the foregoing, bearing fixed or variable rates of interest.
Amounts on deposit in a pre-funding account for any Series will be used to
purchase additional Mortgage Loans during the funding period specified in the
related Prospectus Supplement in the manner specified therein. The amount
initially deposited in a pre-funding account for a Series of Certificates will
not exceed 25% of the aggregate principal amount of such Series of Certificates.
If so specified in the related Prospectus Supplement, the rights of the
holders of the Certificates of one or more Classes of a Series to receive
distributions with respect to the related Mortgage Pool may be subordinated to
such rights of the holders of the Certificates of one or more other Classes of
such Series to the extent described herein and in such Prospectus Supplement. As
provided in the applicable Prospectus Supplement, the timing of payments,
whether of principal or of interest, to any one or more of such Classes may be
on a sequential or a pro rata basis. The Prospectus Supplement with respect to
each Series also will set forth specific information relating to the Trust Fund
with respect to the Series in respect of which the Prospectus is being
delivered, together with specific information regarding the Certificates of such
Series. If so specified in the related Prospectus Supplement, the Primary Assets
and other assets comprising the Trust Fund may be divided into one or more
Mortgage Loan Groups, and each Class of the related Series will evidence
beneficial ownership of the corresponding Mortgage Loan Group, as applicable.
The rate of reduction of the aggregate principal balance of each Class of a
Series may depend principally upon the rate of payment (including prepayments)
with respect to the Mortgage Loans or the Underlying Loans relating to any
Mortgage Certificates, as applicable. A rate of prepayment lower or higher than
anticipated will affect the yield on the Certificates of a Series in the manner
described herein and in the related Prospectus Supplement. Under certain limited
circumstances described herein and in the related Prospectus Supplement, a
Series of Certificates may be subject to termination or redemption under the
circumstances described herein and in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, an election may be made
to treat certain assets comprising the Trust Fund for a Series as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes. See
"Federal Income Tax Considerations."
There currently is no secondary market for the Certificates. No assurance
can be given that any such market will develop or, if it does develop, that it
will continue.
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<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Certificates to be
offered hereunder will, among other things, set forth with respect to such
Series of Certificates: (i) the aggregate principal amount, interest rate, and
authorized denominations of each Class of such Certificates; (ii) certain
information concerning the Primary Assets; (iii) the terms of any Enhancement
(as defined herein) with respect to such Series; (iv) the terms of any insurance
relating to the Primary Assets; (v) information concerning any other assets in
the related Trust Fund, including any Reserve Fund; (vi) the Final Scheduled
Distribution Date (as defined herein) of each Class of such Certificates; (vii)
the method to be used to calculate the amount of interest and principal required
to be applied to the Certificates of each Class of such Series on each
Distribution Date, the timing of the application of interest and principal and
the order of priority of the application of such interest and principal to the
respective Classes and the allocation of interest and principal to be so
applied; (viii) the amount, if any, deposited in the Pre-Funding Account (as
defined herein) available to purchase additional Mortgage Loans, the length of
the Pre-Funding Period (as defined herein) and the criteria for determining
which additional Mortgage Loans may become part of the Trust Fund; (ix)
additional information with respect to the plan of distribution of such
Certificates; and (x) whether a REMIC election will be made with respect to some
or all of the Trust Fund for such Series.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Certificates are required under the related Agreement to be forwarded to
Holders. Unless otherwise specified in the related Prospectus Supplement, such
reports will not be examined and reported on by an independent public
accountant. If so specified in the Prospectus Supplement for a Series of
Certificates, such Series or one or more Classes of such Series will be issued
in book-entry form. In such event, (i) owners of beneficial interests in such
Certificates will not be considered "Holders" under the Agreement and will not
receive such reports directly from the related Trust Fund; rather, such reports
will be furnished to such owners through the participants and indirect
participants of the applicable book-entry system and (ii) references herein to
the rights of "Holders" shall refer to the rights of such owners as they may be
exercised indirectly through such participants. See "The Agreements--Reports to
Certificateholders."
ADDITIONAL INFORMATION
The Seller has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates. This Prospectus, which forms a part
of the Registration Statement, contains, and the Prospectus Supplement for each
Series of Certificates will contain, a summary of the material terms of the
documents referred to herein and therein, but neither contains nor will contain
all of the information set forth in the Registration Statement pursuant to the
Rules and Regulations of the Commission. For further information, reference is
made to such Registration Statement and the exhibits thereto which the Seller
has filed with the Commission under the Securities Act of 1933, as amended.
Statements contained in this Prospectus and any Prospectus Supplement as to the
contents of any contract or other document referred to are summaries and in each
instance reference is made to the copy of the contract or other document filed
as an exhibit to the Registration Statement. Copies of the Registration
Statement may be obtained from the Commission, upon payment of the prescribed
charges, or may be examined free of charge at the Commission's offices. Reports
and other information filed with the Commission can be inspected and copied at
the public reference facilities maintained by the Commission at its Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Regional Offices of the Commission located as follows: Midwest Regional Office,
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and Northeast Regional Office, Seven World Trade Center, Suite 1300, New York,
New York 10048. Copies of such information can be obtained from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the Commission
maintains a web site at "http://www.sec.gov" that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
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Each Trust Fund will be required to file certain reports with the
Commission pursuant to the requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). The Seller intends to cause each Trust Fund to
suspend filing such reports if and when such reports are no longer required
under the Exchange Act.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Certificates
offered hereby and thereby nor an offer of the Certificates to any person in any
state or other jurisdiction in which such offer would be unlawful. The delivery
of this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund referred
to in the accompanying Prospectus Supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this
Prospectus and prior to the termination of any offering of the Certificates
issued by such Trust Fund shall be deemed to be incorporated by reference in
this Prospectus and to be a part of this Prospectus from the date of the filing
of such documents. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for all purposes of this Prospectus to the extent that a statement
contained herein (or in the accompanying Prospectus Supplement) or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference modifies or replaces such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Seller on behalf of any Trust Fund will provide without charge to each
person to whom this Prospectus is delivered, on the written or oral request of
such person, a copy of any or all of the documents referred to above that have
been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Such requests should be directed to the Seller at
8401 Connecticut Avenue, Chevy Chase, Maryland 20815.
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<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus, and by reference to
the information with respect to each Series of Certificates contained in the
related Prospectus Supplement to be prepared and delivered in connection with
the offering of Certificates of such Series. Capitalized terms used and not
otherwise defined herein or in the related Prospectus Supplement shall have the
meanings set forth in the "Glossary of Terms."
Securities Offered......... Mortgage Pass-Through Certificates (the
"Certificates"), issuable in series (each, a
"Series"). Certificates are issuable from time to
time in one or more classes (each, a "Class")
pursuant to a Pooling and Servicing Agreement (an
"Agreement"). One or more of such Classes of a
Series may be subordinated to one or more other
Classes of such Series, as specified in the related
Prospectus Supplement (any such Class to which
another Class is subordinated being hereinafter
referred to as a "Senior Class" and any such
subordinated Class being hereinafter referred to as
a "Subordinated Class"). One or more of such Classes
of Certificates of a Series (the "Residual
Certificates") may evidence a residual interest in
the related Trust Fund (as defined herein). Each
Certificate of a Series will evidence an interest in
the Trust Fund for such Series, or in a Mortgage
Loan Group specified in the related Prospectus
Supplement. Each Series of Certificates will consist
of one or more Classes, one or more of which may be
Classes of Compound Interest Certificates, Planned
Amortization Class ("PAC") Certificates, Variable
Interest Certificates, Zero Coupon Certificates,
Principal Only Certificates, Interest Only
Certificates or Participating Certificates. Each
Class may differ in, among other things, the amounts
allocated to and the priority of principal and
interest payments, Final Scheduled Distribution
Dates, Distribution Dates and interest rates. The
Certificates of each Class will be issued in fully
registered form in the denominations specified in
the related Prospectus Supplement. If so specified
in the related Prospectus Supplement, the
Certificates or certain Classes of such Certificates
offered thereby may be available in book-entry form
only.
Seller and Servicer........ Chevy Chase Bank, F.S.B. ("Chevy Chase"), a
federally chartered stock savings bank, with its
principal executive offices located at 8401
Connecticut Avenue, Chevy Chase, Maryland 20815, and
a telephone number of (301) 986-7000. See "The
Seller."
Interest Payments.......... Interest will be distributed on the days specified
in the Prospectus Supplement with respect to a
Series, or if any such day is not a business day,
the next succeeding business day (the "Distribution
Date"), at the rate or pursuant to the method of
determining such rate, specified in the related
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<PAGE>
Prospectus Supplement for each Class within such
Series, commencing on the day specified in such
Prospectus Supplement, in the manner specified in
such Prospectus Supplement. The interest rate on
Certificates of a Series may be variable or change
with changes in the rates of interest on the related
Mortgage Loans or Underlying Loans relating to any
Mortgage Certificates, as applicable, and/or as
prepayments occur with respect to such Mortgage
Loans or Underlying Loans, as applicable. Interest
Only Certificates may be assigned a "Notional
Amount" set forth in the related Prospectus
Supplement which is used solely for convenience in
expressing the calculation of interest and for
certain other purposes and does not represent the
right to receive any distributions allocable to
principal. Principal Only Certificates may not be
entitled to receive any interest payments or may be
entitled to receive only nominal interest payments.
Interest payable on the Certificates of a Series on
a Distribution Date will include all interest
accrued during the period specified in the related
Prospectus Supplement. See "Yield Considerations"
and "Description of the Certificates--Payments of
Interest."
Principal Payments......... All payments of principal of a Series of
Certificates will be made in an aggregate amount
determined as set forth in the related Prospectus
Supplement and will be paid at the times and will be
allocated among the Classes of such Series in the
order and amounts, and will be applied either on a
pro rata or a random lot basis among all
Certificates of any such Class, all as specified in
the related Prospectus Supplement. See "Description
of the Certificates --Payments of Principal."
Final Scheduled
Distribution Date of
the Certificates.......... The Prospectus Supplement for a Series may specify a
Final Scheduled Distribution Date with respect to
each related Class of Certificates, which is the
date after which no Certificates of such Class are
expected to remain outstanding, calculated on the
basis of the assumptions applicable to such Series
described in the related Prospectus Supplement. The
Final Scheduled Distribution Date of a Class may
equal the maturity date of the Primary Asset in the
related Trust Fund which has the latest stated
maturity or will be determined as described herein
and in the related Prospectus Supplement.
The actual final Distribution Date of the
Certificates of a Series will depend primarily upon
the rate of payment (including prepayments,
liquidations due to default, the receipt of proceeds
from casualty insurance policies and repurchases) of
the Mortgage Loans or Underlying Loans
6
<PAGE>
relating to any Mortgage Certificates, as
applicable, in the related Trust Fund. Unless
otherwise specified in the related Prospectus
Supplement, the actual final Distribution Date of
any Certificate is likely to occur earlier and may
occur substantially earlier or, with respect to a
Class of Certificates, may occur later than its
Final Scheduled Distribution Date as a result of the
application of prepayments to the reduction of the
principal balances of the Certificates and as a
result of defaults on the Primary Assets. The rate
of payments on the Mortgage Loans or Underlying
Loans relating to any Mortgage Certificates, as
applicable, in the Trust Fund for a Series will
depend on a variety of factors, including certain
characteristics of such Mortgage Loans or Underlying
Loans, as applicable, and the prevailing level of
interest rates from time to time, as well as on a
variety of economic, demographic, tax, legal, social
and other factors. No assurance can be given as to
the actual prepayment experience with respect to a
Series. See "Risk Factors--Yield May Vary" and
"Description of the Certificates--Weighted Average
Life of the Certificates."
Optional Termination....... One or more Classes of Certificates of any Series
may be repurchased in whole or in part, at the
option of the Seller, the Servicer or, if so
specified in the related Prospectus Supplement, the
Holder of a specified percentage interest in a
Residual Certificate, at such time and under the
circumstances specified in the related Prospectus
Supplement, at the price set forth therein. If so
specified in the related Prospectus Supplement for a
Series of Certificates, the Seller, the Servicer or
the Holder of a specified percentage interest in a
Residual Certificate or such other entity that is
specified in the related Prospectus Supplement, may,
at its option, cause an early termination of the
related Trust Fund by repurchasing all of the
Primary Assets remaining in the Trust Fund on or
after a specified date, or on or after such time as
the aggregate Certificate Principal Balance of the
Certificates of the Series or the Primary Assets
relating to such Series, as specified in the related
Prospectus Supplement, is less than the amount or
percentage specified in the related Prospectus
Supplement. In the event that the Seller elects to
treat the related Trust Fund as a REMIC, any such
repurchase will be effected only in compliance with
the requirements of Section 860F(a)(4) of the Code,
so as to constitute a "qualified liquidation"
thereunder. See "Description of the Certificates--
Optional Purchase or Termination."
In addition, the Prospectus Supplement may provide
other circumstances under which Holders of
Certificates of a Series could be fully paid
significantly earlier than would
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<PAGE>
otherwise be the case if payments or distributions
were based solely on the payments of the related
Primary Assets.
The Trust Fund............. The Trust Fund for a Series of Certificates will
consist of one or more of the assets below, as
described in more detail in the related Prospectus
Supplement.
A. Primary Assets...... The Primary Assets for a Series may consist, in
whole or in part, of any combination of the
following assets, to the extent and as specified in
the related Prospectus Supplement: (a) one or more
mortgage pools (each, a "Mortgage Pool") containing
(i) conventional one- to four-family residential
mortgage loans, (ii) loans (the "Cooperative Loans")
made to finance the purchase of certain rights
relating to cooperatively owned properties secured
by the pledge of shares issued by a cooperative
corporation (a "Cooperative") and the assignment of
a proprietary lease or occupancy agreement providing
the exclusive right to occupy a particular dwelling
unit (a "Cooperative Dwelling") (the conventional
mortgage loans and the Cooperative Mortgage Loans
collectively are referred to herein as the "Mortgage
Loans"), (iii) loans secured by unimproved land,
(iv) mortgage participation certificates evidencing
participation interests in mortgage loans (the
"Mortgage Certificates") that are acceptable to the
nationally recognized rating agency or agencies
identified in the related Prospectus Supplement
(collectively, the "Rating Agency") rating the
Certificates of such Series for a rating in one of
the four highest rating categories of such Rating
Agency, (b) certain monies received or due
thereunder on or after the date specified in the
related Prospectus Supplement (the "Cut-off Date")
net, if and as provided in the related Prospectus
Supplement, of certain amounts payable to Chevy
Chase Bank, F.S.B., as servicer (the "Servicer") of
the Mortgage Loans and (c) reserve funds, letters of
credit, surety bonds, insurance policies or other
forms of Enhancement as described herein and in the
related Prospectus Supplement.
(1) Mortgage Loans... The Mortgage Loans will be originated or acquired by
the Seller in the ordinary course of its business.
Unless otherwise specified in the applicable
Prospectus Supplement, the original principal amount
of each Mortgage Loan in a Mortgage Pool will not be
more than 95% (such ratio, the "Loan-to-Value
Ratio") of the value of the property securing such
Mortgage Loan (the "Mortgaged Property"), based on
an appraisal of the Mortgaged Property considered
acceptable to the originator of such Mortgage Loan
or the sales price, whichever is less (the "Original
Value"). If so specified in the related Prospectus
Supplement, a Mortgage Pool may include Mortgage
Loans
<PAGE>
originated pursuant to Chevy Chase's CD Pledge
Program (such Mortgage Loans, the "CD Pledge
Loans"). Under Chevy Chase's CD Pledge Program, a
borrower may, subject to certain underwriting
criteria, obtain a Mortgage Loan with a Loan-to-
Value Ratio of up to 100% by pledging to Chevy Chase
certain collateral (the "CD Collateral") as security
for such borrower's obligation under such Mortgage
Loan in lieu of the cash downpayment otherwise
payable. With respect to each such Mortgage Loan,
the CD Collateral includes, without limitation, the
related pledge and guaranty agreement, the related
certificate of deposit and all right, title and
interest in and to the related certificate of
deposit account established by the borrower at Chevy
Chase, and all proceeds thereof. Unless otherwise
specified in the applicable Prospectus Supplement,
any Mortgage Loan having an original principal
amount exceeding 80% of the Original Value will be
covered by a policy of private mortgage insurance
until the outstanding principal amount is reduced as
set forth in the related Prospectus Supplement as a
result of principal payments by the borrower or
otherwise. If so specified in the related Prospectus
Supplement, a Mortgage Pool may include certain
Mortgage Loans ("Lender-Paid MI Loans") with
original Loan-to-Value Ratios greater than 80%. The
interest rates payable by the related borrowers on
such Lender-Paid MI Loans are increased relative to
the interest rates otherwise applicable for so long
as the Loan-to-Value Ratio exceeds 80%, with the
proceeds of such increases used by the Seller to
purchase mortgage insurance on such Mortgage Loans.
The Servicing Fee on a Lender-Paid MI Loan is
increased by the amount of the additional interest
rate thereon attributable to the payment of primary
mortgage insurance premium by the Servicer so long
as the related Loan-to-Value Ratio exceeds 80%;
hence, the Net Mortgage Rate for a Lender-Paid MI
Loan will be reduced by the amount of such
additional interest rate during such period.
Unless otherwise specified in the applicable
Prospectus Supplement, the principal balance at
origination of each Mortgage Loan will not exceed
$1,500,000. The Mortgage Loans in a Mortgage Pool
will all have original maturities of five to forty
years, unless otherwise specified in the applicable
Prospectus Supplement. Mortgage Pools may be formed
from time to time in varying sizes.
The Mortgage Loans may, as specified in the related
Prospectus Supplement, have various payment
characteristics, including balloon or other
irregular payment features, and may accrue interest
at a fixed rate or an adjustable rate.
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<PAGE>
As specified in the related Prospectus Supplement,
the Mortgage Loans will be secured by mortgages and
deeds of trust or other similar security instruments
creating a lien on a Mortgaged Property, which may
be subordinated to one or more senior liens on such
Mortgaged Property as described in the related
Prospectus Supplement.
The related Prospectus Supplement will describe
certain characteristics of the Mortgage Loans for a
Series, including, without limitation, and to the
extent relevant: (a) the aggregate unpaid principal
balance of the Mortgage Loans (or the aggregate
unpaid principal balance included in the Trust Fund
for the related Series); (b) the range and weighted
average Mortgage Rate on the Mortgage Loans and, in
the case of ARM Loans, the adjustment dates, the
highest, lowest and weighted average margin, and the
maximum Mortgage Rate variation at the time of any
periodic adjustment and over the life of such ARM
Loans; (c) the range and the average outstanding
principal balance of the Mortgage Loans; (d) the
range and weighted average original and remaining
term to stated maturity of the Mortgage Loans; (e)
the range and weighted average of the Loan-to-Value
Ratios or Combined Loan-to-Value Ratios, as
applicable, of the Mortgage Loans, computed in the
manner described in the related Prospectus
Supplement; (f) the percentage (by principal balance
as of the Cut-off Date) of Mortgage Loans that
accrue interest at adjustable or fixed interest
rates; (g) any Enhancement relating to the Mortgage
Loans; (h) the geographic distribution of any
Mortgaged Properties securing the Mortgage Loans;
(i) the use and type of each Mortgaged Property
securing a Mortgage Loan; (j) the lien priority of
the Mortgage Loans and (k) the year of origination
of the Mortgage Loans.
(2) Mortgage
Certificates........ Primary Assets for a Series may consist, in whole or
in part, of Mortgage Certificates which include (a)
pass-through certificates representing beneficial
interests in mortgage loans of the type that would
otherwise be eligible to be Mortgage Loans (the
"Underlying Loans") or (b) collateralized
obligations secured by Underlying Loans. Such pass-
through certificates or collateralized obligations
previously will have been (a) offered and
distributed to the public pursuant to an effective
registration statement or (b) purchased in a
transaction not involving any public offering from a
person who is not an affiliate of the issuer of such
securities at the time of sale (nor an affiliate
thereof at any time during the three preceding
months); provided that a period of three years has
--------
elapsed since the later of the date the securities
were acquired from the issuer or an affiliate
thereof. Although individual Underlying Loans may be
insured or guaranteed by the United States or an
agency or
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<PAGE>
instrumentality thereof, they need not be, and the
Mortgage Certificates themselves will not be so
insured or guaranteed. See "The Trust Funds--
Mortgage Certificates." Unless otherwise specified
in the Prospectus Supplement relating to a Series of
Certificates, payments on the Mortgage Certificates
will be distributed directly to the Trustee as
registered owner of such Mortgage Certificates.
The related Prospectus Supplement for a Series will
specify, to the extent relevant and to the extent
such information is reasonably available to the
Seller and the Seller reasonably believes such
information to be reliable: (i) the aggregate
approximate principal amount and type of any
Mortgage Certificates to be included in the Trust
Fund for such Series; (ii) certain characteristics
of the Underlying Loans including (A) the payment
features of such Underlying Loans (i.e., whether
they are fixed rate or adjustable rate and whether
they provide for fixed level payments, negative
amortization or other payment features), (B) the
approximate aggregate principal amount of such
Underlying Loans which are insured or guaranteed by
a governmental entity, (C) the servicing fee or
range of servicing fees with respect to such
Underlying Loans, (D) the minimum and maximum stated
maturities of such Underlying Loans at origination,
(E) the lien priority of such Underlying Loans and
(F) the delinquency status and year of origination
of such Underlying Loans; (iii) the maximum original
term-to-stated maturity of the Mortgage
Certificates; (iv) the weighted average term-to-
stated maturity of the Mortgage Certificates; (v)
the pass-through or certificate rate or ranges
thereof for the Mortgage Certificates; (vi) the
sponsor or depositor of the Mortgage Certificates
(the "MC Sponsor"), the servicer of the Mortgage
Certificates (the "MC Servicer"), and the trustee of
the Mortgage Certificates (the "MC Trustee"); (vii)
certain characteristics of Enhancement, if any, such
as reserve funds, insurance policies, letters of
credit or guarantees, relating to the Underlying
Loans, or to such Mortgage Certificates themselves;
(viii) the terms on which the Underlying Loans may,
or are required to, be repurchased prior to stated
maturity; and (ix) the terms on which substitute
Underlying Loans may be delivered to replace those
initially deposited with the MC Trustee. Such
disclosure may be on an approximate basis as
described above, and will be as of the date
specified in the related Prospectus Supplement. See
"The Trust Funds--Mortgage Certificates--Additional
Information."
B. Collection,
Certificate and
Distribution Accounts Unless otherwise provided in the related
Prospectus Supplement, all payments on or with
respect to the Primary
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<PAGE>
Assets for a Series will be remitted by the Servicer
within the period specified in the related
Prospectus Supplement directly to an account (the
"Collection Account" or the "Certificate Account")
to be established for such series. Unless otherwise
provided in the related Prospectus Supplement, the
Trustee will be required to apply a portion of the
amount in the Collection Account or the Certificate
Account to the payment of certain amounts payable to
the Servicer under the related Agreement and any
other person specified in the Prospectus Supplement,
and to deposit a portion of the amount in the
Collection Account into one or more separate
accounts (each, a "Distribution Account") to be
established for such Series, each in the manner and
at the times established in the related Prospectus
Supplement. All amounts deposited in such
Distribution Account (or, if there is no
Distribution Account, amounts remaining in the
Certificate Account) will be available, unless
otherwise specified in the related Prospectus
Supplement, for (i) application to the payment of
principal of and interest on such Series of
Certificates (or such Class or Classes specified in
the related Prospectus Supplement) on the next
Distribution Date, (ii) the making of adequate
provision for future payments on certain Classes of
Certificates and (iii) any other purpose specified
in the related Prospectus Supplement. After applying
the funds in the Collection Account or the
Certificate Account as described above, any funds
remaining in such Accounts may be paid over to the
Servicer, the Seller, any provider of Enhancement
with respect to such Series (an "Enhancer") or any
other person entitled thereto in the manner and at
the time established in the related Prospectus
Supplement.
C. Pre-Funding and
Capitalized
Interest Accounts.. If specified in the related Prospectus Supplement, a
Trust Fund will include one or more segregated trust
accounts (each, a "Pre-Funding Account") for the
related Series. If so specified, on the closing date
for such Series, a portion of the proceeds of the
sale of the Certificates of such Series (such
amount, the "Pre-Funded Amount") will be deposited
in the Pre-Funding Account and may be used to
purchase additional Primary Assets during the period
of time specified in the related Prospectus
Supplement (the "Pre-Funding Period"). The Primary
Assets to be so purchased will be required to have
certain characteristics specified in the related
Prospectus Supplement. If any Pre-Funded Amount
remains on deposit in the Pre-Funding Account at the
end of the Pre-Funding Period, such amount will be
applied in the manner specified in the related
Prospectus Supplement to prepay the Classes of
Certificates of the applicable Series. The amount
initially deposited in
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<PAGE>
a Pre-Funding Account for a Series of Certificates
will not exceed 25% of the aggregate principal
amount of such Series of Certificates.
If a Pre-Funding Account is established, one or more
segregated trust accounts (each, a "Capitalized
Interest Account") may be established for the
related Series. On the closing date for such Series,
a portion of the proceeds of the sale of the
Certificates of such Series may be deposited in the
Capitalized Interest Account and used to fund the
excess, if any, of (x) the sum of (i) the amount of
interest accrued on the Classes of Certificates of
such Series specified in the related Prospectus
Supplement and (ii) if specified in the related
Prospectus Supplement, certain fees or expenses
during the Pre-Funding Period such as Trustee fees
and credit enhancement fees, over (y) the amount of
interest available therefor from the Primary Assets
in the Trust Fund. If so specified in the related
Prospectus Supplement, amounts on deposit in the
Capitalized Interest Account may be released to the
Seller prior to the end of the Pre-Funding Period
subject to the satisfaction of certain tests
specified in the related Prospectus Supplement. Any
amounts on deposit in the Capitalized Interest
Account at the end of the Pre-Funding Period that
are not necessary for such purposes will be
distributed to the Seller or another person
specified in the related Prospectus Supplement.
Yield Considerations....... If so specified in the applicable Prospectus
Supplement, an assumed rate of prepayment will be
used to calculate the expected yield to maturity on
each Class of the Certificates of a Series. In
general, if a Class of Certificates is purchased at
a premium and principal distributions thereon occur
at a rate faster than anticipated at the time of
purchase, the investor's actual yield to maturity
will be lower than that assumed at the time of
purchase. Conversely, if a Class of Certificates is
purchased at a discount and principal distributions
thereon occur at a rate slower than that assumed at
the time of purchase, the investor's actual yield to
maturity will be lower than that assumed at the time
of purchase. In the case of Interest Only or
Principal Only Certificates, it is possible for
Holders not only to suffer a lower than anticipated
yield but, in extreme cases, to fail to recoup fully
their initial investment. The Prospectus Supplement
for each Series of Certificates that includes a
Class of Interest Only Certificates or Principal
Only Certificates will set forth certain yield
calculations on each such Class based upon a range
of specified prepayment assumptions on the Primary
Assets included in the related Trust Fund.
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Interest payable on the Certificates of a Series on
a Distribution Date will include all interest
accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues
during the calendar month prior to a Distribution
Date, the effective yield to Holders will be reduced
from the yield that otherwise would be obtainable if
interest payable on the Certificate were to accrue
through the day immediately preceding each
Distribution Date, and the effective yield (at par)
to Holders will be less than the indicated coupon
rate. See "Yield Considerations."
Enhancement................ Neither the Certificates nor the Primary Assets are
insured or guaranteed by any governmental agency,
except to the extent of any FHA insurance or VA
guarantee. If and to the extent specified in the
related Prospectus Supplement, enhancement with
respect to a Series or any Class of Certificates may
include any one or more of the following: a
financial guaranty insurance policy,
overcollateralization, a letter of credit, a cash
reserve fund, insurance policies, one or more
Classes of Subordinate Certificates, derivative
products or other forms of credit enhancement, or
any combination thereof (collectively,
"Enhancement"). The Enhancement with respect to any
Series or any Class of Certificates may be
structured to provide protection against
delinquencies and/or losses on the Primary Assets,
against changes in interest rates, or other risks,
to the extent and under the conditions specified in
the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, any
form of Enhancement will have certain limitations
and exclusions from coverage thereunder. Further
information regarding any Enhancer, including
financial information when material, will be
included in the related Prospectus Supplement. In
lieu of, or in addition to, the foregoing credit
support arrangements, if so specified in the related
Prospectus Supplement, payments on the Certificates
of one or more Classes (the "Senior Certificates")
may be supported by a prior right to receive
distributions attributable or otherwise payable to
one or more other Classes (the "Subordinated
Certificates") to the extent specified in the
related Prospectus Supplement. In addition, if so
specified in the related Prospectus Supplement, one
or more Classes of Subordinated Certificates may be
subordinated to one or more other Classes of
Subordinated Certificates and may be entitled to
receive disproportionate amounts of distributions of
principal. A Prospectus Supplement with respect to a
Series may also provide for additional or
alternative forms of Enhancement, including a
guarantee or surety bond, acceptable to the Rating
Agency ("Alternative Enhancement").
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A. Letters of Credit... If so specified in the related Prospectus
Supplement, the issuer of one or more Letters of
Credit (the "L/C Bank") will deliver to the Trustee
such Letter of Credit for the Mortgage Pool. To the
extent specified in the related Prospectus
Supplement, the L/C Bank will honor the Trustee's
demands with respect to such Letter of Credit, to
the extent of the amount available (a) to make
payments to the Certificate Account on each
Distribution Date in an amount equal to the amount
sufficient to repurchase each Liquidating Loan that
has not been purchased by the Servicer pursuant to
the terms of the related Agreement or (b) to provide
coverage with respect to the unpaid principal or
notional amount of the Certificates or a Class or
Classes within such Series. Unless otherwise
provided in the related Prospectus Supplement, the
term "Liquidating Loan" means: (a) each Mortgage
Loan with respect to which foreclosure proceedings
have been commenced (and the Mortgagor's right of
reinstatement has expired), (b) each Mortgage Loan
with respect to which the Servicer has agreed to
accept a deed to the property in lieu of foreclosure
or (c) each Cooperative Loan as to which the shares
of the related Cooperative and the related
proprietary lease or occupancy agreement have been
sold or offered for sale. The liability of the L/C
Bank under the Letter of Credit will be reduced by
the amount of unreimbursed payments thereunder. In
the event that at any time there remains no amount
available under the Letter of Credit for a specific
Mortgage Pool, and coverage under another form of
credit support, if any, is exhausted, any losses
will be borne by the holder of Certificates of the
Series evidencing interests in such Mortgage Pool as
specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus
Supplement, the maximum liability of the L/C Bank
under the Letter of Credit for a Mortgage Pool will
be an amount equal to a percentage (the "L/C
Percentage"), set forth in the Prospectus
Supplement, relating to such Mortgage Pool. The
maximum amount available at any time to be paid
under the Letter of Credit will be determined in
accordance with the provisions of the related
Agreement. The duration of coverage and the amount
and frequency of any reduction in coverage provided
by the Letter of Credit with respect to a Series of
Certificates will be in compliance with requirements
established by the Rating Agency rating such Series
and will be set forth in the related Prospectus
Supplement. See "Enhancement--Letter of Credit."
B. Pool Insurance..... If so specified in the related Prospectus
Supplement, the Servicer or Trustee will obtain a
Pool Insurance Policy to cover any loss (subject to
the limitations described below)
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by reason of default by the borrowers on the related
Mortgage Loans to the extent not covered by any
policy of primary mortgage insurance (a "Primary
Mortgage Insurance Policy"). The amount of coverage
provided by the Pool Insurance Policy for a Mortgage
Pool will be specified in the related Prospectus
Supplement. A Pool Insurance Policy for a Mortgage
Pool, however, will not be a blanket policy against
loss, because claims thereunder may only be made for
particular defaulted Mortgage Loans and only upon
satisfaction of certain conditions precedent. See
"Description of Insurance--Pool Insurance Policies."
The Seller or the Servicer will be required to use
its best reasonable efforts to maintain the Pool
Insurance Policy for each such Mortgage Pool and to
present claims thereunder to the issuer of such Pool
Insurance Policy (the "Pool Insurer") on behalf of
the Trustee and the Certificateholders. See
"Description of the Certificates--Presentation of
Claims."
C. Mortgagor Bankruptcy
Bond................ If so specified in the related Prospectus
Supplement, the Seller or the Servicer will obtain
and use its best reasonable efforts to maintain a
Mortgagor Bankruptcy Bond for such Series covering
certain losses resulting from action that may be
taken by a bankruptcy court in connection with the
bankruptcy of a borrower. The level of coverage
provided by such Mortgagor Bankruptcy Bond will be
specified in the applicable Prospectus Supplement.
See "Description of Insurance--Mortgagor Bankruptcy
Bond."
D. Subordinated
Certificates....... If so specified in the related Prospectus
Supplement, the rights of holders of the
Certificates of one or more Subordinated Classes of
a Series to receive distributions with respect to
the Mortgage Loans in the Mortgage Pool for such
Series, or with respect to a Subordinated Pool (as
defined herein), will be subordinated to the rights
of the holders of the Certificates of one or more
Classes of such Series to receive such distributions
to the extent described in the related Prospectus
Supplement, and limited to the Subordinated Amount
set forth in the related Prospectus Supplement. This
subordination will be intended to enhance the
likelihood of regular receipt by holders of the
Senior Certificates of the full amount of scheduled
payments of principal and interest due them and to
reduce the likelihood that the holders of such
Senior Certificates will experience losses. See
"Enhancement--Subordinated Certificates."
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E. Shifting Interest... If so specified in the applicable Prospectus
Supplement, the protection afforded to holders of
Senior Certificates of a Series by the subordination
of certain rights of holders of Subordinated
Certificates of such Series to distributions on the
related Mortgage Loans may be effected by the
preferential right of the holders of the Senior
Certificates to receive, prior to any distribution
being made in respect of the holders of the related
Subordinated Certificates, current distributions on
the related Mortgage Loans of principal and interest
due them on each Distribution Date out of funds
available for distribution on such date in the
related Certificate Account and by the distribution
to the holders of the Senior Certificates on each
Distribution Date of a greater than pro rata
percentage of certain principal prepayments or other
recoveries of principal specified in the related
Prospectus Supplement on a Mortgage Loan that are
received in advance of their scheduled Due Dates and
are not accompanied by an amount as to interest
representing scheduled interest due on any date or
dates in any month or months subsequent to the month
of prepayment (the "Principal Prepayments"). The
allocation of a greater than pro rata share of such
amounts to the Senior Certificates will have the
effect of accelerating the amortization of the
Senior Certificates while increasing the respective
interest in the Trust Fund evidenced by the
Subordinated Certificates. Increasing the respective
interest of the Subordinated Certificates relative
to that of the Senior Certificates is intended to
preserve the availability of the benefits of the
subordination provided by the Subordinated
Certificates. See "Description of the Certificates--
Distributions of Principal and Interest" and "--
Distributions on Certificates" and "Enhancement--
Shifting Interest."
F. Reserve Fund....... If so specified in the related Prospectus
Supplement, a Reserve Fund may be established for
such Series. Unless otherwise specified in such
Prospectus Supplement, such Reserve Fund will not be
included in the corpus of the Trust Fund for such
Series. If so specified in the related Prospectus
Supplement, such Reserve Fund may be created by the
deposit by the Seller, of cash in the amount
specified in the related Prospectus Supplement (the
"Initial Deposit"). The Reserve Fund will be funded
by the retention of specified distributions on the
Primary Assets of the related Mortgage Pool, until
the Reserve Fund reaches a specified amount (the
"Required Reserve"). Thereafter, specified
distributions on the Primary Assets of the related
Mortgage Pool will be retained to the extent
necessary to maintain such Reserve Fund at the
related Required Reserve. If so specified in the
related Prospectus Supplement, the Reserve Fund with
respect to such Series may be funded at a lesser
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amount or in another manner acceptable to the Rating
Agency rating such Series. See "Enhancement--
Reserve Fund."
G. Other Funds........ Assets consisting of cash, certificates of deposit
or letters of credit, or any combination thereof, in
the aggregate amount specified in the related
Prospectus Supplement, will be deposited by the
Seller in one or more accounts to be established
with respect to a Series of Certificates by the
Seller with the Trustee on the related Closing Date
if such assets are required to make timely
distributions in respect of principal of, and
interest on, the Certificates of such Series, are
otherwise required as a condition to the rating of
such Certificates in the rating category specified
in the Prospectus Supplement, or are required in
order to provide for certain contingencies or in
order to make certain distributions regarding
Certificates which represent interests in GPM Loans
(a "GPM Fund") or Buy-Down Loans (a "Buy-Down
Fund"). Following each Distribution Date, amounts
may be withdrawn from any such fund and used and/or
distributed in accordance with the Agreement under
the conditions and to the extent specified in the
related Prospectus Supplement.
H. Swap Agreement..... If so specified in the Prospectus Supplement
relating to a Series of Certificates, the Trust will
enter into or obtain an assignment of a swap
agreement or similar agreement pursuant to which the
Trust will have the right to receive certain
payments of interest (or other payments) as set
forth or determined as described therein. See
"Enhancement--Swap Agreement."
Hazard Insurance and
Special Hazard Insurance
Policies................... Unless otherwise specified in the related Prospectus
Supplement, all of the Mortgage Loans will be
covered by standard hazard insurance policies
insuring against losses due to various causes,
including fire, lightning and windstorm. When a
Mortgaged Property is located at the time of
origination of the Mortgage Loan in a federally
designated flood area, the Agreement will require
the Servicer to cause flood insurance to be
maintained, to the extent available, and for so long
as the area is so designated, in those areas where
flood insurance is required under the National Flood
Insurance Act of 1968, as amended. Unless so
specified in the related Prospectus Supplement,
neither the Seller nor the Servicer will obtain an
insurance policy (the "Special Hazard Insurance
Policy") covering losses that result from certain
other physical risks that are not otherwise insured
against (including earthquakes and mudflows). If
obtained, any Special Hazard Insurance Policy will
be limited in scope and will
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cover losses in an amount specified in the
applicable Prospectus Supplement. Any hazard losses
not covered by the standard hazard policies, Special
Hazard Insurance Policy or flood insurance policies
will not be insured against and, to the extent that
the amount available under any other method of
credit support available for such Series is
exhausted, will be borne by Certificateholders of
such Series. The hazard insurance policies, Special
Hazard Insurance Policy and flood insurance policies
will be subject to the limitations described under
"Description of Insurance--Standard Hazard Insurance
Policies on Mortgage Loans" and "--Special Hazard
Insurance Policies."
Substitution of Primary
Assets..................... If so specified in the Prospectus Supplement
relating to a Series of Certificates, within the
period following the date of issuance of such
Certificates specified in such Prospectus
Supplement, the Seller or the Servicer will deliver
to the Trustee with respect to such Series Primary
Assets in substitution for any one or more of the
Primary Assets included in the related Trust Fund
which do not conform in one or more material
respects to the representations and warranties in
the related Agreement. See "Description of the
Certificates--Assignment of Mortgage Loans," and "--
Assignment of Mortgage Certificates."
Servicing.................. The Servicer will be responsible for servicing,
managing and making collections on the Mortgage
Loans for a Series. In addition, the Servicer, if so
specified in the related Prospectus Supplement, will
act as custodian and will be responsible for
maintaining custody of the Mortgage Loans and
related documentation on behalf of the Trustee.
Advances with respect to delinquent payments of
principal and/or interest on a Mortgage Loan
("Delinquency Advances") will be made by the
Servicer if and only to the extent described in the
related Prospectus Supplement. Such advances will be
intended to provide liquidity only and will be
reimbursable to the Servicer, to the extent
specified in the related Prospectus Supplement, from
scheduled payments of principal and/or interest,
late collections, or from the proceeds of
liquidation of the related Mortgage Loans or from
other recoveries relating to such Mortgage Loans
(including any insurance proceeds or payments from
Enhancement) or, to the extent specified in the
related Prospectus Supplement, from payments or
proceeds from other Mortgage Loans. If and to the
extent specified in the related Prospectus
Supplement, the Servicer will be required to advance
its own funds to pay for any related expenses of
foreclosure and disposition of any liquidated
Mortgage Loan or related Mortgaged Property (the
"Servicer Advances"). See "Servicing of
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Loans--Advances and Limitation Thereon." The
Servicer will be entitled to be reimbursed for any
such Servicer Advances as specified in the related
Prospectus Supplement. In performing these
functions, the Servicer will exercise the same
degree of skill and care that it customarily
exercises with respect to similar Mortgage Loans
owned or serviced by it for its own portfolio. Under
certain limited circumstances, the Servicer may
resign or be removed, in which event either the
Trustee or a third-party servicer will be appointed
as successor servicer. The Servicer will receive a
periodic fee as servicing compensation (the
"Servicing Fee") and may, as specified herein and in
the related Prospectus Supplement, receive certain
additional compensation. See "Servicing of Loans--
Servicing Compensation and Payment of Expenses."
Federal Income Tax
Considerations............. For a description of the material federal income tax
consequences of an investment in the Certificates,
see "Federal Income Tax Considerations." Prospective
investors should consult their own tax advisors
regarding the federal, state, local, and other tax
consequences of the ownership and disposition of the
Certificates.
ERISA Considerations....... The eligibility of Certificates to be acquired by
employee benefit plans or with the plan assets of
employee benefit plans is subject to the
considerations discussed under "ERISA
Considerations" herein and in the related Prospectus
Supplement. The related Prospectus Supplement will
provide further information with respect to the
eligibility of a Class of Certificates for purchase
by employee benefit plans.
A fiduciary of any employee benefit plan subject to
the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or Section 4975 of the Code
should carefully review with its own legal advisers
whether the purchase or holding of Certificates
could give rise to a transaction prohibited or
otherwise impermissible under ERISA or Section 4975
of the Code. See "ERISA Considerations" herein and
in the related Prospectus Supplement.
Legal Investment........... If so specified in the related Prospectus Supplement
relating to a Series of Certificates, a Class of
such Certificates will constitute a "mortgage
related security" under the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA") if and for
so long as it is rated in one of the two highest
rating categories by at least one nationally
recognized statistical rating organization. Any such
Classes will be legal investments for certain types
of institutional investors to the extent provided in
SMMEA subject, in any
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case, to any other regulations which may govern
investments by such institutional investors. See
"Legal Investment."
Ratings.................... It will be a requirement for issuance of any Series
that each Class of Certificates offered by this
Prospectus and the related Prospectus Supplement be
rated by at least one Rating Agency in one of its
four highest applicable rating categories. The
rating or ratings applicable to Certificates of each
Series offered hereby and by the related Prospectus
Supplement will be as set forth in the related
Prospectus Supplement. There is no assurance that
the rating initially assigned to such Certificates
will not be subsequently lowered or withdrawn by the
Rating Agency. In the event the rating initially
assigned to any Certificates is subsequently lowered
for any reason, no person or entity will be
obligated to provide any credit enhancement in
addition to the Enhancement, if any, specified in
the related Prospectus Supplement.
A securities rating should be evaluated
independently of similar ratings on different types
of securities. A securities rating is not a
recommendation to buy, hold or sell securities and
does not address the effect that the rate of
prepayments on Mortgage Loans or on Underlying Loans
relating to Mortgage Certificates, as applicable,
for a Series may have on the yield to investors in
the Certificates of such Series. See "Risk Factors--
Ratings Are Not Recommendations."
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RISK FACTORS
In addition to the other information contained in this Prospectus and in the
applicable Prospectus Supplement to be prepared and delivered in connection with
the offering of any Series of Certificates, prospective investors should
carefully consider the following risk factors in connection with the purchase of
the Certificates.
No Secondary Market. There will be no market for the Certificates of any
Series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
Certificateholders with liquidity of investment or that it will continue for the
life of the Certificates of any Series. The Prospectus Supplement for any Series
of Certificates may indicate that an underwriter specified therein intends to
establish a secondary market in such Certificates; however, no underwriter will
be obligated to do so. The Certificates will not be listed on any securities
exchange.
Primary Assets Are Only Source of Repayment. The Certificates of a Series
will be payable solely from the assets of the Trust Fund for such Certificates
and any related Enhancement. The Certificates of any Series will not represent
an interest in or obligation of the Seller, the Servicer, the Trustee or any of
their affiliates, except for the limited obligations of the Seller or the
Servicer with respect to certain breaches of representations and warranties and
the Servicer's obligations as Servicer. Neither the Certificates of any Series
nor the related Primary Assets will be guaranteed or insured by any governmental
agency or instrumentality (except to the limited extent described in the related
Prospectus Supplement that certain Primary Assets may be insured or guaranteed,
in whole or in part, by the FHA or VA), the Seller, the Servicer, the Trustee,
any of their affiliates or any other person. Consequently, in the event that
payments on the Primary Assets are insufficient or otherwise unavailable to make
all payments required on the Certificates, there will be no recourse to the
Seller or any other person for any failure to receive distributions on the
Certificates except to the extent of the obligations, if any, of the Seller with
respect to certain representations and warranties. See "The Agreements--
Assignments of Primary Assets." Further, unless otherwise stated in the related
Prospectus Supplement, at the times set forth in the related Prospectus
Supplement, certain Primary Assets and/or any balance remaining in the
Collection Account, Certificate Account or Distribution Account immediately
after making all payments due on the Certificates of such Series and other
payments specified in the related Prospectus Supplement, may be promptly
released or remitted to the Seller, the Servicer, the Enhancer or any other
person entitled thereto and will no longer be available for making payments to
Holders. Consequently, Holders of Certificates of each Series must rely solely
upon payments with respect to the Primary Assets and the other assets
constituting the Trust Fund for a Series of Certificates, including, if
applicable, any amounts available pursuant to any Enhancement for such Series,
for the payment of principal of and interest on the Certificates of such Series.
Adverse economic conditions (which may or may not affect real property
values) may affect the timely payment by borrowers of payments of principal and
interest when due on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Mortgage Loans. For
instance, if a Mortgaged Property secures a senior mortgage or deed of trust for
an adjustable-rate loan, and interest rates have increased since the origination
of the related junior Mortgage Loan, the borrower's ability to pay the required
monthly payment on such Mortgage Loan may be adversely affected by the increase
in monthly payments on the Mortgage Loan and on such senior loan. Further,
application of federal and state bankruptcy and debtor relief laws would affect
the interests of the Certificateholders in the Mortgage Loans if such laws
result in certain Mortgage Loans being uncollectible.
The Trustee on behalf of the Certificateholders will be required under the
Agreement to proceed only against the Primary Assets and other assets
constituting the related Trust Fund in the case of a default with respect to
such Certificates and may not proceed against any assets of the Seller. There is
no assurance that the market value of the Primary Assets or any other assets for
a Series will at any time be equal to or greater than the aggregate principal
amount of the Certificates of such Series then outstanding, plus accrued
interest thereon. Moreover, upon any sale of the Primary Assets after an event
of default under the Agreement for a Series of Certificates, the Trustee, the
Servicer, if any, the Enhancer and any other service provider specified in the
related Prospectus Supplement generally will be entitled to receive the proceeds
of any such
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sale to the extent of unpaid fees and other amounts owing to such persons under
the related Agreement prior to distributions to Holders of Certificates. Upon
any such sale, the proceeds thereof may be insufficient to pay in full the
principal of and interest on the Certificates of such Series. See "The Trust
Funds."
Limited Protection Against Losses. Although any Enhancement is intended to
reduce the risk of delinquent payments or losses to Holders entitled to the
benefit thereof, the amount of such Enhancement will be limited, as set forth in
the related Prospectus Supplement, and will decline and could be depleted under
certain circumstances prior to the payment in full of the related Series of
Certificates, and as a result Holders may suffer losses. See "Enhancement."
Yield May Vary. The yield to maturity experienced by a Holder of Certificates
may be affected by the rate of payment of principal of the Mortgage Loans or
Underlying Loans relating to any Mortgage Certificates, as applicable. The
timing of principal payments of the Certificates of a Series will be affected by
a number of factors, including the following: (i) the extent of prepayments of
the Mortgage Loans or Underlying Loans relating to any Mortgage Certificates, as
applicable, which prepayments may be influenced by a variety of factors; (ii)
the manner of allocating principal payments among the Classes of Certificates of
a Series as specified in the related Prospectus Supplement; and (iii) the
exercise by the party entitled thereto of any right of optional termination. See
"Description of the Certificates--Weighted Average Life of the Certificates."
Prepayments also may result from repurchases of Mortgage Loans or Underlying
Loans relating to the Mortgage Certificates, as applicable, due to material
breaches of the Seller's representations and warranties.
Interest payable on the Certificates of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues during the calendar month
prior to a Distribution Date, the effective yield to Holders will be reduced
from the yield that otherwise would be obtainable if interest payable on the
Certificate were to accrue through the day immediately preceding each
Distribution Date, and the effective yield (at par) to Holders will be less than
the indicated coupon rate. See "Description of the Certificates--Payments of
Interest."
Risks of the Primary Assets; General. An investment in securities such as the
Certificates of any Series which generally represent interests in mortgage loans
may be affected by, among other things, a decline in real estate values and
changes in the mortgagor's or obligor's financial condition. No assurance can be
given that the values of the Mortgaged Properties securing the Mortgage Loans or
the values of the mortgaged properties securing the Underlying Loans relating to
any Mortgage Certificates have remained or will remain at their levels on the
dates of origination of the related Mortgage Loans or Underlying Loans. If the
residential real estate market should experience an overall decline in property
values such that the sum of the outstanding balances of the Mortgage Loans and
the Underlying Loans relating to any Mortgage Certificates comprising a
particular Trust Fund, plus any secondary financing on the related Mortgaged
Properties and mortgaged properties securing any Underlying Loans, become equal
to or greater than the value of the related Mortgaged Properties or mortgaged
properties securing any Underlying Loans, as applicable, the actual rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the mortgage lending industry and those experienced in the
Seller's portfolio. Moreover, a decline in the value of a Mortgaged Property
will increase the risk of loss particularly with respect to any related junior
Mortgage Loan. In addition, adverse economic conditions generally, in particular
geographic areas or industries, or affecting particular segments of the
borrowing community (such as mortgagors relying on commission income and self-
employed mortgagors) and other factors, may affect the timely payment by
mortgagors of scheduled payments of principal and interest on the Mortgage Loans
or Underlying Loans relating to any Mortgage Certificates and, accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to any Trust
Fund. See "Yield Considerations" and "Maturity and Prepayment Considerations."
To the extent that such losses are not covered by the applicable Enhancement,
Holders of Certificates of the Series evidencing interests in the related Trust
Fund will bear all risk of loss resulting from default by borrowers.
Certificateholders will have to look primarily to the value of the related
Mortgaged Properties or mortgaged properties securing any Underlying Loans for
recovery of the outstanding principal and unpaid interest on the defaulted
Mortgage Loans or Underlying Loans relating to any Mortgage Certificates. In
addition to the foregoing, certain geographic regions in the United States from
time to time will experience weaker regional
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economic conditions and housing markets and, consequently, will experience
higher rates of loss and delinquency on mortgage loans generally. The Mortgage
Loans or Underlying Loans relating to any Mortgage Certificates may be
concentrated in these regions, and such concentration may present risk
considerations in addition to those generally present for similar mortgage-
backed or contract-backed securities without such concentration. See "The Trust
Fund--The Mortgage Pools" and "--Underwriting Standards."
If applicable, certain legal aspects of the Mortgage Loans for a Series of
Certificates may be described in the related Prospectus Supplement.
Risks of Balloon Mortgage Loans. Certain of the Mortgage Loans (the "Balloon
Mortgage Loans") included in a Trust Fund as of the related Cut-off Date may not
be fully amortizing over their terms to maturity and, thus, will require
substantial principal payments (i.e., balloon payments) at their stated
maturity. Mortgage loans with balloon payments involve a greater degree of risk
because the ability of a mortgagor to make a balloon payment typically will
depend upon its ability either to timely refinance the loan or to timely sell
the related mortgaged property. The ability of a mortgagor to accomplish either
of these goals will be affected by a number of factors, including the level of
available mortgage interest rates at the time of sale or refinancing, the
mortgagor's equity in the related mortgaged property, the financial condition
and operating history of the mortgagor and the related mortgaged property, tax
laws, prevailing general economic conditions and the availability of credit for
single family properties generally.
Status of Junior Liens; Property Values May Be Insufficient. If the Mortgage
Loans in a Trust Fund are secured primarily by junior liens subordinate to the
rights of the mortgagee under the related senior mortgage(s) or deed(s) of
trust, the proceeds from any liquidation, insurance or condemnation proceedings
will be available to satisfy the outstanding balance of such Mortgage Loans only
to the extent that the claims of such senior mortgagees or beneficiaries have
been satisfied in full, including any related foreclosure costs. In addition, a
junior mortgagee may not foreclose on the Mortgaged Property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
either must pay the entire amount due on the senior mortgage(s) to the senior
mortgagee(s) at or prior to the foreclosure sale or undertake the obligation to
make payments on the senior mortgage(s) in the event the mortgagor is in default
thereunder. The Trust Fund will not have any source of funds to satisfy the
senior mortgage(s) or deeds of trust or make payments due to the senior
mortgagee(s) or beneficiaries.
There are several factors that could adversely affect the value of Mortgaged
Properties such that the outstanding balance of the related Mortgage Loan (or
the balances thereof sold to a Trust Fund) or Underlying Loan relating to any
Mortgage Certificates, together with any senior financing on the Mortgaged
properties, would equal or exceed the value of the Mortgaged Properties. Among
the factors that could adversely affect the value of the Mortgaged Properties
are an overall decline in the residential real estate market in the areas in
which the Mortgaged Properties are located or a decline in the general condition
of the Mortgaged Properties as a result of failure of borrowers to maintain
adequately the Mortgaged Properties or of natural disasters that are not
necessarily covered by insurance, such as earthquakes and floods. Any such
decline could extinguish the value of a junior interest in a Mortgaged Property
before having any effect on the related senior interest therein. If such a
decline occurs, the actual rates of delinquencies, foreclosure and losses on any
junior Mortgage Loans could be higher than those currently experienced in the
mortgage and home improvement lending industry in general. See "Certain Legal
Aspects of the Loans--Junior Mortgages; Rights of Senior Mortgages."
Pre-Funding and Additional Loans May Adversely Affect Investment. If a Trust
Fund includes a Pre-Funding Account and the principal balance of additional
Primary Assets delivered to the Trust Fund during the Pre-Funding Period is less
than the Pre-Funded Amount, the Holders of the Certificates of the related
Series will receive a prepayment of principal as and to the extent described in
the related Prospectus Supplement. Any such principal prepayment may adversely
affect the yield to maturity of the applicable Certificates. Because prevailing
interest rates are subject to fluctuation, there can be no assurance that
investors will be able to reinvest such a prepayment at yields equaling or
exceeding the yields on the related Certificates. It is possible that the yield
on any such reinvestment will be lower, and may be significantly lower, than the
yield on the related Certificates.
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Each additional Primary Asset must satisfy the eligibility criteria specified
in the related Prospectus Supplement and related Agreement. Such eligibility
criteria will be determined in consultation with each Rating Agency (and/or any
Enhancer) prior to the issuance of the related Series and are designed to ensure
that, if such additional Primary Assets were included as part of the initial
Primary Assets, the credit quality of such assets would be consistent with the
initial rating of each Class of Certificates of such Series. The Seller will
certify to the Trustee that all conditions precedent to the transfer of the
additional Primary Assets, including the satisfaction of the eligibility
criteria to the Trust Fund, have been satisfied. It is a condition to the
transfer of any additional Primary Assets to the Trust Fund that (i) each Rating
Agency, after receiving prior notice of the proposed transfer of the additional
Primary Assets to the Trust Fund, shall have not advised the Seller or the
Trustee or any Enhancer that the conveyance of such additional Primary Assets
will result in a qualification, modification or withdrawal of its then current
rating of any Class of Certificates of such Series and (ii) the Enhancer, if
any, shall have consented to such transfer. Following the transfer of additional
Primary Assets to the Trust Fund, the aggregate characteristics of the Primary
Assets then held in the Trust Fund may vary from those of the initial Primary
Assets of such Trust Fund. As a result, the additional Primary Assets may
adversely affect the performance of the related Certificates. See "The
Agreements--Payments on Mortgage Loans; Accounts."
The ability of a Trust Fund to invest in additional Mortgage Loans during the
related Pre-Funding Period will be dependent on the ability of the Seller to
originate or acquire Mortgage Loans that satisfy the requirements for transfer
to the Trust Fund specified in the related Prospectus Supplement. The ability of
the Seller to originate or acquire such Mortgage Loans will be affected by a
variety of social and economic factors, including the prevailing level of market
interest rates, unemployment levels and consumer perceptions of general economic
conditions.
Servicer's Ability to Modify Mortgage Loans. If so specified in the related
Prospectus Supplement, the Servicer will be permitted (within prescribed
parameters) to extend and modify Mortgage Loans under certain circumstances.
Such extensions or modifications may be permitted in order to maximize
recoveries, with respect to Mortgage Loans that are in default or as to which a
payment default is imminent, including in particular with respect to balloon
payments or as otherwise set forth in the related Prospectus Supplement. In
addition, the Servicer may receive a workout fee based on receipts from or
proceeds of such Mortgage Loans. While any such entity generally will be
required to determine that any such extension or modification is not reasonably
likely to produce a lower recovery with respect to a Mortgage Loan, there can be
no assurance that such flexibility with respect to extensions or modifications
or payment of a workout fee will not reduce the present value of receipts from
or proceeds of such a Mortgage Loans from the level which would otherwise have
been realized.
Enforceability; Consumer Protection Laws May Affect Mortgage Loans.
Mortgage Loans may contain a due-on-sale clause, which in general permits the
lender to accelerate the maturity of the Mortgage Loan if the borrower sells,
transfers or conveys the related Mortgaged Property or its interest in such
Mortgaged Property. Such clauses generally are enforceable subject to certain
exceptions. The courts of all states will enforce clauses providing for
acceleration in the event of a material payment default. The equity courts of
any state, however, may refuse the foreclosure of a mortgage or deed of trust
when an acceleration of the indebtedness would be inequitable or unjust or the
circumstances would render the acceleration unconscionable.
Applicable state laws generally regulate interest rates and other charges and
require certain disclosures. In addition, other state laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and debt collection practices may apply to the origination,
servicing and collection of the Mortgage Loans. Depending on the provisions of
the applicable law and the specific facts and circumstances involved, violations
of these laws, policies and principles may limit the ability of the Servicer to
collect all or part of the principal of or interest on the Mortgage Loans, may
entitle the borrower to a refund of amounts previously paid and, in addition,
could subject the owner of the Mortgage Loan to damages and administrative
enforcement.
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The Mortgage Loans are also subject to federal laws; including:
(i) the federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding the
terms of the Mortgage Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national original, receipt of public
assistance or the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit;
(iii) the Americans with Disabilities Act, which, among other things,
prohibits discrimination on the basis of disability in the full and equal
enjoyment of the goods, services, facilities, privileges, advantages or
accommodations of any place of public accommodation; and
(iv) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
Violations of certain provisions of these federal laws may limit the ability
of the Servicer to collect all or part of the principal of or interest on the
Mortgage Loans and, in addition, could subject the Trust Fund to damages and
administrative enforcement. In addition, numerous other federal and state
statutory provisions, including the federal bankruptcy laws, the Soldiers' and
Sailors' Civil Relief Act of 1940 and state debtor relief laws, also may
adversely affect the Servicer's ability to collect the principal of or interest
on the Mortgage Loans and also would affect the interests of the Holders in such
Mortgage Loans if such laws result in the Mortgage Loans being uncollectible.
See "Certain Legal Aspects of the Mortgage Loans."
Potential Liability For Environmental Conditions. Real property pledged as
security to a lender may be subject to certain environmental risks. Under the
laws of certain states, contamination of a property may give rise to a lien on
the property to assure the costs of clean-up. In several states, such a lien
has priority over the lien of an existing mortgage or owner's interest against
such property. In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
("CERCLA"), a lender may be liable, as an "owner" or "operator," for costs of
addressing releases or threatened releases of hazardous substances that require
remedy at a property, if agents or employees of the lender have become
sufficiently involved in the operations of the borrower, regardless of whether
or not the environmental damage or threat was caused by a prior owner. A lender
also risks such liability on foreclosure of the Mortgaged Property. Any such
lien arising with respect to a Mortgaged Property would adversely affect the
value of such Mortgaged Property and could make impracticable the foreclosure on
such Mortgaged Property in the event of a default by the related borrower. See
"Servicing Of Mortgage Loans--Realization Upon Defaulted Mortgage Loans."
Prepayment and Yield Considerations. The rate and timing of principal
payments on the Certificates of each Series will depend, among other things, on
the rate and timing of principal payments (including prepayments, defaults and
liquidations) on the related Mortgage Loans or the Underlying Loans relating to
any Mortgage Certificates. As is the case with mortgage-backed securities
generally, the Certificates of each Series are subject to substantial inherent
cash-flow uncertainties because the Mortgage Loans may be prepaid at any time.
Generally, when prevailing interest rates increase, prepayment rates on mortgage
loans tend to decrease, resulting in a slower return of principal to investors
at a time when reinvestment at such higher prevailing rates would be desirable.
Conversely, when prevailing interest rates decline, prepayment rates on mortgage
loans tend to increase, resulting in a faster return of principal to investors
at a time when reinvestment at comparable yields may not be possible.
The yield to maturity on each Class of Certificates of a Series will depend,
among other things, on the rate and timing of principal payments (including
prepayments, defaults and liquidations) on the Mortgage Loans or the Underlying
Loans relating to any Mortgage Certificates, as applicable, and the allocation
thereof to reduce the Certificate Principal Balance of such Class. The yield to
maturity on each Class of Certificates will also depend on the Pass-Through Rate
and the purchase price for such Certificates. The yield to investors
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on any Class of Certificates will be adversely affected by any allocation
thereto of interest shortfalls on the Mortgage Loans or the Underlying Loans
relating to any Mortgage Certificates, as applicable, which are expected to
result from the distribution of less than a full month's interest in connection
with prepayments (including for this purpose Insurance Proceeds and Liquidation
Proceeds).
In general, if a Class of Certificates is purchased at a premium and
principal distributions thereon occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if a Class of Certificates is
purchased at a discount and principal distributions thereon occur at a rate
slower than that assumed at the time of purchase, the investor's actual yield to
maturity will be lower than that assumed at the time of purchase.
Subordination. To the extent specified in the applicable Prospectus
Supplement, distributions of interest and principal on one or more Classes of
Certificates of a Series may be subordinated in priority of payment to interest
and principal due on one or more other Classes of Certificates of such Series.
Limitation on Exercise of Rights Due to Book-Entry Registration. If so
specified in the applicable Prospectus Supplement, one or more Classes of
Certificates of a Series initially will be represented by one or more
certificates registered in the name of Cede & Co. ("Cede"), or any other nominee
of The Depository Trust Company ("DTC") or any other Depository set forth in the
applicable Prospectus Supplement, and will not be registered in the names of the
beneficial holders of the Certificates of such Series or their nominees. Because
of this, unless and until Certificates in fully registered, certificated form
("Definitive Certificates") for such Series are issued, beneficial holders of
such Certificates will not be recognized by the applicable Trustee as
"Certificateholders" (as such terms are used herein or in the related
Agreement). Hence, until Definitive Certificates are issued, beneficial holders
of such Certificates will be able to exercise the rights of Certificateholders
only indirectly through DTC and its participating organizations.
Ratings Are Not Recommendations. It will be a condition to the issuance of a
Series of Certificates that each Class offered by means of this Prospectus be
rated in one of the four highest rating categories by the Rating Agency
identified in the related Prospectus Supplement. Any such rating would be based
on, among other things, the adequacy of the value of the Primary Assets and any
Enhancement with respect to such Series. Such rating should not be deemed a
recommendation to purchase, hold or sell Certificates, inasmuch as it does not
address market price or suitability for a particular investor. There also is no
assurance that any such rating will remain in effect for any given period of
time or may not be lowered or withdrawn entirely by the Rating Agency if in its
judgment circumstances in the future so warrant. In addition to being lowered
or withdrawn due to any erosion in the adequacy of the value of the Primary
Assets, such rating also might be lowered or withdrawn, among other reasons,
because of an adverse change in the financial or other condition of an Enhancer
or a change in the rating of such Enhancer's long term debt.
DESCRIPTION OF THE CERTIFICATES
General
Each Series of Certificates will be issued pursuant to a Pooling and
Servicing Agreement (an "Agreement") among the Seller, the Servicer, and the
Trustee named in the applicable Prospectus Supplement. A form of the Agreement
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The following summaries describe certain provisions in the
Agreements common to each Series of Certificates. 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 Agreement and the Prospectus Supplement
relating to each Series of Certificates. Where particular provisions or terms of
the Agreements are referred to the actual provisions (including defined terms)
are incorporated herein by reference as part of such summaries.
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Each Series of Certificates will consist of one or more Classes of
Certificates one or more of which may be Compound Interest Certificates,
Variable Interest Certificates, PAC Certificates, Zero Coupon Certificates,
Principal Only Certificates, Interest Only Certificates or Participating
Certificates. A Series also may include one or more Subordinated Classes of
Certificates. The Certificates of each Series will be issued only in fully
registered form, without coupons, in the authorized denominations for each Class
specified in the related Prospectus Supplement. Upon satisfaction of the
conditions, if any, applicable to a Class of a Series as described in the
related Prospectus Supplement, the transfer of the Certificates may be
registered and the Certificates may be exchanged at the office of the Trustee
specified in the Prospectus Supplement without the payment of any service charge
other than any tax or governmental charge payable in connection with such
registration of transfer or exchange. If specified in the related Prospectus
Supplement, one or more Classes of a Series may be available in book-entry form
only.
Unless otherwise provided in the related Prospectus Supplement, payments of
principal of and interest on a Series of Certificates will be made on the
Distribution Dates specified in the related Prospectus Supplement (which may be
different for each Class or for the payment of principal and interest) by check
mailed to the Holders of such Series registered as such at the close of business
on the record date specified in the related Prospectus Supplement applicable to
such Distribution Dates at their addresses appearing on the security register,
except that (a) payments may be made by wire transfer (which, unless otherwise
specified in the related Prospectus Supplement, shall be at the expense of the
Holder requesting payment by wire transfer) in certain circumstances described
in the related Prospectus Supplement and (b) final payments of principal in
retirement of each Certificate will be made only upon presentation and surrender
of such Certificate at the office of the Trustee specified in the Prospectus
Supplement. Notice of the final payment on a Certificate will be mailed to the
Holder of such Certificate before the Distribution Date on which the final
principal payment on any Certificate is expected to be made to the Holder of
such Certificate.
Payments of principal of and interest on the Certificates will be made by the
Trustee, or a paying agent on behalf of the Trustee, as specified in the related
Prospectus Supplement. Unless otherwise provided in the related Prospectus
Supplement, all payments with respect to the Primary Assets for a Series,
together with reinvestment income thereon, amounts withdrawn from any Reserve
Fund, and amounts available pursuant to any other Enhancement, will be deposited
directly into the Collection Account or the Certificate Account. If provided in
the related Prospectus Supplement, such amounts may be net of certain amounts
payable to the Servicer and any other person specified in the Prospectus
Supplement. Such amounts thereafter may be deposited into the Distribution
Account and will be available to make payments on the Certificates of such
Series on the next applicable Distribution Date. See "The Trust Funds--
Accounts."
If so specified in the Prospectus Supplement for a Series with respect to
which the Seller has elected to treat the Trust Fund as a REMIC under the Code,
ownership of the Trust Fund for such Series may be evidenced by Multi-Class
Certificates and Residual Certificates. Distributions of principal and interest
with respect to Multi-Class Certificates may be made on a sequential or
concurrent basis, as specified in the related Prospectus Supplement. The
Residual Certificates, if any, included in a Series will be designated by the
Seller as the "residual interest" in the related REMIC for purposes of Section
860G(a)(2) of the Code, and will represent the right to receive distributions as
specified in the Prospectus Supplement for such Series. All other Classes of
Certificates of such Series will constitute "regular interests" in the related
REMIC, as defined in the Code. If so specified in the related Prospectus
Supplement, such Residual Certificates may be offered hereby and by means of
such Prospectus Supplement. See "Federal Income Tax Consequences."
Valuation of the Primary Assets
If specified in the related Prospectus Supplement for a Series of
Certificates, each Primary Asset included in the related Trust Fund for a Series
will be assigned an initial "Asset Value." Unless otherwise specified in the
related Prospectus Supplement, the Asset Value of the Primary Assets at any time
will be equal to the product of the Asset Value Percentage as set forth in the
related Agreement and the lesser of (a) the stream of remaining regularly
scheduled payments on the Primary Assets, net, unless otherwise provided in the
related Prospectus Supplement, of certain amounts payable as expenses, together
with income earned on each such scheduled payment received through the day
preceding the next Distribution Date at the Assumed
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Reinvestment Rate, if any, discounted to present value using the highest pass-
through rate of any Class of Certificates of such Series over periods equal to
the interval between payments on the Certificates and (b) the then principal
balance of the Primary Assets. Unless otherwise specified in the related
Prospectus Supplement, the initial Asset Value of the Primary Assets will be at
least equal to the principal amount of the Certificates of the related Series at
the date of issuance thereof.
The "Assumed Reinvestment Rate," if any, for a Series will be the highest
rate permitted by the Rating Agency or a rate insured by means of a surety bond,
guaranteed investment contract, or other arrangement satisfactory to the Rating
Agency. If the Assumed Reinvestment Rate is so insured, the related Prospectus
Supplement will set forth the terms of such arrangement.
Payments of Interest
The Certificates of each Class by their terms entitled to receive interest
will bear interest (calculated, unless otherwise specified in the related
Prospectus Supplement, on the basis of a 360-day year of twelve 30-day months)
from the date and at the rate per annum specified, or calculated in the method
described, in the related Prospectus Supplement. Interest on such Certificates
of a Series will be payable on the Distribution Date specified in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement, the
Distribution Date for the payment of interest of a Class may be different from,
or occur more or less frequently than, the Distribution Date for the payment of
principal of such Class. The rate of interest on Certificates of a Series may be
variable or may change with changes in the annual percentage rates of the
Mortgage Loans or Underlying Loans relating to any Mortgage Certificates, as
applicable, included in the related Trust Fund and/or as prepayments occur with
respect to such Mortgage Loans or Underlying Loans, as applicable. Principal
Only Certificates may not be entitled to receive any interest distributions or
may be entitled to receive only nominal interest distributions. Any interest on
Zero Coupon Certificates that is not paid on the related Distribution Date will
accrue and be added to the principal thereof on such Distribution Date.
Interest payable on the Certificates on a Distribution Date will include all
interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding a
Distribution Date, the effective yield to Holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the Certificates were
to accrue through the day immediately preceding such Distribution Date.
Payments of Principal
On each Distribution Date for a Series, principal payments will be made to
the Holders of the Certificates of such Series on which principal is then
payable, to the extent set forth in the related Prospectus Supplement. Such
payments will be made in an aggregate amount determined as specified in the
related Prospectus Supplement and will be allocated among the respective Classes
of a Series in the manner, at the times and in the priority (which may, in
certain cases, include allocation by random lot) set forth in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement,
the Distribution Date for the payment of principal of a Class may be different
from, or occur more or less frequently than, the Distribution Date for the
payment of interest for such Class.
Final Scheduled Distribution Date
The Prospectus Supplement for a Series may specify a Final Scheduled
Distribution Date with respect to each related Class of Certificates, which will
be the date on which the entire aggregate principal balance of such Class is
expected to be reduced to zero, calculated on the basis of the assumptions
applicable to such Series described in such Prospectus Supplement. Since
payments on the Primary Assets will be used to make distributions in reduction
of the outstanding principal amount of the Certificates, it is likely that the
actual final Distribution Date of any such Class will occur earlier, and may
occur substantially earlier, than its Final Scheduled Distribution Date.
Furthermore, unless otherwise specified in the related Prospectus Supplement, as
a result of delinquencies, defaults and liquidations of the Primary Assets in
the Trust Fund, the actual final
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Distribution Date of any Certificate may occur later that its Final Scheduled
Distribution Date. No assurance can be given as to the actual prepayment
experience with respect to a Series. See "--Weighted Average Life of the
Certificates."
Special Redemption
If so specified in the Prospectus Supplement relating to a Series of
Certificates having other than monthly Distribution Dates, one or more Classes
of Certificates of such Series may be subject to special redemption, in whole or
in part, on the day specified in the related Prospectus Supplement (a "Special
Redemption Date") if, as a consequence of prepayments on the Mortgage Loans or
Underlying Loans, as applicable, relating to such Certificates or of low yields
then available for reinvestment, the entity specified in the related Prospectus
Supplement determines, based on assumptions specified in the related Agreement,
that the amount available for the payment of interest that will have accrued on
such Certificates (the "Available Interest Amount") through the designated
interest accrual date specified in the related Prospectus Supplement is less
than the amount of interest that will have accrued on such Certificates to such
date. In such event and as further described in the related Prospectus
Supplement, the Trustee will redeem a principal amount of outstanding
Certificates of such Series as will cause the Available Interest Amount to equal
the amount of interest that will have accrued through such designated interest
accrual date for such Series of Certificates outstanding immediately after such
redemption.
Optional Purchase or Termination
The Seller or the Servicer may, at its option, purchase, in whole or in part,
one or more Classes of Certificates of any Series, on any Distribution Date
under the circumstances, if any, specified in the Prospectus Supplement relating
to such Series. Alternatively, if so specified in the related Prospectus
Supplement for a Series of Certificates, the Seller, the Servicer or another
entity designated in the related Prospectus Supplement may, at its option, cause
an early termination of a Trust Fund by repurchasing all of the Primary Assets
from such Trust Fund on or after a date specified in the related Prospectus
Supplement, or on or after such time as the aggregate outstanding principal
amount of the Certificates or Primary Assets, as specified in the related
Prospectus Supplement, is less than the amount or percentage specified in the
related Prospectus Supplement. In addition, if so specified in the related
Prospectus Supplement, upon certain events of insolvency or receivership of the
Seller or another affiliated entity specified in the related Prospectus
Supplement, the related Primary Assets of the Trust Fund will be liquidated and
the Trust Fund will be terminated, subject to the conditions set forth in the
related Prospectus Supplement. In each such event, the Certificates of the
related Series will experience a prepayment. The redemption, purchase or
repurchase price will be set forth in the related Prospectus Supplement. If
specified in the related Prospectus Supplement, in the event that a REMIC
election had been made, the Trustee shall receive a satisfactory opinion of
counsel that the optional purchase or termination will be conducted so as to
constitute a "qualified liquidation" under Section 860F of the Code.
In addition, the Prospectus Supplement may provide other circumstances under
which Holders of Certificates of a Series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related Primary Assets.
Weighted Average Life of the Certificates
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 principal of such
security will be repaid to the investor. Unless otherwise specified in the
related Prospectus Supplement, the weighted average life of a Class of
Certificates will be influenced by the rate at which the amounts financed under
the Mortgage Loans (or related balances thereof) or Underlying Loans relating to
any Mortgage Certificates, as applicable, included in the Trust Fund for a
Series are paid, which may be in the form of scheduled amortization or
prepayments.
Prepayments on mortgage loans and other receivables can be measured relative
to a prepayment standard or model. The Prospectus Supplement for a Series of
Certificates will describe the prepayment standard or
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model, if any, used and may contain tables setting forth the projected weighted
average life of each Class of Certificates of such Series and the percentage of
the original principal amount of each Class of Certificates of such Series that
would be outstanding on specified Distribution Dates for such Series based on
the assumptions stated in such Prospectus Supplement, including assumptions that
prepayments on the Mortgage Loans or Underlying Loans relating to any Mortgage
Certificates, as applicable, included in the related Trust Fund are made at
rates corresponding to various percentages of the prepayment standard or model
specified in such Prospectus Supplement.
There is, however, no assurance that prepayment of the Mortgage Loans or
Underlying Loans relating to any Mortgage Certificates, as applicable, included
in the related Trust Fund will conform to any level of any prepayment standard
or model specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of mortgage loans may be influenced by a variety of
factors, including job-related factors such as transfers, layoffs or promotions
and personal factors such as divorce, disability or prolonged illness. Economic
conditions, either generally or within a particular geographic area or industry,
also may affect the rate of principal prepayment. Demographic and social
factors may influence the rate of principal prepayments in that some borrowers
have greater financial flexibility to move or refinance than do other borrowers.
The deductibility of mortgage interest payments, servicing decisions and other
factors also affect the rate of principal prepayments. As a result, there can
be no assurance as to the rate or timing of principal prepayments of the
Mortgage Loans or Underlying Loans either from time to time or over the lives of
such Mortgage Loans or Underlying Loans.
The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if
prevailing interest rates fall significantly below the interest rates on the
Mortgage Loans or Underlying Loans relating to any Mortgage Certificates, as
applicable, for a Series, such Mortgage Loans are likely to prepay at rates
higher than if prevailing interest rates remain at or above the interest rates
borne by such Mortgage Loans. In this regard, it should be noted that the
Mortgage Loans or Underlying Loans, as applicable, for a Series may have
different interest rates. In addition, the weighted average life of the
Certificates may be affected by the varying maturities of the Mortgage Loans or
Underlying Loans relating to any Mortgage Certificates, as applicable. If any
Mortgage Loans or Underlying Loans relating to any Mortgage Certificates, as
applicable, for a Series have actual terms-to-stated maturity of less that those
assumed in calculating the Final Scheduled Distribution Date of the related
Certificates, one or more Classes of the Series may be fully paid prior to their
respective Final Scheduled Distribution Date, even in the absence of
prepayments.
THE TRUST FUNDS
General
The Certificates of each Series will represent interests in the assets of the
related Trust Fund. The Trust Fund for each Series will include (i) the Primary
Assets, (ii) if so specified in the related Prospectus Supplement, amounts
available from the reinvestment of payments on such Primary Assets at the
Assumed Reinvestment Rate, if any, (iii) any Enhancement or the rights thereto
and (iv) any Mortgaged Property that secured a Mortgage Loan but which is
acquired by foreclosure or deed in lieu of foreclosure.
The Primary Assets for a Series will be transferred by the Seller to the
related Trust Fund. Mortgage Loans relating to a Series will be serviced by the
Servicer pursuant to the related Agreement.
With respect to each Trust Fund, prior to the initial offering of the related
Series of Certificates, the Trust Fund will have no assets or liabilities. No
Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Primary Assets and other assets contemplated
herein and in the related Prospectus Supplement and the proceeds thereof,
issuing Certificates and making payments and distributions thereon and certain
related activities. No Trust Fund is expected to have any source of capital
other that its assets and any related Enhancement.
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Primary Assets included in the Trust Fund for a Series may consist of any
combination of Mortgage Loans and Mortgage Certificates, to the extent and as
specified in the related Prospectus Supplement.
The Mortgage Pools
General. If so specified in the Prospectus Supplement with respect to a
Series, the Primary Assets for a Series may include one or more Mortgage Pools
containing (i) conventional one- to four-family residential, first, second
and/or more junior mortgage loans, (ii) Cooperative Loans made to finance the
purchase of certain rights relating to cooperatively owned properties secured by
the pledge of shares issued by a Cooperative and the assignment of a proprietary
lease or occupancy agreement providing the exclusive right to occupy a
particular Cooperative Dwelling, (iii) Mortgage Loans secured by unimproved
land, (iv) mortgage participation certificates evidencing participation
interests in such mortgage loans that are acceptable to the nationally
recognized Rating Agency rating the Certificates of such Series for a rating in
one of the four highest rating categories of such Rating Agency or (v) certain
conventional Mortgage Certificates issued by one or more trusts established by
one or more private entities. The Mortgage Loans will be newly originated or
seasoned, and will be purchased by the Seller either directly or through one or
more affiliates.
All Mortgage Loans will be evidenced by promissory notes (the "Mortgage
Notes") secured by first or more junior mortgages or first or second deeds of
trust or other similar security instruments creating a first or more junior
lien, as applicable, on the Mortgaged Properties. The Mortgage Properties will
include "Single Family Property," consisting of detached, individual dwellings,
individual condominiums, townhouses, duplexes, row houses, individual units in
planned unit developments and other attached dwelling units and such other type
of homes or residential units as are set forth in the related Prospectus
Supplement. Each such detached or attached home will be constructed on land
owned in fee simple by the borrower or on land leased by the borrower for a term
at least ten years greater than the term of the applicable Mortgage Loan.
Attached homes may consist of duplexes, triplexes and fourplexes (multifamily
structures where each borrower owns the land upon which the unit is built with
the remaining adjacent land owned in common). The Mortgaged Properties may
include mixed-use property. Mixed-use property will consist of structures of
no more than three stories, which include one to four residential dwelling units
and space used for retail, professional or other commercial uses. Such uses,
which will not involve more than 50% of the space in the structure, may include
doctor, dentist or law offices, real estate agencies, boutiques, newsstands,
convenience stores or other similar types of uses intended to cater to
individual customers as specified in the related Prospectus Supplement. Any
such non-residential use will be in compliance with local zoning laws and
regulations. The Mortgaged Properties may be located in suburban or
metropolitan districts. The Mortgaged Properties also may include investment
properties and vacation and second homes. Mortgage Loans secured by multifamily
property also may be secured by an assignment of leases and rents and operating
or other cash flow guarantees relating to the Mortgaged Properties to the extent
specified in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, a Mortgage Pool may
contain Mortgage Loans with adjustable Mortgage Rates ("ARM Loans") with (unless
otherwise specified in the applicable Prospectus Supplement) a 30-year term at
origination and a mortgage interest rate adjusted periodically to equal the sum
(which may be rounded) of a fixed margin and an index described in such
Prospectus Supplement, subject to any applicable restrictions on such
adjustments. Any such ARM Loan may provide that on the day on which the
Mortgage Rate adjusts, the amount of the monthly payments on the ARM Loan will
be adjusted to provide for the payment of the remaining principal amount of the
ARM Loan with level monthly payments of principal and interest at the new
Mortgage Rate to the maturity date of the ARM Loan. Alternatively, the ARM Loan
may provide that the Mortgage Rate adjusts more frequently than the monthly
payment. As a result, a greater or lesser portion of the monthly payment will be
applied to the payment of principal on the ARM Loan, thus increasing or
decreasing the rate at which the ARM Loan is repaid. See "Yield Considerations."
In the event that an adjustment to the Mortgage Rate causes the amount of
interest accrued in any month to exceed the amount of the monthly payment on
such ARM Loan, the excess (the "Deferred Interest") will be added to the
principal balance of the ARM Loan (unless otherwise paid by the borrower), and
will bear interest at the Mortgage Rate in effect from time to time. The amount
by which the Mortgage Rate or monthly payment may increase or decrease and the
aggregate amount of Deferred Interest on any ARM Loan may be subject to certain
limitations as described in the related Prospectus Supplement.
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If so specified in the Prospectus Supplement for the related Series, the
Mortgage Rate on certain ARM Loans (the "Convertible Mortgage Loans") will be
convertible from an adjustable rate to a fixed rate at the option of the
borrower under certain circumstances. The related Prospectus Supplement will
specify whether, as provided in the related Agreement, the Seller will be
obligated to, or will have the option to, repurchase from the Trust Fund any
such ARM Loan as to which the conversion option has been exercised (a "Converted
Mortgage Loan"), at a purchase price set forth in the related Prospectus
Supplement. The amount of such purchase price will be required to be deposited
in the Certificate Account and will be distributed to the Certificateholders on
the Distribution Date in the month following the month of the exercise of the
conversion option. The obligation of the Seller to repurchase Converted Mortgage
Loans may or may not be supported by cash, letters of credit, third party
guarantees or other similar arrangements. Any Convertible Mortgage Loan that is
converted but not purchased by the Seller will remain in the Mortgage Pool as a
fixed rate Mortgage Loan.
A Mortgage Pool may include Mortgage Loans insured by the FHA ("FHA Loans")
and/or Mortgage Loans partially guaranteed by the Veterans Administration (the
"VA," and such mortgage loans, "VA Loans"). FHA Loans will be insured by the
Federal Housing Administration (the "FHA") as authorized under the National
Housing Act, as amended, and the United States Housing Act of 1937, as amended.
Such FHA loans will be insured under various FHA programs including the standard
FHA 203-b programs to finance the acquisition of one- to four-family housing
units, the FHA 245 graduated payment mortgage program and the FHA 221 and 223
programs to finance certain multifamily residential rental properties. FHA Loans
generally require a minimum down payment of approximately 5% of the original
principal amount of the FHA Loan. No FHA Loan may have an interest rate or
original principal amount exceeding the applicable FHA limits at the time of
origination of such FHA Loan.
VA Loans will be partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended (the "Servicemen's Readjustment Act"). The
Servicemen's Readjustment Act permits a veteran (or in certain instances the
spouse of a veteran) to obtain a mortgage loan guarantee by the VA covering
mortgage financing of the purchase of a one- to four-family dwelling unit at
interest rates permitted by the VA. The program has no mortgage loan limits,
requires no down payment from the purchasers and permits the guarantee of
mortgage loans of up to 30 years' duration. However, no VA Loan will have an
original principal amount greater than five times the partial VA guarantee for
such VA Loan. The maximum guarantee that may be issued by VA under this program
is 50% of the principal amount of the Mortgage Loan if the principal amount of
the Mortgage Loan is $45,000 or less, the lesser of $36,000 and 40% of the
principal amount of the Mortgage Loan if the principal amount of the Mortgage
Loan is greater than $45,000 but less than or equal to $144,000, and the lesser
of $46,000 and 25% of the principal amount of the Mortgage Loan if the principal
amount of the Mortgage Loan is greater than $144,000.
Unless otherwise specified in the applicable Prospectus Supplement, each
Mortgage Pool included in the related Trust Fund will be composed of Mortgage
Loans evidencing interests in Mortgage Loans that bear interest at annual rates
that will exceed by at least 3/8 of 1% the fixed or variable Pass-Through Rate
established for the Mortgage Pool. To the extent and in the manner specified in
the related Prospectus Supplement, Certificateholders of a Series will be
entitled to receive distributions based on the payments of principal on the
underlying Mortgage Loans, plus interest on the principal balance thereof at the
Pass-Through Rate. The difference between a Mortgage Rate and the related Pass-
Through Rate (less any servicing compensation payable to the Servicer and the
amount, if any, payable to the Seller or the person or entity specified in the
applicable Prospectus Supplement) may be retained by the Servicer as servicing
compensation to it. See "Description of the Certificates--Servicing Compensation
and Payment of Expenses."
Unless otherwise specified below or in the applicable Prospectus Supplement,
each Mortgage Loan in a Mortgage Pool will (i) have an individual principal
balance at origination of not less than $25,000 nor more than $1,500,000, (ii)
have monthly payments due on the first day of each month (the "Due Date"), (iii)
be secured by Mortgaged Properties or relate to Cooperative Loans located in any
of the 50 states or the District of Columbia and (iv) consist of fully-
amortizing Mortgage Loans on Single Family Property, each with a 5 to 40 year
term at origination, a fixed or variable rate of interest and level or variable
monthly payments over the term of the Mortgage Loan. Unless otherwise specified
in the related Prospectus Supplement, the Loan-to-
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Value Ratio (as hereinafter described) of each Mortgage Loan at origination will
not exceed 95% on any Mortgage Loan with an original principal balance of up to
$300,000, 90% on any Mortgage Loan with an original principal balance of up to
$400,000, 85% on any Mortgage Loan with an original principal balance of up to
$450,000, 80% on any Mortgage Loan with an original principal balance of up to
$650,000, 75% on any Mortgage Loan with an original principal balance of up to
$700,000, 70% on any Mortgage Loan with an original principal balance of up to
$750,000 and 65% on any Mortgage Loan with an original principal balance of up
to $1,000,000. The Mortgage Pools also may include other types of Mortgage
Loans on Single Family Property to the extent set forth in the applicable
Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, no
Mortgage Loan will have a Loan-to-Value Ratio at origination in excess of 95%,
regardless of its original principal balance. The Loan-to-Value Ratio is the
ratio, expressed as a percentage, of the principal amount of the Mortgage Loan
at the date of determination to the lesser of (a) the appraised value determined
in an appraisal obtained by the originator and (b) the sales price for such
property (the "Original Value"). Unless otherwise specified in the related
Prospectus Supplement, with respect to a Mortgage Loan secured by a mortgage on
a vacation or second home, no income derived from the property will be
considered for underwriting purposes, the Loan-to-Value Ratio (taking into
account any secondary financing) of such Mortgage Loan may not exceed 80%, and
the original principal balance of the Mortgage Loan may not exceed $500,000.
If provided for in the applicable Prospectus Supplement, a Mortgage Pool may
contain Mortgage Loans pursuant to which the monthly payments made by the
borrower during the early years of such Mortgage Loan will be less than the
scheduled monthly payments on the Mortgage Loan ("Buy-Down Loans"). The
resulting difference in payment will be compensated from an amount contributed
by the Seller, the seller of the related Mortgaged Property, the Servicer, the
borrower or another source and placed in a custodial account (the "Buy-Down
Fund") by the Servicer or, if so specified in the related Prospectus Supplement,
with the Trustee. In lieu of a cash deposit, if so specified in the related
Prospectus Supplement, a letter of credit or guaranteed investment contract may
be delivered to the Trustee to fund the Buy-Down Fund. See "Description of the
Certificates--Payments on Mortgage Loans." Buy-Down Loans included in a Mortgage
Pool will provide for a reduction in monthly interest payments by the borrower
for a period of up to the first three years of the term of such Mortgage Loans.
If provided for in the applicable Prospectus Supplement, a Mortgage Pool may
contain Mortgage Loans pursuant to which the monthly payments by the borrower
during the early years of the related Mortgage Note are less than the amount of
interest that would otherwise be payable thereon, with the interest not so paid
added to the outstanding principal balance of such Mortgage Loan ("GPM Loans").
If so specified in the related Prospectus Supplement, the resulting difference
in payment shall be compensated for from an amount contributed by the Seller or
another source and delivered to the Trustee (the "GPM Fund"). In lieu of cash
deposit, the Seller may deliver to the Trustee a letter of credit, guaranteed
investment contract or another instrument acceptable to the Rating Agency rating
the related Series to fund the GPM Fund.
The Prospectus Supplement (or, if such information is not available in
advance of the date of such Prospectus Supplement, a Current Report on Form 8-K
to be filed with the Commission) for each Series of Certificates the Trust Fund
with respect to which contains Mortgage Loans will contain information as to the
type of Mortgage Loans that will comprise the related Mortgage Pool or Pools and
information as to (i) the aggregate principal balance of the Mortgage Loans as
of the applicable Cut-off Date, (ii) the type of Mortgaged Properties securing
the Mortgage Loans, (iii) the original terms to maturity of the Mortgage Loans,
(iv) the largest in principal balance of the Mortgage Loans, (v) the earliest
origination date and latest maturity date of the Mortgage Loans, (vi) the
aggregate principal balance of Mortgage Loans having Loan-to-Value Ratios at
origination exceeding 80%, (vii) the interest rate or range of interest rates
borne by the Mortgage Loans, (viii) the average outstanding principal balance of
the Mortgage Loans, (ix) the geographical distribution of the Mortgage Loans,
(x) the number and aggregate principal balance of Buy-Down Loans or GPM Loans,
if applicable, (xi) with respect to ARM Loans, the adjustment dates, the
highest, lowest and weighted average margin, and the maximum Mortgage Rate
variation at the time of any periodic adjustment and over the life of such ARM
Loans and (xii) with respect to such other Mortgage Loans as are specified in
the Prospectus Supplement, whether the Mortgage Loan provides for an interest
only period and whether
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the principal amount of such Mortgage Loan is fully amortizing or is amortized
on the basis of a period of time that extends beyond the maturity date of the
Mortgage Loan. If specified in the related Prospectus Supplement, the Seller may
segregate the Mortgage Loans in a Mortgage Pool into separate "Mortgage Loan
Groups" (as described in the related Prospectus Supplement) as part of the
structure of the payments of principal and interest on the Certificates of a
Series. In such case, the Seller will disclose the above-specified information
by Mortgage Loan Group.
No assurance can be given that values of the Mortgaged Properties in a
Mortgage Pool have remained or will remain at their levels on the dates of
origination of the related Mortgage Loans. If the real estate market should
experience an overall decline in property values such that the outstanding
balances of the Mortgage Loans and any secondary financing on the Mortgaged
Properties in a particular Mortgage Pool become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, the value of property securing
Cooperative Loans and the delinquency rate with respect to Cooperative Loans
could be adversely affected if the current favorable tax treatment of
cooperative stockholders were to become less favorable. See "Certain Legal
Aspects of the Mortgage Loans--The Mortgage Loans." To the extent that such
losses are not covered by the methods of Enhancement described herein, they will
be borne by holders of the Certificates of the Series evidencing interests in
the Mortgage Pool.
The Seller will cause the Mortgage Loans constituting each Mortgage Pool to
be assigned to the Trustee named in the applicable Prospectus Supplement, for
the benefit of the holders of the Certificates of such Series (the
"Certificateholders"). The Servicer will service the Mortgage Loans pursuant to
the related Agreement among the Servicer, the Seller and the Trustee and will
receive a fee for such services. See "--Mortgage Loan Program" and "Description
of the Certificates."
The Seller will make certain representations and warranties regarding the
Mortgage Loans, but its assignment of the Mortgage Loans to the Trustee will be
without recourse. See "Description of the Certificates--Assignment of Mortgage
Loans." The Servicer's obligations with respect to the Mortgage Loans will
consist principally of its contractual servicing obligations under the related
Agreement and its obligations to make Advances in the event of delinquencies in
payments on or with respect to the Mortgage Loans or in connection with
prepayments and liquidations of such Mortgage Loans, in amounts described herein
under "Description of the Certificates--Advances." Unless otherwise specified in
the related Prospectus Supplement, such Advances with respect to delinquencies
will be limited to amounts that the Servicer believes ultimately would be
reimbursable under any applicable letter of credit, pool insurance policy,
Special Hazard Insurance Policy, mortgagor bankruptcy bond or other policy of
insurance, from amounts in any related Reserve Fund, or out of the proceeds of
liquidation of the Mortgage Loans, cash in the Certificate Account or otherwise.
See "Description of the Certificates--Advances," "Credit Support" and
"Description of Insurance."
Mortgage Loan Program
The Mortgage Loans will have been purchased by the Seller either directly or
through affiliates. Mortgage Loans acquired by the Seller will have been
originated in accordance with the underwriting criteria specified below under
"Underwriting Standards" or as otherwise described in the related Prospectus
Supplement.
Underwriting Standards
Except in the case of such other standards as may be described in the
applicable Prospectus Supplement, all Mortgage Loans will be subject to the
underwriting standards adopted by the Seller. The Seller will represent and
warrant that the Mortgage Loans have been originated in accordance with the
applicable underwriting standards established by the Seller or such other
standards as may be described in the applicable Prospectus Supplement. The
following discussion describes the general underwriting standards of the Seller
with respect to any Mortgage Loan that it originates or purchases.
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The mortgage credit approval process for one- to four-family residential
loans follows a standard procedure that generally complies with Freddie Mac and
Fannie Mae regulations and guidelines (except that certain Mortgage Loans may
have higher loan amount and qualifying ratios) and applicable federal and state
laws and regulations. The credit approval process for Cooperative Loans follows
a procedure that generally complies with applicable Fannie Mae regulations and
guidelines (except for the loan amounts and qualifying ratios) and applicable
federal and state laws and regulations. The Seller or other originator of a
Mortgage Loan (the "Originator") generally will review a detailed credit
application by the prospective borrower designed to provide pertinent credit
information, including a current balance sheet describing assets and liabilities
and a statement of income and expenses, as well as an authorization to apply for
a credit report that summarizes the prospective borrower's credit history with
local merchants and lenders and any record of bankruptcy. In addition, an
employment verification is obtained from the prospective borrower's employer
wherein the employer reports the length of employment with that organization,
the current salary, and gives an indication as to whether it is expected that
the prospective borrower will continue such employment in the future. If the
prospective borrower is self-employed, he or she is required to submit copies of
signed tax returns. The prospective borrower also may be required to authorize
verification of deposits at financial institutions. Certain credit
considerations may cause the Originator or Seller not to require some of the
documents, statements or proofs described in the preceding paragraph in
connection with the origination or purchase of certain Mortgage Loans. In
addition, if so specified in the related Prospectus Supplement, certain Mortgage
Loans may be acquired or originated in accordance with Chevy Chase's Snap
Documentation loan program. For loans that qualify for the Snap Documentation
loan program, Chevy Chase does not require verification of income of prospective
borrowers. These loans may be either purchase money, cash-out refinance or
rate/term refinance loans and must be secured by a one-family detached home,
one-family condominium or a one-family townhome that is the prospective
borrower's primary residence. Credit scores from each of the three major
repositories are obtained. In addition, each applicant must have at least
approximately 30% equity in the Mortgaged Property, and the borrower must
contribute a minimum of 15% of his/her own funds (exclusive of gifts) to the
downpayment. Pursuant to the Snap Documentation loan program, Chevy Chase
relies on the accuracy and completeness of each prospective mortgagor's income
and employment information as provided on a standard Fannie Mae application,
together with telephone or other acceptable verification of employment. Chevy
Chase requires verification of the borrower's assets only if interest income is
used to qualify for the loan or if the Loan-to-Value Ratio exceeds 60%. For
rate/term refinances under the Snap Documentation loan program, for loans
currently serviced by Chevy Chase, an "automated valuation" may be performed in
lieu of a new appraisal if the original appraisal is provided. Chevy Chase's
Snap Documentation loan program allows Loan-to-Value and combined Loan-to-Value
Ratios at the time of origination of up to a maximum of approximately 70%. The
amount of cash paid to the borrower in connection with a cash-out refinancing
under the Snap Documentation loan program is limited depending on the Loan-to-
Value Ratio.
An appraisal generally will be required to be made on each residence to be
financed. Such appraisal generally will be made by an appraiser who meets state
licensing requirements as an appraiser of one- to four-family residential
properties. The appraiser is required to inspect the property and verify that it
is in good condition and that, if new, construction has been completed. The
appraisal generally will be based on the appraiser's judgment of value, giving
appropriate weight to both the market value of comparable homes and the cost of
replacing the residence. These underwriting standards also require a search of
the public records relating to a mortgaged property for liens and judgments
against such mortgaged property.
Based on the data provided, certain verifications and the appraisal, a
determination is made by the Originator as to whether the prospective borrower
has sufficient monthly income available to meet the prospective borrower's
monthly obligations on the proposed loan and other expenses related to the
residence (such as property taxes, hazard and primary mortgage insurance and, if
applicable, maintenance) and other financial obligations and monthly living
expenses. Each Originator's lending guidelines for conventional mortgage loans
generally will specify that mortgage payments plus taxes and insurance and all
monthly payments extending beyond one year (including those mentioned above and
other fixed obligations, such as car payments) would equal no more than
specified percentages of the prospective borrower's gross income. These
guidelines will be applied only to the payments to be made during the first year
of the mortgage loan. For FHA and VA Loans, the Originator's lending guidelines
will follow HUD and VA guidelines,
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respectively. Other credit considerations may cause an Originator 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 Mortgaged Properties may be located in states where, in general, a lender
providing credit on a single-family property may not seek a deficiency judgment
against the borrower but rather must look solely to the property for repayment
in the event of foreclosure. The Seller's underwriting standards applicable to
all states (including anti-deficiency states) require that the value of the
property being financed, as indicated by the appraisal, currently supports and
is anticipated to support in the future the outstanding mortgage loan balance.
Certain of the types of Mortgage Loans that may be included in the Mortgage
Pools may involve additional uncertainties not present in traditional types of
loans. For example, Buy-Down Loans and GPM Loans provide for escalating or
variable payments by the borrower. These types of Mortgage Loans are
underwritten on the basis of a judgment that the borrower will have the ability
to make larger monthly payments in subsequent years. In some instances the
borrower's income may not be sufficient to enable it to continue to make
scheduled loan payments as such payments increase.
To the extent specified in the related Prospectus Supplement, the Seller may
purchase Mortgage Loans for inclusion in a Trust Fund that are underwritten
under standards and procedures which vary from and are less stringent than those
described herein. For instance, Mortgage Loans may be underwritten under a
"limited documentation" program if so specified in the related Prospectus
Supplement. With respect to such Mortgage Loans, minimal investigation into the
borrower's credit history and income profile is undertaken by the Originator and
such Mortgage Loans may be underwritten primarily on the basis of an appraisal
of the Mortgaged Property or cooperative dwelling and the Loan-to-Value Ratio at
origination. Thus, if the Loan-to-Value Ratio is less than a percentage
specified in the related Prospectus Supplement, the Originator may forego
certain aspects of the review relating to monthly income, and traditional ratios
of monthly or total expenses to gross income may not be considered.
Mortgage Certificates
The Primary Assets for a Series may consist, in whole or in part, of Mortgage
Certificates which include pass-through certificates representing beneficial
interests in loans of the type that otherwise would be eligible to be Mortgage
Loans (the "Underlying Loans") or collateralized obligations secured by
Underlying Loans. Such pass-through certificates or collateralized obligations
previously will have been (a) offered and distributed to the public pursuant to
an effective registration statement or (b) purchased in a transaction not
involving any public offering from a person who is not an affiliate of the
issuer of such securities at the time of sale (nor an affiliate thereof at any
time during the three preceding months); provided that a period of three years
--------
has elapsed since the later of the date the securities were acquired from the
issuer or an affiliate thereof. Although individual Underlying Loans may be
insured or guaranteed by the United States or an agency or instrumentality
thereof, they need not be, and the Mortgage Certificates themselves will not be,
so insured or guaranteed.
The Mortgage Certificates will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (a "MC Agreement").
The seller/servicer of the Underlying Loans will have entered into the MC
Agreement with the trustee under such MC Agreement (the "MC Trustee"). The MC
Trustee or its agent, or a custodian, will possess the Underlying Loans. The
Underlying Loans will be serviced by a servicer (the "MC Servicer") directly or
by one or more sub-servicers who may be subject to the supervision of the MC
Servicer.
The sponsor of the Mortgage Certificates (the "MC Sponsor") will be a
financial institution or other entity engaged generally in the business of
lending; a public agency or instrumentality of a state, local or federal
government; or a limited purpose corporation organized for the purpose of, among
other things, establishing trusts and acquiring and selling loans to such
trusts, and selling beneficial interests in such trusts. If so specified in the
related Prospectus Supplement, the MC Sponsor may be an affiliate of the Seller.
The
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obligations of the MC Sponsor generally will be limited to certain
representations and warranties with respect to the assets conveyed by it to the
related trust. Unless otherwise specified in the related Prospectus Supplement,
the MC Sponsor will not have guaranteed any of the assets conveyed to the
related trust or any of the Mortgage Certificates issued under the MC Agreement.
Additionally although the Underlying Loans may be guaranteed by an agency or
instrumentality of the United States, the Mortgage Certificates themselves will
not be so guaranteed.
Distributions of principal and interest will be made on the Mortgage
Certificates on the dates specified in the related Prospectus Supplement. The
Mortgage Certificates 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 Mortgage Certificates by the MC Trustee or the
MC Servicer. The MC Sponsor or the MC Servicer may have the right to repurchase
the Underlying Loans after a certain date or under other circumstances specified
in the related Prospectus Supplement.
The Underlying Loans may be fixed rate, level payment, fully amortizing loans
or adjustable rate loans or loans having balloon or other irregular payment
features Such Underlying Loans will be secured by mortgages on mortgaged
properties that would be eligible to be Mortgaged Properties.
Credit Support Relating to Mortgage Certificates. Credit support in the form
of reserve funds, subordination of other mortgage certificates issued under the
MC Agreement, guarantees, letters of credit, cash collateral accounts, insurance
policies or other types of credit support may be provided with respect to the
Underlying Loans or with respect to the Mortgage Certificates themselves The
type , characteristics and amount of credit support will be a function of
certain characteristics of the Underlying Loans and other factors and will have
been established for the Mortgage Certificates on the basis of requirements of
the nationally recognized statistical rating organization that rated the
Mortgage Certificates.
Additional Information. The Prospectus Supplement for a Series for which the
Primary Assets include Mortgage Certificates will specify (such disclosure may
be on an approximate basis and will be of the date specified in the related
Prospectus Supplement), to the extent relevant and to the extent such
information is reasonably available to the Seller and the Seller reasonably
believes such information to be reliable: (i) the aggregate approximate
principal amount and type of the Mortgage Certificates to be included in the
Trust Fund for such Series; (ii) certain characteristics of the Underlying Loans
including (A) the payment feature of such Underlying Loans (i.e., whether they
are fixed rate or adjustable rate and whether they provide for fixed level
payments or other payment features), (B) the approximate aggregate principal
balance, if known, of such Underlying Loans insured or guaranteed by a
governmental entity, (C) the servicing fee or range of servicing fees with
respect to the Underlying Loans, (D) the minimum and maximum stated maturities
of such Underlying Loans, and (F) the delinquency status and year of origination
of such Underlying Loans; (iii) the maximum original term-to-stated maturity of
the Mortgage Certificates; (iv) the weighted average term-to-stated maturity of
the Mortgage Certificates (v) the pass-through or certificate rate or range
thereof for the Mortgage Certificates; (vi) the MC Sponsor, the MC Servicer (if
other that the MC Sponsor) and the MC Trustee for such Mortgage Certificates;
(vii) certain characteristics of credit support if any, such as Reserve Funds,
insurance polices, letters of credit or guarantees relating to the related
Underlying Loans or to such Mortgage Certificates themselves; (viii) the terms
on which Underlying Loans may, or are required to, be purchased prior to their
state maturity or the stated maturity of the Mortgage Certificates and (ix) the
terms on which Underlying Loans may be substituted for those originally
underlying the Mortgage Certificates.
If information of the nature described above representing the Mortgage
Certificates is not known to the Seller at the time the Certificates are
initially offered, approximate or more general information of the nature
described above will be provided in the Prospectus Supplement and the additional
information, if available, will be set forth in a Current Report on Form 8-K to
be available to investors on the date of issuance of the related Series and to
be filed with the Commission within 15 days of the initial issuance of such
Certificates.
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THE SELLER
The Seller is a federally chartered stock savings bank. The Seller's home
office is located at 7926 Jones Branch Drive, McLean, Virginia 22102, and its
executive offices are located at 8401 Connecticut Avenue, Chevy Chase, Maryland
20815. The Seller's telephone number is (301) 986-7000. The Seller is subject
to comprehensive regulation, examination and supervision by the Office of Thrift
Supervision ("OTS") within the Department of the Treasury and the FDIC.
Deposits at the Seller are fully insured up to $100,000 per insured depositor by
the Savings Association Insurance Fund ("SAIF"), which is administered by the
FDIC.
Legislation passed in 1996 requires the merger of the Bank Insurance Fund
("BIF") and the SAIF into a single Deposit Insurance Fund on January 1, 1999 but
only if the thrift charter is eliminated by that date. Congress is considering
legislation in various forms that would require federal thrifts, like the
Seller, to convert their charters to national or state bank charters. The House
Banking Committee approved a version of such legislation on June 20, 1997 and
the House Commerce Committee approved its version of the legislation on October
30, 1997. While the last session of Congress adjourned without further action on
the bills, the House has resumed consideration of the legislation in the current
session. In the absence of appropriate "grandfather" provisions, such
legislation could have an adverse effect on the Bank and its parent company, the
B.F. Saul Real Estate Investment Trust (the "Real Estate Investment Trust")
because, among other things, the Real Estate Investment Trust engages in
activities that are not permissible for bank holding companies and the
regulatory capital and accounting treatment for banks and thrifts differs in
certain significant respects. While the versions of the bill approved by the
House Banking and Commerce Committees both contain grandfather provisions that
address many of these issues, the Seller cannot determine at this time whether,
or in what form, such legislation may eventually be enacted, and there can be no
assurances that any such legislation that is enacted will contain adequate
grandfather rights for the Seller or the Real Estate Investment Trust.
USE OF PROCEEDS
The Seller will apply all or substantially all of the net proceeds from the
sale of each Series offered hereby and by the related Prospectus Supplement for
one or more of the following purposes: (i) to establish any Reserve Fund, (ii)
to pay costs of structuring and issuing such Certificates, including the costs
of obtaining Enhancement and (iii) for its general corporate purposes.
YIELD CONSIDERATIONS
Each monthly payment on a Mortgage Loan is calculated as one-twelfth of the
applicable Mortgage Rate multiplied by the unpaid principal balance of such
Mortgage Loan. Unless otherwise specified in the related Prospectus Supplement,
the amount of such interest payment distributed monthly to Certificateholders
with respect to each Mortgage Loan will be similarly calculated based on the
applicable Pass-Through Rate for the related Mortgage Pool. The Pass-Through
Rate for a Mortgage Pool will be either fixed or variable, as specified in the
related Prospectus Supplement.
With respect to a Mortgage Pool bearing a fixed Pass-Through Rate, each
Mortgage Loan will have a Mortgage Rate that exceeds the Pass-Through Rate by at
least 1/4 of 1% unless otherwise specified in the related Prospectus Supplement.
The difference between a Mortgage Rate and the related fixed Pass-Through Rate
for the Mortgage Pool (less any servicing compensation payable to the related
Servicers and the amounts, if any, payable to the Seller or the person or entity
specified in the related Prospectus Supplement) will be retained by the Servicer
as servicing compensation to it. See "Description of the Certificates--Servicing
Compensation and Payment of Expenses." Although Mortgage Rates in a fixed Pass-
Through Rate Mortgage Pool may vary, unless otherwise specified in the related
Prospectus Supplement, disproportionate principal prepayments among Mortgage
Loans bearing different Mortgage Rates will not affect the return to
Certificateholders since, as set forth above, the Pass-Through Rate may not
exceed any Mortgage Rate.
With respect to Mortgage Pools having a variable Pass-Through Rate, the Pass-
Through Rate will equal the excess of the weighted average of the Mortgage Rates
on all the Mortgage Loans in the Mortgage Pool
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over the servicing compensation payable to the Servicer and the amounts, if any,
retained by the Seller or paid to the person or entity specified in the related
Prospectus Supplement. The servicing fee and such other amounts will be fixed as
to each Mortgage Loan at a rate per annum, and may vary among Mortgage Loans.
Because the Mortgage Rates in such a Mortgage Pool will differ and the aggregate
servicing compensation and such other amounts to be retained or distributed with
respect to each Mortgage Loan will be fixed, it is likely that the weighted
average of the Mortgage Rates, and the corresponding variable Pass-Through Rate,
will change as the Mortgage Loans amortize and as a result of prepayments.
If so specified in the related Prospectus Supplement, a Mortgage Pool may
contain ARM Loans with Mortgage Rates that adjust more frequently than the
monthly payment with respect to such Mortgage Loans. As a result, the portion of
each monthly payment allocated to principal may vary from month to month.
Negative amortization with respect to a Mortgage Loan will occur if an
adjustment to the Mortgage Rate causes the amount of interest accrued in any
month, calculated at the new Mortgage Rate for such period, to exceed the amount
of the monthly payment or if the allowable increase in any monthly payment is
limited to an amount that is less than the amount of interest accrued in any
month. The amount of any resulting Deferred Interest will be added to the
principal balance of the Mortgage Loan and will bear interest at the Mortgage
Rate in effect from time to time. To the extent that, as a result of the
addition of any Deferred Interest, the Mortgage Loan negatively amortizes over
its term, the weighted average life of the certificates of the related Series
will be greater than otherwise would be the case. As a result, the yield on any
such Mortgage Loan at any time may be less than the yields on similar adjustable
rate mortgage loans, and the rate of prepayment may be lower or higher than
would otherwise be anticipated.
Generally, when a full prepayment is made on a Mortgage Loan, the borrower is
charged interest for the number of days actually elapsed from the due date of
the preceding monthly payment up to the date of such prepayment, at a daily
interest rate determined by dividing the Mortgage Rate by 365. Full prepayments
will reduce the amount of interest paid by the borrower because interest on the
principal amount of any Mortgage Loan so prepaid will be paid only to the date
of prepayment instead of for a full month; however, unless otherwise provided in
the applicable Prospectus Supplement, the Servicer will be required to advance
from its own funds the portion of any interest at the related Pass-Through Rate
that is not so received. Partial prepayments generally are applied on the first
day of the month following receipt, with no resulting reduction in interest
payable for the period in which the partial prepayment is made. Unless otherwise
specified in the related Prospectus Supplement, full and partial prepayments,
together with interest on such full and partial prepayments at the Pass-Through
Rate for the related Mortgage Pool to the last day of the month in which such
prepayments occur, will be deposited in the Certificate Account and will be
available for distribution to Certificateholders on the next succeeding
Distribution Date in the manner specified in the related Prospectus Supplement.
See "Maturity and Prepayment Considerations."
In general, if a Class of Certificates is purchased at a premium and
principal distributions thereon occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if a Class of Certificates is
purchased at a discount and principal distributions thereon occur at a rate
slower than that assumed at the time of purchase, the investor's actual yield to
maturity will be lower than that assumed at the time of purchase.
In the event that the Certificates of a Series are divided into two or more
Classes and that a Class is an Interest Only Certificate, in the event that such
Series includes a Class of Residual Certificates, or as otherwise may be
appropriate, the Prospectus Supplement for such Series will indicate the manner
in which the yield to Certificateholders will be affected by different rates of
prepayments on the Mortgage Loans or on the Underlying Loans relating to any
Mortgage Certificates. Interest payable on the Certificates of a Series on a
Distribution Date will include all interest accrued during the period specified
in the related Prospectus Supplement. In the event interest accrues during the
calendar month prior to a Distribution Date, the effective yield to Holders will
be reduced from the yield that otherwise would be obtainable if interest payable
on the Certificate were to accrue through the day immediately preceding each
Distribution Date, and the effective yield (at par) to Holders will be less than
the indicated coupon rate. In the case of Interest Only or Principal Only
Certificates, there is a possibility that Certificateholders not only will
suffer a lower than anticipated yield but, in extreme cases, will fail to recoup
fully their initial investment. If so specified in the applicable
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Prospectus Supplement, a disproportionately large amount of principal
prepayments may be distributed to the Holders of the Senior Certificates at the
times and under the circumstances described therein.
In the event that the Certificates of a Series include one or more Classes of
Multi-Class Certificates, the Prospectus Supplement for such Series will set
forth information, measured relative to a prepayment standard or model specified
in such Prospectus Supplement, with respect to the projected weighted average
life of each such Class and the percentage of the initial Certificate Principal
Balance of each such Class that would be outstanding on special Distribution
Dates for such Series based on the assumptions stated in such Prospectus
Supplement, including assumptions that prepayments on the Mortgage Loans or on
the Underlying Loans relating to any Mortgage Certificates in the related Trust
Fund are made at rates corresponding to the various percentages of such
prepayment standard or model.
MATURITY AND PREPAYMENT CONSIDERATIONS
Unless otherwise specified in the related Prospectus Supplement, the
scheduled maturities of all of the Mortgage Loans (or the Underlying Loans
relating to any Mortgage Certificates) at origination will not be less than
approximately 5 years or exceed 40 years, but such Mortgage Loans (or such
Underlying Loans) may be prepaid in full or in part at any time. Unless
otherwise specified in the applicable Prospectus Supplement, no such Mortgage
Loan (or Underlying Loan) will provide for a prepayment penalty, and each will
contain (except in the case of FHA and VA Loans) due-on-sale clauses permitting
the mortgagee or obligee to accelerate the maturity thereof upon conveyance of
the Mortgaged Property or Cooperative Dwelling.
The FHA has compiled statistics relating to one- to four-family, level
payment mortgage loans insured by the FHA under the National Housing Act of
1934, as amended, at various interest rates, all of which permit assumption by
the new buyer if the home is sold. Such statistics indicate that while some of
such mortgage loans remain outstanding until their scheduled maturities, a
substantial number are paid prior to their respective stated maturities. The
Actuarial Division of HUD has prepared tables which, assuming full mortgage
prepayments at the rates experienced by FHA, set forth the percentages of the
original number of FHA Loans in pools of level payment mortgage loans of varying
maturities that will remain outstanding on each anniversary of the original date
of such mortgage loans (assuming they all have the same origination date) ("FHA
Experience"). Published information with respect to conventional residential
mortgage loans indicates that such mortgage loans have historically been prepaid
at higher rates than government insured loans because, unlike government insured
mortgage loans, conventional mortgage loans may contain due-on-sale clauses that
allow the holder thereof to demand payment in full of the remaining principal
balance of such mortgage loans upon sales or certain transfers of the mortgaged
property. There are no similar statistics with respect to the prepayment rates
of cooperative loans or loans secured by multifamily properties.
It is customary in the residential mortgage industry in quoting yields (a) on
a pool of 30-year fixed-rate, level payment mortgages, to compute the yield as
if the pool were a single loan that is amortized according to a 30-year schedule
and is then prepaid in full at the end of the twelfth year and (b) on a pool of
15-year fixed-rate, level payment mortgages, to compute the yield as if the pool
were a single loan that is amortized according to a 15-year schedule and then is
prepaid in full at the end of the seventh year.
Prepayments on residential mortgage loans also are commonly measured relative
to a prepayment standard or model. If so specified in the Prospectus Supplement
relating to a Series of Certificates, the model used in a Prospectus Supplement
will be the Standard Prepayment Assumption ("SPA"). SPA represents an assumed
rate of prepayment relative to the then outstanding principal balance of a pool
of mortgages. A prepayment assumption of 100% of SPA assumes prepayment rates of
0.2% per annum of the then outstanding principal balance of such mortgages in
the first month of the life of the mortgages and an additional 0.2% per annum in
each month thereafter until the thirtieth month, and in each month thereafter
during the life of the mortgages, 100% of SPA assumes a constant prepayment rate
of 6% per annum each month.
Information regarding FHA Experience, other published information, SPA or any
other rate of assumed prepayment, as applicable, will be set forth in the
Prospectus Supplement with respect to a Series of Certificates. There is,
however, no assurance that prepayment of the Mortgage Loans underlying a Series
of
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Certificates will conform to FHA Experience, mortgage industry custom, any level
of SPA or any other rate specified in the related Prospectus Supplement. A
number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates, mortgage
recording taxes and the availability of mortgage funds, may affect prepayment
experience on residential mortgage loans.
The terms of the Pooling and Servicing Agreement, unless otherwise specified
in the related Prospectus Supplement, will require the Servicer to enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or the
proposed conveyance of the underlying Mortgaged Property or Cooperative
Dwelling; provided, however, that any enforcement action that would impair or
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threaten to impair any recovery under any related Insurance Policy will not be
required or permitted. See "Description of the Certificates--Enforcement of
"Due-On-Sale" Clauses; Realization Upon Defaulted Mortgage Loans" and "Certain
Legal Aspects of the Mortgage Loans--The Mortgage Loans--"Due-On-Sale" Clauses"
for a description of certain provisions of each Pooling and Servicing Agreement
and certain legal developments that may affect the prepayment experience on the
Mortgage Loans.
At the request of the borrower, the Servicer may refinance the Mortgage Loans
in any Mortgage Pool by accepting prepayments thereon and making new loans
secured by a mortgage on the same property. Upon such refinancing, the new loans
will not be included in the Mortgage Pool and the related Servicer will be
required to repurchase the affected Mortgage Loan. A borrower may be legally
entitled to require the Servicer to allow such a refinancing. Any such
repurchase will have the same effect as a prepayment in full of the related
Mortgage Loan.
If set forth in the applicable Prospectus Supplement, the Seller or other
specified entity will have the option to repurchase the Primary Assets included
in the related Trust Fund under the conditions stated in such Prospectus
Supplement. For any Series of Certificates for which the Seller has elected to
treat the Trust as a REMIC pursuant to the provisions or the Internal Revenue
Code of 1986, as amended (the "Code"), any such repurchase will be effected in
compliance with the requirements of Section 860F(a)(4) of the Code so as to
constitute a "qualifying liquidation" thereunder. In addition, the Seller will
be obligated, under certain circumstances, to repurchase certain of the Primary
Assets. The Servicer and Unaffiliated Sellers will also have certain repurchase
obligations, as more fully described herein. In addition, the mortgage loans
underlying the Mortgage Certificates may be subject to repurchase under
circumstances similar to those described above. Such repurchases will have the
same effect as prepayments in full. See "The Trust Fund--Mortgage Loan Program--
Representations by Unaffiliated Sellers; Repurchases," "Description of the
Certificates--Assignment of Mortgage Loans," "--Assignment of Mortgage
Certificates" and "--Termination."
THE AGREEMENTS
The following summaries describe certain provisions of the Agreements. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the related Agreements.
Assignment of Primary Assets
General. At the time of issuance of the Certificates of a Series, the Seller
will transfer, convey and assign to the Trust Fund all right, title and interest
of the Seller in the Primary Assets and other property to be transferred to the
Trust Fund for a Series. Such assignment will include all principal and
interest due or received on or with respect to the Primary Assets on or after
the Cut-off Date to the extent specified in the related Prospectus Supplement
(except for any Retained Interests). The Trustee will, concurrently with such
assignment, execute and deliver the Certificates.
Assignment of Mortgage Loans. Unless otherwise specified in the related
Prospectus Supplement, the Transferor will, as to each Loan, deliver or cause to
be delivered to the Trustee, or, as specified in the related Prospectus
Supplement, a custodian on behalf of the Trustee (the "Custodian"), the Mortgage
with evidence of recording indicated thereon (except for any Mortgage not
returned from the public recording office, in
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which case the Seller will deliver a copy of such Mortgage together with its
certificate that the original of such Mortgage was delivered to such recording
office) and an assignment of the Mortgage in recordable form. Assignments of the
Mortgage Loans to the Trustee will be recorded in the appropriate public office
for real property records, except in states where, in the opinion of counsel
acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in the Mortgage Loan against the claim of any subsequent
transferee or any successor to or creditor of the Seller or the Originator of
such Mortgage Loan.
The Seller will cause to be delivered to the Trustee, its agent, or the
Custodian, with respect to any Cooperative Loan, the related original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing statement and the relevant stock certificate
and related blank stock powers. The Servicer will file in the appropriate office
a financing statement evidencing the Trustee's security interest in each
Cooperative Loan.
Assignment of Mortgage Certificates. The Seller will cause Mortgage
Certificates to be registered in the name of the Trustee (or its nominee or
correspondent). The Trustee (or its nominee or correspondent) will have
possession of any certificated Mortgage Certificates. 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 Mortgage Certificate.
See "The Trust Funds--Mortgage Certificates." Each Mortgage Certificate will be
identified in a schedule appearing as an exhibit to the related Agreement (the
"Certificate Schedule"), which will specify the original principal amount,
outstanding principal balance as of the Cut-off Date, annual pass-through rate
or interest rate and maturity date for each Mortgage Certificate conveyed to the
Trust Fund. In the Agreement, the Seller will represent and warrant to the
Trustee regarding the Mortgage Certificates: (i) that the information contained
in the Certificate Schedule is true and correct in all material respects; (ii)
that, immediately prior to the conveyance of the Mortgage Certificates, the
Seller had good title thereto and was the sole owner thereof (subject to any
Retained Interest); (iii) that there has been no other sale by it of such
Mortgage Certificates; and (iv) that there is no existing lien, charge, security
interest or other encumbrance (other than any Retained Interest) on such
Mortgage Certificates.
Repurchase and Substitution of Non-Conforming Primary Assets. The Trustee or
the Custodian will, within a specified number of days after receipt thereof,
review and hold such documents in trust for the benefit of the
Certificateholders. Unless otherwise specified in the related Prospectus
Supplement, if any document in the file relating to the Primary Assets delivered
by the Seller to the Trustee (or Custodian) 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 related Closing
Date) to be defective in any material respect, the Trustee will promptly notify
the Seller. Unless otherwise specified in the related Prospectus Supplement, if
the Seller does not cure such defect within 90 days, or within such other period
specified in the related Prospectus Supplement, the Seller will, not later than
90 days or within such other period specified in the related Prospectus
Supplement after the Trustee's notice to the Seller of the defect, repurchase
the related Primary Asset or any property acquired in respect thereof from the
Trustee at a price equal to, unless otherwise specified in the related
Prospectus Supplement, the sum of (a) the lesser of (i) the outstanding
principal balance of such Primary Asset and (ii) the Trust Fund's federal income
tax basis in the Primary Asset and (b) accrued and unpaid interest to the date
of the repurchase/substitution of such Primary Asset at the rate set forth in
the related Agreement; provided, however, that the purchase price shall not be
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limited in (i) above to the Trust Fund's federal income tax basis if the
repurchase at a price equal to the outstanding principal balance of such Primary
Asset will not result in any prohibited transaction tax under Section 860F(a) of
the Code.
If provided in the related Prospectus Supplement, the Seller may, rather than
repurchase the Primary Asset as described above, remove such Primary Asset from
the Trust Fund (the "Deleted Primary Asset") and substitute in its place one or
more other Primary Assets (each, a "Qualifying Substitute Primary Asset")
provided, however, that with respect to a Trust Fund for which a REMIC election
- -------- -------
is made, after a specified time period, the Trustee must have received a
satisfactory opinion of counsel that such substitution will not cause the Trust
Fund to lose its status as a REMIC or otherwise subject to the Trust Fund to a
prohibited transaction tax.
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Unless otherwise specified in the related Prospectus Supplement, any
Qualifying Substitute Primary Asset will have, on the date of substitution, (i)
an outstanding principal balance, after deduction of all scheduled payments due
in the month of substitution, not in excess of the outstanding principal balance
of the Deleted Primary Asset (the amount of any shortfall to be deposited to the
Collection Account in the month of substitution for distribution to Holders),
(ii) an interest rate not less than (and not more than 2% greater than) the
interest rate or Margin of the Deleted Primary Asset, (iii) a remaining term-to-
stated maturity not greater than (and not more than two years less than) that of
the Deleted Primary Asset, and will comply with all of the representations and
warranties set forth in the applicable Agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the above-
described cure, repurchase or substitution obligations constitute the sole
remedies available to the Holders or the Trustee for a material defect in a
document for a Primary Asset.
Unless otherwise specified in the applicable Prospectus Supplement, with
respect to the Mortgage Loans in a Mortgage Pool, the Seller will make
representations and warranties as to the types and geographical distribution of
such Mortgage Loans and as to the accuracy in all material respects of certain
information furnished to the Trustee in respect of each such Mortgage Loan. In
addition, unless otherwise specified in the related Prospectus Supplement, the
Seller will represent and warrant that, as of the Cut-off Date for the related
Series of Certificates, no Mortgage Loan is more than 30 days delinquent as to
payment of principal and interest. Upon a breach of any representation or
warranty by the Seller that materially and adversely affects the interest of the
Certificateholders, the Seller will be obligated either to cure the breach in
all material respects or to purchase the Mortgage Loan at the purchase price set
forth above. Unless otherwise specified in the applicable Prospectus Supplement
and subject to the ability of the Seller, if so specified in the applicable
Prospectus Supplement, to substitute for certain Mortgage Loans as described
below, this repurchase obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for a breach of representation or warranty by
the Seller.
Within the period specified in the related Prospectus Supplement, following
the date of issuance of a Series of Certificates, the Seller or the Servicer may
deliver to the Trustee Mortgage Loans ("Substitute Mortgage Loans") in
substitution for any one or more of the Mortgage Loans ("Deleted Mortgage
Loans") initially included in the Trust Fund but which do not conform in one or
more respects to the description thereof contained in the related Prospectus
Supplement, or as to which a breach of a representation or warranty is
discovered, which breach materially and adversely affects the interests of the
Certificateholders.
In addition to making certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under the
Agreement relating to a Series of Certificates, the Servicer may make certain
representations and warranties to the Trustee in such Agreement with respect to
the enforceability of coverage under any applicable primary insurance policy,
pool insurance policy, Special Hazard Insurance Policy or mortgagor bankruptcy
bond. See "Description of Insurance" for information regarding the extent of
coverage under certain of the aforementioned insurance policies. Upon a breach
of any such representation or warranty that materially and adversely affects the
interests of the Certificateholders of such Series in a Mortgage Loan, the
Servicer will be obligated either to cure the breach in all material respects or
to purchase such Mortgage Loan at the price calculated as set forth above.
To the extent described in the related Prospectus Supplement, the Servicer
will procure a surety bond, corporate guaranty or another similar form of
insurance coverage acceptable to the Rating Agency rating the related Series of
Certificates to support, among other things, this purchase obligation. Unless
otherwise stated in the applicable Prospectus Supplement, the aforementioned
purchase obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for a breach of the Servicer's insurability
representation. The Servicer's obligation to purchase Mortgage Loans upon such a
breach is subject to limitations.
The Trustee will be authorized, with the consent of the Seller and the
Servicer, to appoint the Custodian pursuant to a custodial agreement to maintain
possession of documents relating to the Mortgage Loans as the agent of the
Trustee.
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Pursuant to each Agreement, the Servicer will service and administer the
Mortgage Loans assigned to the Trustee as more fully set forth below.
Servicing of the Mortgage Loans
Customary servicing functions with respect to Mortgage Loans comprising the
Primary Assets in each Trust Fund will be provided by the Servicer directly
pursuant to the Agreement with respect to the related Series of Certificates.
The Servicer may delegate its servicing obligations to third-party servicers,
but continue to act as Servicer under the related Agreement. The Servicer will
be required to perform the customary functions of a servicer, including
collection of payments from borrowers and remittance of such collections to the
Trustee, maintenance of primary mortgage, hazard insurance, FHA insurance and VA
guarantees and filing and settlement of claims thereunder, subject in certain
cases to (a) maintenance of escrow accounts of borrowers for payment of taxes,
insurance, and other items required to be paid by the borrower pursuant to terms
of the related Mortgage Loan; (b) processing of assumptions or substitutions;
(c) attempting to cure delinquencies; (d) supervising foreclosures or
repossessions; (e) inspection and management of Mortgaged Properties and
Cooperative Dwellings under certain circumstances; and (f) maintaining
accounting records relating to the Mortgage Loans. The Servicer also will be
obligated to make Advances in respect of delinquent installments of principal
and interest on Mortgage Loans (as described more fully below under "--Payments
on Mortgage Loans" and in respect of certain taxes and insurance premiums not
paid on a timely basis by borrowers.
As compensation for its servicing duties, the Servicer will be entitled to
amounts from payments with respect to the Mortgage Loans. The Servicer also will
be entitled to collect and retain, as part of its servicing compensation,
certain fees and late charges, which generally are provided in the Mortgage Note
or related schedules. The Servicer will be reimbursed under the related
Agreement for certain expenditures that it makes.
Payments on Mortgage Loans; Accounts
The Trustee or the Servicer will, unless otherwise specified in the
Prospectus Supplement with respect to a Series of Certificates, establish and
maintain a separate account or accounts (the "Collection Account" or the
"Certificate Account") in the name of the Trustee. The Collection Account
and/or Certificate Account will be an account maintained (i) at a depository
institution, the long-term unsecured debt obligations of which at the time of
any deposit therein are rated by the Rating Agency rating the Certificates of
such Series at levels satisfactory to the Rating Agency, (ii) in an account or
accounts the deposits in which are insured to the maximum extent available by
the Federal Deposit Insurance Corporation (the "FDIC") or which are secured in a
manner meeting requirements established by the Rating Agency, (iii) a trust
account maintained with the related Trustee in its corporate trust department or
(iv) otherwise acceptable to the Rating Agency rating the Certificates of such
Series without reduction or withdrawal of their then current ratings of the
Certificates as evidenced by a letter from such Rating Agency to the related
Trustee.
Unless otherwise specified in the related Prospectus Supplement, the funds
held in the Collection Account or the Certificate Account may be invested,
pending remittance to the Trustee, in Eligible Investments. If so specified in
the related Prospectus Supplement, the Servicer will be entitled to receive as
additional compensation any interest or other income earned on funds in the
Collection Account or Certificate Account.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, the Seller or the Trustee will deposit into the Collection Account or
the Certificate Account for each Series on the Business Day following the
Closing Date any amounts representing payments received on or after the related
Cut-off Date and received by the Servicer on or before the Closing Date and,
thereafter, within the period specified in the related Prospectus Supplement,
the following payments and collections received or made by it (other than,
unless otherwise provided in the related Prospectus Supplement, in respect of
principal of and interest on the related Primary Assets due or, in the case of
simple interest Loans, received, on or before such Cut-off Date). The Servicer
will deposit in the Certificate Account for each Series of Certificates on a
daily basis the
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following payments and collections received or made by it subsequent to the Cut-
off Date (other than payments due on or before the Cut-off Date) in the manner
set forth in the related Prospectus Supplement:
(i) all payments on account of principal, including principal
prepayments, on the Primary Assets, which may be net of any portion of such
payments that represent unreimbursed or unrecoverable Advances made by the
Servicer;
(ii) all payments on account of interest on the Primary Assets after
deducting therefrom, at the discretion of the Servicer but only to the extent
of the amount permitted to be withdrawn or withheld from the Collection
Account or the Certificate Account in accordance with the related Agreement,
the servicing fee in respect of such Primary Assets;
(iii) all proceeds of (A) any Special Hazard Insurance Policy, primary
mortgage insurance policy, FHA Insurance, VA Guarantee, mortgagor bankruptcy
bond or pool insurance policy with respect to such Series of Certificates and
any title, hazard or other insurance policy covering any of the Mortgage
Loans included in the related Mortgage Pool (to the extent such proceeds are
not applied to the restoration of the related property or released to the
borrower in accordance with customary servicing procedures) (collectively,
"Insurance Proceeds"); and (B) all other cash amounts received and retained
in connection with the liquidation of defaulted Mortgage Loans, by
foreclosure or otherwise, other than Insurance Proceeds, amounts required to
be paid or refunded to the borrower pursuant to the terms of the applicable
loan documents or otherwise pursuant to law ("Liquidation Proceeds"), net of
expenses of liquidation, unpaid servicing compensation with respect to such
Mortgage Loans and unreimbursed or unrecoverable Advances made by the
Servicer;
(iv) all amounts required to be deposited therein from the Reserve Fund,
if any, for such Series;
(v) any Advances made by the Servicer (as described herein under
"-- Advances");
(vi) any Buy-Down Funds (and, if applicable, investment earnings
thereon) required to be deposited in the Certificate Account, as described
below; and
(vii) all proceeds of any Mortgage Loan repurchased by the Servicer or
the Seller (as described under "Assignment of Mortgage Loans") or repurchased
by the Seller (as described under "--Termination").
If specified in the related Prospectus Supplement, a Trust Fund will include
one or more segregated trust accounts (each, a "Pre-Funding Account")
established and maintained with the Trustee for the related Series. If so
specified, on the closing date for such Series, a portion of the proceeds of the
sale of the Certificates of such Series (such amount, the "Pre-Funded Amount")
may be deposited in the Pre-Funding Account and may be used to purchase
additional Primary Assets during the period of time specified in the related
Prospectus Supplement (the "Pre-Funding Period"). If any Pre-Funded Amount
remains on deposit in the Pre-Funding Account at the end of the Pre-Funding
Period, such amount will be applied in the manner specified in the related
Prospectus Supplement to prepay the Certificates of the applicable Series.
Each additional Primary Asset must satisfy the eligibility criteria specified
in the related Prospectus Supplement and related Agreement. Such eligibility
criteria will be determined in consultation with each Rating Agency (and/or any
Enhancer) prior to the issuance of the related Series and are designed to ensure
that if such additional Primary Assets were included as part of the initial
Primary Assets, the credit quality of such assets would be consistent with the
initial rating of the Certificates of such Series. The Seller will certify to
the Trustee that all conditions precedent to the transfer of the additional
Primary Assets, including the satisfaction of the eligibility criteria to the
Trust Fund, have been satisfied. It is a condition to the transfer of any
additional Primary Assets to the Trust Fund that each Rating Agency, after
receiving prior notice of the proposed transfer of the additional Primary Assets
to the Trust Fund, shall not have advised the Seller or the Trustee or any
Enhancer that the conveyance of such additional Primary Assets will result in a
qualification, modification or withdrawal of its then current rating of any
Class of Certificates of such Series.
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Following the transfer of additional Primary Assets to the Trust Fund, the
aggregate characteristics of the Primary Assets then held in the Trust Fund may
vary from those of the initial Primary Assets of such Trust Fund. As a result,
the additional Primary Assets may adversely affect the performance of the
related Certificates.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a "Capitalized Interest Account") may be established and
maintained with the Trustee for the related Series. On the closing date for
such Series, a portion of the proceeds of the sale of the Certificates of such
Series will be deposited in the Capitalized Interest Account and used to fund
the excess, if any, of the sum of (i) the amount of interest accrued on the
Certificates of such Series and (ii) if specified in the related Prospectus
Supplement, certain fees or expenses during the Pre-Funding Period, over the
amount of interest available therefor from the Primary Assets in the Trust Fund.
If so specified in the related Prospectus Supplement, amounts on deposit in the
Capitalized Interest Account may be released to the Seller prior to the end of
the Pre-Funding Period subject to the satisfaction of certain tests specified in
the related Prospectus Supplement. Any amounts on deposit in the Capitalized
Interest Account at the end of the Pre-Funding Period that are not necessary for
such purposes will be distributed to the Seller or another person specified in
the related Prospectus Supplement.
With respect to each Buy-Down Loan, if so specified in the related Prospectus
Supplement, the Servicer will deposit the Buy-Down Funds with respect thereto in
a custodial account complying with the requirements set forth above for the
Certificate Account, which, unless otherwise specified in the related Prospectus
Supplement, may be an interest-bearing account. The amount of such required
deposits, together with investment earnings thereon at the rate specified in the
applicable Prospectus Supplement, will provide sufficient funds to support the
full monthly payments due on such Buy-Down Loan on a level debt service basis.
Neither the Servicer nor the Seller will be obligated to add to the Buy-Down
Fund should investment earnings prove insufficient to maintain the scheduled
level of payments on the Buy-Down Loans. To the extent that any such
insufficiency is not recoverable from the borrower under the terms of the
related Mortgage Note, distributions to Certificateholders will be affected.
With respect to each Buy-Down Loan, the Servicer will withdraw from the Buy-Down
Fund and deposit in the Certificate Account on or before each Distribution Date
the amount, if any, for each Buy-Down Loan that, when added to the amount due on
that date from the borrower on such Buy-Down Loan, equals the full monthly
payment that would be due on the Buy-Down Loan if it were not subject to the
buy-down plan.
If the borrower on a Buy-Down Loan defaults on such loan during the period
when the borrower is not obligated, on account of the buy-down plan, to pay the
full monthly payment otherwise due on such loan, the amounts remaining in the
Buy-Down Fund with respect to such Buy-Down Loan generally will be used to
satisfy unpaid principal and interest. In the event of a default with respect
to which a claim, including accrued interest supplemented by amounts in the Buy-
Down Fund with respect to the related Buy-Down Loan, has been made, the Servicer
will pay an amount equal to the remaining amounts in the Buy-Down Fund with
respect to the related Buy-Down Loan, to the extent the claim includes accrued
interest supplemented by amounts in the Buy-Down Fund, to the related pool
insurer or the insurer under the related primary insurance policy (the "Primary
Insurer") if the Mortgaged Property is transferred to the pool insurer or the
Primary Insurer, as the case may be, which pays 100% of the related claim
(including accrued interest and expenses) in respect of such default. In the
case of any such prepaid or defaulted Buy-Down Loan the amounts in the Buy-Down
Fund in respect of which were supplemented by investment earnings, the Servicer
will withdraw from the Buy-Down Fund and remit to the Seller or the borrower,
depending on the terms of the related buy-down plan, any investment earnings
remaining in the related Buy-Down Fund.
If so specified in the Prospectus Supplement with respect to a Series, in
lieu of, or in addition to the foregoing, the Seller may deliver cash, a letter
of credit or a guaranteed investment contract to the Trustee to fund the Buy-
Down Fund for such Series, which shall be drawn upon by the Trustee in the
manner and at the times specified in such Prospectus Supplement.
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Collection of Payments on Mortgage Certificates
The Mortgage Certificates, if any, included in a Trust Fund with respect to a
Series of Certificates will be registered in the name of the Trustee so that all
distributions thereon will be made directly to the Trustee. The related
Agreement will require the Trustee, if it has not received a distribution with
respect to any Mortgage Certificate by the second business day after the date on
which such distribution was due and payable pursuant to the terms of such
Mortgage Certificate, to request the issuer or guarantor, if any, of such
Mortgage Certificate to make such payment as promptly as possible and legally
permitted and to take such legal action against such issuer or guarantor as the
Trustee deems appropriate under the circumstances, including the prosecution of
any claims in connection therewith. The reasonable legal fees and expenses
incurred by the Trustee in connection with the prosecution of any such legal
action will be reimbursable to the Trustee out of the proceeds of any such
action and will be retained by the Trustee prior to the deposit of any remaining
proceeds in the Certificate Account pending distribution thereof to
Certificateholders of the related Series. In the event that the Trustee has
reason to believe that the proceeds of any such legal action may be insufficient
to reimburse it for its projected legal fees and expenses, the Trustee will
notify such Certificateholders that it is not obligated to pursue any such
available remedies unless adequate indemnity for its legal fees and expenses is
provided by such Certificateholders.
Withdrawals from the Collection Account or the Certificate Account
Unless otherwise specified in the related Prospectus Supplement, the Servicer
is permitted, from time to time, to make withdrawals from the Collection Account
or the Certificate Account for each Series for the following purposes:
(i) to reimburse itself for Servicer Advances and Delinquency Advances
for such Series made by it pursuant to the related Agreement; the Servicer's
right to reimburse itself for Delinquency Advances is limited to amounts
received on or in respect of particular Mortgage Loans (including, for this
purpose, Liquidation Proceeds and amounts representing proceeds of insurance
policies covering the related Mortgaged Property) which represent late
recoveries of scheduled payments respecting which any such Delinquency
Advance was made;
(ii) to the extent provided in the related Agreement, to reimburse itself
for any Delinquency Advances for such Series that the Servicer determines in
good faith it will be unable to recover from amounts representing late
recoveries of scheduled payments respecting which such Delinquency Advance
was made or from Liquidation Proceeds or the proceeds of insurance policies;
(iii) to reimburse itself for Servicer Advances to the extent provided
in the related Prospectus Supplement;
(iv) in the event it has elected not to pay itself the Servicing Fee out
of the interest component of any scheduled payment, late payment or other
recovery with respect to a particular Mortgage Loan prior to the deposit of
such scheduled payment, late payment or recovery into the Collection Account
or the Certificate Account, to pay to itself the Servicing Fee, as adjusted
pursuant to the related Agreement, from any such scheduled payment, late
payment or such other recovery, to the extent permitted by the related
Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each Primary Asset
or REO Property acquired in respect thereof that has been repurchased or
removed from the Trust Fund by the Seller or the Servicer pursuant to the
related Agreement, all amounts received thereon and not distributed as of the
date on which the related repurchase price was determined;
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(vii) to make payments to the Trustee of such Series for deposit into
the Distribution Account, if any, or for remittance to the Holders of such
Series in the amounts and in the manner provided for in the related
Agreement; and
(viii) to clear and terminate the Collection Account or the Certificate
Account pursuant to the related Agreement.
In addition, if the Servicer deposits in the Collection Account or the
Certificate Account for a Series any amount not required to be deposited
therein, it may, at any time, withdraw such amount from such Collection Account
or the Certificate Account.
Distributions on Certificates
On each Distribution Date with respect to a Series of Certificates as to
which credit support is provided by means other than the creation of a
Subordinated Class and the establishment of a Reserve Fund, the Trustee will
withdraw from the Certificate Account funds on deposit therein and distribute
such funds to Certificateholders of record on the applicable Record Date. Such
distributions shall occur in the manner described herein under "Description of
the Certificates--Payments of Principal" and "--Payments of Interest" and in the
related Prospectus Supplement. Such funds shall consist of the aggregate of all
previously undistributed payments on account of principal (including principal
prepayments, if any) and interest received after the Cut-off Date and on or
prior to the 20th day (or if such day is not a business day, the next preceding
business day) of the month of such distribution or such other day as may be
specified in the related Prospectus Supplement (in either case the
"Determination Date"), except:
(i) all payments that were due on or before the Cut-off Date;
(ii) all principal prepayments received during the month of distribution
and all payments of interest representing interest for the month of
distribution or any portion thereof;
(iii) all payments which represent early receipt (other than prepayments)
of scheduled payments of principal and interest due on a date or dates
subsequent to the first day of the month of distribution;
(iv) amounts received on particular Mortgage Loans as late payments of
principal or interest and respecting which the Servicer has made an
unreimbursed Advance;
(v) amounts representing reimbursement for other Advances which the
Servicer has determined to be otherwise nonrecoverable and amounts
representing reimbursement for certain losses and expenses incurred or
Advances made by the Servicer and discussed below; and
(vi) that portion of each collection of interest on a particular Mortgage
Loan in such Mortgage Pool that represents (A) servicing compensation to the
Servicer, (B) amounts payable to the entity or entities specified in the
related Prospectus Supplement, (C) related Insurance Proceeds or Liquidation
Proceeds or (D) amounts in the Reserve Fund, if any, with respect to the
Series, each deposited in the Certificate Account to the extent described
under "Description of the Certificates--Maintenance of Insurance Policies,"
"--Presentation of Claims" or "--Enforcement of Due-on-Sale Clauses;
Realization Upon Defaulted Mortgage Loans" or in the applicable Prospectus
Supplement.
Except as otherwise specified in the related Prospectus Supplement, no later
than the Business Day immediately preceding the Distribution Date for a Series
of Certificates, the Servicer will furnish a statement to the Trustee setting
forth the amount to be distributed on the next succeeding Distribution Date on
account of principal and interest on the Primary Assets, stated separately or
the information enabling the Trustee to determine the amount of distribution to
be made on the Certificates and a statement setting forth certain information
with respect to the Primary Assets.
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The timing and method of distribution of funds in the Certificate Account to
Classes of Certificates having differing terms, whether subordinated or not, to
the extent not described herein, shall be set forth in the related Prospectus
Supplement.
Special Distributions
To the extent specified in the Prospectus Supplement relating to a Series of
Certificates, one or more Classes of Multi-Class Certificates that do not
provide for monthly Distribution Dates may receive Special Distributions in
reduction of Certificate Principal Balance ("Special Distributions") in any
month, other than a month in which a Distribution Date occurs, if, as a result
of principal prepayments on the Primary Assets in the related Trust Fund and/or
low reinvestment yields, the Trustee determines, based on assumptions specified
in the related Agreement, that the amount of cash anticipated to be on deposit
in the Certificate Account on the next Distribution Date for such Series and
available to be distributed to the Holders of the Certificates of such Classes
may be less than the sum of (i) the interest scheduled to be distributed to
Holders of the Certificates of such Classes and (ii) the amount to be
distributed in reduction of Stated Principal Balance or such Certificates on
such Distribution Date. Any such Special Distributions will be made in the same
priority and manner as distributions in reduction of Certificate Principal
Balance would be made on the next Distribution Date.
Reports to Certificateholders
Unless otherwise specified or modified in the related Prospectus Supplement
for each Series, the Trustee or other entity specified in the related Prospectus
Supplement will prepare and forward to each Certificateholder of record of such
Series on each Distribution Date or as soon thereafter as is practicable, a
statement generally setting forth, among other things, the following
information, if applicable (per each Certificate, as to (i) through (iii) or
(iv) through (vi) below, as applicable):
(i) the amount of principal distributed to Holders of the related
Certificates and the outstanding principal balance of such Certificates
following such distribution;
(ii) the amount of interest distributed to Holders of the related
Certificates and the current interest on such Certificates;
(iii) the amounts of (a) any overdue accrued interest included in such
distribution, (b) any remaining overdue accrued interest with respect to such
Certificates or (c) any current shortfall in amounts to be distributed as
accrued interest to Holders of such Certificates;
(iv) the amounts of (a) any overdue payments of scheduled principal
included in such distribution, (b) any remaining overdue principal amounts
with respect to such Certificates, (c) any current shortfall in receipt of
scheduled principal payments on the related Primary Assets or (d) any
realized losses or Liquidation Proceeds to be allocated as reductions in the
outstanding principal balances of such Certificates;
(v) the amount received under any related Enhancement, and the
remaining amount available under such Enhancement;
(vi) the amount of any delinquencies with respect to payments on the
related Primary Assets;
(vii) the book value of any REO Property acquired by the related Trust
Fund; and
(viii) such other information as specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee, unless otherwise specified in the applicable
Prospectus Supplement, will cause to be furnished to each Certificateholder of
record at any time during such calendar year a report as to the aggregate of
amounts
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reported pursuant to (i), (ii) and (iv)(d) above for such calendar year and such
other information specified in the related Agreement to enable
Certificateholders to prepare their tax returns including, without limitation,
the amount of original issue discount accrued on the Certificates, if
applicable. Information in the Distribution Date and annual statements provided
to the Holders will not have been examined and reported upon by an independent
public accountant. However, the Servicer will provide to the Trustee a report
by independent public accountants with respect to the Servicer's servicing of
the Mortgage Loans. See "Servicing of Loans--Evidence as to Compliance."
If so specified in the Prospectus Supplement for a Series of Certificates,
such Series or one or more Classes of such Series will be issued in book-entry
form. In such event, owners of beneficial interests in such Certificates will
not be considered Holders and will not receive such reports directly from the
Trustee. The Trustee will forward such reports only to the entity or its
nominee which is the registered holder of the global certificate which evidences
such book-entry securities. Beneficial owners will receive such reports from
the participants and indirect participants of the applicable book-entry system
in accordance with the practices and procedures of such entities.
Advances and Limitations Thereon
Unless otherwise stated in the related Prospectus Supplement, the Servicer
will be obligated to advance funds in an amount equal to the aggregate scheduled
installments of payments of principal and interest (adjusted to the applicable
Pass-Through Rate) that were due on the Due Date with respect to a Mortgage Loan
and that were delinquent (including any payments that have been deferred by the
Servicer) as of the close of business on the date specified in the related
Agreement ("Delinquency Advances"), to be remitted no later than the close of
business on the business day immediately preceding the Distribution Date,
subject to (unless otherwise provided in the related Prospectus Supplement) its
determination that such advances are reimbursable under any letter of credit,
Pool Insurance Policy, Primary Mortgage Insurance Policy or Mortgagor Bankruptcy
Bond, from cash in the Reserve Fund, if any, cash in the Reserve Fund, if any,
or the Certificate Account or otherwise. If specified in the related Prospectus
Supplement, the obligation to make Delinquency Advances may be limited in
amount, or may not be activated until a certain portion of a specified Reserve
Fund is depleted. Such advances are intended to provide liquidity and, except
to the extent specified in the related Prospectus Supplement, not to guarantee
or insure against losses. Accordingly, to the extent specified in the related
Prospectus Supplement, any such Advances are reimbursable to the Servicer out of
related recoveries on the Mortgage Loans respecting which such amounts were
advanced. In addition, such Advances are reimbursable from cash in the Reserve
Fund, if any, the Collection Account, Certificate Account or Distribution
Account, as the case may be, to the extent that the Servicer determines that any
such Advances previously made are not ultimately recoverable. The Servicer
generally also will be obligated to make advances in respect of certain taxes,
insurance premiums and, if applicable, property protection expenses not paid by
borrowers on a timely basis and, to the extent deemed recoverable, foreclosure
costs, including reasonable attorney's fees. "Servicer Advances" comprise
certain costs and expenses incurred in connection with defaulted Mortgage Loans,
acquiring title or management of REO Property or the sale of defaulted Mortgage
Loans or REO Properties, as more fully described in the related Prospectus
Supplement. Unless otherwise set forth in the related Prospectus Supplement,
funds so advanced are reimbursable out of recoveries on the related Mortgage
Loans. This right of reimbursement for any Advance will be prior to the rights
of the Certificateholders to receive any amounts recovered with respect to such
Mortgage Loans. If a Servicer Advance is made and subsequently determined to be
nonrecoverable from late collections, Insurance Proceeds or Liquidation Proceeds
from the related Mortgage Loan, the Servicer may be entitled to reimbursement
from other funds in the Collection Account, Certificate Account or Distribution
Account, as the case may be, or from a specified Reserve Fund, to the extent
specified in the related Prospectus Supplement. Unless otherwise provided in
the applicable Prospectus Supplement, the Servicer also will be required to
advance an amount necessary to provide a full month's interest (adjusted to the
applicable Pass-Through Rate) in connection with full or partial prepayments,
liquidations, defaults and repurchases of the Mortgage Loans. Any such Advances
will not be reimbursable to the Servicer.
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Collection Procedures; Escrow Accounts
The Servicer will be responsible for servicing the Mortgage Loans pursuant to
the Agreement for the related Series. If so specified in the related Prospectus
Supplement, the Servicer may subcontract the servicing of all or a portion of
the Mortgage Loans to one or more subservicers.
The Servicer, directly or through the subservicers, as the case may be, will
make reasonable efforts to collect all payments required to be made under the
Mortgage Loans and will, consistent with the related Agreement for a Series and
any related Pool Insurance Policy, Special Hazard Insurance Policy, Primary
Mortgage Insurance Policy, Mortgagor Bankruptcy Bond or other Enhancement,
follow such collection procedures as it follows with respect to comparable
mortgage loans held in its own portfolio, except when, in the case of FHA or VA
Loans, applicable regulations require otherwise. Consistent with the above, the
Servicer may, in its discretion, (i) waive any assumption fee, late payment
charge, any prepayment charge or penalty interest in connection with the
prepayment of a Mortgage Loan or other charge in connection with a Mortgage Loan
or (ii) to the extent provided in the related Agreement, arrange with an obligor
a schedule for the liquidation of delinquencies by extending the Due Dates for
scheduled payments on such Mortgage Loan, provided that the insurance coverage
--------
for such Mortgage Loan or the coverage provided by any Enhancement will not be
adversely affected.
If specified in the related Prospectus Supplement, the Servicer, with respect
to Mortgage Loans, to the extent permitted by law, will establish and maintain
escrow or impound accounts ("Escrow Accounts") in which payments by borrowers
with respect to taxes, assessments, mortgage and hazard insurance premiums and
other comparable items will be deposited. This obligation may be satisfied by
the provision of insurance coverage against loss occasioned by the failure to
escrow insurance premiums rather than causing such escrows to be made. Mortgage
Loans may not require such payments under the related loan documents, in which
case the Servicer will not be required to establish any Escrow Account with
respect to such Mortgage Loans. Withdrawals from the Escrow Account are to be
made to effect timely payment of taxes, assessments, mortgage and hazard
insurance, to refund to borrowers amounts determined to be overages, to pay
interest to borrowers on balances in the Escrow Account to the extent required
by law, and to clear and terminate such Escrow Account. The Servicer will be
responsible for the administration of each Escrow Account and will be obliged to
make advances to such accounts when a deficiency exists therein. Alternatively,
in lieu of establishing an Escrow Account, the Servicer may procure a
performance bond or other form of insurance coverage, in an amount acceptable to
the Rating Agency rating the related Series of Certificates, covering loss
occasioned by the failure to escrow such amounts.
Maintenance of Insurance Policies and Other Servicing Procedures
Standard Hazard Insurance; Flood Insurance. Except as otherwise specified in
the related Prospectus Supplement, the Servicer will be required to maintain or
cause to be maintained for each Mortgage Loan a policy of standard hazard
insurance (a "Standard Hazard Insurance Policy") covering the Mortgaged Property
underlying such Mortgage Loan including extended coverage in an amount equal to
the lesser of (a) the maximum insurable value of the improvements securing such
Mortgage Loan and (b) the principal balance of such Mortgage Loan. If so
specified in the related Prospectus Supplement, the Servicer also will maintain
on property acquired upon foreclosure, or deed in lieu of foreclosure, of any
Mortgage Loan, a Standard Hazard Insurance Policy in an amount that is at least
equal to the replacement cost or maximum insurable value of the improvements
that are a part of the Mortgaged Property. Any amounts collected by the
Servicer under any such policies (other than amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the borrower in
accordance with normal servicing procedures) will be deposited in the Collection
Account or Certificate Account. Any cost incurred in maintaining any such
insurance shall not, for the purpose of calculating monthly distributions to
Certificateholders, be added to the amount owing under the Mortgage Loan,
notwithstanding that the terms of the Mortgage Loan may so permit. Such cost
shall be recoverable by the Servicer only by withdrawal of funds from the
Collection Account or the Certificate Account, as described in the Agreement.
In general, the standard form of fire and extended coverage insurance policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the
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conditions and exclusions specified in each policy. Although the policies
relating to the Mortgage Loans will be underwritten by different insurers under
different state laws in accordance with different applicable state forms and
therefore will not contain identical terms and conditions, the basic terms
thereof are dictated by respective state laws, and most such policies typically
do not cover any physical damage resulting from any of the following: war,
revolution, governmental actions, floods and other water-related causes, earth
movement (including earthquakes, landslides and mudflows), nuclear reactions,
wet or dry rot, vermin, rodents, insects or domestic animals, theft and, in
certain cases, vandalism. The foregoing list is merely indicative of certain
kinds of uninsured risks and is not intended to be all-inclusive. No earthquake
or other additional insurance is to be required of any borrower or maintained on
property acquired in respect of a Mortgage Loan, other than pursuant to such
applicable laws and regulations as shall at any time be in force and as shall
require such additional insurance. When a Mortgaged Property is located at the
time of origination of the Mortgage Loan in a federally designated flood area,
the Agreement will require the Servicer to cause flood insurance to be
maintained, to the extent available, in those areas where flood insurance is
required under the National Flood Insurance Act of 1968, as amended.
The Seller will not require that a standard hazard or flood insurance policy
be maintained on the Cooperative Dwelling relating to any Cooperative Loan.
Generally, the cooperative corporation itself is responsible for maintenance of
hazard insurance for the property owned by the cooperative, and the tenant-
stockholders of that cooperative do not maintain individual hazard insurance
policies. To the extent, however, that a Cooperative and the related borrower on
a Cooperative Loan do not maintain such insurance or do not maintain adequate
coverage or any insurance proceeds are not applied to the restoration of damaged
property, any damage to such borrower's Cooperative Dwelling or such
Cooperative's building could significantly reduce the value of the collateral
securing such Cooperative Loan to the extent not covered by other Enhancement.
The hazard insurance policies covering the Mortgaged Properties typically
contain a co-insurance clause that in effect requires the insured at all times
to carry insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the improvements on the property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clause generally provides that the insurer's
liability in the event of partial loss does not exceed the greater of (i) the
replacement cost of the improvements less physical depreciation or (ii) such
proportion of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such improvements.
In the event that the Servicer obtains and maintains a blanket policy issued
by an insurer acceptable to the Rating Agency insuring against hazard losses on
all of the related Mortgage Loans, it will conclusively be deemed to have
satisfied its obligations to cause to be maintained a Standard Hazard Insurance
Policy for each Mortgage Loan. This blanket policy may contain a deductible
clause, in which case the Servicer will, in the event that there has been a loss
that would have been covered by such policy absent such deductible, deposit in
the Collection Account or the Certificate Account, as applicable, the amount not
otherwise payable under the blanket policy because of the application of such
deductible clause.
Since the amount of hazard insurance to be maintained on the improvements
securing the Mortgage Loans may decline as the principal balances owing thereon
decrease, and since properties have historically appreciated in value over time,
in the event of partial loss, hazard insurance proceeds may be insufficient to
fully restore the damaged Mortgaged Property. See "Description of Insurance--
Special Hazard Insurance Policies" for a description of the limited protection
afforded by a Special Hazard Insurance Policy against losses occasioned by
certain hazards that are otherwise uninsured against, as well as against losses
caused by, the application of the coinsurance provisions contained in the
Standard Hazard Insurance Policies.
Special Hazard Insurance. If so specified in the related Prospectus
Supplement, the Servicer will be required to exercise its best reasonable
efforts to maintain the Special Hazard Insurance Policy, if any, with respect to
a Series of Certificates in full force and effect, unless coverage thereunder
has been exhausted through payment of claims, and will pay the premium for the
Special Hazard Insurance Policy on a timely basis; provided, however, that the
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Servicer shall be under no such obligation if coverage under the Pool
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Insurance Policy with respect to such Series has been exhausted. In the event
that the Special Hazard Insurance Policy is cancelled or terminated for any
reason (other than the exhaustion of total policy coverage), the 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 that is equal to the then existing coverage of the Special Hazard
Insurance Policy; provided that if the cost of any such replacement policy is
--------
greater than the cost of the terminated Special Hazard Insurance Policy, the
amount of coverage under the replacement Special Hazard Insurance Policy may be
reduced to a level such that the applicable premium will not exceed the cost of
the Special Hazard Insurance Policy that was replaced. Certain characteristics
of the Special Hazard Insurance Policy are described under "Description of
Insurance--Special Hazard Insurance Policies."
Pool Insurance. To the extent specified in a related Prospectus Supplement,
the Servicer will exercise its best reasonable efforts to maintain a Pool
Insurance Policy with respect to a Series of Certificates in effect throughout
the term of the related Agreement, unless coverage thereunder has been exhausted
through payment of claims, and will pay the premiums for such Pool Insurance
Policy on a timely basis. In the event that the Pool Insurer ceases to be a
qualified insurer because it is not qualified to transact a mortgage guaranty
insurance business under the laws of the state of its principal place of
business or any other state which has jurisdiction over the Pool Insurer in
connection with the Pool Insurance Policy, or if the Pool Insurance Policy is
cancelled or terminated for any reason (other than the exhaustion of total
policy coverage), the Servicer will exercise its best reasonable efforts to
obtain a replacement policy of pool insurance comparable to the Pool Insurance
Policy and may obtain, under the circumstances described above with respect to
the Special Hazard Insurance Policy, a replacement policy with reduced coverage.
In the event the Pool Insurer ceases to be a qualified insurer because it is not
approved as an insurer by Freddie Mac, Fannie Mae or any successors thereto, the
Servicer will agree to review, not less often than monthly, the financial
condition of the Pool Insurer with a view towards determining whether recoveries
under the Pool Insurance Policy are jeopardized and, if so, will exercise its
best reasonable efforts to obtain from another qualified insurer a replacement
insurance policy under the above-stated limitations. Certain characteristics of
the Pool Insurance Policy are described under "Description of Insurance--Pool
Insurance Policies."
Primary Mortgage Insurance. To the extent specified in the related
Prospectus Supplement, the Servicer will be required to keep in force and effect
for each Mortgage Loan, to the extent required by the underwriting standards of
the Seller, a Primary Mortgage Insurance Policy issued by a qualified insurer
(the "Primary Mortgage Insurer") with regard to each Mortgage Loan for which
such coverage is required pursuant to the related Agreement and to act on behalf
of the Trustee (the "Insured") under each such Primary Mortgage Insurance
Policy. The Servicer will not cancel or refuse to renew any such Primary
Mortgage Insurance Policy in effect at the date of the initial issuance of a
Series of Certificates that is required to be kept in force under the related
Agreement unless the replacement Primary Mortgage Insurance Policy for such
cancelled or non-renewed policy is maintained with an insurer whose claims-
paying ability is acceptable to the Rating Agency rating the related Series of
Certificates. See "Description of Insurance--Primary Mortgage Insurance
Policies."
Mortgagor Bankruptcy Bond. If so specified in the related Prospectus
Supplement, the Servicer will exercise its best reasonable efforts to maintain a
Mortgagor Bankruptcy Bond for a Series of Certificates in full force and effect
throughout the term of the related Agreement, unless coverage thereunder has
been exhausted through payment of claims, and will pay the premiums for such
Mortgagor Bankruptcy Bond on a timely basis. At the request of the Seller,
coverage under a Mortgagor Bankruptcy Bond will be cancelled or reduced by the
Servicer to the extent permitted by the Rating Agency rating the related Series
of Certificates, provided that such cancellation or reduction does not adversely
affect the then current rating of such Series. See "Description of Insurance--
Mortgagor Bankruptcy Bond."
Presentation of Claims. Under the terms of the Mortgage Loans, the borrowers
generally are required to present claims to insurers under hazard insurance
policies maintained on the Mortgaged Properties. The Servicer, on behalf of the
Trustee and Certificateholders, is obligated to present claims under any blanket
insurance policy insuring against hazard losses on the Mortgaged Properties.
However, the ability of the
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Servicer to present such claims depends upon the extent to which information in
this regard is furnished to the Servicer by the borrowers.
The Servicer, on behalf of itself, the Trustee and the Certificateholders,
will present claims to HUD, the VA, the Pool Insurer, the Special Hazard
Insurer, the issuer of the Mortgagor Bankruptcy Bond and each Primary Mortgage
Insurer, as applicable, and take such reasonable steps as are necessary to
permit recovery under such insurance policies or Mortgagor Bankruptcy Bond, if
any, with respect to a Series concerning defaulted Mortgage Loans or Mortgage
Loans that are the subject of a bankruptcy proceeding. All collections by the
Servicer under any FHA insurance or VA guarantee, any Pool Insurance Policy, any
Primary Mortgage Insurance Policy or any Mortgagor Bankruptcy Bond and, where
the related property has not been restored, any Special Hazard Insurance Policy,
are to be deposited in the Collection Account or the Certificate Account,
subject to withdrawal as described herein.
If any property securing a defaulted Mortgage Loan is damaged and proceeds,
if any, from the related Standard Hazard Insurance Policy or the applicable
Special Hazard Insurance Policy 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, the Servicer will not be required to
expend its own funds to restore the damaged property unless it determines (i)
that such restoration will increase the proceeds to Certificateholders on
liquidation of the Mortgage Loan after reimbursement of the expenses incurred by
the Servicer and (ii) that such expenses will be recoverable through proceeds of
the sale of the Mortgaged Property or proceeds of any related Pool Insurance
Policy, any related Primary Mortgage Insurance Policy or otherwise.
If recovery under a Pool Insurance Policy or any related Primary Mortgage
Insurance Policy is not available because the related Servicer has been unable
to make the above determinations or otherwise, the Servicer nevertheless will be
obligated to follow such normal practices and procedures as are deemed necessary
or advisable to realize upon the defaulted Mortgage Loan. If the proceeds of any
liquidation of the Mortgaged Property are less than the principal balance of the
defaulted Mortgage Loan, plus interest accrued thereon at the Pass-Through Rate,
and if coverage under any other method of Enhancement with respect to such
Series is exhausted, the related Trust Fund will realize a loss in the amount of
such difference, plus the aggregate of expenses incurred by the Servicer in
connection with such proceedings and which are reimbursable under the related
Agreement. In the event that any such proceedings result in a total recovery
that is, after reimbursement to the Servicer of its expenses, in excess of the
principal balance of the related Mortgage Loan, together with accrued and unpaid
interest thereon at the applicable Pass-Through Rate, the Servicer will be
entitled to withdraw amounts representing normal servicing compensation on such
Mortgage Loan from the Collection Account or the Certificate Account, as the
case may be.
Enforcement of Due-On-Sale Clauses
The Agreement with respect to Certificates representing interests in a
Mortgage Pool will provide that, when any Mortgaged Property has been conveyed
by the borrower, the Servicer will, to the extent it has knowledge of such
conveyance, have the option to exercise its rights to accelerate the maturity of
such Mortgage Loan under any applicable "due-on-sale" clause, unless it
reasonably believes that such enforcement is not exercisable under applicable
law or regulations, would result in loss of insurance coverage with respect to
such Mortgage Loan or would not be in the best interest of the related Series of
Certificateholders. In any such case, where the due-on-sale clause will not be
exercised, the Servicer is authorized to accept or enter into an assumption and
modification agreement from or with the person to whom such Mortgaged Property
has been or is about to be conveyed, pursuant to which such person becomes
liable under the Mortgage Note and, unless prohibited by applicable state law,
the borrower remains liable thereon, provided that the Mortgage Loan will
continue to be covered by any Pool Insurance Policy and any related Primary
Mortgage Insurance Policy. In the case of an FHA Loan, such an assumption can
occur only with HUD approval of the substitute borrower. The Servicer also will
be authorized, with the prior approval of the insurer under any required
insurance policies, to enter into a substitution of liability agreement with
such person, pursuant to which the original borrower is released from liability
and such person is substituted as borrower and becomes liable under the Mortgage
Note.
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Realization Upon Defaulted Mortgage Loans
Under the Agreement, the Servicer will be required to foreclose upon or
otherwise comparably convert the ownership of properties securing such of the
related Mortgage Loans as come into and continue in default and as to which no
satisfactory arrangements can be made for collection of delinquent payments. In
connection with such foreclosure or other conversion, the Servicer or the
Servicer will follow such practices and procedures as are deemed necessary or
advisable and as shall be normal and usual in its general mortgage servicing
activities and in accordance with Fannie Mae guidelines, except when, in the
case of FHA or VA Loans, applicable regulations require otherwise. However, the
Servicer will not be required to expend its own funds in connection with any
foreclosure or towards the restoration of any property unless it determines (i)
that such restoration and/or foreclosure will increase the proceeds of
liquidation of the related Mortgage Loan to Certificateholders after
reimbursement to itself for such expenses and (ii) that such expenses will be
recoverable to it either through Liquidation Proceeds, Insurance Proceeds, or
amounts in the Reserve Fund, if any, with respect to the related Series, or
otherwise. In addition, if the Servicer has actual knowledge or reasonably
believes that any Mortgaged Property is contaminated by hazardous or toxic
wastes or substances, then the Servicer will not cause the related Trust Fund to
acquire title to such Mortgaged Property in a foreclosure or similar proceeding
if such acquisition, in the reasonable opinion of the Servicer, is not
commercially reasonable. Notwithstanding anything to the contrary herein, in
the case of a Trust Fund for which a REMIC election has been made, the Servicer
will be required to liquidate any Mortgaged Property acquired through
foreclosure within two years after the acquisition of the beneficial ownership
of such Mortgaged Property. While the holder of a Mortgaged Property acquired
through foreclosure often can maximize its recovery by providing financing to a
new purchaser, the Trust Fund will have no ability to do so and neither the
Servicer nor the Seller will be required to do so.
Any prospective purchaser of a Cooperative Dwelling generally will be
required to obtain the approval of the board of directors of the related
Cooperative before purchasing the shares and acquiring rights under the
proprietary lease or occupancy agreement securing the Cooperative Loan. See
"Certain Legal Aspects of the Mortgage Loans--The Mortgage Loans--Foreclosure"
herein. This approval is usually based on the purchaser's income and net worth
and numerous other factors. Although the Cooperative's approval is unlikely to
be unreasonably withheld or delayed, the necessity of acquiring such approval
could limit the number of potential purchasers for those shares and otherwise
limit the Trust Fund's ability to sell and realize the value of those shares.
Servicing Compensation and Payment of Expenses
Under the Agreement for a Series of Certificates, the Servicer will be
entitled to a periodic fee as servicing compensation (the "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 addition, unless otherwise specified in the related Prospectus
Supplement, the Servicer will be entitled to servicing compensation in the form
of assumption fees, late payment charges and similar items, or excess proceeds
following disposition of Mortgaged Properties in connection with Defaulted
Loans.
Except to the extent otherwise specified in the related Prospectus
Supplement, the Servicer will pay certain expenses incurred in connection with
the servicing of the Mortgage Loans including, without limitation, the payment
of the fees and expenses of the Trustee and independent accountants, payment of
insurance policy premiums and the cost of credit support, if any, and payment of
expenses incurred in preparation of reports to Certificateholders.
When a borrower makes a principal prepayment in full between Due Dates on the
related Mortgage Loan, the borrower generally will be required to pay interest
on the amount prepaid only to the date of prepayment. If and to the extent
provided in the related Prospectus Supplement, in order that one or more Classes
of a Series will not be adversely affected by any resulting shortfall in
interest, the amount of the Servicing Fee may be reduced to the extent necessary
to include in the Servicer's remittance to the Trustee for distribution to
Certificateholders an amount equal to one month's interest on the related
Mortgage Loan
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(less the Servicing Fee). If the aggregate amount of such shortfalls in a month
exceeds the Servicing Fee for such month, a shortfall to Certificateholders may
occur.
Unless otherwise specified in the related Prospectus Supplement, the Servicer
will be entitled to reimbursement for Servicer Advances. The related
Certificateholders will suffer no loss by reason of such Servicer Advances to
the extent expenses are covered under related insurance policies or from excess
Liquidation Proceeds. If claims either are not made or not paid under the
applicable insurance policies, or if coverage thereunder has been exhausted, the
related Certificateholders will suffer a loss to the extent that Liquidation
Proceeds, after reimbursement of the Servicer Advances, are less than the
outstanding principal balance of and unpaid interest on the related Mortgage
Loan which would be distributable to Certificateholders. The Servicer generally
is also entitled to reimbursement from the Collection Account or the Certificate
Account for Servicer Advances. In addition, the Servicer will be entitled to
reimbursement for Delinquency Advances as described above under "--Advances and
Limitations Thereon."
Unless otherwise specified in the related Prospectus Supplement, the rights
of the Servicer to receive funds from the Collection Account or the Certificate
Account for a Series, whether as the Servicing Fee or other compensation, or for
the reimbursement of Advances, expenses or otherwise, are not subordinate to the
rights of Certificateholders of such Series.
Evidence as to Compliance
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will provide that each year, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that
such firm has examined certain documents and records relating to the servicing
of the Mortgage Loans by the Servicer and that such examination, which has been
conducted substantially in compliance with either (i) the audit guide for audits
of non-supervised mortgagees approved by the Department of Housing and Urban
Development or (ii) the requirements of the Uniform Single Attestation Program
for Mortgage Bankers, has disclosed no items of non-compliance with the
provisions of the related Agreement that, in the opinion of the firm, are
material, except for such items of non-compliance as shall be referred to in the
report.
If so specified in the related Prospectus Supplement, the Agreement for each
Series will also provide for delivery to the Trustee for such Series of an
annual statement signed by an officer of the Servicer to the effect that the
Servicer has fulfilled its material obligations under such Agreement throughout
the preceding calendar year.
Certain Matters Regarding The Servicer,
The Seller and The Trustee
If an Event of Default occurs under the Agreement, the Servicer may be
replaced by the Trustee or a successor Servicer. Unless otherwise specified in
the related Prospectus Supplement, such Events of Default and the rights of the
Trustee upon such a default under the Agreement for the related Series will be
substantially similar to those described under "The Agreements--Events of
Default; Rights Upon Event of Default."
Unless otherwise specified in the related Prospectus Supplement, the Servicer
does not have the right to assign its rights and delegate its duties and
obligations under the related Agreement for each Series unless the successor
Servicer accepting such assignment or delegation (i) services similar loans in
the ordinary course of its business, (ii) is reasonably satisfactory to the
Trustee for the related Series, (iii) would not cause the Rating Agency's rating
of the Certificates for such Series in effect immediately prior to such
assignment, sale or transfer to be qualified, downgraded or withdrawn as a
result of such assignment, sale or transfer and (iv) executes and delivers to
the Trustee and the Enhancer, if any, an agreement, in form and substance
reasonably satisfactory to the Trustee and the Enhancer, if any, which contains
an assumption by such Servicer of the due and punctual performance and
observance of each covenant and condition to be performed or observed by the
Servicer under the related Agreement from and after the date of such agreement.
No such assignment will become effective until the Trustee or a successor
Servicer has assumed the servicer's obligations and
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duties under the related Agreement. To the extent that the Servicer transfers
its obligations to a wholly-owned subsidiary or affiliate, such subsidiary or
affiliate need not satisfy the criteria set forth above; however, in such
instance, the assigning Servicer will remain liable for the servicing
obligations under the related Agreement. Any entity into which the Servicer is
merged or consolidated or any successor corporation resulting from any merger,
conversion or consolidation will succeed to the Servicer's obligations under the
related Agreement, provided that such successor or surviving entity meets the
--------
requirements for a successor Servicer set forth above.
The Servicer will not be under any liability to the Trust Fund or the
Certificateholders for taking any action or for refraining from taking any
action in good faith pursuant to the Agreement, or for errors in judgment;
provided, however, that the Servicer will not be protected against any liability
- -------- -------
that otherwise would be imposed by reason of willful misfeasance, bad faith or
gross negligence in the performance of duties or by reason of its reckless
disregard of its obligations and duties thereunder. Except to the extent
otherwise provided therein, each Agreement will provide further that the
Servicer and any director, officer, employee or agent of the Servicer will be
entitled to indemnification by the Trust Fund and will be held harmless to the
extent provided in the Agreement against any loss, liability or expense incurred
in connection with any legal action relating to the Agreement or the
Certificates, other than any loss, liability or expense related to any specific
Mortgage Loan or Mortgage Loans (or balances thereof) (except any such loss
liability or expense otherwise reimbursable pursuant to the Agreement) and any
loss, liability or expense incurred by the Servicer by reason of its willful
misfeasance, bad faith or gross negligence in the performance of its duties
thereunder or by reason of the Servicer's reckless disregard of its obligations
and duties thereunder.
Each Agreement will provide that the Servicer will not be under any
obligation to appear in, prosecute or defend any legal action that is not
incidental to its duties under the Agreement and that in its opinion may involve
it in any expense or liability. The Servicer, however, in its discretion, may
undertake any such action that it may deem necessary or desirable with respect
to the Agreement and the rights and duties of the parties thereto and the
interest of the Certificateholders and the Enhancer, if any, thereunder. In
such event, the legal expenses and costs of such action and any liability
resulting therefrom will be expenses, costs and liabilities of the Trust Fund
and the Servicer will be entitled to be reimbursed therefor to the extent
provided in the Agreement. The Servicer's right to such indemnity or
reimbursement will survive any resignation or termination of the Servicer with
respect to any losses, expenses, costs or liabilities arising prior to such
resignation or termination (or arising from events that occurred prior to such
resignation or termination). Any claims by or on behalf of the
Certificateholders or the Trust Fund will be made only against the Servicer, who
will be liable with respect to its own acts and omissions as well as the acts
and omissions of its directors, officer, employees and agents.
The Trustee under each Agreement will be named in the applicable Prospectus
Supplement. The commercial bank or trust company serving as Trustee may have
normal banking relationships with the Seller and with the Servicer and/or their
affiliates.
The Trustee may resign from its obligations under the Pooling and Servicing
Agreement at any time, in which event a successor trustee will be appointed. In
addition, the Seller may remove the Trustee if the Trustee ceases to be eligible
to act as Trustee under the Agreement or if the Trustee becomes insolvent, at
which time the Seller will become obligated to appoint a successor Trustee. The
Trustee may also be removed at any time by the Holders of Certificates
evidencing voting rights aggregating not less than 50% of the voting rights
evidenced by the Certificates of such Series, subject to the rights of the
Enhancer, if any. Any resignation and removal of the Trustee, and the
appointment of a successor trustee, will not become effective until acceptance
of such appointment by the successor Trustee.
Each Agreement also will provide that neither the Seller nor any director,
officer, employee or agent of the Seller or the Trustee, or any responsible
officers of the Trustee will be under any liability to the Certificateholders,
for the taking of any action or for refraining from the taking of any action in
good faith pursuant to the Agreement, or for errors in judgment; provided,
--------
however, that neither the Seller, nor the Trustee nor any such person will be
- -------
protected against, in the case of the Seller, any breach of representations or
warranties made by them, and in the case of the Seller and the Trustee, against
any liability that would
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otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of reckless disregard
of its obligations and duties thereunder. Each Agreement will provide further
that the Seller, and the Trustee and any director, officer and employee or agent
of the Seller or the Trustee shall be entitled to indemnification, by the Trust
Fund and will be held harmless against any loss, liability or expense incurred
in connection with any legal action relating to the related Agreement or the
Certificates and in the case of the Trustee, resulting from any error in any tax
or information return prepared by the Servicer or from the exercise of any power
of attorney granted pursuant to the Agreement, other than any loss, liability or
expense related to any specific Mortgage Loan or Mortgage Certificate (except
any such loss, liability or expense otherwise reimbursable pursuant to the
related Agreement) and any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or gross negligence in the performance of their
duties thereunder or by reason of reckless disregard of their obligations and
duties thereunder. In addition, each Agreement will provide that the Seller will
not be under any obligation to appear in, prosecute or defend any legal action
that is not incidental to its duties under the Agreement and that in its opinion
may involve it in any expense or liability. The Seller may, however, in its
discretion, undertake any such action deemed by it necessary or desirable with
respect to the related Agreement and the rights and duties of the parties
thereto and the interests of the Certificateholders thereunder. In such event,
the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Fund, and the
Seller will be entitled to be reimbursed therefor out of the Certificate
Account.
Deficiency Event
To the extent a deficiency event is specified in the related Prospectus
Supplement, a deficiency event (a "Deficiency Event") with respect to the
Certificates of each Series may be defined in the Agreement as being the
inability of the Trustee to distribute to holders of one or more Classes of
Certificates of such Series, in accordance with the terms thereof and the
Agreement, any distribution of principal or interest thereon when and as
distributable, in each case because of the insufficiency for such purpose of the
funds then held in the related Trust Fund.
To the extent a deficiency event is specified in the related Prospectus
Supplement, upon the occurrence of a Deficiency Event, the Trustee is required
to determine whether or not the application on a monthly basis (regardless of
the frequency of regular Distribution Dates) of all future scheduled payments on
the Mortgage Loans and Mortgage Certificates included in the related Trust Fund
and other amount receivable with respect to such Trust Fund towards payments on
such Certificates in accordance with the priorities as to distributions of
principal and interest set forth in such Certificates will be sufficient to make
distributions of interest at the applicable Interest Rates and to distribute in
full the Certificate Principal Balance of each such Certificate on or before the
latest Final Distribution Date of any outstanding Certificates of such Series.
To the extent a deficiency event is specified in the related Prospectus
Supplement, the Trustee will obtain and rely upon an opinion or report of a firm
of independent accountants of recognized national reputation as to the
sufficiency of the amounts receivable with respect to such Trust Fund to make
such distributions on the Certificates, which opinion or report will be
conclusive evidence as to such sufficiency. Pending the making of any such
determination, distributions on the Certificates shall continue to be made in
accordance with their terms.
To the extent a deficiency event is specified in the related Prospectus
Supplement, in the event that the Trustee makes a positive determination, the
Trustee will apply all amounts received in respect of the related Trust Fund
(after payment of fees and expenses of the Trustee and accountants for the Trust
Fund) to distributions on the Certificates of such Series in accordance with
their terms, except that such distributions shall be made monthly and without
regard to the amount of principal that would otherwise be distributable on any
Distribution Date. Under certain circumstances following such positive
determination, the Trustee may resume making distributions on such Certificates
expressly in accordance with their terms.
To the extent a deficiency event is specified in the related Prospectus
Supplement, if the Trustee is unable to make the positive determination
described above, the Trustee will apply all amounts received in respect of the
related Trust Fund (after payment of Trustee and accountants' fees and expenses)
to monthly distributions
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on the Certificates of such series pro rata, without regard to the priorities as
to distribution of principal set forth in such Certificates, and such
Certificates will, to the extent permitted by applicable law, accrue interest at
the highest Interest Rate borne by any Certificate of such Series, or in the
event any Class of such Series shall accrue interest at a floating rate, at the
weighted average Interest Rate, calculated on the basis of the maximum interest
rate applicable to the Class having such floating interest rate and on the
original principal amount of the Certificates of that Class. In such event, the
Holders of a majority in outstanding principal balance of such Certificates may
direct the Trustee to sell the related Trust Fund, any such direction being
irrevocable and binding upon the holders of all Certificates of such Series and
upon the owners of the residual interests in such Trust Fund. In the absence of
such a direction, the Trustee may not sell all or any portion of such Trust
Fund.
Events of Default
Unless otherwise provided in the related Prospectus Supplement, Events of
Default under each Agreement will consist of: (i) any failure to make a
specified payment which continues unremedied, in most cases, for five business
days after the giving of written notice; (ii) any failure by the Trustee or the
Servicer, as applicable, duly to observe or perform in any material respect any
other of its covenants or agreements in the Agreement, which failure shall
continue for 60 days (15 days in the case of a failure to pay the premium for
any insurance policy) or any breach of any representation and warranty made by
the Servicer which continues unremedied for 120 days after the giving of written
notice of such failure or breach; and (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings regarding the Servicer.
Rights Upon Event of Default
So long as an Event of Default with respect to a Series of Certificates
remains unremedied and unless otherwise set forth in the related Prospectus
Supplement and subject to the rights of the Enhancer, if any, the Seller, the
Trustee or the Holders of Certificates evidencing not less than 25% of the
voting rights evidenced by the Certificates of such Series may terminate all of
the rights and obligations of the Servicer under the Agreement and in and to the
Mortgage Loans and the proceeds thereof, whereupon (subject to applicable law
regarding the Trustee's ability to make advances) the Trustee or, if the Seller
so notifies the Trustee and the Servicer, the Seller or its designee, will
succeed to all the responsibilities, duties and liabilities of the Servicer
under such Pooling and Servicing Agreement and will be entitled to similar
compensation arrangements. In the event that the Trustee would be obligated to
succeed the Servicer but is unwilling or unable so to act, it may appoint, or
petition to a court of competent jurisdiction for the appointment of, a
successor servicer. Pending such appointment, the Trustee (unless prohibited by
law from so acting) shall be obligated to act in such capacity. The Trustee and
such successor servicer may agree upon the servicing compensation to be paid to
such successor, which in no event may be greater than the compensation to the
Servicer under the Agreement.
Amendment
Each Agreement may be amended by the Seller, the Servicer and the Trustee,
without notice to or consent of the Certificateholders, (i) to cure any
ambiguity, (ii) to correct any defective or to correct or supplement any
provision therein, (iii) to add to the duties of the Seller, the Trust Fund or
the Servicer, (iv) to add any other provisions with respect to matters or
questions arising under such Agreement or related Enhancement, (v) to add or
amend any provisions of such Agreement as required by the Rating Agency in order
to maintain or improve the rating of the Certificates (it being understood that
none of the Seller, the Servicer or the Trustee is obligated to maintain or
improve such rating) or (vi) to comply with any requirements imposed by the
Code; provided that any such amendment except pursuant to clause (vi) above will
not materially and adversely affect the interests of any Holders of such Series
or, if specified in the related Prospectus Supplement, the Enhancer, as
evidenced by an opinion of counsel. Any such amendment except pursuant to
clause (vi) of the preceding sentence shall be deemed not to adversely affect in
any material respect the interests of any Holder if the Trustee receives written
confirmation from the Rating Agency rating such Certificates that such amendment
will not cause such Rating Agency to withdraw or reduce the then
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current rating thereof. Unless otherwise specified in the Prospectus
Supplement, the Agreement for each Series also may be amended by the Trustee,
the Servicer, if applicable, and the Seller with respect to such Series with the
consent of the Enhancer, if specified in the related Prospectus Supplement, or
the Holders possessing not less than 51% of the aggregate outstanding principal
amount of the Certificates of such Series or, if only certain Classes of such
Series are affected by such amendment, 51% of the aggregate outstanding
principal amount of Certificates of each Class of such Series affected thereby,
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of such Agreement or modifying in any manner
the rights of Holders of such Series; provided, however, that no such amendment
-------- -------
may (a) reduce the amount or delay the timing of payments on any Certificate
without the consent of the Holder of such Certificate or (b) reduce the
aforesaid percentage of the aggregate outstanding principal amount of
Certificates of such Class, the Holders of which are required to consent to any
such amendment or (c) if specified in the related Prospectus Supplement,
adversely affect the interests of the Enhancer, without, in the case of clauses
(a) or (b), the consent of the Holders of 100% of the aggregate outstanding
principal amount of each Class of Certificates affected thereby.
Voting Rights
The related Prospectus Supplement will set forth the method of determining
allocation of voting rights with respect to a Series.
List of Holders
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, which request is accompanied by a copy of the communication which
such Holders propose to transmit, the Trustee will afford such Holders access
during business hours to the most recent list of Holders of that Series held by
the Trustee.
No Agreement will provide for the holding of any annual or other meeting of
Holders.
Book-Entry Securities
If specified in the Prospectus Supplement for a Series of Certificates, such
Series or one or more Classes of such Series may be issued in book-entry form.
In such event, beneficial owners of such Certificates will not be considered
"Holders" under the Agreements and may exercise the rights of Holders only
indirectly through the participants in the applicable book-entry system.
REMIC Administrator
For any Series with respect to which a REMIC election is made, preparation of
certain reports and certain other administrative duties with respect to the
Trust Fund may be performed by a REMIC administrator, who may be the Seller or
an affiliate of the Seller.
Termination
The obligations created by the Agreement for a Series of Certificates will
terminate upon the distribution of Holders of all amounts distributable to them
pursuant to such Agreement after the earlier of (i) the later of (a) the final
payment or other liquidation of the last Primary Asset remaining in the Trust
Fund for such Series and (b) the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure in respect of any Primary Asset or
(ii) the repurchase, as described below, by the Servicer or other entity
specified in the related Prospectus Supplement from the Trustee for such Series
of all Primary Assets and other property at the time subject to such Agreement.
The Agreement for each Series permits, but does not require, the Servicer or
other entity specified in the related Prospectus Supplement to purchase from the
Trust Fund for such Series all remaining Primary Assets at a price equal to,
unless otherwise specified in the related Prospectus Supplement, 100% of the
aggregate Principal Balance of such Primary Assets plus, with respect to any
property acquired in respect of a Primary Assets, if any, the outstanding
Principal Balance of the
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related Primary Asset at the time of foreclosure, less, in either case, related
unreimbursed Servicer Advances (in the case of the Primary Assets, only to the
extent not already reflected in the computation of the aggregate principal
balance of such Primary Assets) and unreimbursed expenses (that are reimbursable
pursuant to the terms of the Agreement) plus, in either case, accrued interest
thereon at the weighted average rate on the related Primary Assets through the
last day of the Due Period in which such repurchase occurs; provided, however,
-------- -------
that if an election is made for treatment as a REMIC under the Code, the
repurchase price may equal the greater of (a) 100% of the aggregate principal
balance of such Primary Assets, plus accrued interest thereon at the applicable
net rates on the Primary Assets through the last day of the month of such
repurchase and (b) the aggregate fair market value of such Primary Assets plus
the fair market value of any property acquired in respect of a Primary Asset and
remaining in the Trust Fund. The exercise of such right will effect early
retirement of the Certificates of such Series, but such entity's right to so
purchase is subject to the aggregate principal balance of the Primary Assets at
the time of repurchase being less than a fixed percentage, to be set forth in
the related Prospectus Supplement, of the aggregate principal balance of the
Primary Assets as of the Cut-off Date. In no event, however, will the trust
created by the Agreement continue beyond the expiration of 21 years from the
death of the last survivor of certain persons identified therein. For each
Series, the Servicer or the Trustee, as applicable, will give written notice of
termination of the Agreement to each Holder, and the final distribution will be
made only upon surrender and cancellation of the Certificates at an office or
agency specified in the notice of termination. If so provided in the related
Prospectus Supplement for a Series, the Seller or another entity may effect an
optional termination of the Trust Fund under the circumstances described in such
Prospectus Supplement. See "Description of the Certificates--Optional Purchase
or Termination."
ENHANCEMENT
The amounts and types of enhancement arrangements and the provider thereof,
if applicable, with respect to a Series or any Class of Certificates will be set
forth in the related Prospectus Supplement. If and to the extent provided in
the related Prospect Supplement, enhancement may be in the form of a financial
guaranty insurance policy, overcollateralization, a letter of credit, cash
reserve fund, insurance policies, one or more Class of Subordinated
Certificates, derivative products or other form of enhancement, or any
combination thereof, as may be described in the related Prospectus Supplement
(collectively, "Enhancement"). If specified in the related Prospectus
Supplement, Enhancement for any Series of Certificates may cover one or more
Classes of Certificates and, accordingly, may be exhausted for the benefit of a
particular Class of Certificates and thereafter be unavailable to such other
Classes of Certificates. Further information regarding any provider of
Enhancement, including financial information when material, will be included in
the related Prospectus Supplement.
The presence of Enhancement is intended in increase the likelihood of receipt
by certain Certificateholders of the full amount of principal and interest due
thereon and to decrease the likelihood that certain Certificateholders will
experience losses, or may be structured to provide protection against changes in
interest rates or against other risks, to the extent and under the conditions
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the Enhancement for a Class of Certificates
will not provide protection against all risks of loss and will not guarantee
repayment of the entire principal and interest thereon. If losses occur which
exceed the amount covered by any Enhancement or which are not covered by any
Enhancement, Certificateholders will bear their allocable share of deficiencies.
In addition, if a form of Enhancement covers more than one Class of Certificates
of a Series, Certificateholders of any such Class will be subject to the risk
that such Enhancement will be exhausted by the claims of Certificateholders of
other Classes.
Letters of Credit
The Letters of Credit, if any, with respect to a Series of Certificates will
be issued by the bank or financial institution specified in the related
Prospectus Supplement (the "L/C Bank"). The maximum obligation of the L/C Bank
under the Letter of Credit will be to honor requests for payment thereunder in
an aggregate fixed dollar amount, net of unreimbursed payments thereunder, equal
to the percentage of the aggregate
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principal balance on the related Cut-off Date of the Mortgage Loans evidenced by
each Series (the "L/C Percentage") specified in the Prospectus Supplement for
such Series. The duration of coverage and the amount and frequency of any
reduction in coverage provided by the Letter of Credit with respect to a Series
of Certificates will be in compliance with the requirements established by the
Rating Agency rating such Series and will be set forth in the Prospectus
Supplement relating to such Series of Certificates. The amount available under
the Letter of Credit in all cases will be reduced to the extent of the
unreimbursed payments thereunder. Unless otherwise specified in the related
Prospectus Supplement, the obligations of the L/C Bank under the Letter of
Credit for each Series of Certificates will expire 30 days after the latest of
the scheduled final maturity dates of the Mortgage Loans in the related Mortgage
Pool or the repurchase of all Mortgage Loans in the Mortgage Pool in the
circumstances specified above. See "Description of the Certificates--Optional
Purchase or Termination."
Unless otherwise specified in the applicable Prospectus Supplement, the
Servicer will be required under the Agreement to determine not later than three
business days prior to each Distribution Date whether a payment under the Letter
of Credit will be necessary on the Distribution Date and, no later than the
third business day prior to such Distribution Date, to advise the L/C Bank and
the Trustee of its determination, setting forth the amount of any required
payment. On the Distribution Date, the L/C Bank will be required to honor the
Trustee's request for payment thereunder in an amount equal to the lesser of (A)
the remaining amount available under the Letter of Credit and (B) the
outstanding principal balances of any Liquidating Loans to be assigned on such
Distribution Date (together with accrued and unpaid interest thereon at the
related Mortgage Rate to the related Due Date) or provide such coverage with
respect to the unpaid principal or notional amount of the Certificates or a
Class or Classes within such Series as is specified in the related Prospectus
Supplement. The proceeds of such payments under the Letter of Credit will be
deposited into the Certificate Account and will be distributed to
Certificateholders, in the manner specified in the related Prospectus
Supplement, on such Distribution Date, except to the extent of any unreimbursed
Advances, servicing compensation due to the Servicer and other amounts payable
to the Seller or the person or entity named in the applicable Prospectus
Supplement therefrom.
If at any time the L/C Bank makes a payment in the amount of the full
outstanding principal balance and accrued interest on a Liquidating Loan, it
will be entitled to receive an assignment by the Trustee of such Liquidating
Loan, and the L/C Bank will thereafter own such Liquidating Loan free of any
further obligation to the Trustee or the Certificateholders with respect
thereto. Payments made to the Certificate Account by the L/C Bank under the
Letter of Credit with respect to such a Liquidating Loan will be reimbursed to
the L/C Bank only from the proceeds (net of liquidation costs) of such
Liquidating Loan. The amount available under the Letter of Credit will be
increased to the extent it is reimbursed for such payments.
To the extent the proceeds of liquidation of a Liquidating Loan acquired by
the L/C Bank in the manner described in the preceding paragraph exceed the
amount of payments made with respect thereto, the L/C Bank will be entitled to
retain such proceeds as additional compensation for issuance of the Letter of
Credit.
In the event of default by borrowers, prospective purchasers of Certificates
of a Series with respect to which credit support is provided by a Letter of
Credit must look to the credit of the L/C Bank, to the extent of its obligations
under the Letter of Credit. If the amount available under the Letter of Credit
is exhausted or the L/C Bank becomes insolvent, and amounts in the Reserve Fund,
if any, with respect to such Series are insufficient to pay the entire amount of
the loss and still be maintained at the level specified in the related
Prospectus Supplement (the "Required Reserve"), the Certificateholders (in the
priority specified in the related Prospectus Supplement) will thereafter bear
all risks of loss resulting from default by borrowers (including losses not
covered by insurance or Alternative Enhancement), and must look primarily to the
value of the properties securing defaulted Mortgage Loans for recovery of the
outstanding principal and unpaid interest.
In the event that a Subordinated Class of a Series of Certificates is issued
with a notional amount, the coverage provided by the Letter of Credit with
respect to such Series, and the terms and conditions of such coverage, will be
set forth in the related Prospectus Supplement.
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Subordinated Certificates
To the extent specified in the Prospectus Supplement with respect to a Series
of Certificates, Enhancement may be provided by the subordination of the rights
of the holders of one or more Classes of Certificates to receive distributions
with respect to the Mortgage Loans in the Mortgage Pool underlying such Series,
to the rights of the Senior Certificateholders or holders of one or more Classes
of Subordinated Certificates of such Series to receive such distributions, to
the extent of the applicable Subordinated Amount. The Subordinated Amount, as
described below, will be reduced by an amount equal to Aggregate Losses.
Aggregate Losses are defined in the related Agreement for any given period as
the aggregate amount of delinquencies, losses and other deficiencies in the
amounts due to the holders of the Certificates of one or more Classes of such
Series paid or borne by the holders of one or more Classes of Subordinated
Certificates of such Series ("payment deficiencies"), but excluding any payments
of interest on any amounts originally due to the holders of the Certificates of
a Class to which the applicable Class of Subordinated Certificates are
subordinated on a previous Distribution Date, but not paid as due, whether by
way of withdrawal from any Reserve Fund (including, prior to the time that the
Subordinated Amount is reduced to zero, any such withdrawal of amounts
attributable to the Initial Deposit, if any), reduction in amounts otherwise
distributable to the Subordinated Certificateholders on any Distribution Date or
otherwise, less the aggregate amount of previous payment deficiencies recovered
by the related Trust Fund during such period in respect of the Mortgage Loans
giving rise to such previous payment deficiencies, including, without
limitation, such recoveries resulting from the receipt of delinquent principal
and/or interest payments, Liquidation Proceeds or Insurance Proceeds (net, in
each case, of servicing compensation, foreclosure costs and other servicing
costs, expenses and unreimbursed Advances relating to such Mortgage Loans). The
Prospectus Supplement for each Series of Certificates with respect to which
credit support will be provided by one or more Classes of Subordinated
Certificates will set forth the Subordinated Amount for such Series. If
specified in the related Prospectus Supplement, the Subordinated Amount will
decline over time in accordance with a schedule which will also be set forth in
the related Prospectus Supplement.
Shifting Interest
If specified in the Prospectus Supplement for a Series of Certificates for
which Enhancement is provided by shifting interest as described herein, the
rights of the holders of the Subordinated Certificates of a Series to receive
distributions with respect to the Mortgage Loans in the related Trust Fund will
be subordinated to such right of the holders of the Senior Certificates of the
same Series to the extent described in such Prospectus Supplement. This
subordination feature is intended to enhance the likelihood of regular receipt
by holders of Senior Certificates of the full amount of scheduled monthly
payments of principal and interest due them and to provide limited protection to
the holders of the Senior Certificates against losses due to borrower defaults.
The protection afforded to the holders of Senior Certificates of a Series by
the shifting interest subordination feature will be effected by distributing to
the holders of the Senior Certificates a disproportionately greater percentage
(the "Senior Prepayment Percentage") of Principal Prepayments. The initial
Senior Prepayment Percentage will be the percentage specified in the related
Prospectus Supplement and will decrease in accordance with the schedule and
subject to the conditions set forth in the Prospectus Supplement. This
disproportionate distribution of Principal Prepayments will have the effect of
accelerating the amortization of the Senior Certificates while increasing the
respective interest of the Subordinated Certificates in the Mortgage Pool.
Increasing the respective interest of the Subordinated Certificates relative to
that of the Senior Certificates is intended to preserve the availability of the
benefits of the subordination provided by the Subordinated Certificates.
Swap Agreement
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Trust will enter into or obtain an assignment of a swap
agreement or other similar agreement pursuant to which the Trust will have the
right to receive certain payments of interest (or other payments) as set forth
or determined as described therein. The Prospectus Supplement relating to a
Series of Certificates having the benefit of an interest rate
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swap agreement will describe the material terms of such agreement and the
particular risks associated with the interest rate swap feature, including
market and credit risk, the effect of counterparty defaults and other risks, if
any, addressed by the rating. The Prospectus Supplement relating to such Series
of Certificates also will set forth certain information relating to the
corporate status, ownership and credit quality of the counterparty or
counterparties to such swap agreement.
Reserve Fund
If so specified in the related Prospectus Supplement, Enhancement with
respect to a Series of Certificates may be provided by the establishment and
maintenance with the Trustee for such Series of Certificates, in trust, of a
Reserve Fund for such Series. Unless otherwise specified in the related
Prospectus Supplement, the Reserve Fund for a Series will not be included in the
Trust Fund for such Series. The Reserve Fund for each Series will be created by
the Seller and will be funded by the retention by the Servicer of certain
payments on the Mortgage Loans, by the deposit with the Trustee by the Seller of
cash in the amount specified in the related Prospectus Supplement (the "Initial
Deposit"), by any combination of the foregoing, or in another manner specified
in the related Prospectus Supplement. Following the initial issuance of the
Certificates of a Series and until the balance of the Reserve Fund first equals
or exceeds the Required Reserve, the Servicer will retain specified
distributions on the Mortgage Loans otherwise distributable to the holders of
Subordinated Certificates and deposit such amounts in the Reserve Fund. After
the amounts in the Reserve Fund for a Series first equal or exceed the
applicable Required Reserve, the Servicer will retain such distributions and
deposit so much of such amounts in the Reserve Fund as may be necessary to
maintain the Reserve Fund at the Required Reserve, taking into account the
application of such distributions to amounts due and unpaid on the Certificates
(or on the Certificates of such Series to which the applicable Class of
Subordinated Certificates, if any, are subordinated) and the reimbursement of
unreimbursed Advances and liquidation expenses. The balance in the Reserve Fund
in excess of the Required Reserve shall be paid to the applicable Class of
Subordinated Certificates, or to another specified person or entity as set forth
in the related Prospectus Supplement, and shall be unavailable thereafter for
future distribution to Certificateholders of any Class. The Agreement for each
Series will set forth the amount of the Required Reserve applicable from time to
time. The Required Reserve may decline over time in accordance with a schedule
which will also be set forth in the related Agreement.
Amounts held in the Reserve Fund for a Series from time to time will continue
to be the property of the Subordinated Certificateholders of the Classes, if
any, specified in the related Prospectus Supplement until withdrawn from the
Reserve Fund and transferred to the Certificate Account as described below. If
on any Distribution Date the amount in the Certificate Account available to be
applied to distributions on the Senior Certificates of such Series, after giving
effect to any Advances made by the Servicer on such Distribution Date, is less
than the amount required to be distributed to such Senior Certificateholders
(the "Required Distribution") on such Distribution Date, the Servicer will
withdraw from the Reserve Fund and deposit into the Certificate Account the
lesser of (i) the entire amount on deposit in the Reserve Fund available for
distribution to the Senior Certificateholders (which amount will not in any
event exceed the Required Reserve) or (ii) the amount necessary to increase the
funds in the Certificate Account eligible for distribution to the Senior
Certificateholders on such Distribution Date to the Required Distribution;
provided, however, that in no event will any amount representing investment
earnings on amounts held in the Reserve Fund be transferred into the Certificate
Account or otherwise used in any manner for the benefit of the Senior
Certificateholders. If so specified in the applicable Prospectus Supplement,
the balance, if any, in the Reserve Fund in excess of the Required Reserve will
be released to the Subordinated Certificateholders. Unless otherwise specified
in the related Prospectus Supplement, whenever the Reserve Fund is less than the
Required Reserve, holders of the Subordinated Certificates of the applicable
Class will not receive any distributions with respect to the Mortgage Loans
other than amounts attributable to interest on the Mortgage Loans after the
initial Required Reserve has been attained and amounts attributable to any
income resulting from investment of the Reserve Fund as described below. Whether
or not the amount of the Reserve Fund exceeds the Required Reserve on any
Distribution Date, the holders of the Subordinated Certificates of the
applicable Class are entitled to receive from the Certificate Account their
share of the proceeds of any Mortgage Loan, or any property acquired in respect
thereof, repurchased by reason of defective documentation or the breach of a
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representation or warranty pursuant to the Agreement. Amounts in the Reserve
Fund shall be applied in the following order:
(i) to the reimbursement of Advances determined by the Servicer to be
otherwise unrecoverable, other than Advances of interest in connection with
prepayments in full, repurchases and liquidations, and the reimbursement of
liquidation expenses incurred by the Servicer if sufficient funds for such
reimbursement are not otherwise available in the related and Certificate
Account;
(ii) to the payment to the holders of the Senior Certificates of such
Series of amounts distributable to them on the related Distribution Date in
respect of scheduled payments of principal and interest due on the related
Due Date to the extent that sufficient funds in the Certificate Account are
not available therefor; and
(iii) to the payment to the holders of the Senior Certificates of such
Series of the principal balance or purchase price, as applicable, of Mortgage
Loans repurchased, liquidated or foreclosed during the period ending on the
day prior to the Due Date to which such distribution relates and interest
thereon at the related Pass-Through Rate, to the extent that sufficient funds
in the Certificate Account are not available therefor.
Amounts in the Reserve Fund in excess of the Required Reserve, including any
investment income on amounts therein, as set forth below, will be released to
the holders of the Subordinated Certificates, or to such other person as is
specified in the applicable Prospectus Supplement, as set forth above.
Funds in the Reserve Fund for a Series shall be invested as provided in the
related Agreement in certain types of eligible investments. The earnings on
such investments will be withdrawn and paid to the holders of the applicable
Class of Subordinated Certificates in accordance with their respective interests
in the Reserve Fund in the priority specified in the related Prospectus
Supplement. Investment income in the Reserve Fund is not available for
distribution to the holders of the Senior Certificates of such Series or
otherwise subject to any claims or rights of the holders of the applicable Class
of Senior Certificates. Eligible investments for monies deposited in the
Reserve Fund will be specified in the Agreement for a Series of Certificates for
which a Reserve Fund is established and in some instances will be limited to
investments acceptable to the Rating Agency rating the Certificates of such
Series from time to time as being consistent with its outstanding rating of such
Certificates. Such eligible investments will be limited, however, to obligations
or securities that mature at various time periods up to 30 days according to a
schedule in the Agreement based on the current balance of the Reserve Fund at
the time of such investment or the contractual commitment providing for such
investment.
The time necessary for the Reserve Fund of a Series to reach and maintain the
applicable Required Reserve at any time after the initial issuance of the
Certificates of such Series and the availability of amounts in the Reserve Fund
for distributions on such Certificates will be affected by the delinquency,
foreclosure and prepayment experience of the Mortgage Loans in the related Trust
Fund and therefore cannot be accurately predicted.
Performance Bond
If so specified in the related Prospectus Supplement, the Servicer may be
required to obtain a Performance Bond that would provide a guarantee of the
performance by the Servicer of one or more of its obligations under the
Agreement, including its obligation to advance delinquent installments of
principal and interest on Mortgage Loans and its obligation to repurchase
Mortgage Loans in the event of a breach by the Servicer of a representation or
warranty contained in the Agreement. In the event that the outstanding credit
rating of the obligor of the Performance Bond is lowered by the Rating Agency,
with the result that the outstanding rating on the Certificates would be reduced
by such Rating Agency, the Servicer will be required to secure a substitute
Performance Bond issued by an entity with a rating sufficient to maintain the
outstanding rating on the Certificates or to deposit and maintain with the
Trustee cash in the amount specified in the applicable Prospectus Supplement.
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DESCRIPTION OF INSURANCE
To the extent that the applicable Prospectus Supplement does not expressly
provide for a form of Enhancement specified above, the following paragraphs on
insurance shall apply with respect to the Mortgage Loans included in the related
Trust Fund, unless otherwise provided in the related Prospectus Supplement.
Primary Mortgage Insurance Policies
To the extent specified in the related Prospectus Supplement, each Agreement
will require the Servicer to cause a Primary Mortgage Insurance Policy to be
maintained in full force and effect with respect to each Mortgage Loan requiring
such insurance and to act on behalf of the Insured with respect to all actions
required to be taken by the Insured under each such Primary Mortgage Insurance
Policy.
Unless otherwise specified in the related Prospectus Supplement, the amount
of a claim for benefits under a Primary Mortgage Insurance Policy covering a
Mortgage Loan (herein referred to as the "Loss") will consist of the insured
portion of the unpaid principal amount of the covered Mortgage Loan (as
described herein) and accrued and unpaid interest thereon and reimbursement of
certain expenses, less (i) all rents or other payments collected or received by
the Insured (other than the proceeds of hazard insurance) that are derived from
or in any way related to such Mortgaged Property, (ii) hazard insurance proceeds
in excess of the amount required to restore such Mortgaged Property and which
have not been applied to the payment of such Mortgage Loan, (iii) amounts
expended but not approved by the Primary Mortgage Insurer, (iv) claim payments
previously made by the Primary Mortgage Insurer and (v) unpaid premiums.
Unless otherwise specified in the related Prospectus Supplement, as
conditions precedent to the filing of or payment of a claim under a Primary
Mortgage Insurance Policy covering a Mortgage Loan, the Insured will be required
to, in the event of default by the borrower: (i) advance or discharge (A) all
hazard insurance premiums and (B) as necessary and approved in advance by the
Primary Mortgage Insurer, (1) real estate property taxes, (2) all expenses
required to preserve, repair and prevent waste to the Mortgaged Property so as
to maintain such Mortgaged Property in at least as good a condition as existed
at the effective date of such Primary Mortgage Insurance Policy, ordinary wear
and tear excepted, (3) property sales expenses, (4) any outstanding liens (as
defined in such Primary Mortgage Insurance Policy) on the Mortgaged Property and
(5) foreclosure costs, including court costs and reasonable attorneys' fees;
(ii) in the event of a physical loss or damage to the Mortgaged Property, have
restored and repaired the Mortgaged Property to at least as good a condition as
existed at the effective date of such Primary Mortgage Insurance Policy,
ordinary wear and tear excepted; and (iii) tender to the Primary Mortgage
Insurer good and merchantable title to and possession of the mortgaged property.
Unless otherwise specified in the related Prospectus Supplement, other
provisions and conditions of each Primary Mortgage Insurance Policy covering a
Mortgage Loan generally will provide that: (a) no change may be made in the
terms of such Mortgage Loan without the consent of the Primary Mortgage Insurer;
(b) written notice must be given to the Primary Mortgage Insurer within 10 days
after the Insured becomes aware that a borrower is delinquent in the payment of
a sum equal to the aggregate of two scheduled monthly payments due under such
Mortgage Loan or that any proceedings affecting the borrower's interest in the
Mortgaged Property securing such Mortgage Loan have commenced, and thereafter
the Insured must report monthly to the Primary Mortgage Insurer the status of
any such Mortgage Loan until such Mortgage Loan is brought current, such
proceedings are terminated or a claim is filed; (c) the Primary Mortgage Insurer
will have the right to purchase such Mortgage Loan at any time subsequent to the
10 days' notice described in (b) above and prior to the commencement of
foreclosure proceedings, at a price equal to the unpaid principal amount of the
Mortgage Loan, plus accrued and unpaid interest thereon and reimbursable amounts
expended by the Insured for the real estate taxes and fire and extended coverage
insurance on the Mortgaged Property for a period not exceeding 12 months, and
less the sum of any claim previously paid under the Primary Mortgage Insurance
Policy and any due and unpaid premiums with respect to such policy; (d) the
Insured must commence proceedings at certain times specified in the Primary
Mortgage Insurance Policy and diligently proceed to obtain good and merchantable
title to and possession of the Mortgaged Property; (e) the Insured
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must notify the Primary Mortgage Insurer of the price specified in (c) above at
least 15 days prior to the sale of the Mortgaged Property by foreclosure, and
bid such amount unless the Mortgage Insurer specifies a lower or higher amount;
and (f) the Insured may accept a conveyance of the Mortgaged Property in lieu of
foreclosure with written approval of the Mortgage Insurer provided the ability
of the Insured to assign specified rights to the Primary Mortgage Insurer are
not thereby impaired or the specified rights of the Primary Mortgage Insurer are
not thereby adversely affected.
Unless otherwise specified in the related Prospectus Supplement, the Primary
Mortgage Insurer will be required to pay to the Insured either: (1) the insured
percentage of the Loss; or (2) at its option under certain of the Primary
Mortgage Insurance Policies, the sum of the delinquent monthly payments plus any
advances made by the Insured, both to the date of the claim payment, and
thereafter, monthly payments in the amount that would have become due under the
Mortgage Loan if it had not been discharged, plus any advances made by the
Insured, until the earlier of (A) the date the Mortgage Loan would have been
discharged in full if the default had not occurred or (B) an approved sale. Any
rents or other payments collected or received by the Insured which are derived
from or are in any way related to the Mortgaged Property will be deducted from
any claim payment.
FHA Insurance and VA Guarantees
The FHA is responsible for administering various federal programs, including
mortgage insurance, authorized under the National Housing Act, as amended, and
the United States Housing Act of 1937, as amended. Any FHA Insurance or VA
Guarantees relating to Mortgage Loans underlying a Series of Certificates will
be described in the related Prospectus Supplement.
The insurance premiums for FHA Loans are collected by HUD approved lenders or
by the servicers of such FHA Loans and are paid to the FHA. The regulations
governing FHA single-family mortgage insurance programs provide that insurance
benefits are payable either upon foreclosure (or other acquisition of
possession) and conveyance of the mortgaged premises to HUD or upon assignment
of the defaulted FHA Loan to HUD. With respect to a defaulted FHA Loan, the
servicer of such FHA Loan will be limited in its ability to initiate foreclosure
proceedings. When it is determined, either by the servicer or HUD, that default
was caused by circumstances beyond the borrower's control, the servicer will be
expected to make an effort to avoid foreclosure by entering, if feasible, into
one of a number of available forms of forbearance plans with the borrower. Such
plans may involve the reduction or suspension of scheduled mortgage payments for
a specified period, with such payments to be made upon or before the maturity
date of the mortgage, or the recasting of payments due under the mortgage up to
or beyond the scheduled maturity date. In addition, when a default caused by
such circumstances is accompanied by certain other criteria, HUD may provide
relief by making payments to the servicer of such mortgage loan in partial or
full satisfaction of amounts due thereunder (which payments are to be repaid by
the borrower to HUD) or by accepting assignment of the mortgage loan from the
servicer. With certain exceptions, at least three full monthly installments must
be due and unpaid under the mortgage loan, and HUD must have rejected any
request for relief from the borrower before the servicer may initiate
foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Presently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The servicer will be obligated to purchase any such
debenture issued in satisfaction of a defaulted FHA Loan serviced by it for an
amount equal to the principal amount of the FHA Loan.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal balance of the defaulted FHA Loan, adjusted to reimburse
the servicer of such FHA Loan for certain costs and expenses and to deduct
certain amounts received or retained by such servicer after default. When
entitlement to insurance benefits results from foreclosure (or other acquisition
of possession) and conveyance to HUD, the servicer is compensated for no more
than two-thirds of its foreclosure costs, and is compensated for interest
accrued and unpaid prior to such date in general only to the extent it was
allowed pursuant to a forbearance plan approved by HUD. When entitlement to
insurance benefits results from assignment of the
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FHA Loan to HUD, the insurance payment includes full compensation for interest
accrued and unpaid to the assignment date. The insurance payment itself, upon
foreclosure of an FHA Loan, bears interest from a date 30 days after the
mortgagor's first uncorrected failure to perform any obligation or make any
payment due under the mortgage loan and, upon assignment, from the date of
assignment, to the date of payment of the claim, in each case at the same
interest rate as the applicable HUD debenture interest rate as described above.
The maximum guarantee that may be issued by the VA under a VA Loan is 50% of
the principal amount of the VA Loan if the principal amount of the mortgage loan
is $45,000 or less, the lesser of $36,000 and 40% if the principal amount of the
VA Loan if the principal amount of such VA Loan is greater than $45,000 but less
than or equal to $144,000, and the lesser of $46,000 and 25% of the principal
amount of the mortgage loan if the principal amount of the mortgage loan is
greater than $144,000. The liability on the guarantee is reduced or increased
pro rata with any reduction or increase in the amount of indebtedness, but in no
event will the amount payable on the guarantee exceed the amount of the original
guarantee. The VA may, at its option and without regard to the guarantee, make
full payment to a mortgage holder of unsatisfied indebtedness on a mortgage loan
upon its assignment to the VA.
With respect to a defaulted VA Loan, the servicer is, absent exceptional
circumstances, authorized to announce its intention to foreclose only when the
default has continued for three months. Generally, a claim for the guarantee is
submitted after liquidation of the mortgaged property.
The amount payable under the guarantee will be the percentage of the VA Loan
originally guaranteed applied to indebtedness outstanding as of the applicable
date of computation specified in the VA regulations. Payments under the
guarantee will be equal to the unpaid principal amount of the VA Loan, interest
accrued on the unpaid balance of the VA Loan to the appropriate date of
computation and limited expenses of the mortgagee, but in each case only to the
extent that such amounts have not been recovered through liquidation of the
mortgaged property. The amount payable under the guarantee may in no event
exceed the amount of the original guarantee.
Standard Hazard Insurance Policies on Mortgage Loans
The Standard Hazard Insurance Policies covering the Mortgage Loans in a
Mortgage Pool will provide for coverage at least equal to the applicable state
standard form of fire insurance policy with extended coverage. In general, the
standard form of fire and extended coverage policy will cover physical damage
to, or destruction of, the improvements on the related Mortgaged Property caused
by fire, lightning, explosion, smoke, windstorm, hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Because the Standard Hazard Insurance Policies relating to such Mortgage
Loans will be underwritten by different insurers and will cover Mortgaged
Properties located in various states, such policies will not contain identical
terms and conditions. The most significant terms thereof, however, generally
will be determined by state law and generally will be similar. Most such
policies typically will not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reaction, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive.
The Standard Hazard Insurance Policies covering Mortgaged Properties securing
Mortgage Loans typically will contain a "coinsurance" clause which, in effect,
will require the insured at all times to carry insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the
dwellings, structures and other improvements on the Mortgaged Property in order
to recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause will provide that the insurer's
liability in the event of partial loss will not exceed the greater of (i) the
actual cash value (the replacement cost less physical depreciation) of the
dwellings, structures and other improvements damaged or destroyed or (ii) such
proportion of the loss, without deduction for depreciation, as the amount of
insurance carried bears to the specified percentage of the full replacement cost
of such dwellings, structures and other improvements.
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The Seller will not require that a standard hazard or flood insurance policy
be maintained on the Cooperative Dwelling relating to any Cooperative Loan.
Generally, the cooperative corporation itself is responsible for maintenance of
hazard insurance for the property owned by the cooperative and the tenant-
stockholders of that cooperative do not maintain individual hazard insurance
policies. To the extent, however, that a Cooperative and the related borrower on
a Cooperative Loan do not maintain such insurance or do not maintain adequate
coverage or any insurance proceeds are not applied to the restoration of damaged
property, any damage to such borrower's Cooperative Dwelling or such
Cooperative's building could significantly reduce the value of the collateral
securing such Cooperative Loan to the extent not covered by other credit
support.
Any losses incurred with respect to Mortgage Loans due to uninsured risks
(including earthquakes, mudflows and, with respect to Mortgaged Properties
located other than in HUD designated flood areas, floods) or insufficient hazard
insurance proceeds and any hazard losses incurred with respect to Cooperative
Loans could affect distributions to the Certificateholders.
Pool Insurance Policies
If so specified in the related Prospectus Supplement, the Servicer will
obtain a Pool Insurance Policy for a Mortgage Pool underlying Certificates of
such Series. Such Pool Insurance Policy will be issued by the Pool Insurer named
in the applicable Prospectus Supplement. Each Pool Insurance Policy will cover
any loss (subject to the limitations described below) by reason of default to
the extent the related Mortgage Loan is not covered by any Primary Mortgage
Insurance Policy, FHA insurance or VA guarantee. The amount of the Pool
Insurance Policy, if any, with respect to a Series will be specified in the
related Prospectus Supplement. A Pool Insurance Policy, however, will not be a
blanket policy against loss, because claims thereunder may only be made for
particular defaulted Mortgage Loans and only upon satisfaction of certain
conditions precedent described below.
Unless otherwise specified in the related Prospectus Supplement, the Pool
Insurance Policy will provide that as a condition precedent to the payment of
any claim the Insured will be required (i) to advance hazard insurance premiums
on the Mortgaged Property securing the defaulted Mortgage Loan; (ii) to advance,
as necessary and approved in advance by the Pool Insurer, (a) real estate
property taxes, (b) all expenses required to preserve and repair the Mortgaged
Property and to protect the Mortgaged Property from waste, so that the Mortgaged
Property is in at least as good a condition as existed on the date upon which
coverage under the Pool Insurance Policy with respect to such Mortgaged Property
first became effective (ordinary wear and tear excepted), (c) property sales
expenses, (d) any outstanding liens on the Mortgaged Property and (e)
foreclosure costs including court costs and reasonable attorneys' fees; and
(iii) if there has been physical loss or damage to the Mortgaged Property, to
restore the Mortgaged Property to its condition (reasonable wear and tear
excepted) as of the issue date of the Pool Insurance Policy. It also will 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 that have Loan-to-Value Ratios at the
time of origination in excess of 80%. FHA insurance and VA guarantees will be
deemed to be an acceptable Primary Mortgage Insurance Policy under the Pool
Insurance Policy. Assuming satisfaction of these conditions, the Pool Insurer
will pay to the Insured the amount of loss, determined as follows: (i) the
amount of the unpaid principal balance of the Mortgage Loan immediately prior to
the Approved Sale (as defined below) of the Mortgaged Property, (ii) the amount
of the accumulated unpaid interest on such Mortgage Loan to the date of claim
settlement at the applicable Mortgage Rate and (iii) advances as described
above, less (a) all rents or other payments (excluding proceeds of fire and
extended coverage insurance) collected or received by the Insured, which are
derived from, or in any way related to, the Mortgaged Property, (b) amounts paid
under applicable fire and extended coverage policies which are in excess of the
cost of restoring and repairing the Mortgaged Property and which have not been
applied to the payment of the Mortgage Loan, (c) any claims payments previously
made by the Pool Insurer on the Mortgage Loan, (d) due and unpaid premiums
payable with respect to the Pool Insurance Policy and (e) all claim payments
received by the Insured pursuant to any Primary Mortgage Insurance Policy. An
"Approved Sale" is (1) a sale of the Mortgaged Property acquired because of a
default by the borrower to which the Pool Insurer has given prior approval, (2)
a foreclosure or trustee's sale of the Mortgaged Property at a price exceeding
the maximum amount specified by the Pool
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Insurer, (3) the acquisition of the Mortgaged Property under the Primary
Insurance Policy by the Primary Mortgage Insurer or (4) the acquisition of the
Mortgaged Property by the Pool Insurer. The Pool Insurer must be provided with
good and merchantable title to the Mortgaged Property as a condition precedent
to the payment of any Loss. 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 are
insufficient to restore the Mortgaged Property to a condition sufficient to
permit recovery under the Pool Insurance Policy, the Servicer will not be
required to expend its own funds to restore the damaged Mortgaged Property
unless it is determined (A) that such restoration will increase the proceeds to
the Certificateholders of the related Series on liquidation of the Mortgage
Loan, after reimbursement of the expenses of the Servicer and (B) that such
expenses will be recoverable by it through Liquidation Proceeds, Insurance
Proceeds or amounts in the Reserve Fund, if any, with respect to such Series.
No Pool Insurance Policy will insure (and many Primary Mortgage Insurance
Policies may not insure) against loss sustained by reason of a default arising
from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the borrower, the
Originator or other persons involved in the origination thereof, (ii) the
exercise by the Insured of its right to call the Mortgage Loan, or the term of
the Mortgage Loan is shorter than the amortization period and the defaulted
payment is for an amount more than twice the regular periodic payments of
principal and interest for such Mortgage Loan, or (iii) the exercise by the
Insured of a "due-on-sale" clause or other similar provision in the Mortgage
Loan; provided, in either case (ii) or (iii), such exclusion shall not apply if
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the Insured offers a renewal or extension of the Mortgage Loan or a new Mortgage
Loan at the market rate in an amount not less than the then outstanding
principal balance with no decrease in the amortization period. A failure of
coverage attributable to one of the foregoing events might result in a breach of
the Servicer's insurability representation described under "Description of the
Certificates--Assignment of Mortgage Loans" above, and in such event, subject to
the limitations described therein, might give rise to an obligation on the part
of the Servicer to purchase the defaulted Mortgage Loan if the breach materially
and adversely affects the interests of the Certificateholders of the related
Series and cannot be cured by the Servicer. Depending upon the nature of the
event, a breach of representation made by the Seller also may have occurred.
Such a breach, if it materially and adversely affects the interests of the
Certificateholders of such Series and cannot be cured, would give rise to a
repurchase obligation on the part of the Seller as more fully described under
"The Trust Fund--Mortgage Loan Program--Representations by the Seller;
Repurchases" and "Description of the Certificates--Assignment of Mortgage
Loans."
The original amount of coverage under the Pool Insurance Policy will be
reduced over the life of the Certificates of the related Series by the aggregate
dollar amount of claims paid, less the aggregate of the net amounts realized by
the Pool Insurer upon disposition of all foreclosed Mortgaged Properties covered
thereby. The amount of claims paid will include certain expenses incurred by the
Servicer as well as accrued interest on delinquent Mortgage Loans to the date of
payment of the claim. 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 holders
of the Certificates of such Series. In addition, unless the Servicer could
determine that an Advance in respect of a delinquent Mortgage Loan would be
recoverable to it from the proceeds of the liquidation of such Mortgage Loan or
otherwise, the Servicer would not be obligated to make an Advance respecting any
such delinquency, since the Advance would not be ultimately recoverable to it
from either the Pool Insurance Policy or from any other related source. See
"Description of the Certificates--Advances."
Special Hazard Insurance Policies
If so specified in the related Prospectus Supplement, the Servicer shall
obtain a Special Hazard Insurance Policy for the Mortgage Pool underlying a
Series of Certificates. The Special Hazard Insurance Policy for the Mortgage
Pool underlying the Certificates of a Series will be issued by the Special
Hazard Insurer named in the applicable Prospectus Supplement. Each Special
Hazard Insurance Policy will, subject to the limitations described below,
protect against loss by reason of damage to Mortgaged Properties caused by
certain hazards (including vandalism and earthquakes and, except where the
borrower is required to obtain flood insurance, floods and mudflows) not insured
against under the standard form of hazard insurance policy for the respective
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states in which the Mortgaged Properties are located. See "Description of the
Certificates--Maintenance of Insurance Policies" and "--Standard Hazard
Insurance." The Special Hazard Insurance Policy will not cover losses occasioned
by war, certain governmental actions, nuclear reaction and certain other perils.
Coverage under a Special Hazard Insurance Policy will be at least equal to the
amount set forth in the related Prospectus Supplement.
Subject to the foregoing limitations, each Special Hazard Insurance Policy
will provide that, when there has been damage to the Mortgaged Property securing
a defaulted Mortgage Loan and to the extent such damage is not covered by the
Standard Hazard Insurance Policy, if any, maintained by the borrower or the
Servicer, the Special Hazard Insurer will pay the lesser of (i) the cost of
repair or replacement of such Mortgaged Property or (ii) upon transfer of such
Mortgaged Property to the Special Hazard Insurer, the unpaid balance of such
Mortgage Loan at the time of acquisition of such Mortgaged Property by
foreclosure or deed in lieu of foreclosure, plus accrued interest to the date of
claim settlement (excluding late charges and penalty interest) and certain
expenses incurred in respect of such Mortgaged Property. No claim may be validly
presented under a Special Hazard Insurance Policy unless (i) hazard insurance on
the Mortgaged Property has been kept in force and other reimbursable protection,
preservation and foreclosure expenses have been paid (all of which must be
approved in advance as necessary by the insurer) and (ii) the insured has
acquired title to the Mortgaged Property as a result of default by the borrower.
If the sum of the unpaid principal balance plus accrued interest and certain
expenses is paid by the Special Hazard Insurer, the amount of further coverage
under the related Special Hazard Insurance Policy will be reduced by such amount
less any net proceeds from the sale of the Mortgaged Property. Any amount paid
as the cost of repair of the Mortgaged Property will further reduce coverage by
such amount.
The terms of the Agreement will require the Servicer to maintain the Special
Hazard Insurance Policy in full force and effect throughout the term of the
Agreement. If a Pool Insurance Policy is required to be maintained pursuant to
the Agreement, the Special Hazard Insurance Policy will be designed to permit
full recoveries under the Pool Insurance Policy in circumstances where such
recoveries would otherwise be unavailable because Mortgaged Property has been
damaged by a cause not insured against by a Standard Hazard Insurance Policy. In
such event, the Agreement will provide that, if the related Pool Insurance
Policy shall have terminated or been exhausted through payment of claims, the
Servicer will be under no further obligation to maintain such Special Hazard
Insurance Policy.
Mortgagor Bankruptcy Bond
In the event of a personal bankruptcy of a borrower, a bankruptcy court may
establish the value of the related Mortgaged Property or Cooperative Dwelling at
an amount less than the then outstanding principal balance of the related
Mortgage Loan. The amount of the secured debt could be reduced to such value,
and the holder of such Mortgage Loan thus would become an unsecured creditor to
the extent the outstanding principal balance of such Mortgage Loan exceeds the
value so assigned to the Mortgaged Property or Cooperative Dwelling by the
bankruptcy court. In addition, certain other modifications of the terms of a
Mortgage Loan can result from a bankruptcy proceeding. If so specified in the
related Prospectus Supplement, losses resulting from a bankruptcy proceeding
affecting the Mortgage Loans in a Mortgage Pool with respect to a Series of
Certificates will be covered under a Mortgagor Bankruptcy Bond (or any other
instrument that will not result in a downgrading of the rating of the
Certificates of a Series by the Rating Agency that rated such Series). Any
Mortgagor Bankruptcy Bond will provide for coverage in an amount acceptable to
the Rating Agency rating the Certificates of the related Series, which will be
set forth in the related Prospectus Supplement. Subject to the terms of the
Mortgagor Bankruptcy Bond, the issuer thereof may have the right to purchase any
Mortgage Loan with respect to which a payment or drawing has been made or may be
made for an amount equal to the outstanding principal amount of such Mortgage
Loan plus accrued and unpaid interest thereon. The coverage of the Mortgagor
Bankruptcy Bond with respect to a Series of Certificates may be reduced as long
as any such reduction will not result in a reduction of the outstanding rating
of the Certificates of such Series by the Rating Agency rating such Series.
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CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans which are general in nature. Because certain of such legal
aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state other than, in some cases, the states of Maryland,
Virginia and the District of Columbia (the "Mortgage Loan Jurisdictions"), where
it is anticipated that most of the Mortgaged Properties will be located), nor to
encompass the laws of all states in which the security for the Mortgage Loans is
situated.
The Mortgage Loans
General. The Mortgage Loans (other than the Cooperative Loans) comprising or
underlying the Primary Assets for a Series will be secured by either first or
more junior mortgages or deeds of trust, depending upon the prevailing practice
in the state in which the underlying property is located. The filing of a
mortgage, deed of trust or deed to secure debt creates a lien or title interest
upon the real property covered by such instrument and represents the security
for the repayment of an obligation that is customarily evidenced by a promissory
note. It is not prior to the lien for real estate taxes and assessments or other
charges imposed under governmental police powers. Priority with respect to such
instruments depends on their terms, the knowledge of the parties to the mortgage
and generally on the order of recording with the applicable state, county or
municipal office. There are two parties to a mortgage: the mortgagor, who is the
borrower and homeowner, and the mortgagee, who is the lender. In a mortgage
state, the mortgagor delivers to the mortgagee a note or bond evidencing the
loan and the mortgage. Although a deed of trust is similar to a mortgage, a deed
of trust has three parties: the borrower-homeowner called the trustor (similar
to a mortgagor) a lender called the beneficiary (similar to a mortgagee) and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the loan. The
trustee's authority under a deed of trust and the mortgagee's authority under a
mortgage are governed by the express provisions of the deed of trust or
mortgage, applicable law and, in some cases, with respect to the deed of trust,
the directions of the beneficiary.
The real property covered by a mortgage is most often the fee estate in land
and improvements. However, a mortgage may encumber other interests in real
property such as a tenant's interest in a lease of land or improvements, or
both, and the leasehold estate created by such lease. A mortgage covering an
interest in real property other than the fee estate requires special provisions
in the instrument creating such interest or in the mortgage to protect the
mortgagee against termination of such interest before the mortgage is paid.
Certain representations and warranties in the related Agreement will be made
with respect to the Mortgage Loans which are secured by an interest in a
leasehold estate.
Junior Mortgages; Rights of Senior Mortgagees or Beneficiaries
Some of the Mortgage Loans included in the Mortgage Pool for a Series will be
secured by junior mortgages or deeds of trust which are subordinate to senior
mortgages or deeds of trust held by other lenders or institutional investors.
The rights of the Trust Fund (and therefore the Certificateholders), as
beneficiary under a junior deed of trust or as mortgagee under a junior
mortgage, are subordinate to those of the mortgagee or beneficiary under the
senior mortgage or deed of trust, including the prior rights of the senior
mortgagee or beneficiary to receive rents, hazard insurance and condemnation
proceeds and to cause the property securing the Mortgage Loan to be sold upon
default of the mortgagor or trustor, thereby extinguishing the junior
mortgagee's or junior beneficiary's lien unless the Servicer asserts its
subordinate interest in a property in foreclosure litigation or satisfies the
defaulted senior loan. As discussed more fully below, in many states a junior
mortgagee or beneficiary may satisfy a defaulted senior loan in full, or may
cure such default and bring the senior loan current, in either event adding the
amounts expended to the balance due on the junior loan. Absent a provision in
the senior mortgage, no notice of default is required to be given to the junior
mortgagee.
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The form of the mortgage or deed of trust used by many institutional lenders,
like that used by the Seller, confers on the mortgagee or beneficiary the right
both to receive all proceeds collected under any hazard insurance policy and all
awards made in connection with any condemnation proceedings, and to apply such
proceeds and awards to any indebtedness secured by the mortgage or deed of
trust, in such order as the mortgagee or beneficiary 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 senior mortgage or deed of trust 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 mortgage or deed of trust.
Proceeds in excess of the amount of senior mortgage indebtedness will, in most
cases, be applied to the indebtedness of a junior mortgage or deed of trust. The
laws of certain states may limit the ability of mortgagees or beneficiaries to
apply the proceeds of hazard insurance and partial condemnation awards to the
secured indebtedness. In such states, the mortgagor or trustor must be allowed
to use the proceeds of hazard insurance to repair the damage unless the security
of the mortgagee or beneficiary has been impaired. Similarly, in certain states,
the mortgagee or beneficiary is entitled to the award for a partial condemnation
of the real property security only to the extent that its security is impaired.
Another provision typically found in the form of the mortgage or deed of
trust used by many institutional lenders obligates the mortgagor or trustor to
pay before delinquency all taxes and assessments on the property and, when due,
all encumbrances, charges and liens on the property which appear 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 thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to perform
any of these obligations, the mortgagee or beneficiary is given the right under
the mortgage or deed of trust to perform the obligation itself, at its election,
with the mortgagor or trustor agreeing to reimburse the mortgagee or beneficiary
for any sums expended by the mortgagee or beneficiary on behalf of the trustor.
All sums so expended by the mortgagee or beneficiary become part of the
indebtedness secured by the mortgage or deed of trust.
Foreclosure
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is 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 occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be time-
consuming. After the completion of a judicial foreclosure proceeding, the court
may issue a judgment of foreclosure and appoint a receiver or other officer to
conduct the sale of the property. In some states, mortgages may also be
foreclosed by advertisement, pursuant to a power of sale provided in the
mortgage. Foreclosure of a mortgage by advertisement is essentially similar to
foreclosure of a deed of trust by non-judicial power of sale.
Though a deed of trust may also be foreclosed by judicial action, foreclosure
of a deed of trust is generally accomplished by a non-judicial trustee's sale
under a specific provision in the deed of trust that authorizes the trustee to
sell the property upon a default by the borrower under the terms of the note or
deed of trust. In some states, the trustee must record a notice of default and
send a copy to the borrower-trustor and to any person who has recorded a request
for a copy of a notice of default and notice of sale. In addition, the trustee
must provide notice in some states to any other individual having an interest in
the real property, including any junior lienholders. If the loan is not
reinstated within any applicable cure period, a notice of sale must be posted in
a public place and, in most states, published for a specified period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest of record in the property.
In Maryland, a summary court proceeding must be commenced (and a bond must be
filed) to effect a trustee's sale, even under a deed of trust that includes a
power of sale. In Virginia and the District of Columbia, a trustee's sale is
generally non-judicial, although foreclosure may be accomplished by judicial
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action in all of the Mortgage Loan Jurisdictions. The term "foreclosure" often
is used as a shorthand way of referring to a trustee's sale as well as to
judicial foreclosure.
In Maryland and the District of Columbia, prior to a trustee's sale, the
trustee must record a notice of sale in the public records. In all of the
Mortgage Loan jurisdictions, the trustee must give notice of the sale to the
grantor and/or to any successor in interest to the grantor. The trustee also
generally will give notice of the sale to the beneficiary of any junior deed of
trust or other lien and to certain other interested persons. This notice to
junior lien holders is required in Maryland and Virginia. In the Mortgage Loan
Jurisdictions, in addition to the notice to the grantor and others described
above, notice of sale must be published periodically in a local newspaper for a
prescribed period prior to the trustee's sale.
The trustee's sale generally must be conducted by public auction in the
county or city in which all or some part of the security property is located.
At the sale, the trustee generally requires a bidder to deposit with the trustee
a set amount or a percentage of the full amount of the bidder's final bid in
cash (or an equivalent thereto satisfactory to the trustee) prior to and as a
condition to recognizing such bid, and may conditionally accept and hold these
amounts for the duration of the sale. The beneficiary of the deed of trust
generally need not bid cash at the sale, but may instead make a "credit bid" up
to the extent of the total amount due under the deed of trust, including costs
and expenses actually incurred in enforcing the deed of trust, as well as the
trustee's fees and expenses. The trustee will sell the security property to the
highest proper bidder at the sale. Other than in Maryland, judicial
confirmation typically is not required after a sale conducted in accordance with
a power of sale in the Mortgage Loan Jurisdictions.
A sale conducted in accordance with the terms of the power of sale contained
in the deed of trust generally is presumed to be conducted regularly and fairly
and, on a conveyance of the property by trustee's deed, confers absolute legal
title to the property to the purchaser, free of all junior deeds of trust and
free of all other liens and claims subordinate to the deed of trust under which
the sale is made. The purchaser's title, however, is subject to all senior
liens and other senior claims. Thus, if the deed of trust being enforced is a
junior deed of trust, the trustee will convey title to the property to the
purchaser subject to the first deed of trust and any other prior liens and
claims. A trustee's sale or judicial foreclosure under a junior deed of trust
generally has no effect on any senior deed of trust, with the possible exception
of the right of a senior beneficiary to accelerate its indebtedness under a
default clause or a "due-on-sale" clause contained in the senior deed of trust.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
the borrower, or any other 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. Certain state laws control the amount of foreclosure expenses and
costs, including attorneys' fees, which may be recovered by a lender.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the receiver or other designated officer, or by the trustee, is a public
sale. However, because of a number of factors, including the difficulty a
potential buyer at the sale would have in determining the exact status of title
to the property subject to the lien of the mortgage or deed of trust and the
redemption rights that may exist (see "--Rights of Redemption" below), and the
fact that the physical condition and financial performance of the property may
have deteriorated during the foreclosure proceedings, it is uncommon for a third
party to purchase the property at the foreclosure sale. Rather, it is common for
the lender to purchase the property from the trustee or receiver for a credit
bid less than or equal to the unpaid principal amount of the note, accrued and
unpaid interest and the expenses of foreclosure. Thereafter, 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 hazard insurance, paying operating expenses and real estate taxes and
making such repairs at its own expense as are necessary to render the property
suitable for sale. Frequently, the lender employs a third-party management
company to manage and operate the property. The lender commonly will obtain the
services of a real estate broker and pay the broker a commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property. Any loss may be reduced by the receipt of mortgage insurance
proceeds.
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Under the REMIC provision of the Code and the related Agreement, the Servicer
may be permitted to hire an independent contractor to operate any REO Property.
The costs of such operation may be significantly greater than the costs of
direct operation by the Servicer. In the case of a Series in which an election
is made to treat the related Trust Fund as a REMIC, the Servicer shall, on
behalf of the Trust Fund, manage, conserve, protect and operate each REO
Property for the Certificateholders solely for the purpose of its prompt
disposition and sale in a manner which does not cause such REO Property to fail
to qualify as "foreclosure property" within the meaning of Section 860G(a)(8) of
the Code (determined without regard to the exception applicable for purposes of
Section 860D(a) of the Code) or result in the receipt by the REMIC of any
"income from nonpermitted assets" within the meaning of Section 860F(a)(2)(B) of
the Code or any "net income from foreclosure property" under Section 860G(c) of
the Code, which is subject to taxation under the REMIC Provisions.
Cooperative Loans
If specified in the Prospectus Supplement relating to a Series of
Certificates, the Mortgage Loans also may include Cooperative Loans evidenced by
promissory notes secured by security interests in shares issued by private
corporations which are entitled to be treated as housing cooperatives under the
Code and in the related proprietary leases or occupancy agreements granting
exclusive rights to occupy specific dwelling units in the corporations'
buildings. The security agreement will create a lien upon, or grant a title
interest in, the property that it covers, the priority of which will depend on
the terms of the particular security agreement as well as the order of
recordation of the agreement in the appropriate recording office. Such a lien or
title interest is not prior to the lien for real estate taxes and assessments
and other charges imposed under governmental police powers.
A corporation that is entitled to be treated as a housing cooperative under
the Code owns all the real property or some interest therein sufficient to
permit it to own the building and all separate dwelling units therein. The
cooperative is directly responsible for property management and, in most cases,
payment of real estate taxes and hazard and liability insurance. If there is a
blanket mortgage or mortgages on the cooperative apartment building and/or
underlying land, as is generally the case, or an underlying lease of the land,
as is the case in some instances, the cooperative, as property mortgagor, is
also responsible for meeting these mortgage or rental obligations. The interest
of the occupant under proprietary leases or occupancy agreements as to which
that cooperative is the landlord are generally subordinate to the interest of
the holder of a blanket mortgage and to the interest of the holder of a land
lease. If the cooperative is unable to meet the payment obligations (i) arising
under a blanket mortgage, the mortgagee holding a blanket mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements or (ii) arising under its land lease, the holder of the
land lease could terminate it and all subordinate proprietary leases and
occupancy agreements. Also, a blanket mortgage on a cooperative may provide
financing in the form of a mortgage that does not fully amortize, with a
significant portion of principal being due in one final payment at maturity. The
inability of the cooperative to refinance a mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee.
Similarly, a land lease has an expiration date and the inability of the
cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. A foreclosure by
the holder of a blanket mortgage could eliminate or significantly diminish the
value of any collateral held by the lender who financed an individual tenant-
stockholder of cooperative shares including, in the case of the Cooperative
Loans, the collateral securing the Cooperative Loans. Similarly, the termination
of the land lease by its holder could eliminate or significantly diminish the
value of any collateral held by the lender who financed an individual tenant-
stockholder of the cooperative shares or, in the case of the Cooperative Loans,
the collateral securing the Cooperative Loans.
Each cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary leases or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed through
a cooperative share loan
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evidenced by a promissory note and secured by a security interest in the
occupancy agreement or proprietary lease and in the related cooperative shares.
The lender takes possession of the share certificate and a counterpart of the
proprietary lease or occupancy agreement, and a financing statement covering the
proprietary lease or occupancy agreement and the cooperative shares is filed in
the appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares. See "--Realizing upon
Cooperative Loan Security" below.
Tax Aspects of Cooperative Loans
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of the
Code) of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Section 216(b)(1) of the Code is allowed a deduction for
amounts paid or accrued within his taxable year to the corporation representing
his proportionate share of certain interest expenses and certain real estate
taxes allowable as a deduction under Section 216(a) of the Code to the
corporation under Sections 163 and 164 of the Code. In order for a corporation
to qualify under Section 216(b)(1) of the Code for its taxable year in which
such items are allowable as a deduction to the corporation, such section
requires, among other things, that at least 80% of the gross income of the
corporation be derived from its tenant-stockholder. By virtue of this
requirement the status of a corporation for purposes of Section 216(b)(1) of the
Code must be determined on a year-to-year basis. Consequently, there can be no
assurance that cooperatives relating to the Cooperative Loans will qualify under
such section for any particular year. In the event that such a cooperative fails
to qualify for one or more years, the value of the collateral securing any
related Cooperative Loans could be significantly impaired because no deduction
would be allowable to tenant-stockholders under Section 216(a) of the Code with
respect to those years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Section 216(b)(1) of
the Code, the likelihood that such a failure would be permitted to continue over
a period of years appears remote.
Realizing upon Cooperative Loan Security
The cooperative shares and proprietary lease or occupancy agreement owned by
the tenant-stockholder and pledged to the lender are, in almost all cases,
subject to restrictions on transfer as set forth in the cooperative's
certificate of incorporation and by-laws, as well as in the proprietary lease or
occupancy agreement. The proprietary lease or occupancy agreement, even while
pledged, may be cancelled by the cooperative for failure by the tenant-
stockholder to pay rent or other obligations or charges owed by such tenant-
stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. Commonly, rent and other
obligations and charges arising under a proprietary lease or occupancy agreement
which are owed to the cooperative are made liens upon the shares to which the
proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the cooperative to terminate such
lease or agreement in the event the borrower defaults in the performance of
covenants thereunder. The lender and the cooperative will typically enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the tenant-
stockholder under the proprietary lease or occupancy agreement will usually
constitute a default under the security agreement between the lender and the
tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment subject,
however, to the cooperative's right to sums due under such proprietary lease or
occupancy agreement or that have become liens on the shares relating to the
proprietary lease or occupancy agreement. The total amount owed to the
cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not
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monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event the lender succeeds to
the tenant-shareholder's shares and proprietary lease or occupancy agreement as
the result of realizing upon the collateral for a cooperative loan, the lender
must obtain the approval or consent of the cooperative as required by the
proprietary lease before transferring the cooperative shares or assigning the
proprietary lease. Such 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. Generally, the
lender is not limited in any rights it may have to dispossess the tenant-
shareholders.
The terms of the Cooperative Loans do not require either the mortgagor or the
Cooperative to obtain title insurance of any type. Consequently, the existence
of any prior liens or other imperfections of title also may adversely affect the
marketability of the Cooperative Dwelling in the event of foreclosure.
In New York, lenders generally realize upon the pledged shares and
proprietary lease or occupancy agreement given to secure a cooperative loan by
public sale in accordance with the provisions of Article 9 of the Uniform
Commercial Code (the "UCC") and the security agreement relating to those shares.
Article 9 of the UCC requires that a sale be conducted in a "commercially
reasonable" manner. Whether a sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor and
the method, manner, time, place and terms of the sale. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "AntiDeficiency Legislation and
Other Limitations on Lenders" below.
Rights of Redemption
In some states, after a sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, this right of redemption applies only to a sale following
judicial foreclosure, and not a sale pursuant to a non-judicial power of sale.
In most states where the right of redemption is available, statutory redemption
may occur upon payment of the foreclosure purchase price, accrued interest and
taxes. In some states, the right to redeem is an equitable right. The effect of
a statutory right of redemption is to diminish the ability of the lender to sell
the foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser from the lender subsequent to foreclosure or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to retain the property and pay the expenses of ownership until
the redemption period has run.
In the District of Columbia, the debtor under a residential deed of trust (or
anyone on the debtor's behalf) may cure a default during a reinstatement period
by paying the entire amount of the debt then due, exclusive of amounts due
solely to acceleration upon default, plus costs and expenses actually incurred
in enforcing the obligation and statutorily limited attorneys' and trustee's
fees. In all of the Mortgage Loan Jurisdictions, the grantor (or the grantor's
successor), any beneficiary under a junior deed of trust or any other persons
having a subordinate lien or encumbrance may discharge the deed of trust on the
security property by paying the entire principal due as a result of the
acceleration, together with interest and costs, expenses and fees.
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When the lender under a junior mortgage or deed of trust cures the default
and reinstates or redeems the senior mortgage or deed of trust, the amount paid
by the beneficiary for such cure generally becomes a part of the indebtedness
secured by the junior deed of trust.
State laws may control the amount of foreclosure expenses and costs,
including attorneys' fees, which may be recovered by a lender. In the Mortgage
Loan Jurisdictions, there generally is no right to redeem the security property
after the completion of a proper trustee's or foreclosure sale.
Anti-Deficiency Legislation and Other Limitations on Lenders
Some of the Mortgage Loans included in the Mortgage Pool for a Series will be
nonrecourse loans as to which, in the event of default by a borrower, recourse
may be had only against the specific property pledged to secure the related
Mortgage Loan and not against the borrower's other assets. Even if recourse is
available pursuant to the terms of the Mortgage Loan against the borrower's
assets in addition to the Mortgaged Property, certain states have imposed
statutory restrictions that limit the remedies of a beneficiary under a deed of
trust or a mortgagee under a mortgage. In some states, statutes limit the right
of the beneficiary or mortgagee to obtain a deficiency judgment against the
borrower following foreclosure or a non-judicial 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 amount due to the lender and the net
amount realized upon the foreclosure sale. Other statutes prohibit a deficiency
judgment where the loan proceeds were used to purchase a dwelling occupied by
the borrower.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, in the event of waste of the
property.
In the case of cooperative loans, lenders generally realize on cooperative
shares and the accompanying proprietary lease or occupancy agreement 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.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security. For example, in a Chapter
13 proceeding under the federal Bankruptcy Code, when a court determines that
the value of a home is less than the principal balance of the loan, the court
may prevent a lender from foreclosing on the home, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the value
of the home as it exists at the time of the proceeding, leaving the lender as a
general unsecured creditor for the difference between that value and the amount
of outstanding
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indebtedness. A bankruptcy court may grant the debtor a reasonable time to cure
a payment default, and in the case of a mortgage loan not secured by the
debtor's principal residence, also may reduce the monthly payments due under
such mortgage loan, change the rate of interest and alter the mortgage loan
repayment schedule. Certain court decisions have applied such relief to claims
secured by the debtor's principal residence.
The Code provides priority to certain tax liens over the lien of the mortgage
or deed of trust. The laws of some states provide priority to certain tax liens
over the lien of the mortgage or deed of trust. Numerous federal and some state
consumer protection laws impose substantive requirements upon mortgage lenders
in connection with the origination, servicing and the enforcement of mortgage
loans. These laws include the federal Truth in Lending Act, Real Estate
Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing
Act, Fair Credit Reporting Act, and related statutes and regulations. These
federal laws and state laws impose specific statutory liabilities upon lenders
who originate or service mortgage loans and who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
mortgage loans.
Bankruptcy Laws
Numerous statutory provisions, including the Bankruptcy Code and state laws
affording relief to debtors, may interfere with and delay the ability of the
secured mortgage lender to obtain payment of the loan, to realize upon
collateral and/or to enforce a deficiency judgment. For example, under the
Bankruptcy Code, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of the
bankruptcy petition, and, often, no interest or principal payments are made
during the course of the bankruptcy proceeding. The delay and consequences
thereof caused by such automatic stay can be significant. Also, under the
Bankruptcy Code, the filing of a petition in bankruptcy by or on behalf of a
junior lienor, including, without limitation, any junior mortgagee or
beneficiary, may stay the senior lender from taking action to foreclose on such
junior lien. Certain of the Mortgaged Properties may have a junior "wraparound"
mortgage or deed of trust encumbering such Mortgaged Property. In general terms,
a "wraparound" mortgage is a junior mortgage where the full amount of the
mortgage is increased by an amount equal to the principal balance of the senior
mortgage and where the junior lender agrees to pay the senior mortgage out of
the payments received from the mortgagor under the "wraparound" mortgage. As
with other junior mortgages, the filing of a petition under the Bankruptcy Code
by or on behalf of such a "wrap" mortgagee may stay the senior lender from
taking action to foreclose upon such junior "wrap" mortgage.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards for the lender are met, the amount and terms of a mortgage or deed of
trust secured by property of the debtor may be modified under certain
circumstances. The outstanding amount of the loan secured by the real property
may be reduced to the then current value of the property (with a corresponding
partial reduction of the amount of the lender's security interest), thus leaving
the lender a general unsecured creditor for the difference between such value
and the outstanding balance of the loan. Other modifications may include the
reduction in the amount of each monthly payment, which reduction may result from
a reduction in the rate of interest and/or the alteration of the repayment
schedule (with or without affecting the unpaid principal balance of the loan),
and/or an extension (or reduction) of the final maturity date. Some bankruptcy
courts have approved plans, based on the particular facts of the reorganization
case, that effected the curing of a mortgage loan default by paying arrearages
over a number of years. Also, under the Bankruptcy Code, a bankruptcy court may
permit a debtor through its plan to de-accelerate a secured loan and to
reinstate the loan even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the property had yet occurred) prior to the filing of the debtor's petition.
This may be done even if the full amount due under the original loan is never
repaid. Other types of significant modifications to the terms of the mortgage
may be acceptable to the bankruptcy court, often depending on the particular
facts and circumstances of the specific case.
A "deficient valuation" with respect to any mortgage loan is the excess of
(a)(i) the then outstanding principal balance of the mortgage loan, plus (ii)
accrued and unpaid interest and expenses reimbursable under the terms of the
related note to the date of the bankruptcy petition (collectively, the
"Outstanding Balance"),
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over (b) a valuation by a court of competent jurisdiction of the mortgaged
property which reduces the principal balance receivable on such mortgage loan to
an amount less than the Outstanding Balance of the mortgage loan, which
valuation results from a proceeding initiated under the Bankruptcy Code. As used
herein, "Deficient Valuation" means, with respect to any Mortgage Loan, the
deficient valuation described in the preceding sentence, without giving effect
to clause (a)(ii) thereof. If the terms of a court order in respect of any
retroactive Deficient Valuation provide for a reduction in the indebtedness of a
Mortgage Loan and the earlier maturity thereof, the term Deficient Valuation
includes an additional amount equal to the excess, if any, of (a) the amount of
principal that would have been due on such Mortgage Loan for each month
retroactively affected (i.e. each month occurring after the effective date of
such Deficient Valuation but before the distribution of amounts in respect of
such Deficient Valuation to Certificateholders pursuant to the related
Agreement), based on the original payment terms and amortization schedule of
such Mortgage Loan over (b) the amount of principal due on such Mortgage Loan
for each such retroactive month (assuming the effect of such retroactive
application according to such Mortgage Loan's revised amortization schedule). A
"Debt Service Reduction," with respect to any Mortgage Loan, is a reduction in
the scheduled monthly payment, as described in the Agreement, for such Mortgage
Loan by a court of competent jurisdiction in a proceeding under the Bankruptcy
Code, except such a reduction resulting from a Deficient Valuation.
Federal bankruptcy law may also interfere with or affect the ability of the
secured mortgage lender to enforce an assignment by a mortgagor of rents and
leases related to the mortgaged property if the related mortgagor is in a
bankruptcy proceeding. Under Section 362 of the Bankruptcy Code, the mortgagee
will be stayed from enforcing the assignment, and the legal proceedings
necessary to resolve the issue can be time-consuming and may result in
significant delays in the receipt of the rents. Rents may also escape an
assignment thereof (i) if the assignment is not fully perfected under state law
prior to commencement of the bankruptcy proceeding, (ii) to the extent such
rents are used by the borrower to maintain the mortgaged property, or for other
court authorized expenses, or (iii) to the extent other collateral may be
substituted for the rents.
To the extent a mortgagor's ability to make payment on a mortgage loan is
dependent on payments under a lease of the related property, such ability may be
impaired by the commencement of a bankruptcy proceeding relating to a lessee
under such lease. Under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a lessee results in a stay in bankruptcy against
the commencement or continuation of any state court proceeding for past due
rent, for accelerated rent, for damages or for a summary eviction order with
respect to a default under the lease that occurred prior to the filing of the
lessee's petition.
In addition, federal bankruptcy law generally provides that a trustee or
debtor in possession in a bankruptcy or reorganization case under the Bankruptcy
Code may, subject to approval of the court, (a) assume the lease and retain it
or assign it to a third party or (b) reject the lease. If the lease is assumed,
the trustee or debtor in possession (or assignee, if applicable) must cure any
defaults under the lease, compensate the lessor for its losses and provide the
lessor with "adequate assurance" of future performance. Such remedies may be
insufficient, however, as the lessor may be forced to continue under the lease
with a lessee that is a poor credit risk or an unfamiliar tenant if the lease
was assigned, and any assurances provided to the lessor may, in fact, be
inadequate. Furthermore, there is likely to be a period of time between the date
upon which a lessee files a bankruptcy petition and the date upon which the
lease is assumed or rejected. Although the lessee is obligated to make all lease
payments currently with respect to the post-petition period, there is a risk
that such payments will not be made due to the lessee's poor financial
condition. If the lease is rejected, the lessor will be treated as an unsecured
creditor with respect to its claim for damages for termination of the lease and
the mortgagor must relet the mortgaged property before the flow of lease
payments will recommence. In addition, pursuant to Section 502(b)(6) of the
Bankruptcy Code, a lessor's damages for lease rejection are limited.
In a bankruptcy or similar proceeding action may be taken seeking the
recovery as a preferential transfer of any payments made by the mortgagor under
the related Mortgage Loan to the Trust Fund. Payments on long-term debt may be
protected from recovery as preferences if they are payments in the ordinary
course of
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business made on debts incurred in the ordinary course of business. Whether any
particular payment would be protected depends upon the facts specific to a
particular transaction.
"Due-on-Sale" Clauses
The enforceability of these clauses has been subject of legislation or
litigation in many states, and in some cases the enforceability of these clauses
was limited or denied. However, the Garn-St Germain Depository Institutions Act
of 1982 (the "Garn-St Germain Act") preempts state constitutional, statutory and
case law that prohibits the enforcement of due-on-sale clauses and permits
lenders to enforce these clauses in accordance with their terms, subject to
certain limited exceptions. The Garn-St Germain Act does "encourage" lenders to
permit assumption of loans at the original rate of interest or at some other
rate less than the average of the original rate and the market rate.
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St Germain Act may not exercise a due-on-
sale clause, notwithstanding the fact that a transfer of the property may have
occurred. These include intra-family transfers, certain transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also prohibit
the imposition of 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 Certain Provisions
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. State and federal statutes or
regulations may also limit a lender's right to collect a prepayment penalty when
the prepayment is caused by the lender's acceleration of the loan pursuant to a
due-on-sale clause. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. Under
the Agreement, late charges and prepayment fees (to the extent permitted by law
and not waived by the Servicer) may be retained by the Servicer as additional
servicing compensation.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial remedies
that may be fashioned include judicial requirements that the lender undertake
affirmative and sometimes 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 lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders to
foreclose if the default under the mortgage instrument is not monetary, such as
the borrower failing to adequately maintain or insure the property or the
borrower executing a second mortgage or deed of trust affecting the property. In
other cases, some courts have been faced with the issue whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under the deeds of trust receive notices in addition to
the statutorily-prescribed minimum requirements. For the most part, these cases
have upheld the notice provisions as being reasonable or have found that the
sale by a trustee under a deed of trust or under a mortgage having a power of
sale does not involve sufficient state action to afford constitutional
protections to the borrower.
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Environmental Considerations
Real property pledged as security to a lender may be subject to potential
environmental risks. Such environmental risks may give rise to a diminution in
value of property securing any Mortgage Loan or, as more fully described below,
liability for cleanup costs or other remedial actions, which liability could
exceed the value of such property or the principal balance of the related
Mortgage Loan. In certain circumstances, a lender may choose not to foreclose on
contaminated property rather than risk incurring liability for remedial actions.
Under the laws of certain states where the Mortgaged Properties are located,
the owner's failure to perform remedial actions required under environmental
laws may in certain circumstances give rise to a lien on the Mortgaged Property
to ensure the reimbursement of remedial costs incurred by the state. In several
states such lien has priority over the lien of an existing mortgage against such
property. Because the costs of remedial action could be substantial, the value
of a Mortgaged Property as collateral for a Mortgage Loan could be adversely
affected by the existence of an environmental condition giving rise to a lien.
Under some circumstances, cleanup costs, or the obligation to take remedial
actions, can be imposed on a secured lender such as the Trust Fund with respect
to each Series. Under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended ("CERCLA"), current ownership or operation of a property provides a
sufficient basis for imposing liability for the costs of addressing prior or
current releases or threatened releases of hazardous substances on that
property. Under such laws, a secured lender who holds indicia of ownership
primarily to protect its interest in a property may, by virtue of holding such
indicia, fall within the literal terms of the definition of "owner or operator";
consequently, such laws often specifically exclude such a secured lender from
the definitions of "owner" or "operator", provided that the lender does not
participate in the management of the facility.
Whether actions taken by a secured creditor would constitute such
participation in the management of a facility or property, so that the lender
loses the protection of the secured creditor exclusion, has been a matter of
judicial interpretation of the statutory language, and court decisions have
historically been inconsistent. In 1990, the United States Court of Appeals for
the Eleventh Circuit suggested, in United States v. Fleet Factors Corp., that
the mere capacity of the lender to influence a borrower's decisions regarding
disposal of hazardous substances was sufficient participation in the management
of the borrower's business to deny the protection of the secured creditor
exclusion to the lender, regardless of whether the lender actually exercised
such influence. Other judicial decisions did not interpret the secured creditor
exclusion as narrowly as did the Eleventh Circuit.
This ambiguity appears to have been resolved by the enactment of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996 (the
"Asset Conservation Act"), which took effect on September 30, 1996. The Asset
Conservation Act provides that in order to be deemed to have participated in the
management of a secured property, a lender must actually participate in the
operational affairs of the property or the borrower. The Asset Conservation Act
also provides that participation in the management of the property does not
include "merely having the capacity to influence, or unexercised right to
control" operations. Rather, a lender will lose the protection of the secured
creditor exclusion only if it exercises decision-making control over the
borrower's environmental compliance and hazardous substance handling and
disposal practices, or assumes day-to-day management of all operational
functions of the secured property.
It should be noted that the secured creditor exclusion does not govern
liability for cleanup costs under federal laws other than CERCLA. CERCLA's
jurisdiction extends to the investigation and remediation of releases of
"hazardous substances." The definition of "hazardous substances" under CERCLA
specifically excludes petroleum products. Under federal law, the operation and
management of underground petroleum storage tanks (excluding heating oil) is
governed by Subtitle I of the Resource Conservation and Recovery Act ("RCRA").
Under the Asset Conservation Act, the protections accorded to lenders under
CERCLA are also accorded to the holders of security interests in underground
storage tanks. However, liability for cleanup of petroleum contamination will
most likely be governed by state law, which may not provide any specific
protection for secured creditors.
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If a lender is or becomes liable for clean-up costs, it may bring an action
for contribution against the current owners or operators, the owners or
operators at the time of on-site disposal activity or any other party who
contributed to the environmental hazard, but such persons or entities may be
bankrupt or otherwise judgment-proof. Furthermore, such action against the
borrower may be adversely affected by the limitations on recourse in the loan
documents. Similarly, in some states anti-deficiency legislation and other
statutes requiring the lender to exhaust its security before bringing a personal
action against the borrower-trustor (see "--Anti-Deficiency Legislation" below)
may curtail the lender's ability to recover from its borrower the environmental
clean-up and other related costs and liabilities incurred by the lender.
Shortfalls occurring as the result of imposition of any clean-up costs will be
addressed in the Prospectus Supplement and Agreement for the related Series.
Soldiers' and Sailors' Relief Act
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a borrower who enters military service after the
origination of such borrower's Mortgage Loan (including a borrower who is a
member of the National Guard or is in reserve status at the time of the
origination of the Mortgage Loan and is later called to active duty) may not be
charged interest (including fees and charges) above an annual rate of 6% during
the period of such borrower's active duty status, unless a court orders
otherwise upon application of the lender. Any shortfall in interest collections
resulting from the application of the Relief Act, to the extent not covered by
any applicable Enhancements, could result in losses to the Holders of the
Certificates. The Relief Act applies to mortgagors who are members of the Army,
Navy, Air Force, Marines, 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 later called to active duty) after origination of the related
Mortgage Loan, no information can be provided as to the number of Mortgage Loans
that may be affected by the Relief Act. In addition, the Relief Act imposes
limitations which would impair the ability of the Servicer to foreclose on an
affected Mortgage Loan during the borrower's period of active duty status and,
under certain circumstances, during an additional three months thereafter. Thus,
in the event that such a Mortgage Loan goes into default, there may be delays
and losses occasioned by the inability to realize upon the Mortgage Property in
a timely fashion.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
I. General
The following is a general discussion of certain of the anticipated federal
income tax consequences of the purchase, ownership and disposition of
Certificates. Orrick, Herrington & Sutcliffe LLP, counsel to the Seller, is
delivering its opinion regarding certain federal income tax matters discussed
below. The opinion addresses only those issues specifically identified below as
being covered by such opinion; however, such opinion also states that the
additional discussion set forth below, to the extent it is a discussion of law
or legal conclusions, is true and correct in all material respects. Prospective
investors should be aware that opinions of counsel are not binding on the
Internal Revenue Service (the "IRS") or the courts, and there can be no absolute
assurance that the IRS or the courts will agree with the conclusions expressed
in counsel's opinion. As used hereinafter in "Certain Federal Income Tax
Consequences," "Mortgage Loans" shall include Mortgage Certificates.
The following summary is based on the Code as well as Treasury regulations
and administrative and judicial rulings and practice. Legislative, judicial and
administrative changes may occur, possibly with retroactive effect, that could
alter or modify the continued validity of the statements and conclusions set
forth herein. This summary does not purport to address all federal income tax
matters that may be relevant to particular holders. For example, it generally
is addressed only to original purchasers of the Certificates that are United
States investors, deals only with Certificates held as capital assets within the
meaning of Section 1221 of the Code, and does not address tax consequences to
holders that may be relevant to investors subject to special rules, such as non-
U.S. investors, banks, thrifts, insurance companies, tax-exempt organizations,
electing large partnerships, dealers in securities or currencies, mutual funds,
REITs, S corporations, estates and trusts, investors that hold the Certificates
as part of a hedge, straddle, integrated or conversion transaction, or holders
whose "functional currency" is not the United States dollar. Further, it does
not address alternative minimum tax consequences or the indirect effects on the
holders of equity interests in an entity that is a beneficial owner of the
Certificates. Further, this discussion does not address the state or local tax
consequences of the purchase, ownership and disposition of such Certificates.
Investors should consult their own tax advisers in determining the federal,
state, local, or other tax consequences to them of the purchase, ownership and
disposition of the Certificates offered hereunder.
The following discussion addresses securities of two general types: (i)
certificates ("REMIC Certificates") representing interests in a Mortgage Pool
("REMIC Mortgage Pool") which the Servicer will elect to have treated as one or
more real estate mortgage investment conduits ("REMICs") under Code Sections
860A through 860G ("REMIC Provisions") and (ii) certificates ("Trust
Certificates") representing certain interests in a Trust Fund which the Servicer
does not elect to have treated as a REMIC. REMIC Certificates and Trust
Certificates will be referred to collectively as "Certificates." If securities
are issued that (i) represent interests in a Mortgage Pool which the Servicer
will elect to have treated as interests in a "financial asset securitization
trust" (a "FASIT") or (ii) are characterized as (a) non-REMIC, non-FASIT
indebtedness and (b) the corresponding equity interest in the issuer of such
debt, the federal income tax consequences of these securities will be addressed
in the related Prospectus Supplement.
Under the REMIC Provisions, REMICs may issue one or more classes of "regular"
interests and must issue one and only one class of "residual" interests. A REMIC
Certificate representing a regular interest in a REMIC Mortgage Pool will be
referred to as a "REMIC Regular Certificate" and a REMIC Certificate
representing a residual interest in a REMIC Mortgage Pool will be referred to as
a "REMIC Residual Certificate."
A Trust Certificate representing an undivided equitable ownership interest in
the principal of the Mortgage Loans constituting the related Trust Fund,
together with interest thereon at a remittance rate (which may be less than,
greater than, or equal to the pass-through rate), will be referred to as a
"Trust Fractional Certificate" and a Trust Certificate representing an equitable
ownership of all or a portion of the interest paid on each Mortgage Loan
constituting the related Trust Fund (net of normal servicing fees) will be
referred to as a "Trust Interest Certificate."
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The following discussion is based in part upon the rules governing original
issue discount that are set forth in Code Sections 1271 through 1273 and 1275
and in Treasury regulations issued under the original issue discount provisions
of the Code (the "OID Regulations"), and the Treasury regulations issued under
the provisions of the Code relating to REMICs (the "REMIC Regulations").
II. REMIC Trust Funds
A. Classification of REMIC Trust Funds
With respect to each series of REMIC Certificates relating to a REMIC
Mortgage Pool, Orrick, Herrington & Sutcliffe LLP, will deliver their opinion
generally to the effect that, assuming that (i) any required REMIC election is
made timely in the required form, (ii) there is ongoing compliance with all
provisions of the related Pooling and Servicing Agreement, (iii) certain
representations set forth in the Pooling and Servicing Agreement are true and
(iv) there is continued compliance with applicable provisions of the Code, as it
may be amended from time to time, and applicable Treasury regulations issued
thereunder, such REMIC Mortgage Pool (or a portion thereof) will qualify as one
or more REMICs and the classes of interests offered will be considered to be
"regular interests" or "residual interests" within the meaning of the REMIC
Provisions.
Holders of REMIC Certificates ("REMIC Certificateholders") should be aware
that, if an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for REMIC status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In such event, an entity electing to be treated as a REMIC
may be taxable as a separate corporation under Treasury regulations. In the
case of an inadvertent termination of REMIC status, the Code provides the
Treasury Department with authority to issue regulations providing relief. Any
such relief, however, may be accompanied by sanctions, such as the imposition of
a corporate tax on all or a portion of the REMIC's income for the period of time
in which the requirements for REMIC status are not satisfied.
B. Taxation of Owners of REMIC Regular Certificates
In general, REMIC Regular Certificates will be treated for federal income tax
purposes as debt instruments issued by the REMIC Mortgage Pool and not as
ownership interests in the REMIC Mortgage Pool or its Assets. In general,
interest, original issue discount and market discount paid or accrued on a REMIC
Regular Certificate will be treated as ordinary income to the holder of such
REMIC Regular Certificate. Distributions in reduction of the stated redemption
price at maturity of the REMIC Regular Certificate will be treated as a return
of capital to the extent of such holder's basis in such REMIC Regular
Certificate. Holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
1. Original Issue Discount
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Code Section 1273(a). Any holders of REMIC
Regular Certificates issued with original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with a constant yield method that takes into account the compounding
of interest, in advance of the receipt of the cash attributable to such income.
The Servicer will report annually (or more frequently if required) to the
Internal Revenue Service ("IRS") and to Certificateholders such information with
respect to the original issue discount accruing on the REMIC Regular
Certificates as may be required under Code Section 6049 and the regulations
thereunder. See "Reporting and Other Administrative Matters of REMICs" below.
Rules governing original issue discount are set forth in Code Sections 1271
through 1273 and 1275 and in the OID Regulations. Code Section 1272(a)(6)
provides special original issue discount rules applicable to REMIC Regular
Certificates.
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Code Section 1272(a)(6) requires that a mortgage prepayment assumption
("Prepayment Assumption") be used in computing the accrual of original issue
discount on REMIC Regular Certificates, and for certain other federal income tax
purposes. The Prepayment Assumption is to be determined in the manner prescribed
in Treasury regulations. To date, no such regulations have been promulgated. The
legislative history to Code Section 1272(a)(6) indicates that the regulations
will provide that the Prepayment Assumption, if any, used with respect to a
particular transaction must be the same as that used by the parties in pricing
the transaction. The Servicer will use a Prepayment Assumption in reporting
original issue discount that is consistent with this standard. However, neither
the Seller nor the Servicer makes any representation that the Mortgage Loans
will in fact prepay at the rate reflected in the Prepayment Assumption or at any
other rate. Each investor must make its own decision as to the appropriate
prepayment assumption to be used in deciding whether or not to purchase any of
the REMIC Regular Certificates. The Prospectus Supplement with respect to a
Series of REMIC Certificates will disclose the Prepayment Assumption to be used
in reporting original issue discount, if any, and for certain other federal
income tax purposes.
The total amount of original issue discount on a REMIC Regular Certificate is
the excess of the "stated redemption price at maturity" of the REMIC Regular
Certificate over its "issue price." Except as discussed in the following two
paragraphs, in general, the issue price of a particular class of REMIC Regular
Certificates offered hereunder will be the price at which a substantial amount
of REMIC Regular Certificates of that class are first sold to the public
(excluding bond houses and brokers), and the stated redemption price at maturity
of a REMIC Regular Certificate will be its Stated Principal Balance.
If a REMIC Regular Certificate is sold with accrued interest that relates to
a period prior to the issue date of such REMIC Regular Certificate, the amount
paid for the accrued interest will be treated instead as increasing the issue
price of the REMIC Regular Certificate. In addition, that portion of the first
interest payment in excess of interest accrued from the date of initial issuance
of the Certificates (the "Closing Date") to the first Distribution Date will be
treated for federal income tax reporting purposes as includible in the stated
redemption price at maturity of the REMIC Regular Certificates, and as
excludible from income when received as a payment of interest on the first
Distribution Date (except to the extent of any accrued market discount as of
that date). The OID Regulations suggest, however, that some or all of this pre-
issuance accrued interest "may" be treated as a separate asset (and hence not
includible in a REMIC Regular Certificate's issue price or stated redemption
price at maturity), whose cost is recovered entirely out of interest paid on the
first Distribution Date.
The stated redemption price at maturity of a REMIC Regular Certificate is
equal to the total of all payments to be made on such Certificate other than
"qualified stated interest." Under the OID Regulations, "qualified stated
interest" is interest that is unconditionally payable at least annually during
the entire term of the Certificate at either (i) a single fixed rate that
appropriately takes into account the length of the interval between payments or
(ii) a current value of a single "qualified floating rate" or "objective rate"
(each, a "Single Variable Rate"). A "current value" is the value of a variable
rate on any day that is no earlier than three months prior to the first day on
which that value is in effect and no later than one year following that day. A
"qualified floating rate" is a rate whose variations can reasonably be expected
to measure contemporaneous variations in the cost of newly borrowed funds in the
currency in which the Certificate is denominated. Such a rate remains qualified
even though it is multiplied by a fixed, positive multiple greater than 0.65 but
not exceeding 1.35, increased or decreased by a fixed rate, or both. Certain
combinations of rates constitute a single qualified floating rate, including (i)
interest stated at a fixed rate for an initial period of less than one year
followed by a qualified floating rate if the value of the floating rate at the
Closing Date is intended to approximate the fixed rate, and (ii) two or more
qualified floating rates that can reasonably be expected to have approximately
the same values throughout the term of the Certificate. A combination of such
rates is conclusively presumed to be a single floating rate if the values of all
rates on the Closing Date are within 0.25 percentage points of each other. A
variable rate that is subject to an interest rate cap, floor, governor or
similar restriction on rate adjustment may be a qualified floating rate only if
such restriction is fixed throughout the term of the instrument, or is not
reasonably expected as of the Closing Date to cause the yield on the debt
instrument to differ significantly from the expected yield absent the
restriction. An "objective rate" is a rate determined using a single fixed
formula and based on objective financial information or economic information.
However, an objective rate does not include a rate based on information that is
in
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the control of the issuer or that is unique to the circumstances of a related
party. A combination of interest stated at a fixed rate for an initial period of
less than one year followed by an objective rate is treated as a single
objective rate if the value of the objective rate at the Closing Date is
intended to approximate the fixed rate; such a combination of rates is
conclusively presumed to be a single objective rate if the objective rate on the
Closing Date does not differ from the fixed rate by more than 0.25 percentage
points. The qualified stated interest payable with respect to certain variable
rate debt instruments not bearing stated interest at a Single Variable Rate is
discussed below under "Variable Rate Certificates." Under the foregoing rules,
some of the payments of interest on a Certificate bearing a fixed rate of
interest for an initial period followed by a qualified floating rate of interest
in subsequent periods could be treated as included in the stated redemption
price at maturity if the initial fixed rate were to differ sufficiently from the
rate that would have been set using the formula applicable to subsequent
periods. See "Variable Rate Certificates." REMIC Regular Certificates offered
hereby other than such Certificates providing for variable rates of interest are
not anticipated to have stated interest other than "qualified stated interest,"
but if any such REMIC Regular Certificates are so offered, appropriate
disclosures will be made in the Prospectus Supplement. Some or all of the
payments on REMIC Regular Certificates providing for the accretion of interest
will be included in the stated redemption price at maturity of such
Certificates.
Under a de minimis rule in the Code, as interpreted in the OID Regulations,
original issue discount on a REMIC Regular Certificate will be considered to be
zero if such original issue discount is less than 0.25% of the stated redemption
price at maturity of the REMIC Regular Certificate multiplied by the weighted
average life of the REMIC Regular Certificate. For this purpose, the weighted
average life of the REMIC Regular Certificate is computed as the sum of the
amounts determined by multiplying the amount of each payment under the
instrument (other than a payment of qualified stated interest) by a fraction,
whose numerator is the number of complete years from the issue date until such
payment is made and whose denominator is the stated redemption price at maturity
of such REMIC Regular Certificate. The IRS may take the position that this rule
should be applied taking into account the Prepayment Assumption and the effect
of any anticipated investment income. Under the OID Regulations, REMIC Regular
Certificates bearing only qualified stated interest except for any "teaser"
rate, interest holiday or similar provision are treated as subject to the de
minimis rule if the greater of the foregone interest or any excess of the
Certificates' stated principal amount over their issue price is less than such
de minimis amount.
The OID Regulations generally treat de minimis original issue discount as
includible in income as each principal payment is made, based on the product of
the total amount of such de minimis original issue discount and a fraction,
whose numerator is the amount of such principal payment and whose denominator is
the outstanding principal balance of the REMIC Regular Certificate. The OID
Regulations also permit a Certificateholder to elect to accrue de minimis
original issue discount (together with stated interest, market discount and
original issue discount) into income currently based on a constant yield method.
See "Taxation of Owners of REMIC Regular Certificates--Market Discount and
Premium."
Each holder of a REMIC Regular Certificate must include in gross income the
sum of the "daily portions" of original issue discount on its REMIC Regular
Certificate for each day during its taxable year on which it held such REMIC
Regular Certificate. For this purpose, in the case of an original holder of a
REMIC Regular Certificate, the daily portions of original issue discount will be
determined as follows. A calculation will first be made of the portion of the
original issue discount that accrued during each accrual period, that is
generally each period that ends on a date that corresponds to a Distribution
Date on the REMIC Regular Certificate and begins on the first day following the
immediately preceding accrual period (or in the case of the first such period,
begins on the Closing Date). For any accrual period such portion will equal the
excess, if any, of (i) the sum of (A) the present value of all of the
distributions remaining to be made on the REMIC Regular Certificate, if any, as
of the end of the accrual period and (B) distributions made on such REMIC
Regular Certificate during the accrual period of amounts included in the stated
redemption price at maturity, over (ii) the adjusted issue price of such REMIC
Regular Certificate at the beginning of the accrual period. The present value of
the remaining payments referred to in the preceding sentence will be calculated
based on (i) the yield to maturity of the REMIC Regular Certificate, calculated
as of the settlement date, giving effect to the Prepayment Assumption, (ii)
events (including actual prepayments) that have occurred prior to the end of the
accrual period and (iii) the Prepayment Assumption. The adjusted issue price of
a REMIC
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Regular Certificate at the beginning of any accrual period will equal the issue
price of such Certificate, increased by the aggregate amount of original issue
discount with respect to such REMIC Regular Certificate that accrued in prior
accrual periods, and reduced by the amount of any distributions made on such
REMIC Regular Certificate in prior accrual periods of amounts included in the
stated redemption price at maturity. The original issue discount accruing during
any accrual period will then be allocated ratably to each day during the period
to determine the daily portion of original issue discount for each day. With
respect to an accrual period between the settlement date and the first
Distribution Date on the REMIC Regular Certificate that is shorter than a full
accrual period, the OID Regulations permit the daily portions of original issue
discount to be determined according to any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
REMIC Regular Certificate at a cost (not including payment for accrued qualified
stated interest) less than its remaining stated redemption price at maturity
will also be required to include in gross income, for each day on which it holds
such REMIC Regular Certificate, the daily portions of original issue discount
with respect to such REMIC Regular Certificate, but reduced, if such cost
exceeds the "adjusted issue price", by an amount equal to the product of (i)
such daily portions and (ii) a constant fraction, whose numerator is such excess
and whose denominator is the sum of the daily portions of original issue
discount on such REMIC Regular Certificate for all days on or after the day of
purchase. The adjusted issued price of a REMIC Regular Certificate on any given
day is equal to the sum of the adjusted issue price (or, in the case of the
first accrual period, the issue price) of the REMIC Regular Certificate at the
beginning of the accrual period during which such day occurs and the daily
portions of original issue discount for all days during such accrual period
prior to such day, reduced by the aggregate amount of distributions made during
such accrual period prior to such day other than distributions of qualified
stated interest.
Variable Rate Certificates. REMIC Regular Certificates bearing interest at
one or more variable rates are subject to certain special rules. The qualified
stated interest payable with respect to certain variable rate debt instruments
not bearing interest at a Single Variable Rate generally is determined under the
OID Regulations by converting such instruments into fixed rate debt instruments.
Instruments qualifying for such treatment generally include those providing for
stated interest at (i) more than one qualified floating rate, or (ii) a single
fixed rate and (a) one or more qualified floating rates or (b) a single
"qualified inverse floating rate" (each, a "Multiple Variable Rate"). A
qualified inverse floating rate is an objective rate equal to a fixed rate
reduced by a qualified floating rate, the variations in which can reasonably be
expected to inversely reflect contemporaneous variations in the cost of newly
borrowed funds (disregarding permissible rate caps, floors, governors and
similar restrictions such as are described above).
Purchasers of REMIC Regular Certificates bearing a variable rate of interest
should be aware that there is uncertainty concerning the application of Code
Section 1272(a)(6) and the OID Regulations to such Certificates. In the absence
of other authority, the Servicer currently intends to be guided by the
provisions of the OID Regulations governing variable rate debt instruments in
adapting the provisions of Code Section 1272(a)(6) to such Certificates for the
purpose of preparing reports furnished to Certificateholders. The effect of the
application of such provisions generally will be to cause Certificateholders
holding Certificates bearing interest at a Single Variable Rate to take into
account for each period an amount corresponding approximately to the sum of (i)
the qualified stated interest accruing on the outstanding face amount of the
REMIC Regular Certificate as the stated interest rate for that Certificate
varies from time to time and (ii) the amount of original issue discount that
would have been attributable to that period on the basis of a constant yield to
maturity for a bond issued at the same time and issue price as the REMIC Regular
Certificate, having the same face amount and schedule of payments of principal
as such Certificate, subject to the same Prepayment Assumption, and bearing
interest at a fixed rate equal to the value of the applicable qualified floating
rate or qualified inverse floating rate in the case of a Certificate providing
for either such rate, or equal to the fixed rate that reflects the reasonably
expected yield on the Certificate in the case of a Certificate providing for an
objective rate other than an inverse floating rate, in each case as of the issue
date. Certificateholders holding REMIC Regular Certificates bearing interest at
a Multiple Variable Rate generally will take into account interest and original
issue discount under a similar methodology, except that the amounts of qualified
stated interest and original issue discount attributable to such a Certificate
first will be determined for an "equivalent" debt instrument bearing fixed
rates, the assumed fixed rates for which are (a) for each qualified floating
rate, the
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value of each such rate as of the Closing Date (with appropriate adjustment for
any differences in intervals between interest adjustment dates), (b) for a
qualified inverse floating rate, the value of the rate as of the Closing Date,
and (c) for any other objective rate, the fixed rate that reflects the yield
that is reasonably expected for the Certificate. If the interest paid or accrued
with respect to a Multiple Variable Rate Certificate during an accrual period
differs from the assumed fixed interest rate, such difference will be an
adjustment (to interest or original issue discount, as applicable) to the
Certificateholder's taxable income for the taxable period or periods to which
such difference relates.
In the case of a Certificate that provides for stated interest at a fixed
rate in one or more accrual periods and either one or more qualified floating
rates or a qualified inverse floating rate in other accrual periods, the fixed
rate is first converted into an assumed variable rate. The assumed variable rate
will be a qualified floating rate or a qualified inverse floating rate according
to the type of actual variable rates provided by the Certificate, and must be
such that the fair market value of the REMIC Regular Certificate as of issuance
is approximately the same as the fair market value of an otherwise identical
debt instrument that provides for the assumed variable rate in lieu of the fixed
rate. The REMIC Regular Certificate is then subject to the determination of the
amount and accrual of original issue discount as described above, by reference
to the hypothetical variable rate instrument.
Purchasers of variable rate REMIC Regular Certificates further should be
aware that the provisions of the OID Regulations applicable to variable rate
debt instruments have been limited and may not apply to some REMIC Regular
Certificates having variable rates. If such a Certificate is not governed by the
provisions of the OID Regulations applicable to variable rate debt instruments,
it may be subject to provisions of Treasury regulations, issued in final form on
June 11, 1996, applicable to instruments having contingent payments (the "1996
Contingent Debt Regulations"). The application of those provisions to
instruments such as variable rate REMIC Regular Certificates is subject to
differing interpretations. Prospective purchasers of variable rate REMIC Regular
Certificates are advised to consult their tax advisers concerning the tax
treatment of such Certificates.
2. Market Discount and Premium
A Certificateholder that purchases a REMIC Regular Certificate at a market
discount, that is, at a purchase price less than the REMIC Regular Certificate's
stated redemption price at maturity, or, in the case of a REMIC Regular
Certificate issued with original issue discount, the REMIC Regular Certificate's
adjusted issue price (as defined under "Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount"), will recognize market discount upon
receipt of each payment of principal. In particular, such a holder will
generally be required to allocate each payment of principal on a REMIC Regular
Certificate first to accrued market discount, and to recognize ordinary income
to the extent such principal payment does not exceed the aggregate amount of
accrued market discount on such REMIC Regular Certificate not previously
included in income. Such market discount must be included in income in addition
to any original issue discount includible in income with respect to such REMIC
Regular Certificate.
A Certificateholder may elect to include market discount in income currently
as it accrues, rather than including it on a deferred basis in accordance with
the foregoing. If made, such election will apply to all market discount bonds
acquired by such Certificateholder on or after the first day of the first
taxable year to which such election applies. In addition, the OID Regulations
permit a Certificateholder to elect to accrue all interest, discount (including
de minimis market or original issue discount), reduced by any premium, in income
as interest, based on a constant yield method. If such an election were made for
a REMIC Regular Certificate with market discount, the Certificateholder is
deemed to have made an election to currently include market discount in income
with respect to all other debt instruments having market discount that such
Certificateholder acquires during the year of the election or thereafter.
Similarly, a Certificateholder that makes this election for a Certificate that
is acquired at a premium is deemed to have made an election to amortize bond
premium, as described below, with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. The
election to accrue interest, discount and premium on a constant yield method
with respect to a Certificate is irrevocable without the consent of the IRS.
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Under a statutory de minimis exception, market discount with respect to a
REMIC Regular Certificate will be considered to be zero for purposes of Code
Sections 1276 through 1278 if such market discount is less than 0.25% of the
stated redemption price at maturity of such REMIC Regular Certificate multiplied
by the number of complete years to maturity remaining after the date of its
purchase. In interpreting a similar de minimis rule with respect to original
issue discount on obligations payable in installments, the OID Regulations refer
to the weighted average maturity of obligations, and it is likely that the same
rule will be applied in determining whether market discount is de minimis. It
appears that de minimis market discount on a REMIC Regular Certificate would be
treated in a manner similar to original issue discount of a de minimis amount.
See "Taxation of Holders of REMIC Regular Certificates--Original Issue
Discount." Such treatment would result in discount being included in income at a
slower rate than discount would be required to be included using the method
described above. However, Treasury regulations implementing the market discount
de minimis exception have not been issued in proposed, temporary or final form,
and the precise treatment of de minimis market discount on obligations payable
in more than one installment therefore remains uncertain.
The 1986 Act grants authority to the Treasury Department to issue regulations
providing for the method for accruing market discount of more than a de minimis
amount on debt instruments, the principal of which is payable in more than one
installment. Until such time as regulations are issued by the Treasury
Department, certain rules described in certain legislative history might apply.
Under those rules, the holder of a bond purchased with more than de minimis
market discount may elect to accrue such market discount either on the basis of
a constant yield method or on the basis of the appropriate proportionate method
described below. Under the proportionate method for obligations issued with
original issue discount, the amount of market discount that accrues during a
period is equal to the product of (i) the total remaining market discount,
multiplied by (ii) a fraction, the numerator of which is the original issue
discount accruing during the period and the denominator of which is the total
remaining original issue discount at the beginning of the period. Under the
proportionate method for obligations issued without original issue discount, the
amount of market discount that accrues during a period is equal to the product
of (i) the total remaining market discount, multiplied by (ii) a fraction, the
numerator of which is the amount of stated interest paid during the accrual
period and the denominator of which is the total amount of stated interest
remaining to be paid at the beginning of the period. The Prepayment Assumption,
if any, used in calculating the accrual of original issue discount is to be used
in calculating the accrual of market discount under any of the above methods.
Because the regulations referred to in this paragraph have not been issued, it
is not possible to predict what effect such regulations might have on the tax
treatment of a REMIC Regular Certificate purchased at a discount in the
secondary market.
Further, a purchaser generally will be required to treat a portion of any
gain on sale or exchange of a REMIC Regular 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. Such purchaser also may be required to defer a portion of
its interest deductions for the taxable year attributable to any indebtedness
incurred or continued to purchase or carry such REMIC Regular Certificate. Any
such deferred interest expense is, in general, allowed as a deduction not later
than the year in which the related market discount income is recognized. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
A REMIC Regular Certificate purchased at a cost (not including payment for
accrued qualified stated interest) greater than its remaining stated redemption
price at maturity will be considered to be purchased at a premium. The holder of
such a REMIC Regular Certificate may elect to amortize such premium under the
constant yield method. 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 the Certificateholder as having made the
election to amortize premium generally, as described above. The Committee Report
indicates a Congressional intent that the same rules that will apply to accrual
of market discount on installment obligations will also apply in amortizing bond
premium under Code Section 171 on installment obligations such as the REMIC
Regular Certificates.
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3. Treatment of Subordinated Certificates
As described above under "Credit Support--Subordinated Certificates," certain
Series of Certificates may contain one or more Classes of Subordinated
Certificates. Holders of Subordinated Certificates will be required to report
income with respect to such Certificates on the accrual method without giving
effect to delays and reductions in distributions attributable to defaults or
delinquencies on any Mortgage Loans, except possibly, in the case of income that
constitutes qualified stated interest, to the extent that it can be established
that such amounts are uncollectible. As a result, the amount of income reported
by a Certificateholder of a Subordinated Certificate in any period could
significantly exceed the amount of cash distributed to such Certificateholder in
that period.
Although not entirely clear, it appears that a corporate holder or a holder
who holds a Regular Certificate in the course of a trade or business generally
should be allowed to deduct as an ordinary loss any loss sustained on account of
partial or complete worthlessness of a Subordinated Certificate. Although
similarly unclear, a noncorporate holder who does not hold such Regular
Certificate in the course of a trade or business generally should be allowed to
deduct as a short-term capital loss any loss sustained on account of complete
worthlessness of a Subordinated Certificate. Special rules are applicable to
banks and thrift institutions, including rules regarding reserves for bad debts.
Holders of Subordinated Certificates should consult their own tax advisers
regarding the appropriate timing, character and amount of any loss sustained
with respect to Subordinated Certificates.
C. Taxation of Owners of REMIC Residual Certificates
1. General
An owner of a REMIC Residual Certificate ("Residual Owner") generally will be
required to report its daily portion of the taxable income or, subject to the
limitation described below in "Taxation of Owners of REMIC Residual
Certificates--Basis Rules and Distributions," the net loss of the REMIC Mortgage
Pool for each day during a calendar quarter that the Residual Owner owned such
REMIC Residual Certificate. For this purpose, the daily portion will be
determined by allocating to each day in the calendar quarter, using a 30 days
per month/90 days per quarter/360 days per year counting convention, its ratable
portion of the taxable income or net loss of the REMIC Mortgage Pool for such
quarter, and by allocating the daily portions among the Residual Owners (on such
day) in accordance with their percentage of ownership interests on such day. Any
amount included in the gross income of, or allowed as a loss to, any Residual
Owner by virtue of the rule referred to in this paragraph will be treated as
ordinary income or loss. Purchasers of REMIC Residual Certificates should be
aware that taxable income from such Certificates may exceed cash distributions
with respect thereto in any taxable year. For example, if the Mortgage Loans are
acquired by a REMIC at a discount, then the holder of a residual interest may
recognize income without corresponding cash distributions. This result could
occur because a payment produces recognition by the REMIC of discount on the
Mortgage Loan while all or a portion of such payment could be used in whole or
in part to make principal payments on REMIC Regular Certificates issued without
substantial discount. Taxable income may also be greater in earlier years as a
result of the fact that interest expense deductions, expressed as a percentage
of the outstanding principal amount of the REMIC Regular Certificates, will
increase over time as the lower yielding sequences of Certificates are paid,
whereas interest income with respect to any given Mortgage Loan will remain
constant over time as a percentage of the outstanding principal amount of that
loan.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such Certificate will be taken into account
in determining the income of such holder for federal income tax purposes.
Although it appears likely that any such payment would be includible in income
immediately upon its receipt, the IRS might assert that such payment should be
included in income over time according to an amortization schedule or according
to some other method. Because of the uncertainty concerning the treatment of
such payments, holders of REMIC Residual Certificates should consult their tax
advisers concerning the treatment of such payments for income tax purposes.
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2. Taxable Income or Net Loss of the REMIC Trust Fund
The taxable income or net loss of the REMIC Mortgage Pool will reflect a
netting of income from the Mortgage Loans, any cancellation of indebtedness
income due to the allocation of Realized Losses to REMIC Regular Certificates,
and the deductions and losses allowed to the REMIC Mortgage Pool. Such taxable
income or net loss for a given calendar quarter will be determined in the same
manner as for an individual having the calendar year as his taxable year and
using the accrual method of accounting, with certain modifications. The first
modification is that a deduction will be allowed for accruals of interest
(including original issue discount) on the REMIC Regular Certificates. Second,
market discount equal to the excess of any Mortgage Loan's adjusted issue price
(as determined under "Taxation of Owners of REMIC Regular Certificates--Market
Discount and Premium") over its fair market value at the time of its transfer to
the REMIC Mortgage Pool generally will be included in income as it accrues,
based on a constant yield method and on the Prepayment Assumption. For this
purpose, the Servicer intends to treat the fair market value of the Mortgage
Loans as being equal to the aggregate issue prices of the REMIC Regular
Certificates and REMIC Residual Certificates; if one or more classes of REMIC
Regular Certificates or REMIC Residual Certificates are retained by the Seller,
the Servicer will estimate the value of such retained interests in order to
determine the fair market value of the Mortgage Loans for this purpose. Third,
no item of income, gain, loss or deduction allocable to a prohibited transaction
(see "Prohibited Transactions and Other Possible REMIC Taxes", below) will be
taken into account. Fourth, the REMIC Mortgage Pool generally may not deduct any
item that would not be allowed in calculating the taxable income of a
partnership by virtue of Code Section 703(a)(2). Fifth, the REMIC Regulations
provide that the limitation on miscellaneous itemized deductions imposed on
individuals by Code Section 67 will not be applied at the Mortgage Pool level to
the servicing fees paid to the Servicer or sub-servicers if any. (See, however,
"Pass-Through of Servicing Fees", below.) If the deductions allowed to the REMIC
Mortgage Pool exceed its gross income for a calendar quarter, such excess will
be the net loss for the REMIC Mortgage Pool for that calendar quarter.
3. Basis Rules and Distributions
Any distribution by a REMIC Mortgage Pool to a Residual Owner will not be
included in the gross income of such Residual Owner to the extent it does not
exceed the adjusted basis of such Residual Owner's interest in a REMIC Residual
Certificate. Such distribution will reduce the adjusted basis of such interest,
but not below zero. To the extent a distribution exceeds the adjusted basis of
the REMIC Residual Certificate, it will be treated as gain from the sale of the
REMIC Residual Certificate. (See "Sales of REMIC Certificates," below.) The
adjusted basis of a REMIC Residual Certificate is equal to the amount paid for
such REMIC Residual Certificate, increased by amounts included in the income of
the Residual Owner (see "Taxation of Owners of REMIC Residual Certificates--
Daily Portions" above), and decreased by distributions and by net losses taken
into account with respect to such interest.
A Residual Owner is not allowed to take into account any net loss for any
calendar quarter to the extent such net loss exceeds such Residual Owner's
adjusted basis in its REMIC Residual Certificate as of the close of such
calendar quarter (determined without regard to such net loss). Any loss
disallowed 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 effect of these basis and distribution rules is that a Residual Owner 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 Mortgage Pool or upon the sale of its REMIC Residual Certificate. See
"Sales of REMIC Certificates," below. The Residual Owner does, however, receive
reduced taxable income over the life of the REMIC because the REMIC's basis in
the underlying REMIC Mortgage Pool includes the fair market value of the REMIC
Regular Certificates and REMIC Residual Certificates.
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4. Excess Inclusions
Any "excess inclusions" with respect to a REMIC Residual Certificate are
subject to certain special tax rules. With respect to a Residual Owner, the
excess inclusion for any calendar quarter is defined as the excess (if any) of
the daily portions of taxable income over the sum of the "daily accruals" for
each day during such quarter that such REMIC Residual Certificate was held by
such Residual Owner. The daily accruals are 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 percent of the long-term "applicable federal rate" (generally,
an average of current yields on Treasury securities of comparable maturity, and
hereafter the "AFR") in effect at the time of issuance of the REMIC Residual
Certificate. For this purpose, the adjusted issue price of a REMIC Residual
Certificate as of the beginning of any calendar quarter is the issue price of
the REMIC Residual Certificate, increased by the amount of daily accruals for
all prior quarters and decreased by any distributions made with respect to such
REMIC Residual Certificate before the beginning of such quarter. The issue price
of a REMIC Residual Certificate is the initial offering price to the public
(excluding bond houses and brokers) at which a substantial amount of the REMIC
Residual Certificates were sold.
For Residual Owners, an excess inclusion cannot be offset by deductions,
losses or loss carryovers from other activities. However, net operating loss
carryovers are determined without regard to excess inclusion income. For
Residual Owners that are subject to tax on unrelated business taxable income (as
defined in Code Section 511), an excess inclusion is treated as unrelated
business taxable income. For Residual Owners that are nonresident alien
individuals or foreign corporations generally subject to United States 30%
withholding tax, even if interest paid to such Residual Owners is generally
eligible for exemptions from such tax, an excess inclusion will be subject to
such tax and no tax treaty rate reduction or exemption may be claimed with
respect thereto. See "Foreign Investors in REMIC Certificates."
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Owner. First, alternative minimum taxable income for a Residual Owner
is determined without regard to the special rule, discussed above, that taxable
income cannot be less than excess inclusions. Second, a Residual Owner's
alternative minimum taxable income for a taxable year cannot be less than the
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deduction must be computed without regard to any excess
inclusions.
5. Noneconomic REMIC Residual Certificates
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax." If such transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due with respect to the
income on such "noneconomic" REMIC Residual Certificate. It is expected that the
REMIC Residual Certificates will be noneconomic.
6. Tax-Exempt Investors
Tax-exempt organizations (including employee benefit plans) that are subject
to tax on unrelated business taxable income (as defined in Code Section 511)
will be subject to tax on any excess inclusions attributed to them as owners of
Residual Certificates. Excess inclusion income associated with a Residual
Certificate may significantly exceed cash distributions with respect thereto.
See "Excess Inclusions."
Generally, tax-exempt organizations that are not subject to federal income
taxation on "unrelated business taxable income" pursuant to Code Section 511 are
treated as "disqualified organizations" under provisions of the "Technical and
Miscellaneous Revenue Act of 1988" (the "1988 Act"). Under provisions of the
Pooling and Servicing Agreement, such organizations generally are prohibited
from owning Residual Certificates. See "Sales of REMIC Certificates."
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D. Sales of REMIC Certificates
If a REMIC Certificate is sold, the seller will recognize gain or loss equal
to the difference between the amount realized on the sale and its adjusted basis
in the REMIC Certificate. The adjusted basis of a REMIC Regular Certificate
generally will equal the cost of such REMIC Regular Certificate to the seller,
increased by any original issue discount or market discount included in the
seller's gross income with respect to such REMIC Regular Certificate and reduced
by premium amortization deductions and distributions previously received by the
seller of amounts included in the stated redemption price at maturity of such
REMIC Regular Certificate. The adjusted basis of a REMIC Residual Certificate
will be determined as described under "Taxation of Owners of REMIC Residual
Certificates--Basis Rules and Distributions." Gain from the disposition of a
REMIC Regular Certificate that might otherwise be treated as a capital gain will
be treated as ordinary income to the extent that such gain does not exceed the
excess, if any, of (i) the amount that would have been includible in such
holder's income had income accrued at a rate equal to 110% of the AFR as of the
date of purchase over (ii) the amount actually includible in such holder's
income. Except as otherwise provided under "Taxation of Owners of REMIC Regular
Certificates--Market Discount and Premium" and under Code Section 582(c), any
additional gain or any loss on the sale or exchange of a REMIC Certificate will
be capital gain or loss, provided such REMIC Certificate is held as a capital
asset (generally, property held for investment) within the meaning of Code
Section 1221. Capital Losses may not, in general, be offset against ordinary
income.
If a Residual Owner sells a REMIC Residual Certificate at a loss, the loss
will not be recognized if, within six months before or after the sale of the
REMIC Residual Certificate, such Residual Owner purchases another residual in
any REMIC or any interest in a taxable mortgage pool (as defined in Code Section
7701(i)) comparable to a residual interest in a REMIC. Such disallowed loss will
be allowed upon the sale of the other residual interest (or comparable interest)
if the rule referred to in the preceding sentence does not apply to that sale.
While the Committee Report states that this rule may be modified by Treasury
regulations, the REMIC Regulations do not address this issue and it is not clear
whether any such modification will in fact be implemented or, if implemented,
what its precise nature or effective date would be.
The 1988 Act makes transfers of a REMIC Residual Certificate to certain
"disqualified organizations" subject to an additional tax on the transferor in
an amount equal to the maximum corporate tax rate applied to the present value
(using a discount rate equal to the AFR) of the total anticipated excess
inclusions with respect to such residual interest for the periods after the
transfer. For this purpose, "disqualified organizations" includes the United
States, any state or political subdivision of a state, any foreign government or
international organization or any agency or instrumentality of any of the
foregoing; any tax-exempt entity (other than a Code Section 521 cooperative)
which is not subject to the tax on unrelated business income; and any rural
electrical or telephone cooperative. The anticipated excess inclusions must be
determined as of the date that the REMIC Residual Certificate is transferred and
must be based on events that have occurred up to the time of such transfer, the
Prepayment Assumption, and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents. The tax
generally is imposed on the transferor of the REMIC Residual Certificate, except
that it is imposed on an agent for a disqualified organization if the transfer
occurs through such agent. The Pooling and Servicing Agreement requires, as a
prerequisite to any transfer of a Residual Certificate, the delivery to the
Trustee of an affidavit of the transferee to the effect that it is not a
disqualified organization and contains other provisions designed to render any
attempted transfer of a Residual Certificate to a disqualified organization
void.
In addition, if a "pass-through entity" includes in income excess inclusions
with respect to a REMIC Residual Certificate, and a disqualified organization is
the record holder of an interest in such entity at any time during any taxable
year of such entity, then a tax will be imposed on such entity equal to the
product of (i) the amount of excess inclusions on the REMIC Residual Certificate
for such taxable year that are allocable to the interest in the pass-through
entity held by such disqualified organization and (ii) the highest marginal
federal income tax rate imposed on corporations. A pass-through entity will not
be subject to this tax for any period, however, if the record holder of an
interest in such entity furnishes to such entity (i) such holder's social
security number and a statement under penalties of perjury that such social
security number is that of the record holder or (ii) a statement under penalties
of perjury that such record holder is not a disqualified
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organization. For these purposes, a "pass-through entity" means any regulated
investment company, real estate investment trust, trust, partnership or certain
other entities described in Code Section 860E(e)(6). In addition, a person
holding an interest in a pass-through entity as a nominee for another person
shall, with respect to such interest, be treated as a pass-through entity.
E. Pass-Through of Servicing Fees
The general rule is that Residual Owners take into account taxable income or
net loss of the related REMIC Mortgage Pool. Under that rule, servicing
compensation of the Servicer and the subservicers (if any) will be allocated to
the holders of the REMIC Residual Certificates, and therefore will not affect
the income or deductions of holders of REMIC Regular Certificates. However, in
the case of a "single-class REMIC", such expenses and an equivalent amount of
additional gross income will be allocated among all holders of REMIC Regular
Certificates and REMIC Residual Certificates for purposes of the limitations on
the deductibility of certain miscellaneous itemized deductions by individuals
contained in Code Sections 56(b)(1) and 67. Generally, any holder of a REMIC
Residual Certificate and any holder of a REMIC Regular Certificate issued by a
"single-class REMIC" who is an individual, estate or trust (including such a
person that holds an interest in a pass-through entity holding such a REMIC
Certificate) will be able to deduct such expenses in determining regular taxable
income only to the extent that such expenses together with certain other
miscellaneous itemized deductions of such individual, estate or trust exceed 2%
of adjusted gross income; such a holder may not deduct such expenses to any
extent in determining liability for alternative minimum tax. Accordingly, REMIC
Residual Certificates, and REMIC Regular Certificates receiving an allocation of
servicing compensation, may not be appropriate investments for individuals,
estates or trusts, and such persons should carefully consult with their own tax
advisers regarding the advisability of an investment in such Certificates.
A "single-class REMIC" is a REMIC that either (i) would be treated as an
investment trust under the provisions of Treasury Regulation Section 301.7701-
4(c) in the absence of a REMIC election, or (ii) is substantially similar to
such an investment trust and is structured with the principal purpose of
avoiding the allocation of investment expenses to holders of REMIC Regular
Certificates. The Seller intends (subject to certain exceptions which, if
applicable, will be stated in the applicable Prospectus Supplement) to treat
each REMIC Mortgage Pool as other than a "single-class REMIC," consequently
allocating servicing compensation expenses and related income amounts entirely
to REMIC Residual Certificates and in no part to REMIC Regular Certificates.
F. Prohibited Transactions and Other Possible REMIC Taxes
The Code imposes a tax on REMIC Mortgage Pools equal to 100 percent of the
net income derived from "prohibited transactions." In general, a prohibited
transaction means the disposition of a Mortgage Loan other than pursuant to
certain specified exceptions, the receipt of income from a source other than a
Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the REMIC Certificates. The Code also imposes a 100 percent tax
on the value of any contribution of assets to the REMIC after the "startup day"
(the day on which the regular and residual interests are issued), other than
pursuant to specified exceptions, and subjects "net income from foreclosure
property" to tax at the highest corporate rate. It is not anticipated that a
REMIC Mortgage Pool will engage in any such transactions or receive any such
income.
G. Termination of a REMIC Trust Fund
In general, no special tax consequences will apply to a holder of a REMIC
Regular Certificate upon the termination of the REMIC Mortgage Pool by virtue of
the final payment or liquidation of the last Mortgage Loan remaining in the
REMIC Mortgage Pool. If a Residual Owner's adjusted basis in its REMIC Residual
Certificate at the time such termination occurs exceeds the amount of cash
distributed to such Residual Owner in liquidation of its interest, then,
although the matter is not entirely free from doubt, it appears that the
Residual Owner would be entitled to a loss (which could be a capital loss) equal
to the amount of such excess.
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H. Reporting and Other Administrative Matters of REMICs
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. Certain holders of REMIC Regular
Certificates who are generally exempt from information reporting on debt
instruments, such as corporations, banks, registered securities or commodities
brokers, real estate investment trusts, registered investment companies, common
trust funds, charitable remainder annuity trusts and unitrusts, will be provided
interest and original issue discount income information and the information set
forth in the following paragraph upon request in accordance with the
requirements of the Treasury 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 Mortgage
Pool must also comply with rules requiring the face of a REMIC Certificate
issued at more than a de minimis discount to disclose the amount of original
issue discount and the issue date and requiring such information to be reported
to the Treasury Department.
The REMIC Regular Certificate information reports must include a statement of
the "adjusted issue price" of the REMIC Regular Certificate at the beginning of
each accrual period. In addition, the reports must include information necessary
to compute the accrual of any market discount that may arise upon secondary
trading of REMIC Regular Certificates. Because exact computation of the accrual
of market discount on a constant yield method would require information relating
to the holder's purchase price which the REMIC Mortgage Pool may not have, it
appears that this provision will only require information pertaining to the
appropriate proportionate method of accruing market discount.
The responsibility for complying with the foregoing reporting rules will be
borne by the Servicer.
For purposes of the administrative provisions of the Code, REMIC Pools will
be treated as partnerships and the holders of Residual Certificates will be
treated as partners. The Servicer will file federal income tax information
returns on behalf of the related REMIC Pool, and will be designated as agent for
and will act on behalf of the "tax matters person" with respect to the REMIC
Pool in all respects.
As agent for the tax matters person, the Servicer will, subject to certain
notice requirements and various restrictions and limitations, generally have the
authority to act on behalf of the REMIC and the Residual Owners in connection
with the administrative and judicial review of items of income, deduction, gain
or loss of the REMIC Mortgage Pool, as well as the REMIC Mortgage Pool's
classification. Residual Owners will generally be required to report such REMIC
Mortgage Pool items consistently with their treatment on the REMIC Mortgage
Pool's federal income tax information return and may in some circumstances be
bound by a settlement agreement between the Servicer, as agent for the tax
matters person, and the IRS concerning any such REMIC Mortgage Pool item.
Adjustments made to the REMIC Mortgage Pool tax return may require a Residual
Owner to make corresponding adjustments on its return, and an audit of the REMIC
Mortgage Pool's tax return, or the adjustments resulting from such an audit,
could result in an audit of a Residual Owner's return.
I. Backup Withholding with Respect to REMIC Certificates
Payments of interest and principal on REMIC Regular Certificates, as well as
payment of proceeds from the sale of REMIC Certificates, may be subject to the
"backup withholding tax" under Code Section 3406 at a rate of 31 percent if
recipients of such payments fail to furnish to the payor certain information,
including their taxpayer identification numbers, or otherwise fail to establish
an exemption from such tax. Any amounts deducted and withheld from a
distribution to a recipient would be allowed as a credit against such
recipient's federal income tax. Furthermore, certain penalties may be imposed by
the IRS on a recipient of payments that is required to supply information but
that does not do so in the manner required.
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J. Foreign Investors in REMIC Certificates
1. REMIC Regular Certificates
Except as qualified below, payments made on a REMIC Regular Certificate to a
REMIC Regular Certificateholder that is not a U.S. Person, as hereinafter
defined (a "non-U.S. Person"), or to a person acting on behalf of such a
Certificateholder, generally will be exempt from U.S. federal income and
withholding taxes, provided that (a) the holder of the Certificate is not
subject to U.S. tax as a result of a connection to the United States other than
ownership of such Certificate, (b) the holder of such Certificate signs a
statement under penalties of perjury that certifies that such holder is a Non-
U.S. Person, and provides the name and address of such holder, and (c) the last
U.S. Person in the chain of payment to the holder receives such statement from
such holder or a financial institution holding on its behalf and does not have
actual knowledge that such statement is false. If the holder does not qualify
for exemption, distributions of interest, including distributions in respect of
accrued original issue discount, to such holder may be subject to a withholding
tax rate of 30 percent, subject to reduction under an applicable tax treaty.
"U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity treated as a corporation or partnership
for United States federal income tax purposes, created or organized in or under
the laws of the United States or any political subdivision thereof (unless, in
the case of a partnership, regulations provide otherwise), or an estate or trust
defined in Section 7701(a)(30)(D) and (E), respectively.
Holders of REMIC Regular Certificates should be aware that the IRS may take
the position that exemption from U.S. withholding taxes does not apply to such a
holder that also directly or indirectly owns 10 percent or more of the REMIC
Residual Certificates. Further, the foregoing rules will not apply to exempt a
"United States shareholder" (as such term is defined in Code Section 951) of a
controlled foreign corporation from taxation on such United States shareholder's
allocable portion of the interest or original issue discount income earned by
such controlled foreign corporation.
2. REMIC Residual Certificates
Amounts paid to a Residual Owner that is not a "U.S. Person" (as defined
above) (a "non-U.S. Person") generally will be treated as interest for purposes
of applying the withholding tax on non-U.S. Persons with respect to income on
its REMIC Residual Certificate. However, it is unclear whether distributions on
REMIC Residual Certificates will be eligible for the general exemption from
withholding tax that applies to REMIC Regular Certificates as described above.
Treasury Regulations provide that, for purposes of the portfolio interest
exception, payments to the foreign owner of a REMIC Residual Certificate are to
be considered paid on the obligations held by the REMIC, rather than on the
Certificate itself. Such payments will thus only qualify for the portfolio
interest exception if the underlying obligations held by the REMIC would so
qualify. Such withholding tax generally is imposed at a rate of 30 percent but
is subject to reduction under any tax treaty applicable to the Residual Owner.
However, there is no exemption from withholding tax nor may the rate of such tax
be reduced, under a tax treaty or otherwise, with respect to any distribution of
income that is an excess inclusion. Although no regulations have been proposed
or adopted addressing withholding on residual interests held by non-U.S.
Persons, the provisions of the REMIC Regulations, described below, relating to
the transfer of residual interests to non-U.S. Persons can be read as implying
that withholding with respect to excess inclusion income is to be determined by
reference to the amount of the accrued excess inclusion income rather than to
the amount of cash distributions. If the IRS were successfully to assert such a
position, cash distributions on Residual Certificates held by non-U.S. Persons
could be subject to withholding at rates as high as 100 percent, depending on
the relationship of accrued excess inclusion income to cash distributions with
respect to such Residual Certificates. See "Taxation of Owners of REMIC Residual
Certificates--Excess Inclusions."
Certain restrictions relating to transfers of REMIC Residual Certificates to
and by investors who are non-U.S. Persons are also imposed by the REMIC
Regulations. First, transfers of REMIC Residual Certificates to a non-U.S.
Person that have "tax avoidance potential" are disregarded for all federal
income tax purposes.
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If such transfer is disregarded, the purported transferor of such a REMIC
Residual Certificate to a non-U.S. Person continues to remain liable for any
taxes due with respect to the income on such REMIC Residual Certificate. A
transfer of a REMIC Residual Certificate has tax avoidance potential unless, at
the time of the transfer, the transferor reasonably expects (1) that the REMIC
will distribute to the transferee Residual Certificateholder amounts that will
equal at least 30 percent of each excess inclusion, and (2) that such amounts
will be distributed at or after the time at which the excess inclusion accrues
and not later than the close of the calendar year following the calendar year of
accrual. This rule does not apply to transfers if the income from the REMIC
Residual Certificate is taxed in the hands of the transferee as income
effectively connected with the conduct of a U.S. trade or business. Second, if a
non-U.S. Person transfers a REMIC Residual Certificate to a U.S. Person (or to a
non-U.S. Person in whose hands income from the REMIC Residual Certificate would
be effectively connected), and the transfer has the effect of allowing the
transferor to avoid tax on accrued excess inclusions, that transfer is
disregarded for all federal income tax purposes and the purported non-U.S.
Person transferor continues to be treated as the owner of the REMIC Residual
Certificate. Thus, the REMIC's liability to withhold 30 percent of the accrued
excess inclusions is not terminated even though the REMIC Residual Certificate
is no longer held by a non-U.S. Person.
Holders of REMIC Regular Certificates and REMIC Residual Certificates should
be aware that proposed Treasury Regulations (the "1996 Proposed Regulations")
were issued on April 15, 1996 which, if adopted in final form, could affect the
United States taxation of foreign investors in REMIC Certificates. The 1996
Proposed Regulations are generally proposed to be effective for payments after
December 31, 1997, regardless of the issue date of the REMIC Certificate with
respect to which such payments are made, subject to certain transition rules.
One of the effects of the 1996 Proposed Regulations would be to provide certain
presumptions with respect to withholding for holders not providing the required
certifications to qualify for the withholding exemption described above. In
addition, the 1996 Proposed Regulations would replace a number of current tax
certification forms with a single, restated form and standardize the period of
time for which withholding agents could rely on such certifications. The 1996
Proposed Regulations would also provide rules to determine whether, for purposes
of United States federal withholding tax, interest paid to a non-U.S. Person
that is an entity should be treated as paid to the entity or those holding an
interest in that entity.
The discussion under this heading is not intended to be a complete discussion
of the provisions of the 1996 Proposed Regulations, and prospective investors
are urged to consult their tax advisers with respect to the effect the 1996
Proposed Regulations may have.
K. State and Local Taxation
Many states do not automatically conform to changes in the federal income tax
laws. Consequently, a REMIC Mortgage Pool that would not qualify as a fixed
investment trust for federal income tax purposes may be characterized as a
corporation, a partnership, or some other entity for purposes of state income
tax law. Such characterization could result in entity level income or franchise
taxation of the REMIC Mortgage Pool formed in, owning mortgages or property in,
or having servicing activity performed in a state without conforming REMIC
provisions in its income or franchise tax law. Further, REMIC Regular
Certificateholders resident in non-conforming states may have their ownership of
REMIC Regular Certificates characterized as an interest other than debt of the
REMIC such as stock or a partnership interest. Investors are advised to consult
their tax advisers concerning the state and local income tax consequences of
their purchase and ownership of REMIC Regular Certificates.
III. Non-REMIC Trust Funds
A. Classification of Trust Funds
With respect to each series of Trust Certificates Orrick, Herrington &
Sutcliffe LLP will deliver their opinion to the effect that the arrangements
pursuant to which such Trust Fund will be administered and such Trust
Certificates will be issued will be classified as a grantor trust and not as an
association taxable as a corporation or publicly traded partnership treated as a
corporation.
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B. Taxation of Owners of Trust Fractional Certificates
Each holder of a Trust Fractional Certificate (a "Trust Fractional
Certificateholder") will be treated as the owner of an undivided percentage
interest in the principal of, and possibly a different undivided percentage
interest in the interest portion of, each of the Trust Funds included in a
Mortgage Pool. Accordingly, each Trust Fractional Certificateholder must report
on its federal income tax return its allocable share of income from its
interests, as described below, at the same time and in the same manner as if it
had held directly interests in the Mortgage Loans and received directly its
share of the payments on such Mortgage Loans. Because those interests represent
interests in "stripped bonds" or "stripped coupons" within the meaning of Code
Section 1286, such interests would be considered to be newly issued debt
instruments, and thus to have no market discount or premium, and the amount of
original issue discount may differ from the amount of original issue discount on
the Mortgage Loans and the amount includible in income on account of a Trust
Fractional Certificate may differ significantly from the amount payable thereon
from payments of interest on the Mortgage Loans. Each Trust Fractional
Certificateholder may report and deduct its allocable share of the servicing and
related fees and expenses paid to or retained by the Company at the same time,
to the same extent, and in the same manner as such items would have been
reported and deducted had it held directly interests in the Mortgage Loans and
paid directly its share of the servicing and related fees and expenses. A holder
of a Trust Fractional Certificate who is an individual, estate or trust will be
allowed a deduction for servicing fees in determining its regular tax liability
only to the extent that the aggregate of such holder's miscellaneous itemized
deductions exceeds two percent of such holder's adjusted gross income, and will
be allowed no deduction for such fees in determining its liability for
alternative minimum tax. Amounts received by Trust Fractional Certificateholders
in lieu of amounts due with respect to any Mortgage Loan but not received by the
Seller from the borrower will be treated for federal income tax purposes as
having the same character as the payments which they replace.
Purchasers of Trust Fractional Certificates identified in the applicable
Prospectus Supplement as representing interests in Stripped Mortgage Loans
should read the material under the headings "Application of Stripped Bond
Rules," "Market Discount and Premium" and "Allocation of Purchase Price" for a
discussion of particular rules applicable to their Certificates. A "Stripped
Mortgage Loan" means a Mortgage Loan having a Retained Yield (as that term is
defined below) or a Mortgage Loan included in a Trust Fund having either Trust
Interest Certificates or more than one class of Trust Fractional Certificates or
identified in the Prospectus Supplement as related to a Class of Trust
Certificates identified as representing interests in Stripped Mortgage Loans.
Purchasers of Trust Fractional Certificates identified in the applicable
Prospectus Supplement as representing interests in Unstripped Mortgage Loans
should read the material under the headings "Treatment of Unstripped
Certificates", "Market Discount and Premium", and "Allocation of Purchase Price"
for a discussion of particular rules applicable to their Certificates. However,
the IRS has indicated that under some circumstances it will view a portion of
servicing and related fees and expenses paid to or retained by the Servicer or
sub-servicers as an interest in the Mortgage Loans, essentially equivalent to
that portion of interest payable with respect to each Mortgage Loan that is
retained by the Seller ("Retained Yield"). If such a view were sustained with
respect to a particular Trust Fund, such purchasers would be subject to the
rules set forth under "Application of Stripped Bond Rules" rather than those
under "Treatment of Unstripped Certificates." The Seller does not expect any
Servicing Fee or Master Servicing Fee to constitute a retained interest in the
Mortgage Loans; nevertheless, any such expectation generally will be a matter of
uncertainty, and prospective purchasers are advised to consult their own tax
advisers with respect to the existence of a retained interest and any effects on
investment in Trust Fractional Certificates.
1. Application of Stripped Bond Rules
Each Trust Fund will consist of an interest in each of the Mortgage Loans
relating thereto, exclusive of the Seller's Retained Yield, if any. With respect
to each Series of Certificates Orrick, Herrington & Sutcliffe LLP will advise
the Seller that, in their opinion, any Retained Yield will be treated for
federal income tax purposes as an ownership interest retained by the Seller in a
portion of each interest payment on the underlying Mortgage Loans. The sale of
the Trust Certificates associated with any Trust Fund for which there
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is a class of Trust Interest Certificates or two or more Classes of Trust
Fractional Certificates bearing different interest rates or of Trust
Certificates identified in the Prospectus Supplement as representing interests
in Stripped Mortgage Loans (subject to certain exceptions which, if applicable,
will be stated in the applicable Prospectus Supplement) will be treated for
federal income tax purposes as having effected a separation in ownership between
the principal of each Mortgage Loan and some or all of the interest payable
thereon. As a consequence, each Stripped Mortgage Loan will become subject to
the "stripped bond" rules of the Code (the "Stripped Bond Rules"). The effect of
applying those rules will generally be to require each Trust Fractional
Certificateholder to accrue and report income attributable to its share of the
principal and interest on each of the Stripped Mortgage Loans as original issue
discount on the basis of the yield to maturity of such Stripped Mortgage Loans,
as determined in accordance with the provisions of the Code dealing with
original issue discount. For a description of the general method of calculating
original issue discount, see "REMIC Trust Funds--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount." See also "Non-Remic Trust Funds-
- -Prepayments" hereof. The yield to maturity of a Trust Fractional
Certificateholder's interest in the Stripped Mortgage Loans will be calculated
taking account of the price at which the holder purchased the Certificate and
the holder's share of the payments of principal and interest to be made thereon.
Although the provisions of the Code and the OID Regulations do not directly
address the treatment of instruments similar to Trust Fractional Certificates,
in reporting to Trust Fractional Certificateholders the Trustee intends to treat
such Certificates as a single obligation with payments corresponding to the
aggregate of the payments allocable thereto from each of the Mortgage Loans, and
to determine the amount of original issue discount on such certificates
accordingly. See "Aggregate Reporting."
Under Treasury regulations, original issue discount so determined with
respect to a particular Stripped Mortgage Loan may be considered to be zero
under the de minimis rule described above, in which case it is treated as market
discount. See "REMIC Trust Funds--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount." Those regulations also provide that
original issue discount so determined with respect to a particular Stripped
Mortgage Loan will be treated as market discount if the rate of interest on the
Stripped Mortgage Loan, including a reasonable Servicing Fee, is no more than
one percentage point less than the unstripped rate of interest. See "--Market
Discount and Premium." The Trustee intends to apply the foregoing de minimis and
market discount rules on an aggregate poolwide basis, although it is possible
that investors may be required to apply them on a loan by loan basis. The loan
by loan information required for such application of those rules may not be
available. See "Aggregate Reporting."
Subsequent purchasers of the Certificates may be required to include
"original issue discount" in an amount computed using the price at which such
subsequent purchaser purchased the Certificates. Further, such purchasers may be
required to determine if the above described de minimis and market discount
rules apply at the time a Trust Fractional Certificate is acquired, based on the
characteristics of the Mortgage Loans at that time.
Variable Rate Certificates. Purchasers of Trust Fractional Certificates
bearing a variable rate of interest should be aware that there is considerable
uncertainty concerning the application of the OID Regulations to Mortgage Loans
bearing a variable rate of interest. Although such regulations are subject to a
different interpretation, as discussed below, in the absence of other contrary
authority in preparing reports furnished to Certificateholders the Trustee
intends to treat Stripped Mortgage Loans bearing a variable rate of interest
(other than those treated as having market discount pursuant to the regulations
described above) as subject to the provisions therein governing variable rate
debt instruments. The effect of the application of such provisions generally
will be to cause Certificateholders holding Trust Fractional Certificates
bearing interest at a Single Variable Rate or at a Multiple Variable Rate (as
defined above under "REMIC Trust Funds--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount") to accrue original issue discount and
interest as though the value of each variable rate were a fixed rate, which is
(a) for each qualified floating rate, the value of each such rate as of the
Closing Date (with appropriate adjustment for any differences in intervals
between interest adjustment dates), (b) for a qualified inverse floating rate,
the value of the rate as of Closing Date, and (c) for any other objective rate,
the fixed rate that reflects the yield that is reasonably expected for the Trust
Fractional Certificate. If the interest paid or accrued with respect to such
Variable Rate Trust Fractional Certificate during an accrual period differs from
the assumed fixed interest rate, such
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difference will be an adjustment (to interest or original issue discount, as
applicable) to the Certificateholder's taxable income for the taxable period or
periods to which such difference relates.
Prospective purchasers of Trust Fractional Certificates bearing a variable
rate of interest should be aware that the provisions in the OID Regulations
applicable to variable rate debt instruments may not apply to certain adjustable
and variable rate mortgage loans, possibly including the Mortgage Loans, or to
Stripped Certificates representing interests in such Mortgage Loans. If variable
rate Trust Fractional Certificates are not governed by the provisions of the OID
Regulations applicable to variable rate debt instruments, such Certificates may
be subject to the provisions of the 1996 Contingent Debt Regulations. The
application of those provisions to instruments such as the Trust Fractional
Certificates is subject to differing interpretations. Prospective purchasers of
variable rate Trust Fractional Certificates are advised to consult their tax
advisers concerning the tax treatment of such Certificates.
Aggregate Reporting. The Trustee intends in reporting information relating to
original issue discount to Certificateholders to provide such information on an
aggregate poolwide basis. Applicable law is unclear, however, and it is possible
that investors may be required to compute original issue discount on a mortgage
loan by mortgage loan basis (or on the basis of the rights to individual
payments) taking account of an allocation of their basis in the Certificates
among the interests in the various mortgage loans represented by such
Certificates according to their respective fair market values. Investors should
be aware that it may not be possible to reconstruct after the fact sufficient
mortgage by mortgage information should a computation on that basis be required
by the IRS.
Because the treatment of the Certificates under the OID Regulations is both
complicated and uncertain, Certificateholders should consult their tax advisers
to determine the proper method of reporting amounts received or accrued on
Certificates.
2. Treatment of Unstripped Certificates
Mortgage Loans in a Trust Fund for which there is neither any Class of Trust
Interest Certificates, nor more than one Class of Trust Fractional Certificates,
nor any Retained Yield otherwise identified in the Prospectus Supplement as
being unstripped mortgage loans ("Unstripped Mortgage Loans") will be treated as
wholly owned by the Trust Fractional Certificateholders of a Trust Fund. Trust
Fractional Certificateholders using the cash method of accounting must take into
account their pro rata shares of original issue discount as it accrues and
qualified stated interest (as described in "REMIC Trust funds--Taxation of
Owners of REMIC Regular Certificates--Original Issue Discount") from Unstripped
Mortgage Loans as and when collected by the Trustee. Trust Fractional
Certificateholders using an accrual method of accounting must take into account
their pro rata shares of qualified stated interest from Unstripped Mortgage
Loans as it accrues or is received by the Trustee, whichever is earlier.
Code Sections 1272 through 1275 provide rules for the current inclusion in
income of original issue discount on obligations issued by natural persons on or
after March 2, 1984. Generally those sections provide that original issue
discount should be included in income on the basis of a constant yield to
maturity. However, the application of the original issue discount rules to
mortgages is unclear in certain respects. The Treasury Department has issued the
OID Regulations relating to original issue discount, which generally address the
treatment of mortgages issued on or after April 4, 1994. The OID Regulations
would provide a new de minimis rule for determining whether certain self-
amortizing installment obligations, such as the Mortgage Loans, are to be
treated as having original issue discount. Such obligations would have original
issue discount if the points charged at origination (or other loan discount)
exceeded the greater of one-sixth of one percent times the number of full years
to final maturity or one-fourth of one percent times weighted average maturity.
The OID Regulations treat certain variable rate mortgage loans as having
original issue discount because of an initial rate of interest that differs from
that determined by the mechanism for setting the interest rate during the
remainder of the loan, or because of the use of an index that does not vary in a
manner approved the OID Regulations. For a description of the general method of
calculating the amount of original issue discount see "REMIC Trust Funds--
Taxation of Owners of REMIC Regular Certificates--Original Issue Discount" and
"Application of Stripped Bond Rules--Variable Rate Certificates."
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A subsequent purchaser of a Trust Fractional Certificate that purchases such
Certificate at a cost (not including payment for accrued qualified stated
interest) less than its allocable portion of the aggregate of the remaining
stated redemption prices at maturity of the Unstripped Mortgage Loans will also
be required to include in gross income, for each day on which it holds such
Trust Fractional Certificate, its allocable share of the daily portion of
original issue discount with respect to each Unstripped Mortgage Loan, but
reduced, if the cost of such subsequent purchaser's interest in such Unstripped
Mortgage Loan exceeds its "adjusted issue price," by an amount equal to the
product of (i) such daily portion and (ii) a constant fraction, whose numerator
is such excess and whose denominator is the sum of the daily portions of
original issue discount allocable to such subsequent purchaser's interest for
all days on or after the day of purchase. The adjusted issue price of an
Unstripped Mortgage Loan on any given day is equal to the sum of the adjusted
issue price (or, in the case of the first accrual period, the issue price) of
such Unstripped Mortgage Loan at the beginning of the accrual period during
which such day occurs and the daily portions of original issue discount for all
days during such accrual period prior to such day, reduced by the aggregate
amount of payments made during such accrual period prior to such day other than
payments of qualified stated interest.
3. Market Discount and Premium
In general, if the Stripped Bond Rules do not apply to a Trust Fractional
Certificate, a purchaser of a Trust Fractional Certificate will be treated as
acquiring market discount bonds to the extent that the share of such purchaser's
purchase price allocable to any Unstripped Mortgage Loan is less than its
allocable share of the "adjusted issue price" of such Mortgage Loan. See
"Treatment of Unstripped Certificates" and "Application of Stripped Bond Rules."
Thus, with respect to such Mortgage Loans, a holder will be required, under Code
Section 1276, to include as ordinary income the previously unrecognized accrued
market discount in an amount not exceeding each principal payment on any such
Mortgage Loans at the time each principal payment is received or due, in
accordance with the purchaser's method of accounting, or upon a sale or other
disposition of the Certificate. In general, the amount of market discount that
has accrued is determined on a ratable basis. A Trust Fractional
Certificateholder may, however, elect to determine the amount of accrued market
discount on a constant yield to maturity basis. This election is made on a bond-
by-bond basis and is irrevocable. In addition, the description of the market
discount rules in "Taxation of Owners of REMIC Regular Certificates--Market
Discount and Premium" with respect to (i) conversion to ordinary income of a
portion of any gain recognized on sale or exchange of a market discount bond,
(ii) deferral of interest expense deductions, (iii) the de minimis exception
from the market discount rules and (iv) the elections to include in income
either market discount or all interest, discount and premium as they accrue, is
also generally applicable to Trust Fractional Certificates. Treasury regulations
implementing the market discount rules, including the 1986 Act amendments
thereto, have not yet been issued and investors therefore should consult their
own tax advisers regarding the application of these rules.
If a Trust Fractional Certificate is purchased at a premium, under existing
law such premium must be allocated to each of the Mortgage Loans (on the basis
of its relative fair market value). The portion of any premium allocated to
Unstripped Mortgage Loans originated after September 27, 1985 can be amortized
and deducted under the provisions of the Code relating to amortizable bond
premium. The portion of such premium allocated to Unstripped Mortgage Loans
originated on or before September 27, 1985 may only be deducted upon the sale or
final distribution in respect of any such Mortgage Loan, as the special rules of
the Code that permit the amortization of such premium apply in the case of debt
instruments other than corporate and governmental obligations, only to
obligations issued after that date. Upon such a sale or final distribution in
respect of such a Mortgage Loan, the premium, if any, allocable thereto would be
recognized as a short-term or long-term capital loss by a Certificateholder
holding the interests in Mortgage Loans represented by such Certificate as
capital assets, depending on how long the Certificate had been held.
The application of the Stripped Bond Rules to Stripped Mortgage Loans will
generally cause any premium allocable to Stripped Mortgage Loans to be amortized
automatically by adjusting the rate of accrual of interest and discount to take
account of the allocable portion of the actual purchase price of the
Certificate. In that event, no additional deduction for the amortization of
premium would be allowed. It is possible that the IRS may take the position that
the application of the Stripped Bond Rules to the Stripped Mortgage Loans should
be adjusted so as not to take account of any premium allocable to a Stripped
Mortgage Loan originated
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on or before September 27, 1985. Any such premium would then be subject to the
provisions of the Code relating to the amortization of bond premium, including
the limitations described in the preceding paragraph on the amortization of
premium allocable to Mortgage Loans originated on or before September 27, 1985.
The IRS recently published regulations (the "Premium Regulations") on the
amortization of bond premium. The Proposed Premium Regulations describe the
constant yield method under which such premium is amortized and provide that the
resulting offset to interest income can be taken into account only as a
Certificateholder takes the corresponding interest income into account under
such holder's regular accounting method. In the case of instruments that may be
called or repaid prior to maturity, the regulations provide that the premium is
calculated by assuming that the issuer will exercise or not exercise its
redemption rights in the manner that maximizes the Certificateholder's yield and
the Certificateholder will exercise or not exercise its option in a manner that
maximizes the Certificateholder's Yield. The regulations do not, however, apply
to instruments that are subject to Section 1272(a)(6). It is not clear whether
Section 1272(a)(6) would apply to Unstripped Certificates.
4. Allocation of Purchase Price
As noted above, a purchaser of a Trust Fractional Certificate relating to
Unstripped Mortgage Loans may be required to allocate the purchase price thereof
to the undivided interest it acquires in each of the Mortgage Loans, in
proportion to the respective fair market values of the portions of such Mortgage
Loans included in the Trust Fund at the time the Certificate is purchased. The
Seller believes that it may be reasonable to make such allocation in proportion
to the respective principal balances of the Mortgage Loans, where the interests
in the Mortgage Loans represented by a Trust Fractional Certificate have a
common remittance rate and other common characteristics, and otherwise so as to
produce a common yield for each interest in a Mortgage Loan, provided the
Mortgage Loans are not so diverse as to evoke differing prepayment expectations.
However, if there is any significant variation in interest rates among the
Mortgage Loans, a disproportionate allocation of the purchase price taking
account of prepayment expectations may be required.
C. Taxation of Owners of Trust Interest Certificates
With respect to each Series of Certificates Orrick, Herrington & Sutcliffe
LLP will advise the Seller that, in their opinion, each holder of a Trust
Interest Certificate (a "Trust Interest Certificateholder") will be treated as
the owner of an undivided interest in the interest portion ("Interest Coupon")
of each of the Mortgage Loans. Accordingly, and subject to the discussion under
"Application of Stripped Bond Rules" below, each Trust Interest
Certificateholder is treated as owning its allocable share of the entire
Interest Coupon from the Mortgage Loans, will report income as described below,
and may deduct its allocable share of the servicing and related fees and
expenses paid to or retained by the Seller at the same time and in the same
manner as such items would have been reported under the Trust Interest
Certificateholder's tax accounting method had it held directly an interest in
the Interest Coupon from the Mortgage Loans, received directly its share of the
amounts received with respect to the Mortgage Loans and paid directly its share
of the servicing and related fees and expenses. An individual, estate or trust
holder of a Trust Interest Certificate will be allowed a deduction for servicing
fees in determining its regular tax liability only to the extent that the
aggregate of such holder's miscellaneous itemized deductions exceeds two percent
of such holder's adjusted gross income, and will be allowed no deduction for
such fees in determining its liability for alternative minimum tax. Amounts, if
any, received by Trust Interest Certificateholders in lieu of amounts due with
respect to any Mortgage Loan but not received by the Servicer from the borrower
will be treated for federal income tax purposes as having the same character as
the payment which they replace.
1. Application of Stripped Bond Rules
A Trust Interest Certificate will consist of an undivided interest in the
Interest Coupon of each of the Mortgage Loans. With respect to each Series of
Certificates Orrick, Herrington & Sutcliffe LLP will advise the Seller that, in
their opinion a Trust Interest Certificate will be treated for federal income
tax purposes as comprised of an ownership interest in a portion of the Interest
Coupon of each of the Mortgage Loans (a "Stripped Interest") separated by the
Seller from the right to receive principal payments and the remainder,
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if any, of each interest payment on the underlying Mortgage Loan. As a
consequence, the Trust Interest Certificates will become subject to the Stripped
Bond Rules. Each Trust Interest Certificateholder will be required to apply the
Stripped Bond Rules to its interest in the Interest Coupon under the method
prescribed by the Code, taking account of the price at which the holder
purchased the Trust Interest Certificate and the Trust Interest
Certificateholder's share of the scheduled payment to be made thereon. The
Stripped Bond Rules generally require a holder of Stripped Coupons to accrue and
report income from such Stripped Coupons daily on the basis of the yield to
maturity of such stripped bonds or coupons, as determined in accordance with the
provisions of the Code dealing with original issue discount. For a discussion of
the general method of calculating original issue discount, see "REMIC Trust
Funds--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount." See also "Prepayments" below. The provisions of the Code and the OID
Regulations do not directly address the treatment of instruments similar to
Trust Interest Certificates. In reporting to Trust Interest Certificateholders
such Certificates will be treated as a single obligation with payment
corresponding to the aggregate of the payment allocable thereto from each of the
Mortgage Loans. See "Aggregate Reporting."
Alternatively, Trust Interest Certificateholders may be required by the IRS
to treat each scheduled payment on each Stripped Interest (or their interests in
all scheduled payments from each of the Stripped Interests) as a separate
obligation for purposes of allocating purchase price and computing original
issue discount.
The tax treatment of the Trust Interest Certificates with respect to the
application of the original issue discount provisions of the Code is currently
unclear. However, the Trustee intends to treat each Trust Interest Certificate
as a single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect to
a Trust Interest Certificate must be included in ordinary gross income for
federal income tax purposes as it accrues in accordance with a constant yield
method that takes into account the compounding of interest and such accrual of
income may be in advance of the receipt of any cash attributable to such income.
In general, the rules for accruing original issue discount set forth above in
"REMIC Trust Funds--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount" apply. See "Prepayments" below. For purposes of applying the
original issue discount provisions of the Code, the issue price used in
reporting original issue discount with respect to a Trust Interest Certificate
will be the purchase price paid by each holder thereof and the stated redemption
price at maturity may include the aggregate amount of all payments to be made
with respect to the Trust Interest Certificate whether or not denominated as
interest. The amount of original issue discount with respect to a Trust Interest
Certificate may be treated as zero under the original issue discount de minimis
rules described above.
Aggregate Reporting. The Trustee intends in reporting information relating to
original issue discount to Certificateholders to provide such information on an
aggregate poolwide basis. Applicable law is unclear, however, and it is possible
that investors may be required to compute original issue discount either on a
mortgage loan by mortgage loan basis or on a payment by payment basis taking
account of an allocation of their basis in the Certificates among the interests
in the various mortgage loans represented by such Certificates according to
their respective fair market values. The effect of an aggregate computation for
the inclusion of original issue discount in income may be to defer the
recognition of losses due to early prepayments relative to a computation on a
mortgage by mortgage basis. Investors should be aware that it may not be
possible to reconstruct after the fact sufficient mortgage by mortgage
information should a computation on that basis be required by the IRS.
Because the treatment of the Trust Interest Certificates under current law
and the potential application of the 1996 Contingent Debt Regulations are both
complicated and uncertain, Trust Interest Certificateholders should consult
their tax advisers to determine the proper method of reporting amounts received
or accrued on Trust Interest Certificates.
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D. Prepayments
The Tax Reform Act of 1986 (the "1986 Act") contains a provision requiring
original issue discount on certain obligations issued after December 31, 1986 to
be calculated taking into account a prepayment assumption and requiring such
discount to be taken into income on the basis of a constant yield to assumed
maturity taking account of actual prepayments. Although the proper treatment of
interests, such as the Trust Fractional Certificates and the Trust Interest
Certificates, in debt instruments that are subject to prepayment is unclear.
Legislation recently enacted has extended (for taxable years beginning after
such enactment) the rules contained in the 1986 Act to any pool of debt
instruments the yield on which may be affected by reason of prepayments.
Accordingly, it appears that Section 1272(a)(6) would apply to such
Certificates. See "Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount." Trust Fractional Certificateholders and Trust Interest
Certificateholders should consult their tax advisers as to the proper reporting
of income from Trust Fractional Certificates and Trust Interest Certificates, as
the case may be, in the light of the possibility of prepayment and, with respect
to the Trust Interest Certificates, as to the possible application of the 1996
Contingent Debt Regulations.
E. Sales of Trust Certificates
If a Certificate is sold, gain or loss will be recognized by the holder
thereof in an amount equal to the difference between the amount realized on the
sale and the Certificateholder's adjusted tax basis in the Certificate. Such tax
basis will equal the Certificateholder's cost for the Certificate, increased by
any original issue or market discount with respect to the interest in the
Mortgage Loans represented by such Certificate previously included in income,
and decreased by any deduction previously allowed for premium and by the amount
of payments, other than payments of qualified stated interest, previously
received with respect to such Certificate. The portion of any such gain
attributable to accrued market discount not previously included in income will
be ordinary income, as will gain attributable to a Certificate which is part of
a "conversion transaction" or which the holder elects to treat as ordinary. See
"REMIC Trust Funds--Sales of REMIC Certificates" above. Any remaining gain or
any loss will be capital gain or loss if the Certificate was held as a capital
asset except to the extent that code Section 582(c) applies to such gain or
loss. Capital losses may not, in general, be offset against ordinary income.
F. Trust Reporting
The Servicer will furnish to each holder of a Trust Fractional Certificate
with each distribution a statement setting forth the amount of such distribution
allocable to principal on the underlying Mortgage Loans and to interest thereon
at the Pass-Through Rate. In addition, the Servicer will furnish, within a
reasonable time after the end of each calendar year, to each holder of a Trust
Certificate who was such a holder at any time during such year, information
regarding the amount of servicing compensation received by the Servicer and sub-
servicer (if any) and such other customary factual information as the Servicer
deems necessary or desirable to enable holders of Trust Certificates to prepare
their tax returns.
G. Back-up Withholding
In general, the rules described in "REMIC Trust Funds--Back-up Withholding"
will also apply to Trust Certificates.
H. Foreign Certificateholders
Payments in respect of interest or original issue discount (including amounts
attributable to servicing fees) on the Mortgage Loans to a Certificateholder who
is not a citizen or resident of the United States, a corporation or other entity
organized in or under the laws of the United States or of any State thereof, or
a United States estate or trust, will not generally be subject to 30% United
States withholding tax, provided that such Certificateholder (i) does not own,
directly or indirectly, 10% or more of, and is not a controlled foreign
corporation (within the meaning of Code Section 957) related to, each of the
issuers of the Mortgages and (ii) provides required certification as to its non-
United States status under penalty of perjury and then will be free
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of such tax only to the extent that the underlying Mortgages were issued after
July 18, 1984. This withholding tax may be reduced or eliminated by an
applicable tax treaty. Notwithstanding the foregoing, if any such payments are
effectively connected with a United States trade or business conducted by the
Certificateholder, they will be subject to regular United States income tax and,
in the case of a corporation, to a possible branch profits tax, but will
ordinarily be exempt from United States withholding tax provided that applicable
documentation requirements are met.
Holders of Trust Certificates should be aware that proposed Treasury
Regulations were issued on April 15, 1996 which, if adopted in final form, could
affect the United States taxation of foreign investors in Trust Certificates.
For further discussion of those proposed regulations, see "REMIC TRUST FUNDS--
Foreign Investors in REMIC Certificates" above.
I. State and Local Taxation
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the state
income tax consequences of the acquisition, ownership, and disposition of the
Certificates. State income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state. Therefore, potential investors
should consult their own tax advisers with respect to the various state tax
consequences of an investment in the Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain restrictions on employee pension and welfare benefit plans
subject to ERISA ("ERISA Plans") and on certain other retirement plans and
arrangements, including individual retirement accounts and annuities, Keogh
plans, bank collective investment funds and insurance company general and
separate accounts in which such ERISA Plans are invested. Section 4975 of the
Code imposes essentially the same prohibited transaction restrictions on tax-
qualified retirement plans described in Section 401(a) of the Code and on
individual retirement accounts described in Section 408 of the Code
(collectively, "Tax-Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA) and, if no election has been under Section 410(d) of the
Code, church plans (as defined in Section 3(33) of ERISA), are not subject to
ERISA or Section 4975 of the Code. Accordingly, assets of such plans may be
invested in Certificates without regard to the ERISA considerations described
below, subject to the provisions of applicable federal and state law. However,
any such plan that is a tax-qualified plan and exempt from taxation under
Sections 401(a) and 501(a) of the Code is subject to the prohibited transaction
restrictions imposed under Section 503 of the Code.
In addition to imposing general fiduciary standards, including those of
investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving "plan assets" of ERISA Plans and Tax-Favored Plans (collectively,
"Plans") and persons ("parties in interest" under ERISA or "disqualified
persons" under the Code (collectively, "Parties in Interest")) who have certain
specified relationships to the Plans, unless a statutory or administrative
exemption is available. Certain Parties in Interest that participate in a
prohibited transaction may be subject to penalties and/or excise taxes imposed
under ERISA and/or Section 4975 of the Code, unless a statutory or
administrative exemption is available with respect to any such transaction.
Plan Assets Regulation
An investment of Plan Assets in Certificates may cause the underlying
Mortgage Loans, Mortgage Certificates, Cooperative Loans, and/or other assets
held in a Trust Fund to be deemed "plan assets" of such Plan. The U.S.
Department of Labor (the "DOL") has issued a regulation (the "Plan Assets
Regulation")
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concerning whether or not the assets of a Plan would be deemed to include an
interest in the underlying assets of an entity (such as a Trust Fund), for
purposes of applying the general fiduciary standards of ERISA and the prohibited
transaction provisions of ERISA and Section 4975 of the Code, when a Plan
acquires an equity interest (such as a Certificate) in such entity. Because of
the factual nature of certain rules in the Plan Assets Regulation, the assets of
a Plan may be deemed to include either (i) an interest in the assets of a entity
in which the Plan holds an equity interest (such as a Trust Fund), or (ii)
merely the Plan's interest in the instrument evidencing such interest (such as a
Certificate). Therefore, neither Plans nor certain entities in which assets of
Plans are invested should acquire or hold Certificates in reliance upon the
availability of any exception under the Plan Assets Regulation. For purposes of
this section, the term "plan assets" or "assets of a Plan" ("Plan Assets") has
the meaning specified in the Plan Assets Regulation and includes an undivided
interest in the underlying assets of certain entities in which a Plan invests.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust Fund and cause the Seller, the Servicer,
the Trustee, the obligor under any credit enhancement mechanism and certain of
their affiliates to be considered or become Parties in Interest with respect to
a Plan investing in the Certificates, whether directly or through an entity
holding Plan Assets. In such circumstances, the acquisition or holding of
Certificates by or with Plan Assets of the investing Plan could also give rise
to a prohibited transaction under ERISA and/or Section 4975 of the Code, unless
a statutory or administrative exemption is available. Under the Plan Assets
Regulation, the assets of a Plan which holds a Certificate would include such
Certificate and may also be deemed to include the Mortgage Loans and/or other
assets held in the related Trust Fund. Special caution should be exercised
before Plan Assets are used to acquire a Certificate in such circumstances,
especially if, with respect to such Plan Assets, the Seller, the Servicer, the
Trustee, the obligor under any credit enhancement mechanism or any of their
affiliates has either (i) investment discretion with respect to such Plan
Assets, or (ii) authority or responsibility to give (or regularly gives)
investment advice with respect to such Plan Assets for a fee pursuant to an
agreement or understanding that such advice will serve as a primary basis for
investment decisions with respect to such Plan Assets.
Any person who has discretionary authority or control as to the management or
disposition of Plan Assets, or who provides investment advice with respect to
Plan Assets for a fee (in the manner described above), is a fiduciary with
respect to such Plan Assets. If the Mortgage Loans and/or other assets held in
a Trust Fund were to constitute Plan Assets, any party exercising management or
discretionary control with respect to such assets may be deemed to be a
"fiduciary" with respect to any investing Plan and subject to the fiduciary
requirements of ERISA and the prohibited transaction provisions of ERISA and
Section 4975 of the Code. In addition, if the Mortgage Loans and/or other
assets held in a Trust Fund constitute Plan Assets, the acquisition or holding
of Certificates by, on behalf of or with Plan Assets of a Plan, and the
operation of such Trust Fund, may be deemed to constitute or result in a
prohibited transaction under ERISA and Section 4975 of the Code.
Underwriter's Exemption
The DOL has issued essentially identical individual exemptions to various
underwriters (collectively, as amended by Prohibited Transaction Exemption
("PTE") 97-34, 62 Fed. Reg. 39021 (July 21, 1997), the "Underwriter's
Exemption"), which generally exempt from the application of the prohibited
transaction provisions of ERISA and Section 4975 of the Code certain
transactions, among others, relating to (i) the servicing and operations of
pools of certain secured obligations (such as Mortgage Loans) that are held in a
trust, and (ii) the purchase, sale and holding of pass-through certificates
issued by such trust as to which an underwriter (or its affiliate) which has
received an Underwriter's Exemption is the sole underwriter or manager or co-
manager of the underwriting syndicate or a placement agent, provided that
certain conditions set forth in the Underwriter's Exemption are satisfied. For
purposes of this section, the term "Underwriter" includes both such an
underwriter (or affiliate) and any member of the underwriting syndicate or
selling group with respect to the Class of Certificates as to which such
underwriter (or affiliate) is the manager or a co-manager.
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Each Underwriter's Exemption sets forth the following eight general
conditions, which must be satisfied in order for a transaction involving the
purchase, sale and holding of Certificates to be eligible for exemptive relief
under the Underwriter's Exemption:
First, the acquisition of Certificates by a Plan or with Plan Assets must
be on terms that are at least as favorable to the Plan as they would be in an
arm's-length transaction with an unrelated party.
Second, the Certificates must not evidence rights or interests that are
subordinated to the rights and interests evidenced by the other Certificates
issued by the same trust.
Third, the Certificates, at the time of acquisition by a Plan or with Plan
Assets, must be rated in one of the three highest generic rating categories
by Standard & Poor's Ratings Services, Moody's Investors Service, Inc., Duff
& Phelps Credit Rating Co. or Fitch IBCA, Inc. (collectively, the "Exemption
Rating Agencies").
Fourth, the Trustee must not be an affiliate of any other member of the
"Restricted Group," which consists of any Underwriter, the Seller, the
Servicer, the Trustee and any mortgagor with respect to assets of a Trust
Fund constituting more than 5% of the aggregate unamortized principal balance
of the assets held in the Trust Fund as of the date of initial issuance of
the Certificates.
Fifth, the sum of all payments made to and retained by the Underwriters
must represent not more than reasonable compensation for underwriting the
Certificates; the sum of all payments made to and retained by the Seller
pursuant to the assignment of the assets to the Trust Fund must represent not
more than the fair market value of such obligations; and the sum of all
payments made to and retained by the Servicer must represent not more than
reasonable compensation for the Servicer's services under the applicable
Agreement and reimbursement of the Servicer's reasonable expenses in
connection therewith.
Sixth, the Plan or other person investing Plan Assets in the Certificates
must be an accredited investor (as defined in Rule 501(a)(1) of Regulation D
under the Securities Act of 1933, as amended).
Seventh, (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) certificates evidencing
interests in such other investment pools must have been rated in one of the
three highest categories of one of the Exemption Rating Agencies for at least
one year prior to the acquisition of Certificates by or with Plan Assets of a
Plan; and (iii) certificates in such other investment pools must have been
purchased by investors (other than Plans) for at least one year prior to any
acquisition of Certificates by or with Plan Assets of a Plan.
Eighth, the Trustee must not be an affiliate of any other member of the
Restricted Group.
Any fiduciary or other person who proposes to use Plan Assets to acquire
Certificates in reliance upon the Underwriter's Exemption must make its own
determination as to whether the general conditions set forth above will be
satisfied with respect to its acquisition and holding of such Certificates.
If the general conditions of the Underwriter's Exemption are satisfied, the
Exemption may provide exemptive relief from:
(a) The restrictions imposed by Sections 406(a) and 407(a) of ERISA and
Sections 4975(c)(1) through (D) of the Code in connection with the direct or
indirect sale, exchange, transfer or holding, or the direct or indirect
acquisition or disposition in the secondary market, of Certificates by or
with Plan Assets of a Plan, provided that no exemptive relief is provided
from the restrictions of Sections 406(a)(1)(E) and 406(a)(2) of ERISA for the
acquisition or holding of a Certificate by or with Plan Assets of a Plan
sponsored by any member of the Restricted Group (an "Excluded Plan"), or by
any person who has discretionary authority or renders investment advice for a
fee (as described above) with respect to Plan Assets of such Excluded Plan;
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(b) The restrictions imposed by Sections 406(b)(1) and (b)(2) of ERISA and
Section 4975(c)(1)(E) of the Code in connection with (i) the direct or
indirect sale, exchange or transfer of Certificates in the initial issuance
of Certificates between the Seller or an Underwriter and a Plan when the
person who has discretionary authority or renders investment advice for a fee
(as described above) with respect to the investment of the relevant Plan
Assets in the Certificates is a mortgagor with respect to 5% or less of the
fair market value of the assets of a Trust Fund (or its affiliate), (ii) the
direct or indirect acquisition or disposition in the secondary market of
Certificates by or with Plan Assets of a Plan, and (iii) the holding of
Certificates by or with Plan Assets of a Plan; and
(c) The restrictions imposed by Sections 406 and 407(a) of ERISA and
Section 4975(c) of the Code for certain transactions in connection with the
servicing, management and operation of a Mortgage Pool, subject to certain
specific conditions which the Seller expects will be satisfied if the general
conditions of the Underwriter's Exemption are satisfied.
The Underwriter's Exemption also may provide exemptive relief from the
restrictions imposed by Sections 406(a) and 407(a) of ERISA and Sections
4975(c)(1)(A) through (D) of the Code if such restrictions would otherwise be
deemed to apply merely because a person is deemed to be a Party in Interest with
respect to a Plan investing in the Certificates (whether directly or through an
entity holding Plan Assets) by virtue of providing services to the Plan (or such
Plan Assets), or by virtue of having certain specified relationships to such a
person, solely as a result of the Plan's ownership of Certificates.
Before purchasing a Certificate, a fiduciary or other investor of Plan Assets
should itself confirm that (i) the Certificates constitute "certificates" for
purposes of the Underwriter's Exemption, and (ii) the specific and general
conditions and other requirements set forth in the Underwriter's Exemption would
be satisfied. In addition to making its own determination as to the
availability of the exemptive relief provided in the Underwriter's Exemption,
the fiduciary or other Plan Asset investor should consider its general fiduciary
obligations under ERISA in determining whether to purchase any Certificates with
Plan Assets.
Other Exemptions
Any fiduciary or other person who proposes to use Plan Assets to acquire
Certificates should consult with its legal counsel with respect to the potential
applicability of ERISA and the Code to such investment and the availability of
exemptive relief under the Underwriter's Exemption or any other prohibited
transaction exemption in connection therewith. In particular, in connection
with an acquisition of Certificates representing a beneficial ownership interest
in a pool of single-family residential first or second Mortgage Loans, such
fiduciary or other Plan Asset investor should also consider the availability of
exemptive relief under Prohibited Transaction Class Exemption ("PTCE") 83-1 for
certain transactions involving mortgage pool investment trusts. However, PTCE
83-1 does not provide exemptive relief with respect to Certificates evidencing
an interest in a Trust Fund which includes Mortgage Certificates, Cooperative
Loans, Mortgage Loans secured by cooperative buildings, Multifamily Property or
unimproved real property, or certain other assets. In addition, such fiduciary
or other Plan Asset investor should consider the availability of other class
exemptions granted by the DOL, which provide relief from certain of the
prohibited transaction provisions of ERISA and Section 4975 of the Code,
including Sections I and III of PTCE 95-60, regarding transactions by insurance
company general accounts. The applicable Prospectus Supplement may contain
additional information regarding the application of the Underwriter's Exemption,
PTCE 83-1, PTCE 95-60 or other DOL class exemptions with respect to the
Certificates offered thereby. There can be no assurance that any of these
exemptions will apply with respect to any particular Plan's or other Plan Asset
investor's investment in the Certificates or, even if an exemption were
applicable, that such exemption would apply to all prohibited transactions that
may occur in connection with such an investment.
Insurance Company General Accounts
In addition to any exemptive relief that may be available under PTCE 95-60
for the purchase and holding of the Certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4
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of Title I of ERISA and Section 4975 of the Code, including the prohibited
transaction restrictions imposed by ERISA and Section 4975(c) of the Code, for
transactions involving an insurance company general account. Pursuant to
Section 401(c) of ERISA, the DOL was required to issue final regulations (the
"401(c) Regulations") no later than December 31, 1997 which are to provide
guidance for the purpose of determining, in cases where insurance policies or
annuity contracts supported by an insurer's general account are issued to or for
the benefit of a Plan on or before December 31, 1998, which general account
assets constitute Plan Assets. Section 401(c) of ERISA generally provides that,
until the date which is 18 months after the 401(c) Regulations become final, no
person shall be subject to liability under Part 4 of Title I of ERISA or Section
4975 of the Code on the basis of a claim that the assets of an insurance company
general account constitute Plan Assets, (i) except as otherwise provided by the
Secretary of Labor in the 401(c) Regulations to prevent avoidance of the
regulations, or (ii) unless an action is brought by the Secretary of Labor for
certain breaches of fiduciary duty which would also constitute a violation of
federal or state criminal law. Any assets of an insurance company general
account that support insurance policies or annuity contracts issued to a Plan
(a) after December 31, 1998, or (b) issued to a Plan on or before December 31,
1998 and with respect to which the insurance company does not comply with the
401(c) Regulations, may be treated as Plan Assets. In addition, because Section
401(c) does not relate to insurance company separate accounts, assets of a
separate account are still treated as Plan Assets of any Plan invested in such
separate account. An insurance company contemplating the investment of general
account assets in Certificates should consult with its legal counsel with
respect to the applicability of Sections I and III of PTCE 95-60 and Section
401(c) of ERISA, including the general account's ability to continue to hold the
Certificates after the date which is 18 months after the date the 401(c)
Regulations become final.
Representations from Investing Plans
The exemptive relief afforded by the Underwriter's Exemption will not apply
to the purchase, sale or holding of Subordinated Certificates, Residual
Certificates or Certificates evidencing an interest in a Trust Fund which
contains a swap or other notional principal contract. Except as otherwise
specified in the applicable Prospectus Supplement, transfers of such
Certificates to a Plan, to a trustee or other person acting on behalf of any
Plan, or to any other person using Plan Assets to acquire such Certificates will
not be registered by the Trustee unless the transferee provides the Seller and
the Trustee with an opinion of counsel satisfactory to the Seller and the
Trustee, which opinion will not be at the expense of the Seller or the Trustee,
that the acquisition of such Certificates by or on behalf of such Plan or with
Plan Assets is permissible under applicable law, will not constitute or result
in any non-exempt prohibited transaction under ERISA or Section 4975 of the
Code, and will not subject the Seller or the Trustee to any obligation in
addition to those undertaken in the applicable Agreement. In lieu of such
opinion of counsel, except as otherwise specified in the applicable Prospectus
Supplement, the transferee may provide a certification of facts substantially to
the effect that the acquisition of Subordinated Certificates by or on behalf of
such Plan or with Plan Assets is permissible under applicable law, will not
constitute or result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Code, will not subject the Seller or the Trustee to any
obligation in addition to those undertaken in the applicable Agreement, and the
following conditions are met: (i) the source of funds used to purchase such
Certificates is an insurance company general account (as defined in PTCE 95-60),
and (ii) the conditions set forth in Sections I and III of PTCE 95-60 have been
satisfied as of the date of the acquisition of such Certificates.
Tax-Exempt Plan Investors
A Plan which is exempt from federal income taxation pursuant to Section 501
of the Code generally will be subject to federal income taxation to the extent
that its income constitutes unrelated business taxable income (or "UBTI") within
the meaning of Section 512 of the Code. Excess inclusions of a REMIC allocated
to a Residual Certificate held by such a Plan will be considered UBTI and thus
will be subject to federal income tax. See "Certain Federal Income Tax
Consequences-Taxation of Owners of Residual Certificates-Excess Inclusions" and
"-Tax-Exempt Investors."
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Consultation with Counsel
There can be no assurance that the Underwriter's Exemption or any other
exemption granted by the DOL will apply with respect to any particular Plan that
acquires Certificates (whether directly or through an entity holding Plan
Assets) or, even if all of the conditions specified in the Underwriter's
Exemption were satisfied, that exemptive relief would be available for all
transactions involving a Trust Fund. Prospective Plan Asset investors should
consult with their legal counsel concerning the impact of ERISA and the Code and
the potential consequences to their specific circumstances prior to making an
investment in Certificates.
Any fiduciary or other person who proposes to acquire or hold Certificates on
behalf of a Plan or with Plan Assets should consult with its legal counsel with
respect to the potential applicability of the fiduciary responsibility
provisions of ERISA and the prohibited transaction provisions of ERISA and
Section 4975 of the Code to the proposed investment and the availability of
exemptive relief under the Underwriter's Exemption, PTCE 83-1, Sections I and
III of PTCE 95-60, and/or any other class exemption granted by the DOL.
Any fiduciary or other person who proposes to use Plan Assets to acquire
Certificates should consult with its own legal counsel with respect to the
potential consequences under ERISA and the Code of the acquisition and ownership
of Certificates.
LEGAL INVESTMENT
The applicable Prospectus Supplement for a Series of Certificates will
specify whether a Class of such Certificates, as long as it is rated in one of
the two highest rating categories by one or more nationally recognized
statistical rating organizations, will constitute a "mortgage related security"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
Such Class, if any, constituting a "mortgage related security" will be a legal
investment for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including depository institutions,
insurance companies, trustees and state government employee retirement systems)
created pursuant to or existing under the laws of the United States or of any
state (including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any agency or instrumentality thereof constitute legal
investments for such entities.
Pursuant to SMMEA, a number of states enacted legislation, on or prior to the
October 3, 1991 cutoff for such enactments, limiting to varying extents the
ability of certain entities (in particular, insurance companies) to invest in
"mortgage related securities," in most cases by requiring the affected investors
to rely solely upon existing state law, and not SMMEA. Accordingly, the
investors affected by such legislation will be authorized to invest in
Certificates qualifying as "mortgage related securities" only to the extent
provided in such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in mortgage related
securities without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in such securities, and national banks
may purchase such securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to such regulations as the applicable federal
regulatory authority may prescribe. In this connection, federal credit unions
should review NCUA Letter to Credit Unions No. 96, as modified by Letter to
Credit Unions No. 108, which includes guidelines to assist federal credit unions
in making investment decisions for mortgage related securities. The NCUA has
adopted rules, codified as 12 C.F.R. Section 703.5(f)-(k), which prohibit
federal credit unions from investing in certain mortgage related securities
(including securities such as certain Series, Classes of Certificates), except
under limited circumstances.
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All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Securities Activities" dated
January 28, 1992, as revised April 15, 1994 (the "Policy Statement") of the
Federal Financial Institutions Examination Council.
The Policy Statement which has been adopted by the Board of Governors of the
Federal Reserve System, the Office of the Comptroller of the Currency, the FDIC
and the Office of Thrift Supervision and by the NCUA (with certain
modifications), prohibits depository institutions from investing in certain
"high-risk mortgage securities" (including securities such as certain Series,
Classes of the Certificates), except under limited circumstances, and sets forth
certain investment practices deemed to be unsuitable for regulated institutions.
Institutions whose investment activities are subject to regulation by federal
or state authorities should review rules, policies and guidelines adopted from
time to time by such authorities before purchasing any Certificates, as certain
Series, Classes or may be deemed unsuitable investments, or may otherwise be
restricted, under such rules, policies or guidelines (in certain instances
irrespective of SMMEA).
The foregoing does not take into consideration the applicability of statutes,
rules, regulations, orders, guidelines or agreements generally governing
investments made by a particular investor, including, but not limited to,
"prudent investor" provisions, percentage-of-assets limits, provisions which may
restrict or prohibit investment in securities which are not "interest bearing"
or "income paying," and, with regard to any Certificates issued in book-entry
form, provisions which may restrict or prohibit investments in securities which
are issued in book-entry form.
Except as to the status of certain Classes of Certificates as "mortgage
related securities," no representation is made as to the proper characterization
of the Certificates for legal investment purposes, financial institution
regulatory purposes, or other purposes, or as to the ability of particular
investors to purchase Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Certificates) may adversely affect the liquidity of the
Certificates.
Investors should consult their own legal advisers in determining whether and
to what extent such Certificates constitute legal investments for such
investors.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement (the
"Underwriting Agreement") with respect to each Trust Fund, the Seller will agree
to sell to each of the underwriters named therein and in the related Prospectus
Supplement, and each of such underwriters will severally agree to purchase from
the Seller, the principal amount of each Class of Certificates of the related
Series set forth therein and in the related Prospectus Supplement.
In each Underwriting Agreement, the several underwriters will agree, subject
to the terms and conditions set forth therein, to purchase all of the
Certificates described therein which are offered hereby and by the related
Prospectus Supplement if any of such Certificates are purchased. In the event
of a default by any such underwriter, each Underwriting Agreement will provide
that, in certain circumstances, purchase commitments of the nondefaulting
underwriters may be increased, or the Underwriting Agreement may be terminated.
Each Prospectus Supplement will either (i) set forth the price at which each
Class of Certificates being offered thereby will be offered to the public and
any concessions that may be offered to certain dealers participating in the
offering of such Certificates or (ii) specify that the related Certificates are
to be resold by the underwriters in negotiated transactions at varying prices to
be determined at the time of such sale. After the initial public offering of
any Certificates, the public offering price and such concessions may be changed.
Each Underwriting Agreement will provide that Chevy Chase will indemnify
underwriters against certain liabilities, including liabilities under the
Securities Act.
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Under each Underwriting Agreement, the closing of the sale of any Class of
Certificates subject thereto will be conditioned on the closing of the sale of
all other such Classes.
The place and time of delivery for the Certificates in respect of which this
Prospectus is delivered will be set forth in the related Prospectus Supplement.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain federal
income tax and other matters in connection with the Certificates will be passed
upon for the Seller by Orrick, Herrington & Sutcliffe LLP. Certain legal
matters relating to the Certificates will be passed upon for the Seller by Shaw,
Pittman, Potts & Trowbridge, a partnership including professional corporations,
and for any underwriters, agents or dealers, by Orrick, Herrington & Sutcliffe
LLP.
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GLOSSARY OF CERTAIN TERMS
The following are abbreviated definitions of certain capitalized terms in
this Prospectus. Unless otherwise provided in a "Supplemental Glossary" in the
Prospectus Supplement for a Series, such definitions shall apply to capitalized
terms used in such Prospectus Supplement. The definitions may vary from those
in the related Agreement for a Series and the related Agreement for a Series
generally provides a more complete definition of certain of the terms.
Reference should be made to the related Agreement for a Series for a more
complete definition of such terms.
"Accrual Termination Date" means, with respect to a Class of Compound
Interest Certificates, the Distribution Date specified in the related Prospectus
Supplement.
"Agreement" means, with respect to a Series of Certificates, the related
Pooling and Servicing Agreement.
"Appraised Value" means, with respect to property securing a Mortgage Loan,
the lesser of the appraised value determined in an appraisal obtained at
origination of the Mortgage Loan or sales price of such property at such time.
"ARM Loan" means a Mortgaged Loan with an adjustable Mortgage Rate.
"Balloon Loan" means a Mortgage Loan which is not fully amortizing over its
term and requires a substantial principal payment at maturity.
"Bankruptcy Code" means the federal bankruptcy code, 11 United States Code
101 et seq., and related rules and regulations promulgated thereunder.
"Business Day" means a day that, in the City of New York or in the city or
cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulations or executive order to be closed.
"Capitalized Interest Account" means one or more segregated trust accounts
established for a Series, funds on deposit in which are used to fund the excess,
if any, of (x) the sum of (i) the amount of interest accrued on the Classes of
Securities of such Series specified in the related Prospectus Supplement and
(ii) if specified in the related Prospectus Supplement, certain fees or expenses
during the Pre-Funding Period such as Trustee fees and credit enhancement fees,
over (y) the amount of interest available therefor from the Primary Assets in
the Trust Fund.
"CD Collateral" means, with respect to a CD Pledge Loan, the collateral
securing such CD Pledge Loan, including without limitation the related pledge
and guarantee agreement, the related certificate of deposit and all right, title
and interest in and to the related certificate of deposit account established by
the borrower at Chevy Chase, and all proceeds thereof.
"CD Pledge Loan" means a loan originated pursuant to Chevy Chase's CD Pledge
program, under which a borrower may, subject to certain underwriting criteria,
obtain a Mortgage Loan with a Loan-to-Value Ratio of up to 100% by pledging to
Chevy Chase CD Collateral as security for such borrower's obligations under such
Mortgage Loan in lieu of the cash downpayment otherwise payable.
"Certificate" means the Mortgage Pass-Through Certificates.
"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980.
"Certificate Account" or "Collection Account" means, with respect to a
Series, the account established for the deposit by the Servicer of payments
received from the Primary Assets.
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"Chevy Chase" means Chevy Chase Bank, F.S.B.
"Class" means a class of Certificates of a Series.
"Closing Date" means, with respect to a Series, the date specified in the
related Prospectus Supplement as the date on which Certificates of such Series
are first issued.
"Code" means the Internal Revenue Code of 1986, as amended, and regulations
(including proposed regulations) or other pronouncements of the Internal Revenue
Service promulgated thereunder.
"Combined Loan-to-Value Ratio" mean, with respect to a Mortgage Loan, the
ratio determined as set forth in the related Prospectus Supplement taking into
account the amounts of any related senior mortgage loans on the related
Mortgaged Property.
"Commission" means the Securities and Exchange Commission.
"Compound Interest Security" means any Certificate of a Series on which all
or a portion of the interest accrued thereon is added to the principal balance
of such Certificate on each Distribution Date, through the Accrual Termination
Date, and with respect to which no interest shall be payable until such Accrual
Termination Date, after which interest payments will be made on the Compound
Value thereof.
"Compound Value" means, with respect to a Class of Compound Interest
Certificates, the original Certificate Principal Balance of such Class, plus all
accrued and unpaid interest, if any, previously added to the Certificate
Principal Balance thereof and reduced by any payments of principal previously
made on such Class of Compound Interest Certificates.
"Condominium" means a form of ownership of real property wherein each owner
is entitled to the exclusive ownership and possession of his or her individual
Condominium Unit and also owns a proportionate undivided interest in all parts
of the Condominium Building (other than the individual Condominium Units) and
all areas or facilities, if any, for the common use of the Condominium Units.
"Condominium Association" means the person(s) appointed or elected by the
Condominium Unit owners to govern the affairs of the Condominium.
"Condominium Building" means a multi-unit building or buildings, or a group
of buildings whether or not attached to each other, located on property subject
to Condominium ownership.
"Condominium Loan" means a Mortgage Loan secured by a Mortgage on a
Condominium Unit (together with its appurtenant interest in the common elements)
"Condominium Unit" means and individual housing unit in a Condominium
Building,
"Cooperative" means a corporation owned by tenant-stockholders who, through
the ownership of stock, shares or membership securities in the corporation,
receive proprietary leases or occupancy agreements which confer exclusive rights
to occupy specific units and which is described in Section 216 of the Code.
"Cooperative Dwelling" means an individual housing unit in a building owned
by Cooperative.
"Cooperative Loan" means Mortgage Loan made with respect to a Cooperative
Dwelling and secured by an assignment by the borrower (tenant-stockholder) or
security interest in shares issued by the applicable Cooperative.
"Cut-off Date" means the date designated as such in the related Prospectus
Supplement for a Series.
116
<PAGE>
"Debt Securities" means securities characterized as indebtedness for federal
income tax purposes, and Regular Interest Securities.
"Deferred Interest" means the excess of the interest accrued on the
outstanding principal balance of a Mortgage Loan during a specified period over
the amount of interest required to be paid by an obligor on such Mortgage Loan
on the related Due Date.
"Definitive Certificate" means a Certificate in fully registered,
certificated form.
"Delinquency Advance" means cash advanced by the Servicer in respect of
delinquent payments of principal of and/or interest on a Mortgage Loan to the
extent specified in the related Prospectus Supplement.
"Depository" means DTC or any successor thereto.
"Discount Certificate" means a Class of Certificates the purchase price of
which is less than the aggregate amount of the Principal Distributions to be
made to such Class.
"Disqualified Organization" means the United States, any State or political
subdivision thereof, any possession of the United States, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income.
"Distribution Account" means, with respect to a Series, the account or
accounts established for the deposit of remittance from the Collection Account
for distribution to Certificateholders.
"Distribution Date" means, with respect to a Series or Class of Certificates,
each date specified as a distribution date for such Series or Class in the
related Prospectus Supplement.
"DTC" means The Depository Trust Company.
"Due Date" means each date, as specified in the related Prospectus Supplement
for a Series, on which any payment of principal or interest is due and payable
by the obligor on any Primary Asset pursuant to the terms thereof.
"Eligible Investments" means any one or more of the obligations or securities
described as such in the related Agreement.
"Enhancement" means the enhancement for a Series, if any, specified in the
related Prospectus Supplement.
"Enhancer" means the provider of the Enhancement for a Series specified in
the related Prospectus Supplement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means an account, established and maintained by the Servicer
for a Mortgage Loan, into which payments by borrowers to pay taxes, assessments,
mortgage and hazard insurance premiums and other comparable items required to be
paid to the mortgagee are deposited.
"Fannie Mae" means the Federal National Mortgage Association.
"FDIC" means the Federal Deposit Insurance Corporation.
"FHA" means the Federal Housing Administration.
117
<PAGE>
"Final Scheduled Distribution Date" means, with respect to a Class of
Certificates of a Series, the date after which no Certificates of such Class
will remain outstanding, in each case based on the assumptions set forth in the
related Prospectus Supplement.
"Freddie Mac" means the Federal Home Loan Mortgage Corporation.
"Holder" or "Certificateholder" means the person or entity in whose name a
Security is registered.
"HUD" means the United States Department of Housing and Urban Development.
"Insurance Policies" means certain mortgage insurance, hazard insurance and
other insurance policies required to be maintained with respect to Mortgage
Loans.
"Insurance Proceeds" means amount paid by the insurer under any of the
Insurance Policies covering any Mortgage Loan or Mortgaged Property.
"Interest Only Certificates" means a Class of Certificates entitled solely or
primarily to distributions of interest and which is identified as such in the
related Prospectus Supplement.
"IRS" means the Internal Revenue Service.
"Lender-Paid MI Loan" means a Mortgage Loan with an original Loan-to-Value
Ratio greater than 80%, pursuant to which the interest rate payable by the
related borrower is increased relative to the interest rate otherwise applicable
for so long as the Loan-to-Value Ratio exceeds 80%, with the proceeds of such
increase being used by the Seller to purchase mortgage insurance on such
Mortgage Loan.
"Liquidation Proceeds" means amounts received by the Servicer in connection
with the liquidation of a Mortgage Loan, net of liquidation expenses.
"Loan-to-Value Ratio" means, with respect to a Mortgage Loan, the ratio
determined as set forth in the related Prospectus Supplement.
"MC Agreement" means the pooling and servicing agreement, indenture, trust
agreement or similar agreement pursuant to which a Mortgage Certificate is
issued
"MC Servicer" means the servicer of the Underlying Loans.
"MC Sponsor" means, with respect to Mortgage Certificate, the sponsor or
depositor under an MC Agreement.
"MC Trustee" means the trustee designated under and MC Agreement.
"Minimum Rate" means the lifetime minimum Mortgage Rate during the life of
each ARM Loan.
"Modification" means a change in any term of a Mortgage Loan.
"Mortgage" means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
"Mortgage Certificate" means a participation or pass-through certificate
representing a fractional, undivided interest in Underlying Loans or
collateralized obligations secured by Underlying Loans.
"Mortgage Loan" means a mortgage loan or balance thereof secured by a
Mortgaged Property.
118
<PAGE>
"Mortgage Loan Group" means, with respect to the Primary Assets and other
assets comprising the Trust Fund of a Series, a group of such Primary Assets and
other assets having the characteristics described in the related Prospectus
Supplement.
"Mortgage Note" means the note or other evidence of indebtedness of a
borrower under the Mortgage Loan.
"Mortgaged Property" means any real estate securing a Mortgage Loan.
"1986 Act" means the Tax Reform Act of 1986.
"Notional Amount" means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Certificates.
"OTS" means the Officer of Thrift Supervision.
"PAC" ("Planned Amortization Class Certificates") means a Class of
Certificates of a Series on which payments of principal are made in accordance
with a schedule specified in the related Prospectus Supplement, based on certain
assumptions stated therein.
"Participating Certificates" means Certificates entitled to receive payments
of principal and interest and an additional return on investment as described in
the related Prospectus Supplement.
"Pass-Through Certificate" means a security representing an undivided
beneficial interest in a pool of assets, including the right to receive a
portion of all principal and interest payments relating to those assets.
"Pay Through Certificate" means a Regular Interest Certificate that is
subject to acceleration due to acceleration due to prepayment on the underlying
Primary Assets.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
"Pooling and Servicing Agreement" means the pooling and servicing agreement
relating to a Series of Certificates among the Seller, the Servicer (if such
Series relates to Mortgage Loans) and the Trustee.
"Pre-Funding Account" means one or more segregated trust accounts established
for a Series, funds on deposit in which may be used to purchase additional
Primary Assets during the Pre-Funding Period specified in the related Prospectus
Supplement.
"Premium Certificate" means a Class of Certificates the purchase price of
which is greater than the aggregate amount of the Principal Distributions to be
made to such Class.
"Primary Assets" means the Mortgage Certificates and/or Mortgages Loans, as
the case may be, which are included in the Trust Fund for such Series. A
Primary Asset refers to a specific Mortgage Certificate or Mortgage Loan, as the
case may be.
"Principal Balance" means, with respect to a Primary Asset and as of a due
Date, the original principal amount of the Primary Assets, plus the amount of
any Deferred Interest added to such principal amount, reduced by all payments,
both scheduled or otherwise, received on such Primary Asset prior to such Due
Date and applied to principal in accordance with the terms of the Primary Asset.
"Principal Only Certificates" means a Class of Certificates entitled solely
or primarily to distributions of principal and identified as such in the
Prospectus Supplement.
119
<PAGE>
"Principal Prepayment" means certain principal prepayments or other
recoveries of principal on a Mortgage Loan that are received in advance of their
respective Due Dates and are not accompanied by an amount representing scheduled
interest due on any date or dates in any month or months subsequent to the month
of prepayment.
"Qualified Insurer" means a mortgage guarantee or insurance company duly
qualified as such under the laws of the states in which the Mortgaged Properties
are located duly authorized and licensed in such states to transact the
applicable insurance business and to write the insurance provided.
"Rating Agency" means the nationally recognized statistical rating
organization (or organizations) which was (or were) requested by the Seller to
rate the Certificates upon the original issuance thereof.
"Regular Interest" means a regular interest in a REMIC.
"REMIC" means a real estate mortgage investment conduit.
"REMIC Administrator" means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to serve
as administrator of the Series.
"REMIC Provisions" means the provisions of the federal income tax law
relating to real estate mortgage investment conduits, which appear at sections
860A through 860G of Subchapter M of Chapter 1 of the Code, and related
provisions, and regulations, including proposed regulations and rulings, and
administrative pronouncements promulgated thereunder, as the foregoing may be in
effect from time to time.
"REO Property" means real property which secured a defaulted Mortgage Loan,
beneficial ownership of which as been acquired upon foreclosure, deed in lieu of
foreclosure, repossession or otherwise.
"Reserve Fund" means, with respect to a Series, any Reserve Fund established
pursuant to the related Agreement.
"Residual Certificate" means a Class of Certificates of a Series evidencing a
Residual Interest in the related Trust Fund.
"Residual Interest" means a residual interest in a REMIC.
"Retained Interest" means, with respect to a Primary Asset, the amount or
percentage specified in the related Prospectus Supplement which is not included
in the Trust fund for the related Series.
"Seller" means Chevy Chase Bank, F.S.B.
"Senior Certificates" or "Senior Class" means a Class of Certificates as to
which the rights of Holders to receive distributions of principal and interest
are senior to the rights of Holders of Subordinated Certificates, to the extent
specified in the related Prospectus Supplement.
"Series" means a separate series of Certificates sold pursuant to this
Prospectus and the related Prospectus Supplement.
"Servicer" means Chevy Chase Bank, F.S.B., or the successors or assigns of
such Person.
"Servicer Advance" means cash advanced by the Servicer to pay for any
expenses of foreclosure and disposition of any liquidated Mortgage Loan or
related Mortgaged Property.
"Single Family Property" means property securing a Mortgage Loan consisting
of one to four-family attached or detached residential housing, including
Cooperative Dwellings.
120
<PAGE>
"SMMEA" means the Secondary Mortgage Market Enhancement Act of 1984.
"Stripped Securities" means Pass-Through Certificates representing interests
in Primary Assets with respect to which all or a portion of the principal
payments have been separated from all or a portion of the interest payments.
"Subordinated Certificates" or "Subordinated Class" means a Class of
Certificates as to which the rights of Holders to receive distributions of
principal, interest or both is subordinated to the rights of Holders of Senior
Certificates, and may be allocated losses and shortfalls prior to the allocation
thereof to other Classes of Certificates, to the extent and under the
circumstance specified in the related Prospectus Supplement.
"Trustee" means the trustee under the applicable Agreement and its
successors.
"Trust Fund" means, with respect to any Series of Certificates, the trust
holding all money, instruments, securities and other property, including all
proceeds thereof, which are held for the benefit of the Holders by the Trustee
under the Agreement including, without limitation, the Primary Assets (except
any Retained Interests), rights to all amounts in the Distribution Account,
Collection Account, Certificate Account or Reserve Funds, if any, distributions
on the Primary Assets (net of servicing fees) and rights to any Enhancement and
all other property and interest held by or pledged to the Trustee pursuant to
the related Agreement for such Series.
"UCC" means the Uniform Commercial Code.
"Underlying Loans" means loans of the type eligible to be Mortgage Loans
underlying or securing Mortgage Certificates.
"VA" means the Veterans Administration.
"Variable Interest Certificate" means a Certificate on which interest accrues
at a rate that is adjusted, based upon a predetermined index, at fixed periodic
intervals, all as set forth in the related Prospectus Supplement.
"Zero Coupon Certificate" means a Certificate entitled to receive payments of
principal only.
121
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer contained herein, and, if given or made,
such information or representations must not be relied upon as having been
authorized by Chevy Chase or by the Underwriter. This Prospectus does not
constitute an offer of any securities other than those to which it relates or an
offer to sell, or a solicitation of an offer to buy, those to which it relates
in any state to any person to whom it is not lawful to make such offer in such
state. The delivery of this Prospectus at any time does not imply that the
information herein is correct as of any time subsequent to its date.
-----------------------------
TABLE OF CONTENTS
Page
PROSPECTUS SUPPLEMENT
Report to Certificateholders ............................................. S-3
Summary of Terms ......................................................... S-4
Risk Factors ............................................................. S-17
Description of the Mortgage Loans ........................................ S-19
Description of the Certificates .......................................... S-35
Certain Yield and Prepayment Considerations .............................. S-46
The Seller and The Servicer .............................................. S-53
Servicing ................................................................ S-54
[The Certificate Insurer ................................................. S-54
Certain Federal Income Tax Consequences .................................. S-56
ERISA Considerations ..................................................... S-58
Use of Proceeds .......................................................... S-59
Plan of Distribution ..................................................... S-59
[Experts ................................................................. S-60
Legal Matters ............................................................ S-60
Ratings .................................................................. S-60
Index of Terms ........................................................... S-61
PROSPECTUS
Prospectus Supplement .................................................... 3
Reports to Certificateholders ............................................ 3
Additional Information ................................................... 3
Incorporation of Certain Information by Reference ........................ 4
Summary of Terms ......................................................... 5
Risk Factors ............................................................. 22
Description of the Certificates .......................................... 27
The Trust Funds .......................................................... 31
The Seller ............................................................... 39
Use of Proceeds .......................................................... 39
Yield Considerations ..................................................... 39
Maturity and Prepayment Considerations ................................... 41
The Agreements ........................................................... 42
Enhancement .............................................................. 62
Description of Insurance ................................................. 67
Certain Legal Aspects of the Mortgage Loans .............................. 73
Certain Federal Income Tax Consequences .................................. 85
ERISA Considerations ..................................................... 107
Legal Investment ......................................................... 112
Plan of Distribution ..................................................... 113
Legal Matters ............................................................ 114
Glossary of Terms ........................................................ 115
Until __________ __, 199_ (90 days after the date of this Prospectus
Supplement), all dealers effecting transactions in the Certificates, whether or
not participating in this distribution, may be required to deliver a Prospectus
and a Prospectus Supplement. This is in addition to the obligation of dealers to
deliver a Prospectus and a Prospectus Supplement when acting as Underwriters and
with respect to their unsold allotments or subscriptions.
================================================================================
================================================================================
Chevy Chase Mortgage
Loan Trust 199_-_
Mortgage-Backed Pass-Through
Certificates
Series 199_-_
$___________ Class [A-I] [Fixed] [Adjustable Rate] Certificates
$___________ Class [A-II] [Fixed] [Adjustable Rate] Certificates
Chevy Chase Bank,
F.S.B.
Seller and Servicer
PROSPECTUS SUPPLEMENT
__________ __, 199_
----------------------
[Underwriter]
================================================================================
<PAGE>
<PAGE>
PART II
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Registration Fee........................................ $ 212,121.21
Printing and Engraving.................................. 325,000.00
Trustee's Fees.......................................... 25,000.00
Legal Fees and Expenses................................. 450,000.00
Blue Sky Fees and Expenses.............................. 25,000.00
Accountants' Fees and Expenses.......................... 200,000.00
Rating Agency Fees...................................... 420,000.00
Miscellaneous........................................... 42,878.79
-------------
Total............................................ $1,700,000.00
------------------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The directors and officers of Chevy Chase Bank, F.S.B. (the "Bank") are
insured (subject to certain exceptions and deductions) against civil liabilities
and related defense expenses that they may incur in their capacities as such
under a liability insurance policy.
The form of the Underwriting Agreement, filed as Exhibit 1.1 to this
Registration Statement, provides that the Bank will indemnify and reimburse the
Underwriter(s) and each controlling person of the Underwriter(s) with respect to
certain expenses and liabilities, including liabilities under the Securities Act
of 1933 or other federal or state regulations or under the common law, which
arise out of or are based on certain material misstatements or omissions in the
Registration Statement. In addition, the Underwriting Agreement provides that
the Underwriter(s) will similarly indemnify and reimburse the Bank and each
director, each officer who signed the Registration Statement and each
controlling person of the Bank with respect to certain material misstatements or
omissions in the Registration Statement which are based on certain written
information furnished by the Underwriter(s) for use in connection with the
preparation of the Registration Statement.
2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS
(a) Financial
---------
Statements:
-----------
None.
(b) Exhibits Page
-------- ----
*1.1 Form of Underwriting Agreement (incorporated by reference to
Exhibit 1.1 of Registration Statement (No. 333-33733)).
*3.1 Charter of the Bank, as amended (incorporated by reference to
Exhibit 3.1 of Registration Statement (No. 333-33733)).
*3.2 By-Laws of the Bank, as amended (incorporated by reference
to Exhibit 3.2 of Registration Statement (No. 333-33733)).
4.1 Form of Pooling and Servicing Agreement.
5.1(a) Opinion of Orrick, Herrington & Sutcliffe LLP with respect to
the securities being registered.
5.1(b) Opinion of Shaw, Pittman, Potts & Trowbridge with respect to
the securities being registered.
8.1(a) Opinion of Orrick, Herrington & Sutcliffe LLP with respect to
tax matters.
23.1(a) Consent of Orrick, Herrington & Sutcliffe LLP (included in its
opinions filed as Exhibit 5.1(a) and Exhibit 8.1(a)).
23.1(b) Consent of Shaw, Pittman, Potts & Trowbridge (included in its
opinion filed as Exhibit 5.1(b)).
24.1 Powers of Attorney of Directors and Officers of the Bank
(included on signature page).
- ----------
* Previously filed.
3
<PAGE>
ITEM 17. UNDERTAKINGS
Each of the undersigned registrant (the "Registrant") hereby undertakes
that:
(1) For purposes of determining any liability under the Securities Act of
1933, as amended (the "Securities Act"), the information omitted from the form
of prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
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) For purpose of determining any liability under the Securities Act, each
filing of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")
that is incorporated by reference in the 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.
---- ----
(4) To provide to the Underwriters at the closing specified in the
Underwriting Agreement, certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
(5) 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;
(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 thereto) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement;
and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(6) To remove from registration by the means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities Act
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
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 the director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such
4
<PAGE>
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 Securities Act and will be governed by the final
adjudication of such issue.
5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Chevy Chase, State of Maryland, on
July 15, 1998.
CHEVY CHASE BANK, F.S.B.
as Registrant
By: /s/ B. Francis Saul II
--------------------------------
B. Francis Saul II
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Alexander R.M. Boyle and Stephen R. Halpin, Jr.,
and each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for and in his name, place and stead,
in any and all capacities to sign this Amendment No. 1 to the Registration
Statement and any or all other documents in connection herewith, and to file the
same, with all exhibits hereto, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as might or could be done in person, hereby ratifying and confirming
all said attorneys-in-fact and agents or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed on July 15,
1998 by the following persons in the capacities indicated.
Signature Title
--------- -----
/s/ Alexander R.M. Boyle
- ---------------------------
Alexander R.M. Boyle Vice Chairman of the Board
Director
/s/ Vincent C. Burke, Jr.
- ---------------------------
Vincent C. Burke, Jr. Director
/s/ Donald G. Conrad
- ---------------------------
Donald G. Conrad Director
/s/ Gavin Malloy Farr
- ---------------------------
Gavin Malloy Farr Director
6
<PAGE>
/s/ Joel A. Friedman Senior Vice President
- ---------------------------- and Controller
Joel A. Friedman (Principal Accounting Officer)
/s/ Jack S. Griswold
- ----------------------------
Jack S. Griswold Director
/s/ Gilbert M. Grosvenor
- ----------------------------
Gilbert M. Grosvenor Director
/s/ Stephen R. Halpin, Jr.
- ---------------------------- Executive Vice President
Stephen R. Halpin, Jr. (Principal Financial Officer)
/s/ Penne Percy Korth
- ----------------------------
Penne Percy Korth Director
/s/ LaSalle D. Leffall
- ----------------------------
LaSalle D. Leffall Director
/s/ William F. McSweeny
- ----------------------------
William F. McSweeny Director
/s/ Garland P. Moore, Jr.
- ----------------------------
Garland P. Moore, Jr. Director
/s/ George M. Rogers, Jr.
- ----------------------------
George M. Rogers, Jr. Director
/s/ B. Francis Saul II Chairman of the Board and
- ---------------------------- Chief Executive Officer
B. Francis Saul II (Principal Executive Officer)
/s/ B. Francis Saul III
- ----------------------------
B. Francis Saul III Director
/s/ Leonard L. Silverstein
- ----------------------------
Leonard L. Silverstein Director
7
<PAGE>
Exhibit Index
Exhibits
- --------
*1.1 Form of Underwriting Agreement (incorporated by reference to
Exhibit 1.1 of Registration Statement (No. 333-33733)).
*3.1 Charter of the Bank, as amended (incorporated by reference to
Exhibit 3.1 of Registration Statement (No. 333-33733)).
*3.2 By-Laws of the Bank, as amended (incorporated by reference to
Exhibit 3.2 of Registration Statement (No. 333-33733)).
4.1 Form of Pooling and Servicing Agreement.
5.1(a) Opinion of Orrick, Herrington & Sutcliffe LLP with respect to the
securities being registered.
5.1(b) Opinion of Shaw, Pittman, Potts & Trowbridge with respect to the
securities being registered.
8.1(a) Opinion of Orrick, Herrington & Sutcliffe LLP with respect to tax
matters.
23.1(a) Consent of Orrick, Herrington & Sutcliffe LLP (included in its
opinions filed as Exhibit 5.1(a) and Exhibit 8.1(a)).
23.1(b) Consent of Shaw, Pittman, Potts & Trowbridge (included in its
opinion filed as Exhibit 5.1(b)).
24.1 Powers of Attorney of Directors and Officers of the Bank
(included on signature page).
- ----------
* Previously filed.
8
<PAGE>
EXHIBIT 4.1
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
CHEVY CHASE BANK, F.S.B.,
Seller and Servicer,
and
[NAME OF TRUSTEE],
Trustee
-------------------
FORM OF POOLING AND SERVICING AGREEMENT
Dated as of [_______ __, 199_]
relating to
CHEVY CHASE HOME LOAN TRUST 199_-____
MORTGAGE-BACKED PASS-THROUGH CERTIFICATES, SERIES 199_-____
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
ARTICLE II
CONVEYANCE OF TRUST FUND;
REPRESENTATIONS AND WARRANTIES
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 2.01. Conveyance of Trust Fund................................................ 26
SECTION 2.02. Acceptance by Trustee................................................... 29
SECTION 2.03. Representations, Warranties and
Covenants of the Servicer and Seller................................. 30
SECTION 2.04. Representations, Warranties and Covenants of the Servicer and the
Seller with respect to the Mortgage Loans............................ 32
SECTION 2.05. Issuance of Certificates................................................ 40
SECTION 2.06. REMIC Provisions........................................................ 40
<CAPTION>
ARTICLE III
ADMINISTRATION AND SERVICING
OF MORTGAGE LOANS
<S> <C> <C>
SECTION 3.01. Servicing Standard...................................................... 45
SECTION 3.02. Enforcement of the Obligations of Sub-Servicers......................... 46
SECTION 3.03. Termination of the Rights of Sub-Servicers.............................. 47
SECTION 3.04. Liability of the Servicer............................................... 48
SECTION 3.05. Rights of the Seller and the Trustee
in Respect of the Servicer........................................... 48
SECTION 3.06. Trustee to Act as Servicer.............................................. 48
SECTION 3.07. Collection of Mortgage Loan Payments.................................... 49
SECTION 3.08. Collection of Taxes, Assessments and
Similar Items; Escrow Accounts....................................... 51
SECTION 3.09. Permitted Withdrawals from the Custodial Account........................ 52
SECTION 3.10. Maintenance of Primary Mortgage Insurance Policies;
Collections Thereunder............................................... 53
SECTION 3.11. Maintenance of Hazard Insurance and Other Insurance..................... 54
SECTION 3.12. Enforcement of Due-On-Sale Clauses;
Assumption Agreements................................................ 55
SECTION 3.13. Realization Upon Defaulted Mortgage Loans............................... 57
SECTION 3.14. Trustee to Cooperate; Release of Trustee Mortgage Files................. 59
SECTION 3.15. Documents, Records and Funds in Possession of Servicer
to be Held for the Seller and the Trustee for the Benefit
of the Certificateholders............................................ 60
SECTION 3.16. Servicing Compensation.................................................. 60
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 3.17. Reports to the Seller; Account Statements............................... 61
SECTION 3.18. Annual Statement as to Compliance....................................... 61
SECTION 3.19. Annual Independent Public Accountants' Servicing Report................. 61
SECTION 3.20. Reports to Trustee...................................................... 62
SECTION 3.21. Converted Mortgage Loans; Certain Procedures and Purchases.............. 62
SECTION 3.22. Letter of Credit........................................................ 63
ARTICLE IV
PAYMENTS AND STATEMENTS TO CERTIFICATEHOLDERS
SECTION 4.01. Certificate Account..................................................... 64
SECTION 4.02. Distributions........................................................... 65
SECTION 4.03. Allocation of Realized Losses........................................... 67
SECTION 4.04. Monthly Statements to Certificateholders................................ 68
SECTION 4.05. Prepayment Interest Shortfalls and Relief Act Shortfalls................ 70
SECTION 4.06. The Policy.............................................................. 70
SECTION 4.07 Reserve Account......................................................... 71
ARTICLE V
ADVANCES
SECTION 5.01. Monthly Advances by the Servicer........................................ 72
SECTION 5.02. Advances for Attorneys' Fees............................................ 73
SECTION 5.03. Nonrecoverable Advances................................................. 73
SECTION 5.04. Advance Procedures...................................................... 73
ARTICLE VI
THE CERTIFICATES
SECTION 6.01. The Certificates........................................................ 74
SECTION 6.02. Registration of Transfer and Exchange of Certificates................... 75
SECTION 6.03. Mutilated, Destroyed, Lost or Stolen Certificates....................... 80
SECTION 6.04. Persons Deemed Owners................................................... 80
SECTION 6.05. Access to List of Certificateholders' Names and Addresses............... 81
SECTION 6.06. Maintenance of Office or Agency......................................... 81
SECTION 6.07. Book-Entry Certificates................................................. 81
SECTION 6.08. Notices to Clearing Agency.............................................. 82
SECTION 6.09. Definitive Certificates................................................. 82
ARTICLE VII
THE SELLER AND THE SERVICER
SECTION 7.01. Liabilities of the Seller and the Servicer.............................. 83
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 7.02. Merger or Consolidation of the
Seller or the Servicer............................................... 83
SECTION 7.03. Limitation on Liability of the Seller, the Servicer and Others.......... 84
SECTION 7.04. Servicer Not to Resign.................................................. 85
SECTION 7.05. Errors and Omissions Insurance; Fidelity Bonds.......................... 85
SECTION 7.06. Servicer May Own Certificates........................................... 85
ARTICLE VIII
DEFAULT
SECTION 8.01. Events of Default....................................................... 85
SECTION 8.02. Trustee to Act; Appointment of Successor................................ 87
SECTION 8.03. Notification to Certificateholders...................................... 88
SECTION 8.04. Waiver of Events of Default............................................. 89
ARTICLE IX
CONCERNING THE TRUSTEE
SECTION 9.01. Duties of Trustee....................................................... 89
SECTION 9.02. Certain Matters Affecting the Trustee................................... 91
SECTION 9.03. Trustee Not Liable for Certificates or Mortgage Loans................... 92
SECTION 9.04. Trustee May Own Certificates............................................ 93
SECTION 9.05. Trustee's Fees and Expenses............................................. 93
SECTION 9.06. Eligibility Requirements for Trustee.................................... 93
SECTION 9.07. Resignation and Removal of Trustee...................................... 94
SECTION 9.08. Successor Trustee....................................................... 94
SECTION 9.09. Merger or Consolidation of Trustee...................................... 95
SECTION 9.10. Appointment of Co-Trustee or Separate Trustee........................... 95
SECTION 9.11. Office of the Trustee................................................... 96
SECTION 9.12. Tax Returns............................................................. 96
ARTICLE X
TERMINATION
SECTION 10.01. Termination upon Liquidation or Repurchase of all Mortgage Loans....... 97
SECTION 10.02. Procedure Upon Optional Termination.................................... 98
SECTION 10.03. Additional Termination Requirements.................................... 99
ARTICLE XI
MISCELLANEOUS PROVISIONS
SECTION 11.01. Amendment.............................................................. 99
SECTION 11.02. Recordation of Agreement; Counterparts................................. 101
</TABLE>
iii
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<TABLE>
<S> <C> <C>
SECTION 11.03. Governing Law.......................................................... 101
SECTION 11.04. Intention of Parties................................................... 101
SECTION 11.05. Notices................................................................ 103
SECTION 11.06. Severability of Provisions............................................. 103
SECTION 11.07. Limitation on Rights of Certificateholders............................. 103
SECTION 11.08. Certificates Nonassessable and Fully Paid.............................. 104
SECTION 11.09. Rights of the Certificate Insurer...................................... 104
<CAPTION>
EXHIBITS
<S> <C> <C>
Exhibit A: Form of Class A Certificate................................................ A-1
Exhibit B: Form of Class S Certificate................................................ B-1
Exhibit C: Form of Class R Certificate................................................ C-1
Exhibit D: Schedule of Mortgage Loans................................................. D-1
Exhibit E: Form of Initial Certification of Trustee................................... E-1
Exhibit F: Form of Final Certification of Trustee..................................... F-1
Exhibit G: Form of Request for Release................................................ G-1
Exhibit H: Form of Investor Representation Letter..................................... H-1
Exhibit I: Form of Transferor Representation Letter................................... I-1
Exhibit J: Form of Investor Transfer Affidavit and Agreement.......................... J-1
Exhibit K: Form of Transfer Certificate............................................... K-1
Exhibit L: Certificate Guaranty Insurance Policy...................................... L-1
</TABLE>
iv
<PAGE>
THIS POOLING AND SERVICING AGREEMENT, dated as of ______ __, 199_, is
hereby executed by and between CHEVY CHASE BANK, F.S.B. ("Chevy Chase"), in its
capacity as seller (the "Seller") and in its capacity as servicer (the
"Servicer") and [NAME OF TRUSTEE], [a national banking association], as trustee
(the "Trustee"). Capitalized terms used in this Agreement and not otherwise
defined will have the meanings assigned to them in Article I below.
PRELIMINARY STATEMENT
The Seller is the owner of the Mortgage Loans and the other property
being conveyed by it to the Trustee in its capacity as trustee of the Trust
Fund, in accordance with this Agreement, and the Seller has duly authorized the
execution and delivery of this Agreement to provide for the conveyance to the
Trustee of the Trust Fund.
As provided herein, the Seller will elect to treat the assets
consisting of the Mortgage Loans and certain other assets as described herein as
a real estate mortgage investment conduit (a "REMIC") for federal income tax
purposes, and such segregated pool of assets will be designated as the "Trust
REMIC". The Class R Certificates will represent the sole class of "residual
interests" in the Trust REMIC for purposes of the REMIC Provisions (as defined
herein) under federal income tax law. The following table irrevocably sets forth
the designation, Certificate Rate, aggregate Initial Certificate Principal
Balance and Maturity Date for each Class of Certificates comprising the
interests representing "regular interests" in the Trust REMIC (the "REMIC
Regular Certificates"). The "latest possible maturity date" (determined solely
for purposes of satisfying Treasury Regulation Section 1.860G-1(a)(4)(iii)) for
each Class of REMIC Regular Certificates shall be the first Distribution Date
that follows the stated maturity date for the Mortgage Loan included in the
Trust Fund as of the Closing Date with the longest remaining term to stated
maturity.
<TABLE>
<CAPTION>
Aggregate Initial
Certificate
Designation Type Certificate Rate Principal Balances Maturity Date
- -------------- --------------- -------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Class [A-I] Senior [__________] $[___________] [_____________]
Class [A-II] Senior [__________] $[___________] [_____________]
Class S [Subordinate] [__________] [__________] [_____________]
</TABLE>
All covenants and agreements made by the Seller herein are for the
benefit and security of the Certificateholders [and the Certificate Insurer].
The Seller is entering into this Agreement, and the Trustee is accepting the
trusts created hereby and thereby, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged. The principal balance
of the Mortgage Loans as of the Cut-off Date is $[___________________].
The parties hereto intend to effect an absolute sale and assignment of
the Mortgage Loans to the Trustee for the benefit of Certificateholders [and the
Certificate Insurer] under the Mortgage Loan Purchase Agreement and this
Agreement. However, the Seller will hereunder absolutely assign, and as a
precautionary matter grant a security interest in and to, its rights, if any, in
the Mortgage Loans, [and the Reserve Account] to the Trustee
1
<PAGE>
on behalf of Certificateholders [and the Certificate Insurer] to ensure that the
interest of the Certificateholders [and the Certificate Insurer] hereunder in
the Mortgage Loans [and the Reserve Account] is fully protected.
W I T N E S S E T H T H A T:
In consideration of the mutual agreements herein contained, the
Seller, the Servicer, the Seller and the Trustee agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and phrases,
unless the context otherwise requires, shall have the following meanings:
Adjusted Servicing Fee Rate: For each Distribution Date, as to each
---------------------------
Mortgage Loan, a per annum rate equal to the percentage equivalent of a fraction
the numerator of which is the amount described in clause (i) of the definition
of Servicing Fee for such Mortgage Loan in effect as of the Due Date in the
preceding calendar month, and the denominator of which is the Principal Balance
of such Mortgage Loan immediately preceding such Distribution Date.
Adjustment Date: As to each Mortgage Loan, each date set forth in the
---------------
related Mortgage Note on which an adjustment to the interest rate on such
Mortgage Loan becomes effective.
Adverse REMIC Event: As defined in Section 2.06(f).
-------------------
Agreement: This Pooling and Servicing Agreement and any and all
---------
amendments or supplements hereto.
Alternative Credit Support: Any method of credit support, other than
--------------------------
the methods of Credit Support specified herein and other than Subordinated
Certificates, as provided for in this Agreement.
Appraised Value: The appraised value of the Mortgaged Property based
---------------
upon the appraisal made for the originator at the time of the origination of the
related Mortgage Loan or the sales price of the Mortgaged Property at the time
of such origination, whichever is less, or with respect to any Mortgage Loan
that represents a refinancing, the lower of the appraised value at origination
or the appraised value of the Mortgaged Property based upon the appraisal made
at the time of such refinancing.
Available Distribution Amount: With respect to any Distribution Date
-----------------------------
and [each Loan Group], the excess of
2
<PAGE>
(a) the sum of (i) the aggregate amount of payments and collections
received by the Servicer in respect of each Mortgage Loan on or prior to
the related Determination Date and not previously remitted, from any
source, including amounts received from the related Mortgagor, Insurance
Proceeds, Liquidation Proceeds (net of related Liquidation Expenses) and
condemnation awards, and amounts received in connection with the purchase
of any Mortgage Loans by the Seller or Servicer and the substitution of
Replacement Mortgage Loans, and excluding interest and other earnings on
amounts on deposit in or credited to the Custodial Account and the
Certificate Account, (ii) the aggregate amount of Monthly Advances required
to be remitted by the Servicer relating to such Distribution Date, (iii)
amounts withdrawn from the Reserve Account pursuant to Section 4.07(c) for
such Distribution Date, [and (iv) Insured Payments payable pursuant to the
Policy with respect to such Distribution Date] [(in each case with respect
to the related Loan Group)];
over
(b) the sum of (i) the aggregate amount of the servicing compensation
to be paid to the Servicer pursuant to the terms hereof (including, without
limitation, Servicing Fees, prepayment penalties, fees or premiums, late
payment charges and assumption fees and any excess interest charges payable
by the Mortgagor by virtue of any default or other non-compliance by the
Mortgagor with the terms of the Mortgage Loan or any other instrument or
document executed in connection therewith or otherwise), (ii) any amount
included therein representing late payments or other recoveries of
principal or interest (including Liquidation Proceeds (net of Liquidation
Expenses), Insurance Proceeds and condemnation awards) with respect to any
Mortgage Loans in respect of which the Servicer has made a previously
unreimbursed Monthly Advance to the extent of such Monthly Advance, (iii)
amounts included therein representing reimbursement of Nonrecoverable
Advances and other amounts permitted to be withdrawn from the Custodial
Account or the Certificate Account, (iv) all Monthly Payments or portions
thereof (other than Principal Prepayments and other unscheduled collections
of principal) received in respect of scheduled principal and interest on
any Mortgage Loan due after the related Due Period and included therein,
(v) all payments due on any Mortgage Loan on or prior to the Cut-off Date
and included therein, (vi) an amount equal to the Principal Balance of each
Mortgage Loan immediately prior to such Distribution Date multiplied by
one-twelfth of the Trustee Fee Rate, (vii) Principal Prepayments and other
unscheduled collections of principal received after the related Prepayment
Period and included therein [and (viii) the Certificate Insurer Premium
payable as of such Distribution Date] [(in each case with respect to the
related Loan Group)].
The Available Distribution Amount, when used without reference to a particular
Loan Group, means the sum of the Available Distribution Amounts for both Loan
Groups.
Bankruptcy Code: The United States Bankruptcy Code, as amended from
---------------
time to time (11 U.S.C.).
3
<PAGE>
Beneficial Holder: A Person holding a beneficial interest in any
-----------------
Certificate through a Participant or an Indirect Participant or a Person holding
a beneficial interest in any Definitive Certificate, as defined in Section 6.07.
Book-Entry Certificates: Certificates evidencing a beneficial
-----------------------
interest in the Trust Fund, ownership and transfers of which shall be made
through book entries, as described in Section 6.07.
Business Day: Any day other than (i) a Saturday or a Sunday, or (ii)
------------
a day on which the Certificate Insurer or banking institutions in New York or
the state in which the Servicer or the Corporate Trust Office are located are
authorized or obligated by law or executive order to be closed.
Certificate: Any Class A, Class S or Class R Certificate executed and
-----------
authenticated by the Trustee for the benefit of the Certificateholders in
substantially the form or forms attached as Exhibits hereto.
Certificate Account: The separate account or accounts created and
-------------------
maintained by the Trustee pursuant to Section 4.01, in the name of the Trustee
for the benefit of the Certificateholders and the Certificate Insurer for
deposit of payments and collections in respect of the Mortgage Loans pursuant to
Section 4.01 hereof, which account or accounts must be an Eligible Account or
Accounts.
Certificate Insurer: __________, a __________, and its permitted
-------------------
successors and assigns.
Certificate Principal Balance: On any date and with respect to each
-----------------------------
Class of the Class A Certificates, the Initial Certificate Principal Balance of
such Class less the sum of (i) all amounts previously distributed to Holders of
such Class with respect to principal pursuant to Section 4.02 and (ii) all
amounts of Realized Losses previously allocated to such Class pursuant to
Section 4.03, unless an Insured Payment in respect of such amount has been paid
by the Certificate Insurer and is included in clause (i) above.
Certificate Rate: In the case of each Class of the Class A
----------------
Certificates and any Distribution Date, a per annum rate equal to the weighted
average, expressed as a percentage, of the Net Mortgage Rates of the Mortgage
Loans in the related Loan Group, weighted on the basis of the respective
Principal Balances of such Mortgage Loans at the close of business on the Due
Date immediately preceding the related Due Period after giving effect to
distributions on such date allocable to principal. With respect to the Class S
Certificates and any Distribution Date, a rate per annum equal to [___]%.
Interest on the Certificates will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
Certificate Register: The register maintained pursuant to Section
--------------------
6.02(a) hereof.
4
<PAGE>
Certificateholder or Holder: The Person in whose name a Certificate
----------------- ------
is registered in the Certificate Register.
Class: Each of the Class A, Class S or Class R Certificates, as
-----
appropriate.
Class A Certificate: Any of the Class [A-I] Certificates or Class [A-
-------------------
II] Certificates.
Class A-I Certificate: A Certificate executed and authenticated by
---------------------
the Trustee in substantially the form set forth in Exhibit A hereto and
---------
designated as a Class A-I Certificate and evidencing ownership of interests
designated as "regular interests" in the Trust REMIC for purposes of the REMIC
Provisions.
Class [A-II] Certificate: A Certificate executed and authenticated by
------------------------
the Trustee in substantially the form set forth in Exhibit A hereto and
---------
designated as a Class [A-II] Certificate and evidencing ownership of interests
designated as "regular interests" in the Trust REMIC for purposes of the REMIC
Provisions.]
Class A-I Cumulative Interest Shortfall Amount: On any Distribution
----------------------------------------------
Date, an amount equal to (i) any portion of a Class [A-I] Interest Distribution
Amount that was not distributed to the Holders of the Class [A-I] Certificates
on any preceding Distribution Date less (ii) any amount described in clause (i)
hereof that is included in a Realized Loss that has been allocated to the Class
[A-I] Certificates on or prior to such Distribution Date.
Class [A-II] Cumulative Interest Shortfall Amount: On any
-------------------------------------------------
Distribution Date, an amount equal to (i) any portion of a Class [A-II] Interest
Distribution Amount that was not distributed to the Holders of the Class [A-II]
Certificates on any preceding Distribution Date less (ii) any amount described
in clause (i) hereof that is included in a Realized Loss that has been allocated
to the Class [A-II] Certificates on or prior to such Distribution Date.]
Class [A-I] Interest Distribution Amount: On any Distribution Date,
----------------------------------------
(a) one-twelfth of the product of (i) the Certificate Principal Balance of the
Class [A-I] Certificates immediately prior to such Distribution Date and (ii)
the related Certificate Rate, minus (b) the related Certificate Insurer Premium
and the aggregate amount of Prepayment Interest Shortfalls and Relief Act
Shortfalls allocated to such Certificates pursuant to Section 4.05 on such
Distribution Date.
Class [A-II] Interest Distribution Amount: On any Distribution Date,
-----------------------------------------
(a) one-twelfth of the product of (i) the Certificate Principal Balance of the
Class [A-II] Certificates immediately prior to such Distribution Date and (ii)
the related Certificate Rate, minus (b) the related Certificate Insurer Premium
and the aggregate amount of Prepayment Interest Shortfalls and Relief Act
Shortfalls allocated to such Certificates pursuant to Section 4.05 on such
Distribution Date.]
Class [A-I] Principal Distribution Amount: (a) On any Distribution
-----------------------------------------
Date, the sum of (i) the principal due on the related Due Date for each Group I
Loan and received during the related Due Period or with respect to which a
Monthly Advance was made with
5
<PAGE>
respect to the related Due Period, (ii) for each Group I Loan that was prepaid
during the related Prepayment Period, the amount of the Principal Prepayment
including, with respect to any Group I Loan that was the subject of a Debt
Service Reduction in any prior Prepayment Period, the amount of any such
Principal Prepayment that exceeds the Principal Balance of such Group I Loan as
of the date of the prepayment, (iii) for each Group I Loan that was purchased by
the Seller or Servicer during the related Prepayment Period pursuant to Section
2.01, 2.02, 2.04, 3.12, 3.21 or 10.01 hereof, the principal amount of the
Purchase Price (net of any amounts with respect to which a distribution of
principal has already been made) and the amount of any shortfall deposited in
the Custodial Account in connection with the substitution of a Deleted Mortgage
Loan pursuant to Section 2.01, 2.02 or 2.04 hereof during the related Prepayment
Period, (iv) the aggregate amount of the principal portion of Liquidation
Proceeds and the principal portion of Insurance Proceeds received with respect
to such Group I Loan net of any withdrawals permitted hereunder to be made by
the Servicer from the Custodial Account with respect to such Group I Loan, (v)
for each Group I Loan with respect to which any other unscheduled recovery of
principal has been received during the related Prepayment Period, the amount of
such unscheduled recovery, (vi) that portion, if any, of the Class S Interest
Distribution Amount for such Distribution Date allocated to the Class [A-I]
Certificates (as provided in the definition of Class S Interest Distribution
Amount) in respect of the principal portion of Realized Losses on [Group I
Loans] in the related Prepayment Period, (vii) amounts withdrawn from the
Reserve Account in respect of the principal portion of Realized Losses related
to [Group I Loans] in the related Prepayment Period in accordance with Section
4.07(c) and (viii) any amounts paid in respect of a Collateralization Deficit
related to Loan Group I pursuant to the Policy, and (b) on the Scheduled Final
Distribution Date, the outstanding Certificate Principal Balance of the Class
[A-I] Certificates.
Class [A-II] Principal Distribution Amount: (a) On any Distribution
------------------------------------------
Date, the sum of (i) the principal due on the related Due Date for each Group II
Loan and received during the related Due Period or with respect to which a
Monthly Advance was made with respect to the related Due Period, (ii) for each
Group II Loan that was prepaid during the related Prepayment Period, the amount
of the Principal Prepayment including, with respect to any Group II Loan that
was the subject of a Debt Service Reduction in any prior Prepayment Period, the
amount of any such Principal Prepayment that exceeds the Principal Balance of
such Group II Loan as of the date of the prepayment, (iii) for each Group II
Loan that was purchased by the Seller or Servicer during the related Prepayment
Period pursuant to Section 2.01, 2.02, 2.04, 3.12, 3.21 or 10.01 hereof, the
principal amount of the Purchase Price (net of any amounts with respect to which
a distribution of principal has already been made) and the amount of any
shortfall deposited in the Custodial Account in connection with the substitution
of a Deleted Mortgage Loan pursuant to Section 2.01, 2.02 or 2.04 hereof during
the related Prepayment Period, (iv) the aggregate amount of the principal
portion of Liquidation Proceeds and the principal portion of Insurance Proceeds
received with respect to such Group II Loan net of any withdrawals permitted
hereunder to be made by the Servicer from the Custodial Account with respect to
such Group II Loan, (v) for each Group II Loan with respect to which any other
unscheduled recovery of principal has been received during the related
Prepayment Period, the amount of such unscheduled recovery, (vi) that portion,
if any, of the Class S Interest Distribution Amount for such Distribution Date
allocated to the Class [A-II] Certificates (as provided in the definition of
Class S Interest Distribution
6
<PAGE>
Amount) in respect of the principal portion of Realized Losses on [Group II
Loans] in the related Prepayment Period, (vii) amounts withdrawn from the
Reserve Account in respect of the principal portion of Realized Losses related
to [Group II Loans] in the related Prepayment Period in accordance with Section
4.07(c) and (viii) any amounts paid in respect of a Collateralization Deficit
related to Loan Group II pursuant to the Policy, and (b) on the Scheduled Final
Distribution Date, the outstanding Certificate Principal Balance of the Class
[A-II] Certificates.]
Class R Certificate: A Certificate executed and authenticated by the
-------------------
Trustee in substantially the form set forth in Exhibit C and designated as a
Class R Certificate and evidencing an interest designated as a "residual
interest" in the Trust REMIC for purposes of the REMIC Provisions.
Class S Certificate: A Certificate executed and authenticated by the
-------------------
Trustee in substantially the form set forth in Exhibit B hereto and designated
as a Class S Certificate and evidencing ownership of interests designated as
"regular interests" in the Trust REMIC for purposes of the REMIC Provisions.
Class S Interest Distribution Amount: On any Distribution Date, (a)
------------------------------------
the aggregate of the product of (i) the Principal Balance of each Mortgage Loan
immediately after the Distribution Date preceding such Distribution Date (or,
with respect to the first Distribution Date, immediately prior to the Closing
Date) and (ii) one-twelfth of [____]%, minus (b) the aggregate amount of
Prepayment Interest Shortfalls and Relief Act Shortfalls allocated to the Class
S Certificates pursuant to Section 4.05 on such Distribution Date. On any
Distribution Date with respect to which there are Realized Losses, the Class S
Interest Distribution Amount, to the extent of such Realized Losses, shall be
allocated between the Class [A-I] and Class [A-II] Certificates in proportion to
the principal portion of Realized Losses on the related Loan Group for the
related Distribution Date.
Clearing Agency: An organization registered as a "clearing agency"
---------------
pursuant to Section 17A of the Securities Exchange Act of 1934, as amended,
which initially shall be DTC.
Code: The Internal Revenue Code of 1986.
----
Collateralization Deficit: With respect to any Distribution Date and a
-------------------------
Loan Group, the excess of (x) the aggregate outstanding Certificate Principal
Balance of the related Class of Class A Certificates (after giving effect to all
distributions to be made on such Distribution Date other than distributions from
amounts attributable to related Insured Payments) as of such Distribution Date
over (y) the aggregate outstanding Principal Balance of the Mortgage Loans in
such Loan Group as of the close of business on the related Due Date (reduced, to
the extent not already reflected, by any amounts received by the Servicer in
respect of scheduled payments of principal after such Due Date but before the
related Determination Date and any amounts allocable to principal paid by the
Servicer as part of a Monthly Advance after such Due Date but on or before the
related Servicer Advance Date, in each case with respect to the Mortgage Loans
in such Loan Group).
7
<PAGE>
Converted Mortgage Loan: A Convertible Mortgage Loan the interest on
-----------------------
which has converted to a fixed interest rate in accordance with the terms of the
related Mortgage Note.
Convertible Mortgage Loan: Any Mortgage Loan which by its terms
-------------------------
grants to the related Mortgagor the option to convert the interest rate borne by
such Mortgage Loan from an adjustable interest rate to a fixed interest rate.
Converting Mortgage Loan: Any Convertible Mortgage Loan with respect
------------------------
to which the related Mortgagor has given notice of its intent to convert from an
adjustable interest rate to a fixed interest rate and prior to the conversion of
such Convertible Mortgage Loan.
Corporate Trust Office: The designated office of the Trustee in the
----------------------
State of [____________] at which at any particular time its corporate trust
business shall be administered, which office at the date of the execution of
this Agreement is located at [_______________________________________].
Credit Support: The Certificate Guaranty Insurance Policy, Letter of
--------------
Credit, the Reserve Account or the Alternative Credit Support specified in this
Agreement.
[Cumulative Insurance Payments: As of any time of determination, the
-----------------------------
aggregate amount of all Insured Payments previously made by the Certificate
Insurer under the Policy plus any unpaid Certificate Insurer Premium, plus
interest thereon from the date such amounts became due until paid in full, at a
rate of interest equal to the Late Payment Rate and in accordance with Section
3.03(a) of the Insurance Agreement, minus the sum of the aggregate of all
payments previously made to the Certificate Insurer pursuant to Section 4.02
hereof as reimbursement for such amounts.]
Custodial Account: The deposit account or accounts created and
-----------------
maintained by the Servicer pursuant to Section 3.07 hereof in the name of a
depository institution which may be the Servicer for the benefit of the
Certificateholders and the Certificate Insurer, which account or accounts must
be Eligible Accounts.
Cut-off Date: [____________], 199[_]
------------
Debt Service Reduction: With respect to any Mortgage Loan, a
----------------------
reduction in the scheduled Monthly Payment for such Mortgage Loan by a court of
competent jurisdiction in a proceeding under the Bankruptcy Code, except such a
reduction constituting a Deficient Valuation or any reduction that results in a
permanent forgiveness of principal.
Deficiency Amount: With respect to each Class of the Class A
-----------------
Certificates as of any Distribution Date, the sum of (i) any shortfall in the
related Available Distribution Amount to pay the Class [A-I] Interest
Distribution Amount or Class [A-II] Interest Distribution Amount, as applicable,
and (ii) the related Collateralization Deficit.
8
<PAGE>
Deficient Valuation: With respect to any Mortgage Loan, a valuation
-------------------
by a court of competent jurisdiction of the Mortgaged Property in an amount less
than the then outstanding indebtedness under the Mortgage Loan, or that results
in a permanent forgiveness of principal, which valuation in either case results
from a proceeding under the Bankruptcy Code.
Deleted Mortgage Loan: A Mortgage Loan replaced or to be replaced by a
---------------------
Replacement Mortgage Loan.
Delinquency Amount: As of any Distribution Date, the product of the
------------------
Rolling Three Month Delinquency Percentage and the aggregate Principal Balances
of the Mortgage Loans as of the close of business on the last day of the related
Due Period immediately preceding such Distribution Date.
Delinquency Percentage: With respect to any Distribution Date, the
----------------------
percentage equivalent of a fraction (a) the numerator of which equals the
aggregate Principal Balances of all Mortgage Loans that are 90 or more days
delinquent, in foreclosure or converted to REO Properties as of the close of
business on the last day of the related Due Period and (b) the denominator of
which is the aggregate Principal Balance of the Mortgage Loans as of the close
of business on the last day of such Due Period.
Delivered: With respect to any Eligible Investment, when the steps
---------
applicable to such item as specified below are completed:
(i) if such item is an instrument, delivering such instrument to
the Trustee endorsed to the Trustee or endorsed in blank;
(ii) if such item is a certificated security, delivering such
certificated security to the Trustee in bearer form or in registered form
issued to the Trustee or endorsed to the Trustee or endorsed in blank by an
effective endorsement;
(iii) if such item is a security entitlement other than a United
States Security Entitlement, causing a securities intermediary (who shall
maintain the related financial asset in a quantity corresponding to the
aggregate of all security entitlements it has established with respect to
such financial asset) to indicate by book entry that such security
entitlement has been credited to a securities account of the Trustee with
such securities intermediary;
(iv) if such item is a United States Security Entitlement, causing a
securities intermediary (who shall maintain the related financial asset in
a quantity corresponding to the aggregate of all security entitlements it
has established with respect to such financial asset) to indicate by book
entry that such United States Security Entitlement has been credited to a
securities account of the Trustee with such securities intermediary;
9
<PAGE>
(v) if such item is a securities account, causing the securities
intermediary to indicate by book entry that all security entitlements
carried in the securities account have been credited to such securities
account; and
(vi) if such item is an uncertificated security, causing the issuer of
such uncertificated security to register the Trustee as the registered
owner of such uncertificated security.
Delivery Date: [____________], 199[_].
-------------
Depository Agreement: The Letter of Representation dated as of March
--------------------
27, 1998 by and among DTC, the Seller and the Trustee.
Determination Date: The 15th day (or if such 15th day is not a
------------------
Business Day, the Business Day immediately preceding such 15th day) of the month
of the related Distribution Date.
Disqualified Organization: Any organization defined as a
-------------------------
"disqualified organization" under Section 860E(e)(5) of the Code, which includes
any of the following: (i) the United States, any State or political subdivision
thereof, any possession of the United States, or any agency or instrumentality
of any of the foregoing (other than an instrumentality which is a corporation if
all of its activities are subject to tax and, except for the FHLMC, a majority
of its board of directors is not selected by such governmental unit), (ii) a
foreign government, any international organization, or any agency or
instrumentality of any of the foregoing, (iii) any organization (other than
certain farmers' cooperatives described in Section 521 of the Code) which is
exempt from the tax imposed by Chapter 1 of the Code (including the tax imposed
by Section 511 of the Code on unrelated business taxable income), (iv) rural
electric and telephone cooperatives described in Section 1381(a)(2)(C) of the
Code. A Disqualified Organization also includes any "electing large
partnership" as defined in Section 775(a) of the Code and any other Person so
designated by the Trustee based upon an Opinion of Counsel that the holding of
an Ownership Interest in a Class R Certificate by such Person may cause the
Trust REMIC or any Person having an Ownership Interest in any Class of
Certificates (other than such 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 Class R Certificate to such Person. The terms
"United States", "State" and "international organization" shall have the
meanings set forth in Section 7701 of the Code or successor provisions.
Distribution Date: The 25th day of each calendar month, or if such
-----------------
25th day is not a Business Day, the next succeeding Business Day, commencing in
[___], 199[_].
DTC: The Depository Trust Company.
---
Due Date: The first day of the calendar month in which the related
--------
Distribution Date occurs.
10
<PAGE>
Due Period: The period from and including the second day of the
----------
calendar month preceding the calendar month in which any Distribution Date
occurs to and including the first day of the calendar month in which such
Distribution Date occurs.
Eligible Account: Either (i) an account or accounts maintained with a
----------------
federal or state-chartered depository institution or trust company (which may be
the Servicer or an affiliate of the Servicer or which may be the Trustee or an
affiliate of the Trustee) the short-term unsecured debt obligations of which
(or, in the case of a depository institution or trust company that is the
principal subsidiary of a holding company, the short-term unsecured debt
obligations of such holding company) are rated by each Rating Agency not lower
than P-1 in the case of Moody's and A-1+ in the case of Standard & Poor's, (ii)
an account or accounts the deposits in which are fully insured by the FDIC,
provided that any such deposits not so insured shall be otherwise maintained
such that (as evidenced by an Opinion of Counsel delivered to the Trustee and
the Rating Agencies) the applicable Certificateholders have a claim with respect
to the funds in such account or a perfected first priority security interest
against any collateral (which shall be limited to Eligible Investments) securing
such funds that is superior to claims of any other depositors or creditors of
the depository institution or trust company with which such account is
maintained, (iii) a trust account or accounts maintained with the trust
department of a federal or state chartered depository institution or trust
company acting in its fiduciary capacity, provided that any such state chartered
depository institution is subject to regulation regarding funds on deposit
substantially similar to the regulations set forth in 12 C.F.R. ' 9.10(b) or
(iv) any account maintained at any Federal Home Loan Bank.
Eligible Investments: At any time, any one or more of the following
--------------------
obligations, instruments and securities:
(i) obligations of the United States or any agency thereof,
provided such obligations are backed by the full faith and credit of the
United States;
(ii) general obligations of or obligations guaranteed by any state
of the United States or the District of Columbia receiving the highest
long-term rating of Moody's and Standard & Poor's, or such lower ratings as
are acceptable to the Certificate Insurer and will not result in the
downgrading or withdrawal of the rating, if any, then assigned to the Class
A Certificates by each applicable Rating Agency;
(iii) commercial paper (having original maturities of not more than
270 days) which is then rated in the highest commercial paper rating
category of Moody's and Standard & Poor's, or such lower category as is
acceptable to the Certificate Insurer and will not result in the
downgrading or withdrawal of the rating then assigned to the Class A
Certificates by each applicable Rating Agency;
(iv) certificates of deposit, demand or time deposits, federal funds
or bankers' acceptances (in each case having maturities of not more than
365 days) issued by any depository institution or trust company
incorporated under the laws of the United States or of any state thereof
and subject to supervision and examination by federal and/or state banking
authorities, provided that the commercial paper and/or
11
<PAGE>
long-term debt obligations of such depository institution or trust company
(or in the case of a depository institution or trust company that is the
principal subsidiary of a holding company, the commercial paper or long-
term debt obligations of such holding company) are then rated in the
highest rating category of Moody's and Standard & Poor's, in the case of
commercial paper, and in the highest category in the case of long-term debt
obligations, or such lower categories as is acceptable to the Certificate
Insurer and will not result in the downgrading or withdrawal of the rating
then assigned to the Class A Certificates by each applicable Rating Agency,
and, in the case of short-term debt obligations which have maturities of 30
days or less, a rating of P-1 by Moody's, and a rating of A-1+ by Standard
& Poor's;
(v) demand or time deposits or certificates of deposit issued by
(a) any Federal Home Loan Bank or (b) any bank or trust company or savings
association which is rated at least "A" by Standard & Poor's which has
combined capital, surplus and undistributed profits of not less than $50
million and fully insured by the FDIC;
(vi) repurchase obligations with respect to any security described
in (i) and (ii) above or any other security issued or guaranteed by an
agency or instrumentality of the United States, in either case entered into
with a depository institution or trust company (acting as principal)
described in (iv) above;
(vii) securities bearing interest or sold at a discount issued by
any corporation incorporated under the laws of the United States or any
state thereof which, at the time of such investment or contractual
commitment providing for such investments are then rated in the highest
rating category of Moody's and Standard & Poor's or in such lower rating
category as will not result in the downgrading or withdrawal of the rating,
if any, then assigned to the Class A Certificates by each applicable Rating
Agency;
(viii) such other investments which are acceptable to the Certificate
Insurer and do not adversely affect the rating, if any, on the Class A
Certificates by each applicable Rating Agency; and
(ix) units of taxable money-market portfolios rated in the highest
rating category by Moody's and Standard & Poor's and not restricted to
obligations issued or guaranteed by any agency or instrumentality of the
United States or entities whose obligations are backed by the full faith
and credit of the United States and repurchase agreements collateralized by
such obligations.
provided that (A) such obligation or security is held for a temporary period
pursuant to Treasury Regulations Section 1.860G-2(g)(1), and (B) Eligible
Investments shall include only such obligations or securities that mature on or
before the (i) Business Day immediately preceding the next Distribution Date
with respect to amounts on deposit in the Certificate Account or the Reserve
Account and (ii) the second Business Day immediately preceding the next
Distribution Date with respect to amounts on deposit in the Custodial Account.
In addition, no Eligible Investment which incorporates a penalty for early
withdrawal will be
12
<PAGE>
used unless the maturity of such Eligible Investment is on or before the
Business Day immediately preceding the next Distribution Date.
Escrow Account: As defined in Section 3.08.
--------------
Event of Default: As defined in Section 8.01 hereof.
----------------
FDIC: The Federal Deposit Insurance Corporation, or any successor
----
thereto.
FHLMC: The Federal Home Loan Mortgage Corporation, a corporate
-----
instrumentality of the United States created and existing under Title III of the
Emergency Home Finance Act of 1970, as amended, or any successor thereto.
Final Distribution Date: The Distribution Date on which the final
-----------------------
distribution in respect of the Certificates will be made pursuant to Section
10.01, which Final Distribution Date shall in no event be later than the end of
the 90-day liquidation period described in Section 10.03.
Five-Year Index: With respect to any Mortgage Loan and as to any
---------------
Adjustment Date therefor, a per annum rate equal to the weekly average yield on
U.S. Treasury securities adjusted to a constant maturity of five years as
reported by the Federal Reserve Board in statistical Release No. H.15(519) as of
the date specified in the related Mortgage Note, or, in the event that such
index is no longer available, an index selected by the Servicer and reasonably
acceptable to the Trustee that is based on comparable information.
FNMA: The Federal National Mortgage Association, a federally
----
chartered and privately owned corporation organized and existing under the
Federal National Mortgage Association Charter Act, or any successor thereto.
[Group I Loans]: The Mortgage Loans designated on the Mortgage Loan
---------------
Schedule attached hereto as Exhibit D-1. The [Group I Loans] relate to the
Class [A-I] Certificates.
[Group II Loans]: The Mortgage Loans designated on the Mortgage Loan
----------------
Schedule attached hereto as Exhibit D-2. The [Group II Loans] relate to the
Class [A-II] Certificates.
Index: Any or all of the One-Year Index, Three-Year Index and Five-
-----
Year Index.
Indirect Participants: Entities, such as banks, brokers, dealers and
---------------------
trust companies, that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly.
13
<PAGE>
Initial Certificate Principal Balance: With respect to the Class
-------------------------------------
[A-I] Certificates, $[______________], and with respect to the Class [A-II]
Certificates, $[_________________].
[Insurance Account: The account or accounts created and maintained
-----------------
pursuant to Section 4.06, which shall be entitled [NAME OF TRUSTEE], as trustee,
in trust for the registered holders of Chevy Chase Bank Home Loan Trust 1998-
____, Mortgage-Backed Pass-Through Certificates, Series 199[_]-[_____], Class
A," and which must be an Eligible Account.]
Insurance Proceeds: Amounts paid pursuant to any insurance policy
------------------
with respect to a Mortgage Loan that have not been used to restore the related
property.
Insured Payment: With respect to each Class of the Class A
---------------
Certificates, as of any Distribution Date, the related Deficiency Amount, if
any, for such Distribution Date.
[Late Payment Rate: As defined in the Certificate Guaranty Insurance
-----------------
Policy.]
Lender-Paid MI Loan: A Mortgage Loan so indicated on the Mortgage
-------------------
Loan Schedule.
[L/C Bank: The issuer, if any, of the Letter of Credit with respect
--------
to the Certificates]
[Letter of Credit: The irrevocable stand-by letter of credit issued
----------------
by the L?C Bank in favor of the Trustee for the benefit of the
Certificateholders, terms of which, to the extent not specified herein, shall be
specified in such Letter of Credit.]
Liquidated Loan: With respect to any Distribution Date, a Mortgage
---------------
Loan which, as of the close of business on the Business Day next preceding the
related Determination Date, (a) has been liquidated through deed in lieu of
foreclosure, sale in foreclosure, trustee's sale or other realization as
provided by applicable law of real property subject to the related Mortgage and
any security agreements or (b) with respect to which payment under related
private mortgage insurance or hazard insurance and/or from any public or
governmental authority on account of a taking or condemnation of any such
property has been received; provided, however, that any REO Property shall not
be treated as a Liquidated Loan until such property has been finally liquidated.
Liquidation Expenses: Customary and reasonable "out of pocket"
--------------------
expenses incurred by the Servicer (or the related Sub-Servicer) in connection
with the liquidation of any defaulted Mortgage Loan and not recovered by the
Servicer (or the related Sub-Servicer) under a Primary Mortgage Insurance Policy
for reasons other than the Servicer's failure to comply with Section 3.10
hereof, such expenses including, without limitation, legal fees and expenses,
any unreimbursed amount expended by the Servicer pursuant to Section 3.11 hereof
respecting the related Mortgage and any related and unreimbursed expenditures
for real estate property taxes or for property restoration or preservation to
the extent not
14
<PAGE>
previously reimbursed under any hazard insurance policy for reasons other than
the Servicer's failure to comply with Section 3.11 hereof.
Liquidation Proceeds: Amounts other than Insurance Proceeds received
--------------------
in connection with the liquidation of a defaulted Mortgage Loan, whether through
trustee's sale, foreclosure sale or otherwise or amounts received in connection
with any condemnation or partial release of a Mortgaged Property.
Loan Group: Either or both of Loan Group I and Loan Group II.
----------
Loan Group I: The group of Mortgage Loans comprised of the [Group I
------------
Loans].
Loan Group II: The group of Mortgage Loans comprised of the [Group II
-------------
Loans].
Loan-to-Value Ratio: As of any date, the fraction, expressed as a
-------------------
percentage, the numerator of which is the Principal Balance of the related
Mortgage Loan at the date of determination and the denominator of which is the
Appraised Value of the related Mortgaged Property or, in the case of a
Replacement Mortgage Loan, the appraised value of the related Mortgaged Property
based upon an appraisal made within 180 days prior to the date of substitution
of such Replacement Mortgage Loan for a Deleted Mortgage Loan.
Margin: As to each Mortgage Loan, the fixed percentage set forth in
------
the related Mortgage Note, which percentage is added to the applicable Index on
each Adjustment Date to determine (subject to rounding in accordance with the
related Mortgage Note, the applicable Periodic Cap, Maximum Interest Rate and
Minimum Interest Rate) the interest rate to be borne by such Mortgage Loan until
the next Adjustment Date thereof.
Maturity Date: The latest possible maturity date, solely for purposes
-------------
of Section 1.860G-1(a)(4)(iii) of the Treasury regulations, by which the
Certificate Principal Balance, if any, of each Class of Regular Certificates
would be reduced to zero as determined under a hypothetical scenario which
assumes that such date is the Distribution Date in the month of the maturity
date of the Mortgage Loan with the latest scheduled maturity date. The Maturity
Date for each Class of Regular Certificates is October 25, 2031.
Maximum Interest Rate: As to any Mortgage Loan, the maximum interest
---------------------
rate that may be borne by such Mortgage Loan as set forth in the related
Mortgage Note, which rate may be applicable to such Mortgage Loan at any time
during the life of such Mortgage Loan.
Minimum Interest Rate: As to any Mortgage Loan, the minimum interest
---------------------
rate that may be borne by such Mortgage Loan as set forth in the related
Mortgage Note, which rate may be applicable to such Mortgage Loan at any time
during the life of such Mortgage Loan.
15
<PAGE>
Monthly Advance: The aggregate of the advances made by or on behalf
---------------
of the Servicer with respect to any Distribution Date pursuant to Section 5.01
hereof, the amount of any such advances being equal to the regular monthly
installments of principal and interest on the Mortgage Loans that were due on
the related Due Date and delinquent as of the close of business on the related
Determination Date, after adjustment of any delinquent interest payment to be
equal to interest at a rate equal to the Mortgage Rate less the Servicing Fee
Rate on the Principal Balance of the Mortgage Loans, less the aggregate amount
of any such delinquent payments that the Servicer has determined would
constitute a Nonrecoverable Advance if made.
Monthly Payment: The scheduled monthly payment of principal and
---------------
interest on a Mortgage Loan.
Moody's: Moody's Investors Service, Inc. or any successor thereto.
-------
Mortgage: The mortgage, deed of trust or other instrument creating a
--------
first lien on a fee simple or leasehold estate in real property securing a
Mortgage Note.
Mortgage File: For each Mortgage Loan, the Trustee Mortgage File and
-------------
the Servicer Mortgage File.
Mortgage Loan: Each of the mortgage loans transferred and assigned to
-------------
the Trustee pursuant to the provisions hereof as from time to time are held as a
part of the Trust Fund, evidenced by a Mortgage Note and secured by a Mortgage,
the mortgage loans so held being identified in the Mortgage Loan Schedule, as
amended from time to time.
Mortgage Loan Purchase Agreement: The Mortgage Loan Purchase
--------------------------------
Agreement dated as of March 1, 1998 between the Seller, Credit Suisse First
Boston Corporation and the Seller, pursuant to which the Seller purchased the
Mortgage Loans from the Seller.
Mortgage Loan Repurchase Price: The price, calculated as set forth in
------------------------------
Section 10.01, to be paid in connection with the repurchase of the Mortgage
Loans pursuant to an Optional Termination of the Trust Fund.
Mortgage Loan Schedule: The list of Mortgage Loans transferred to the
----------------------
Trustee as part of the Trust Fund for the Certificates and from time to time
subject to this Agreement (as from time to time amended by the Servicer to
reflect the addition of Replacement Mortgage Loans and the deletion of Deleted
Mortgage Loans pursuant to the provisions of this Agreement), attached hereto as
Exhibit D-1 (with respect to the [Group I Loans]) and Exhibit D-2 (with respect
- ----------- -----------
to the [Group II Loans]), setting forth the following information with respect
to each Mortgage Loan:
(i) the loan number;
(ii) the city, state and zip code for each Mortgaged Property;
16
<PAGE>
(iii) the applicable Index;
(iv) the Margin;
(v) the Maximum Interest Rate;
(vi) the Minimum Interest Rate;
(vii) the original term to maturity;
(viii) the remaining term to maturity;
(ix) the original principal balance;
(x) the Principal Balance as of the Cut-off Date;
(xi) the first Due Date;
(xii) the Monthly Payment in effect as of the Cut-off Date;
(xiii) the Loan-to-Value Ratio at origination;
(xiv) the Appraised Value of the Mortgaged Property;
(xv) the Net Mortgage Rate;
(xvi) a code indicating whether the Mortgaged Property is either
(a) a detached single-family dwelling or a de minimis
planned unit development, (b) a condominium unit or a
dwelling in a planned unit development, or (c) a two- to
four-family residential property;
(xvii) a code indicating whether the Mortgaged Property at the
time of origination was represented to be owner-occupied;
(xviii) a code indicating whether the Mortgage Loan is a Lender-
Paid MI Loan; and
(xix) the purpose for which the financing was made.
Such schedule shall also set forth the total of the amounts described under (ix)
above for all of the Mortgage Loans. Such schedule may be in the form of more
than one list collectively setting forth all of the information required and
shall also be in a computer-readable format acceptable to the Trustee and the
Certificate Insurer.
Mortgage Note: The original executed note or other evidence of the
-------------
indebtedness of a Mortgagor under a Mortgage Loan, including a lost note
affidavit with a copy of the related note.
17
<PAGE>
Mortgage Rate: The annual rate of interest borne by a Mortgage Note,
-------------
which is set forth in the related Mortgage Note. The Mortgage Rate for each
Mortgage Loan as of the Cut-off Date will be adjusted on each Adjustment Date to
a rate equal to the sum of the Index applicable to such Adjustment Date and the
Margin, rounded to or up to the nearest multiple of 0.125%, as specified in the
related Mortgage Note, subject to the application of the applicable Periodic
Cap, Maximum Interest Rate and Minimum Interest Rate.
Mortgaged Property: The underlying property securing a Mortgage Loan.
------------------
Mortgagor: The obligor on a Mortgage Note.
---------
Net Mortgage Rate: As to each Mortgage Loan, with respect to any
-----------------
Distribution Date, a rate per annum equal to (a) the Mortgage Rate in effect as
of the Due Date in the preceding calendar month minus (b) the Adjusted Servicing
Fee Rate minus (c) the Trustee Fee Rate minus (d) [_____]% per annum.
1933 Act: The Securities Act of 1933, as amended.
--------
Nonrecoverable Advance: The portion of any Monthly Advance previously
----------------------
made or proposed to be made by the Servicer or other advance previously made by
the Servicer that, in the good faith judgment of the Servicer, will not or, in
the case of a current delinquency, would not be, ultimately recoverable by the
Servicer from Insurance Proceeds or Liquidation Proceeds (net of Liquidation
Expenses) with respect to the related Mortgage Loan.
Officers' Certificate: A certificate signed by the Chairman of the
---------------------
Board, any Vice Chairman of the Board, the President, an Executive Vice
President, Senior Vice President, a Vice President, or other authorized officer,
and by the Treasurer, the Secretary, or one of the Assistant Treasurers or
Assistant Secretaries of the Seller, the Seller, the Servicer, a Sub-Servicer or
the Trustee, as the case may be, and delivered to [the Certificate Insurer], the
Seller, the Servicer or the Trustee, as required by this Agreement.
One-Year Index: With respect to any Mortgage Loan and as to any
--------------
Adjustment Date therefor, a per annum rate equal to the weekly average yield on
U.S. Treasury securities adjusted to a constant maturity of one year as reported
by the Federal Reserve Board in statistical Release No. H.15(519) as of the date
specified in the related Mortgage Note, or, in the event that such index is no
longer available, an index selected by the Servicer and reasonably acceptable to
the Trustee that is based on comparable information.
Opinion of Counsel: A written opinion of counsel, who may be counsel
------------------
for the Seller or the Servicer, reasonably acceptable to the Trustee [and the
Certificate Insurer]. With respect to the definition of Eligible Account in
this Article I and Sections 2.04 and 7.04 hereof and any opinion dealing with
the qualification of a REMIC or compliance with the REMIC Provisions, such
counsel must (i) in fact be independent of the Seller and the Servicer, (ii) not
have any direct financial interest in the Seller or the Servicer or in any
affiliate of either of them and (iii) not be connected with the Seller or the
Servicer as an
18
<PAGE>
officer, employee, promoter, underwriter, trustee, partner, director or Person
performing similar functions.
Optional Termination: The purchase of the Mortgage Loans pursuant to
--------------------
Section 10.01.
Optional Termination Date: The date fixed by the Servicer for the
-------------------------
purchase of the Mortgage Loans pursuant to Section 10.01.
Participant: A broker, dealer, bank, other financial institution or
-----------
other Person for whom DTC effects book-entry transfers and pledges of securities
deposited with DTC.
Pass-Through Entity: (a) a regulated investment company described in
-------------------
Section 851 of the Code, a real estate investment trust described in Section 856
of the Code, a common trust fund or an organization described in Section 1381(a)
of the Code, (b) any partnership, trust or estate or (c) any person holding a
Class A Certificate as nominee for another person.
Percentage Interest: The percentage interest (which may be expressed
-------------------
as a fraction) evidenced by any Certificate, which (a) in the case of each Class
of the Class A Certificates, is equal to a fraction, the numerator of which is
the Initial Certificate Principal Balance of such Certificate, and the
denominator of which is equal to the aggregate Initial Certificate Principal
Balances of all Certificates of the same Class and (b) in the case of the Class
S or Class R Certificates, is set forth on the face thereof.
Periodic Cap: With respect to each Mortgage Loan, the maximum
------------
increase or decrease in the Mortgage Rate on any Adjustment Date (other than
with respect to certain of the Mortgage Loans, the first Adjustment Date for
such Mortgage Loan), as specified in the related Mortgage Note.
Person: Any individual, corporation, partnership, joint venture,
------
association, joint-stock company, trust, unincorporated organization or
government, or any agency or political subdivision thereof.
[Policy: The Certificate Guaranty Insurance Policy No. _____ issued
------
by the Certificate Insurer in respect of the Class A Certificates, a copy of
which is attached hereto as Exhibit L.]
Prepayment Interest Shortfall: As to any Distribution Date and any
-----------------------------
Mortgage Loan (other than a Mortgage Loan secured by an REO Property) that was
the subject of a Principal Prepayment during the related Prepayment Period, an
amount equal to the excess of one month's interest at the Mortgage Rate on the
Principal Balance of such Mortgage Loan over the amount of interest paid by the
Mortgagor for such Prepayment Period to the date of such Principal Prepayment.
Prepayment Period: With respect to any Distribution Date, the
-----------------
calendar month prior to the month in which such Distribution Date occurs.
19
<PAGE>
Primary Mortgage Insurance Policy: Each primary policy of mortgage
---------------------------------
guaranty insurance with respect to the Mortgage Loans or any replacement policy
therefor.
Principal Balance: With respect to any Mortgage Loan, as of the date
-----------------
of any determination, the principal balance of such Mortgage Loan remaining to
be paid by the Mortgagor as of the Cut-off Date after deduction of all payments
due on or before the Cut-off Date, reduced (but not below zero) by the sum of
(i) all amounts previously received or collected by the Servicer in respect of
principal of such Mortgage Loan subsequent to the Cut-off Date, other than
amounts representing payments due on such Mortgage Loan on or prior to the Cut-
off Date; (ii) all Liquidation Proceeds (net of Liquidation Expenses) and
Insurance Proceeds allocated to principal; (iii) all amounts allocable to the
principal of such Mortgage Loan previously paid by the Servicer as part of a
Monthly Advance, in each case which were distributed to Certificateholders
pursuant to Section 4.02; and (iv) all Realized Losses allocated to
Certificateholders with respect thereto on any previous Distribution Date. In
the case of a Replacement Mortgage Loan, "Principal Balance" shall mean, at the
time of any determination, the principal balance of such Replacement Mortgage
Loan on the date of substitution after deduction of all payments due on or
before the Due Date in the month of substitution, reduced by the sums described
in (i) through (iv), above, after such Due Date.
Principal Prepayment: Any Mortgagor payment or other recovery of
--------------------
principal on a Mortgage Loan that is received in advance of its scheduled Due
Date and is not accompanied by an amount as to interest representing scheduled
interest due on any date or dates in any month or months subsequent to the month
of prepayment.
Purchase Price: With respect to any Mortgage Loan required to be
--------------
purchased by the Seller or Servicer pursuant to Section 2.01, 2.02, 2.04 or 3.12
or which the Servicer purchases pursuant to Section 3.21 the sum of (i) 100% of
the Principal Balance of the Mortgage Loan on the date of such purchase, (ii)
accrued and unpaid interest on the Mortgage Loan at a rate equal to the sum of
the Net Mortgage Rate, the Trustee Fee Rate and 0.80% per annum to the next Due
Date and (iii) the amount of any unreimbursed Monthly Advances and other
advances made by the Servicer with respect to such Mortgage Loan and
reimbursable to the Servicer hereunder. With respect to any Mortgage Loan
required or allowed to be purchased, the Servicer or Seller, as applicable,
shall deliver to the Trustee an Officers' Certificate as to the calculation of
the Purchase Price.
Qualified Certificate Insurer: A mortgage guaranty insurance company
-----------------------------
duly qualified as such under the laws of the state of its principal place of
business and each other state having jurisdiction over such insurer in
connection with the insurance policy issued by such insurer, duly authorized and
licensed by the insurance regulatory authority of the state of its principal
place of business and, to the extent required by applicable law, each such other
state, to transact a mortgage guaranty insurance business in such state and each
such other state and to write the insurance provided by the insurance policy
issued by it and approved as an insurer by FHLMC or FNMA and whose claims-paying
ability will not adversely affect the rating on the Certificates.
Rating Agency: Moody's and Standard & Poor's or any successor
-------------
thereto.
20
<PAGE>
Realized Loss: An amount determined by the Servicer and evidenced by
-------------
an Officers' Certificate delivered to the Trustee, in connection with any
Mortgage Loan equal to (a) with respect to any Liquidated Loan, the excess of
the Principal Balance of such Liquidated Loan plus interest thereon at a rate
equal to the sum of the applicable Net Mortgage Rate and the Trustee Fee Rate
from the Due Date as to which interest was last paid up to the Due Date next
succeeding such liquidation over proceeds, if any, received in connection with
such liquidation, after application of all withdrawals permitted to be made by
the Servicer from the related Custodial Account with respect to such Mortgage
Loan, (b) with respect to any Mortgage Loan which has become the subject of a
Deficient Valuation, the excess of the Principal Balance of the Mortgage Loan
over the principal amount as reduced in connection with the proceedings
resulting in the Deficient Valuation or (c) with respect to any Mortgage Loan
which has become the subject of a Debt Service Reduction, the present value of
all monthly Debt Service Reductions on such Mortgage Loan, assuming that the
Mortgagor pays each Monthly Payment on the applicable Due Date and that no
Principal Prepayments are received with respect to such Mortgage Loan,
discounted monthly at the applicable Mortgage Rate.
Record Date: With respect to any Distribution Date, the close of
-----------
business on the last Business Day of the month preceding the month in which the
applicable Distribution Date occurs.
Regular Certificates: All of the Certificates other than the Class R
--------------------
Certificates.
Relief Act: The Soldiers' and Sailors' Civil Relief Act of 1940, as
----------
amended.
Relief Act Shortfalls: With respect to any Distribution Date and any
---------------------
Mortgage Loan, the amount of any interest that is not collectible from the
Mortgagor during the related Due Period pursuant to the Relief Act or similar
legislation or regulations as in effect from time to time.
REMIC: A "real estate mortgage investment conduit", within the
-----
meaning of Section 860D of the Code.
REMIC Election: An election, for federal income tax purposes, to
--------------
treat certain assets as a REMIC.
REMIC Regular Interest: Any of the Class A Certificates and Class S
----------------------
Certificates. The Class A Certificates shall accrue interest at the related
Certificate Rate in effect from time to time, minus the Certificate Insurer
Premium Rate, and shall be entitled to distributions of principal, subject to
the terms and conditions hereof, in an aggregate amount equal to their initial
Certificate Principal Balance as set forth in the preliminary statement hereto.
The Class S Certificates shall accrue interest at the related Certificate Rate,
and shall not be entitled to any distributions of principal.
REMIC Provisions: Provisions of the federal income tax law relating
----------------
to REMICs, which appear at Section 860A through 860G of the Subchapter M of
Chapter 1 of
21
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the Code and related provisions, and regulations promulgated thereunder, as the
foregoing may be in effect from time to time.
REO Property: Any Mortgaged Property acquired by or in the name of
------------
the Trustee for the benefit of the Certificateholders [and the Certificate
Insurer] in foreclosure or by deed-in-lieu of foreclosure.
Replacement Mortgage Loan: A Mortgage Loan substituted by the
-------------------------
Servicer or Seller for a Deleted Mortgage Loan which must, on the date of such
substitution, as confirmed in an Officers' Certificate delivered to the Trustee,
(i) have an outstanding Principal Balance, after deduction of the principal
portion of the Monthly Payment due in the month of substitution (or in the case
of a substitution of more than one Mortgage Loan for a Deleted Mortgage Loan, an
aggregate Principal Balance, after such deduction), not in excess of the
Principal Balance of the Deleted Mortgage Loan (the amount of any shortage to be
deposited by the Servicer or Seller, as the case may be, in the Certificate
Account in the month of substitution as set forth in Section 2.03 of this
Agreement); (ii) at the time of substitution have a Net Mortgage Rate equal to
or exceeding the Net Mortgage Rate of the Deleted Mortgage Loan; (iii) have a
Loan-to-Value Ratio no higher than the Loan-to-Value Ratio of the Deleted
Mortgage Loan; (iv) have a remaining term to maturity no greater than (and not
more than one year less than) the Deleted Mortgage Loan; (v) be of the same or
better credit quality classification as that of the Deleted Mortgage Loan; and
(vi) comply with each representation and warranty relating to the Mortgage Loans
set forth in Section 2.04 hereof.
Required Insurance Policy: With respect to any Mortgage Loan, any
-------------------------
insurance policy that is required to be maintained from time to time under this
Agreement in respect of such Mortgage Loan, including each standard hazard and,
if applicable, flood insurance policy.
[Reserve Account: The account established and maintained by the
---------------
Trustee in accordance with Section 4.07.]
[Reserve Account Balance: With respect to each Distribution Date
-----------------------
(other than the first Distribution Date), the amount on deposit in the Reserve
Account as of the preceding Distribution Date after giving effect to all
distributions to be made on such preceding Distribution Date, and with respect
to the first Distribution Date, as of the Closing Date.]
Reserve Account Decrease Amount: As of any Distribution Date, the
-------------------------------
excess, if any, of the amount on deposit in the Reserve Account on such
Distribution Date (after taking into account all allocations and distributions
to be made on such Distribution Date, including payments from the Reserve
Account in respect of Realized Losses) over the Reserve Account Requirement as
of such Distribution Date.
Reserve Account Increase Amount: On any Distribution Date, the
-------------------------------
excess, if any, of the Reserve Account Requirement as of such Distribution Date
over the amount on deposit in the Reserve Account as of such Distribution Date
(after taking into account all
22
<PAGE>
distributions to be made on such Distribution Date, including payments from the
Reserve Account in respect of Realized Losses).
Reserve Account Initial Target: $[________________].
------------------------------
Reserve Account Monthly Investment Income: With respect to each
-----------------------------------------
Distribution Date, actual investment income received in respect of deposits in
the Reserve Account during the investment period applicable to the related
Eligible Investment in which such deposits were invested.
[Reserve Account Requirement:
---------------------------
(a) As of the Delivery Date, zero;
(b) for any Distribution Date occurring during the period commencing
on the Delivery Date and ending on the later of the thirtieth distribution
date following the Delivery Date and the date upon which an aggregate
amount equal to one-half of the aggregate Principal Balance of the Mortgage
Loans as of the Cut-off Date has been received by the Class A
Certificateholders as payments in reduction of the Certificate Principal
Balance thereof, the greater of: (i) the Reserve Account Initial Target
and (ii) 0.60 multiplied by the Delinquency Amount as of such Distribution
Date; and
(c) for any Distribution Date occurring after the end of the period in
clause (b) above, the greatest of (i) 2% of the aggregate Principal Balance
of the Mortgage Loans as of the close of business on the last day of the
related Due Period preceding such Distribution Date, (ii) 0.60 multiplied
by the Delinquency Amount and (iii) the greater of (x) 0.25% of the
aggregate Principal Balance of the Mortgage Loans as of the Cut-off Date
and (y) the aggregate Principal Balance of the three Mortgage Loans with
the greatest Principal Balance as of such Distribution Date.
Notwithstanding the above, in the event of a claim on the Policy, the Reserve
Account Requirement shall not step down from the amount of the Reserve Account
Requirement in effect as of the Distribution Date immediately preceding such
claim on the Policy until such time as the amount of such claim is reimbursed to
the Certificate Insurer.]
Responsible Officer: When used with respect to the Trustee, the
-------------------
Chairman or Vice Chairman of the Board of Directors or Trustees, the Chairman or
Vice Chairman of the Executive or Standing Committee of the Board of Directors
or Trustees, the President, the Chairman of the Committee on Trust Matters, any
Vice President, any Assistant Vice President, the Secretary, any Assistant
Secretary, the Treasurer, any Assistant Treasurer, the Cashier, any Assistant
Cashier, any Trust Officer or Assistant Trust Officer, the Controller and any
Assistant Controller or any other officer of the Trustee customarily performing
functions similar to those performed by any of the above designated officers and
also, with respect to a particular matter, any other officer to whom such matter
is referred because of such officer's knowledge of and familiarity with the
particular subject.
23
<PAGE>
Rolling Three-Month Delinquency Percentage: As of any Distribution
------------------------------------------
Date, the fraction, expressed as a percentage, equal to the average of the
Delinquency Percentage for each of the three (or one and two in the case of the
first and second Distribution Dates) immediately preceding Due Periods.
Rule 144A: Rule 144A under the 1933 Act, as in effect from time to
---------
time.
Scheduled Final Distribution Date: [______________].
---------------------------------
Seller: Chevy Chase Bank, F.S.B. or its successor in interest.
------
Servicer: Chevy Chase Bank, F.S.B. or any successor under the terms
--------
of this Agreement.
Servicer Advance Date: The date on which the Servicer is required to
---------------------
make a Monthly Advance pursuant to Section 5.04 hereof.
Servicer Mortgage File: All documents pertaining to a Mortgage Loan
----------------------
not required to be included in the Trustee Mortgage File and held by the
Servicer or any Sub-Servicer.
Servicer Trigger Event: The occurrence of any of the following
----------------------
events:
(a) cumulative Realized Losses since the Delivery Date equal or exceed
1.00% of the aggregate Principal Balance of the Mortgage Loans as of the
Cut-off Date;
(b) cumulative Realized Losses for the three year period commencing on
the Delivery Date equal or exceed 0.75% of the aggregate Principal Balance
of the Mortgage Loans as of the Cut-off Date; or
(c) as of any Determination Date, the Rolling Three Month Delinquency
Percentage exceeds 4.0%.
Servicing Fee: For each calendar month, as to each Mortgage Loan, (i)
-------------
an amount equal to one month's interest (or in the event of any payment of
interest which accompanies a Principal Prepayment in full made by the Mortgagor,
interest for the number of days covered by such payment of interest) at a rate
equal to the sum of (A) the applicable Servicing Fee Rate and (B) in the case of
Lender-Paid MI Loans, one-twelfth of the additional interest rate payable
thereon by the related Mortgagor) on the Principal Balance of such Mortgage Loan
immediately preceding the Distribution Date occurring in such month and (ii)
increased by any late payment charges, assumption fees and other usual and
customary fees collected from the Mortgagor and by any net income on Eligible
Investments held in the Custodial Account.
Servicing Fee Rate: [______]% per annum.
------------------
24
<PAGE>
Servicing Officer: Any officer of the Servicer involved in, or
-----------------
responsible for, the administration and servicing of the Mortgage Loans whose
name appears on a list of servicing officers furnished to the Trustee and the
Certificate Insurer on the Delivery Date by the Servicer pursuant to this
Agreement, as such list may from time to time be amended.
Standard & Poor's: Standard & Poor's Ratings Services, a division of
-----------------
the McGraw-Hill Companies, or its successor in interest.
Sub-Servicer: Any other entity with respect to any Mortgage Loan
------------
under any Sub-Servicing Agreement applicable to such Mortgage Loan and any
successors and assigns under such Sub-Servicing Agreement.
Sub-Servicing Agreement: Any servicing agreement between the Servicer
-----------------------
and a Sub-Servicer pursuant to which the Servicer delegates any of its servicing
responsibilities with respect to any of the Mortgage Loans.
Three-Year Index: With respect to any Mortgage Loan and as to any
----------------
Adjustment Date therefor, a per annum rate equal to the weekly average yield on
U.S. Treasury securities adjusted to a constant maturity of three years as
reported by the Federal Reserve Board in statistical Release No. H.15(519) as of
the date specified in the related Mortgage Note, or, in the event that such
index is no longer available, an index selected by the Servicer and reasonably
acceptable to the Trustee that is based on comparable information.
Transferee Affidavit and Agreement: As defined in Section
----------------------------------
6.02(g)(i)(B).
Trust Fund: Collectively, the assets of the Trust REMIC plus the
----------
Reserve Account and all amounts deposited therein pursuant to the provisions of
this Agreement.
Trust REMIC: The corpus of the trust created by this Agreement
-----------
consisting of (a) the Mortgage Loans listed in the Mortgage Loan Schedule,
including all interest and principal received or receivable by the Seller on or
with respect to the Mortgage Loans after the Cut-off Date, but not including
payments of principal and interest due and payable on the Mortgage Loans on or
before the Cut-off Date, together with the Mortgage Files relating to the
Mortgage Loans, (b) REO Property, (c) the Custodial Account and the Certificate
Account and all amounts deposited therein pursuant to the applicable provisions
of this Agreement, (d) any insurance policies with respect to the Mortgage Loans
and (e) all proceeds of the conversion, voluntary or involuntary, of any of the
foregoing into cash or other liquid property. The Trust REMIC specifically
excludes the Reserve Account.
Trustee: [NAME OF TRUSTEE] not in its individual capacity, but solely
-------
in its capacity as trustee for the benefit of the Certificateholders [and the
Certificate Insurer] under this Agreement, and any successor thereto, as
provided herein.
Trustee Fee: The fee payable to the Trustee on each Distribution Date
-----------
for its services as Trustee hereunder, in an amount equal to one-twelfth of the
Trustee Fee Rate
25
<PAGE>
multiplied by the Principal Balance of the Mortgage Loans
immediately prior to such Distribution Date.
Trustee Fee Rate: [____]% per annum.
----------------
Trustee Mortgage File: The mortgage documents listed in Section 2.01
---------------------
hereof pertaining to a particular Mortgage Loan and any additional documents
required to be added to the Trustee Mortgage File pursuant to this Agreement.
United States Regulations: 31 C.F.R. Part 357; 12 C.F.R. Part 615,
-------------------------
Subpart O; 12 C.F.R. Part 912; 12 C.F.R. Part 1511; 24 C.F.R. Part 81; 31 C.F.R.
Part 354; and 18 C.F.R. Part 1314.
United States Securities Entitlement: A "Security Entitlement" as
------------------------------------
defined in a United States Regulation.
U.S. Person: 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 or any state (including the District of Columbia)
thereof, or an estate or trust whose income from sources without the United
States is includable in gross income for United States federal income tax
purposes regardless of its connection with the conduct of a trade or business
within the United States.
Voting Rights: The portion of the aggregate voting rights of all the
-------------
Certificates evidenced by a Certificate. 98% of all Voting Rights will be
allocated to the Class A Certificates in proportion to their Certificate
Principal Balances, 1% of all Voting Rights will be allocated among the Class S
Certificates in proportion to their Percentage Interests and 1.0% of all Voting
Rights will be allocated to the Class R Certificates.
ARTICLE II
CONVEYANCE OF TRUST FUND;
REPRESENTATIONS AND WARRANTIES
SECTION 2.01. Conveyance of Trust Fund.
------------------------
The Seller hereby sells, transfers, assigns, delivers, sets over and
otherwise conveys to the Trustee for the benefit of the Certificateholders [and
the Certificate Insurer], without recourse, the Seller's right, title and
interest in and to (a) the Mortgage Loans listed in the Mortgage Loan Schedule,
including all interest and principal received or receivable by the Seller on or
with respect to the Mortgage Loans after the Cut-off Date, but not including
payments of principal and interest due and payable on the Mortgage Loans on or
before the Cut-off Date, which Mortgage Loans the Seller shall cause to be
delivered to the Trustee on or prior to the Delivery Date, together with the
Trustee Mortgage Files relating to the Mortgage Loans, (b) all amounts on
deposit in the Reserve Account, (c) REO Property, (d) the Custodial Account, the
Certificate Account and all amounts deposited therein or other
26
<PAGE>
property credited thereto pursuant to the applicable provisions of this
Agreement, (e) any insurance policy with respect to the Mortgage Loans and (f)
all proceeds of the conversion, voluntary or involuntary, of any of the
foregoing into cash or other liquid property.
The Seller hereby sells, transfers, assigns, delivers, sets over and
otherwise conveys to the Trustee for the benefit of [the Certificate Insurer
and] Certificateholders, without recourse, any and all right, title and interest
of the Seller, if any, in and to (a) the Mortgage Loans listed in the Mortgage
Loan Schedule, including all interest and principal received or receivable by
the Seller on or with respect to the Mortgage Loans after the Cut-off Date, but
not including payments of principal and interest due and payable on the Mortgage
Loans on or before the Cut-off Date, (b) all amounts on deposit in the Reserve
Account, (c) REO Property, (d) the Custodial Account, the Certificate Account
and all amounts deposited therein or other property credited thereto pursuant to
the applicable provisions of this Agreement, (e) any insurance policy with
respect to the Mortgage Loans and (f) all proceeds of the conversion, voluntary
or involuntary, of any of the foregoing into cash or other liquid property.
The Holder of the Class S Certificates hereby transfers, assigns,
delivers, sets over and otherwise conveys to the Trustee for the benefit of the
Certificate Insurer and Certificateholders, without recourse, any and all right,
title and interest of the Holder of the Class S Certificates, if any, in and to
amounts on deposit in the Reserve Account, but not including any amounts to
which the Holder of such Class S Certificates is entitled pursuant to Section
4.07, and all proceeds of the conversion, voluntary or involuntary, of the
foregoing into cash or other liquid property.
In connection with any such transfer and assignment, the Seller shall
deliver to, and deposit with, the Trustee the following documents or instruments
with respect to each Mortgage Loan so assigned:
(i) the Mortgage Note, endorsed without recourse to the order of
the Trustee, with all intervening endorsements showing a complete chain of
endorsement from the originator to the last endorser (or an original lost
note affidavit from the Seller stating that the Mortgage Note was lost,
misplaced or destroyed, together with a copy of the related Mortgage Note,
with respect to such Mortgage Loans identified in the Trustee's Initial
Certification referenced in Section 2.02), and if the Mortgage Note or
Mortgage or any other material document or instrument relating to the
Mortgage Loan has been signed on behalf of the Mortgagor by another person,
the original power of attorney or other instrument that authorized and
empowered such person to sign, or a copy of the original power of attorney
or other instrument;
(ii) the original Mortgage, and any intervening assignment thereof,
in each case as recorded, with evidence of recording indicated thereon;
(iii) an original assignment or assignments of Mortgage showing an
unbroken chain of title from the originator to the preceding assignee to
the Trustee with evidence of recording indicated thereon;
27
<PAGE>
(iv) the original copy of each assumption, modification, written
assurance or substitution agreement, if any, with respect to such Mortgage
Loan, as identified on the Mortgage Loan Schedule;
[(v) the Letter of Credit, if any; and]
[(vi) any Alternative Credit Support.]
Notwithstanding the foregoing, in the event that in connection with
any Mortgage Loan the Seller cannot deliver an original recorded counterpart of
any of the documents required to be delivered pursuant to clauses (ii) or (iii)
above with evidence of recording thereon concurrently with the execution and
delivery hereof, the Seller shall deliver, or cause the Servicer to deliver, to
the Trustee a duplicate original or true copy of such document certified by the
Seller or the Servicer or the applicable public recording office to be a true
and complete duplicate original or copy of the original thereof submitted for
recording, or a copy of the Mortgage certified by a title insurance or escrow
company or companies reasonably acceptable to the Certificate Insurer,
evidencing that such Mortgage or assignment of Mortgage has been delivered to
the appropriate public recording office for recordation. In the event that the
Seller cannot deliver a duplicate original or true copy certified as stated
above of such document required to be delivered pursuant to clauses (ii) or
(iii) above, within 45 days of the Delivery Date, the Servicer shall purchase
the related Mortgage Loan at the Purchase Price therefor. The Seller shall
promptly deliver, or cause the Servicer to deliver, to the Trustee (A) such
original document with evidence of recording indicated thereon or a photocopy of
such document certified by the appropriate county recorder's office to be a true
and complete copy of the original thereof, upon receipt thereof from the public
recording official or from the Servicer, and (B) upon discovery of any defect or
omission in the deliveries of any of items (ii) through (iv) above with respect
to any Mortgage Loan, a correct and complete document or instrument meeting the
requirements of such item or a certified copy thereof, certified by the relevant
recording office, but in no event shall any such delivery be made later than 90
days following the Delivery Date (unless such document has not been returned
from the relevant recording office at such time, in which case the Servicer
shall make such delivery within 270 days of the Delivery Date; provided,
however, that such 270 day period shall be extended to 360 days upon
presentation of an officer's certificate of the Servicer to the effect that such
document has not yet been returned from the relevant recording office, and shall
be extended for additional thirty-day periods upon the written consent of the
Certificate Insurer). From time to time the Servicer may forward or cause to be
forwarded to the Trustee for the benefit of the Certificateholders and the
Certificate Insurer additional original documents evidencing an assumption or
modification of a Mortgage Loan.
The Trustee shall promptly complete the endorsement of the Mortgage
Note referred to in (i) above and the assignment of Mortgage referred to in
(iii) above to the Trustee for the benefit of the Holders of the Chevy Chase
Bank Home Loan Trust 199_-____ Mortgage-Backed Pass-Through Certificates, Series
199[__]-[___] and [NAME OF Certificate Insurer]. The Trustee on behalf of the
Servicer shall within 180 days of the Closing Date record in the appropriate
public office for real property records each original assignment referred to in
(iii) above with respect to each Mortgaged Property, and the
28
<PAGE>
Trustee shall release any such assignment to the Seller or the Servicer, as
applicable, for such purpose. The Seller or the Servicer shall promptly deliver
to the Trustee each original assignment with evidence of recording indicated
thereon or a photocopy thereof certified by the appropriate county recorder's
office to be a true and complete copy of the original thereof, upon receipt
thereof from the public recording official. If any assignment is returned
unrecorded to the Seller or the Servicer because of any defect therein, the
Seller or the Servicer shall cure or correct such defect and cause such
assignment to be recorded in accordance with this paragraph and if such defect
is not cured the Servicer shall purchase the Mortgage Loan at the Purchase Price
therefor.
SECTION 2.02. Acceptance by Trustee.
---------------------
The Trustee will hold the documents referred to in Section 2.01 above
and the other documents constituting a part of the Trustee Mortgage Files
delivered to it in trust for the use and benefit of all present and future
Certificateholders and the Certificate Insurer. Upon execution and delivery of
this Agreement and within 45 days after the execution and delivery of this
Agreement, the Trustee shall ascertain whether all documents required to be
delivered to it pursuant to Section 2.01 hereof are in its possession, and shall
deliver to the Seller, [the Certificate Insurer] and the Servicer a
certification (upon execution and delivery of this Agreement, the "Initial
Certification" and within 45 days thereof, the "Final Certification",
respectively) in the forms set forth as Exhibits E and F hereto to the effect
---------- -
that, as to each Mortgage Loan listed in the Mortgage Loan Schedule: (a) all
documents required to be delivered to the Trustee pursuant to this Agreement are
in its possession, (b) such documents have been reviewed by it and have not been
mutilated, damaged, defaced, torn or otherwise physically altered, and such
documents relate to such Mortgage Loan, (c) based on its examination and only as
to the foregoing documents, the information set forth in items (i) through (vi)
of the definition of Mortgage Loan Schedule respecting such Mortgage Loan
accurately reflects the information contained in the documents in the Trustee
Mortgage File and (d) each Mortgage Note has been endorsed and each assignment
of Mortgage has been delivered as provided in Section 2.01 hereof. The Trustee
shall deliver to the Seller, [the Certificate Insurer] and the Servicer a copy
of such Final Certification. If, in the course of such review, the Trustee
finds any document or documents constituting a part of a Mortgage File which do
not meet the requirements of (a)-(d) above, the Trustee shall promptly notify
the Servicer, [the Certificate Insurer] and the Seller in writing, and request
that the Servicer correct or cure such defect. The Trustee shall promptly
notify the Seller in writing if any original assignment referred to in clause
(iii) of Section 2.01 has not been received by it prior to June 30, 1998. In the
event the Servicer or Seller shall fail to cure any document deficiency or
defect reflected in the Final Certification or as otherwise required under
Section 2.01, it shall not be the obligation of the Trustee hereunder to cure
the same, and the Servicer shall purchase the Mortgage Loan at the Purchase
Price therefor.
The Seller agrees that at any time and from time to time upon written
request of the Trustee or the Certificate Insurer, the Seller shall promptly and
duly execute and deliver any and all such further documents and assurances, and
take such further actions as the Trustee reasonably may request in order to
obtain or more fully vest the benefits of the assignment intended hereunder (as
set forth hereinabove in Section 2.01 and hereinbelow in Section 2.03) and of
the rights and powers herein granted.
29
<PAGE>
The Trustee shall retain possession and custody of each Trustee
Mortgage File in accordance with and subject to the terms and conditions set
forth herein.
SECTION 2.03. Representations, Warranties and
--------------------------------
Covenants of the Servicer and Seller.
------------------------------------
Chevy Chase, as Seller and Servicer, hereby represents and warrants
to, and covenants with, the Seller, [the Certificate Insurer] and the Trustee
that, as of the date hereof:
(i) Chevy Chase is a federal savings bank, validly existing and
in good standing under the laws of the United States of America and is duly
authorized and qualified to transact any and all business contemplated by
this Agreement in any state in which a Mortgaged Property is located or is
otherwise not required under applicable law to effect such qualification
and, in any event, is in compliance with the doing business laws of any
such State, to the extent necessary to ensure the enforceability of each
Mortgage Loan and the servicing of the Mortgage Loans in accordance with
the terms of this Agreement;
(ii) Chevy Chase has the full corporate power and authority to
service each Mortgage Loan, and to execute, deliver and perform, and to
enter into and consummate the transactions contemplated by this Agreement
and has duly authorized by all necessary corporate action on the part of
Chevy Chase the execution, delivery and performance of this Agreement; and
this Agreement, assuming the due authorization, execution and delivery
thereof by the Seller and the Trustee, constitutes a legal, valid and
binding obligation of Chevy Chase, enforceable against Chevy Chase in
accordance with its terms, except that (A) the enforceability thereof may
be limited to bankruptcy, insolvency, moratorium, receivership and other
similar laws relating to creditors' rights generally and (B) the remedy of
specific performance and injunctive and other forms of equitable relief may
be subject to the equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought;
(iii) the execution and delivery of this Agreement by Chevy
Chase, the servicing of the Mortgage Loans by Chevy Chase hereunder, the
consummation of any other of the transactions herein contemplated, and the
fulfillment of or compliance with the terms hereof are in the ordinary
course of business of Chevy Chase and will not (A) result in a material
breach of any term or provision of the charter or by-laws of Chevy Chase or
(B) materially conflict with, result in a material breach, violation or
acceleration of, or result in a material default under, the terms of any
other material agreement or instrument to which Chevy Chase is a party or
by which it may be bound, or any statute, order or regulation applicable to
Chevy Chase of any court, regulatory body, administrative agency or
governmental body having jurisdiction over Chevy Chase; and Chevy Chase is
not a party to, bound by, or in breach or violation of any material
indenture or other material agreement or instrument, or subject to or in
violation of any stature, order or regulation of any court, regulatory
body, administrative agency or governmental body having
30
<PAGE>
jurisdiction over it, which materially and adversely affects, or, to Chevy
Chase's knowledge would in the future materially and adversely affect, (1)
the ability of Chevy Chase to perform its obligations under this Agreement
or (2) the business, operations, financial condition, properties or assets
of the Servicer taken as a whole;
(iv) Chevy Chase is, and will remain, subject to supervision
and examination by any state or federal authority as may be applicable and
will remain in good standing and qualified to do business where so required
by applicable law and is, and will remain an approved servicer of
conventional mortgage loans for FNMA or FHLMC;
(v) no litigation is pending or, to the best of Chevy Chase's
knowledge, threatened, against Chevy Chase that would materially and
adversely affect the execution, delivery or enforceability of this
Agreement or the ability of Chevy Chase to service the Mortgage Loans or to
perform any of its other obligations hereunder in accordance with the terms
hereof;
[(vi) Chevy Chase will at all times comply in the performance
of its obligations under this Agreement with all reasonable rules and
requirements of the insurer under each Required Insurance Policy;]
(vii) no written information, certificate of an officer,
statement furnished in writing or written report delivered to the
Certificate Insurer, the Seller, any affiliate of the Seller or the Trustee
and prepared by Chevy Chase pursuant to this Agreement will contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the information, certificate, statement or report not
misleading;
(viii) except for permits and similar authorizations required
under the securities or "blue sky" laws no consent, approval, authorization
or order of any court or governmental agency or body is required for the
execution, delivery and performance by Chevy Chase of, or compliance by
Chevy Chase with, this Agreement or the consummation of the transactions
contemplated hereby, or if any such consent, approval, authorization or
order is required, Chevy Chase has obtained the same;
(ix) Chevy Chase will service the Mortgage Loans in accordance
with the standards set forth in this Agreement; and
(x) this Agreement and all other documents related hereto to
which the Seller is a party have been approved by the Seller's board of
directors, which approval is reflected in the minutes of such board, and
shall continuously from the time of each such document's execution, be
maintained as an official record of the Seller.
31
<PAGE>
SECTION 2.04. Representations, Warranties and Covenants of the
Servicer and the Seller with respect to the Mortgage
Loans.
The Seller and the Servicer hereby represents and warrants to, and
covenants with, the Seller, [the Certificate Insurer] and the Trustee for the
benefit of the Certificateholders that, as to each Mortgage Loan, as of the Cut-
off Date or such other date specifically set forth herein, and with respect to
representation (i) listed below, as of the Delivery Date:
(i) The information set forth in the Mortgage Loan Schedule is
complete, true and correct.
(ii) All payments required to be made up to, but excluding, the
Cut-off Date for such Mortgage Loan under the terms of the Mortgage Note
have been made; none of the Mortgage Loans are more than 30 days
delinquent; Chevy Chase has not advanced funds, or induced, solicited or
knowingly received any advance of funds from a party other than the owner
of the Mortgaged Property subject to the Mortgage, directly or indirectly,
for the payment of any amount required by the Mortgage Loan.
(iii) To the best of the Servicer's knowledge, there are no
delinquent taxes, ground rents, water charges, sewer rents, assessments,
insurance premiums, leasehold payments, including assessments payable in
future installments or other outstanding charges affecting the related
Mortgaged Property.
(iv) The terms of the Mortgage Note and the Mortgage have not
been impaired, waived, altered or modified in any respect, except by
written instruments which have been recorded, if necessary to protect the
interests of the Trustee, and which have been delivered to the Trustee or
the Trustee's designee, the substance of which waiver, alteration or
modification has been approved by the primary mortgage guaranty insurer, if
any, and by the title insurer, to the extent required by the related policy
and is reflected on the Mortgage Loan Schedule. No instrument of waiver,
alteration or modification has been executed, and no Mortgagor has been
released, in whole or in part, except in connection with an assumption
agreement approved by the primary mortgage insurer, if any, and title
insurer, to the extent required by the policy, and which assumption
agreement is part of the Mortgage File and the terms of which are reflected
in the Mortgage Loan Schedule.
(v) The Mortgage Note and the Mortgage are not subject to any
right of rescission, set-off, counterclaim or defense, including the
defense of usury, nor will the operation of any of the terms of the
Mortgage Note and Mortgage, or the exercise of any right thereunder, render
the Mortgage unenforceable, in whole or in part, or subject to any right of
rescission, set-off, counterclaim or defense, including the defense of
usury and no such right of rescission, set-off, counterclaim or defense has
been asserted with respect thereto.
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(vi) All buildings upon the Mortgaged Property are insured by a
generally acceptable insurer against loss by fire, hazards of extended
coverage and such other hazards as are customary in the area where the
Mortgaged Property is located. All such insurance policies contain a
standard mortgagee clause naming the Servicer, its successors and assigns
as mortgagee and all premiums thereon have been paid. If upon origination
of the Mortgage Loan, the Mortgaged Property was in an area identified in
the Federal Register by the Federal Emergency Management Agency as having
special flood hazards (and such flood insurance has been made available) a
flood insurance policy meeting the requirements of the current guidelines
of the Federal Insurance Administration is in effect which policy conforms
to the requirements of FNMA and FHLMC. The Mortgage obligates the
Mortgagor thereunder to maintain all such insurance at Mortgagor's cost and
expense, and on the Mortgagor's failure to do so, authorizes the holder of
the Mortgage to maintain such insurance at Mortgagor's cost and expense and
to seek reimbursement therefor from the Mortgagor.
(vii) Any and all requirements of any federal, state or local
law including, without limitation, environmental, usury, truth in lending,
real estate settlement procedures, consumer credit protection, equal credit
opportunity or disclosure laws applicable to the Mortgage Loan and the
related Mortgaged Property have been complied with.
(viii) The Mortgage has not been satisfied, canceled or
subordinated, or rescinded, in whole or in part, and the Mortgaged Property
has not been released from the lien of the Mortgage, in whole or in part,
nor has any instrument been executed that would effect any such release,
cancellation, subordination or rescission.
(ix) The Mortgage is a valid, existing and enforceable first
lien on the Mortgaged Property, including all improvements on the Mortgaged
Property subject only to (A) the lien of current real property taxes and
assessments not yet due and payable, (B) covenants, conditions and
restrictions, rights of way, easements and other matters of the public
record as of the date of recording being acceptable to mortgage lending
institutions generally and specifically referred to in lender's title
insurance policy delivered to the originator of the Mortgage Loan and which
do not adversely affect the Appraised Value of the Mortgaged Property, and
(C) other matters to which like properties are commonly subject which do
not materially interfere with the benefits of the security intended to be
provided by the Mortgage or the use, enjoyment, value or marketability of
the related Mortgaged Property. Any security agreement, chattel mortgage or
equivalent document related to and delivered in connection with the
Mortgage establishes and creates a valid, existing and enforceable first
lien and first priority security interest on the property described therein
and the Seller has full right to sell and assign the same to the Seller.
The Mortgaged Property was not, as of the date of origination of the
Mortgage Loan, subject to a mortgage, deed of trust, deed to secure debt or
other security instrument creating a lien subordinate to the lien of the
Mortgage, except in the case of [___] [Group I Loans] representing [___]%
of the aggregate Principal Balance of the [Group I Loans] as of the Cut-off
Date and [___] [Group II Loans] representing
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[___]% of the aggregate Principal Balance of the [Group II Loans] as of the
Cut-off Date, where the Seller was aware of the simultaneous creation of a
second lien subordinate to the lien of the Mortgage.
(x) The Mortgage Note and the related Mortgage are genuine and
each is the legal, valid and binding obligation of the maker thereof,
enforceable in accordance with its terms, except as the enforceability
thereof may be limited by bankruptcy, insolvency, or reorganization.
(xi) All parties to the Mortgage Note and the Mortgage had
legal capacity to enter into the Mortgage Loan and to execute and deliver
the Mortgage Note and the Mortgage, and the Mortgage Note and the Mortgage
have been duly and properly executed by such parties.
(xii) The proceeds of the Mortgage Loan have been fully
disbursed and there is no requirement for future advances thereunder and
any and all requirements as to completion of any on-site or off-site
improvement and as to disbursements of any escrow funds therefor have been
complied with. All costs, fees and expenses incurred in making or closing
the Mortgage Loan and the recording of the Mortgage were paid, and the
Mortgagor is not entitled to any refund of any amounts paid or due under
the Mortgage Note or Mortgage.
(xiii) The Mortgage Note and the Mortgage are not assigned or
pledged, and immediately prior to the sale of the Mortgage Loan to the
Seller the Seller was the sole owner of record and holder thereof and with
full right to transfer and sell the Mortgage Loan to the Seller free and
clear of any encumbrance, equity, lien, pledge, charge, claim or security
interest and with full right and authority subject to no interest or
participation of, or agreement with, any other party, to sell and assign
each Mortgage Loan pursuant to the Mortgage Loan Purchase Agreement.
(xiv) All parties which have had any interest in the Mortgage,
whether as mortgagee, assignee, pledgee or otherwise, are (or, during the
period in which they held and disposed of such interest, were) (A) in
compliance with any and all applicable licensing requirements of the laws
of the state wherein the Mortgaged Property is located, and (B) organized
under the laws of such state, or (C) qualified to do business in such
state, or (D) federal savings and loan associations or national banks
having principal offices in such state, or (E) not doing business in such
state.
(xv) The Mortgage Loan is covered by an ALTA lender's title
insurance policy acceptable to FNMA or FHLMC, issued by a title insurer
acceptable to FNMA and FHLMC and qualified to do business in the
jurisdiction where the Mortgaged Property is located, insuring (subject to
the exceptions contained in (ix)(A) and (B) above) the Seller, its
successors and assigns as to the first priority lien of the Mortgage in the
original principal amount of the Mortgage Loan. The original title policy
and all riders thereto are in the possession of the Servicer or the
Trustee. Additionally, such lender's title insurance policy affirmatively
insures ingress and egress, and against encroachments by or upon the
Mortgaged Property or any interest
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therein. The Seller is the sole insured of such lender's title insurance
policy, and such lender's title insurance policy is in full force and
effect and will be in full force and effect upon the consummation of the
transactions contemplated by this Agreement. No claims have been made under
such lender's title insurance policy, and no prior holder of the related
Mortgage, including the Seller, has done, by act or omission, anything
which would impair the coverage of such lender's title insurance policy.
(xvi) There is no default, breach, violation or event of
acceleration existing under the Mortgage or the Mortgage Note and no event
which, with the passage of time or with notice and the expiration of any
grace or cure period, would constitute a default, breach, violation or
event of acceleration, and the Seller has not waived any default, breach,
violation or event of acceleration.
(xvii) There are no mechanics' or similar liens or claims which
have been filed for work, labor or material (and no rights are outstanding
that under law could give rise to such lien) affecting the related
Mortgaged Property which are or may be liens prior to, or equal or
coordinate with, the lien of the related Mortgage.
(xviii) All improvements which were considered in determining
the Appraised Value of the related Mortgaged Property lay wholly within the
boundaries and building restriction lines of the Mortgaged Property, and no
improvements on adjoining properties encroach upon the Mortgaged Property.
(xix) The Mortgage Loan was originated by the Seller or a
subsidiary of the Seller which is a FNMA-approved, FHLMC-approved or HUD-
approved mortgage banker, or savings and loan association, a savings bank,
a commercial bank or similar banking institution which is supervised and
examined by a federal or state authority. Principal payments on the
Mortgage Loan commenced no more than sixty days after funds were disbursed
in connection with the Mortgage Loan. The Mortgage Note is payable on the
first day of each month in monthly installments of principal and interest,
with interest in arrears, and requires Monthly Payments sufficient to
amortize the original principal balance of the Mortgage Loan over a term of
not more than [__] years, except for [__] Mortgage Loans with an
amortization term and maturity of not more than [__] years. No Mortgage
Loans have provisions which will require negative amortization. Except for
[___] Mortgage Loans with an amortization term of [___] years and a
maturity of [___] years, no Mortgage Loan requires a balloon payment at the
end of its term.
(xx) The origination practices used by the Seller and the
collection practices used by the Servicer with respect to each Mortgage
Note and Mortgage have been in all respects legal, proper, prudent and
customary in the mortgage origination and servicing business. With respect
to escrow deposits and escrow payments, if any, all such payments are in
the possession of, or under the control of, the Servicer and there exist no
deficiencies in connection therewith for which customary arrangements for
repayment thereof have not been made. No escrow deposits or escrow payments
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or other charges or payments due the Seller have been capitalized under any
Mortgage or the related Mortgage Note.
(xxi) The Mortgaged Property is free of damage and waste and
there is no proceeding pending for the total or partial condemnation
thereof.
(xxii) The Mortgage contains customary and enforceable
provisions such as to render the rights and remedies of the holder thereof
adequate for the realization against the Mortgaged Property of the benefits
of the security provided thereby, including, (A) in the case of a Mortgage
designated as a deed of trust, by trustee's sale, and (B) otherwise by
judicial foreclosure. There is no other exemption available to the
Mortgagor which would interfere with the right to sell the Mortgaged
Property at a trustee's sale or the right to foreclose the Mortgage. The
Mortgagor has not notified the Servicer and the Servicer has no knowledge
of any relief requested or allowed to the Mortgagor under the Relief Act.
(xxiii) The Mortgage Loan was underwritten generally in
accordance with the Seller's underwriting standards in effect at the time
the Mortgage Loan was originated.
(xxiv) The Mortgage Note is not and has not been secured by any
collateral except the lien of the corresponding Mortgage and the security
interest of any applicable security agreement or chattel mortgage referred
to in (ix) above.
(xxv) The Mortgage File contains an appraisal of the related
Mortgaged Property signed prior to the approval of the Mortgage Loan
application by a qualified appraiser, duly appointed by the originator of
the Mortgage Loan, who had no interest, direct or indirect in the Mortgaged
Property or in any loan made on the security thereof, and whose
compensation is not affected by the approval or disapproval of the Mortgage
Loan.
(xxvi) In the event the Mortgage constitutes a deed of trust, a
trustee, duly qualified under applicable law to serve as such, has been
properly designated and currently so serves and is named in the Mortgage,
and no fees or expenses are or will become payable by the Seller to the
trustee under the deed of trust, except, in connection with a trustee's
sale after default by the Mortgagor.
(xxvii) Except for [____] [Group I Loans] representing [____]%
of the aggregate Principal Balance of the [Group I Loans] as of the Cut-off
Date and [__] [Group II Loans] representing [____]% of the aggregate
Principal Balance of the [Group II Loans] as of the Cut-off Date, each of
which was originated in accordance with the guidelines of the Seller and
FNMA, no Mortgage Loan contains provisions pursuant to which Monthly
Payments are (A) paid or partially paid with funds deposited in any
separate account established by the Seller, the Mortgagor, or anyone on
behalf of the Mortgagor, (B) paid by any source other than the Mortgagor or
(C) contains any other similar provisions which may constitute a "buydown"
provision. No Mortgage Loan was a graduated payment mortgage loan as of
the date of its
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origination. No Mortgage Loan has a shared appreciation or other contingent
interest feature.
(xxviii) The Seller does not expect, as to any particular
Mortgage Loan included in the Trust Fund, that such Mortgage Loan will
become a defaulted Mortgage Loan and that the related Mortgaged Property
will be foreclosed upon (or acquired by deed-in-lieu of foreclosure).
(xxix) No Mortgage Loan was made in connection with
facilitating the trade-in or exchange of a Mortgaged Property.
(xxx) The Seller has no knowledge of any circumstances or
condition with respect to the Mortgage, the Mortgaged Property, the
Mortgagor or the Mortgagor's credit standing that can reasonably be
expected to cause the Mortgage Loan to be an unacceptable investment, cause
the Mortgage Loan to become delinquent, or adversely affect the value of
the Mortgage Loan.
(xxxi) Each such Mortgage Loan with a Loan-to-Value Ratio at
origination in excess of 80% is and will be subject to a Primary Mortgage
Insurance Policy, issued by a FNMA or FHLMC approved insurer, which insures
that portion of the Mortgage Loan over 75% of the Loan-to-Value Ratio. All
provisions of such Primary Mortgage Insurance Policy have been and are
being complied with, such policy is in full force and effect, and all
premiums due thereunder have been paid. Any Mortgage subject to any such
Primary Mortgage Insurance Policy obligates the Mortgagor thereunder to
maintain such insurance and to pay all premiums and charges in connection
therewith, except in the case of the Lender-Paid MI Loans, where such
premiums are paid by the Servicer from amounts collected in addition to the
Mortgage Rate. The Mortgage Rate for each Mortgage Loan is net of any such
insurance premium, except in the case of the Lender-Paid MI Loans.
(xxxii) To the best of the Servicer's knowledge, the Mortgaged
Property is lawfully occupied under applicable law. All inspections,
licenses and certificates required to be made or issued with respect to all
occupied portions of the Mortgaged Property and, with respect to the use
and occupance of the same, including but not limited to certificates of
occupancy, have been made or obtained from the appropriate authorities.
(xxxiii) No action has been taken or failed to be taken, no
event has occurred and no state of facts exists or has existed on or prior
to the Cut-off Date (whether or not known to the Seller on or prior to such
date) which has resulted or will result in an exclusion from, denial of, or
defense coverage under any private mortgage insurance (including, without
limitation, any exclusions, denials or defenses which would limit or reduce
the availability of the timely payment of the full amount of the loss
otherwise due thereunder to the insured) whether arising out of actions,
representations, errors, omissions, negligence, or fraud of the Seller, the
related Mortgagor or any party involved in the application for such
coverage, including the appraisal, plans and specifications and other
exhibits or documents submitted
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therewith to the insurer under such insurance policy, or for any other
reason under such coverage, but not including the failure of such insurer
to pay by reason of such insurer's breach of such insurance policy or such
insurer's financial inability to pay.
(xxxiv) The Assignment of Mortgage, is in recordable form and is
acceptable for recording under the laws of the jurisdiction in which the
Mortgaged Property is located.
(xxxv) Any future advances made to the Mortgagor prior to the
Cut-off Date have been consolidated with the outstanding principal amount
secured by the Mortgage, and the secured principal amount, as consolidated,
bears a single interest rate and single repayment term. The lien of the
Mortgage securing the consolidated principal amount is expressly insured as
having consolidated principal amount is expressly insured as having first
lien priority by a title insurance policy, an endorsement to the policy
insuring the mortgagee's consolidated interest or by other title evidence
acceptable to FNMA and FHLMC. The consolidated principal amount does not
exceed the original principal amount of the Mortgage Loan.
(xxxvi) If the Mortgaged Property is a condominium unit or a
planned unit development (other than a de minimis planned unit development)
such condominium or planned unit development project meets FNMA or FHLMC
eligibility requirements.
(xxxvii) With respect to each Convertible Mortgage Loan, (x) the
related Mortgagor has the option to convert the interest rate borne by such
Mortgage Loan from an adjustable interest rate to a fixed interest rate
determined pursuant to the terms of the related Mortgage Note and (y) the
fixed interest rate to be borne by each such Convertible Mortgage Loan upon
the conversion of the interest rate on such Mortgage Loan is intended to
approximate a market rate of interest for newly originated mortgages at the
time of the conversion.
(xxxviii) Each Mortgage is a "qualified mortgage" for purposes
of the REMIC Provisions.
Upon the discovery by the Seller, the Servicer, the Certificate
Insurer or the Trustee (or upon notice thereof in writing from a
Certificateholder) of a breach or breaches of any of the representations and
warranties made in Section 2.04 in respect of any Mortgage Loan, or any breach
of a representation or warranty of the Servicer set forth in Section 2.03, which
breach or breaches, individually or in the aggregate, materially and adversely
affect the interests of the Certificateholders or the Certificate Insurer, the
party discovering such breach shall give prompt written notice to the other
parties. The Trustee shall promptly notify the Seller and Servicer of such
breach and request that the Seller or Servicer, as the case may be, cure such
breach within 60 days from the date of such notice, and if the Seller or
Servicer does not cure such breach in all material respects, the Seller or
Servicer, as the case may be, shall either (i) substitute a Replacement Mortgage
Loan or Loans for the related Mortgage Loan, which substitution must be made as
specified in this Section or (ii) purchase
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such Mortgage Loan held for the benefit of the Certificateholders and the
Certificate Insurer from the Trustee at the Purchase Price therefor.
The Seller or Servicer shall not have any right to substitute a
Replacement Mortgage Loan or Loans for the affected Mortgage Loan more than
three months after the Delivery Date (or more than two years after the Delivery
Date if the related Mortgage Loan is a "defective obligation" within the meaning
of Section 860G(a)(4)(B)(ii) of the Code), and any substitution must be
accompanied by an Officers' Certificate delivered to the Trustee and the
Certificate Insurer, certifying that such Replacement Mortgage Loan conforms to
the requirements of this Agreement, and by an Opinion of Counsel to the effect
that such substitution will not cause the Trust REMIC to fail to qualify as a
REMIC and will not result in a prohibited transaction tax, which Opinion of
Counsel shall be paid for by the Seller or Servicer, as the case may be.
Notwithstanding the foregoing, if any such breach would cause a Mortgage Loan to
be other than a "qualified mortgage loan" as described in Section 860G(a)(3) of
the Code, any substitution or purchase shall occur within 90 days of the
discovery of the breach.
As to any Replacement Mortgage Loan or Loans, the Seller or Servicer
shall deliver to the Trustee for such Replacement Mortgage Loan or Loans, the
Mortgage Note, the Mortgage, the related assignment of the Mortgage, and such
other documents and agreements as are required by Section 2.01, with the
Mortgage Note endorsed to the Trustee for the benefit of the Certificate Insurer
and the Holders of the Chevy Chase Bank Home Loan Trust 199_-____ Mortgage-
Backed Pass-Through Certificates, Series 199_-_____. No substitution will be
made in any calendar month after the Determination Date for such month. Monthly
payments due with respect to Replacement Mortgage Loans in the month of
substitution shall not be part of the Trust Fund and will be remitted by the
Servicer or Seller to the Seller on the next succeeding Distribution Date. For
the month of substitution, distributions to Certificateholders will include the
Monthly Payment due on such Deleted Mortgage Loan for such month and thereafter
the Seller or Servicer, as the case may be, shall be entitled to retain all
amounts received in respect of such Deleted Mortgage Loan.
Upon such substitution, the Servicer shall amend or cause to be
amended the Mortgage Loan Schedule to reflect the removal of such Deleted
Mortgage Loan and the substitution of the Replacement Mortgage Loan or Loans.
Upon such substitution, the Replacement Mortgage Loan or Loans shall be subject
to the terms of this Agreement in all respects and the Seller shall be deemed to
have made, as of the date of substitution, with respect to the Replacement
Mortgage Loan or Loans, the representations and warranties pertaining to the
Mortgage Loans contained in Section 2.04 hereof. Upon receipt of the Trustee
Mortgage File pertaining to any Replacement Mortgage Loans, the Trustee shall
release the Trustee Mortgage File held for the benefit of the Certificateholders
and the Certificate Insurer relating to such Deleted Mortgage Loan to the Seller
or Servicer as applicable and shall execute and deliver such instruments of
transfer or assignment, in each case without recourse, as shall be necessary to
vest title (to the extent that such title was transferred to the Trustee) in the
Seller or Servicer as applicable, or its designee to any Deleted Mortgage Loan
substituted for pursuant to this Section 2.04.
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In any month in which the Seller or Servicer substitutes one or more
Replacement Mortgage Loans for one or more Deleted Mortgage Loans, the Servicer
will determine the amount (if any) by which the aggregate Principal Balance of
all such Replacement Mortgage Loans as of the date of substitution is less than
the aggregate Principal Balance of all such Deleted Mortgage Loans (in each case
after application of scheduled principal portion of the monthly payments
received in the month of substitution). The amount of such shortage shall be
deposited into the Custodial Account by the Seller or Servicer in the month of
substitution pursuant to Section 3.07, without any reimbursement thereof. The
Servicer shall give notice in writing to the Trustee of such event, which notice
shall be accompanied by an Officers' Certificate as to the calculation of such
shortage.
In the event that the Seller or Servicer shall have repurchased a
Mortgage Loan, upon receipt by the Trustee of written notification of the
deposit of the Purchase Price, the Trustee shall release the related Trustee
Mortgage File held for the benefit of the Certificateholders and the Certificate
Insurer to the Seller or Servicer as applicable and the Trustee shall execute
and deliver the related instruments of transfer or assignment, in each case
without recourse, as shall be necessary to transfer title (to the extent that
such title was transferred to the Trustee) from the Trustee for the benefit of
the Certificateholders and the Certificate Insurer and vest title in the Seller
or Servicer, or the designee thereof, as the case may be, to any Mortgage Loan
purchased pursuant to this Section 2.04. It is understood and agreed that the
obligation under this Agreement of any Person to repurchase or substitute any
Mortgage Loan as to which such breach has occurred and is continuing shall
constitute the sole and exclusive remedy respecting such breach available to
Certificateholders or the Trustee on their behalf (except for the Certificate
Insurer's rights under the Insurance Agreement).
SECTION 2.05. Issuance of Certificates.
------------------------
The Trustee acknowledges the assignment to it of the Mortgage Loans
together with the assignment to it of all other assets included in the Trust
Fund, receipt of which is hereby acknowledged. Concurrently with such
assignment and delivery and in exchange therefor, the Trustee, pursuant to the
written request of the Seller executed by an officer of the Seller, has executed
the Class A, Class S and Class R Certificates and caused them to be
authenticated and delivered to or upon the order of the Seller in authorized
denominations which evidence ownership of the Trust Fund. The rights of the
Holders of such Certificates to receive distributions from the Trust Fund and
all ownership interests of the Holders of the Class A, Class S and Class R
Certificates in such distributions shall be as set forth in this Agreement.
SECTION 2.06. REMIC Provisions.
----------------
(a) The Seller hereby elects and authorizes the Trustee to treat the
Trust REMIC as a REMIC under the Code and, if necessary, under applicable state
law. Such election will be made on Form 1066 or other appropriate federal tax
or information return (including Form 8811) or any appropriate state return (x)
for the taxable year ending on the last day of the calendar year in which the
Certificates are issued and (y) for the taxable year ending on the last day of
the calendar year in which Certificates are first sold by Chevy
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Chase to a third party. The Delivery Date is hereby designated as the "startup
day" of the Trust REMIC within the meaning of Section 860G(a)(9) of the Code.
The "regular interests" (within the meaning of Section 860G of the Code) in the
Trust REMIC shall consist of the Class A-I, Class A-II and Class S Certificates
and the "residual interest" in the Trust REMIC shall consist of the Class R
Certificates. The Seller and the Trustee shall not permit the creation of any
"interests" (within the meaning of Section 860G of the Code) in the Trust REMIC
other than the Class A-I Certificates, Class A-II Certificates, Class S
Certificates and Class R Certificates.
(b) Chevy Chase Bank, F.S.B. on behalf of the Holders of the Class R
Certificates, shall act as agent for the Class R Certificateholder as the "tax
matters person" (within the meaning of the REMIC Provisions) for the Trust REMIC
in the manner provided under Treasury regulations section 1.860F-4(d) and
temporary Treasury regulations section 301.6231(a)(7)-1T. By its acceptance of
a Class R Certificate, each Holder thereof shall have agreed to such appointment
and shall have consented to the appointment of the Trustee as its agent to act
on behalf of the Trust REMIC pursuant to the specific duties outlined herein.
(c) A Holder of the Class R Certificates, by the purchase of such
Certificates, shall be deemed to have agreed to timely pay, upon demand by the
Trustee, the amount of any minimum California state franchise taxes due with
respect to the Trust REMIC under Sections 23151(a) and 23153(a) of the
California Revenue and Taxation Code. Notwithstanding the foregoing, the
Trustee shall be authorized to retain the amount of such tax from amounts
otherwise distributable to such Holder in the event such Holder does not
promptly pay such amount upon demand by the Trustee. In the event that any
other federal, state or local tax is imposed, including without limitation taxes
imposed on a "prohibited transaction" of a REMIC as defined in Section 860F of
the Code, such tax shall be charged against amounts otherwise available for
distribution to the applicable Holder of a Class R Certificate and then against
amounts otherwise available for distribution to the Holders of Regular
Certificates in accordance with the provisions set forth in Sections 4.02 and
4.03, respectively. The Trustee shall promptly deposit in the Certificate
Account any amount of "prohibited transaction" tax that results from a breach of
the Trustee's duties under this Agreement. The Servicer shall promptly deposit
in the Certificate Account any amount of "prohibited transaction" tax that
results from a breach of the Servicer's duties under this Agreement.
(d) The Trustee shall act as attorney-in-fact and as agent on behalf
of the tax matters person of the Trust REMIC and in such capacity the Trustee
shall: (i) prepare, sign and file, or cause to be prepared, signed and filed,
federal and state tax returns using a calendar year as the taxable year for the
Trust REMIC when and as required by the REMIC Provisions and other applicable
federal income tax laws as the direct representative of the Trust REMIC in
compliance with the Code and shall provide copies of such returns as required by
the Code; (ii) make an election, on behalf of the Trust REMIC, to be treated as
a REMIC on the federal tax return of the Trust REMIC for its first taxable year,
in accordance with the REMIC Provisions; and (iii) prepare and forward, or cause
to be prepared and forwarded, to the Certificateholders and to any governmental
taxing authority all information reports as and when required to be provided to
them in accordance with the
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REMIC Provisions and the Code. The expenses of preparing and filing such returns
shall be borne by the Trustee. The Seller and Servicer shall provide on a prompt
and timely basis to the Trustee or its designee such information with respect to
the Trust REMIC as is in their possession and reasonably required or requested
by the Trustee to enable it to perform its obligations under this subsection.
In its capacity as attorney-in-fact and as agent on behalf of the tax
matters person, Chevy Chase shall also: (A) act on behalf of the Trust REMIC in
relation to any tax matter or controversy involving the Trust Fund, (B)
represent the Trust Fund in any administrative or judicial proceeding relating
to an examination or audit by any governmental taxing authority with respect
thereto and (C) cause to be paid solely from the sources provided herein the
amount of any taxes imposed on the Trust REMIC when and as the same shall be due
and payable (but such obligation shall not prevent the Trustee or any other
appropriate Person from contesting any such tax in appropriate proceedings and
shall not prevent the Trustee from withholding payment of such tax, if permitted
by law, pending the outcome of such proceedings).
(e) The Trustee shall provide (i) to any transferor of a Class R
Certificate such information as is necessary for the application of any tax
relating to the transfer of a Class R Certificate to any Person who is not a
permitted transferee, (ii) to the Certificateholders such information or reports
as are required by the Code or the REMIC Provisions including reports relating
to interest, original issue discount and market discount or premium and (iii) to
the Internal Revenue Service the name, title, address and telephone number of
the person who will serve as the representative of the Trust REMIC.
(f) The Trustee, the Seller and the Holder of the Class R Certificates
shall take any action or cause the Trust Fund to take any action necessary to
create or maintain the status of the Trust REMIC as a REMIC under the REMIC
Provisions and shall assist each other as necessary to create or maintain such
status. Neither the Trustee nor the Holder of the Class R Certificates shall
take any action, cause the Trust Fund to take any action or fail to take (or
fail to cause the Trust Fund to take) any action that, under the REMIC
Provisions, if taken or not taken, as the case may be, could (i) endanger the
status of the Trust REMIC as a REMIC or (ii) result in the imposition of a tax
upon the Trust REMIC (including, but not limited to, the tax on prohibited
transactions as defined in Code Section 860F(a)(2) and the tax on prohibited
contributions set forth in Section 860G(d) of the Code) (either such event, an
"Adverse REMIC Event") unless the Trustee has received an Opinion of Counsel (at
the expense of the party seeking to take such action) to the effect that the
contemplated action will not endanger such status or result in the imposition of
such a tax.
The Trustee shall not take or fail to take any action (whether or not
authorized hereunder) as to which the Servicer or Seller has advised it in
writing that it has received an Opinion of Counsel to the effect that an Adverse
REMIC Event could occur with respect to such action. In addition, prior to
taking any action with respect to the Trust REMIC or its assets, or causing the
Trust REMIC to take any action, which is not expressly permitted under the terms
of this Agreement, the Trustee will consult with the Servicer and Seller or
their designees, in writing, with respect to whether such action could cause an
Adverse
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REMIC Event to occur with respect to the Trust REMIC, and the Trustee shall not
take any such action or cause the Trust REMIC to take any such action as to
which the Servicer or Seller has advised it in writing that an Adverse REMIC
Event could occur.
In addition, prior to taking any action with respect to the Trust
REMIC or the assets therein, or causing the Trust REMIC to take any action,
which is not expressly permitted under the terms of this Agreement, the Holder
of the Class R Certificates will consult with the Trustee or its designee, in
writing, with respect to whether such action could cause an Adverse REMIC Event
to occur with respect to the Trust REMIC, and no such Person shall take any
action or cause the Trust Fund to take any such action as to which the Trustee
has advised it in writing that an Adverse REMIC Event could occur. The Trustee
may consult with counsel to make such written advice, and the cost of same shall
be borne by the party seeking to take action not permitted by this Agreement.
At all times as may be required by the Code, the Servicer will to the
extent within its control and the scope of its duties more specifically set
forth herein, maintain substantially all of the assets of the Trust REMIC as
"qualified mortgages" as defined in Section 860G(a)(3) of the Code and
"permitted investments" as defined in Section 860G(a)(5) of the Code.
(g) In the event that any tax is imposed on "prohibited transactions"
of the Trust REMIC, as defined in Section 860F(a)(2) of the Code, on "net income
from foreclosure property" of the Trust REMIC, as defined in Section 860G(c) of
the Code, on any contributions to the Trust REMIC after the Startup Day therefor
pursuant to Section 860G(d) of the Code, or any other tax is imposed by the Code
or any applicable provisions of state or local tax laws, such tax shall be
charged (i) to the Servicer, if such tax arises out of or results from a breach
by the Servicer of any of its obligations under this Agreement or if the
Servicer has in its sole discretion determined to indemnify the Trust Fund
against such tax, (ii) to the Trustee, if such tax arises out of or results from
a breach by the Trustee of any of its obligations under this Article II, or
(iii) otherwise against amounts on deposit in the Custodial Account as provided
by Section 3.09 and on the Distribution Date(s) following such reimbursement the
aggregate of such taxes shall be allocated in reduction of the Interest
Distribution Amount on each Class entitled thereto in the same manner as if such
taxes constituted a Prepayment Interest Shortfall.
(h) The Trustee and the Servicer shall, for federal income tax
purposes, maintain books and records with respect to the Trust REMIC on a
calendar year and on an accrual basis or as otherwise may be required by the
REMIC Provisions.
(i) Following the Startup Day, neither the Servicer nor the Trustee
shall accept any contributions of assets to the Trust REMIC unless the Servicer
and the Trustee shall have received an Opinion of Counsel (at the expense of the
party seeking to make such contribution) to the effect that the inclusion of
such assets in the Trust REMIC will not cause the Trust REMIC to fail to qualify
as a REMIC at any time that any Certificates are outstanding, or subject the
Trust REMIC to any tax under the REMIC Provisions or other applicable provisions
of federal, state and local law or ordinances.
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(j) Neither the Servicer nor the Trustee shall enter into any
arrangement by which the Trust REMIC will receive a fee or other compensation
for services nor permit the Trust REMIC to receive any income from assets other
than "qualified mortgages" as defined in Section 860G(a)(3) of the Code or
"permitted investments" as defined in Section 860G(a)(5) of the Code.
(k) Within 30 days after the Closing Date, the Trustee shall prepare
and file with the Internal Revenue Service Form 8811, "Information Return for
Real Estate Mortgage Investment Conduits (REMIC) and Issuers of Collateralized
Debt Obligations" for the Trust REMIC.
(m) Neither the Trustee nor the Servicer shall sell, dispose of or
substitute for any of the Mortgage Loans (except in connection with (i) the
default, imminent default or foreclosure of a Mortgage Loan, including but not
limited to, the acquisition or sale of a Mortgaged Property acquired by deed in
lieu of foreclosure, (ii) the bankruptcy of the Trust REMIC, (iii) the
termination of the Trust REMIC pursuant to Article X of this Agreement or (iv) a
purchase of Mortgage Loans pursuant to Article II or III of this Agreement) nor
acquire any assets for the Trust REMIC, nor sell or dispose of any investments
in the Custodial Account or the Certificate Account for gain nor accept any
contributions to the Trust REMIC after the Closing Date (a) unless it has
received an Opinion of Counsel that such sale, disposition, substitution or
acquisition will not affect adversely the status of the Trust REMIC as a REMIC
or (b) unless the Servicer has determined in its sole discretion to indemnify
the Trust Fund against such tax.
(n) In order to enable the Trustee to perform its duties as set forth
herein, the Seller shall provide, or cause to be provided to the Trustee, within
ten days after the Delivery Date, all information or data that the Trustee
determines to be relevant for tax purposes to the valuations and offering prices
of the Certificates, including, without limitation, the price, yield, prepayment
assumption and projected cash flows of the Certificates and the Mortgage Loans
and the Trustee shall be entitled to rely upon any and all such information and
data in the performance of its duties set forth herein. Thereafter, the
Servicer shall provide, promptly upon request therefor, any such additional
information or data that the Trustee may from time to time reasonably request in
order to enable the Trustee to perform its duties as set forth herein and the
Trustee shall be entitled to rely upon any and all such information and data in
the performance of its duties set forth herein. The Seller shall indemnify the
Trustee and hold its harmless for any loss, liability, damage, claim or expense
of the Trustee arising from any failure of the Seller to provide, or to cause to
be provided, accurate information or data to the Trustee on a timely basis. The
Servicer shall indemnify the Trustee and hold it harmless for any loss,
liability, damage, claim or expense of the Trustee arising from any failure of
the Servicer to provide, or to cause to be provided, accurate information or
data to the Trustee on a timely basis. The indemnification provisions hereunder
shall survive the termination of this Agreement and shall extend to any co-
trustee appointed pursuant to this Agreement.
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ARTICLE III
ADMINISTRATION AND SERVICING
OF MORTGAGE LOANS
SECTION 3.01. Servicing Standard.
------------------
For and on behalf of the Trustee, the Certificate Insurer and the
Certificateholders, the Servicer shall service and administer the Mortgage Loans
in accordance with prudent mortgage loan servicing standards and procedures
generally accepted in the mortgage banking industry and generally in a manner
consistent with FNMA guidelines except as otherwise expressly provided in this
Agreement. In connection with such servicing and administration, the Servicer
shall have full power and authority, acting alone and/or through any Sub-
Servicer as provided in Section 3.02 hereof, to do or cause to be done any and
all things that it may deem necessary or desirable in connection with such
servicing and administration, including but not limited to, the power and
authority, subject to the terms hereof (a) to execute and deliver, on behalf of
the Certificateholders and the Trustee, customary consents or waivers and other
instruments and documents (including, without limitation, estoppel
certificates), (b) to consent to transfers of any Mortgaged Property and
assumptions of the Mortgage Notes and related Mortgages (but only in the manner
provided in this Agreement), (c) to collect any Insurance Proceeds and
Liquidation Proceeds, (d) to consent to any subordinate financings to be secured
by any Mortgaged Property to the extent that such consent is required pursuant
to the terms of the related Mortgage, (e) to consent to the application of any
proceeds of insurance policies or condemnation awards to the restoration of the
applicable Mortgaged Property or otherwise, and (f) subject to the provisions of
Section 3.07 and 3.13, to effectuate foreclosure or other conversion of the
ownership of the Mortgage Property securing any Mortgage Loan; provided,
however, that the Servicer shall take no action that is materially inconsistent
with or materially prejudices the interest of the Trustee, the Certificate
Insurer or the Certificateholders in any Mortgage Loan or the rights and
interest of the Seller, the Certificate Insurer, the Trustee and the
Certificateholders under the terms of this Agreement unless such action is
specifically called for by the terms hereof.
Without limiting the generality of the foregoing, but subject to the
terms hereof, the Servicer, in its own name or in the name of the Seller and the
Trustee, is hereby authorized and empowered by the Seller and the Trustee, when
the Servicer believes it appropriate in its best judgment, to execute and
deliver, on behalf of the Trustee, the Seller, the Certificateholders or any of
them, any and all instruments of modification, satisfaction, cancellation or
assignment, or of partial or full release or discharge and all other comparable
instruments, with respect to the Mortgage Loans, and with respect to the
Mortgaged Properties held for the benefit of the Certificateholders. The
Servicer shall promptly notify the Trustee of any such execution and delivery.
The Seller and the Trustee for the benefit of the Certificateholders shall
furnish the Servicer with any powers of attorney and other documents necessary
or appropriate to enable the Servicer to service and administer the Mortgage
Loans.
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In accordance with the standards of the preceding paragraph, the
Servicer shall advance or cause to be advanced funds as necessary for the
purpose of effecting the timely payment of taxes and assessments on each
Mortgaged Property or any related unpaid insurance premiums that are not timely
paid by the Mortgagors prior to any such time as a Mortgage Loan is in
foreclosure; provided, however, that the Servicer shall be required to advance
only to the extent that such advances, in the good faith judgment of the
Servicer, will be recoverable by the Servicer out of Insurance Proceeds,
Liquidation Proceeds (net of Liquidation Expenses) or otherwise; and provided
further, that such payments shall be advanced when the tax, premium or other
cost for which such payment is intended is due. Any such advances shall be
reimbursable in the first instance from related collections from the related
Mortgagors pursuant to Section 3.07 hereof, and further as Liquidation Expenses
as provided in Section 3.13 hereof and may be withdrawn from the Custodial
Account pursuant to Section 3.09 hereof. All costs incurred by the Servicer or
by the related Sub-Servicer in effecting the timely payments of taxes and
assessments on the Mortgaged Properties and related insurance premiums shall
not, for the purpose of calculating monthly distributions to the
Certificateholders, be added to the Principal Balance under the related Mortgage
Loans, notwithstanding that the terms of such Mortgage Loans so permit.
Notwithstanding anything in this Agreement to the contrary, the
Servicer shall not (unless the Mortgagor is in default with respect to the
Mortgage Loan or such default is, in the judgment of the Servicer, imminent)
permit any modification with respect to any Mortgage Loan (i) that would change
the Net Mortgage Rate or, reduce or increase the principal balance (except for
reductions resulting from actual payments of principal), except for conversions
to a fixed rate in accordance with the terms of the Mortgage Loan or (ii) that
would both constitute a sale or exchange of such Mortgage Loan within the
meaning of Section 1001 of the Code (including any proposed, temporary or final
regulations promulgated thereunder) (other than in connection with a proposed
conveyance or assumption of such Mortgage Loan that is a Principal Prepayment
made (or treated as made) by the Mortgagor of the entire principal balance of a
Mortgage Loan) and cause the Trust REMIC to fail to qualify as a REMIC under the
Code.
SECTION 3.02. Enforcement of the Obligations of Sub-Servicers.
-----------------------------------------------
(a) For purposes of this Agreement, the Servicer shall be deemed to
have received the payments on the Mortgage Loans referred to in Sections 3.07
and 3.08 hereof when the related Sub-Servicer has received such payments and
shall remain obligated to deposit such payments in accordance with Sections 3.07
and 3.08 hereof, regardless of whether such payments are remitted by the Sub-
Servicer to the Servicer. The Servicer and the related Sub-Servicer may enter
into amendments to any applicable Sub-Servicing Agreement; provided, however,
that any such amendments shall be consistent with and shall not violate the
provisions of this Agreement; and provided further, that the substance of any
such material amendment or material change shall be transmitted promptly to the
Seller, the Trustee, the Certificate Insurer and the Rating Agencies.
(b) As part of its servicing activities hereunder, the Servicer, for
the benefit of the Seller, the Trustee, the Certificate Insurer and the
Certificateholders, shall supervise, administer, monitor and oversee the
servicing of the Mortgage Loans that are not
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serviced by it directly, and shall enforce the obligations of each Sub-Servicer
under the related Sub-Servicing Agreement. Such enforcement shall include,
without limitation, the legal prosecution of claims, termination of Sub-
Servicing Agreements, as appropriate, and the pursuit of other appropriate
remedies, and shall be in such form and carried out to such an extent and at
such time as the Servicer, in its good faith business judgment, would require
were it the owner of the related Mortgage Loans. The Servicer shall pay the
costs of such enforcement at its own expense, but shall be reimbursed therefor
only (i) from a general recovery resulting from such enforcement only to the
extent, if any, that such recovery exceeds all amounts due in respect of the
related Mortgage Loans or (ii) from a specific recovery of costs, expenses or
attorneys fees against the party against whom such enforcement is directed. The
Servicer shall not waive any event of default by a Sub-Servicer under a Sub-
Servicing Agreement which is a failure to remit any payment required to be made
by such Sub-Servicer that would result in an Event of Default under this
Agreement.
(c) During the term of this Agreement, the Servicer shall consult
fully with each of the Sub-Servicers as may be necessary from time to time to
perform and carry out the Servicer's obligations hereunder and receive, review
and evaluate all reports, information and other data that are provided to the
Servicer by each Sub-Servicer and otherwise exercise reasonable efforts to cause
each Sub-Servicer to perform and observe the covenants, obligations and
conditions to be performed or observed by it under its Sub-Servicing Agreement.
If any Sub-Servicer materially breaches or fails to perform or observe any
material obligations or conditions of its Sub-Servicing Agreement, the Servicer
shall promptly deliver to the Seller, the Certificate Insurer and to the Trustee
an Officers' Certificate certifying that such Sub-Servicer is in default and
describing the events and circumstances giving rise to the default and what
action (if any) has been, or is to be, taken by the Sub-Servicer to cure the
default and setting forth the action to be taken by the Servicer.
SECTION 3.03. Termination of the Rights of Sub-Servicers.
------------------------------------------
If the Servicer terminates the rights of a Sub-Servicer under any Sub-
Servicing Agreement, the Servicer shall service the Mortgage Loans directly
pursuant to and in accordance with the terms of this Agreement, or at the
Servicer's election, enter into a substitute servicing agreement with another
mortgage loan servicing company reasonably acceptable to the Trustee and the
Servicer under which such mortgage loan servicing company shall assume, satisfy,
perform and carry out all liabilities, duties, responsibilities and obligations
that are to be, or otherwise were to have been, satisfied, performed and carried
out by the terminated Sub-Servicer, regardless of whether such liabilities,
duties, responsibilities or obligations shall have accrued before or after the
termination of the rights of such Sub-Servicer; provided, however, that any such
substitute servicer and any such substitute servicing shall satisfy the
requirements of Sections 3.01 and 3.02. If the Servicer does not elect to enter
into a substitute servicing agreement with a successor servicer, the Servicer
shall nevertheless service the Mortgage Loans directly pursuant to and in
accordance with the terms of this Agreement, until a substitute Sub-Servicer has
been appointed and designated and a substitute servicing agreement has been
entered into by the Servicer and such substitute Sub-Servicer. The Servicer
shall give notice to the Trustee, the Certificate
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Insurer and the Rating Agencies of any termination of a Sub-Servicer and any
appointment or designation of a substitute Sub-Servicer.
SECTION 3.04. Liability of the Servicer.
-------------------------
Notwithstanding the provisions of any Sub-Servicing Agreement, any of
the provisions of this Agreement relating to agreements or arrangements between
the Servicer or a Sub-Servicer or reference to actions taken through a Sub-
Servicer or otherwise, the Servicer shall remain obligated and liable to the
Seller, the Trustee, the Certificate Insurer and the Certificateholders for the
servicing and administering of the Mortgage Loans included in the Trust Fund in
accordance with (and subject to the limitations contained within) the provisions
of this Agreement without diminution of such obligation or liability by virtue
of such Sub-Servicing Agreements or agreements or arrangements or by virtue of
indemnification from the Sub-Servicer and to the same extent and under the same
terms and conditions as if the Servicer alone were servicing and administering
the Mortgage Loans. The Servicer shall be entitled to enter into any agreement
with the Seller or a Sub-Servicer for indemnification of the Servicer and
nothing contained in this Agreement shall be deemed to limit or modify such
indemnification.
SECTION 3.05. Rights of the Seller and the Trustee
------------------------------------
in Respect of the Servicer.
--------------------------
The Servicer shall afford the Seller, the Certificate Insurer and the
Trustee, without charge but only upon reasonable notice and during normal
business hours, access to all records and documentation in the Servicer's
possession regarding the Mortgage Loans and to all accounts, insurance policies
and other matters in the Servicer's possession relating to this Agreement and
access to officers of the Servicer responsible for its obligations hereunder.
The Seller may, but is not obligated to, enforce the obligations of the Servicer
hereunder. The Seller shall not have any responsibility or liability for any
action or failure to act by the Servicer and is not obligated to supervise the
performance of the Servicer hereunder or otherwise.
SECTION 3.06. Trustee to Act as Servicer.
--------------------------
In the event that the Servicer shall for any reason no longer be the
Servicer hereunder (including by reason of an Event of Default), the Trustee
shall thereupon assume all of the rights and obligations of the Servicer
hereunder arising thereafter (except that the Trustee shall not be liable for
losses of the Servicer pursuant to Section 3.07 hereof, obligated to make
Monthly Advances if prohibited by applicable law, nor to effectuate repurchases
or substitutions of Mortgage Loans hereunder as substitute Servicer, including
pursuant to Section 2.04 hereof and except that the Trustee makes no
representations and warranties hereunder, including pursuant to Section 2.04
hereof). If the Servicer shall for any reason no longer be the Servicer
(including by reason of any Event of Default), the Trustee (or any other
successor servicer) shall succeed to any rights and obligations of the Servicer
under any Sub-Servicing Agreement and shall be deemed to have assumed the
Servicer's interest therein; provided, however, that the Servicer shall not
thereby be relieved
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of any liability or obligations under this Agreement, any Sub-Servicing or
substitute servicing agreement arising prior to the date of such succession.
The Servicer shall, upon request of the Trustee, but at the expense of
the Servicer, deliver to the assuming party all documents and records relating
to the Mortgage Loans then being serviced thereunder and an accounting of
amounts collected held by it and otherwise use its best efforts to effect the
orderly and efficient transfer of servicing to the assuming party.
SECTION 3.07. Collection of Mortgage Loan Payments.
------------------------------------
The Servicer shall make reasonable efforts to collect all payments
called for under the terms and provisions of the Mortgage Loans and shall, to
the extent such procedures shall be consistent with this Agreement, follow such
collection procedures as it follows with respect to mortgage loans comparable to
the Mortgage Loans held in its own portfolio and serviced by the Servicer.
Consistent with the foregoing, the Servicer may in its discretion (a) waive any
late payment charge or any prepayment charge or penalty interest in connection
with the prepayment of a Mortgage Loan and (b) subject to Section 3.01, only
upon determining that the coverage of such Mortgage Loan by any related Primary
Mortgage Insurance Policy will not be affected, extend the due dates for
payments due on a Mortgage Note for a period not greater than 270 days, but in
no event beyond the maturity date of any Mortgage Loan. In the event of any
such arrangement described in clause (b) of the preceding sentence, the Servicer
shall continue to make timely Monthly Advances on the related Mortgage Loan,
pursuant to and in accordance with Section 5.01 of this Agreement (but subject
to any limitations contained therein), during the scheduled period in accordance
with the amortization schedule of such Mortgage Loan without modification
thereof by reason of such arrangements.
The Servicer shall establish and maintain, in its name on behalf of
the Certificateholders and the Certificate Insurer, the Custodial Account. The
Servicer shall deposit into the Custodial Account within two Business Days of
receipt by the Servicer, or receipt from the Sub-Servicers except as otherwise
specifically provided herein, the following payments and collections received or
made by it subsequent to the Cut-off Date (other than in respect of principal of
and interest and any other payments on the Mortgage Loans due on or before the
Cut-off Date):
(i) all payments on account of principal, including Principal
Prepayments, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans;
(iii) all Insurance Proceeds and Liquidation Proceeds, other
than proceeds to be applied to the restoration or repair of the Mortgaged
Property or released to the Mortgagor in accordance with the Servicer's
normal servicing procedures, net of Liquidation Expenses, unpaid servicing
compensation and unreimbursed Monthly Advances;
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[(iv) all Payments received by the Trustee under the Letter of
Credit and any payments under any Alternative Credit Support].
(v) all Monthly Advances made by the Servicer pursuant to
Section 5.01 hereof;
(vi) any amount of any losses required to be deposited by the
Servicer pursuant to the second succeeding paragraph of this Section 3.07
in connection with any losses on Eligible Investments;
(vii) any amounts required to be deposited by the Servicer
pursuant to Section 3.11 hereof;
(viii) all proceeds of any purchase by the Seller or the
Servicer, as the case may be, of any Mortgage Loans or property acquired in
respect of the Mortgage Loans pursuant to Sections 2.01, 2.02, 2.04, 3.12,
3.21 or 10.01 hereof and all amounts required to be deposited in connection
with the substitution of Replacement Mortgage Loans pursuant to Sections
2.01, 2.02 or 2.04 hereof; and
(ix) any other amounts required to be deposited in the Custodial
Account pursuant to this Agreement including, without limitation, the
amounts required to be deposited therein pursuant to Section 3.13 hereof.
The foregoing requirements for remittance by the Servicer shall be
exclusive, it being understood and agreed that, without limiting the generality
of the foregoing, payments in the nature of prepayment penalties, fees or
premiums, late payment charges, assumption fees and any excess interest charges
payable by the Mortgagor by virtue of any default or other non-compliance by the
Mortgagor with the terms of the Mortgage or any other instrument or document
executed in connection therewith or otherwise, if collected, need not be
remitted or deposited into the Custodial Account by the Servicer. In the event
that the Servicer shall remit or deposit any amount not required to be remitted
or deposited and not otherwise subject to withdrawal pursuant to Section 3.09
hereof, it may at any time withdraw such amount from the Custodial Account on
the following Distribution Date, any provision herein to the contrary
notwithstanding. Such direction may be accomplished by delivering an Officers'
Certificate to the Trustee which describes the amounts deposited in error in the
Custodial Account. All funds deposited in the Custodial Account shall be held
by the Servicer in trust for the Certificateholders and the Certificate Insurer
until disbursed in accordance with this Agreement or withdrawn in accordance
with Section 3.09. In no event shall the Trustee incur liability for
withdrawals from the Custodial Account at the direction of the Servicer.
The Servicer shall invest the funds in the Custodial Account in
Eligible Investments, which shall mature not later than the second Business Day
preceding the Distribution Date following the date of such investment (except
that if such Eligible Investment is an obligation of the institution that
maintains the Custodial Account, then such Eligible Investment shall mature not
later than such Distribution Date). All such Eligible Investments shall be made
in the name of the Trustee for the benefit of the Certificateholders
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and the Certificate Insurer (in its capacity as such) or its nominee. The
Servicer shall cause each such Eligible Investment to be Delivered to the
Trustee or its nominee (including a securities intermediary). All income and
gain net of any losses realized from any such investment shall be for the
benefit of the Servicer and shall be subject to withdrawal at its direction from
time to time. The amount of any losses net of any gains not paid to the Servicer
incurred in respect of any such investments shall be remitted to the Trustee or
deposited in the Custodial Account out of the Servicer's own funds promptly
following the date the same are realized.
The Servicer shall promptly give notice to the Trustee, the Rating
Agencies, the Certificate Insurer and the Seller of the location of the
Custodial Account and of any change thereof.
SECTION 3.08. Collection of Taxes, Assessments and
------------------------------------
Similar Items; Escrow Accounts.
------------------------------
In addition to the Custodial Account, the Servicer shall establish and
maintain one or more custodial accounts (each, an "Escrow Account") and deposit
and retain therein all collections from the Mortgagors (or advances by the
Servicer) for the payment of taxes, assessments and hazard insurance premiums or
comparable items for the account of the Mortgagors. Escrow Accounts shall be
Eligible Accounts.
Withdrawals of amounts so collected from the Escrow Accounts may be
made only to effect timely payment of taxes, assessments, hazard insurance
premiums or Primary Mortgage Insurance Policy premiums, condominium or PUD
association dues, or comparable items, to reimburse the Servicer pursuant to
Sections 3.10 hereof (with respect to the Primary Mortgage Insurance Policy) and
3.08 hereof (with respect to taxes and assessments) and 3.11 hereof (with
respect to hazard insurance), to refund to any Mortgagors any sums as may be
determined to be overages, to pay interest, if required, to Mortgagors on
balances in the Escrow Account or to clear and terminate the Escrow Account at
the termination of this Agreement in accordance with Section 10.01 hereof. As
part of its servicing duties, the Servicer shall, and the Sub-Servicers shall,
pursuant to any Sub-Servicing Agreement, be required to, pay to the Mortgagors
interest on funds in the Escrow Account, to the extent required by law.
The Servicer shall, with respect to each Mortgage Loan, to the extent
any related Sub-Servicer does not do so, advance the payments referred to in the
preceding paragraph that are not timely paid by the Mortgagors; provided,
however, that the Servicer shall be required to so advance only to the extent
that such advances, in the good faith judgment of the Servicer, will be
recoverable by the Servicer out of Insurance Proceeds, Liquidation Proceeds or
otherwise of the related Mortgage Loan; and provided further, that such payments
shall be advanced when the tax, premium or other cost for which such payment is
intended is due.
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SECTION 3.09. Permitted Withdrawals from the Custodial Account.
------------------------------------------------
The Servicer may (and, with respect to clauses (e) and (g) below,
shall), from time to time, direct the Trustee to make, and the Trustee shall
make, to the extent required or authorized hereunder, withdrawals from the
Custodial Account for the following purposes:
(a) to pay to the Servicer as additional servicing compensation,
earnings on or investment income with respect to funds in the Custodial
Account credited to the Custodial Account;
(b) to reimburse the Servicer for advances made pursuant to
Sections 3.01, 3.10, 3.13, 5.01 and 5.02 hereof, such right of
reimbursement pursuant to this subclause (b) being limited to amounts
received in respect of the particular Mortgage Loan (including, for this
purpose, Insurance Proceeds, Liquidation Proceeds, amounts representing
proceeds of other insurance policies, if any, covering the related
Mortgaged Property, rental and other income from REO Property and proceeds
of any purchase or repurchase of the related Mortgage Loan);
(c) to reimburse the Servicer for any Nonrecoverable Advances;
(d) to reimburse the Servicer from Liquidation Proceeds for
Liquidation Expenses and, to the extent that Liquidation Proceeds after
such reimbursement are in excess of the Principal Balance of the related
Mortgage Loan together with accrued and unpaid interest thereon at a rate
equal to the sum of the Net Mortgage Rate and the Trustee Fee Rate, to pay
out of such excess the amount of any unpaid servicing compensation with
respect to the related Mortgage Loan to the Servicer, which may include any
unpaid servicing compensation to the Sub-Servicer (for disbursement in
accordance with Section 3.16 hereof);
(e) to pay to the Seller or the Servicer, as the case may be,
with respect to each Mortgage Loan or property acquired in respect thereof
that has been purchased pursuant to Sections 2.01, 2.02, 2.04 or 3.12
hereof all amounts received thereon and not taken into account in
determining the Purchase Price of such repurchased Mortgage Loan;
(f) to reimburse the Servicer or the Seller for expenses incurred
by and reimbursable to the Servicer or the Seller pursuant to Section 7.03
hereof;
(g) to withdraw any amount deposited in the Custodial Account
pursuant to Section 3.07 and not required to be deposited therein; and
(h) to clear and terminate the Custodial Account upon termination
of this Agreement pursuant to Section 10.01 hereof.
The Servicer shall keep and maintain separate accounting, on a
Mortgage Loan by Mortgage Loan basis, for the purpose of justifying any
withdrawal from the Custodial Account pursuant to such subclauses (a), (b), (c),
(d), (e) and (f). The Servicer may apply
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Liquidation Proceeds and Insurance Proceeds received with respect to a
particular Mortgage Loan to reimbursements permitted by clauses (b), (c) and (d)
above in any order as the Servicer deems appropriate.
On or prior to the second Business Day preceding each Distribution
Date after payment of items (a) through (h) above, the Servicer shall withdraw
from the Custodial Account and remit to the Trustee, in immediately available
funds, and the Trustee, upon receipt thereof, shall deposit in the Certificate
Account, an amount equal to the sum of the Available Distribution Amount, the
Trustee Fee, the Servicing Fee and the Certificate Insurer Premium for such
Distribution Date.
SECTION 3.10. Maintenance of Primary Mortgage Insurance Policies;
---------------------------------------------------
Collections Thereunder.
----------------------
The Servicer shall not take, or permit any Sub-Servicer to take, any
action that would result in loss of coverage under any applicable Primary
Mortgage Insurance Policy for any loss which, but for the actions of the
Servicer or Sub-Servicer, would have been covered thereunder. The Servicer
shall use its best reasonable efforts to cause such Sub-Servicer to keep in full
force and effect each Primary Mortgage Insurance Policy applicable to a Mortgage
Loan being serviced by it, including for each Lender-Paid MI Loan, until the
principal balance of the related Mortgage Loan, in the case of a Mortgage Loan
having a Loan-to-Value Ratio at origination in excess of 80%, is reduced to (a)
80% or less of the Appraised Value or (b) 80% or less of its current value based
on a new appraisal. The Servicer agrees to pay to the extent the related Sub-
Servicer does not do so, the premiums for each Primary Mortgage Insurance Policy
on a timely basis and shall use its best reasonable efforts to cause itself or
the Sub-Servicer to be named as loss payee. In the event that the insurer under
any Primary Mortgage Insurance Policy shall cease to be qualified to transact a
mortgage guaranty insurance business under the laws of the state of its
organization or any other state that has jurisdiction over such insurer (or if
such insurer's claims-paying ability shall adversely affect the rating on the
Class A Certificates) or such Primary Mortgage Insurance Policy is cancelled or
terminated for any reason, the Servicer shall exercise its best reasonable
efforts to obtain, or to cause the related Sub-Servicer to obtain, from another
Qualified Certificate Insurer, a replacement policy comparable to such Primary
Mortgage Insurance Policy at the expense of the Mortgagor. The Servicer shall
not consent to the cancellation or refusal to renew any such Primary Mortgage
Insurance Policy applicable to any Mortgage Loan, which is in effect at the date
of the initial issuance of the Certificates and is required to be kept in force
hereunder unless the replacement Primary Mortgage Insurance Policy for such
cancelled or non-renewed policy is maintained with an insurer with a rating not
lower than the insurer issuing the Primary Mortgage Insurance Policy in effect
at the date of the initial issuance of the Certificates or whose claims-paying
will not adversely affect the rating on the Class A Certificates or unless any
such cancellation or refusal, or consent thereto, will not adversely affect the
rating on the Class A Certificates. In connection with any assumption and
modification agreement entered into by the Servicer or a Sub-Servicer pursuant
to Section 3.12, the Servicer shall obtain a replacement Primary Mortgage
Insurance Policy, as provided above.
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In connection with its activities as administrator and servicer of the
Mortgage Loans, the Servicer agrees to present, on behalf of itself, the Seller,
the Trustee for the benefit of the Certificateholders and the Certificate
Insurer, claims to the insurer under any Primary Mortgage Insurance Policies
and, in this regard, to take such reasonable action as shall be necessary to
permit recovery under any Primary Mortgage Insurance Policies respecting
defaulted Mortgage Loans. Pursuant to Section 3.07 hereof, any amounts
collected by the Servicer under any Primary Mortgage Insurance Policy shall be
deposited in the Custodial Account, subject to withdrawal pursuant to Section
3.09 hereof.
SECTION 3.11. Maintenance of Hazard Insurance and Other Insurance.
----------------------------------------------------
The Servicer shall cause to be maintained for each Mortgage Loan,
hazard insurance with extended coverage in an amount that is at least equal to
the maximum insurable value of improvements securing such Mortgage Loan or its
Principal Balance, whichever is less.
Each policy of standard hazard insurance shall contain, or have an
accompanying endorsement that contains, a standard mortgagee clause complying in
all material respects in form and substance to applicable FNMA guidelines. The
Servicer shall cause to be maintained on property acquired upon foreclosure or
deed in lieu of foreclosure of any Mortgage Loan, liability insurance and, to
the extent described below, flood insurance. Pursuant to Section 3.07 hereof,
any amounts collected by the Servicer under any such policies (other than
amounts to be applied to the restoration or repair of the related Mortgaged
Property or property thus acquired or amounts released to the Mortgagor in
accordance with the terms of the applicable Mortgage or the Servicer's normal
servicing procedures) shall be deposited in the Custodial Account, subject to
withdrawal pursuant to Section 3.09 hereof.
Any cost incurred by the Servicer or the related Sub-Servicer in
maintaining any such insurance shall not, for the purpose of calculating monthly
distributions to the Certificateholders or remittances to the Trustee for their
benefit, be added to the Principal Balance of the Mortgage Loan, notwithstanding
that the terms of the Mortgage Loan so permit. Such costs shall be recoverable
by the Servicer out of payments by the related Mortgagor or out of Insurance
Proceeds or Liquidation Proceeds to the extent permitted by Section 3.09 hereof.
If the Mortgaged Property is located at the time of origination of the Mortgage
Loan in a federally designated special flood hazard area, the Servicer shall
cause flood insurance to be maintained. Such flood insurance shall be in an
amount equal to the lesser of (i) the unpaid Principal Balance of the related
Mortgage Loan or (ii) the maximum amount of such insurance available for the
related Mortgaged Property under the national flood insurance program, if the
area in which such Mortgaged Property is located is participating in such
program.
In the event that the Servicer shall obtain and maintain a blanket
policy insuring against hazard losses on all of the Mortgage Loans, it shall
conclusively be deemed to have satisfied its obligations as set forth in the
first sentence of this Section 3.11, it being understood and agreed that such
policy may contain a deductible clause on terms substantially equivalent to
those commercially available and maintained by comparable servicers, and
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provided that the provider of such blanket policy is rated by A.M. Best Company
A:V or higher and the claims-paying ability of such provider is rated in one of
the three highest rating categories by at least one nationally recognized
statistical rating organization. If such policy contains a deductible clause,
the Servicer shall, to the extent that there shall not have been maintained on
the related Mortgaged Property a policy complying with the first sentence of
this Section 3.11 and there shall have been a loss that would have been covered
by such policy, remit to the Trustee for deposit in the Custodial Account the
amount not otherwise payable under the blanket policy because of such deductible
clause, accompanied by an Officers' Certificate describing the calculation of
such amount. In connection with its activities as administrator and servicer of
the Mortgage Loans, the Servicer agrees to present, on behalf of itself, the
Seller, the Trustee for the benefit of the Certificateholders, claims under any
such blanket policy.
SECTION 3.12. Enforcement of Due-On-Sale Clauses;
-----------------------------------
Assumption Agreements.
---------------------
(a) Except as otherwise provided in this Section 3.12(a), when any
property subject to a Mortgage has been conveyed by the Mortgagor, the Servicer
shall, to the extent that it has knowledge of such conveyance, enforce any due-
on-sale clause contained in any Mortgage Note or Mortgage, to the extent
permitted under applicable law and governmental regulations, but only to the
extent that such enforcement will not adversely affect or jeopardize coverage
under any Required Insurance Policy. In the event that the Servicer or the
related Sub-Servicer is prohibited by law from enforcing any such due-on-sale
clause, or if coverage under any Required Insurance Policy would be adversely
affected, the Servicer is authorized, subject to Section 3.12(b), to take or
enter into an assumption and modification agreement from or with the person to
whom such property has been or is about to be conveyed, pursuant to which such
person becomes liable under the Mortgage Note and, unless prohibited by
applicable state law, the Mortgagor remains liable thereon, provided that the
Mortgage Loan shall continue to be covered (if so covered before the Servicer
enters such agreement) by the applicable Required Insurance Policies. The
Servicer, subject to Section 3.12(b), is also authorized with the prior approval
of the insurers under any Required Insurance Policies to enter into a
substitution of liability agreement with such person, pursuant to which the
original Mortgagor is released from liability and such person is substituted as
Mortgagor and becomes liable under the Mortgage Note. Notwithstanding the
foregoing, the Servicer shall not be deemed to be in default under this Section
3.12(a) by reason of any transfer or assumption which the Servicer is restricted
by law from preventing, for any reason whatsoever.
(b) Subject to the Servicer's duty to enforce any due-on-sale clause
to the extent set forth in Section 3.12(a) hereof, in any case in which a
Mortgaged Property has been conveyed to a Person by a Mortgagor, if an
assumption is permitted under Section 3.12(a) and such Person is to enter into
an assumption agreement or modification agreement or supplement to the Mortgage
Note or Mortgage held for the benefit of the Certificateholders and the
Certificate Insurer that requires the signature of the Trustee, or if an
instrument of release signed by the Trustee is required releasing the Mortgagor
from liability on the Mortgage Loan, the Servicer shall deliver or cause to be
delivered to the Trustee for signature the assumption agreement with the Person
to whom the Mortgaged
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Property is to be conveyed and such modification agreement or supplement to the
Mortgage Note or Mortgage or other instruments as are reasonable or necessary to
carry out the terms of the Mortgage Note or Mortgage or otherwise to comply with
any applicable laws regarding assumptions or the transfer of the Mortgaged
Property to such Person. The Servicer shall also deliver or cause to be
delivered to the Trustee with the foregoing documents a letter explaining the
nature of such documents and the reason or reasons why the Trustee's signature
is required.
With such letter, the Servicer shall deliver to the Trustee a
certificate of a Servicing Officer certifying that: (i) a Servicing Officer has
examined and approved such documents as to form and substance, (ii) the
Trustee's execution and delivery thereof will not conflict with or violate any
terms of this Agreement or cause the unpaid balance and interest on the Mortgage
Loan to be uncollectible in whole or in part, (iii) any required consents of
insurers under any Required Insurance Policies have been obtained and (iv)
subsequent to the closing of the transaction involving the assumption or
transfer (A) the Mortgage Loan will continue to be secured by a first mortgage
lien pursuant to the terms of the Mortgage, (B) such transaction will not
adversely affect the coverage under any Required Insurance Policies, (C) the
Mortgage Loan will fully amortize over the remaining term thereof or, if the
Mortgage Loan provided that the amortization period on which the Monthly
Payments were based was a longer period, such period has not been extended, (D)
the interest rate on the Mortgage Loan will not be altered nor will the term of
the Mortgage Loan be increased as a result of such assumption or transfer and
(E) if the seller/transferor of the Mortgaged Property is to be released from
liability on the Mortgage Loan, the Servicer used the same underwriting
standards in evaluating the creditworthiness of the purchaser/transferee as were
used in making the original Mortgage Loan, and such release will not (based on
the Servicer's good faith determination) adversely affect the collectibility of
the Mortgage Loan. Upon receipt of such certificate, the Trustee for the
benefit of the Certificateholders and the Certificate Insurer shall execute any
necessary instruments for such assumption or substitution of liability. Upon
the closing of the transactions contemplated by such documents, the Servicer
shall cause the originals of the assumption agreement, the release (if any), or
the modification or supplement to the Mortgage Note or Mortgage to be delivered
to the Trustee for the benefit of the Certificateholders and the Certificate
Insurer and deposited with the Trustee Mortgage File for such Mortgage Loan.
Any fee collected by the Servicer for entering into an assumption or
substitution of liability agreement will be retained by the Servicer as
additional servicing compensation.
In the event that the Servicer, in connection with any such assumption
or modification agreement or supplement to the Mortgage Note, is unable to
deliver the certificate of the Servicing Officer set forth above, the Servicer
shall purchase, or cause the related Sub-Servicer to purchase the related
Mortgage Loan in the manner, and at the Purchase Price, set forth in Section
2.04 hereof.
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SECTION 3.13. Realization Upon Defaulted Mortgage Loans.
-----------------------------------------
The Servicer shall foreclose upon or otherwise comparably convert the
ownership of properties securing such of the Mortgage Loans as come into and
continue in default and as to which, in the reasonable judgment of the Servicer,
no satisfactory arrangements can, in accordance with prudent lending practices,
be made for collection of delinquent payments pursuant to Section 3.01 hereof.
In connection with such foreclosure or other conversion, the Servicer shall
follow such practices and procedures as it shall deem necessary or advisable, as
shall be normal and usual in its general mortgage servicing activities and for
its own portfolio and as are in accordance with the requirements of the insurer
under any Required Insurance Policy and shall deliver to the Certificate Insurer
a liquidation report with respect to the related Mortgage Loan on the form of
report customarily prepared by the Servicer. In particular, the Servicer will
service each Mortgage Loan in a manner that preserves the right to proceed
against all collateral securing such Mortgage Loan (e.g., in accordance with any
applicable "single action" rule). The Servicer shall not be required to expend
its own funds in connection with any foreclosure or towards the restoration,
repair, protection or maintenance of any property unless it shall determine in
its sole discretion that such expenses will be recoverable to it as Liquidation
Expenses either through Liquidation Proceeds (respecting which it shall have
priority for purposes of withdrawals from the Custodial Account pursuant to
Section 3.09 hereof) or through Insurance Proceeds (respecting which it shall
have similar priority). The Servicer shall be responsible for all other costs
and expenses incurred by it in any such proceedings; provided, however, that it
shall be entitled to reimbursement thereof from the proceeds of liquidation of
the related Mortgaged Property, as contemplated in Section 3.09 hereof.
In the event that any Mortgaged Property becomes an REO Property, the
deed or certificate of sale shall be taken in the name of the Trustee for the
benefit of the Certificateholders and the Certificate Insurer, or its nominee,
on behalf of the Certificateholders and the Certificate Insurer. Pursuant to
its efforts to sell such REO Property, the Servicer shall either itself or
through an agent selected by the Servicer protect and conserve such REO Property
in the same manner and to such extent as is customary in the locality where such
REO Property is located and may, incident to its conservation and protection of
the interests of the Certificateholders and the Certificate Insurer, rent the
same, or any part thereof, as the Servicer deems to be in the best interest of
the Servicer, the Certificate Insurer and the Certificateholders for the period
prior to the sale of such REO Property on such terms and conditions and for such
periods as the Servicer deems to be in the best interest of the Servicer, the
Certificate Insurer and the Certificateholders. Notwithstanding anything herein
to the contrary, in the event that the Trust REMIC acquires any REO Property as
aforesaid or otherwise in connection with a default or imminent default on a
Mortgage Loan, the Servicer, on behalf of the Trust REMIC, shall dispose of such
REO Property within three full years after the taxable year of its acquisition
by the Trust REMIC for purposes of Section 860G(a)(8) of the Code (or such
shorter period as may be necessary under applicable state (including any state
in which such property is located) law to maintain the status of the Trust REMIC
as a REMIC under applicable state law and avoid taxes resulting from such
property failing to be foreclosure property under applicable state law) or, at
the expense of the Trust REMIC, request, more than 60 days before the day on
which such grace period would otherwise expire, an extension of such grace
period unless the
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Servicer obtains for the Trustee an Opinion of Counsel, addressed to the
Trustee, the Certificate Insurer and the Servicer, to the effect that the
holding by the Trust REMIC of such REO Property subsequent to such period will
not result in the imposition of taxes on "prohibited transactions" as defined in
Section 860F of the Code, or cause the Trust REMIC to fail to qualify as a REMIC
under the Code at any time that any Certificates of the Trust REMIC are
outstanding, in which case the Trust REMIC may continue to hold such REO
Property (subject to any conditions contained in such Opinion of Counsel). The
Servicer shall be entitled to be reimbursed from the Custodial Account for any
costs incurred in obtaining such Opinion of Counsel. Notwithstanding any other
provision of this Agreement, no REO Property acquired by the Trust REMIC shall
be rented (or allowed to continue to be rented) or otherwise used by or on
behalf of the Trust REMIC in such circumstances or manner or pursuant to any
terms that would (i) cause such REO Property to fail to qualify as "foreclosure
property" within the meaning of Section 860G(a)(8) of the Code or (ii) subject
the Trust REMIC to the imposition of any federal income taxes on the income
earned from such REO Property, including any taxes imposed by reason of Section
860G(c) of the Code, unless the Servicer has agreed to indemnify and hold
harmless the Trust REMIC with respect to the imposition of any such taxes.
The decision of the Servicer to foreclose on a defaulted Mortgage Loan
shall be subject to a determination by the Servicer that the proceeds of such
foreclosure would exceed the costs and expenses of bringing such a proceeding.
The income earned from the management of any Mortgaged Properties acquired
through foreclosure or other judicial proceeding on behalf of the
Certificateholders and the Certificate Insurer, net of reimbursement to the
Servicer for expenses incurred (including any taxes) in connection with such
management, advances made by the Servicer pursuant to Sections 3.01, 3.11, 3.13
or 5.01 in connection with the related Mortgage Loan or REO Property and
Liquidation Expenses incurred by the Servicer in connection with the related
Mortgage Loan, shall be applied to the payment of principal of and interest on
the related defaulted Mortgage Loans (with interest accruing and principal
amortizing as though such Mortgage Loans were still current) and all such income
shall be deemed, for all purposes in this Agreement, to be payments on account
of principal of and interest on the related Mortgage Notes and shall be
deposited into the Custodial Account.
Prior to obtaining or causing the Trustee to obtain a deed as a result
of or in lieu of foreclosure, or otherwise acquiring (or causing the Trustee to
acquire) possession of or title to any Mortgaged Property, if the Servicer
determines that obtaining a deed or otherwise acquiring title or possession of
such Mortgaged Property would likely subject the Servicer, the Trustee or the
Trust Fund to substantial liability in respect of environmental conditions
concerning the Mortgaged Property, (a) the Servicer shall (i) notify the Trustee
and the Seller of such determination and (ii) refrain from obtaining or
directing the Trustee to obtain a deed as a result of or in lieu of foreclosure
or otherwise acquiring title or possession to such Mortgaged Property and (b)
the obligations of the Servicer to make advances, including, without limitation,
Monthly Advances, in connection with the Mortgage Loan in question shall cease
as of the date that the Servicer makes such determination.
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SECTION 3.14. Trustee to Cooperate; Release of Trustee Mortgage
-------------------------------------------------
Files.
-----
Upon the payment in full of any Mortgage Loan, or the receipt by the
Servicer of a notification that payment in full will be escrowed in a manner
customary for such purposes, and upon notification by the Servicer in the form
of a certification (which certification shall include a statement to the effect
that all amounts received or to be received in connection with such payment
which are required to be deposited in the Custodial Account have been or will be
so deposited) of a Servicing Officer and a Request for Release of the Trustee
Mortgage File in the form of Exhibit G hereto the Trustee shall promptly release
the related Trustee Mortgage File to the Servicer, and the Trustee shall execute
and deliver to the Servicer the request for reconveyance, deed of reconveyance
or release, satisfaction or assignment of mortgage or such instrument releasing
the lien of the Mortgage, and, in each case, such other documents or instruments
as may be reasonably required in connection therewith, as directed by the
Servicer, together with the Mortgage Note with written evidence of cancellation
thereon. The provisions of the immediately preceding sentence shall not, in any
manner, limit or impair the right of the Servicer to execute and deliver, on
behalf of the Trustee, the Seller, the Certificateholders or any of them, any
and all instruments of satisfaction, cancellation or assignment, or of partial
or full release or discharge and all other comparable instruments, with respect
to the Mortgage Loans, and with respect to the Mortgaged Properties held for the
benefit of the Certificateholders. No expenses incurred in connection with any
instrument of satisfaction or deed of reconveyance shall be chargeable to the
Certificate Account but shall be paid by the Servicer. From time to time and as
shall be appropriate for the servicing or foreclosure of any Mortgage Loan,
including, without limitation, for such purpose, collection under any policy of
flood insurance, any fidelity bond or errors or omissions policy, or for the
purposes of effecting a partial or total release of any Mortgaged Property from
the lien of the Mortgage or the making of any corrections to the Mortgage Note
or the Mortgage or any of the other documents included in the Trustee Mortgage
File, the Trustee shall, upon request of the Servicer and the delivery to the
Trustee of a Request for Release signed by a Servicing Officer, in the form of
Exhibit G hereto, release the Trustee Mortgage File to the Servicer. If the
Servicer at any time seeks to initiate a foreclosure proceeding in respect of
any Mortgaged Property, the Servicer shall deliver to the Seller or the Trustee,
for signature as appropriate, any court pleadings, requests for trustee's sale
or other documents necessary to effectuate such foreclosure or any legal action
brought to obtain judgment against the Mortgagor on the Mortgage Note or the
Mortgage or to obtain a deficiency judgment or to enforce any other remedies or
rights provided by the Mortgage Note or the Mortgage or otherwise available at
law or in equity, together with a certificate of a Servicing Officer requesting
that such pleadings or documents be executed by the Trustee. A Servicing
Officer shall certify as to the reason such documents or pleadings are required
and that the execution and delivery thereof by the Trustee will not invalidate
the insurance coverage under any Required Insurance Policy or invalidate or
otherwise affect the lien of the Mortgage except for the termination of such
lien upon completion of the foreclosure.
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SECTION 3.15. Documents, Records and Funds in Possession of Servicer
------------------------------------------------------
to be Held for the Seller and the Trustee for the
-------------------------------------------------
Benefit of the Certificateholders.
---------------------------------
Notwithstanding any other provisions of this Agreement, the Servicer
shall transmit to the Trustee to the extent required by this Agreement all
documents and instruments coming into the possession of the Servicer from time
to time and shall account fully to the Trustee for the benefit of the
Certificateholders and the Certificate Insurer for any funds received by the
Servicer or which otherwise are collected by the Servicer as Liquidation
Proceeds or Insurance Proceeds in respect of any Mortgage Loan. All Servicer
Mortgage Files or Trustee Mortgage Files and funds collected or held by, or
under the control of, the Servicer in respect of any Mortgage Loans, whether
from the collection of principal and interest payments or from Liquidation
Proceeds or Insurance Proceeds, including but not limited to, any funds on
deposit in the Custodial Account, shall be held by the Servicer for and on
behalf of the Seller, the Trustee for the benefit of the Certificateholders and
the Certificate Insurer and shall be and remain the sole and exclusive property
of the Trustee, subject to the applicable provisions of this Agreement. The
Servicer also agrees that it shall not create, incur or subject any Servicer
Mortgage File or Trustee Mortgage File or any funds that are deposited in the
Custodial Account or any Servicing or Escrow Account, or any funds that
otherwise are or may become due or payable to the Trustee for the benefit of the
Certificateholders, to any claim, lien, security interest, judgment, levy, writ
of attachment or other encumbrance, or assert by legal action or otherwise any
claim or right of setoff against any Servicer Mortgage File or Trustee Mortgage
File or any funds collected on, or in connection with, a Mortgage Loan, except,
however, that the Servicer shall be entitled to set off against and deduct from
any such funds any amounts that are properly due and payable to the Servicer
under this Agreement subject to the terms of this Agreement.
SECTION 3.16. Servicing Compensation.
----------------------
As compensation for its activities hereunder, the Servicer shall be
entitled to retain from the Custodial Account or withdraw from the Custodial
Account the amounts specified in subclause (a) of Section 3.09 hereof as payable
to it.
Additional servicing compensation in the form of prepayment penalties,
fees or premiums, assumption fees, modification fees, late payment charges or
otherwise or any excess interest charges payable by the Mortgagor by virtue of
any default or other non-compliance by the Mortgagor with the terms of the
Mortgage or any other instrument or document executed in connection therewith or
otherwise shall be retained by the Servicer to the extent not required to be
deposited in the Custodial Account pursuant to Section 3.07 hereof. The
Servicer shall be required to pay all expenses incurred by it in connection with
its servicing activities hereunder (including payment of premiums for Primary
Mortgage Insurance Policies, to the extent such premiums are not required to be
paid or have not been paid by the related Mortgagor or the related Sub-Servicer,
payment of any premiums for hazard insurance, as required by Section 3.11 hereof
and maintenance of the other forms of insurance coverage required by Section
3.11 hereof) the payment of servicing compensation to any Sub-Servicers pursuant
to any Sub-Servicing Agreement and the payment of the
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expenses of the Trustee to the extent provided in Section 9.05, and shall not be
entitled to reimbursement therefor except as specifically provided in Sections
3.09, 3.13 and 5.03 hereof.
SECTION 3.17. Reports to the Seller; Account Statements.
-----------------------------------------
Within five Business Days following each Distribution Date, the
Servicer shall deliver to the Trustee, [the Certificate Insurer] and the Seller
a statement setting forth the status of the Custodial Account, if any, as of the
close of business on such Distribution Date showing, for the period covered by
such statement, the aggregate of deposits in or withdrawals from the Custodial
Account, if any, for each category of deposit specified in Section 3.07 hereof
and each category of withdrawal specified in Section 3.09 hereof. The Servicer
shall forward a copy of such statement to the Rating Agencies. Within ten
Business Days following each Distribution Date, the Trustee shall deliver to the
Seller and the Certificate Insurer a statement setting forth the status of the
Certificate Account as of the close of business on such Distribution Date
showing, for the period covered by such statement, the aggregate of deposits in
or withdrawals from the Certificate Account. The Trustee shall forward a copy
of such statement to the Rating Agencies.
SECTION 3.18. Annual Statement as to Compliance.
---------------------------------
The Servicer shall deliver to the Seller, the Certificate Insurer and
the Trustee on or before January 31 of each year, commencing [____________], an
Officers' Certificate stating, as to each signer thereof, that (a) a review of
the activities of the Servicer during the year ended on the preceding September
30 and of the performance of the Servicer under this Agreement has been made
under such officer's supervision, (b) to the best of such officer's knowledge,
based on such review, the Servicer has fulfilled all its obligations under this
Agreement in all material respects throughout such year, or, if there has been a
default in the fulfillment of any such obligation, specifying each such default
known to such officer and the nature and status thereof, (c) a Servicing Officer
has conducted an examination of the activities of each Sub-Servicer during the
immediately preceding year and its performance under any Sub-Servicing
Agreement, and (d) to the best of such Servicing Officer's knowledge, based on
such examination, each Sub-Servicer has performed and fulfilled its duties,
responsibilities and obligations under such Sub-Servicing Agreement in all
material respects throughout such year, or if there has been a default in the
performance or fulfillment of any such duties, responsibilities or obligations,
specifying each such default known to such Servicing Officer and the nature and
status thereof. The Servicer shall forward a copy of each such statement to the
Rating Agencies.
SECTION 3.19. Annual Independent Public Accountants' Servicing
------------------------------------------------
Report.
------
On or before January 31 of each year, beginning with the first January
31 that occurs at least eleven months after the Cut-off Date, the Servicer, at
its expense, shall cause a firm of independent public accounts that is a member
of the American Institute of Certified Public Accountants to furnish a statement
to the Seller, the Certificate Insurer and the Trustee for the benefit of the
Certificateholders to the effect that such firm has examined
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certain documents substantially similar to this Agreement and records relating
to the servicing of mortgage loans serviced by the Servicer or any successor
servicer that are substantially similar to the Mortgage Loans and that, on the
basis of an examination conducted substantially in compliance with the Uniform
Single Audit Program for Mortgage Bankers or the Audit Program for Mortgages
serviced for FHLMC, such servicing has been conducted in compliance with such
agreements except for such significant exceptions or errors in records that, in
the opinion of such firm, the Uniform Single Audit Program for Mortgage Bankers
or the Audit Program for Mortgages serviced for FHLMC requires it to report. In
rendering such statement such firm may rely, as to matters relating to direct
servicing of Mortgage Loans by Sub-Servicers, if any, upon comparable statements
for examinations conducted substantially in compliance with the Uniform Single
Audit Program for Mortgage Bankers or the Audit Program for Mortgages serviced
for FHLMC (rendered within one year of such statement) of independent public
accounts with respect to the related Sub-Servicer. The Servicer shall forward a
copy of each such report to the Rating Agencies.
SECTION 3.20. Reports to Trustee.
------------------
On or before the third Business Day of each month, the Servicer shall
cause to be delivered to the Trustee and the Certificate Insurer a monthly
servicing report in electronic format containing the information required by the
Trustee to prepare the information set forth in Section 4.04(a). The Trustee
may conclusively rely on information provided by the Servicer and shall have no
obligation to recompute, recalculate, or verify the accuracy of such
information.
SECTION 3.21. Converted Mortgage Loans; Certain Procedures and
------------------------------------------------
Purchases.
---------
(a) The Trustee, as Note Holder (as defined in the Mortgage Notes for
the Mortgage Loans) on behalf of the Certificateholders and the Certificate
Insurer is hereby authorized and hereby authorizes and directs the Servicer, on
behalf of the Note Holder, to determine fixed interest rates into which
Mortgagors under Convertible Mortgage Loans may convert the adjustable interest
rates on their Mortgage Notes in accordance with the terms set forth in such
Mortgage Notes. The Servicer agrees to make such determinations and otherwise
administer the program contemplated in the Mortgage Notes for the Convertible
Mortgage Loans until the later to occur of (i) the date on which all the
Convertible Mortgage Loans have become Converted Mortgage Loans, and (ii) the
last date on which Mortgagors have the option to convert the adjustable interest
rates on their Mortgage Notes to fixed interest rates.
(b) The Seller may, but is not obligated to, purchase such Converting
Mortgage Loan. All amounts paid by the Seller in connection with the purchase of
a Converting Mortgage Loan or Converted Mortgage Loan, as the case may be, will
be deposited in the Custodial Account. No party to this Agreement or any
successor to any party shall be required to purchase any Converted or Converting
Mortgage Loan.
(c) Notwithstanding that a Mortgage Loan becomes a Converting
Mortgage Loan or Converted Mortgage Loan in any month, such Converting Mortgage
Loan
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or Converted Mortgage Loan shall remain in the Trust Fund and all payments in
respect thereof shall remain in the Trust Fund unless and until such Converting
Mortgage Loan or Converted Mortgage Loan, as the case may be, is purchased by
the Seller, pursuant to Section 3.21(b).
(d) Upon any purchase of a Converting Mortgage Loan or Converted
Mortgage Loan, as the case may be, by the Seller pursuant to Section 3.21(b) and
the deposit in the Custodial Account of the Purchase Price, the Seller shall
give the Trustee written notice thereof and, based thereon, the Trustee shall
release, or cause any Custodian to release, the related Mortgage File and convey
such Mortgage Loan to the purchaser whereupon such purchased Converted Mortgage
Loan shall cease to be part of the Trust Fund.
[SECTION 3.22. Letter of Credit.]
----------------
[The Seller shall obtain, in favor of the Trustee on behalf of the
Certificateholders, an irrevocable, stand-by Letter of Credit, the terms and
provisions of which are as set forth in the Letter of Credit. In the event that
the L/C Bank shall be required to make any payments under the Letter of Credit,
the Servicer shall notify the Trustee, no later than the Determination Date next
preceding the related Distribution Date, such notice specifying the amount of
such required payment. Not later than the close of business on the Business Day
preceding the Distribution Date, the Trustee shall draw upon the Letter of
Credit in the amount of such required payment to the extent of the amount
available thereunder and deposit in the Certificate Account, in immediately
available funds, the amount drawn under the Letter of Credit.]
[If at any time the L/C Bank makes a payment covering the amount of
the outstanding principal balance of a Liquidating Loan, the Trustee shall
release (or shall cause the related Custodian to release) the related Mortgage
File to the L/C Bank or its designee and shall execute and deliver such
instruments of transfer or assignment, in each case without recourse, as shall
be necessary to vest in the L/C Bank or its designee all right, title and
interest in such Mortgage Loan, and the L/C Bank or its designee will thereupon
acquire such Liquidating Loan, together with related security interests and
documents, free of any further obligation to the Trustee or the
Certificateholders of such Series with respect thereto except as may be provided
in such Letter of Credit.]
[The Depositor shall have the power to substitute for any Letter of
Credit another irrevocable standby letter of credit, provided that no such
substitution shall be made unless the substitute letter of credit contains
provisions that are in all material respects the same as, or more favorable to
the Certificateholders than, the original Letter of Credit and provided further
that such substitution will not result in a reduction of the then outstanding
rating of the Certificates, or the withdrawal of such rating, by the Rating
Agency rating such Certificates, as evidenced by written confirmation to that
effect by such Rating Agency.]
[Any replacement of the Letter of Credit pursuant to this Section 3.22
shall be accompanied by a written Opinion of Counsel to the issuer of such
substitute letter of credit, addressed to the Servicer and the Trustee, to the
effect that such substitute letter of credit
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constitutes a legal, valid and binding obligation of the issuer thereof,
enforceable in accordance with its terms (subject, as to enforcement of
remedies, to applicable bankruptcy, insolvency, moratorium and other similar
laws from time to time in effect relating to creditors' rights generally) and
concerning such other matters as the Servicer and the Trustee shall reasonably
request.]
ARTICLE IV
PAYMENTS AND STATEMENTS TO CERTIFICATEHOLDERS
SECTION 4.01. Certificate Account.
-------------------
The Trustee shall establish, prior to the Delivery Date, and shall
maintain, in the name of the Trustee on behalf of the Holders of interests in
the Trust Fund, the Certificate Account, which shall be an Eligible Account,
into which the Trustee upon receipt from the Servicer shall deposit all payments
remitted by the Servicer and any amounts required to be remitted by the Seller
pursuant to the terms hereof. All distributions to be made from time to time to
Holders of interests in the Trust Fund out of funds in the Certificate Account
shall be made by or on behalf of the Trustee. The Trustee will give notice to
the Servicer, the Rating Agencies, [the Certificate Insurer] and the Seller of
the location of the Certificate Account and of any change thereof, prior to the
use thereof. Funds held in the Certificate Account and delivered to the Trustee
earlier than one Business Day prior to the next Distribution Date shall be
invested by the Trustee in Eligible Investments as directed by the Servicer or
shall remain uninvested. The Trustee shall cause each such Eligible Investment
to be Delivered to it or its nominee (including a securities intermediary). All
income and gain net of any losses realized from any such investment shall be for
the benefit of the Servicer and shall be subject to withdrawal at the Servicer's
direction from time to time. The amount of any losses net of any gains not paid
to the Servicer incurred in respect of any such investments shall be deposited
in the Certificate Account out of the Servicer's own funds immediately as
realized.
In addition, the Trustee shall (i) withdraw from the Reserve Account
and deposit into the Certificate Account an amount equal to the amount of any
Realized Losses on the Mortgage Loans during the related Prepayment Period in
excess of the Class S Interest Distribution Amount, to the extent of funds
available in the Reserve Account (with such withdrawal allocated between the
Loan Groups in proportion to Realized Losses on each Loan Group) [and (ii)
withdraw from the Insurance Account and deposit into the Certificate Account the
amount necessary to make any Insured Payment on each Distribution Date, to the
extent received from the Certificate Insurer (with such withdrawal allocated to
the Loan Group to which an Insured Payment relates)].
The Trustee shall make, to the extent required or authorized
hereunder, withdrawals from the Certificate Account for the following purposes:
(i) to withdraw any amount deposited in the Certificate Account and
not required to be deposited therein;
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(ii) to reimburse the Servicer for any unreimbursed Nonrecoverable
Advance;
(iii) to make required distributions pursuant to Section 4.02; and
(iv) to pay to the Seller any amount to which it is entitled
pursuant to Section 7.03.
SECTION 4.02. Distributions.
-------------
(a) On each Distribution Date the Trustee shall apply amounts in the
Certificate Account (including any withdrawals from the Reserve Account in
accordance with Section 4.01 [and any Insured Payment transferred from the
Insurance Account and payable to the Class A Certificateholders in accordance
with Section 4.06)], to pay the following amounts in the following order of
priority:
(i) [to pay to the Certificate Insurer, the Certificate Insurer
Premium (with such amount allocated to each Loan Group pro rata based on
the aggregate Principal Balance of the Mortgage Loans in such Loan Group);]
(ii) to pay to itself on each Distribution Date an amount equal to
the Principal Balance of each Mortgage Loan immediately prior such
Distribution Date multiplied by one-twelfth of the Trustee Fee Rate (with
such fee allocated to each Loan Group pro rata based on the aggregate
Principal Balance of the Mortgage Loans in such Loan Group);
(iii) to pay to the Servicer, on any Distribution Date, the Servicing
Fee due on such Distribution Date, if the Servicer has remitted prior to
the related Distribution Date funds directly to the Trustee for deposit in
the Certificate Account (with such fee allocated to each Loan Group pro
rata based on the aggregate Principal Balance of the Mortgage Loans in such
Loan Group);
(iv) [to pay to the Certificate Insurer the amount of Cumulative
Insurance Payments as of such Distribution Date (with such amount allocated
to the related Loan Group);]
(v) concurrently,
(i) to the holders of the Class [A-I] Certificates, to the
extent of the related Available Distribution Amount remaining,
the Class [A-I] Interest Distribution Amount and the Class [A-I]
Cumulative Interest Shortfall Amount for which no Insured
Payment has been previously paid to the Class [A-I]
Certificateholders; and
(ii) to the holders of the Class [A-II] Certificates, to
the extent of the related Available Distribution Amount
remaining, the Class [A-II] Interest Distribution Amount and the
Class [A-II]
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Cumulative Interest Shortfall Amount for which no Insured
Payment has been previously paid to the Class [A-II]
Certificateholders;
(vi) concurrently,
(i) to the holders of the Class [A-I] Certificates, to the
extent of the related Available Distribution Amount remaining,
the Class [A-I] Principal Distribution Amount, until the
Certificate Principal Balance thereof has been reduced to zero;
(ii) to the holders of the Class [A-II] Certificates, to
the extent of the related Available Distribution Amount
remaining, the Class [A-II] Principal Distribution Amount,
until the Certificate Principal Balance thereof has been
reduced to zero;
(iii) to the holders of the Class [A-I] Certificates, to the
extent of the Available Distribution Amount for Loan Group II
remaining, the portion of Class [A-I] Principal Distribution
Amount remaining unpaid for such Distribution Date, until the
Certificate Principal Balance thereof has been reduced to zero;
and
(iv) to the holders of the Class [A-II] Certificates, to
the extent of the Available Distribution Amount for Loan Group
I remaining, the portion of Class [A-II] Principal Distribution
Amount remaining unpaid for such Distribution Date, until the
Certificate Principal Balance thereof has been reduced to zero;
(vii) to the holders of the Class S Certificates, or to the Reserve
Fund to the extent the Reserve Account Requirement is not satisfied, to the
extent of the Available Distribution Amount remaining, the Class S Interest
Distribution Amount in the following order of priority:
[(i) first, to the Reserve Fund, any Reserve Fund Increase
Amount;]
(ii) second, to the holders of the Class S Certificates,
the remaining portion, if any, of the Class S Interest
Distribution Amount; and
(viii) to the holder of the Class R Certificates, the balance, if
any, of the Available Distribution Amount.
(b) Within five Business Days before the related Distribution Date,
the Servicer shall notify the Trustee of the amounts, if any, payable to the
Certificate Insurer pursuant to Sections 4.02(a)(iv).
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(c) The Trustee shall be responsible for the calculations with
respect to distributions from the Certificate Account so long as the Trust Fund
has not been terminated in accordance with this Agreement. All distributions
made to Certificateholders of any Class on such Distribution Date will be made
to the Certificateholders of the respective Class of record on the immediately
preceding Record Date, except for the final distribution, which shall be made as
provided in the form of Certificate. All distributions made to the
Certificateholders shall be based upon the Percentage Interest represented by
their respective Certificates. If on any Determination Date, the Trustee
determines that there are no Mortgage Loans outstanding and no other funds or
assets in the Trust Fund other than the funds in the Certificate Account, the
Trustee shall promptly send the final distribution notice to each
Certificateholder specifying the manner in which the final distribution will be
made.
(d) Any Certificateholder shall be entitled to receive distributions
hereunder on a Distribution Date (other than as provided in Section 10.02
respecting the final distribution) by wire transfer to the account specified in
writing by the Certificateholder to the Trustee if the Initial Certificate
Principal Balance evidenced by such Holder's Certificate is at least equal to
$2,500,000 or the Percentage Interest thereof is 100%. In each case, the
account must be specified in writing at least five Business Days prior to the
Record Date for the Distribution Date on which wire transfers will commence.
All other distributions shall be made by check payable to the Certificateholder
mailed by first class mail to the address of such Certificateholder reflected in
the Certificate Register.
SECTION 4.03. Allocation of Realized Losses.
-----------------------------
Prior to each Distribution Date, based on the information provided by
the Servicer in its monthly report, the Trustee shall determine the total of
Realized Losses, if any, incurred with respect to the Mortgage Loans in each
Loan Group during the previous Prepayment Period. On each Distribution Date,
Realized Losses will be allocated after the distribution of principal and
interest on such Distribution Date; provided, however, that if the Certificate
Principal Balance of any Class of Certificates would be reduced to zero as a
result of Realized Losses to be allocated on such Distribution Date if no funds
were available for distributions on the Certificates, then Realized Losses will
be allocated to such Class prior to the distribution of principal and interest.
In every case, such Realized Losses shall be allocated first to the Class S
Certificates, by operation of clause (vi) of the definitions of Class [A-I]
Principal Distribution Amount and Class [A-II] Principal Distribution Amount, up
to the amount of the Class S Interest Distribution Amount for the related
Distribution Date. If the amount of Realized Losses in respect of any
Prepayment Period exceeds the amount of the Class S Interest Distribution Amount
for such Distribution Date, the Trustee shall transfer to the Certificate
Account from, and to the extent of, the funds on deposit in the Reserve Fund in
accordance with Sections 4.01 and 4.07.
To the extent Realized Losses allocated with respect to any
Distribution Date exceed the Class S Interest Distribution Amount and amounts
available on deposit in the Reserve Fund, and payments are not made in respect
thereof by the Certificate Insurer as required under the Policy, the remaining
Realized Losses will be allocated to the related Class of Class A Certificates.
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SECTION 4.04. Monthly Statements to Certificateholders.
----------------------------------------
(a) Not later than each Distribution Date, the Trustee shall prepare
and the Trustee shall cause to be forwarded by mail to each Certificateholder,
the Servicer, the Certificate Insurer, the Seller and the Rating Agencies a
statement setting forth:
(i) the amount of such distribution representing principal of
the Mortgage Loans, separately identifying the aggregate amount of any
Principal Prepayments included therein, and the portion of such
distribution, if any, representing a Monthly Advance of principal and the
Certificate Principal Balance of the Class A Certificates after giving
effect to such distributions;
(ii) the amount of such distribution representing interest on
the Mortgage Loans and the portion of such distribution, if any,
representing a Monthly Advance of interest;
(iii) the aggregate Principal Balances of the Mortgage Loans as
of the close of business on such Distribution Date and the amount of
Principal Prepayments received during the immediately preceding Prepayment
Period;
(iv) the related amount of the Servicing Fees retained or
withdrawn from the Custodial Account or the Certificate Account;
(v) the amount of Monthly Advances paid by the Servicer;
(vi) the number and aggregate principal amounts of Mortgage
Loans (A) delinquent (1) one month, (2) two months, (3) three months or
more and (B) in foreclosure and (C) in bankruptcy;
(vii) the book value (within the meaning of 12 C.F.R. (S)
571.13 or comparable provision) of any REO Property;
(viii) the respective amounts, if any, of Realized Losses
allocated to the respective Classes of Certificates with respect to such
Distribution Date;
(ix) all Monthly Advances recovered during the related Due
Period;
(x) the amount of any tax imposed on a "prohibited
transaction" of the Trust Fund as defined in Section 860F of the Code
during the related Due Period;
(xi) the amount of any reduction in Certificate Principal
Balance, cumulative interest shortfall amount or interest distribution
amount for any Class attributable to the application of Realized Losses
thereto on such Distribution Date;
[(xii) the amount of any Insured Payment made on such
Distribution Date, the amount of any reimbursement payment made to the
Certificate
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Insurer on such Distribution Date pursuant to Section 4.02(b) and the
amount of Cumulative Insurance Payments after giving effect to any such
Insured Payment or any such reimbursement payment to the Certificate
Insurer;]
(xiii) the Certificate Rate on the Class A Certificates for such
Distribution Date;
(xiv) the aggregate principal balance of all Converting
Mortgage Loans and Converted Mortgage Loans, as the case may be, purchased
by the Servicer pursuant to Section 3.21, the proceeds of which are being
distributed on such Distribution Date and the aggregate principal balance
of all Converted Mortgage Loans which have not been so purchased pursuant
to Section 3.21;
(xv) the aggregate principal balance of all Mortgage Loans
which are the subject of substitution or purchase by the Servicer pursuant
to Section 2.04, during the month of such Distribution Date, together with
the number of such Mortgage Loans removed and the amount of any resulting
shortage deposited into the Custodial Account by the Seller or Servicer in
such month;
(xvi) the Rolling Three Month Delinquency Percentage;
(xvii) cumulative Realized Losses since the Delivery Date and
for the three year period commencing on the Delivery Date; and
(xviii) the amount of any payment made from or to the Reserve
Account and the balance of the Reserve Account after giving effect to such
amount.
(b) Upon reasonable advance notice in writing, if required by federal
regulation, the Trustee will provide to each Certificateholder that is a savings
association, bank or insurance company certain reports and access to information
and documentation regarding the Mortgage Loans sufficient to permit such
Certificateholder to comply with applicable regulations of the Office of Thrift
Supervision or other regulatory authorities with respect to investment in the
Certificates and the Servicer shall cooperate with the Trustee in providing such
information; provided, however, that the Trustee shall be entitled to be
reimbursed by each such Certificateholder for the Trustee's actual expenses
incurred in providing such reports and access. The Trustee will provide to any
Certificateholder upon request the outstanding Certificate Principal Balance as
of such dates and, if then known by the Trustee, the outstanding Certificate
Principal Balances after giving effect to any distribution to be made on the
next following Distribution Date.
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SECTION 4.05. Prepayment Interest Shortfalls and Relief Act
---------------------------------------------
Shortfalls.
----------
Prepayment Interest Shortfalls resulting from a Principal Prepayment
of a Mortgage Loan during any Prepayment Period and Relief Act Shortfalls will
be applied first, to reduce the Class A Interest Distribution Amount payable on
the related Distribution Date as set forth in the definition of the Class A
Interest Distribution Amount and second, to reduce the Class S Interest
Distribution Amount payable on the related Distribution Date, in respect of such
Mortgage Loan.
[SECTION 4.06. The Policy.
----------
(a) If the Trustee determines that the Deficiency Amount is greater
than zero with respect to any Distribution Date, the Trustee shall complete the
notice in the Form of Exhibit A to the Policy (the "Notice") and submit such
Notice in accordance with the Policy to the Certificate Insurer no later than
12:00 P.M., New York City time, on the third Business Day immediately preceding
each Distribution Date, as a claim for an Insured Payment in an amount equal to
such Deficiency Amount.
(b) The Trustee shall establish and maintain the Insurance Account
on behalf of the Holders of the Class A Certificates. Upon receipt of an Insured
Payment from the Certificate Insurer on behalf of the Holders of the applicable
Class of Class A Certificates, the Trustee shall deposit such Insured Payment in
the Insurance Account. All amounts on deposit in the Insurance Account shall
remain uninvested. On each Distribution Date, the Trustee shall transfer any
Insured Payment then on deposit in the Insurance Account to the Certificate
Account. The Trustee shall distribute on each Distribution Date any Deficiency
Amount for such Distribution Date from the Certificate Account, together with
the distributions to be made to the Class A Certificateholders on such
Distribution Date, as distributions of interest and principal, respectively.
(c) The Trustee shall (i) receive as attorney-in-fact of each Class
A Certificateholder any Insured Payment from the Certificate Insurer and (ii)
distribute such Insured Payment to the applicable Class A Certificateholders as
set forth in subsection (b) above. Insured Payments disbursed by the Trustee
from proceeds of the Policy shall not be considered payment by the Trust Fund
with respect to the Class A Certificates, nor shall such disbursement of such
Insured Payments discharge the obligations of the Trust Fund with respect to the
amounts thereof, and the Certificate Insurer shall become owner of such amounts
to the extent covered by such Insured Payments as the deemed assignee of such
Class A Certificateholders. The Trustee hereby agrees on behalf of each Class A
Certificateholder (and each Class A Certificateholder, by its acceptance of its
Class A Certificates, hereby agrees) for the benefit of the Certificate Insurer
that the Trustee shall recognize that to the extent the Certificate Insurer pays
Insured Payments, either directly or indirectly (as by paying through the
Trustee), to the Holders of the applicable Class of Class A Certificates, the
Certificate Insurer will be entitled to be subrogated to the rights of such
Class A Certificateholders to the extent of such payments.]
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[SECTION 4.07 Reserve Account.
---------------
(a) The Trustee shall establish, prior to the Delivery Date, and
shall maintain, in the name of the Trustee on behalf of the Holders of interests
in the Trust Fund, the Reserve Account, which shall be an Eligible Account, into
which the Trustee shall deposit all amounts required to be deposited therein
pursuant to Section 4.02(a)(vii). All distributions to be made from time to time
to Holders of interests in the Trust Fund out of funds in the Reserve Account
shall be made by or on behalf of the Trustee in accordance with the terms of
this Agreement. The Trustee will give notice to the Servicer, the Rating
Agencies, the Certificate Insurer and the Seller of the location of the Reserve
Account and of any change thereof, prior to the use thereof. Funds held in the
Reserve Account shall be invested by the Trustee in Eligible Investments, as
directed by the Holder of the Class S Certificates, that will mature so that
such funds will be available at the close of business on the Business Day
preceding each Distribution Date. In the event that the Holder of the Class S
Certificates does not deliver investment instructions, such funds will be
invested by the Trustee in units of taxable money-market portfolios rated in the
highest rating category by Moody's and Standard & Poor's and not restricted to
obligations issued or guaranteed by any agency or instrumentality of the United
States or entities whose obligations are backed by the full faith and credit of
the United States, or repurchase agreements collateralized by such obligations.
The Trustee shall cause each such Eligible Investment to be Delivered to it or
its nominee (including a securities intermediary). The amount of any losses
incurred in respect of principal on any such investments that were made at the
direction of the Seller shall be remitted to the Trustee and deposited into the
Reserve Account from the Seller's own funds promptly following the date such
losses are realized.
(b) On each Distribution Date, the Reserve Account Monthly
Investment Income with respect to such Distribution Date shall be allocated as
follows:
(i) an amount equal to the lesser of (A) such Reserve Account
Monthly Investment Income and (B) one-twelfth of 2.5% of the Reserve
Account Balance with respect to such Distribution Date shall be
maintained in the Reserve Account and not distributed, subject,
however, to withdrawals of Reserve Account Decrease Amounts;
(ii) the excess, if any, of (A) such Reserve Account Monthly
Investment Income over (B) one-twelfth of 2.5% of the Reserve Account
Balance with respect to such Distribution Date shall be distributed to
the Holder of the Class S Certificates.
The balance, if any, remaining in the Reserve Account on the
Distribution Date on which the Certificate Principal Balance of each Class of
the Class A Certificates is reduced to zero will be distributed by the Trustee
to the Holder of the Class S Certificates.
In addition, on any Distribution Date, any Reserve Account Decrease
Amount shall be distributed to the Holder of the Class S Certificates on such
Distribution Date.
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(c) On each Distribution Date, to the extent of funds available in
the Reserve Account after the allocation in Section 4.07(b)(ii), the Trustee
shall withdraw from the Reserve Account and deposit into the Certificate Account
an amount equal to the excess, if any, of any Realized Losses on the Mortgage
Loans during the related Prepayment Period over the Class S Interest
Distribution Amount for such Distribution Date, with such amount allocated as
set forth in Section 4.01.
(d) For federal income tax purposes, the Holder of the Class S
Certificates shall be the owner of the Reserve Account and shall report all
items of income, deduction, gain or loss arising therefrom. Notwithstanding
anything herein to the contrary, the Reserve Account shall not be an asset of
the Trust REMIC. To the extent that the Reserve Account constitutes reserve
funds for federal income tax purposes, (1) it shall be an outside reserve fund
and not an asset of the Trust REMIC, (2) it shall be owned by the Holder of the
Class S Certificates and (3) amounts transferred by the Trust REMIC to the
Reserve Account shall be treated as transferred to the Holder of the Class S
Certificates, all within the meaning of Section 1.860G-2(h) of the Treasury
Regulations. The Reserve Account may not be owned by more than one Person.
(e) The provisions of this Section 4.07 may be modified and the
Reserve Account Requirement may be reduced or eliminated by the Certificate
Insurer at its sole discretion at any time. Upon receipt of written notice of
such reduction or elimination from the Certificate Insurer, the Servicer shall
give written notice thereof to the Rating Agencies, the Trustee and the
Certificateholders.]
ARTICLE V
ADVANCES
SECTION 5.01. Monthly Advances by the Servicer.
--------------------------------
Subject to the conditions of this Article V, the Servicer, as required
below, shall make a Monthly Advance to the Certificate Account maintained by the
Trustee, in the amount, if any, of the aggregate Monthly Payments less
Prepayment Interest Shortfalls and Relief Act Shortfalls, after adjustment of
the interest portion of each such Monthly Payment to the Mortgage Rate less the
applicable Servicing Fee Rate, on the Mortgage Loans that were due on the Due
Date but that were not received and remitted to the Certificate Account on or
prior to the Servicer Advance Date. The Servicer shall be obligated to make any
such Monthly Advance only to the extent that such advance, in the good faith
judgment of the Servicer, will be recoverable by the Servicer from Insurance
Proceeds, Liquidation Proceeds (less Liquidation Expenses), or otherwise on the
related Mortgage Loan.
On the Determination Date immediately preceding the related
Distribution Date, the Servicer shall determine whether and to what extent any
Mortgagor has failed to make any Monthly Payment due on the Due Date and whether
such deficiencies, if advanced by the Servicer, would be recoverable by the
Servicer from related Insurance Proceeds or Liquidation Proceeds (net of
Liquidation Expenses). If the Servicer shall have determined
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that it is not obligated to make the entire Monthly Advance because all or a
lesser portion of such Monthly Advance would not be recoverable by the Servicer
from related Insurance Proceeds or Liquidation Proceeds (net of Liquidation
Expenses), the Servicer shall deliver to the Trustee, not less than two Business
Days prior to the related Distribution Date, for the benefit of the
Certificateholders and the Certificate Insurer, an Officers' Certificate setting
forth the reasons for such determination.
In lieu of making all or a portion of any Monthly Advance, the
Servicer may cause to be made an appropriate entry in its records relating to
the Custodial Account that funds in such account, including but not limited to
any amounts received in respect of scheduled principal and interest on any
Mortgage due after the related Due Period, in excess of the Available
Distribution Amount (less the amount of such Monthly Advance) for the related
Distribution Date have been used by the Servicer in discharge of its obligation
to make any such Monthly Advance. Any funds so applied shall be replaced by the
Servicer by deposit, in the manner set forth above, in the Custodial Account no
later than the Servicer Advance Date to the extent that funds in the Custodial
Account on such date are less than the amounts required to be distributed on the
related Distribution Date. The Servicer shall be entitled to be reimbursed from
the Custodial Account for all Monthly Advances of its own funds made pursuant to
this Section as provided in Section 3.09.
SECTION 5.02. Advances for Attorneys' Fees.
----------------------------
The Servicer shall make advances from time to time for attorneys' fees
and court costs incurred, or which reasonably can be expected to be incurred,
for the foreclosure of any Mortgage Loan or for any transaction in which the
Trustee for the benefit of the Certificateholders and the Certificate Insurer is
expected to receive a deed-in-lieu of foreclosure, unless the Servicer has made
a good faith determination that such advances would not be recoverable from
Insurance Proceeds or Liquidation Proceeds relating to the Mortgage Loan. If
the Servicer shall make a good faith determination that such advances would not
be so recoverable, the Servicer shall promptly deliver to the Trustee an
Officers' Certificate setting forth the reasons for such determination. The
Servicer shall be entitled to reimbursement for any such advance as provided in
Section 3.09 hereof.
SECTION 5.03. Nonrecoverable Advances.
-----------------------
The determination by the Servicer that it has made a Nonrecoverable
Advance shall be evidenced by an Officers' Certificate of the Servicer promptly
delivered to the Trustee setting forth the reasons for such determination.
Following the Trustee's receipt of the Officers' Certificate, the Servicer shall
be entitled to reimbursement for such Nonrecoverable Advance as provided in
Section 3.09 hereof.
SECTION 5.04. Advance Procedures.
------------------
(a) If, on any Determination Date, the Servicer determines to make
a Monthly Advance in accordance with Section 5.01, it shall make such Monthly
Advance on or before noon, St. Paul time, on the second Business Day prior to
the related Distribution Date (the "Servicer Advance Date"). The Servicer shall
notify the Trustee of the aggregate
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amount of Monthly Advances for a Distribution Date on or before three Business
Days prior to such Distribution Date. Any such Monthly Advance shall be included
with the distribution on the related Distribution Date pursuant to Section 4.02.
(b) In the event that the Servicer fails to make a Monthly Advance
required to be made pursuant to Section 5.01 on or before 3 p.m., St. Paul,
Minnesota time, on the Servicer Advance Date, the Trustee shall on or before 12
noon, New York time on the next Business Day provide to the Servicer, by
telecopy, written notice of such failure and the amount of such failure and that
continuance of such failure for a period of one Business Day will be an Event of
Default.
ARTICLE VI
THE CERTIFICATES
SECTION 6.01. The Certificates.
----------------
The Certificates shall be in substantially the forms set forth in
Exhibits A, B and C hereto, with such appropriate insertions, omissions,
substitutions and other variations as are required or permitted by this
Agreement or as may in the reasonable judgment of the Trustee or the Seller be
necessary, appropriate or convenient to comply, or facilitate compliance, with
applicable laws, and may have such letters, numbers or other marks of
identification and such legends or endorsements placed thereon as may be
required to comply with the rules of any securities exchange on which any of the
Certificates may be listed, or as may, consistently herewith, be determined by
the officers executing such Certificates, as evidenced by their execution
thereof.
The definitive Certificates shall be printed, typewritten,
lithographed or engraved or produced by any combination of these methods or may
be produced in any other manner permitted by the rules of any securities
exchange on which any of the Certificates may be listed, all as determined by
the officers executing such Certificates, as evidenced by their execution
thereof.
The Class [A-II] Certificates will be in fully-registered form only in
minimum denominations of $[_______] Certificate Principal Balance and integral
multiples of $[______] in excess thereof, provided that one Class [A-I]
Certificate may be issued in such other amount as is required so that the
aggregate of the Class [A-I] Certificate equals its aggregate Certificate
Principal Balance. The Class [A-II] Certificates will be in fully-registered
form only in minimum denominations of $[_______] Certificate Principal Balance
and integral multiples of $[________] in excess thereof, provided that one Class
[A-II] Certificate may be issued in such other amount as is required so that the
aggregate of the Class [A-II] Certificate equals its aggregate Certificate
Principal Balance. The Class S Certificates will be issued in fully-registered
form only in minimum Percentage Interests of 20% and integral multiples thereof.
The Class R Certificates will be in fully-registered form issuable only as a
single Certificate.
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The Certificates shall be executed by manual or facsimile signature on
behalf of the Trustee by a Responsible Officer. Certificates bearing the manual
or facsimile signatures of individuals who were, at the time when such
signatures were affixed, authorized to sign on behalf of the Trustee shall bind
the Trustee, notwithstanding that such individuals or any of them have ceased to
be so authorized prior to the authentication and delivery of such Certificates
or did not hold such offices at the date of such Certificate. No Certificate
shall be entitled to any benefit under this Agreement, or be valid for any
purpose, unless there appears on such Certificate a certificate of
authentication executed by the Trustee by manual signature, and such certificate
of authentication upon any Certificate shall be conclusive evidence, and the
only evidence, that such Certificate has been duly authenticated and delivered
hereunder. All Certificates shall be dated the date of their authentication.
SECTION 6.02. Registration of Transfer and Exchange of Certificates.
-----------------------------------------------------
(a) The Trustee shall maintain, or cause to be maintained, a
Certificate Register in which, subject to such reasonable regulations as it may
prescribe, the Trustee shall provide for the registration of Certificates and of
transfers and exchanges of Certificates as herein provided. Upon surrender for
registration of transfer of any Certificate, the Trustee shall execute,
authenticate and deliver, in the name of the designated transferee or
transferees, one or more new Certificates in like aggregate interest and of the
same Class.
(b) At the option of a Certificateholder, Certificates may be
exchanged for other Certificates of authorized denominations and the same
aggregate interest in the Trust Fund and of the same Class, upon surrender of
the Certificates to be exchanged at the office or agency of the Trustee set
forth in Section 9.11. Whenever any Certificates are so surrendered for
exchange, the Trustee shall execute, authenticate and deliver the Certificates
which the Certificateholder making the exchange is entitled to receive. Every
Certificate presented or surrendered for registration of transfer or exchange
shall be accompanied by a written instrument of transfer in form satisfactory to
the Trustee duly executed by the Holder thereof or his attorney duly authorized
in writing.
(c) No service charge to the Certificateholders shall be made for
any registration of transfer or exchange of Certificates, but payment of a sum
sufficient to cover any tax or governmental charge that may be imposed in
connection with any transfer or exchange of Certificates may be required.
(d) All Certificates surrendered for registration of transfer and
exchange shall be canceled and subsequently destroyed by the Trustee in
accordance with the Trustee's customary procedures.
(e) No transfer of any Class S or Class R Certificate shall be made
unless that transfer is made pursuant to an effective registration statement
under the 1933 Act and effective registration or qualification under applicable
state securities laws, or is made in a transaction which does not require such
registration or qualification. In the event that a transfer is to be made
without registration or qualification, (i) the Trustee shall require, in order
to assure compliance with such laws, that the Certificateholder desiring to
effect the transfer and such Certificateholder's prospective transferee each
certify to the Trustee in
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writing in the forms set forth in Exhibit H and Exhibit I, respectively, the
facts surrounding the transfer and (ii) the Seller or the Trustee shall require
an opinion of counsel reasonably satisfactory to the requesting party that such
transfer may be made without such registration or qualification, which Opinion
of Counsel shall not be required to be an expense of the Seller or the Trustee.
Neither the Seller nor the Trustee is obligated to register or qualify any Class
S or Class R Certificate under the 1933 Act or any other securities law or to
take any action not otherwise required under this Agreement to permit the
transfer of such Certificate or interest without registration or qualification.
Any such Holder desiring to effect such transfer shall, and does hereby agree
to, indemnify the Trustee and the Seller against any liability that may result
if the transfer is not so exempt, or is not made in accordance with federal and
state laws.
(f) No transfer of a Class S or Class R Certificate shall be made
to any employee benefit or other plan that is subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Code,
to a trustee or other person acting on behalf of any such plan, or to any other
person using "plan assets" to effect such acquisition, unless the prospective
transferee of a Certificateholder desiring to transfer its Certificate provides
the Trustee with (i) in the case of a transfer of Class S Certificates only, a
certification as set forth in paragraph 6 of Exhibit H, or (ii) in the case of a
transfer of Class S or Class R Certificates, an Opinion of Counsel which
establishes to the reasonable satisfaction of the Seller and the Trustee that
the purchase and holding of a Class S or Class R Certificate by, on behalf of or
with "plan assets" of such plan is permissible under applicable local law, would
not constitute or result in a prohibited transaction under Section 406 of ERISA
or Section 4975 of the Code, and would not subject the Seller or the Trustee to
any obligation or liability (including liabilities under ERISA or Section 4975
of the Code) in addition to those undertaken in this Agreement or any other
liability. The Trustee shall require that such prospective transferee certify to
the Trustee in writing the facts establishing that such transferee is not such a
plan and is not acting on behalf of or using "plan assets" of any such plan to
effect such acquisition.
(g) Additional restrictions on transfers of the Class R
Certificates to Disqualified Organizations are set forth below:
(i) Each Person who has or who acquires any ownership
interest in a Class R Certificate shall be deemed by the acceptance or
acquisition of such ownership interest to have agreed to be bound by the
following provisions and to have irrevocably authorized the Trustee or its
designee under clause (iii)(A) below to deliver payments to a Person other
than such Person and to negotiate the terms of any mandatory sale under
clause (iii)(B) below and to execute all instruments of transfer and to do
all other things necessary in connection with any such sale. The rights of
each Person acquiring any ownership interest in a Class R Certificate are
expressly subject to the following provisions:
(A) Each Person holding or acquiring any ownership
interest in a Class R Certificate shall be other than a Disqualified
Organization and shall promptly notify the Trustee of any change or
impending change in its status as other than a Disqualified
Organization.
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(B) In connection with any proposed transfer of any
ownership interest in a Class R Certificate to a U.S. Person, the
Trustee shall require delivery to it, and shall not register the
transfer of a Class R Certificate until its receipt of (1) an
affidavit and agreement (a "Transferee Affidavit and Agreement"
attached hereto as Exhibit J) from the proposed transferee, in form
and substance satisfactory to the Servicer, representing and
warranting, among other things, that it is not a non-U.S. Person, that
such transferee is other than a Disqualified Organization, that it is
not acquiring its ownership interest in a Class R Certificate that is
the subject of the proposed Transfer as a nominee, trustee or agent
for any Person who is not other than a Disqualified Organization, that
for so long as it retains its ownership interest in a Class R
Certificate, it will endeavor to remain other than a Disqualified
Organization, and that it has reviewed the provisions of this Section
6.02(g) and agrees to be bound by them, and (2) a certificate,
attached hereto as Exhibit K, from the Holder wishing to transfer a
Class R Certificate, in form and substance satisfactory to the
Servicer, representing and warranting, among other things, that no
purpose of the proposed transfer is to allow such Holder to impede the
assessment or collection of tax.
(C) Notwithstanding the delivery of a Transferee
Affidavit and Agreement by a proposed transferee under clause (B)
above, if the Trustee has actual knowledge that the proposed
transferee is not other than a Disqualified Organization, no transfer
of an ownership interest in a Class R Certificate to such proposed
transferee shall be effected.
(D) Each Person holding or acquiring any ownership
interest in a Class R Certificate agrees, by holding or acquiring such
ownership interest, (1) to require a Transferee Affidavit and
Agreement from the other Person to whom such Person attempts to
transfer its ownership interest and to provide a certificate to the
Trustee in the form attached hereto as Exhibit K, and (2) to obtain
the express written consent of the Servicer prior to any transfer of
such ownership interest, which consent may be withheld in the
Servicer's sole discretion.
(ii) The Trustee shall register the transfer of any Class R
Certificate only if it shall have received the Transferee Affidavit and
Agreement, a certificate of the Holder requesting such transfer in the form
attached hereto as Exhibit J and all of such other documents as shall have
been reasonably required by the Trustee as a condition to such
registration.
(iii) (A) If any Disqualified Organization shall become a
Holder of a Class R Certificate, then the last preceding Holder that
was other than a Disqualified Organization shall be restored, to the
extent permitted by law, to all rights and obligations as Holder
thereof retroactive to the date of registration of such transfer of
such Class R Certificate. If any non-U.S. Person shall become a
Holder of a Class R Certificate, then the last preceding Holder that
is a U.S. Person shall be restored, to the extent permitted by law,
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to all rights and obligations as Holder thereof retroactive to the
date of registration of the transfer to such non-U.S. Person of such
Class R Certificate. If a transfer of a Class R Certificate is
disregarded pursuant to the provisions of Treasury Regulations Section
1.860E-1 or Section 1.860G-3, then the last preceding Holder that was
other than a Disqualified Organization shall be restored, to the
extent permitted by law, to all rights and obligations as Holder
thereof retroactive to the date of registration of such transfer of
such Class R Certificate. The Trustee shall be under no liability to
any Person for any registration of transfer of a Class R Certificate
that is in fact not permitted by this Section 6.02(g) or for making
any payments due on such Certificate to the Holder thereof or for
taking any other action with respect to such Holder under the
provisions of this Agreement.
(B) If any purported transferee of a Class R
Certificate shall become a Holder of a Class R Certificate in
violation of the restrictions in this Section 6.02(g) and to the
extent that the retroactive restoration of the rights of the Holder of
such Class R Certificate as described in clause (iii)(A) above shall
be invalid, illegal or unenforceable, then the Servicer shall have the
right, without notice to the Holder or any prior Holder of such Class
R Certificate, to sell such Class R Certificate to a purchaser
selected by the Servicer on such terms as the Servicer may choose.
Such purported transferee shall promptly endorse and deliver a Class R
Certificate in accordance with the instructions of the Servicer. Such
purchaser may be the Servicer itself or any affiliate of the Servicer.
The proceeds of such sale, net of the commissions (which may include
commissions payable to the Servicer or its affiliates), expenses and
taxes due, if any, shall be remitted by the Servicer to such purported
transferee. The terms and conditions of any sale under this clause
(iii)(B) shall be determined in the sole discretion of the Servicer,
and the Servicer shall not be liable to any Person having an ownership
interest or a purported ownership interest in a Class R Certificate as
a result of its exercise of such discretion.
(iv) The Servicer, on behalf of the Trustee, shall make
available, upon written request from the Trustee, all information
reasonably available to it that is necessary to compute any tax imposed (A)
as a result of the transfer of an ownership interest in a Class R
Certificate to any Person who is not other than a Disqualified
Organization, including the information regarding "excess inclusions" of
such Residual Certificate required to be provided to the Internal Revenue
Service and certain Persons as described in Treasury Regulation Sections
1.860E-2(a)(5) or 1.860D-1(b)(5), and (B) as a result of any regulated
investment company, real estate investment trust, common trust fund,
partnership, trust, estate or organizations described in Section 1381 of
the Code having as among its record holders at any time any Person who is
not other than a Disqualified Organization. Reasonable compensation for
providing such information may be required by the Servicer from such
Person.
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(v) The provisions of this Section 6.02(g) set forth prior to
this Section (v) may be modified, added to or eliminated by the Servicer,
provided that there shall have been delivered to the Trustee the following:
(A) written notification from each Rating Agency to the
effect that the modification, addition to or elimination of such
provisions will not cause such Rating Agency to downgrade its then-
current rating of the Certificates; and
(B) a certificate of the Servicer stating that the
Servicer has received an Opinion of Counsel, in form and substance
satisfactory to the Servicer, to the effect that such modification,
addition to or elimination of such provisions will not cause the Trust
REMIC to cease to qualify as a REMIC and will not create a risk that
(i) the Trust REMIC may be subject to an entity-level tax caused by
the transfer of a Class R Certificate to a Person which is not other
than a Disqualified Organization or (2) a Certificateholder or another
Person will be subject to a REMIC-related tax caused by the transfer
of applicable Class R Certificate to a Person which is not other than
a Disqualified Organization.
(vi) The following legend shall appear on each Class R
Certificate:
ANY RESALE, TRANSFER OR OTHER DISPOSITION OF THIS CERTIFICATE MAY BE
MADE ONLY IF THE PROPOSED TRANSFEREE PROVIDES A TRANSFER AFFIDAVIT TO
THE Servicer AND THE TRUSTEE THAT (1) SUCH TRANSFEREE IS NOT (A) THE
UNITED STATES, ANY STATE OR POLITICAL SUBDIVISION THEREOF, ANY FOREIGN
GOVERNMENT, ANY INTERNATIONAL ORGANIZATION, OR ANY AGENCY OR
INSTRUMENTALITY OF ANY OF THE FOREGOING, (B) ANY ORGANIZATION (OTHER
THAN A COOPERATIVE DESCRIBED IN SECTION 521 OF THE CODE) WHICH IS
EXEMPT FROM THE TAX IMPOSED BY CHAPTER 1 OF THE CODE UNLESS SUCH
ORGANIZATION IS SUBJECT TO THE TAX IMPOSED BY SECTION 511 OF THE CODE,
(C) ANY ORGANIZATION DESCRIBED IN SECTION 1381(a)(2)(C) OF THE CODE
(ANY SUCH PERSON DESCRIBED IN THE FOREGOING CLAUSES (A), (B), OR (C)
BEING HEREINAFTER REFERRED TO AS A "DISQUALIFIED ORGANIZATION"), OR
(D) AN AGENT OF A DISQUALIFIED ORGANIZATION AND (2) NO PURPOSE OF SUCH
TRANSFER IS TO ENABLE THE TRANSFEROR TO IMPEDE THE ASSESSMENT OR
COLLECTION OF TAX. SUCH AFFIDAVIT SHALL INCLUDE CERTAIN
REPRESENTATIONS AS TO THE FINANCIAL CONDITION OF THE PROPOSED
TRANSFEREE. NOTWITHSTANDING THE REGISTRATION IN THE CERTIFICATE
REGISTER OF ANY TRANSFER, SALE OR OTHER DISPOSITION OF THIS CLASS R
CERTIFICATE TO A DISQUALIFIED ORGANIZATION OR AN AGENT OF A
DISQUALIFIED ORGANIZATION, SUCH REGISTRATION SHALL BE DEEMED TO BE
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OF NO LEGAL FORCE OR EFFECT WHATSOEVER AND SUCH PERSON SHALL NOT BE
DEEMED TO BE A CERTIFICATEHOLDER FOR ANY PURPOSE HEREUNDER, INCLUDING,
BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS CERTIFICATE.
EACH HOLDER OF THE CLASS R CERTIFICATE BY ACCEPTANCE OF THIS
CERTIFICATE SHALL BE DEEMED TO HAVE CONSENTED TO THE PROVISIONS OF
THIS PARAGRAPH.
(h) The Trustee shall have no liability to the Trust Fund arising from
a transfer of any such Certificate in reliance upon a certification, ruling or
Opinion of Counsel described in this Section 6.02; provided, however, that the
Trustee shall not register the transfer of any Class R Certificate if it has
actual knowledge that the proposed transferee does not meet the qualifications
of a permitted Holder of a Class R Certificate as set forth in this Section
6.02.
SECTION 6.03. Mutilated, Destroyed, Lost or Stolen Certificates.
-------------------------------------------------
If (a) any mutilated Certificate is surrendered to the Trustee, or the
Trustee receives evidence to its satisfaction of the destruction, loss or theft
of any Certificate and (b) there is delivered to the Servicer, the Certificate
Insurer and the Trustee such security or indemnity as may be required by them to
save each of them harmless, then, in the absence of notice to the Trustee that
such Certificate has been acquired by a bona fide purchaser, the Trustee shall
execute, authenticate and deliver, in exchange for or in lieu of any such
mutilated, destroyed, lost or stolen Certificate, a new Certificate of like
tenor and interest in the Trust Fund. In connection with the issuance of any
new Certificate under this Section 6.03, the Trustee may require the payment of
a sum sufficient to cover any tax or other governmental charge that may be
imposed in relation thereto and any other expenses (including the fees and
expenses of the Trustee) connected therewith. Any replacement Certificate
issued pursuant to this Section 6.03 shall constitute complete and indefeasible
evidence of ownership in the Trust Fund, as if originally issued, whether or not
the lost, stolen or destroyed Certificate shall be found at any time.
SECTION 6.04. Persons Deemed Owners.
---------------------
Prior to due presentation of a Certificate for registration of
transfer, the Servicer, the Trustee, and any agent of the Servicer, the
Certificate Insurer or the Trustee may treat the person in whose name any
Certificate is registered as the owner of such Certificate for the purpose of
receiving distributions as provided in this Agreement and for all other purposes
whatsoever, and neither the Servicer, the Trustee, the Certificate Insurer nor
any agent of the Servicer, the Certificate Insurer or the Trustee shall be
affected by any notice to the contrary.
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SECTION 6.05. Access to List of Certificateholders' Names and
-----------------------------------------------
Addresses.
---------
(a) If three or more Certificateholders (i) request in writing from
the Trustee a list of the names and addresses of Certificateholders, (ii) state
that such Certificateholders desire to communicate with other Certificateholders
with respect to their rights under this Agreement or under the Certificates and
(iii) provide a copy of the communication which such Certificateholders propose
to transmit, then the Trustee shall, within ten Business Days after the receipt
of such request, afford such Certificateholders access during normal business
hours to a current list of the Certificateholders. The expense of providing any
such information requested by a Certificateholder shall be borne by the
Certificateholders requesting such information and shall not be borne by the
Trustee. Every Certificateholder, by receiving and holding a Certificate,
agrees that the Trustee shall not be held accountable by reason of the
disclosure of any such information as to the list of the Certificateholders
hereunder, regardless of the source from which such information was derived.
(b) The Servicer, so long as it is the master servicer hereunder,
shall have unlimited access to a list of the names and addresses of the
Certificateholders which list shall be provided by the Trustee promptly upon the
request of the Servicer.
SECTION 6.06. Maintenance of Office or Agency.
-------------------------------
The Trustee will maintain or cause to be maintained at its expense an
office or offices or agency or agencies in St. Paul, Minnesota where
Certificates may be surrendered for registration of transfer or exchange and
where notices and demands to or upon the Trustee in respect of the Certificates
and this Agreement may be served. The Trustee initially designates the office
described in Section 9.11 as its office for such purpose. The Trustee will give
prompt written notice to the Certificateholders of any change in the location of
any such office or agency.
[SECTION 6.07. Book-Entry Certificates.
-----------------------
Notwithstanding the foregoing, each class of the Class A Certificates,
upon original issuance, shall be issued in the form of one or more typewritten
Certificates representing the Book-Entry Certificates, to be delivered to DTC,
the initial Clearing Agency, by, or on behalf of, the Seller. The Class A
Certificates shall initially be registered on the Certificate Register in the
name of Cede & Co., the nominee of DTC, as the initial Clearing Agency, and no
Beneficial Holder will receive a definitive certificate representing such
Beneficial Holder's interest in the Certificates, except as provided in Section
6.09. Unless and until definitive, fully registered Certificates ("Definitive
Certificates") have been issued to the Beneficial Holders pursuant to Section
6.09:
(a) the provisions of this Section 6.07 shall be in full force
and effect with respect to the Class A Certificates;
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(b) the Seller and the Trustee may deal with the Clearing Agency
for all purposes with respect to the Class A Certificates (including the
making of distributions on such Certificates) as the sole Holder of such
Certificates;
(c) to the extent that the provisions of this Section 6.07
conflict with any other provisions of this Agreement, the provisions of
this Section 6.07 shall control; and
(d) the rights of the Beneficial Holders of the Class A
Certificates shall be exercised only through the Clearing Agency and the
Participants and shall be limited to those established by law and
agreements between such Beneficial Holders and the Clearing Agency and/or
the Participants. Pursuant to the Depository Agreement, unless and until
Definitive Certificates are issued pursuant to Section 6.09, the initial
Clearing Agency will make book-entry transfers among the Participants and
receive and transmit distributions of principal and interest on the related
Certificates to such Participants.
For purposes of any provision of this Agreement requiring or
permitting actions with the consent of, or at the direction of, Holders of each
Class of the Class A Certificates evidencing a specified percentage of the
aggregate unpaid principal amount of such Certificates, such direction or
consent may be given by the Clearing Agency at the direction of Beneficial
Holders owning such Certificates evidencing the requisite percentage of
principal amount of such Certificates. The Clearing Agency may take conflicting
actions with respect to each Class of the Class A Certificates to the extent
that such actions are taken on behalf of the Beneficial Holders.]
[SECTION 6.08. Notices to Clearing Agency.
--------------------------
Whenever notice or other communication to the Holders of each Class of
Class A Certificates is required under this Agreement, unless and until
Definitive Certificates shall have been issued to the related Certificateholders
pursuant to Section 6.09, the Trustee shall give all such notices and
communications specified herein to be given to Holders of each Class of the
Class A Certificates to the Clearing Agency which shall give such notices and
communications to the related Participants in accordance with its applicable
rules, regulations and procedures.]
[SECTION 6.09. Definitive Certificates.
-----------------------
If (a) the Seller advises the Trustee in writing that the Clearing
Agency is no longer willing or able to properly discharge its responsibilities
under the Depository Agreement with respect to the Certificates and the Trustee
or the Seller is unable to locate a qualified successor, (b) the Seller, at its
option, advises the Trustee in writing that it elects to terminate the book-
entry system with respect to the Class A Certificates through the Clearing
Agency or (c) after the occurrence of an Event of Default, Holders of each Class
of Class A Certificates evidencing not less than 66-2/3% of the aggregate
Certificate Principal Balance of such Class of the Class A Certificates advise
the Trustee in writing that the continuation of a book-entry system with respect
to the such Certificates through the Clearing Agency is no
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longer in the best interests of the Holders of such Certificates with respect to
such Class of the Class A Certificates, the Trustee shall notify all Holders of
such Certificates of the occurrence of any such event and the availability of
Definitive Certificates. Upon surrender to the Trustee of the such Certificates
by the Clearing Agency, accompanied by registration instructions from the
Clearing Agency for registration, the Trustee shall authenticate and deliver the
Definitive Certificates. Neither the Seller nor the Trustee shall be liable for
any delay in delivery of such instructions and may conclusively rely on, and
shall be protected in relying on, such instructions. Upon the issuance of
Definitive Certificates all references herein to obligations imposed upon or to
be performed by the Clearing Agency shall be deemed to be imposed upon and
performed by the Trustee, to the extent applicable with respect to such
Definitive Certificates, and the Trustee shall recognize the Holders of
Definitive Certificates as Certificateholders hereunder.]
ARTICLE VII
THE SELLER AND THE SERVICER
SECTION 7.01. Liabilities of the Seller and the Servicer.
------------------------------------------
The Seller and the Servicer shall each be liable in accordance
herewith only to the extent of the obligations specifically and respectively
imposed upon and undertaken by them herein.
SECTION 7.02. Merger or Consolidation of the
------------------------------
Seller or the Servicer.
----------------------
The Seller and the Servicer will each do or cause to be done all
things necessary to preserve and keep in full force and effect its existence,
rights and franchises (charter and statutory) and will each obtain and preserve
its qualification to do business as a foreign corporation in each jurisdiction
in which such qualification is or shall be necessary to protect the validity and
enforceability of this Agreement, or any of the Mortgage Loans and to perform
its respective duties under this Agreement.
Any Person into which the Seller or the Servicer may be merged or
consolidated, or any Person resulting from any merger or consolidation to which
the Seller or the Servicer shall be a party, or any Person succeeding to the
business of the Seller or the Servicer, shall be the successor of the Seller or
the Servicer, as the case may be, hereunder, without the execution or filing of
any paper or any further act on the part of any of the parties hereto, anything
herein to the contrary notwithstanding; provided, however, that the successor or
surviving Person to the Servicer shall be qualified to sell mortgage loans to,
and to service mortgage loans on behalf of, FNMA or FHLMC.
Notwithstanding anything else in this Section 7.02 or in Section 7.04
hereof to the contrary, the Servicer may assign its rights and delegate its
duties and obligations under this Agreement (except for the obligation of the
Servicer or Seller to effectuate repurchases or substitutions of Mortgage Loans
hereunder, including pursuant to Section 2.01, 2.02 or
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2.04 hereof, which shall remain with Chevy Chase hereunder); provided, however,
that the Servicer gives the Seller, the Certificate Insurer and the Trustee
notice of such assignment; and provided further, that such purchaser or
transferee accepting such assignment and delegation shall be an institution that
is a FNMA and FHLMC approved seller/servicer in good standing, which has a net
worth of at least $[_____________], and which is willing to service the Mortgage
Loans and executes and delivers to the Seller and the Trustee an agreement
accepting such delegation and assignment, which contains an assumption by such
Person of the rights, powers, duties, responsibilities, obligations and
liabilities of the Servicer, with like effect as if originally named as a party
to this Agreement; and provided further, that each of the Rating Agencies
acknowledge that its rating of the Certificates in effect immediately prior to
such assignment and delegation or its rating of the risk undertaken by the
Certificate Insurer with respect to the Policy will not be qualified or reduced
as a result of such assignment and delegation. In the case of any such
assignment and delegation, the Servicer shall be released from its obligations
under this Agreement (except as provided above), except that the Servicer shall
remain liable for all liabilities and obligations incurred by it as Servicer
hereunder prior to the satisfaction of the conditions to such assignment and
delegation set forth in the preceding sentence.
SECTION 7.03. Limitation on Liability of the Seller, the Servicer and
-------------------------------------------------------
Others.
------
Neither the Seller, the Servicer, any Sub-Servicer nor any of the
directors, officers, employees or agents of the Seller, the Servicer or any Sub-
Servicer shall be under any liability to the Certificateholders for any action
taken or for refraining from the taking of any action in good faith pursuant to
this Agreement, or for errors in judgment; provided, however, that this
provision shall not protect the Seller or the Servicer against any breach of
representations or warranties made by it herein or protect the Seller or the
Servicer or any such person from any liability which would otherwise be imposed
by reasons of willful misfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties hereunder.
The Seller, the Servicer, any Sub-Servicer and any director, officer, employee
or agent of the Seller, the Servicer or any Sub-Servicer may rely in good faith
on any document of any kind prima facie properly executed and submitted by any
Person respecting any matters arising hereunder. The Seller, the Servicer, any
Sub-Servicer and any director, officer, employee or agent of the Seller, the
Servicer or any Sub-Servicer shall be indemnified by the Trust Fund and held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to this Agreement or the Certificates, other than any
loss, liability or expense incurred by reason of willful misfeasance, bad faith
or negligence in the performance of duties hereunder or by reason of reckless
disregard of obligations and duties hereunder, provided that the foregoing
indemnification by the Trust Fund shall be limited to amounts that would
otherwise be distributable with respect to the Class S Certificates. Neither
the Seller, the Servicer nor any Sub-Servicer shall be under any obligation to
appear in, prosecute or defend any legal action that is not incidental to their
respective duties hereunder and which in its opinion may involve it in any
expense or liability; provided, however, that either the Seller, the Servicer or
any Sub-Servicer may in its discretion undertake any such action that it may
deem necessary or desirable in respect of this Agreement and the rights and
duties of the parties hereto and interests of the Trustee and the
Certificateholders hereunder.
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SECTION 7.04. Servicer Not to Resign.
----------------------
The Servicer shall not resign from the obligations and duties imposed
upon it hereunder except upon determination that such obligations and duties
hereunder are no longer permissible under applicable law. Any such
determination permitting the resignation of the Servicer under this Section 7.04
shall be evidenced by an Opinion of Counsel to such effect delivered to the
Trustee and the Certificate Insurer. The Servicer shall give notice of any
proposed resignation to the Trustee, the Certificateholders, the Certificate
Insurer and the Rating Agencies. No such resignation by the Servicer shall
become effective until the Trustee or a successor servicer acceptable to the
Certificate Insurer shall have assumed the Servicer's responsibilities and
obligations in accordance with Section 8.02 hereof.
SECTION 7.05. Errors and Omissions Insurance; Fidelity Bonds.
----------------------------------------------
The Servicer shall, for so long as it acts as servicer under this
Agreement, obtain and maintain in force (a) a policy or policies of insurance
covering errors and omissions in the performance of its obligations as servicer
hereunder, and (b) a fidelity bond in respect of its officers, employees and
agents. Each such policy or policies and bond shall, together, comply with the
requirements from time to time of FNMA or FHLMC for persons performing servicing
for mortgage loans purchased by FNMA or FHLMC. In the event that any such
policy or bond ceases to be in effect, the Servicer shall obtain a comparable
replacement policy or bond from an insurer or issuer, meeting the requirements
set forth above as of the date of such replacement.
SECTION 7.06. Servicer May Own Certificates.
-----------------------------
The Servicer in its individual or any other capacity may become the
owner or pledgee of Certificates with the same rights as it would have if it
were not the Servicer.
ARTICLE VIII
DEFAULT
SECTION 8.01. Events of Default.
-----------------
"Event of Default", wherever used herein, means any one of the
following events (whatever reason for such Event of Default and whether it shall
be voluntary or involuntary or be effected by operation of law or pursuant to
any judgment, decree or order of any court or any order, rule or regulation of
any administrative or governmental body):
(a) any failure by the Servicer to remit to the
Certificateholders, the Certificate Insurer or to the Trustee any payment
other than a Monthly Advance required to be made by the Servicer under the
terms of this Agreement, which failure shall continue unremedied for a
period of one Business Day after the date upon which written notice of such
failure shall have been given to the Servicer by the Trustee, the
Certificate Insurer or the Seller or to the Servicer, the Certificate
Insurer and the
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Trustee by the Holders of Certificates having not less than
25% of the Voting Rights evidenced by the Certificates; or
(b) any failure by the Servicer to observe or perform in any
material respect any other of the covenants or agreements on the part of
the Servicer contained in this Agreement (except as set forth in (c) below)
which failure (i) materially affects the rights of the Certificateholders
or the Certificate Insurer and (ii) shall continue unremedied for a period
of 60 days (except that such number of days shall be 15 in the case of a
failure to pay the premium for any Required Insurance Policy) after the
date on which written notice of such failure shall have been given to the
Servicer by the Trustee or the Seller, or to the Servicer and the Trustee
by the Holders of Certificates evidencing not less than 25% of the Voting
Rights evidenced by the Certificates; or
(c) if a representation or warranty set forth in Section 2.03 or
2.04 hereof shall prove to be materially incorrect as of the time made in
any respect that materially and adversely affects interests of the
Certificateholders or the Certificate Insurer, and the circumstances or
condition in respect of which such representation or warranty was incorrect
shall not have been eliminated or cured, or the affected Mortgage Loan
shall not have been substituted for or repurchased, within 60 days after
the date on which written notice thereof shall have been given to the
Servicer and Seller by the Trustee for the benefit of the
Certificateholders and the Certificate Insurer or by the Seller; or
(d) a decree or order of a court or agency or supervisory
authority having jurisdiction in the premises for the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings, or for
the winding-up or liquidation of its affairs, shall have been entered
against the Servicer and such decree or order shall have remained in force
undischarged or unstayed for a period of 60 days; or
(e) the Servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings of or
relating to the Servicer or all or substantially all of the property of the
Servicer; or
(f) the Servicer shall admit in writing its inability to pay its
debts generally as they become due, file a petition to take advantage of,
or commence a voluntary case under, any applicable insolvency or
reorganization statute, make an assignment for the benefit of its
creditors, or voluntarily suspend payment of its obligations; or
(g) either Rating Agency shall lower or withdraw the outstanding
rating of the Certificates because the existing or prospective financial
condition or mortgage loan servicing capability of the Servicer is
insufficient to maintain such outstanding rating; or
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(h) any failure of the Servicer to make any Monthly Advance in
the manner and at the time required to be made from its own funds pursuant
to this Agreement and after receipt of notice from the Trustee pursuant to
Section 5.04, which failure continues unremedied after 5 p.m.,
[_____________________], on the Business Day immediately preceding the
Distribution Date; or
(i) a Servicer Trigger Event occurs.
If an Event of Default due to the actions or inaction of the Servicer
described in clauses (a) through (g) or (i) of this Section shall occur, then,
and in each and every such case, so long as such Event of Default shall not have
been remedied, the Trustee shall at the direction of the Certificate Insurer
(unless an Certificate Insurer Default is continuing) or, if so directed by the
Holders of Certificates evidencing not less than 25% of the Voting Rights
evidenced by the Certificates, by notice in writing to the Servicer (with the
prior written consent of the Certificate Insurer and with a copy to the Rating
Agencies), terminate all of the rights and obligations of the Servicer under
this Agreement (other than rights to reimbursement for Monthly Advances or other
advances previously made, as provided in Section 3.09) provided, however, that
unless an Certificate Insurer Default is continuing the successor to the
Servicer appointed pursuant to Section 7.02 shall be acceptable to the
Certificate Insurer and shall have accepted the duties of Servicer effective
upon the resignation of the Servicer.
If an Event of Default described in clause (h) shall occur, the
Trustee with the consent of the Certificate Insurer (which shall not be
unreasonably withheld) shall, prior to the next Distribution Date, terminate the
rights and obligations of the Servicer hereunder and succeed to the rights and
obligations of the Servicer hereunder pursuant to Section 8.02, including the
obligation to make Monthly Advances on such Distribution Date pursuant to the
terms hereof.
SECTION 8.02. Trustee to Act; Appointment of Successor.
----------------------------------------
On and after the time the Servicer receives a notice of termination
pursuant to Section 8.01 hereof or resigns pursuant to Section 7.04 hereof,
subject to the provisions of Section 3.06 hereof, the Trustee shall be the
successor in all respects to the Servicer in its capacity as servicer under this
Agreement and with respect to the transactions set forth or provided for herein
and shall be subject to all the responsibilities, duties and liabilities
relating thereto placed on the Servicer by the terms and provisions hereof,
provided that the Trustee shall not be deemed to have made any representation or
warranty as to any Mortgage Loan made by the Servicer and shall not effect any
repurchases or substitutions of any Mortgage Loan. As compensation therefor,
the Trustee shall be entitled to all funds relating to the Mortgage Loans that
the Servicer would have been entitled to charge to the related Custodial Account
if the Servicer had continued to act hereunder (except that the terminated
Servicer shall retain the right to be reimbursed for advances (including,
without limitation, Monthly Advances) theretofore made by the Servicer with
respect to which it would be entitled to be reimbursed if it had not been so
terminated as Servicer). Notwithstanding the foregoing, if the Trustee has
become the successor to the Servicer in accordance with this Section 8.02, the
Certificate Insurer may, and if the Certificate Insurer fails to the Trustee
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may, if it shall be unwilling to so act, or shall, if it is unable to so act
(exclusive of the obligations with respect to Monthly Advances), appoint, or
petition a court of competent jurisdiction to appoint, any established mortgage
loan servicing institution acceptable to the Certificate Insurer, the
appointment of which does not adversely affect the then current rating of the
Certificates, as the successor to the Servicer hereunder in the assumption of
all or any part of the responsibilities, duties or liabilities of the Servicer,
provided that such successor to the Servicer shall not be deemed to have made
any representation or warranty as to any Mortgage Loan made by the Servicer.
Pending appointment of a successor to the Servicer hereunder, the Trustee,
unless the Trustee is prohibited by law from so acting, shall act in such
capacity as provided herein. In connection with such appointment and
assumption, the Trustee may make such arrangements for the compensation of such
successor out of payments on Mortgage Loans as it and such successor shall
agree; provided, however, that no such compensation shall be in excess of that
permitted the Servicer hereunder. The Trustee and such successor shall take
such action, consistent with this Agreement, as shall be necessary to effectuate
any such succession. Neither the Trustee nor any other successor servicer shall
be deemed to be in default hereunder by reason of any failure to make, or any
delay in making, any distribution hereunder or any portion thereof caused by the
failure of the Servicer to deliver, or any delay in delivering, cash, documents
or records to it.
The Servicer that has been terminated shall, at the request of the
Trustee but at the expense of such Servicer, deliver to the assuming party all
documents and records relating to each Sub-Servicing Agreement and the related
Mortgage Loans and an accounting of amounts collected and held by it and
otherwise use its best efforts to effect the orderly and efficient transfer of
each Sub-Servicing Agreement to the assuming party.
The Servicer shall cooperate with the Trustee and any successor
servicer in effecting the termination of the Servicer's responsibilities and
rights hereunder, including without limitation, the transfer to such successor
for administration by it of all cash amounts which shall at the time be credited
by the Servicer to the Custodial Account or thereafter received with respect to
the Mortgage Loans.
Neither the Trustee nor any other successor servicer shall be deemed
to be in default hereunder by reason of any failure to make, or any delay in
making, any distribution hereunder or any portion thereof caused by (a) the
failure of the Servicer to (i) deliver, or any delay in delivering, cash,
documents or records to it, (ii) cooperate as required by this Agreement, or
(iii) deliver the Mortgage Loan to the Trustee as required by this Agreement, or
(b) restrictions imposed by any regulatory authority having jurisdiction over
the Servicer.
Any successor to the Servicer as servicer shall during the term of its
service as servicer maintain in force the policy or policies that the Servicer
is required to maintain pursuant to Section 7.05 hereof.
SECTION 8.03. Notification to Certificateholders.
----------------------------------
(a) Upon any termination or appointment of a successor to the
Servicer, the Trustee shall give prompt written notice thereof to the
Certificate Insurer, the
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Certificateholders at their respective addresses appearing in the Certificate
Register and to the Rating Agencies.
(b) Within 2 Business Days after the occurrence of any Event of
Default, the Trustee shall transmit by mail to the Certificate Insurer and all
Certificateholders and the Rating Agencies notice of each such Event of Default
hereunder known to the Trustee, unless such Event of Default shall have been
cured or waived.
SECTION 8.04. Waiver of Events of Default.
---------------------------
The Certificate Insurer or the Holders representing at least 66-2/3%
of the Voting Rights of Certificates affected by a default or Event of Default
hereunder may waive any default or Event of Default, with the written consent of
the Certificate Insurer, which consent shall not be unreasonably withheld;
provided, however, that (a) a default or Event of Default under clause (i) of
Section 8.01 may be waived, with the written consent of the Certificate Insurer,
only by all of the Holders of Certificates affected by such default or Event of
Default (which Voting Rights of the Class A Certificateholders may be exercised
by the Certificate Insurer without the consent of such Holders and may only be
exercised by such Holders with the prior written consent of the Certificate
Insurer so long as there does not exist a failure by the Certificate Insurer to
make a required payment under the Policy) and (b) no waiver pursuant to this
Section 8.04 shall affect the Holders of Certificates in the manner set forth in
Section 11.01(b)(i), (ii) or (iii). Upon any such waiver of a default or Event
of Default by the Certificate Insurer or the Holders representing the requisite
percentage of Voting Rights of Certificates affected by such default or Event of
Default with the consent of the Certificate Insurer, which consent shall not be
unreasonably withheld, such default or Event of Default shall cease to exist and
shall be deemed to have been remedied for every purpose hereunder. No such
waiver shall extend to any subsequent or other default or Event of Default or
impair any right consequent thereon except to the extent expressly so waived.
ARTICLE IX
CONCERNING THE TRUSTEE
SECTION 9.01. Duties of Trustee.
-----------------
The Trustee, prior to the occurrence of an Event of Default and after
the curing of all Events of Default that may have occurred, undertakes with
respect to the Trust Fund to perform such duties and only such duties as are
specifically set forth in this Agreement. In case an Event of Default has
occurred and remains uncured, the Trustee shall exercise such of the rights and
powers vested in it by this Agreement, and use the same degree of care and skill
in their exercise, as a prudent person would exercise or use under the
circumstances in the conduct of such person's own affairs. Any permissive right
of the Trustee set forth in this Agreement shall not be construed as a duty.
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The Trustee, upon receipt of all resolutions, certificates,
statements, opinions, reports, documents, orders or other instruments furnished
to the Trustee that are specifically required to be furnished pursuant to any
provision of this Agreement shall examine them to determine whether they conform
to the requirements of this Agreement. The Trustee shall have no duty to
recompute, recalculate or verify the accuracy of any resolution, certificate,
statement, opinion, report, document, order or other instrument so furnished to
the Trustee.
No provision of this Agreement shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act or its own misconduct, its negligent failure to perform its obligations
in compliance with this Agreement, or any liability which would be imposed by
reason of its willful misfeasance or bad faith; provided, however, that:
(a) prior to the occurrence of an Event of Default, and after the
curing of all such Events of Default that may have occurred, the duties and
obligations of the Trustee shall be determined solely by the express
provisions of this Agreement, the Trustee shall not be personally liable
except for the performance of such duties and obligations as are
specifically set forth in this Agreement, no implied covenants or
obligations shall be read into this Agreement against the Trustee and the
Trustee may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon any certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Agreement which it reasonably believed in good faith to be genuine and
to have been duly executed by the proper authorities respecting any matters
arising hereunder;
(b) the Trustee shall not be personally liable for an error of
judgment made in good faith by a Responsible Officer or Responsible
Officers of the Trustee, unless the Trustee was negligent or acted in bad
faith or with willful misfeasance;
(c) the Trustee shall not be personally liable with respect to
any action taken, suffered or omitted to be taken by it in good faith in
accordance with the direction of Holders of Certificates evidencing not
less than 25% of the Voting Rights allocated to each Class of Certificates
relating to the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred
upon the Trustee, under this Agreement; and
(d) no provision of this Agreement shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in
the performance of any of its duties hereunder or in the exercise of any of
its rights or powers if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or
liability is not reasonably assured to it.
Except with respect to an Event of Default described in clause (a) of
Section 8.01, the Trustee shall not be deemed to have knowledge of any Event of
Default or event which, with notice or lapse of time, or both, would become an
Event of Default, unless a Responsible Officer of the Trustee shall have
received written notice thereof from
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the Servicer, the Seller or a Certificateholder, or a Responsible Officer of the
Trustee has actual notice thereof, and in the absence of such notice no
provision hereof requiring the taking of any action or the assumption of any
duties or responsibility by the Trustee following the occurrence of any Event of
Default or event which, with notice or lapse of time or both, would become an
Event of Default, shall be effective as to the Trustee.
The Trustee shall have no duty hereunder with respect to any
complaint, claim, demand, notice or other document it may receive or which may
be alleged to have been delivered to or served upon it by the parties as a
consequence of the assignment of any Mortgage Loan hereunder; provided, however,
that the Trustee shall use its best efforts to remit to the Servicer upon
receipt of any such complaint, claim, demand, notice or other document (i) which
is delivered to the Corporate Trust Office of the Trustee, (ii) of which a
Responsible Officer has actual knowledge, and (iii) which contains information
sufficient to permit the Trustee to make a determination that the real property
to which such document relates is a Mortgaged Property.
SECTION 9.02. Certain Matters Affecting the Trustee.
-------------------------------------
(a) Except as otherwise provided in Section 9.01:
(i) the Trustee may request and rely upon and shall be
protected in acting or refraining from acting upon any resolution,
Officers' Certificate, certificate of auditors or any other certificate,
statement, instrument, opinion, report, notice, request, consent, order,
appraisal, bond or other paper or document believed by it to be genuine and
to have been signed or presented by the proper party or parties;
(ii) the Trustee may consult with counsel and any Opinion of
Counsel shall be full and complete authorization and protection in respect
of any action taken or suffered or omitted by it hereunder in good faith
and in accordance with such Opinion of Counsel;
(iii) the Trustee shall be under no obligation to exercise any
of the trusts or powers vested in it by this Agreement or to institute,
conduct or defend any litigation hereunder or in relation hereto at the
request, order or direction of any of the Certificateholders, pursuant to
the provisions of this Agreement, unless such Certificateholders shall have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby; nothing
contained herein shall, however, relieve the Trustee of the obligation,
upon the occurrence of an Event of Default (which has not been cured or
waived), to exercise such of the rights and powers vested in it by this
Agreement, and to use the same degree of care and skill in their exercise
as a prudent person would exercise or use under the circumstances in the
conduct of such person's own affairs;
(iv) the Trustee shall not be personally liable for any action
taken, suffered or omitted by it in good faith and believed by it to be
authorized or within the discretion or rights or powers conferred upon it
by this Agreement;
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(v) prior to the occurrence of an Event of Default hereunder
and after the curing of all Events of Default that may have occurred, the
Trustee shall not be bound to make any investigation into the facts or
matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent, order, approval, bond or other
paper or document, unless requested in writing so to do by Holders of
Certificates evidencing not less than 25% of the Voting Rights allocated to
each Class of Certificates; provided, however, that if the payment within a
reasonable time to the Trustee of the costs, expenses or liabilities likely
to be incurred by it in the making of such investigation is, in the opinion
of the Trustee, not reasonably assured to the Trustee by the security
afforded to it by the terms of this Agreement, the Trustee may require
reasonable indemnity against such expense or liability as a condition to
taking any such action; the reasonable expense of every such investigation
shall be paid by the Servicer in the event that such investigation relates
to an Event of Default by the Servicer, if an Event of Default by the
Servicer shall have occurred and is continuing, and otherwise by the
Certificateholders requesting the investigation;
(vi) the Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or through
agents or attorneys;
(vii) the Trustee shall not be required to expend its own funds
or otherwise incur any financial liability in the performance of any of its
duties hereunder if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such liability is not
assured to it; and
(viii) the Trustee shall not be liable for any loss on any
investment of funds pursuant to this Agreement.
(b) All rights of action under this Agreement or under any of the
Certificates, enforceable by the Trustee, may be enforced by it without the
possession of any of the Certificates, or the production thereof at the trial or
other proceeding relating thereto, and any such suit, action or proceeding
instituted by the Trustee shall be brought in its name for the benefit of all
the Holders of such Certificates, subject to the provisions of this Agreement.
SECTION 9.03. Trustee Not Liable for Certificates or Mortgage Loans.
-----------------------------------------------------
The recitals contained herein shall be taken as the statements of the
Seller or the Servicer, as the case may be, and the Trustee assumes no
responsibility for their correctness. The Trustee makes no representations as
to the validity or sufficiency of this Agreement, the Certificates or of any
Mortgage Loan or related document. The Trustee shall not be accountable for the
use or application by the Seller or the Servicer of any funds paid to the Seller
or the Servicer in respect of the Mortgage Loans or deposited in or withdrawn
from the Certificate Account by the Seller or the Servicer.
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SECTION 9.04. Trustee May Own Certificates.
----------------------------
The Trustee in its individual or any other capacity may become the
owner or pledgee of Certificates with the same rights as it would have if it
were not the Trustee.
SECTION 9.05. Trustee's Fees and Expenses.
---------------------------
The Trustee shall pay to itself on each Distribution Date from amounts
on deposit in the Certificate Account, an amount equal to the Trustee Fee in
accordance with Section 4.02(a). Any amount payable to the Trustee on such
Distribution Date in excess of such amount on deposit will be paid by the
Servicer from its own funds. Any payment hereunder made by the Servicer to the
Trustee, other than any amount to be paid from the Certificate Account pursuant
to this Section 9.05, shall be paid from the Servicer's own funds, without
reimbursement from the Trust Fund therefor.
The Trustee and any director, officer, employee or agent of the
Trustee shall be indemnified by the Seller and held harmless against any loss,
liability or expense (a) incurred in connection with any legal action relating
to this Agreement or the Certificates, or the performance of any of the
Trustee's duties hereunder, other than any loss, liability or expense incurred
by reason of willful misfeasance, bad faith or negligence in the performance of
any of the Trustee's duties hereunder or by reason of reckless disregard of the
Trustee's obligations and duties hereunder and (b) resulting from the exercise
of any power of attorney granted by the Trustee in accordance with this
Agreement. Such indemnity shall survive the termination of this Agreement or
the resignation or removal of the Trustee hereunder.
SECTION 9.06. Eligibility Requirements for Trustee.
------------------------------------
The Trustee hereunder shall at all times be a corporation or
association having its principal office in a state and city acceptable to the
Seller and the Certificate Insurer and organized and doing business under the
laws of such state or the United States of America, authorized under such laws
to exercise corporate trust powers, having ratings on its long-term debt
obligations at the time of such appointment in at least the third highest rating
category by both Moody's and Standard & Poor's or such lower ratings as will not
cause Moody's or Standard & Poor's to lower their then-current ratings of the
Class A Certificates, acceptable to the Certificate Insurer, having a combined
capital and surplus of at least $50,000,000 and subject to supervision or
examination by federal or state authority. If such corporation or association
publishes reports of condition at least annually, pursuant to law or to the
requirements of the aforesaid supervising or examining authority, then for the
purposes of this Section 9.06 the combined capital and surplus of such
corporation or association shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published. In
case at any time the Trustee shall cease to be eligible in accordance with the
provisions of this Section 9.06, the Trustee shall resign immediately in the
manner and with the effect specified in Section 9.07 hereof.
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SECTION 9.07. Resignation and Removal of Trustee.
----------------------------------
The Trustee may at any time resign and be discharged from the trusts
hereby created by (a) giving written notice of resignation to the Seller and the
Certificate Insurer and by mailing notice of resignation by first class mail,
postage prepaid, to the Certificateholders at their addresses appearing on the
Certificate Register, and to the Rating Agencies, not less than 60 days before
the date specified in such notice when, subject to Section 9.08, such
resignation is to take effect, and (b) acceptance by a successor trustee
acceptable to the Certificate Insurer in accordance with Section 9.08 meeting
the qualifications set forth in Section 9.06. If no successor trustee shall
have been so appointed and have accepted appointment within 30 days after the
giving of such notice of resignation, the resigning Trustee may petition any
court of competent jurisdiction for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible in accordance
with the provisions of Section 9.06 hereof and shall fail to resign after
written request thereto by the Seller, or if at any time the Trustee shall
become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a
receiver of the Trustee or of its property shall be appointed, or any public
officer shall take charge or control of the Trustee or of its property or
affairs for the purpose of rehabilitation, conservation or liquidation or if the
Trustee breaches any of its obligations or representations hereunder, then the
Certificate Insurer or, with the prior written consent of the Certificate
Insurer, the Seller may remove the Trustee and appoint a successor trustee by
written instrument, in duplicate, one copy of which instrument shall be
delivered to the Trustee and one copy to the successor trustee. The Trustee may
also be removed at any time by the Holders of Certificates evidencing not less
than 50% of the Voting Rights evidenced by the Certificates with the prior
written consent of the Certificate Insurer. Notice of any removal of the
Trustee and acceptance of appointment by the successor trustee shall be given to
the Rating Agencies by the Servicer.
Any resignation or removal of the Trustee and appointment of a
successor trustee pursuant to any of the provisions of this Section 9.07 shall
become effective upon acceptance of appointment by the successor trustee as
provided in Section 9.08 hereof.
SECTION 9.08. Successor Trustee.
-----------------
Any successor trustee appointed as provided in Section 9.07 hereof
shall execute, acknowledge and deliver to the Seller and to its predecessor
trustee an instrument accepting such appointment hereunder and thereupon the
resignation or removal of the predecessor trustee shall become effective and
such successor trustee, without any further act, deed or conveyance, shall
become fully vested with all the rights, powers, duties and obligations of its
predecessor hereunder, with the like effect as if originally named as trustee
herein. The Seller and the predecessor trustee shall execute and deliver such
instruments and do such other things as may reasonably be required for more
fully and certainly vesting and confirming in the successor trustee all such
rights, powers, duties, and obligations.
No successor trustee shall accept appointment as provided in this
Section 9.08 unless at the time of such acceptance such successor trustee shall
be eligible under the
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provisions of Section 9.06 hereof and its appointment is acceptable to the
Certificate Insurer and shall not adversely affect the then current rating of
the Certificates.
Upon acceptance of appointment by a successor trustee as provided in
this Section 9.08, the Servicer shall mail notice of the succession of such
trustee hereunder to all Holders of Certificates at their addresses as shown in
the Certificate Register. If the Servicer fails to mail such notice within ten
days after acceptance of appointment by the successor trustee, the successor
trustee shall cause such notice to be mailed at the expense of the Seller.
SECTION 9.09. Merger or Consolidation of Trustee.
----------------------------------
Any Person into which the Trustee may be merged or converted or with
which it may be consolidated or any Person resulting from any merger, conversion
or consolidation to which the Trustee shall be a party, or any Person succeeding
to the business of the Trustee, shall be the successor of the Trustee hereunder,
provided that such Person shall be eligible under the provisions of Section 9.06
hereof without the execution or filing of any paper or further act on the part
of any of the parties hereto, anything herein to the contrary notwithstanding.
SECTION 9.10. Appointment of Co-Trustee or Separate Trustee.
---------------------------------------------
Notwithstanding any other provisions of this Agreement, at any time,
for the purpose of meeting any legal requirements of any jurisdiction in which
any part of the Trust Fund or property securing any Mortgage Note may at the
time be located, the Servicer and the Trustee acting jointly shall have the
power and shall execute and deliver all instruments to appoint one or more
Persons approved by the Trustee to act as co-trustee or co-trustees jointly with
the Trustee, or separate trustee or separate trustees, of all or any part of the
Trust Fund, and to vest in such Person or Persons, in such capacity and for the
benefit of the applicable Certificateholders, such title to the Trust Fund, or
any part thereof, and, subject to the other provisions of this Section 9.10,
such powers, duties, obligations, rights and trusts as the Servicer and the
Trustee may consider necessary or desirable. If the Servicer shall not have
joined in such appointment within fifteen days after the receipt by it of a
request to do so, or in the case an Event of Default shall have occurred and be
continuing, the Trustee alone shall have the power to make such appointment. No
co-trustee or separate trustee hereunder shall be required to meet the terms of
eligibility as a successor trustee under Section 9.06 and no notice to
Certificateholders of the appointment of any co-trustee or separate trustee
shall be required under Section 9.08.
Every separate trustee and co-trustee shall, to the extent permitted
by law, be appointed and act subject to the following provisions and conditions:
(a) all rights, powers, duties and obligations conferred or
imposed upon the Trustee, except for any obligation of the Trustee under
this Agreement to advance funds on behalf of the Servicer, shall be
conferred or imposed upon and exercised or performed by the Trustee and
such separate trustee or co-trustee jointly (it being understood that such
separate trustee or co-trustee is not authorized to act separately without
the Trustee joining in such act), except to the extent that under any
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law of any jurisdiction in which any particular act or acts are to be
performed by the Trustee (whether as Trustee hereunder or as successor to
the Servicer), the Trustee shall be incompetent or unqualified to perform
such act or acts, in which event such rights, powers, duties and
obligations (including the holding of title to the Trust Fund or any
portion thereof in any such jurisdiction) shall be exercised and performed
singly by such separate trustee or co-trustee, but solely at the direction
of the Trustee;
(b) no trustee hereunder shall be held personally liable by
reason of any act or omission of any other trustee hereunder; and
(c) the Servicer and the Trustee acting jointly may at any time
accept the resignation of or remove any separate trustee or co-trustee.
Any notice, request or other writing given to the Trustee shall be
deemed to have been given to each of the then separate trustees and co-trustees,
as effectively as if given to each of them. Every instrument appointing any
separate trustee or co-trustee shall refer to this Agreement and the conditions
of this Article IX. Each separate trustee and co-trustee, upon its acceptance of
the trusts conferred, shall be vested with the estates or property specified in
its instrument of appointment, either jointly with the Trustee or separately, as
may be provided therein, subject to all the provisions of this Agreement,
specifically including every provision of this Agreement relating to the conduct
of, affecting the liability of, or affording protection to, the Trustee. Every
such instrument shall be filed with the Trustee and a copy thereof given to the
Servicer and the Seller.
Any separate trustee or co-trustee may, at any time, constitute the
Trustee its agent or attorney-in-fact, with full power and authority, to the
extent not prohibited by law, to do any lawful act under or in respect of this
Agreement on its behalf and in its name. If any separate trustee or co-trustee
shall die, become incapable of acting, resign or be removed, all of its estates,
properties, rights, remedies and trusts shall vest in and be exercised by the
Trustee, to the extent permitted by law, without the appointment of a new or
successor trustee.
SECTION 9.11. Office of the Trustee.
---------------------
The office of the Trustee for purposes of receipt of notices and
demands is [ADDRESS OF TRUSTEE], Attn: Structured Finance/Chevy Chase Home Loan
Trust 199[_]-[___].
SECTION 9.12. Tax Returns.
-----------
The Servicer, upon request, will furnish the Trustee with all such
information in the possession of the Servicer as may be reasonably required in
connection with the preparation by the Trustee of all tax and information
returns of the Trust Fund, and the Trustee shall sign such returns. The
Servicer shall indemnify the Trustee for all reasonable costs, including legal
fees, related to errors in such tax returns due to errors in information
provided by the Servicer.
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ARTICLE X
TERMINATION
SECTION 10.01. Termination upon Liquidation or Repurchase of all
-------------------------------------------------
Mortgage Loans.
--------------
The obligations and responsibilities of the Servicer, the Seller and
the Trustee created hereby with respect to the Trust Fund created hereby shall
terminate upon the earlier of:
(a) the repurchase by the Servicer at its election, of all
Mortgage Loans and all property acquired in respect of any Mortgage Loan
remaining in the Trust Fund, which repurchase right the Servicer may
exercise at its sole and exclusive election as of any Distribution Date
(such applicable Distribution Date being herein referred to as the
"Optional Termination Date") on or after the date on which the aggregate
Principal Balance of the Mortgage Loans at the time of the repurchase is
less than or equal to 5% of the aggregate Principal Balance of the Mortgage
Loans as of the Cut-off Date; and
(b) the later of (i) twelve months after the maturity of the last
Mortgage Loan remaining in the Trust Fund, (ii) the liquidation (or any
advance with respect thereto) of the last Mortgage Loan remaining in the
Trust Fund and the disposition of all REO Property and (iii) the
distribution to Certificateholders of all amounts required to be
distributed to them pursuant to this Agreement.
In no event shall the trust created hereby continue beyond the expiration of 21
years from the death of the last survivor of the descendants of Mr. Joseph P.
Kennedy, former Ambassador of the United States to Great Britain, living on the
date of execution of this Agreement.
The Mortgage Loan Repurchase Price for any such Optional Termination
of the Trust Fund shall be equal to the aggregate Principal Balance of the
Mortgage Loans as of the date of repurchase, together with accrued and unpaid
interest thereon from the date to which such interest was paid or advanced at
the sum of the applicable Net Mortgage Rate and the Trustee Fee Rate with
respect to each Mortgage Loan through the last day of the month of such
repurchase, plus any sums on account of such Mortgage Loan that have been
advanced by the Servicer and are reimbursable to the Servicer hereunder
(including the Principal Balance of each Mortgage Loan that was secured by any
REO Property) [plus any amounts due the Certificate Insurer under the Insurance
Agreement]; provided, however, that if the Servicer shall so choose, the
Servicer may remit the Mortgage Loan Repurchase Price net of advances that would
otherwise be reimbursable to the Servicer and the Servicer would have no further
entitlement to reimbursement for such advances. The Trustee shall give notice
to the Certificate Insurer and the Rating Agencies of the Servicer's election to
purchase the Mortgage Loans pursuant to this Section 10.01 and of the Optional
Termination Date. No purchase pursuant to clause (a) is permitted if it would
result in a draw on the Policy unless the Certificate Insurer consents.
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SECTION 10.02. Procedure Upon Optional Termination.
-----------------------------------
(a) In case of any Optional Termination pursuant to Section 10.01,
the Servicer shall, at least twenty days prior to the date notice is to be
mailed to the affected Certificateholders notify the Trustee and the Certificate
Insurer of such Optional Termination Date and of the applicable repurchase price
of the Mortgage Loans to be repurchased.
(b) Any repurchase of the Mortgage Loans by the Servicer shall be
made on an Optional Termination Date by deposit of the applicable repurchase
price into the Certificate Account, as applicable, before the Distribution Date
on which such repurchase is effected. Upon receipt by the Trustee of an
Officers' Certificate of the Servicer certifying as to the deposit of such
repurchase price into the Certificate Account, the Trustee and each co-trustee
and separate trustee, if any, then acting as such under this Agreement, shall,
upon request and at the expense of the Servicer execute and deliver all such
instruments of transfer or assignment, in each case without recourse, as shall
be reasonably requested by the Seller or the Servicer, to vest title in the
Servicer in the Mortgage Loans so repurchased and shall transfer or deliver to
the Servicer the repurchased Mortgage Loans. Any distributions on the Mortgage
Loans received by the Trustee subsequent to (or with respect to any period
subsequent to) the Optional Termination Date shall be promptly remitted by it to
the Servicer.
(c) Notice of the Distribution Date on which the Servicer anticipates
that the final distribution shall be made (whether upon Optional Termination or
otherwise), shall be given promptly by the Servicer to the Trustee and the
Certificate Insurer and by the Trustee by first class mail to Holders of the
affected Certificates. Such notice shall be mailed no earlier than the 15th day
and not later than the 10th day preceding the Optional Termination Date or date
of final distribution, as the case may be. Such notice shall specify (i) the
Distribution Date upon which final distribution on the affected Certificates
will be made upon presentation and surrender of such Certificates at the office
or agency therein designated, (ii) the amount of such final distribution and
(iii) that the Record Date otherwise applicable to such Distribution Date is not
applicable, such distribution being made only upon presentation and surrender of
such Certificates at the office or agency maintained for such purposes (the
address of which shall be set forth in such notice).
(d) In the event that any Certificateholders shall not surrender
Certificates for cancellation within six months after the date specified in the
above mentioned written notice, the Trustee shall give a second written notice
to the remaining such Certificateholders to surrender their Certificates for
cancellation and receive the final distribution with respect thereto. If within
six months after the second notice all the Certificates shall not have been
surrendered for cancellation, the Trustee may take appropriate steps, or may
appoint an agent to take appropriate steps, to contact the remaining
Certificateholders concerning surrender of their Certificates, and the cost
thereof shall be paid out of the funds and other assets which remain subject to
the Trust Fund.
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SECTION 10.03. Additional Termination Requirements.
-----------------------------------
(a) In the event the Servicer exercises its purchase option pursuant
to Section 10.01, the Trust REMIC shall be terminated in accordance with the
following additional requirements, unless the Trustee has received an Opinion of
Counsel to the effect that the failure of the Trust REMIC to comply with the
requirements of this Section will not (i) result in the imposition of taxes on a
"prohibited transaction" of the Trust REMIC, as described in Section 860F of the
Code, or (ii) cause the Trust REMIC to fail to qualify as a REMIC at any time
that any Certificates are outstanding:
(A) within 90 days prior to the final Distribution Date set
forth in the notice given by the Servicer under Section 10.02, the Holder
of the Class R Certificates shall adopt a plan of complete liquidation of
the Trust REMIC and specify the first day of the applicable 90-day
liquidation period in a statement attached to the Trust Fund's final tax
return pursuant to Treasury Regulations Section 1.860F-1, and satisfy (or
cause to be satisfied) all of the requirements of a qualified liquidation
under the REMIC Provisions; and
(B) at or after the time of adoption of any such plan of
complete liquidation for the Trust REMIC at or prior to the final
Distribution Date, the Trustee shall sell all of the assets of the Trust
Fund to the Seller for cash; provided, however, that in the event that a
calendar quarter ends after the time of adoption of such a plan of complete
liquidation but prior to the final Distribution Date, the Trustee shall not
sell any of the assets of the Trust Fund prior to the close of that
calendar quarter.
(b) By its acceptance of a Class R Certificate, the Holder thereof
hereby agrees to adopt such a plan of complete liquidation and to take such
other action in connection therewith as may be reasonably required to liquidate
and otherwise terminate the Trust REMIC.
ARTICLE XI
MISCELLANEOUS PROVISIONS
SECTION 11.01. Amendment.
---------
(a) This Agreement may be amended from time to time by the Seller and
the Trustee, with the consent of the Certificate Insurer but without the consent
of any of the Certificateholders,
(i) to cure any ambiguity,
(ii) to correct or supplement any provisions herein that may be
inconsistent with any other provisions herein,
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(iii) to modify, eliminate or add to any of its provisions to such
extent as shall be necessary or desirable to maintain the qualification of
the Trust REMIC as a REMIC at all times that any Certificate is outstanding
or to avoid or minimize the risk of the imposition of any tax on the Trust
Fund pursuant to the Code that would be a claim against the Trust Fund,
provided that the Trustee has received an Opinion of Counsel to the effect
that (A) such action is necessary or desirable to maintain such
qualification or to avoid or minimize the risk of the imposition of any
such tax and (B) such action will not adversely affect the status of the
Trust REMIC as a REMIC or adversely affect in any material respect the
interests of any Certificateholder, or
(iv) to make any other provisions with respect to matters or questions
arising under this Agreement that are not materially inconsistent with the
provisions of this Agreement, provided that such action shall not adversely
affect in any material respect the interests of any Certificateholder or
cause an Adverse REMIC Event.
(b) This Agreement may be amended from time to time by the Seller, the
Servicer and the Trustee with the consent of the Certificate Insurer and the
Holders of Certificates evidencing, in the aggregate, not less than 66-2/3% of
the Voting Rights of all the Certificates for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
this Agreement or of modifying in any manner the rights of the Holders of the
Certificates; provided, however, that no such amendment may (i) reduce in any
manner the amount of, delay the timing of or change the manner in which payments
received on or with respect to Mortgage Loans are required to be distributed
with respect to any Certificate without the consent of the Holder of such
Certificate, (ii) adversely affect in any material respect the interests of the
Holders of a Class of Certificates in a manner other than as set forth in (i)
above without the consent of the Holders of Certificates evidencing not less
than 66-2/3% of the Voting Rights of such Class, (iii) reduce the aforesaid
percentages of Voting Rights, the holders of which are required to consent to
any such amendment without the consent of 100% of the Holders of Certificates of
the Class affected thereby, (iv) change the percentage of the Principal Balance
of the Mortgage Loans specified in Section 10.01(a) relating to optional
termination of the Trust Fund or (v) modify the provisions of this Section
11.01.
It shall not be necessary for the consent of Certificateholders under
this Section to approve the particular form of any proposed amendment, but it
shall be sufficient if such consent shall approve the substance thereof. The
manner of obtaining such consents and of evidencing the authorization of the
execution thereof by Certificateholders shall be subject to such reasonable
regulations as the Trustee may prescribe.
(c) This Agreement may be amended from time to time by the Seller,
without the consent of the Seller, the Trustee, the Certificate Insurer, the
Servicer or the Certificateholders, to modify Section 3.21(b) to make purchases
of Converting Mortgage Loans or Converted Mortgage Loans by the Seller
mandatory.
(d) Promptly after the execution of any amendment to this Agreement,
the Trustee shall furnish written notification of the substance of such
amendment to each Certificateholder and the Rating Agencies.
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SECTION 11.02. Recordation of Agreement; Counterparts.
--------------------------------------
(a) This Agreement is subject to recordation in all appropriate public
offices for real property records in all the counties or other comparable
jurisdictions in which any or all of the Mortgaged Properties are situated, and
in any other appropriate public recording office or elsewhere. Such
recordation, if any, shall be effected by the Servicer at its expense on
direction of the Certificate Insurer or the Trustee, but only upon direction of
the Certificate Insurer or the Trustee accompanied by an Opinion of Counsel to
the effect that such recordation materially and beneficially affects the
interests of the Certificateholders of the Trust Fund.
(b) For the purpose of facilitating the recordation of this Agreement
as herein provided and for other purposes, this Agreement may be executed
simultaneously in any number of counterparts, each of which counterparts shall
be deemed to be an original, and such counterparts shall constitute but one and
the same instrument.
SECTION 11.03. Governing Law.
-------------
THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE SUBSTANTIVE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND
TO BE PERFORMED IN THE STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS AND
REMEDIES OF THE PARTIES HERETO AND THE CERTIFICATEHOLDERS SHALL BE DETERMINED IN
ACCORDANCE WITH SUCH LAWS.
SECTION 11.04. Intention of Parties.
--------------------
(a) It is the express intent of the Seller, the Seller and the Trustee
that the conveyance by the Seller to the Seller pursuant to the Mortgage Loan
Purchase Agreement and the conveyance by the Seller to the Trustee and by the
Seller to the Trustee as provided for in Section 2.01 of each of the Seller's
and Seller's right, title and interest in and to the Mortgage Loans be, and be
construed as, an absolute sale and assignment by the Seller to the Seller and by
the Seller to the Trustee of the Mortgage Loans for the benefit of the
Certificateholders and the Certificate Insurer. Further, it is not intended
that either conveyance be deemed to be a pledge of the Mortgage Loans by the
Seller to the Seller or by the Seller to the Trustee to secure a debt or other
obligation. However, in the event that the Mortgage Loans are held to be
property of the Seller or the Seller, or if for any reason the Mortgage Loan
Purchase Agreement or this Agreement is held or deemed to create a security
interest in the Mortgage Loans, then it is intended that (i) this Agreement
shall also be deemed to be a security agreement within the meaning of Articles 8
and 9 of the New York Uniform Commercial Code and the Uniform Commercial Code of
any other applicable jurisdiction; (ii) the conveyances provided for in Section
2.01 shall be deemed to be a grant by the Seller and the Seller to the Trustee
on behalf of the Certificateholders and the Certificate Insurer (and the
Certificate Insurer directly), to secure payment in full of the Secured
Obligations (as defined below), of a security interest in all of the Seller's
and the Seller's right (including the power to convey title thereto), title and
interest, whether now owned or hereafter acquired, in and to the Mortgage Loans,
including the Mortgage Notes,
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the Mortgages, any related insurance policies and all other documents in the
related Mortgage Files, and all accounts, contract rights, general intangibles,
chattel paper, instruments, documents, money, deposit accounts, certificates of
deposit, goods, letters of credit, advices of credit and uncertificated
securities consisting of, arising from or relating to (A) the Mortgage Loans,
including with respect to each Mortgage Loan, the Mortgage Note and related
Mortgage, and all other documents in the related Trustee Mortgage Files, and
including any Replacement Mortgage Loans; (B) pool insurance policies, hazard
insurance policies and any bankruptcy bond relating to the foregoing, if
applicable; (C) the Certificate Account; (D) the Custodial Account; (E) the
Reserve Account and all amounts on deposit therein; (F) all amounts payable
after the Cut-off Date to the holders of the Mortgage Loans in accordance with
the terms thereof; (G) all income, payments, proceeds and products of the
conversion, voluntary or involuntary, of the foregoing into cash, instruments,
securities or other property, including without limitation all amounts from time
to time held or invested in the Certificate Account, whether in the form of
cash, instruments, securities or other property; and (H) all cash and non-cash
proceeds of any of the foregoing; (iii) the possession by the Trustee or any
other agent of the Trustee of Mortgage Notes or such other items of property as
constitute instruments, money, documents, advices of credit, letters of credit,
goods, certificated securities or chattel paper shall be deemed to be a
possession by the secured party, or possession by a purchaser, for purposes of
perfecting the security interest pursuant to the Uniform Commercial Code
(including, without limitation, Sections 9-305 or 9-115 thereof); and (iv)
notifications to persons holding such property, and acknowledgments, receipts or
confirmations from persons holding such property, shall be deemed notifications
to, or acknowledgments, receipts or confirmations from, securities
intermediaries, bailees or agents of, or persons holding for, the Trustee, as
applicable, for the purpose of perfecting such security interest under
applicable law. "Secured Obligations" means (i) the rights of each
Certificateholder to be paid any amount owed to it under this Agreement, (ii)
the rights of the Certificate Insurer to be paid any amount owed to it under
this Agreement, (iii) all other obligations of the Seller and the Seller under
this Agreement and the Mortgage Loan Purchase Agreement and (iv) the right of
the Certificateholders and the Certificate Insurer to the Mortgage Loans.
(b) The Seller and the Seller, and, at the Seller's direction, the
Servicer and the Trustee, shall, to the extent consistent with this Agreement,
take such reasonable actions as may be necessary to ensure that, if this
Agreement were deemed to create a security interest in the Mortgage Loans and
the other property described above, such security interest would be deemed to be
a perfected security interest of first priority as applicable. The Trustee
shall file, at its expense, all filings necessary to maintain the effectiveness
of any original filings necessary under the Uniform Commercial Code as in effect
in any jurisdiction to perfect the Trustee's security interest (and the security
interest granted to the Certificate Insurer directly) in or lien on the Mortgage
Loans, including without limitation (i) continuation statements, and (ii) such
other statements as may be occasioned by any transfer of any interest of the
Servicer or the Seller in any Mortgage Loan.
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SECTION 11.05. Notices.
-------
In addition to other notices provided under this Agreement, the
Trustee shall notify the Rating Agencies in writing: (a) of any substitution of
any Mortgage Loan; (b) of any payment or draw on any insurance policy applicable
to the Mortgage Loans; (c) of the final payment of any amounts owing to a Class
of Certificates; (d) any Event of Default under this Agreement; and (e) in the
event any Mortgage Loan is repurchased in accordance with this Agreement.
All directions, demands and notices hereunder shall be in writing and
shall be deemed to have been duly given when received (i) in the case of the
Trustee, [NAME OF TRUSTEE], [ADDRESS OF TRUSTEE], Attn: Structured Finance or
such other address as may hereafter be furnished to the Seller in writing by the
Trustee; (ii) in the case of the Seller or Servicer, Chevy Chase Bank, F.S.B.,
8401 Connecticut Avenue, Chevy Chase, Maryland 20815, Attention: General
Counsel; [(iii) in the case of the Certificate Insurer, [NAME OF Certificate
Insurer], [ADDRESS OF Certificate Insurer], Attn: Insured Portfolio Management
Structured Finance;] and (iv) in the case of the Rating Agencies, Moody's
Investors Service, 99 Church Street, New York, New York 10007, Attention:
Mortgage-Backed Securities Rating Group and Standard & Poor's Rating Services,
25 Broadway, New York, New York 10004, Attention: Structured Finance. Notices
to Certificateholders shall be deemed given when mailed, first class postage
prepaid.
SECTION 11.06. Severability of Provisions.
--------------------------
If any one or more of the covenants, agreements, provisions or terms
of this Agreement shall be for any reason whatsoever held invalid, then such
covenants, agreements, provisions or terms shall be deemed severable from the
remaining covenants, agreements, provisions or terms of this Agreement and shall
in no way affect the validity or enforceability of the other provisions of this
Agreement or of the Certificates or the rights of the Holders thereof or the
Certificate Insurer.
SECTION 11.07. Limitation on Rights of Certificateholders.
------------------------------------------
The death or incapacity of any Certificateholder shall not operate to
terminate this Agreement or the Trust Fund, nor entitle such Certificateholder's
legal representative or heirs to claim an accounting or to take any action or
commence any proceeding in any court for a petition or winding up of the Trust
Fund, or otherwise affect the rights, obligations and liabilities of the parties
hereto or any of them.
No Certificateholder shall have any right to vote (except as provided
herein) or in any manner otherwise control the operation and management of the
Trust Fund, or the obligations of the parties hereto, nor shall anything herein
set forth or contained in the terms of the Certificates be construed so as to
constitute the Certificateholders from time to time as partners or members of an
association; nor shall any Certificateholder be under any liability to any third
party by reason of any action taken by the parties to this Agreement pursuant to
any provision hereof.
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No Certificateholder shall have any right by virtue or by availing
itself of any provisions of this Agreement to institute any suit, action or
proceeding in equity or at law upon or under or with respect to this Agreement,
unless such Holder previously shall have given to the Trustee and Certificate
Insurer a written notice of an Event of Default and of the continuance thereof,
as provided herein, and such default would not result in a claim under the
Policy, and unless the Holders of Certificates evidencing not less than 25% of
the Voting Rights evidenced by the Certificates shall also have made written
request upon the Trustee to institute such action, suit or proceeding in its own
name as Trustee hereunder and shall have offered to the Trustee such reasonable
indemnity as it may require against the costs, expenses, and liabilities to be
incurred therein or thereby and the Certificate Insurer shall have given its
written consent, and the Trustee, for 60 days after its receipt of such notice,
request and offer of indemnity, shall have neglected or refused to institute any
such action, suit or proceeding; it being understood and intended, and being
expressly covenanted by each Certificateholder with every other
Certificateholder and the Trustee, that no one or more Holders of Certificates
shall have any right in any manner whatever by virtue or by availing itself or
themselves of any provisions of this Agreement to affect, disturb or prejudice
the rights of the Holders of any other of the Certificates, or to obtain or seek
to obtain priority over or preference to any other such Holder or to enforce any
right under this Agreement, except in the manner herein provided and for the
common benefit of all Certificateholders. For the protection and enforcement of
the provisions of this Section 11.07, each and every Certificateholder and the
Trustee shall be entitled to such relief as can be given either at law or in
equity.
SECTION 11.08. Certificates Nonassessable and Fully Paid.
-----------------------------------------
It is the intention of the Seller that Certificateholders shall not be
personally liable for obligations of the Trust Fund, that the interests in the
Trust Fund represented by the Certificates shall be nonassessable for any reason
whatsoever, and that the Certificates, upon due authentication thereof by the
Trustee pursuant to this Agreement, are and shall be deemed fully paid.
[SECTION 11.09. Rights of the Certificate Insurer.
---------------------------------
(a) The Certificate Insurer is an express third-party beneficiary of
this Agreement unless an Certificate Insurer Default exists.
(b) On each Distribution Date the Trustee shall forward to the
Certificate Insurer a copy of the reports furnished to the Class A
Certificateholders and the Seller on such Distribution Date.
(c) The Trustee shall provide to the Certificate Insurer copies of any
report, notice, Opinion of Counsel, Officer's Certificate, request for consent
or request for amendment to any document related hereto promptly upon the
Trustee's production or receipt thereof.
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(d) Unless an Certificate Insurer Default exists, the Trustee and the
Seller shall not agree to any amendment to this Agreement without first having
obtained the prior written consent of the Certificate Insurer, if such consent
is not unreasonably withheld.
(e) So long as there does not exist a failure by the Certificate
Insurer to make a required payment under the Policy, the Certificate Insurer
shall have the right to exercise all rights of the Holders of the Class A
Certificates under this Agreement without any consent of such Holders, and such
Holders may exercise such rights only with the prior written consent of the
Certificate Insurer, except as provided herein.]
105
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IN WITNESS WHEREOF, the Seller, the Servicer and the Trustee have
caused their names to be signed hereto by their respective officers thereunto
duly authorized all as of the __th day of ____________, 199_.
CHEVY CHASE BANK, F.S.B.,
as Seller and Servicer
By:
-------------------------------
Name:
Title:
[NAME OF TRUSTEE],
as Trustee
By:
-------------------------------
Name:
Title:
<PAGE>
STATE OF [__________] )
: ss.:
COUNTY OF [_________])
On this __th day of ____________, 199_, before me, personally appeared
[_____________], known to me to be a [______________] of [NAME OF TRUSTEE], the
national association that executed the within instrument, and also known to me
to be the person who executed it on behalf of said national association, and
acknowledged to me that such national association executed the within
instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year in this certificate first above written.
______________________________
Notary Public
[NOTARIAL SEAL]
<PAGE>
STATE OF [_______] )
: ss.:
COUNTY OF [_______] )
On the __th day of ___________, 199_, before me, personally appeared
[______________], known to me to be a [_____________] of CHEVY CHASE BANK
F.S.B., one of the corporations that executed the within instrument and also
known to me to be the person who executed it on behalf of said corporation, and
acknowledged to me that such corporation executed the within instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year in this certificate first above written.
------------------------------
Notary Public
[NOTARIAL SEAL]
<PAGE>
STATE OF [________] )
: ss.:
COUNTY OF [_______] )
On the __th day of _____, 199_, before me, a Notary Public in and for
said State, personally appeared [_____________], known to me to be a
[_____________] of Chevy Chase Bank, F.S.B., the federally chartered bank that
executed the within instrument and also known to me to be the person who
executed it on behalf of said bank, and acknowledged to me that such bank
executed the within instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year in this certificate first above written.
------------------------------
Notary Public
[NOTARIAL SEAL]
<PAGE>
EXHIBIT A
FORM OF CLASS [A-I] [A-II] CERTIFICATE
SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "REGULAR
INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT" AS THOSE TERMS ARE
DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE CODE.
THIS CERTIFICATE DOES NOT REPRESENT AN INTEREST IN OR OBLIGATION OF CHEVY CHASE
BANK, F.S.B. OR THE TRUSTEE REFERRED TO BELOW, OR OF ANY OF THEIR AFFILIATES.
THIS CERTIFICATE IS NOT GUARANTEED OR INSURED BY ANY GOVERNMENT AGENCY OR
INSTRUMENTALITY.
<PAGE>
CHEVY CHASE BANK HOME LOAN TRUST 199_-___
MORTGAGE-BACKED PASS-THROUGH CERTIFICATE
SERIES 199[_]-[____], CLASS [A-I] [A-II]
Evidencing an undivided interest in a Trust Fund whose assets consist of a pool
of adjustable-rate, conventional mortgage loans secured by first liens on one-
to four-family, residential real properties and certain other property held in
trust transferred by
CHEVY CHASE BANK HOME LOAN TRUST 1998_-____
CUSIP __________ $___________ INITIAL AGGREGATE
CLASS [A-I] [A-II]
CERTIFICATE PRINCIPAL
BALANCE
Certificate No. [A-I-__] [A-II-__] $___________ INITIAL CERTIFICATE
PRINCIPAL BALANCE OF
THIS CERTIFICATE
First Distribution Date: Scheduled Final
[____________], 199[_] Distribution Date:
[________], 20[__]
THIS CERTIFIES THAT CEDE & CO. is the registered owner of a beneficial
interest in the Trust Fund referred to below consisting of a pool of adjustable-
rate conventional mortgage loans secured by first liens on one- to four-family
residential real properties (the "Mortgage Loans") and certain other property
held in trust transferred to the Trust Fund by Chevy Chase Bank, F.S.B. (the
"Seller"), and certain related property. The Trust Fund was created pursuant to
the Pooling and Servicing Agreement, dated as of [___________], 199[_] (the
"Agreement"), among Chevy Chase Bank, F.S.B., as seller and servicer, [NAME OF
TRUSTEE], as trustee (the "Trustee", which term includes any successor entity
under the Agreement) and a summary of certain of the pertinent provisions of
which is set forth herein. This Certificate is issued under and is subject to
the terms, provisions and conditions of the Agreement, to which Agreement the
Holder of this Certificate by virtue of the acceptance hereof assents and by
which such Holder is bound.
This Certificate is one of a duly authorized issue of certificates by
the Chevy Chase Bank Home Loan Trust 199_-_ Mortgage-Backed Pass-Through
Certificates, Series 199_-____ (the "Certificates"), which is comprised of the
following [four] Classes: [Class A-I], [Class A-II], [Class S] and [Class R].
Reference is hereby made to the Agreement for a statement of the respective
rights thereunder of the Seller and the Trustee and the Holders of the
Certificates and the terms upon which the Certificates are authenticated and
delivered. This Certificate represents an interest in the Trust Fund, which
Trust Fund consists of, among other things, (i) the Mortgage Loans and all
distributions thereon payable after the Cut-off Date, net of certain amounts in
accordance with the provisions of the Agreement, (ii) REO Property, (iii) the
Certificate Account and the Custodial Account and all amounts deposited therein
pursuant to the applicable provisions of the Agreement, net of any
A-2
<PAGE>
investment earnings thereon, (iv) the interest of the Trust Fund in any
insurance policies with respect to the Mortgage Loans, (v) the interest of the
Trust Fund in the Policy issued for the benefit of the Holders of the Class A
Certificates, (vi) the rights of the Seller assigned to the Trustee pursuant to
Sections 2.01 and 3.01 of the Agreement, (vii) the Reserve Account and all
amounts deposited therein and (viii) all proceeds of the conversion, voluntary
or involuntary, of any of the foregoing into cash or other liquid property.
This Class [A-I] [A-II] Certificate represents a Percentage Interest
equal to the Initial Certificate Principal Balance of this Certificate divided
by the Initial Certificate Principal Balance of the Class [A-I] [A-II]
Certificates, both as set forth above.
The Trustee shall distribute from the Certificate Account, to the
extent of available funds, on the 25th day of each calendar month, or, if such
25th day is not a Business Day, the Business Day immediately following such 25th
day (each, a "Distribution Date"), commencing [__________], 199[_], to the
Person in whose name this Certificate is registered at the close of business on
the last Business Day of the month immediately preceding the month of such
distribution (each, a "Record Date"), a principal amount equal to the product of
the Percentage Interest evidenced by this Certificate and that portion of the
Available Distribution Amount that is allocated to principal on such Class of
Certificates on such Distribution Date.
Distributions of interest will be made on each Distribution Date, to
the extent of available funds, in an amount equal to the sum of (a) one month's
interest accrued at the per annum applicable Certificate Rate on the outstanding
Certificate Principal Balance of this Certificate as of the day immediately
prior to the related Distribution Date reduced by its pro rata portion of the
aggregate shortfalls of interest allocated to such Class of Certificates and (b)
the amount of any Class [A-I] [A-II] Cumulative Interest Shortfall Amount
payable on such Distribution Date.
Not later than each Distribution Date, the Trustee will send to each
Certificateholder a statement containing information relating to the Mortgage
Loans and payments made to Certificateholders.
Distributions on this Certificate will be made by the Trustee by check
mailed to the address of the Holder hereof entitled thereto at the address
appearing in the Certificate Register or, if such Holder holds one or more of
this Class of Certificates with an aggregate initial Certificate Principal
Balance of at least $2,500,000 or all of the Certificates of this Class, by wire
transfer in immediately available funds to the account of such Certificateholder
designated in writing to the Trustee at least five Business Days prior to the
applicable Record Date. Notwithstanding the above, the final distribution on
this Certificate will be made after due notice of the pendency of such final
distribution and only upon presentation and surrender of this Certificate at the
office or agency designated in such notice.
The Agreement permits, with certain exceptions as therein provided,
the amendment thereof and the modification of the rights and obligations of the
Seller and the Trustee and the rights of the Certificateholders under the
Agreement at any time by the Seller
A-3
<PAGE>
and the Trustee with the consent of the Holders of Certificates evidencing
Voting Rights aggregating not less than 66-2/3% of the Voting Rights of all the
Certificates; provided, however, that no such amendment may (i) reduce in any
manner the amount of, delay the timing of or change the manner in which payments
received on Mortgage Loans are required to be distributed in respect of any
Certificate without the consent of the Holder of such Certificate, (ii)
adversely affect in any material respect the interests of the Holders of a Class
of Certificates in a manner other than in (i) above without the consent of the
Holders of Certificates evidencing not less than 66-2/3% of the Voting Rights of
such Class and (iii) reduce the aforesaid percentages of Voting Rights, the
holders of which are required to consent to any such amendment, without the
consent of 100% of the Holders of Certificates of the Class affected thereby.
Any such consent by the Holder of this Certificate shall be conclusive and
binding on such Holder and upon all future Holders of this Certificate and of
any Certificate issued upon the transfer hereof or in exchange herefor or in
lieu hereof whether or not notation of such consent is made upon this
Certificate. The Agreement also permits the Seller and the Trustee to amend
certain terms and conditions set forth in the Agreement without the consent of
Holders of the Certificates. At any time that any of the Class A Certificates
are outstanding, 98% of all Voting Rights will be allocated to the Holders of
the Class A Certificates, in proportion to their then outstanding Certificate
Principal Balances, 1% of all Voting Rights will be allocated to the Holders of
the Class S Certificates and 1% of all Voting Rights will be allocated to the
Holders of the Class R Certificates.
As provided in the Agreement and subject to certain limitations
therein set forth, the transfer of this Certificate is registrable on the
Certificate Register upon surrender of this Certificate for registration of
transfer at the office or agency of the Trustee designated therefor, duly
endorsed by, or accompanied by a written instrument of transfer in a form
satisfactory to the Trustee duly executed by the Holder hereof or such Holder's
attorney duly authorized in writing, and thereupon one or more new Certificates
of the same Class and of authorized denominations, and for the same aggregate
interest in the Trust Fund will be issued to the designated transferee or
transferees.
The Class [A-I] [A-II] Certificates will be issued in fully registered
form in minimum denominations of $100,000 Certificate Principal Balance and in
integral multiples of $1,000 in excess of such amount; provided, however, that
one Certificate of each Class may be issued in such other amount as is required
so that the aggregate of each Class of Certificates equals its respective
aggregate Certificate Principal Balance. As provided in the Agreement and
subject to certain limitations therein set forth, this Certificate is
exchangeable for one or more new Certificates of the same Class and of
authorized denominations evidencing a like aggregate Certificate Principal
Balance, as requested by the Holder surrendering the same.
No service charge will be made for such registrations of transfers or
exchanges, but the Trustee may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith. The Trustee
and any agent of the Trustee may treat the person in whose name this Certificate
is registered as the owner hereof for all purposes, and neither the Trustee nor
any such agent thereof shall be affected by notice to the contrary.
A-4
<PAGE>
The obligations and responsibilities of the Seller and the Trustee
created by the Agreement will terminate upon the earlier of (a) the purchase by
the Holder of the Class R Certificates from the Trust Fund of all remaining
Mortgage Loans and all property acquired in respect of such Mortgage Loans,
thereby effecting early retirement of the Certificates, or (b) the maturity or
other liquidation (or any advance with respect thereto) of the last Mortgage
Loan remaining in the Trust Fund and the disposition of all property acquired
upon foreclosure or deed in lieu of foreclosure of any Mortgage Loan. As
provided in the Agreement, the right to purchase all Mortgage Loans pursuant to
clause (a) above shall be conditioned upon the unpaid Principal Balances of such
Mortgage Loans, at the time of any such repurchase, aggregating less than or
equal to 5% of the aggregate Principal Balances thereof as of the Cut-off Date.
Any term used herein that is defined in the Agreement shall have the
meaning assigned in the Agreement, and nothing herein shall be deemed
inconsistent with that meaning. If the terms hereof are inconsistent with the
Agreement, the Agreement shall control.
Unless the certificate of authentication hereon has been executed by
or on behalf of the Trustee by manual signature, this Certificate shall not be
entitled to any benefit under the Agreement or be valid or obligatory for any
purpose.
The recitals contained herein shall be taken as statements of the
Seller and not of the Trustee. The Trustee assumes no responsibility for the
correctness of the statements contained in this Certificate and makes no
representation as to the validity or sufficiency of the Agreement, this
Certificate, any Mortgage Loan or any related document.
A-5
<PAGE>
IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed under its corporate seal.
[NAME OF TRUSTEE], solely as Trustee
and not individually
By:
---------------------------
Authorized Officer
CERTIFICATE OF AUTHENTICATION
This is one of the Certificates referred to in the within-mentioned Agreement.
Date: ___________
[NAME OF TRUSTEE],
as Trustee
By:
-----------------------------
Authorized Officer
A-6
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED the undersigned hereby sell(s), assign(s) and
transfer(s) unto
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please print or typewrite name and address, including postal zip code, or
assignee) the undivided interest in the Trust Fund evidenced by the within
Certificate and hereby authorize(s) the transfer of registration of such
interest to the assignee on the Certificate Register.
I (we) further direct the Trustee to issue a new Certificate of the same
Class and of a like Initial Certificate Principal Balance and undivided interest
in the Trust Fund to the above-named assignee and to deliver such Certificate to
the following address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dated: _____________________
____________________________ _____________________________________
Social Security or Signature by or on behalf of assignor
other Tax Identification (signature must be signed as
No. of Assignee registered)
------------------------------
Signature Guaranteed
DISTRIBUTION INSTRUCTIONS
The assignee should include the following for the information of the
Master Servicer:
Distribution shall be made by check mailed to________________________
______________________________________________________________________________ ,
or if the aggregate initial Certificate Principal Balance of Certificates of
this Class held by the Holder is at least $2,500,000 or the Percentage Interest
within such Class is 100%, and the Trustee shall have received appropriate
wiring instructions in accordance with the Agreement, by wire transfer in
immediately available funds to ___________________________ the account of
_________________________, account number ____________________. This
information is provided by the assignee named above, or its agent.
A-7
<PAGE>
EXHIBIT B
FORM OF CLASS S CERTIFICATE
THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY
NOT BE RESOLD OR TRANSFERRED UNLESS IT IS REGISTERED PURSUANT TO SUCH ACT AND
LAWS OR IS SOLD OR TRANSFERRED IN TRANSACTIONS THAT ARE EXEMPT FROM REGISTRATION
UNDER SUCH ACT AND UNDER APPLICABLE STATE LAW AND IS TRANSFERRED IN ACCORDANCE
WITH THE PROVISIONS OF SECTION 6.02 OF THE AGREEMENT REFERRED TO HEREIN.
THE YIELD TO MATURITY ON THIS CERTIFICATE WILL BE EXTREMELY SENSITIVE TO THE
RATE AND TIMING OF PAYMENTS (INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS.
SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "REGULAR
INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT" AS THOSE TERMS ARE
DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE CODE.
THE FOLLOWING INFORMATION IS PROVIDED SOLELY FOR THE PURPOSES OF APPLYING THE
U.S. FEDERAL INCOME TAX ORIGINAL ISSUE DISCOUNT ("OID") RULES TO THIS
CERTIFICATE. THE ISSUE DATE OF THIS CERTIFICATE IS [_____________], 199[_].
ASSUMING THAT THE MORTGAGE LOANS PREPAY AT 100% SPA (AS DESCRIBED IN THE
PROSPECTUS SUPPLEMENT), AND ASSUMING A CONSTANT PASS-THROUGH RATE EQUAL TO THE
INITIAL CERTIFICATE RATE, THIS CERTIFICATE HAS BEEN ISSUED WITH NO MORE THAN
$_____ OF OID PER [$1,000] [$100,000] OF [INITIAL NOTIONAL AMOUNT], THE PRE-TAX
YIELD TO MATURITY IS ___% AND THE AMOUNT OF OID ATTRIBUTABLE TO THE INITIAL
ACCRUAL PERIOD IS NO MORE THAN $_______ PER [$1,000] [$100,000] OF [INITIAL
NOTIONAL AMOUNT], COMPUTED USING THE APPROXIMATE METHOD. NO REPRESENTATION IS
MADE THAT THE MORTGAGE LOANS WILL PREPAY AT A RATE BASED ON THE STANDARD
PREPAYMENT ASSUMPTION OR AT ANY OTHER RATE OR AS TO THE CONSTANCY OF THE
CERTIFICATE RATE.
THIS CERTIFICATE DOES NOT REPRESENT AN INTEREST IN OR OBLIGATION OF CREDIT
SUISSE FIRST BOSTON MORTGAGE SECURITIES CORP. OR THE TRUSTEE REFERRED TO BELOW,
OR OF ANY OF THEIR AFFILIATES. THIS CERTIFICATE IS NOT GUARANTEED OR INSURED BY
ANY GOVERNMENT AGENCY OR INSTRUMENTALITY.
NO TRANSFER OF THIS CERTIFICATE MAY BE MADE TO AN EMPLOYEE BENEFIT OR OTHER PLAN
SUBJECT TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED
("ERISA"), OR SECTION 4975 OF THE
B-1
<PAGE>
CODE UNLESS THE TRANSFEREE PROVIDES EITHER A CERTIFICATION PURSUANT TO SECTION
6.02(f) OF THE AGREEMENT OR AN OPINION OF COUNSEL SATISFACTORY TO THE Seller AND
THE TRUSTEE THAT THE PURCHASE OF THIS CERTIFICATE BY OR ON BEHALF OF SUCH PLAN
IS PERMISSIBLE UNDER APPLICABLE LAW AND WILL NOT CONSTITUTE OR RESULT IN A
NON-EXEMPT PROHITIED TRANSACTION UNDER SECTION 406 OF ERISA AND SECTION 4975 OF
THE CODE.
B-2
<PAGE>
CHEVY CHASE BANK HOME LOAN TRUST 199_-___
MORTGAGE-BACKED PASS-THROUGH CERTIFICATE
SERIES 199_-____, CLASS S
Evidencing an undivided interest in the interest portion of a Trust Fund whose
assets consist of a pool of adjustable-rate, conventional mortgage loans secured
by first liens on one- to four-family, residential real properties and certain
other property held in trust transferred by
CHEVY CHASE HOME LOAN TRUST 199_-____
$_____________ INITIAL AGGREGATE
NOTIONAL AMOUNT OF
CLASS S CERTIFICATES
Certificate No. S-__ 100% PERCENTAGE INTEREST
REPRESENTED BY THIS
CERTIFICATE
First Distribution Date: Scheduled Final
[_____] [__,] [____] Distribution Date:
[________________], [____]
THIS CERTIFIES THAT _______________________________________ is the
registered owner of a beneficial interest in the Trust Fund referred to below
consisting of a pool of adjustable-rate, conventional mortgage loans secured by
first liens on one- to four-family residential real properties (the "Mortgage
Loans") and certain other property held in trust transferred to the Trust Fund
by Chevy Chase Bank, F.S.B. (the "Seller"), and certain related property. The
Trust Fund was created pursuant to the Pooling and Servicing Agreement, dated as
of [___________], 199[__] (the "Agreement"), among the Chevy Chase Bank, F.S.B.,
[NAME OF TRUSTEE], as trustee (the "Trustee", which term includes any successor
entity under the Agreement) and Chevy Chase Bank, F.S.B., as seller and
servicer, a summary of certain of the pertinent provisions of which is set forth
herein. This Certificate is issued under and is subject to the terms,
provisions and conditions of the Agreement, to which Agreement the Holder of
this Certificate by virtue of the acceptance hereof assents and by which such
Holder is bound.
This Certificate is one of a duly authorized issue of certificates by
Chevy Chase Bank, F.S.B. designated as the Chevy Chase Home Loan Trust 199_-____
Mortgage-Backed Pass-Through Certificates, Series 199[_]-[___] (the
"Certificates"), which is comprised of the following [four] Classes: [Class A-
I], [Class A-II], [Class S] and [Class R]. Reference is hereby made to the
Agreement for a statement of the respective rights thereunder of the Seller and
the Trustee and the Holders of the Certificates and the terms upon which the
Certificates are authenticated and delivered. This Certificate represents an
interest in the Trust Fund, which Trust Fund consists of, among other things,
(i) the Mortgage Loans and all distributions thereon payable after the Cut-off
Date, net of certain amounts in accordance with the provisions of the Agreement,
(ii) REO Property, (iii) the
B-3
<PAGE>
Certificate Account and the Custodial Account and all amounts deposited therein
pursuant to the applicable provisions of the Agreement, net of any investment
earnings thereon, (iv) the interest of the Trust Fund in any insurance policies
with respect to the Mortgage Loans, (v) the interest of the Trust Fund in the
Policy issued for the benefit of the Holders of the Class A Certificates, (vi)
the rights of the Seller assigned to the Trustee pursuant to Sections 2.01 and
3.01 of the Agreement, (vii) the Reserve Account and all amounts deposited
therein and (viii) all proceeds of the conversion, voluntary or involuntary, of
any of the foregoing into cash or other liquid property.
This Class S Certificate represents the right to receive a portion of
interest with respect to the Mortgage Loans on a Distribution Date. This Class S
Certificate is not entitled to any distributions with respect to principal on
the Mortgage Loans in the Trust Fund. The Holder of this Class S Certificate
hereby acknowledges the grant of the security interest to the Trustee pursuant
to Section 2.01 of the Agreement.
The Trustee shall distribute from the Certificate Account, to the
extent of available funds, on the 25th day of each calendar month, or, if such
25th day is not a Business Day, the Business Day immediately following such 25th
day (the "Distribution Date"), commencing [____________], 199[_], to the Person
in whose name this Certificate is registered at the close of business on the
last Business Day of the month immediately preceding the month of such
distribution (each a "Record Date"), distributions of interest in an amount
equal to the Class S Interest Distribution Amount for such Distribution Date.
Not later than each Distribution Date, the Trustee will send to each
Certificateholder a statement containing information relating to the Mortgage
Loans and payments made to Certificateholders.
Distributions on this Certificate will be made by the Trustee by check
mailed to the address of the Holder hereof entitled thereto at the address
appearing in the Certificate Register or, if such Holder holds all of the
Certificates of this Class, by wire transfer in immediately available funds to
the account of such Certificateholder designated in writing to the Trustee at
least five Business Days prior to the applicable Record Date. Notwithstanding
the above, the final distribution on this Certificate will be made after due
notice of the pendency of such final distribution and only upon presentation and
surrender of this Certificate at the office or agency designated in such notice.
The Agreement permits, with certain exceptions as therein provided,
the amendment thereof and the modification of the rights and obligations of the
Seller and the Trustee and the rights of the Certificateholders under the
Agreement at any time by the Seller and the Trustee with the consent of the
Holders of Certificates evidencing Voting Rights aggregating not less than 66-
2/3% of the Voting Rights of all the Certificates; provided, however, that no
such amendment may (i) reduce in any manner the amount of, delay the timing of
or change the manner in which payments received on Mortgage Loans are required
to be distributed in respect of any Certificate without the consent of the
Holder of such Certificate, (ii) adversely affect in any material respect the
interests of the Holders of a Class of Certificates in a manner other than in
(i) above without the consent of the Holders of Certificates evidencing not less
than 66-2/3% of the Voting Rights of such Class and (iii)
B-4
<PAGE>
reduce the aforesaid percentages of Voting Rights, the holders of which are
required to consent to any such amendment, without the consent of 100% of the
Holders of Certificates of the Class affected thereby. Any such consent by the
Holder of this Certificate shall be conclusive and binding on such Holder and
upon all future Holders of this Certificate and of any Certificate issued upon
the transfer hereof or in exchange herefor or in lieu hereof whether or not
notation of such consent is made upon this Certificate. The Agreement also
permits the Seller and the Trustee to amend certain terms and conditions set
forth in the Agreement without the consent of Holders of the Certificates. At
any time that any of the Class A Certificates are outstanding, 98% of all Voting
Rights will be allocated to the Holders of the Class A certificates, in
proportion to their then outstanding Certificate Principal Balances, 1% of all
Voting Rights will be allocated to the Holders of the Class S Certificates and
1% of all Voting Rights will be allocated to the Holders of the Class R
Certificates.
As provided in the Agreement and subject to certain limitations
therein set forth, the transfer of this Certificate is registrable on the
Certificate Register upon surrender of this Certificate for registration of
transfer at the office or agency of the Trustee designated therefor, duly
endorsed by, or accompanied by a written instrument of transfer in a form
satisfactory to the Trustee duly executed by the Holder hereof or such Holder's
attorney duly authorized in writing, and thereupon one or more new Certificates
of the same Class and of authorized denominations, and for the same aggregate
interest in the Trust Fund will be issued to the designated transferee or
transferees.
The Class S Certificates will be issued in fully registered form in
minimum Percentage Interests of 20% and integral multiples thereof. As provided
in the Agreement and subject to certain limitations therein set forth, this
Certificate is exchangeable for one or more new Certificates of the same Class
and of authorized Percentage Interests evidencing a like aggregate Percentage
Interest, as requested by the Holder surrendering the same.
No service charge will be made for such registrations of transfers or
exchanges, but the Trustee may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith. The Trustee
and any agent of the Trustee may treat the person in whose name this Certificate
is registered as the owner hereof for all purposes, and neither the Trustee nor
any such agent thereof shall be affected by notice to the contrary.
The obligations and responsibilities of the Seller and the Trustee
created by the Agreement will terminate upon the earlier of (a) the purchase by
the Holder of the Class R Certificates from the Trust Fund of all remaining
Mortgage Loans and all property acquired in respect of such Mortgage Loans,
thereby effecting early retirement of the Certificates, or (b) the maturity or
other liquidation (or any advance with respect thereto) of the last Mortgage
Loan remaining in the Trust Fund and the disposition of all property acquired
upon foreclosure or deed in lieu of foreclosure of any Mortgage Loan. As
provided in the Agreement, the right to purchase all Mortgage Loans pursuant to
clause (a) above shall be conditioned upon the unpaid Principal Balances of such
Mortgage Loans, at the time of any such repurchase, aggregating less than or
equal to 5% of the aggregate Principal Balances thereof as of the Cut-off Date.
B-5
<PAGE>
Any term used herein that is defined in the Agreement shall have the
meaning assigned in the Agreement, and nothing herein shall be deemed
inconsistent with that meaning. If the terms hereof are inconsistent with the
Agreement, the Agreement shall control.
Unless the certificate of authentication hereon has been executed by
or on behalf of the Trustee by manual signature, this Certificate shall not be
entitled to any benefit under the Agreement or be valid or obligatory for any
purpose.
The recitals contained herein shall be taken as statements of the
Seller and not of the Trustee. The Trustee assumes no responsibility for the
correctness of the statements contained in this Certificate and makes no
representation as to the validity or sufficiency of the Agreement, this
Certificate, any Mortgage Loan or any related document.
B-6
<PAGE>
IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed under its corporate seal.
[NAME OF TRUSTEE], solely as
Trustee and not individually
By:
-----------------------------
Authorized Officer
CERTIFICATE OF AUTHENTICATION
This is one of the Certificates referred to in the within-mentioned Agreement.
Date:
-----------------
[NAME OF TRUSTEE],
as Trustee
By:
-----------------------------
Authorized Officer
B-7
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED the undersigned hereby sell(s), assign(s) and
transfer(s) unto
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please print or typewrite name and address, including postal zip code, or
assignee) the undivided interest in the Trust Fund evidenced by the within
Certificate and hereby authorize(s) the transfer of registration of such
interest to the assignee on the Certificate Register.
I (we) further direct the Trustee to issue a new Certificate of the same
Class and of a like Percentage Interest and undivided interest in the Trust Fund
to the above-named assignee and to deliver such Certificate to the following
address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dated:
------------------
- ------------------------ -------------------------------------
Social Security or Signature by or on behalf of assignor
other Tax Identification (signature must be signed as registered)
No. of Assignee
------------------------------------
Signature Guaranteed
DISTRIBUTION INSTRUCTIONS
The assignee should include the following for the information of the
Master Servicer:
Distribution shall be made by check mailed to
------------------------
- -------------------------------------------------------------------------------,
or if the Percentage Interest within such Class is 100%, and the Trustee shall
have received appropriate wiring instructions in accordance with the Agreement,
by wire transfer in immediately available funds to __________________________
the account of _________________________, account number ____________________.
This information is provided by the assignee named above, or its agent.
B-8
<PAGE>
EXHIBIT C
FORM OF CLASS R CERTIFICATE
THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY
NOT BE RESOLD OR TRANSFERRED UNLESS IT IS REGISTERED PURSUANT TO SUCH ACT AND
LAWS OR IS SOLD OR TRANSFERRED IN TRANSACTIONS THAT ARE EXEMPT FROM REGISTRATION
UNDER SUCH ACT AND UNDER APPLICABLE STATE LAW AND IS TRANSFERRED IN ACCORDANCE
WITH THE PROVISIONS OF SECTION 6.02 OF THE AGREEMENT REFERRED TO HEREIN.
SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "RESIDUAL
INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT" AS THOSE TERMS ARE
DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE OF
1986 (THE "CODE"). THIS CERTIFICATE MAY NOT BE TRANSFERRED TO A NON-UNITED
STATES PERSON.
THIS CERTIFICATE DOES NOT REPRESENT AN INTEREST IN OR OBLIGATION OF CREDIT
SUISSE FIRST BOSTON MORTGAGE SECURITIES CORP. OR THE TRUSTEE REFERRED TO BELOW,
OR OF ANY OF THEIR AFFILIATES. THIS CERTIFICATE IS NOT GUARANTEED OR INSURED BY
ANY GOVERNMENT AGENCY OR INSTRUMENTALITY.
ANY SALE, TRANSFER OR OTHER DISPOSITION OF THIS CLASS R CERTIFICATE MAY BE MADE
ONLY IF THE PROPOSED TRANSFEREE PROVIDES A TRANSFER AFFIDAVIT TO THE TRUSTEE TO
THE EFFECT THAT (1) SUCH TRANSFEREE AGREES TO BE BOUND BY THE TERMS OF THE
AGREEMENT AND ALL RESTRICTIONS SET FORTH ON THE FACE HEREOF, (2) SUCH TRANSFEREE
IS NOT EITHER (A) THE UNITED STATES, ANY STATE OR POLITICAL SUBDIVISION THEREOF,
ANY FOREIGN GOVERNMENT, ANY INTERNATIONAL ORGANIZATION, OR ANY AGENCY OR
INSTRUMENTALITY OF ANY OF THE FOREGOING, (B) ANY ORGANIZATION (OTHER THAN A
COOPERATIVE DESCRIBED IN SECTION 521 OF THE CODE) WHICH IS EXEMPT FROM THE TAX
IMPOSED BY CHAPTER 1 OF THE CODE UNLESS SUCH ORGANIZATION IS SUBJECT TO THE TAX
IMPOSED BY SECTION 511 OF THE CODE, (C) AN ELECTING LARGE PARTNERSHIP UNDER
SECTION 775 OF THE CODE OR ANY ORGANIZATION DESCRIBED IN SECTION 1381(a)(2)(C)
OF THE CODE, (ANY SUCH PERSON DESCRIBED IN THE FOREGOING CLAUSES (A), (B) OR (C)
BEING HEREINAFTER REFERRED TO AS A "DISQUALIFIED ORGANIZATION") OR (D) AN AGENT
OF A DISQUALIFIED ORGANIZATION, AND (3) NO PURPOSE OF SUCH TRANSFER IS TO ENABLE
THE TRANSFEROR TO IMPEDE THE ASSESSMENT OR COLLECTION OF TAX. SUCH AFFIDAVIT
SHALL INCLUDE CERTAIN REPRESENTATIONS AS TO THE FINANCIAL CONDITION OF THE
PROPOSED TRANSFEREE.
C-1
<PAGE>
NO TRANSFER OF THIS CERTIFICATE MAY BE MADE TO AN EMPLOYEE BENEFIT OR OTHER PLAN
SUBJECT TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED
("ERISA"), OR SECTION 4975 OF THE CODE UNLESS THE TRANSFEREE PROVIDES AN OPINION
OF COUNSEL SATISFACTORY TO THE Seller AND THE TRUSTEE THAT THE PURCHASE OF THIS
CERTIFICATE BY OR ON BEHALF OF SUCH PLAN IS PERMISSIBLE UNDER APPLICABLE LAW AND
WILL NOT CONSTITUTE OR RESULT IN A NON-EXEMPT PROHIBITED TRANSACTION UNDER
SECTION 406 OF ERISA AND SECTION 4975 OF THE CODE.
C-2
<PAGE>
CHEVY CHASE BANK HOME LOAN TRUST 199_-____
MORTGAGE-BACKED PASS-THROUGH CERTIFICATE
SERIES 199_-____, CLASS R
Evidencing an undivided interest in a Trust Fund whose assets consist of a pool
of adjustable-rate, conventional mortgage loans secured by first liens on one-
to four-family, residential real properties and certain other property held in
trust transferred by
CHEVY CHASE HOME LOAN TRUST 199_-____
Certificate No. R-_ 100% PERCENTAGE INTEREST
REPRESENTED BY
THIS CERTIFICATE
First Distribution Date: Scheduled Final
[___________], 199[_] Distribution Date:
[________________]
THIS CERTIFIES THAT _______________________________________ is the
registered owner of a beneficial interest in the Trust Fund referred to below
consisting of a pool of adjustable-rate conventional mortgage loans secured by
first liens on one- to four-family residential real properties (the "Mortgage
Loans") and certain other property held in trust transferred to the Trust Fund
by Chevy Chase Bank F.S.B. (the "Seller"), and certain related property. The
Trust Fund was created pursuant to the Pooling and Servicing Agreement, dated as
of [___________], 199[_] (the "Agreement"), among the [NAME OF TRUSTEE], as
trustee (the "Trustee", which term includes any successor entity under the
Agreement) and Chevy Chase Bank, F.S.B., as seller and servicer, a summary of
certain of the pertinent provisions of which is set forth herein. This
Certificate is issued under and is subject to the terms, provisions and
conditions of the Agreement, to which Agreement the Holder of this Certificate
by virtue of the acceptance hereof assents and by which such Holder is bound.
This Certificate is one of a duly authorized issue of certificates by
Chevy Chase Bank, F.S.B. designated as the Chevy Chase Home Loan Trust 199_-___
Mortgage-Backed Pass-Through Certificates, Series 199[_]-[___] (the
"Certificates"), which is comprised of the following [four] Classes: [Class A-
I], [Class A-II], [Class S] and [Class R]. Reference is hereby made to the
Agreement for a statement of the respective rights thereunder of the Seller and
the Trustee and the Holders of the Certificates and the terms upon which the
Certificates are authenticated and delivered. This Certificate represents an
interest in the Trust Fund, which Trust Fund consists of, among other things,
(i) the Mortgage Loans and all distributions thereon payable after the Cut-off
Date, net of certain amounts in accordance with the provisions of the Agreement,
(ii) REO Property, (iii) the Certificate Account and the Custodial Account and
all amounts deposited therein pursuant to the applicable provisions of the
Agreement, net of any investment earnings thereon, (iv) the interest of the
Trust Fund in any insurance policies with respect to the Mortgage Loans, (v)
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the interest of the Trust Fund in the Policy issued for the benefit of the
Holders of the Class A Certificates, (vi) the rights of the Seller assigned to
the Trustee pursuant to Sections 2.01 and 3.01 of the Agreement, (vii) the
Reserve Account and all amounts deposited therein and (viii) all proceeds of the
conversion, voluntary or involuntary, of any of the foregoing into cash or other
liquid property.
This Class R Certificate is not entitled to any distributions with
respect to principal or interest on the Mortgage Loans in the Trust Fund.
Not later than each Distribution Date, the Trustee will send to each
Certificateholder a statement containing information relating to the Mortgage
Loans and payments made to Certificateholders.
The Agreement permits, with certain exceptions as therein provided,
the amendment thereof and the modification of the rights and obligations of the
Seller and the Trustee and the rights of the Certificateholders under the
Agreement at any time by the Seller and the Trustee with the consent of the
Holders of Certificates evidencing Voting Rights aggregating not less than
66-2/3% of the Voting Rights of all the Certificates; provided, however, that no
such amendment may (i) reduce in any manner the amount of, delay the timing of
or change the manner in which payments received on Mortgage Loans are required
to be distributed in respect of any Certificate without the consent of the
Holder of such Certificate, (ii) adversely affect in any material respect the
interests of the Holders of a Class of Certificates in a manner other than in
(i) above without the consent of the Holders of Certificates evidencing not less
than 66-2/3% of the Voting Rights of such Class or (iii) reduce the aforesaid
percentages of Voting Rights, the holders of which are required to consent to
any such amendment, without the consent of 100% of the Holders of Certificates
of the Class affected thereby. Any such consent by the Holder of this
Certificate shall be conclusive and binding on such Holder and upon all future
Holders of this Certificate and of any Certificate issued upon the transfer
hereof or in exchange herefor or in lieu hereof whether or not notation of such
consent is made upon this Certificate. The Agreement also permits the Seller
and the Trustee to amend certain terms and conditions set forth in the Agreement
without the consent of Holders of the Certificates. At any time that any of the
Class A Certificates are outstanding, 98% of all Voting Rights will be allocated
among the Holders of the Class A, in proportion to their then outstanding
Certificate Principal Balances, 1% of all Voting Rights will be allocated to the
Holders of the Class S Certificates and 1% of all Voting Rights will be
allocated to the Holders of the Class R Certificates.
As provided in the Agreement and subject to certain limitations
therein set forth, the transfer of this Certificate is registrable on the
Certificate Register upon surrender of this Certificate for registration of
transfer at the office or agency of the Trustee designated therefor, duly
endorsed by, or accompanied by a written instrument of transfer in a form
satisfactory to the Trustee duly executed by the Holder hereof or such Holder's
attorney duly authorized in writing, and thereupon one or more new Certificates
of the same Class and of authorized denominations, and for the same aggregate
interest in the Trust Fund will be issued to the designated transferee or
transferees.
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The Class R Certificates will be issued in fully registered form in
minimum Percentage Interests of 20% and integral multiples thereof. As provided
in the Agreement and subject to certain limitations therein set forth, this
Certificate is exchangeable for one or more new Certificates of the same Class
and of authorized Percentage Interests evidencing a like aggregate Percentage
Interest, as requested by the Holder surrendering the same.
No service charge will be made for such registrations of transfers or
exchanges, but the Trustee may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith. The Trustee
and any agent of the Trustee may treat the person in whose name this Certificate
is registered as the owner hereof for all purposes, and neither the Trustee nor
any such agent thereof shall be affected by notice to the contrary.
Pursuant to the Agreement, the Seller will make an election to treat
the Trust REMIC as a real estate mortgage investment conduit (a "REMIC") for
federal income tax purposes. The Class R Certificates will be the "residual
interest" in the Trust REMIC, and all other Classes of Certificates will
constitute the "regular interests" in the Trust REMIC.
The obligations and responsibilities of the Seller and the Trustee
created by the Agreement will terminate upon the earlier of (a) the purchase by
the Holder of the Class R Certificates from the Trust Fund of all remaining
Mortgage Loans and all property acquired in respect of such Mortgage Loans,
thereby effecting early retirement of the Certificates, or (b) the maturity or
other liquidation (or any advance with respect thereto) of the last Mortgage
Loan remaining in the Trust Fund and the disposition of all property acquired
upon foreclosure or deed in lieu of foreclosure of any Mortgage Loan. As
provided in the Agreement, the right to purchase all Mortgage Loans pursuant to
clause (a) above shall be conditioned upon the unpaid Principal Balances of such
Mortgage Loans, at the time of any such repurchase, aggregating less than or
equal to 5% of the aggregate Principal Balances thereof as of the Cut-off Date.
Any term used herein that is defined in the Agreement shall have the
meaning assigned in the Agreement, and nothing herein shall be deemed
inconsistent with that meaning. If the terms hereof are inconsistent with the
Agreement, the Agreement shall control.
Unless the certificate of authentication hereon has been executed by
or on behalf of the Trustee by manual signature, this Certificate shall not be
entitled to any benefit under the Agreement or be valid or obligatory for any
purpose.
The recitals contained herein shall be taken as statements of the
Seller and not of the Trustee. The Trustee assumes no responsibility for the
correctness of the statements contained in this Certificate and makes no
representation as to the validity or sufficiency of the Agreement, this
Certificate, any Mortgage Loan or any related document.
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<PAGE>
IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed under its corporate seal.
[NAME OF TRUSTEE], solely as
Trustee and not individually
By:
-----------------------------
Authorized Officer
CERTIFICATE OF AUTHENTICATION
This is one of the Certificates referred to in the within-mentioned Agreement.
Date:
--------------
[NAME OF TRUSTEE],
as Trustee
By:
-----------------------------
Authorized Officer
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<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED the undersigned hereby sell(s), assign(s) and
transfer(s) unto
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please print or typewrite name and address, including postal zip code, or
assignee) the undivided interest in the Trust Fund evidenced by the within
Certificate and hereby authorize(s) the transfer of registration of such
interest to the assignee on the Certificate Register.
I (we) further direct the Trustee to issue a new Certificate of the same
Class and of a like Percentage Interest and undivided interest in the Trust Fund
to the above-named assignee and to deliver such Certificate to the following
address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dated:
------------------------
- ------------------------------ ----------------------------------------
Social Security or Signature by or on behalf of assignor
other Tax Identification (signature must be signed as registered)
No. of Assignee
----------------------------------------
Signature Guaranteed
DISTRIBUTION INSTRUCTIONS
The assignee should include the following for the information of the
Master Servicer:
Distribution shall be made by check mailed to
------------------------
- -------------------------------------------------------------------------------,
or if the Percentage Interest within such Class is 100%, and the Trustee shall
have received appropriate wiring instructions in accordance with the Agreement,
by wire transfer in immediately available funds to __________________________
the account of _________________________, account number ____________________.
This information is provided by the assignee named above, or its agent.
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<PAGE>
EXHIBIT D
SCHEDULE OF MORTGAGE LOANS
D-1
<PAGE>
EXHIBIT E
FORM OF INITIAL CERTIFICATION OF TRUSTEE
[________], 199[_]
Chevy Chase Bank, F.S.B.
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
Re: Pooling and Servicing Agreement ("Pooling and Servicing Agreement")
relating to Chevy Chase Home Loan Trust 199_-____ Mortgage-Backed
Pass-Through Certificates, Series 199[_]-[____]
Ladies and Gentlemen:
In accordance with and subject to the provisions of Section 2.02 of
the Pooling and Servicing Agreement, the undersigned, as Trustee, hereby
certifies that, except for the exceptions noted on the schedule attached hereto,
it has (a) received an original Mortgage Note with respect to each Mortgage Loan
listed on the Mortgage Loan Schedule and (b) received an original Mortgage (or a
certified copy thereof) with respect to each Mortgage Loan listed on the
Mortgage Loan Schedule in accordance with Section 2.01 of the Pooling and
Servicing Agreement. The Trustee has made no independent examination of any
documents contained in each Mortgage File beyond the review specifically
mentioned above. The Trustee makes no representations as to: (i) the validity,
legality, sufficiency, enforceability or genuineness of any of the documents
delivered in accordance with Section 2.01 of the Pooling and Servicing Agreement
or any of the Mortgage Loans identified in the Mortgage Loan Schedule, or (ii)
the collectibility, insurability, effectiveness or suitability of any such
Mortgage Loan.
The Trustee acknowledges receipt of notice that the Seller has granted
to the Trustee for the benefit of the Certificateholders a security interest in
all of the Seller's right, title and interest in and to the Mortgage Loans.
Capitalized terms used herein without definition shall have the
meaning assigned to them in the Pooling and Servicing Agreement.
[NAME OF TRUSTEE],
as Trustee
By:
----------------------------------------
Authorized Representative
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EXHIBIT F
FORM OF FINAL CERTIFICATION OF TRUSTEE
[date]
Chevy Chase Bank, F.S.B.
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
Re: Pooling and Servicing Agreement ("Pooling and Servicing Agreement")
relating to Chevy Chase Home Loan Trust 199_-____ Mortgage-Backed
Pass-Through Certificates, Series 199_-____
Ladies and Gentlemen:
In accordance with and subject to the provisions of Section 2.02 of the
above-referenced Pooling and Servicing Agreement the undersigned, as Trustee,
hereby certifies that, except for the exceptions noted on the schedule attached
hereto, as to each Mortgage Loan listed in the Mortgage Loan Schedule it has
reviewed the Mortgage File and has determined that (based solely on its review
of each such documents on its face) (i) all documents described in clauses (i)-
(v) of Section 2.01 of the Pooling and Servicing Agreement are in its
possession, (ii) such documents have been reviewed by it and have not been
mutilated, damaged, defaced, torn or otherwise physically altered and such
documents relate to such Mortgage Loan and (iii) each Mortgage Note has been
endorsed and each assignment of Mortgage has been delivered as provided in
Section 2.01 of the Pooling and Servicing Agreement. The Trustee has made no
independent examination of any documents required to be delivered in accordance
with Section 2.01 of the Pooling and Servicing Agreement beyond the review
specifically required therein. The Trustee makes no representations as to: (i)
the validity, legality, sufficiency, enforceability or genuineness of any of the
documents required to be delivered in accordance with Section 2.01 of the
Pooling and Servicing Agreement or any of the Mortgage Loans identified on the
Mortgage Loan Schedule, or (ii) the collectibility, insurability, effectiveness
or suitability of any such Mortgage Loan.
Capitalized terms used herein without definition have the meanings ascribed
to them in the Pooling and Servicing Agreement.
[NAME OF TRUSTEE],
as Trustee
By:
------------------------------------
Authorized Representative
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EXHIBIT G
FORM OF REQUEST FOR RELEASE
[date]
To:
In connection with the administration of the Mortgage Loans held by
you as Trustee under the Pooling and Servicing Agreement dated as of [_______],
199[_], between Credit Suisse First Boston Mortgage Securities Corp., as Seller,
and you, as Trustee (the "Pooling and Servicing Agreement"), the undersigned
hereby requests a release of the Mortgage File held by you as Trustee with
respect to the following described Mortgage Loan for the reason indicated below.
Mortgagor's Name:
Address:
Loan No.:
Reason for requesting file:
1. Mortgage Loan paid in full.
---- (The Servicer hereby certifies that all amounts received in
connection with the Mortgage Loan have been or will be credited
to the Certificate Account pursuant to the Pooling and Servicing
Agreement.)
2. Mortgage Loan repurchased.
---- (The Servicer hereby certifies that the Purchase Price has been
credited to the Certificate Account pursuant to the Pooling and
Servicing Agreement.)
3. The Mortgage Loan is being foreclosed.
----
4. Other. (Describe)
----
The undersigned acknowledges that the above Mortgage File will be
held by the undersigned in accordance with the provisions of the Pooling and
Servicing Agreement and will be returned, except if the Mortgage Loan has been
paid in full or repurchased (in which case the Mortgage File will be retained
by us permanently) when no longer required by us for such purpose.
Capitalized terms used herein shall have the meanings ascribed to
them in the Pooling and Servicing Agreement.
G-1
<PAGE>
[SERVICER]
By:
---------------------------------
Name:
Title:
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<PAGE>
EXHIBIT H
FORM OF INVESTOR REPRESENTATION LETTER
[date]
Chevy Chase Bank, F.S.B.
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
[NAME OF TRUSTEE]
[ADDRESS OF TRUSTEE]
Re: Chevy Chase Home Loan Trust 199_-____ Mortgage-Backed Pass-Through
Certificates, Series 199[_]-[____]
Ladies and Gentlemen:
[_______________________] (the "Purchaser") intends to purchase from
[_______________________] (the "Seller") the Chevy Chase Home Loan Trust 199_-
____ Mortgage-Backed Pass-Through Certificates, Series 199[_]-[____] [Class S]
[Class R] (together, the "Certificates"), issued pursuant to the Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement"), dated as of
[_________], 199[_] among Chevy Chase Bank, F.S.B., as seller and servicer, and
[NAME OF TRUSTEE], as trustee (the "Trustee"). All terms used herein and not
otherwise defined shall have the meanings set forth in the Pooling and Servicing
Agreement. The Purchaser hereby certifies, represents and warrants to, and
covenants with, the Company and the Trustee that:
1. The Purchaser understands that (a) the Certificates have not been
and will not be registered or qualified under the Securities Act of 1933,
as amended (the "Act") or any state securities law, (b) the Company is not
required to so register or qualify the Certificates, (c) the Certificates
may be resold only if registered and qualified pursuant to the provisions
of the Act or any state securities law, or if an exemption from such
registration and qualification is available, (d) the Pooling and Servicing
Agreement contains restrictions regarding the transfer of the Certificates
and (e) the Certificates will bear a legend to the foregoing effect.
2. The Purchaser is acquiring the Certificates for its own account
for investment only and not with a view to or for sale in connection with
any distribution thereof in any manner that would violate the Act or any
applicable state securities laws.
3. The Purchaser is (a) a substantial, sophisticated institutional
investor having such knowledge and experience in financial and business
matters, and, in particular, in such matters related to securities similar
to the Certificates, such that it is capable of evaluating the merits and
risks of investment in the Certificates, (b) able to
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<PAGE>
bear the economic risks of such an investment and (c) an "accredited
investor" within the meaning of Rule 501(a) promulgated pursuant to the
Act.
4. The Purchaser has been furnished with, and has had an opportunity
to review (a) a copy of the Pooling and Servicing Agreement and (b) such
other information concerning the Certificates, the Mortgage Loans and the
Company as has been requested by the Purchaser from the Company or the
Seller and is relevant to the Purchaser's decision to purchase the
Certificates. The Purchaser has had any questions arising from such review
answered by the Company or the Seller to the satisfaction of the Purchaser.
5. The Purchaser has not and will not nor has it authorized or will
it authorize any person to (a) offer, pledge, sell, dispose of or otherwise
transfer any Certificate, any interest in any Certificate or any other
similar security to any person in any manner, (b) solicit any offer to buy
or to accept a pledge, disposition of other transfer of any Certificate,
any interest in any Certificate or any other similar security from any
person in any manner, (c) otherwise approach or negotiate with respect to
any Certificate, any interest in any Certificate or any other similar
security with any person in any manner, (d) make any general solicitation
by means of general advertising or in any other manner or (e) take any
other action, that (as to any of (a) through (e) above) would constitute a
distribution of any Certificate under the Act, that would render the
disposition of any Certificate a violation of Section 5 of the Act or any
state securities law, or that would require registration or qualification
pursuant thereto. The Purchaser will not sell or otherwise transfer any of
the Certificates, except in compliance with the provisions of the Pooling
and Servicing Agreement.
6. The Purchaser
(a) is not an employee benefit or other plan subject to the
prohibited transaction provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or Section 4975 of the
Internal Revenue Code of 1986, as amended (the "Code") (a "Plan"), or
any other person (including an investment manager, a named fiduciary
or a trustee of any Plan) acting, directly or indirectly, on behalf of
or purchasing any Certificate with "plan assets" of any Plan; or
(b) is buying Class S Certificates, is an insurance company,
the source of funds to be used by it to purchase the Class S
Certificates is an "insurance company general account" (within the
meaning of Department of Labor Prohibited Transaction Class Exemption
("PTCE") 95-60), and the purchase is being made in reliance upon the
availability of the exemptive relief afforded under Sections I and III
of PTCE 95-60.
H-2
<PAGE>
Very truly yours,
[Purchaser]
By:
--------------------------------
Name:
Title:
H-3
<PAGE>
EXHIBIT I
FORM OF TRANSFEROR REPRESENTATION LETTER
[date]
Chevy Chase Bank, F.S.B.
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
[NAME OF TRUSTEE]
[ADDRESS OF TRUSTEE]
Re: Chevy Chase Home Loan Trust 199_-____ Mortgage-Backed Pass-Through
Certificates, Series 1998-CCB1
Ladies and Gentlemen:
In connection with the sale by [_______________________] (the "Seller") to
[_______________________] (the "Purchaser") the Chevy Chase Home Loan Trust
199_-____ Mortgage-Backed Pass-Through Certificates, Series 199[_]-[____] [Class
S] [Class R] (together, the "Certificates"), issued pursuant to the Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement"), dated as of
[____________], 199[_] among Chevy Chase Bank, F.S.B., as seller and servicer,
and [NAME OF TRUSTEE], as trustee (the "Trustee"), the Seller hereby certifies,
represents and warrants to, and covenants with, the Company and the Trustee
that:
Neither the Seller nor anyone acting on its behalf has (a) offered,
pledged, sold, disposed of or otherwise transferred any Certificate, any
interest in any Certificate or any other similar security to any person in any
manner, (b) has solicited any offer to buy or to accept a pledge, disposition or
other transfer of any Certificate, any interest in any Certificate or any other
similar security from any person in any manner, (c) has otherwise approached or
negotiated with respect to any Certificate, any interest in any Certificate or
any other similar security with any person in any manner, (d) has made any
general solicitation by means of general advertising or in any other manner, or
(e) has taken any other action, that (as to any of (a) through (e) above) would
constitute a distribution of the Certificates under the Securities Act of 1933
(the "Act"), that would render the disposition of any Certificate a violation of
Section 5 of the Act or any state securities law, or that would require
registration or qualification pursuant thereto. The Seller will not act, in any
manner set forth in the foregoing sentence with respect to any Certificate. The
Seller has not and will not sell or otherwise transfer any of the Certificates,
except in compliance with the provisions of the Pooling and Servicing Agreement.
I-1
<PAGE>
Very truly yours,
[Seller]
By:
-------------------------------
Name:
Title:
I-2
<PAGE>
EXHIBIT J
FORM OF INVESTOR TRANSFER AFFIDAVIT AND AGREEMENT
STATE OF )
: ss.:
COUNTY OF )
[NAME OF OFFICER], being first duly sworn, deposes and says:
1. That he is [Title of Officer] or [Name of Owner] (record or
beneficial owner (the "Owner") of the Class R Certificates (the "Class R
Certificates")), a [savings institution] [corporation] duly organized and
existing under the laws of [the State of ____________________] [the United
States], on behalf of which he makes this affidavit and agreement.
2. That the Owner (i) is not and will not be a "disqualified
organization" as of [date of transfer] within the meaning of Section 860E(e)(5)
of the Internal Revenue Code of 1986, as amended (the "Code"), (ii) will
endeavor to remain other than a disqualified organization for so long as it
retains its ownership interest in the Class R Certificates, and (iii) is
acquiring the Class R Certificates for its own account or for the account of
another Owner from which it has received an affidavit and agreement in
substantially the same form as this affidavit and agreement. A "Permitted
Transferee" is any person other than a "disqualified organization". (For this
purpose, a "disqualified organization" means the United States, any state or
political subdivision thereof, any agency or instrumentality of any of the
foregoing (other than an instrumentality all of the activities of which are
subject to tax and, except for the Federal Home Loan Mortgage Corporation, a
majority of whose board of directors is not selected by any such governmental
entity) or any foreign government, international organization or any agency or
instrumentality of such foreign government or organization, any electing large
partnership under Section 775 of the Code or any rural electric or telephone
cooperative, or any organization (other than certain farmers' cooperatives) that
is generally exempt from federal income tax unless such organization is subject
to the tax on unrelated business taxable income).
3. That the Owner is aware (i) of the tax that would be imposed on
transfers of Class R Certificates to disqualified organizations under the Code;
(ii) that such tax would be on the transferor (or, with respect to electing
large partnerships, on such partnership), or, if such transfer is through an
agent (which person includes a broker, nominee or middleman) for a non-Permitted
Transferee, on the agent; (iii) that the person (other than with transfers with
respect to electing large partnerships) otherwise liable for the tax shall be
relieved of liability for the tax if the transferee furnishes to such person an
affidavit that the transferee is a Permitted Transferee and, at the time of
transfer, such person does not have actual knowledge that the affidavit is
false; and (iv) that the Class R Certificates may be "noneconomic residual
interests" within the meaning of Treasury regulations promulgated pursuant to
the Code and that the transferor of a noneconomic residual interest will remain
liable for any taxes due with respect to the income on such residual interest,
if a significant
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<PAGE>
purpose of the transfer was to enable the transferor to impede the assessment
or collection of tax.
4. That the Owner is aware of the tax imposed on a "pass-through
entity" holding Class R Certificates if at any time during the taxable year of
the pass-through entity a non-Permitted Transferee is the record holder of an
interest in such entity. (For this purpose, a "pass through entity" includes a
regulated investment company, a real estate investment trust or common trust
fund, a partnership, trust or estate, and certain cooperatives.)
5. That the Owner is aware that the Trustee will not register the
Transfer of any Class R Certificates unless the transferee, or the transferee's
agent, delivers to it an affidavit and agreement, among other things, in
substantially the same form as this affidavit and agreement. The Owner
expressly agrees that it will not consummate any such transfer if it knows or
believes that any of the representations contained in such affidavit and
agreement are false.
6. That the Owner has reviewed the restrictions set forth on the
face of the Class R Certificates and the provisions of Section 6.02 of the
Pooling and Servicing Agreement under which the Class R Certificates were
issued. The Owner expressly agrees to be bound by and to comply with such
restrictions and provisions.
7. That the Owner consents to any additional restrictions or
arrangements that shall be deemed necessary upon advice of counsel to constitute
a reasonable arrangement to ensure that the Class R Certificates will only be
owned, directly or indirectly, by an Owner that is a Permitted Transferee.
8. That the Owner's Taxpayer Identification Number is
______________.
9. That the Owner is 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 or any political subdivision thereof, or an estate or
trust whose income from sources without the United States is includable in gross
income for United States federal income tax purposes regardless of its
connection with the conduct of a trade or business within the United States.
10. That no purpose of the Owner relating to the purchase of the
Class R Certificate by the Owner is or will be to impede the assessment or
collection of tax.
11. That the Owner has no present knowledge or expectation that it
will be unable to pay any United States taxes owed by it so long as any of the
Certificates remain outstanding.
12. That the Owner has no present knowledge or expectation that it
will become insolvent or subject to a bankruptcy proceeding for so long as any
of the Certificates remain outstanding.
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<PAGE>
13. That no purpose of the Owner relating to any sale of the Class R
Certificate by the Owner will be to impede the assessment or collection of tax.
14. The Owner hereby agrees to cooperate with the Trustee and to take
any action required of it by the Code or Treasury regulations thereunder
(whether now or hereafter promulgated) in order to create or maintain the REMIC
status of the Trust Fund.
15. The Owner hereby agrees that it will not take any action that
could endanger the REMIC status of the Trust Fund or result in the imposition of
tax on the Trust Fund unless counsel for, or acceptable to, the Trustee has
provided an opinion that such action will not result in the loss of such REMIC
status or the imposition of such tax, as applicable.
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<PAGE>
IN WITNESS WHEREOF, the Owner has caused this instrument to be
executed on its behalf, pursuant to the authority of its Board of Directors, by
its [Title of Officer] and its corporate seal to be hereunto attached, attested
by its [Assistant] Secretary, this ____ day of _________________.
[NAME OF OWNER]
By:
------------------------------
[Name of Officer]
[Title of Officer]
[Corporate Seal]
ATTEST:
______________________________
[Assistant] Secretary
Personally appeared before me the above-named [Name of Officer], known
or proved to me to be the same person who executed the foregoing instrument and
to be the [Title of Officer] of the Owner, and acknowledged to me that he
executed the same as his free act and deed and the free act and deed of the
Owner.
Subscribed and sworn before me this ____ day of ________________.
NOTARY PUBLIC
COUNTY OF___________________________
STATE OF____________________________
My Commission expires the ____ day of __________,
19____.
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<PAGE>
EXHIBIT K
FORM OF TRANSFER CERTIFICATE
[date]
Chevy Chase Bank, F.S.B.
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
[NAME OF TRUSTEE]
[ADDRESS OF TRUSTEE]
Re: Chevy Chase Home Loan Trust 199_-____ Mortgage-Backed Pass-
Through Certificates,
Series 199[_]-[___], Class R (the "Certificates")
-------------------------------------------------
Ladies and Gentlemen:
This letter is delivered to you in connection with the sale by
_______________ (the "Seller") to __________________________________ (the
"Purchaser") of a ___% Percentage Interest in the above referenced Certificates,
pursuant to Section 6.02 of the Pooling and Servicing Agreement (the "Pooling
and Servicing Agreement"), dated as of [_____], 199[_] among [NAME OF TRUSTEE],
as trustee (the "Trustee") and Chevy Chase Bank, F.S.B., as seller and servicer.
All terms used herein and not otherwise defined shall have the meanings set
forth in the Pooling and Servicing Agreement. The Seller hereby certifies,
represents and warrants to, and covenants with, the Seller and the Trustee that:
1. No purpose of the Seller relating to sale of the Certificate by
the Seller to the Purchaser is or will be to enable the Seller to impede the
assessment or collection of any tax.
2. The Seller understands that the Purchaser has delivered to the
Trustee a transfer affidavit and agreement in the form attached to the Pooling
and Servicing Agreement as Exhibit J. The Seller does not know or believe that
any representation contained therein is false.
3. The Seller has no actual knowledge that the proposed Transferee
is not a Permitted Transferee.
4. The Seller has no actual knowledge that the Purchaser would be
unwilling or unable to pay taxes due on its share of the taxable income
attributable to the Certificate.
K-1
<PAGE>
5. The Seller has conducted a reasonable investigation of the
financial condition of the Purchaser and, as a result of the investigation,
found that the Purchaser has historically paid its debts as they came due, and
found no significant evidence to indicate that the Purchaser will not continue
to pay its debts as they come due in the future.
6. The Purchaser has represented to the Seller that, if the
Certificate constitutes a noneconomic residual interest, it (i) understands that
as holder of a noneconomic residual interest it may incur tax liabilities in
excess of any cash flows generated by the interest, and (ii) intends to pay
taxes associated with its holding of the Certificate as they become due.
Very truly yours,
[SELLER]
By:
------------------------------
Name:
Title:
K-2
<PAGE>
EXHIBIT L
CERTIFICATE GUARANTY INSURANCE POLICY
L-1
<PAGE>
Exhibit 5.1(a)
--------------
Opinion of Orrick, Herrington & Sutcliffe LLP
With Respect to Securities Being Registered
-------------------------------------------
<PAGE>
Exhibit 5.1(a)
[LETTERHEAD OF ORRICK, HERRINGTON & SUTCLIFFE LLP]
July 16, 1998
Chevy Chase Bank, F.S.B.
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
Ladies and Gentlemen:
We have acted as special counsel to Chevy Chase Bank, F.S.B. (the
"Registrant"), in connection with the preparation and filing with the Securities
and Exchange Commission (the "Commission") on July 16, 1998 of Post-Effective
Amendment No. 1 ("Amendment No. 1") to Registration Statement No. 333-33733 (the
"Registration Statement"), in connection with the registration under the
Securities Act of 1933, as amended (the "Act") of Asset-Backed Securities (the
"Securities"). The Securities are issuable in series (each, a "Series") under
either a separate Pooling and Servicing Agreement, Trust Agreement or Indenture
(each, an "Agreement") by and among the Registrant, the Servicer named therein
and the Trustee named therein. The Securities of each Series are to be sold as
set forth in the Registration Statement, any amendment thereto, and the
prospectus and prospectus supplement relating to such Series.
We have examined such instruments, documents and records as we deemed
relevant and necessary as a basis of our opinion hereinafter expressed. In such
examination, we have assumed the following: (a) the authenticity of original
documents and the genuineness of all signatures; (b) the conformity to the
originals of all documents submitted to us as copies; and (c) the truth,
accuracy and completeness of the information, representations and warranties
contained in the records, documents, instruments and certificates we have
reviewed.
Based on such examination, we are of the opinion that when the issuance
of each Series of Securities has been duly authorized by appropriate corporate
action and the Securities of such Series have been duly executed, authenticated
and delivered in accordance with the Agreement relating to such Series and sold
in the manner described in the Registration Statement and the prospectus and
prospectus supplement relating thereto, the Securities of such Series will be
legally issued, fully paid, binding obligations of the trust created by each
Agreement and the holders of the Securities of such Series will be entitled to
the benefits of the related Agreement, except as enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization, arrangement,
fraudulent conveyance, moratorium, or other laws relating to or affecting the
rights of creditors generally and general principles of equity, including
without
<PAGE>
Chevy Chase Bank, F.S.B.
July 16, 1998
Page 3
limitation, concepts of materiality, reasonableness, good faith and fair
dealing, and the possible unavailability of specific performance or injunctive
relief, regardless of whether such enforceability is considered in a proceeding
in equity or at law.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name wherever appearing in the
Registration Statement and the prospectus contained therein, as supplemented by
the prospectus supplement related to a series of Securities. In giving such
consent, we do not consider that we are "experts," within the meaning of the
term as used in the Act or the rules and regulations of the Commission issued
thereunder, with respect to any part of the Registration Statement, including
this opinion as an exhibit or otherwise.
Very truly yours,
/s/ ORRICK, HERRINGTON & SUTCLIFFE LLP
ORRICK, HERRINGTON & SUTCLIFFE LLP
<PAGE>
Exhibit 5.1(b)
Opinion of Shaw Pittman Potts & Trowbridge
With Respect to Securities Being Registered
-------------------------------------------
<PAGE>
Exhibit 5.1(b)
Shaw Pittman Potts & Trowbridge
A Partnership Including Professional Corporations
2300 N Street, N.W.
Washington, D.C. 20037
July 16, 1998
Chevy Chase Bank, F.S.B.
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
Ladies and Gentlemen:
We have acted as special counsel to Chevy Chase Bank, F.S.B., a federally
chartered stock savings bank (the "Bank"), in connection with Amendment No. 1
to Registration Statement No. 333-33733 (the "Registration Statement")
relating to the proposed offering from time to time in one or more series of
asset backed certificates (the "Securities"). Each Series of Securities is to
be issued under and pursuant to a separate pooling and servicing agreement
(each, an "Agreement"), among the Bank, an independent trustee (the "Trustee")
and such other parties as shall be identified in the prospectus supplement for
such Series of Securities. The form of Agreement has been filed with the
Commission as exhibits to Amendment No. 1 to the Registration Statement.
We have examined and are familiar with originals, or copies certified or
otherwise identified to our satisfaction, of (i) the federal stock charter and
the bylaws of the Bank, (ii) certain resolutions of the Board of Directors of
the Bank or a duly authorized committee thereof, (iii) Amendment No. 1 to the
Registration Statement and form of prospectus supplement included therein, (iv)
the form of Agreement (including the form of Certificate attached as an exhibit
thereto) and (v) such other documents as we have deemed necessary or
appropriate as a basis for the opinion set forth below. In our examination, we
have assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified,
photostatic or facsimile copies and the authenticity of the originals of such
copies. As to any facts material to the opinion set forth below, we have relied
upon statements and representations of officers and other representatives of the
Bank and others.
Based upon and subject to the foregoing, we are of the opinion that:
1. When (i) the issuance, execution and delivery of each Series of
Certificates have been authorized by all necessary corporate action in
accordance with the provisions of the related Agreement or Agreements, (ii) such
Agreement or Agreements have been duly authorized by all necessary corporate
action and have been duly executed and delivered by the parties thereto and
<PAGE>
(iii) such Certificates have been duly executed and delivered, authenticated by
the Trustee and sold as described in the Registration Statement, as amended by
Amendment No. 1, against payment therefor as specified in the applicable
underwriting or purchase agreement assuming that the terms of such Certificates
are otherwise in compliance with applicable law at such time, such Certificates
will be legally issued, fully paid and non-assessable.
We do not express any opinion herein concerning any law other than the
federal securities laws of the United States, the laws of the State of Maryland
and the laws of the State of New York.
We hereby consent to the filing of this opinion as an exhibit to Amendment
No. 1 to the Registration Statement. We also consent to the reference to Shaw
Pittman Potts & Trowbridge under the caption "Legal Matters" in the prospectus
which forms a part of Amendment No. 1 to the Registration Statement and in each
prospectus supplement relating to the Securities in which our firm is named.
Very truly yours,
/s/ Shaw Pittman Potts & Trowbridge
-----------------------------------
2
<PAGE>
Exhibit 8.1(a)
[LETTERHEAD OF ORRICK, HERRINGTON & SUTCLIFFE LLP]
July 16, 1998
Chevy Chase Bank, F.S.B.
8401 Connecticut Avenue
Chevy Chase, Maryland 20815
Ladies and Gentlemen:
We have advised Chevy Chase Bank, F.S.B. and (the "Registrant") with
respect to certain federal income tax aspects of the issuance by the Registrant
of its Asset-Backed Securities, issuable in series (the "Securities"). In
connection therewith we have reviewed the description of selected federal income
tax consequences to holders of the Securities that appears under the heading
"Certain Federal Income Tax Consequences" in the prospectus (the "Prospectus")
forming a part of the Registration Statement on Form S-3 (File No. 333-33733) as
amended on July 16, 1998 (the "Registration Statement") with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the "Act").
Such description does not purport to discuss all possible income tax
ramifications of the proposed issuance, but with respect to those tax
consequences which are discussed, in our opinion, to the extent the description
is a discussion of law or legal conclusions, such description is true and
correct in all material respects.
This opinion is based on the facts and circumstances set forth in the
Prospectus and in the other documents reviewed by us. Our opinion as to the
matters set forth herein could change with respect to a particular series of
Securities as a result of changes in facts and circumstances, changes in the
terms of the documents reviewed by us, or changes in the law subsequent to the
date hereof. As the Registration Statement contemplates series of Securities
with numerous different characteristics, the particular characteristics of each
series of Securities must be considered in determining the applicability of this
opinion to a particular series of Securities.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name wherever appearing in the
Registration Statement and the Prospectus contained therein, as supplemented by
the prospectus supplement relating to a series of Securities. In giving such
consent, we do not consider that we are "experts,"
<PAGE>
Chevy Chase Bank, F.S.B.
July 16, 1998
Page 2
within the meaning of the term as used in the Act or the rules and regulations
of the Commission issued thereunder, with respect to any part of the
Registration Statement, (including this opinion) as an exhibit or otherwise.
Very truly yours,
/s/ ORRICK, HERRINGTON & SUTCLIFFE LLP
ORRICK, HERRINGTON & SUTCLIFFE LLP
<PAGE>
Exhibit 8.1(a)
--------------
Opinion of Orrick, Herrington & Sutcliffe LLP
With Respect to Certain Tax Matters
-----------------------------------
