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Filed Pursuant to Rule 424B
File No. 333-49761
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS SUPPLEMENT DATED MAY 26, 1998
TO PROSPECTUS DATED MAY 26, 1998)
$196,664,528 (APPROXIMATE)
HOMESIDE MORTGAGE SECURITIES, INC.
SELLER
HOMESIDE LENDING, INC.
SERVICER
MULTI-CLASS MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1998-2
On any Distribution Date on which the aggregate unpaid principal
balance of the Mortgage Loans is less than 5% of the aggregate unpaid scheduled
principal balance of the Mortgage Pool on the Cut-off Date, the Servicer may
repurchase from the Trust Fund all Mortgage Loans remaining outstanding at a
purchase price equal to the sum of (i) the unpaid principal amount of such
Mortgage Loans (other than any such Mortgage Loans as to which the related
Mortgaged Properties have been acquired and whose fair market values are
included in clause (ii) below), plus accrued interest thereon at the Net
Mortgage Rate to the next Due Date and (ii) the fair market value of any such
acquired properties, in each case less any unreimbursed Advances made with
respect to such Mortgage Loans. Upon such repurchase, holders of the Offered
Certificates generally will receive the outstanding principal balance of the
Offered Certificates plus accrued interest thereon (other than on the Class
IIA-P Certificates) at the applicable Remittance Rate.
Capitalized terms used but not defined herein shall have the meanings
ascribed to such terms in the Prospectus Supplement dated May 26, 1998.
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THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MAY 27, 1998
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PROSPECTUS
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MORTGAGE PASS-THROUGH CERTIFICATES (ISSUABLE IN SERIES)
HOMESIDE MORTGAGE SECURITIES, INC.
SELLER
HOMESIDE LENDING, INC.
SERVICER
Each Certificate offered hereby will evidence a beneficial ownership
interest in one of a number of trust funds (each a "Trust Fund") created by
HomeSide Mortgage Securities, Inc. ("HomeSide Mortgage Securities" or the
"Seller"), formerly known as BancBoston Mortgage Securities, Inc., from time to
time. As specified in the related Prospectus Supplement, the property of each
Trust Fund will consist of a pool of one- to four-family residential mortgage
loans (the "Mortgage Loans") and related property and interests (such as amounts
received as Monthly Payments or principal prepayments which are on deposit in
the Collection Account from time to time, property which secured a Mortgage Loan
which has been acquired by foreclosure or proceeds of the liquidation of a
Mortgaged Property) conveyed to such Trust Fund by the Seller. As more
specifically described in the related Prospectus Supplement, each pool will
consist entirely of fixed-rate, first-lien Mortgage Loans or entirely of
adjustable-rate, first-lien Mortgage Loans originated by HomeSide Lending, Inc.
("HomeSide Lending" or the "Servicer"), formerly known as BancBoston Mortgage
Corporation, either directly or through correspondent originators, or originated
by other originators and, in any such case, acquired by the Seller. Information
regarding the size, composition and other characteristics of the mortgage pool
relating to such Series, will be furnished in the related Prospectus Supplement
at the time such Series is offered. If specified in the related Prospectus
Supplement, a Trust Fund may also include one or more of the following:
reinvestment income, reserve accounts, insurance policies, guarantees or similar
instruments or agreements.
The Certificates may be sold from time to time in one or more series on
terms determined at the time of sale and specified in the Prospectus Supplement
relating to such series. Each series of Certificates will be issued in a single
class or in two or more classes. The Certificates of each class will evidence
the beneficial ownership of (i) any distributions in respect of the assets of
the Trust Fund that are allocable to principal of the Certificates in the amount
of the aggregate original principal balance, if any, of such class of
Certificates as specified in the related Prospectus Supplement and (ii) any
distributions in respect of the assets of the Trust Fund that are allocable to
interest on the principal balance or notional principal balance of such
Certificates at the interest rate, if any, applicable to such class of
Certificates as specified in the related Prospectus Supplement. One or more
classes of each series (i) may be entitled to receive distributions allocable to
principal, principal prepayments, interest or any combination thereof prior to
one or more other classes of Certificates of such series or after the occurrence
of certain events and (ii) may be subordinated in the right to receive such
distributions on such Certificates to one or more senior classes of
Certificates, in each case as specified in the related Prospectus Supplement.
Interest on each class of Certificates entitled to distributions allocable to
interest will accrue at a fixed rate or at a rate that is subject to change from
time to time as specified in the related Prospectus Supplement on an actual or
notional principal amount, may represent a specified portion of interest
received on some or all of the assets of the Trust Fund or may otherwise be
determined as specified in the related Prospectus Supplement.
Distributions on the Certificates of a series will be made only from
the assets of the related Trust Fund. The Certificates of any series will not be
insured or guaranteed by any governmental entity or by any other person.
THE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR AN INTEREST IN
HOMESIDE MORTGAGE SECURITIES, INC., HOMESIDE LENDING, INC. OR ANY OF THEIR
AFFILIATES. THE CERTIFICATES WILL NOT BE SAVINGS ACCOUNTS OR DEPOSITS AND ARE
NOT
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INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY NOR HAS THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENTAL AGENCY PASSED UPON THE ACCURACY OF THE INFORMATION CONTAINED
IN THIS PROSPECTUS.
Except as otherwise specifically provided in the applicable Prospectus
Supplement (which may also provide that a party other than the Seller shall have
some or all of the following obligations), the Seller's only obligations with
respect to the Certificates will be (i) its obligation, as described herein (see
"The Pooling and Servicing Agreement--Repurchase or Substitution"), to
repurchase Mortgage Loans under certain circumstances if either documentation
with respect to one or more Mortgage Loans required to be delivered by the
Seller to the Trustee is missing or defective or a representative or warranty
with respect to one or more Mortgage Loans is breached and such breach
materially and adversely affects the interests of the Certificateholders in a
Mortgage Loan, and (ii) its obligations, if any, as principal obligor in
connection with certain credit enhancements that may be described in the
Prospectus Supplement. Except as otherwise specifically provided in the
applicable Prospectus Supplement and except for certain representations and
warranties relating to the Servicer, the Servicer's obligations with respect to
each Series of Certificates will be limited to its contractual servicing
obligations, including any obligation it may have to advance, under the
circumstances specified in the Prospectus Supplement, delinquent payments on the
Mortgage Loans included in the related Trust Fund, and its obligations pursuant
to certain representations and warranties made by it.
The yield on each class of Certificates of a series will be affected by
the rate of payment of principal (including prepayments) on the assets in the
related Trust Fund and the timing of receipt of such payments as described
herein and in the related Prospectus Supplement. Each series of Certificates may
be subject to early termination only under the circumstances described herein
and in the related Prospectus Supplement.
PROSPECTIVE INVESTORS IN THE CERTIFICATES SHOULD CONSIDER THE FACTORS
DISCUSSED UNDER "RISK FACTORS" BEGINNING ON PAGE 6.
If specified in a Prospectus Supplement, an election will be made to
treat the related Trust Fund as a "real estate mortgage investment conduit"
("REMIC") for federal income tax purposes, or two REMIC elections may be made
with respect to the related Trust Fund. See "Federal Income Tax Consequences".
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described under
"Plan of Distribution" herein and in the related Prospectus Supplement. There
will have been no public market for any series of Certificates prior to the
offering thereof. Accordingly, once an offering of any Series of Certificates
has been made, there can be no assurance that a secondary market for
Certificates of such Series will develop or, if it does develop, that such
market will continue. No application will be made to list the Certificates on
any securities exchange.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF CERTIFICATES
UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
THE DATE OF THIS PROSPECTUS IS MAY 26, 1998.
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PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a series of Certificates being
offered hereby will, among other things, set forth with respect to such series
of Certificates (i) information as to the assets comprising the Trust Fund,
including the characteristics of the Mortgage Loans and, if applicable, the
insurance, guarantees or other instruments or agreements included in the Trust
Fund and the amount and source of any reserve accounts; (ii) the aggregate
original principal balance of each class of Certificates entitled to
distributions allocable to principal and, if a fixed rate of interest, the
interest rate for each class of such Certificates entitled to distributions
allocable to interest; (iii) information as to any class of Certificates that
has a rate of interest that is subject to change from time to time and the basis
on which such interest rate will be determined; (iv) information as to any class
of Certificates on which interest will accrue and be added to the principal or,
if applicable, the notional principal balance thereof; (v) information as to the
method used to calculate the amount of interest to be paid on any class entitled
to distributions of interest only; (vi) information as to the nature and extent
of subordination with respect to any class of Certificates that is subordinate
in right of payment to any other class; (vii) the circumstances, if any, under
which the Trust Fund is subject to early termination; (viii) if applicable, the
final distribution date and the first mandatory principal distribution date of
each class of such Certificates; (ix) the method used to calculate the aggregate
amounts of principal and interest required to be distributed on each
distribution date in respect of each class of such Certificates and, with
respect to any series consisting of more than one class, the basis on which such
amounts will be allocated among the classes of such series; (x) the distribution
date for each class of the Certificates, the date on which payments received in
respect of the assets included in the Trust Fund during the related period will
be deposited in the related Collection Account (as defined herein) and, if
applicable, the assumed reinvestment rate applicable to payments received in
respect of such assets and the date on which such payments are assumed to be
received for such series of Certificates; (xi) the name of the trustee of the
Trust Fund; (xii) information with respect to the administrator, if any, of the
Trust Fund; (xiii) whether an election will be made to treat all or a portion of
the Trust Fund as a REMIC or a double REMIC and, if applicable, the designation
of the regular interests and residual interests therein; and (xiv) information
with respect to the plan of distribution of such Certificates.
AVAILABLE INFORMATION
The Seller will be subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), with respect
to the series of Certificates offered hereby and by the related Prospectus
Supplement, and in accordance therewith will file reports and other information
with the Securities and Exchange Commission (the "Commission"). Such reports and
other information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at Seven World Trade
Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can
be obtained upon written request addressed to the Commission, Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
Such material can also be obtained from the web site that the Commission
maintains at http://www.sec.gov.
The Seller has filed with the Commission a Registration Statement under
the Securities Act of 1933, as amended, with respect to the Certificates. This
Prospectus, which forms a part of the Registration Statement, omits certain
information contained in such Registration Statement pursuant to the rules and
regulations of the Commission. The Registration Statement can be inspected and
copied at prescribed rates at the public reference facilities maintained by the
Commission as described in the preceding paragraph.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Seller pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act with respect to a series of Certificates subsequent
to the date of this Prospectus and the related Prospectus Supplement and prior
to the termination of the offering of such series of Certificates shall be
deemed to be incorporated by reference in this
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Prospectus as supplemented by the related Prospectus Supplement. If so specified
in any such document, such document shall also be deemed to be incorporated by
reference in the Registration Statement of which this Prospectus forms a part.
Any statement contained herein or in a Prospectus Supplement for a
series of Certificates or in a document incorporated or deemed to be
incorporated by reference herein or therein shall be deemed to be modified or
superseded for purposes of this Prospectus and such Prospectus Supplement to the
extent that a statement contained herein or in such Prospectus Supplement or in
any subsequently filed document which also is or is deemed to be incorporated by
reference herein or in such Prospectus Supplement modifies or supersedes such
statement, except to the extent that such subsequently filed document expressly
states otherwise. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus or the related Prospectus Supplement or, if applicable, the
Registration Statement.
The Seller will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus and the related Prospectus
Supplement is delivered, on the written or oral request of any such person, a
copy of any and all of the documents incorporated herein by reference, except
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to the Office of the Secretary, HomeSide Mortgage Securities,
Inc., 7301 Baymeadows Way, Jacksonville, Florida 32256. Telephone requests for
such copies should be directed to the Office of the Secretary at (904) 281-3000.
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Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the series of Certificates covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus Supplement and
Prospectus when acting as underwriters of the series of Certificates covered by
such Prospectus Supplement and with respect to their unsold allotments or
subscriptions.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon as having been authorized. 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 to sell or a
solicitation of an offer to buy the Certificates to any person in any state or
other jurisdiction in which such offer or solicitation would be unlawful.
Neither the delivery of this Prospectus or any Prospectus Supplement with
respect hereto nor any sale made hereunder and thereunder shall, under any
circumstances, create any implication that the information herein or therein is
correct as of any time subsequent to the date of such information.
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REPORTS TO CERTIFICATEHOLDERS
The Trustee will provide to the holders of Certificates of each series,
annually and on each Distribution Date, reports concerning the Trust Fund
related to such Certificates. See "The Pooling and Servicing Agreement-- Reports
to Certificateholders". The Trustee will file with the Commission such reports
with respect to the Trust Fund for a series of Certificates as are required
under the Exchange Act and the rules and regulations of the Commission
thereunder until the completion of the reporting period required by Rule 15d-1
under the Exchange Act.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY OF PROSPECTUS...............................................................1
RISK FACTORS........................................................................6
DESCRIPTION OF THE CERTIFICATES.....................................................8
General........................................................................8
Classes of Certificates........................................................9
Distributions of Principal and Interest.......................................10
THE MORTGAGE POOLS.................................................................11
CREDIT SUPPORT.....................................................................13
General.......................................................................13
Limited Guarantee of the Guarantor............................................14
Subordination.................................................................14
Cross-Support.................................................................15
Pool Insurance................................................................15
Special Hazard Insurance......................................................16
Bankruptcy Bond...............................................................17
Repurchase Bond...............................................................17
Guaranteed Investment Contracts...............................................17
Reserve Accounts..............................................................17
Other Insurance, Guarantees and Similar Instruments or Agreements.............18
YIELD, MATURITY AND WEIGHTED AVERAGE LIFE CONSIDERATIONS...........................18
HOMESIDE MORTGAGE SECURITIES, INC..................................................19
HOMESIDE LENDING, INC..............................................................19
Production....................................................................20
Wholesale Production..........................................................20
Underwriting Policies.........................................................21
SERVICING OF THE MORTGAGE LOANS....................................................23
Collection and Other Servicing Procedures.....................................23
Private Mortgage Insurance....................................................24
Hazard Insurance..............................................................24
Advances......................................................................25
Servicing and Other Compensation and Payment of Expenses......................26
Resignation, Succession and Indemnification of the Servicer...................26
THE POOLING AND SERVICING AGREEMENT................................................27
Assignment of Mortgage Loans; Warranties......................................27
Payments on Mortgage Loans; Collection Account................................28
Repurchase or Substitution....................................................29
Certain Modifications and Refinancings........................................30
Evidence as to Compliance.....................................................30
The Trustee...................................................................30
Reports to Certificateholders.................................................31
Events of Default.............................................................31
Rights Upon Event of Default..................................................32
</TABLE>
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<TABLE>
<S> <C>
Amendment.....................................................................33
Termination; Purchase of Mortgage Loans.......................................33
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS........................................33
General.......................................................................34
Foreclosure...................................................................34
Right of Redemption...........................................................35
Anti-Deficiency Legislation and Other Limitations on Lenders..................36
Consumer Protection Laws......................................................36
Enforceability of Due-on-Sale Clauses.........................................37
Applicability of Usury Laws...................................................38
Soldiers' and Sailors' Civil Relief Act.......................................38
Late Charges, Default Interest and Limitations on Prepayment..................38
Environmental Considerations..................................................39
Forfeiture in Drug and RICO Proceedings.......................................40
LEGAL INVESTMENT MATTERS...........................................................40
ERISA CONSIDERATIONS...............................................................41
FEDERAL INCOME TAX CONSEQUENCES....................................................43
General.......................................................................43
REMIC Elections...............................................................43
REMIC Certificates............................................................43
Tax Opinion...................................................................43
Status of Certificates....................................................... 44
Income from Regular Certificates..............................................44
Income from Residual Certificates.............................................47
Sale or Exchange of Certificates..............................................49
Taxation of Certain Foreign Investors.........................................50
Transfers of Residual Certificates............................................51
Servicing Compensation and Other REMIC Pool Expenses..........................52
Reporting and Administrative Matters..........................................53
Non-REMIC Certificates........................................................53
Trust Fund as Grantor Trust...................................................53
Status of the Certificates....................................................54
Possible Application of Stripped Bond Rules...................................54
Taxation of Certificates if Stripped Bond Rules Do Not Apply..................54
Taxation of Certificates if Stripped Bond Rules Apply.........................55
Sales of Certificates.........................................................56
Foreign Investors.............................................................56
Reporting.....................................................................56
Backup Withholding............................................................56
PLAN OF DISTRIBUTION...............................................................56
USE OF PROCEEDS....................................................................57
FINANCIAL INFORMATION..............................................................57
LEGAL MATTERS......................................................................58
</TABLE>
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SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the Prospectus Supplement to be prepared in connection with each Series of
Certificates. Unless otherwise specified, capitalized terms used and not defined
in this Summary of Prospectus have the meanings given to them in this Prospectus
and in the related Prospectus Supplement.
Title of Securities Mortgage Pass-Through Certificates, issuable
in series.
Seller; Servicer HomeSide Mortgage Securities, Inc.
("HomeSide Mortgage Securities" or the
"Seller"), formerly known as BancBoston
Mortgage Securities, Inc. See "HomeSide
Mortgage Securities, Inc." HomeSide Lending,
Inc. ("HomeSide Lending" or the "Servicer"),
formerly known as BancBoston Mortgage
Corporation. See "HomeSide Lending, Inc."
HomeSide or such other entity or entities
specified in the Prospectus Supplement, will
service, and may act as master servicer with
respect to, the Mortgage Loans included in
the Trust Fund.
Description of Certificates Each Certificate will represent a beneficial
ownership interest in one of a number of
trusts to be created by the Seller from time
to time pursuant to a pooling and servicing
agreement (each, an "Agreement") among the
Seller, the Servicer and the commercial bank
or trust company acting as trustee specified
in the Prospectus Supplement. The property
of each trust (a "Trust Fund") will consist
of a pool (a "Mortgage Pool") of residential
one- to four-family mortgage loans (the
"Mortgage Loans") and related property and
interests (including, for example, (i)
amounts received as Monthly Payments or
principal prepayments which are on deposit
in the Collection Account from time to time,
(ii) property which secured a Mortgage Loan
which has been acquired by foreclosure or
(iii) proceeds of the liquidation of a
Mortgaged Property) conveyed to each Trust
Fund by the Seller. As specified in the
related Prospectus Supplement, each Mortgage
Pool will consist entirely of fixed-rate or
adjustable-rate Mortgage Loans originated by
the Servicer, either directly or through
correspondent originators, or originated by
other originators and, in any such case,
acquired by the Servicer or an affiliate
thereof. If specified in the related
Prospectus Supplement, a Trust Fund may also
include one or more of the following:
reinvestment income, reserve accounts,
insurance policies, guarantees or similar
instruments or agreements intended to
decrease the likelihood that
Certificateholders will experience delays in
distributions of scheduled payments on, or
losses in respect of, the assets in such
Trust Fund. The Certificates of any series
will be entitled to payment only from the
assets of the related Trust Fund.
The Certificates of any series may be issued
in a single class or in two or more classes,
as specified in the Prospectus Supplement.
One or more classes of Certificates of each
series (i) may be entitled to receive
distributions allocable only to principal,
only to interest or to any combination
thereof; (ii) may be entitled to receive
distributions only of prepayments of
principal throughout the lives of the
Certificates or during specified periods;
(iii) may be subordinated in the right to
receive distributions of scheduled payments
of principal, prepayments of principal,
interest or any combination thereof to one
or more other classes of Certificates of
such series throughout the lives of the
Certificates or during specified periods;
(iv) may be entitled to receive such
distributions only after the occurrence of
events specified in the Prospectus
Supplement; (v) may be entitled to receive
distributions in accordance with a schedule
or formula or on the basis of collections
from designated portions of the assets in
the Trust Fund; (vi) as to Certificates
entitled
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to distributions allocable to interest, may
be entitled to receive interest at a fixed
rate or a rate that is subject to change
from time to time; and (vii) as to
Certificates entitled to distributions
allocable to interest, may be entitled to
distributions allocable to interest only
after the occurrence of events specified in
the Prospectus Supplement and may accrue
interest until such events occur, in each
case as specified in the Prospectus
Supplement. The timing and amounts of such
distributions may vary among classes, over
time, or otherwise as specified in the
related Prospectus Supplement.
The Certificates will be offered in
fully-registered form only in the
denominations specified in the Prospectus
Supplement. The Certificates will not be
guaranteed or insured by any governmental
agency or instrumentality or any other
issuer and, except as described in the
Prospectus Supplement, the Mortgage Loans
included in the related Trust Fund will not
be guaranteed or insured by any governmental
agency or instrumentality or any other
person.
Distributions on
the Certificates Distributions on the Certificates entitled
thereto will be made on the 25th day (or, if
such day is not a business day, the business
day immediately following such 25th day) of
each month or such other date specified in
the Prospectus Supplement solely out of the
payments received in respect of the assets
of the related Trust Fund. The amount
allocable to payments of principal and
interest on any distribution date will be
determined as specified in the Prospectus
Supplement. All distributions will be made
pro rata to Certificateholders of the class
entitled thereto or by the other method
specified in the Prospectus Supplement. See
"Description of the Certificates."
The aggregate original principal balance of
the Certificates will equal the aggregate
distributions allocable to principal that
such Certificates will be entitled to
receive. If specified in the Prospectus
Supplement, the Certificates of a series
will have an aggregate original principal
balance equal to the aggregate unpaid
principal balance of the related Mortgage
Loans as of the first day of the month of
creation of the Trust Fund and will bear
interest in the aggregate at a rate equal to
the interest rate borne by the underlying
Mortgage Loans, net of servicing fees
payable to the Servicer and any primary or
sub-services of the Mortgage Loans and any
other amounts (including fees payable to the
Servicer as master Servicer, if applicable)
specified in the Prospectus Supplement (as
to each Mortgage Loan, the "Remittance
Rate"). See "Description of the
Certificates--Distributions of Principal and
Interest."
The rate at which interest will be passed
through to holders of Certificates entitled
thereto may be a fixed rate or a rate that
is subject to change from time to time, in
each case as specified in the Prospectus
Supplement. Any such rate may be calculated
on a loan-by-loan, weighted average or other
basis, in each case as described in the
Prospectus Supplement. See "Description of
the Certificates--Distributions of Principal
and Interest."
The Mortgage Pools As specified in the Prospectus Supplement,
each Mortgage Pool will consist of Mortgage
Loans which were represented to the Seller
as meeting certain standards. Each Mortgage
Pool will contain one or more of the
following types of Mortgage Loans:(1) 20- to
30-year ("30-year") fixed-rate, fully
amortizing Mortgage Loans providing for
level monthly payments of principal and
interest; (2) 10- to 15-year ("15-year")
fixed-rate, fully amortizing Mortgage Loans
providing for level
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monthly payments of principal and
interest;(3) adjustable-rate Mortgage Loans
("ARMs" or "ARM Loans"), which may include
loans providing for negative amortization;
(4) another type of Mortgage Loan, as
described in the applicable Prospectus
Supplement. If specified in the applicable
Prospectus Supplement, a Mortgage Pool may
contain Mortgage Loans subject to buy-down
plans ("Buy-Down Mortgage Loans"). See "The
Mortgage Pools."
Primary Mortgage
Insurance To the extent specified in the applicable
Prospectus Supplement, each Mortgage Loan
having a Loan-to-Value Ratio above a
specified level will be covered by a Primary
Mortgage Insurance Policy insuring against
default by the Borrower with respect to all
or a specified portion of the principal
amount thereof until the principal balance
of such Mortgage Loan is reduced below a
specified percentage of the lesser of the
sales price or appraised value of the
Mortgaged Property. See "The Mortgage
Pools."
Purchase of Mortgage
Loans As described in the applicable Prospectus
Supplement, the Agreement for each series
may permit, but not require, the Seller, the
Servicer or another party to purchase from
the Trust Fund for such series all remaining
Mortgage Loans and all property acquired in
respect of the Mortgage Loans, at a price
described in the Prospectus Supplement,
subject to the condition that the aggregate
outstanding principal balance of the
Mortgage Loans for such series at the time
of purchase shall be less than a percentage
of the aggregate principal balance at the
Cut-Off Date specified in the Prospectus
Supplement. The exercise of such right will
result in the early retirement of the
Certificates of that series. See "The
Pooling and Servicing
Agreement--Termination; Purchase of Mortgage
Loans."
Collection Account With respect to each Trust Fund, the
Servicer will be obligated to establish an
account into which it will deposit on the
dates specified in the related Prospectus
Supplement payments received in respect of
the assets in such Trust Fund. See "The
Pooling and Servicing Agreement--Payments on
Mortgage Loans; Collection Account."
Advances If specified in the Prospectus Supplement,
the Servicer, as Servicer or master servicer
of the Mortgage Loans, will be obligated to
advance, using its own funds, delinquent
installments of principal and interest (the
latter adjusted to the applicable Remittance
Rate) on the Mortgage Loans in a Trust Fund.
Any such obligation to make advances may be
limited to amounts due holders of certain
classes of Certificates of the related
series, to amounts deemed to be recoverable
from late payments or liquidation proceeds,
for specified periods or any combination
thereof, in each case as specified in the
related Prospectus Supplement. Any such
advance will be recoverable by the Servicer
as specified in the related Prospectus
Supplement. See "Servicing of the Mortgage
Loans-- Advances."
Credit Support If specified in the Prospectus
Supplement, a series of Certificates, or
certain classes within such series, may have
the benefit of one or more of the following
types of credit support. The protection
against losses afforded by any such credit
support will be limited. See "Credit
Support."
A. Limited Guarantee If specified in the Prospectus Supplement,
certain obligations of the Servicer under
the related Agreement, including obligations
of the Servicer to cover certain
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deficiencies in principal or interest
payments on the Mortgage Loans resulting
from the bankruptcy of the related borrower,
may be covered by a financial guarantee
policy, limited guarantee or other similar
instrument (the "Limited Guarantee"),
limited in scope and amount, issued by an
entity named in the Prospectus Supplement
(the "Guarantor"). If so specified, the
Guarantor may be obligated to take either or
both of the following actions in the event
the Servicer fails to do so: make deposits
to the Collection Account (a "Deposit
Guarantee"); or make advances (an "Advance
Guarantee"). Any such Limited Guarantee will
be limited in amount and a portion of the
coverage of any such Limited Guarantee may
be separately allocated to certain events.
The scope, amount and, if applicable, the
allocation of any Limited Guarantee will be
described in the related Prospectus
Supplement. See "Credit Support--Limited
Guarantee of the Guarantor."
B. Subordination A series of Certificates may include one or
more classes that are subordinate in the
right to receive distributions on such
Certificates to one or more senior classes
of Certificates of the same series, to the
extent described in the related Prospectus
Supplement. If so specified in the related
Prospectus Supplement, subordination may
apply only in the event of certain types of
losses not covered by other forms of credit
support, such as hazard losses not covered
by standard hazard insurance policies or
losses resulting from the bankruptcy of the
borrower.
If specified in the Prospectus Supplement, a
reserve fund may be established and
maintained by the deposit therein of
distributions allocable to the holders of
subordinate Certificates until a specified
level is reached. The related Prospectus
Supplement will set forth information
concerning the amount of subordination of a
class or classes of subordinate Certificates
in a series, the circumstances in which such
subordination will be applicable, the
manner, if any, in which the amount of
subordination will decrease over time, the
manner of funding the related reserve fund,
if any, and the conditions under which
amounts in any such reserve fund will be
used to make distributions to holders of
senior Certificates or released from the
related Trust Fund. See "Credit
Support--Subordination."
C. Cross-Support If specified in the Prospectus Supplement,
the beneficial ownership of separate groups
of assets included in a Trust Fund may be
evidenced by separate classes of the related
series of Certificates. In such case, and if
so specified, credit support may be provided
by a cross-support feature which requires
that distributions be made with respect to
Certificates evidencing beneficial ownership
of one or more asset groups prior to
distributions to subordinate Certificates
evidencing a beneficial ownership interest
in other asset groups within the same Trust
Fund. If specified in the Prospectus
Supplement, the coverage provided by one or
more forms of credit support may apply
concurrently to two or more separate Trust
Funds. If applicable, the Prospectus
Supplement will identify the Trust Funds to
which such credit support relates and the
manner of determining the amount of the
coverage provided thereby and of the
application of such coverage to the
identified Trust Funds. See "Credit
Support--Cross Support."
D. Pool and Special
Hazard Insurance In order to decrease the likelihood that
Certificateholders will experience losses in
respect of the Mortgage Loans, if specified
in the Prospectus Supplement, the Seller
will obtain one or more insurance policies
to cover (i) losses by reason of defaults by
borrowers (a "Mortgage Pool Insurance
Policy") and (ii) losses by reason of
hazards not covered under the standard form
of hazard insurance (a "Special Hazard
Insurance Policy"), in each case up to the
amounts, for the periods
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and subject to the conditions specified in
the Prospectus Supplement. See "Credit
Support-- Pool Insurance" and "-- Special
Hazard Insurance."
E. Reserve Accounts,
Other Insurance,
Guarantees and Similar
Instruments and
Agreements In order to decrease the likelihood that
Certificateholders will experience delays in
the receipt of scheduled payments on, and
losses in respect of, the assets in a Trust
Fund, if specified in the related Prospectus
Supplement, such Trust Fund may also include
reserve accounts, other insurance,
guarantees and similar instruments and
agreements entered into with the entities,
in the amounts, for the purposes and subject
to the conditions specified in the
Prospectus Supplement. See "Credit
Support--Reserve Accounts" and "--Other
Insurance, Guarantees and Similar
Instruments or Agreements."
Federal Income Tax
Consequences The federal income tax consequences to
Certificateholders will depend on, among
other factors, whether an election is made
to treat the Trust Fund or specified
portions thereof as a "real estate mortgage
investment conduit" ("REMIC") under the
provisions of the Internal Revenue Code of
1986, as amended (the "Code").
See "Federal Income Tax Consequences".
ERISA Considerations A fiduciary of any employee
benefit plan subject to the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"), or a plan subject to
Section 4975 of the Code should carefully
review with its own legal advisors whether
the purchase or holding of Certificates
could give rise to a transaction prohibited
or otherwise impermissible under ERISA or
the Code. See "ERISA Considerations".
Legal Investment Matters The Prospectus Supplement for each series of
Certificates will specify which, if any, of
the classes of Certificates offered thereby
will constitute "mortgage related
securities" under the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA").
Classes of Certificates that qualify as
"mortgage related securities" will be legal
investments for certain types of
institutional investors to the extent
provided in SMMEA, subject, in any case, to
any other regulations which may govern
investments by such institutional investors.
Institutions whose investment authority is
subject to legal restrictions should consult
with their own legal advisors or the
applicable authorities to determine whether
and to what extent an investment in a
particular class of Certificates (whether or
not such class constitutes a "mortgage
related security") constitutes a legal
investment for them. See "Legal Investment
Matters".
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<PAGE> 13
RISK FACTORS
Prospective Certificateholders should consider, among other things, the
following factors in connection with the purchase of the Certificates:
l. Losses on the Mortgage Pool. An investment in Certificates
evidencing interests in Mortgage Loans may be affected, among other things, by a
decline in real estate values or changes in mortgage market rates. If the
residential real estate market in the locale of properties securing the Mortgage
Loans 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 Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. To the extent that such losses are not covered by
any subordination feature, applicable insurance policies or other credit
enhancement, holders of the Certificates of a Series evidencing interests in
such Mortgage Pool will bear all risk of loss resulting from default by
mortgagors and will have to look primarily to the value of the Mortgaged
Properties for recovery of the outstanding principal and unpaid interest of the
defaulted Mortgage Loans. See "The Mortgage Pools."
2. Limited Obligations. The Certificates will not represent an interest
in or obligation of the Seller. The Certificates will not be insured or
guaranteed by any government agency or instrumentality, nor, unless expressly
provided in the related Prospectus Supplement, by HomeSide Lending, Inc.,
HomeSide Mortgage Securities, Inc. or any of their affiliates.
3. Limited Liquidity. There can be no assurance that a secondary market
will develop for the Certificates of any Series or, if it does develop, that it
will provide the holders of Certificates of such Series with liquidity of
investment or that it will remain for the term of such series of Certificates.
Although the Certificateholders of each series receive monthly statements
containing certain statistical information with respect to the related Mortgage
Pool, neither the Company nor the Servicer publishes any information relating to
the Certificates of any series or any Mortgage Pool. The limited availability of
any such published information may influence the liquidity of the Certificates.
The Certificates will not be listed on any securities exchange.
4. Prepayment Considerations. The prepayment experience on the Mortgage
Loans will affect the average life of the Certificates or each class of
Certificates. Prepayments on the Mortgage Loans may be influenced by a variety
of economic, geographic, social and other factors, including the difference
between the interest rates on the Mortgage Loans and prevailing mortgage rates
(giving consideration to the cost of refinancing). In general, if mortgage rates
fall below the interest rates on the Mortgage Loans, the rate of prepayment
would be expected to increase, and the yields at which an investor in the
Certificates may be able to reinvest amounts received as payments on such
investor's Certificates may be lower than the yield on such Certificates.
Conversely, if mortgage rates rise above the interest rates on the Mortgage
Loans, the rate of prepayment would be expected to decrease, and the amount of
payments available to a Certificateholder for reinvestment may be relatively
low. Other factors affecting prepayment of mortgage loans include changes in
housing needs, job transfers, unemployment and servicing decisions. See "Yield,
Maturity and Weighted Average Life Considerations."
5. Yield, Maturity and Weighted Average Life Considerations. The yield
of the Certificates of each series will depend in part on the rate of principal
payment on the Mortgage Loans (including prepayments, liquidations due to
defaults and mortgage loan repurchases). Such yield may be adversely affected,
depending upon whether a particular Certificate is purchased at a premium or
discount price, by a higher or lower than anticipated rate of prepayments on the
related Mortgage Loans. In particular, the yield on Classes of Certificates
entitling the holders thereof primarily or exclusively to payments of interest
or primarily or exclusively to payments of principal will be extremely sensitive
to the rate of prepayments on the related Mortgage Loans. In addition, the yield
on certain Classes of Certificates may be relatively more sensitive to the rate
of prepayment of specified Mortgage Loans than other Classes of Certificates.
Furthermore, the yield to investors may be adversely affected by interest
shortfalls which may result from the timing of the receipt of prepayments or
liquidations to the extent that such interest shortfalls are not covered by
aggregate Servicing Fees or other mechanisms specified in the applicable
Prospectus Supplement. The yield to investors in Classes
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<PAGE> 14
of Certificates will be adversely affected to the extent that losses on the
Mortgage Loans in the related Trust Fund are allocated to such Classes and may
be adversely affected to the extent of unadvanced delinquencies on the Mortgage
Loans in the related Trust Fund. Classes of Certificates identified in the
applicable Prospectus Supplement as subordinated Certificates are more likely to
be affected by delinquencies and losses than other Classes of Certificates.
See "Yield, Maturity and Weighted Average Life Considerations."
6. Subordination. With respect to Certificates of a series having one
or more classes of subordinated Certificates, while the subordination feature is
intended to enhance the likelihood of timely payment of principal and interest
to senior Certificateholders, such subordination will be limited as specified in
the Prospectus Supplement, any reserve fund could be depleted under certain
circumstances, and payments applied to the senior Certificates which are
otherwise due to the subordinated Certificates may be less than losses.
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<PAGE> 15
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to a separate
pooling and servicing agreement (each, an "Agreement") entered into among the
Seller, the Servicer and a commercial bank or trust company named in the
Prospectus Supplement, as trustee (the "Trustee") for the benefit of holders of
Certificates of that Series. The provisions of each Agreement will vary
depending upon the nature of the Certificates to be issued thereunder and the
nature of the related Trust Fund. The Agreement will be substantially in the
form filed as an exhibit to the Registration Statement of which this Prospectus
is a part, or in such similar form as will reflect the terms of a series of
Certificates described in the Prospectus Supplement. The following summaries
describe the material provisions which may appear in each Agreement. The
Prospectus Supplement for a series of Certificates will describe any provision
of the Agreement relating to such series that materially differs from the
description thereof contained in this Prospectus. The summaries do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, all of the provisions of the Agreement for each series of
Certificates and the applicable Prospectus Supplement. The Seller will provide
any Certificateholder, without charge, on written request a copy of the
Agreement for any series. Requests should be addressed to HomeSide Mortgage
Securities, Inc., 7301 Baymeadows Way, Jacksonville, Florida 32256, Attention:
General Counsel. The Agreement relating to a series of Certificates will be
filed with the Securities and Exchange Commission in a report on Form 8-K within
15 days after the date of issuance of such series of Certificates (the "Delivery
Date").
The Certificates of a series will be entitled to payment only from the
assets included in the Trust Fund related to such series and will not be
entitled to payments in respect of the assets included in any other trust fund
established by the Seller. The Certificates will not represent obligations of
the Seller, the Servicer or any of their affiliates and will not be insured or
guaranteed by any governmental agency or any other person. Unless otherwise
specified in the Prospectus Supplement, the Seller's only obligations with
respect to the Certificates will consist of its obligations pursuant to certain
representations and warranties made by it. Unless otherwise specified in the
Prospectus Supplement, the Servicer's only obligations with respect to the
Certificates will consist of its contractual servicing and/or master servicing
obligations, including any obligation to make advances under certain limited
circumstances specified herein of delinquent installments of principal and
interest (adjusted to the applicable Remittance Rate), and its obligations
pursuant to certain representations and warranties made by it.
The Mortgage Loans will not be insured or guaranteed by any
governmental entity or, except as specified in the Prospectus Supplement, by any
other person. To the extent that delinquent payments on or losses in respect of
defaulted Mortgage Loans are not advanced by the Servicer or any other entity or
paid from any applicable credit support arrangement, such delinquencies may
result in delays in the distribution of payments to the holders of one or more
classes of Certificates, and such losses will be borne by the holders of one or
more classes of Certificates.
GENERAL
The Certificates of each series will be issued in fully-registered form
only. The minimum original Certificate Principal Balance or Notional Principal
Balance that may be represented by a Certificate (the "denomination") will be
specified in the Prospectus Supplement. The original Certificate Principal
Balance of each Certificate will equal the aggregate distributions allocable to
principal to which such Certificate is entitled. Distributions allocable to
interest on each Certificate that is not entitled to distributions allocable to
principal will be calculated based on the Notional Principal Balance of such
Certificate. The Notional Principal Balance of a Certificate will not evidence
an interest in or entitlement to distributions allocable to principal but will
be used solely for convenience in expressing the calculation of interest and for
certain other purposes.
The Certificates of a series will be transferable and exchangeable on a
Certificate Register to be maintained at the corporate trust office of the
Trustee for the related series or such other office or agency maintained for
such purposes by the Trustee in New York City (or at the office of the
certificate registrar specified in the related Prospectus Supplement). Unless
otherwise specified in the Prospectus Supplement, under each Agreement, the
Trustee will initially be appointed as the Certificate Registrar. Unless
otherwise specified in the Prospectus Supplement, no service charge
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<PAGE> 16
will be made for any registration of transfer or exchange of Certificates, but
payment of a sum sufficient to cover any tax or other governmental charge may be
required.
CLASSES OF CERTIFICATES
Each series of Certificates will be issued in a single class or in two
or more classes. The Certificates of each class will evidence the beneficial
ownership of (i) any distributions in respect of the assets of the Trust Fund
that are allocable to principal, in the aggregate amount of the original
Certificate Principal Balance, if any, of such class of Certificates as
specified in the Prospectus Supplement and (ii) any distributions in respect of
the assets of the Trust Fund that are allocable to interest on the Certificate
Principal Balance or Notional Principal Balance of such Certificates from time
to time at the Certificate Rate, if any, applicable to such class of
Certificates as specified in the Prospectus Supplement. If specified in the
Prospectus Supplement, one or more classes of a series of Certificates may
evidence beneficial ownership interests in separate groups of assets included in
the related Trust Fund.
If specified in the Prospectus Supplement, the Certificates will have
an aggregate original Certificate Principal Balance equal to the aggregate
unpaid principal balance of the Mortgage Loans as of the close of business on
the first day of the month of creation of the Trust Fund (the "Cut-Off Date")
after deducting payments of principal due on or before, and prepayments of
principal received on or before, the Cut-Off Date and in the aggregate will bear
interest equal to the weighted average of the Remittance Rates. The Remittance
Rate will equal the rate of interest payable on each Mortgage Loan minus the
Servicer's servicing fee as described herein, the servicing fee of any third
party servicer of the Mortgage Loans and such other amounts (including fees
payable to the Servicer as master servicer, if applicable) as are specified in
the Prospectus Supplement. The Certificates may have an original Certificate
Principal Balance as determined in the manner specified in the Prospectus
Supplement.
Each class of Certificates that is entitled to distributions allocable
to interest will bear interest at a fixed rate or a rate that is subject to
change from time to time (a) in accordance with a schedule, (b) in reference to
an index, or (c) otherwise (each, a "Certificate Rate"), in each case as
specified in the Prospectus Supplement. One or more classes of Certificates may
provide for interest that accrues, but is not currently payable ("Accrual
Certificates"). With respect to any class of Accrual Certificates, if specified
in the Prospectus Supplement, any interest that has accrued but is not paid on a
given Distribution Date (as defined below under "Distributions of Principal and
Interest") will be added to the aggregate Certificate Principal Balance of such
class of Certificates on that Distribution Date.
A series of Certificates may include one or more classes entitled only
to distributions (i) allocable to interest, (ii) allocable to principal (and
allocable as between scheduled payments of principal and Principal Prepayments,
as defined below) or (iii) allocable to both principal (and allocable as between
scheduled payments of principal and Principal Prepayments) and interest. A
series of Certificates may consist of one or more classes as to which
distributions will be allocated (i) on the basis of collections from designated
portions of the assets of the Trust Fund, (ii) in accordance with a schedule or
formula, (iii) in relation to the occurrence of events, or (iv) otherwise, in
each case as specified in the Prospectus Supplement. The timing and amounts of
such distributions may vary among classes, over time or otherwise, in each case
as specified in the Prospectus Supplement.
The taking of action with respect to certain matters under the
Agreement, including certain amendments thereto, will require the consent of the
holders of the Certificates. The voting rights allocated to each class of
Certificates will be specified in the Prospectus Supplement. Votes may be
allocated in different proportions among classes of Certificates depending on
whether the Certificates of a class have a Notional Principal Balance or a
Certificate Principal Balance.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
General.
Distributions of principal and interest at the applicable Certificate
Rate (if any) on the Certificates will be made by the Trustee to the extent of
funds available from the related Trust Fund on the 25th day (or if such 25th day
is not a business day, on the business day next following such 25th day) of each
calendar month (each, a "Distribution Date"),
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commencing in the month following the issuance of the related series, or on such
other date as is specified in the Prospectus Supplement. Distributions will be
made to the persons in whose names the Certificates are registered at the close
of business on the dates specified in the Prospectus Supplement (each, a "Record
Date"). Distributions will be made by check or money order mailed to the person
entitled thereto at the address appearing in the Certificate Register or, if
specified in the Prospectus Supplement, in the case of Certificates that are of
a certain minimum denomination as specified in the Prospectus Supplement, upon
written request by the Certificateholder, by wire transfer or by such other
means as are agreed upon with the person entitled thereto; provided, however,
that the final distribution in retirement of the Certificates will be made only
upon presentation and surrender of the Certificates at the office or agency of
the Trustee specified in the notice to Certificateholders of such final
distribution.
Distributions allocable to principal and interest on the Certificates
will be made by the Trustee out of, and only to the extent of, funds in a
separate account established and maintained under the Agreement for the benefit
of holders of the Certificates of the related series (the "Collection Account"),
including any funds transferred from any Reserve Account. As between
Certificates of different classes and as between distributions of principal
(and, if applicable, between distributions of Principal Prepayments and
scheduled payments of principal) and interest, distributions made on any
Distribution Date will be applied as specified in the Prospectus Supplement.
Distributions to any class of Certificates will be made pro rata to all
Certificateholders of that class or by the other method described in the
Prospectus Supplement. If so specified in the Prospectus Supplement, the amounts
deposited into the Collection Account as described below under "The Pooling and
Servicing Agreement--Payments on Mortgage Loans; Collection Account" will be
invested in the eligible investments specified in the Agreement and all income
or other gain from such investments will be deposited in the Collection Account
and will be for the benefit of the Servicer or other entity specified in the
Prospectus Supplement and subject to withdrawal from time to time.
DISTRIBUTIONS OF INTEREST. Interest will accrue on the aggregate
Certificate Principal Balance (or, in the case of Certificates entitled only to
distributions allocable to interest, the aggregate Notional Principal Balance)
of each class of Certificates entitled to interest from the date, at the
Certificate Rate and for the periods (each, an "Interest Accrual Period")
specified in the Prospectus Supplement. To the extent funds are available
therefor, interest accrued during each Interest Accrual Period on each class of
Certificates entitled to interest (other than a class of Accrual Certificates)
will be distributable on the Distribution Dates specified in the Prospectus
Supplement until the aggregate Certificate Principal Balance of the Certificates
of such class has been distributed in full or, in the case of Certificates
entitled only to distributions allocable to interest, until the aggregate
Notional Principal Balance of such Certificates is reduced to zero or for the
period of time designated in the Prospectus Supplement. Distributions of
interest on each class of Accrual Certificates will commence only after the
occurrence of the events specified in the Prospectus Supplement. Prior to such
time, the beneficial ownership interest of such class of Accrual Certificates in
the Trust Fund, as reflected in the aggregate Certificate Principal Balance of
such class of Accrual Certificates, will increase on each Distribution Date by
the amount of interest that accrued on such class of Accrual Certificates during
the preceding Interest Accrual Period but that was not required to be
distributed to such class on such Distribution Date. Any such class of Accrual
Certificates will thereafter accrue interest on its outstanding Certificate
Principal Balance as so adjusted.
DISTRIBUTIONS OF PRINCIPAL. Unless otherwise specified in the
Prospectus Supplement, the aggregate Certificate Principal Balance of any class
of Certificates entitled to distributions of principal will be the aggregate
original Certificate Principal Balance of such class of Certificates specified
in the Prospectus Supplement, reduced by all distributions reported to the
holders of such Certificates as allocable to principal, and, in the case of
Accrual Certificates, as specified in the Prospectus Supplement, increased on
each Distribution Date by all interest accrued but not then distributable on
such Accrual Certificates. The Prospectus Supplement will specify the method by
which the amount of principal to be distributed on the Certificates on each
Distribution Date will be calculated and the manner in which such amount will be
allocated among the classes of Certificates entitled to distributions of
principal.
If so specified in the Prospectus Supplement, one or more classes of
senior Certificates will be entitled to receive all or a disproportionate
percentage of the payments or other recoveries of principal on a Mortgage Loan
which are received in advance of their scheduled due dates and not accompanied
by amounts of interest representing scheduled interest due after the month of
such payments ("Principal Prepayments") in the percentages and under the
circumstances or for the periods specified in the Prospectus Supplement. Any
such allocation of Principal Prepayments to such class
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or classes of Certificateholders will have the effect of accelerating the
amortization of such Certificates while increasing the interests evidenced by
the remaining Certificates in the Trust Fund.
THE MORTGAGE POOLS
Each mortgage pool (a "Mortgage Pool") will consist of one- to
four-family residential mortgage loans evidenced by promissory notes (each, a
"Note") secured by first mortgages or first deeds of trust or other similar
security instrument (each, a "Mortgage") creating a first lien on properties
(the "Mortgaged Properties"). When each series of Certificates is issued, the
Seller will cause the Mortgage Loans comprising each Mortgage Pool to be
assigned to the Trustee for the benefit of the holders of the Certificates of
that series, and will receive the Certificates in exchange therefor. Certain
Certificates evidencing interests in a Trust Fund may not form part of the
offering made pursuant to this Prospectus and the related Prospectus Supplement.
The Mortgaged Properties in each Mortgage Pool may consist of
single-unit dwellings, two-, three- and four-unit detached, townhouse or
rowhouse dwellings, condominium and planned-unit development ("PUD") units and
such other types of homes or units as are described in the applicable Prospectus
Supplement, and may include vacation and second homes and investment properties.
The applicable Prospectus Supplement will contain information concerning the
originators of the Mortgage Loans and the underwriting standards employed by
such originators.
Unless otherwise specified in the applicable Prospectus Supplement, all
Mortgage Loans will (i) have monthly payments due on the first of each month,
(ii) be secured by Mortgaged Properties located in one of the states of the
United States or the District of Columbia, and (iii) be of one or more of the
following types of Mortgage Loans:
(1) Fully-amortizing Mortgage Loans, each with a 20-to 30-year
("30-Year") term at origination, interest (the "Mortgage Rate") at a fixed rate
and level monthly payments over the term of the Mortgage Loan.
(2) Fully-amortizing Mortgage Loans, each with a 10-to 15-year
("15-Year") term at origination, a fixed Mortgage Rate and level monthly
payments over the term of the Mortgage Loan.
(3) Mortgage Loans, each with an adjustable Mortgage Rate, which may
include loans providing for negative amortization.
Mortgage Loans with certain Loan-to-Value Ratios and/or certain
principal balances may be covered wholly or partially by primary mortgage
guaranty insurance policies (each, a "Primary Mortgage Insurance Policy"). The
existence, extent and duration of any such coverage will be described in the
applicable Prospectus Supplement. The "Loan-to- Value Ratio" is the ratio,
expressed as a percentage, of the principal amount of the Mortgage Loan to the
lesser of (i) the sales price for such property at the time the Mortgage Loan is
closed and (ii) the appraised value at origination or, in the case of
refinancings, the value set forth in the appraisal, if any, obtained by the loan
originator in connection with such refinancing. Unless otherwise specified in
the applicable Prospectus Supplement, each Mortgage Loan will also be covered by
a Standard Hazard Insurance Policy, as described under "Servicing of the
Mortgage Loans--Hazard Insurance" below.
In addition, other credit enhancements acceptable to the rating agency
(or agencies) rating the Certificates may be provided for coverage of certain
risks of default or losses. See "Credit Support" herein.
If specified in the applicable Prospectus Supplement, a Mortgage Pool
may contain Mortgage Loans subject to buy-down plans ("Buy-Down Mortgage Loans")
pursuant to which the monthly payments made by the Borrower will be less than
the scheduled monthly payments on the Buy-Down Mortgage Loan, the resulting
difference to be drawn from an amount contributed by the seller of the Mortgaged
Property or another source at the time of origination of the Buy-Down Mortgage
Loan and placed in a trust or custodial account (the "Buy-Down Fund") (such
amount hereinafter referred to as the "Buy-Down Reserve"). The applicable
Prospectus Supplement or Current Report (as defined below) will contain
information, with respect to any Buy-Down Mortgage Loans, concerning limitations
on the interest rate payable by the Borrower initially, on annual increases in
the interest rate, on the length of the buy-down period, and on
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the Buy-Down Fund. The repayment of a temporary Buy-Down Mortgage Loan is
dependent on the ability of the Borrower to make larger monthly payments after
the Buy-Down Reserves have been depleted and, for certain Buy-Down Mortgage
Loans, while such funds are being depleted. The inability of the Borrower to
make larger monthly payments may lead to a default on the Buy-Down Mortgage Loan
or, if the Borrower is able to obtain refinancing on favorable terms, a
prepayment of such loan. See "Yield, Maturity and Weighted Average Life
Considerations."
The Prospectus Supplement for a series of Certificates may specify that
the related Mortgage Pool contains Mortgage Loans that have been used for
refinancing for the purpose of removing equity from the related Mortgaged
Properties ("Cash-Out Refinance Loans").
The Prospectus Supplement for each series of Certificates will specify
the approximate aggregate principal balance of the Mortgage Loans (within the
percentage or dollar range specified therein). The Prospectus Supplement for
each series of Certificates will contain information regarding the Mortgage
Loans which are expected to be included in the related Mortgage Pool, including
among other things, information, as of the applicable Cut-Off Date and to the
extent then specifically known to the Seller, as to (i) the aggregate principal
balance of the Mortgage Loans, (ii) the aggregate principal balance or
percentage by aggregate principal balance of Mortgage Loans secured by each type
of property, (iii) the original terms to maturity of the Mortgage Loans, (iv)
the smallest and largest in principal balance at origination of the Mortgage
Loans, (v) the earliest origination date and latest maturity date of the
Mortgage Loans, (vi) the aggregate principal balance or percentage by aggregate
principal balance of Mortgage Loans having Loan-to-Value Ratios at origination
exceeding 80%, (vii) the Mortgage Rate or range of Mortgage Rates borne by the
Mortgage Loans and (viii) the average outstanding principal balance of the
Mortgage Loans. If specific information with respect to the Mortgage Loans is
not known at the time the related series of Certificates is initially offered,
more general information of the nature described above will be provided in the
Prospectus Supplement, and specific information will be set forth in a report on
Form 8-K to be filed with the Securities and Exchange Commission within fifteen
days after the initial issuance of such Certificates (the "Current Report"). A
copy of the Agreement with respect to a series of Certificates will be attached
to the related Current Report and will be available for inspection at the
corporate trust office of the Trustee specified in the related Prospectus
Supplement.
The Seller's assignment of the Mortgage Loans to the Trustee will be
without recourse. Unless otherwise specified in the applicable Prospectus
Supplement, the Seller or another party identified in such Prospectus Supplement
will make certain representations concerning the Mortgage Loans, including that
no Mortgage Loan in a Mortgage Pool evidenced by Certificates will be more than
one month delinquent as of the date of the initial issuance of the Certificates.
For a description of other representations that will be made by the party
specified in the applicable Prospectus Supplement concerning the Mortgage Loans,
see "The Pooling and Servicing Agreement--Assignment of Mortgage Loans;
Warranties." The Seller's obligations with respect to the Mortgage Loans will be
limited to any representations and warranties made by it in, as well as its
contractual obligations under, the Agreement for each series of Certificates.
Unless otherwise specified in the applicable Prospectus Supplement, these
obligations consist primarily of the obligation under certain circumstances to
repurchase or replace Mortgage Loans as to which there has been a material
breach of the Seller's representations and warranties which materially and
adversely affects the interests of the Certificateholders in a Mortgage Loan or
to cure such breach, and of the obligation, under certain circumstances, to
ensure the timely payment of premiums on certain insurance policies and bonds.
See "The Pooling and Servicing Agreement--Assignment of Mortgage Loans;
Warranties."
In addition, to the extent specified in the applicable Prospectus
Supplement, in the event of delinquencies in payments of principal and interest
on the Mortgage Loans in any Mortgage Pool, the Servicer (or, if so indicated in
the applicable Prospectus Supplement, another entity) will advance cash in
amounts described herein under "The Pooling and Servicing Agreement-Advances"
and "--Payments on Mortgage Loans; Collection Account." The Servicer is not
required to make any advance which it determines in its good faith judgment not
to be ultimately recoverable under any applicable policy of insurance
("Insurance Proceeds") or out of the proceeds of liquidation of a Mortgage Loan
("Liquidation Proceeds"). Each month, the Trustee (or such other paying agent as
may be specified in the applicable Prospectus Supplement) will be obligated to
remit to Certificateholders of each series all amounts relating to the Mortgage
Loans due to the Certificateholders to the extent such amounts have been
collected or advanced by the
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Servicer or such other entity and remitted to the Trustee pursuant to the terms
of the Agreement for such series. See "Description of the
Certificates--Distributions of Principal and Interest."
There can be no assurance that real estate values will remain at
present levels in the areas in which the Mortgaged Properties will be located.
If the residential 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 properties subject to the
Mortgage Loans included in such Mortgage Pool, the actual rates of
delinquencies, foreclosures and losses could be significantly higher than those
now generally experienced in the mortgage lending industry. To the extent that
such delinquencies, foreclosures and losses are not covered by applicable credit
enhancements described in the Prospectus Supplement, the losses resulting
therefrom will be borne by holders of the Certificates of the series evidencing
interests in such Mortgage Pool. With respect to any series as to which
subordinated Certificates shall have been issued, such losses will first be
borne by the holders of subordinated Certificates as a result and to the extent
of the subordination in right of payment of the subordinated Certificates to the
senior Certificates and as a result of first allocating such losses to reduce
the Certificate Principal Balance of such subordinated Certificates.
Because the principal amounts of Mortgage Loans decline monthly as
principal payments, including prepayments, are received, the fractional
undivided interest in principal evidenced by each Certificate in a series
multiplied by the aggregate principal balance of the Mortgage Loans in the
related Mortgage Pool will decline correspondingly. The principal balance
represented by a Certificate, therefore, ordinarily will decline over time.
CREDIT SUPPORT
GENERAL
Credit support may be provided with respect to one or more classes of
a series of Certificates or with respect to the assets in the related Trust
Fund. Credit support may be in the form of a limited financial guarantee policy,
limited guarantee or other similar instrument (a "Limited Guarantee") issued by
an entity named in the Prospectus Supplement (the "Guarantor"), the
subordination of one or more classes of the Certificates of such series, the
establishment of one or more reserve accounts, the use of a pool insurance
policy, bankruptcy bond, special hazard insurance policy, repurchase bond,
guaranteed investment contract or another method of credit support described in
the related Prospectus Supplement, or any combination of the foregoing. Unless
otherwise specified in the Prospectus Supplement, any credit support will not
provide protection against all risks of loss and will not guarantee repayment of
the entire principal balance of the Certificates and interest thereon. If losses
occur which exceed the amount covered by credit support or which are not covered
by the credit support, Certificateholders will bear their allocable share of the
resulting deficiencies.
LIMITED GUARANTEE OF THE GUARANTOR
If specified in the Prospectus Supplement, certain obligations of the
Servicer under the related Agreement may be covered by a Limited Guarantee,
limited in scope and amount, issued by the Guarantor. If so specified, the
Guarantor may be obligated to take either or both of the following actions in
the event the Servicer fails to do so: make deposits to the Collection Account
(a "Deposit Guarantee"); or make advances (an "Advance Guarantee"). Any such
Limited Guarantee will be limited in amount and a portion of the coverage of any
such Limited Guarantee may be separately allocated to certain events. The scope,
amount and, if applicable, the allocation of any Limited Guarantee will be
described in the related Prospectus Supplement.
SUBORDINATION
If so specified in the Prospectus Supplement, distributions in respect
of scheduled principal, Principal Prepayments, interest or any combination
thereof that otherwise would have been payable to one or more classes of
Certificates of a series (the "subordinated Certificates") will instead be
payable to holders of one or more other classes of such series (the "senior
Certificates") under the circumstances and to the extent specified in the
Prospectus
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Supplement. If specified in the Prospectus Supplement, delays in receipt of
scheduled payments on the Mortgage Loans and losses on defaulted Mortgage Loans
will be borne first by the various classes of subordinated Certificates and
thereafter by the various classes of senior Certificates, in each case under the
circumstances and subject to the limitations specified in the Prospectus
Supplement. The aggregate distributions in respect of delinquent payments on the
Mortgage Loans over the lives of the Certificates or at any time, the aggregate
losses in respect of defaulted Mortgage Loans which must be borne by the
subordinated Certificates by virtue of subordination and the amount of the
distributions otherwise distributable to the subordinated Certificateholders
that will be distributable to senior Certificateholders on any Distribution Date
may be limited as specified in the Prospectus Supplement. If aggregate
distributions in respect of delinquent payments on the Mortgage Loans or
aggregate losses in respect of such Mortgage Loans were to exceed the total
amounts payable and available for distribution to holders of subordinated
Certificates or, if applicable, were to exceed the specified maximum amount,
holders of senior Certificates could experience losses on the Certificates.
In addition to or in lieu of the foregoing, if so specified in the
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of subordinated Certificates on any Distribution Date may instead be
deposited into one or more reserve accounts (a "Reserve Account") established by
the Trustee. If so specified in the Prospectus Supplement, such deposits may be
made on each Distribution Date, on each Distribution Date for specified periods
or until the balance in the Reserve Account has reached a specified amount and,
following payments from the Reserve Account to holders of senior Certificates or
otherwise, thereafter to the extent necessary to restore the balance in the
Reserve Account to required levels, in each case as specified in the Prospectus
Supplement. If so specified in the Prospectus Supplement, amounts on deposit in
the Reserve Account may be released to the Servicer or the holders of any class
of Certificates at the times and under the circumstances specified in the
Prospectus Supplement.
If specified in the Prospectus Supplement, one or more classes of
Certificates may bear the risk of certain losses on defaulted Mortgage Loans not
covered by other forms of credit support prior to other classes of Certificates.
Such subordination might be effected by reducing the Certificate Principal
Balance of the subordinated Certificates on account of such losses, thereby
decreasing the proportionate share of distributions allocable to such
Certificates, or by another means specified in the Prospectus Supplement.
If specified in the Prospectus Supplement, various classes of senior
Certificates and subordinated Certificates may themselves be subordinate in
their right to receive certain distributions to other classes of senior and
subordinated Certificates, respectively, through a cross-support mechanism or
otherwise.
As between classes of senior Certificates and as between classes of
subordinated Certificates, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the Prospectus Supplement. As
between classes of subordinated Certificates, payments to holders of senior
Certificates on account of delinquencies or losses and payments to any Reserve
Account will be allocated as specified in the Prospectus Supplement.
CROSS-SUPPORT
If specified in the Prospectus Supplement, the beneficial ownership of
separate groups of assets included in a Trust Fund may be evidenced by separate
classes of the related series of Certificates. In such case, credit support may
be provided by a cross-support feature which may require that distributions be
made with respect to Certificates evidencing beneficial ownership of one or more
asset groups prior to distributions to subordinated Certificates evidencing a
beneficial ownership interest in other asset groups within the same Trust Fund.
The Prospectus Supplement for a series which includes a cross-support feature
will describe the manner and conditions for applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one
or more forms of credit support may apply concurrently to two or more separate
Trust Funds. If applicable, the Prospectus Supplement will identify the Trust
Funds to which such credit support relates and the manner of determining the
amount of the coverage provided thereby and of the application of such coverage
to the identified Trust Funds.
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POOL INSURANCE
In order to decrease the likelihood that Certificateholders will
experience losses in respect of the Mortgage Loans, if specified in the
Prospectus Supplement, the Seller will obtain one or more pool insurance
policies. Any such policies may be in lieu of or in addition to any obligations
of the Seller or the Servicer in respect of the Mortgage Loans. Such pool
insurance policy will, subject to the limitations described below and in the
Prospectus Supplement, cover loss by reason of default in payments on the
Mortgage Loans up to the amounts specified in the Prospectus Supplement or the
Detailed Description and for the periods specified in the Prospectus Supplement.
The Servicer will agree to use its best reasonable efforts to maintain in effect
any such pool insurance policy and to present claims thereunder to the pool
insurer on behalf of itself, the Trustee and the Certificateholders. The pool
insurance policy, however, is not a blanket policy against loss, since claims
thereunder may only be made respecting particular defaulted Mortgage Loans and
only upon satisfaction of certain conditions precedent described below. The pool
insurance policy, if any, will not cover losses due to a failure to pay or
denial of a claim under a primary mortgage insurance policy, irrespective of the
reason therefor. The related Prospectus Supplement will describe any provisions
of a pool insurance policy that are materially different from those described
below.
Any pool insurance policy may provide that no claims may be validly
presented thereunder unless (i) any required primary mortgage insurance policy
is in effect for the defaulted Mortgage Loan and a claim thereunder has been
submitted and settled; (ii) hazard insurance on the related Mortgaged Property
has been kept in force and real estate taxes and other protection and
preservation expenses have been paid; (iii) if there has been physical loss or
damage to the Mortgaged Property, it has been restored to its condition
(reasonable wear and tear excepted) at the Cut-Off Date; (iv) the insured has
acquired good and merchantable title to the Mortgaged Property free and clear of
liens, except certain permitted encumbrances; and (v) the Servicer has advanced
foreclosure costs. Upon satisfaction of these conditions, the pool insurer will
have the option either (a) to purchase the Mortgaged Property at a price equal
to the Principal Balance thereof plus accrued and unpaid interest at the
Mortgage Rate to the date of purchase and certain expenses incurred by the
Servicer on behalf of the Trustee and the Certificateholders, or (b) to pay the
amount by which the sum of the Principal Balance of the defaulted Mortgage Loan
plus accrued and unpaid interest at the Mortgage Rate to the date of payment of
the claim and the aforementioned expenses exceeds the proceeds received from an
approved sale of the Mortgaged Property, in either case net of certain amounts
paid or assumed to have been paid under any related primary mortgage insurance
policy. If any property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy or any applicable
special hazard insurance policy are insufficient to restore the damaged property
to a condition sufficient to permit recovery under the pool 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 Servicer for its expenses, and (ii) that such expenses will
be recoverable by it through proceeds of the sale of the property or proceeds of
the pool insurance policy or any primary mortgage insurance policy.
In general, 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
Mortgagor or persons involved in the origination thereof, or (ii) failure to
construct a Mortgaged Property in accordance with plans and specifications. If
so specified in the related Prospectus Supplement, a failure of coverage
attributable to one of the foregoing events might result in a breach of a
representation of the Seller (or another party) and in such event might give
rise to an obligation on the part of the Seller (or such other party) to
purchase or replace the defaulted Mortgage Loan if the breach materially and
adversely affects the interests of Certificateholders and cannot be cured.
As specified in the Prospectus Supplement, the original amount of
coverage under any pool insurance policy will be reduced over the life of the
related series of Certificates by the aggregate dollar amount of claims paid
less the aggregate of the net amounts realized by the pool insurer upon
disposition of all foreclosed properties. The amount of claims paid will include
certain expenses incurred by the Servicer as well as accrued interest on
delinquent Mortgage Loans to the date of payment of the claim. See "Certain
Legal Aspects of the Mortgage Loans --Foreclosure". Accordingly, if aggregate
net claims paid under any pool insurance policy reach the original policy limit,
coverage under
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that pool insurance policy will be exhausted and any further losses will be
borne by one or more classes of Certificateholders unless assumed by some other
entity, if and to the extent specified in the Prospectus Supplement.
Since any mortgage pool insurance policy may require that the property
subject to a defaulted Mortgage Loan be restored to its original condition prior
to claiming against the pool insurer, such policy may not provide coverage
against hazard losses. The hazard policies concerning the Mortgage Loans
typically exclude from coverage physical damage resulting from a number of
causes and, even when the damage is covered, may afford recoveries which are
significantly less than the full replacement cost of such losses. Even if
special hazard insurance is applicable as specified in the Prospectus
Supplement, no coverage in respect of special hazard losses will cover all
risks, and the amount of any such coverage will be limited. See "Special Hazard
Insurance" below. As a result, certain hazard risks will not be insured against
and will therefore be borne by Certificateholders, unless otherwise assumed by
some other entity, as specified in the Prospectus Supplement.
SPECIAL HAZARD INSURANCE
In order to decrease the likelihood that Certificateholders will
experience losses in respect of the Mortgage Loans, if specified in the
Prospectus Supplement, the Seller will obtain one or more special hazard
insurance policies with respect to the Mortgage Loans. Such a special hazard
insurance policy will, subject to limitations described below and in the
Prospectus Supplement, protect holders of Certificates from (i) loss by reason
of damage to Mortgaged Properties caused by certain hazards (including
earthquakes and, to a limited extent, tidal waves and related water damage) not
covered by the standard form of hazard insurance policy for the respective
states in which the Mortgaged Properties are located or under flood insurance
policies, if any, covering the Mortgaged Properties, and (ii) loss from partial
damage caused by reason of the application of the co-insurance clause contained
in hazard insurance policies. See "Servicing of the Mortgage Loans--Hazard
Insurance" below. Any special hazard insurance policy may not cover losses
occasioned by war, civil insurrection, certain governmental actions, errors in
design, faulty workmanship or materials (except under certain circumstances),
nuclear reaction, flood (if the Mortgaged Property is located in a federally
designated flood area), chemical contamination and certain other risks.
Aggregate claims under each special hazard insurance policy may be limited to a
specified percentage of the aggregate principal balance as of the Cut-Off Date
of the Mortgage Loans. Any special hazard insurance policy may also provide that
no claim may be paid unless hazard and, if applicable, flood insurance on the
Mortgaged Property has been kept in force and other protection and preservation
expenses have been paid by the Servicer.
Subject to the foregoing limitations, any special hazard insurance
policy may provide that, where there has been damage to property securing a
foreclosed Mortgage Loan (title to which has been acquired by the insured) and
to the extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the mortgagor or the Servicer, the
special hazard insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the property to the
special hazard insurer, the unpaid principal balance of such Mortgage Loan at
the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement and certain
expenses incurred by the Servicer with respect to such property. If the unpaid
principal balance plus accrued interest and certain expenses is paid by the
insurer, the amount of further coverage under the related special hazard
insurance policy will be reduced by such amount less any net proceeds from the
sale of the property. Any amount paid as the cost of repair or replacement of
the property will also reduce coverage by such amount. Restoration of the
property with the proceeds described under clause (i) above will satisfy the
condition under any pool insurance policy that the property be restored before a
claim under such pool insurance policy may be validly presented with respect to
the defaulted Mortgage Loan secured by such property. The payment described
under clause (ii) above will render unnecessary presentation of a claim in
respect of such Mortgage Loan under the related pool insurance policy.
Therefore, so long as a pool insurance policy remains in effect, the payment by
the insurer under a special hazard insurance policy of the cost of repair or
replacement or the unpaid principal balance of the Mortgage Loan plus accrued
interest and certain expenses will not affect the total insurance proceeds paid
to Certificateholders, but will affect the relative amounts of coverage
remaining under the related special hazard insurance policy and pool insurance
policy.
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BANKRUPTCY BOND
In the event of a bankruptcy of a borrower, the bankruptcy court may
establish the value of the Mortgaged Property securing the related Mortgage Loan
at an amount less than the then outstanding principal balance of such Mortgage
Loan secured by such Mortgaged Property and could reduce the secured debt to
such value. In such case, the holder of such Mortgage Loan would become an
unsecured creditor to the extent of the difference between the outstanding
principal balance of such Mortgage Loan and such reduced secured debt. In
addition, certain other modifications of the terms of a Mortgage Loan can result
from a bankruptcy proceeding, including the reduction in monthly payments
required to be made by the borrower. See "Certain Legal Aspects of the Mortgage
Loans --Enforceability of Certain Provisions". If so provided in the related
Prospectus Supplement, the Servicer will obtain a bankruptcy bond or similar
insurance contract (the "bankruptcy bond") for proceedings with respect to
borrowers under the Bankruptcy Code. Any such bankruptcy bond will cover certain
losses resulting from a reduction by a bankruptcy court of scheduled payments of
principal of and interest on a Mortgage Loan or a reduction by such court of the
secured principal amount of a Mortgage Loan and will cover certain unpaid
interest on the amount of such a principal reduction from the date of the filing
of a bankruptcy petition.
Any such bankruptcy bond will provide coverage in the aggregate amount
specified in the related Prospectus Supplement. Such amount will be reduced by
payments made under such bankruptcy bond in respect of the related Mortgage
Loans, to the extent specified in the related Prospectus Supplement, and will
not be restored.
In lieu of a bankruptcy bond, the Servicer may obtain a Limited
Guarantee to cover such bankruptcy-related losses.
REPURCHASE BOND
If so specified in the related Prospectus Supplement, the Servicer will
be obligated to purchase any Mortgage Loan up to an aggregate dollar amount
specified in the related Prospectus Supplement) for which insurance coverage is
denied due to dishonesty, misrepresentation or fraud in connection with the
origination or sale of such Mortgage Loan. Such obligation may be secured by a
surety bond or other instrument or mechanism guaranteeing payment of the amount
to be paid by the Servicer.
GUARANTEED INVESTMENT CONTRACTS
If so specified in the Prospectus Supplement, on or prior to the
Delivery Date, the Trustee will enter into a guaranteed investment contract (a
"GIC") pursuant to which all amounts deposited in the Collection Account, and if
so specified the Reserve Accounts, will be invested by the Trustee and under
which the issuer of the GIC will pay to the Trustee interest at an agreed rate
per annum with respect to the amounts so invested.
RESERVE ACCOUNTS
If specified in the Prospectus Supplement, cash, U.S. Treasury
securities, instruments evidencing ownership of principal or interest payments
thereon, letters of credit, demand notes, certificates of deposit, other
instruments or obligations or a combination thereof in the aggregate amount
specified in the Prospectus Supplement will be deposited by the Servicer on the
Delivery Date in one or more Reserve Accounts established by the Trustee. Such
cash and the principal and interest payments on such other instruments will be
used to enhance the likelihood of timely payment of principal of, and interest
on, or, if so specified in the Prospectus Supplement, to provide additional
protection against losses in respect of, the assets in the related Trust Fund,
to pay the expenses of the Trust Fund or for such other purposes specified in
the Prospectus Supplement. Whether or not the Servicer has any obligation to
make such a deposit, certain amounts to which the subordinated
Certificateholders, if any, will otherwise be entitled may instead be deposited
into the Reserve Account from time to time and in the amounts as specified in
the Prospectus Supplement. Any cash in the Reserve Account and the proceeds of
any other instrument upon maturity will be invested in Eligible Investments,
which will include obligations of the United States and certain agencies
thereof, certificates of deposit, certain commercial paper, time deposits and
bankers acceptances sold by eligible commercial banks, certain repurchase
agreements of
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United States government securities with eligible commercial banks and certain
other Eligible Investments described in the Agreement. If a letter of credit is
deposited with the Trustee, such letter of credit will be irrevocable. Unless
otherwise specified in the Prospectus Supplement, any instrument deposited
therein will name the Trustee, in its capacity as trustee for the holders of the
related Certificates, as beneficiary and will be issued by an entity acceptable
to each rating agency that rates the Certificates. Additional information with
respect to such instruments deposited in the Reserve Accounts will be set forth
in the Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Account for distribution to the
holders of Certificates for the purposes, in the manner and at the times
specified in the Prospectus Supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the Prospectus Supplement, the related Trust Fund may
also include insurance, guarantees, letters of credit or similar arrangements
for the purpose of (i) maintaining timely payments or providing additional
protection against losses on the assets included in such Trust Fund, (ii) paying
administrative expenses or (iii) establishing a minimum reinvestment rate on the
payments made in respect of such assets or principal payment rate on such
assets. Such arrangements may include agreements under which Certificateholders
are entitled to receive amounts deposited in various accounts held by the
Trustee upon the terms specified in the Prospectus Supplement. Such arrangements
may be in lieu of any obligation of the Servicer to advance delinquent
installments in respect of the Mortgage Loans.
YIELD, MATURITY AND WEIGHTED AVERAGE LIFE CONSIDERATIONS
The yields to maturity and weighted average lives of the Certificates
will be affected primarily by the rate and timing of principal payments received
on or in respect of the Mortgage Loans included in the related Trust Fund. Such
principal payments will include scheduled payments as well as Principal
Prepayments (including refinancings) and prepayments resulting from foreclosure,
condemnation and other dispositions of the Mortgaged Properties (including
amounts paid by insurers under applicable insurance policies), from purchase by
the Seller of any Mortgage Loan as to which there has been a material breach of
warranty or defect in documentation (or deposit of certain amounts in respect of
delivery of a substitute Mortgage Loan), purchase by the Servicer of Mortgage
Loans modified by it in lieu of refinancing thereof and from the repurchase by
the Seller of all of the Mortgage Loans in certain circumstances. See "The
Pooling and Servicing Agreement--Termination; Purchase of Mortgage Loans." The
yield to maturity and weighted average lives of the Certificates may also be
affected by the amount and timing of delinquencies and losses on the Mortgage
Loans.
A number of social, economic, tax, geographic, demographic, legal and
other factors may influence prepayments, delinquencies and losses. For a Trust
Fund comprised of Mortgage Loans, these factors may include the age of the
Mortgage Loans, the geographic distribution of the Mortgaged Properties, the
payment terms of the Mortgages, the characteristics of the mortgagors, homeowner
mobility, economic conditions generally and in the geographic area in which the
Mortgaged Properties are located, enforceability of due-on-sale clauses,
servicing decisions, prevailing mortgage market interest rates in relation to
the interest rates on the Mortgage Loans, the availability of mortgage funds,
the use of second or "home equity" mortgage loans by mortgagors, the
availability of refinancing opportunities (including refinancing opportunities
offered by HomeSide Lending to existing borrowers or to its affiliates), the use
of the properties as second or vacation homes, the extent of the mortgagors' net
equity in the Mortgaged Properties and, where investment properties are securing
the Mortgage Loans, tax-related considerations and the availability of other
investments. The rate of principal payment may also be subject to seasonal
variations.
The rate of principal prepayments on pools of conventional housing
loans has fluctuated significantly in recent years. Generally, if prevailing
interest rates were to fall significantly below the interest rates on the
Mortgage Loans, the Mortgage Loans would be expected to prepay at higher rates
than if prevailing rates were to remain at or above the interest rates on the
Mortgage Loans. Conversely, if interest rates were to rise above the interest
rates on the Mortgage Loans, the Mortgage Loans would be expected to prepay at
lower rates than if prevailing rates were to remain at or below interest rates
on the Mortgage Loans. The timing of changes in the rate of prepayments may
significantly affect
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a Certificateholder's actual yield to maturity, even if the average rate of
principal payments is consistent with a Certificateholder's expectation. In
general, the earlier a prepayment of principal the greater the effect on a
Certificateholder's yield to maturity. As a result, the effect on a
Certificateholder's yield of principal payments occurring at a rate higher (or
lower) than the rate anticipated by the investor during the period immediately
following the issuance of the related series of Certificates will not be offset
by a subsequent like reduction (or increase) in the rate of principal payments.
To the extent described in the applicable Prospectus Supplement, the
effective yields to Certificateholders will be lower than the yields produced by
the interest rates on the Certificates because, while interest will accrue on
each Mortgage Loan from the first day of each month, the distribution of such
interest to Certificateholders will be made in the month following the month of
accrual.
When a Mortgage Loan prepays in full, the borrower will generally be
required to pay interest on the amount of prepayment only to the prepayment
date. When a partial prepayment of principal is made on a Mortgage Loan, the
borrower generally will not be required to pay interest on the amount of the
partial prepayment during the month in which such prepayment is made. In
addition, unless otherwise specified in the related Prospectus Supplement, a
full or partial prepayment will not be required to be passed through to
Certificateholders until the month following receipt.
If and to the extent specified in the applicable Prospectus Supplement,
under the Agreement, if a full or partial voluntary prepayment of a Mortgage
Loan is made and does not include the full amount of interest on such Mortgage
Loan which would have been due but for such prepayment to and including the end
of the month in which the prepayment takes place, the servicer will be obligated
to pay the interest thereon at the Remittance Rate from the date of prepayment
through the end of such month (each such payment, a "Compensating Interest
Payment"), provided that the aggregate of such Compensating Interest Payments by
the Servicer with respect to any Distribution Date will not exceed the aggregate
Servicing Fee to which the Servicer is entitled in connection with such
Distribution Date. The Servicer will not be entitled to reimbursement for such
Compensating Interest Payments. Consequently, to the extent the Servicer is so
obligated, neither partial nor full prepayments will reduce the amount of
interest passed through to Certificateholders the following month from the
amount which would have been passed through in the absence of such prepayments.
If the Servicer is not obligated to make Compensating Interest Payments, or if
such payments are insufficient to cover the interest shortfall, partial or full
prepayments will reduce the amount of interest passed through to
Certificateholders, as described in the applicable Prospectus Supplement.
Factors other than those identified herein and in the Prospectus
Supplement could significantly affect principal prepayments at any time and over
the lives of the Certificates. The relative contribution of the various factors
affecting prepayment may also vary from time to time. There can be no assurance
as to the rate of payment of principal of the Mortgage Loans at any time or over
the lives of the Certificates.
The Prospectus Supplement relating to a series of Certificates will
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments), delinquencies and losses on the yield,
weighted average lives and maturities of such Certificates.
HOMESIDE MORTGAGE SECURITIES, INC.
HomeSide Mortgage Securities, Inc. ("HomeSide Mortgage Securities" or
the "Seller") is a Delaware corporation and a wholly-owned subsidiary of
HomeSide Lending, Inc. The Seller has not had and is not expected to have any
business operations other than offering Certificates and related activities. The
Seller's principal offices are located at 7301 Baymeadows Way, Jacksonville,
Florida 32256. Its telephone number is (904) 281-3000. See "HomeSide Mortgage
Securities, Inc." in the Prospectus.
HOMESIDE LENDING, INC.
HomeSide Lending, Inc. ("HomeSide Lending" or the "Servicer"), the
successor to BancBoston Mortgage Corporation ("BBMC"), which was the mortgage
banking subsidiary of BankBoston, N.A., formerly known as The First
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National BankBoston ("BankBoston"), was acquired by HomeSide, Inc. on March 15,
1996 (the "BBMC Acquisition"). Barnett Mortgage Corporation ("BMC"), formerly
the mortgage banking subsidiary of Barnett Banks, Inc. ("Barnett"), was acquired
by HomeSide, Inc. on May 31, 1996. Upon the acquisition of BMC, now known as
HomeSide Holdings, Inc. ("HomeSide Holdings"), by HomeSide, Inc., all of the
assets and liabilities of BMC, with the exception of certain GNMA servicing
rights, were transferred to HomeSide Lending. HomeSide Holdings is an indirect
wholly-owned subsidiary of HomeSide, Inc. and HomeSide Lending is a wholly-owned
subsidiary of HomeSide Holdings. On February 10, 1998, a wholly-owned subsidiary
of National Australia Bank Ltd. ("NAB") acquired all the outstanding shares of
common stock of HomeSide, Inc. Following the transaction described above, such
subsidiary now owns 100% of the common stock of HomeSide, Inc. (now known as
HomeSide International, Inc.) and HomeSide International, Inc. became an
indirect wholly-owned subsidiary of NAB. HomeSide Lending was incorporated in
Florida on September 18, 1986. HomeSide Lending's executive offices are located
at 7301 Baymeadows Way, Jacksonville, Florida 32256, telephone number (904)
281-3000.
HomeSide Lending is engaged in the business of mortgage banking, which
primarily involves originating, purchasing, selling and servicing residential
mortgage loans secured by one- to four-family homes.
PRODUCTION
HomeSide Lending originates and purchases residential single family
mortgage loans through all major channels including correspondents, mortgage
brokers, co-issue partners, consumer direct telemarketing and affinity programs.
Each correspondent assisting HomeSide Lending in the origination of mortgage
loans is required to follow HomeSide Lending's loan underwriting policies.
WHOLESALE PRODUCTION
CORRESPONDENT PRODUCTION
Through its correspondent program, HomeSide Lending purchases loans
from approximately 500 commercial banks, savings and loan associations, licensed
mortgage lenders and other financial intermediaries. The correspondent takes the
mortgage application and processes the loan, which is either underwritten
through contract underwriters or, in some cases, the correspondent to whom
underwriting authority has been delegated. Closing documents are submitted to
HomeSide Lending for legal review and funding. The participants in this program
are prequalified and monitored on an ongoing basis by HomeSide Lending. If a
correspondent subsequently fails to meet HomeSide Lending's requirements,
HomeSide Lending typically terminates the relationship. Correspondents are also
required to repurchase loans in the event of fraud or misrepresentation in the
origination process and for certain other reasons.
CO-ISSUE PRODUCTION
Co-issue production, which represents the purchase of servicing rights
from a correspondent under contracts to deliver specified volumes on a monthly
or quarterly basis, is another main source of HomeSide Lending's production. The
co-issue correspondent controls the entire loan process from application to
closing. This arrangement particularly suits large originators who have the
ability to deliver on an automated basis. Reflecting this delegated underwriting
authority, co-issue correspondents are subject to more extensive credit and
quality control reviews. Contractually, the co-issue correspondent is obligated
to make certain representations and warranties and is required to repurchase
loans in the event of fraud or misrepresentation in the origination process or
for certain other reasons.
BROKER PRODUCTION
Under its broker program, HomeSide Lending funds loans at closing from
a network of approximately 450 mortgage brokers nationwide. The broker controls
the process of application and loan processing. A preclosing quality control
review is performed by HomeSide Lending to verify the borrower's credit. All
loans originated through brokers are underwritten by HomeSide Lending's approved
contract underwriters. Loans are funded by HomeSide Lending and may be closed in
either the broker's name or HomeSide Lending's name. Participants in this
program prequalify on the
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basis of creditworthiness, mortgage lending experience and reputation. Each
broker is subject to annual and ongoing reviews by HomeSide Lending.
DIRECT PRODUCTION
HomeSide Lending's direct production includes the use of telemarketing
to originate loans from several sources, including refinancings of mortgage
loans in HomeSide Lending's existing servicing portfolio, leads generated from
direct mail campaigns and other advertising, and mortgages related to affinity
group and co-branding partnerships.
BankBoston retained all of its retail production facilities in the New
England area and entered into exclusive five-year agreements to sell, subject to
certain limitations, all loans originated from these sources to HomeSide Lending
on a broker or correspondent basis at market prices. In 1996, HomeSide Lending
sold or closed most of HomeSide Lending's remaining retail branches.
HomeSide Lending may from time to time conduct solicitations of
borrowers under any Mortgage Loans to refinance such loans with HomeSide Lending
acting for its own account. See "Yield, Maturity and Weighted Average Life
Considerations."
UNDERWRITING POLICIES
The Mortgage Loans will be originated or acquired by HomeSide Lending
based on its credit, appraisal, and underwriting guidelines as published and
amended from time to time. The Mortgage Loans may be underwritten by HomeSide
Lending or by designated third parties. HomeSide Lending may purchase Mortgage
Loans which do not conform to the underwriting standards set forth in HomeSide
Lending's published guide. Such Mortgage Loans may be purchased in negotiated
transactions from sellers who will represent that the Mortgage Loans have been
originated in accordance with credit, appraisal and underwriting standards
agreed to by HomeSide Lending. In such event, the applicable Prospectus
Supplement will describe the underwriting standards used in originating such
Mortgage Loans. All Mortgage Loans will be originated using an application
approved by HomeSide Lending.
In originating or purchasing residential mortgages, HomeSide Lending
follows standard procedures established to comply with applicable federal and
state laws and regulations. HomeSide Lending's underwriting standards generally
follow guidelines acceptable to Fannie Mae and FHLMC.
To determine the adequacy of the underlying property to be financed,
HomeSide Lending requires an appraisal by an independent third party. The
appraiser inspects the property and estimates its market value on the basis of
comparable properties and the cost of replacing the property. If the property is
new construction, the appraiser will inspect the property to verify that
construction has been completed. Generally, the maximum amount allowed to be
financed on a property is based upon the lower of purchase price or appraised
value.
Initially, a prospective mortgagor is required to complete a detailed
application designed to provide HomeSide Lending with pertinent information
about the prospective mortgagor, the property to be financed and the type of
loan desired. As part of the description of the prospective mortgagor's
financial condition, HomeSide Lending requires a current statement describing
assets and liabilities and income and expenses, and a credit report which
summarizes the prospective mortgagor's credit and payment history with merchants
and other lenders.
HomeSide Lending may, in order to assess the creditworthiness of a
prospective mortgagor and as part of the normal course of its underwriting
process, use a statistically derived credit or mortgage score. The score is
provided by a third party and may be used to determine eligibility for certain
loan programs. HomeSide Lending, when making an underwriting decision, will use
the score in conjunction with other mortgage loan characteristics.
Under HomeSide Lending's Full Documentation underwriting program,
HomeSide Lending requires verification of the prospective Mortgagor's employment
and income from the prospective mortgagor's employer, where the employer reports
the prospective mortgagor's length of employment with that organization and
current salary. Each
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prospective mortgagor who is self-employed is required to submit a copy of his
or her federal income tax returns. HomeSide Lending may originate or purchase
loans under its Alternative Documentation underwriting program, which is the
same as the corresponding Fannie Mae and FHLMC programs, as in effect at the
time of each mortgage loan origination. Under this program, the prospective
mortgagor's employment and income are verified through alternative sources such
as pay stubs, W-2 forms and/or federal income tax returns.
HomeSide Lending's documentation standards may vary from those
described above for certain prospective mortgagors. The degree to which the
documentation required varies will be dependent on the financial ability of the
prospective mortgagor to make a larger cash down payment on a purchase
transaction or to finance a lower percentage of the appraised value of the
property securing the related mortgage loan. Such standards have been modified,
for example, for mortgage loans eligible for HomeSide Lending's "limited" or "no
ratio" documentation programs. To be eligible for either of these programs, the
prospective mortgagor is required to have a higher level of verified assets
and/or liquid reserves. In addition, greater reliance is placed on the
prospective mortgagor's credit or mortgage score. The maximum Loan-to-Value
ratio of any mortgage loan originated under these programs is 80%.
Under the Limited Documentation Program, HomeSide Lending may not
require that a prospective borrower's income be verified prior to closing, but
the prospective borrower must agree to allow HomeSide Lending to audit the
prospective mortgagor's income at a later date.
Under the No Ratio Documentation Program, income is not used as a means
of qualifying for the loan. The prospective mortgagor is required to provide
evidence of his or her job stability to be verified in writing by an independent
third party. HomeSide Lending may require two full appraisals or may place
certain other restrictions on eligibility for this program.
Upon receipt of the appropriate verification, HomeSide Lending makes a
determination as to whether the prospective mortgagor has sufficient monthly
income to meet the monthly payment obligations on the proposed mortgage loan,
including taxes and insurance, as well as other financial obligations and normal
monthly living expenses. HomeSide Lending's underwriting standards for such
determination generally follow the guidelines established by Fannie Mae and
FHLMC, as in effect at the time of each mortgage loan origination.
Mortgage loans that HomeSide Lending acquires or originates which have
an original principal amount exceeding 80% of original value will usually have
primary mortgage insurance. Such insurance typically reduces the exposure of
HomeSide Lending to an effective Loan-to-Value Ratio of 75%.
HomeSide Lending grants delegated underwriting status to its larger
correspondents who meet certain financial strength, delinquency, underwriting
and quality control standards. The granting of delegated status by HomeSide
Lending enables a correspondent to submit conventional loans to HomeSide Lending
without prior underwriting approval. Correspondent lenders who have not been
granted delegated underwriting status are required by HomeSide Lending to have
their mortgage loans underwritten by third party contract underwriters prior to
purchase by HomeSide Lending. In all cases, correspondents are required to use
underwriting standards established by HomeSide Lending.
HomeSide Lending implemented an automated underwriting process for its
retail production operation in 1994. The automated underwriting technology
incorporates credit scoring and appraisal evaluation systems. These systems
employ rules-based and statistical technologies to evaluate the borrower, the
property and salability of the loan to the secondary market.
From time to time, exceptions to HomeSide Lending's underwriting
guidelines may be made. Such exceptions may be made only if specifically
approved on a loan-by-loan basis by certain personnel of HomeSide Lending who
have the authority to make such exceptions. Exceptions may be made only after
careful consideration of certain mitigating factors such as borrower capacity,
liquidity, employment and residential stability and local economic conditions.
With respect to any Mortgage Pool which contains Mortgage Loans
acquired by HomeSide Lending in a bulk purchase, the related Prospectus
Supplement will describe the extent, if any, to which such Mortgage Loans were
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reunderwritten by HomeSide Lending. To the extent that any Mortgage Pool
contains Mortgage Loans as to which HomeSide Lending is unable to establish the
underwriting standards used in originating such Mortgage Loans, the related
Prospectus Supplement will describe any resulting risks.
SERVICING OF THE MORTGAGE LOANS
Unless otherwise specified in the Prospectus Supplement, with respect
to each series of Certificates, the related Mortgage Loans will be serviced by
HomeSide Lending, acting alone or, as master servicer, through one or more
direct servicers. Unless otherwise specified in the Prospectus Supplement, if
HomeSide Lending acts as master servicer with respect to a series, the related
Agreement will provide that HomeSide Lending shall not be released from its
obligations to the Trustee and Certificateholders with respect to the servicing
and administration of the Mortgage Loans, that any servicing agreement entered
into between HomeSide Lending and a direct servicer will be deemed to be between
HomeSide Lending and the direct servicer alone and that the Trustee and the
Certificateholders will have no claims, obligations, duties or liabilities with
respect to any such agreement.
COLLECTION AND OTHER SERVICING PROCEDURES
Subject to the terms of the Agreement, the Servicer generally will be
obligated to service and administer the Mortgage Loans in accordance with the
specific procedures set forth in the Fannie Mae Seller's Guide and Fannie Mae
Servicing Guide, as amended or supplemented from time to time, and, to the
extent such procedures are unavailable, in accordance with the mortgage
servicing practices of prudent mortgage lending institutions.
The Servicer will be responsible for using its best reasonable efforts
to collect all payments called for under the Mortgage Loans and shall,
consistent with each Agreement, follow such collection procedures as it deems
necessary and advisable with respect to the Mortgage Loans. Consistent with the
above, the Servicer, may, in its discretion, (i) waive any late payment charge
and (ii) if a default on the related Mortgage Loan has occurred or is reasonably
foreseeable, arrange with the mortgagor a schedule for the liquidation of a
delinquency. In the event of any such arrangement the Servicer will be
responsible for distributing funds with respect to such Mortgage Loan during the
scheduled period in accordance with the original amortization schedule thereof
and without regard to the temporary modification thereof.
The Servicer will be obligated to use it best reasonable efforts to
realize upon a defaulted Mortgage Loan in such manner as will maximize the
payments to Certificateholders. In this regard, the Servicer may (directly or
through a local assignee) sell the property at a foreclosure or trustee's sale,
negotiate with the mortgagor for a deed in lieu of foreclosure or, in the event
a deficiency judgment is available against the mortgagor or other person,
foreclose against such property and proceed for the deficiency against the
appropriate person. See "Certain Legal Aspects of the Mortgage
Loans--Anti-Deficiency Legislation and Other Limitations on Lenders" for a
description of the limited availability of deficiency judgments. The amount of
the ultimate net recovery (including the proceeds of any pool insurance or other
guarantee), after reimbursement to the Servicer of its expenses incurred in
connection with the liquidation of any such defaulted Mortgage Loan will be
distributed to the related Certificateholders on the next Distribution Date
following the month of receipt. If specified in the Prospectus Supplement, if
such net recovery exceeds the Principal Balance of such Mortgage Loan plus one
month's interest thereon at the Remittance Rate, the excess will be paid to the
Servicer as additional servicing compensation. The Servicer will not be required
to expend its own funds in connection with any foreclosure or towards the
restoration of any Mortgaged Property unless it shall determine (i) that such
restoration or foreclosure will increase the Liquidation Proceeds in respect of
the related Mortgaged Loan to Certificateholders after reimbursement to itself
for such expenses and (ii) that such expenses will be recoverable to it either
through Liquidation Proceeds or Insurance Proceeds in respect of the related
Mortgage Loan.
If a Mortgaged Property has been or is about to be conveyed by the
mortgagor, the Servicer will be obligated to accelerate the maturity of the
Mortgage Loan, unless it reasonably believes it is unable to enforce that
Mortgage Loan's "due-on-sale" clause under applicable law or such enforcement
would adversely affect or jeopardize coverage under any related primary mortgage
insurance policy or pool insurance policy. If it reasonably believes it may be
restricted by law, for any reason, from enforcing such a "due-on-sale" clause,
the Servicer, with the consent of the
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insurer under any insurance policy implicated thereby, may enter into an
assumption and modification agreement with the person to whom such property has
been or is about to be conveyed, pursuant to which such person becomes liable
under the Mortgage Note. Any fee collected by the Servicer for entering into an
assumption agreement will be retained by the Servicer as additional servicing
compensation. For a description of circumstances in which the Servicer may be
unable to enforce "due-on-sale" clauses, see "Certain Legal Aspects of the
Mortgage Loans -- Enforceability of Certain Provisions". In connection with any
such assumption, the Mortgage Rate borne by the related Mortgage Note may not be
decreased.
The Servicer will maintain with one or more depository institutions
one or more accounts into which it will deposit all payments of taxes, insurance
premiums, assessments or comparable items received for the account of the
mortgagors. Withdrawals from such account or accounts may be made only to effect
payment of taxes, insurance premiums, assessments or comparable items, to
reimburse the Servicer out of related collections for any cost incurred in
paying taxes, insurance premiums and assessments or otherwise preserving or
protecting the value of the Mortgages, to refund to mortgagors any amounts
determined to be overages and to pay interest to mortgagors on balances in such
account or accounts to the extent required by law.
PRIVATE MORTGAGE INSURANCE
Generally, Mortgage Loans that the Servicer originates or acquires do
not have Loan-to-Value Ratios in excess of 95%. Unless otherwise specified in
the Prospectus Supplement, each Agreement will obligate the Servicer to exercise
its best reasonable efforts to maintain and keep in full force and effect a
private mortgage insurance policy on all Mortgage Loans that have a
Loan-to-Value Ratio in excess of 80%.
A private mortgage insurance policy may provide that, as an alternative
to paying a claim thereunder, the mortgage insurer will have the right to
purchase the Mortgage Loan following the receipt of a notice of default, at a
purchase price equal to the sum of the principal balance of the Mortgage Loan,
accrued interest thereon and the amount of certain advances made by the Servicer
with respect to the Mortgage Loan. The mortgage insurer may have such purchase
right after the borrower has failed to make three scheduled monthly payments (or
one payment if it is the first payment due on the Mortgage Loan) or after any
foreclosure or other proceeding affecting the Mortgage Loan or the Mortgaged
Property has been commenced. The proceeds of any such purchase will be
distributed to Certificateholders on the applicable Distribution Date. A
mortgage insurer may be more likely to exercise such purchase option when
prevailing interest rates are low relative to the interest rate borne by the
defaulted Mortgage Loan, in order to reduce the aggregate amount of accrued
interest that the insurer would be obligated to pay upon payment of a claim.
HAZARD INSURANCE
The Servicer will cause to be maintained for each Mortgaged Property a
standard hazard insurance policy. The coverage of such policy is required to be
in an amount at least equal to the maximum insurable value of the improvements
which are a part of such property from time to time or the principal balance
owing on such Mortgage Loan from time to time, whichever is less. All amounts
collected by the Servicer under any hazard policy (except for amounts to be
applied to the restoration or repair of property subject to the related Mortgage
or property acquired by foreclosure or amounts released to the related mortgagor
in accordance with the Servicer's normal servicing procedures) will be deposited
in the Collection Account.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and, therefore, will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flow), nuclear
reactions, pollution, wet or dry rot, vermin, rodents, insects or domestic
animals, theft and, in certain cases, vandalism. The foregoing list is merely
indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive. If the property securing a Mortgage Loan is located in a
federally designated
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flood area, the Agreement will require that flood insurance be maintained in an
amount representing coverage not less than the least of (i) the principal
balance owing on such Mortgage Loan from time to time, (ii) the maximum
insurable value of the improvements which are a part of such property from time
to time or (iii) the maximum amount of insurance which is available under the
Flood Disaster Protection Act of 1973, as amended. The Seller may also purchase
special hazard insurance against certain of the uninsured risks described above.
See "Credit Support--Special Hazard Insurance".
Most of the properties securing the Mortgage Loans will be covered by
homeowners' insurance policies, which, in addition to the standard form of fire
and extended coverage, provide coverage for certain other risks. These
homeowners' policies typically contain a "coinsurance" clause which in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the 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, then the insurer's
liability in the event of partial loss will not exceed the lesser of (i) the
actual cash value (generally defined as replacement cost at the time and place
of loss, less physical depreciation) of the improvements damaged or destroyed,
or (ii) such proportion of the loss as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such improvements.
Since the amount of hazard insurance the Servicer is required to cause
to be maintained on the improvements securing the Mortgage Loans declines as the
principal balances owing thereon decrease, if the residential properties
securing the Mortgage Loans appreciate in value over time, the effect of
coinsurance in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property.
The Servicer will cause to be maintained on any Mortgaged Property
acquired upon foreclosure, or by deed in lieu of foreclosure, hazard insurance
with extended coverage in an amount which is at least equal to the lesser of (i)
the maximum insurable value from time to time of the improvements which are a
part of such property or (ii) the unpaid principal balance of the related
Mortgage Loan at the time of such foreclosure or deed in lieu of foreclosure,
plus accrued interest and the Servicer's good-faith estimate of the related
liquidation expenses to be incurred in connection therewith.
The Servicer may maintain, in lieu of causing individual hazard
insurance policies to be maintained with respect to each Mortgage Loan, one or
more blanket insurance policies covering hazard losses on the Mortgage Loans.
The Servicer will pay the premium for such policy on the basis described therein
and will pay any deductible amount with respect to claims under such policy
relating to the Mortgage Loans.
ADVANCES
To the extent specified in the Prospectus Supplement, in the event that
any borrower fails to make any payment of principal or interest required under
the terms of a Mortgage Loan, the Servicer will be obligated to advance the
entire amount of such payment adjusted in the case of any delinquent interest
payment to the applicable Net Mortgage Rate. This obligation to advance will be
limited to amounts which the Servicer reasonably believes will be recoverable by
it out of liquidation proceeds or otherwise in respect of such Mortgage Loan.
The Servicer will be entitled to reimbursement for any such advance from related
late payments on the Mortgage Loan as to which such advance was made.
Furthermore, the Servicer will be entitled to reimbursement for any such advance
(i) from Liquidation Proceeds or Insurance Proceeds received if such Mortgage
Loan is foreclosed prior to any payment to Certificateholders in respect of the
repossession or foreclosure and (ii) from receipts or recoveries on all other
Mortgage Loans or from any other assets of the Trust Fund, for all or any
portion of such advance which the Servicer determines, in good faith, may not be
ultimately recoverable from such liquidation or insurance proceeds (a
"Nonrecoverable Advance"). Any Nonrecoverable Advance will be reimbursable out
of the assets of the Trust Fund. The amount of any scheduled payment required to
be advanced by the Servicer will not be affected by any agreement between the
Servicer and a borrower providing for the postponement or modification of the
due date or amount of such scheduled payment. If specified in the Prospectus
Supplement, the Trustee for the related series will make advances of delinquent
payments of principal and interest in the event of a failure by the Servicer to
perform such obligation.
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Any such obligation to make advances may be limited to amounts due
holders of certain classes of Certificates of the related series or may be
limited to specified periods or otherwise as specified in the Prospectus
Supplement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the Prospectus Supplement, the Servicer's
primary compensation for its servicing activities will come from the payment to
it, with respect to each interest payment on a Mortgage Loan, of all or a
portion of the difference between the Mortgage Rate for such Mortgage Loan and
the related Remittance Rate. In addition to its primary compensation, the
Servicer will retain all assumption fees, late payment charges and other
miscellaneous charges, all to the extent collected from borrowers. In the event
the Servicer is acting as master servicer under an Agreement, it will receive
compensation with respect to the performance of its activities as master
servicer.
Unless otherwise specified in the Prospectus Supplement, the Servicer
will be responsible for paying all expenses incurred in connection with the
servicing of the Mortgage Loans (subject to limited reimbursement as described
under "The Pooling and Servicing Agreement---Payments on Mortgage Loans;
Collection Account"), including, without limitation, payment of any premium for
any Advance Guarantee, Deposit Guarantee, bankruptcy bond, repurchase bond or
other guarantee or surety, payment of the fees and the disbursements of the
Trustee and the and independent accountants, payment of the compensation of any
direct servicers of the Mortgage Loans, payment of all fees and expenses in
connection with the realization upon defaulted Mortgage Loans and payment of
expenses incurred in connection with distributions and reports to
Certificateholders. Unless otherwise specified in the Prospectus Supplement, the
Servicer may assign any of its primary servicing compensation in excess of that
amount customarily retained as servicing compensation for similar assets.
RESIGNATION, SUCCESSION AND INDEMNIFICATION OF THE SERVICER
The Agreement will provide that the Servicer may not resign from its
obligations and duties as servicer or master servicer thereunder, except upon
determination that its performance of such duties is no longer permissible under
applicable law. No such resignation will become effective until the Trustee or a
successor has assumed the Servicer's servicing obligations and duties under such
Agreement. The Guarantor's obligations under any Advance Guarantee or Deposit
Guarantee will, upon issuance thereof, be irrevocable, subject to certain
limited rights of assignment as described in the Prospectus Supplement if
applicable.
The Agreement will provide that neither the Seller nor the Servicer
nor, if applicable, the Guarantor, nor any of their respective directors,
officers, employees or agents, shall be under any liability to the Trust Fund or
the Certificateholders of the related series for taking any action, or for
refraining from taking any action, in good faith pursuant to such Agreement, or
for errors in judgment; provided, however, that neither the Servicer nor, if
applicable, the Guarantor, nor any such person, will be protected against any
liability which would otherwise be imposed by reason of willful misfeasance, bad
faith or gross negligence in the performance of duties or by reason of reckless
disregard of obligations and duties thereunder. The Agreement will also provide
that the Seller, the Servicer and, if applicable, the Guarantor and their
respective directors, officers, employees and agents are entitled to
indemnification by the related Trust Fund and will be held harmless against any
loss, liability or expense incurred in connection with any legal action relating
to the Agreement or the Certificates, other than any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, each Agreement will provide that
neither the Seller nor the Servicer nor, if applicable, the Guarantor is under
any obligation to appear in, prosecute or defend any legal action which is not
incidental to the Servicer's servicing responsibilities under such Agreement or
the Guarantor's payment obligations under any Limited Guarantee, respectively,
and which in its respective opinion may involve it in any expense or liability.
Each of the Seller, the Servicer and, if applicable, the Guarantor may, however,
in its respective discretion undertake any such action which it may deem
necessary or desirable in respect of such 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, the Servicer and, if applicable, the Guarantor, will be entitled
to be reimbursed therefor from amounts deposited in the Collection Account.
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Any corporation into which the Servicer may be merged or consolidated
or any corporation resulting from any merger, conversion or consolidation to
which the Servicer is a party, or any corporation succeeding to the business of
the Servicer, which assumes the obligations of the Servicer, will be the
successor of the Servicer under each Agreement.
THE POOLING AND SERVICING AGREEMENT
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 Agreement applicable to a
particular series of Certificates. Where particular provisions or terms used in
the Agreements are referred to, such provisions or terms are as specified in the
Agreements.
ASSIGNMENT OF MORTGAGE LOANS; WARRANTIES
At the time of issuance of each series of Certificates, the Seller will
cause the Mortgage Loans in the Trust Fund represented by that series of
Certificates to be assigned to the Trustee, together with all principal and
interest due on or with respect to such Mortgage Loans, other than principal and
interest due on or before the Cut-Off Date and prepayments of principal received
before the Cut-Off Date. The Trustee, concurrently with such assignment, will
execute and deliver Certificates evidencing such Trust Fund to the Seller in
exchange for the Mortgage Loans. Each Mortgage Loan will be identified in a
schedule appearing as an exhibit to the Agreement for that series (the "Mortgage
Loan Schedule"). The Mortgage Loan Schedule will include, as to each Mortgage
Loan, information as to the outstanding principal balance as of the close of
business on the Cut-Off Date, as well as information respecting the Mortgage
Rate, the current scheduled monthly payment, the number of months remaining
until the stated maturity date of each Note and the location of the related
Mortgaged Property.
In addition, the Seller will, as to each Mortgage Loan, deliver to the
Trustee (i) the Note, endorsed to the order of the Trustee by the holder/payee
thereof without recourse; (ii) the "buy-down" agreement (if applicable); (iii) a
Mortgage and Mortgage assignment meeting the requirements of the Agreement; (iv)
all Mortgage assignments from the original holder of the Mortgage Loan, through
any subsequent transferees to the transferee to the Trustee; (v) the original
Lender's Title Insurance Policy, or other evidence of title or if a policy has
not been issued, a written commitment or interim binder or preliminary report of
title issued by the title insurance or escrow company; (vi) as to each Mortgage
Loan, an original certificate of Primary Mortgage Insurance Policy (or copy
certified to be true by the originator) to the extent required under the
applicable requirements for the Mortgage Pool; and (vii) such other documents as
may be described in the applicable Prospectus Supplement. Except as expressly
permitted by the Agreement, all documents so delivered are to be original
executed documents; provided, however, that in instances where the original
recorded document has been retained by the applicable jurisdiction or has not
yet been returned from recordation, the Seller may deliver a photocopy
containing a certification of the appropriate judicial or other governmental
authority of the jurisdiction, and the Servicer shall cause the originals of
each Mortgage and Mortgage assignment which is so unavailable to be delivered to
the Trustee as soon as available.
The Trustee will hold such documents for each series of Certificates in
trust for the benefit of all Certificateholders of such series. The Trustee is
obligated to review such documents for each Mortgage Loan within 270 days after
the conveyance of the Mortgage Loan to it. If any document is found by the
Trustee not to have been properly executed or received or to be unrelated to the
Mortgage Loan identified in the Agreement, the Trustee will promptly notify the
Seller. The Seller, or another party specified in the applicable Prospectus
Supplement, will be required to cure such defect or to repurchase the Mortgage
Loan or to provide a substitute Mortgage Loan. See "Repurchase or Substitution"
below.
In the Agreement for each series, the Seller or another party described
in the Agreement (the "Representing Party") will make certain representations
and warranties with respect to the Mortgage Loans. Unless otherwise specified in
the applicable Prospectus Supplement, the representations and warranties in each
Agreement will generally include that (i) the information set forth in the
Mortgage Loan Schedule is true and correct in all material respects at the date
or dates with respect to which such information is furnished; (ii) each Mortgage
constitutes a valid and enforceable first lien on the Mortgaged Property,
including all improvements thereon (subject only to (A) the lien of current real
property
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taxes and assessments, (B) covenants, conditions and restrictions, rights of
way, easements and other matters of public record as of the date of recording of
such Mortgage, such exceptions appearing of record being acceptable to mortgage
lending institutions generally and specifically referred to in the Lender's
Title Insurance Policy delivered to the originator of the Mortgage Loan and not
adversely affecting the 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 such Mortgage);
(iii) each Primary Mortgage Insurance Policy is in full force and effect, and
(except where noted in the Agreement) each Mortgage Loan which has a
Loan-to-Value Ratio greater than 80% is subject to a Primary Mortgage Insurance
Policy; (iv) at the date of initial issuance of the Certificates, no Mortgage
Loan was more than 30 days delinquent in payment, no Mortgage Loan had more than
one delinquency in excess of 30 days during the preceding 12-month period; (v)
at the time each Mortgage Loan was originated and, to the best knowledge of the
Representing Party, at the date of initial issuance of the Certificates, there
are no delinquent taxes, assessments or other outstanding charges affecting the
Mortgaged Property; (vi) each Mortgage Loan was originated in compliance with
and complied at the time of origination in all material respects with applicable
laws, including usury, equal credit opportunity and disclosure laws; (vii) each
Mortgage Loan is covered by a lender's title insurance policy insuring the
priority of the lien of the Mortgage in the original principal amount of such
Mortgage Loan, and each such policy is in full force and effect; and (viii)
immediately prior to the assignment to the Trust Fund the Seller had good title
to, and was the sole owner of, each Mortgage Loan free and clear of any lien,
claim, charge, encumbrance or security interest of any kind.
Upon the discovery or notice of a breach of any of such representations
or warranties which materially and adversely affects the interests of the
Certificateholders in a Mortgage Loan, the Seller or the applicable party will
cure the breach or repurchase such Mortgage Loan or will provide a substitute
Mortgage Loan in the manner described under "Repurchase or Substitution" below.
Unless otherwise indicated in the applicable Prospectus Supplement, this
obligation to repurchase or substitute constitutes the sole remedy available to
the Certificateholders or the Trustee for any such breach of representations and
warranties.
The Agreement for a Series of Certificates may provide that the
Servicer may, at its sole option, purchase from the Trust Fund, at the price
specified in the Agreement, any Mortgage Loan as to which the related Borrower
has failed to make full payments as required under the related Note for three
consecutive months.
PAYMENTS ON MORTGAGE LOANS; COLLECTION ACCOUNT
It is expected that the Agreement for each series of Certificates will
provide that the Servicer will establish and maintain a trust account or
accounts (the "Collection Account") in the name of the Trustee for the benefit
of the Certificateholders. The amount at any time credited to the Collection
Account will be fully-insured to the maximum coverage possible or shall be
invested in Permitted Investments, all as described in the applicable Prospectus
Supplement. In addition, a Collection Account may be established for the purpose
of making distributions to Certificateholders if and as described in the
applicable Prospectus Supplement.
The Servicer will deposit in the Collection Account, as described more
fully in the applicable Prospectus Supplement, amounts representing the
following collections and payments (other than in respect of principal of or
interest on the Mortgage Loans due on or before the Cut-Off Date and prepayments
of principal received on or before the Cut-Off Date): (i) all installments of
principal and interest on the applicable Mortgage Loans and any principal and/or
interest required to be advanced by the Servicer that were due on the
immediately preceding Due Date, net of servicing fees due the Servicer and other
amounts, if any, specified in the applicable Prospectus Supplement; (ii) all
amounts received in respect of such Mortgage Loans representing late payments of
principal and interest to the extent such amounts were not previously advanced
by the Servicer with respect to such Mortgage Loans, net of servicing fees due
the Servicer; (iii) all principal prepayments (whether full or partial) on such
Mortgage Loans received, together with interest calculated at the Mortgage Rate
(net of servicing fees due the Servicer) to the end of the calendar month during
which such principal prepayment shall have been received by the Servicer, to the
extent received from the mortgagor or advanced by the Servicer, as described
under "Servicing of the Mortgage Loans--Advances" herein; and (iv) any amounts
received by the Servicer as Insurance Proceeds (to the extent not applied to the
repair or restoration of the Mortgaged Property) or Liquidation Proceeds.
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REPURCHASE OR SUBSTITUTION
The Trustee will review the documents delivered to it with respect to
the assets of the applicable Trust Fund within 270 days after execution and
delivery of the related Agreement. Unless otherwise specified in the Prospectus
Supplement, if any document required to be delivered by the Seller is not
delivered or is found to be defective in any material respect, then within 90
days after notice of such defect (or one and one half years if the Trustee shall
not have received a document by virtue of the fact that such document shall not
have been returned by the appropriate recording office), the Seller will (a)
cure such defect, (b) remove the affected Mortgage Loan from the Trust Fund and
substitute one or more other mortgage loans therefor or (c) repurchase the
Mortgage Loan from the Trustee for a price equal to 100% of its Principal
Balance plus interest thereon at the applicable Remittance Rate from the date on
which interest was last paid to the first day of the month in which such
purchase price is to be distributed to the related Certificateholders. Unless
otherwise specified in the Prospectus Supplement, this repurchase and
substitution obligation constitutes the sole remedy available to
Certificateholders or the Trustee on behalf of Certificateholders against the
Seller for a material defect in a document relating to a Mortgage Loan.
Unless otherwise specified in the Prospectus Supplement, the Seller
will agree, within 90 days of the earlier of the discovery by the Seller or
receipt by the Seller of notice from the Trustee or the Servicer of its
discovery of any breach of any representation or warranty of the Seller set
forth in the related Agreement with respect to the Mortgage Loans that
materially and adversely affects the interests of the Certificateholders in a
Mortgage Loan (a "Defective Mortgage Loan") or the value of a Mortgage Loan, to
either (a) cure such breach in all material respects, (b) repurchase such
Defective Mortgage Loan at a price equal to 100% of its Principal Balance plus
interest thereon at the applicable Remittance Rate from the date on which
interest was last paid to the first day of the month in which such purchase
price is to be distributed or (c) remove the affected Mortgage Loan from the
Trust Fund and substitute one or more other mortgage loans or contracts
therefor. Unless otherwise specified in the Prospectus Supplement, this
repurchase or substitution obligation will constitute the sole remedy available
to Certificateholders or the Trustee on behalf of Certificateholders for any
such breach.
If so specified in the Prospectus Supplement for a series where the
Seller has acquired the related Mortgage Loans, in lieu of agreeing to
repurchase or substitute Mortgage Loans as described above, the Seller may
obtain such an agreement from the entity which sold such mortgage loans, which
agreement will be assigned to the Trustee for the benefit of the holders of the
Certificates of such series. In such event, unless otherwise specified in the
related Prospectus Supplement, the Seller will have no obligation to repurchase
or substitute mortgage loans if such entity defaults in its obligation to do so.
If a mortgage loan is substituted for another Mortgage Loan as
described above, the new mortgage loan will have the following characteristics,
or such other characteristics as may be specified in the Prospectus Supplement:
(i) a Principal Balance (together with any other new mortgage loan so
substituted), as of the first Distribution Date following the month of
substitution, after deduction of all payments due in the month of substitution,
not in excess of the Principal Balance of the removed Mortgage Loan as of such
Distribution Date (the amount of any difference, plus one month's interest
thereon at the applicable Net Mortgage Rate, to be deposited in the Collection
Account on the business day prior to the applicable Distribution Date), (ii) a
Mortgage Rate not less than, and not more than one percentage point greater
than, that of the removed Mortgage Loan, (iii) a remaining term to stated
maturity not later than, and not more than one year less than, the remaining
term to stated maturity of the removed Mortgage Loan, (iv) a Loan-to Value Ratio
at origination not greater than that of the removed Mortgage Loan, and (v) in
the reasonable determination of the Seller, be of the same type, quality and
character (including location of the Mortgaged Property) as the removed Mortgage
Loan (as if the defect or breach giving rise to the substitution had not
occurred) and be, as of the substitution date, in compliance with the
representations and warranties contained in the Agreement.
If a REMIC election is to be made with respect to all or a portion of a
Trust Fund, any such substitution will occur within two years after the initial
issuance of the related Certificates.
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CERTAIN MODIFICATIONS AND REFINANCINGS
The Agreement will permit the Servicer to modify any Mortgage Loan upon
the request of the related Mortgagor, and will also permit the Servicer to
solicit such requests by offering Mortgagors the opportunity to refinance their
Mortgage Loans, provided in either case that the Servicer purchases such
Mortgage Loan from the Trust Fund immediately following such modification. Any
such modification may not be made unless the modification includes a change in
the interest rate on the related Mortgage Loan to approximately a prevailing
market rate. Any such purchase will be for a price equal to 100% of the
Principal Balance of such Mortgage Loan, plus accrued and unpaid interest
thereon to the date of purchase at the applicable Remittance Rate, net of any
unreimbursed advances of principal and interest thereon made by the Servicer.
Such purchases may occur when prevailing interest rates are below the interest
rates on the Mortgage Loans and Mortgagors request (and/or the Servicer offers)
modifications as an alternative to refinancings through other mortgage
originators. If a REMIC election is made with respect to all or a portion of the
related Trust Fund, the Servicer will indemnify the REMIC against liability for
any prohibited transactions taxes and any related interest, additions or
penalties imposed on the REMIC as a result of any such modification or purchase.
The Agreement will provide that if the Servicer in its individual
capacity agrees to refinance any Mortgage Loan as described above, such Mortgage
Loan will be assigned to the Servicer by the Trustee upon certification that the
Principal Balance of such Mortgage Loan and accrued and unpaid interest thereon
at the Remittance Rate has been deposited in the Collection Account.
EVIDENCE AS TO COMPLIANCE
The Agreement will provide that a firm of independent public
accountants will furnish to the Trustee on or before May 31 of each year,
beginning with May 31 in the fiscal year which begins not less than three months
after the date of the initial issue of Certificates, a statement as to
compliance by the Servicer with certain standards relating to the servicing of
the Mortgage Loans.
The Agreement will also provide for delivery to the Trustee on or
before May 31 of each fiscal year, beginning with May 31 in the fiscal year
which begins not less than three months after the date of the initial issue of
the Certificates, a statement signed by an officer of the Servicer to the effect
that the Servicer has fulfilled its obligations under the Agreement throughout
the preceding year or, if there has been a default in the fulfillment of any
such obligation, describing each such default.
THE TRUSTEE
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with the Seller and the Servicer. In addition, the Seller
and the Trustee acting jointly will have the power and the responsibility for
appointing co-trustees or separate trustees of all or any part of the Trust Fund
relating to a particular series of Certificates. In the event of such
appointment, all rights, powers, duties and obligations conferred or imposed
upon the Trustee by the Agreement shall be conferred or imposed upon the Trustee
and such separate trustee or co-trustee jointly, or, in any jurisdiction in
which the Trustee shall be incompetent or unqualified to perform certain acts,
singly upon such separate trustee or co-trustee who shall exercise and perform
such rights, powers, duties and obligations solely at the direction of the
Trustee.
The Trustee will make no representations as to the validity or
sufficiency of the Agreement, the Certificates (other than the signature and
countersignature of the Trustee on the Certificates) or of any Mortgage Loan or
related document, and will not be accountable for the use or application by the
Seller or Servicer of any funds paid to the Seller or Servicer in respect of the
Certificates or the related assets, or amounts deposited into the Collection
Account. If no Event of Default has occurred, the Trustee will be required to
perform only those duties specifically required of it under the Agreement.
However, upon receipt of the various certificates, reports or other instruments
required to be furnished to it, the Trustee will be required to examine them to
determine whether they conform to the requirements of the Agreement.
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The Trustee may resign at any time, and the Seller may remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement, if the Trustee becomes insolvent or in such other instances, if any,
as are set forth in the Agreement. Following any resignation or removal of the
Trustee, the Seller will be obligated to appoint a successor Trustee, any such
successor to be approved by the Guarantor if so specified in the Prospectus
Supplement in the event that the Guarantor has issued any Limited Guarantee with
respect to the Certificates. Any resignation or removal of the Trustee and
appointment of a successor Trustee does not become effective until acceptance of
the appointment by the successor Trustee.
REPORTS TO CERTIFICATEHOLDERS
At least two Business Days before each Distribution Date, the Servicer
will furnish to the Trustee certain information regarding the status of the
Mortgage Loans and other matters. On the related Distribution Date, the Trustee
will mail to Certificateholders a statement prepared by it and generally setting
forth, to the extent applicable to any series, among other things:
(i) The aggregate amount of the related distribution allocable to
principal, separately identifying the amount allocable to each
class;
(ii) The amount of such distribution allocable to interest
separately identifying the amount allocable to each class;
(iii) The amount of servicing compensation received by the Servicer
in respect of the Mortgage Loans during the month preceding
the month of the Distribution Date;
(iv) The aggregate Certificate Principal Balance (or Notional
Principal Balance) of each class of Certificates after giving
effect to distributions and allocations, if any, of losses on
the Mortgage Loans on such Distribution Date;
(v) The aggregate Certificate Principal Balance of any class of
Accrual Certificates after giving effect to any increase in
such Certificate Principal Balance that results from the
accrual of interest that is not yet distributable thereon;
(vi) The aggregate amount of any advances made by the Servicer
included in the amounts distributed to Certificateholders on
such Distribution Date;
(vii) If any class of Certificates has priority in the right to
receive Principal Prepayments, the amount of Principal
Prepayments in respect of the Mortgage Loans; and
(viii) The aggregate Principal Balance of Mortgage Loans which were
delinquent as to a total of one, two or three or more
installments of principal and interest or were in foreclosure.
(ix) The Trustee will also furnish annually customary information
deemed necessary for Certificateholders to prepare their tax
returns.
The Servicer will provide Certificateholders which are federally
insured savings and loan associations with certain reports and with access to
information and documentation regarding the Mortgage Loans included in the Trust
Fund sufficient to permit such associations to comply with applicable
regulations of the Office of Thrift Supervision.
EVENTS OF DEFAULT
Events of Default under the Agreement with respect to a series of
Certificates will consist of: (i) any failure by the Servicer in the performance
of any obligation under the Agreement which causes any payment required to be
made under the terms of the Certificates or the Agreement not to be timely made,
which failure continues unremedied
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for a period of three business days after the date upon which written notice of
such failure, requiring the same to be remedied, shall have been given to the
Servicer by the Trustee, or to the Servicer and the Trustee by
Certificateholders representing not less than 25% of the Voting Rights of any
class of Certificates to which a payment is not timely made; (ii) any failure on
the part of the Servicer duly to observe or perform in any material respect any
other of the covenants or agreements on the part of the Servicer in the
Certificates or in the Agreement which failure continues unremedied for a period
of 60 days after the date on which written notice of such failure, requiring the
same to be remedied, shall have been given to the Servicer by the Trustee, or to
the Servicer and the Trustee by Certificateholders representing not less than
25% of the Voting Rights of all classes of Certificates affected by such
failure; (iii) the entering against the Servicer of a decree or order of a
court, agency or supervisory authority having jurisdiction in the premises for
the appointment of a conservator, 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, provided that
any such decree or order shall have remained in force undischarged or unstayed
for a period of 60 days; (iv) the consent by the Servicer to the appointment of
a conservator, receiver, liquidator or liquidating committee in any insolvency,
readjustment of debt, marshalling of assets and liabilities, voluntary
liquidation or similar proceedings of or relating to the Servicer or of or
relating to all or substantially all of its property; (v) the admission by the
Servicer in writing of its inability to pay its debts generally as they become
due, the filing by the Servicer of a petition to take advantage of any
applicable insolvency or reorganization statute, the making of an assignment for
the benefit of its creditors or the voluntary suspension of the payment of its
obligations; and (vi) notice by the Servicer that it is unable to make an
Advance required to be made pursuant to the Agreement.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default under the Agreement remains unremedied
by the Servicer, the Trustee, or holders of Certificates evidencing interests
aggregating more than 50% of such Certificates, may terminate all of the rights
and obligations of the Servicer under the Agreement, whereupon the Trustee will
succeed to all the responsibilities, duties and liabilities of the Servicer
under the Agreement and will be entitled to similar compensation arrangements,
provided that if the Trustee had no obligation under the Agreement to make
advances of delinquent principal and interest on the Mortgage Loans upon the
failure of the Servicer, to do so, if the Trustee had such obligation but is
prohibited by law or regulation from making such advances, the Trustee will not
be required to assume such obligation of the Servicer. The Servicer shall be
entitled to payment of certain amounts payable to it under the Agreement,
notwithstanding the termination of its activities as servicer. No such
termination will affect in any manner the Guarantor's obligations under any
Limited Guarantee, except that the obligation of the Servicer to make advances
of delinquent payments of principal and interest (adjusted to the applicable
Remittance Rate) will become the direct obligations of the Guarantor under the
Advance Guarantee until a new servicer is appointed. In the event that the
Trustee is unwilling or unable so to act, it may appoint, or petition a court of
competent jurisdiction for the appointment of, a housing and home finance
institution with a net worth of at least $15,000,000 and is a FNMA or FHLMC
approved seller/servicer in good standing and, if the Guarantor has issued any
Limited Guarantee with respect to the Certificates, approved by the Guarantor,
to act as successor to the Company, as servicer, under such Agreement. In
addition, if the Guarantor has issued any Limited Guarantee with respect to the
related series of Certificates, the Guarantor will have the right to replace any
successor servicer with an institution meeting the requirements described in the
preceding sentence. The Trustee and such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the Servicer under such Agreement.
No holder of Certificates will have any right under the Agreement to
institute any proceeding with respect to the Agreement, unless such holder
previously has given to the Trustee written notice of default and unless the
holders of Certificates of each affected class evidencing, in the aggregate, 25%
or more of the interests in such class have made written request to the Trustee
to institute such proceeding in its own name as Trustee thereunder and have
offered to the Trustee reasonable indemnity and the Trustee for 60 days after
receipt of such notice, request and offer of indemnity has neglected or refused
to institute any such proceedings. However, the Trustee is under no obligation
to exercise any of the trusts or powers vested in it by the Agreement or to make
any investigation of matters arising thereunder or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the Certificateholders, unless such Certificateholders have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
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AMENDMENT
The Agreement may be amended by the Seller, the Servicer and the
Trustee, and if the Guarantor has issued any Limited Guarantee with respect to
the Certificates, with the consent of the Guarantor, but without
Certificateholder consent, to cure any ambiguity, to correct or supplement any
provision therein which may be inconsistent with any other provision therein, to
take any action necessary to maintain REMIC status of any Trust Fund as to which
a REMIC election has been made, to avoid or minimize the risk of the imposition
of any tax on the Trust Fund pursuant to the Code or to make any other
provisions with respect to matters or questions arising under the Agreement
which are not materially inconsistent with the provisions of the Agreement;
provided that such action will not, as evidenced by an opinion of counsel
satisfactory to the Trustee, adversely affect in any material respect the
interests of any Certificateholders of that series. The Agreement may also be
amended by the Seller, the Servicer and the Trustee with the consent of holders
of Certificates evidencing interests aggregating not less than 662/3% of all
interests of each class affected by such amendment, for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of such Agreement or of modifying in any manner the rights of Certificateholders
of that series; provided, however, that no such amendment may (i) reduce in any
manner the amount of, or delay the timing of, payments received on Mortgage
Loans which are required to be distributed 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 any class of Certificates in
any manner other than as described in (i), without the consent of the holders of
Certificates of such class evidencing at least 66% of the interests of such
class or (iii) reduce the aforesaid percentage of Certificates, the holders of
which are required to consent to any such amendment, without the consent of the
holders of all Certificates of such affected class then outstanding.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The obligations of the parties to the Agreement for each Series will
terminate upon (i) the purchase of all the Mortgage Loans, as described in the
applicable Prospectus Supplement, (ii) the later of (a) the distribution to
Certificateholders of that series of final payment with respect to the last
outstanding Mortgage Loan, or (b) the disposition of all property acquired upon
foreclosure or deed-in-lieu of foreclosure with respect to the last outstanding
Mortgage Loan and the remittance to the Certificateholders of all funds due
under the Agreement; or (iii) mutual consent of the parties and all
Certificateholders. In no event, however, will the trust created by an Agreement
continue beyond the expiration of 21 years from the death of the survivor of the
descendants living on the date of the Agreement of a specific person named in
such Agreement. With respect to each series, the Trustee will give or cause to
be given written notice of termination of the Agreement to each
Certificateholder, and the final distribution under the Agreement will be made
only upon surrender and cancellation of the related Certificates at an office or
agency specified in the notice of termination.
As described in the applicable Prospectus Supplement, the Agreement for
each series may permit, but not require, the Seller, the Servicer or another
party to purchase from the Trust Fund for such series all remaining Mortgage
Loans and all property acquired in respect of the Mortgage Loans, at a price
described in the Prospectus Supplement, subject to the condition that the
aggregate outstanding principal balance of the Mortgage Loans for such series at
the time of purchase shall be less than a percentage of the aggregate principal
balance at the Cut-Off Date specified in the Prospectus Supplement. The exercise
of such right will result in the early retirement of the Certificates of that
series.
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 such legal aspects are
governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Mortgage Loans is situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the Mortgage Loans.
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GENERAL
The Mortgages will be either deeds of trust or mortgages. A mortgage
creates a lien upon the real property encumbered by the mortgage. It is not
prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of filing with a
state or county office. There are two parties to a mortgage: the mortgagor, who
is the borrower and homeowner or the land trustee or the trustee of an inter
vivos revocable trust (as described below), and the mortgagee, who is the
lender. Under the mortgage instrument, the mortgagor delivers to the mortgagee a
note or bond and the mortgage. In the case of a land trust, there are three
parties because title to the property is held by a land trustee under a land
trust agreement of which the borrower/homeowner is the beneficiary; at
origination of a mortgage loan, the borrower executes a separate undertaking to
make payments on the mortgage note. In the case of an inter vivos revocable
trust, there are three parties because title to the property is held by the
trustee under the trust instrument of which the home occupant is the primary
beneficiary; at origination of a mortgage loan, the primary beneficiary and the
trustee execute a mortgage note and the trustee executes a mortgage or deed of
trust, with the primary beneficiary agreeing to be bound by its terms. Although
a deed of trust is similar to a mortgage, a deed of trust normally has three
parties, the borrower-homeowner called the trustor (similar to a mortgagor), a
lender (similar to a mortgagee) called the beneficiary, and a third-party
grantee called the trustee. Under a deed of trust, the borrower grants the
property, irrevocably until the debt is paid, in trust and generally with a
power of sale, to the trustee to secure payment of the obligation. The trustee's
authority under a deed of trust and the mortgagee's authority under a mortgage
are governed by the law of the state in which the real property is located, as
well as by federal law, the express provisions of the deed of trust or mortgage
and, in some cases, the directions of the beneficiary.
FORECLOSURE
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 to a third party upon any default by
the borrower under the terms of the note or deed of trust. In some states, the
trustee must record a notice of default and send a copy to the borrower-trustor
and 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 lien holders. 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. Generally, state law controls the amount
of foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. If the deed of trust is not reinstated, a notice of sale
must be posted in a public place and, in most states, published for a specific
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the foreclosure
may occasionally result from difficulties in locating necessary parties
defendant. Judicial foreclosure proceedings are often not protested by any of
the parties defendant. However, when the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be time
consuming. After the completion of judicial foreclosure, the court generally
issues a judgment of foreclosure and appoints a referee or other court officer
to conduct the sale of the property.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder. In either event, the amounts expended are added to the
balance due on the junior loan, and the rights of the junior mortgagee may be
subrogated to the rights of the senior mortgagees. In addition, in the event
that the foreclosure of a junior mortgage triggers the enforcement of a
"due-on-sale" clause, the junior mortgagee may be required to pay the full
amount of the senior mortgages to the senior mortgagees. Accordingly, with
respect to those Mortgage Loans which are junior mortgage loans, if the lender
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purchases the property, the lender's title will be subject to all senior liens
and claims and certain governmental liens. The proceeds received by the referee
or trustee from the sale are applied first to the costs, fees and expenses of
sale and then in satisfaction of the indebtedness secured by the mortgage or
deed of trust under which the sale was conducted. Any remaining proceeds are
generally payable to the holders of junior mortgages or deeds of trust and other
liens and claims in order of their priority, whether or not the borrower is in
default. Any additional proceeds are generally payable to the mortgagor or
trustor. The payment of the proceeds to the holders of junior mortgages may
occur in the foreclosure action of the senior mortgagee or may require the
institution of separate legal proceeds.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
referee for an amount equal to the principal amount of the mortgage or deed of
trust, accrued and unpaid interest and expenses of foreclosure. Thereafter, the
lender will assume the burdens of ownership, including obtaining casualty
insurance, paying taxes and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Any loss may be reduced by the receipt of any
mortgage insurance proceeds.
In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that the lenders reinstate loans or
recast payment schedules in order to accommodate borrowers who are suffering
from temporary financial disability. In other cases, courts have limited the
right of a lender to foreclose if the default under the mortgage instrument is
not monetary, such as the borrower's failure to adequately maintain the property
or the borrower's execution of a second mortgage or deed of trust affecting the
property.
Some courts have been faced with the issue of whether or not federal or
state constitutional provisions reflecting due process concerns for adequate
notice require that borrowers under deeds of trust or mortgages receive notices
in addition to the statutorily prescribed minimum. For the most part, these
cases have 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.
RIGHT OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, the right to redeem is an equitable right. The equity of redemption,
which is a non-statutory right that must be exercised prior to a foreclosure
sale, should be distinguished from statutory rights of redemption. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The rights 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.
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ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
ANTI-DEFICIENCY STATUTES
Certain states have imposed statutory prohibitions 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 sale
under a deed of trust. A deficiency judgment would be a personal judgment
against the former borrower equal in most cases to the difference between the
net amount realized upon the public sale of the real property and the amount due
to the lender. Other statutes require the beneficiary or mortgagee to exhaust
the security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. Finally, other statutory provisions limit any deficiency judgment
against the former borrower following a judicial sale to the excess of the
outstanding debt over the fair market value of the property at the time of the
public sale. The purpose of these statutes is generally to prevent a beneficiary
or a mortgagee from obtaining a large deficiency judgment against the former
borrower as a result of low or no bids at the judicial sale.
BANKRUPTCY LAWS
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws and
state laws affording relief to debtors, may interfere with or affect the ability
of the secured mortgage lender to realize upon collateral and/or enforce a
deficiency judgment. For example, with respect to federal bankruptcy law, the
filing of a petition acts as a stay against the enforcement of remedies in
connection with the collection of a debt. Moreover, a court with federal
bankruptcy jurisdiction may permit a debtor through his or her Chapter 11 or
Chapter 13 plan of reorganization to cure a monetary default in respect of a
mortgage loan on a debtor's residence by paying arrearages within a reasonable
time period and reinstating the original mortgage loan payment schedule even
though the lender accelerated the mortgage loan and final judgment of
foreclosure had been entered in state court (provided no sale of the residence
had yet occurred) prior to the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the reorganization case, that effected the curing of a mortgage loan
default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified
if the borrower has filed a petition under Chapter 11 or Chapter 13. These
courts have suggested that such modifications may include reducing the amount of
each monthly payment, changing the rate of interest, altering the repayment
schedule and reducing the lender's security interest to the value of the
residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
loan. If the borrower has filed a petition under Chapter 13, federal bankruptcy
law and limited case law indicate that the foregoing modifications could not be
applied to the terms of a loan secured solely by property that is the principal
residence of the debtor. In all cases, the secured creditor is entitled to the
value of its security plus post-petition interest, attorneys' fees, if
specifically provided for, and costs to the extent the value of the security
exceeds the debt.
TAX LIENS
The Internal Revenue Code of 1986, as amended, provides priority to
certain tax liens over the lien of the mortgage. This may have the effect of
delaying or interfering with the enforcement of rights with respect to a
defaulted Mortgage Loan.
CONSUMER PROTECTION LAWS
Substantive requirements are imposed upon mortgage lenders in
connection with the origination and the servicing of mortgage loans by numerous
federal and some state consumer protection laws. These laws and their
implementing regulations include the federal Truth in Lending Act (and
Regulation Z), Real Estate Settlement Procedures Act (and Regulation X), Equal
Credit Opportunity Act (and Regulation B), Fair Credit Billing Act, Fair
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Credit Reporting Act, Fair Housing Act, as well as other related statutes and
regulations. These federal laws impose specific statutory liabilities upon
lenders who originate 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 In particular, the originators' failure to comply with certain
requirements of the federal Truth-in-Lending Act, as implemented by Regulation
Z, could subject both originators and assignees of such obligations to monetary
penalties and could result in obligors rescinding the mortgage loans against
either the originators or assignees.
On March 21, 1994, the United States Court of Appeals for the 11th
Circuit ruled in the case of Rodash v. AIB Mortgage Co. that the federal Truth
in Lending Act requires mortgage lenders to disclose to borrowers the collection
of certain intangible taxes and courier fees as prepaid finance charges. Since
the Rodash decision, class action lawsuits have been brought against numerous
mortgage lending institutions alleging certain violations of the Truth in
Lending Act concerning the improper disclosure of various fees.
For Truth in Lending violations, one of the remedies available to the
borrowers under certain affected non-purchase money mortgage loans is
rescission, which, if elected by the borrower, would serve to cancel the loan
and merely require the borrower to pay the principal balance of the mortgage
loan, less a credit for interest paid, closing costs and prepaid finance
charges.
Unless otherwise specified in the Prospectus Supplement, the Seller or
another Representing Party will represent in the Agreement that all applicable
laws, including the Truth in Lending Act, were complied with in connection with
origination of the Mortgage Loans. In the event that such representation is
breached in respect of any Mortgage Loan in a manner that materially and
adversely affects Certificateholders, the Seller or such Representing Party will
be obligated to repurchase the affected Mortgage Loan at a price equal to the
unpaid principal balance thereof plus accrued interest as provided in the
Agreement or to substitute a new mortgage loan in place of the affected Mortgage
Loan.
ENFORCEABILITY OF DUE-ON-SALE CLAUSES
Unless the Prospectus Supplement indicates otherwise, all of the
Mortgage Loans will contain due-on-sale clauses. These clauses permit the lender
to accelerate the maturity of a loan if the borrower sells, transfers, or
conveys the property. The enforceability of these clauses was the 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 prohibiting the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions contained in the Garn-St
Germain Act and regulations promulgated by Office of Thrift Supervision (the
"OTS"), as successor to the Federal Home Loan Bank Board. 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.
Due-on-sale clauses contained in mortgage loans originated by federal
savings and loan associations or federal savings banks are fully enforceable
pursuant to regulations of the OTS which preempt state law restrictions on the
enforcement of due-on-sale clauses.
The Garn-St Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St Germain Act (including federal
savings and loan associations and federal savings banks) 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 three years or less and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act by the
Federal Home Loan Bank Board as succeeded by the OTS also prohibit the
imposition of a prepayment penalty upon the acceleration of a loan pursuant to a
due-on-sale clause. If interest rates were to rise above the interest rates on
the Mortgage Loans, then any inability of the Servicer to enforce due-on-sale
clauses may result in the Trust Fund including a greater number of loans bearing
below-market interest rates than would otherwise be the case, since a transferee
of the property underlying a Mortgage Loan would have a greater incentive in
such circumstances to assume the transferor's Mortgage Loan. Any inability of
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the Servicer to enforce due-on-sale clauses may affect the average life of the
Mortgage Loans and the number of Mortgage Loans that may be outstanding until
maturity.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. The OTS, as successor
to the Federal Home Loan Bank Board, is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorized any state to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision which expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V.
Under the Agreement for each series of Certificates, the Seller will
represent and warrant to the Trustee that the Mortgage Loans have been
originated in compliance in all material respects with applicable state laws,
including usury laws.
SOLDIERS' AND SAILORS' CIVIL 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 for such borrower's Mortgage Loan (including a borrower who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such borrower's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
borrowers who are members of the Army, Navy, Air Force, Marines, National Guard,
Reserves, Coast Guard, and officers of the U.S. Public Health Service ordered to
federal duty with the military. Because the Relief Act applies to borrowers who
enter military service (including reservists who are called to active duty)
after origination of the related Mortgage Loan, no information can be provided
as to the number of loans that may be affected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability for the Master Servicer to collect full amounts of interest on certain
of the Mortgage Loans. Any shortfalls in interest collections resulting from the
application for the Relief Act will be allocated on a pro rata basis to the
Certificates. In addition, the Relief Act imposes limitations that would impair
the ability of the Master Servicers to foreclose on an affected Mortgage Loan
during the borrower's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter. Thus, in the
event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned thereby.
Under the applicable Agreement, the Servicer will not be required to
make deposits to the Collection Account for a series of Certificates in respect
of any Mortgage Loan as to which the Relief Act has limited the amount of
interest the related borrower is required to pay each month, and
Certificateholders will bear such loss.
LATE CHARGES, DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENT
Notes and mortgages may contain provisions that obligate the borrower
to pay a late charge or additional interest if payments are not timely made, and
in some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon involuntary prepayment is unclear under the laws of many states.
Most conventional single-family mortgage loans may be prepaid in full or in part
without penalty. The regulations of the Federal Home Loan Bank Board, as
succeeded by the OTS, prohibit the imposition of a prepayment penalty or
equivalent fee for or in connection with the acceleration of a loan by exercise
of a due-on-sale clause. A mortgagee to whom a prepayment in full has been
tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage. The absence of
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a restraint on prepayment, particularly with respect to Mortgage Loans having
higher mortgage rates, may increase the likelihood of refinancing or other early
retirements of the Mortgage Loans.
ENVIRONMENTAL CONSIDERATIONS
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended ("CERCLA"), and under state law in certain states,
a secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the definition
of owners and operators those who, without participating in the management of a
facility, hold indicia of ownership primarily to protect a security interest in
the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996 (the "Conservation Act") amended, among other things, the provisions of
CERCLA with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the property of the borrower. The
Conservation Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of all operational functions of the mortgaged property.
The Conservation Act also provides that a lender will continue to have the
benefit of the secured creditor exemption even if it forecloses on a mortgaged
property, purchases it at a foreclosure sale or accepts a deed-in-lieu of
foreclosure provided that the lender seeks to sell the mortgaged property at the
earliest practicable commercially reasonable time on commercially reasonable
terms.
Other federal and state laws in certain circumstances may impose
liability on a secured party which takes a deed-in-lieu of foreclosure,
purchases a mortgaged property at a foreclosure sale, or operates a mortgaged
property on which contaminants other than CERCLA hazardous substances are
present, including petroleum, agricultural chemicals, hazardous wastes,
asbestos, radon, and lead-based paint. Such cleanup costs may be substantial. It
is possible that such cleanup costs could become a liability of a Trust Fund and
reduce the amounts otherwise distributable to the holders of the related series
of Certificates. Moreover, certain federal statutes and certain states by
statute impose a lien for any cleanup costs incurred by such state on the
property that is the subject of such cleanup costs (an "Environmental Lien").
All subsequent liens on such property generally are subordinated to
Environmental Liens. In the latter states, the security interest of the Trustee
in a related parcel of real property that is subject to such an Environmental
Lien could be adversely affected.
Traditionally, many residential mortgage lenders have not taken steps
to evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Neither the Seller nor any
replacement Servicer will be required by any Agreement to undertake any such
evaluations prior to foreclosure or accepting a deed-in-lieu of foreclosure. The
Seller does not make any representations or warranties or assume any liability
with respect to the absence or effect of contaminants on any related real
property or any foreclose on related real property or accept a deed-in-lieu of
foreclosure if it knows or reasonably believes that there are material
contaminated conditions on such property. A failure so to foreclose may reduce
the amounts otherwise available to Certificateholders of the related series.
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Except as otherwise specified in the applicable Prospectus Supplement,
at the time the Mortgage Loans were originated, no environmental assessment or a
very limited environment assessment of the Mortgaged Properties will have been
conducted.
FORFEITURE IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984, the
government may seize the property even before conviction. The government must
publish notice of the forfeiture proceeding and may give notice to all parties
"known to have an alleged interest in the property," including the holders of
mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
LEGAL INVESTMENT MATTERS
The Prospectus Supplement for each series of Certificates will specify,
which, if any, of the classes of Certificates offered thereby will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Marketing
Enhancement Act of 1984 ("SMMEA"). The appropriate characterization of those
Certificates not qualifying as "mortgage related securities" ("Non-SMMEA
Certificates") under various legal investment restrictions, and thus the ability
of investors subject to these restrictions to purchase such Certificates, may be
subject to interpretive uncertainties. Accordingly, investors whose investment
authority is subject to legal restrictions should consult their own legal
advisors to determine whether and to what extent the Non-SMMEA Certificates
constitute legal investments for them.
Generally, only classes of Certificates that (i) are rated in one of
the two highest rating categories by one or more nationally recognized
statistical rating organizations and (ii) are part of a series evidencing
interests in a Trust Fund consisting of loans secured by, among other things, a
single parcel of real estate upon which is located a dwelling or mixed
residential and commercial structure, such as certain multifamily loans,
originated by certain types of obligations as specified in SMMEA, will be
"mortgage related securities" for purposes of SMMEA. As "mortgage related
securities", such classes will constitute legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including but not limited to, state-chartered savings banks, commercial banks,
savings and loan associations and insurance companies, as well as trustees and
state government employee retirement systems) created pursuant to or existing
under the laws of the United States or of any state (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to state
regulation to the same extent that under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities.
Pursuant to SMMEA, a number of states enacted legislation, on or before
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. Section 24 (Seventh), subject in each case
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to such regulations as the applicable federal regulatory authority may
prescribe. In this connection, federal credit unions should review the National
Credit Union Administration ("NCUA") Letter to Credit Unions No. 96, as modified
by Letter to Credit Unions No. 108, which includes guidelines to assist federal
credit unions in making investment decisions for mortgage related securities.
The NCUA has adopted rules, codified as 12 C.F.R. Sections 703.5(f)-(k) which
prohibit federal credit unions from investing in certain mortgage related
securities (including securities such as certain Series or Classes of
Certificates), except under limited circumstances.
All depositary institutions considering an investment in the
Certificates (whether or not the class of certificates under consideration for
purchase constitutes a "mortgage related security") should review the Federal
Financial Institutions Examination Council's "Supervisory Policy Statement on
Securities Activities" (to the extent adopted by their respective regulators)
(the "Policy Statement"). The Policy Statement, which has been adopted by the
Board of Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Comptroller of the Currency 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 or classes of the Certificates),
except under limited circumstances, and sets forth certain investment practices
deemed to be unsuitable for regulated institutions. Under the Policy Statement,
it is the responsibility of each depository institution to determine, prior to
purchase (and at stated intervals thereafter), whether a particular mortgage
derivative product is a "high-risk mortgage security", and whether the purchase
(or retention) of such a product would be consistent with the Policy Statement.
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 or classes may be deemed to be 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 Certificates as "mortgage related
securities," no representation is made as to the proper characterization of the
Certificates for legal investment purposes, financial institutions 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 regulatory characteristics of the
Certificates) may adversely affect the liquidity of the Certificates. Investors
should consult their own legal advisors in determining whether and to what
extent the Certificates constitute legal investments for such investors.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Internal Revenue Code of 1986, as amended, (the "Code")
impose requirements on employee benefit plans (including retirement plans and
arrangements, collective investment funds and separate accounts in which such
plans, accounts or arrangements are invested) subject to ERISA or the Code
(collectively, "Plans") and on persons who are fiduciaries with respect to such
Plans. Among other things, ERISA requires that the assets of a Plan subject to
ERISA be held in trust and that the trustee, or other duly authorized fiduciary,
have exclusive authority and discretion to manage and control the assets of such
Plan. ERISA also imposes certain duties on persons who are fiduciaries with
respect to a Plan. Under ERISA, any person who exercises any authority or
control respecting the management or disposition of the assets of a Plan
generally is considered to be a fiduciary of such Plan. In addition to the
imposition by ERISA of general fiduciary standards of investment prudence and
diversification, ERISA and Section 4975 of the Code prohibit a broad range of
transactions involving Plan assets and persons having certain specified
relationships to a Plan ("Parties in Interest") and impose additional
prohibitions where Parties in Interest are fiduciaries with respect to such
Plan.
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The United States Department of Labor (the "DOL") has issued
regulations concerning the definition of what constitutes the assets of a Plan
(DOL Reg. Section 2510.3-101). Under this regulation, the underlying assets and
properties of corporations, partnerships and certain other entities in which a
Plan makes an "equity" investment could be deemed for purposes of ERISA and
Section 4975 of the Code to be assets of the investing Plan in certain
circumstances. In such a case, the fiduciary making such an investment for the
Plan could be deemed to have delegated the fiduciary's asset management
responsibility, the underlying assets and properties could be subject to the
reporting and disclosure requirements of ERISA, and transactions involving the
underlying assets and properties could be subject to the fiduciary
responsibility requirements of ERISA and Section 4975 of the Code. Certain
exceptions to the regulation may apply in the case of a Plan's investment in the
Certificates, but it cannot be predicted in advance whether such exceptions will
apply due to the factual nature of the conditions to be met. Accordingly,
because the Mortgage Loans may be deemed Plan assets of each Plan that purchases
Certificates, an investment in the Certificates by a Plan might give rise to a
prohibited transaction under ERISA Sections 406 or 407 and be subject to an
excise tax under Code Section 4975 unless a statutory or administrative
exemption applies.
DOL Prohibited Transaction Class Exemption 83-1 ("PTE 83-1") exempts
from the prohibited transaction rules of ERISA and Section 4975 of the Code
certain transactions relating to the operation of residential mortgage pool
investment trusts and the direct or indirect sale, exchange, transfer and
holding of "mortgage pool pass-through certificates" in the initial issuance of
such certificates. PTE 83-1 permits, subject to certain conditions, transactions
which might otherwise be prohibited between Plans and Parties in Interest with
respect to those Plans involving the origination, maintenance and termination of
mortgage pools consisting of mortgage loans secured by either first or second
mortgages, or deeds of trust on single-family residential property, and the
acquisition and holding of certain mortgage pool pass-through certificates
representing an interest in such mortgage pools by Plans.
PTE 83-1 sets forth three general conditions which must be satisfied
for any transaction to be eligible for exemption: (i) the maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying certificateholders against
reductions in pass-through payments due to property damage or defaults in loan
payments in an amount not less than the greater of one percent of the aggregate
principal balance of all covered pooled mortgage loans or the principal balance
of the largest covered pooled mortgage loan; (ii) the existence of a pool
trustee who is not an affiliate of the pool sponsor; and (iii) a limitation on
the amount of the payments retained by the pool sponsor, together with other
funds inuring to its benefit, to not more than adequate consideration for
selling the mortgage loans plus reasonable compensation for services provided by
the pool sponsor to the mortgage pool.
Although the Trustee for any series of Certificates will be
unaffiliated with the Servicer, there can be no assurance that the system of
insurance or subordination will meet the general or specific conditions referred
to above. In addition, the nature of a Trust Fund's assets or the
characteristics of one or more classes of the related series of Certificates may
not be included within the scope of PTE 83-1 or any other class exemption under
ERISA. The Prospectus Supplement will provide additional information with
respect to the application of ERISA and the Code to the related Certificates.
Several underwriters of mortgage-backed securities have applied for and
obtained individual prohibited transaction exemptions which are in some respects
broader than PTE 83-1. Such exemptions only apply to mortgage-backed securities
which, in addition to satisfying other conditions, are sold in an offering with
respect to which such underwriter serves as the sole or a managing underwriter,
or as a selling or placement agent. If such an exemption might be applicable to
a series of Certificates, the related Prospectus Supplement will refer to such
possibility.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Certificates
must make its own determination as to whether the general and the specific
conditions of PTE 83-1 have been satisfied, or as to the availability of any
other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Certificates is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
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Unless otherwise specified in the Prospectus Supplement, the Agreement
will provide that the Residual Certificates of any series of Certificates with
respect to which a REMIC election has been made may not be acquired by a Plan.
Any Plan proposing to invest in Certificates should consult with its
counsel to confirm that such investment will not result in a prohibited
transaction and will satisfy the other requirements of ERISA and the Code.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following generally describes the anticipated material federal
income tax consequences of purchasing, owning and disposing of Certificates. It
does not address special rules which may apply to particular types of investors.
The authorities on which this discussion is based are subject to change or
differing interpretations, and any such change or interpretation could apply
retroactively. Investors should consult their own tax advisors regarding the
Certificates.
For purposes of this discussion, unless otherwise specified, the term
"Owner" will refer to the beneficial owner of a Certificate.
REMIC ELECTIONS
Under the Internal Revenue Code of 1986, as amended (the "Code"), an
election may be made to treat the Trust Fund related to each Series of
Certificates (or segregated pools of assets within the Trust Fund) as a "real
estate mortgage investment conduit" ("REMIC") within the meaning of Section
860D(a) of the Code. If one or more REMIC elections are made, the Certificates
of any class will be either "regular interests" in a REMIC within the meaning of
Section 860G(a)(1) of the Code ("Regular Certificates") or "residual interests"
in a REMIC within the meaning of Section 860G(a)(2) of the Code ("Residual
Certificates"). The Prospectus Supplement for each Series of Certificates will
indicate whether an election will be made to treat the Trust Fund as one or more
REMICs, and if so, which Certificates will be Regular Certificates and which
will be Residual Certificates.
If a REMIC election is made, the Trust Fund, or each portion thereof
that is treated as a separate REMIC, will be referred to as a "REMIC Pool". If
the Trust Fund is comprised of two REMIC Pools, one will be an "Upper-Tier
REMIC" and one a "Lower-Tier REMIC". The assets of the Lower-Tier REMIC will
consist of the Mortgage Loans and related Trust Fund assets. The assets of the
Upper-Tier REMIC will consist of all of the regular interests issued by the
Lower-Tier REMIC.
The discussion below under the heading "REMIC Certificates" considers
Series for which a REMIC election will be made. Series for which no such
election will be made are addressed under "Non-REMIC Certificates".
REMIC CERTIFICATES
The discussion in this section applies only to a Series of Certificates
for which a REMIC election is made.
TAX OPINION.
Qualification as a REMIC requires ongoing compliance with certain
conditions. Upon the issuance of each Series of Certificates for which a REMIC
election is made, Morgan, Lewis & Bockius LLP, counsel to the Seller, will
deliver its opinion, dated as of the date of such issuance, generally to the
effect that, with respect to each such Series of Certificates, under then
existing law and assuming compliance by the Seller, the Servicer and the Trustee
for such Series with all of the provisions of the related Agreement (and such
other agreements and representations as may be referred to in such opinion),
each REMIC Pool will be a REMIC, and the Certificates of such Series will be
treated as either Regular Certificates or Residual Certificates.
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STATUS OF CERTIFICATES.
The Certificates will be:
o assets described in Code Section 7701(a)(19)(C) (relating to the
qualification of certain corporations, trusts, or associations as real estate
investment trusts); and
o "real estate assets" under Code Section 856(c)(5)(B) (relating to
real estate interests, interests in real estate mortgages, and shares or
certificates of beneficial interests in real estate investment trusts),
to the extent the assets of the related REMIC Pool are so treated. Interest on
the Regular Certificates will be "interest on obligations secured by mortgages
on real property or on interests in real property" within the meaning of Code
Section 856(c)(3)(B) in the same proportion that the income of the REMIC Pool is
so treated. If at all times 95% or more of the assets or income of the REMIC
Pool qualifies under the foregoing Code sections, the Certificates (and income
thereon) will so qualify in their entirety.
In the event the assets of the related REMIC Pool include buy-down
Mortgage Loans, it is unclear whether the related buy-down funds would qualify
under the foregoing Code sections.
The rules described in the two preceding paragraphs will be applied to
a Trust Fund consisting of two REMIC Pools as if the Trust Fund were a single
REMIC holding the assets of the Lower-Tier REMIC.
INCOME FROM REGULAR CERTIFICATES.
GENERAL. Except as otherwise provided in this tax discussion, Regular
Certificates will be taxed as newly originated debt instruments for federal
income tax purposes. Interest, original issue discount and market discount
accrued on a Regular Certificate will be ordinary income to the Owner. All
Owners must account for interest income under the accrual method of accounting,
which may result in the inclusion of amounts in income that are not currently
distributed in cash.
On January 27, 1994 the Internal Revenue Service adopted regulations
applying the original issue discount rules of the Code (the "OID Regulations").
Except as otherwise noted, the discussion below is based on the OID Regulations.
ORIGINAL ISSUE DISCOUNT. Certain Regular Certificates may have
"original issue discount." An Owner must include original issue discount in
income as it accrues, without regard to the timing of payments.
The total amount of original issue discount on a Regular Certificate is
the excess of its "stated redemption price at maturity" over its "issue price."
The issue price for any Regular Certificate is the price (including any accrued
interest) at which a substantial portion of the class of Certificates including
such Regular Certificate are first sold to the public. In general, the stated
redemption price at maturity is the sum of all payments made on the Regular
Certificate, other than payments of interest that (i) are actually payable at
least annually over the entire life of the Certificates and (ii) are based on a
single fixed rate or variable rate (or certain combinations of fixed and
variable rates). The stated redemption price at maturity of a Regular
Certificate always includes its original principal amount, but generally does
not include distributions of stated interest, except in the case of Accrual
Certificates, and, as discussed below, Interest Only Certificates. An "Interest
Only Certificate" is a Certificate entitled to receive distributions of some or
all of the interest on the Mortgage Loans or other assets in a REMIC Pool and
that has either a notional or nominal principal amount. Special rules for
Regular Certificates that provide for interest based on a variable rate are
discussed below in "Income from Regular Certificates -- Variable Rate Regular
Certificates".
With respect to an Interest Only Certificate, the stated redemption
price at maturity is likely to be the sum of all payments thereon, determined in
accordance with the Prepayment Assumption (as defined below). In that event,
Interest Only Certificates would always have original issue discount.
Alternatively, in the case of an Interest Only
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Certificate with some principal amount, the stated redemption price at maturity
might be determined under the general rules described in the preceding
paragraph. If, applying those rules, the stated redemption price at maturity
were considered to equal the principal amount of such Certificate, then the
rules described below under "Premium" would apply. The Prepayment Assumption is
the assumed rate of prepayment of the Mortgage Loans used in pricing the Regular
Certificates. The Prepayment Assumption will be set forth in the related
Supplement.
Under a de minimis rule, original issue discount on a Regular
Certificate will be considered zero if it is less than 0.25% of the
Certificate's stated redemption price at maturity multiplied by the
Certificate's weighted average maturity. The weighted average maturity of a
Regular Certificate is computed based on the number of full years (i.e.,
rounding down partial years) each distribution of principal (or other amount
included in the stated redemption price at maturity) is scheduled to be
outstanding. The schedule of such distributions likely should be determined in
accordance with the Prepayment Assumption.
The Owner of a Regular Certificate generally must include in income the
original issue discount that accrues for each day on which the Owner holds such
Certificate, including the date of purchase, but excluding the date of
disposition. The original issue discount accruing in any period equals:
PV End + Dist - PV Beg
Where:
PV End = present value of all remaining distributions to be made as of the end
of the period;
Dist = distributions made during the period includible in the stated
redemption price at maturity; and
PV Beg = present value of all remaining distributions as of the beginning of
the period.
The present value of the remaining distributions is calculated based on
(i) the original yield to maturity of the Regular Certificate, (ii) events
(including actual prepayments) that have occurred prior to the end of the period
and (iii) the Prepayment Assumption. For these purposes, the original yield to
maturity of a Regular Certificate will be calculated based on its issue price,
assuming that the Certificate will be prepaid in all periods in accordance with
the Prepayment Assumption, and with compounding at the end of each accrual
period used in the formula.
Assuming the Regular Certificates have monthly Distribution Dates,
discount would be computed under the formula generally for the one-month periods
(or shorter initial period) ending on each Distribution Date. The original issue
discount accruing during any accrual period is divided by the number of days in
the period to determine the daily portion of original issue discount for each
day.
The daily portions of original issue discount generally will increase
if prepayments on the underlying Mortgage Loans exceed the Prepayment Assumption
and decrease if prepayments are slower than the Prepayment Assumption (changes
in the rate of prepayments having the opposite effect in the case of an Interest
Only Certificate). If the relative principal payment priorities of the classes
of Regular Certificates of a Series change, any increase or decrease in the
present value of the remaining payments to be made on any such class will affect
the computation of original issue discount for the period in which the change in
payment priority occurs.
If original issue discount computed as described above is negative for
any period, the Owner generally will not be allowed a current deduction for the
negative amount but instead will be entitled to offset such amount only against
future positive original issue discount from such Certificate.
ACQUISITION PREMIUM. If an Owner of a Regular Certificate acquires such
Certificate at a price greater than its "adjusted issue price," but less than
its remaining stated redemption price at maturity, the daily portion for any day
(as computed above) is reduced by an amount equal to the product of (i) such
daily portion and (ii) a fraction, the numerator of which is the amount by which
the price exceeds the adjusted issue price and the denominator of which is the
sum of
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the daily portions for such Regular Certificate for all days on and after the
date of purchase. The adjusted issue price of a Regular Certificate on any given
day is its issue price, increased by all original issue discount that has
accrued on such Certificate and reduced by the amount of all previous
distributions on such Certificate of amounts included in its stated redemption
price at maturity.
MARKET DISCOUNT. A Regular Certificate may have market discount (as
defined in the Code). Market discount equals the excess of the adjusted issue
price of a Certificate over the Owner's adjusted basis in the Certificate. The
Owner of a Certificate with market discount must report ordinary interest
income, as the Owner receives distributions on the Certificate of principal or
other amounts included in its stated redemption price at maturity, equal to the
lesser of (a) the excess of the amount of those distributions over the amount,
if any, of accrued original issue discount on the Certificate or (b) the portion
of the market discount that has accrued and not previously been included in
income. Also, such Owner must treat gain from the disposition of the Certificate
as ordinary income to the extent of any accrued, but unrecognized, market
discount. Alternatively, an Owner may elect in any taxable year to include
market discount in income currently as it accrues on all market discount
instruments acquired by the Owner in that year or thereafter. An Owner may
revoke such an election only with the consent of the Internal Revenue Service.
In general terms, market discount on a Regular Certificate may be
treated, at the Owner's election, as accruing either (a) on the basis of a
constant yield (similar to the method described above for accruing original
issue discount) or (b) alternatively, either (i) in the case of a Regular
Certificate issued without original issue discount, in the ratio of stated
interest distributable in the relevant period to the total stated interest
remaining to be distributed from the beginning of such period (computed taking
into account the Prepayment Assumption) or (ii) in the case of a Regular
Certificate issued with original issue discount, in the ratio of the amount of
original issue discount accruing in the relevant period to the total remaining
original issue discount at the beginning of such period. An election to accrue
market discount on a Regular Certificate on a constant yield basis is
irrevocable with respect to that Certificate.
An Owner may be required to defer a portion of the deduction for
interest expense on any indebtedness that the Owner incurs or maintains in order
to purchase or carry a Regular Certificate that has market discount. The
deferred amount would not exceed the market discount that has accrued but not
been taken into income. 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.
Market discount with respect to a Regular Certificate will be
considered to be zero if such market discount is de minimis under a rule similar
to that described above in the fourth paragraph under "Original Issue Discount".
Owners should consult their own tax advisors regarding the application of the
market discount rules as well as the advisability of making any election with
respect to market discount.
Discount on a Regular Certificate that is neither original issue
discount nor market discount, as defined above, must be allocated ratably among
the principal payments on the Certificate and included in income (as gain from
the sale or exchange of the Certificate) as the related principal payments are
made (whether as scheduled payments or prepayments).
PREMIUM. A Regular Certificate, other than an Accrual Certificate or,
as discussed above under "Original Issue Discount", an Interest Only
Certificate, purchased at a cost (net of accrued interest) greater than its
principal amount generally is considered to be purchased at a premium. The Owner
may elect under Code Section 171 to amortize such premium under the constant
yield method, using the Prepayment Assumption. To the extent the amortized
premium is allocable to interest income from the Regular Certificate, it is
treated as an offset to such interest rather than as a separate deduction. An
election made by an Owner would generally apply to all its debt instruments and
may not be revoked without the consent of the Internal Revenue Service.
SPECIAL ELECTION TO APPLY OID RULES. In lieu of the rules described
above with respect to de minimis discount, acquisition premium, market discount
and premium, an Owner of a Regular Certificate may elect to accrue such
discount, or adjust for such premium, by applying the principles of the OID
rules described above. An election made
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by a taxpayer with respect to one obligation can affect other obligations it
holds. Owners should consult with their tax advisors regarding the merits of
making this election.
RETAIL REGULAR CERTIFICATES. For purposes of the original issue and
market discount rules, a repayment in full of a Retail Certificate that is
subject to payment in units or other increments, rather than on a pro rata basis
with other Retail Certificates, will be treated in the same manner as any other
prepayment.
VARIABLE RATE REGULAR CERTIFICATES. The Regular Certificates may
provide for interest that varies based on an interest rate index. The OID
Regulations provide special rules for calculating income from certain "variable
rate debt instruments" or "VRDIs." A debt instrument must meet certain technical
requirements to qualify as a VRDI, which are outlined in the next paragraph.
Under the regulations, income on a VRDI is calculated by (1) creating a
hypothetical debt instrument that pays fixed interest at rates equivalent to the
variable interest, (2) applying the original issue discount rules of the Code to
that fixed rate instrument, and (3) adjusting the income accruing in any accrual
period by the difference between the assumed fixed interest amount and the
actual amount for the period. In general, where a variable rate on a debt
instrument is based on an interest rate index (such as LIBOR), a fixed rate
equivalent to a variable rate is determined based on the value of the index as
of the issue date of the debt instrument. In cases where rates are reset at
different intervals over the life of a VRDI, adjustments are made to ensure that
the equivalent fixed rate for each accrual period is based on the same reset
interval.
A debt instrument must meet a number of requirements in order to
qualify as a VRDI. A VRDI cannot be issued at a premium above its principal
amount that exceeds a specified percentage of its principal amount (15%, or if
less 1.5% times its weighted average life). As a result, Interest Only
Certificates will never be VRDIs. Also, a debt instrument that pays interest
based on a multiple of an interest rate index is not a VRDI if the multiple is
less than or equal to 0.65 or greater than 1.35, unless, in general, interest is
paid based on a single formula that lasts over the life of the instrument. A
debt instrument is not a VRDI if it is subject to caps and floors, unless they
remain the same over the life of the instrument or are not expected to change
significantly the yield on the instrument. Variable rate Regular Certificates
other than Interest Only Certificates may or may not qualify as VRDIs depending
on their terms.
In a case where a variable rate Regular Certificate does not qualify as
a VRDI, it will be treated under the OID Regulations as a contingent payment
debt instrument. The Internal Revenue Service has issued final regulations
addressing contingent payment debt instruments, but such regulations are not
applicable by their terms to REMIC regular interests. Until further guidance is
forthcoming, one method of calculating income on such a Regular Certificate that
appears to be reasonable would be to apply the principles governing VRDIs
outlined above.
SUBORDINATED CERTIFICATES. Certain Series of Certificates may contain
one or more classes of subordinated Certificates. In the event there are
defaults or delinquencies on the related Mortgage Loans, amounts that otherwise
would be distributed on a class of subordinated Certificates may instead be
distributed on other more senior classes of Certificates. Since Owners of
Regular Certificates are required to report income under an accrual method,
Owners of subordinated Certificates will be required to report income without
giving effect to delays and reductions in distributions on such Certificates
attributable to defaults or delinquencies on the Mortgage Loans, except to the
extent that it can be established that amounts are uncollectible. As a result,
the amount of income reported by an Owner of a subordinated Certificate in any
period could significantly exceed the amount of cash distributed to such Owner
in that period. The Owner will eventually be allowed a loss (or be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the subordinated Certificate is reduced as a result of defaults
and delinquencies on the Mortgage Loans. Such a loss could in some circumstances
be a capital loss. Also, the timing and amount of such losses or reductions in
income are uncertain. Owners of subordinated Certificates should consult their
tax advisors on these points.
INCOME FROM RESIDUAL CERTIFICATES.
TAXATION OF REMIC INCOME. Generally, Owners of Residual Certificates in
a REMIC Pool ("Residual Owners") must report ordinary income or loss equal to
their pro rata shares (based on the portion of all Residual
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Certificates they own) of the taxable income or net loss of the REMIC. Such
income must be reported regardless of the timing or amounts of distributions on
the Residual Certificates.
The taxable income of a REMIC Pool is generally determined under the
accrual method of accounting in the same manner as the taxable income of an
individual taxpayer. Taxable income is generally gross income, including
interest and original issue discount income, if any, on the assets of the REMIC
Pool and income from the amortization of any premium on Regular Certificates,
minus deductions. Market discount (as defined in the Code) with respect to
Mortgage Loans held by a REMIC Pool is recognized in the same fashion as if it
were original issue discount. Deductions include interest and original issue
discount expense on the Regular Certificates, reasonable servicing fees
attributable to the REMIC Pool, other administrative expenses and amortization
of any premium on assets of the REMIC Pool. As previously discussed, the timing
of recognition of "negative original issue discount," if any, on a Regular
Certificate is uncertain; as a result, the timing of recognition of the
corresponding income to the REMIC Pool is also uncertain.
If the Trust Fund consists of an Upper-Tier REMIC and a Lower-Tier
REMIC, the OID Regulations provide that the regular interests issued by the
Lower-Tier REMIC to the Upper- Tier REMIC will be treated as a single debt
instrument for purposes of the original issue discount provisions. A
determination that these regular interests are not treated as a single debt
instrument would have a material adverse effect on the Owners of Residual
Certificates issued by the Lower-Tier REMIC.
A Residual Owner may not amortize the cost of its Residual Certificate.
Taxable income of the REMIC Pool, however, will not include cash received by the
REMIC Pool that represents a recovery of the REMIC Pool's initial basis in its
assets, and such basis will include the issue price of the Residual Certificates
(assuming the issue price is positive). Such recovery of basis by the REMIC Pool
will have the effect of amortization of the issue price of the Residual
Certificate over its life. The period of time over which such issue price is
effectively amortized, however, may be longer than the economic life of the
Residual Certificate. The issue price of a Residual Certificate is the price at
which a substantial portion of the class of Certificates including the Residual
Certificate are first sold to the public (or if the Residual Certificate is not
publicly offered, the price paid by the first buyer).
A subsequent Residual Owner must report the same amounts of taxable
income or net loss attributable to the REMIC Pool as an original Owner. No
adjustments are made to reflect the purchase price.
LOSSES. A Residual Owner that is allocated a net loss of the REMIC Pool
may not deduct such loss currently to the extent it exceeds the Owner's adjusted
basis (as defined in "Sale or Exchange of Certificates" below) in its Residual
Certificate. A Residual Owner that is a U.S. person (as defined below in
"Taxation of Certain Foreign Investors"), however, may carry over any disallowed
loss to offset any taxable income generated by the same REMIC Pool.
EXCESS INCLUSIONS. A portion of the taxable income allocated to a
Residual Certificate is subject to special tax rules. That portion, referred to
as an "excess inclusion," is calculated for each calendar quarter and equals the
excess of such taxable income for the quarter over the daily accruals for the
quarter. The daily accruals equal the product of (i) 120% of the federal
long-term rate under Code Section 1274(d) for the month which includes the
Closing Date (determined on the basis of quarterly compounding and properly
adjusted for the length of the quarter) and (ii) the adjusted issue price of the
Certificate at the beginning of such quarter. The adjusted issue price of a
Residual Certificate at the beginning of a quarter is the issue price of the
Certificate, plus the amount of daily accruals on the Certificate for all prior
quarters, decreased (but not below zero) by any prior distributions on the
Certificate. If the aggregate value of the Residual Certificates is not
considered to be "significant," then to the extent provided in Treasury
regulations, a Residual Owner's entire share of REMIC taxable income will be
treated as an excess inclusion. The regulations that have been adopted under
Code Sections 860A through 86OG (the "REMIC Regulations") do not contain such a
rule.
Excess inclusions generally may not be offset by unrelated losses or
loss carryforwards or carrybacks of a Residual Owner. In addition, for all
taxable years beginning after August 20, 1996, and unless a Residual Owner
elects otherwise for all other taxable years, the alternate minimum taxable
income of a Residual Owner for a taxable year may
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not be less than the Residual Owner's excess inclusions for the taxable year and
excess inclusions are disregarded when calculating a Residual Owner's alternate
minimum tax operating loss deduction.
Excess inclusions are treated as unrelated business taxable income for
an organization subject to the tax on unrelated business income. In addition,
under Treasury regulations yet to be issued, if a real estate investment trust,
regulated investment company or certain other pass-through entities are Residual
Owners, a portion of the distributions made by such entities may be treated as
excess inclusions.
DISTRIBUTIONS. Distributions on a Residual Certificate (whether at
their scheduled times or as a result of prepayments) generally will not result
in any taxable income or loss to the Residual Owner. If the amount of any
distribution exceeds a Residual Owner's adjusted basis in its Residual
Certificate, however, the Residual Owner will recognize gain (treated as gain
from the sale or exchange of its Residual Certificate) to the extent of such
excess. See "Sale or Exchange of Certificates" below.
PROHIBITED TRANSACTIONS; SPECIAL TAXES. Net income recognized by a
REMIC Pool from "prohibited transactions" is subject to a 100% tax and is
disregarded in calculating the REMIC Pool's taxable income. In addition, a REMIC
Pool is subject to federal income tax at the highest corporate rate on "net
income from foreclosure property" (which has a technical definition). A 100% tax
also applies to certain contributions to a REMIC Pool made after it is formed.
It is not anticipated that any REMIC Pool will (i) engage in prohibited
transactions in which it recognizes a significant amount of net income, (ii)
receive contributions of property that are subject to tax, or (iii) derive a
significant amount of net income from foreclosure property that is subject to
tax.
NEGATIVE VALUE RESIDUAL CERTIFICATES. The federal income tax treatment
of any consideration paid to a transferee on a transfer of a Residual
Certificate is unclear. Such a transferee should consult its tax advisor. The
preamble to the REMIC Regulations indicates that the Internal Revenue Service
may issue future guidance on the tax treatment of such payments.
In addition, on December 23, 1996, the Internal Revenue Service
released final regulations under Code Section 475 relating to the requirement
that a dealer mark certain securities to market. These regulations provide that
a REMIC residual interest that is acquired on or after January 4, 1995 is not a
"security" for the purposes of Section 475 of the Code, and thus is not subject
to the mark to market rules.
The method of taxation of Residual Certificates described in this
section can produce a significantly less favorable after-tax return for a
Residual Certificate than would be the case if the Certificate were taxable as a
debt instrument. Also, a Residual Owner's return may be adversely affected by
the excess inclusions rules described above. In certain periods, taxable income
and the resulting tax liability for a Residual Owner may exceed any
distributions it receives. In addition, a substantial tax may be imposed on
certain transferors of a Residual Certificate and certain Residual Owners that
are "pass-thru" entities. See "Transfers of Residual Certificates" below.
Investors should consult their tax advisors before purchasing a Residual
Certificate.
SALE OR EXCHANGE OF CERTIFICATES.
An Owner generally will recognize gain or loss upon sale or exchange of
a Regular or Residual Certificate equal to the difference between the amount
realized and the Owner's adjusted basis in the Certificate. The adjusted basis
in a Certificate generally will equal the cost of the Certificate, increased by
income previously recognized, and reduced (but not below zero) by previous
distributions, and by any amortized premium in the case of a Regular
Certificate, or net losses allowed as a deduction in the case of a Residual
Certificate.
Except as described below, any gain or loss on the sale or exchange
of a Certificate held as a capital asset will be capital gain or loss and will
be long-term, mid-term or short-term depending on whether the Certificate has
been held for more than eighteen months, more than one year but less than
eighteen months, or one year or less. Such gain or loss will be ordinary income
or loss (i) for a bank or thrift institution, and (ii) in the case of a Regular
Certificate, (a) to the extent of any accrued, but unrecognized, market
discount, or (b) to the extent income recognized by the Owner is less
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than the income that would have been recognized if the yield on such Certificate
were 110% of the applicable federal rate under Code Section 1274(d).
A Residual Owner should be allowed a loss upon termination of the REMIC
Pool equal to the amount of the Owner's remaining adjusted basis in its Residual
Certificates. Whether the termination will be treated as a sale or exchange
(resulting in a capital loss) is unclear.
Except as provided in Treasury regulations, the wash sale rules of Code
Section 1091 (relating to the disallowance of losses on the sale or disposition
of certain stock or securities) will apply to dispositions of a Residual
Certificate where the seller of the interest, during the period beginning six
months before the sale or disposition of the interest and ending six months
after such sale or disposition, acquires (or enters into any other transaction
that results in the application of Code Section 1091) any REMIC residual
interest, or any interest in a "taxable mortgage pool" (such as a non-REMIC
owner trust) that is economically comparable to a residual interest.
TAXATION OF CERTAIN FOREIGN INVESTORS.
REGULAR CERTIFICATES. A Regular Certificate held by an Owner that is a
non-U.S. person (as defined below), and that has no connection with the United
States other than owning the Certificate, will not be subject to U.S.
withholding or income tax with respect to the Certificate provided such Owner
(i) is not a "10-percent shareholder", related to the issuer, within the meaning
of Code Section 871(h)(3)(B) or a controlled foreign corporation, related to the
issuer, described in Code Section 881(c)(3)(C), and (ii) provides an appropriate
statement, signed under penalties of perjury, identifying the Owner and stating,
among other things, that the Owner is a non-U.S. person. If these conditions are
not met, a 30% withholding tax will apply to interest (including original issue
discount) unless an income tax treaty reduces or eliminates such tax or unless
the interest is effectively connected with the conduct of a trade or business
within the United States by such Owner. In the latter case, such Owner will be
subject to United States federal income tax with respect to all income from the
Certificate at regular rates then applicable to U.S. taxpayers (and in the case
of a corporation, possibly also the branch profits tax).
The term "non-U.S. person" means any person other than a U.S. person. A
U.S. person 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, any trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust, or an estate that
is subject to U.S. federal income tax regardless of the source of its income.
RESIDUAL CERTIFICATES. A Residual Owner that is a non-U.S. person, and
that has no connection with the United States other than owning a Residual
Certificate, will not be subject to U.S. withholding or income tax with respect
to the Certificate (other than with respect to excess inclusions) provided that
(i) the conditions described in the second preceding paragraph with respect to
Regular Certificates are met and (ii) in the case of a Residual Certificate in a
REMIC Pool holding Mortgage Loans, the Mortgage Loans were originated after July
18, 1984. Excess inclusions are subject to a 30% withholding tax in all events
(notwithstanding any contrary tax treaty provisions) when distributed to the
Residual Owner (or when the Residual Certificate is disposed of). The Code
grants the Treasury Department authority to issue regulations requiring excess
inclusions to be taken into account earlier if necessary to prevent avoidance of
tax. The REMIC Regulations do not contain such a rule. The preamble thereto
states that the Internal Revenue Service is considering issuing regulations
concerning withholding on distributions to foreign holders of residual interests
to satisfy accrued tax liability due to excess inclusions.
With respect to a Residual Certificate that has been held at any time
by a non-U.S. person, the Trustee (or its agent) will be entitled to withhold
(and to pay to the Internal Revenue Service) any portion of any payment on such
Residual Certificate that the Trustee reasonably determines is required to be
withheld. If the Trustee (or its agent) reasonably determines that a more
accurate determination of the amount required to be withheld from a distribution
can be made within a reasonable period after the scheduled date for such
distribution, it may hold such distribution in trust for the Residual Owner
until such determination can be made.
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Special tax rules and restrictions that apply to transfers of Residual
Certificates to and from non-U.S. persons are discussed in the next section.
TRANSFERS OF RESIDUAL CERTIFICATES.
Special tax rules and restrictions apply to transfers of Residual
Certificates to disqualified organizations or foreign investors, and to
transfers of noneconomic Residual Certificates.
DISQUALIFIED ORGANIZATIONS. In order to comply with the REMIC rules of
the Code, the Agreement will provide that no legal or beneficial interest in a
Residual Certificate may be transferred to, or registered in the name of, any
person unless (i) the proposed purchaser provides to the Trustee an "affidavit"
(within the meaning of the REMIC Regulations) to the effect that, among other
items, such transferee is not a "disqualified organization" (as defined below),
is not purchasing a Residual Certificate as an agent for a disqualified
organization (i.e., as a broker, nominee, or other middleman) and is not an
entity (a "Book-Entry Nominee") that holds REMIC residual securities as nominee
to facilitate the clearance and settlement of such securities through electronic
book-entry changes in accounts of participating organizations and (ii) the
transferor states in writing to the Trustee that it has no actual knowledge that
such affidavit is false.
If despite these restrictions a Residual Certificate is transferred to
a disqualified organization, the transfer may result in a tax equal to the
product of (i) the present value of the total anticipated future excess
inclusions with respect to such Certificate and (ii) the highest corporate
marginal federal income tax rate. Such a tax generally is imposed on the
transferor, except that if the transfer is through an agent for a disqualified
organization, the agent is liable for the tax. A transferor is not liable for
such tax if the transferee furnishes to the transferor an affidavit that the
transferee is not a disqualified organization and, as of the time of the
transfer, the transferor does not have actual knowledge that the affidavit is
false.
A disqualified organization may hold an interest in a REMIC Certificate
through a "pass-thru entity" (as defined below). In that event, the pass-thru
entity is subject to tax (at the highest corporate marginal federal income tax
rate) on excess inclusions allocable to the disqualified organization. However,
such tax will not apply to the extent the pass-thru entity receives affidavits
from record holders of interests in the entity stating that they are not
disqualified organizations and the entity does not have actual knowledge that
the affidavits are false.
For these purposes, (i) "disqualified organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing, certain organizations that are exempt from taxation under the Code
(including tax on excess inclusions) and certain corporations operating on a
cooperative basis, and (ii) "pass-thru entity" means any regulated investment
company, real estate investment trust, common trust fund, partnership, trust or
estate and certain corporations operating on a cooperative basis. Except as may
be provided in Treasury regulations, any person holding an interest in a
pass-thru entity as a nominee for another will, with respect to that interest,
be treated as a pass-thru entity.
FOREIGN INVESTORS. Under the REMIC Regulations, a transfer of a
Residual Certificate to a non-U.S. person that will not hold the Certificate in
connection with a U.S. trade or business will be disregarded for all federal tax
purposes if the Certificate has "tax avoidance potential." A Residual
Certificate has tax avoidance potential unless, at the time of transfer, the
transferor reasonably expects that:
(i) for each excess inclusion, the REMIC will distribute to the
transferee residual interest holder an amount that will equal at least 30
percent of the excess inclusion, and
(ii) each such amount 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.
A transferor has such reasonable expectation if the above test would be
met assuming that the REMIC's Mortgage Loans will prepay at each rate between 50
percent and 200 percent of the Prepayment Assumption.
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The REMIC Regulations also provide that a transfer of a Residual
Certificate from a non-U.S. person to a U.S. person (or to a non-U.S. person
that will hold the Certificate in connection with a U.S. trade or business) is
disregarded if the transfer has "the effect of allowing the transferor to avoid
tax on accrued excess inclusions."
In light of these provisions, the Agreement provides that a Residual
Certificate may not be purchased by or transferred to any person that is not a
U.S. person, unless (i) such person holds the Certificate in connection with the
conduct of a trade or business within the United States and furnishes the
transferor and the Trustee with an effective Internal Revenue Service Form 4224,
or (ii) the transferee delivers to both the transferor and the Trustee an
opinion of nationally recognized tax counsel to the effect that such transfer is
in accordance with the requirements of the Code and the regulations promulgated
thereunder and that such transfer will not be disregarded for federal income tax
purposes.
NONECONOMIC RESIDUAL CERTIFICATES. Under the REMIC Regulations, a
transfer of a "noneconomic" Residual Certificate will be disregarded for all
federal income tax purposes if a significant purpose of the transfer is to
impede the assessment or collection of tax. Such a purpose exists if the
transferor, at the time of the transfer, either knew or should have known that
the transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor is presumed to lack such knowledge if:
(i) the transferor conducted, at the time of the transfer, a reasonable
investigation of the financial condition of the transferee and found that the
transferee had historically paid its debts as they came due and found no
significant evidence to indicate that the transferee will not continue to pay
its debts as they become due, and
(ii) the transferee represents to the transferor that it understands
that, as the holder of the noneconomic residual interest, it may incur tax
liabilities in excess of any cash flows generated by the interest and that it
intends to pay taxes associated with holding the residual interest as they
become due.
A Residual Certificate (including a Certificate with significant value
at issuance) is noneconomic unless, at the time of the transfer, (i) the present
value of the expected future distributions on the Certificate at least equals
the product of the present value of the anticipated excess inclusions and the
highest corporate income tax rate in effect for the year in which the transfer
occurs, and (ii) the transferor reasonably expects that the transferee will
receive distributions on the Certificate, at or after the time at which taxes
accrue, in an amount sufficient to pay the taxes.
The Agreement will provide that no legal or beneficial interest in a
Residual Certificate may be transferred to, or registered in the name of, any
person unless the transferor represents to the Trustee that it has Conducted the
investigation of the transferee, and made the findings, described in the
preceding paragraph, and the proposed transferee provides to the Trustee the
transferee representations described in the preceding paragraph, and agrees that
it will not transfer the Certificate to any person unless that person agrees to
comply with the same restrictions on future transfers.
SERVICING COMPENSATION AND OTHER REMIC POOL EXPENSES.
Under Code Section 67, an individual, estate or trust is allowed
certain itemized deductions only to the extent that such deductions, in the
aggregate, exceed 2% of the Owner's adjusted gross income, and such a person is
not allowed such deductions to any extent in computing its alternative minimum
tax liability. Under Treasury regulations, if such a person is an Owner of a
REMIC Certificate, the REMIC Pool is required to allocate to such a person its
share of the servicing fees and administrative expenses paid by a REMIC together
with an equal amount of income. Those fees and expenses are deductible as an
offset to the additional income, but subject to the 2% floor.
In the case of a REMIC Pool that has multiple classes of Regular
Certificates with staggered maturities, fees and expenses of the REMIC Pool
would be allocated entirely to the Owners of Residual Certificates. However, if
the REMIC Pool were a "single-class REMIC" as defined in applicable Treasury
regulations, such deductions would be allocated proportionately among the
Regular and Residual Certificates.
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REPORTING AND ADMINISTRATIVE MATTERS.
Annual reports will be made to the Internal Revenue Service, and to
Holders of record of Regular Certificates, and Owners of Regular Certificates
holding through a broker, nominee or other middleman, that are not excepted from
the reporting requirements, of accrued interest, original issue discount,
information necessary to compute accruals of market discount, information
regarding the percentage of the REMIC Pool's assets meeting the qualified assets
tests described above under "Status of Certificates" and, where relevant,
allocated amounts of servicing fees and other Code Section 67 expenses. Holders
not receiving such reports may obtain such information from the related REMIC by
contacting the person designated in IRS Publication 938. Quarterly reports will
be made to Residual Holders showing their allocable shares of income or loss
from the REMIC Pool, excess inclusions, and Code Section 67 expenses.
The Trustee will sign and file federal income tax returns for each
REMIC Pool. To the extent allowable, the Trustee will act as the tax matters
person for each REMIC Pool. Each Owner of a Residual Certificate, by the
acceptance of its Residual Certificate, agrees that the Trustee will act as the
Owner's agent in the performance of any duties required of the Owner in the
event that the Owner is the tax matters person.
An Owner of a Residual Certificate is required to treat items on its
federal income tax return consistently with the treatment of the items on the
REMIC Pool's return, unless the Owner owns 100% of the Residual Certificate for
the entire calendar year or the Owner either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC Pool. The Internal Revenue Service may
assess a deficiency resulting from a failure to comply with the consistency
requirement without instituting an administrative proceeding at the REMIC level.
Any person that holds a Residual Certificate as a nominee for another person may
be required to furnish the REMIC Pool, in a manner to be provided in Treasury
regulations, the name and address of such other person and other information.
NON-REMIC CERTIFICATES
The discussion in this Section applies only to a series of Certificates
for which no REMIC election is made.
TRUST FUND AS GRANTOR TRUST.
Upon issuance of each series of Certificates, Morgan, Lewis & Bockius
LLP, counsel to the Seller, will deliver its opinion, dated as of the date of
such issuance, to the effect that, under then current law, assuming compliance
by the Seller, the Servicer and the Trustee with all the provisions of the
Agreement (and such other agreements and representations as may be referred to
in the opinion), and assuming the Trust Fund does not constitute a "taxable
mortgage pool" as defined in Section 7701(i) of the Code (relating to the
classification of certain types of entities as taxable mortgage pools), the
Trust Fund will be classified for federal income tax purposes as a grantor trust
and not as an association taxable as a corporation.
Under the grantor trust rules of the Code, each Owner of a Certificate
will be treated for federal income tax purposes as the owner of an undivided
interest in the Mortgage Loans (and any related assets) included in the Trust
Fund. The Owner will include in its gross income, gross income from the portion
of the Mortgage Loans allocable to the Certificate, and may deduct its share of
the expenses paid by the Trust Fund that are allocable to the Certificate, at
the same time and to the same extent as if it had directly purchased and held
such interest in the Mortgage Loans and had directly received payments thereon
and paid such expenses. If an Owner is an individual, trust or estate, the Owner
will be allowed deductions for its share of Trust Fund expenses (including
reasonable servicing fees) only to the extent that the sum of those expenses and
the Owner's other miscellaneous itemized deductions exceeds 2% of adjusted gross
income, and will not be allowed to deduct such expenses for purposes of the
alternative minimum tax. Distributions on a Certificate will not be taxable to
the Owner, and the timing or amount of distributions will not affect the timing
or amount of income or deductions relating to a Certificate.
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STATUS OF THE CERTIFICATES.
The Certificates, other than Interest Only Certificates, will be:
o "real estate assets" under Code Section 856(c)(5)(A) (relating to the
qualification of certain corporations, trusts, or associations as real estate
investment trusts); and
o assets described in Section 7701(a)(19)(B) of the Code (relating to
real estate interests, interests in real estate mortgages, and shares or
certificates of beneficial interests in real estate investment trusts),
to the extent the assets of the Trust Fund are so treated. Interest income from
such Certificates will be "interest on obligations secured by mortgages on real
property" under Code Section 856(c)(3)(B) to the extent the income of the Trust
Fund qualifies under that section. An "Interest Only Certificate" is a
Certificate which is entitled to receive distributions of some or all of the
interest on the Mortgage Loans or other assets in a REMIC Pool and that has
either a notional or nominal principal amount. Although it is not certain,
Certificates that are Interest Only Certificates should qualify under the
foregoing Code sections to the same extent as other Certificates.
POSSIBLE APPLICATION OF STRIPPED BOND RULES.
In general, the provisions of Section 1286 of the Code (the "stripped
bond rules") apply to all or a portion of those Certificates where there has
been a separation of the ownership of the rights to receive some or all of the
principal payments on a Mortgage Loan from the right to receive some or all of
the related interest payments. Certain Non-REMIC Certificates may be subject to
these rules either because they represent specifically the right to receive
designated portions of the interest or principal paid on the Mortgage Loans, or
because the Servicing Fee is determined to be excessive (each, a "Stripped
Certificate").
Each Stripped Certificate will be considered to have been issued with
original issue discount for federal income tax purposes. Original issue discount
with respect to a Stripped Certificate must be included in ordinary income as it
accrues, which may be prior to the receipt of the cash attributable to such
income. For these purposes, under original issue discount regulations, each
Stripped Certificate should be treated as a single installment obligation for
purposes of calculating original issue discount and gain or loss on disposition.
The Internal Revenue Service has indicated that with respect to certain mortgage
loans, original issue discount would be considered zero either if (i) the
original issue discount did not exceed an amount that would be eligible for the
de minimis rule described above under "REMIC Certificates - Income From Regular
Certificates - Original Issue Discount", or (ii) the annual stated rate of
interest on the mortgage loan was not more than 100 basis points lower than on
the loan prior to its being stripped. In either such case the rules described
above under "REMIC Certificates--Income From Regular Certificates--Market
Discount" (including the applicable de minimis rule) would apply with respect to
the mortgage loan.
TAXATION OF CERTIFICATES IF STRIPPED BOND RULES DO NOT APPLY.
If the stripped bond rules do not apply to a Certificate, then the
Owner will be required to include in income its share of the interest payments
on the Mortgage Loans held by the Trust Fund in accordance with its tax
accounting method. The Owner must also account for discount or premium on the
Mortgage Loans if it is considered to have purchased its interest in the
Mortgage Loans at a discount or premium. An Owner will be considered to have
purchased an interest in each Mortgage Loan at a price determined by allocating
its purchase price for the Certificate among the Mortgage Loans in proportion to
their fair market values at the time of purchase. It is likely that discount
would be considered to accrue and premium would be amortized, as described
below, based on an assumption that there will be no future prepayments of the
Mortgage Loans, and not based on a reasonable prepayment assumption. Legislative
proposals which are currently pending would, however, generally require a
reasonable prepayment assumption.
DISCOUNT. The treatment of any discount relating to a Mortgage Loan
will depend on whether the discount is original issue discount or market
discount. Discount at which a Mortgage Loan is purchased will be original issue
discount only if the Mortgage Loan itself has original issue discount; the
issuance of Certificates is not considered a new
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issuance of a debt instrument that can give rise to original issue discount. A
Mortgage Loan generally will be considered to have original issue discount if
the greater of the amount of points charged to the borrower, or the amount of
any interest foregone during any initial teaser period, exceeds 0.25% of the
stated redemption price at maturity times the number of full years to maturity,
or if interest is not paid at a fixed rate or a single variable rate
(disregarding any initial teaser rate) over the life of the Mortgage Loan. It is
not anticipated that the amount of original issue discount, if any, accruing on
the Mortgage Loans in each month will be significant relative to the interest
paid currently on the Mortgage Loans, but there can be no assurance that this
will be the case.
In the case of a Mortgage Loan that is considered to have been
purchased with market discount that exceeds a de minimis amount (generally,
0.25% of the stated redemption price at maturity times the number of whole years
to maturity remaining at the time of purchase), the Owner will be required to
include in income in each month the amount of such discount that has accrued
through such month and not previously been included in income, but limited to
the amount of principal on the Mortgage Loan that is received by the Trust Fund
in that month. Because the Mortgage Loans will provide for monthly principal
payments, such discount may be required to be included in income at a rate that
is not significantly slower than the rate at which such discount accrues. Any
market discount that has not previously been included in income will be
recognized as ordinary income if and when the Mortgage Loan is prepaid in full.
For a more detailed discussion of the market discount rules of the Code, see
"REMIC Certificates -- Income from Regular Certificates -- Market Discount"
above.
In the case of market discount that does not exceed a de minimis
amount, the Owner generally will be required to allocate ratably the portion of
such discount that is allocable to a Mortgage Loan among the principal payments
on the Mortgage Loan and to include the discount in ordinary income as the
related principal payments are made (whether as scheduled payments or
prepayments).
PREMIUM. In the event that a Mortgage Loan is purchased at a premium,
the Owner may elect under Section 171 of the Code to amortize such premium under
a constant yield method based on the yield of the Mortgage Loan to such Owner,
provided that such Mortgage Loan was originated after September 27, 1985.
Premium allocable to a Mortgage Loan originated on or before that date should be
allocated among the principal payments on the Mortgage Loan and allowed as an
ordinary deduction as principal payments are made (whether as scheduled payments
or prepayments).
TAXATION OF CERTIFICATES IF STRIPPED BOND RULES APPLY.
If the stripped bond rules apply to a Certificate, income on the
Certificate will be treated as original issue discount and will be included in
income as it accrues under a constant yield method. More specifically, for
purposes of applying the original issue discount rules of the Code, the Owner
will likely be taxed as if it had purchased a newly issued, single debt
instrument providing for payments equal to the payments on the interests in the
Mortgage Loans allocable to the Certificate, and having original issue discount
equal to the excess of the sum of such payments over the Owner's purchase price
for the Certificate (which would be treated as the issue price). The amount of
original issue discount income accruing in any taxable year will be computed
generally as described above under "REMIC Certificates -- Income from Regular
Certificates -- Original Issue Discount". It is possible, however, that the
calculation must be made using as the Prepayment Assumption an assumption of
zero prepayments. If the calculation is made assuming no future prepayments,
then the Owner should be allowed to deduct currently any negative amount of
original issue discount produced by the accrual formula.
Different approaches could be applied in calculating income under the
stripped bond rules. For example, a Certificate could be viewed as a collection
of separate debt instruments (one for each payment allocable to the Certificate)
rather than a single debt instrument. Also, in the case of an Interest-Only
Certificate, it could be argued that certain proposed regulations governing
contingent payment debt obligations apply. Owners should consult their own tax
advisors regarding the calculation of income under the stripped bond rules.
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SALES OF CERTIFICATES.
A Certificateholder that sells a Certificate will recognize gain or
loss equal to the difference between the amount realized in the sale and its
adjusted tax basis in the Certificate. In general, such adjusted basis will
equal the Certificateholder's cost for the Certificate, increased by the amount
of any income previously reported with respect to the Certificate and decreased
(but not below zero) by the amount of any distributions received thereon, the
amount of any losses previously allowable to such Owner with respect to such
Certificate and any premium amortization thereon. Any such gain or loss would be
capital gain or loss if the Certificate was held as a capital asset, subject to
the potential treatment of gain as ordinary income to the extent of any accrued
but unrecognized market discount under the market discount rules of the Code, if
applicable.
FOREIGN INVESTORS.
Except as described in the following paragraph, an Owner that is not a
U.S. person (as defined under "REMIC Certificates -- Taxation of Foreign
Investors" above) and that is not subject to federal income tax as a result of
any direct or indirect connection to the United States in addition to its
ownership of a Certificate will not be subject to United States income or
withholding tax in respect of a Certificate (assuming the underlying Mortgage
Loans were originated after July 18, 1984), if the Owner provides an appropriate
statement, signed under penalties of perjury, identifying the Owner and stating,
among other things, that the Owner is not a U.S. person. If these conditions are
not met, a 30% withholding tax will apply to interest (including original issue
discount) unless an income tax treaty reduces or eliminates such tax or unless
the interest is effectively connected with the conduct of a trade or business
within the United States by such Owner. Income effectively connected with a U.S.
trade or business will be subject to United States federal income tax at regular
rates then applicable to U.S. taxpayers (and in the case of a corporation,
possibly also the branch profits tax).
In the event the Trust Fund acquires ownership of real property located
in the United States in connection with a default on a Mortgage Loan, then any
rental income from such property allocable to an Owner that is not a U.S. person
generally will be subject to a 30% withholding tax. In addition, any gain from
the disposition of such real property allocable to an Owner that is not a U.S.
person may be treated as income that is effectively connected with a U.S. trade
or business under special rules governing United States real property interests.
The Trust Fund may be required to withhold tax on gain realized upon a
disposition of such real property by the Trust Fund at a 35% rate.
REPORTING.
Tax information will be reported annually to the Internal Revenue
Service and to Holders of Certificates that are not excluded from the reporting
requirements.
BACKUP WITHHOLDING
Distributions made on a Certificate and proceeds from the sale of a
Certificate to or through certain brokers may be subject to a "backup"
withholding tax of 31% unless, in general, the Owner of the Certificate complies
with certain procedures or is a corporation or other person exempt from such
withholding. Any amounts so withheld from distributions on the Certificates
would be refunded by the Internal Revenue Service or allowed as a credit against
the Owner's federal income tax.
PLAN OF DISTRIBUTION
The Seller may sell Certificates of each series to or through
underwriters (the "Underwriters") by a negotiated firm commitment underwriting
and public reoffering by the Underwriters, and also may sell and place
Certificates directly to other purchasers or through agents. The Seller intends
that Certificates will be offered through such various methods from time to time
and that offerings may be made concurrently through more than one of these
methods or that an offering of a particular series of Certificates may be made
through a combination of such methods.
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The distribution of the Certificates may be effected from time to time
in one or more transactions at a fixed price or prices, which may be changed, or
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
If so specified in the Prospectus Supplement relating to a series of
Certificates, the Seller or any affiliate thereof may purchase some or all of
one or more classes of Certificates of such series from the Underwriter or
Underwriters at a price specified in such Prospectus Supplement. Such purchaser
may thereafter from time to time offer and sell, pursuant to this Prospectus,
some or all of such Certificates so purchased directly, through one or more
underwriters to be designated at the time of the offering of such Certificates
or through broker-dealers acting as agent and/or principal. Such offering may be
restricted in the manner specified in such Prospectus Supplement and may be
effected from time to time in one or more transactions at a fixed price or
prices, which may be changed, or at market prices prevailing at the time of
sale, at prices related to such prevailing market prices or at negotiated
prices.
In connection with the sale of the Certificates, Underwriters may
receive compensation from the Seller or from the purchasers of Certificates for
whom they may act as agents in the form of discounts, concessions or
commissions. Underwriters may sell the Certificates of a series to or through
dealers and such dealers may receive compensation in the form of discounts,
concessions or commissions from the Underwriters and/or commissions from the
purchasers for whom they may act as agents. Underwriters, dealers and agents
that participate in the distribution of the Certificates of a series may be
deemed to be Underwriters and any discounts or commissions received by them from
the Seller and any profit on the resale of the Certificates by them may be
deemed to be underwriting discounts and commissions, under the Securities Act of
1933, as amended (the "Act"). Any such Underwriters or agents will be
identified, and any such compensation received from the Seller will be
described, in the applicable Prospectus Supplement.
It is anticipated that the underwriting agreement pertaining to the
sale of any series or class of Certificates will provide that the obligations of
the underwriters will be subject to certain conditions precedent and that the
underwriters will be obligated to purchase all such Certificates if any are
purchased.
Under agreements which may be entered into by the Seller, Underwriters
and agents who participate in the distribution of the Certificates may be
entitled to indemnification by the Seller against certain liabilities, including
liabilities under the Act.
If so indicated in the Prospectus Supplement, the Seller will authorize
Underwriters or other persons acting as the Seller's agents to solicit offers by
certain institutions to purchase the Certificates from the Seller pursuant to
contracts providing for payment and delivery on a future date. Institutions with
which such contracts may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational charitable
institutions and others, but in all cases such institutions must be approved by
the Seller. The obligation of any purchaser under any such contract will be
subject to the condition that the purchaser of the offered Certificates shall
not at the time of delivery be prohibited under the laws of the jurisdiction to
which such purchaser is subject from purchasing such Certificates. The
Underwriters and such other agents will not have responsibility in respect of
the validity or performance of such contracts.
The Underwriters may, from time to time, buy and sell Certificates, but
there can be no assurance that an active secondary market will develop and there
is no assurance that any market, if established, will continue.
USE OF PROCEEDS
Substantially all of the net proceeds from the sale of each series of
Certificates will be applied by the Seller to the purchase price of the Mortgage
Loans underlying the Certificates of such Series.
FINANCIAL INFORMATION
The Seller has determined that its financial statements are not
material to the offering made hereby. However, any prospective investor who
desires to review financial information concerning the Seller will be provided,
upon
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request, with a copy of the most recent financial statements of the Seller. Such
request should be directed to: HomeSide Mortgage Securities, Inc., 7301
Baymeadows Way, Jacksonville, Florida 32256, Attention: Office of the Secretary.
LEGAL MATTERS
Certain legal matters in connection with the Certificates offered
hereby, including certain federal income tax matters, will be passed upon for
the Seller by Morgan, Lewis & Bockius LLP, New York, New York.
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INDEX OF CERTAIN PROSPECTUS DEFINITIONS
Defined Term Page
- ------------ ----
Accrual Certificates..........................................................9
Act..........................................................................59
Advance Guarantee.............................................................4
Agreement.....................................................................1
ARM Loans.....................................................................3
ARMs..........................................................................3
BankBoston...................................................................20
Bankruptcy Bond..............................................................17
Barnett......................................................................20
BBMC Acquisition.............................................................20
BBMC.........................................................................20
BMC..........................................................................20
Book-Entry Nominee...........................................................53
Buy-Down Fund................................................................12
Buy-Down Mortgage Loans.......................................................3
Buy-Down Reserve.............................................................12
Cash-Out Refinance Loans.....................................................12
Collection Account...........................................................10
Certificate Rate..............................................................9
Code..........................................................................5
Commission...................................................................ii
Compensating Interest Payment................................................19
Current Report...............................................................12
Cut-Off Date..................................................................9
Defective Mortgage Loan......................................................30
Delivery Date.................................................................8
Denomination..................................................................8
Deposit Guarantee.............................................................4
Distribution Date............................................................10
DOL..........................................................................43
ERISA.........................................................................5
Exchange Act..................................................................3
Garn-St. Germain Act.........................................................38
GIC..........................................................................18
Guarantor.....................................................................4
HomeSide Holdings............................................................20
HomeSide Lending..........................................................Cover
HomeSide Mortgage Securities..............................................Cover
Insurance Proceeds...........................................................13
Interest Accrual Period......................................................10
Limited Guarantee.............................................................4
Liquidation Proceeds.........................................................13
Mortgage Loan Schedule.......................................................28
Mortgage Loans............................................................Cover
Mortgage Pool.................................................................1
Mortgage Pool Insurance Policy................................................5
NCUA.........................................................................42
Nonrecoverable Advance.......................................................26
Non-SMMEA Certificates.......................................................41
59
<PAGE> 67
OID Regulations..............................................................46
OTS..........................................................................39
Parties in Interest..........................................................43
Plans........................................................................43
Policy Statement.............................................................42
Principal Prepayments........................................................11
PTE 83-1.....................................................................43
Record Date..................................................................10
Regular Certificates.........................................................45
Relief Act...................................................................39
REMIC.........................................................................5
REMIC Regulations............................................................50
Remittance Rate...............................................................2
Representing Party...........................................................28
Reserve Account..............................................................14
Residual Certificates........................................................45
Residual Owners..............................................................49
Seller....................................................................Cover
Senior Certificates..........................................................14
Servicer..................................................................Cover
SMMEA.........................................................................5
Special Hazard Insurance Policy...............................................5
Stripped Bond Rules..........................................................56
Stripped Certificate.........................................................56
Subordinated Certificates....................................................14
Title V......................................................................39
Trustee.......................................................................8
Trust Fund................................................................Cover
Underwriters.................................................................59
60
<PAGE> 68
PROSPECTUS SUPPLEMENT [LOGO]
(To Prospectus Dated May 26, 1998)
$196,664,528 (APPROXIMATE)
HomeSide Mortgage Securities, Inc.
Seller
HomeSide Lending, Inc.
Servicer
Multi-Class Mortgage Pass-Through Certificates, Series 1998-2
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
$13,800,000 6.50% Class IA-2 Certificates $44,832,074 6.50% Class IIA-1 Certificates
$62,400,000 7.00% Class IA-3 Certificates $ 112,962 (2) Class IIA-P Certificates
$ 3,750,000 7.00% Class IA-4 Certificates $ 0 6.50%(3) Class IIA-X Certificates
$20,301,266 6.75% Class IA-5 Certificates $ 100 6.75% Class A-R Certificates
$31,000,000 6.50% Class IA-6 Certificates $ 4,113,767 Variable Rate(4) Class M Certificates
$13,397,588 6.50% Class IA-7 Certificates $ 1,928,329 Variable Rate(4) Class B-1 Certificates
$ 0 6.75%(1) Class IA-X Certificates $ 1,028,442 Variable Rate(4) Class B-2 Certificates
</TABLE>
- ---------------
(1) The Class IA-X Certificates are interest-only certificates, have no
principal balance and will bear interest on the Class IA-X Notional Amount
(initially $6,793,825) as described herein under "Description of the
Certificates--Interest."
(2) The Class IIA-P Certificates will be entitled to principal only as
described herein under "Description of the Certificates--Principal
(Including Prepayments) -- Distributions to the Class IIA-P
Certificateholders."
(3) The Class IIA-X Certificates are interest-only certificates, have no
principal balance and will bear interest on the Class IIA-X Notional Amount
(initially $1,899,628) as described herein under "Description of the
Certificates--Interest."
(4) The Certificate Rate on the Class M, Class B-1 and Class B-2 Certificates
will vary monthly, as described herein under "Description of the
Certificates--Interest--Certificate Rate With Respect to the Subordinated
Certificates." The Certificate Rate on the Class M, Class B-1 and Class B-2
Certificates with respect to the June 1998 Distribution Date will be
approximately 6.70% per annum.
Principal and interest payable monthly, commencing in June 1998
The Series 1998-2 Certificates will consist of the eleven Classes of
Class A Certificates set forth above and the Class IA-1 Certificates
(collectively, the "Class A Certificates"), the Class M Certificates and the
Class B-1, Class B-2, Class B-3, Class B-4 and Class B-5 Certificates
(collectively, the "Class B Certificates"). The "Certificates" are the Class A,
Class M and Class B Certificates, referred to collectively. The "Offered
Certificates" are the Class A (exclusive of the Class IA-1 Certificates), Class
M, Class B-1, and Class B-2 Certificates, referred to collectively. The "Class
IA Certificates" are the Class IA-1, Class IA-2, Class IA-3, Class IA-4, Class
IA-5, Class IA-6, Class IA-7 and Class IA-X Certificates, referred to
collectively. The "Class IIA Certificates" are the Class IIA-1, Class IIA-P and
Class IIA-X Certificates, referred to collectively. The "Non-Offered Class B
Certificates" are the Class B-3, Class B-4 and Class B-5 Certificates, referred
to collectively. Only the Offered Certificates are offered hereby.
The Certificates will represent beneficial interests in a pool (the
"Mortgage Pool") of fixed rate one- to four-family first lien mortgage loans
(the "Mortgage Loans") and certain related property (together, the "Trust Fund")
conveyed by HomeSide Mortgage Securities, Inc. (the "Seller"). The Mortgage Pool
will be divided into two groups (each, a "Mortgage Group"): "Mortgage Group One"
and "Mortgage Group Two." Mortgage Group One will consist of Mortgage Loans with
approximate original terms to stated maturity of greater than 15 years, but not
more than 30 years. Mortgage Group Two will consist of Mortgage Loans with
approximate original terms to stated maturity of up to 15 years. See "The
Mortgage Pool." Distributions of interest and principal with respect to the
Class IA Certificates will be made primarily based on payments received on the
Mortgage Loans in Mortgage Group One (the "Group One Mortgage Loans"). Dis-
<PAGE> 69
tributions of interest and principal with respect to the Class IIA Certificates
will be made primarily based upon payments received on the Mortgage Loans in
Mortgage Group Two (the "Group Two Mortgage Loans"). Distributions of interest
and principal with respect to the Class A-R, Class M and Class B Certificates
will be made based upon payments received on the Mortgage Loans in both Mortgage
Groups. The Offered Certificates will be issued in the initial principal amounts
set forth above, and the Non-Offered Class B Certificates will be issued in the
aggregate initial principal amount of approximately $1,928,329. HomeSide
Lending, Inc. ("HomeSide Lending") will serve as Servicer (in such capacity, the
"Servicer") of the Mortgage Pool. Capitalized terms used and not otherwise
defined herein shall have the respective meanings ascribed to such terms in the
Prospectus dated May 26, 1998 attached hereto (the "Prospectus").
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW
YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
---------------------------
PROSPECTIVE INVESTORS IN THE OFFERED CERTIFICATES SHOULD CONSIDER THE
FACTORS DISCUSSED UNDER "RISK FACTORS" BEGINNING ON PAGE S-22 OF THIS PROSPECTUS
SUPPLEMENT AND "RISK FACTORS" BEGINNING ON PAGE 6 OF THE PROSPECTUS.
The Offered Certificates will be purchased from the Seller by
Donaldson, Lufkin & Jenrette Securities Corporation (the "Underwriter") and will
be offered by the Underwriter from time to time in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. Proceeds to
the Seller from the sale of the Offered Certificates will be approximately
$___________ plus accrued interest on the Offered Certificates, before deducting
expenses payable by the Seller.
---------------------------
The Offered Certificates are offered by the Underwriter subject to
prior sale, when, as and if delivered to and accepted by the Underwriter, and
subject to certain other conditions. It is expected that delivery of the Class
A-R, Class M, Class B-1 and Class B-2 Certificates will be made at the offices
of Donaldson, Lufkin & Jenrette Securities Corporation, New York, New York and
that delivery of the remaining Classes of Offered Certificates will be made in
book-entry form only, through the Same Day Funds Settlement System of The
Depository Trust Company, in each case on or about May 27, 1998.
---------------------------
Donaldson, Lufkin & Jenrette
Securities Corporation
The date of this Prospectus Supplement is May 26, 1998
(Cover continued on next page)
<PAGE> 70
Initially, the Class A Certificates will evidence a beneficial interest
of approximately 96.50% in the Trust Fund (with the Class IA Certificates
evidencing a beneficial interest of approximately 96.50% in Mortgage Group One
and the Class IIA Certificates evidencing a beneficial interest of approximately
96.50% in Mortgage Group Two), the Class M Certificates will evidence a
beneficial interest of approximately 1.60% in the Trust Fund, the Class B-1
Certificates will evidence a beneficial interest of approximately 0.75% in the
Trust Fund, the Class B-2 Certificates will evidence a beneficial interest of
approximately 0.40% in the Trust Fund and the Non-Offered Class B Certificates
will evidence the remaining approximate 0.75% beneficial interest in the Trust
Fund. The rights of the Class M Certificateholders to receive distributions with
respect to the Mortgage Loans will be subordinated to the rights of the Class A
Certificateholders to the extent described herein. The rights of the Class B-1
Certificateholders to receive distributions with respect to the Mortgage Loans
will be subordinated to the rights of the Class A and Class M Certificateholders
to the extent described herein. The rights of the Class B-2 Certificateholders
to receive distributions with respect to the Mortgage Loans will be subordinated
to the rights of the Class A, Class M and Class B-1 Certificateholders to the
extent described herein. The rights of the Non-Offered Class B
Certificateholders to receive distributions with respect to the Mortgage Loans
will be subordinated to the rights of the Class A, Class M, Class B-1 and Class
B-2 Certificateholders to the extent described herein. The relative interests in
the Trust Fund represented by the Class A, Class M and Class B Certificates (and
the relative interests in Mortgage Group One and Mortgage Group Two represented
by the Class IA Certificates and the Class IIA Certificates, respectively) will
vary from time to time because of the disproportionate allocation of certain
unscheduled principal payments on the Mortgage Loans to the related Non-PO Class
A Certificates and the allocation of certain losses and shortfalls on the
Mortgage Loans first to the Class B Certificates in reverse numerical order, and
then to the Class M Certificates, prior to the allocation of such losses and
shortfalls to the Class A Certificates. Realized Losses (defined herein) on the
Mortgage Loans (other than Excess Losses (defined herein)) will be allocated
first to the Non-Offered Class B Certificates, then to the Class B-2
Certificates, then to the Class B-1 Certificates, then to the Class M
Certificates and then to the Class A Certificates relating to the applicable
Loan Group as described herein, in each case until their principal balances have
been reduced to zero. See "Description of the Certificates--Subordinated
Certificates and Shifting Interests."
Proceeds of the assets in the Trust Fund are the sole source of
payments on the Offered Certificates. The Offered Certificates will not
represent an interest in or obligation of the Seller, HomeSide Lending or any of
their affiliates or any other entity. The Offered Certificates will not be
savings accounts or deposits and neither the Offered Certificates nor the
underlying Mortgage Loans will be insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency or by the Seller,
HomeSide Lending or any of their affiliates or any other entity, nor has the
Federal Deposit Insurance Corporation or any other governmental agency passed
upon the accuracy of the information contained in this Prospectus Supplement or
in the Prospectus.
The Offered Certificates may not be an appropriate investment for
individual investors who do not have sufficient resources or expertise to
evaluate the particular characteristics of the applicable Class of Offered
Certificates. This may be the case because:
o The yield to maturity of Offered Certificates purchased at a
price other than par will be sensitive to the uncertain rate
and timing of principal prepayments (including full or partial
prepayments, repurchases, defaults and liquidations) on the
Mortgage Loans;
o The rate of principal distributions on, and the weighted
average life of, the Offered Certificates will be sensitive to
the uncertain rate and timing of principal prepayments
(including full or partial prepayments, repurchases, defaults
and liquidations) on the Mortgage Loans, and as such the
Offered Certificates may be inappropriate investments for an
investor requiring a distribution of a particular amount of
principal on a specific date or an otherwise predictable
stream of distributions;
o There can be no assurance that an investor will be able to
reinvest amounts distributed in respect of principal on an
Offered Certificate (which, in general, are expected to be
greater during periods of relatively low interest rates) at a
rate at least as high as the Certificate Rate applicable
thereto;
S-2
<PAGE> 71
o As discussed below, there can be no assurance that a secondary
market for the Offered Certificates will develop or provide
Certificateholders with liquidity of investment; and
o The Offered Certificates are subject to the further risks and
other special considerations discussed herein and in the
Prospectus under the heading "Risk Factors."
THE YIELD TO MATURITY OF THE CLASS IA-X CERTIFICATES WILL BE EXTREMELY
SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS,
LIQUIDATIONS, REPURCHASES AND DEFAULTS) ON THE NON-DISCOUNT MORTGAGE LOANS
(DEFINED HEREIN) IN MORTGAGE GROUP ONE, WHICH MAY FLUCTUATE SIGNIFICANTLY FROM
TIME TO TIME. A RAPID RATE OF PRINCIPAL PREPAYMENTS ON THE NON-DISCOUNT MORTGAGE
LOANS IN MORTGAGE GROUP ONE WILL HAVE A MATERIAL NEGATIVE EFFECT ON THE YIELD TO
MATURITY OF THE CLASS IA-X CERTIFICATES. INVESTORS SHOULD FULLY CONSIDER THE
ASSOCIATED RISKS, INCLUDING THE RISK THAT A RAPID RATE OF PRINCIPAL PREPAYMENTS
ON THE NON-DISCOUNT MORTGAGE LOANS IN MORTGAGE GROUP ONE COULD RESULT IN THE
FAILURE OF INVESTORS IN THE CLASS IA-X CERTIFICATES TO RECOUP THEIR INITIAL
INVESTMENT. SEE "PREPAYMENT AND YIELD CONSIDERATIONS -- YIELD CONSIDERATIONS
WITH RESPECT TO THE CLASS IA-X CERTIFICATES."
THE YIELD TO MATURITY OF THE CLASS IIA-X CERTIFICATES WILL BE EXTREMELY
SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS,
LIQUIDATIONS, REPURCHASES AND DEFAULTS) ON THE NON-DISCOUNT MORTGAGE LOANS IN
MORTGAGE GROUP TWO, WHICH MAY FLUCTUATE SIGNIFICANTLY FROM TIME TO TIME. A RAPID
RATE OF PRINCIPAL PREPAYMENTS ON THE NON-DISCOUNT MORTGAGE LOANS IN MORTGAGE
GROUP TWO WILL HAVE A MATERIAL NEGATIVE EFFECT ON THE YIELD TO MATURITY OF THE
CLASS IIA-X CERTIFICATES. INVESTORS SHOULD FULLY CONSIDER THE ASSOCIATED RISKS,
INCLUDING THE RISK THAT A RAPID RATE OF PRINCIPAL PREPAYMENTS ON THE
NON-DISCOUNT MORTGAGE LOANS IN MORTGAGE GROUP TWO COULD RESULT IN THE FAILURE OF
INVESTORS IN THE CLASS IIA-X CERTIFICATES TO RECOUP THEIR INITIAL INVESTMENT.
SEE "PREPAYMENT AND YIELD CONSIDERATIONS -- YIELD CONSIDERATIONS WITH RESPECT TO
THE CLASS IIA-X CERTIFICATES."
THE YIELD TO MATURITY OF THE CLASS IIA-P CERTIFICATES WILL BE EXTREMELY
SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS,
LIQUIDATIONS, REPURCHASES AND DEFAULTS) ON THE DISCOUNT MORTGAGE LOANS IN
MORTGAGE GROUP TWO, WHICH MAY FLUCTUATE SIGNIFICANTLY FROM TIME TO TIME. A
SLOWER RATE OF PRINCIPAL PREPAYMENTS ON THE DISCOUNT MORTGAGE LOANS IN MORTGAGE
GROUP TWO THAN THAT ANTICIPATED BY INVESTORS WILL HAVE A MATERIAL NEGATIVE
EFFECT ON THE YIELD TO MATURITY OF THE CLASS IIA-P CERTIFICATES. INVESTORS
SHOULD FULLY CONSIDER THE ASSOCIATED RISKS, INCLUDING THE RISK THAT A RELATIVELY
SLOW RATE OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, LIQUIDATIONS,
REPURCHASES AND DEFAULTS) ON THE DISCOUNT MORTGAGE LOANS IN MORTGAGE GROUP TWO
WILL HAVE A MATERIAL NEGATIVE EFFECT ON THE YIELD TO AN INVESTOR IN THE CLASS
IIA-P CERTIFICATES. SEE "YIELD AND PREPAYMENT CONSIDERATIONS -- YIELD
CONSIDERATIONS WITH RESPECT TO THE CLASS IIA-P CERTIFICATES."
THE YIELD TO MATURITY ON THE CLASS M, CLASS B-1 AND CLASS B-2
CERTIFICATES, RESPECTIVELY, WILL BE EXTREMELY SENSITIVE TO LOSSES ON THE
MORTGAGE LOANS (AND THE TIMING THEREOF), TO THE EXTENT SUCH LOSSES ARE NOT
COVERED BY THE APPLICABLE CLASSES OF CERTIFICATES SUBORDINATE THERETO, BECAUSE
THE ENTIRE AMOUNT OF ANY SUCH LOSSES (OTHER THAN EXCESS LOSSES) WILL BE
ALLOCABLE TO SUCH CLASSES OF CERTIFICATES UNTIL THEIR PRINCIPAL BALANCE IS
REDUCED TO ZERO. SEE "PREPAYMENT AND YIELD CONSIDERATIONS."
The Book-Entry Certificates (defined herein) will be represented by
certificates registered in the name of Cede & Co., as nominee of DTC, as further
described herein. The interests of beneficial owners of the Book-Entry
Certificates will be represented by book entries on the records of participating
members of DTC. Definitive certificates will be available for the Book-Entry
Certificates only under the limited circumstances described herein. See
"Description of the Certificates--Book-Entry Registration."
It is a condition to the issuance of the Offered Certificates that (i)
the Class A Certificates (other than the Class IIA-P, Class IA-X and Class IIA-X
Certificates) be rated "AAA" by each of Fitch IBCA, Inc. ("Fitch") and Standard
& Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc.
("S&P"), (ii) the Class IIA-P, Class IA-X and Class IIA-X Certificates be rated
"AAA" by Fitch and "AAAr" by S&P, (iii) the Class M Certificates be rated at
least "AA" by Fitch, (iv)
S-3
<PAGE> 72
the Class B-1 Certificates be rated at least "A" by Fitch, and (v) the Class B-2
Certificates be rated at least "BBB" by Fitch. See "Ratings."
The Seller intends to cause an election to be made to treat the
segregated pool comprising the assets of the Trust Fund (the "Subsidiary REMIC")
as a real estate mortgage investment conduit (a "REMIC") for federal income tax
purposes. The Seller intends to cause an election to be made to treat the pool
of assets represented by the "regular interests" in the Subsidiary REMIC as a
separate REMIC (the "Master REMIC"). The Offered Certificates (other than the
Class A-R Certificate) will constitute "regular interests" in the Master REMIC.
The Class A-R Certificate will represent the sole class of "residual interests"
in each of the Subsidiary REMIC and the Master REMIC. See "Federal Income Tax
Considerations" herein and "Federal Income Tax Consequences" in the Prospectus.
There is currently no secondary market for the Offered Certificates and
there can be no assurance that a secondary market will develop or, if such a
market does develop, that it will provide Certificateholders with liquidity of
investment at any particular time or for the life of the Offered Certificates.
Donaldson, Lufkin & Jenrette Securities Corporation (the "Underwriter") intends
to act as a market maker in the Offered Certificates, subject to applicable
provisions of federal and state securities laws and other regulatory
requirements, but is not under any obligation to do so and any such market
making may be discontinued at any time. There can be no assurance that any
investor will be able to sell an Offered Certificate at a price equal to or
greater than the price at which such Certificate was purchased. THE CLASS M AND
OFFERED CLASS B CERTIFICATES MAY NOT BE TRANSFERRED UNLESS THE TRANSFEREE HAS
DELIVERED (I) A REPRESENTATION LETTER TO THE TRUSTEE STATING EITHER (A) THAT THE
TRANSFEREE IS NOT A PLAN AND IS NOT ACTING ON BEHALF OF A PLAN OR USING THE
ASSETS OF A PLAN TO EFFECT SUCH PURCHASE OR (B) SUBJECT TO CERTAIN CONDITIONS
DESCRIBED HEREIN, THAT THE SOURCE OF FUNDS USED TO PURCHASE THE CLASS M OR
OFFERED CLASS B CERTIFICATES IS AN "INSURANCE COMPANY GENERAL ACCOUNT" OR (II)
AN OPINION OF COUNSEL AND SUCH OTHER DOCUMENTATION AS PROVIDED IN THIS
PROSPECTUS SUPPLEMENT. IN ADDITION, THE CLASS A-R CERTIFICATE MAY NOT BE
PURCHASED BY OR TRANSFERRED TO (I) A "DISQUALIFIED ORGANIZATION," (II) EXCEPT
UNDER CERTAIN LIMITED CIRCUMSTANCES, A PERSON WHO IS NOT A "U.S. PERSON," (III)
A PLAN OR A PERSON ACTING ON BEHALF OF OR INVESTING THE ASSETS OF A PLAN OR (IV)
ANY PERSON OR ENTITY WHO THE TRANSFEROR KNOWS OR HAS REASON TO KNOW WILL BE
UNWILLING OR UNABLE TO PAY WHEN DUE FEDERAL, STATE OR LOCAL TAXES WITH RESPECT
THERETO. See "ERISA Considerations" and "Description of the Certificates
- --Restrictions on Transfer of the Class A-R, Class M and Offered Class B
Certificates" herein and "Federal Income Tax Consequences" in the Prospectus.
---------------------------
The Seller will file with the Securities and Exchange Commission (the
"Commission") certain materials relating to the Mortgage Loans and the Offered
Certificates on Form 8-K. Such materials were prepared by the Underwriter for
certain prospective investors, and, unless otherwise specified in such Form 8-K,
the information included in such materials is subject to and is superseded by,
the information set forth in this Prospectus Supplement.
---------------------------
This Prospectus Supplement does not contain complete information about
the offering of the Offered Certificates. Additional information is contained in
the Prospectus and purchasers are urged to read both this Prospectus Supplement
and the Prospectus in full. Sales of the Offered Certificates may not be
consummated unless the purchaser has received both this Prospectus Supplement
and the Prospectus.
---------------------------
UNTIL AUGUST 24, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE
OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND 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 OF
SUBSCRIPTIONS.
S-4
<PAGE> 73
TERMS OF THE CERTIFICATES
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and in the
accompanying Prospectus. Capitalized terms used herein and not otherwise defined
shall have the respective meanings assigned them in the Prospectus.
<TABLE>
<CAPTION>
<S> <C>
Securities Offered.......................... Multi-Class Mortgage Pass-Through Certificates, Series
1998-2, Class A (the "Class A Certificates"), Class M,
Class B-1 and Class B-2. The Class A Certificates
(exclusive of the Class IA-1 Certificates), Class M
Certificates, Class B-1 Certificates and Class B-2
Certificates are sometimes collectively referred to
herein as the "Offered Certificates." Only the Offered
Certificates are offered hereby.
The Class A Certificates will consist of the Class
IA-1, Class IA-2, Class IA-3, Class IA-4, Class IA-5,
Class IA-6, Class IA-7, Class IA-X, Class IIA-1, Class
IIA-P, Class IIA-X and Class A-R Certificates.
The Class A Certificates (exclusive of Class IA-1
Component Four (defined herein) and the Class IIA-P
Certificates) are sometimes collectively referred to
herein as the "Non-PO Class A Certificates."
The "Class IA Certificates" are the Class IA-1, Class
IA-2, Class IA-3, Class IA-4, Class IA-5, Class IA-6,
Class IA-7 and Class IA-X Certificates, referred to
collectively.
The "Class IA Certificates" (exclusive of Class IA-1
Component Four) are sometimes collectively referred to
as the "Non-PO Class IA Certificates."
The "Class IIA Certificates" are the Class IIA-1, Class
IIA-P and Class IIA-X Certificates, referred to
collectively.
The "Class IIA Certificates" (exclusive of the Class
IIA-P Certificates) are sometimes collectively referred
to as the "Non-PO Class IIA Certificates."
The Class IIA-P Certificates are principal only
Certificates and will not be entitled to payments of
interest.
The Class IA-X and Class IIA-X Certificates and Class
IA-1 Component Two and Class IA-1 Component Five (each
as defined herein) are interest-only Certificates. The
Class IA-X and Class IIA-X Certificates and Class IA-1
Component Two and Class IA-1 Component Five will not
receive distributions of principal, but will accrue
interest on the Class IA-X Notional Amount, the Class
IIA-X Notional Amount, the Class IA-1 Component Two
Notional Amount and the Class IA-1 Component Five
Notional Amount (each as defined herein), respectively.
The Class IA-2, Class IA-6 and Class IA-7 Certificates
are sometimes collectively referred to herein as the
"PACs." The Class IA-3 Certificates and Class IA-1
Component Three are sometimes collectively referred to
herein as the "TACs."
</TABLE>
S-5
<PAGE> 74
<TABLE>
<CAPTION>
<S> <C>
On each Distribution Date on or before the Class IA-1
Component Three Accretion Termination Date (defined
herein), an amount equal to the Class IA-1 Component
Three Accrual Amount (defined herein) will be added to
the principal balance of Class IA-1 Component Three and
distributed as principal to the Class IA-3 Certificates
and Class IA-1 Component Three, in the amount and
priority as described herein. On each Distribution Date
on or before the Class IA-4 Accretion Termination Date
(defined herein), an amount equal to the Class IA-4
Accrual Amount (defined herein) will be added to the
principal balance of the Class IA-4 Certificates and
distributed as principal to the Class IA-3 and Class
IA-4 Certificates and Class IA-1 Component Three, in
the amount and priority as described herein.
The "Class B Certificates" are the Class B-1, Class
B-2, Class B-3, Class B-4 and Class B-5 Certificates,
referred to collectively.
The Class M and Class B Certificates are sometimes
collectively referred to herein as the "Subordinated
Certificates."
The "Offered Class B Certificates" are the Class B-1
and Class B-2 certificates, referred to collectively.
The "Non-Offered Class B Certificates" are the Class
B-3, Class B-4 and Class B-5 Certificates, referred to
collectively.
The Class IA-1 Certificates and the Non-Offered Class B
Certificates are not offered hereby. Any information
contained herein relating to the Class IA-1
Certificates or the Non-Offered Class B Certificates is
presented solely to provide a better understanding of
the Offered Certificates.
For purposes of calculating distributions, the Class
IA-1 Certificates, which are not offered hereby, will
be comprised of five components (each, a "Component")
having the designations, initial principal balances or
notional amounts and Certificate Rates set forth below.
Holders of the Class IA-1 Certificates will be entitled
to receive distributions on any Distribution Date to
the extent of the amount distributed with respect to
the Components related to such Class on such
Distribution Date. Such Components will not be
separately transferrable.
</TABLE>
<TABLE>
<CAPTION>
Approximate
Initial Component Certificate
Designation Principal Balance Rate
----------- ----------------- ----
<S> <C>
Class IA-1 Component One $ 6,525,404 (1)
Class IA-1 Component Two $ 0 7.00%(2)
Class IA-1 Component Three $51,838,295 7.00%(3)
Class IA-1 Component Four $ 153,914 (4)
Class IA-1 Component Five $ 0 6.75%(5)
(1) Class IA-1 Component One will not be entitled to
distributions of interest and will receive principal
only in respect of the Group One Mortgage Loans.
</TABLE>
S-6
<PAGE> 75
<TABLE>
<CAPTION>
<S> <C>
(2) Class IA-1 Component Two will accrue interest on
the Class IA-1 Component Two Notional Amount (defined
herein). The initial Class IA-1 Component Two Notional
Amount will be approximately $4,156,971. Class IA-1
Component Two will not be entitled to receive
distributions of principal.
(3) On each Distribution Date on or before the Class
IA-1 Component Three Accretion Termination Date
(defined herein), an amount equal to the Class IA-1
Component Three Accrual Amount (defined herein) will be
added to the principal balance of Class IA-1 Component
Three, and such amount will be distributed as principal
to other Components and Classes of Class IA
Certificates as described herein and will not be
distributed as interest to Class IA-1 Component Three.
(4) Class IA-1 Component Four will not be entitled to
distributions of interest and will only receive
principal in respect of the Discount Mortgage Loans
(defined herein) in Mortgage Group One. For a
description of the principal distributions to Class
IA-1 Component Four, see "Description of the
Certificates--Principal (Including
Prepayments)--Distributions to Class IA-1 Component
Four."
(5) Class IA-1 Component Five will accrue interest on
the Class IA-1 Component Five Notional Amount (defined
herein). The initial Class IA-1 Component Five Notional
Amount will be approximately $8,253,000. Class IA-1
Component Five will not be entitled to receive
distributions of principal.
Seller...................................... HomeSide Mortgage Securities, Inc. ("HomeSide Mortgage
Securities" or the "Seller"). See "HomeSide Mortgage
Securities, Inc." in the Prospectus.
Servicer.................................... HomeSide Lending, Inc. ("HomeSide Lending" or the
"Servicer"). See "HomeSide Lending , Inc." in the
Prospectus.
Trustee..................................... Norwest Bank Minnesota, National Association, a
national banking association (the "Trustee"). See "The
Pooling and Servicing Agreement -- Trustee."
Initial Principal Amount of Offered
Certificates................................ $196,664,528 (Approximate; subject to a permitted
variance of plus or minus 5%). In addition, the
original principal amount of any Class of Certificates
may be adjusted if necessary to obtain the required
ratings on the Offered Certificates. Accordingly, any
investors' commitments with respect to the Offered
Certificates may be increased or decreased
correspondingly.
</TABLE>
S-7
<PAGE> 76
<TABLE>
<CAPTION>
<S> <C>
Denominations and Registration of
the Certificates............................ The Offered Certificates (other than the Class IA-X and
Class IIA-X Certificates) generally will be issuable in
denominations of $25,000 principal amount (or integral
multiples of $1,000 in excess thereof). The Class IA-X
and Class IIA-X Certificates will have no principal
balance, but will be issuable in fully registered form
in denominations of $25,000 based on the Class IA-X
Notional Amount and the Class IIA-X Notional Amount,
respectively (each as defined herein) (or integral
multiples thereof). A single Class A-R Certificate will
be issuable in a $100 denomination. The Class A
Certificates (other than the Class IA-1, Class IIA-P
and Class A-R Certificates) initially will be issued in
book-entry form and initially will be represented by
one or more physical certificates registered in the
name of Cede & Co., as the nominee of The Depository
Trust Company ("DTC"). No person acquiring an interest
in any Offered Certificate (a "Certificate Owner") will
be entitled to receive a Definitive Certificate
(defined herein) representing such person's interest in
the Trust Fund, except in the event that Definitive
Certificates are issued under the limited circumstances
described herein. The Class IIA-P, Class A-R, Class M,
Class B-1 and Class B-2 Certificates will be issued in
fully registered certificated form. All references
herein to holders of Certificates
("Certificateholders") and their rights shall mean and
include the rights of Certificate Owners, as such
rights may be exercised through DTC and its
participating organizations, except as otherwise
specified herein. See "Description of the Certificates
-- Book-Entry Registration" and "-- Definitive
Certificates."
Cut-Off Date................................ May 1, 1998
Agreement................................... The Pooling and Servicing Agreement, to be dated as of
May 1, 1998 (the "Agreement"), among the Seller, the
Servicer, and the Trustee, relating to the
Certificates.
The Mortgage Loans.......................... Fixed rate, first lien mortgage loans secured by one-
to four-family residential properties, having an
aggregate unpaid principal balance on the Cut-off Date
of approximately $257,110,471 (the "Mortgage Loans").
Monthly payments of principal of and interest on the
Mortgage Loans ("Monthly Payments") will be due on the
first day of each month (each, a "Due Date").
The Seller expects the Mortgage Loans to have the
characteristics described below. References herein to
percentages of the Mortgage Loans refer to the
percentage of the aggregate principal balance of the
Mortgage Loans (or, where so indicated, such percentage
of the Mortgage Loans in the related Mortgage Group) as
of the Cut-off Date, after giving effect to Monthly
Payments due on or prior to the Cut-off Date, whether
or not received. The Mortgage Loans will be divided
into two groups (each, a "Mortgage Group"): "Mortgage
Group One" (constituting approximately 81.89% of the
Mortgage Loans) and "Mortgage Group Two" (constituting
approximately 18.11% of the Mortgage Loans). See "The
Mortgage Pool."
</TABLE>
S-8
<PAGE> 77
SELECTED MORTGAGE LOAN DATA
(APPROXIMATE AS OF THE CUT-OFF DATE)
MORTGAGE POOL
<TABLE>
<CAPTION>
<S> <C>
Number of Mortgage Loans................................................................. 766
Aggregate Unpaid Principal Balance....................................................... $257,110,471
Range of Unpaid Principal Balances....................................................... $64,230 - $839,318
Average Unpaid Principal Balance......................................................... $335,653
Range of Mortgage Rates.................................................................. 6.500% - 9.500%
Weighted Average Mortgage Rate........................................................... 7.401%
Range of Remaining Terms to Stated Maturity.............................................. 118 months - 360 months
Weighted Average Remaining Term to Stated Maturity....................................... 324 months
Weighted Average Loan Age(1)............................................................. 2 months
Range of Original Loan-to-Value Ratios................................................... 25.9% - 95.0%
Weighted Average Original Loan-to-Value Ratio............................................ 72.4%
Weighted Average FICO Score.............................................................. 717
PERCENTAGE OF MORTGAGE POOL
BY AGGREGATE PRINCIPAL BALANCE
AS OF THE CUT-OFF DATE
------------------------------
Original Term
10 Years.............................................................................. 0.52%
15 Years.............................................................................. 17.60%
20 Years.............................................................................. 0.75%
25 Years.............................................................................. 0.52%
30 Years.............................................................................. 80.62%
</TABLE>
- ---------------
(1) Based on the number of months from and including the first Monthly Payment
to and including the Cut-off Date.
S-9
<PAGE> 78
SELECTED MORTGAGE LOAN DATA
(APPROXIMATE AS OF THE CUT-OFF DATE)
MORTGAGE GROUP ONE
<TABLE>
<CAPTION>
<S> <C>
Number of Mortgage Loans................................................................. 628
Aggregate Unpaid Principal Balance....................................................... $210,535,303
Range of Unpaid Principal Balances....................................................... $64,230 - $839,318
Average Unpaid Principal Balance......................................................... $335,247
Range of Mortgage Rates.................................................................. 6.750% - 9.500%
Weighted Average Mortgage Rate........................................................... 7.487%
Range of Remaining Terms to Stated Maturity.............................................. 237 months - 360 months
Weighted Average Remaining Term to Stated Maturity....................................... 356 months
Weighted Average Loan Age(1)............................................................. 2 months
Range of Original Loan-to-Value Ratios................................................... 25.9% - 95.0
Weighted Average Original Loan-to-Value Ratio............................................ 73.8%
Weighted Average FICO Score.............................................................. 717
PERCENTAGE OF MORTGAGE GROUP
ONE
BY AGGREGATE PRINCIPAL BALANCE
AS OF THE CUT-OFF DATE
------------------------------
Original Term
20 Years.............................................................................. 0.91%
25 Years.............................................................................. 0.63%
30 Years.............................................................................. 98.46%
</TABLE>
- ---------------
(1) Based on the number of months from and including the first Monthly Payment
to and including the Cut-off Date.
S-10
<PAGE> 79
SELECTED MORTGAGE LOAN DATA
(APPROXIMATE AS OF THE CUT-OFF DATE)
MORTGAGE GROUP TWO
<TABLE>
<CAPTION>
<S> <C>
Number of Mortgage Loans................................................................. 138
Aggregate Unpaid Principal Balance....................................................... $46,575,168
Range of Unpaid Principal Balances....................................................... $233,215 - $687,847
Average Unpaid Principal Balance......................................................... $337,501
Range of Mortgage Rates.................................................................. 6.500% - 7.875%
Weighted Average Mortgage Rate........................................................... 7.009%
Range of Remaining Terms to Stated Maturity.............................................. 118 months - 180 months
Weighted Average Remaining Term to Stated Maturity....................................... 177 months
Weighted Average Loan Age(1)............................................................. 1 month
Range of Original Loan-to-Value Ratios................................................... 29.4% - 90.0%
Weighted Average Original Loan-to-Value Ratio............................................ 66.1%
Weighted Average FICO Score.............................................................. 719
PERCENTAGE OF MORTGAGE GROUP
TWO
BY AGGREGATE PRINCIPAL BALANCE
AS OF THE CUT-OFF DATE
------------------------------
Original Term
10 Years.............................................................................. 2.85%
15 Years.............................................................................. 97.15%
</TABLE>
- ---------------
(1) Based on the number of months from and including the first Monthly Payment
to and including the Cut-off Date.
<TABLE>
<CAPTION>
<S> <C>
Prepayment and Yield
Considerations............................ The rate of principal payments and the yields to
maturity of the Offered Certificates are related to the
rate and timing of payments of principal, including
prepayments, on the underlying Mortgage Loans in the
related Mortgage Group (or, with respect to the Class M
and Offered Class B Certificates, on the underlying
Mortgage Loans in both Mortgage Groups). As is the case
with mortgage-backed securities generally, the Offered
Certificates are subject to substantial inherent
cash-flow uncertainties because the Mortgage Loans may
be prepaid, in whole or in part, at any time without
penalty. Any prepayments of Mortgage Loans in a
Mortgage Group will result in distributions to the
related Certificateholders of principal amounts which
would otherwise be distributed over the remaining terms
of the related Mortgage Loans.
</TABLE>
S-11
<PAGE> 80
<TABLE>
<CAPTION>
<S> <C>
The rate of prepayments with respect to mortgage loans
secured by one- to four-family residences has
fluctuated significantly in recent years. The Seller
believes that a predominant factor affecting the
prepayment rate on a large pool of mortgage loans is
the difference between the interest rates on the
mortgage loans (giving consideration to the cost of any
refinancing) and prevailing mortgage rates. In general,
if mortgage interest rates were to fall below (or rise
above) the interest rates on the Mortgage Loans, the
rate of prepayment would be expected to increase (or
decrease). Other factors affecting the prepayment rate
of the Mortgage Loans may include changes in
mortgagors' housing needs, job transfers, unemployment,
mortgagors' net equity in the mortgaged properties and
servicing decisions.
In general, rapid rates of prepayments on the Mortgage
Loans are likely to coincide with periods of low
prevailing interest rates. During such periods, the
yields at which an investor may be able to reinvest
amounts received as principal payments on the
investor's Class of Offered Certificates may be lower
than the Certificate Rate on that Class. Conversely, in
general, slow rates of prepayments on the Mortgage
Loans are likely to coincide with periods of high
prevailing interest rates. During such periods, the
amount of principal payments available to an investor
for reinvestment at such high rates may be relatively
low.
The table set forth herein under "Prepayment and Yield
Considerations" illustrates the effect of various
constant prepayment rates on the weighted average lives
of each Class of Offered Certificates based on certain
assumptions described therein (the "Modeling
Assumptions").
THE YIELD TO MATURITY OF THE CLASS IA-X CERTIFICATES
WILL BE EXTREMELY SENSITIVE TO THE RATE AND TIMING OF
PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS,
LIQUIDATIONS, REPURCHASES AND DEFAULTS) ON THE
NON-DISCOUNT MORTGAGE LOANS (DEFINED HEREIN) IN
MORTGAGE GROUP ONE, WHICH MAY FLUCTUATE SIGNIFICANTLY
FROM TIME TO TIME. A RAPID RATE OF PRINCIPAL
PREPAYMENTS ON THE NON-DISCOUNT MORTGAGE LOANS IN
MORTGAGE GROUP ONE WILL HAVE A MATERIAL NEGATIVE EFFECT
ON THE YIELD TO MATURITY OF THE CLASS IA-X
CERTIFICATES. IN ADDITION, BECAUSE HOLDERS OF THE CLASS
IA-X CERTIFICATES GENERALLY HAVE RIGHTS TO RELATIVELY
LARGER PORTIONS OF INTEREST PAYMENTS ON THE GROUP ONE
MORTGAGE LOANS WITH HIGHER MORTGAGE RATES, AND BECAUSE
MORTGAGE LOANS HAVING HIGHER MORTGAGE RATES ARE
GENERALLY LIKELY TO PREPAY AT A FASTER RATE THAN
MORTGAGE LOANS WITH LOWER MORTGAGE RATES, THE YIELD ON
THE CLASS IA-X CERTIFICATES WILL BE ADVERSELY AFFECTED
TO A GREATER EXTENT THAN THE YIELDS ON THE OTHER
CLASSES OF CLASS IA CERTIFICATES IF THE GROUP ONE
MORTGAGE LOANS WITH HIGHER MORTGAGE RATES PREPAY FASTER
THAN THE GROUP ONE MORTGAGE LOANS WITH LOWER MORTGAGE
RATES. THE YIELD TO INVESTORS ON THE CLASS IA-X
CERTIFICATES WILL NOT BE AFFECTED BY PREPAYMENTS ON THE
DISCOUNT MORTGAGE LOANS (DEFINED HEREIN) OR ON THE
GROUP TWO MORTGAGE LOANS. INVESTORS SHOULD FULLY
CONSIDER THE ASSOCIATED RISKS, INCLUDING THE RISK THAT
A RAPID RATE OF PRINCIPAL PREPAYMENTS ON THE
NON-DISCOUNT MORTGAGE LOANS IN MORTGAGE GROUP ONE COULD
RESULT IN THE FAILURE OF INVESTORS IN THE CLASS IA-X
CERTIFICATES TO RECOUP THEIR INITIAL INVESTMENT. SEE
"PREPAYMENT AND YIELD CONSIDERATIONS -- YIELD
CONSIDERATIONS WITH RESPECT TO THE CLASS IA-X
CERTIFICATES."
</TABLE>
S-12
<PAGE> 81
<TABLE>
<CAPTION>
<S> <C>
THE YIELD TO MATURITY OF THE CLASS IIA-X CERTIFICATES
WILL BE EXTREMELY SENSITIVE TO THE RATE AND TIMING OF
PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS,
LIQUIDATIONS, REPURCHASES AND DEFAULTS) ON THE
NON-DISCOUNT MORTGAGE LOANS IN MORTGAGE GROUP TWO,
WHICH MAY FLUCTUATE SIGNIFICANTLY FROM TIME TO TIME. A
RAPID RATE OF PRINCIPAL PREPAYMENTS ON THE NON-DISCOUNT
MORTGAGE LOANS IN MORTGAGE GROUP TWO WILL HAVE A
MATERIAL NEGATIVE EFFECT ON THE YIELD TO MATURITY OF
THE CLASS IIA-X CERTIFICATES. IN ADDITION, BECAUSE
HOLDERS OF THE CLASS IIA-X CERTIFICATES GENERALLY HAVE
RIGHTS TO RELATIVELY LARGER PORTIONS OF INTEREST
PAYMENTS ON MORTGAGE LOANS IN MORTGAGE GROUP TWO WITH
HIGHER MORTGAGE RATES, AND BECAUSE MORTGAGE LOANS
HAVING HIGHER MORTGAGE RATES ARE GENERALLY LIKELY TO
PREPAY AT A FASTER RATE THAN MORTGAGE LOANS WITH LOWER
MORTGAGE RATES, THE YIELD ON THE CLASS IIA-X
CERTIFICATES WILL BE ADVERSELY AFFECTED TO A GREATER
EXTENT THAN THE YIELDS ON THE OTHER CLASSES OF CLASS
IIA CERTIFICATES IF THE MORTGAGE LOANS IN MORTGAGE
GROUP TWO WITH HIGHER MORTGAGE RATES PREPAY FASTER THAN
THE MORTGAGE LOANS IN MORTGAGE GROUP TWO WITH LOWER
MORTGAGE RATES. THE YIELD TO INVESTORS ON THE CLASS
IIA-X CERTIFICATES WILL NOT BE AFFECTED BY PREPAYMENTS
ON THE DISCOUNT MORTGAGE LOANS OR ON THE MORTGAGE LOANS
IN MORTGAGE GROUP ONE. INVESTORS SHOULD FULLY CONSIDER
THE ASSOCIATED RISKS, INCLUDING THE RISK THAT A RAPID
RATE OF PRINCIPAL PREPAYMENTS ON THE NON-DISCOUNT
MORTGAGE LOANS IN MORTGAGE GROUP TWO COULD RESULT IN
THE FAILURE OF INVESTORS IN THE CLASS IIA-X
CERTIFICATES TO RECOUP THEIR INITIAL INVESTMENT. SEE
"PREPAYMENT AND YIELD CONSIDERATIONS -- YIELD
CONSIDERATIONS WITH RESPECT TO THE CLASS IIA-X
CERTIFICATES."
THE YIELD TO MATURITY OF THE CLASS IIA-P CERTIFICATES
WILL BE EXTREMELY SENSITIVE TO THE RATE AND TIMING OF
PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS,
LIQUIDATIONS, REPURCHASES AND DEFAULTS) ON THE DISCOUNT
MORTGAGE LOANS IN MORTGAGE GROUP TWO, WHICH MAY
FLUCTUATE SIGNIFICANTLY FROM TIME TO TIME. A SLOWER
RATE OF PRINCIPAL PREPAYMENTS ON THE DISCOUNT MORTGAGE
LOANS IN MORTGAGE GROUP TWO THAN THAT ANTICIPATED BY
INVESTORS WILL HAVE A MATERIAL NEGATIVE EFFECT ON THE
YIELD TO MATURITY OF THE CLASS IIA-P CERTIFICATES.
INVESTORS SHOULD FULLY CONSIDER THE ASSOCIATED RISKS,
INCLUDING THE RISK THAT A RELATIVELY SLOW RATE OF
PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS,
LIQUIDATIONS, REPURCHASES AND DEFAULTS) ON THE DISCOUNT
MORTGAGE LOANS IN MORTGAGE GROUP TWO WILL HAVE A
MATERIAL NEGATIVE EFFECT ON THE YIELD TO AN INVESTOR IN
THE CLASS IIA-P CERTIFICATES. SEE "YIELD AND PREPAYMENT
CONSIDERATIONS -- YIELD CONSIDERATIONS WITH RESPECT TO
THE CLASS IIA-P CERTIFICATES."
THE YIELD TO MATURITY ON THE CLASS M, CLASS B-1 AND
CLASS B-2 CERTIFICATES, RESPECTIVELY, WILL BE EXTREMELY
SENSITIVE TO LOSSES ON THE MORTGAGE LOANS (AND THE
TIMING THEREOF), TO THE EXTENT SUCH LOSSES ARE NOT
COVERED BY THE APPLICABLE CLASSES OF CERTIFICATES
SUBORDINATE THERETO, BECAUSE THE ENTIRE AMOUNT OF ANY
SUCH LOSSES (OTHER THAN EXCESS LOSSES (DEFINED HEREIN))
WILL BE ALLOCABLE TO SUCH CLASSES OF CERTIFICATES UNTIL
THEIR PRINCIPAL BALANCE IS REDUCED TO ZERO.
</TABLE>
S-13
<PAGE> 82
<TABLE>
<CAPTION>
<S> <C>
If an Offered Certificate is purchased at a discount
from its original principal amount and if the purchaser
of such Offered Certificate calculates its yield to
maturity based on a faster assumed rate of payment of
principal than that actually received on such Offered
Certificate, its actual yield to maturity will be lower
than that so calculated. Conversely, if an Offered
Certificate is purchased at a premium to its original
principal amount, and if the purchaser of such Offered
Certificate calculates its yield to maturity based on a
slower assumed rate of payment of principal than that
actually received on such Offered Certificate, its
actual yield to maturity will be lower than that so
calculated and, under certain circumstances, such a
purchaser may fail to recoup its initial investment.
See "Prepayment and Yield Considerations" herein and
"Yield, Maturity and Weighted Average Life
Considerations" in the Prospectus.
Description of the Certificates........... Initially, the Class A Certificates will evidence in
the aggregate a beneficial interest of approximately
96.50% (the "Class A Percentage") in the pool of
Mortgage Loans (the "Mortgage Pool") and certain other
property held in trust for the benefit of the
Certificateholders (the "Trust Fund"), generally
allocated between the Class IA Certificates, which
initially will represent a beneficial interest of
approximately 96.50% in the Group One Mortgage Loans
and the Class IIA Certificates, which initially will
represent a beneficial interest of approximately 96.50%
in the Group Two Mortgage Loans. Initially, the Class M
Certificates will evidence in the aggregate a
beneficial interest of approximately 1.60% in the Trust
Fund, the Class B-1 Certificates will evidence in the
aggregate a beneficial interest of approximately 0.75%
in the Trust Fund, the Class B-2 Certificates will
evidence in the aggregate a beneficial interest in
approximately 0.40% in the Trust Fund and the
Non-Offered Class B Certificates will evidence in the
aggregate the remaining beneficial interest of
approximately 0.75% in the Trust Fund. The relative
interests in the Trust Fund represented by the Class A,
Class M and Class B Certificates (and the relative
interests in Mortgage Group One and Mortgage Group Two
represented by the Class IA Certificates and the Class
IIA Certificates, respectively) will vary from time to
time because of the disproportionate allocation of
certain unscheduled principal payments on the Mortgage
Loans to the related Non-PO Class A Certificates and
the allocation of certain losses and shortfalls on the
Mortgage Loans first to the Class B Certificates in
reverse numerical order, and then to the Class M
Certificates, prior to the allocation of such losses
and shortfalls to the Class A Certificates. The
Non-Offered Class B Certificates will have an initial
aggregate principal balance of approximately $1,928,329
and will be privately placed with a limited number of
institutional investors and are not offered hereby. See
"Description of the Certificates -- Distributions to
Certificateholders" and "-- Subordinated Certificates
and Shifting Interests."
Record Date............................... The last business day of the month preceding the month
of each Distribution Date.
</TABLE>
S-14
<PAGE> 83
<TABLE>
<CAPTION>
<S> <C>
Principal Including
Prepayments............................. Principal received or advanced as a portion of the
Monthly Payment on each Mortgage Loan will be passed
through monthly, on the 25th day of the month (or if
such day is not a business day, the next succeeding
business day) in which the related Due Date occurs
(each, a "Distribution Date"), commencing June 25,
1998. Principal prepayments received during the period
from the first day of any month to the last day of such
month (each, a "Principal Prepayment Period") will be
distributed on the Distribution Date occurring in the
month following the month of receipt. Distributions in
respect of principal will be allocated among the
various Classes as described herein under "Description
of the Certificates -- Distributions of Principal and
Interest" and on a pro rata basis among the
Certificates of each Class. Class IA-1 Component Two
and Class IA-1 Component Five and the Class IA-X and
Class IIA-X Certificates will be entitled to interest
only and will not be entitled to distributions of
principal. The rate of distribution allocable to
principal will depend on, among other factors, the rate
of payment of principal (including prepayments) of the
Mortgage Loans. The Final Scheduled Distribution Date
(defined herein) of each Class of Offered Certificates
has been calculated as described herein. The actual
final distribution with respect to each Class of
Offered Certificates is likely to occur prior to its
Final Scheduled Distribution Date, although, in the
event of defaults in payment of the Mortgage Loans, it
could occur later or earlier. See "Description of the
Certificates -- Distributions to Certificateholders --
Principal (Including Prepayments)."
Interest.................................. Interest received or advanced on each Mortgage Loan at
the applicable Net Mortgage Rate (defined herein) will
be passed through monthly on the Distribution Date
occurring in the month in which the related Due Date
occurs, commencing June 25, 1998. Interest will be
payable to the holders of each Class of Offered
Certificates at the rate (the "Certificate Rate")
specified or described on the cover hereof on the
outstanding respective principal balances of such
Certificates (or, in the case of the Class IA-X and
Class IIA-X Certificates, the Class IA-X Notional
Amount and Class IIA-X Notional Amount, respectively)
as of the relevant Determination Date (defined herein),
calculated on the basis of a 360-day year of twelve
30-day months, less any Non-Supported Interest
Shortfalls (defined herein) and the interest portion of
any Realized Losses (defined herein), allocated
thereto, except that (1) interest accrued on Class IA-1
Component Three on or before the Class IA-1 Component
Three Accretion Termination Date will be added to the
principal balance of Class IA-1 Component Three and (2)
interest accrued on the Class IA-4 Certificates on or
before the Class IA- 4 Accretion Termination Date will
be added to the principal balance of the Class IA-4
Certificates. The Class IIA-P Certificates will be
entitled to principal only and will not be entitled to
distributions of interest. See "Description of the
Certificates -- Distributions to Certificateholders --
Interest" and "-- Principal (Including Prepayments)."
The Servicer will receive a fee for the servicing of
each Mortgage Loan (the "Servicing Fee") equal to 0.25%
per annum of the unpaid principal balance of each
Mortgage Loan. See "The Pooling and Servicing Agreement
-- Servicing Compensation and Payment of Expenses."
</TABLE>
S-15
<PAGE> 84
<TABLE>
<CAPTION>
<S> <C>
Class IA-1 Component Two and Class IA-1 Component Five
and the Class IA-X and Class IIA-X Certificates are
interest only certificates. Class IA-1 Component Two
and Class IA-1 Component Five and the Class IA-X and
Class IIA-X Certificates will not receive distributions
of principal, but will accrue interest on the Class
IA-1 Component Two Notional Amount, the Class IA-1
Component Five Notional Amount, the Class IA-X Notional
Amount and the Class IIA-X Notional Amount,
respectively.
Subordinated Certificates................. The rights of the holders of each Class of Subordinated
Certificates to receive distributions with respect to
the Mortgage Loans will be subordinated to the rights
of the Class A Certificateholders, and (except in the
case of the Class M and Class B-1 Certificateholders)
to the holders of each Class of Class B Certificates
having a lower numerical class designation, to the
extent described below. The subordination provided by
the Subordinated Certificates is intended to enhance
the likelihood of regular receipt by the Class A
Certificateholders of the full amount of monthly
distributions due them and to protect the Class A
Certificateholders against losses. The subordination
provided by each Class of Class B Certificates relative
to the Class M Certificates and each Class of Class B
Certificates having a lower numerical class designation
is intended to similarly benefit such Classes of
Subordinated Certificates.
On each Distribution Date, payments to the Class A
Certificateholders will be made prior to payments to
the Class M and Class B Certificateholders, payments to
the Class M Certificateholders will be made prior to
payments to the Class B Certificateholders, payments to
the Class B-1 Certificate holders will be made prior to
payments to the Class B-2 Certificateholders and the
Non-Offered Class B Certificateholders and payments to
the Class B-2 Certificateholders will be made prior to
payments to the Non-Offered Class B Certificateholders.
If, on any Distribution Date prior to the Credit
Support Depletion Date (defined herein), the Class IA
or Class IIA Certificateholders receive less than the
amount due to them on such date, the interest of such
Class A Certificateholders in the related Mortgage
Group will increase so as to preserve the entitlement
of such Class A Certificateholders with respect to
unpaid principal of the Mortgage Loans in such Mortgage
Group and interest thereon. If a principal prepayment
is made or certain other unscheduled amounts of
principal are received on a Mortgage Loan, the
applicable Non-PO Class A Certificateholders will be
entitled to receive an amount equal to the applicable
Non-PO Class A Prepayment Percentage (defined herein)
of the amount received. This will have the effect of
accelerating receipt of principal by such Non-PO Class
A Certificateholders, thus reducing their proportionate
interest in the related Mortgage Group and increasing
the relative interest evidenced by the Class M and
Class B Certificates (absent offsetting Realized Losses
(defined herein) allocated to the Class B or Class M
Certificates). Increasing the interest of the Class M
and Class B Certificates relative to that of the Class
A Certificates is intended to preserve the availability
of the subordination provided by the Class M and Class
B Certificates. Similarly, because, as described
herein, the then-current level of Credit Support
(defined herein) of each Class of Subordinated
Certificates will determine which Class or Classes of
Subordinated Certificates will receive amounts in
respect of principal prepayments included in the
Subordinated Optimal Principal Amount (defined herein),
under certain circumstances, on any Distribution Date,
Realized Losses on the Mortgage Loans may cause one or
more Classes of Subordinated Certificates to receive a
disproportionate amount of the Subordinated Optimal
Principal Amount. See "Description of the Certificates
-- Distributions to Certificateholders -- Principal
(Including Prepayments)" and "--Subordinated
Certificates and Shifting Interests."
</TABLE>
S-16
<PAGE> 85
<TABLE>
<CAPTION>
<S> <C>
Advances.................................. The Servicer is obligated to make advances ("Advances")
for distribution to the Certificateholders in respect
of delinquent Monthly Payments due on the immediately
preceding Due Date unless the Servicer determines such
Advances will not be recoverable from future payments
or collections on the related Mortgage Loans. See "The
Pooling and Servicing Agreement -- Advances."
Compensating Interest..................... When a Mortgagor makes a full or partial principal
prepayment of a Mortgage Loan between Due Dates, the
Mortgagor generally is required to pay interest on the
principal balance thereof only to the date of
prepayment. In order to minimize any resulting
shortfall in interest (such shortfall, a "Prepayment
Interest Shortfall"), the aggregate amount of the
Servicing Fee will be reduced to the extent necessary
to include an amount in payments to the holders of the
Offered Certificates equal to a full month's interest
payment at the applicable Net Mortgage Rate (defined
herein) with respect to such pre-paid Mortgage Loan.
Such reductions in the Servicing Fee will be made only
to the extent that the aggregate amount of such
interest shortfalls does not exceed the aggregate
amount of the Servicing Fee on the related Distribution
Date. See "The Pooling and Servicing
Agreement--Adjustment to Servicing Fee in Connection
with Prepaid Mortgage Loans."
Optional Termination...................... On any Distribution Date on which the aggregate unpaid
principal balance of the Mortgage Loans is less than
10% of the aggregate unpaid scheduled principal balance
of the Mortgage Pool on the Cut-off Date, the Servicer
may repurchase from the Trust Fund all Mortgage Loans
remaining outstanding at a purchase price equal to the
sum of (i) the unpaid principal amount of such Mortgage
Loans (other than any such Mortgage Loans as to which
the related Mortgaged Properties have been acquired and
whose fair market values are included in clause (ii)
below), plus accrued interest thereon at the Net
Mortgage Rate (defined herein) to the next Due Date and
(ii) the fair market value of any such acquired
properties, in each case less any unreimbursed Advances
made with respect to such Mortgage Loans. Upon such
repurchase, holders of the Offered Certificates
generally will receive the outstanding principal
balance of the Offered Certificates plus accrued
interest thereon (other than on the Class IIA-P
Certificates) at the applicable Remittance Rate. See
"The Pooling and Servicing Agreement -- Optional
Termination."
Federal Income Tax
Consequences............................ An election will be made to treat the segregated pool
comprising the assets of the Trust Fund (the
"Subsidiary REMIC") as a real estate mortgage
investment conduit (a "REMIC") for federal income tax
purposes. An election will be made to treat the pool of
assets represented by the regular interests in the
Subsidiary REMIC as a separate REMIC (the "Master
REMIC") for federal income tax purposes. The Offered
Certificates (other than the Class A-R Certificate)
will represent regular interests in the Master REMIC.
As such, the Offered Certificates (other than the Class
A-R Certificate) will generally be treated as debt
instruments issued by a REMIC. The Class A-R
Certificate will represent the sole Class of residual
interests in the Subsidiary REMIC and the Master REMIC.
</TABLE>
S-17
<PAGE> 86
<TABLE>
<CAPTION>
<S> <C>
All Certificateholders will be required to use the
accrual method of accounting with respect to interest
income on the Certificates, regardless of their normal
method of accounting. Holders of Offered Certificates
that have original issue discount will be required to
include amounts in income with respect to such
Certificates in advance of the receipt of cash
attributable to such income. It is anticipated that the
Class IA-4, Class IA-X, Class IIA-P and Class IIA-X
Certificates will be issued with original issue
discount in an amount equal to the excess of their
initial principal balances over their respective issue
prices (including (except with respect to the Class
IIA-P Certificates) accrued interest). It is also
anticipated that the Class IA-2, Class IA-3, Class IA-6
and Class IA-7 Certificates will be issued at a
premium, and that the Class IA-5, Class IIA-1, Class M,
Class B-1 and Class B-2 Certificates will be issued
with de minimis original issue discount for federal
income tax purposes. Holders of Offered Certificates
that have original issue discount will be required to
include amounts in income with respect to such
Certificates in advance of the receipt of cash
attributable to such income. The prepayment assumption
that will be used in computing the amount of original
issue discount includible periodically will be 250% of
the Prepayment Model set forth herein. See "Prepayment
and Yield Considerations." No representation is made
that payments on the Offered Certificates will occur at
that rate or any other rate.
The Offered Certificates will be treated as (i) assets
described in section 7701(a)(19)(C) of the Internal
Revenue Code of 1986, as amended (the "Code") and (ii)
"real estate assets" within the meaning of section
856(c)(5)(B) of the Code, in each case to the extent
described herein and in the Prospectus. See "Federal
Income Tax Consequences" in the Prospectus.
Class A-R Certificate. The Class A-R Certificate
generally will be treated in the same manner as the
Class A Certificates for the various qualification
purposes referred to above, but generally will not be
treated as evidence of indebtedness for federal income
tax purposes. Instead, the holders of the Class A-R
Certificate will be required to report, and will be
taxed on, their pro rata shares of the taxable income
or loss of each REMIC, and such requirements will
continue until there are no Certificates of any Class
outstanding, even though the Class A-R
Certificateholder previously may have received full
payment of its stated interest and principal.
Furthermore, the taxable income of the Class A-R
Certificateholder attributable to the Class A-R
Certificate may exceed the principal and interest
distributions received by such Certificateholders with
respect to such Certificates during the corresponding
period, which could result in a negative after-tax
return for such Certificateholders. See "Federal Income
Tax Considerations."
THE CLASS A-R CERTIFICATE, WHICH REPRESENTS THE
RESIDUAL INTEREST IN THE SUBSIDIARY REMIC AND THE
MASTER REMIC, MAY EXPERIENCE A NEGATIVE AFTER-TAX
RETURN. ACCORDINGLY, PROSPECTIVE INVESTORS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS AND CONSIDER THE
AFTER-TAX EFFECT OF OWNERSHIP OF THE CLASS A-R
CERTIFICATE AND THE SUITABILITY OF THE CLASS A-R
CERTIFICATE TO THEIR INVESTMENT OBJECTIVES.
</TABLE>
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<PAGE> 87
<TABLE>
<CAPTION>
<S> <C>
Restrictions on Purchase and Transfer of Class A-R
Certificate. The Class A-R Certificate is not offered
for sale to tax-exempt organizations that are
"disqualified organizations" as defined in "Federal
Income Tax Consequences -- Transfers of Residual
Certificates -- Disqualified Organizations" in the
Prospectus. In addition, there are limitations on
transfers of the Class A-R Certificate to plans
("Plans") described in or subject to the plan asset
regulations set forth in 29 C.F.R. ss. 2510.3-101,
persons acting on behalf of Plans, or persons using the
assets of Plans. Furthermore, the Class A-R Certificate
may not be purchased by or transferred to any person
that is not a "U.S. Person," as defined herein under
"Description of the Certificates -- Restrictions on
Transfer of the Class A-R, Class M and Offered Class B
Certificates," unless (i) such person holds the Class
A-R Certificate in connection with the conduct of a
trade or business within the U.S. and furnishes the
transferor and the Trustee with an effective Internal
Revenue Service Form 4224 (or successor form) or (ii)
the transferee delivers to both the transferor and the
Trustee an opinion of counsel to the effect that such
transfer of the Class A-R Certificate will not be
disregarded for Federal income tax purposes. Finally,
neither the Class A-R Certificate nor any beneficial
interest therein may be sold or otherwise transferred
without the consent of the Trustee, which will be
withheld if necessary to avoid a risk of REMIC
disqualification or REMIC-level tax. See "Description
of the Certificates -- Restrictions on Transfer of the
Class A-R, Class M and Offered Class B Certificates."
ERISA Considerations...................... 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,
including an individual retirement account (each, a
"Plan"), or any other person investing "plan assets" of
any Plan, should carefully review with its legal
advisors whether the purchase or holding of Class A
Certificates could give rise to a transaction
prohibited or not otherwise permissible under ERISA or
the Code. The Class A-R Certificate may not be
purchased by or transferred to a Plan or any other
person investing in "plan assets" of any Plan. Because
the Class M and Offered Class B Certificates are
subordinated to the Class A Certificates, such
Certificates may not be transferred unless the
transferee has delivered (i) a representation letter to
the Trustee stating either (a) that the transferee is
not a Plan and is not acting on behalf of a Plan or
using the "plan assets" of a Plan to effect such
purchase or (b) subject to certain conditions described
herein, that the source of funds used to purchase the
Class M or Offered Class B Certificates is an
"insurance company general account" or (ii) an opinion
of counsel as described under "ERISA Considerations" in
this Prospectus Supplement. See "ERISA Considerations"
herein and in the Prospectus.
</TABLE>
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<PAGE> 88
<TABLE>
<CAPTION>
<S> <C>
Legal Investment.......................... The Class A and Class M Certificates will constitute
"mortgage related securities" under 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 organization, and, as such, will be
"legal investments" for certain types of institutional
investors to the extent provided in SMMEA, subject to
state laws overriding SMMEA. There may be certain
restrictions on the ability of certain investors either
to purchase Class A and Class M Certificates or to
purchase Class A and Class M Certificates representing
more than a specified percentage of the investor's
assets. THE OFFERED CLASS B CERTIFICATES WILL NOT
CONSTITUTE "MORTGAGE RELATED SECURITIES" UNDER SMMEA.
The appropriate characterization of the Offered Class B
Certificates under various legal investment
restrictions, and thus the ability of investors subject
to these restrictions to purchase the Offered Class B
Certificates, may be subject to significant
interpretive uncertainties. Prospective purchasers of
the Offered Certificates, including those institutions
whose investment activities are subject to review by
federal or state regulatory authorities, should consult
their own legal, tax and accounting advisors and, where
appropriate, applicable regulatory authorities, in
determining the consequences to them of the purchase,
ownership and disposition of the Offered Certificates.
See "Legal Investment Matters" herein and in the
Prospectus.
Use of Proceeds........................... Substantially all of the net proceeds from the sale of
the Offered Certificates will be applied by the Seller
to the purchase price of the Mortgage Loans. See "Use
of Proceeds."
Liquidity Considerations.................. There is currently no secondary market for the
Certificates offered hereby, and there can be no
assurance that such a market will develop. Donaldson,
Lufkin & Jenrette Securities Corporation (the
"Underwriter") has indicated its intention to make a
secondary market in the Certificates offered hereby,
but the Underwriter is not obligated to do so. There
can be no assurance that a secondary market for such
Certificates will develop, or if it does develop, will
continue for the life of the Certificates, or provide
investors with liquidity of investment. In addition,
there can be no assurance that an investor in a
Certificate will be able to sell such Certificate at a
price that is equal to or greater than the price at
which such investor purchased such Certificate.
Final Scheduled Distribution
Date................................... The Final Scheduled Distribution Date of each Class of
Class IA Certificates, as well as the Class M and
Offered Class B Certificates, is June 25, 2028, which
is the Distribution Date occurring in the month that is
one month following the latest stated maturity date of
any Group One Mortgage Loan. The Final Scheduled
Distribution Date of each Class of Class IIA
Certificates is June 25, 2013, which is the
Distribution Date occurring in the month that is one
month following the latest stated maturity date of any
Group Two Mortgage Loan.
The rate of principal payments of the Certificates will
depend on the rate of principal payments of the
Mortgage Loans (including prepayments, defaults,
delinquencies and liquidations) which, in turn, will
depend on the characteristics of the Mortgage Loans,
the level of prevailing interest rates and other
economic factors, and no assurance can be given as to
the actual payment experience. The principal balance or
notional amount, as applicable, of each Class of
Certificates may be reduced to zero earlier or later
than its Final Scheduled Distribution Date.
</TABLE>
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<PAGE> 89
<TABLE>
<CAPTION>
<S> <C>
Ratings................................... It is a condition to the issuance of the Offered
Certificates that (i) the Class A Certificates (other
than the Class IIA-P, Class IA-X and Class IIA-X
Certificates) be rated "AAA" by each of Fitch IBCA,
Inc. ("Fitch") and Standard & Poor's Ratings Services,
a division of The McGraw-Hill Companies, Inc. ("S&P"),
(ii) the Class IIA- P, Class IA-X and Class IIA-X
Certificates be rated "AAA" by Fitch and "AAAr" by S&P,
(iii) the Class M Certificates be rated at least "AA"
by Fitch, (iv) the Class B-1 Certificates be rated at
least "A" by Fitch, and (v) the Class B-2 Certificates
be rated at least "BBB" by Fitch. See "Ratings."
</TABLE>
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<PAGE> 90
RISK FACTORS
GENERAL
The rate of distributions in reduction of the principal balance of any
Class of Offered Certificates, the aggregate amount of distributions of
principal and interest on any Class of Offered Certificates and the yield to
maturity of any Class of Offered Certificates will be directly related to the
rate of payments of principal on the Mortgage Loans (or, (i) in the case of the
Class IA and Class IIA Certificates, on the Mortgage Loans in the related
Mortgage Group and (ii) in the case of the Class IA-X and Class IIA-X
Certificates, on the Non-Discount Mortgage Loans in the related Mortgage Group),
and to the amount and timing of mortgagor defaults resulting in Realized Losses.
The rate of principal payments on the Mortgage Loans will in turn be affected
by, among other things, the amortization schedules of the Mortgage Loans, the
rate of principal prepayments (including partial prepayments and those resulting
from refinancing) thereon by mortgagors, liquidations of defaulted Mortgage
Loans, repurchases of Mortgage Loans by the Seller as a result of defective
documentation or breaches of representations and warranties, optional purchase
by the Servicer of defaulted Mortgage Loans and optional purchase by the
Servicer of all of the Mortgage Loans in connection with the termination of the
Trust Fund. See "Prepayment and Yield Considerations" and "The Pooling and
Servicing Agreement -- Optional Termination" herein and "The Pooling and
Servicing Agreement -- Assignment of Mortgage Loans; Warranties," "--Repurchase
or Substitution" and "--Termination; Purchase of Mortgage Loans" in the
Prospectus. Mortgagors are permitted to prepay the Mortgage Loans, in whole or
in part, at any time without penalty.
The rate of payments (including prepayments, liquidations and defaults)
on pools of mortgage loans is influenced by a variety of economic, geographic,
social and other factors. If prevailing rates for similar mortgage loans fall
below the Mortgage Interest Rates on the Mortgage Loans, the rate of prepayment
would generally be expected to increase. Conversely, if interest rates on
similar mortgage loans rise above the Mortgage Interest Rates on the Mortgage
Loans, the rate of prepayment would generally be expected to decrease.
An investor that purchases any of the Offered Certificates at a
discount, particularly the Class IIA-P Certificates, should consider the risk
that a slower than anticipated rate of principal payments (including
prepayments, liquidations and defaults) on the Mortgage Loans (or, (i) in the
case of the Class IA and Class IIA Certificates, on the Mortgage Loans in the
related Mortgage Group, and (ii) in the case of the Class IIA-P Certificates, on
the Discount Mortgage Loans in Mortgage Group Two) will result in an actual
yield that is lower than such investor's expected yield. See "Prepayment and
Yield Considerations--Yield Considerations With Respect to the Class IIA-P
Certificates." An investor that purchases any of the Offered Certificates at a
premium, particularly the Class IA-X and Class IIA-X Certificates, should
consider the risk that a faster than anticipated rate of principal payments
(including prepayments, liquidation and defaults) on the Mortgage Loans (or, (i)
in the case of the Class IA and Class IIA Certificates, on the Mortgage Loans in
the related Mortgage Group and (ii) in the case of the Class IA-X and Class
IIA-X Certificates, on the Non-Discount Mortgage Loans in the related Mortgage
Group), will result in an actual yield that is lower than such investor's
expected yield. See "Prepayment and Yield Considerations -- Yield Considerations
With Respect to the Class IA-X and Class IIA-X Certificates."
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<PAGE> 91
SUBORDINATION
The rights of the holders of the Class M Certificates to receive
distributions with respect to the Mortgage Loans will be subordinated to such
rights of the holders of the Class A Certificates and the rights of the holders
of a Class of Class B Certificates to receive distributions with respect to the
Mortgage Loans will be subordinated to such rights of the holders of the Class A
Certificates, the Class M Certificates and the Classes of Class B Certificates
with lower numerical designations, all to the extent described herein under
"Description of the Certificates -- Subordination Certificates and Shifting
Interests."
BOOK-ENTRY SYSTEM FOR CERTAIN CLASSES OF CLASS A CERTIFICATES
Transactions in the Book-Entry Certificates generally can be effected
only through DTC, Participants and Indirect Participants (each as defined
herein). The ability of a Certificate Owner to pledge Book-Entry Certificates
and the liquidity of the Book-Entry Certificates in general may be limited due
to the lack of a physical certificate for such Book-Entry Certificates. In
addition, Certificate Owners may experience delays in their receipt of payments.
GEOGRAPHIC CONCENTRATION OF THE MORTGAGED PROPERTIES
Approximately 26.29%, 17.25%, 11.04% and 4.50% of the Mortgage Loans (by
aggregate principal balance as of the Cut-off Date) are expected to be secured
by Mortgaged Properties located in the states of California, Florida,
Massachusetts and Texas, respectively. Consequently, losses and prepayments on
the Mortgage Loans and resultant payments on the Offered Certificates may, both
generally and particularly, be affected significantly by changes in the housing
markets and regional economies of, and the occurrence of natural disasters (such
as earthquakes, fires, floods and hurricanes) in, the states of California,
Florida, Massachusetts and Texas.
See "Risk Factors" in the Prospectus for a description of certain other
risks and special considerations applicable to the Offered Certificates.
S-23
<PAGE> 92
THE MORTGAGE POOL
GENERAL
The mortgage pool with respect to the Certificates (the "Mortgage Pool")
will consist of approximately 766 conventional mortgage loans (the "Mortgage
Loans") evidenced by fixed interest rate promissory notes (each, a "Mortgage
Note") having an aggregate principal balance on May 1, 1998 (the "Cut-off Date")
of approximately $257,110,471. References herein to percentages of Mortgage
Loans refer in each case to the percentage of the aggregate principal balance of
the Mortgage Loans or, as the case may be, the Mortgage Loans in the applicable
Mortgage Group, as of the Cut-off Date, based on the outstanding principal
balances of the Mortgage Loans as of the Cut-off Date, after giving effect to
Monthly Payments (defined herein) due on or prior to the Cut-off Date, whether
or not received. References to percentages of Mortgaged Properties (defined
herein) refer, in each case, to the percentages of aggregate principal balances
of the related Mortgage Loans (determined as described in the preceding
sentence). The Mortgage Notes are secured by mortgages or deeds of trust or
other similar security instruments creating first liens on single-family (one-
to four-family) residential properties (the "Mortgaged Properties"). The
Mortgaged Properties consist of individual dwelling units, individual
condominium units, two- to four-family dwelling units, planned unit developments
and townhouses. The Trust Fund includes, in addition to the Mortgage Pool, (i)
the amounts held from time to time in one or more accounts (collectively, the
"Accounts") maintained in the name of the Trustee pursuant to the Pooling and
Servicing Agreement (the "Agreement") to be dated as of May 1, 1998 by and among
HomeSide Mortgage Securities, Inc. (the "Seller"), HomeSide Lending, Inc., as
servicer (in such capacity, the "Servicer") and Norwest Bank Minnesota, National
Association, as trustee (the "Trustee"), (ii) any property which initially
secured a Mortgage Loan and which is acquired by foreclosure or deed-in-lieu of
foreclosure, (iii) all insurance policies and the proceeds thereof described
below and (iv) certain rights to require repurchase of the Mortgage Loans by the
Seller for breach of representation or warranty.
The Seller will cause the Mortgage Loans to be assigned to the Trustee.
The Servicer will service the Mortgage Loans either by itself or through other
mortgage servicing institutions (the "Sub-servicers"), pursuant to the
Agreement. With respect to those Mortgage Loans serviced by the Servicer through
a Sub-servicer, the Servicer will remain liable for its servicing obligations
under the Agreement as if the Servicer alone were servicing such Mortgage Loans.
REPRESENTATIONS AND WARRANTIES
The Seller will make certain representations and warranties for the
benefit of the Trustee with respect to the Mortgage Loans as described in the
Prospectus under "The Mortgage Pools" and "The Pooling and Servicing Agreement
- -- Assignment of Mortgage Loans; Warranties" and "-- Repurchase or Substitution"
and will be obligated to repurchase any Mortgage Loan as to which there is a
material breach of any such representation or warranty. Such repurchase will
constitute the sole remedy available to Certificateholders for a breach of such
representations or warranties. The Trustee will enforce the repurchase
obligations of the Seller. In lieu of such repurchase obligation, the Seller
may, within two years after the date of initial delivery of the Certificates,
substitute for the affected Mortgage Loans Substitute Mortgage Loans, as
described under "The Pooling and Servicing Agreement -- Assignment of Mortgage
Loans; Warranties" and "-- Repurchase or Substitution" in the Prospectus.
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<PAGE> 93
MORTGAGE LOANS
Certain data with respect to the Mortgage Loans are set forth below. The
Mortgage Loans will be divided into two groups: "Mortgage Group One" and
"Mortgage Group Two" (each, a "Mortgage Group"). Mortgage Group One,
constituting approximately 81.89% of the Mortgage Loans, will consist of
Mortgage Loans which had original terms to stated maturity of greater than 15
years, but not more than 30 years. Mortgage Group Two, constituting
approximately 18.11% of the Mortgage Loans, will consist of Mortgage Loans which
had original terms to stated maturity of up to 15 years.
The weighted average number of months from and including the first
Monthly Payment on the Group One Mortgage Loans and the Group Two Mortgage Loans
to and including the Cut-off Date was approximately 2 months and 1 month,
respectively. The Group One Mortgage Loans were originated between January 1995
and April 1998 and the Group Two Mortgage Loans were originated between March
1997 and April 1998.
Monthly payments of principal and interest on the Mortgage Loans
("Monthly Payments") will be due on the first day of each month (each, a "Due
Date").
Approximately 11.96% and approximately 3.76%, respectively, of the Group
One Mortgage Loans and the Group Two Mortgage Loans having original
Loan-to-Value Ratios of greater than 80% are insured under Primary Mortgage
Insurance Policies (as defined in the Prospectus). Not more than approximately
2.91% and approximately 2.60%, respectively, of the Group One Mortgage Loans and
the Group Two Mortgage Loans are insured by any one Primary Mortgage Insurance
Policy insurer. At the time of origination of the Mortgage Loans, each of the
Primary Mortgage Insurance Policy insurers was approved by the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC"). See "Servicing of the Mortgage Loans -- Private Mortgage Insurance"
in the Prospectus.
All of the Mortgage Loans have FICO Scores. The weighted average FICO
Score for the Mortgage Loans that were scored is 717 with respect to Mortgage
Group One and 719 with respect to Mortgage Group Two. "FICO Scores" are
statistical credit scores obtained by many mortgage lenders in connection with
the loan application to help assess a borrower's credit-worthiness. FICO Scores
are generated by models developed by a third party and are made available to
lenders through three national credit bureaus. The models were derived by
analyzing data on consumers in order to establish patterns which are believed to
be indicative of the borrower's probability of default. The FICO Score is based
on a borrower's historical credit data, including, among other things, payment
history, delinquencies on accounts, levels of outstanding indebtedness, length
of credit history, types of credit, and bankruptcy experience. FICO Scores range
from approximately 250 to approximately 900, with higher scores indicating an
individual with a more favorable credit history compared to an individual with a
lower score. However, a FICO Score purports only to be a measurement of the
relative degree of risk a borrower represents to a lender, i.e., that a borrower
with a higher score is statistically expected to be less likely to default in
payment than a borrower with a lower score. In addition, it should be noted that
FICO Scores were developed to indicate a level of default probability over a
two-year period which does not correspond to the life of a mortgage loan.
Furthermore, FICO Scores were not developed specifically for use in connection
with mortgage loans, but rather for consumer loans in general. Therefore, a FICO
Score does not take into consideration the effect of mortgage loan
characteristics on the probability of repayment by the borrower. Neither the
Seller nor HomeSide Lending makes any representations or warranties as to the
actual performance of any Mortgage Loan or that
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<PAGE> 94
a particular FICO Score should be relied upon as a basis for an expectation that
the borrower will repay the Mortgage Loan according to its terms.
Additional data with respect to the Mortgage Loans are set forth in the
following tables (totals may not sum to 100.00% due to rounding):
MORTGAGE POOL
MORTGAGE POOL
MORTGAGE RATES(1)
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Pool by
Principal Balance Aggregate Principal
Number of as of the Balance as of the
Mortgage Rate Mortgage Loans Cut-off Date Cut-off Date
------------- -------------- ------------ ------------
<S> <C> <C> <C>
6.000 or less................... 3 $1,112,297 0.43%
6.501 to 7.000.................. 127 43,760,509 17.02
7.001 to 7.500.................. 397 131,603,598 51.19
7.501 to 8.000.................. 207 69,256,678 26.94
8.001 to 8.5000................. 31 10,978,186 4.27
9.001 to 9.5000................. 1 399,204 0.16
--- ------------ ------
Totals.................. 766 $257,110,471 100.00%
=== ============ ======
</TABLE>
- ---------------
(1) The interest rates (the "Mortgage Rates") borne by the Mortgage Loans as of
the Cut-off Date ranged from 6.500% per annum to 9.500% per annum and the
weighted average Mortgage Rate on the Mortgage Loans as of the Cut-off Date
was approximately 7.401% per annum.
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<PAGE> 95
MORTGAGE POOL
GEOGRAPHICAL DISTRIBUTION
OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
Percentage of
Mortgage Pool by
Aggregate Aggregate Principal
Number of Principal Balance Balance as of the
State Mortgage Loans as of the Cut-off Date Cut-off Date
----- -------------- ---------------------- ------------
<S> <C> <C> <C>
Alabama.......................... 6 $1,860,970 0.72%
Arkansas......................... 17 5,671,649 2.21
Arizona.......................... 6 1,938,379 0.75
California....................... 194 67,602,647 26.29
Colorado......................... 13 4,948,896 1.92
Connecticut...................... 8 2,512,084 0.98
District of Columbia............. 3 1,415,768 0.55
Florida.......................... 135 44,345,969 17.25
Georgia.......................... 26 7,663,346 2.98
Hawaii........................... 1 499,629 0.19
Idaho............................ 1 434,000 0.17
Iowa............................. 1 320,000 0.12
Illinois......................... 16 4,959,570 1.93
Indiana.......................... 5 1,761,799 0.69
Kansas........................... 7 2,117,219 0.82
Kentucky......................... 1 329,166 0.13
Maine............................ 5 1,538,912 0.60
Maryland......................... 13 3,873,171 1.51
Massachusetts.................... 78 28,388,622 11.04
Michigan......................... 12 3,902,577 1.52
Minnesota........................ 5 1,747,222 0.68
Mississippi...................... 2 648,512 0.25
Missouri......................... 21 6,809,507 2.65
Nebraska......................... 14 4,830,611 1.88
New Hampshire.................... 2 483,367 0.19
New Jersey....................... 11 3,483,457 1.35
New Mexico....................... 1 241,212 0.09
Nevada........................... 1 252,557 0.10
New York......................... 19 5,759,900 2.24
North Carolina................... 12 3,572,777 1.39
North Dakota..................... 1 252,393 0.10
Ohio............................. 12 3,582,108 1.39
Oklahoma......................... 17 6,154,404 2.39
Oregon........................... 7 2,046,385 0.80
Pennsylvania..................... 6 1,907,218 0.74
Rhode Island..................... 9 3,353,535 1.30
South Carolina................... 2 622,354 0.24
</TABLE>
S-27
<PAGE> 96
<TABLE>
<CAPTION>
Percentage of
Mortgage Pool by
Aggregate Aggregate Principal
Number of Principal Balance Balance as of the
State Mortgage Loans as of the Cut-off Date Cut-off Date
----- -------------- ---------------------- ------------
<S> <C> <C> <C>
South Dakota..................... 1 253,443 0.10
Tennessee........................ 5 1,624,527 0.63
Texas............................ 37 11,559,011 4.50
Utah............................. 8 3,114,990 1.21
Virginia......................... 5 1,924,513 0.75
Washington....................... 11 3,542,224 1.38
West Virginia.................... 1 249,810 0.10
Wisconsin........................ 8 3,010,063 1.17
--- ------------ ------
Totals................... 766 $257,110,471 100.00%
=== ============ ======
</TABLE>
MORTGAGE POOL
ORIGINAL PRINCIPAL BALANCE(2)
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Pool by
Principal Balance Aggregate Principal
Original Number of as of the Balance as of the
Principal Balance Mortgage Loans Cut-off Date Cut-off Date
----------------- -------------- ------------ ------------
<S> <C> <C> <C>
$300,000 or less............... 386 $102,446,769 39.85%
$300,001-$400,000.............. 227 77,507,024 30.15
$400,001-$500,000.............. 96 43,032,681 16.74
$500,001-$600,000.............. 35 19,247,196 7.49
$600,001-$700,000.............. 17 10,911,348 4.24
$700,001-$800,000.............. 3 2,314,758 0.90
$800,001-$900,000.............. 2 1,650,696 0.64
--- ------------ ------
Totals................. 766 $257,110,471 100.00%
=== ============ ======
</TABLE>
- ---------------
(2) The average outstanding principal balance of the Mortgage Loans as of the
Cut-off Date was approximately $335,653. The original principal balances of
the Mortgage Loans ranged from $217,500 to $840,700.
S-28
<PAGE> 97
MORTGAGE POOL
YEAR OF ORIGINATION
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Pool by
Principal Balance Aggregate Principal
Year of Number of as of the Balance as of the
Origination Mortgage Loans Cut-off Date Cut-off Date
----------- -------------- ------------ ------------
<S> <C> <C> <C>
1995...................... 1 $ 648,470 0.25%
1996...................... 4 1,537,188 0.60
1997...................... 98 29,121,597 11.33
1998...................... 663 225,803,216 87.82
--- ------------ -------
Total............. 766 $257,110,471 100.00%
=== ============ ======
</TABLE>
MORTGAGE POOL
ORIGINAL LOAN-TO-VALUE RATIO(3)
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Pool by
Original Principal Balance Aggregate Principal
Loan-to-Value Number of as of the Balance as of the
Ratio Mortgage Loans Cut-off Date Cut-off Date
----- -------------- ------------ ------------
<S> <C> <C> <C>
60.00% or less..................... 100 $ 36,852,754 14.33%
60.01%-65.00%...................... 49 17,913,989 6.97
65.01%-70.00%...................... 72 26,036,897 10.13
70.01%-75.00%...................... 158 54,796,761 21.31
75.01%-80.00%...................... 290 94,571,021 36.78
80.01%-85.00%...................... 9 2,557,187 0.99
85.01%-90.00%...................... 70 19,780,180 7.69
90.01%-95.00%...................... 18 4,601,682 1.79
---- ------------ ------
Totals..................... 766 $257,110,471 100.00%
=== ============ ======
</TABLE>
- ---------------
(3) The weighted average original Loan-to-Value Ratio of the Mortgage Loans was
approximately 72.43% as of the Cut-off Date.
S-29
<PAGE> 98
MORTGAGE POOL
LOAN PURPOSE
<TABLE>
<CAPTION>
Aggregate Percentage of
Principal Mortgage Pool by
Balance Aggregate Principal
Number of as of the Balance as of the
Loan Purpose Mortgage Loans Cut-off Date Cut-off Date
------------ -------------- ------------ ------------
<S> <C> <C> <C>
Rate/Term Refinance.................... 411 $140,571,469 54.67%
Purchase............................... 258 82,849,473 32.22
Cash-out Refinance..................... 97 33,689,530 13.10
---- ------------ ------
Totals......................... 766 $257,110,471 100.00%
=== ============ ======
</TABLE>
MORTGAGE POOL
TYPES OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Pool by
Principal Aggregate
Balance Principal Balance
Number of as of the as of the
Property Type Mortgage Loans Cut-off Date Cut-off Date
------------- -------------- ------------ ------------
<S> <C> <C> <C>
Single-family Residence.................... 570 $193,230,262 75.15%
Planned Unit Development................... 170 54,403,513 21.16
Condominium................................ 19 6,771,609 2.63
Two- to Four-Family Dwelling Unit.......... 4 1,500,402 0.58
Townhouse/Rowhouse......................... 3 1,204,685 0.47
--- ------------ ------
Totals............................. 766 $257,110,471 100.00%
=== ============ ======
</TABLE>
MORTGAGE POOL
OCCUPANCY(6)
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Pool by
Principal Balance Aggregate Principal
Number of as of the Balance as of the
Occupancy Mortgage Loans Cut-off Date Cut-off Date
--------- -------------- ------------ ------------
<S> <C> <C> <C>
Owner-occupied........................... 753 $252,415,791 98.17%
Second Home.............................. 13 4,694,680 1.83
--- ------------ ------
Totals........................... 766 $257,110,471 100.00%
=== ============ ======
</TABLE>
- ---------------
(6) Based on representations by the Mortgagors at the time of origination of
the related Mortgage Loans.
S-30
<PAGE> 99
MORTGAGE POOL
LOAN DOCUMENTATION
<TABLE>
<CAPTION>
Aggregate Percentage of
Principal Mortgage Pool by
Number of Balance Aggregate Principal
Mortgage as of the Balance as of the
Loan Documentation Loans Cut-off Date Cut-off Date
------------------ ----- ------------ ------------
<S> <C> <C> <C>
Full/Alternative Documentation........... 745 $249,136,581 96.90%
Limited Documentation.................... 21 7,973,890 3.10
--- ------------ ------
Totals........................... 766 $257,110,471 100.00%
=== ============ ======
</TABLE>
MORTGAGE GROUP ONE
MORTGAGE GROUP ONE
MORTGAGE RATES(1)
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Pool by
Principal Balance Aggregate Principal
Number of as of the Balance as of the
Mortgage Rate Mortgage Loans Cut-off Date Cut-off Date
------------- -------------- ------------ ------------
<S> <C> <C> <C>
7.000% or less................... 49 $ 17,838,137 8.47%
7.001%-7.500%.................... 345 113,494,553 53.91
7.501%-8.000%.................... 202 67,825,224 32.22
8.001%-8.500%.................... 31 10,978,186 5.21
8.501%-9.000%.................... 1 399,204 0.19
--- -------------- ------
Totals................... 628 $210,535,303 100.00%
=== ============ ======
</TABLE>
- ---------------
(1) The interest rates (the "Mortgage Rates") borne by the Mortgage Loans as of
the Cut-off Date ranged from 6.750% per annum to 9.500% per annum and the
weighted average Mortgage Rate on the Mortgage Loans as of the Cut-off Date
was approximately 7.488% per annum.
S-31
<PAGE> 100
MORTGAGE GROUP ONE
GEOGRAPHICAL DISTRIBUTION
OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
Percentage of
Mortgage Group One
Aggregate by Aggregate
Number of Principal Balance Principal Balance as
State Mortgage Loans as of the Cut-off Date of the Cut-off Date
----- -------------- ---------------------- -------------------
<S> <C> <C> <C>
Alabama.......................... 5 $1,611,750 0.77%
Arkansas......................... 9 2,941,600 1.40
Arizona.......................... 6 1,938,379 0.92
California....................... 167 58,704,101 27.88
Colorado......................... 11 4,351,480 2.07
Connecticut...................... 6 1,785,134 0.85
District of Columbia............. 2 827,392 0.39
Florida.......................... 111 35,923,145 17.06
Georgia.......................... 24 6,989,147 3.32
Hawaii........................... 1 499,629 0.24
Iowa............................. 1 320,000 0.15
Illinois......................... 15 4,701,198 2.23
Indiana.......................... 5 1,761,799 0.84
Kansas........................... 6 1,861,793 0.88
Kentucky......................... 1 329,166 0.16
Maine............................ 4 1,255,492 0.60
Maryland......................... 12 3,613,983 1.72
Massachusetts.................... 52 19,161,423 9.10
Michigan......................... 11 3,626,160 1.72
Minnesota........................ 5 1,747,222 0.83
Mississippi...................... 2 648,512 0.31
Missouri......................... 13 4,172,254 1.98
Nebraska......................... 12 4,274,399 2.03
New Hampshire.................... 2 483,367 0.23
New Jersey....................... 10 3,184,363 1.51
New Mexico....................... 1 241,212 0.11
Nevada........................... 1 252,557 0.12
New York......................... 18 5,516,501 2.62
North Carolina................... 11 3,332,778 1.58
Ohio............................. 12 3,582,108 1.70
Oklahoma......................... 14 5,134,428 2.44
Oregon........................... 7 2,046,385 0.97
Pennsylvania..................... 5 1,475,362 0.70
Rhode Island..................... 5 1,850,425 0.88
South Carolina................... 2 622,354 0.30
South Dakota..................... 1 253,443 0.12
</TABLE>
S-32
<PAGE> 101
<TABLE>
<CAPTION>
Percentage of
Mortgage Group One
Aggregate by Aggregate
Number of Principal Balance Principal Balance as
State Mortgage Loans as of the Cut-off Date of the Cut-off Date
----- -------------- ---------------------- -------------------
<S> <C> <C> <C>
Tennessee........................ 3 893,086 0.42
Texas............................ 25 7,992,376 3.80
Utah............................. 7 2,867,490 1.36
Virginia......................... 5 1,924,513 0.91
Washington....................... 10 3,145,224 1.49
West Virginia.................... 1 249,810 0.12
Wisconsin........................ 7 2,442,363 1.16
--- ------------ ------
Totals................... 628 $210,535,303 100.00%
=== ============ ======
</TABLE>
MORTGAGE GROUP ONE
ORIGINAL PRINCIPAL BALANCE(2)
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Pool by
Principal Balance Aggregate Principal
Original Number of as of the Balance as of the
Principal Balance Mortgage Loans Cut-off Date Cut-off Date
----------------- -------------- ------------ ------------
<S> <C> <C> <C>
$300,000 or less............... 326 $ 86,373,474 41.03%
$300,001-$400,000.............. 178 61,075,535 29.01
$400,001-$500,000.............. 76 34,100,878 16.20
$500,001-$600,000.............. 28 15,404,536 7.32
$600,001-$700,000.............. 15 9,615,426 4.57
$700,001-$800,000.............. 3 2,314,758 1.10
$800,001-$900,000.............. 2 1,650,696 0.78
--- ------------ ------
Totals................. 628 $210,535,303 100.00%
=== ============ ======
</TABLE>
- ---------------
(2) The average outstanding principal balance of the Mortgage Loans as of the
Cut-off Date was approximately $335,247. The original principal balances of
the Mortgage Loans ranged from $217,500 to $840,700.
S-33
<PAGE> 102
MORTGAGE GROUP ONE
YEAR OF ORIGINATION
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Group One by
Principal Balance Aggregate Principal
Year of Number of as of the Balance as of the
Origination Mortgage Loans Cut-off Date Cut-off Date
----------- -------------- ------------ ------------
<S> <C> <C> <C>
1995...................... 1 $ 648,470 0.31%
1996...................... 4 1,537,188 0.73
1997...................... 97 28,836,570 13.70
1998...................... 526 179,513,075 85.27
--- ------------ ------
Totals............ 628 $210,535,303 100.00%
=== ============ ======
</TABLE>
MORTGAGE GROUP ONE
ORIGINAL LOAN-TO-VALUE RATIO(3)
<TABLE>
<CAPTION>
Aggregate Percentage of
Principal Mortgage Group
Balance One by Aggregate
Original Number of as of the Principal Balance as
Loan-to-Value Ratio Mortgage Loans Cut-off Date of the Cut-off Date
------------------- -------------- ------------ -------------------
<S> <C> <C> <C>
60.00% or less....................... 62 $ 22,815,538 10.84%
60.01%-65.00%........................ 37 14,049,033 6.67
65.01%-70.00%........................ 56 20,479,610 9.73
70.01%-75.00%........................ 124 42,976,010 20.41
75.01%-80.00%........................ 258 85,027,613 40.39
80.01%-85.00%........................ 9 2,557,187 1.21
85.01%-90.00%........................ 64 18,028,631 8.56
90.01%-95.00%........................ 18 4,601,682 2.19
--- ------------ ------
Totals....................... 628 $210,535,303 100.00%
=== ============ ======
</TABLE>
- ---------------
(3) The weighted average original Loan-to-Value Ratio of the Group One Mortgage
Loans was approximately 73.82% as of the Cut-off Date.
S-34
<PAGE> 103
MORTGAGE GROUP ONE
LOAN PURPOSE
<TABLE>
<CAPTION>
Aggregate Percentage of
Principal Mortgage Group One
Balance by Aggregate
Number of as of the Principal Balance as
Loan Purpose Mortgage Loans Cut-off Date of the Cut-off Date
------------ -------------- ------------ -------------------
<S> <C> <C> <C>
Rate/Term Refinance.................... 316 $108,311,546 51.45%
Purchase............................... 241 77,864,064 36.98
Cash-out Refinance..................... 71 24,359,693 11.57
--- ------------ ------
Totals......................... 628 $210,535,303 100.00%
=== ============ ======
</TABLE>
MORTGAGE GROUP ONE
TYPES OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Group
Principal One by Aggregate
Balance Principal Balance
Number of as of the as of the
Property Type Mortgage Loans Cut-off Date Cut-off Date
------------- -------------- ------------ ------------
<S> <C> <C> <C>
Single-Family Residence.................... 466 $158,269,193 75.17%
Planned Unit Development................... 140 44,171,052 20.98
Condominium................................ 19 6,771,609 3.22
Two- to Four-Family Dwelling Unit.......... 2 813,809 0.39
Townhouse/Rowhouse......................... 1 509,640 0.24
--- ------------ ------
Totals............................. 628 $210,535,303 100.00%
=== ============ ======
</TABLE>
MORTGAGE GROUP ONE
OCCUPANCY(6)
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Group
Principal Balance One by Aggregate
Number of as of the Principal Balance as
Occupancy Mortgage Loans Cut-off Date of the Cut-off Date
--------- -------------- ------------ -------------------
<S> <C> <C> <C>
Owner-occupied........................... 616 $206,181,567 97.93%
Second Home.............................. 12 4,353,736 2.07
---- ------------ ------
Totals........................... 628 $210,535,303 100.00%
=== ============ ======
</TABLE>
- ---------------
(6) Based on representations by the Mortgagors at the time of origination of
the related Mortgage Loans.
S-35
<PAGE> 104
MORTGAGE GROUP ONE
LOAN DOCUMENTATION
<TABLE>
<CAPTION>
Aggregate Percentage of
Principal Mortgage Group
Number of Balance One by Aggregate
Mortgage as of the Principal Balance as
Loan Documentation Loans Cut-off Date of the Cut-off Date
------------------ ----- ------------ -------------------
<S> <C> <C> <C>
Full/Alternative Documentation........... 614 $205,274,785 97.50%
Limited Documentation.................... 14 5,260,517 2.50
--- ------------ ------
Totals........................... 628 $210,535,303 100.00%
=== ============ ======
</TABLE>
MORTGAGE GROUP TWO
MORTGAGE GROUP TWO
MORTGAGE RATES(1)
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Group Two
Principal Balance by Aggregate Principal
Number of as of the Balance as of the Cut-
Mortgage Rate Mortgage Loans Cut-off Date off Date
------------- -------------- ------------ --------
<S> <C> <C> <C>
6.500% or less.................. 3 $ 1,112,297 2.39%
6.501%-7.000%................... 78 25,922,372 55.66
7.001%-7.500%................... 52 18,109,046 38.88
7.501%-8.000%................... 5 1,431,453 3.07
---- ----------- ------
Totals.................. 138 $46,575,168 100.00%
=== =========== ======
</TABLE>
- ---------------
(1) The Mortgage Rates borne by the Group Two Mortgage Loans as of the Cut-off
Date ranged from 6.500% per annum to 7.875% per annum and the weighted
average Mortgage Rate on the Group Two Mortgage Loans as of the Cut-off
Date was approximately 7.010% per annum.
S-36
<PAGE> 105
MORTGAGE GROUP TWO
GEOGRAPHICAL DISTRIBUTION
OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
Percentage of
Mortgage Group
Aggregate Two by Aggregate
Number of Principal Balance Principal Balance as
State Mortgage Loans as of the Cut-off Date of the Cut-off Date
----- -------------- ---------------------- -------------------
<S> <C> <C> <C>
Alabama.......................... 1 249,220 0.54%
Arkansas......................... 8 2,730,049 5.86
California....................... 27 8,898,546 19.11
Colorado......................... 2 597,416 1.28
Connecticut...................... 2 726,950 1.56
District of Columbia............. 1 588,376 1.26
Florida.......................... 24 8,422,824 18.08
Georgia.......................... 2 674,199 1.45
Idaho............................ 1 434,000 0.93
Illinois......................... 1 258,372 0.55
Kansas........................... 1 255,426 0.55
Maine............................ 1 283,421 0.61
Maryland......................... 1 259,189 0.56
Massachusetts.................... 26 9,227,198 19.81
Michigan......................... 1 276,417 0.59
Missouri......................... 8 2,637,253 5.66
Nebraska......................... 2 556,212 1.19
New Jersey....................... 1 299,094 0.64
New York......................... 1 243,399 0.52
North Carolina................... 1 239,999 0.52
North Dakota..................... 1 252,393 0.54
Oklahoma......................... 3 1,019,976 2.19
Pennsylvania..................... 1 431,856 0.93
Rhode Island..................... 4 1,503,110 3.23
Tennessee........................ 2 731,440 1.57
Texas............................ 12 3,566,635 7.66
Utah............................. 1 247,500 0.53
Washington....................... 1 397,000 0.85
Wisconsin........................ 1 567,700 1.22
--- -------------- ------
Totals................... 138 $46,575,168 100.00%
=== =========== ======
</TABLE>
S-37
<PAGE> 106
MORTGAGE GROUP TWO
ORIGINAL PRINCIPAL BALANCE(2)
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Group Two by
Principal Balance Aggregate Principal
Original Number of as of the Balance as of the
Principal Balance Mortgage Loans Cut-off Date Cut-off Date
----------------- -------------- ------------ ------------
<S> <C> <C> <C>
$300,000 or less............... 60 $16,073,295 34.51%
$300,001-$400,000.............. 49 16,431,489 35.28
$400,001-$500,000.............. 20 8,931,803 19.18
$500,001-$600,000.............. 7 3,842,659 8.25
$600,001-$700,000.............. 2 1,295,922 2.78
--- ----------- ------
Totals................. 138 $46,575,168 100.00%
=== =========== ======
</TABLE>
- ---------------
(2) The average outstanding principal balance of the Group Two Mortgage Loans
as of the Cut-off Date was approximately $337,501. The original principal
balances of the Group Two Mortgage Loans ranged from $234,700 to $690.000.
MORTGAGE GROUP TWO
YEAR OF ORIGINATION
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Group Two by
Principal Balance Aggregate Principal
Year of Number of as of the Balance as of the
Origination Mortgage Loans Cut-off Date Cut-off Date
----------- -------------- ------------ ------------
<S> <C> <C> <C>
1997...................... 1 $ 285,027 0.61%
1998...................... 137 46,290,141 99.39
--- ----------- ------
Total............. 138 $46,575,168 100.00%
=== =========== ======
</TABLE>
S-38
<PAGE> 107
MORTGAGE GROUP TWO
ORIGINAL LOAN-TO-VALUE RATIO(3)
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Group
Principal Balance Two by Aggregate
Original Number of as of the Principal Balance as
Loan-to-Value Ratio Mortgage Loans Cut-off Date of the Cut-off Date
------------------- -------------- ------------ -------------------
<S> <C> <C> <C>
60.00% or less....................... 38 $14,037,216 30.14%
60.01%-65.00%........................ 12 3,864,956 8.30
65.01%-70.00%........................ 16 5,557,287 11.93
70.01%-75.00%........................ 34 11,820,751 25.38
75.01%-80.00%........................ 32 9,543,408 20.49
85.01%-90.00%........................ 6 1,751,549 3.76
--- ------------- ------
Totals....................... 138 $46,575,168 100.00%
=== =========== ======
</TABLE>
- ---------------
(3) The weighted average original Loan-to-Value Ratio of the Group Two Mortgage
Loans was approximately 66.12% as of the Cut-off Date.
MORTGAGE GROUP TWO
LOAN PURPOSE
<TABLE>
<CAPTION>
Aggregate Percentage of
Principal Mortgage Group Two
Balance by Aggregate
Number of as of the Principal Balance as
Loan Purpose Mortgage Loans Cut-off Date of the Cut-off Date
------------ -------------- ------------ -------------------
<S> <C> <C> <C>
Rate/Term Refinance.............. 95 $32,259,922 69.26%
Cash-out Refinance............... 26 9,329,837 20.03
Purchase......................... 17 4,985,408 10.70
--- ----------- ------
Totals................... 138 $46,575,168 100.00%
=== =========== ======
</TABLE>
S-39
<PAGE> 108
MORTGAGE GROUP TWO
TYPES OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Group
Principal Two by Aggregate
Balance Principal Balance
Number of as of the as of the
Property Type Mortgage Loans Cut-off Date Cut-off Date
------------- -------------- ------------ ------------
<S> <C> <C> <C>
Single-Family Residence.................... 104 $34,961,068 75.06%
Planned Unit Development................... 30 10,232,461 21.97
Townhouse/Rowhouse......................... 2 695,045 1.49
Two- to Four-Family ....................... 2 686,593 1.47
--- ----------- ------
Totals............................. 138 $46,575,168 100.00%
=== =========== ======
</TABLE>
MORTGAGE GROUP TWO
OCCUPANCY(6)
<TABLE>
<CAPTION>
Percentage of
Aggregate Mortgage Group
Principal Balance Two by Aggregate
Number of as of the Principal Balance as
Occupancy Mortgage Loans Cut-off Date of the Cut-off Date
--------- -------------- ------------ -------------------
<S> <C> <C> <C>
Primary.................................. 137 $46,234,224 99.27%
Second Home.............................. 1 340,944 0.73
--- ----------- ------
Totals........................... 138 $46,575,168 100.00%
=== =========== ======
</TABLE>
- ---------------
(6) Based on representations by the Mortgagors at the time of origination of
the related Mortgage Loans.
S-40
<PAGE> 109
MORTGAGE GROUP TWO
LOAN DOCUMENTATION
<TABLE>
<CAPTION>
Aggregate Percentage of
Principal Mortgage Group
Number of Balance Two by Aggregate
Mortgage as of the Principal Balance as
Loan Documentation Loans Cut-off Date of the Cut-off Date
------------------ ----- ------------ -------------------
<S> <C> <C> <C>
Full/Alternative Documentation........... 131 $43,861,796 94.17%
Limited Documentation.................... 7 2,713,372 5.83
--- ----------- ------
Totals........................... 138 $46,675,168 100.00%
=== =========== ======
</TABLE>
At the date of issuance of the Certificates, no Mortgage Loan will be
delinquent more than 30 days or will have had more than one delinquency in
excess of 30 days as to any Monthly Payment during the preceding twelve months.
With respect to either Mortgage Group, no zip code area contains
greater than approximately 1.11% of the related Mortgaged Properties.
A Standard Hazard Insurance Policy is required to be maintained by the
Mortgagor with respect to each Mortgage Loan in an amount equal to the maximum
insurable value of the improvements securing such Mortgage Loan or the principal
balance of such Mortgage Loan, whichever is less. See "Servicing of the Mortgage
Loans -- Hazard Insurance" in the Prospectus. No Mortgage Pool Insurance Policy,
Special Hazard Insurance Policy or Mortgagor Bankruptcy Insurance will be
maintained with respect to the Mortgage Pool, nor will any Mortgage Loan be
insured by the FHA or guaranteed by the VA.
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as presently
constituted. Prior to the issuance of the Certificates, Mortgage Loans may be
removed from the Mortgage Pool if the Seller deems such removal necessary or
appropriate. Other mortgage loans may be included in the Mortgage Pool prior to
the issuance of the Certificates unless including such mortgage loans would
materially alter the characteristics of the Mortgage Pool as described herein.
The Seller believes that the information set forth herein will be representative
of the characteristics of the Mortgage Pool as it will be constituted at the
time the Certificates are issued.
S-41
<PAGE> 110
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on the Offered Certificates (other than
the Class IA-X and Class IIA-X Certificates), the aggregate amount of each
interest payment on the Offered Certificates and the yield to maturity of such
Certificates are related to the rate and timing of payments of principal on the
underlying Mortgage Loans (or, with respect to the Class IA and Class IIA
Certificates, on the underlying Mortgage Loans in the related Mortgage Group).
The principal payments on such Mortgage Loans may be in the form of scheduled
principal payments or prepayments (for this purpose, the term "prepayment"
includes prepayments in full, curtailments and liquidations due to default,
casualty, condemnation and the like, as well as repurchases by a mortgage loan
seller). Any such prepayments will result in distributions to holders of
Certificates ("Certificateholders") of principal amounts which would otherwise
be distributed over the remaining terms of the Mortgage Loans. In addition,
because for at least nine years after the issuance of the Certificates, the
Class IA and Class IIA Certificateholders (other than the Class IA-5, Class
IIA-P, Class IA-X and Class IIA-X Certificateholders) will be entitled to
receive a percentage of certain amounts, including principal prepayments, which
is greater than their proportionate interest in the related Mortgage Group, the
rate of principal prepayments on the Mortgage Loans in the related Mortgage
Group will have a greater effect on the rate of principal payments and the
amount of interest payments on, and the yield to maturity of, such Certificates
than if such Certificateholders were entitled only to their proportionate
interest in such amounts. See "Description of the Certificates -- Distributions
of Principal and Interest." In general, the prepayment rate may be influenced by
a number of factors, including general economic conditions and homeowner
mobility. Mortgagors are permitted to prepay the Mortgage Loans, in whole or in
part, at any time without penalty. The rate of payment of principal may also be
affected by any repurchase of the Mortgage Loans as to which there has been a
material breach of a representation or warranty or defect in documentation, or
by a purchase by the Servicer of certain Mortgage Loans modified at the request
of a Mortgagor (including Mortgagors with respect to which the Servicer has
solicited such a request), or by the exercise by the Servicer of its right to
purchase a defaulted Mortgage Loan. See "The Mortgage Pool -- General" and "The
Pooling and Servicing Agreement -- Optional Termination." In such event, the
repurchase price will be passed through to the Certificateholders as a
prepayment of principal in the month following the month of such repurchase.
The rate of prepayments with respect to mortgage loans on one- to
four-family residences has fluctuated significantly in recent years. The Seller
believes that in a fluctuating interest rate environment a predominant factor
affecting the prepayment rate on a large pool of mortgage loans is the
difference between the interest rates on the mortgage loans (giving
consideration to the cost of any refinancing) and prevailing mortgage rates. In
general, if mortgage interest rates were to fall below the interest rates on the
Mortgage Loans, the rate of prepayment would be expected to increase.
Conversely, in general, if mortgage interest rates were to rise above the
interest rates on the Mortgage Loans, the rate of prepayment would be expected
to decrease. Other factors affecting prepayment of mortgage loans include
changes in mortgagors' housing needs, job transfers, unemployment, mortgagors'
net equity in the mortgaged properties and servicing decisions. Additionally, in
general, mortgage loans having relatively high principal balances and/or
relatively low loan-to-value ratios may be more likely to prepay than mortgage
loans having relatively low principal balances and/or relatively high
loan-to-value ratios. Therefore, if a mortgage pool consists of mortgage loans
which generally have relatively high principal balances and relatively low
loan-to-value ratios, the rate of prepayments with respect to such mortgage pool
could be higher than would otherwise be the case. In addition, prepayments
generally will also result from home sales by mortgagors and from foreclosures
due to defaults on mortgage loans. There is no historical prepayment data
available for the Mortgage Pool, and comparable data is not available because
the Mortgage Loans do not constitute a representative sample of
S-42
<PAGE> 111
mortgage loans generally. In addition, historical data available with respect to
mortgage loans underlying mortgage pass-through certificates issued by GNMA,
FNMA or FHLMC may not be comparable to prepayments expected to be experienced by
the Mortgage Pool, because the Mortgage Loans have characteristics which differ
from mortgage loans underlying pass-through certificates issued by GNMA, FNMA
and FHLMC.
The timing of changes in the rate of prepayments on the Mortgage Loans
may significantly affect the total distributions received, the date of receipt
of such distributions and the actual yield to maturity to an investor in the
Offered Certificates, even if the average rate of principal payments is
consistent with an investor's expectations. Because the rate of distribution of
principal of the Certificates will be directly related to the actual
amortization (including prepayments) of the Mortgage Loans in the related
Mortgage Group (or, in the case of the Class M and Offered Class B Certificates,
of the Mortgage Loans in both Mortgage Groups), which may include Mortgage Loans
that have remaining terms to maturity shorter or longer than those assumed and
interest rates higher or lower than those assumed, the distributions of the
Offered Certificates are likely to differ from those reflected in the following
tables, even if all the Mortgage Loans in the related Mortgage Group (or, in the
case of the Class M and Offered Class B Certificates, of the Mortgage Loans in
both Mortgage Groups) prepay at the indicated percentages of the Prepayment
Model (defined below). In addition, it is not likely that the Mortgage Loans
will prepay at a constant rate until maturity or that all of the Mortgage Loans
will prepay at the same rate. In general, the earlier a payment of principal on
the Mortgage Loans, the greater the effect on an investor's yield to maturity.
As a result, if principal payments occur at a rate higher (or lower) than the
rate anticipated by an investor in the Offered Certificates during the period
immediately following the issuance of the Certificates, the effect on such
investor's yield will not be equally offset by a subsequent like reduction (or
increase) in the rate of principal payments. If an Offered Certificate is
offered at a discount from its original principal amount and if the purchaser of
such Offered Certificate calculates its yield to maturity based on a faster
assumed rate of payment of principal than that actually received on such
Certificate, its actual yield to maturity will be lower than that so calculated.
Conversely, if an Offered Certificate is offered at a premium to its original
principal amount, and if the purchaser of such Offered Certificate calculates
its yield to maturity based on a slower assumed rate of payment of principal
than that actually received on such Certificate, its actual yield to maturity
will be lower than that so calculated and, under certain circumstances, such a
purchaser may fail to recoup its initial investment. No assurances can be given
as to the rate of payments on the Mortgage Loans in either Mortgage Group.
Principal distributions on the Class IA-2, Class IA-6 and Class IA-7
Certificates (the "PACs") on any Distribution Date are generally payable based
on the respective Planned Principal Balances set forth in Appendix A. The
Planned Principal Balances for each of the PACs were determined assuming that
the prepayment rate of the Group One Mortgage Loans occur each month at a
constant level between approximately 100% and 500% of the Prepayment Model.
However, as discussed herein, actual principal distributions may deviate from
the described amounts because the actual prepayment rate of the Group One
Mortgage Loans each month may not occur at a constant level between
approximately 100% and 500% of the Prepayment Model.
Principal distributions on Class IA-1 Component Three and the Class
IA-3 Certificates (the "TACs") are generally payable based on the Targeted
Principal Balances set forth in Appendix A. The Targeted Principal Balances for
the TACs were determined assuming that the prepayment rate of the Group One
Mortgage Loans occur each month at a constant level of 250% of the Prepayment
Model. However, as discussed herein, actual principal distributions may deviate
from the described amounts because the actual
S-43
<PAGE> 112
prepayment rate of the Group One Mortgage Loans each month may not occur or
remain constant at such percentage of the Prepayment Model. If the principal
balance of the Class IA-4 Certificates is reduced to zero before the principal
balances of the TACs are reduced to zero, the weighted average lives of the TACs
will become significantly more sensitive to changes in the prepayment rate of
the Group One Mortgage Loans.
Principal prepayments on the Group One Mortgage Loans and other
unscheduled payments of principal may result in principal available for
distribution on a Distribution Date to the PACs and the TACs in an amount
greater than the amount necessary to reduce the applicable principal balance of
the PACs and the TACs to their scheduled amounts. Such excess principal after
payment of the PACs and the TACs to their scheduled amounts will be distributed
to the Class IA-4 Certificates until the principal balance of such Class has
been reduced to zero. Accordingly, the rate of payments on the Group One
Mortgage Loans is expected to have a greater effect on the weighted average life
of the Class IA-4 Certificates, and under certain scenarios the TACs, than on
the weighted average life of the PACs. If the rate of the Principal Prepayments
and other unscheduled payments of principal with respect to the Group One
Mortgage Loans causes the principal available for distribution on the Non-PO
Class IA Certificates on any Distribution Date to be less than the amounts
necessary to reduce the principal balances of each of the PACs to their
respective Planned Principal Balance, the TACs will not receive any
distributions of principal, and if the principal available for distribution to
the TACs is less than the amount necessary to reduce the principal balances of
the TACs to their respective Targeted Principal Balances, the Class IA-4
Certificates will not receive any distributions of principal.
Investors in the Class IA-5 Certificates should be aware that because
the Class IA-5 Certificates are not expected to receive any distributions of
payments of principal prior to the Distribution Date occurring in June 2003 and
until the Distribution Date occurring in June 2007 are expected to receive a
disproportionately small portion of principal prepayments (unless the principal
balances of the Non-PO Class IA Certificates (other than the Class IA-5
Certificates) have been reduced to zero), the weighted average life of the Class
IA-5 Certificates will be longer than would otherwise be the case, and the
effect on the market value of the Class IA-5 Certificates of changes in market
interest rates or market yields for similar securities will be greater than for
other classes of Class A Certificates entitled to such distributions.
IF THE AGGREGATE PRINCIPAL BALANCE OF THE NON-OFFERED CLASS B
CERTIFICATES IS REDUCED TO ZERO, THE YIELD TO MATURITY ON THE CLASS B-2
CERTIFICATES WILL BE EXTREMELY SENSITIVE TO LOSSES ON THE MORTGAGE LOANS (AND
THE TIMING THEREOF), BECAUSE THE ENTIRE AMOUNT OF ANY SUCH LOSSES (OTHER THAN
EXCESS LOSSES) WHICH OCCUR AFTER THE AGGREGATE PRINCIPAL BALANCE OF THE
NON-OFFERED CLASS B CERTIFICATES HAS BEEN REDUCED TO ZERO WILL BE ALLOCABLE TO
THE CLASS B-2 CERTIFICATES, AS DESCRIBED HEREIN. IF THE AGGREGATE PRINCIPAL
BALANCE OF THE CLASS B-2 CERTIFICATES AND THE NON-OFFERED CLASS B CERTIFICATES
IS REDUCED TO ZERO, THE YIELD TO MATURITY ON THE CLASS B-1 CERTIFICATES WILL BE
EXTREMELY SENSITIVE TO LOSSES ON THE MORTGAGE LOANS AND THE TIMING THEREOF
BECAUSE THE ENTIRE AMOUNT OF ANY SUCH LOSSES (OTHER THAN EXCESS LOSSES) WHICH
OCCUR AFTER THE AGGREGATE PRINCIPAL BALANCE OF THE CLASS B-2 CERTIFICATES AND
THE NON-OFFERED CLASS B CERTIFICATES HAS BEEN REDUCED TO ZERO WILL BE ALLOCABLE
TO THE CLASS B-1 CERTIFICATES, AS DESCRIBED HEREIN. IF THE AGGREGATE PRINCIPAL
BALANCE OF THE CLASS B CERTIFICATES IS REDUCED TO ZERO, THE YIELD TO MATURITY ON
THE CLASS M CERTIFICATES WILL BE EXTREMELY SENSITIVE TO LOSSES ON THE MORTGAGE
LOANS AND THE TIMING THEREOF BECAUSE THE ENTIRE AMOUNT OF ANY SUCH LOSSES (OTHER
THAN EXCESS LOSSES) WHICH OCCUR AFTER THE AGGREGATE PRINCIPAL BALANCE OF THE
CLASS B CERTIFICATES HAS BEEN REDUCED TO ZERO WILL BE ALLOCABLE TO THE CLASS M
CERTIFICATES, AS DESCRIBED HEREIN. IN ADDITION, AS DESCRIBED HEREIN, FOR AT
LEAST NINE YEARS AFTER THE ISSUANCE OF THE CERTIFICATES OR SUCH LESSER TIME AS
THE
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<PAGE> 113
CLASS A CERTIFICATES ARE OUTSTANDING, EACH CLASS OF SUBORDINATED CERTIFICATES
(DEFINED HEREIN), AS WELL AS THE CLASS IA-5 CERTIFICATES, WILL BE ENTITLED TO
RECEIVE A PERCENTAGE OF CERTAIN AMOUNTS, INCLUDING PRINCIPAL PREPAYMENTS, WHICH
IS GENERALLY LESS THAN THEIR PROPORTIONATE INTEREST IN THE TRUST FUND. SEE
"DESCRIPTION OF THE CERTIFICATES -- SUBORDINATED CERTIFICATES AND SHIFTING
INTERESTS."
No assurance can be given as to the rate or timing of principal
payments or prepayments on the Mortgage Loans. In addition, it is unlikely that
prepayments on the Mortgage Loans will occur at a constant rate even if the
average prepayment experience equals the indicated levels of the Prepayment
Model.
In the event of acceleration of Mortgage Loans as a result of
enforcement of "due-on-sale" provisions in connection with transfers of the
related Mortgaged Properties, the level of prepayments on the respective
Mortgage Loans will be increased, thereby shortening the weighted average lives
of the Offered Certificates. See "Yield, Maturity and Weighted Average Life
Considerations" in the Prospectus.
The yield to holders of the Offered Certificates will depend upon,
among other things, the price at which such Offered Certificates are purchased
and the amount of and rate at which principal, including both scheduled and
unscheduled payments thereof, is paid to the respective Certificateholders.
The yield to Offered Certificateholders (other than the Class IIA-P
Certificateholders) will be reduced by lags between the time interest income
accrues to Certificateholders and the time the related interest income is
received by Certificateholders. In addition, the yield to Certificateholders
(other than the Class IIA-P Certificateholders) may be reduced as a result of
Prepayment Interest Shortfalls (defined herein) to the extent described herein.
See "The Pooling and Servicing Agreement -- Adjustment to Servicing Fee in
Connection with Prepaid Mortgage Loans."
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
"Prepayment Model") represents an assumed rate of prepayment each month relative
to the then outstanding principal balance of a pool of mortgage loans. A
prepayment assumption of 100% of the Prepayment Model assumes prepayment rates
of 0.2% per annum of the then outstanding principal balance of such mortgage
loans in the first month of the life of the mortgage loans and an additional
0.2% per annum in each month thereafter until the thirtieth month. Beginning in
the thirtieth month and in each month thereafter during the life of the mortgage
loans, 100% of the Prepayment Model assumes a constant prepayment rate of 6.0%
per annum. The tables set forth below are based on the assumption that the
Mortgage Loans prepay at the indicated percentages of the Prepayment Model.
Neither the Prepayment Model nor any other prepayment model purports to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Pool.
The tables set forth below have been prepared on the basis of the
characteristics of the Mortgage Loans that are expected to be included in the
Trust Fund and the respective expected initial principal balances of the Offered
Certificates. For purposes of preparation of the tables, it has been assumed
that the Mortgage Loans included in the Mortgage Pool on the Closing Date have
the actual characteristics of the Mortgage Loans described herein and that (i)
scheduled payments on all Mortgage Loans are received on the first day of each
month beginning June 1, 1998, (ii) any principal prepayments on the Mortgage
Loans are received on the last day of each month beginning in May 1998 and
include 30 days of interest thereon, (iii) there are no defaults or
delinquencies on the Mortgage Loans, (iv) optional termination of the Trust Fund
does not occur, (v) there are no partial prepayments on the Mortgage Loans and
prepayments are computed
S-45
<PAGE> 114
after giving effect to scheduled payments received on the following day, (vi)
the Mortgage Loans prepay at the indicated constant percentages of the
Prepayment Model, (vii) the date of issuance for the Certificates is May 29,
1998, (viii) cash distributions are received by the Certificateholders on the
25th day of each month when due, (ix) the scheduled monthly payment for each
Mortgage Loan is computed based upon its outstanding balance, Mortgage Rate and
remaining term to maturity such that each Mortgage Loan will amortize in amounts
sufficient to repay the remaining balance of such Mortgage Loan by its remaining
term to maturity and (x) the Trust Fund is charged a total of 0.26% per annum in
Servicing Fees and Trustee Fees. The assumptions set forth in this paragraph are
referred to herein as the "Modeling Assumptions."
Any discrepancy between the characteristics of the Mortgage Loans
actually included in the Trust Fund and the characteristics of the Mortgage
Loans expected to be so included may affect the percentages of the original
principal balance outstanding set forth in the tables and the weighted average
lives of the Offered Certificates. In addition, to the extent that the Mortgage
Loans that actually are included in the Trust Fund have characteristics that
differ from those assumed in preparing the following tables, the outstanding
principal balance of any Offered Certificate will likely be reduced to zero
earlier or later than indicated by the tables.
Variations in actual prepayment experience and the principal balances
of Mortgage Loans that prepay may increase or decrease the percentages of the
original principal balances outstanding and the weighted average lives shown in
the following tables. Such variations may occur even if the average prepayment
experience of all such Mortgage Loans equals the indicated levels of the
Prepayment Model. There is no assurance that the Mortgage Loans will prepay at
any constant level of the Prepayment Model.
Based on the foregoing assumptions, the following tables indicate the
weighted average life of each Class of Offered Certificates and set forth the
percentages of the original principal balance of each Class of Offered
Certificates that would be outstanding after each of the dates shown at various
percentages of the Prepayment Model.
NO ASSURANCE CAN BE GIVEN AS TO THE RATE OR TIMING OF PRINCIPAL PAYMENTS OR
PREPAYMENTS ON ANY OF THE MORTGAGE LOANS.
S-46
<PAGE> 115
PERCENTAGE OF INITIAL PRINCIPAL BALANCE OUTSTANDING
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT
MODEL SET FORTH BELOW
<TABLE>
<CAPTION>
CLASS IA-2 CLASS IA-3
--------------------------------------------- ---------------------------------------------
DISTRIBUTION DATE 0% 100% 250% 350% 500% 0% 100% 250% 350% 500%
-- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial.................. 100 100 100 100 100 100 100 100 100 100
May 25, 1999............. 100 100 100 100 100 91 85 77 77 71
May 25, 2000............. 99 93 93 93 93 81 64 37 31 11
May 25, 2001............. 83 0 0 0 0 73 56 8 0 0
May 25, 2002............. 66 0 0 0 0 65 48 0 0 0
May 25, 2003............. 48 0 0 0 0 57 40 0 0 0
May 25, 2004............. 30 0 0 0 0 48 31 0 0 0
May 25, 2005............. 11 0 0 0 0 38 17 0 0 0
May 25, 2006............. 0 0 0 0 0 27 0 0 0 0
May 25, 2007............. 0 0 0 0 0 16 0 0 0 0
May 25, 2008............. 0 0 0 0 0 4 0 0 0 0
May 25, 2009............. 0 0 0 0 0 0 0 0 0 0
May 25, 2010............. 0 0 0 0 0 0 0 0 0 0
May 25, 2011............. 0 0 0 0 0 0 0 0 0 0
May 25, 2012............. 0 0 0 0 0 0 0 0 0 0
May 25, 2013............. 0 0 0 0 0 0 0 0 0 0
May 25, 2014............. 0 0 0 0 0 0 0 0 0 0
May 25, 2015............. 0 0 0 0 0 0 0 0 0 0
May 25, 2016............. 0 0 0 0 0 0 0 0 0 0
May 25, 2017............. 0 0 0 0 0 0 0 0 0 0
May 25, 2018............. 0 0 0 0 0 0 0 0 0 0
May 25, 2019............. 0 0 0 0 0 0 0 0 0 0
May 25, 2020............. 0 0 0 0 0 0 0 0 0 0
May 25, 2021............. 0 0 0 0 0 0 0 0 0 0
May 25, 2022............. 0 0 0 0 0 0 0 0 0 0
May 25, 2023............. 0 0 0 0 0 0 0 0 0 0
May 25, 2024............. 0 0 0 0 0 0 0 0 0 0
May 25, 2025............. 0 0 0 0 0 0 0 0 0 0
May 25, 2026............. 0 0 0 0 0 0 0 0 0 0
May 25, 2027............. 0 0 0 0 0 0 0 0 0 0
May 25, 2028............. 0 0 0 0 0 0 0 0 0 0
May 25, 2029............. 0 0 0 0 0 0 0 0 0 0
Weighted Average Life in
years(1)................. 4.9 2.5 2.5 2.5 2.5 5.5 4.0 1.7 1.6 1.4
</TABLE>
- ---------------
(1) The weighted average lives of the Offered Certificates as shown above are
determined by (i) multiplying the amount of each assumed principal
distribution by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the results and
(iii) dividing the sum by the total principal distribution on such
Certificates.
S-47
<PAGE> 116
PERCENTAGE OF INITIAL PRINCIPAL BALANCE OUTSTANDING
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT
MODEL SET FORTH BELOW
<TABLE>
<CAPTION>
CLASS IA-4 CLASS IA-5
--------------------------------------------- ---------------------------------------------
DISTRIBUTION DATE 0% 100% 250% 350% 500% 0% 100% 250% 350% 500%
-- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial.................. 100 100 100 100 100 100 100 100 100 100
May 25, 1999............. 107 107 107 16 0 100 100 100 100 100
May 25, 2000............. 115 115 115 0 0 100 100 100 100 100
May 25, 2001............. 123 123 123 0 0 100 100 100 100 100
May 25, 2002............. 132 132 132 0 0 100 100 100 100 100
May 25, 2003............. 142 142 142 0 0 100 100 100 100 100
May 25, 2004............. 152 152 152 0 0 99 97 94 92 89
May 25, 2005............. 163 163 163 0 0 97 93 87 82 76
May 25, 2006............. 175 175 175 0 0 95 88 77 70 60
May 25, 2007............. 187 187 187 0 0 93 82 66 57 40
May 25, 2008............. 201 201 201 0 0 91 75 55 44 27
May 25, 2009............. 215 215 215 0 0 89 69 46 34 19
May 25, 2010............. 231 231 231 0 0 87 63 38 26 13
May 25, 2011............. 248 248 248 0 0 84 58 31 20 9
May 25, 2012............. 266 266 266 0 0 82 53 26 15 6
May 25, 2013............. 285 285 272 0 0 79 48 21 12 4
May 25, 2014............. 305 305 222 0 0 76 43 17 9 3
May 25, 2015............. 328 328 181 0 0 72 39 14 7 2
May 25, 2016............. 351 351 146 0 0 69 35 11 5 1
May 25, 2017............. 377 377 117 0 0 65 31 9 4 1
May 25, 2018............. 404 404 93 0 0 61 27 7 3 1
May 25, 2019............. 433 433 73 0 0 56 24 6 2 0
May 25, 2020............. 464 464 57 0 0 52 20 4 1 0
May 25, 2021............. 498 492 44 0 0 47 17 3 1 0
May 25, 2022............. 534 407 33 0 0 41 14 3 1 0
May 25, 2023............. 573 327 24 0 0 35 11 2 0 0
May 25, 2024............. 614 252 17 0 0 29 9 1 0 0
May 25, 2025............. 658 181 11 0 0 22 6 1 0 0
May 25, 2026............. 641 113 6 0 0 15 4 0 0 0
May 25, 2027............. 294 49 2 0 0 7 2 0 0 0
May 25, 2028............. 0 0 0 0 0 0 0 0 0 0
May 25, 2029............. 0 0 0 0 0 0 0 0 0 0
Weighted Average Life in
years(1)................. 28.9 26.2 19.1 0.7 0.4 21.0 15.6 11.7 10.4 9.0
</TABLE>
- ---------------
(1) The weighted average lives of the Offered Certificates as shown above are
determined by (i) multiplying the amount of each assumed principal
distribution by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the results and
(iii) dividing the sum by the total principal distribution on such
Certificates.
S-48
<PAGE> 117
PERCENTAGE OF INITIAL PRINCIPAL BALANCE OUTSTANDING
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT
MODEL SET FORTH BELOW
<TABLE>
<CAPTION>
CLASS IA-6 CLASS IA-7
----------------------------------------------- -----------------------------------------------
DISTRIBUTION DATE 0% 100% 250% 350% 500% 0% 100% 250% 350% 500%
-- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial.................. 100 100 100 100 100 100 100 100 100 100
May 25, 1999............. 100 100 100 100 100 100 100 100 100 100
May 25, 2000............. 100 100 100 100 100 100 100 100 100 100
May 25, 2001............. 100 100 100 100 100 100 99 99 99 99
May 25, 2002............. 100 100 100 100 100 100 6 6 6 6
May 25, 2003............. 100 65 65 65 65 100 0 0 0 0
May 25, 2004............. 100 32 32 32 32 100 0 0 0 0
May 25, 2005............. 100 10 10 10 10 100 0 0 0 0
May 25, 2006............. 100 0 0 0 0 90 0 0 0 0
May 25, 2007............. 100 0 0 0 0 68 0 0 0 0
May 25, 2008............. 100 0 0 0 0 43 0 0 0 0
May 25, 2009............. 100 0 0 0 0 17 0 0 0 0
May 25, 2010............. 95 0 0 0 0 0 0 0 0 0
May 25, 2011............. 82 0 0 0 0 0 0 0 0 0
May 25, 2012............. 67 0 0 0 0 0 0 0 0 0
May 25, 2013............. 52 0 0 0 0 0 0 0 0 0
May 25, 2014............. 36 0 0 0 0 0 0 0 0 0
May 25, 2015............. 18 0 0 0 0 0 0 0 0 0
May 25, 2016............. 0 0 0 0 0 0 0 0 0 0
May 25, 2017............. 0 0 0 0 0 0 0 0 0 0
May 25, 2018............. 0 0 0 0 0 0 0 0 0 0
May 25, 2019............. 0 0 0 0 0 0 0 0 0 0
May 25, 2020............. 0 0 0 0 0 0 0 0 0 0
May 25, 2021............. 0 0 0 0 0 0 0 0 0 0
May 25, 2022............. 0 0 0 0 0 0 0 0 0 0
May 25, 2023............. 0 0 0 0 0 0 0 0 0 0
May 25, 2024............. 0 0 0 0 0 0 0 0 0 0
May 25, 2025............. 0 0 0 0 0 0 0 0 0 0
May 25, 2026............. 0 0 0 0 0 0 0 0 0 0
May 25, 2027............. 0 0 0 0 0 0 0 0 0 0
May 25, 2028............. 0 0 0 0 0 0 0 0 0 0
May 25, 2029............. 0 0 0 0 0 0 0 0 0 0
Weighted Average Life in
years(1)................. 15.0 5.6 5.6 5.6 5.6 9.7 3.6 3.6 3.6 3.6
</TABLE>
- ---------------
(1) The weighted average lives of the Offered Certificates as shown above are
determined by (i) multiplying the amount of each assumed principal
distribution by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the results and
(iii) dividing the sum by the total principal distribution on such
Certificates.
S-49
<PAGE> 118
PERCENTAGE OF INITIAL PRINCIPAL BALANCE OUTSTANDING
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT
MODEL SET FORTH BELOW
<TABLE>
<CAPTION>
CLASS IA-X(2) CLASS IIA-1
----------------------------------------------- -----------------------------------------------
DISTRIBUTION DATE 0% 100% 250% 350% 500% 0% 100% 250% 350% 500%
-- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial................. 100 100 100 100 100 100 100 100 100 100
May 25, 1999............ 99 97 95 93 90 96 94 92 90 88
May 25, 2000............ 98 92 84 79 71 92 86 79 74 67
May 25, 2001............ 97 86 71 62 50 87 77 63 55 44
May 25, 2002............ 96 80 60 48 34 82 68 50 40 28
May 25, 2003............ 95 74 50 38 24 76 60 40 29 18
May 25, 2004............ 93 69 42 29 16 71 52 31 21 11
May 25, 2005............ 92 63 35 23 11 65 44 24 15 7
May 25, 2006............ 90 59 29 18 8 58 37 18 10 4
May 25, 2007............ 88 54 24 14 5 51 31 13 7 2
May 25, 2008............ 87 50 20 11 4 43 25 10 5 1
May 25, 2009............ 85 46 17 8 2 35 19 7 3 1
May 25, 2010............ 82 42 14 6 2 27 14 4 2 0
May 25, 2011............ 80 38 12 5 1 18 9 2 1 0
May 25, 2012............ 78 35 10 4 1 9 4 1 0 0
May 25, 2013............ 75 32 8 3 1 0 0 0 0 0
May 25, 2014............ 72 29 6 2 0 0 0 0 0 0
May 25, 2015............ 69 26 5 2 0 0 0 0 0 0
May 25, 2016............ 65 23 4 1 0 0 0 0 0 0
May 25, 2017............ 62 20 3 1 0 0 0 0 0 0
May 25, 2018............ 58 18 3 1 0 0 0 0 0 0
May 25, 2019............ 54 16 2 0 0 0 0 0 0 0
May 25, 2020............ 49 13 2 0 0 0 0 0 0 0
May 25, 2021............ 44 11 1 0 0 0 0 0 0 0
May 25, 2022............ 39 9 1 0 0 0 0 0 0 0
May 25, 2023............ 33 8 1 0 0 0 0 0 0 0
May 25, 2024............ 27 6 0 0 0 0 0 0 0 0
May 25, 2025............ 21 4 0 0 0 0 0 0 0 0
May 25, 2026............ 14 3 0 0 0 0 0 0 0 0
May 25, 2027............ 6 1 0 0 0 0 0 0 0 0
May 25, 2028............ 0 0 0 0 0 0 0 0 0 0
May 25, 2029............ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life in
years(1)................ 20.0 11.6 6.5 5.0 3.7 8.6 6.7 4.9 4.1 3.2
</TABLE>
- ---------------
(1) The weighted average lives of the Offered Certificates as shown above are
determined by (i) multiplying the amount of each assumed principal
distribution (or reduction in notional amount) by the number of years from
the date of issuance of the Certificates to the related Distribution Date,
(ii) summing the results and (iii) dividing the sum by the total principal
distribution (or reduction in notional amount) on such Certificates.
(2) Indicates the percentage of the Class IA-X Notional Amount outstanding.
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PERCENTAGE OF INITIAL PRINCIPAL BALANCE OUTSTANDING
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT
MODEL SET FORTH BELOW
<TABLE>
<CAPTION>
CLASS IIA-P CLASS IIA-X(2)
----------------------------------------------- -----------------------------------------------
DISTRIBUTION DATE 0% 100% 250% 350% 500% 0% 100% 250% 350% 500%
-- ---- ---- ---- ---- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial................. 100 100 100 100 100 100 100 100 100 100
May 25, 1999............ 96 94 92 91 88 96 94 92 91 88
May 25, 2000............ 92 86 79 74 67 92 87 79 75 68
May 25, 2001............ 87 77 64 56 45 87 77 64 56 45
May 25, 2002............ 82 68 51 42 30 82 69 51 42 30
May 25, 2003............ 77 60 41 31 20 77 60 41 31 20
May 25, 2004............ 71 52 32 23 13 71 52 32 23 13
May 25, 2005............ 65 45 25 16 8 65 45 25 16 8
May 25, 2006............ 58 38 19 12 5 58 38 19 12 5
May 25, 2007............ 51 32 14 8 3 51 31 14 8 3
May 25, 2008............ 44 25 10 5 2 43 25 10 5 2
May 25, 2009............ 36 20 7 4 1 35 19 7 3 1
May 25, 2010............ 28 14 5 2 1 27 14 5 2 1
May 25, 2011............ 19 9 3 1 0 18 9 3 1 0
May 25, 2012............ 9 4 1 1 0 9 4 1 0 0
May 25, 2013............ 0 0 0 0 0 0 0 0 0 0
May 25, 2014............ 0 0 0 0 0 0 0 0 0 0
May 25, 2015............ 0 0 0 0 0 0 0 0 0 0
May 25, 2016............ 0 0 0 0 0 0 0 0 0 0
May 25, 2017............ 0 0 0 0 0 0 0 0 0 0
May 25, 2018............ 0 0 0 0 0 0 0 0 0 0
May 25, 2019............ 0 0 0 0 0 0 0 0 0 0
May 25, 2020............ 0 0 0 0 0 0 0 0 0 0
May 25, 2021............ 0 0 0 0 0 0 0 0 0 0
May 25, 2022............ 0 0 0 0 0 0 0 0 0 0
May 25, 2023............ 0 0 0 0 0 0 0 0 0 0
May 25, 2024............ 0 0 0 0 0 0 0 0 0 0
May 25, 2025............ 0 0 0 0 0 0 0 0 0 0
May 25, 2026............ 0 0 0 0 0 0 0 0 0 0
May 25, 2027............ 0 0 0 0 0 0 0 0 0 0
May 25, 2028............ 0 0 0 0 0 0 0 0 0 0
May 25, 2029............ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life in
years(1)................ 8.7 6.8 5.0 4.2 3.4 8.6 6.8 5.0 4.2 3.4
</TABLE>
- ---------------
(1) The weighted average lives of the Offered Certificates as shown above are
determined by (i) multiplying the amount of each assumed principal
distribution (or reduction in notional amount) by the number of years from
the date of issuance of the Certificates to the related Distribution Date,
(ii) summing the results and (iii) dividing the sum by the total principal
distribution (or reduction in notional amount) on such Certificates.
(2) Indicates the percentage of the Class IIA-X Notional Amount outstanding.
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PERCENTAGE OF INITIAL PRINCIPAL BALANCE OUTSTANDING
AT THE RESPECTIVE PERCENTAGES OF THE PREPAYMENT
MODEL SET FORTH BELOW
<TABLE>
<CAPTION>
CLASS M, CLASS B-1 AND CLASS B-2
----------------------------------------------
DISTRIBUTION DATE 0% 100% 250% 350% 500%
-- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial......................... 100 100 100 100 100
May 25, 1999.................... 98 98 98 98 98
May 25, 2000.................... 97 97 97 97 97
May 25, 2001.................... 95 95 95 95 95
May 25, 2002.................... 93 93 93 93 93
May 25, 2003.................... 91 91 91 91 91
May 25, 2004.................... 89 87 85 83 80
May 25, 2005.................... 87 83 77 74 68
May 25, 2006.................... 84 78 68 62 53
May 25, 2007.................... 81 71 58 50 39
May 25, 2008.................... 78 65 47 38 26
May 25, 2009.................... 75 59 39 29 18
May 25, 2010.................... 72 53 32 22 12
May 25, 2011.................... 69 47 25 16 8
May 25, 2012.................... 65 42 20 12 5
May 25, 2013.................... 61 37 16 9 3
May 25, 2014.................... 59 33 13 7 2
May 25, 2015.................... 56 30 11 5 2
May 25, 2016.................... 53 27 9 4 1
May 25, 2017.................... 50 24 7 3 1
May 25, 2018.................... 47 21 6 2 0
May 25, 2019.................... 44 18 4 2 0
May 25, 2020.................... 40 16 3 1 0
May 25, 2021.................... 36 13 3 1 0
May 25, 2022.................... 32 11 2 1 0
May 25, 2023.................... 27 9 1 0 0
May 25, 2024.................... 22 7 1 0 0
May 25, 2025.................... 17 5 1 0 0
May 25, 2026.................... 11 3 0 0 0
May 25, 2027.................... 5 1 0 0 0
May 25, 2028.................... 0 0 0 0 0
May 25, 2029.................... 0 0 0 0 0
Weighted Average Life in
years(1)........................ 17.9 13.7 10.6 9.5 8.4
</TABLE>
- ---------------
(1) The weighted average lives of the Offered Certificates as shown above are
determined by (i) multiplying the amount of each assumed principal
distribution by the number of years from the date of issuance of the
Certificates to the related Distribution Date, (ii) summing the results and
(iii) dividing the sum by the total principal distribution on such
Certificates.
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<PAGE> 121
YIELD CONSIDERATIONS WITH RESPECT TO THE CLASS IIA-P CERTIFICATES
The yield to maturity of the Class IIA-P Certificates will be extremely
sensitive to the rate and timing of principal payments (including prepayments
and defaults) on the Discount Mortgage Loans (defined herein) in Mortgage Group
Two, which may fluctuate significantly from time to time. A slower rate of
principal payments on the Discount Mortgage Loans in Mortgage Group Two than
that anticipated by investors will have a material negative effect on the yield
to maturity of the Class IIA-P Certificates. An investor should fully consider
the associated risks, including the risk that a relatively slow rate of
principal payments (including prepayments and defaults) on the Discount Mortgage
Loans in Mortgage Group Two will have a material negative effect on the yield to
an investor in the Class IIA-P Certificates. The Discount Mortgage Loans in
Mortgage Group Two will have lower Net Mortgage Rates than the other Mortgage
Loans in such Mortgage Group. In general, mortgage loans with lower mortgage
interest rates may tend to prepay at a slower rate of payment in respect of
principal than mortgage loans with relatively higher mortgage interest rates, in
response to changes in market interest rates. As a result, the Discount Mortgage
Loans in Mortgage Group Two may prepay at a slower rate of payment in respect of
principal than the other Mortgage Loans in such Mortgage Group, resulting in a
lower yield on the Class IIA-P Certificates than would be the case if the
Discount Mortgage Loans in Mortgage Group Two prepaid at the same rate as the
other Mortgage Loans in such Mortgage Group. As of the Cut-off Date, there were
approximately 28 Discount Mortgage Loans in Mortgage Group Two, with an
aggregate outstanding principal balance of approximately $9,705,718.
The following tables illustrate the significant effect that principal
prepayments on the Discount Mortgage Loans in a Mortgage Group have upon the
yield to maturity of the Class IIA-P Certificates. The actual prices to be paid
for the Class IIA-P Certificates have not been determined and will be dependent
on the characteristics of Mortgage Group Two. The table shows the hypothetical
pre-tax yields to maturity of the Class IIA-P Certificates, stated on a
corporate bond equivalent basis, under five different prepayment assumptions
based on the Prepayment Model described above. The table is based on the
Modeling Assumptions and assumes further that the purchase price of the Class
IIA-P Certificates is 69.50%.
PRE-TAX YIELD
PREPAYMENT MODEL
<TABLE>
<CAPTION>
0% 100% 250% 350% 500%
--- ---- ---- ---- ----
<S> <C> <C> <C> <C>
4.45% 5.84% 8.18% 9.81% 12.22%
</TABLE>
Any change in the composition of Mortgage Group Two from that assumed
could substantially alter the information set forth in the table above. No
assurances can be given as to the rate or timing of principal payments or
prepayments on the Discount Mortgage Loans in Mortgage Group Two.
The pre-tax yields set forth in the preceding tables were calculated by
determining the monthly discount rates which, when applied to the assumed
streams of cash flows to be paid on the Class IIA-P Certificates would cause the
discounted present value of such assumed streams of cash flows to equal the
assumed offering price of 69.50% for the Class IIA-P Certificates. In all cases
monthly rates are then
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<PAGE> 122
converted to the corporate bond equivalent yields shown above. Implicit in the
use of any discounted present value or internal rate of return calculation such
as these is the assumption that intermediate cash flows are reinvested at the
discount rate or internal rate of return. Thus, these calculations do not take
into account the different interest rates at which investors may be able to
reinvest funds received by them as distributed on the Class IIA-P Certificates.
Consequently, these yields do not purport to reflect the return on any
investment in the Class IIA-P Certificates when such reinvestment rates are
considered.
It is unlikely that the characteristics of the Discount Mortgage Loans
in Mortgage Group Two will correspond exactly to those assumed in preparing the
table above. The pre-tax yield of the Class IIA-P Certificates may therefore
differ even if all the Discount Mortgage Loans in Mortgage Group Two prepay
monthly at the assumed prepayment rate. In addition, it is highly unlikely that
any Discount Mortgage Loan in Mortgage Group Two will prepay at a constant rate
until maturity or that all the Discount Mortgage Loans in Mortgage Group Two
will prepay at the same rate. The timing of changes in the rate of prepayments
on the Discount Mortgage Loans in Mortgage Group Two may affect significantly
the total distributions received, the date of receipt of such distributions and
the actual yield received by a holder of a Class IIA-P Certificate, even if the
average rate of principal prepayments on the Discount Mortgage Loans in Mortgage
Group Two is consistent with an investor's expectations.
YIELD CONSIDERATIONS WITH RESPECT TO THE CLASS IA-X AND CLASS IIA-X CERTIFICATES
The yield to maturity of the Class IA-X and Class IIA-X Certificates
will be extremely sensitive to the rate and timing of principal payments
(including prepayments, liquidations, repurchases and defaults) on the
Non-Discount Mortgage Loans (defined herein) in the related Mortgage Group,
which may fluctuate significantly from time to time. A rapid rate of principal
payments on the Non-Discount Mortgage Loans in a Mortgage Group will have a
material negative effect on the yield to maturity of the Class IA-X or Class
IIA-X Certificates, as the case may be. An investor should fully consider the
associated risks, including the risk that a relatively rapid rate of principal
payments (including prepayments and defaults) on the Non- Discount Mortgage
Loans in the related Mortgage Group will have a material negative effect on the
yield to an investor in the Class IA-X or Class IIA-X Certificates, as the case
may be, and could result in any case in the failure of investors in the Class
IA-X or Class IIA-X Certificates to recoup their initial investment. The
Non-Discount Mortgage Loans in a Mortgage Group will have higher Net Mortgage
Rates than the other Mortgage Loans in such Mortgage Group. In general, mortgage
loans with higher mortgage interest rates may tend to prepay at a faster rate of
payment in respect of principal than mortgage loans with relatively lower
mortgage interest rates, in response to changes in market interest rates. As a
result, the Non-Discount Mortgage Loans in a Mortgage Group may prepay at a
faster rate of payment in respect of principal than the other Mortgage Loans in
such Mortgage Group, resulting in a lower yield on the Class IA-X or Class IIA-X
Certificates, as the case may be, than would be the case if the Non-Discount
Mortgage Loans in the related Mortgage Group, prepaid at the same rate as the
other Mortgage Loans in such Mortgage Group.
The following tables illustrate the significant effect that principal
prepayments on the Non-Discount Mortgage Loans in a Mortgage Group have upon the
yield to maturity of the Class IA-X or Class IIA-X Certificates, as the case may
be. The actual prices to be paid for the Class IA-X or Class IIA-X Certificates
have not been determined and will be dependent on the characteristics of each
Mortgage Group. The tables show the hypothetical pre-tax yields to maturity of
the Class IA-X and Class IIA-X Certificates, stated on a corporate bond
equivalent basis, under six different prepayment assumptions based on the
Prepayment Model described above. The tables are based on the Modeling
Assumptions and assume further that the
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<PAGE> 123
purchase price of the Class IA-X and Class IIA-X Certificates are $1,326,494 and
$356,286, respectively (which includes accrued interest in each case).
CLASS IA-X CERTIFICATES
PRE-TAX YIELD
PREPAYMENT MODEL
<TABLE>
<CAPTION>
0% 100% 250% 350% 500% 700%
-- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
35.96% 30.99% 23.37% 18.20% 10.28% (0.57%)
</TABLE>
CLASS IIA-X CERTIFICATES
PRE-TAX YIELD
PREPAYMENT MODEL
<TABLE>
<CAPTION>
0% 100% 250% 350% 500% 700%
-- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
30.54% 25.93% 18.87% 14.07% 6.71% (3.39%)
</TABLE>
Based upon the above assumptions, at approximately 690% and 634% of the
Prepayment Model, respectively, the pre-tax yield to maturity of the Class IA-X
and Class IIA-X Certificates will be approximately 0%. If the rate of
prepayments on the Mortgage Loans in the related Mortgage Group were to exceed
such respective level for as little as one month, while equaling such level for
all other months, the Class IA-X or Class IIA-X Certificateholders, as the case
may be, would not fully recoup their initial investment. Any change in the
composition of either Mortgage Group from that assumed could substantially alter
the information set forth in the tables above. No assurances can be given as to
the rate or timing of principal payments or prepayments on the Non-Discount
Mortgage Loans in either Mortgage Group.
The pre-tax yields set forth in the preceding tables were calculated by
determining the monthly discount rates which, when applied to the assumed
streams of cash flows to be paid on the Class IA-X and Class IIA-X Certificates
would cause the discounted present value of such assumed streams of cash flows
to equal the assumed offering prices of $1,326,494 and $356,286, respectively
(which includes accrued interest in each case) for the Class IA-X and Class
IIA-X Certificates, respectively. In all cases, monthly rates are then converted
to the corporate bond equivalent yields shown above. Implicit in the use of any
discounted present value or internal rate of return calculation such as these is
the assumption that intermediate cash flows are reinvested at the discount rate
or internal rate of return. Thus, these calculations do not take into account
the different interest rates at which investors may be able to reinvest funds
received by them as distributed on the Class IA-X or Class IIA-X Certificates.
Consequently, these yields do not purport to reflect the return on any
investment in the Class IA-X or Class IIA-X Certificates when such reinvestment
rates are considered.
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<PAGE> 124
It is unlikely that the characteristics of the Non-Discount Mortgage
Loans will correspond exactly to those assumed in preparing the table above. The
pre-tax yield of the Class IA-X or Class IIA-X Certificates may therefore differ
even if all the Mortgage Loans in the related Mortgage Group prepay monthly at
the assumed prepayment rate. In addition, it is highly unlikely that any
Mortgage Loan will prepay at a constant rate until maturity or that all the
Mortgage Loans in either Mortgage Group will prepay at the same rate. The timing
of changes in the rate of prepayments on the Non-Discount Mortgage Loans in
either Mortgage Group may affect significantly the total distributions received,
the date of receipt of such distributions and the actual yield received by a
holder of a Class IA-X or Class IIA-X Certificate, as the case may be, even if
the average rate of principal prepayments on the Non-Discount Mortgage Loans in
such Mortgage Group is consistent with an investor's expectations.
The Seller makes no representation that any of the Mortgage Loans will
prepay in the manner or at any of the rates assumed in the tables set forth
above. 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 Offered
Certificates. Since the rate of principal payments (including prepayments) and
repurchases on the Mortgage Loans in either Mortgage Group will significantly
affect the yield to maturity on the Offered Certificates relating to such
Mortgage Group, prospective investors are urged to consult their investment
advisors as to both the anticipated rate of future principal payments (including
prepayments) on the Mortgage Loans and the suitability of the Offered
Certificates to their investment objectives.
The Seller intends to file certain additional yield tables and other
computational materials with respect to one or more Classes of Offered
Certificates with the Securities and Exchange Commission in a Report on Form
8-K. See "Incorporation of Certain Documents By Reference" in the Prospectus.
Such tables and materials were prepared by the Underwriter at the request of
certain prospective investors, based on assumptions provided by, and satisfying
the special requirements of, such investors. Such tables and assumptions may be
based on assumptions that differ from the Modeling Assumptions. Accordingly,
such tables and other materials may not be relevant to or appropriate for
investors other than those specifically requesting them.
HOMESIDE MORTGAGE SECURITIES, INC.
HomeSide Mortgage Securities, Inc. ("HomeSide Mortgage Securities" or
the "Seller") is a Delaware corporation and a wholly-owned subsidiary of
HomeSide Lending, Inc. The Seller has not had and is not expected to have any
business operations other than offering various series of mortgage pass-through
certificates and related activities. The Seller's principal offices are located
at 7301 Baymeadows Way, Jacksonville, Florida 32256. Its telephone number is
(904) 281-3000. See "HomeSide Mortgage Securities, Inc." in the Prospectus.
HOMESIDE LENDING, INC.
HomeSide Lending, Inc. ("HomeSide Lending" or the "Servicer") is a
Florida corporation and an indirect wholly-owned subsidiary of HomeSide
International, Inc., a Delaware corporation. The principal offices of the
Servicer are located at 7301 Baymeadows Way, Jacksonville, Florida 32256. Its
telephone number is (904) 281-3000. See "HomeSide Lending, Inc." in the
Prospectus.
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<PAGE> 125
DELINQUENCY AND FORECLOSURE EXPERIENCE OF THE SERVICER
The following delinquency tables set forth certain information
concerning the delinquency and foreclosure experience on one- to four-family,
first-lien, conventional residential mortgage loans serviced directly by
HomeSide Lending. See "HomeSide Lending" in the Prospectus.
HomeSide Lending, Inc.
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31,
------------------------- ----------------------------------------------------------
1998 1997 1996
------------------------- ------------------------- -------------------------
BY BY DOLLAR BY BY DOLLAR BY BY DOLLAR
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
PERIOD OF DELINQUENCY OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
----------------------- -------- -------- -------- -------- -------- --------
(Dollar Amounts in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total portfolio- Direct
Servicing (excludes loans in
transit)......................... 1,145,444 $96,208,149 1,151,061 $96,257,455 1,028,948 $82,775,485
Period of delinquency (1)........
30 to 59 days.................. 36,525 $ 2,876,513 44,987 $ 3,432,680 39,425 $ 2,835,748
60 to 89 days.................. 7,625 611,653 9,409 730,542 7,975 574,255
90 days or more................ 6,164 522,766 7,720 625,317 5,685 427,647
Total past due................... 50,314 $ 4,010,933 62,116 $ 4,788,539 53,085 $ 3,837.650
Percent of portfolio............. 4.18% 4.97% 4.64%
Foreclosures (2)................. $ 826,878 $ 803,994 $ 592,985
Foreclosure Rate................. 0.86% 0.84% 0.72%
</TABLE>
(1) The indicated periods of delinquency are based on the number of days
past due on a contractual basis. No mortgage payment is considered
delinquent for these purposes until the monthly anniversary of its
contractual due date (e.g., a mortgage loan with a payment due January
1 would first be considered delinquent on February 1). The
delinquencies reported above were determined as of the month ending for
the dates indicated.
(2) Foreclosed loans represent the principal balance of mortgage loans
secured by mortgaged properties, the title of which has not yet been
secured by the Servicer, the investors or an insurer. Loans where the
title has been secured following foreclosure or delivery of a deed in
lieu of foreclosure, and has not been liquidated, are considered to be
completed foreclosures pending final settlements for claims or
liquidation and are not included in the foreclosure counts.
The above delinquency and foreclosure statistics represent the recent
total portfolio experience of HomeSide Lending for the indicated periods. There
can be no assurance, however, that the delinquency experience on the Mortgage
Loans will be comparable. In addition, the foregoing statistics include mortgage
loans with a variety of payment and other characteristics that may not
correspond to those of the Mortgage Loans. Further, the Mortgage Loans were not
chosen from HomeSide Lending's portfolio on the basis of any methodology which
could or would make them representative of the total pool of mortgage loans in
HomeSide Lending's portfolio. The actual delinquency experience on the Mortgage
Loans will depend, among other things, upon the value of the real estate
securing such Mortgage Loans and the ability of the mortgagors to make required
payments.
The likelihood that mortgagors will become delinquent in the payment of
their mortgage loans and the rate of any subsequent foreclosures may be affected
by a number of factors related to borrowers' personal circumstances, including,
but not limited to, unemployment or change in employment (or in the case of
self-employed mortgagors or mortgagors relying on commission income,
fluctuations in income), marital separation and a mortgagor's equity in the
related mortgaged property. In addition, delinquency and
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<PAGE> 126
foreclosure experience may be sensitive to adverse economic conditions, either
nationally or regionally, may exhibit seasonal variations and may be influenced
by the level of interest rates and servicing decisions on the applicable
mortgage loans. Regional economic conditions (including declining real estate
values) may particularly affect delinquency and foreclosure experience on
mortgage loans to the extent that mortgaged properties are concentrated in
certain geographic areas.
HomeSide Lending does not track ultimate investor losses resulting from
the foreclosure and subsequent disposition of mortgage properties relating to
mortgage loans sold to such investors where the investor completes the sale of
the mortgaged property. Historically, HomeSide Lending has sold substantially
all of its mortgaged properties relating to mortgage loans to investors prior to
completion of the foreclosure of the mortgaged properties. In limited
circumstances, typically resulting from mortgage loans guaranteed by the United
States Department of Veterans Affairs, an investor may require HomeSide Lending
to repurchase a mortgage loan and HomeSide Lending may sustain principal losses
relating to the sale of the related mortgaged property. For the period from
March 1, 1997 to December 31, 1997, the total principal losses resulting from
the foreclosure and subsequent disposition of mortgaged properties owned by the
Servicer were $11.2 million or 0.01% of HomeSide Lending's total portfolio.
These total losses of $11.2 million included $10.4 million or 0.09% of HomeSide
Lending's VA portion of the total portfolio. The Seller believes that this loss
information reflects the historical loss experience of a group of mortgage loans
too small to be indicative of future loss experience and is not indicative of
the likely or actual loss experience with respect to the Mortgage Loans.
THE POOLING AND SERVICING AGREEMENT
The Certificates will be issued pursuant to the Agreement. The
following summaries describe certain provisions of the Agreement. See "The
Pooling and Servicing Agreement" in the accompanying Prospectus for summaries of
certain other provisions of the Agreement. The summaries below do not purport to
be complete and are subject to, and qualified in their entirety by reference to,
the provisions of the Agreement. Where particular provisions or terms used in
the Agreement are referred to, such provisions or terms are as specified in the
Agreement.
ASSIGNMENT OF MORTGAGE LOANS
The Seller will cause the Mortgage Loans to be assigned to the Trustee,
together with the rights to all principal and interest due on or with respect to
the Mortgage Loans after the Cut-off Date other than interest accrued on the
Mortgage Loans prior to the Cut-off Date. The Trustee will, concurrently with
such assignment, authenticate and deliver the Certificates. Each Mortgage Loan
will be identified in a schedule appearing as an exhibit to the Agreement (the
"Mortgage Loan Schedule"). The Mortgage Loan Schedule will specify, among other
things, with respect to each Mortgage Loan, the original principal amount and
the unpaid principal balance as of the close of business on the Cut-off Date;
the Monthly Payment; the months remaining to stated maturity of the Mortgage
Note; and the Mortgage Rate.
In addition, the Seller will, as to each Mortgage Loan, deliver or
cause to be delivered to the Trustee the Mortgage Note (together with all
amendments and modifications thereto) endorsed without recourse to the Trustee
or its designee, the original or a certified copy of the mortgage (together with
all amendments and modifications thereto) with evidence of recording indicated
thereon and an original or certified copy of an assignment of the Mortgage in
recordable form. The Seller will cause the assignments to be recorded in the
appropriate public records.
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<PAGE> 127
SERVICING
The Mortgage Loans will be serviced by the Servicer generally in
accordance with procedures described in the accompanying Prospectus under the
headings "Servicing of the Mortgage Loans" and "Description of the
Certificates."
When any Mortgaged Property is conveyed by the Mortgagor, the Servicer
generally will enforce any "due-on-sale" clause contained in the Mortgage Loan,
to the extent permitted under applicable law and governmental regulations.
Acceleration of Mortgage Loans as a result of enforcement of such "due-on-sale"
provisions in connection with transfers of the related Mortgaged Properties will
affect the level of prepayments on the Mortgage Loans, thereby affecting the
weighted average lives and yields to maturity of the Offered Certificates. See
"Prepayment and Yield Considerations" herein and "Maturity and Prepayment
Considerations" in the Prospectus. The terms of the Mortgage Loans or applicable
law, however, may provide that the Servicer is prohibited from exercising the
"due-on-sale" clause if information is submitted so as to evaluate the intended
buyer as if a new loan were being made to the buyer and it can reasonably be
determined that the security under the related Mortgage Note will not be
impaired by the assumption of the Mortgage Loan and that the risk of a breach of
any covenant in the Mortgage Note is acceptable. Upon any such assumption, a fee
equal to a specified percentage of the outstanding principal balance of the
Mortgage Loan is typically required, which sum will be retained by the Servicer
as additional servicing compensation.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will be paid a monthly fee (the "Servicing Fee")
(including sub-servicing compensation) with respect to each Mortgage Loan in an
amount equal to 0.25% per annum of the unpaid principal balance of each Mortgage
Loan.
The Servicer is obligated to pay certain ongoing expenses associated
with the Mortgage Pool and incurred by the Servicer in connection with its
responsibilities under the Agreement. See "The Pooling and Servicing Agreement
- -- Servicing and Other Compensation and Payment of Expenses" in the Prospectus
for information regarding other possible compensation to the Servicer and for
information regarding expenses payable by the Servicer.
ADJUSTMENT TO SERVICING FEE IN CONNECTION WITH PREPAID MORTGAGE LOANS
When a Mortgagor makes a full or partial principal prepayment of a
Mortgage Loan between Due Dates, the Mortgagor generally is required to pay
interest on the principal balance thereof only to the date of prepayment. In
order to minimize any resulting shortfall in interest (such shortfall, a
"Prepayment Interest Shortfall"), the aggregate amount of the Servicing Fee will
be reduced to the extent necessary to include an amount in payments to the
holders of the Offered Certificates equal to a full month's interest payment at
the applicable Net Mortgage Rate (defined herein) with respect to such prepaid
Mortgage Loan. Such reductions in the Servicing Fee will be made only to the
extent that the aggregate amount of such interest shortfalls does not exceed the
aggregate amount of the Servicing Fee on the related Distribution Date. Any
Prepayment Interest Shortfalls (adjusted to the applicable Net Mortgage Rate) in
excess of the aggregate amount of the Servicing Fee deposited in the Certificate
Account for a Distribution Date (such excess, the "Non-Supported Interest
Shortfall") will be allocated on such Distribution Date pro rata among the
outstanding Classes of Certificates (including the Class IA-X and Class IIA-X
Certificates) based upon the amount of interest which each such Class would
otherwise be paid on such Distribution Date and will consequently reduce the
yield
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<PAGE> 128
on the applicable Classes of Certificates. Any principal prepayment, together
with a full month's interest thereon at the applicable Net Mortgage Rate (to the
extent described in this paragraph), will be paid on the Distribution Date in
the month following the month in which the last day of the related Principal
Prepayment Period (defined herein) occurred. See "Yield, Maturity and Weighted
Average Life Considerations" in the Prospectus.
PAYMENTS ON MORTGAGE LOANS; COLLECTION ACCOUNT; CERTIFICATE ACCOUNT
The Agreement provides that the Servicer for the benefit of the
Certificateholders shall establish and maintain a Collection Account (the
"Collection Account"), into which the Servicer is generally required to deposit
or cause to be deposited on a daily basis the payments and collections described
in "The Pooling and Servicing Agreement -- Payments on Mortgage Loans;
Certificate Account" in the Prospectus, except that the Servicer may deduct its
Servicing Fee and any expenses of liquidating defaulted Mortgage Loans or
property acquired in respect thereof. The Agreement permits the Servicer to
direct any depository institution maintaining the Collection Account to invest
the funds in the Collection Account in one or more investments acceptable to S&P
and Fitch (as provided in the Agreement), that mature, unless payable on demand,
no later than the Business Day preceding the 24th day of each month, or, if such
day is not a business day, the preceding business day (the "Servicer Remittance
Date"). The Servicer will be entitled to all income and gain realized from any
such investment, and such income and gain will be subject to withdrawal by the
Servicer from time to time. The Servicer will be required to deposit the amount
of any losses incurred in respect to any such investments out of its own funds
as such losses are realized.
The Trustee will be obligated to establish an account (the "Certificate
Account"), into which the Servicer will deposit or cause to be deposited on the
Servicer Remittance Date the Available Distribution Amount (including any
Advances with respect to such Servicer Remittance Date) for the related
Distribution Date, together with certain other amounts specified in the
Agreement. Subject to the restrictions set forth in the Agreement, the Trustee
is permitted to direct the investment of funds in the Certificate Account. Any
such investments are required to mature, unless payable on demand, no later than
the related Distribution Date. The Trustee will be entitled to all income and
gain realized from any such investment, and such income and gain will be subject
to withdrawal by the Trustee from time to time. The Trustee will be required to
deposit the amount of any losses incurred in respect to any such investments out
of its own funds as such losses are realized.
ADVANCES
In the event that any Mortgagor fails to make any payment of principal
or interest required under the terms of a Mortgage Loan, the Servicer will
advance the entire amount of such payment, net of the applicable Servicing Fee,
less the amount of any such payment that the Servicer reasonably believes will
not be recoverable out of liquidation proceeds or otherwise. The amount of any
scheduled payment required to be advanced by the Servicer will not be affected
by any agreement between the Servicer and a Mortgagor providing for the
postponement or modification of the due date or amount of such scheduled
payment. The Servicer will be entitled to reimbursement for any such advance
from related late payments on the Mortgage Loan as to which such advance was
made. Furthermore, in the event that any Mortgage Loan as to which an advance
has been made is foreclosed while in the Trust Fund, the Servicer will be
entitled to reimbursement for such advance from related liquidation proceeds or
insurance proceeds prior to payment to Certificateholders of the related
Mortgage Pool of the Scheduled Principal Balance of such Mortgage Loan plus
accrued interest at the Net Mortgage Rate.
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If the Servicer makes a good faith judgment that all or any portion of
any advance made by it with respect to any Mortgage Loan may not ultimately be
recoverable from related liquidation proceeds (a "Nonrecoverable Advance"), the
Servicer will so notify the Trustee and the Servicer will be entitled to
reimbursement for such Nonrecoverable Advance from recoveries on all other
unrelated Mortgage Loans included in the related Mortgage Pool. The Servicer's
judgment that it has made a Nonrecoverable Advance with respect to any Mortgage
Loan will be based upon its assessment of the value of the related Mortgaged
Property and such other facts and circumstances as it may deem appropriate in
evaluating the likelihood of receiving liquidation proceeds, net of expenses,
equal to or greater than the aggregate amount of unreimbursed advances made with
respect to such Mortgage Loan.
PURCHASES OF DEFAULTED MORTGAGE LOANS
Under the Agreement, the Servicer will have the option (but not the
obligation) to purchase any Mortgage Loan as to which the Mortgagor has failed
to make unexcused payment in full of three or more scheduled payments of
principal and interest (a "Defaulted Mortgage Loan"). Any such purchase will be
for a price equal to 100% of the outstanding principal balance of such Mortgage
Loan, plus accrued and unpaid interest thereon at the Net Mortgage Rate (less
any amounts representing previously unreimbursed advances). The purchase price
for any Defaulted Mortgage Loan will be deposited in the Certificate Account on
the business day prior to the Distribution Date on which the proceeds of such
purchase are to be distributed to the Certificateholders.
TRUSTEE
The Trustee for the Certificates offered hereby will be Norwest Bank
Minnesota, National Association, a national banking association. The Corporate
Trust Office of the Trustee is located at Sixth Street and Marquette Avenue,
Minneapolis, Minnesota 55479 (the "Corporate Trust Office"). The Trustee will be
paid a monthly fee (the "Trustee Fee") in an amount equal to 0.01% per annum of
the aggregate unpaid principal balance of the Mortgage Loans. The Trustee will
make available each month, to any interested party, the monthly statement to
Certificateholders via the Trustee's website, electronic bulletin board and its
fax-on-demand service. The Trustee's website will be located at
"www.ctslink.com". The Trustee's electronic bulletin board may be accessed by
calling (301) 815-6620, and its fax-on-demand service may be accessed by calling
(301) 815-6610.
OPTIONAL TERMINATION
The Servicer may, on any Distribution Date, repurchase from the Trust
Fund all Mortgage Loans remaining outstanding at such time as the aggregate
unpaid principal balance of such Mortgage Loans is less than 10% of the
aggregate unpaid scheduled principal balance of the Mortgage Pool on the Cut-off
Date. The repurchase price will equal the sum of (i) the unpaid principal amount
of such Mortgage Loans (other than any such Mortgage Loans as to which the
related Mortgaged Properties have been acquired and whose fair market values are
included in clause (ii) below), plus accrued interest thereon at the Remittance
Rate to the next Due Date and (ii) the fair market value of any such acquired
properties, in each case less any unreimbursed Advances made with respect to
such Mortgage Loans. Upon any such repurchase, the Offered Certificateholders
generally will receive the outstanding principal balance of the Offered
Certificates plus accrued interest thereon at the applicable Remittance Rate.
Such amounts will be distributed to Certificateholders on the Distribution Date
in the month following the month of repurchase.
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SPECIAL SERVICING AGREEMENTS
The Agreement may permit the Servicer to enter into a special servicing
agreement with an unaffiliated holder of a Class of Class B Certificates or of a
class of securities representing interests in the Class B Certificates and/or
other subordinated mortgage pass-through certificates. Pursuant to such
agreement, such holder may instruct the Servicer to commence or delay
foreclosure proceedings with respect to delinquent Mortgage Loans. Such
commencement or delay at such holder's direction will be taken by the Servicer
only after such holder deposits a specified amount of cash with the Servicer.
Such cash will be available for distribution to Certificateholders if
Liquidation Proceeds are less than they otherwise may have been had the Servicer
acted pursuant to its normal servicing procedures.
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. A copy of
the Agreement will be attached as an exhibit to the Current Report on Form 8-K
of the Seller that will be available to purchasers of the Certificates at, and
will be filed with the Securities and Exchange Commission within 15 days of, the
initial delivery of the Certificates. Reference is made to the Prospectus for
additional information regarding the terms and conditions of the Agreement.
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.
GENERAL
Initially, the Class A Certificates will evidence in the aggregate a
beneficial interest of approximately 96.50% in the Trust Fund (the "Class A
Percentage"), allocated between the Class IA Certificates, which initially will
represent a beneficial interest of approximately 96.50% (the "Class IA
Percentage") in the Group One Mortgage Loans, and the Class IIA Certificates,
which initially will represent a beneficial interest of approximately 96.50%
(the "Class IIA Percentage") in the Group Two Mortgage Loans. Initially, the
Class M Certificates will evidence a beneficial interest of approximately 1.60%
in the Trust Fund, the Class B-1 Certificates will evidence a beneficial
interest of approximately 0.75% in the Trust Fund, the Class B-2 Certificates
will evidence in the aggregate a beneficial interest of approximately 0.40% in
the Trust Fund and the Non-Offered Class B Certificates will evidence in the
aggregate the remaining beneficial interest (the "Non-Offered Class B
Percentage") in the Trust Fund. Initially, the Non-Offered Class B Percentage
will be approximately 0.75%.The relative interests in the Trust Fund represented
by the Class A, Class M and Class B Certificates (and the relative interests in
Mortgage Group One and Mortgage Group Two represented by the Class IA
Certificates and the Class IIA Certificates, respectively) will vary from time
to time because of the disproportionate allocation of certain unscheduled
principal payments on the Mortgage Loans to the related Non-PO Class A
Certificates and the allocation of certain losses and shortfalls on the Mortgage
Loans first to the Class B Certificates in reverse numerical order, and then to
the Class M Certificates, prior to the allocation of such losses and shortfalls
to the Class A Certificates. See "Description of the Certificates --Subordinated
Certificates and Shifting Interests." The Non-Offered Class B Certificates will
be privately placed with a limited number of institutional investors and are not
offered hereby. The Offered Certificates (other than the Class IA-X, Class IIA-X
and Class A-R Certificates) generally will be issuable in denominations of
$25,000 principal amount (or integral multiples of $1,000 in excess thereof).
The Class
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IA-X and Class IIA-X Certificates will have no principal balance, but will be
issuable in fully registered form in denominations of $25,000 based on the Class
IA-X Notional Amount and the Class IIA-X Notional Amount, respectively (or
integral multiples thereof). A single Class A-R Certificate will be issuable in
a $100 denomination.
The Class A-R, Class M, Class B-1 and Class B-2 Certificates, as well
as Definitive Certificates (defined herein), if any, will be transferable and
exchangeable at the Corporate Trust Office. No service charge will be made for
any registration or transfer of Offered Certificates, but the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge in connection with such transfer. The Class A Certificates, other than
the Class IA-1, Class IIA-P and Class A-R Certificates (such Classes of
Certificates, the "Book-Entry Certificates") will be represented initially by
one or more physical certificates registered in the name of Cede & Co. ("Cede")
as the nominee of The Depository Trust Company ("DTC"). No person acquiring an
interest in the Book-Entry Certificates (a "Certificate Owner") will be entitled
to receive a certificate representing such person's interest in the Trust Fund,
except as set forth below under "Description of the Certificates -- Definitive
Certificates." Unless and until Definitive Certificates are issued under the
limited circumstances described herein, all references to actions by the
Book-Entry Certificateholders shall refer to actions taken by DTC upon
instructions from its Participants (as defined below) and all references herein
to distributions, notices, reports and statements to the Book-Entry
Certificateholders shall refer to distributions, notices, reports and statements
to DTC or Cede, as the registered holder of the Book-Entry Certificates, as the
case may be, for distribution to Certificate Owners in accordance with DTC
procedures. See "Description of the Certificates -- Book-Entry Registration."
The Final Scheduled Distribution Date of each Class of Class IA
Certificates, as well as the Class M and Offered Class B Certificates is June
25, 2028, which is the Distribution Date occurring in the month that is one
month following the latest stated maturity date of any Group One Mortgage Loan.
The Final Scheduled Distribution Date of each Class of Class IIA Certificates is
June 25, 2013, which is the Distribution Date occurring in the month that is one
month following the latest stated maturity date of any Group Two Mortgage Loan.
The rate of principal payments of the Certificates will depend on the
rate of principal payments of the Mortgage Loans (including prepayments,
defaults, delinquencies and liquidations) which, in turn, will depend on the
characteristics of the Mortgage Loans, the level of prevailing interest rates
and other economic factors, and no assurance can be given as to the actual
payment experience. The principal balance or notional amount, as applicable, of
each Class of Certificates may be reduced to zero earlier or later than its
Final Scheduled Distribution Date.
BOOK-ENTRY REGISTRATION
DTC is a limited purpose trust company organized under the laws of the
State of New York and is a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to Section 17A of the Securities Exchange
Act of 1934. DTC was created to hold securities for its participating
organizations (each, a "Participant") and to facilitate the clearance and
settlement of securities transactions between Participants through electronic
book-entries, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers (including
Donaldson, Lufkin & Jenrette Securities Corporation (the "Underwriter")), banks,
trust companies and clearing corporations. Indirect access to the
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DTC system also is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
Certificate Owners that are not Participants or Indirect Participants
and that desire to purchase, sell or otherwise transfer ownership of, or other
interests in, the Book-Entry Certificates may do so only through Participants
and Indirect Participants. In addition, Certificate Owners will receive all
distributions of principal and interest on the Book-Entry Certificates through a
Participant or an Indirect Participant. Under a book-entry format, Certificate
Owners may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede, as nominee for DTC. DTC will
forward such payments to its Participants, which thereafter will forward them to
Certificate Owners directly or through an Indirect Participant. It is
anticipated that the only "Certificateholder" of a Book-Entry Certificate will
be Cede, as nominee of DTC. Certificate Owners will not be recognized by the
Trustee as Certificateholders, as such term is used in the Agreement, and
Certificate Owners will be permitted to exercise the rights of Book-Entry
Certificateholders only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC will be required to make book-entry
transfers of Book-Entry Certificates among Participants and to receive and
transmit distributions of principal of, and interest on, Book-Entry
Certificates. Participants and Indirect Participants with which Certificates
Owners have accounts with respect to the Book-Entry Certificates similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Certificate Owners. Accordingly, although Certificate
Owners will not possess physical certificates, the Rules provide a mechanism by
which Participants and Certificate Owners will receive payments and will be able
to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and on behalf of certain banks, the ability of a
Certificate Owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the DTC system, or to otherwise act with respect to such
Certificates, may be limited due to the absence of physical certificates for
such Certificates.
DTC has advised the Seller that it will take any action permitted to be
taken by a Certificateholder under the Agreement only at the direction of one or
more Participants to whose accounts with DTC the Book-Entry Certificates are
credited. Additionally, DTC has advised the Seller that it will take such action
where the consent of specified percentages of the Offered Certificates is
required under the Agreement only at the direction of and on behalf of
Participants whose interests represent such specified percentages. DTC may take
conflicting actions on behalf of other Participants.
Neither the Seller, the Servicer nor the Trustee will have any
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests of the Book-Entry Certificates held by Cede,
as nominee for DTC, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
DEFINITIVE CERTIFICATES
The Class A-R, Class M, Class B-1 and Class B-2 Certificates will be
issued in fully registered, certificated form. The Book-Entry Certificates will
be issued in fully registered, certificated form ("Definitive Certificates") to
Certificate Owners 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
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its responsibilities as depository with respect to the Book-Entry Certificates
and the Seller is unable to locate a qualified successor within 30 days or (ii)
the Seller, at its option, elects to terminate the book-entry system through
DTC.
Upon the occurrence of either event described in the immediately
preceding paragraph, the Trustee is required to notify DTC which in turn will
notify all Certificate Owners through Participants of the availability of
Definitive Certificates in exchange for Book-Entry Certificates. Upon surrender
by Cede, as nominee of DTC, of the definitive certificates representing the
Book-Entry Certificates and receipt of instructions for re-registration, the
Trustee will reissue the Book-Entry Certificates as Definitive Certificates to
Certificate Owners.
RESTRICTIONS ON TRANSFER OF THE CLASS A-R, CLASS M AND OFFERED CLASS B
CERTIFICATES
The Class A-R Certificate will be subject to the following restrictions
on transfer, and the Class A-R Certificate will contain a legend describing such
restrictions.
The REMIC provisions of the Code impose certain taxes on (i)
transferors of residual interests to, or agents that acquire residual interests
on behalf of, Disqualified Organizations and (ii) certain Pass-Through Entities
(as defined in the Prospectus) that have Disqualified Organizations as
beneficial owners. No tax will be imposed on a Pass-Through Entity with respect
to the Class A-R Certificate to the extent it has received an affidavit from the
owner thereof that such owner is not a Disqualified Organization or a nominee
for a Disqualified Organization. The Agreement will provide that no legal or
beneficial interest in the Class A-R Certificate may be transferred to or
registered in the name of any person unless (i) the proposed purchaser provides
to the Trustee an affidavit to the effect that, among other items, such
transferee is not a Disqualified Organization (as defined in the Prospectus) and
is not purchasing the Class A-R Certificate as an agent for a Disqualified
Organization (i.e., as a broker, nominee, or other middleman thereof) and (ii)
the transferor states in writing to the Trustee that it has no actual knowledge
that such affidavit or letter is false. Further, such affidavit or letter
requires the transferee to affirm that it (i) historically has paid its debts as
they have come due and intends to do so in the future, (ii) understands that it
may incur tax liabilities with respect to the Class A-R Certificate in excess of
cash flows generated thereby, (iii) intends to pay taxes associated with holding
the Class A-R Certificate as such taxes become due and (iv) will not transfer
the Class A-R Certificate to any person or entity that does not provide a
similar affidavit or letter.
In addition, the Class A-R Certificate may not be purchased by or
transferred to any person that is not a "U.S. Person," unless (i) such person
holds such Class A-R Certificate in connection with the conduct of a trade or
business within the United States and furnishes the transferor and the Trustee
with an effective Internal Revenue Service Form 4224 (or successor form) or (ii)
the transferee delivers to both the transferor and the Trustee an opinion of a
nationally recognized tax counsel to the effect that such transfer of the Class
A-R Certificate will not be disregarded for federal income tax purposes. The
term "U.S. Person" means a citizen or resident of the Untied States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, an estate that
is subject to United States federal income tax regardless of the source of its
income, or a trust if (A) a court within the United States is able to exercise
primary supervision over the administration of such trust, and (B) one or more
United States fiduciaries have the authority to control all substantial
decisions of such trust.
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The Agreement will provide that any attempted or purported transfer in
violation of these transfer restrictions will be null and void and will vest no
rights in any purported transferee. Any transferor or agent to whom the Trustee
provides information as to any applicable tax imposed on such transferor or
agent may be required to bear the cost of computing or providing such
information. See "Federal Income Tax Consequences -- REMIC Certificates; --
Income from Residual Certificates; -- Taxation of Certain Foreign Investors; --
Transfers of Residual Certificates; -- Servicing Compensation and Other REMIC
Pool Expense" in the Prospectus.
THE CLASS A-R CERTIFICATE MAY NOT BE PURCHASED BY OR TRANSFERRED TO A
PLAN OR A PERSON ACTING ON BEHALF OF OR INVESTING THE ASSETS OF A PLAN. See
"ERISA Considerations" herein and in the Prospectus.
Because the Class M and Offered Class B Certificates are subordinated
to the Class A Certificates, the Class M Certificates and the Offered Class B
Certificates may not be transferred unless the transferee has delivered (i) a
representation letter to the Trustee stating either (a) that the transferee is
not a Plan and is not acting on behalf of a Plan or using the assets of Plan to
effect such purchase or (b) subject to the conditions described herein, that the
source of funds used to purchase the Class M or Offered Class B Certificates is
an "insurance company general account" or (ii) an opinion of counsel and such
other documentation as described herein under "ERISA Considerations." See "ERISA
Considerations" herein and in the Prospectus.
DISTRIBUTIONS TO CERTIFICATEHOLDERS
Distributions of principal and interest on the Certificates will be
made on the 25th day of each month or, if such day is not a business day, the
next succeeding business day (each, a "Distribution Date"), beginning June 25,
1998, to the persons in whose names the Certificates are registered at the close
of business on the last business day of the month preceding the month in which
payment is made (each, a "Record Date"). Distributions will be made to each
Class as described below and on a pro rata basis among the Certificates of each
Class. Distributions of principal of and interest on the Book-Entry Certificates
will initially be made by the Trustee directly to Cede by wire transfer.
Distributions with respect to the Class A-R, Class M, Class B-1 and Class B-2
Certificates and, upon the issuance of Definitive Certificates to persons other
than Cede, distributions of principal and interest on such Definitive
Certificates will be made by the Trustee directly to holders in whose names such
Certificates were registered at the close of business on the related Record
Date. Such distributions will be made by check mailed to the address of the
person entitled thereto as it appears on the certificate register, or, upon
written request to the Trustee delivered at least ten business days prior to the
first Distribution Date for which distribution by wire transfer is to be made,
by a holder of an Offered Certificate having an original aggregate principal
balance of at least $5,000,000, by wire transfer to such Certificateholder,
except that the final distribution in retirement of Certificates will be made
only upon presentation and surrender of the Certificates at the office or agency
of the Trustee specified in the final distribution notice to Certificateholders.
Principal received or advanced as part of a regularly scheduled Monthly
Payment on each Mortgage Loan will be passed through monthly on the Distribution
Date occurring in the month in which the related Due Date occurs. The Non-PO
Class IA and Non-PO Class IIA Certificateholders will be entitled to an amount
equal to the Non-PO Class IA Percentage and the Non-PO Class IIA Percentage
(each as defined herein), respectively, of the applicable Non-PO Percentage
(defined herein) of scheduled principal amounts due or advanced with respect to
each Mortgage Loan in the related Mortgage Group. Principal prepayments and
certain other unscheduled amounts of principal received during the period from
the first day of any
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month to the last day of such month (each, a "Principal Prepayment Period") will
be passed through on the Distribution Date occurring in the month following the
month of receipt. The Non-PO Class IA and Non-PO Class IIA Certificateholders
will be entitled to an amount equal to the Non-PO Class IA Prepayment Percentage
and the Non-PO Class IIA Prepayment Percentage (each as defined herein),
respectively, of the applicable Non-PO Percentage of such unscheduled amounts of
principal.
The aggregate amount available for distribution to Certificateholders
on each Distribution Date will be the Available Distribution Amount. The
"Available Distribution Amount" means, generally, with respect to each Mortgage
Group (the "Group One Available Distribution Amount" and the "Group Two
Available Distribution Amount," respectively) or, as the context requires, both
Mortgage Groups, as of any Distribution Date, an amount equal to the amount on
deposit in the Collection Account as of the close of business on the related
Servicer Remittance Date with respect to the related Mortgage Group, except: (a)
amounts received on Mortgage Loans in the related Mortgage Group as late
payments or other recoveries of principal or interest (including liquidation
proceeds and insurance proceeds) and applied to the reimbursement of
unreimbursed Advances and amounts representing reimbursement for certain losses
and expenses incurred by the Servicer, as described in the Agreement; (b) the
Servicing Fee relating to Mortgage Loans in the related Mortgage Group, as
adjusted as provided in the Agreement with respect to principal prepayments; (c)
all amounts representing Monthly Payments with respect to Mortgage Loans in the
related Mortgage Group due after the related Due Date; (d) all principal
prepayments, liquidation proceeds, insurance proceeds, condemnation proceeds and
repurchase proceeds received after the related Principal Prepayment Period; and
(e) the Trustee Fee relating to Mortgage Loans in the related Mortgage Group.
On each Distribution Date, the Group One Available Distribution Amount
will be allocated among the applicable Classes and Components of Certificates
and distributed to the holders of record thereof as of the related Record Date
as follows:
first, (a) to each Class or Component of Non-PO Class IA Certificates,
the sum of (i) the Interest Accrual Amount with respect to such Class or
Component and (ii) any Interest Shortfall with respect to such Class or
Component; provided, however, that no such distributions will be made to Class
IA-1 Component Three on or before the Class IA-1 Component Three Accretion
Termination Date and no such distributions will be made to the Class IA-4
Certificates on or before the Class IA-4 Accretion Termination Date, (b) on or
before the Class IA-1 Component Three Accretion Termination Date, to the Class
IA-3 Certificates and Class IA-1 Component Three in the manner described herein
under "Principal (Including Prepayments) --Allocation of the Class IA-1
Component Three Accrual Amount and the Class IA-4 Accrual Amount," as principal,
the Class IA-1 Component Three Accrual Amount (defined herein) and (c) on or
before the Class IA-4 Accretion Termination Date, to the Class IA-3 and Class
IA-4 Certificates and Class IA-1 Component Three in the manner described herein
under "Principal (Including Prepayments) -- Allocation of the Class IA-1
Component Three Accrual Amount and the Class IA-4 Accrual Amount," as principal,
the Class IA-4 Accrual Amount (defined herein);
second, concurrently (i) to the Non-PO Class IA Certificates, up to the
Non-PO Class IA Optimal Principal Amount (allocated among such Classes as
described below under "--Principal (Including Prepayments) -- Allocation of the
Non-PO Class IA Optimal Principal Amount") and (ii) to Class IA-1 Component
Four, the applicable PO Percentage (defined herein) of all principal received on
or in respect of each Discount Mortgage Loan in Mortgage Group One;
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third, to Class IA-1 Component Four, the Class IA-1 Component Four
Shortfall Amount (defined herein); provided, however, that any amounts
distributed pursuant to this clause third will not cause a further reduction in
the principal balance of Class IA-1 Component Four;
fourth, to the Subordinated Certificates, interest and then principal,
as described under "--Interest" and "--Certificate Rate With Respect to the
Subordinated Certificates" and "--Principal (Including Prepayments) --
Allocation of the Subordinated Optimal Principal Amount"; and;
fifth, to the Class A-R Certificates, the remaining portion, if any
(which is expected to be zero), of the Group One Available Distribution Amount
for such Distribution Date.
On each Distribution Date, the Group Two Available Distribution Amount
will be allocated among the applicable Classes of Certificates and distributed
to the holders of record thereof as of the related Record Date as follows:
first, to each Class of Non-PO Class IIA Certificates, the sum of (i)
the Interest Accrual Amount with respect to such Class and (ii) any Interest
Shortfall with respect to such Class;
second, concurrently (i) to the Class IIA-1 Certificates, up to the
Non-PO Class IIA Optimal Principal Amount and (ii) to the Class IIA-P
Certificates, the applicable PO Percentage of all principal received on or in
respect of each Discount Mortgage Loan in Mortgage Group Two;
third, to the Class IIA-P Certificates, the Class IIA-P Shortfall
Amount (defined herein); provided, however, that any amounts distributed
pursuant to this paragraph third will not cause a further reduction in the
principal balance of the Class IIA-P Certificates; and
fourth, to the Subordinated Certificates, interest and then principal,
as described herein.
Cross-Collateralization Provisions. In addition to the foregoing
distributions, the Non-PO Class IA or Non-PO Class IIA Certificates may receive
additional principal distributions on any Distribution Date prior to the Credit
Support Depletion Date (defined herein) under the circumstances specified in (A)
and (B) below:
(A) On any Distribution Date on or after the date on which the
aggregate principal balance of the Non-PO Class IA Certificates or the
principal balance of the Class IIA-1 Certificates has been reduced to
zero, all principal (in excess of that needed to reduce such aggregate
principal balance to zero) on the Mortgage Loans in the Mortgage Loan
Group relating to such Class A Certificates that have been paid in
full, other than the portion thereof distributable to Class IA-1
Component Four or the Class IIA-P Certificates, will be paid as
principal to the remaining Class A Certificates (other than Class IA-1
Component Four or the Class IIA-P Certificates) in accordance with the
order set forth under "--Principal (Including Prepayments) --
Allocation of the Non-PO Class IA Optimal Principal Amount" beginning
with clause second thereof or "--Allocation of the Non-PO Class IIA
Optimal Principal Amount," in reduction of the principal balances
thereof, provided that on such Distribution Date either (a) the
Aggregate Subordinated Percentage for such Distribution Date is less
than 200% of the initial Aggregate Subordinate Percentage, or (b) the
average outstanding principal balance of the Mortgage Loans in either
Mortgage Group delinquent 60 days or more over the prior six months, as
a percentage of the corresponding Group One or Group Two Subordinated
Amount
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(each as defined herein), is greater than or equal to 50%. For purposes
of the foregoing, the "Aggregate Subordinated Percentage" for any
Distribution Date is equal to the aggregate principal balance of the
Subordinated Certificates immediately prior to such Distribution Date
divided by the aggregate Scheduled Principal Balance of all of the
Mortgage Loans immediately prior to such Distribution Date.
(B) If on any Distribution Date on which the aggregate
principal balance of the Non-PO Class IA or Non-PO Class IIA
Certificates would be greater than the Non-PO Allocated Amount with
respect to the related Mortgage Group (the "Undercollateralized
Group"), after giving effect to distributions to be made on such
Distribution Date, the portion of the Available Distribution Amount in
respect of principal on the Mortgage Loans in other Mortgage Group (the
"Overcollateralized Group") otherwise allocable to the Subordinated
Certificates will be distributed to the Classes of Non-PO Class A
Certificates relating to the Undercollateralized Group (in accordance
with the priorities set forth herein), in reduction of the principal
balances thereof, until the aggregate principal balance of the Non-PO
Class A Certificates included in the Undercollateralized Group is equal
to the applicable Non-PO Allocated Amount. Moreover, the Available
Distribution Amount with respect to the Overcollateralized Group will
be further reduced (after distributions to Class IA-1 Component Four or
the Class IIA-P Certificates, as the case may be, and of interest to
the Non-PO Class A Certificates included in the Undercollateralized
Group) in an amount equal to one month's interest on the amount by
which the Undercollateralized Group is undercollateralized at 6.75% per
annum (if Mortgage Group One is the Undercollateralized Group) or 6.50%
per annum (if Mortgage Group Two is the Undercollateralized Group),
plus any shortfall of such amounts from prior Distribution Dates, with
accrued interest thereon; provided, however, that in no event will the
Available Distribution Amount with respect to the Overcollateralized
Group on any Distribution Date be reduced by more than the sum of (i)
the overcollateralized amount with respect to the Overcollateralized
Group and (ii) interest thereon at the applicable Remittance Rate. Such
amounts will be distributed to the applicable Classes of Certificates
in the priority of interest payable on such Distribution Date.
In the event that Mortgage Group One is the Undercollateralized Group,
the reduction in the Available Distribution Amount of the Overcollateralized
Group to pay interest to the Undercollateralized Group as described above may
cause a shortfall in the amount of principal and interest otherwise
distributable to the Subordinated Certificates and further to the amount of
principal otherwise distributable to the Class IIA Certificates because the
Class IIA Certificates have a Remittance Rate which is less than that of the
Class IA Certificates. Such shortfall shall be payable from amounts otherwise
distributable first from the Subordinated Certificates in reverse order of their
priority of payment and then from the Class IIA Certificates in respect of
principal.
"Class A Certificates" means the Class IA-1, Class IA-2, Class IA-3,
Class IA-4, Class IA-5, Class IA-6, Class IA-7, Class IA-X, Class IIA-1, Class
IIA-P, Class IIA-X and Class A-R Certificates, referred to collectively.
The Class A Certificates (exclusive of Class IA-1 Component Four and
the Class IIA-P Certificates) are sometimes collectively referred to herein as
the "Non-PO Class A Certificates."
The "Class IA Certificates" are the Class IA-1, Class IA-2, Class IA-3,
Class IA-4, Class IA-5, Class IA-6, Class IA-7 and Class IA-X Certificates,
referred to collectively.
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The "Class IIA Certificates" are the Class IIA-1, Class IIA-P and Class
IIA-X Certificates, referred to collectively.
The Class IA Certificates (exclusive of Class IA-1 Component Four) are
sometimes collectively referred to as the "Non-PO Class IA Certificates."
The Class IIA Certificates (exclusive of the Class IIA-P Certificates)
are sometimes collectively referred to as the "Non-PO Class IIA Certificates."
The Class A Certificates (exclusive of the Class IA-1 Certificates),
Class M Certificates, Class B-1 Certificates and Class B-2 Certificates are
sometimes collectively referred to herein as the "Offered Certificates."
"Class B Certificates" means the Class B-1, Class B-2, Class B-3, Class
B-4 and Class B-5 Certificates, referred to collectively.
"Non-Offered Class B Certificates" means the Class B-3, Class B-4 and
Class B-5 Certificates, referred to collectively.
"Subordinated Certificates" means the Class M and Class B Certificates,
referred to collectively.
The Class IA-2, Class IA-6 and Class IA-7 Certificates are sometimes
collectively referred to herein as the "PACs."
The Class IA-3 Certificates and Class IA-1 Component Three are
sometimes referred to herein as the "TACs."
For any Distribution Date, with respect to each of the PACs, the
"Planned Principal Balance" means the amount specified for each such Class for
such Distribution Date in Appendix A hereto.
For any Distribution Date, with respect to each of the TACs, the
"Targeted Principal Balance" means the amount specified for each such Component
and Class for such Distribution Date in Appendix A hereto.
On each Distribution Date on or before the Class IA-1 Component Three
Accretion Termination Date (defined herein), an amount equal to the Class IA-1
Component Three Accrual Amount (defined herein) will be added to the principal
balance of Class IA-1 Component Three and distributed as principal to the Class
IA-3 Certificates and Class IA-1 Component Three, in the amount and priority as
described herein. On each Distribution Date on or before the Class IA-4
Accretion Termination Date (defined herein), an amount equal to the Class IA-4
Accrual Amount (defined herein) will be added to the principal balance of the
Class IA-4 Certificates and distributed as principal to the Class IA-3 and Class
IA-4 Certificates and Class IA-1 Component Three, in the amount and priority as
described herein.
The "Credit Support Depletion Date" is the first Distribution Date on
which the aggregate outstanding principal balance of the Subordinated
Certificates has been or will be reduced to zero.
With respect to each Mortgage Loan, the "PO Percentage" will equal a
fraction, expressed as a percentage (but not less than 0%), the numerator of
which will equal the excess, if any, of the Remittance
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Rate with respect to the applicable Mortgage Group over the applicable Net
Mortgage Rate (defined herein) and the denominator of which will equal the
applicable Remittance Rate. The PO Percentage will be 0% with respect to
Mortgage Loans for which the Net Mortgage Rate is greater than or equal to the
applicable Remittance Rate. The Remittance Rate with respect to Mortgage Group
One (the "Group One Remittance Rate") is 6.75% per annum and the Remittance Rate
with respect to Mortgage Group Two (the "Group Two Remittance Rate") is 6.50%
per annum. As of the Cut-off Date, the weighted average Mortgage Rate of the
Discount Mortgage Loans (defined below) in Mortgage Group One is approximately
6.95% and the weighted average Mortgage Rate of the Discount Mortgage Loans in
Mortgage Group Two is approximately 6.68%.
With respect to each Mortgage Loan, the "Non-PO Percentage" will equal
a fraction, expressed as a percentage (but not greater than 100%), the numerator
of which will equal the applicable Net Mortgage Rate and the denominator of
which will equal the applicable Remittance Rate. The Non-PO Percentage will be
100% with respect to Mortgage Loans for which the Net Mortgage Rate is greater
than or equal to the applicable Remittance Rate.
The "Discount Mortgage Loans" are those Mortgage Loans having Net
Mortgage Rates less than the applicable Remittance Rate.
The "Non-Discount Mortgage Loans" are those Mortgage Loans having Net
Mortgage Rates greater than the applicable Remittance Rate.
Class IA-1 Component Four and the Class IIA-P Certificates will not be
entitled to receive interest and will be entitled to receive principal only with
respect to the Discount Mortgage Loans in the related Mortgage Group. The Class
IA-X and Class IIA-X Certificates will not be entitled to receive principal and
will be entitled to receive interest only with respect to the Non-Discount
Mortgage Loans in the related Mortgage Group.
With respect to each Mortgage Loan, the "Net Mortgage Rate" equals the
applicable Mortgage Rate less the sum of (i) the Servicing Fee and (ii) the
Trustee Fee.
The "Non-PO Allocated Amount" with respect to each Mortgage Group or,
as the context requires, both Mortgage Groups, will be calculated as of any date
by (i) multiplying the outstanding principal balance of each Mortgage Loan in
the related Mortgage Group as of such date (giving effect to any Advances but
prior to giving effect to any principal prepayments received with respect to
such Mortgage Loan that have not been passed through to the Certificateholders)
by the Non-PO Percentage with respect to such Mortgage Loan and (ii) summing the
results.
INTEREST
On each Distribution Date, interest will be payable to each Class and
Component of Certificates (other than Class IA-1 Component One, Class IA-1
Component Four and the Class IIA-P Certificates) in an amount equal to the sum
of (i) the Interest Accrual Amount with respect to such Class or Component and
(ii) any Interest Shortfall with respect to such Class or Component, except that
(A) interest accrued on Class IA-1 Component Three on or before the Class IA-1
Component Three Accretion Termination Date will be added to the principal
balance of Class IA-1 Component Three and (B) interest accrued on the Class IA-4
Certificates prior to the Class IA-4 Accretion Termination Date will be added to
the principal balance of the Class IA-4 Certificates.
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As of any Distribution Date, the "Interest Accrual Amount" with respect
to any Class or Component of Certificates (other than Class IA-1 Component One,
Class IA-1 Component Four and the Class IIA-P Certificates) means generally one
month's interest at the Certificate Rate on the outstanding principal balance
thereof (or, in the case of Class IA-1 Component Two, Class IA-1 Component Five
and the Class IA-X and Class IIA-X Certificates, on the Class IA-1 Component Two
Notional Amount, the Class IA-1 Component Five Notional Amount, the Class IA-X
Notional Amount and Class IIA-X Notional Amount, respectively), minus (i) any
Non-Supported Interest Shortfalls allocated to such Class or Component on such
Distribution Date (as described herein under "The Pooling and Servicing
Agreement -- Adjustment to Servicing Fee in connection with Prepaid Mortgage
Loans") and (ii) the interest portion of any Realized Losses, allocated as
described herein.
As of any Distribution Date, the "Interest Shortfall" with respect to
any Class or Component of Certificates (other than Class IA-1 Component One,
Class IA-1 Component Four and the Class IIA-P Certificates) means generally any
portion of the Interest Accrual Amount with respect to any previous Distribution
Date which remains unpaid (before giving effect to distributions made on such
Distribution Date).
For any Class of Certificates (other than the Class IA-1, Class IIA-P
and Subordinated Certificates), the "Certificate Rate" is the per annum rate of
interest specified for such Class on the cover hereof. The "Certificate Rate"
for each Class of Subordinated Certificates will be calculated with respect to
each Distribution Date as described below.
The "Class IA-1 Component Two Notional Amount" with respect to any
Distribution Date will equal the product of (x) the aggregate outstanding
principal balance of the PACs (prior to giving effect to distributions made on
such Distribution Date) and (y) a fraction, the numerator of which is the
difference between the Certificate Rate with respect to Class IA-1 Component Two
and the Certificate Rate with respect to each of the PACs and the denominator of
which is the Certificate Rate with respect to Class IA-1 Component Two. The
initial Class IA-1 Component Two Notional Amount will be approximately
$4,156,971.
The "Class IA-1 Component Five Notional Amount" with respect to any
Distribution Date will equal the product of (x) 64.3118638362% of the aggregate
Scheduled Principal Balance of the Non-Discount Loans in Mortgage Group One
having Net Mortgage Rates less than or equal to 7.74% per annum and (y) a
fraction, the numerator of which is the weighted average of the Class IA-X
Stripped Interest Rates for the Non-Discount Loans in Mortgage Group One having
Net Mortgage Rates less than or equal to 7.74% per annum and the denominator of
which is 6.75%. The initial Class IA-1 Component Five Notional Amount will be
approximately $8,253,000.
The "Class IA-X Notional Amount" with respect to any Distribution Date
will equal the sum of (1) the product of (A) 35.6881361638% of the aggregate
Scheduled Principal Balance of the Non-Discount Mortgage Loans in Mortgage Group
One having Net Mortgage Rates less than or equal to 7.74% per annum and (B) a
fraction, the numerator of which is the weighted average of the Class IA-X
Stripped Interest Rates for the Non-Discount Mortgage Loans in Mortgage Group
One having Net Mortgage Rates less than or equal to 7.74% per annum and the
denominator of which is 6.75% and (2) the product of (A) the aggregate Scheduled
Principal Balance of the Non-Discount Mortgage Loans in Mortgage Group One
having Net Mortgage Rates greater than 7.74% per annum and (B) a fraction, the
numerator of which is the weighted average of the Class IA-X Stripped Interest
Rates for the Non-Discount Mortgage Loans in Mortgage Group
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One having Net Mortgage Rates in excess of 7.74% per annum and the denominator
of which is 6.75%. The initial Class IA-X Notional Amount will be approximately
$6,793,825.
The "Class IIA-X Notional Amount" with respect to any Distribution Date
will equal the product of (x) the aggregate Scheduled Principal Balance of the
Non-Discount Mortgage Loans in Mortgage Group Two and (y) a fraction, the
numerator of which is the weighted average of the Class IIA-X Stripped Interest
Rates for the Non-Discount Mortgage Loans in Mortgage Group Two as of such Due
Date and the denominator of which is 6.50%. The initial Class IIA-X Notional
Amount will be $1,899,628.
The "Class IA-X Stripped Interest Rate" means for each Group One
Mortgage Loan, the excess, if any, of the Net Mortgage Rate for such Mortgage
Loan over 6.75%.
The "Class IIA-X Stripped Interest Rate" means for each Group Two
Mortgage Loan, the excess, if any, of the Net Mortgage Rate for such Mortgage
Loan over 6.50%.
The "Scheduled Principal Balance" of a Mortgage Loan as of any
Distribution Date is the unpaid principal balance of such Mortgage Loan as
specified in the amortization schedule at the time relating thereto (before any
adjustment to such schedule by reason of bankruptcy or similar proceeding or any
moratorium or similar waiver or grace period) as of the first day of the month
preceding the month of such Distribution Date, after giving effect to any
previously applied prepayments, the payment of principal due on such first day
of the month and any reduction of the principal balance of such Mortgage Loan by
a bankruptcy court, irrespective of any delinquency in payment by the related
Mortgagor.
Certificate Rate With Respect to the Subordinated Certificates
On any Distribution Date, the Certificate Rate on each Class of
Subordinated Certificates will equal the fraction, expressed as a percentage,
the numerator of which will equal the sum of (i) the product of (x) 6.75% and
(y) the excess of the aggregate Scheduled Principal Balance of the Group One
Mortgage Loans over the aggregate outstanding principal balance of the Class IA
Certificates (prior to giving effect to distributions to be made on such
Distribution Date) (the "Group One Subordinated Amount") and (ii) the product of
(x) 6.50% and (y) the excess of the aggregate Scheduled Principal Balance of the
Group Two Mortgage Loans over the aggregate outstanding principal balance of the
Class IIA Certificates (prior to giving effect to distributions to be made on
such Distribution Date) (the "Group Two Subordinated Amount") and the
denominator of which will equal the sum of the Group One Subordinated Amount and
the Group Two Subordinated Amount. The initial Certificate Rate with respect to
each Class of Subordinated Certificates will be approximately 6.70%.
PRINCIPAL (INCLUDING PREPAYMENTS)
Distributions to Class IA-1 Component Four
On each Distribution Date, Class IA-1 Component Four will receive a
portion of the Group One Available Distribution Amount attributable to principal
received on or with respect to any Discount Mortgage Loan in Mortgage Group One
equal to the amount of such principal so attributable multiplied by the PO
Percentage with respect to such Discount Mortgage Loan. In addition, on each
Distribution Date prior to and including the Credit Support Depletion Date,
Class IA-1 Component Four also will be allocated principal, to the extent of
amounts available to pay the Subordinated Optimal Principal Amount (without
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regard to clause (2) of the definition of such term) on such Distribution Date,
in an amount (the "Class IA-1 Component Four Shortfall Amount") generally equal
to (i) the applicable PO Percentage of any Realized Loss with respect to a
Discount Mortgage Loan in Mortgage Group One other than an Excess Loss and (ii)
the sum of amounts, if any, by which the amounts specified in clause (i) with
respect to each prior Distribution Date exceeded the amount actually distributed
in respect thereof on such prior Distribution Date and not subsequently
distributed to Class IA-1 Component Four; provided, however, that such payments
in respect of the Class IA-1 Component Four Shortfall Amount will not cause a
further reduction in the principal balance of Class IA-1 Component Four. The
aggregate of the amounts payable to Class IA-1 Component Four described in this
paragraph are referred to herein as the "Class IA-1 Component Four Distribution
Amount."
Allocation of the Class IA-1 Component Three Accrual Amount and the Class IA-4
Accrual Amount
CLASS IA-1 COMPONENT THREE ACCRUAL AMOUNT. The "Class IA-1 Component
Three Accretion Termination Date" is the earlier to occur of (i) the
Distribution Date following the Distribution Date on which the principal balance
of the Class IA-3 Certificates has been reduced to zero and (ii) the
Distribution Date following the Credit Support Depletion Date. On each
Distribution Date prior to the Class IA-1 Component Three Accretion Termination
Date, an amount (the "Class IA-1 Component Three Accrual Amount") equal to the
accrued interest that would otherwise be distributable in respect of Class IA-1
Component Three on such Distribution Date will be added to the principal balance
of Class IA-1 Component Three (such amount to thereafter accrue interest at the
Certificate Rate) and such amount will be distributed as principal as follows:
first, to the Class IA-3 Certificates, to the extent necessary to
reduce the principal balance of such Class to its Targeted Principal
Balance for such Distribution Date; and
second, 10.00% to Class IA-1 Component Three and 90.00% to the Class
IA-3 Certificates, without regard to their respective Targeted
Principal Balances, until the principal balance of the Class IA-3
Certificates has been reduced to zero; and
third, to Class IA-1 Component Three.
CLASS IA-4 ACCRUAL AMOUNT. The "Class IA-4 Accretion Termination Date"
is the earlier to occur of (i) the Distribution Date following the Distribution
Date on which the principal balance of Class IA-1 Component Three has been
reduced to zero and (ii) the Distribution Date following the Credit Support
Depletion Date. On each Distribution Date prior to the Class IA-4 Accretion
Termination Date, after the Class IA-1 Component Three Accrual Amount has been
distributed as described above, an amount (the "Class IA-4 Accrual Amount")
equal to the accrued interest that would otherwise be distributable in respect
of the Class IA-4 Certificates on such Distribution Date will be added to the
principal balance of the Class IA-4 Certificates (such amount to thereafter
accrue interest at the Certificate Rate) and such amount will be distributed, as
principal, as follows:
first, to the Class IA-3 Certificates, to the extent necessary to
reduce the principal balance of such Class to its Targeted Principal
Balance for such Distribution Date;
second, to Class IA-1 Component Three, to the extent necessary to
reduce the principal balance of such Component to its Targeted
Principal Balance for such Distribution Date; and
third, to the Class IA-4 Certificates.
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Allocation of the Non-PO Class IA Optimal Principal Amount
Except after the Credit Support Depletion Date, distributions in
respect of principal will be made on each Distribution Date to the Non-PO Class
IA Certificates as described below. On each Distribution Date, the Non-PO Class
IA Optimal Principal Amount (defined herein) will be distributed to the Non-PO
Class IA Certificateholders as follows:
first, to the Class IA-5 Certificates, up to the Lockout Principal
Distribution Amount (defined below), until the principal balance of such Class
has been reduced to zero; and
second, to the Class A-R Certificate, until the principal balance of
such Class has been reduced to zero;
third, (A) 3.5714290601% of the amount distributable pursuant to this
clause third to Class IA-1 Component One until the principal balance of such
Component has been reduced to zero; and
(B) 96.4285709399% of the amount distributable pursuant to this
clause third sequentially as follows:
(1) first, to the Class IA-2, Class IA-7 and Class IA-6
Certificates, sequentially, in each case until the
principal balance of each such Class has been reduced
to its Planned Principal Balance;
(2) second, to the Class IA-3 Certificates and Class IA-1
Component Three, sequentially, in each case until the
principal balance of such Class and such Component has
been reduced to its Targeted Principal Balance;
(3) third, to the Class IA-4 Certificates, until the
principal balance of such Class has been reduced to
zero;
(4) fourth, 90.00% to the Class IA-3 Certificates and
10.00% to Class IA-1 Component Three, without regard
to their respective Targeted Principal Balances, until
the principal balance of the Class IA-3 Certificates
has been reduced to zero;
(5) fifth, to Class IA-1 Component Three, without regard
to the Targeted Principal Balance of such Component,
until the principal balance of such Component has been
reduced to zero; and
(6) sixth, to the Class IA-2, Class IA-7 and Class IA-6
Certificates, sequentially, without regard to their
respective Planned Principal Balances, until the
principal balances of such Classes have been reduced
to zero; and
fourth, to the Class IA-5 Certificates, until the principal balance of
such Class has been reduced to zero.
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On any Distribution Date after the Credit Support Depletion Date,
distributions among the Classes of Non-PO Class IA Certificates then outstanding
will be made pro rata in accordance with their respective outstanding principal
balances and not in accordance with the priorities set forth above.
Distributions to the Class IIA-P Certificateholders
On each Distribution Date, the Class IIA-P Certificates will receive a
portion of the Available Distribution Amount attributable to principal received
on or with respect to any Discount Mortgage Loan in Mortgage Group Two equal to
the amount of such principal so attributable multiplied by the PO Percentage
with respect to such Discount Mortgage Loan. In addition, on each Distribution
Date prior to and including the Credit Support Depletion Date, the Class IIA-P
Certificates also will be allocated principal, to the extent of amounts
available to pay the Subordinated Optimal Principal Amount (without regard to
clause (2) of the definition of such term) on such Distribution Date, in an
amount (the "Class IIA-P Shortfall Amount") generally equal to (i) the
applicable PO Percentage of any Realized Loss with respect to a Discount
Mortgage Loan in Mortgage Group Two other than an Excess Loss and (ii) the sum
of amounts, if any, by which the amounts specified in clause (i) with respect to
each prior Distribution Date exceeded the amount actually distributed in respect
thereof on such prior Distribution Date and not subsequently distributed to the
Class IIA-P Certificates; provided, however, that such payments in respect of
the Class IIA-P Shortfall Amount will not cause a further reduction in the
principal balance of the Class IIA-P Certificates. The aggregate of the amounts
payable to the Class IIA-P Certificates described in this paragraph are referred
to herein as the "Class IIA-P Distribution Amount."
Allocation of the Non-PO Class IIA Optimal Principal Amount
On each Distribution Date, the Non-PO Class IIA Optimal Principal
Amount (defined herein) will be distributed to the Class IIA-1
Certificateholders.
"Liquidation Principal" is the principal portion of liquidation
proceeds received with respect to each Mortgage Loan which became a Liquidated
Mortgage Loan (but not in excess of the principal balance thereof) during the
calendar month preceding the month of the Distribution Date, exclusive of the
portion thereof attributable to the Class IA-1 Component Four Distribution
Amount. A "Liquidated Mortgage Loan" is a Mortgage Loan as to which the Servicer
has determined that all amounts which it expects to recover from or on account
of such Mortgage Loan, whether from insurance proceeds, liquidation proceeds or
otherwise have been recovered.
The "Lockout Principal Distribution Amount" for any Distribution Date
will equal the sum of (i) the Adjusted Lockout Percentage (defined below) of the
applicable Non-PO Percentage of the principal portion of all Monthly Payments,
whether or not received, which were due on the related Due Date on outstanding
Group One Mortgage Loans as of such Due Date, (ii) the Lockout Prepayment
Percentage (defined herein) of the applicable Non-PO Percentage of the principal
portion of principal prepayments, insurance proceeds, condemnation awards and
any other cash proceeds from sources other than Mortgagors, and repurchase
proceeds, in each case received with respect to the Group One Mortgage Loans
during the related Principal Prepayment Period and (iii) the Lockout Liquidation
Amount (defined below).
The "Adjusted Lockout Percentage" will equal (i) for any Distribution
Date prior to the Distribution Date in June 2003, 0% and (ii) for any
Distribution Date on or after the Distribution Date in June 2003, the Lockout
Percentage.
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The "Lockout Percentage" for any Distribution Date will equal the
outstanding principal balance of the Class IA-5 Certificates divided by the
Non-PO Allocated Amount with respect to Mortgage Group One, in each case
immediately prior to such Distribution Date. The Lockout Percentage as of the
Cut-Off Date will be approximately 9.64%.
The "Lockout Liquidation Amount" is the aggregate, for each Group One
Mortgage Loan which became a Liquidated Mortgage Loan during the calendar month
preceding the month of the Distribution Date, of the lesser of (i) the Lockout
Percentage of the applicable Non-PO Percentage of the Scheduled Principal
Balance of such Mortgage Loan and (ii) the Lockout Percentage on any
Distribution Date occurring prior to the fifth anniversary of the first
Distribution Date, and the Lockout Prepayment Percentage (as defined herein) on
any Distribution Date thereafter, in each case, of the Liquidation Principal
with respect to such Mortgage Loan.
The "Lockout Prepayment Percentage" will equal the product of (a) the
Lockout Percentage and (b) the Step Down Percentage.
The "Step Down Percentage" for any Distribution Date will be the
percentage indicated below:
DISTRIBUTION DATE OCCURRING IN STEP DOWN PERCENTAGE
- ------------------------------ --------------------
June 1998 through May 2003............................... 0%
June 2003 through May 2004............................... 30%
June 2004 through May 2005............................... 40%
June 2005 through May 2006............................... 60%
June 2006 through May 2007............................... 80%
June 2007 and thereafter................................. 100%
Principal distributions made on each Class of Certificates will be paid
pro rata among the Certificates of such Class in accordance with their
respective outstanding principal balances.
The "Non-PO Class IA Optimal Principal Amount" and the "Non-PO Class
IIA Optimal Principal Amount" (each, a "Non-PO Class A Optimal Principal
Amount") mean generally as of any Distribution Date, an amount, not in excess of
the applicable Non-PO Class A Principal Balance equal to the sum of: (a) an
amount equal to the applicable Non-PO Class A Percentage of the applicable
Non-PO Percentage of the principal portion of all Monthly Payments whether or
not received, which were due on the related Due Date on outstanding Mortgage
Loans in the related Mortgage Group as of such Due Date; (b) an amount equal to
the applicable Non-PO Class A Prepayment Percentage of the applicable Non-PO
Percentage of all principal prepayments on Mortgage Loans in the related
Mortgage Group received during the related Principal Prepayment Period; (c) with
respect to each Mortgage Loan in the related Mortgage Group not described in (d)
below, an amount equal to the applicable Non-PO Class A Percentage of the
applicable Non-PO Percentage of the sum of the principal portion of all
insurance proceeds, condemnation awards and any other cash proceeds from a
source other than the Mortgagor, to the extent required to be deposited in the
Collection Account, which were received during the related Principal Prepayment
Period, net of related unreimbursed servicing advances and net of any portion
thereof which, as to any Mortgage Loan in the related Mortgage Group,
constitutes a late collection with respect to which an Advance has previously
been made; (d) with respect to each Mortgage Loan in the related Mortgage Group
which has become a Liquidated Mortgage Loan during the related Principal
Prepayment Period, an amount equal to the lesser of (i) the applicable
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Non-PO Class A Percentage of the applicable Non-PO Percentage of an amount equal
to the principal balance of such Mortgage Loan (net of Advances with respect to
principal) as of the Due Date immediately preceding the date on which it became
a Liquidated Mortgage Loan and (ii) the applicable Non-PO Class A Prepayment
Percentage of the applicable Non-PO Percentage of the net liquidation proceeds,
if any, with respect to such Liquidated Mortgage Loan (net of any unreimbursed
Advances); (e) with respect to each Mortgage Loan in the related Mortgage Group
repurchased during the related Principal Prepayment Period, an amount equal to
the applicable Non-PO Class A Prepayment Percentage of the applicable Non-PO
Percentage of the principal portion of the purchase price thereof (net of
amounts with respect to which a distribution has previously been made to the
applicable Non-PO Class A Certificateholders); and (f) while none of the
Subordinated Certificates remains outstanding, the excess of the outstanding
principal balance of the applicable Non-PO Class A Certificates (calculated
after giving effect to reductions thereof on such Distribution Date with respect
to amounts described in (a) - (e) above) over the applicable Non-PO Allocated
Amount.
As of any Distribution Date, the "Non-PO Class IA Percentage" and the
"Non-PO Class IIA Percentage" (each, a "Non-PO Class A Percentage") will equal a
fraction, expressed as a percentage, the numerator of which is the applicable
Non-PO Class A Principal Balance and the denominator of which is the applicable
Non-PO Allocated Amount immediately prior to the Due Date in the month of such
Distribution Date.
The "Non-PO Class IA Principal Balance" and the "Non-PO IIA Principal
Balance" (each, a "Non-PO Class A Principal Balance") means, generally, as of
any Distribution Date, (a) the applicable Non-PO Class A Principal Balance for
the preceding Distribution Date less (b) amounts distributed to the applicable
Non-PO Class A Certificateholders on such preceding Distribution Date allocable
to principal (including Advances) and any losses allocated to the applicable
Non-PO Class A Certificates; provided that the Non-PO Class IA Principal Balance
on the first Distribution Date will be the initial Non-PO Class IA Principal
Balance, which is expected to be approximately $203,166,467; and the Non-PO
Class IIA Principal Balance on the first Distribution Date will be the initial
Non-PO Class IIA Principal Balance, which is expected to be approximately
$44,832,074.
The "Non-PO Class IA Prepayment Percentage" and the "Non-PO Class IIA
Prepayment Percentage" (each, a "Non-PO Class A Prepayment Percentage") mean,
generally, as of any Distribution Date up to and including the Distribution Date
in May 2003, 100%; as of any Distribution Date in the first year thereafter, the
applicable Non-PO Class A Percentage plus 70% of the applicable Subordinated
Percentage for such Distribution Date; as of any Distribution Date in the second
year thereafter, the applicable Non-PO Class A Percentage plus 60% of the
applicable Subordinated Percentage for such Distribution Date; as of any
Distribution Date in the third year thereafter, the applicable Non-PO Class A
Percentage plus 40% of the applicable Subordinated Percentage for such
Distribution Date; as of any Distribution Date in the fourth year thereafter,
the applicable Non-PO Class A Percentage plus 20% of the applicable Subordinated
Percentage for such Distribution Date; and as of any Distribution Date after the
fourth year thereafter, the applicable Non-PO Class A Percentage; provided that,
if either applicable Non-PO Class A Percentage as of any such Distribution Date
is greater than the initial applicable Non-PO Class A Percentage, each Non-PO
Class A Prepayment Percentage shall be 100%; and provided further, however, that
no reduction of either Non-PO Class A Prepayment Percentage below the level in
effect for the most recent period shall occur with respect to any Distribution
Date unless, as of the last day of the month preceding such Distribution Date,
(i) the aggregate outstanding principal balance of Mortgage Loans delinquent 60
days or more (including for this purpose any Mortgage Loans in foreclosure and
Mortgage
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Loans with respect to which the related Mortgaged Property has been acquired by
the Trust Fund) does not exceed 50% of the aggregate principal balance of the
Subordinated Certificates as of such date and (ii) cumulative Realized Losses do
not exceed (a) 30% of the aggregate principal balance of the Subordinated
Certificates as of the date of issuance of the Certificates (the "Original
Subordinated Principal Balance") if such Distribution Date occurs between and
including June 2003 and May 2004, (b) 35% of the Original Subordinated Principal
Balance if such Distribution Date occurs between and including June 2004 and May
2005, (c) 40% of the Original Subordinated Principal Balance if such
Distribution Date occurs between and including June 2005 and May 2006, (d) 45%
of the Original Subordinated Principal Balance if such Distribution Date occurs
between and including June 2006 and May 2007, and (e) 50% of the Original
Subordinated Principal Balance if such Distribution Date occurs during or after
June 2007.
As of any Distribution Date, the "Mortgage Group One Subordinated
Percentage" means the difference between 100% and the Non-PO Class IA
Percentage, the "Mortgage Group Two Subordinated Percentage" means the
difference between 100% and the Non-PO Class IIA Percentage, and each is a
"Subordinated Percentage." As of any Distribution Date, the "Mortgage Group One
Subordinated Prepayment Percentage" means the difference between 100% and the
Non-PO Class IA Prepayment Percentage, the "Mortgage Group Two Subordinated
Prepayment Percentage" means the difference between 100% and the Non-PO Class
IIA Prepayment Percentage, and each is a "Subordinated Prepayment Percentage."
Allocation of the Subordinated Optimal Principal Amount
On each Distribution Date, distributions in respect of principal will
be made to each Class of Subordinated Certificates up to an amount equal to the
portion of the Subordinated Optimal Principal Distribution Amount (defined
below) allocable to such Class, calculated as described below.
The "Subordinated Optimal Principal Amount" means generally as of any
Distribution Date, an amount, not in excess of the aggregate outstanding
principal balance of the Subordinated Certificates, equal to (1) the sum of: (a)
an amount equal to the applicable Subordinated Percentage of the applicable
Non-PO Percentage of the principal portion of all Monthly Payments whether or
not received, which were due on the related Due Date on outstanding Mortgage
Loans as of such Due Date; (b) an amount equal to the applicable Subordinated
Prepayment Percentage of the applicable Non-PO Percentage of all principal
prepayments received during the related Principal Prepayment Period; (c) with
respect to each Mortgage Loan not described in (d) below, an amount equal to the
applicable Subordinated Percentage of the applicable Non-PO Percentage of the
sum of the principal portion of all insurance proceeds, condemnation awards and
any other cash proceeds from a source other than the Mortgagor, to the extent
required to be deposited in the Collection Account, which were received during
the related Principal Prepayment Period, net of related unreimbursed servicing
advances and net of any portion thereof which, as to any Mortgage Loan,
constitutes a late collection with respect to which an Advance has previously
been made; (d) with respect to each Mortgage Loan which has become a Liquidated
Mortgage Loan during the related Principal Prepayment Period, an amount equal to
the portion (if any) of the net liquidation proceeds with respect to such
Liquidated Mortgage Loan (net of any unreimbursed Advances) that was not
included in the Class IA-1 Component Four Distribution Amount, the Class IIA-P
Distribution Amount, the Non-PO Class IA Optimal Principal Amount or the Non-PO
Class IIA Optimal Principal Amount with respect to such Distribution Date and
(e) with respect to each Mortgage Loan repurchased during the related Principal
Prepayment Period, an amount equal to the applicable Subordinated Prepayment
Percentage of the applicable Non-PO Percentage of the principal portion of the
purchase price thereof (net of amounts with respect to which a distribution has
previously been
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made to the Subordinated Certificateholders) minus (2) the sum of the Class IA-1
Component Four Shortfall Amount and the Class IIA-P Shortfall Amount with
respect to such Distribution Date; provided, however, that the Subordinated
Optimal Principal Amount for any Distribution Date will be reduced to the extent
of any amounts required to be distributed to the Class A Certificates pursuant
to the provisions described under "--Distributions to Certificateholders --
Cross Collateralization Provisions." Any reduction in the Subordinated Optimal
Principal Amount pursuant to clause (2) above or the proviso in the immediately
preceding sentence will be applied in reduction of the Subordinated Optimal
Principal Amount as follows: first, by the amounts described in clause (a) of
the definition thereof, second, by the amounts described in clause (d) of the
definition thereof, third, by the amounts described in clause (c) of the
definition thereof, fourth, by the amounts described in clause (e) of the
definition thereof, and fifth, by the amounts described in clause (b) of the
definition thereof. Any reduction in the Subordinated Optimal Principal Amount
pursuant to clause (2) above will result in a corresponding reduction in the
principal balance of the Class of Subordinated Certificates with the highest
numerical class designation then outstanding.
On each Distribution Date, the Subordinated Optimal Principal Amount
will be allocated among the outstanding Classes of Subordinated Certificates pro
rata in accordance with their respective outstanding principal balances;
provided, however, that the portion of the Subordinated Optimal Principal Amount
consisting of the Subordinated Lock-out Amount will be allocated only among
those Classes of Subordinated Certificates entitled to receive distributions in
respect of the Subordinated Lock-Out Amount on such Distribution Date, as
described in the second succeeding sentence. With respect to any Distribution
Date, the "Subordinated Lock-out Amount" means the amounts described in clause
(b) of the definition of Subordinated Optimal Principal Amount (after any
adjustment thereto as described in the preceding paragraph). On each
Distribution Date, the Subordinated Lock-out Amount will be allocated among the
following Classes of Certificates: (i) any Class of Subordinated Certificates
which has current Credit Support (defined herein) (before giving effect to any
distribution of principal thereon on such Distribution Date) greater than or
equal to the original Credit Support for such Class; (ii) the Class of
Subordinated Certificates having the lowest numerical class designation of any
outstanding Class of Subordinated Certificates which does not meet the criteria
in (i) above; and (iii) the Class B-5 Certificates if all other outstanding
Classes of Subordinated Certificates meet the criteria in (i) above or if no
other Class of Subordinated Certificates is outstanding; provided, however, that
no Class of Subordinated Certificates will receive any distribution in respect
of the Subordinated Lock-out Amount on any Distribution Date if on such
Distribution Date any Class of Subordinated Certificates having a lower
numerical class designation than such Class fails to meet the criteria in (i)
above. For the purposes of (ii) above and the last sentence of the immediately
preceding paragraph, the Class M Certificates will be deemed to have a lower
numerical class designation than each Class of Class B Certificates.
Each Class of Subordinated Certificates (other than the Class B-5
Certificates) will have the benefit of a level of credit support, expressed as a
percentage of the aggregate outstanding principal balance of the Certificates
("Credit Support"). Credit Support for such Classes of Certificates will equal
in each case the percentage obtained by dividing the aggregate outstanding
principal balance of all Classes of Subordinated Certificates having higher
numerical class designations than such Class by the aggregate outstanding
principal balance of all outstanding Classes of Certificates (other than the
Class A-P Certificates) (for this purpose, the Class M Certificates shall be
deemed to have a lower numerical class designation than each Class of Class B
Certificates). Generally, the level of Credit Support for any Class will
decrease to the extent Realized Losses are allocated to any Class of
Subordinated Certificates having a higher numerical class designation and will
increase to the extent that any Class or Classes of Certificates not
subordinated to such
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Class receives a disproportionate portion of payments (including prepayments) of
principal on the Mortgage Loans.
ADDITIONAL RIGHTS OF THE CLASS A-R CERTIFICATEHOLDER
The Class A-R Certificate will remain outstanding for so long as the
Trust Fund shall exist, whether or not such Certificate is receiving current
distributions of principal or interest. In addition to distributions of
principal and interest distributable as described under "Distributions on the
Certificates," the holder of the Class A-R Certificate will be entitled to
receive (i) the amounts, if any, of the Available Distribution Amount remaining
in the Certificate Account on any Distribution Date after distributions of
principal and interest on the Certificates on such date and (ii) the proceeds of
the assets of the Trust Fund, if any, remaining in either REMIC on the final
Distribution Date for the Certificates, after distributions in respect of any
accrued and unpaid interest on such Certificates, and after distributions in
respect of principal have reduced the Certificate Principal Balances of the
Certificates to zero. It is not anticipated that there will be any material
assets remaining in the Trust Fund at any such time or that any material
distributions will be made with respect to the Class A-R Certificate at any
time. See "Federal Income Tax Consequences--Residual Certificates" in the
Prospectus.
SUBORDINATED CERTIFICATES AND SHIFTING INTERESTS
The rights of the Class M Certificateholders to receive distributions
with respect to the Mortgage Loans will be subordinated to the rights of the
Class A Certificateholders, the rights of the holders of each Class of Class B
Certificates to receive distributions with respect to the Mortgage Loans will be
subordinated to the rights of the holders of the Class A Certificates, the Class
M Certificates, and each Class of Class B Certificates having a lower numerical
class designation than such Class of Class B Certificates, each to the extent
described below. The subordination provided by the Class M and Class B
Certificates is intended to enhance the likelihood of regular receipt by the
Class A Certificateholders of the full amount of monthly distributions due them
and to protect the Class A Certificateholders against losses. The subordination
provided by each Class of Class B Certificates is intended to enhance the
likelihood of regular receipt by the holders of the Class A Certificates, the
Class M Certificates, and each Class of Class B Certificates having a lower
numerical class designation than such Class of Class B Certificates of the full
amount of monthly distributions due them and to protect such Certificateholders
against losses.
On each Distribution Date payments to the Class A Certificateholders
will be made prior to payments to the Class M and Class B Certificateholders,
payments to the Class M Certificateholders will be made prior to payments in the
Class B Certificateholders, payments to the Class B-1 Certificateholders will be
made prior to payments to the Class B-2 Certificateholders and the Non-Offered
Class B Certificateholders and payments to the Class B-2 Certificateholders will
be made prior to payments to the Non-Offered Class B Certificateholders. If on
any Distribution Date on which the aggregate outstanding principal balance of
the Class M and Class B Certificates is greater than zero the Non-PO Class A
Certificateholders are paid less than the Non-PO Class A Optimal Principal
Amount for such date, the interest of the Non-PO Class A Certificateholders in
the Trust Fund will vary so as to preserve the entitlement of the Non-PO Class A
Certificateholders to unpaid principal of the Mortgage Loans and interest
thereon. This may have the effect of increasing the proportionate interest of
the Non-PO Class A Certificateholders in the Trust Fund.
"Mortgage Pool Principal Balance" means, generally, as of any
Distribution Date, the sum of the principal balances of all Mortgage Loans as to
which no prepayment in full, cash liquidation or foreclosure
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and sale of the related Mortgaged Property has taken place and as to which no
determination of the Servicer has been made that all recoverable amounts have
been received.
The Non-PO Class A Certificateholders will be entitled to receive the
Non-PO Class A Prepayment Percentage of the applicable Non-PO Percentage of the
amount of principal prepayments and certain other unscheduled amounts of
principal received on the Mortgage Loans as described above. This will have the
effect of initially accelerating principal payments to the Non-PO Class A
Certificateholders (other than the Class IA-5 Certificateholders) and reducing
their proportionate interest in the Trust Fund and correspondingly increasing
(in the absence of offsetting Realized Losses) the Credit Support of each Class
of Subordinated Certificates having Credit Support. See "Description of the
Certificates -- Distributions of Principal and Interest." Increasing the
interest of the Class M and Class B Certificates in the Trust Fund relative to
that of the Class A Certificates is intended to preserve the availability of the
benefits of the subordination provided by the Class M and Class B Certificates.
All Realized Losses on the Mortgage Loans (other than Excess Losses
(defined below)) generally will be allocated first, to the Non-Offered Class B
Certificates until the principal balance of the Non-Offered Class B Certificates
has been reduced to zero; second, to the Class B-2 Certificates until the
principal balance of the Class B-2 Certificates has been reduced to zero; third,
to the Class B-1 Certificates until the principal balance of the Class B-1
Certificates has been reduced to zero; fourth, to the Class M Certificates until
the principal balance of the Class M Certificates has been reduced to zero; and
fifth, (A) to the Non-PO Class IA Certificates pro rata based upon their
respective outstanding principal balances until the principal balance of the
Non-PO Class IA Certificates has been reduced to zero (if the Realized Loss
occurred with respect to a Group One Mortgage Loan) or (B) to the Class IIA-1
Certificates (if the Realized Loss occurred with respect to a Group Two Mortgage
Loan); provided, however, that if a Realized Loss occurs with respect to a
Discount Mortgage Loan (A) the amount of such Realized Loss equal to the product
of (i) the amount of such Realized Loss and (ii) the PO Percentage with respect
to such Discount Mortgage Loan will be allocated to Class IA-1 Component Four
(if the Realized Loss occurred with respect to a Discount Mortgage Loan in
Mortgage Group One) or to the Class IIA-P Certificates (if the Realized Loss
occurred with respect to a Discount Mortgage Loan in Mortgage Group Two) and (B)
the remainder of such Realized Loss will be allocated as described above.
A "Realized Loss" is generally the amount, if any, with respect to any
defaulted Mortgage Loan which has been liquidated in accordance with the
Agreement, by which the unpaid principal balance and accrued interest thereon at
a rate equal to the Net Mortgage Rate exceeds the amount actually recovered by
the Servicer with respect thereto (net of reimbursement of certain expenses) at
the time such defaulted Mortgage Loan was liquidated.
Investors in the Class A Certificates should be aware that because the
Subordinated Certificates represent interests in both Mortgage Groups, the
principal balances of the Subordinated Certificates could be reduced to zero as
a result of a disproportionate amount of Realized Losses on the Mortgage Loans
in one Mortgage Group. Therefore, notwithstanding that Realized Losses on the
Mortgage Loans in one Mortgage Group may only be allocated to the related Class
A Certificates (except for Excess Losses), the allocation to the Subordinated
Certificates of Realized Losses on the Mortgage Loans in the other Mortgage
Group will increase the likelihood that Realized Losses may be allocated to such
Class A Certificates.
Excess Fraud Losses, Excess Bankruptcy Losses and Excess Special Hazard
Losses (collectively, "Excess Losses") will be allocated without priority among
(i) all Classes of Subordinated Certificates and
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(ii) (a) the Classes or Components of Non-PO Class IA Certificates (if the
Excess Loss occurred with respect to a Group One Mortgage Loan), or (b) the
Class IIA-1 Certificates (if the Excess Loss occurred with respect to a Group
Two Mortgage Loan), pro rata based upon their respective outstanding principal
balances; provided, however, that (i) the applicable PO Percentage of any Excess
Losses on the Discount Mortgage Loans in Mortgage Group One will be allocated to
Class IA-1 Component Four and (ii) the applicable PO Percentage of any Excess
Losses on the Discount Mortgage Loans in Mortgage Group Two will be allocated to
the Class IIA-P Certificates. For purposes of the foregoing, each Class of
Subordinated Certificates will be deemed to have a principal balance (and to
accrue interest thereon) equal to the actual principal balance thereof times a
fraction, the numerator of which is the Group One Subordinated Amount (for a
loss on a Group One Mortgage Loan) or the Group Two Subordinated Amount (for a
loss on a Group Two Mortgage Loan), and the denominator of which is the
aggregate of the Group One Subordinated Amount and the Group Two Subordinated
Amount.
The aggregate amount of Realized Losses that may be allocated in
connection with Special Hazard Losses (defined below) on the Mortgage Loans (the
"Special Hazard Amount") to the Subordinated Certificates will initially be
equal to approximately $2,571,105. As of each anniversary of the Cut-off Date,
the Special Hazard Amount generally will be reduced, but not increased, to an
amount equal to the lesser of (i) the Special Hazard Amount as of the previous
anniversary of the Cut-off Date less the sum of all amounts allocated to the
Certificates in respect of Special Hazard Losses on the Mortgage Loans since
such previous anniversary and (ii) the Adjustment Amount. The "Adjustment
Amount" with respect to each anniversary of the Cut-off Date will be equal to
the greatest of (i) 1.00% multiplied by the aggregate outstanding principal
balance of the Mortgage Loans, (ii) the aggregate outstanding principal balance
of the Mortgage Loans secured by Mortgaged Properties located in the California
postal zip code area in which the highest percentage of the Mortgage Loans are
located and (iii) twice the outstanding principal balance of the Mortgage Loan
having the largest outstanding principal balance, in each case as of such
anniversary of the Cut-off Date.
A "Special Hazard Loss" is a loss incurred in respect of any defaulted
Mortgage Loan as a result of direct physical loss or damage to the Mortgage
Property, which is not insured against under the standard hazard insurance
policy or blanket policy insuring against hazard losses which the Servicer is
required to cause to be maintained on each Mortgage Loan. See "Servicing of the
Mortgage Loans--Hazard Insurance" in the Prospectus.
"Excess Special Hazard Losses" are Special Hazard Losses in excess of
the Special Hazard Amount.
The aggregate amount of Realized Losses incurred on defaulted Mortgage
Loans as to which there was fraud in the origination of such Mortgage Loan
("Fraud Losses") which may be allocated to the Subordinated Certificates (the
"Fraud Loss Amount") will initially be equal to approximately $2,571,105. As of
any date of determination after the Cut-off Date, the Fraud Loss Amount
generally will equal (X) prior to the third anniversary of the Cut-off Date an
amount equal to 1.00% of the aggregate principal balance of all of the Mortgage
Loans as of the Cut-off Date minus the aggregate amounts allocated to the
Certificates with respect to Fraud Losses on the Mortgage Loans up to such date
of determination and (Y) from the third to the fifth anniversary of the Cut-off
Date, an amount equal to (1) 0.50% of the aggregate principal balance of all of
the Mortgage Loans as of the most recent anniversary of the Cut-off Date minus
(2) the aggregate amounts allocated to the Certificates with respect to Fraud
Losses on the Mortgage Loans since the most recent anniversary of the Cut-off
Date up to such date of determination. On and after the fifth anniversary of the
Cut-off Date, the Fraud Loss Amount will be zero.
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"Excess Fraud Losses" are Fraud Losses in excess of the Fraud Loss
Amount.
The aggregate amount of Realized Losses which may be allocated in
connection with Bankruptcy Losses on the Mortgage Loans (the "Bankruptcy
Amount") to the Subordinate Certificates will initially be equal to
approximately $100,000. As of any date of determination, the Bankruptcy Amount
will equal approximately $100,000 less the sum of any amounts allocated to the
Certificates for such losses up to such date of determination.
A "Bankruptcy Loss" is a Deficient Valuation or a Debt Service
Reduction. With respect to any Mortgage Loan, A "Deficient Valuation" is a
valuation by a court of competent jurisdiction of the Mortgage Property in an
amount less than the then outstanding indebtedness under the Mortgage Loan,
which valuation results from a proceeding initiated under the United States
Bankruptcy Code. A "Debt Service Reduction" is any reduction in the amount which
a mortgagor is obligated to pay on a monthly basis with respect to a Mortgage
Loan as a result of any proceeding initiated under the United States Bankruptcy
Code, other than a reduction attributable to a Deficient Valuation.
"Excess Bankruptcy Losses" are Bankruptcy Losses in excess of the
Bankruptcy Amount.
Amounts actually paid at any time to the Class M and Class B
Certificateholders in accordance with the terms of the Agreement will not be
subsequently recoverable from the Class M and Class B Certificateholders.
Investors in the Class A Certificates should be aware that the
applicable coverage for Realized Losses cover Mortgage Loans in both Loan
Groups. Therefore, in the event Mortgage Loans in a Loan Group suffer a high
level of Special Hazard Losses, Fraud Losses or Bankruptcy Losses, it will
reduce the available coverage for the Class A Certificates relating to both Loan
Groups and may cause the Class A Certificates relating to the other Loan Group
to suffer losses in the event Mortgage Loans in either Loan Group suffer
Realized Losses after the available coverage has been exhausted.
FEDERAL INCOME TAX CONSIDERATIONS
An election will be made to treat the segregated pool comprising the
assets of the Trust Fund (the "Subsidiary REMIC") as a REMIC for federal income
tax purposes. An election will be made to treat the pool of assets represented
by the regular interests in the Subsidiary REMIC as a separate REMIC (the
"Master REMIC").
The Offered Certificates (other than the Class A-R Certificate) will
represent regular interests in the Master REMIC and will be treated as newly
originated debt instruments. The Class A-R Certificate will represent the
residual interest in each REMIC. All Certificateholders will be required to use
the accrual method of accounting with respect to interest income on the
Certificates, regardless of their normal method of accounting. Holders of
Offered Certificates that have original issue discount will be required to
include amounts in income with respect to such Certificates in advance of the
receipt of cash attributable to such income. It is anticipated that the Class
IA-4, Class IA-X, Class IIA-P and Class IIA-X Certificates will be issued with
original issue discount in an amount equal to the excess of their initial
principal balances over their respective issue prices (including (except with
respect to the Class IIA-P Certificates) accrued interest). It is also
anticipated that the Class IA-2, Class IA-3, Class IA-6 and Class IA-7
Certificates will be issued at a premium, and that the Class IA-5, Class IIA-1,
Class M, Class B-1 and Class B-2 Certificates
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will be issued with de minimis original issue discount for federal income tax
purposes. The prepayment assumption that will be used in computing the amount
and rate of accrual of original issue discount includible periodically will be
250% of the Prepayment Model set forth herein. See "Prepayment and Yield
Considerations." No representation is made that payments on the Offered
Certificates will occur at that rate or any other rate.
The Offered Certificates will be treated as (i) assets described in
section 7701(a)(19)(C) of the Code and (ii) "real estate assets" within the
meaning of section 856(c)(5)(B) of the Code, in each case to the extent
described herein and in the Prospectus. Interest on the Offered Certificates
will be treated as "interest on obligations secured by mortgages on real
property" within the meaning of section 856(c)(3)(B) of the Code to the same
extent that the Offered Certificates are treated as "real estate assets" within
the meaning of section 856(c)(5)(B) of the Code.
CLASS A-R CERTIFICATE
The holder of the Class A-R Certificate must include the taxable income
or loss of each REMIC in determining its federal taxable income. The Class A-R
Certificate will remain outstanding for federal income tax purposes until there
are no Certificates of any other Class outstanding. PROSPECTIVE INVESTORS ARE
CAUTIONED THAT THE CLASS A-R CERTIFICATEHOLDER'S REMIC TAXABLE INCOME AND THE
TAX LIABILITY THEREON MAY EXCEED, AND MAY SUBSTANTIALLY EXCEED, CASH
DISTRIBUTIONS TO SUCH HOLDER DURING CERTAIN PERIODS, IN WHICH EVENT, THE HOLDER
THEREOF MUST HAVE SUFFICIENT ALTERNATIVE SOURCES OF FUNDS TO PAY SUCH TAX
LIABILITY. Furthermore, it is anticipated that all or a substantial portion of
the taxable income of each REMIC includible by the holder of the Class A-R
Certificate will be treated as "excess inclusion" income, resulting in (i) the
inability of such holder to use net operating losses to offset such income from
such REMIC, (ii) the treatment of such income as "unrelated business taxable
income" to certain holders who are otherwise tax-exempt, and (iii) the treatment
of such income as subject to 30% withholding tax to certain non-U.S.
investors, with no exemption or treaty reduction.
The Class A-R Certificate will be considered a "noneconomic residual
interest," with the result that transfers thereof would be disregarded for
federal income tax purposes if any significant purpose of the transferor was to
impede the assessment or collection of tax. Accordingly, the transferee
affidavit used for transfer of the Class A-R Certificate will require the
transferee to affirm that it (i) historically has paid its debts as they have
come due and intends to do so in the future, (ii) understands that it may incur
tax liabilities with respect to the Class A-R Certificate in excess of cash
flows generated thereby, (iii) intends to pay taxes associated with holding the
Class A-R Certificate as such taxes become due and (iv) will not transfer the
Class A-R Certificate to any person or entity that does not provide a similar
affidavit. The transferor must certify in writing to the Trustee that, as of the
date of the transfer, it had no knowledge or reason to know that the
affirmations made by the transferee pursuant to the preceding sentence were
false. Additionally, the Class A-R Certificate generally may not be transferred
to certain persons who are not U.S. Persons (as defined herein). See
"Description of the Certificates -- Restrictions on Transfer of the Class A-R,
Class M and Offered Class B Certificates" herein and "Federal Income Tax
Consequences -- REMIC Certificates; -- Income from Residual Certificates;
Taxation of Certain Foreign Investors; -- Transfers of Residual Certificates" in
the Prospectus.
An individual, trust or estate that holds the Class A-R Certificate
(whether such Certificate is held directly or indirectly through certain
pass-through entities) also may have additional gross income with respect to,
but may be subject to limitations on the deductibility of, Servicing Fees on the
Mortgage Loans
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and other administrative expenses of the Trust Fund in computing such holder's
regular tax liability, and may not be able to deduct such fees or expenses to
any extent in computing such holder's alternative minimum tax liability. In
addition, some portion of a purchaser's basis, if any, in the Class A-R
Certificate may not be recovered until termination of the Trust Fund.
Furthermore, the federal income tax consequences of any consideration paid to a
transferee on a transfer of the Class A-R Certificate are unclear. The preamble
to the REMIC Regulations indicates that the Internal Revenue Service anticipates
providing guidance with respect to the federal tax treatment of such
consideration. Any transferee receiving consideration with respect to the Class
A-R Certificate should consult its tax advisors.
DUE TO THE SPECIAL TAX TREATMENT OF RESIDUAL INTERESTS, THE EFFECTIVE
AFTER-TAX RETURN OF THE CLASS A-R CERTIFICATE MAY BE SIGNIFICANTLY LOWER THAN
WOULD BE THE CASE IF THE CLASS A-R CERTIFICATE WERE TAXED AS A DEBT INSTRUMENT,
OR MAY BE NEGATIVE.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences" in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of an employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or section 4975 of
the Code, including an individual retirement account (each, a "Plan"), or any
other person investing "plan assets" of any Plan, should carefully review with
its legal advisors whether the purchase or holding of Class A Certificates could
give rise to a transaction prohibited or not otherwise permissible under ERISA
or the Code. See "ERISA Considerations" in the Prospectus.
The Class A-R Certificate may not be purchased by or transferred to a
Plan or any other person investing "plan assets" of any Plan. Accordingly, the
following discussion does not purport to discuss any considerations under ERISA
with respect to the purchase, acquisition or resale of the Class A-R Certificate
and for purposes of the following discussion all references to the Offered
Certificates are deemed to exclude the Class A-R Certificate.
The U.S. Department of Labor ("DOL") has issued Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1") exempting certain transactions involving
mortgage pool investment entities holding mortgages on certain residential
property from the prohibited transaction provisions of ERISA and the Code. See
"ERISA Considerations" in the Prospectus for a discussion of PTCE 83-1 and the
prohibited transaction provisions of ERISA and the Code.
Prohibited transaction exemptions granted by the DOL to each
Underwriter (collectively, the "Exemption"), exempts the purchase and holding of
the Class A Certificates by or with "plan assets" of a Plan from the prohibited
transaction provisions of section 406(a) of ERISA (and the excise taxes imposed
by section 4975(c)(1)(A) of the Code) provided that certain conditions are met.
Among the conditions are the following: (i) the applicable Underwriter is the
sole underwriter, or the manager or co-manager of the underwriting syndicate for
such Class A Certificates, (ii) the Class A Certificates are rated in one of the
three highest generic rating categories by Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. ("S & P"), Moody's Investors
Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc. ("Fitch"),
(iii) the Class A Certificates are collateralized by, among other things,
obligations that bear interest or are purchased at a discount and are secured by
single-family residential, multifamily residential
S-86
<PAGE> 155
or commercial real property (including obligations secured by leasehold
interests on commercial real property), or fractional undivided interests in
such obligations, (iv) the Class A Certificates are not subordinated to other
Certificates of the Trust Fund, (v) the Plan is an "accredited investor" (as
defined under Rule 501(a)(1) of Regulation D under the Securities Act of 1933,
as amended (the "Act")), (vi) the acquisition of the Class A Certificates by a
Plan is on terms that are at least as favorable to the Plan as they would be in
an arm's length transaction with an unrelated third party, and (vii) the
compensation to the Underwriter represents reasonable compensation, the proceeds
to the Seller represent not more than the fair market value of the obligations
securing such Class A Certificates and the sum of all payments made to and
retained by the Servicer represents not more than reasonable compensation for
the Servicer's services under the Agreement and reimbursement of the Servicer's
reasonable expenses in connection therewith. It is expected that the Class A
Certificates will satisfy the conditions of the corresponding Exemption set
forth above in clauses (i), (iii), (iv) and (vii). Whether the remaining
conditions of the exemption will be satisfied with respect to the Class A
Certificates will depend on the circumstances at the time "plan assets" of a
Plan are used to acquire such Certificates. In that connection, the Class A
Certificates will, on the date of their original issue, satisfy the condition
set forth in clause (ii). In addition, if certain additional conditions
specified in the Exemption are met, the Exemption would provide an exemption
from the prohibited transaction provisions of ERISA section 406(b) (and the
excise taxes imposed by section 4975(c)(1)(E) of the Code) relating to possible
self-dealing transactions by fiduciaries who have discretionary authority, or
render investment advice, with respect to Plan assets used to purchase Class A
Certificates where the fiduciary (or its affiliate) is an obligor on the
obligations or receivables held in the Trust Fund. The Exemption would not apply
to certain otherwise prohibited transactions with respect to Plans sponsored by
the following entities (or any affiliate of any such entity): (a) the Seller,
(b) the applicable Underwriter, (c) the Trustee, (d) the Servicer or (e) any
obligor with respect to obligations or receivables included in the Seller
constituting more than five percent of the aggregate unamortized principal
balance of the assets in the Seller.
Before purchasing a Class A Certificate, a fiduciary of a Plan or any
other person investing "plan assets" of any Plan, should itself confirm that (a)
the Class A Certificates constitute "certificates" for the purposes of the
Exemption and (b) that the specific and general conditions set forth in the
Exemption would be satisfied. In addition to making its own determination as to
the availability of the exemptive relief provided in the Exemption, the
fiduciary or other Plan investor should consider its general fiduciary
obligations under ERISA in determining whether to purchase a Certificate on
behalf or with "plan assets" of a Plan.
Neither the Exemption nor PTCE 83-1 will apply to the Class M
Certificates, the Class B-1 Certificates or the Class B-2 Certificates;
therefore, the purchase or holding of a Class M Certificate, a Class B-1
Certificate or a Class B-2 Certificate by or with "plan assets" of a Plan may
result in prohibited transactions or the imposition of excise taxes or civil
penalties. Accordingly, transfer of the Class M, Class B-1 or Class B-2
Certificates will not be made unless the transferee (i) executes a
representation letter in form and substance satisfactory to the Trustee and the
Seller stating that (a) it is not, and is not acting on behalf of, any such Plan
or using the "plan assets" of any such Plan to effect such purchase or (b) if it
is an insurance company, that the source of funds used to purchase the Class M,
Class B-1 or Class B-2 Certificates is an "insurance company general account"
(as such term is defined in Section V(e) of Prohibited Transaction Class
Exemption 95-60 ("PTCE 95-60"), 60 Fed. Reg. 35925 (July 12, 1995) and there is
no Plan with respect to which the amount of such general account's reserves and
liabilities for the contract(s) held by or on behalf of such Plan and all other
Plans maintained by the same employer (or affiliate thereof as defined in
Section V(a)(1) of PTCE 95-60 or by the same employee organization, exceed 10%
of the total
S-87
<PAGE> 156
of all reserves and liabilities of such general account (as such amounts are
determined under Section 1(a) of PTCE 95-60) at the date of acquisition or (ii)
provides an opinion of counsel in form and substance satisfactory to the Trustee
and the Seller that the purchase or holding of the Class M, Class B-1 or Class
B-2 Certificates by or on behalf of such Plan will not result in the assets of
the Trust Fund being deemed to be "plan assets" and subject to the prohibited
transaction provisions of ERISA and the Code and will not subject the Seller,
the Servicer or the Trustee to any obligation in addition to those undertaken in
the Agreement. The Class M, Class B-1 and Class B-2 Certificates will contain a
legend describing such restrictions on transfer and the Agreement will provide
that any attempted or purported transfer in violation of these transfer
restrictions will be null and void and will vest no rights in any purported
transferee.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1, the
Exemption or other exemptions, and the potential consequences to their specific
circumstances prior to making an investment in the Class A Certificates.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment procedure and diversification an investment in
the Class A Certificates is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
The sale of Certificates to a Plan is in no respect a representation by
the Seller or the Underwriter that this investment meets all relevant legal
requirements with respect to investments by Plans generally or by any particular
Plan, or that this investment is appropriate for Plans generally or for any
particular Plan.
LEGAL INVESTMENT MATTERS
The Class A and Class M Certificates offered hereby will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"), and, as such, are legal investments for
certain entities to the extent provided in SMMEA. However, institutions subject
to the jurisdiction of the Office of the Comptroller of the Currency, the Board
of Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision, the National Credit Union
Administration or federal or state banking, insurance or other regulatory
authorities should review applicable rules, supervisory policies and guidelines,
since certain restrictions may apply to investments in such classes. It should
also be noted that certain states have enacted legislation limiting to varying
extents the ability of certain entities (in particular insurance companies) to
invest in mortgage related securities. Investors should consult with their own
legal advisors in determining whether, and to what extent the Class A and Class
M Certificates constitute legal investments for such investors. See "Legal
Investment" in the Prospectus.
The Class B-1 and Class B-2 Certificates will not constitute "mortgage
related securities" under SMMEA. The appropriate characterization of the Class
B-1 and Class B-2 Certificates under various legal investment restrictions, and
thus the ability of investors subject to these restrictions to purchase Class
B-1 and Class B-2 Certificates, may be subject to significant interpretive
uncertainties. All investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether, and
to what extent, the Class B-1 and Class B-2 Certificates will constitute legal
investments for them.
Except as to the status of the Class A and Class M Certificates as
"mortgage related securities", the Seller makes no representations as to the
proper characterization of the Offered Certificates for legal investment or
financial institution regulatory purposes, or as to the ability of particular
investors to purchase
S-88
<PAGE> 157
the Offered Certificates under applicable legal investment restrictions. The
uncertainties described above (and any unfavorable future determinations
concerning legal investment or financial institution regulatory characteristic
of the Offered Certificates) may adversely affect the liquidity of the Offered
Certificates.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
the Offered Certificates will be applied by the Seller to the purchase price of
the Mortgage Loans.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement dated January 28, 1998 and the terms agreement dated May 26, 1998
(collectively, the "Underwriting Agreement") each among the Seller, HomeSide
Lending and the Underwriter, the Seller has agreed to sell to the Underwriter
and the Underwriter has agreed to purchase from the Seller, all of the Offered
Certificates.
The Underwriting Agreement provides that the Underwriter's obligations
thereunder are subject to certain conditions precedent and that the Underwriter
will be obligated to purchase all of the Offered Certificates if any are
purchased.
The distribution of the Offered Certificates by the Underwriter will be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined, in each case, at the time of sale. The
Underwriter may effect such transactions by selling the Offered Certificates to
or through dealers, and such dealers may receive from the Underwriter, for whom
they act as agents, compensation in the form of underwriting discounts,
concessions or commissions. The Underwriter and any dealers that participate
with the Underwriter in the distribution of the Offered Certificates may be
deemed to be underwriters, and any discounts, concessions or commissions
received by them, and any profit on the resale of the Offered Certificates
positioned by them, may be deemed to be underwriting discounts and commissions
under the Act.
The Underwriting Agreement provides that the Seller or HomeSide Lending
will indemnify the Underwriter against certain civil liabilities, including
liabilities under the Act.
LEGAL MATTERS
Certain legal matters will be passed upon for the Seller by Morgan,
Lewis & Bockius LLP, New York, New York and for the Underwriter by Thacher
Proffitt & Wood, New York, New York. The material federal income tax
consequences of the Certificates will be passed upon for the Seller by Morgan,
Lewis & Bockius LLP.
RATINGS
It is a condition to the issuance of the Offered Certificates that the
Class A Certificates (other than the Class IIA-P, Class IA-X and Class IIA-X
Certificates) be rated "AAA" by each of Fitch and S&P, that the Class IIA-P,
Class IA-X and Class IIA-X Certificates be rated "AAA" by Fitch and "AAAr" by
S&P, and that the Class M, Class B-1 and Class B-2 Certificates be rated at
least "AA", "A" and "BBB", respectively, by Fitch.
S-89
<PAGE> 158
The ratings assigned by Fitch to mortgage pass-through certificates
address the likelihood of the receipt by Certificateholders of all distributions
to which such Certificateholders are entitled. Fitch's ratings address the
structural and legal aspects associated with the Certificates, including the
nature of the underlying mortgage loans. Fitch's ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood or
rate of principal prepayments. The ratings do not address the possibility that
Certificateholders might suffer a lower than anticipated yield.
S&P's ratings on mortgage pass-through certificates address the
likelihood of receipt by Certificateholders of payments required under the
operative agreements. S&P assigns the additional rating of "r" to highlight
classes of securities that S&P believes may experience high volatility or high
variability in expected returns due to non-credit risks. S&P's ratings take into
consideration the credit quality of the mortgage pool including any credit
support providers, structural and legal aspects associated with the
certificates, and the extent to which the payment stream of the mortgage pool is
adequate to make payment required under the certificates. S&P's ratings on
mortgage pass-through certificates do not, however, constitute a statement
regarding the frequency of prepayments on the mortgage loans. S&P's ratings do
not address the possibility that investors may suffer a lower than anticipated
yield.
The ratings of the Offered Certificates should be evaluated
independently from similar ratings on other types of securities. 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.
The Seller has not requested a rating of the Offered Certificates by
any rating agency other than Fitch and S&P and the Seller has not provided
information relating to the Certificates offered hereby or the Mortgage Loans to
any rating agency other than Fitch and S&P. However, there can be no assurance
as to whether any other rating agency will rate the Offered Certificates or, if
another rating agency rates such Certificates, what rating would be assigned to
such Certificates by such rating agency. Any such unsolicited rating assigned by
another rating agency to the Offered Certificates may be lower than the rating
assigned to such Certificates by either, or both, of Fitch and S&P.
S-90
<PAGE> 159
GLOSSARY OF DEFINED TERMS IN PROSPECTUS SUPPLEMENT
Page
----
Accounts....................................................................S-24
Act.........................................................................S-87
Adjusted Lockout Percentage.................................................S-76
Adjustment Amount...........................................................S-83
Advances....................................................................S-17
Aggregated Subordinated Percentage..........................................S-69
Agreement....................................................................S-8
Available Distribution Amount...............................................S-67
Bankruptcy Amount...........................................................S-84
Bankruptcy Loss.............................................................S-84
Book-Entry Certificates.....................................................S-63
Cede........................................................................S-63
Certificate Account.........................................................S-60
Certificate Owner............................................................S-8
Certificate Rate............................................................S-15
Certificateholders...........................................................S-8
Certificates...............................................................Cover
Class IA-4 Accretion Termination Date.......................................S-74
Class IA-4 Accrual Amount...................................................S-74
Class A Certificates.......................................................Cover
Class IA Certificates......................................................Cover
Class IIA Certificates.....................................................Cover
Class IA-1 Component Two Notional Amount....................................S-72
Class IA-1 Component Four Distribution Amount...............................S-74
Class IA-1 Component Five Notional Amount...................................S-72
Class IA-1 Component Three Accretion Termination Date.......................S-74
Class IA-1 Component Three Accrual Amount...................................S-74
Class IIA-P Distribution Amount.............................................S-76
Class IA-X Notional Amount..................................................S-72
Class IIA-X Notional Amount.................................................S-73
Class A Percentage..........................................................S-62
Class IA Percentage.........................................................S-62
Class IIA Percentage........................................................S-62
Class IA-X Stripped Interest Rate...........................................S-73
Class IIA-X Stripped Interest Rate..........................................S-73
Class B Certificates.......................................................Cover
Code........................................................................S-18
Collection Account..........................................................S-60
Commission...................................................................S-4
Component....................................................................S-6
Corporate Trust Office......................................................S-61
Credit Support..............................................................S-80
Credit Support Depletion Date...............................................S-70
Cut-off Date................................................................S-24
S-91
<PAGE> 160
Debt Service Reduction......................................................S-84
Defaulted Mortgage Loan.....................................................S-61
Deficient Valuation.........................................................S-84
Definitive Certificates.....................................................S-64
Discount Mortgage Loans.....................................................S-71
Distribution Date...........................................................S-15
DOL.........................................................................S-86
DTC..........................................................................S-8
Due Date.....................................................................S-8
ERISA.......................................................................S-19
Excess Bankruptcy Losses....................................................S-84
Excess Fraud Losses.........................................................S-84
Excess Losses...............................................................S-82
Excess Special Hazard Losses................................................S-83
Exemption...................................................................S-86
FHLMC.......................................................................S-25
FICO Scores.................................................................S-25
Fitch........................................................................S-3
FNMA........................................................................S-25
Fraud Loss Amount...........................................................S-83
Fraud Losses................................................................S-83
Group One Available Distribution Amount.....................................S-67
Group Two Available Distribution Amount.....................................S-67
Group One Mortgage Loans...................................................Cover
Group Two Mortgage Loans...................................................Cover
Group One Remittance Rate...................................................S-71
Group Two Remittance Rate...................................................S-71
Group One Subordinated Amount...............................................S-73
Group Two Subordinated Amount...............................................S-73
HomeSide Lending...........................................................Cover
HomeSide Mortgage Securities.................................................S-7
Indirect Participants.......................................................S-64
Interest Accrual Amount.....................................................S-72
Interest Shortfall..........................................................S-72
Liquidated Mortgage Loan....................................................S-76
Liquidation Principal.......................................................S-76
Lockout Liquidation Amount..................................................S-77
Lockout Percentage..........................................................S-77
Lockout Prepayment Percentage...............................................S-77
Lockout Principal Distribution Amount.......................................S-76
Master REMIC.................................................................S-4
Modeling Assumptions........................................................S-12
Monthly Payments.............................................................S-8
Mortgage Group.............................................................Cover
Mortgage Group One.........................................................Cover
Mortgage Group Two.........................................................Cover
Mortgage Group One Subordinated Percentage..................................S-78
S-92
<PAGE> 161
Mortgage Group Two Subordinated Percentage..................................S-78
Mortgage Group One Subordinated Prepayment Percentage.......................S-78
Mortgage Group Two Subordinated Prepayment Percentage.......................S-78
Mortgage Loans.............................................................Cover
Mortgage Loan Schedule......................................................S-58
Mortgage Note...............................................................S-24
Mortgage Pool..............................................................Cover
Mortgage Pool Principal Balance.............................................S-81
Mortgaged Properties........................................................S-24
Mortgage Rates..............................................................S-26
Net Mortgage Rate...........................................................S-71
Non-Discount Mortgage Loans.................................................S-71
Non-Offered Class B Certificates...........................................Cover
Non-Offered Class B Percentage..............................................S-62
Non-PO Allocated Amount.....................................................S-71
Non-PO Class A Certificates..................................................S-5
Non-PO Class IA Certificates.................................................S-5
Non-PO Class IIA Certificates................................................S-5
Non-PO Class A Optimal Principal Amount.....................................S-77
Non-PO Class IA Optimal Principal Amount....................................S-77
Non-PO Class IIA Optimal Principal Amount...................................S-77
Non-PO Class A Percentage...................................................S-78
Non-PO Class IA Percentage..................................................S-78
Non-PO Class IIA Percentage.................................................S-78
Non-PO Class A Prepayment Percentage........................................S-78
Non-PO Class IA Prepayment Percentage.......................................S-78
Non-PO Class IIA Prepayment Percentage......................................S-78
Non-PO Class A Principal Balance............................................S-78
Non-PO Class IA Principal Balance...........................................S-78
Non-PO Class IIA Principal Balance..........................................S-78
Non-PO Percentage...........................................................S-71
Non-recoverable Advance.....................................................S-61
Non-Supported Interest Shortfall............................................S-59
Offered Certificates.......................................................Cover
Original Subordinated Principal Balance.....................................S-79
Overcollateralization Group.................................................S-69
PACs.........................................................................S-5
Participant.................................................................S-63
Plan........................................................................S-19
Planned Principal Balance...................................................S-70
PO Percentage...............................................................S-70
Prepayment Interest Shortfall...............................................S-17
Prepayment Model............................................................S-45
Principal Prepayment Period.................................................S-15
Prospectus.................................................................Cover
PTCE 83-1...................................................................S-86
Realized Loss...............................................................S-82
S-93
<PAGE> 162
Record Date.................................................................S-14
REMIC........................................................................S-4
Rules.......................................................................S-64
S & P........................................................................S-3
Scheduled Principal Balance.................................................S-73
Seller.....................................................................Cover
Servicer...................................................................Cover
Servicer Remittance Date....................................................S-60
Servicing Fee...............................................................S-59
SMMEA.......................................................................S-20
Special Hazard Amount.......................................................S-83
Special Hazard Loss.........................................................S-83
Step Down Percentage........................................................S-77
Stripped Interest Rate......................................................S-61
Subordinated Certificates....................................................S-6
Subordinated Lock-out Amount................................................S-80
Subordinated Optimal Principal Amount.......................................S-79
Subordinated Percentage.....................................................S-79
Subordinated Prepayment Percentage..........................................S-79
Subservicers................................................................S-24
Subsidiary REMIC............................................................S-17
TACs.........................................................................S-5
Targeted Principal Balance..................................................S-70
Trustee......................................................................S-7
Trustee Fee.................................................................S-61
Trust Fund.................................................................Cover
Undercollateralized Group...................................................S-69
Underwriting Agreement......................................................S-89
Underwriter................................................................Cover
U.S. Person.................................................................S-65
S-94
<PAGE> 163
APPENDIX A
<TABLE>
<CAPTION>
Class IA-1
Component Three Class IA-3 Class IA-2 Class IA-7 Class IA-6
Targeted Principal Targeted Principal Planned Principal Planned Principal Planned Principal
Balance Balance Balance Balance Balance
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Initial Balance $51,838,295.00 $62,400,000.00 $13,800,000.00 $13,397,588.00 $31,000,000.00
June 1998 52,140,685.05 61,674,784.46 13,800,000.00 13,397,588.00 31,000,000.00
July 1998 52,444,839.05 60,861,767.49 13,800,000.00 13,397,588.00 31,000,000.00
August 1998 52,750,767.28 59,961,221.31 13,800,000.00 13,397,588.00 31,000,000.00
September 1998 53,058,480.09 58,973,430.79 13,800,000.00 13,397,588.00 31,000,000.00
October 1998 53,367,987.89 57,898,790.20 13,800,000.00 13,397,588.00 31,000,000.00
November 1998 53,679,301.15 56,737,803.25 13,800,000.00 13,397,588.00 31,000,000.00
December 1998 53,992,430.41 55,491,082.96 13,800,000.00 13,397,588.00 31,000,000.00
January 1999 54,307,386.25 54,159,351.24 13,800,000.00 13,397,588.00 31,000,000.00
February 1999 54,624,179.34 52,743,438.32 13,800,000.00 13,397,588.00 31,000,000.00
March 1999 54,942,820.38 51,244,281.85 13,800,000.00 13,397,588.00 31,000,000.00
April 1999 55,263,320.17 49,662,925.83 13,800,000.00 13,397,588.00 31,000,000.00
May 1999 55,585,689.54 48,000,519.28 13,800,000.00 13,397,588.00 31,000,000.00
June 1999 55,909,939.39 46,258,314.71 13,800,000.00 13,397,588.00 31,000,000.00
July 1999 56,236,080.71 44,437,666.30 13,800,000.00 13,397,588.00 31,000,000.00
August 1999 56,564,124.51 42,540,027.90 13,800,000.00 13,397,588.00 31,000,000.00
September 1999 56,894,081.90 40,566,950.80 13,800,000.00 13,397,588.00 31,000,000.00
October 1999 57,225,964.05 38,520,081.23 13,800,000.00 13,397,588.00 31,000,000.00
November 1999 57,559,782.17 36,401,157.77 13,800,000.00 13,397,588.00 31,000,000.00
December 1999 57,895,547.57 34,212,008.34 13,800,000.00 13,397,588.00 31,000,000.00
January 2000 58,233,271.59 31,954,657.37 13,800,000.00 13,397,588.00 31,000,000.00
February 2000 58,572,965.68 29,631,097.89 13,800,000.00 13,397,588.00 31,000,000.00
March 2000 58,914,641.31 27,243,603.94 13,800,000.00 13,397,588.00 31,000,000.00
April 2000 59,258,310.05 24,794,642.35 13,800,000.00 13,397,588.00 31,000,000.00
May 2000 59,603,983.53 23,284,491.48 12,802,539.55 13,397,588.00 31,000,000.00
June 2000 59,951,673.43 21,746,334.59 11,777,162.02 13,397,588.00 31,000,000.00
July 2000 60,301,391.53 20,182,251.61 10,724,474.62 13,397,588.00 31,000,000.00
August 2000 60,653,149.64 18,598,060.16 9,647,688.42 13,397,588.00 31,000,000.00
September 2000 61,006,959.68 17,004,536.08 8,553,582.95 13,397,588.00 31,000,000.00
October 2000 61,362,833.62 15,415,540.72 7,451,338.13 13,397,588.00 31,000,000.00
November 2000 61,720,783.48 13,844,101.53 6,349,879.31 13,397,588.00 31,000,000.00
December 2000 62,080,821.38 12,296,874.79 5,253,979.98 13,397,588.00 31,000,000.00
January 2001 62,442,959.51 10,773,437.97 4,163,611.83 13,397,588.00 31,000,000.00
February 2001 62,807,210.10 9,273,374.29 3,078,746.67 13,397,588.00 31,000,000.00
March 2001 63,173,585.50 7,796,272.62 1,999,356.48 13,397,588.00 31,000,000.00
April 2001 63,542,098.08 6,341,727.36 925,413.35 13,397,588.00 31,000,000.00
May 2001 63,912,760.32 4,909,338.45 0.00 13,254,477.57 31,000,000.00
June 2001 64,285,584.75 3,498,711.22 0.00 12,191,345.53 31,000,000.00
July 2001 64,660,584.00 2,109,456.32 0.00 11,133,577.78 31,000,000.00
August 2001 65,037,770.74 741,189.71 0.00 10,081,147.01 31,000,000.00
September 2001 64,810,690.22 0.00 0.00 9,034,026.07 31,000,000.00
October 2001 63,864,868.72 0.00 0.00 7,992,187.93 31,000,000.00
November 2001 62,941,140.13 0.00 0.00 6,955,605.72 31,000,000.00
December 2001 62,039,153.70 0.00 0.00 5,924,252.70 31,000,000.00
</TABLE>
S-95
<PAGE> 164
<TABLE>
<CAPTION>
Class IA-1
Component Three Class IA-3 Class IA-2 Class IA-7 Class IA-6
Targeted Principal Targeted Principal Planned Principal Planned Principal Planned Principal
Balance Balance Balance Balance Balance
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
January 2002 61,158,563.65 0.00 0.00 4,898,102.28 31,000,000.00
February 2002 60,299,029.09 0.00 0.00 3,877,127.98 31,000,000.00
March 2002 59,460,214.01 0.00 0.00 2,861,303.51 31,000,000.00
April 2002 58,641,787.15 0.00 0.00 1,850,602.67 31,000,000.00
May 2002 57,843,421.97 0.00 0.00 844,999.43 31,000,000.00
June 2002 57,064,796.56 0.00 0.00 0.00 30,844,467.89
July 2002 56,305,593.62 0.00 0.00 0.00 29,848,982.26
August 2002 55,565,500.33 0.00 0.00 0.00 28,858,516.92
September 2002 54,844,208.37 0.00 0.00 0.00 27,873,046.37
October 2002 54,141,413.77 0.00 0.00 0.00 26,892,545.25
November 2002 53,456,816.92 0.00 0.00 0.00 25,916,988.32
December 2002 52,790,122.47 0.00 0.00 0.00 24,946,350.49
January 2003 52,141,039.29 0.00 0.00 0.00 23,980,606.78
February 2003 51,509,280.42 0.00 0.00 0.00 23,019,732.38
March 2003 50,894,562.97 0.00 0.00 0.00 22,063,702.57
April 2003 50,296,608.10 0.00 0.00 0.00 21,112,492.77
May 2003 49,715,140.98 0.00 0.00 0.00 20,166,078.56
June 2003 49,215,332.12 0.00 0.00 0.00 19,288,153.36
July 2003 48,730,952.07 0.00 0.00 0.00 18,414,960.56
August 2003 48,261,739.09 0.00 0.00 0.00 17,546,476.43
September 2003 47,807,435.20 0.00 0.00 0.00 16,682,677.35
October 2003 47,367,786.13 0.00 0.00 0.00 15,823,539.83
November 2003 46,942,541.26 0.00 0.00 0.00 14,969,040.52
December 2003 46,531,453.58 0.00 0.00 0.00
January 2004 46,134,279.64 0.00 0.00 0.00 13,273,863.70
February 2004 45,750,779.49 0.00 0.00 0.00 12,433,140.10
March 2004 45,380,716.63 0.00 0.00 0.00 11,596,962.51
April 2004 45,023,857.97 0.00 0.00 0.00 10,765,308.20
May 2004 44,663,318.59 0.00 0.00 0.00 9,954,809.76
June 2004 44,255,509.72 0.00 0.00 0.00 9,241,951.07
July 2004 43,837,280.83 0.00 0.00 0.00 8,556,094.85
August 2004 43,409,270.08 0.00 0.00 0.00 7,896,363.40
September 2004 42,972,091.90 0.00 0.00 0.00 7,261,906.04
October 2004 42,526,337.77 0.00 0.00 0.00 6,651,898.26
November 2004 42,072,576.95 0.00 0.00 0.00 6,065,540.97
December 2004 41,611,357.21 0.00 0.00 0.00 5,502,059.72
January 2005 41,143,205.54 0.00 0.00 0.00 4,960,703.96
February 2005 40,668,628.80 0.00 0.00 0.00 4,440,746.31
March 2005 40,188,114.39 0.00 0.00 0.00 3,941,481.87
April 2005 39,702,130.90 0.00 0.00 0.00 3,462,227.55
May 2005 39,211,128.70 0.00 0.00 0.00 3,002,321.38
June 2005 38,660,285.70 0.00 0.00 0.00 2,677,501.14
July 2005 38,108,012.86 0.00 0.00 0.00 2,367,029.76
August 2005 37,554,632.52 0.00 0.00 0.00 2,070,392.22
September 2005 37,000,452.78 0.00 0.00 0.00 1,787,090.41
October 2005 36,445,767.99 0.00 0.00 0.00 1,516,642.59
</TABLE>
S-96
<PAGE> 165
<TABLE>
<CAPTION>
Class IA-1
Component Three Class IA-3 Class IA-2 Class IA-7 Class IA-6
Targeted Principal Targeted Principal Planned Principal Planned Principal Planned Principal
Balance Balance Balance Balance Balance
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
November 2005 35,890,859.29 0.00 0.00 0.00 1,258,582.91
December 2005 35,335,994.99 0.00 0.00 0.00 1,012,460.87
January 2006 34,781,431.08 0.00 0.00 0.00 777,840.85
February 2006 34,227,411.63 0.00 0.00 0.00 554,301.65
March 2006 33,674,169.22 0.00 0.00 0.00 341,436.05
April 2006 33,121,925.35 0.00 0.00 0.00 138,850.31
May 2006 32,517,054.64 0.00 0.00 0.00 0.00
June 2006 31,838,749.52 0.00 0.00 0.00 0.00
July 2006 31,170,025.19 0.00 0.00 0.00 0.00
August 2006 30,510,736.66 0.00 0.00 0.00 0.00
September 2006 29,860,740.95 0.00 0.00 0.00 0.00
October 2006 29,219,897.14 0.00 0.00 0.00 0.00
November 2006 28,588,066.25 0.00 0.00 0.00 0.00
December 2006 27,965,111.28 0.00 0.00 0.00 0.00
January 2007 27,350,897.15 0.00 0.00 0.00 0.00
February 2007 26,745,290.68 0.00 0.00 0.00 0.00
March 2007 26,148,160.59 0.00 0.00 0.00 0.00
April 2007 25,559,377.41 0.00 0.00 0.00 0.00
May 2007 24,978,813.52 0.00 0.00 0.00 0.00
June 2007 24,453,252.56 0.00 0.00 0.00 0.00
July 2007 23,934,365.38 0.00 0.00 0.00 0.00
August 2007 23,422,054.69 0.00 0.00 0.00 0.00
September 2007 22,916,224.52 0.00 0.00 0.00 0.00
October 2007 22,416,780.19 0.00 0.00 0.00 0.00
November 2007 21,923,628.28 0.00 0.00 0.00 0.00
December 2007 21,436,676.62 0.00 0.00 0.00 0.00
January 2008 20,955,834.27 0.00 0.00 0.00 0.00
February 2008 20,481,011.51 0.00 0.00 0.00 0.00
March 2008 20,012,119.82 0.00 0.00 0.00 0.00
April 2008 19,549,071.87 0.00 0.00 0.00 0.00
May 2008 19,091,781.48 0.00 0.00 0.00 0.00
June 2008 18,640,163.62 0.00 0.00 0.00 0.00
July 2008 18,194,134.43 0.00 0.00 0.00 0.00
August 2008 17,753,611.11 0.00 0.00 0.00 0.00
September 2008 17,318,512.02 0.00 0.00 0.00 0.00
October 2008 16,888,756.59 0.00 0.00 0.00 0.00
November 2008 16,464,265.30 0.00 0.00 0.00 0.00
December 2008 16,044,959.71 0.00 0.00 0.00 0.00
January 2009 15,630,762.44 0.00 0.00 0.00 0.00
February 2009 15,221,597.11 0.00 0.00 0.00 0.00
March 2009 14,817,388.38 0.00 0.00 0.00 0.00
April 2009 14,418,061.88 0.00 0.00 0.00 0.00
May 2009 14,023,544.27 0.00 0.00 0.00 0.00
June 2009 13,633,763.16 0.00 0.00 0.00 0.00
July 2009 13,248,647.11 0.00 0.00 0.00 0.00
August 2009 12,868,125.66 0.00 0.00 0.00 0.00
</TABLE>
S-97
<PAGE> 166
<TABLE>
<CAPTION>
Class IA-1
Component Three Class IA-3 Class IA-2 Class IA-7 Class IA-6
Targeted Principal Targeted Principal Planned Principal Planned Principal Planned Principal
Balance Balance Balance Balance Balance
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
September 2009 12,492,129.26 0.00 0.00 0.00 0.00
October 2009 12,120,589.29 0.00 0.00 0.00 0.00
November 2009 11,753,438.04 0.00 0.00 0.00 0.00
December 2009 11,390,608.69 0.00 0.00 0.00 0.00
January 2010 11,032,035.32 0.00 0.00 0.00 0.00
February 2010 10,677,652.86 0.00 0.00 0.00 0.00
March 2010 10,327,397.13 0.00 0.00 0.00 0.00
April 2010 9,981,204.76 0.00 0.00 0.00 0.00
May 2010 9,639,013.24 0.00 0.00 0.00 0.00
June 2010 9,300,760.90 0.00 0.00 0.00 0.00
July 2010 8,966,386.84 0.00 0.00 0.00 0.00
August 2010 8,635,831.00 0.00 0.00 0.00 0.00
September 2010 8,309,034.11 0.00 0.00 0.00 0.00
October 2010 7,985,937.64 0.00 0.00 0.00 0.00
November 2010 7,666,483.89 0.00 0.00 0.00 0.00
December 2010 7,350,615.86 0.00 0.00 0.00 0.00
January 2011 7,038,277.34 0.00 0.00 0.00 0.00
February 2011 6,729,412.84 0.00 0.00 0.00 0.00
March 2011 6,423,967.60 0.00 0.00 0.00 0.00
April 2011 6,121,887.57 0.00 0.00 0.00 0.00
May 2011 5,823,119.43 0.00 0.00 0.00 0.00
June 2011 5,527,610.54 0.00 0.00 0.00 0.00
July 2011 5,235,308.94 0.00 0.00 0.00 0.00
August 2011 4,946,163.37 0.00 0.00 0.00 0.00
September 2011 4,660,123.22 0.00 0.00 0.00 0.00
October 2011 4,377,138.56 0.00 0.00 0.00 0.00
November 2011 4,097,160.08 0.00 0.00 0.00 0.00
December 2011 3,820,139.15 0.00 0.00 0.00 0.00
January 2012 3,546,027.75 0.00 0.00 0.00 0.00
February 2012 3,274,778.47 0.00 0.00 0.00 0.00
March 2012 3,006,344.55 0.00 0.00 0.00 0.00
April 2012 2,740,679.80 0.00 0.00 0.00 0.00
May 2012 2,477,738.66 0.00 0.00 0.00 0.00
June 2012 2,217,476.13 0.00 0.00 0.00 0.00
July 2012 1,959,847.82 0.00 0.00 0.00 0.00
August 2012 1,704,809.90 0.00 0.00 0.00 0.00
September 2012 1,452,319.09 0.00 0.00 0.00 0.00
October 2012 1,202,332.69 0.00 0.00 0.00 0.00
November 2012 954,808.54 0.00 0.00 0.00 0.00
December 2012 709,705.02 0.00 0.00 0.00 0.00
January 2013 466,981.05 0.00 0.00 0.00 0.00
February 2013 226,596.07 0.00 0.00 0.00 0.00
March 2013 0.00 0.00 0.00 0.00 0.00
</TABLE>
S-98
<PAGE> 167
<TABLE>
<S> <C>
=================================================================== ===========================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, HOMESIDE MORTGAGE
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING SECURITIES, INC.
BEEN AUTHORIZED BY THE SELLER OR ANY UNDERWRITER. THIS PROSPECTUS SELLER
SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY ANY OF THE OFFERED CERTIFICATES IN
ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH $196,664,528
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF MULTI-CLASS MORTGAGE
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY PASS-THROUGH CERTIFICATES,
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS SERIES 1998-2
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE SELLER SINCE SUCH DATE.
TABLE OF CONTENTS [LOGO]
PROSPECTUS SUPPLEMENT
Page
----
Terms of the Certificates.......................................S-5
Risk Factors...................................................S-22
The Mortgage Pool..............................................S-24 HOMESIDE LENDING, INC.
Prepayment and Yield Considerations............................S-42 SERVICER
HomeSide Mortgage Securities, Inc..............................S-56
HomeSide Lending, Inc..........................................S-56
Delinquency and Foreclosure Experience of the Servicer.........S-57
The Pooling and Servicing Agreement............................S-58
Description of the Certificates................................S-62
Federal Income Tax Considerations..............................S-84 -------------------------------------------
ERISA Considerations...........................................S-86
Legal Investment Matters.......................................S-88
Use of Proceeds................................................S-89 PROSPECTUS SUPPLEMENT
Underwriting...................................................S-89
Legal Matters..................................................S-89 -------------------------------------------
Ratings........................................................S-89
Glossary.......................................................S-91
Appendix A.....................................................S-95
DONALDSON, LUFKIN & JENRETTE
PROSPECTUS SECURITIES CORPORATION
Prospectus Supplement............................................ii
Available Information............................................ii
Incorporation of Certain Documents by Reference..................ii
Reports to Certificateholders...................................iii
Summary of Prospectus.............................................1 May 26, 1998
Risk Factors......................................................6
Description of the Certificates...................................8
The Mortgage Pools...............................................11
Credit Support...................................................13
Yield, Maturity and Weighted Average Life Considerations.........18
HomeSide Mortgage Securities, Inc................................19
HomeSide Lending, Inc............................................19
Servicing of the Mortgage Loans..................................23
The Pooling and Servicing Agreement..............................27
Certain Legal Aspects of the Mortgage Loans......................33
Legal Investment Matters.........................................40
ERISA Considerations.............................................41
Federal Income Tax Consequences..................................43
Plan of Distribution.............................................56
Use of Proceeds..................................................57
Financial Information............................................57
Legal Matters....................................................58
=================================================================== ===========================================
</TABLE>
