<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 15, 1997
REGISTRATION NO.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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FUND AMERICA INVESTORS CORPORATION II
(Exact name of registrant as specified in governing instruments)
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6400 S. FIDDLER'S GREEN CIRCLE
SUITE 1200B
ENGLEWOOD, COLORADO 80111
(303) 290-6025
(Address of principal executive offices)
STEVEN B. CHOTIN
6400 S. FIDDLER'S GREEN CIRCLE
SUITE 1200B
ENGLEWOOD, COLORADO 80111
(Name and address of agent for service)
------------------------
Copies to:
DAVID BARBOUR
ANDREWS & KURTH L.L.P.
1717 MAIN STREET
SUITE 3700
DALLAS, TEXAS 75201
(214) 659-4400
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC. From time to
time after the effective date of this Registration Statement as determined by
market conditions and pursuant to Rule 415.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
Box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ________________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________________
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<S> <C> <C> <C> <C>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER UNIT* OFFERING PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
Collateralized Mortgage
Obligations and
Asset-Backed Certificates
(and certain underlying
Non-Agency Certificates and
Private Mortgage-Backed
Securities)................ $1,000,000 100% $1,000,000 $303.03
==================================================================================================================
</TABLE>
* Estimated solely for purposes of calculating the registration fee.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 15, 1997
PROSPECTUS
COLLATERALIZED MORTGAGE OBLIGATIONS
PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
AND CERTAIN NON-AGENCY CERTIFICATES
AND PRIVATE MORTGAGE-BACKED SECURITIES
FUND AMERICA INVESTORS CORPORATION II
AND CERTAIN TRUSTS, ALL OF THE BENEFICIAL OWNERSHIP INTEREST
IN WHICH IS OWNED BY FUND AMERICA INVESTORS CORPORATION II
This Prospectus relates to Collateralized Mortgage Obligations (the
"Bonds") and Asset-Backed Certificates (the "Certificates" and, together with
the Bonds, the "Securities"), which may be sold from time to time in one or more
series (a "Series") by Fund America Investors Corporation II (the "Company") on
terms determined at the time of sale and described in this Prospectus and the
related Prospectus Supplement (a "Prospectus Supplement"). As specified in the
related Prospectus Supplement, the Securities of each Series, which will include
one or more series of Bonds and/or Certificates, will be issued by either the
Company or a separate entity (each a "Trust") formed by the Company solely for
the purpose of issuing the Securities of the related Series (either such entity,
as applicable, the "Issuer"). If a Series of Securities includes Bonds, such
Bonds will be issued pursuant to an Indenture, and will represent indebtedness
of the related Issuer. If a Series of Securities includes Certificates, such
Certificates will evidence a beneficial ownership interest in the related Trust.
The Securities of each Series will be secured by or will represent a
beneficial interest in certain mortgage-related assets (the "Mortgage Assets")
and may also be secured by, represent beneficial interests in, or have the
benefits of certain other assets (together with the Mortgage Assets, the
"Assets") which may include reinvestment income, reserve funds, cash accounts,
insurance policies, guarantees, letters of credit or other credit enhancement
("Credit Enhancement") as described in the related Prospectus Supplement. The
Mortgage Assets with respect to a Series of Bonds will consist of one or more of
the following: (i) mortgage-backed certificates, mortgage pass-through
certificates, or mortgage participation certificates ("Agency Securities")
issued or guaranteed by the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"); (ii) pass-through certificates or participation
certificates, formed by the Company in connection with the issuance of the
related Series of Securities for purposes of ease of administration, which are
neither issued nor guaranteed by any agency or instrumentality of the United
States ("Non-Agency Certificates") and which evidence undivided interests in (a)
Agency Securities, (b) one or more pools of single family (one- to four-unit)
residential mortgage loans or loans for which the related proceeds were used to
finance property improvements, acquisition of personal property such as home
appliances or furnishings, debt consolidation, or a combination of property
improvements, debt consolidation and other consumer purposes, or participation
interests therein (collectively, "Mortgage Loans"), (c) conditional sales
contracts and installment sales or loan agreements or participation interests
therein either secured by manufactured housing ("Secured Contracts") or
unsecured ("Unsecured Contracts" and, together with the Secured Contracts, the
"Contracts") or (d) multifamily mortgage loans secured by rental apartment
buildings or projects containing five or more residential units, or cooperative
apartment building loans ("Multifamily Loans"); (iii) mortgage pass-through or
participation certificates representing beneficial interests in certain mortgage
loans or certain mortgage-backed securities, collateralized mortgage obligations
secured by certain mortgage loans or certain mortgage-backed securities, and
residual interest securities relating to issuances of mortgage pass-through
certificates or collateralized mortgage obligations (collectively, "Private
Mortgage-Backed Securities") and (iv) participation or other interests in any of
the foregoing. Private Mortgage-Backed Securities may include securities formed
or issued by the Company (or an Owner Trust beneficially owned by the Company),
an affiliate of the Company, or by third parties. The Mortgage Assets with
respect to a Series of Certificates will consist of one or more of the
following: (i) Agency Securities, (ii) Non-Agency Certificates, (iii) Mortgage
Loans, (iv) Contracts, (v) Multifamily Loans, (vi) Private Mortgage-Backed
Securities, and (vii) participation or other interests in any of the foregoing.
To the extent specified in the related Prospectus Supplement, Mortgage Loans,
Contracts and Multifamily Loans may be secured by junior liens on the related
mortgaged properties, and may include Title I Loans.
(Cover continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 27 HEREIN FOR A DESCRIPTION OF
CERTAIN RISKS AND OTHER FACTORS WHICH SHOULD BE CONSIDERED IN EVALUATING AN
INVESTMENT IN THE SECURITIES.
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 OR ANY RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Offers of the Securities of a Series 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 Securities prior to the
offering thereof. There can be no assurance that a secondary market will develop
for the Securities of any Series or, if it does develop, that such market will
continue.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of Securities unless accompanied by a Prospectus
Supplement.
THE DATE OF THIS PROSPECTUS IS AUGUST , 1997.
<PAGE> 3
(Cover continued from previous page)
Each Series will be issued in one more Classes, one or more of which may be
Principal Only Securities, Interest Only Securities, Compound Interest
Securities, Variable Interest Rate Securities, Scheduled Amortization
Securities, Companion Securities, Special Allocation Securities, or any other
Class of Securities, if any, included in such Series and described in the
related Prospectus Supplement. Principal Only Securities will not accrue, and
will not be entitled to receive, any interest. Payments or distributions of
interest on each Class of Securities other than Principal Only Securities and
Compound Interest Securities will be made on each Payment Date or Distribution
Date as specified in the Prospectus Supplement. Interest will not be paid or
distributed on Compound Interest Securities on a current basis until the date or
period specified in the related Prospectus Supplement. Prior to such time,
interest on such Class of Compound Interest Securities will accrue and the
amount of interest so accrued will be added to the principal thereof on each
Payment Date or Distribution Date. The amount of principal and interest
available and payable on each Series on each Payment Date or Distribution Date
will be applied to the Classes of such Series in the order and as otherwise
specified in the related Prospectus Supplement. Principal payments or
distributions on each Class of a Series will be made on a pro rata, random lot
or other selection basis among Securities of such Class, as specified in the
related Prospectus Supplement. Securities of a Series will be subject to
redemption or repurchase only under the circumstances and according to the
priorities described herein and in the related Prospectus Supplement. The
Company or its affiliates may retain or hold for sale from time to time all or a
portion of one or more Classes of a Series.
Bonds of a Series will constitute non-recourse obligations of the related
Issuer and Certificates of a Series will evidence an interest in the related
Trust only. Neither the Bonds nor the Certificates will be insured or guaranteed
by GNMA, FNMA, FHLMC, any governmental entity or, unless otherwise specified in
the related Prospectus Supplement, by any other person. Unless otherwise
specified in the related Prospectus Supplement, the Company's only obligations,
if any, with respect to a Series will be to obtain certain representations and
warranties from each Seller of the related Mortgage Assets and to assign to the
related Trustee (or, in the case of Bonds issued by a Trust, to such Trust) the
Company's rights with respect thereto, and its obligations pursuant to certain
representations and warranties made by it. Unless otherwise specified in the
Prospectus Supplement relating to a Series, no affiliate of the Company will
have any obligations with respect to such Series.
The yield on each Class of a Series will be affected by the rate of payment
of principal (including prepayments) on the related Trust Estate or Mortgage
Assets and the timing of receipt of such payments as described herein and in the
related Prospectus Supplement.
Each Private Mortgage-Backed Security and each participation or other
interest therein securing a Series of Bonds or underlying a Series of
Certificates (including Private Mortgage-Backed Securities formed or issued by
the Company or an affiliate of the Company) will have been acquired by the
Company, in a secondary market transaction, from a seller other than the issuer
thereof and any of its affiliates, and will have been (i) issued in an offering
registered under the Securities Act of 1933, as amended (the "Securities Act")
or (ii) issued in an offering exempt from the registration requirements of the
Securities Act and will have been held by persons other than the issuer of such
securities and its affiliates for at least three years.
If specified in the Prospectus Supplement for a Series, one or more
elections may be made to treat all or specified portions of the related Trust
Estate or Trust Fund as a "real estate mortgage investment conduit" ("REMIC") or
to treat the arrangement by which such Series is issued as a REMIC, for federal
income tax purposes. See "Certain Federal Income Tax Consequences".
--2--
<PAGE> 4
PROSPECTUS SUPPLEMENT AND CURRENT REPORT ON FORM 8-K
The Prospectus Supplement and Current Report on Form 8-K relating to a
Series to be offered hereunder will, among other things, set forth all of the
following with respect to such Series:
(i) whether the Securities of such Series are Bonds or Certificates;
(ii) information as to the Assets, included in the related Trust
Property, or otherwise available for such Series including (A) the certain
characteristics of the Mortgage Assets included therein and (B) a description
of the Credit Enhancement, if any, with respect to such Series;
(iii) the aggregate original principal balance of each Class of such
Series entitled to payments or distributions allocable to principal and, if a
fixed rate of interest, the interest rate for each Class of such Series
entitled to distributions allocable to interest;
(iv) information as to any Class of such Series 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;
(v) information as to any Class of such Series on which interest will
accrue and be added to the principal or, if applicable, notional principal
balance thereof;
(vi) information as to the method used to calculate the amount of
interest to be paid on any Class of such Series entitled to payments or
distributions of interest only;
(vii) information as to the nature and extent of subordination with
respect to any Class of such Series that is subordinate in right of payment to
any other Class of such Series;
(viii) the Stated Maturity of each Class of Bonds or the Assumed Final
Distribution Date of each Class of Certificates;
(ix) the circumstances, if any, under which the Securities of such
Series are subject to redemption or repurchase;
(x) the Payment Dates or Distribution Dates, as applicable, for each
Class of such Securities;
(xi) the method used to calculate the aggregate amounts of principal
and interest available and required to be applied to the Securities of such
Series on each Payment Date or Distribution Date, as applicable, and with
respect to a Series consisting of more than one Class, the basis on which such
amounts will be allocated among the Classes of such Series;
(xii) the identity of the Trustee for such Series;
(xiii) whether one or more elections will be made to treat all or
specified portions of the Assets securing such Series or included in the
related Trust Property as a 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
Series.
The actual characteristics of the Mortgage Assets relating to a Series
will not deviate in any material respect from the parameters specified in the
related Prospectus Supplement; provided, however, that if the characteristics
described in the initial related Prospectus Supplement materially differ from
the actual characteristics, a supplement to the related Prospectus Supplement
will be distributed.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith is required to file reports and other information (the
"Reports") with the Securities and Exchange Commission (the "Commission"). The
Company has filed with the Commission a Registration Statement under the
Securities Act of 1933, as amended, with respect to the Securities. This
Prospectus, which forms a part of the Registration Statement, and the
Prospectus Supplement relating to each Series of Securities contain summaries
of the material documents referred to herein and therein, but do not contain
all of the 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 at Room 1024, Judiciary Plaza, 450 Fifth Street
N.W., 1st Floor, Room 1024, Washington, D.C. 20549, and at the following
regional offices of the Commission: Chicago Regional Office, Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and New York
Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048.
Such material may also be accessed electronically by means of the Commission's
home page on the Internet at http://www.sec.gov.
The Company does not plan to send any financial information to holders
of Securities. The Trustee, however, will include with each payment or
distribution on Securities of a Series a statement containing certain payment
information with respect to such Securities.
The Company's principal executive offices are located at 6400 S.
Fiddler's Green Circle, Suite 1200B, Englewood, Colorado 80111. Its telephone
number is (303) 290-6025.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission under
the Exchange Act are incorporated by reference in this Prospectus:
(1) the Company's Annual Report on Form 10-K for its fiscal year
ended December 31, 1996, filed April 8, 1997;
(2) the Company's Quarterly Report on Form 10-Q for its fiscal
quarter ended March 31, 1997, filed May 15, 1997; and
(3) the Company's Quarterly Report on Form 10-Q for its fiscal
quarter ended June 30, 1997, filed August 14, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the Securities shall be deemed to
be incorporated by reference in this Prospectus and to be a part hereof from
the date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in an other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, upon the request of such person, a copy of
any or all of the documents referred to above which have been or may be
incorporated in this Prospectus by reference (other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference into
any such document). Requests for such copies should be directed to Helen M.
Dickens, Vice President, Fund America Investors Corporation II, 6400 S.
Fiddler's Green Circle, Suite 1200B, Englewood, Colorado 80111 (303/290-6025).
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<PAGE> 6
TABLE OF CONTENTS
<TABLE>
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Page
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PROSPECTUS SUPPLEMENT AND CURRENT REPORT ON FORM 8-K . . . . . . . . . . . . 3
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . . . 4
TABLE OF CONTENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
INDEX OF PRINCIPAL TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SUMMARY OF PROSPECTUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Prepayment and Yield Considerations . . . . . . . . . . . . . . . . . 24
Risks Associated with Certain Loan Assets . . . . . . . . . . . . . . 25
Limited Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Limited Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Limitations, Reduction and Substitution of Credit Enhancement . . . . 27
Limited Nature of Ratings . . . . . . . . . . . . . . . . . . . . . . 29
Original Issue Discount; Residual Certificates . . . . . . . . . . . 29
Funds Available for Redemptions or Repurchases at the Request
of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Book Entry Registration . . . . . . . . . . . . . . . . . . . . . . . 30
Nature of Direct or Indirect Backing for Securities . . . . . . . . . 30
Insurance Considerations for Certain Non-Agency Certificates
and Private Mortgage-Backed Securities . . . . . . . . . . . . . . . 31
Certain Matters Relating to Insolvency . . . . . . . . . . . . . . . 31
Junior Lien Mortgage Loans; Liquidation of Mortgage Loans . . . . . . 31
Geographic Concentration . . . . . . . . . . . . . . . . . . . . . . 32
Remedies Following Default . . . . . . . . . . . . . . . . . . . . . 32
Deposits, Substitutions and Withdrawals of Assets . . . . . . . . . . 32
Other Legal Considerations . . . . . . . . . . . . . . . . . . . . . 32
DESCRIPTION OF THE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . 33
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
The Bonds - General . . . . . . . . . . . . . . . . . . . . . . . . . 33
The Certificates - General . . . . . . . . . . . . . . . . . . . . . 34
Form of Securities; Transfer and Exchange . . . . . . . . . . . . . . 34
REMIC Election . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Classes of Securities . . . . . . . . . . . . . . . . . . . . . . . . 35
Payments or Distributions of Principal and Interest . . . . . . . . . 37
Redemption of Bonds; Termination or Repurchase with Respect to
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . 39
Book Entry Registration . . . . . . . . . . . . . . . . . . . . . . . 39
ASSETS SECURING OR UNDERLYING THE SECURITIES . . . . . . . . . . . . . . . . 40
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Agency Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Non-Agency Certificates . . . . . . . . . . . . . . . . . . . . . . . 47
</TABLE>
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<TABLE>
<S> <C>
Multifamily Loans . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Private Mortgage-Backed Securities . . . . . . . . . . . . . . . . . 50
Characteristics of Agency Securities and Private Mortgage-Backed
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Deposit, Substitution and Withdrawal of Assets . . . . . . . . . . . 52
Pre-Funding Arrangements . . . . . . . . . . . . . . . . . . . . . . 52
CREDIT ENHANCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Overcollateralization . . . . . . . . . . . . . . . . . . . . . . . . 54
Cross-Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Pool Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Special Hazard Insurance . . . . . . . . . . . . . . . . . . . . . . 55
FHA Insurance on the Multifamily Loans . . . . . . . . . . . . . . . 55
Bankruptcy Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Reserve Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Other Insurance, Guarantees and Similar Instruments or Agreements . . 56
SERVICING OF THE MORTGAGE LOANS,MULTIFAMILY LOANS AND CONTRACTS . . . . . . . 57
Servicing Agreements . . . . . . . . . . . . . . . . . . . . . . . . 57
Payments on Mortgage Loans . . . . . . . . . . . . . . . . . . . . . 58
Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Servicing Procedures . . . . . . . . . . . . . . . . . . . . . . . . 59
Primary Mortgage Insurance . . . . . . . . . . . . . . . . . . . . . 61
Standard Hazard Insurance . . . . . . . . . . . . . . . . . . . . . . 62
Title Insurance Policies . . . . . . . . . . . . . . . . . . . . . . 63
Claims Under Primary Mortgage Insurance Policies and Standard Hazard
Insurance Policies; Other Realization Upon Defaulted Loans . . 63
Administration and Servicing Compensation and Payment of Expenses . . 64
THE INDENTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Modification of Indenture . . . . . . . . . . . . . . . . . . . . . . 65
Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Rights Upon Event of Default . . . . . . . . . . . . . . . . . . . . 66
List of Holders of Bonds . . . . . . . . . . . . . . . . . . . . . . 66
Issuer's Annual Compliance Statement . . . . . . . . . . . . . . . . 66
Trustee's Annual Report . . . . . . . . . . . . . . . . . . . . . . . 67
Satisfaction and Discharge of Indenture . . . . . . . . . . . . . . . 67
Reports by Trustee to Bondholders . . . . . . . . . . . . . . . . . . 67
Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . . . 67
THE POOLING AGREEMENT AND DEPOSIT TRUST AGREEMENT . . . . . . . . . . . . . . 67
Assignment of Mortgage Assets . . . . . . . . . . . . . . . . . . . . 68
Repurchase or Substitution of Mortgage Loans, Contracts and
Multifamily Loans . . . . . . . . . . . . . . . . . . . . . . 71
Evidence as to Compliance . . . . . . . . . . . . . . . . . . . . . . 71
List of Certificateholders . . . . . . . . . . . . . . . . . . . . . 72
Administration of the Certificate Account . . . . . . . . . . . . . . 72
Reports to Holders of Certificates . . . . . . . . . . . . . . . . . 73
Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Rights Upon Event of Default . . . . . . . . . . . . . . . . . . . . 74
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
</TABLE>
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<TABLE>
<S> <C>
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
THE ISSUER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Owner Trust Issuer . . . . . . . . . . . . . . . . . . . . . . . . . 76
Management Agreement . . . . . . . . . . . . . . . . . . . . . . . . 76
THE TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS . . . . . . . . . . . . . . . . 77
The Mortgage Loans and Multifamily Loans . . . . . . . . . . . . . . 78
Consumer Protection Laws with respect to Contracts . . . . . . . . . 85
LEGAL INVESTMENT MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . 91
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . 93
Federal Income Tax Consequences for REMIC Securities . . . . . . . . 94
Federal Income Tax Consequences for Securities as to
Which No REMIC Election Is Made . . . . . . . . . . . . . . . . . . 112
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . 119
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
FINANCIAL INFORMATION AND ADDITIONAL INFORMATION . . . . . . . . . 119
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
</TABLE>
- 7 -
<PAGE> 9
INDEX OF PRINCIPAL TERMS
<TABLE>
<CAPTION>
Page
<S> <C>
"Accrued Value" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
"Adjustable Multifamily Loan Rates" . . . . . . . . . . . . . . . . . . . . . 22
"Adjustable Rate Multifamily Loans" . . . . . . . . . . . . . . . . . . . . . 22
"Administrator" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
"Advance Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
"Agency Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
"Annual Reduction" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
"Applicable Accounting Standards" . . . . . . . . . . . . . . . . . . . . . . 74
"APR" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 52
"Assumed Final Distribution Date" . . . . . . . . . . . . . . . . . . . . . . 17
"Bankruptcy Bond" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
"Beneficial Owners" . . . . . . . . . . . . . . . . . . . . . . . . . . . 24, 43
"BIF" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
"Bond Interest Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
"Book Entry Securities" . . . . . . . . . . . . . . . . . . . . . . . . . 24, 42
"Certificate Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
"Certificate Interest Rate" . . . . . . . . . . . . . . . . . . . . . . . . . 14
"Certificate Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
"Certificates of Beneficial Ownership" . . . . . . . . . . . . . . . . . . . 79
"Class" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
"Clearing Agency" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24, 42
"Clearing Agency Participants" . . . . . . . . . . . . . . . . . . . . . 24, 42
"Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
"Collateral Value" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
"Collection Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
"Commission" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
"Committee Report" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
"Companion Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
"Company" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13, 78
"Compound Interest Securities" . . . . . . . . . . . . . . . . . . . . . 13, 39
"Contract Loan Schedule" . . . . . . . . . . . . . . . . . . . . . . . . . . 72
"Contract Pool" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 52
"Contracts" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 52
"Conventional Multifamily Loans" . . . . . . . . . . . . . . . . . . . . . . 22
"Cooperative Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
"Cooperatives" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21, 43
"CPTs" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
"Credit Enhancement" . . . . . . . . . . . . . . . . . . . . . . . . 23, 32, 56
"Custodial Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
"Cut-off Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
"Deposit Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
"Deposit Trust Agreement" . . . . . . . . . . . . . . . . . . . . . . . . 12, 37
"Disqualified Organization" . . . . . . . . . . . . . . . . . . . . . . . . 109
"Distribution Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
"DOL" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
"ERISA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25, 95
"Event of Default" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
"Exchange Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
"FAMC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
"FDIC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61, 75, 94
</TABLE>
- 8 -
<PAGE> 10
<TABLE>
<S> <C>
"FHA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
"FHA Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
"FHA-Insured Multifamily Loans" . . . . . . . . . . . . . . . . . . . . . . . 22
"FHLMC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
"FHLMC Certificate Group" . . . . . . . . . . . . . . . . . . . . . . . . . . 48
"FHLMC Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
"Final REMIC Regulations" . . . . . . . . . . . . . . . . . . . . . . . . . . 96
"FLTs" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
"FmHA Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
"FNMA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
"FNMA Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . 19, 19
"Funding Agreement Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . 50
"Funding Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
"Garn-St. Germain Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
"GNMA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
"GNMA Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . 19, 19
"GNMA Issuer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
"Guaranty Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
"Indenture" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
"Initial Depositor" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
"Insurance Proceeds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
"Interest Accrual Period" . . . . . . . . . . . . . . . . . . . . . . . . . . 14
"Interest Only Securities" . . . . . . . . . . . . . . . . . . . . . . . 12, 39
"INVs" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
"IOs" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
"IRS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
"Issuer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37, 37
"Liquidation Proceeds" . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
"Loan-to-Value Ratio" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
"Management Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
"Manager" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
"Manufactured Home" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
"Manufactured Home Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . 88
"Manufacturer's Invoice Price" . . . . . . . . . . . . . . . . . . . . . . . 53
"Market Discount" . . . . . . . . . . . . . . . . . . . . . . . . 101, 103, 104
"Maximum Variable Interest Rate" . . . . . . . . . . . . . . . . . . . . 15, 15
"Minimum Variable Interest Rate" . . . . . . . . . . . . . . . . . . . . 15, 15
"Monthly Advance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
"Mortgage Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 97
"Mortgage Notes" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
"Mortgage Pool" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
"Mortgage Pool Insurance Policy" . . . . . . . . . . . . . . . . . . . . . . 57
"Mortgage Rates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
"Mortgaged Properties" . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
"Mortgages" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
"Mortgagors" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
"Multifamily Loan Pool" . . . . . . . . . . . . . . . . . . . . . . . . . 18, 51
"Multifamily Loan Schedule" . . . . . . . . . . . . . . . . . . . . . . . . . 72
"Multifamily Loan Seller" . . . . . . . . . . . . . . . . . . . . . . . . . . 72
"Multifamily Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
"NCUA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61, 94
"Non-Agency Administrator" . . . . . . . . . . . . . . . . . . . . . . . . . 50
"Non-Agency Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . 18
"Non-Agency Pooling and Administration Agreement" . . . . . . . . . . . . . . 50
</TABLE>
- 9 -
<PAGE> 11
<TABLE>
<S> <C>
"Non-Agency Servicers" . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
"Non-Priority Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . 39
"Non-REMIC Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
"Notional Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . 37
"OID Regulations" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
"Original Issue Discount" . . . . . . . . . . . . . . . . . . . 35, 99, 104, 105
"Original Value" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
"OTS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86, 94
"Owner" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
"Owner Trust" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
"Owner Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 37
"PACs" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
"Parties in Interest" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
"Pass-Through Entity" . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
"Payment Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
"Permitted Instruments" . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
"Plan Asset Regulations" . . . . . . . . . . . . . . . . . . . . . . . . . . 95
"Plans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
"PMBS Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
"PMBS Issuer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
"PMBS Servicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
"PMBS Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
"Policy Statement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
"Pool Insurer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
"Pooling Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
"POs" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
"Premium REMIC Regular Securities" . . . . . . . . . . . . . . . . . . . . 103
"Prepayment Assumption" . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
"Pre-Funding Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
"Pre-Funding Arrangement" . . . . . . . . . . . . . . . . . . . . . . . . 23, 55
"Principal Only Securities" . . . . . . . . . . . . . . . . . . . . . . . 12, 39
"Principal Prepayments" . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
"Priority Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
"Private Mortgage-Backed Securities" . . . . . . . . . . . . . . . . . . . . 18
"Prohibited Transactions" . . . . . . . . . . . . . . . . . . . . . . . . 38, 95
"Property Improvement Loans" . . . . . . . . . . . . . . . . . . . . . . . . 88
"PTC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
"Record Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
"Registrar" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
"Regular Securityholder" . . . . . . . . . . . . . . . . . . . . . . . . . . 98
"REIT" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
"Relief Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
"REMIC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24, 97
"REMIC Pool" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
"REMIC Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
"Remittance Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
"Remittance Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
"Reports" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
"Reserve Fund" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
"Residual Holders" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
"Residual Securities" . . . . . . . . . . . . . . . . . . . . . . . . 24, 32, 97
"Residual Securityholders" . . . . . . . . . . . . . . . . . . . . . . . . 105
"Residuals" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
"Retail Class Security" . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
</TABLE>
- 10 -
<PAGE> 12
<TABLE>
<S> <C>
"SAIF" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
"Scheduled Amortization Securities" . . . . . . . . . . . . . . . . . . . . . 39
"Scheduled Principal" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
"Secured Contract" . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 52
"Seller" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
"Senior Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
"Servicers" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
"Servicing Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
"SMMEA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26, 94
"Special Hazard Insurance Policy" . . . . . . . . . . . . . . . . . . . . . . 58
"Standard Indenture Provisions" . . . . . . . . . . . . . . . . . . . . . . . 12
"Stated Maturity" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
"Stripped Certificateholder" . . . . . . . . . . . . . . . . . . . . . . . 120
"Stripped Certificates" . . . . . . . . . . . . . . . . . . . . . . . . 116, 118
"Subordinated Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . 56
"Subsequent Loan Assets" . . . . . . . . . . . . . . . . . . . . . . . . . . 55
"TACs" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
"TAMRA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
"Thrift Institution" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
"Title I Contracts" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
"Title I Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
"Title I Program" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
"Title V" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
"TMP" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
"Trust" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 37
"Trust Estate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
"Trust Property" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
"Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 60
"U.S. Person" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110, 111
"UCC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
"Underlying Mortgage Loans" . . . . . . . . . . . . . . . . . . . . . . . . . 27
"Underwriters" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
"Unsecured Contract" . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 52
"VA Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
"Variable Interest Rate Securities" . . . . . . . . . . . . . . . . . . . . . 13
"VA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
"Window Period Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
"Zs" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
</TABLE>
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<PAGE> 13
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and in the
Prospectus Supplement with respect to the Series offered thereby and to the
related Indenture, Pooling Agreement or Deposit Trust Agreement, as applicable.
Unless otherwise specified, initially 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. See "Index of Principal Terms"
herein.
Securities Offered .......... Bonds and/or Certificates issuable in Series.
Bonds of a Series will be issued pursuant to an
indenture (the "Indenture") between the
respective Issuer (as defined below) and the
Trustee (the "Trustee") for such Series, and will
be secured by the Assets included in a trust
estate (the "Trust Estate") and pledged to secure
such Series. Such Indenture may be in the form
of a Terms Indenture incorporating by reference
the Standard Indenture Provisions (the "Standard
Indenture Provisions") of the Issuer.
Certificates of a Series will be issued pursuant
to either (i) a pooling agreement or a pooling
and administration agreement (each, a "Pooling
Agreement") between the Company, the
Administrator, if any, and the Trustee for such
Series or (ii) a Deposit Trust Agreement (the
"Deposit Trust agreement") between the Company,
acting as depositor, and a bank, trust company or
any other fiduciary, acting or owner trustee (the
"Owner Trustee"). Certificates of a Series will
evidence beneficial interests in the related
Trust (as defined below). With respect to each
Series, a bank, trust company or other fiduciary
acting as a trustee and named in the Prospectus
Supplement with respect to such Series (the
"Trustee" with respect to such Series) will enter
into the related Indenture, Pooling Agreement,
and/or Deposit Trust Agreement, as indicated
above. Holders of Securities are referred to
herein as "Holders" or "Securityholders."
The Securities of any Series may be issued in one
or more classes (each a "Class"), as specified in
the related Prospectus Supplement. One or more
Classes of Securities of each Series
(i) may be entitled to receive payments or
distributions allocable only to principal
("Principal Only Securities"), only to interest
("Interest Only Securities") or to any
combination thereof;
(ii) may be entitled to receive payments or
distributions only of prepayments of principal
throughout the lives of the Securities of such
Series or during specified periods;
(iii) may be subordinated in the right to receive
payments or distributions of scheduled payments
of principal, prepayments of principal, interest
or any combination thereof to one or more other
Classes of such Series throughout the lives of
the Securities of such Series or during specified
periods;
- 12 -
<PAGE> 14
(iv) may be entitled to receive such payments or
distributions only after the occurrence of events
specified in the Prospectus Supplement;
(v) may be entitled to receive payments or
distributions in accordance with a schedule or
formula or on the basis of collections from
designated portions of the Assets securing such
Series or included in the related Trust Property
(as defined below);
(vi) as to Securities entitled to payments or
distributions allocable to interest, may be
entitled to receive interest at a rate that is
subject to change from time to time ("Variable
Interest Rate Securities") or at a fixed rate;
(vii) may accrue interest, with such accrued
interest added to the principal amount of the
Securities of such Class and no payments being made
thereon until such time as is specified in the
related Prospectus Supplement ("Compound Interest
Securities").
The timing and amounts of such distributions may
vary among Classes, over time, or otherwise as
specified in the related Prospectus Supplement.
The Company or its affiliates may retain or hold
for sale from time to time all or a portion of one
or more Classes of a Series.
The Securities of each Class of a Series will be
issued either in fully registered form or in book
entry form in the authorized denominations
specified in the Prospectus Supplement. The
Securities will not be guaranteed or insured by
GNMA, FNMA, FHLMC, any governmental entity or,
unless otherwise specified in the related
Prospectus Supplement, by any other person and,
except as otherwise specified in the related
Prospectus Supplement, the Mortgage Assets (other
than Agency Securities) relating to a Series will
not be guaranteed or insured by any governmental
agency or instrumentality or any other insurer.
The Company ............. Fund America Investors Corporation II (the
"Company") is a limited purpose Delaware
corporation formed on December 14, 1992. The
Company's principal executive offices are located
at 6400 S. Fiddler's Green Circle, Suite 1200B,
Englewood, Colorado 80111; telephone number (303)
290-6025. See "The Issuer -- The Company."
Issuer .................. The Issuer with respect to a Series of Bonds will
be either the Company or a separate entity (each,
an "Owner Trust") formed by the Company solely for
the purpose of issuing the Securities of one or
more Series. Each Series of Bonds will be non-
recourse obligations of the related Issuer. The
Issuer with respect to a Series of Bonds will not
have, nor be expected in the future to have, any
significant assets available for payments on
- 13 -
<PAGE> 15
such Series of Bonds, other than the Assets
included in the related Trust Estate.
The Issuer with respect to a Series of Certificates
will be the trust established by the Company
pursuant to a Pooling Agreement or the Owner Trust
established by the Company pursuant to a Deposit
Trust Agreement (each a "Trust").
Unless otherwise specified in a related Prospectus
Supplement (i) each Series of Bonds will be
separately secured by the related Trust Estate,
which will constitute the only significant assets
available to make payments on the Bonds of such
Series and (ii) each Series of Certificates will be
entitled to distributions only from the Assets
included in the related Trust and any other Assets
pledged or otherwise available for the benefit of
Holders of such Series as specified in the related
Prospectus Supplement.
The Administrator;
Non-Agency
Administrator ........... With respect to a Series of Certificates for which
the related Trust includes Mortgage Loans,
Multifamily Loans, and Contracts, the entity or
entities named as the Administrator in the related
Prospectus Supplement (the "Administrator"), will
act as administrator, and may act as a servicer,
with respect to such Mortgage Loans, Multifamily
Loans, and Contracts. The Administrator may be an
affiliate of the Company. With respect to a Series
of Certificates for which the Trust does not
include Mortgage Loans, Multifamily Loans or
Contracts, there will be no Administrator unless
otherwise specified in the related Prospectus
Supplement.
With respect to a Non-Agency Certificate, the
entity named as the Non-Agency Administrator will
act as administrator, and may act as servicer, with
respect to the underlying Mortgage Loans,
Multifamily Loans, and Contracts. The Non-Agency
Administrator may be an affiliate of the Company.
Payments or Distributions
of Interest ............. Each Class of a Series (other than a Class of
Principal Only Securities) will accrue interest at
the rate set forth in (or, in the case of Variable
Interest Securities, as determined as provided in)
the related Prospectus Supplement (the "Bond
Interest Rate" with respect to a Class of Bonds and
the "Certificate Interest Rate" with respect to a
Class of Certificates). One or more Classes may be
entitled to receive payments or distributions of
interest only to the extent of amounts available to
make such payments or distributions. Interest on
each Class will accrue during the respective
periods and be paid or distributed on the
respective dates specified in the related
Prospectus Supplement (each such period an
"Interest Accrual Period" and each such date a
"Payment Date" with respect to a Class of Bonds and
a "Distribution Date" with respect to a Class of
Certificates). Interest on all Securities which
bear or receive interest, other than Compound
Interest Securities, will be due and payable on the
Payment Dates, or distributed on the Distribution
Dates, as
- 14 -
<PAGE> 16
applicable, specified in the related Prospectus
Supplement. However, failure to pay or distribute
interest on a current basis may not necessarily be
an Event of Default with respect to a particular
Series or Class of Securities. Interest on any
Class of Compound Interest Securities will not be
paid or distributed currently, but will accrue and
the amount of the interest so accrued will be added
to the principal thereof on each Payment Date or
Distribution Date, as applicable, until such time
as is specified in the related Prospectus
Supplement. Principal Only Securities will not
accrue, and will not be entitled to receive, any
interest. Upon maturity or earlier redemption of
the Securities of any Class, interest will be paid
to the date specified in the related Prospectus
Supplement.
Each payment of interest on each Class of
Securities (or addition to principal of a Class of
Compound Interest Securities) on a Payment Date or
Distribution Date, as applicable, will include all
interest accrued during the related Interest
Accrual Period. If the Interest Accrual Period for
a Series ends on a date other than a Payment Date
or Distribution Date, as applicable, for such
Series, the yield realized by the Holders of such
Securities may be lower than the yield that would
result if the Interest Accrual Period ended on such
Payment Date or Distribution Date. Additionally,
if so specified in the related Prospectus
Supplement, interest accrued for an Interest
Accrual Period for one or more Classes may be
calculated on the assumption that principal
payments or distributions (and additions to
principal of the Securities), and allocations of
losses on the Mortgage Assets (if so specified in
the related Prospectus Supplement), are made on the
first day of the preceding Interest Accrual Period
and not on the Payment Date or Distribution Date,
as applicable, for such preceding Interest Accrual
Period when actually made or added. Such method
would produce a lower effective yield than if
interest were calculated on the basis of the actual
principal amount outstanding.
With respect to each Class of Variable Interest
Rate Securities of a Series, the related Prospectus
Supplement will set forth: (i) the initial Bond
Interest Rate or Certificate Interest Rate, as
applicable, (or the manner of determining the
initial Bond Interest Rate or Certificate Interest
Rate); (ii) the formula, index or other method by
which the Bond Interest Rate or Certificate
Interest Rate, as applicable, will be determined
from time to time; (iii) the periodic intervals at
which such determination will be made; (iv) the
interest rate cap (the "Maximum Variable Interest
Rate") if any, and the interest rate floor (the
"Minimum Variable Interest Rate"), if any, on the
Bond Interest Rate or Certificate Interest Rate for
such Variable Interest Rate Securities; and any
other terms relevant to such Class of Securities.
See "Description of the Securities -- Payments or
Distributions of Principal and Interest -- Payments
or Distributions of Interest."
- 15 -
<PAGE> 17
Payments or Distributions
of Principal ....... Principal payments and/or distributions on the
Securities of a Series will be made from amounts
available therefor on each Payment Date or
Distribution Date, as applicable, in an aggregate
amount determined as set forth in the related
Prospectus Supplement and will be allocated among
the respective Classes of a Series of Securities
at the times, in the manner and in the priority
set forth in the related Prospectus Supplement.
Except with respect to Compound Interest
Securities and Interest Only Securities, unless
specified otherwise in the related Prospectus
Supplement, on each Payment Date or Distribution
Date, as applicable, principal payments and/or
distributions will be made on the Securities of a
Series in an aggregate amount determined in the
related Prospectus Supplement. If a Series has a
Class of Compound Interest Securities, additional
principal payments on the Securities of such
Series will be made on each Payment Date or
Distribution Date, as applicable, in an amount
equal to the interest accrued, but not then
payable or distributable, on such Class of
Compound Interest Securities for the related
Interest Accrual Period. See "Description of the
Securities -- Payments or Distributions of
Principal and Interest -- Payments or
Distributions of Principal."
Unscheduled Payments or
Distributions ............. If specified in the related Prospectus
Supplement, the Securities of a Series will be
subject to receipt of payments and/or
distributions before the next scheduled Payment
Date or Distribution Date as described under
"Description of Securities -- Payments or
Distributions of Principal and Interest --
Unscheduled Payments or Distributions."
Allocation of Losses ...... If so specified in the related Prospectus
Supplement, on any Payment Date or Distribution
Date, as applicable, on which the principal
balance of the Mortgage Assets relating to a
Series is reduced due to losses on such Mortgage
Assets, (i) the amount of such losses will be
allocated first, to reduce the aggregate
outstanding principal balance of the Subordinate
Securities of such Series or other subordination,
if any, and, thereafter, to reduce the aggregate
outstanding principal balance of the remaining
Securities of such Series in the priority and
manner specified in such Prospectus Supplement
until the aggregate outstanding principal balance
of each Class of such Securities so specified has
been reduced to zero or paid in full, thus
reducing the amount of principal payable or
distributable on each such Class of Securities or
(ii) such losses may be allocated in any other
manner set forth in the related Prospectus
Supplement. Unless otherwise specified in the
related Prospectus Supplement, such reductions of
principal of a Class or Classes of Securities
will be allocated to the Holders of the
Securities of such Class or Classes pro rata in
the proportion which the outstanding principal of
each Security of such Class or Classes bears to
the aggregate outstanding principal balance of
all Securities of such Class. See "Description
of the Securities -- Payments or
- 16 -
<PAGE> 18
Distributions of Principal and Interest --
Payments or Distributions of Principal."
Stated Maturity and Assumed
Final Distribution Date .... The "Stated Maturity" for each Class of Bonds of
a Series will be the date specified in the
related Prospectus Supplement no later than which
all the Bonds of such Class will be fully paid,
as determined on the basis of the assumptions set
forth in the related Prospectus Supplement. The
"Assumed Final Distribution Date" for each Class
of Certificates of a Series will be the date
specified in the related Prospectus Supplement
after which no Certificates of such Class will
remain outstanding, as determined on the basis of
the assumptions set forth in the related
Prospectus Supplement. The Assumed Final
Distribution Date of a Class of Certificates may
equal the maturity date of the Mortgage Asset in
the related Trust which has the latest stated
maturity or will be determined as described
herein and in the related Prospectus Supplement.
The actual maturity date of the Securities of a
Series will depend primarily upon the level of
prepayments with respect to the Mortgage Assets
(including the Underlying Mortgage Loans if such
Mortgage Assets consist of Mortgage Certificates)
securing or underlying such Series of Securities.
The actual maturity of any Securities is likely
to occur earlier and may occur substantially
earlier than its Stated Maturity or Assumed Final
Distribution Date, as applicable, as a result of
the application of prepayments to the reduction
of the principal balances of the Securities. The
rate of prepayments on the Mortgage Assets
securing or underlying a Series will depend on a
variety of factors, including certain
characteristics of such Mortgage Loans and the
prevailing level of interest rates from time to
time, as well as on a variety of economic,
demographic, tax, legal, social and other
factors. No assurance can be given as to the
actual prepayment experience with respect to a
Series. See "Special Considerations."
Redemption of Bonds ........ To the extent provided in the related Prospectus
Supplement, the Bonds of any Class of Series may
be (i) redeemed at the request of holders of such
Bonds; (ii) redeemed at the option of the Company
or another party specified in the related
Prospectus Supplement; or (iii) subject to
special redemption under certain circumstances.
The circumstances and terms under which the Bonds
of a Series may be redeemed will be described in
the related Prospectus Supplement.
Termination or
Repurchase with
Respect to Certificates .... To the extent provided in the related Prospectus
Supplement, the Certificates of any Class of a
Series may be (i) repurchased at the request of
holders of such Certificates; (ii) repurchased at
the option of the Company, the Administrator, if
any, or another party specified in the related
Prospectus Supplement; or (iii) subject to
special repurchase under certain circumstances.
In
- 17 -
<PAGE> 19
addition, if so specified in the Prospectus
Supplement for a Series of Certificates, the
Company, the Administrator, if any, or another
party specified in the related Prospectus
Supplement may, at its option, cause an early
termination of the Trust for such Series by
repurchasing all of the Mortgage Assets from such
Trust, under the circumstances specified in such
Prospectus Supplement. The circumstances and
terms under which the Certificates of a Series
may be repurchased and the circumstances and
terms under which the related Trust may be
terminated will be described in the related
Prospectus Supplement.
Assets Securing or
Underlying the Securities .. Each Series of Bonds will be separately secured
by a Trust Estate. The Mortgage Assets included
in the Trust Estate with respect to a Series of
Bonds will include Mortgage Assets consisting of
one or more of the following, as specified in the
related Prospectus Supplement:
(i) mortgage-backed certificates, mortgage
pass-through certificates or mortgage
participation certificates, including
residual interests ("Agency Securities")
issued or guaranteed by the Government
National Mortgage Association ("GNMA"),
the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC");
(ii) non-publicly offered pass-through
certificates or participation certificates
which are neither issued nor guaranteed by
any agency or instrumentality of the
United States ("Non-Agency Certificates")
and which evidence undivided interests in
(a) Agency Securities, (b) a pool (a
"Mortgage Pool") of single family (one- to
four-unit) residential mortgage loans or
loans for which the related proceeds were
used to finance property improvements,
acquisition of personal property such as
home appliances or furnishings, debt
consolidation or a confirmation of
property improvements, debt consolidation
and other consumer purposes, or
participation interests therein
(collectively, "Mortgage Loans"), (c) a
pool (a "Contract Pool") of conditional
sales contracts and installment sales or
loan agreements or participation interests
therein secured by manufactured housing
("Contracts") or (d) a pool (a
"Multifamily Loan Pool") of multifamily
mortgage loans including cooperative
apartment building loans ("Multifamily
Loans");
(iii) mortgage pass-through certificates
representing beneficial interests in
certain mortgage loans or certain
mortgage-backed securities, collateralized
mortgage obligations secured by certain
mortgage loans or certain mortgage-backed
securities, and residual interest
securities relating to issuances of
mortgage pass-through certificates or
- 18 -
<PAGE> 20
collateralized mortgage obligations
(collectively, "Private Mortgage-Backed
Securities"); and
(iv) participation or other interests in any of
the foregoing.
Each Series of Certificates will represent
beneficial ownership interests in a Trust. The
Mortgage Assets included in the related Trust
with respect to a Series of Certificates will
include Mortgage Assets consisting of one or more
of the following, as specified in the related
Prospectus Supplement:
(i) Agency Securities,
(ii) Non-Agency Certificates,
(iii) a Mortgage Pool,
(iv) a Contract Pool,
(v) a Multifamily Loan Pool,
(vi) Private Mortgage-Backed Securities, and
(vii) participation or other interests in any of
the foregoing.
Trust Property may also include, or the related
Securities may also have the benefits of, certain
other Assets, including but not limited to:
reinvestment income, reserve funds, cash
accounts, insurance policies, guarantees, letters
of credit or other credit enhancement as
described in the related Prospectus Supplement,
intended to decrease the likelihood that holders
of Securities will experience delays in payments
or distributions of scheduled payments on, or
losses in respect of, the assets included in such
Trust Estate or Trust (together with the Trust
Estate or the assets of the Trust, as applicable,
the "Trust Property"). The Securities of any
Series will be entitled to payment only from the
Trust Property.
A. Agency Securities ....... Agency Securities will consist of:
(i) "fully modified pass-through" mortgage-
backed certificates guaranteed as to
timely payment of principal and interest
by the GNMA ("GNMA Certificates"),
(ii) guaranteed mortgage pass-through
certificates issued and guaranteed as to
timely payment of principal and interest
by the FNMA ("FNMA Certificates"),
(iii) mortgage participation certificates issued
and guaranteed as to timely payment of
interest and, unless otherwise specified
in the related Prospectus Supplement,
ultimate payment of principal by the FHLMC
("FHLMC Certificates"),
- 19 -
<PAGE> 21
(iv) stripped mortgage-backed securities
representing an undivided interest in all
or a part of either the principal
distributions (but not the interest
distributions) or the interest
distributions (but not the principal
distributions) or in some specified
portion of the principal and interest
distributions (but not all of such
distributions) on certain GNMA, FNMA or
FHLMC Certificates and, unless otherwise
specified in the Prospectus Supplement,
guaranteed to the same extent as the
underlying securities,
(v) other types of mortgage-backed
certificates, mortgage pass-through
certificates or mortgage participation
certificates issued or guaranteed by GNMA,
FNMA or FHLMC, such as FNMA Guaranteed
REMIC Pass-Through Certificates and FHLMC
Multiclass Mortgage Participation
Certificates, and including residual
interest securities, as described in the
related Prospectus Supplement or
(vi) a combination of such Agency Securities.
All GNMA Certificates will be backed by the full
faith and credit of the United States. No FHLMC
or FNMA Certificates will be backed, directly or
indirectly, by the full faith and credit of the
United States.
The Prospectus Supplement for a Series will
describe any Agency Securities to be included in
the related Trust Property, and will specify
certain characteristics of the mortgage loans
underlying such Agency Securities. See "Assets
Securing or Underlying the Securities -- Agency
Securities."
B. Non-Agency
Certificates ....... Non-Agency Certificates will evidence an
undivided interest in Agency Securities, a
Mortgage Loan Pool, a Contract Pool, or a
Multifamily Loan Pool. Non-Agency Certificates
themselves will have been formed by the Company
in connection with the issuance of the related
Series of Securities for purposes of ease of
administration, and will not be insured or
guaranteed by the United States or any agency or
instrumentality thereof. Unless otherwise
specified in the related Prospectus Supplement
relating to a Series, payments on the Non-Agency
Certificates to be included in the related Trust
Property will be distributed directly to the
related Trustee as registered owner of such Non-
Agency Certificates. The Prospectus Supplement
for a Series will describe any Non-Agency
Certificates to be included in the related Trust
Property, and will specify certain
characteristics of the Agency Securities,
Mortgage Loans, Contracts or Multifamily Loans
underlying such Non-Agency Certificates. See
"Assets Securing or Underlying the Securities --
Non-Agency Certificates."
- 20 -
<PAGE> 22
C. Private Mortgage-Backed
Securities .......... Private Mortgage-Backed Securities may include
(a) mortgage pass-through certificates
representing beneficial interests in certain
mortgage loans or certain mortgage-backed
securities, (b) collateralized mortgage
obligations secured by certain mortgage loans or
certain mortgage-backed securities or (c)
residual interest securities relating to an
issuance of securities of the type referred to in
clause (a) or (b). Private Mortgage-Backed
Securities may include stripped mortgage-backed
securities representing an undivided interest in
all or a part of either the principal
distributions (but not the interest
distributions) or the interest distributions (but
not the principal distributions) or in some
specified portion of the principal and interest
distributions (but not all of such distributions)
on certain mortgage loans. Private Mortgage-
Backed Securities may include securities formed
or issued by the Company (or an Owner Trust
beneficially owned by it), by an affiliate of the
Company, or by third parties. Although
individual mortgage loans underlying a Private
Mortgage-Backed Security may be insured or
guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and
the Private Mortgage-Backed Securities themselves
will not be so insured or guaranteed. The
mortgage loans underlying Private Mortgage-Backed
Securities may be secured by single-family
property, multifamily property, manufactured
homes, or by an assignment of the proprietary
lease or occupancy agreement relating to a
specific dwelling within a Cooperative and the
related shares issued by such Cooperative.
Unless otherwise specified in the related
Prospectus Supplement relating to a Series,
payments on the Private Mortgage-Backed
Securities relating to a Series will be
distributed directly to the related Trustee as
registered owner of such Private Mortgage-Backed
Securities. The Prospectus Supplement for a
Series will describe any Private Mortgage-Backed
Securities to be included in the related Trust
Property, and will specify certain
characteristics of the mortgage loans underlying
such Private Mortgage-Backed Securities. See
"Assets Securing or Underlying the Securities --
Private Mortgage-Backed Securities."
D. Mortgage Loans ......... Unless otherwise specified in the related
Prospectus Supplement, the Mortgage Loans
underlying the Non-Agency Certificates included
in the Trust Property for a Series, or the
Mortgage Loans included in the Trust Property for
a Series of Securities will be conventional
mortgage loans originated or acquired by the
Company, either directly or through an affiliate.
The residential properties securing the Mortgage
Loans may be located in or outside of the United
States. If so specified in the related
Prospectus Supplement, the Mortgage Loans
relating to a Series may include cooperative
apartment loans with respect to individual units
in cooperative apartment complexes, which loans
are secured by security interests in shares
issued by private, non-profit, cooperative
housing corporations ("Cooperatives") and in the
related proprietary leases or occupancy
agreements granting exclusive rights to occupy
- 21 -
<PAGE> 23
specific dwelling units in such Cooperatives'
buildings. In addition, the Mortgage Loans may
be secured by junior liens on the related
mortgaged properties. Mortgage Loans may include
Title I Loans.
The related Prospectus Supplement for a Series
will describe any Mortgage Loans underlying the
Non-Agency Certificates to be included in the
related Property, or the Mortgage Loans included
in the Trust Property for a Series of Securities,
and will specify certain information regarding
the payment terms of such Mortgage Loans. See
"Assets Securing or Underlying the Securities --
Mortgage Loans."
E. Contracts ............. The Contracts underlying the Non-Agency
Certificates included in the Trust Property, for
a Series, or the Contracts included in the Trust
Property for a Series of Certificates will
consist of conditional sales contracts and
installment sales or loan agreements or
participation interests therein secured by new or
used Manufactured Homes (as defined herein). As
specified in the related Prospectus Supplement,
Contracts may either be secured by new or used
Manufactured Homes (as defined herein) (a
"Secured Contract") or unsecured (an "Unsecured
Contract"). Contracts may be conventional (i.e.,
not insured or guaranteed by any government
agency), insured by the Federal Housing
Administration ("FHA"), including Title I
Contracts, or partially guaranteed by the
Veterans Administration ("VA"), as specified in
the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus
Supplement, each Contract will be fully
amortizing and will bear interest at a fixed
annual percentage rate ("APR"). The related
Prospectus Supplement for a Series will describe
any Contracts underlying the Non-Agency
Certificates included in the related Trust
Property for a Series, or the Contracts included
in the Trust Property for a Series of Securities.
The Unsecured Contracts included in the Trust
Property for a Series will not constitute a
material concentration of the assets of such
Trust Property. See "Assets Securing or
Underlying the Securities -- Contracts."
F. Multifamily Loans ..... Multifamily Loans underlying the Non-Agency
Certificates included in the Trust Property, for
a Series or the Multifamily Loans included in the
Trust Property for a Series of Certificates may,
as specified in the related Prospectus
Supplement, include fixed rate or adjustable rate
Multifamily Loans. Multifamily Loans may be
conventional multifamily mortgage loans
("Conventional Multifamily Loans") or mortgage
loans insured by the FHA ("FHA-Insured
Multifamily Loans") in each case secured by
rental apartment buildings or projects containing
five or more residential units or may be mortgage
loans with respect to apartment buildings owned
by Cooperatives. Multifamily Loans may include
Title I Loans. Adjustable rate Multifamily Loans
("Adjustable Rate Multifamily Loans") may, as
described in the related Prospectus Supplement,
permit or require periodic changes in the
interest rates borne by the Multifamily Loans
("Adjustable Multifamily Loan Rates") and in the
monthly
- 22 -
<PAGE> 24
payments made on the Multifamily Loans.
Multifamily Loans relating to a Series may, as
described in the related Prospectus Supplement,
provide for no amortization of the principal
amount of such loans prior to maturity or for a
specified period after origination, and require
the entire unpaid principal balance to be paid in
a lump sum at maturity or may provide for full
amortization of principal over the term of the
Multifamily Loan. Multifamily Loans may provide
for negative amortization as specified in the
related Prospectus Supplement.
The related Prospectus Supplement for a Series
will describe any Multifamily Loans underlying
the Non-Agency Certificates to be included in the
related Trust Property, for a Series, or the
Multifamily Loans included in the Trust Property
for a Series of Certificates. See "Assets
Securing or Underlying the Securities --
Multifamily Loans."
G. Pre-Funding
Arrangements ....... If so specified in the related Prospectus
Supplement, the Trust Property may include a pre-
funding account which will be used to acquire
additional Trust Property for a specified period
of time following the date on which the related
Securities are issued. Any such pre-funding
arrangement (a "Pre-Funding Arrangement") will
require that any Trust Property to be so acquired
will conform to the requirements specified in the
related Indenture or Pooling Agreement. See
"Assets Securing or Underlying the Securities --
Pre-Funding Arrangements."
Advances .................. Unless otherwise specified in the Prospectus
Supplement for a Series, the Servicers (in the
case of a Series of Certificates) and the Non-
Agency Servicers (in the case of Non-Agency
Certificates) of the related Mortgage Loans,
Contracts and Multifamily Loans will be obligated
to advance delinquent installments of principal
and interest (less applicable servicing fees) on
such Mortgage Loans, Contracts and Multifamily
Loans. Unless otherwise specified in the related
Prospectus Supplement, in the event a Servicer or
Non-Agency Servicer fails to make such advances,
the related Administrator (in the case of a
Series of Certificates) and the related Non-
Agency Administrator (in the case of Non-Agency
Certificates) shall be obligated to make the
advance. Any such obligation to make advances
may be limited to amounts due holders of the
related Certificates or Non-Agency Certificates,
as applicable, to amounts deemed to be
recoverable from late payments or liquidation
proceeds, to specified periods or any combination
thereof, in each case as specified in the related
Prospectus Supplement. Any such advance will be
recoverable by the applicable Servicer (or the
related Administrator) as specified in the
related Prospectus Supplement.
Credit Enhancement ........ If specified in the related Prospectus
Supplement, a Series, or certain Classes within
such Series, may have the benefit of one or more
types of credit enhancement ("Credit
Enhancement") including but not limited to
subordination, cross support, mortgage pool
insurance, special hazard insurance, a bankruptcy
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bond, reserve funds, other insurance, guarantees
and similar instruments and arrangements. The
protection against losses afforded by any such
Credit Enhancement will be limited. See "Credit
Enhancement."
Book Entry Registration ... If the Prospectus Supplement for a Series so
provides, Securities of one or more Classes of
such Series may be issued in book entry form
("Book Entry Securities") in which case a single
Bond or Certificate, as applicable, will be
issued in the name of a clearing agency (a
"Clearing Agency") registered with the Securities
and Exchange Commission, or its nominee.
Transfers and pledges of Book Entry Securities
may be made only through entries on the books of
the Clearing Agency in the name of brokers,
dealers, banks and other organizations eligible
to maintain accounts with the Clearing Agency
("Clearing Agency Participants") or their
nominees. Transfers and pledges by purchasers
and other beneficial owners of Book Entry
Securities ("Beneficial Owners") other than
Clearing Agency Participants may be effected only
through Clearing Agency Participants. Beneficial
Owners will receive payments or distributions of
principal and interest, and, if applicable, may
tender Securities for redemption or repurchase to
the related Trustee, only through the Clearing
Agency and Clearing Agency Participants. Except
as otherwise specified in this Prospectus or a
related Prospectus Supplement, the terms
"Securityholders" and "holders" shall be deemed
to include Beneficial Owners. See "Special
Considerations -- Book Entry Registration" and
"Description of the Securities -- Book Entry
Registration."
Certain Federal Income Tax
Consequences .............. The federal income tax consequences to Holders of
a Series will depend on, among other factors,
whether one or more elections are made to treat
the related Trust Property 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"). The Prospectus Supplement for each
Series will specify whether such an election will
be made.
If the applicable Prospectus Supplement so
specifies with respect to a Series of Securities,
one or more REMIC elections will be made with
respect to such Series of Securities. Securities
of such Series will be designated as "regular
interests" in a REMIC ("Regular Securities") or
as "residual interests" in a REMIC ("Residual
Securities").
If the applicable Prospectus Supplement so
specifies with respect to a Series of Securities,
the Securities of such Series will not be treated
as regular or residual interests in a REMIC for
federal income tax purposes but instead will be
treated as (i) indebtedness of the Issuer, (ii)
an undivided beneficial ownership interest in the
Mortgage Assets (and the arrangement pursuant to
which the Mortgage Assets will be held and the
Securities will be issued will be treated as a
grantor trust under
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<PAGE> 26
Subpart E, part I of subchapter J of Chapter 1 of
Subtitle A of the Code and not as an association
taxable as a corporation for federal income tax
purposes); (iii) equity interests in an
association that will satisfy the requirements
for qualification as a real estate investment
trust; or (iv) interests in an entity that will
satisfy the requirements for qualification as a
partnership for federal income tax purposes. The
federal income tax consequences to Holders of any
such Series will be described in the related
Prospectus Supplement to the extent not described
herein.
Compound Interest Securities and Principal Only
Securities will, and certain other Classes of
Securities may, be issued with original issue
discount that is not de minimis. In such cases,
the Holder will be required to include the
original issue discount in gross income as it
accrues, which may be prior to the receipt of
cash, or a portion of the cash, attributable to
such income. If a Security is issued at a
premium, the Holder will be entitled to make an
election to amortize such premium on a constant
yield method. Securities constituting regular or
residual interests in a REMIC will generally
represent "qualifying real property loans" for
mutual savings banks and domestic building and
loan associations, "loans secured by an interest
in real property" for domestic building and loan
associations and "real estate assets" for real
estate investment trusts to the extent that the
underlying mortgage loans and interest thereon
qualify for such treatment. Non-REMIC Securities
will not qualify for such treatment.
A Holder of a Residual Security will be required
to include in its income its pro rata share of
the taxable income of the REMIC. In certain
circumstances, the Holder of a Residual Security
may have REMIC taxable income or tax liability
attributable to REMIC taxable income for a
particular period in excess of cash distributions
for such period or have an after-tax return that
is less than the after-tax return on comparable
debt instruments. In addition, a portion (or, in
some cases, all) of the income from a Residual
Security (i) except in certain circumstances with
respect to a Holder classified as a thrift
institution under the Code, may not be subject to
offset by losses from other activities, (ii) for
a Holder that is subject to tax under the Code on
unrelated business taxable income, may be treated
as unrelated business taxable income and (iii)
for a foreign Holder, may not qualify for
exemption from or reduction of withholding.
Further, individual Holders are subject to
limitations on the deductibility of expenses of
the REMIC. See "Certain 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 the Code should
carefully review with its own legal advisors
whether the purchase or holding of Securities
could give rise to a transaction prohibited or
otherwise impermissible under ERISA or the Code.
See "ERISA Considerations." To the extent
described in the Prospectus
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<PAGE> 27
Supplement for a Series, certain Classes of
Securities of such Series may not be transferred
unless the Trustee and the Company are furnished
with a letter of representation or an opinion of
counsel to the effect that such transfer will not
result in a violation of the prohibited
transaction provisions of ERISA and the Code and
will not subject the Trustee, the Company or the
Administrator, if any, to additional obligations.
Additionally, unless otherwise specified in the
related Prospectus Supplement, Securities
representing an "equity" interest in a Mortgage
Pool consisting of multifamily mortgage loans may
not be transferred to an employee benefit plan or
other retirement plan or arrangement subject to
ERISA. See "Description of the Securities --
General" and "ERISA Considerations."
Legal Investment Matters .. Unless otherwise specified in the related
Prospectus Supplement, Securities of each Series
will constitute "mortgage related securities"
under the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") and, as such, will be legal
investments for certain types of institutional
investors to the extent provided in SMMEA,
subject, in any case, to any other regulations
which may govern investments by such
institutional investors. See "Legal Investment
Matters."
Use of Proceeds ........... Substantially all of the net proceeds from the
sale of a Series will be applied to the
simultaneous purchase of the Mortgage Assets
included in the related Trust Property or to
reimburse the amounts previously used to effect
such purchase, the costs of carrying the Mortgage
Assets until sale of such Series and to pay other
expenses connected with pooling the Mortgage
Assets and issuing such Series. See "Use of
Proceeds."
Rating .................... It is a condition to the issuance of each Class
of a Series specified as being offered by the
related Prospectus Supplement that the Securities
of such Class be rated in one of the four highest
rating categories established for such Securities
by a nationally recognized statistical rating
agency.
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<PAGE> 28
RISK FACTORS
Prospective investors in the Securities should consider, among other
things, the following factors in connection with the purchase of the
Certificates:
GENERAL
An investment in Securities secured by or evidencing interests in a
Mortgage Pool may be affected by, among other things, a decline in real estate
values or a decline in mortgage interest rates. 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
related Mortgaged Properties, in a particular Mortgage Pool become equal to or
greater than the value of the Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the mortgage lending industry. To the extent that such losses
are not covered by applicable insurance policies, if any, or by any Credit
Enhancement as described herein, Holders of Securities secured by or 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
related Mortgaged Properties for recovery of the outstanding principal and
unpaid interest of the defaulted Mortgage Loans. See "Assets Securing or
Underlying the Securities -- Mortgage Loans."
An investment in Securities secured by or evidencing interests in a
Multifamily Loan Pool may also be affected, among other things, by a decline in
real estate values or a decline in mortgage interest rates. The actual rates
of delinquencies, foreclosures and losses on Multifamily Loans could be
affected by adverse changes in general economic conditions and by local
conditions including excessive building resulting in an oversupply of rental
housing stock or a decrease in employment reducing the demand for rental units
in the area, by federal, state or local regulations and controls affecting
rents, prices of goods, fuel and energy consumption and prices, water and
environmental restrictions affecting new construction, by increasing labor and
materials costs, and by the relative attractiveness to tenants of the
multifamily rental projects securing such Multifamily Loans and their
neighborhoods. Repayment of a Multifamily Loan secured by an apartment
building owned by a cooperative will depend primarily on the receipt of
payments from the tenant-stockholders of the cooperative and its ability to
refinance the loan at maturity. To the extent that such losses are not covered
by applicable insurance policies, if any, or by any Credit Enhancement, Holders
of Securities secured by or evidencing interests in a Multifamily Loan Pool
will bear all risk of loss resulting from default by mortgagors and will have
to look primarily to the value of the multifamily projects for recovery of the
outstanding principal and unpaid interest of the defaulted Multifamily Loans.
See "Assets Securing or Underlying the Securities -- Multifamily Loans."
An investment in Securities secured by or evidencing interests in
Contracts may be affected by, among other things, a downturn in regional or
local economic conditions. These regional or local economic conditions are
often volatile, and historically have affected the delinquency, loan loss and
repossession experience of Contracts. To the extent that losses on Contracts
are not covered by applicable insurance policies, if any, or by any Credit
Enhancement, Holders of the Securities secured by or evidencing interests in
such Contracts will bear all risk of loss resulting from default by obligors
and will have to look primarily to the value of the Manufactured Homes for
recovery of the outstanding principal and unpaid interest of the defaulted
Contracts. See "Assets Securing or Underlying the Securities -- Contracts."
PREPAYMENT AND YIELD CONSIDERATIONS
The prepayment experience on the Mortgage Loans, the Multifamily Loans,
and the Contracts included in the Trust Property or underlying the Non-Agency
Certificates included in the Trust Property, and on the mortgage loans
underlying the Agency Securities and the Private Mortgage-Backed Securities
(the "Underlying Mortgage Loans") will affect the average life of each Class of
Securities relating to the Trust Property including such Mortgage Assets.
Prepayments on the Mortgage Loans, the Multifamily Loans, the Contracts and the
Underlying 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, the Multifamily Loans, the Contracts or
the Underlying Mortgage Loans (giving consideration to the cost of refinancing)
and prevailing mortgage rates. In general, if mortgage interest rates fall
below the interest rates on the Mortgage Loans, the Multifamily Loans, the
Contracts or the Underlying Mortgage Loans
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<PAGE> 29
relating to a Series, the rate of prepayment would be expected to increase and
Securityholders of such Series may be unable to reinvest such payments in
securities of comparable quality having interest rates similar to those borne
by the Securities of such Series. Conversely, if mortgage interest rates rise
above the interest rates on the Mortgage Loans, the Multifamily Loans, the
Contracts or the Underlying Mortgage Loans, the rate of prepayment would be
expected to decrease. Prepayments on Multifamily Loans may also be influenced
by a variety of economic factors affecting project sale or refinancing,
including, without limitation, the relative tax benefits of continued ownership
of the property as a result of changes in federal tax law, among other factors.
Prepayments may be influenced by a variety of economic, geographic, social and
other factors, including aging, seasonality and interest rate fluctuations.
Other factors affecting prepayment of mortgage loans include changes in housing
needs, job transfers, unemployment and servicing decisions.
Additional prepayment, yield and weighted average life considerations
with respect to a Series of Securities will be set forth in the related
Prospectus Supplement.
RISKS ASSOCIATED WITH CERTAIN LOAN ASSETS
NO HAZARD INSURANCE FOR TITLE I MORTGAGE LOANS. With respect to any
Title I Loans, the FHA Regulations do not require that a borrower obtain title
or fire and casualty insurance as a condition to obtaining a property
improvement loan. With respect to both manufactured home contracts that are
Title I Contracts and property improvement loans that are Title I Loans, if the
related Mortgage Property is located in a flood hazard area, however, flood
insurance in an amount at least equal to the loan amount is required. In
addition, the FHA Regulations do not require that the borrower obtain insurance
against physical damage arising from earth movement (including earthquakes,
landslides and mudflows) as a condition to obtaining a property improvement
loan insured under the Title I Program. Accordingly, if a Mortgaged Property
that secures a Title I Loan suffers any uninsured hazard or casualty losses,
holders of any Securities secured in whole or in part by Title I Loans may bear
the risk of loss resulting from a default by the borrower to the extent such
losses are not recovered by foreclosure on the defaulted loans or from any FHA
claims payments. Such loss may be otherwise covered by amounts available from
the credit enhancement provided for the Securities, as specified in the related
Prospectus Supplement.
CONTRACTS SECURED BY MANUFACTURED HOMES. The Contracts will be secured
by security interests in Manufactured Homes that are not considered to be real
property because they are not permanently affixed to real estate. Perfection
of security interests in such Manufactured Homes and enforcement of rights to
realize upon the value of such Manufactured Homes as collateral for the Secured
Contracts are subject to a number of Federal and state laws, including the
Uniform Commercial Code as adopted in each state and each state's certificate
of title statutes. The steps necessary to perfect the security interest in a
Manufactured Home will vary from state to state. Because of the expense and
administrative inconvenience involved, the Servicer of a Secured Contract will
not amend any certificate of title to change the lienholder specified therein
from such Servicer to the Issuer or the applicable Trustee and will not deliver
any certificate of title to such Issuer or Trustee or note thereon such
Issuer's or Trustee's interest. Consequently, in some states, in the absence
of such an amendment, the assignment to such Issuer or Trustee of the security
interest in the Manufactured Home may not be effective or such security
interest may not be perfected and, in the absence of such notation or delivery
to such Issuer or Trustee, the assignment of the security interest in the
Manufactured Home may not be effective against creditors of the Servicer or a
trustee in bankruptcy of the Servicer. If any related Credit Enhancement is
exhausted and a Secured Contract is in default, then recovery of amounts due on
such Secured Contracts is dependent on repossession and resale of the
Manufactured Home securing such Secured Contract. Certain other factors may
limit the ability of the Servicer to realize upon the Manufactured Homes or may
limit the amount realized to less than the amount due.
UNSECURED CONTRACTS. The obligations of the borrower under any
Unsecured Contract included as part of the related Trust Property will not be
secured by an interest in the related real estate or otherwise, and the related
Issuer, as the owner of such Unsecured Contract and the related Trustee, as
assignee for the benefit of the Holders of Bonds, of the Issuer's interest in
such Unsecured Contract, will be a general unsecured creditor as to such
obligations. As a consequence, in the event of a default under an Unsecured
Contract, the related Issuer or Trustee, as applicable, will have recourse only
against the borrower's assets generally, along with all other general unsecured
creditors of the borrower. In a bankruptcy or insolvency proceeding relating
to an borrower on an Unsecured Contract, the obligations of the borrower under
such Unsecured Contract may be discharged in their entirety, notwithstanding
the fact that the
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<PAGE> 30
portion of such borrower's assets made available to the related Trustee as a
general unsecured creditor to pay amounts due and owing thereunder are
insufficient to pay all such amounts. A borrower on an Unsecured Contract may
not demonstrate the same degree of concern over performance of its obligations
under such Unsecured Contract as if such obligations were secured by a single
family residence owned by such borrower.
CONSUMER PROTECTION LAWS RELATED TO CONTRACTS. Numerous federal and
state consumer protection laws impose requirements on lending under retail
installment sales contracts and installment loan agreements such as the
Contracts, and the failure by the lender or seller of goods to comply with such
requirements could give rise to liabilities of assignees for amounts due under
such agreements and claims by such assignees may be subject to set-off as a
result of such lender's or seller's noncompliance. These laws would apply to a
Trustee as an assignee of Contracts. The Company will warrant that each
Contract complies with all requirements of law and, with respect to any Secured
Contract, will make certain warranties relating to the validity, subsistence,
perfection and priority of the security interest in each Manufactured Home
securing such Secured Contract. A breach of any such warranty that materially
adversely affects the interests of the Securityholders in any Contract would
create an obligation of the Seller to repurchase or replace such Contract
unless such breach is cured.
RELIANCE ON MANAGEMENT OF TIMESHARE UNITS. Unlike most conventional
single-family residential properties, the value of a timeshare unit is
substantially dependent on the management of the resort property in which it is
located. Management of timeshare resort properties includes operation of a
reservation system, maintenance of the physical structure, refurbishing of
individual units, maintenance and management of common areas and recreational
facilities, and facilitating the rental of individual units on behalf of
timeshare owners. In addition, timeshare units, which are purchased for
intervals of one or more specified weeks each year, are marketed as the owner's
purchase of future vacation opportunities rather than as a primary residence, a
second home or an investment. Accordingly, while borrowers are obligated to
make payments under their Mortgage Loans irrespective of any defect in, damage
to or change in conditions (such as poor management, faulty construction or
physical, social or environmental conditions) relating to the timeshare
properties, any such defect, damage or change in conditions could result in
delays in payment or in defaults by borrowers whose timeshare units are
affected.
MORTGAGED PROPERTIES NOT LOCATED IN THE UNITED STATES. If so provided
in the related Prospectus Supplement, the Trust Property with respect to a
Series may include Mortgage Loans or Multifamily Loans that are, or Non-Agency
Certificates backed by Mortgage Loans or Multifamily Loans that are, secured by
Mortgaged Properties not located in the United States. The related Prospectus
Supplement will set forth certain material risks associated with such Mortgage
Loans or Multifamily Loans which are different and additional to those
associated with similar properties in the United States, including restrictions
on enforcement of the rights of the holder of the debt secured by such
properties, currency exchange rate fluctuations, currency exchange controls and
general trends or conditions in the related real estate market.
LIMITED LIQUIDITY
There will be no market for the Securities of any Series prior to the
issuance thereof, and there can be no assurance that a secondary market will
develop or, if it does develop, that it will provide the related Holders with
liquidity of investment or will continue for the life of such Series. The
market value of the Securities will fluctuate with changes in prevailing rates
of interest. Consequently, the sale of Securities by a Holder in any market
that may develop may be at a discount from par value or their purchase price.
Unless otherwise specified in the Prospectus Supplement for a Series, Holders
of the Securities of such Series will have no right to request redemption or
repurchase of such Securities, and such Securities will be subject to
redemption only under the limited circumstances described in such Prospectus
Supplement.
LIMITED ASSETS
The Issuer with respect to a Series will not have, nor will it be
expected in the future to have, any significant assets available for payments
on such Series other than the related Trust Property. The Bonds will be non-
recourse obligations of the related Issuer and each Series of Bonds will be
separately secured. Unless otherwise specified in the related Prospectus
Supplement, no Series of Bonds will have any claim against or any security
interest in the Mortgage Assets or other Assets pledged to secure any other
Series. If the Mortgage Assets and other Assets securing a Series
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<PAGE> 31
of Bonds is insufficient to make payments on such Bonds, no other assets of an
Issuer will be available for payment of the deficiency. In addition, unless
otherwise set forth in the Prospectus Supplement for a Series of Certificates,
the Trust Property for such Series will be the only available source of funds
to make distributions on the Certificates of such Series.
The only obligations, if any, of the Company with respect to a Series
will be to obtain certain representations and warranties from each Seller of
the related Mortgage Assets and to assign to the related Trustee (or, in the
case of Bonds issued by an Owner Trust, to such Owner Trust) the Company's
rights with respect thereto, and its obligations pursuant to certain
representations and warranties made by it. The Company does not have, and is
not expected in the future to have, any significant assets. If the Company
were required to repurchase a Mortgage Asset included in the Trust Property for
a Series, its only sources of funds to make such repurchase would be from funds
obtained from the enforcement of a corresponding obligation, if any, on the
part of the Seller of such Mortgage Asset or the related Servicer (if any), as
the case may be, or from a Reserve Fund, if any, established to provide funds
for such repurchases.
Immediately after each required payment or distribution of principal of,
and interest on, a Series has been paid in full, funds held in one or more
accounts maintained pursuant to the related Indenture or Pooling Agreement, as
applicable, if not required to be deposited in any related Reserve Fund or
otherwise applied pursuant to the related Indenture or Pooling Agreement, may
be withdrawn under certain circumstances and conditions described in the
related Prospectus Supplement, or may be distributed to a party specified in
such Indenture or Pooling Agreement. In addition, certain amounts remaining in
related Reserve Funds with respect to a Series may likewise be withdrawn or
distributable to a party specified in the related Indenture or Pooling
Agreement after such Reserve Funds reach certain prescribed balances, or after
the principal balances of the Securities of such Series have been reduced to a
prescribed level, in which cases such amounts would no longer be available to
make payments on such Securities.
Because payments or distributions of principal on the Securities of a
Series may, if so provided in the related Prospectus Supplement, be applied to
outstanding Classes of such Series in the priority specified in the related
Prospectus Supplement, a deficiency that arises after Securities of a Class of
any such Series having higher priority in payment have been fully or partially
repaid will have a disproportionately greater effect on the Securities of
Classes of such Series having lower priority in payment. The disproportionate
effect of any such deficiency is further increased in the case of Classes of
Compound Interest Securities of any Series because, prior to the retirement of
all Classes of such Series having higher priority in payment than such Compound
Interest Securities, interest is not payable, unless otherwise provided in the
related Prospectus Supplement, but is accrued and added to the principal of
such Compound Interest Securities.
In addition, due to the priority of payments and the allocation of
losses, defaults experienced on the Mortgage Assets included in the Trust
Property for a Series of Special Allocation Securities may have a
disproportionate effect on a specified Class or Classes within such Series. If
so specified in the Prospectus Supplement for a Series of Special Allocation
Securities, on any Payment Date or Distribution Date, as applicable, for such
Series on which the principal balance of the related Mortgage Assets is reduced
due to losses on such Mortgage Assets (i) the amount of such losses shall be
allocated first to reduce the aggregate outstanding principal balance of the
Subordinate Securities and thereafter to reduce the aggregate outstanding
principal balance of the remaining Securities in the priority and manner
specified in such Prospectus Supplement until the aggregate outstanding
principal balance of each Class of Securities so specified has been reduced to
zero or paid in full, thereby reducing the amount of principal payable on each
such Class of Securities or (ii) such losses may be allocated in any other
manner set forth in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, such reductions of principal of
a Class of a Series will be allocated to the Holders of the Securities of such
Class pro rata in their proportion which the outstanding principal balance of
each Security of such Class bears to the aggregate outstanding principal
balance of all Securities of such Class.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT
As specified in the related Prospectus Supplement with respect to each
Series, Credit Enhancement will be provided to the extent required by the
rating agencies requested to rate any Securities of such Series of
Certificates. Credit Enhancement with respect to a Series will be provided in
one or more of the forms described in the related
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<PAGE> 32
Prospectus Supplement, including, but not limited to, prioritization as to
payments of one or more Classes of such Series, a Mortgage Pool Insurance
Policy, a Special Hazard Insurance Policy, a bankruptcy bond, one or more
Reserve Funds, other insurance, guarantees and similar instruments and
agreements, or any combination thereof. Regardless of the form of Credit
Enhancement provided with respect to a Series, the amount of coverage will be
limited in amount and in most cases will be subject to periodic reduction in
accordance with a schedule or formula. Furthermore, such Credit Enhancement
may provide only very limited coverage as to certain types of losses, and may
provide no coverage as to certain other types of losses. The related Trustee
will generally be permitted to reduce, terminate or substitute all or a portion
of the Credit Enhancement for a Series, if the applicable rating agencies
indicate that the then-current rating of the Securities of such Series will not
be adversely affected.
LIMITATIONS ON FHA INSURANCE FOR TITLE I LOANS.
The related Prospectus Supplement will specify the number and percentage
of the Title I Loans and/or Title I Contracts, if any, included in the related
Trust Property that are partially insured by the FHA pursuant to Title I
Program. Since the FHA Insurance Amount for the Title I Loans and Title I
Contracts is limited as described herein and in the related Prospectus
Supplement, and since the adequacy of such FHA Insurance Amount is dependent
upon future events, including reductions for the payment of FHA claims, no
assurance can be given that the FHA insurance amount is or will be adequate to
cover 90% of all potential losses on the Title I Loans and Title I Contracts
included in the related Trust Property. If the FHA insurance amount for the
Title I Loans and Title I Contracts is reduced to zero, such loans and
contracts will be effectively uninsured from and after the date of such
reduction. Under the Title I Program, until a claim for insurance
reimbursement is submitted to the FHA, the FHA does not review or approve for
qualification for insurance the individual Title I Loan or Title I Contract
insured thereunder (as is typically the case with other federal loan insurance
programs). Consequently, the FHA has not acknowledged that any of the Title I
Loans and Title I Contracts are eligible for FHA insurance, nor has the FHA
reviewed or approved the underwriting and qualification by the originating
lenders of any individual Title I Loans and Title I Contracts. See "Certain
Legal Aspects of the Loan Assets -- The Title I Program".
The availability of FHA Insurance reimbursement following a default on a
Title I Loan or Title I Contract is subject to a number of conditions,
including strict compliance by the originating lender of such loan, the
Company, the FHA Claims Administrator, the Servicer and any subservicer with
the FHA Regulations in originating and servicing such Title I Loan or Title I
Contract, and limits on the aggregate insurance coverage available in the
Company's FHA Reserve. For example, the FHA Regulations provide that, prior to
originating a Title I Loan or Title I Contract, a Title I lender must exercise
prudence and diligence in determining whether the borrower and any co-maker or
co-signer is solvent and an acceptable credit risk with a reasonable ability to
make payments on the loan. Although the related Seller will represent and
warrant that the Title I Loans and Title I Contracts have been originated and
serviced in compliance with all FHA Regulations, these regulations are
susceptible to substantial interpretation. Failure to comply with all FHA
Regulations may result in a denial of FHA Claims, and there can be no assurance
that the FHA's enforcement of the FHA Regulations will not become stricter in
the future. See "Certain Legal Aspects of the Loan Assets -- The Title I
Program -- General".
The FHA will not recognize any Issuer or any Securityholders as the
owners of the Title I Loans or Title I Contracts, or any portion thereof,
entitled to submit FHA Claims. Accordingly, neither the Issuer nor the
Securityholders will have a direct right to receive insurance payments from the
FHA. The Company will contract with a Servicer specified in the Prospectus
Supplement to serve as the Administrator for FHA Claims (the "FHA Claims
Administrator") pursuant to an FHA claims administration agreement (the "FHA
Claims Administration Agreement"), which will provide for the FHA Claims
Administrator to handle all aspects of administering, processing and submitting
FHA Claims with respect to the Title I Loans or Title I Contracts, in the name
and on behalf of the Company. The Securityholders will be dependent on the FHA
Claims Administrator to (i) make claims on the Title I Loans or Title I
Contracts in accordance with FHA Regulations and (ii) remit all FHA Insurance
proceeds received from the FHA in accordance with the related Pooling
Agreement. The Securityholders' rights relating to the receipt of payment from
and the administration, processing and submission of FHA Claims by the Company
or any FHA Claims Administrator are limited and governed by the related Pooling
Agreement, and the FHA Claims Administration Agreement and these functions are
obligations of the Company and the FHA Claims Administrator, but not the FHA.
See "Certain Legal Aspects of the Loan Assets -- The Title I Program -- Claims
Procedures under Title I".
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LIMITED NATURE OF RATINGS
Any rating assigned by a rating agency to a Class of Securities will
reflect only its assessment of the likelihood that holders of such Securities
will receive payments or distributions to which such Securityholders are
entitled under the related Indenture, Deposit Trust Agreement or Pooling
Agreement. Such rating will not constitute an assessment of the likelihood
that principal prepayments on the Mortgage Assets will be made, the degree to
which the rate of such prepayments might differ from that originally
anticipated or the likelihood of early optional redemption or termination of
the Securities. Furthermore, such rating will not address the possibility that
prepayment of the Mortgage Assets at a higher or lower rate than anticipated by
an investor may cause such investor to experience a lower than anticipated
yield or that an investor that purchases a Security at a significant premium
might fail to recover its initial investment under certain prepayment
scenarios. Hence, a rating assigned by a rating agency does not guarantee or
ensure the realization of any anticipated yield on a Class of Securities.
The amount, type and nature of credit enhancement, if any, provided with
respect to a Series of Securities will be determined on the basis of criteria
established by each rating agency rating a Class of Securities of such Series.
Those criteria are sometimes based upon an actuarial analysis of the behavior
of similar types of loans in a larger group. However, there can be no
assurance that the historical data supporting any such actuarial analysis will
accurately reflect future experience, or that the data derived from a large
pool of similar types of assets will accurately predict the delinquency,
default or loss experience of any particular pool of Mortgage assets. In other
cases, such criteria may be based upon determination of the values of the
Mortgaged Properties or other properties, if any, that provide security for the
Mortgage Assets. However, no assurance can be given that those values will not
decline in the future. As a result, the Credit Enhancement required in respect
of the Securities of any Series may be insufficient to fully protect the
holders thereof from losses on the related Mortgage Assets. See "--
Limitations, Reductions and Substitutions of Credit Enhancement" and "Credit
Enhancement".
ORIGINAL ISSUE DISCOUNT; RESIDUAL CERTIFICATES
All of the Compound Interest Securities and Principal Only Securities
will be, and certain of the other Securities may be, issued with original issue
discount for federal income tax purposes. A Holder of a Security issued with
original issue discount will be required to include original issue discount in
ordinary gross income for federal income tax purposes as it accrues, in advance
of receipt of the cash, or a portion of the cash, attributable to such income.
Accrued but unpaid interest on the Compound Interest Securities generally will
be treated as original issue discount for this purpose. At certain rapid
Mortgage Asset prepayment rates, original issue discount may accrue on certain
Classes of Securities, including certain variable rate Regular Securities, that
may never be received as cash, resulting in a subsequent loss on such
Securities. See "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Securities -- Taxation of Regular Securities -- Original
Issue Discount" and "Certain Federal Income Tax Consequences -- Federal Income
Tax Consequences for Securities as to Which No REMIC Election Is Made -- Non-
REMIC Bonds" and "-- Standard Certificates -- Premium and Discount -- Original
Issue Discount" and "-- Stripped Certificates -- Taxation of Stripped
Certificates -- Original Issue Discount."
An election may be made to treat all or the Trust Property with respect
to a Series as a REMIC for federal income tax purposes. Holders ("Residual
Holders") of Securities representing the residual interests in the related
REMIC ("Residual Securities") must report on their federal income tax returns
their pro rata share of REMIC taxable income or loss. All or a portion of the
REMIC taxable income reportable by Residual Holders may be treated as such
holders' "excess inclusion" subject to special rules for federal income tax
purposes. The REMIC taxable income, and possibly the tax liabilities of the
Residual Holders, may exceed the cash distributions on the Residual Securities
during certain periods. Residual Holders who are individuals may be subject to
limitations on the deductibility of servicing fees on the related Mortgage
Assets and other REMIC administrative expenses. Hence, Residual Holders may
experience an after-tax return that is significantly lower than would be
anticipated based upon the stated interest rate, if any, of their Residual
Securities. See "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Securities -- Taxation of Residual Securities."
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FUNDS AVAILABLE FOR REDEMPTIONS OR REPURCHASES AT THE REQUEST OF HOLDERS
With respect to any Series for which the related Prospectus Supplement
provides for redemptions or repurchases of the Securities of such Series at the
request of Holders, there can be no assurance that amounts available for such
redemptions or repurchases, if any, for such Securities will be sufficient to
permit such Securities to be redeemed or repurchased within a reasonable time
after redemption or repurchase is requested, for reasons including the
following:
1. Scheduled principal payments on the related Mortgage Assets generally
will be minimal in the early years and will increase in the later years of such
Mortgage Assets. As a result, funds available to be applied to redemptions or
repurchases at the request of Holders, may be expected to be limited in the
early years and to increase during the later years of each Series. Accordingly,
the availability of funds for redemptions or repurchases of Securities of any
Series at the request of Holders will depend largely upon the rates of
prepayment of the related Mortgage Assets. See "Certain Yield, Prepayment and
Weighted Average Life Considerations" in the related Prospectus Supplement.
2. Prepayments of principal on Mortgage Assets are less likely to occur
during periods of higher interest rates when it is more likely that requests
for redemption by Holders will be made. During periods in which prevailing
interest rates are higher than the interest rate paid on Securities that may be
redeemed at the request of Holders, greater numbers of such Securities are
expected to be tendered for redemption in order to take advantage of the higher
interest rates payable on other investments then available. During such
periods, there will likely also be a reduction in the rate of prepayments on
the related Mortgage Assets, thus limiting the funds available to satisfy
requested redemption by Holders.
3. As specified in the related Prospectus Supplement, certain Holders,
such as personal representatives of deceased Holders, may have certain
priorities as to redemption at the request of Holders.
BOOK ENTRY REGISTRATION
Because transfers and pledges of Book Entry Securities can be effected
only through book entries at a Clearing Agency through Clearing Agency
Participants, the liquidity of the secondary market for Book Entry Securities
may be reduced to the extent that some investors are unwilling to hold
Securities in book entry form in the name of Clearing Agency Participants and
the ability to pledge Book Entry Securities may be limited due to lack of a
physical certificate. Beneficial Owners of Book Entry Securities may, in
certain cases, experience delay in the receipt of payments of principal and
interest since such payments will be forwarded by the related Trustee to the
Clearing Agency who will then forward payment to the Clearing Agency
Participants who will thereafter forward payment to Beneficial Owners. In the
event of the insolvency of the Clearing Agency or of a Clearing Agency
Participant in whose name Securities are recorded, the ability of Beneficial
Owners to obtain timely payment and (if the limits of applicable insurance
coverage by the Securities Investor Protection Corporation are exceeded, or if
such coverage is otherwise unavailable) ultimate payment of principal and
interest on Book Entry Securities may be impaired.
NATURE OF DIRECT OR INDIRECT BACKING FOR SECURITIES
Only Agency Securities are guaranteed by an agency or instrumentality of
the United States and only the guarantee by GNMA of GNMA Certificates is
entitled to the full faith and credit of the United States. The guaranteed by
FNMA and FHLMC of FNMA Certificates and FHLMC Certificates, respectively, are
backed only by the credit of FNMA, a federally chartered privately owned
corporation, or by the credit of FHLMC, a federally chartered corporation
controlled by the Federal Home Loan Banks. See "Assets Securing or Underlying
the Securities -- Agency Securities." Although payment of principal of, and
interest on, any Agency Security securing or underlying a Series will be
guaranteed by either GNMA, FNMA or FHLMC, such guarantee will run only to such
Agency Security and will not guarantee the payment of principal or interest on
the Securities of such Series. The Prospectus Supplement for a Series with
respect to which the related Trust Property includes Non-Agency Certificates or
Private Mortgage-Backed Securities may describe certain arrangements through
which such Non-Agency Certificates or Private Mortgage-Backed Securities and/or
the related Underlying Mortgage Loans are insured, guaranteed or otherwise
backed, but any such guarantee will inure only to the benefit of such Non-
Agency Certificates or Private Mortgage-Backed Securities or
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Underlying Mortgage loans, as the case may be, and will not guarantee the
payment of principal or interest on the Securities of such Series. Any such
backing may be subject to contingencies described in the applicable Prospectus
Supplement and will be limited to the credit and assets of the particular
specified insurer or guarantor and will not be entitled to the full faith and
credit of the United States or to any agency or instrumentality thereof.
INSURANCE CONSIDERATIONS FOR CERTAIN NON-AGENCY CERTIFICATES AND PRIVATE
MORTGAGE-BACKED SECURITIES
Potential investors should be aware that (a) any decline in the value of
a property securing an Underlying Mortgage Loan with respect to Non-Agency
Certificate or Private Mortgage-Backed Security may result in a loss on such
Non-Agency Certificate or Private Mortgage-Backed Security if the Mortgagor on
such Underlying Mortgage Loan defaults and the loss is not covered by any
insurance policy, guarantee or comparable instrument, and (b) any hazard loss
not covered by a standard hazard insurance policy or any applicable special
hazard insurance policy or comparable instrument covering a defaulted
Underlying Mortgage Loan with respect to a Non-Agency Certificate or Private
Mortgage-Backed Security will result in a loss on such Non-Agency Certificate
or Private Mortgage-Backed Security. Any such loss on a Non-Agency Certificate
or Private Mortgage-Backed Security, if not covered by funds available in the
Reserve Fund, if any, or Collection Account, or by a guarantee, will result in
a loss to Holders.
CERTAIN MATTERS RELATING TO INSOLVENCY
The Sellers of the Mortgage Assets to the Company and the Company will
intend that the transfers of such Mortgage Assets to the Company and, in turn
to the applicable Issuers (if other than the Company), constitute sales rather
than pledges to secure indebtedness of the Seller. However, if a Seller of
Mortgage Assets were to become a debtor under the federal bankruptcy code, it
is possible that a creditor or trustee-in-bankruptcy of such Seller may argue
that the sale thereof by such Seller is a pledge rather than a sale. This
position, if argued or accepted by a court, could result in a delay in or
reduction of distributions to the related Holders.
JUNIOR LIEN MORTGAGE LOANS; LIQUIDATION OF MORTGAGE LOANS
An overall decline in the residential real estate market could adversely
affect the values of the properties securing the Mortgage Loans, including
Title I Loans, with junior liens such that the outstanding principal balances,
together with any senior financing thereon, exceeds the value of the Mortgaged
Properties. Since Mortgage Loans secured by junior (i.e. second, third, etc.)
liens are subordinate to the rights of the beneficiaries under the related
senior deeds of trust or senior mortgages, such a decline would adversely
affect the position of the related junior beneficiary or junior mortgagee
before having such an effect on the position of the related senior
beneficiaries or senior mortgagees. A rise in interest rates over a period of
time, the general condition of a Mortgaged Property and other factors may also
have the effect of reducing the value of the Mortgaged Property from the value
at the time the junior lien Mortgage Loan was originated. As a result, the
ratio of the amount of the Mortgage Loan to the value of the Mortgaged Property
may exceed the ratio in effect at the time the Mortgage Loan was originated.
Such an increase may reduce the likelihood that, in the event of a default by
the borrower, liquidation or other proceeds will be sufficient to satisfy the
junior lien Mortgage Loan after satisfaction of any senior liens and the
payment of any liquidation expenses.
Even assuming that the Mortgaged Property provides adequate security for
the junior lien Mortgage Loan, substantial delay could be encountered in
connection with the liquidation of a defaulted Mortgage Loan and corresponding
delays in the receipt of related proceeds by Holders could occur. Further,
liquidation expenses (such as legal fees, real estate taxes, and maintenance
and preservation expenses) could reduce the proceeds available for payment to
Holders and thereby reduce the security for the junior lien Mortgage Loan. In
the event that any Mortgaged Properties fail to provide adequate security for
the related junior lien Mortgage Loan and any related Credit Enhancement has
been exhausted, Holders would experience a loss.
Liquidation expenses with respect to defaulted Mortgage Loans do not
vary directly with the outstanding principal balance of the Mortgage Loans at
the time of default. Therefore, assuming that a Servicer took the same steps
in realizing upon defaulted Mortgage Loans having small remaining principal
balances as in the case of defaulted Mortgage Loans having larger principal
balances, the amount realized after expenses of liquidation would be smaller as
a percentage of the outstanding principal balance of the smaller Mortgage
Loans. To the extent the average
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outstanding principal balances of the Mortgage Loans in the related Trust
Property are relatively small, realizations net of liquidation expenses may
also be relatively small as a percentage of the principal amount of the
Mortgage Loans.
GEOGRAPHIC CONCENTRATION
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency on mortgage
loans generally. Any concentration of Mortgage Assets in such a region may
present risk considerations in addition to those generally present for similar
mortgage-backed or asset-backed securities without such concentration.
REMEDIES FOLLOWING DEFAULT
The market value of the Mortgage Assets securing or underlying a Series
will fluctuate as general interest rates fluctuate. Following an Event of
Default with respect to a Series of Bonds, there is no assurance that the
market value of the Mortgage Assets securing such Series of Bonds will be equal
to or greater than the unpaid principal and accrued interest due on the Bonds
of such Series, together with any other expenses or liabilities payable
thereon. If the Mortgage Assets securing a Series of Bonds are sold by the
Trustee following an Event of Default, the proceeds of such sale may be
insufficient to pay in full the principal of and interest on such Bonds, and
any Classes on which principal payments have previously been made may have, in
the aggregate, a greater proportion of their principal repaid than will Classes
on which principal payments have not previously been made. However, in certain
events the Trustee may be restricted from selling the Mortgage Assets securing
a Series of Bonds. See "The Indenture -- Events of Default."
In the event the principal of the Securities of a Series is declared due
and payable, the Holders of any such Securities issued at a discount from par
("original issue discount") may be entitled, under applicable provisions of the
federal Bankruptcy Code, to receive no more than an amount equal to the unpaid
principal amount thereof less unamortized original issue discount ("accrued
value"). There is no assurance as to how such accrued value would be
determined if such event occurred.
DEPOSITS, SUBSTITUTIONS AND WITHDRAWALS OF ASSETS
To the extent provided in the Prospectus Supplement for a Series, the
related Issuer or the Company may, subsequent to the issuance of such Series,
deposit additional Assets and withdraw Assets previously included in the
related Trust Property or Assets deposited in a Reserve Fund for such Series.
The effect of deposit or substitution of other Assets (i) for a Series of Bonds
may be to overcollateralize such Series, thus limiting the amount of funds
available for application to payments of principal on such Series and (ii) for
a Series of Bonds or Certificates, may be to alter the characteristics of the
Assets securing or underlying such Series, either of which may alter the timing
and amount of principal and/or interest payments or distributions on, and the
maturity of, or the date of the final distribution on, the Securities of such
Series. See "Assets Securing or Underlying the Securities -- Deposit,
Substitution and Withdrawal of Assets."
OTHER LEGAL CONSIDERATIONS
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of the originators
of the Mortgage Loans and Contracts. In addition, other state laws, public
policy and general principles of equity relating to the protection of
consumers, unfair and deceptive practices and debt recollection practices may
apply to the origination, servicing and collection of the Mortgage Loans and
Contracts. Depending on the provisions of the applicable law and the specified
facts and circumstances involved, violations of these laws, policies and
principles may limit collection of all or part of the principal of or interest
on the Mortgage Loans and Contracts, and may entitle the borrower to a refund
of amounts previously paid. See "Certain Legal Aspects of the Mortgage
Assets."
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The Mortgage Loans and Contracts are also subject to federal laws,
including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding the
terms thereof.
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, martial status, national origin, receipt of public assistance or
the exercise of any right under the Consumer Credit Protection Act, in the
extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
Violations of certain provisions of these federal laws may limit the ability of
the Servicer or the Administrator to collect all or part of the principal of or
interest on the Mortgage Loans and Contracts and in addition could subject the
Servicer or the Administrator to damages and administrative enforcement.
Unless otherwise specified in the related Prospectus Supplement, the
related Seller or the Company will be required to repurchase any Mortgage Loan
or Contract which, at the time of origination, did not comply with applicable
federal and state laws or regulations.
DESCRIPTION OF THE SECURITIES
GENERAL
The following summaries describe certain features common to each Series.
Such 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
Indenture or Pooling Agreement, as applicable, and the Prospectus Supplement
relating to each Series. When particular provisions or terms used or referred
to in an Indenture or Pooling Agreement are referred to herein, such provisions
or terms shall be as used or referred to in such Indenture or Pooling
Agreement.
Neither the Bonds nor the Certificates will be insured or guaranteed by
GNMA, FNMA, FHLMC, any governmental entity or, unless otherwise specified in
the related Prospectus Supplement by any other person. Unless otherwise
specified in the related Prospectus Supplement, the Company's only obligations
with respect to a Series will be to obtain certain representations and
warranties from each Seller and to assign to the related Trustee the Company's
rights with respect thereto, and its obligations pursuant to certain
representations and warranties made by it. Unless otherwise specified in the
Prospectus Supplement relating to a Series, no affiliate of the Company will
have any obligations with respect to such Series.
The Mortgage Assets relating to a Series, other than the Agency
Securities, will not be, insured or guaranteed by any governmental entity or,
unless otherwise specified in the related Prospectus Supplement, by any other
person. With respect to a Series for which the related Trust Property includes
Mortgage Loans, Contracts or Multifamily Loans, to the extent that delinquent
payments on or losses in respect of defaulted Mortgage Loans, Contracts or
Multifamily Loans, are not advanced by the related Servicer, the Administrator,
if any, or any other entity or paid from any applicable Credit Enhancement,
such delinquencies may result in delays in payments or distributions to the
Holders of one or more Classes of such Series, and such losses will be borne by
the Holders of one or more Classes of such Series.
In addition, with respect to a Series for which the related Trust
Property includes Mortgage Assets other than Mortgage Loans, late payments on
such Mortgage Assets may result in delays in payments and/or distributions to
the Holders of one or more Classes of such Series, and losses on such Mortgage
Assets will be borne by the Holders of one or more Classes of such Series, to
the extent such late payments and losses are not advanced or paid from any
applicable Credit Enhancement.
THE BONDS - GENERAL
The Bonds will be issued in Series pursuant to an Indenture between the
applicable Issuer and the related Trustee named in the related Prospectus
Supplement, each such Indenture as supplemented by or is incorporated by
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reference by a Series Supplement with respect to each Series. A form of
Indenture has been filed with the Commission as an Exhibit to the Registration
Statement of which Prospectus forms a part. A copy of the Series Supplement
for a Series, if any, will be filed with the Commission as an Exhibit to a
Current Report on Form 8-K to be filed with the Commission within 15 days of
issuance of such Series of Bonds.
The "Issuer" with respect to a Series of Bonds will be the Company or a
trust beneficially owned by the Company (each, a "Trust"). Each such Trust
will be created by an agreement (the "Deposit Trust Agreement") between the
Company, acting as depositor, and a bank, trust company or other fiduciary,
acting as owner trustee (the "Owner Trustee"), solely for the purpose of
issuing one or more Series of Bonds. The Company may sell or assign its
beneficial ownership interest in any Trust, in whole or in part, to another
entity or entities at the time of, or subsequent to, the issuance of any Bonds
by such Trust. Each Series of Bonds will be non-recourse obligations of the
related Issuer. The Issuer with respect to a Series of Bonds will not have,
nor be expected in the future to have, any significant assets available for
payments on such Series of Bonds other than the Assets included in the related
Trust Estate. Unless otherwise specified in the related Prospectus Supplement,
each Series of Bonds will be separately secured by the related Trust Estate,
which will constitute the only significant assets available to make payments on
the Bonds of such Series. Accordingly, the investment characteristics of a
Series of Bonds will be determined by the Assets included in the related Trust
Estate and will not be affected by the identity of the obligor with respect to
such Series of Bonds.
THE CERTIFICATES - GENERAL
The Certificates will be issued in Series pursuant to a Deposit Trust
Agreement or a Pooling Agreement a form of each of which has been filed as an
Exhibit to the Registration Statement of which this Prospectus forms a part.
The Deposit Trust Agreement or Pooling Agreement relating to a Series of
Certificates will be filed as an Exhibit to a Report on Form 8-K to be filed
with the Commission within 15 days following the issuance of such Series of
Certificates.
The "Issuer" with respect to a Series of Certificates will be the
related Trust established by the Company pursuant to the related Deposit Trust
Agreement or Pooling Agreement. Each Series of Certificates will be entitled
to distributions only from the Assets included in the related Trust Property
and any other Assets pledged or otherwise available for the benefit of the
Holders of such Series as specified in the related Prospectus Supplement.
Accordingly, the investment characteristics of a Series of Certificates will be
determined by the Assets included in the related Trust Property. The
Certificates of a Series will not represent obligations of the Company, any
Administrator, any Servicer or any affiliate thereof.
FORM OF SECURITIES; TRANSFER AND EXCHANGE
As specified in the related Prospectus Supplement, the Securities of
each Series will be issued either in book entry form or fully registered
certificated form in the minimum denominations for each Class specified in the
related Prospectus Supplement. Unless otherwise specified in the Prospectus
Supplement, the original Principal Balance of each Security will equal the
aggregate payments or distributions allocable to principal to which such
Security is entitled. Unless otherwise specified in the related Prospectus
Supplement, payments or distributions allocable to interest on each Security of
a Series that is not entitled to payments or distributions allocable to
principal will be calculated based on the Notional Principal Balance of such
Security. The "Notional Principal Balance" of a Security will be a notional
amount assigned to such security and will not evidence an interest in or
entitlement to payments or distributions allocable to principal, but will be
used solely for convenience in expressing the calculation of interest and for
certain other purposes.
Except as described below under "Book Entry Registration" with respect
to Book Entry Securities, the Securities of each Series will be transferable
and exchangeable on a register to be maintained at the corporate trust office
of the related Trustee or such other office or agency maintained for such
purposes by the Trustee in New York City. Unless otherwise specified in the
Prospectus Supplement with respect to a Series, under the related Indenture or
Pooling Agreement, the Trustee will be appointed initially as the "Registrar"
for such Series for purposes of maintaining books and records of the ownership
and transfer of the Securities of such Series. Unless otherwise specified in
the Prospectus Supplement with respect to a Series, no service change will be
made for any registration of transfer or exchange of Securities of such Series,
but payment of a sum sufficient to cover any tax or other governmental charge
may be required.
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Under current law the purchase and holding of a Class of Securities
entitled only to a specified percentage of payments or distributions of either
interest or principal or a notional amount of either interest or principal on
the related Mortgage Assets or a Class of Securities entitled to receive
payments or distributions of interest and principal on the Mortgage Assets only
after payments or distributions to other Classes or after the occurrence of
certain specified events by or on behalf of any employee benefit plan or other
retirement arrangement (including individual retirement accounts and annuities,
Keogh plans and collective investment funds in which such plans, accounts or
arrangements are invested) subject to provisions of ERISA or the Code, may
result in "prohibited transactions" within the meaning of ERISA and the Code.
See "ERISA Considerations." Unless otherwise specified in the related
Prospectus Supplement, transfer of Securities of such a Class will not be
registered unless the transferee (i) executes a representation letter stating
that it is not, and is not purchasing on behalf of, any such plan, account or
arrangement or (ii) provides an opinion of counsel satisfactory to the related
Trustee and the Company that the purchase of Securities of such a Class by or
on behalf of such plan, account or arrangement is permissible under applicable
law and will not subject the related Trustee, the Administrator, if any, or the
Company to any obligation or liability in addition to those undertaken in the
Pooling Agreement.
REMIC ELECTION
As to each Series, one or more elections may be made to treat all or
specified portions of the related Trust Property as a REMIC for federal income
tax purposes. The related Prospectus Supplement will specify whether a REMIC
election is to be made. Alternatively, the Indenture or Pooling Agreement for
a Series may provide that a REMIC election may be made at the discretion of the
Company, the Administrator, if any, or another entity and may only be made if
certain conditions are satisfied. As to any such Series, the terms and
provisions applicable to the making of a REMIC election, as well as any
material federal income tax consequences to Holders of such Series not
otherwise described herein, will be set forth in the related Prospectus
Supplement. If such an election is made with respect to a Series, one or more
of the Classes of such Series will be designated as evidencing the "residual
interests" in the related REMIC or REMICs, as defined in the Code. All other
Classes of such Series will constitute "regular interests" in the related REMIC
or REMICs, as defined in the Code. As to each Series with respect to which a
REMIC election is to be made, the Administrator, if any, the related Trustee, a
Residual Holder or another person as specified in the related Prospectus
Supplement will be obligated to take all actions required in order to comply
with applicable laws and regulations and will be obligated to pay any
prohibited transaction taxes. The person so specified, unless otherwise
provided in the related Prospectus Supplement, will be entitled to
reimbursement for any such payment from the assets of the related Trust
Property or, if applicable, from any Residual Holder.
CLASSES OF SECURITIES
Each Series will be issued in one or more Classes. If specified in the
Prospectus Supplement, one or more Classes of a Series may be secured by (in
the case of Bonds), or evidence beneficial ownership interests in (in the case
of Certificates), separate groups of Assets included in the related Trust
Property or otherwise available for the benefit of such Series.
If specified in the related Prospectus Supplement, the Certificates of a
Series will have an aggregate original principal balance equal to the aggregate
unpaid principal balance of the Mortgage Assets included in the related Trust
Property as of the close of business on the first day of the month of creation
of the related Trust (the "Cut-off Date") after deducting payments of principal
due on or before the Cut-off Date and, unless otherwise specified in the
related Prospectus Supplement, will bear interest in the aggregate equal to the
Pass-Through Rate for such Series. The "Pass-Through Rate" for a Series will
equal the rate of interest borne by the related Mortgage Assets, net of the
aggregate servicing fees and any other amounts (including fees payable to the
Administrator, if any, for such Series) as are specified in the Prospectus
Supplement. The original principal balance of the Certificates of a Series and
the Certificate Interest Rate on the Classes of such Certificates will be
determined in the manner specified in the Prospectus Supplement.
Each Class of Securities that is entitled to payments or distributions
allocable to interest will bear interest at the applicable Bond Interest Rate
or Certificate Interest Rate, which in either case may be a fixed rate (which
may be zero) or, in the case of Variable Interest Securities, may be a rate
that is subject to change from time to time (a) in
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accordance with a schedule, (b) in reference to an index, or (c) otherwise in
each case as specified in the related Prospectus Supplement. Notwithstanding
the foregoing, if so specified in the related Prospectus Supplement, one or
more Classes of a Series may be entitled to receive payments or distributions
of interest only to the extent of amounts available to make such payments or
distributions. One or more Classes of Securities may provide for interest that
accrues, but is not currently payable ("Compound Interest Securities"). With
respect to any Class of Compound Interest Securities, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid on
a given Payment Date or Distribution Date will be added to the aggregate
principal balance of such Class on that Payment Date or Distribution Date.
A Series may include one or more Classes entitled only to payments or
distributions (i) allocable to interest ("Interest Only Securities"), (ii)
allocable to principal ("Principal Only Securities"), and allocable as between
scheduled payments of principal and Principal Prepayments, as defined below
under "Payments or Distributions of Principal and Interest" or (iii) allocable
to both principal (and allocable as between scheduled payments of principal and
Principal Prepayments) and interest. A Series may include one or more classes
as to which payments or distributions will be allocated (i) on the basis of
collections from designated portions of the Assets included in the related
Trust Property, (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 related Prospectus Supplement. The timing and amounts of such
payments or distributions may vary among Classes, over time or otherwise, in
each case as specified in the related Prospectus Supplement.
A Series of Securities may include one or more Classes of Scheduled
Amortization Securities and Companion Securities. "Scheduled Amortization
Securities" are Securities with respect to which payments or distributions of
principal are to be made in specified amounts on specified Payment Dates or
Distribution Dates, to the extent of funds available on such Payment Date or
Distribution Date. "Companion Securities" are Securities which receive
payments or distributions of all or a portion of any funds available on a given
Payment Date or Distribution Date which are in excess of amounts required to be
applied to payments or distributions on Scheduled Amortization Securities on
such Payment Date or Distribution Date. Because of the manner of application
of payments or distributions of principal to Companion Securities, the weighted
average lives of Companion Securities of a Series may be expected to be more
sensitive to the actual rate of prepayments on the Mortgage Assets in the
related Trust Property than will the Scheduled Amortization Securities of such
Series.
One or more Series of Securities may constitute Series of "Special
Allocation Securities," which may include Senior Securities, Subordinated
Securities, Priority Securities and Non-Priority Securities. As more fully
described in the related Prospectus Supplement for a Series of Special
Allocation Securities, Special Allocation Securities are Securities for which
the timing and/or priority of payments or distributions of principal and/or
interest may favor one or more Classes of such Securities over one or more
other Classes of such Securities. Such timing and/or priority may be modified
or reordered upon the occurrence of one or more specified events. Unless
otherwise specified in the related Prospectus Supplement for a Series of
Special Allocation Securities, losses on the Assets included in the related
Trust Property may be disproportionately borne by one or more Classes of such
Series, and the proceeds and distributions from such Assets may be applied to
the payment in full of one or more Classes of such Series before the balance,
if any, of such proceeds are applied to one or more other Classes within such
Series. For example, Special Allocation Securities in a Series may be
comprised of one or more Classes of Senior Securities having a priority in
right to payments or distributions of principal and interest over one or more
Classes of Subordinated Securities, to the extent described in the related
Prospectus Supplement, as a form of Credit Enhancement. See "Credit
Enhancement -- Subordination". Typically, Subordinated Securities of a Series
will carry a rating by the rating agencies rating the Securities of such Series
lower than that of the Senior Securities of such Series. In addition, one or
more Classes of Securities of a Series ("Priority Securities") may be entitled
to a priority of payments or distributions of principal or interest from Assets
included in the related Trust Property over another Class of Securities of such
Series ("Non-Priority Securities"), but only after the exhaustion of other
Credit Enhancement applicable to such Series. Priority Securities and Non-
Priority Securities nonetheless may be within the same rating category.
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PAYMENTS OR DISTRIBUTIONS OF PRINCIPAL AND INTEREST
General
Payments or distributions of principal and interest on the Securities of
a Series will be made by the related Trustee, to the extent of funds available
therefor, on the related Payment Date or Distribution Date. Payments or
distributions will be made to the persons in whose names the Securities of such
Series are registered at the close of business on the dates specified in the
related Prospectus Supplement (each, a "Record Date"). With respect to
Securities other than Book Entry Securities, payments or distributions will be
made by check or money order mailed to Securityholders of such Series at their
addresses appearing in the books and records maintained by or on behalf of the
Issuer of such Series or, if specified in the related Prospectus Supplement, in
the case of Securities that are of a certain minimum denomination as specified
in the related Prospectus Supplement, upon written request by a holder of such
Series, by wire transfer or by such other means as are agreed upon with such
Securityholder; provided, however, that the final payment or distribution in
retirement of a Series (other than Book Entry Securities) will be made only
upon presentation and surrender of such Securities at the office or agency of
the related Trustee specified in the notice to Securityholders of such final
distribution. With respect to Book Entry Securities, such payments or
distributions will be made as described below under "Book Entry Registration"
and in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
payments or distributions allocable to principal and interest on the Securities
of a Series will be made by the related Trustee out of, and only to the extent
of, funds in a separate account established and maintained under the related
Indenture or Pooling Agreement for the benefit of Securityholders of such
Series (the "Collection Account" with respect to a Series of Bonds and the
"Certificate Account" with respect to a Series of Certificates), including any
funds transferred from any related Reserve Fund. As between Securities of
different Classes of a Series and as between payments or distributions of
principal (and, if applicable, between payments or distributions of Principal
Prepayments and scheduled payments of principal) and interest, payments or
distributions made on any Payment Date or Distribution Date will be applied as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, payments or distributions to any Class of
Securities will be made pro rata to all Securityholders of that Class. If so
specified in the related Prospectus Supplement, the amounts received by the
Trustee as described below under "Assets Securing or Underlying the Securities"
will be invested in the Permitted Instruments specified herein and in the
related Prospectus Supplement and all income or other gain from such
investments will be deposited in the related Collection Account or Certificate
Account and will be available to make payments or distributions on the
Securities of the applicable Series on the next succeeding Payment Date or
Distribution Date in the manner specified in the related Prospectus Supplement.
Payments or Distributions of Interest
Each Class of a Series (other than a Class of Principal Only Securities)
will accrue interest at the applicable Bond Interest Rate or Certificate
Interest Rate. One or more Classes may be entitled to receive payments or
distributions of interest only to the extent of amounts available to make such
payments or distributions. Interest on each Class will accrue during the
related Interest Accrual Period and will be paid or distributed on the related
Payment Date or Distribution Date. Interest on all Securities which bear or
receive interest, other than Compound Interest Securities, will be due and
payable on the Payment Dates, or distributed on the Distribution Dates, as
applicable, specified in the related Prospectus Supplement. However, failure
to pay or distribute interest on a current basis may not necessarily be an
Event of Default with respect to a particular Series or Class of Securities.
Interest on any Class of Compound Interest Securities will not be paid or
distributed currently, but will accrue and the amount of the interest so
accrued will be added to the principal thereof on each Payment Date or
Distribution Date, as applicable, until the date specified in the related
Prospectus Supplement. Principal Only Securities will not accrue, and will not
be entitled to receive, any interest. Upon maturity or earlier redemption of
the Securities of any Class, interest will be paid to the date specified in the
related Prospectus Supplement.
Each payment of interest on each Class of Securities (or addition to
principal of a Class of Compound Interest Securities) on a Payment Date or
Distribution Date, as applicable, will include all interest accrued during the
related Interest Accrual Period. If the Interest Accrual Period for a Series
ends on a date other than a Payment Date or Distribution Date, as applicable,
for such Series, the yield realized by the Holders of such Securities may be
lower than
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the yield that would result if the Interest Accrual Period ended on such
Payment Date or Distribution Date. Additionally, if so specified in the
related Prospectus Supplement, interest accrued for an Interest Accrual Period
for one or more Classes may be calculated on the assumption that principal
payments or distributions (and additions to principal of the Securities), and
allocations of losses on the Mortgage Assets (if so specified in the related
Prospectus Supplement), are made on the first day of the preceding Interest
Accrual Period and not on the Payment Date or Distribution Date, as applicable,
for such preceding Interest Accrual Period when actually made or added. Such
method would produce a lower effective yield than if interest were calculated
on the basis of the actual principal amount outstanding.
A Series may include one or more Classes of Variable Interest Rate
Securities. With respect to each Class of Variable Interest Securities of a
Series, the related Prospectus Supplement will set forth: (i) the initial Bond
Interest Rate or Certificate Interest Rate, as applicable (or the manner of
determining the initial Bond Interest Rate or Certificate Interest Rate); (ii)
the formula, index or other method by which the Bond Interest Rate or
Certificate Interest Rate, as applicable, will be determined from time to time;
(iii) the periodic intervals at which such determination will be made; (iv) the
Maximum Variable Interest Rate, if any, and the Minimum Variable Interest Rate;
and (v) any other terms relevant to such Class of Securities.
Payments or Distributions of Principal
Principal payments or distributions on the Securities of a Series will
be made from amounts available therefor on each Payment Date or Distribution
Date, as applicable, in an aggregate amount determined as set forth in the
related Prospectus Supplement and will be allocated among the respective
Classes of a Series of Securities at the times, in the manner and in the
priority set forth in the related Prospectus Supplement.
Except with respect to Compound Interest Securities and Interest Only
Securities, unless specified otherwise in the related Prospectus Supplement, on
each Payment Date or Distribution Date, as applicable, principal payments or
distributions will be made on the Securities of a Series in an aggregate amount
determined in the related Prospectus Supplement. If a Series of Securities has
a Class of Compound Interest Securities, additional principal payments on the
Securities of such Series will be made on each Payment Date or Distribution
Date, as applicable, in an amount equal to the interest accrued, but not then
payable or distributable, on such Class of Compound Interest Securities for the
related Interest Accrual Period.
If so specified in the related Prospectus Supplement, on any Payment
Date or Distribution Date, as applicable, on which the principal balance of the
Mortgage Assets relating to a Series is reduced due to losses on such Mortgage
Assets, (i) the amount of such losses will be allocated first, to reduce the
aggregate outstanding principal balance of the Subordinate Securities of such
Series or other subordination, if any, and, thereafter, to reduce the aggregate
outstanding principal balance of the remaining Securities of such Series in the
priority and manner specified in such Prospectus Supplement until the aggregate
outstanding principal balance of each Class of such Securities of such Series
so specified has been reduced to zero or paid in full, thus reducing the amount
of principal payable or distributable on each such Class of Securities or (ii)
such losses may be allocated in any other manner set forth in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, such reductions of principal of a Class or Classes of Securities
will be allocated to the Holders of the Securities of such Class or Classes pro
rata in the proportion which the outstanding principal of each Security of such
Class or Classes bears to the aggregate outstanding principal balance of all
Securities of such Class.
If so provided in the related Prospectus Supplement, one or more Classes
of Senior Certificates of a Series will be entitled to receive all or a
disproportionate percentage of the payments of principal which are received on
the related Mortgage Assets in advance of their scheduled due dates and are not
accompanied by amounts 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.
Unless otherwise provided in the related Prospectus Supplement, any such
allocation of principal prepayments to such Class or Classes will have the
effect of accelerating the amortization of such Senior Securities while
increasing the interests evidenced by the Subordinated Securities in rights to
the benefit of the Assets in the related Trust Property. Increasing the
interests of the Subordinated Securities relative to that of the Senior
Securities is intended to preserve the availability of the subordination credit
enhancement provided to the Priority Securities by the Subordinated Securities.
See "Credit Enhancement -- Subordination."
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Unscheduled Payments or Distributions
If specified in the related Prospectus Supplement, the Securities of a
Series will be subject to receipt of payments or distributions before the next
scheduled Payment Date or Distribution Date under the circumstances and in the
manner described below and in the related Prospectus Supplement. If
applicable, the related Trustee will be required to make such unscheduled
payments or distributions on the Securities of a Series on the date and in the
amount specified in the related Prospectus Supplement if, due to substantial
payments of principal (including Principal Prepayments) on the related Mortgage
Assets, low rates then available for reinvestment of such payments or both, the
Trustee determines, based on the assumptions specified in the related Indenture
or Pooling Agreement, that the amount anticipated to be on deposit in the
Collection Account or Certificate Account for such Series on the next related
Payment Date or Distribution Date, together with, if applicable, any amounts
available to be withdrawn from any related Reserve Fund or from any other
Credit Enhancement provided for such Series, may be insufficient to make
required payments or distributions on the Securities of such Series on such
Payment Date or Distribution Date. Unless otherwise specified in the related
Prospectus Supplement, the amount of any such unscheduled payment or
distribution that is allocable to principal will not exceed the amount that
would otherwise have been required to be paid or distributed as principal on
the Securities of such Series on the next Payment Date or Distribution Date.
Unless otherwise specified in the related Prospectus Supplement, all
unscheduled payments or distributions will include interest at the applicable
Bond Interest Rate or Certificate Interest Rate (if any) on the amount of the
unscheduled payment or distribution allocable to principal for the period and
to the date specified in such Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, all
payments or distributions allocable to principal in any unscheduled payment or
distribution made on the Securities of a Series will be made in the same
priority and manner as payments or distributions of principal on such
Securities would have been made on the next Payment Date or Distribution Date,
and with respect to Securities of the same Class, unscheduled payments or
distributions of principal will be made on a pro rata basis. Notice of any
unscheduled payment or distribution will be given by the Trustee prior to the
date of such payment or distribution.
REDEMPTION OF BONDS; TERMINATION OR REPURCHASE WITH RESPECT TO CERTIFICATES
To the extent provided in the related Prospectus Supplement, the Bonds
of any Class of a Series may be (i) redeemed at the request of holders of such
Bonds; (ii) redeemed at the option of the Company or another party specified in
the related Prospectus Supplement; or (iii) subject to special redemption under
certain circumstances. The circumstances and terms under which the Bonds of a
Series may be redeemed will be described in the related Prospectus Supplement.
To the extent provided in the related Prospectus Supplement, the
Certificates of any Class of a Series may be (i) repurchased at the request of
holders of such Certificates; (ii) repurchased at the option of the Company,
the Administrator, if any, or another party specified in the related Prospectus
Supplement; or (iii) subject to special repurchase under certain circumstances.
In addition, if so specified in the Prospectus Supplement for a Series of
Certificates, the Company, the Administrator, if any, or another party
specified in the related Prospectus Supplement may, at its option, cause an
early termination of the Trust for such Series by repurchasing all of the
Mortgage Assets from such Trust, under the circumstances specified in such
Prospectus Supplement. The circumstances and terms under which the
Certificates of a Series may be repurchased and the circumstances and terms
under which the related Trust may be terminated will be described in the
related Prospectus Supplement.
BOOK ENTRY REGISTRATION
If the Prospectus Supplement for a Series so provides, Securities of any
Class of such Series may be issued in book entry form ("Book Entry Securities")
and held in the form of a single bond or certificate issued in the name of a
Clearing Agency ("Clearing Agency") registered with the Securities and Exchange
Commission or its nominee. Transfers and pledges of Book Entry Securities may
be made only through entries on the books of the Clearing Agency in the name of
brokers, dealers, banks and other organizations eligible to maintain accounts
with the Clearing Agency ("Clearing Agency Participants") or their nominees.
Clearing Agency Participants may also be Beneficial Owners (as defined below)
of Book Entry Securities.
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Purchasers and other Beneficial Owners of Book Entry Securities
("Beneficial Owners") may not hold Book Entry Securities directly, but may
hold, transfer or pledge their ownership interest in the Book Entry Securities
only through Clearing Agency Participants. Additionally, Beneficial Owners
will receive all payments or distributions of principal and interest with
respect to Book Entry Securities, and, if applicable, may request redemption or
repurchase of Book Entry Securities, only through the Clearing Agency and the
Clearing Agency Participants. Beneficial Owners will not be registered holders
of Securities or be entitled to receive definitive certificates representing
their ownership interest in the Securities except under the limited
circumstances, if any, described in the related Prospectus Supplement. See
"Special Considerations -- Book Entry Registration."
If Securities of a Series are issued as Book Entry Securities, the
Clearing Agency will be required to make book entry transfers among Clearing
Agency Participants, to receive and transmit payments or distributions of
principal and interest with respect to the Securities of such Series, and to
receive and transmit requests for redemption or repurchase with respect to such
Securities. Clearing Agency Participants with whom Beneficial Owners have
accounts with respect to such Book Entry Securities will be similarly required
to make book entry transfers and receive and transmit payments or distributions
and redemption or repurchase requests on behalf of their respective Beneficial
Owners. Accordingly, although Beneficial Owners will not be registered holders
of Securities and will not possess physical certificates, a method will be
provided whereby Beneficial Owners may receive payments or distributions,
transfer their interests, and submit redemption or repurchase requests.
ASSETS SECURING OR UNDERLYING THE SECURITIES
Each Series of Bonds will be secured by a pledge by the related Issuer
to the related Trustee of the Assets included in the related Trust Estate, and
each Series of Certificates will represent a beneficial interest in the Assets
included in the related Trust and transferred to the related Trustee by the
Company. Such Assets may include (i) Mortgage Assets and payments or
distributions thereon (subject, if specified in the Prospectus Supplement, to
certain exclusions); (ii) if specified in the Prospectus Supplement,
reinvestment income on such payments or distributions; (iii) with respect to
Property that includes Mortgage Loans, Contracts or Multifamily Loans, all
property acquired by foreclosure or deed in lieu of foreclosure with respect to
any such Mortgage Loan, Contract or Multifamily Loan and certain rights of the
Administrator, if any, and the Servicers under any policies required to be
maintained in respect of the related Mortgage Assets; and (iv) if so specified
in the Prospectus Supplement, one or more forms of Credit Enhancement. The
primary Assets of any Trust Estate or Trust will consist of Mortgage Assets.
The Company expects to acquire Mortgage Assets from various sellers (each, a
"Seller"), which may be affiliates of the Company, in open market or privately
negotiated transactions. Such acquisitions may be made through an affiliate of
the Company.
Mortgage Assets may be acquired by the Company from affiliates of the
Company. The following is a brief description of the Mortgage Assets expected
to be included in the Trust Property of each Series. If specific information
respecting the Mortgage Assets is not known at the time a Series is initially
offered, more general information of the nature described below will be
provided in the related 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 Series. A
copy of the related Indenture or Pooling Agreement with respect to each Series
will be attached to the Form 8-K and will be available for inspection at the
corporate trust office of the related Trustee specified in the related
Prospectus Supplement. A schedule of the Mortgage Assets relating to each
Series, will be attached to the related Indenture or Pooling Agreement
delivered to the Trustee upon delivery of such Series.
MORTGAGE LOANS
The Mortgage Loans will be evidenced by promissory notes (the "Mortgage
Notes") secured by mortgages or deeds of trust (the "Mortgages") creating liens
on residential properties (the "Mortgaged Properties"). Such Mortgage Loans
will be within the broad classification of single family mortgage loans,
defined generally as loans on residences containing one to four dwelling units.
If so specified in the Prospectus Supplement, the Mortgage Loans may include
cooperative apartment loans ("Cooperative Loans") secured by security interests
in shares issued by private, non-profit, cooperative housing corporations
("Cooperatives") and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in such
Cooperatives' buildings, or the Mortgage Loans may be secured by junior liens
on the related mortgaged properties, including Title I Loans. The Mortgaged
Properties
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securing the Mortgage Loans may be located in or outside of the United States,
and may include investment properties and vacation and second homes. Each
Mortgage Loan will be selected by the Company for inclusion in the Trust
Property of a Series from among those acquired by the Company or originated or
acquired by one or more affiliates of the Company, including newly originated
loans.
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans included in the Trust Property for a Series or underlying a Non-
Agency Certificate included in the Trust Property for a Series will be
"conventional" mortgage loans, that is, they will not be insured or guaranteed
by any governmental agency, the principal and interest on such Mortgage Loans
will be payable on the first day of each month, and the interest will be
calculated based on a 360-day year of twelve 30-day months. When full payment
is made on a Mortgage Loan during a month, the mortgagor is charged interest
only on the days of the month actually elapsed up to the date of such
prepayment, at a daily interest rate that is applied to the principal amount of
the loan so prepaid.
The payment terms of the Mortgage Loans to be included in the Trust
Property for a Series or underlying a Non-Agency Certificate included in the
Trust Property for a Series will be described in the related Prospectus
Supplement and may include any of the following features or combinations
thereof or other features described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from time
to time in relation to an index, a rate that is fixed for period of time or
under certain circumstances and is followed by an adjustable rate, a rate that
otherwise varies from time to time, or a rate that is convertible from an
adjustable rate to a fixed rate. Changes to an adjustable rate may be subject
to periodic limitations, maximum rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and added to the principal of a
loan for such periods and under such circumstances as may be specified in the
related Prospectus Supplement. Mortgage Loans may provide for the payment of
interest at a rate lower than the specified mortgage rate for a period of time
or for the life of the Mortgage Loan with the amount of any difference
contributed from funds supplied by the seller of the Mortgaged Property or
another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the loan over its term, may be calculated on the basis of an
amortization schedule that is significantly longer than the original term to
maturity or on an interest rate that is different from the interest rate on the
Mortgage Loan or may not be amortized during all or a portion of the original
term. Payment of all or a substantial portion of the principal may be due on
maturity. Principal may include interest that has been deferred and added to
the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the life
of the loan, may increase over a specified period of time or may change from
period to period. Mortgage Loans may include limits on periodic increases or
decreases in the amount of monthly payments and may include maximum or minimum
amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the loan or may decline over time, and may be
prohibited for the life of the loan or for certain periods ("lockout periods").
Certain loans may permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in connection with any
such subsequent prepayment. Other loans may permit prepayments without payment
of a fee unless the prepayment occurs during specified time periods. The loans
may include "due-on-sale" clauses which permit the mortgagee to demand payment
of the entire mortgage loan in connection with the sale or certain transfers of
the related mortgaged property. Other Mortgage Loans may be assumable by
persons meeting the then applicable underwriting standards of the Company.
With respect to a Series for which the related Trust Property includes
Mortgage Loans, or for which Mortgage Loans underlie the Non-Agency
Certificates included in the related Trust Property, the related Prospectus
Supplement may specify, among other things, information regarding the interest
rates (the "Mortgage Rates"), the average principal balance and the aggregate
principal balance of such Mortgage Loans, the years of origination and original
principal balances and the original loan-to-value ratios of such Mortgage
Loans.
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Unless otherwise specified in the Prospectus Supplement, the "Loan-to-
Value Ratio" of any Mortgage Loan will be determined by dividing the amount of
the loan by the "Original Value" of the related mortgaged property. The
principal amount of the "loan," for purposes of computation of the Loan-to-
Value Ratio of any Mortgage Loan, will include any part of an origination fee
that has been financed. In some instances, it may also include amounts which
the seller or some other party to the transaction has paid to the mortgagor,
such as minor reductions in the purchase price made at the closing. The
"Original Value" of a mortgaged property is (a) in the case of any newly
originated mortgage loan, the lesser of (i) the value of the mortgaged
property, based on an appraisal thereof acceptable to the Company and (ii) the
selling price, and (b) in the case of any mortgage loan used to retire a
previous mortgage loan, the value of the mortgaged property, based on an
appraisal thereof acceptable to the Company.
There can be no assurance that the Original Value will reflect actual
real estate values during the term of a Mortgage Loan. If the residential real
estate market should experience an overall decline in property values such that
the outstanding principal balances of the Mortgage Loans become equal to or
greater than the values of the Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be significantly higher than those
now generally experienced in the mortgage lending industry. In addition,
adverse economic conditions (which may or may not affect real estate values)
may affect the timely and ultimate payment by mortgagors of scheduled payments
of principal and interest on the Mortgage Loans and, accordingly, the actual
rates of delinquencies, foreclosures and losses with respect to the Mortgage
Loans.
AGENCY SECURITIES
Government National Mortgage Association (GNMA)
GNMA is a wholly-owned corporate instrumentality of the United States
within the United States Department of Housing and Urban Development. Section
306(g) of Title III of the National Housing Act of 1934, as amended (the
"Housing Act"), authorizes GNMA to guarantee the timely payment of the
principal of and interest on certificates which represent an interest in a pool
of mortgage loans insured by the Federal Housing Administration ("FHA Loans"),
or guaranteed by the Farmers Home Administration ("FmHA Loans") or partially
guaranteed by the Veterans' Administration ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which may
be required to be paid under any guarantee under this subsection." In order to
meet its obligations under any such guarantee, GNMA may, under Section 306(d)
of the Housing Act, borrow from the United States Treasury in an amount which
is at any time sufficient to enable GNMA, with no limitations as to amount, to
perform its obligations under its guarantee.
GNMA Certificates. Each GNMA Certificate relating to a series (which
may be issued under either the GNMA I program or the GNMA II program, as
referred to by GNMA) will be a "fully modified pass-through" mortgage-backed
certificate issued and serviced by a mortgage banking company or other
financial concern ("GNMA Issuer") approved by GNMA or approved by FNMA as a
seller-servicer of FHA Loans, FmHA Loans and/or VA Loans. Each GNMA
Certificate will represent a fractional undivided interest in a pool of
mortgage loans which may include FHA Loans, FmHA Loans and/or VA Loans. Each
such mortgage loan is secured by a one- to four-family residential property.
Each such GNMA Certificate will provide for the payment by or on behalf of the
GNMA Issuer to the registered holder of such GNMA Certificate of scheduled
monthly payments of principal and interest equal to the registered holder's
proportionate interest in the aggregate amount of the monthly principal and
interest payment on each FHA Loan, FmHA Loan or VA Loan underlying such GNMA
Certificate, less the applicable servicing and guarantee fee which together
equal the difference between the interest on the FHA Loan, FmHA Loan or VA Loan
and the pass-through rate on the GNMA Certificate. In addition, each payment
will include proportionate pass-through payments of any prepayments of
principal on the FHA Loans, FmHA Loans or VA Loans underlying such GNMA
Certificate and liquidation proceeds in the event of a foreclosure or other
disposition of any such FHA Loans, FmHA Loans or VA Loans.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States.
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Each such GNMA Certificate will have an original maturity of not more
than 30 years (but may have an original maturity of substantially less than 30
years). GNMA will approve the issuance of each such GNMA Certificate in
accordance with a guarantee agreement (a "Guaranty Agreement") between GNMA and
the GNMA Issuer. Pursuant to its Guaranty Agreement, a GNMA Issuer will be
required to advance its own funds in order to make timely payments of all
amounts due on the GNMA Certificate, even if the payments received by the GNMA
Issuer on the mortgage loans underlying each such GNMA Certificate are less
than the amounts due on such GNMA Certificate.
If a GNMA Issuer is unable to make payments on a GNMA Certificate as
such payments become due, it is required promptly to notify GNMA and request
GNMA to make such payments. Upon such notification and request, GNMA will make
such payments directly to the registered holder of the GNMA Certificate. In
the event no payment is made by a GNMA Issuer and the GNMA Issuer fails to
notify and request GNMA to make such payment, the holder of the GNMA
Certificate will have recourse only against GNMA to obtain such payment. In
the case of GNMA Certificates issued in definitive form, the Trustee, as
registered holder of the GNMA Certificates pledged to secure a series of Bonds,
will have the right to proceed directly against GNMA under the terms of the
Guaranty Agreements relating to such GNMA Certificates for any amounts that are
not paid when due. In the case of GNMA Certificates issued in book-entry form,
The Participants Trust Corporation ("PTC"), or its nominee, will have the right
to proceed against GNMA in such event.
All mortgage loans underlying a particular GNMA I Certificate must have
the same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on each GNMA
I Certificate will equal the interest rate on the mortgage loans included in
the pool of mortgage loans underlying such GNMA I Certificate, less one-half
percentage point per annum of the unpaid principal balance of the mortgage
loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate relating
to a series will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans of VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installment on such GNMA Certificate is due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments
on any FHA Loans, FmHA Loans or VA Loans underlying a GNMA Certificate relating
to a series or any other early recovery of principal on such loan will be
passed through to the Trustee as the registered holder of such GNMA
Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or
by "buydown" mortgage loans for which funds will have been provided (and
deposited into escrow accounts) for application to the payment of a portion of
the borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from non-"buydown" GNMA Certificates and will include amounts
to be collected from both the borrower and the related escrow account. The
graduated payment mortgage loans will provide for graduated interest payments
that, during the early years of such mortgage loans, will be less than the
amount of stated interest on such mortgage loans. The interest not so paid
will be added to the principal of such graduated payment mortgage loans and,
together with interest thereon, will be paid in subsequently years. The
obligations of GNMA and of a GNMA Issuer will be the same irrespective of
whether the GNMA Certificates relating to a series of Certificates are backed
by graduated payment mortgage loans or "buydown" mortgage loans. No statistics
comparable to the FHA's prepayment experience on level payment, non-"buydown"
mortgage loans are available in respect of graduated payment or "buydown"
mortgages. GNMA Certificates included in the Trust Property for a Series or
underlying a Non-Agency Certificate included in the Trust Property for a Series
may be held in book-entry form.
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If specified in the related Prospectus Supplement, GNMA Certificates
included in the Trust Property for a Series or underlying a Non-Agency
Certificate included in the Trust Property for a Series may be held on deposit
at PTC, a limited purpose trust company organized under the banking law of the
State of New York. PTC operates a private sector, industry-owned depository and
settlement facility for the book-entry transfer of interests in GNMA
Certificates. Distributions of principal of and interest on each GNMA
Certificate held through PTC will be credited by PTC to the PTC participant on
whose account the GNMA Certificate is credited.
If specified in the related Prospectus Supplement, GNMA Certificates
included in the Trust Property for a Series or underlying a Non-Agency
Certificate included in the Trust Property for a Series may be backed by
multifamily mortgage loans having the characteristics specified in such
Prospectus Supplement.
Federal National Mortgage Association (FNMA)
FNMA is a federally chartered and privately owned corporation organized
and existing under the Federal National Mortgage Association Charter Act (the
"Charter Act"). FNMA was originally established in 1938 as a United States
government agency to provide supplemental liquidity to the mortgage market and
was transformed into a stockholder-owned and privately-managed corporation by
legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for additional
lending. FNMA acquires funds to purchase mortgage loans from many capital
market investors that may not ordinarily invest in mortgages, thereby expanding
the total amount of funds available for housing. Operating nationwide, FNMA
helps to redistribute mortgage funds from capital surplus to capital-short
areas.
FNMA Certificates. FNMA Certificates are Guaranteed Mortgage Pass-
Through Certificates representing fractional undivided interests in a pool of
mortgage loans formed by FNMA. Each mortgage loan must meet the applicable
standards of the FNMA purchase program. Mortgage loans comprising a pool are
either provided by FNMA from its own portfolio or purchased pursuant to the
criteria of the FNMA purchase program.
Mortgage loans underlying FNMA Certificates relating to a series will
consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a FNMA Certificate are expected to be between either 8 to 15
years or 20 to 30 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest
rates that vary by as much as two percentage points from each other. The rate
of interest payable on a FNMA Certificate is equal to the lowest interest rate
of any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Thus,
the annual interest rates on the mortgage loans underlying a FNMA Certificate
will generally be between 50 basis points and 250 points greater than the
annual FNMA Certificate pass-through rate. If specified in the related
Prospectus Supplement, FNMA Certificates included in the Trust Property with
respect to a Series or underlying a Non-Agency Certificate included in the
Trust Property for a Series may be backed by adjustable rate mortgages.
Regular monthly installment payments on each FNMA Certificate will be
comprised of interest due as specified by such FNMA Certificate plus the
scheduled principal payments on the Mortgage Loans underlying such FNMA
Certificate due during the period beginning on the second day of the month
prior to the month in which the scheduled monthly installment on such FNMA
Certificate is due and ending on the first day of such month in which the
scheduled monthly installment on such FNMA Certificate is due. Such regular
monthly installments on each such FNMA Certificate will be distributed to the
holder of record on the 25th day of each month. Any principal prepayments on
the mortgage loans underlying any FNMA Certificate included in the Trust
Property with respect to a Series or underlying a Non-Agency Certificate
included in the Trust Property for a Series or any other early recovery of
principal on such mortgage loans will be passed through to the holder of record
of such FNMA Certificate on the 25th day of the month next following such
prepayment or recovery and, in turn, a portion of such amounts will be paid or
distributed to Holders of such Series, secured thereby, as additional principal
payments.
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FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing such holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by such FNMA Certificate on the underlying mortgage loans, whether
or not received, and such holder's proportionate share of the full principal
amount of any foreclosed or other finally liquidated mortgage loan, whether or
not such principal amount is actually recovered. The obligations of FNMA under
its guarantees are obligations solely of FNMA and are not backed by, nor
entitled to, the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United
States nor any agency thereof is obligated to finance FNMA's operations or to
assist FNMA in any other manner. If FNMA were unable to satisfy its
obligations, distributions to holders of FNMA Certificates would consist solely
of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FNMA Certificates would be
affected by delinquent payments and defaults on such mortgage loans.
If specified in the related Prospectus Supplement, FNMA Certificates
included in the Trust Property for a Series or underlying a Non-Agency
Certificate included in the Trust Property for a Series may be backed by
multifamily mortgage loans having the characteristics specified in such
Prospectus Supplement.
Federal Home Loan Mortgage Corporation (FHLMC)
FHLMC is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended
(the "FHLMC Act"). The common stock of FHLMC is owned by the Federal Home Loan
Banks. FHLMC was established primarily for the purpose of increasing the
availability of mortgage credit for the financing of urgently needed housing.
It seeks to provide an enhanced degree of liquidity for residential mortgage
investments primarily by assisting in the development of secondary markets for
conventional mortgages. The principal activity of FHLMC currently consists of
the purchase of first lien conventional mortgage loans or participation
interests in such mortgage loans and the sale of the mortgage loans or
participations so purchased in the form of mortgage securities, primarily FHLMC
Certificates. FHLMC is confined to purchasing, so far as practicable, mortgage
loans that it deems to be of such quality, type and class as to meet generally
the purchase standards imposed by private institutional mortgage investors.
FHLMC Certificates. Each FHLMC Certificate represents an undivided
interest in a pool of mortgage loans that may consist of first lien
conventional loans, FHA Loans or VA Loans (a "FHLMC Certificate group"). FHLMC
Certificates are sold under the terms of a Mortgage Participation Certificate
Agreement. A FHLMC Certificate may be issued under either FHLMC's Cash Program
or Guarantor Program.
Unless otherwise described in the related Prospectus Supplement,
mortgage loans underlying the FHLMC Certificates relating to a series will
consist of mortgage loans with original terms to maturity of between 10 and 30
years. Each such mortgage loan must meet the applicable standards set forth in
FHLMC Act. A FHLMC Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another FHLMC Certificate group. Under the Guarantor
Program any such FHLMC Certificate group may include only whole loans or
participation interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of
the applicable Certificate rate on the registered holder's pro rata share of
the unpaid principal balance outstanding on the underlying mortgage loans in
the FHLMC Certificate group represented by such FHLMC Certificate, whether or
not received. FHLMC also guarantees to each registered holder of a FHLMC
Certificate collection by such holder of all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of such holder's
pro rata share thereof, but does not, except if and to the extent specified in
the Prospectus Supplement for a Series, guarantee the timely payment of
scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees the
timely payment of principal based on the difference between the pool factor
published in the month preceding the month of distribution and the pool factor
published in such month of distribution. Pursuant to its guarantees, FHLMC
indemnifies holders of FHLMC Certificates against any diminution in principal
by reason of charges for property repairs, maintenance and foreclosure. FHLMC
may remit the amount due on account of its guarantee of collection of principal
at any time after default on an underlying mortgage loan, but not later than
(i) 30
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days following foreclosure sale, (ii) 30 days following payment of the claim by
any mortgage insurer, or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after
default on the mortgage loans underlying FHLMC Certificates, including the
timing of demand for acceleration, FHLMC reserves the right to exercise its
judgment with respect to the mortgage loans in the same manner as for mortgage
loans which it has purchased but not sold. The length of time necessary for
FHLMC to determine that a mortgage loan should be accelerated varies with the
particular circumstances of each mortgagor, and FHLMC has not adopted standards
which require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. If FHLMC were unable to
satisfy such obligations, distributions to holders of FHLMC Certificates would
consist solely of payments and other recoveries on the underlying mortgage
loans and, accordingly, monthly distributions to holders of FHLMC Certificates
would be affected by delinquent payments and defaults on such mortgage loans.
In addition to FHLMC's guarantees of timely payment of interest and
ultimate collection of principal, FHLMC guarantees with respect to FHLMC
Certificates representing certain qualifying mortgage loans the timely payment
by each mortgagor of the monthly principal scheduled to be paid under the
amortization schedule applicable to each such mortgage loan ("Scheduled
Principal"). Servicers of the mortgage loans comprising these FHLMC
Certificates are required to pay Scheduled Principal to FHLMC whether or not
received from the mortgagors. FHLMC, in turn, guarantees to pay Scheduled
Principal to each registered holder of such FHLMC Certificates whether or not
received from the servicers. FHLMC monthly payments of Scheduled Principal are
computed based upon the servicer's monthly report to FHLMC of the amount of
Scheduled Principal due to be paid on the related mortgage loans. The
Prospectus Supplement for each Series for which the related Trust Property
includes FHLMC Certificates or for which the related Trust Property includes
Non-Agency Certificates backed by FHLMC Certificates will set forth the nature
of FHLMC's guarantee with respect to scheduled principal payments on the
mortgage loans in the pools represented by such FHLMC Certificates.
Requests for registration of ownership of FHLMC Certificates made on or
before the last business day of a month are made effective as of the first day
of that month. With respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, a Federal Reserve Bank which maintains book-entry accounts
with respect thereto will make payments of interest and principal each month to
holders in accordance with the holders' instructions. The first payment to a
holder of a FHLMC Certificate will normally be received by the 15th day of the
second month following the month in which the purchaser became recognized as
the holder of such FHLMC Certificate. Thereafter, payments will normally be
received by the 15th day of each month.
A FHLMC Certificate may be issued under programs created by FHLMC,
including its Cash Program or Guarantor Program. Under FHLMC's Cash Program,
the pooled mortgage loans underlying a FHLMC Certificate are purchased for cash
from a number of sellers. With respect to FHLMC Certificate Pools formed prior
to June 1, 1987, under the Cash Program, there is no limitation on the amount
by which interest rates on the mortgage loans underlying a FHLMC Certificate
may exceed the interest rate on the FHLMC Certificate. Under such program,
FHLMC purchases groups of whole mortgage loans at specified percentages of
their unpaid principal balances, adjusted for accrued or prepaid interest,
which, when applied to the interest rate of the mortgage loans purchased,
results in the yield (expressed as a percentage) required by FHLMC. The
required yield, which includes a minimum servicing fee retained by the
servicer, is calculated using the outstanding principal balance of the mortgage
loans, an assumed term and a prepayment period as determined by FHLMC. No
mortgage loan is purchased by FHLMC at greater than 100% of its outstanding
principal balance. Thus, the range of interest rates on the mortgage loans in
a FHLMC Certificate Pool formed prior to June 1987 under the Cash Program will
vary since mortgage loans are purchased and identified to a FHLMC Certificate
Pool based upon their yield to FHLMC rather than on the interest rates on the
mortgage loans. With respect to FHLMC Certificate Pools formed on or after
June 1, 1987, the range of interest rates on the mortgage loans and
participations in a FHLMC Certificate Pool which is comprised of 15- or 30-year
fixed-rate single family mortgage loans bought by FHLMC under the Cash Program
will be restricted to one percentage point. In addition, the minimum interest
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rate on any mortgage loan in a FHLMC Certificate Pool will be greater than or
equal to the annual pass-through rate on the related FHLMC Certificate, and the
maximum interest rate will not be more than two percentage points above such
pass-through rate.
Under FHLMC's Guarantor Program, the mortgage loans underlying a FHLMC
Certificate are purchased from a single seller in exchange for such FHLMC
Certificate. The interest rate on a FHLMC Certificate under such program is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of FHLMC's management and
guaranty income as agreed upon between the seller and FHLMC. Under the
Guarantor Program, the range between the lowest and highest annual interest
rates on the mortgage loans in a FHLMC Certificate Pool may not exceed two
percentage points. For some FHLMC Certificates issued pursuant to purchase
contracts under the Guarantor Program on or after September 1, 1987, the range
of the interest rates on the mortgage loans in a FHLMC Certificate Pool will
not exceed one percentage point.
If specified in the related Prospectus Supplement, FHLMC Certificates
included in the Trust Property for a Series or underlying a Non-Agency
Certificate included in the Trust Property for a Series may be backed by
multifamily mortgage loans having the characteristics specified in such
Prospectus Supplement.
Stripped Agency Securities
Agency Securities may consist of one or more stripped mortgage-backed
securities, each as described herein and in the related Prospectus Supplement.
Each such Agency Security will represent an undivided interest in all or part
of either the principal distributions (but not the interest distributions) or
the interest distributions (but not the principal distributions), or in some
specified portion of the principal and interest distributions (but not all of
such distributions) on certain GNMA Certificates, FNMA Certificates, FHLMC
Certificates, or other Agency Securities. The underlying securities will be
held under a trust agreement by GNMA, FNMA or FHLMC each as trustee, or by
another trustee named in the related Prospectus Supplement. FHLMC, FNMA or
GNMA will guarantee each stripped Agency Security to the same extent as such
entity guarantees the underlying securities backing such stripped Agency
Security, unless otherwise specified in the related Prospectus Supplement.
Other Agency Securities
If specified in the related Prospectus Supplement, the Trust Property of
a Series may include, or Non-Agency Certificates included in the Trust Property
of a Series may be backed by, other mortgage pass-through or participation
certificates issued or guaranteed by GNMA, FNMA or FHLMC, such as FNMA
Guaranteed REMIC Pass-Through Certificates and FHLMC Multiclass Mortgage
Participation Certificates. The characteristics of any such mortgage pass-
through or participation certificates will be described in such Prospectus
Supplement. If so specified, a combination of different types of Agency
Securities may be included in the Trust Property of a Series or may back Non-
Agency Certificates.
NON-AGENCY CERTIFICATES
Each Non-Agency Certificate will evidence an undivided interest in
Agency Securities, a Mortgage Pool, a Contract Pool or a Multifamily Loan Pool.
Unless otherwise specified in the Prospectus Supplement, the Non-Agency
Certificates will have the characteristics described herein. Non-Agency
Certificates backed directly by Mortgage Loans, Contracts, or Multifamily Loans
will be issued pursuant to a pooling and administration agreement (the "Non-
Agency Pooling and Administration Agreement") between the Company, as the
entity forming such Non-Agency Certificates, an administrator (the "Non-Agency
Administrator") and a trustee acting under such Non-Agency Pooling and
Administration Agreement (the "Certificate Trustee"). Non-Agency Certificates
backed by Agency Securities may be issued pursuant to a Funding Agreement (the
"Funding Agreement") between the Company, as the entity forming such Non-Agency
Certificates and a trustee acting under such Funding Agreement (the "Funding
Agreement Trustee"). Non-Agency Certificates will be formed by the Company in
connection with the issuance of the related Series of Securities for purposes
of ease of administration of the assets underlying such Non-Agency
Certificates. Non-Agency Certificates themselves will not have been and will
not be publicly offered. It is expected that non-Agency Certificates will
primarily be used by the Company to back Series of Bonds, as opposed to
Certificates.
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The Mortgage Loans, Contracts, and Multifamily Loans directly backing
the Non-Agency Certificates issued under a Non-Agency Pooling and
Administration Agreement will be serviced by one or more loan servicing
institutions (the "Non-Agency Servicers") pursuant to servicing agreements
between each Servicer and the Company (each a "Non-Agency Servicing
Agreement"). All of the Company's right, title and interest in the Servicing
Agreements with respect to the Mortgage Loans, Contracts, and Multifamily Loans
will be assigned to the Certificate Trustee. Pursuant to the Non-Agency
Pooling and Administration Agreement, the Servicers of the Mortgage Loans,
Contracts, and Multifamily Loans covered thereby will be required to deposit
with the Certificate Trustee all collections received by such Servicers on the
Mortgage Loans, Contracts, and Multifamily Loans (net of a servicing fee to be
retained by the Non-Agency Servicers). Monthly distributions of the principal
and interest (adjusted to the pass-through rate borne by such Non-Agency
Certificate) components of such collections will be made to the Trustee for the
Bonds of the applicable Series for deposit into the Collection Account. The
Mortgage Loans, Contracts, and Multifamily Loans underlying any such Non-Agency
Certificates may be covered by
(i) individual policies of primary mortgage
insurance insuring against all or a portion of any foreclosure losses on
the particular Mortgage Loans, Contracts, and Multifamily Loans covered
thereby;
(ii) a pool insurance policy insuring against
foreclosure losses on all of the Mortgage Loans, Contracts, and
Multifamily Loans in the underlying pool up to a specified limit of
liability;
(iii) a policy of special hazard insurance
insuring against losses from causes not covered by standard fire and
extended coverage policies of insurance, and/or
(iv) such other policies of insurance or other
forms of support (including, without limitation, obligations to advance
delinquent payments and overcollateralization) as shall be specified in
the Prospectus Supplement for a Series which is secured or backed by
Non-Agency Certificates backed directly by Mortgage Loans, Contracts, or
Multifamily Loans, including, if applicable, any insurance for Title I
Loans under the Title I Program.
All of the Company's rights, title and interest in the Agency Securities
directly backing Non-Agency Certificates issued under a Funding Agreement will
be assigned to the Funding Agreement Trustee. Pursuant to the Funding
Agreement, distributions on the Agency Securities will be collected by the
Funding Agreement Trustee, and monthly payments of the principal and interest
(adjusted to the pass-through rate borne by the Non-Agency Certificates)
components of such distributions will be made to the Trustee for the applicable
Series for deposit into the Collection Account. Each of the Agency Securities
sold or assigned to the Funding Agreement Trustee will have the benefit of the
applicable guarantees and other attributes described hereinabove under "GNMA
Certificates," "FNMA Certificates" and "FHLMC Certificates," as the case may
be, and in the related Prospectus Supplement for the Series which is secured or
backed by Non-Agency Certificates backed by Agency Securities.
Any default by any insurer under a policy of insurance covering a
Mortgage Loan, Contracts, or Multifamily Loans, any loss or losses in excess of
policy limits, any failure by a Non-Agency Servicer or other obligor to make
advances in respect of delinquent payments or any loss occasioned by an
uninsured cause will adversely affect distributions to the Trustee for the
related Series and, as a consequence, may result in there being insufficient
funds in the related Collection Account with which to make required payments or
distributions of principal and interest on the Securities of such Series.
MULTIFAMILY LOANS
Each pool of Multifamily Loans included in the Trust Property with
respect to a Series or underlying a Non-Agency Certificate included in the
Trust Property for a Series (the "Multifamily Loan Pool") will consist of
Conventional Multifamily Loans or FHA-Insured Multifamily Loans secured by
mortgages or deeds of trust or other similar security instruments creating a
first lien on rental apartment buildings or projects containing five or more
units, including, but not limited to, high-rise, mid-rise and garden apartments
or Multifamily Loans secured by apartment buildings owned by cooperative
housing corporations. The Company expects that these loans will have been
originated by mortgagees in the ordinary course of their real estate lending
activities. Each Multifamily Loan Pool will be
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composed of Multifamily Loans bearing interest at the annual fixed or
adjustable rates of interest specified in the Prospectus Supplement.
The related Prospectus Supplement may specify for the Multifamily Loans
contained in the related Multifamily Loan Pool, among other things, the dates
of origination of the Multifamily Loans; the interest rates on the Multifamily
Loans, if fixed rate, and in the case of Adjustable Multifamily Loans, the
initial Adjustable Multifamily Rates, the index or formula, if any, used to
determine the Adjustable Multifamily Rate, the margin or margins, if any, to be
added or subtracted from the Index to calculate the Multifamily Loan Rate, and
the maximum and minimum percentage adjustment, if any, for the life of the
Multifamily Loan and on any annual basis, and the frequency of adjustment; the
number of Multifamily Loans in the Multifamily Loan Pool; the original loan
amounts or range of original loan amounts of Multifamily Loans contained in the
Multifamily Loan Pool; the original Loan-to-Value Ratio on a weighted average
basis of the Multifamily Loans contained in the Multifamily Loan Pool; and the
original and remaining terms of the loans on a weighted average basis. The
related Prospectus Supplement may also specify the number and type of units
contained in each property secured by a Multifamily Loan contained in a
Multifamily Loan Pool, the loan amount per unit for each project, the
percentage of units in each property occupied as a specified date, the
appraised value of each property and whether each property is subject to local
rent control ordinances. The related Prospectus Supplement may set forth the
types and locations of properties securing the Multifamily Loans, the balloon,
principal amortization or interest only terms, if any, and whether the
Multifamily Loan financed the acquisition or rehabilitation of the underlying
properties or refinanced prior indebtedness. Unless otherwise specified in the
related Prospectus Supplement, the properties securing the Multifamily Loans
will be located in one or more states in the United States, the District of
Columbia, or Puerto Rico.
Certain of the Multifamily Loans may be secured by apartment buildings
owned by Cooperatives. The Cooperative apartment building and the land under
the building will be owned by a private, non-profit cooperative. The
Cooperative owns all of the apartment units in the building and all common
areas. The Cooperative is owned by tenant-stockholders who, through ownership
of stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific apartments or units. Generally, a tenant-stockholder of a
Cooperative must make a monthly payment to the cooperative representing such
tenant-stockholder's pro rata share of the cooperative's payments for its
mortgage loan, real property taxes, maintenance expenses and other capital or
ordinary expenses. Such payments to the Cooperative are in addition to any
payments of principal and interest the tenant-stockholder must make on any
loans of the tenant-stockholder secured by its shares in the Cooperative. The
Cooperative will be directly responsible for building management and, in most
cases, payment of real estate taxes and hazard and liability insurance. The
Cooperative's ability to meet debt service obligations on the Multifamily
Loans, as well as all other operating expenses, will be dependent in large part
on the receipt of maintenance payments from the tenant-stockholders, as well as
any rental income from units or commercial assessments on the tenant-
stockholders. The Cooperative's ability to pay the principal amount of the
Multifamily Loan at maturity depends primarily on its ability to pay the
principal amount of the Multifamily Loan. The Company, the Seller and the
Administrator or Non-Agency Administrator, if any, will have no obligation to
provide refinancing for the Multifamily Loans.
CONTRACTS
Each pool of Contracts included in the Trust Property with respect to a
Series or underlying a Non-Agency Certificate included in the Trust Property
for a Series (the "Contract Pool") will consist of manufactured housing
conditional sales contracts and installment loan agreements or participation
interests therein (collectively, "Contracts"). As specified in the related
Prospectus Supplement, Contracts may either be secured by a Manufactured Home
(a "Secured Contract") or unsecured (an "Unsecured Contract"). The Contracts
may be conventional manufactured housing contracts or contracts insured by the
FHA, including Title I Contracts, or partially guaranteed by the VA. Each
Contract is secured by a Manufactured Home. Unless otherwise specified in the
related Prospectus Supplement, the Contracts included in the Trust Property
with respect to a Series will be fully amortizing and will bear interest at a
fixed annual percentage rate ("APR").
The Manufactured Homes securing the Secured Contracts consist of
manufactured homes within the meaning of 42 United States Code, Section
5402(6), which defines a "Manufactured Home" as "a structure, transportable in
one
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or more sections, which in the traveling mode, is eight body feet or more in
width or forty body feet or more in length, or, when erected on site, is three
hundred twenty or more square feet, and which is built on a permanent chassis
and designed to be used as a dwelling with or without permanent foundation when
connected to the required utilities, and includes the plumbing, heating, air-
conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requires of [this] paragraph
except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and
Urban Development and complies with the standards established under [this]
chapter." Moreover, if an election is made to treat a Trust Estate or Trust
including Contracts as a REMIC as described in "Certain Federal Income Tax
Consequences -- Certain Income Tax Consequences for REMIC Securities," the
related Manufactured Homes will have a minimum of 400 square feet of living
space and a minimum width in excess of 102 inches.
Unless otherwise specified in the Prospectus Supplement with respect to
a Series for which the related Trust Property includes Contracts or with
respect to which the related Trust Property includes Non-Agency Certificates
backed by Contracts, for purposes of calculating the loan-to-value ratio of a
Secured Contract relating to a new Manufactured Home, the "Collateral Value" is
no greater than the sum of a fixed percentage of the list price of the unit
actually billed by the manufacturer to the dealer (exclusive of freight to the
dealer site) including "accessories" identified in the invoice (the
"Manufacturer's Invoice Price"), plus the actual cost of any accessories
purchased from the dealer, a delivery and set-up allowance, depending on the
size of the unit and the cost of state and local taxes, filing fees and up to
three years prepaid hazard insurance premiums. Unless otherwise specified in
the related Prospectus Supplement, the Collateral Value of a used Manufactured
Home is the least of the sales price, the appraised value, and the National
Automobile Dealer's Association book value plus prepaid taxes and hazard
insurance premiums. The appraised value of a Manufactured Home is based upon
the age and condition of the manufactured housing unit and the quality and
condition of the mobile home park in which it is situated, if applicable.
The related Prospectus Supplement may specify for the Contracts
contained in the related Contract Pool, among other things, the date of
origination of the Contracts; the APRs on the Contracts; the Contract Loan-to-
Value Ratios; the minimum and maximum outstanding principal balance as of the
Cut-off Date and the average outstanding principal balance; the outstanding
principal balances of the Contracts included in the Contract Pool; and the
original maturities of the Contracts and the last maturity date of any
Contract.
The Unsecured Contracts included in the Trust Property for a Series of
Securities will not constitute a material concentration of the assets of such
Trust Property.
PRIVATE MORTGAGE-BACKED SECURITIES
Private Mortgage-Backed Securities may consist of (a) mortgage pass-
through certificates evidencing an undivided interest in a pool of Underlying
Mortgage Loans or certain mortgage-backed securities, or (b) collateralized
mortgage obligations secured by Underlying Mortgage Loans or certain mortgage-
backed securities. Private Mortgage-Backed Securities may include stripped
mortgage-backed securities representing an undivided interest in all or a part
of either the principal distributions (but not the interest distributions) or
the interest distributions (but not the principal distributions) or in some
specified portion of the principal and interest distributions (but not all of
such distributions) on certain Underlying Mortgage Loans or on certain
underlying mortgage-backed securities. Private Mortgage-Backed Securities will
have been issued pursuant to a pooling and servicing agreement, an indenture or
similar agreement (a "PMBS Agreement"). Generally, the seller/servicer of the
Underlying Mortgage Loans will have entered into the PMBS Agreement with the
trustee under such PMBS Agreement (the "PMBS Trustee"). The PMBS Trustee or
its agent, or a custodian, will possess the Underlying Mortgage Loans relating
to such Private Mortgage-Backed Security. Underlying Mortgage Loans relating to
a Private Mortgage-Backed Security will be serviced by a servicer (the "PMBS
Servicer") directly or by one or more subservicers who may be subject to the
supervision of the PMBS Servicer.
The issuer of the Private Mortgage-Backed Securities (the "PMBS Issuer")
will be a financial institution or other entity engaged generally in the
business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized for the
purpose of, among other things, establishing trusts and acquiring and selling
housing loans to such trusts and selling beneficial interests in such trusts.
If so specified in the related Prospectus Supplement, the PMBS Issuer may be
the Company or an affiliate of the Company. The
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obligations of the PMBS Issuer will generally be limited to certain
representations and warranties with respect to the assets conveyed by it to the
related trust. Unless otherwise specified in the related Prospectus
Supplement, neither the PMBS Issuer nor any agency or instrumentality of the
United States nor any other person will have guaranteed any of the assets
conveyed to the related trust or any of the Private Mortgage-Backed Securities
issued under the PMBS Agreement.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-
Backed Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or
the PMBS Servicer may have the right to repurchase assets underlying the
Private Mortgage-Backed Securities after a certain date or under other
circumstances specified in the related Prospectus Supplement.
The Underlying Mortgage Loans relating to the Private Mortgage-Backed
Securities may consist of fixed rate, level payment, fully amortizing loans or
graduated payment mortgage loans, buydown loans, adjustable rate mortgage
loans, or loans having balloon or other special payment features. Such
Underlying Mortgage Loans may be secured by single family property, multifamily
property, manufactured homes or by an assignment of the proprietary lease or
occupancy agreement relating to a specific dwelling within a Cooperative and
the related shares issued by such Cooperative.
Credit support in the form of reserve funds, subordination of other
private mortgage certificates issued under the PMBS Agreement, letters of
credit, surety bonds, insurance policies or other types of credit support may
be provided with respect to the Underlying Mortgage Loans relating to the
Private Mortgage-Backed Securities or with respect to the Private Mortgage-
Backed Securities themselves.
The Prospectus Supplement for a Series for which the related Trust
Property includes Private Mortgage-Backed Securities will describe such Private
Mortgage-Backed Securities and will specify certain characteristics of the
mortgage loans underlying the Private Mortgage-Backed Securities.
CHARACTERISTICS OF AGENCY SECURITIES AND PRIVATE MORTGAGE-BACKED SECURITIES
The Agency Securities and the Private Mortgage-Backed Securities may
include component securities ("CPTs"), floaters ("FLTs"), inverse floaters
("INVs"), interest only securities ("IOs"), principal only securities ("POs"),
planned amortization classes ("PACs"), targeted amortization classes ("TACs"),
residual interest securities ("Residuals"), accrual securities ("Zs"), and
other types of securities, including securities which combine the
characteristics of two or more of such types of securities. The exact types
and characteristics of such securities will be set forth in the related
Prospectus Supplement for a Series for which the related Trust Property
includes such securities.
A CPT is a security that consists of multiple payment components which
have differing principal and/or interest characteristics. The payment
characteristics of a CPT will reflect a combination of the payment
characteristics of such components.
An FLT has an interest rate that varies directly with an objective index
such as LIBOR, i.e., as LIBOR increases, the FLT interest rate will increase.
An INV has an interest rate that varies inversely with an objective
index such as LIBOR, i.e., as LIBOR increases, the INV interest rate will
decrease. The interest rate on a INV might be expressed as a multiple of the
index, such as 35% - (3 x LIBOR).
An IO pays only interest or primarily interest and pays no
disproportionately small amount of principal. A PO pays principal only and no
interest.
A PAC is a security with respect to which principal payments are made in
predetermined amounts on specified payment dates to the extent funds are
available on such payment dates. Generally, a PAC will adhere to its payment
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schedule if the underlying mortgage loans prepay at a constant prepayment
assumption in the "planned range" between certain specified prepayment rates.
The cash flow of a PAC is thus relatively stable if prepayments are within such
"planned range." Payment stability in a PAC is necessarily offset by
instability in other classes of related mortgage-backed securities, which are
said to "support" the more stable classes. Such "support classes" are likely
to be much more sensitive to prepayments on the underlying mortgage loans than
the classes they support or such mortgage loans.
A TAC, like a PAC, is designed to provide more stable cash flows, but is
more likely than a PAC to have the expected maturity extended or shortened.
A Residual generally represents an interest in the residual cash flows
from the collateral relating to an issuance of mortgage-backed securities after
the other classes of securities supported by such collateral are paid on a
payment date. Residuals include both securities with stated principal and
interest and those without stated principal and interest.
A Z is a security that accretes all of interest, which is added to the
outstanding principal balance of such security. This accretion may continue
until such security begins receiving principal payments, until such other
events has occurred or until the security is retired.
DEPOSIT, SUBSTITUTION AND WITHDRAWAL OF ASSETS
With respect to a Series, to the extent provided in the related
Indenture or Pooling Agreement and the related Prospectus Supplement, the
related Issuer or the Company may deposit or withdraw Assets or substitute new
Mortgage Assets for Mortgage Assets previously included in the related Trust
Property or for Assets deposited in a Reserve Fund for such Series.
PRE-FUNDING ARRANGEMENTS
To the extent provided in the related Prospectus Supplement for a
Series, the related Pooling Agreement will provide for a commitment by the
related Issuer to subsequently purchase additional Loan Assets ("Subsequent
Loan Assets") following the date on which the related Securities are issued (a
"Pre-Funding Arrangement"). With respect to a Series, the Pre-Funding
Arrangement will require that any Subsequent Loan Assets included in the Trust
Property conform to the requirements and conditions provided in the related
Pooling Agreement. If a Pre-Funding Arrangement is utilized in connection with
the issuance of the Series of Securities, on the closing date for the issuance
of such Series the related Trustee will be required to deposit in a segregated
account (a "Pre-Funding Account") all or a portion of the proceeds received by
such Trustee in connection with the sale of one or more Classes of Securities
of such Series; and, subsequently, the Issuer will acquire Subsequent Loan
Assets in exchange for the release of money from the Pre-Funding Account for
such Series. In addition, the Pre-Funding Arrangement will be limited to a
specified period, not to exceed three months, during which time any transfers
of Subsequent Loan Assets must occur and to a maximum deposit to the related
Pre-Funding Account of no more than twenty-five percent (25%) of the aggregate
proceeds received from the sale of all Classes of Securities of such Series.
If all of the funds originally deposited in the such Pre-Funding Account
are not used by the end of such specified period, then any remaining amount of
such funds will be applied as a mandatory prepayment of a Class or Classes of
Securities as specified in the related Prospectus Supplement. Although it is
intended that the principal amount of Subsequent Loan Assets to be included as
Trust Property after the closing date for the issuance of any particular Series
will require application of substantially all of the Pre-Funding Account, and
it is not anticipated that there will be any material amount of principal
distributions from amounts remaining on deposit in the Pre-Funding Account in
reduction of the principal balances of any Securities, no assurance can be
given that such a distribution with respect to the Securities will not occur on
the Distribution Date or Payment Date following the termination of the Pre-
Funding Arrangement. In any event, it is unlikely that the Issuer will be able
to deliver Subsequent Loan Assets with aggregate principal balances that
exactly equal the Pre-Funding Account, and the portion of the Pre-Funding
Account remaining at the end of the Pre-Funding Arrangement, if any, will be
distributed in reduction of the principal balance of the Securities of the
related Series, as set forth in related Prospectus Supplement.
As may be further specified in the related Prospectus Supplement,
amounts on deposit in the Pre-Funding Account will be invested in short-term
debt obligations of, or debt obligations guaranteed by, the United States,
repurchase agreements that satisfy the criteria specified in the applicable
Indenture or Pooling Agreement, certificates
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of deposit, time deposits and bankers acceptances of any United States
depository institution or trust company, FDIC insured deposits, including
deposits with the related Trustee, commercial paper, debt obligations, and
money market funds; provided such investments are acceptable to each rating
agency rating the Series of Securities at the time at which the investments are
made (collectively "Permitted Instruments"); and provided further that an
investment in such Permitted Instruments will not require the Issuer for a
Series to be registered as an "investment company" under the Investment Company
Act of 1940, as amended. Permitted Instruments will consist of short term
investments that convert into cash or mature within a short period of time,
have minimal or no exposure to fluctuations in value as a result of market
changes in prevailing interest rates and are acceptable to each rating agency
rating the applicable Series of Securities.
The utilization of a Pre-Funding Arrangement is intended to improve the
efficiency of the issuance of a Series of Securities and the sale and
assignment of the Loan Assets to the related Issuer through the incremental
delivery of the Loan Assets on the closing date and during the three month
period following the closing date for such Series, which allows for a more even
accumulation of the Assets by the Issuer and the issuance of a larger principal
amount of Securities for such Series than would be the case without a Pre-
Funding Arrangement.
CREDIT ENHANCEMENT
GENERAL
Various forms of credit enhancement ("Credit Enhancement") may be
provided with respect to one or more Classes of a Series or with respect to the
Assets in the related Trust Property. Credit Enhancement may be in the form of
the subordination of one or more Classes of such Series, the establishment of
one or more Reserve Funds, the use of a cross-support feature, use of a
Mortgage Pool Insurance Policy, Special Hazard Insurance Policy, bankruptcy
bond, or another form of Credit Enhancement described in the related Prospectus
Supplement, or any combination of the foregoing. Unless otherwise specified in
the related Prospectus Supplement, any Credit Enhancement with respect to a
Series will not provide protection against all risks of loss and will not
guarantee repayment of the entire principal balance of the Securities of such
Series and interest thereon. If losses occur which exceed the amount covered by
such Credit Enhancement or which are not covered by the Credit Enhancement,
Holders will bear their allocable share of deficiencies.
SUBORDINATION
If so specified in the related Prospectus Supplement, payments or
distributions in respect of scheduled principal, interest or any combination
thereof that otherwise would have been payable or distributable to one or more
Classes of a Series (the "Subordinated Securities") will instead be payable to
one or more other Classes of such Series (the "Senior Securities") under the
circumstances and to the extent provided in such Prospectus Supplement. If
specified in the Prospectus Supplement, delays in receipt of scheduled payments
on the Mortgage Assets and losses on defaulted Mortgage Assets will be borne
first by the various Classes of Subordinated Securities and thereafter by the
various Classes of Senior Securities, in each case under the circumstances and
subject to the limitations specified in the Prospectus Supplement. The
aggregate payments or distributions in respect of delinquent payments or
distributions on the Mortgage Assets over the lives of the Securities of a
Series or at any time, the aggregate losses in respect of defaulted Mortgage
Assets which must be borne by the Subordinated Securities by virtue of
subordination and the amount of the payments or distributions otherwise payable
or distributable to the Subordinated Securities that will be distributable to
Holders of Senior Securities on any Payment Date or Distribution Date may be
limited as specified in the related Prospectus Supplement. If aggregate
payments or distributions in respect of delinquent payments or distributions on
the Mortgage Assets or aggregate losses in respect of such Mortgage Assets were
to exceed the total amounts payable or distributable and available for payment
or distribution to Holders of Subordinated Securities of, if applicable, were
to exceed the specified maximum amount, Holders of Senior Securities could
experience losses on their Securities.
In addition to or in lieu of the foregoing, if so specified in the
related Prospectus Supplement, all or any portion of payments or distributions
otherwise payable or distributable to Holders of Subordinated Securities on any
Payment Date or Distribution Date may instead be deposited into one or more
Reserve Fund (as defined below) established by the related Trustee. If so
specified in the related Prospectus Supplement, such deposits may be made on
each Payment Date or Distribution Date, on each Distribution Date for specified
periods, or on each Distribution Date until the balance in the Reserve Fund has
reached a specified amount and, following payments from the Reserve Fund to
Holders of
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Senior Securities or otherwise, thereafter to the extent necessary to restore
the balance in the Reserve Fund to required levels, in each case as specified
in such Prospectus Supplement. If so specified in the related Prospectus
Supplement, amounts on deposit in the Reserve Fund may be released to the
Company or the Holders of any Class of Securities at the times and under the
circumstances specified in such Prospectus Supplement.
If specified in the related Prospectus Supplement, various Classes of
Senior Securities and Subordinated Securities may themselves be subordinate in
their right to receive certain distributions to other Classes of Senior and
Subordinated Securities, respectively, through a cross-support mechanism or
otherwise.
As between Classes of Senior Securities and as between Classes of
Subordinated Securities, payments or distributions may be allocated among such
Classes (i) in the order of their Stated Maturities or Assumed 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 related Prospectus Supplement. As between Classes of
Subordinated Securities, payments or distributions to Holders of Senior
Securities on account of delinquencies or losses and payments to any Reserve
Fund will be allocated as specified in the related Prospectus Supplement.
OVERCOLLATERALIZATION
If provided in the related Prospectus Supplement, the aggregate
principal balance of the Mortgage Assets included in the Trust Property may
exceed the aggregate original principal balance of the Securities of a Series
thereby creating "Excess Collateral" on each Distribution Date or Payment Date.
If provided in the related Prospectus Supplement, such Excess Collateral may be
distributed to holders of Senior Securities to produce and maintain a specified
level of overcollateralization. With respect to a Series of Securities, the
overcollateralization level may be fixed or may increase or decrease over time,
subject to certain floors, caps and triggers, as set forth in the related
Prospectus Supplement and the related Indenture or Pooling Agreement.
CROSS-SUPPORT
If specified in the related Prospectus Supplement, separate Classes of
related Series of Securities may represent the beneficial ownership of or be
separately secured by, separate groups of Assets included in the Trust Property
for a Series or otherwise available for the benefit of such Securities. In
such case, Credit Enhancement may be provided by a cross-support feature which
may require that distributions or payments be made with respect to Securities
evidencing beneficial ownership of or secured by one or more asset groups prior
to distributions to Subordinated Securities evidencing a beneficial ownership
interest in or secured by other asset groups within the same Trust Estate or
Trust. 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 Enhancement may apply concurrently to two or more
separate Trust Estates or Trusts for a separate Series of Securities. If
applicable, the Prospectus Supplement will identify the Trusts 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
Trusts.
POOL INSURANCE
With respect to a Series for which the related Trust Property includes
Mortgage Loans (and, if specified in the related Prospectus Supplement, a
Series for which the related Trust Property includes Contracts), in order to
decrease the likelihood that Holders of the Securities of such Series will
experience losses in respect of such Mortgage Loans, if specified in the
related Prospectus Supplement, one or more mortgage pool insurance policies
(each, a "Mortgage Pool Insurance Policy") will be obtained. Such Mortgage Pool
Insurance Policy will, subject to the limitations described below and in the
Prospectus Supplement, cover loss by reason of default in payments on such
Mortgage Loans up to the amounts specified in the Prospectus Supplement or
report on Form 8-K and for the periods specified in the Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Administrator under the related Indenture or Pooling Agreement will agree to
use its best reasonable efforts to cause to be maintained in effect any such
Mortgage Pool Insurance Policy and to file claims thereunder to the issuer of
such Mortgage Pool Insurance
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Policy (the "Pool Insurer"). A Mortgage 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 set forth in such policy as described in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, the Mortgage Pool Insurance Policies, 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 the terms of any applicable Mortgage Pool
Insurance Policy and will set forth certain information with respect to the
related Pool Insurer.
SPECIAL HAZARD INSURANCE
With respect to a Series for which the related Trust Property includes
Mortgage Loans (and, if specified in the related Prospectus Supplement, each
Series for which the related Trust Property includes Contracts), in order to
decrease the likelihood that Holders of the Securities of such Series will
experience losses in respect of such Mortgage Loans, if specified in the
related Prospectus Supplement, one or more Special Hazard Insurance Policies
will be obtained. Such a "Special Hazard Insurance Policy" with respect to a
Series will, subject to limitations described below and in the related
Prospectus Supplement, protect Holders of the Securities of such Series 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
caused by reason of the application of the coinsurance clause contained in
hazard insurance policies. See "Servicing of the Mortgage Loans, Multifamily
Loans and Contracts -- Standard Hazard Insurance." 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 will be limited as described in the related Prospectus
Supplement. 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.
The related Prospectus Supplement will describe the terms of any
applicable Special Hazard Insurance Policy and will set forth certain
information with respect to the related Special Hazard Insurer.
FHA INSURANCE ON THE MULTIFAMILY LOANS
There are two primary FHA insurance programs that are available for
Multifamily Loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD
to insurance mortgage loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section 244 of the
Housing Act provides for coinsurance of such mortgage loans made under Sections
221(d)(3) and (d)(4) by HUD/FHA and a HUD-approved coinsurer. Generally the
term of such a mortgage loan can be up to 40 years and the ratio of loan amount
to property replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans
made for the purchase or refinancing of existing apartment projects which are
at least three years old. Section 244 also provides for coinsurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project or a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan to value ratio of no more than 85% is
required for the purchase of a project and 70% for the refinancing of a
project.
FHA insurance is generally payable in cash or at the option of the
mortgagee in debentures. Such insurance does not cover 100% of the mortgage
loan but is instead subject to certain deductions and certain losses of
interest from the date of the default.
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BANKRUPTCY BOND
In the event of a bankruptcy of a borrower, the bankruptcy court may
establish the value of the property securing the related Mortgage Loan at an
amount less than the then outstanding principal balance of such Mortgage Loan.
The amount of the secured debt could be reduced to such value, and the holder
of such Mortgage Loan thus would become an unsecured creditor to the extent the
outstanding principal balance of such Mortgage Loan exceeds the value so
assigned to the property by the bankruptcy court. In addition, certain other
modifications of the terms of a Mortgage Loan can result from a bankruptcy
proceeding, including the reduction in monthly payments required to be made by
the borrower. See "Certain Legal Aspects of the Mortgage Assets" herein. If so
provided in the related Prospectus Supplement, the Company will obtain a
bankruptcy bond or similar insurance contract (the "bankruptcy bond") for
proceedings with respect to borrowers under the Bankruptcy Code. The bankruptcy
bond will cover certain losses resulting from a reduction by a bankruptcy court
of scheduled payments of principal of and interest on a Mortgage Loan or a
reduction by such court of the 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.
A bankruptcy bond with respect to a Series 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, unless otherwise specified in the related Prospectus
Supplement, and will not be restored.
If specified in the related Prospectus Supplement, other forms of Credit
Enhancement may be provided to cover such bankruptcy-related losses. Any
bankruptcy bond or other form of Credit Enhancement provided to cover
bankruptcy-related losses will be described in the related Prospectus
Supplement.
RESERVE FUNDS
If specified in the Prospectus Supplement with respect to a Series,
assets such as cash, U.S. Treasury securities, instruments evidencing ownership
of principal or interest payments thereon, letters of credit, demand notes,
certificates of deposit or a combination thereof in the aggregate amount
specified in such Prospectus Supplement will be deposited by the related Issuer
or the Company in one or more accounts (each, a "Reserve Fund") established and
maintained with the related Trustee. Such cash and the payments on such other
assets will be used to enhance the likelihood of timely payment or distribution
of principal of, and interest on, or, if so specified in the related Prospectus
Supplement, to provide additional protection against losses in respect of, the
Assets in the related Trust Property, to pay the expenses of the related Trust
Estate or Trust or for such other purposes specified in such Prospectus
Supplement. Whether or not the related Issuer or the Company has any obligation
to make such a deposit, certain amounts to which the Holders of the
Subordinated Securities of such Series, if any, the related Issuer or the
Company would otherwise be entitled may instead be deposited into the Reserve
Fund from time to time and in the amounts as specified in the related
Prospectus Supplement. Any cash in any Reserve Fund and the proceeds of any
other instrument upon maturity will be invested in Permitted Instruments. If a
letter of credit is deposited with the Trustee, such letter of credit will be
irrevocable. Unless otherwise specified in the Prospectus Supplement with
respect to a Series, any instrument deposited therein will name the related
Trustee, in its capacity as trustee for the Holders of the Securities of such
Series, as beneficiary and will be issued by an entity acceptable to each
rating agency that rates such Securities. Additional information with respect
to such instruments deposited in the Reserve Funds may be set forth in the
Prospectus Supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the Prospectus Supplement with respect to a Series, the
related Trust Property may also include or the Securities of such Series may
also have the benefits of, assets such as insurance, guarantees, surety bonds,
letters of credit, guaranteed investment contracts, swap agreements, option
agreements or similar arrangements for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the Assets
included in such Trust Property, (ii) paying administrative expenses, (iii)
establishing a minimum reinvestment rate on the payments or distributions made
in respect of such Assets, (iv) guaranteeing timely payment or distribution of
principal and interest on the Securities of such Series, or (v) for such other
purpose as is specified in such Prospectus Supplement. Such arrangements may
include agreements under which Holders of the Securities of a Series are
entitled to receive amounts deposited in various accounts held by the related
Trustee upon the terms specified in the related Prospectus Supplement.
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Such arrangements may be in lieu of any obligation of the Servicers or the
Administrator, if any, to advance delinquent installments in respect of the
Mortgage Loans. See "Servicing of Mortgage Loans, Multifamily Loans and
Contracts -- Advances".
SERVICING OF THE MORTGAGE LOANS,
MULTIFAMILY LOANS AND CONTRACTS
Except as otherwise noted, the description set forth below of the
servicing of Mortgage Loans and Multifamily Loans is applicable to Mortgage
Loans and Multifamily Loans (i) included in the Trust Property with respect to
a Series of Securities that includes Certificates and (ii) underlying Non-
Agency Certificates. Accordingly, except as otherwise noted, references under
the heading "Servicing of the Mortgage Loans, Multifamily Loans and Contracts"
to the "Administrator," the "Servicers," a "Servicing Agreement," and the
"Trustee" should be read as applying to the related Non-Agency Servicers, the
Non-Agency Servicing Agreements and the Certificate Trustees with respect to
Non-Agency Certificates.
Unless otherwise provided in the related Prospectus Supplement, with
respect to a Series of Certificates for which the related Trust Property
includes Mortgage Loans, Multifamily Loans and Contracts included in the Trust
Property for a Series of Certificates and Mortgage Loans and Multifamily Loans
underlying Non-Agency Certificates will be serviced either (i) by the related
Administrator as sole servicer, (ii) by the related Administrator as
administrator or master servicer, (iii) by one or more loan servicing
institutions as servicers or (iv) by another institution as master servicer. If
an institution other than the Administrator acts as the sole servicer or as the
master servicer for a Series or with respect to a Non-Agency Certificate, the
Administrator may have no servicing obligations with respect to such Series or
such Non-Agency Certificate. Generally, the discussion in this section of the
Prospectus is applicable under circumstances when the Administrator is an
affiliate of the Company. If the Administrator is not an affiliate of the
Company, the discussion relating to the servicing of the Mortgage Loans,
Multifamily Loans and Contracts as set forth below may be modified or
superseded by any discussion relating to the servicing of the Mortgage Loans,
Multifamily Loans and Contracts set forth in the Prospectus Supplement.
The Prospectus Supplement for each Series of Certificates for which the
related Trust Property includes Mortgage Loans, Multifamily Loans or Contracts,
and for each Series for which the related Trust Property includes Non-Agency
Certificates, will specify whether the Administrator or another institution
will act as sole servicer or master servicer. If the Administrator acts as
master servicer or administrator, all references to the Servicer under the
heading "Servicing of the Mortgage Loans, Multifamily Loans and Contracts" (and
in the case of a Series of Certificates, under the heading "The Pooling
Agreement and Deposit Trust Agreement") should be read to refer to the direct
Servicers of such series, acting under the supervision of the Administrator as
master servicer or administrator. If an institution other than the
Administrator acts as sole Servicer for a series, or acts as master servicer
for such series, all references to the Servicer herein and under the headings
"Servicing of the Mortgage Loans, Multifamily Loans and Contracts" and "The
Pooling Agreement and Deposit Trust Agreement" should be read to refer to such
institution as sole or master servicer, as appropriate.
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans, Multifamily Loans and Contracts will be serviced by one or more
loan servicing institutions (the "Servicers"), which may include the
Administrator, pursuant to servicing agreements between each Servicer and the
Administrator (each, a "Servicing Agreement").
SERVICING AGREEMENTS
Unless otherwise specified in the related Prospectus Supplement, each
Servicer must be a FNMA- or FHLMC-approved servicer of conventional mortgage
loans. In addition, the Administrator will require adequate servicing
experience, where appropriate, and financial stability, generally including a
net worth of at least $1,000,000, as well as satisfaction of certain other
criteria.
Each Servicer will be required to perform the customary functions of a
mortgage loan servicer, including collection of payments from borrowers (the
"Mortgagors") and remittance of such collections to the Trustee,
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maintenance of applicable standard hazard insurance and primary mortgage
insurance policies, maintenance of escrow or impoundment accounts of Mortgagors
for payment of taxes, insurance, and other items required to be paid by the
Mortgagor pursuant to the Mortgage Loan, Multifamily Loan and Contract,
attempting to cure delinquencies, supervising foreclosures, management of
Mortgaged Properties under certain circumstances, and maintaining accounting
records relating to the Mortgage Loans, Multifamily Loans and Contracts, as
applicable. Unless otherwise specified in the related Prospectus Supplement,
each Servicer will also be obligated to make advances in respect of delinquent
installments of principal and interest on Mortgage Loans, Multifamily Loans and
Contracts, as applicable, as described more fully under " -- Payments on
Mortgage Loans" and " -- Advances," and in respect of certain taxes and
insurance premiums not paid on a timely basis by Mortgagors.
The Servicers will be entitled to a monthly servicing fee as specified
in the related Prospectus Supplement. The Servicers will also generally be
entitled to collect and retain, as part of their servicing compensation, late
payment charges and assumption underwriting fees. The Servicers will be
reimbursed from proceeds of one or more of the insurance policies described
herein ("Insurance Proceeds") or from proceeds received in connection with the
liquidation of defaulted Mortgage Loans ("Liquidation Proceeds") for certain
expenditures. See " -- Advances" and " -- Administration and Servicing
Compensation and Payment of Expenses" herein.
Each Servicer will be required to service each Mortgage Loan,
Multifamily Loan and Contract, as applicable, pursuant to the terms of its
Servicing Agreement for the entire term of such Mortgage Loan, Multifamily Loan
and Contract, as applicable, unless such Servicing Agreement is earlier
terminated by the Trustee, or in the event of a monetary default, by the
Administrator, on behalf of the Trustee. Upon termination of a Servicing
Agreement, the Administrator will act as Servicer of the related Mortgage Loans
pursuant to a Servicing Agreement on the same terms and conditions applicable
to any other Servicer.
PAYMENTS ON MORTGAGE LOANS
Each Servicer will establish and maintain a separate account (each, a
"Custodial Account"). Subject to the following paragraph, each Custodial
Account must be an account the deposits in which are fully insured by either
the Federal Deposit Insurance Corporation ("FDIC") or the National Credit Union
Administration ("NCUA") or are, to the extent such deposits are in excess of
the coverage provided by such insurance, continuously secured by certain
obligations issued or guaranteed by the United States of America. If at any
time the amount on deposit in such Custodial Account shall exceed the amount so
insured or secured, the applicable Servicer must remit to the Trustee the
amount on deposit in such Custodial Account which exceeds the amount so insured
or secured, less any amount such Servicer may retain for its own account
pursuant to its Servicing Agreement.
Notwithstanding the foregoing, the deposits in a Servicer's Custodial
Account will not be required to be fully insured or secured as described above,
and such Servicer will not be required to remit amounts on deposit therein in
excess of the amount so insured or secured, so long as such Servicer meets
certain requirements established by the rating agencies requested to rate the
Securities of the applicable Series.
Each Servicer is required to deposit into its Custodial Account on a
daily basis all amounts in respect of each Mortgage Loan received by such
Servicer, with interest adjusted to a rate (the "Remittance Rate") equal to the
related Mortgage Rate less the Servicer's servicing fee rate. On the 18th day
of each month, or such other day specified in the related Prospectus Supplement
(the "Remittance Date"), each Servicer of the Mortgage Loans will remit to the
Trustee all funds held in its Custodial Account with respect to each Mortgage
Loan; provided, however, that Principal Prepayments may be remitted on the
Remittance Date in the month following the month of such prepayment. Each
Servicer will be required, pursuant to the terms of the related Servicing
Agreement and as specified in the Related Prospectus Supplement, to remit with
each Principal Prepayment interest thereon at the Remittance Rate through the
last day of the month in which such Principal Prepayment is made. Each Servicer
is also required to advance its own funds as described below.
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ADVANCES
Unless otherwise specified in the related Prospectus Supplement, with
respect to a delinquent Mortgage Loan, Multifamily Loan or Contract, the
related Servicer will be obligated to advance its own funds or funds from its
Custodial Account equal to the aggregate amount of payments of principal and
interest (adjusted to the applicable Remittance Rate) which were due on a due
date and which are delinquent as of the close of business on the business day
preceding the Remittance Date ("Monthly Advance"). Such advances are required
to be made by the Servicer unless the Servicer, with the concurrence of the
Administrator, determines that such advance ultimately would not be
reimbursable under any applicable insurance policy, from the proceeds of
liquidation of the related Mortgaged Properties, or from any other source (any
amount not so reimbursable being referred to herein as a "Nonrecoverable
Advance"). Such advance obligation will continue through the month following
the month of final liquidation of such Mortgage Loan, Multifamily Loan or
Contract. Any Servicer funds thus advanced will be reimbursable to such
Servicer out of recoveries on the Mortgage Loans, Multifamily Loans or
Contracts with respect to which such amounts were advanced. The Servicers will
also be obligated to make advances with respect to certain taxes and insurance
premiums not paid by Mortgagors on a timely basis. Funds so advanced are
reimbursable to the Servicers out of recoveries on the related Mortgage Loans,
Multifamily Loans or Contracts. Each Servicer's right of reimbursement for any
advance will be prior to the rights of the Holders of the Securities of the
applicable Series to receive any related Insurance Proceeds or Liquidation
Proceeds.
Unless otherwise specified in the Prospectus Supplement with respect to
a Series, the Administrator will be obligated pursuant to the related Indenture
or Pooling Agreement to advance on or before the applicable Payment Date or
Distribution Date an amount equal to any Monthly Advance which a Servicer fails
to remit, but will not be obligated to make such advance if the Administrator
determines it to be a Nonrecoverable Advance. Failure by a Servicer to make a
required Monthly Advance will be grounds for termination under the related
Servicing Agreement.
SERVICING PROCEDURES
Unless otherwise specified in the related Prospectus Supplement, each
Servicer will service the Mortgage Loans, Multifamily Loans and Contracts
pursuant to written guidelines promulgated by the Company or the Administrator.
The Administrator will exercise its best reasonable efforts to insure that the
Servicers service the Mortgage Loans, Multifamily Loans and Contracts in
compliance with such guidelines and in a manner consistent with industry
standards.
Mortgage Loans. The Servicer will be responsible for making reasonable
efforts to collect all payments called for under the Mortgage Loans. The
Servicer will be obligated to follow such normal practices and procedures as it
deems necessary or advisable to realize upon a defaulted Mortgage Loan. 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 (see "Certain Legal Aspects of the
Mortgage Assets -- The Mortgage Loans and Multifamily Loans -- Anti-Deficiency
Legislation and Other Limitations on Lenders" for a description of the limited
availability of deficiency judgments), foreclose against such property and
proceed for the deficiency against the appropriate person. The amount of the
ultimate net recovery (including the proceeds of any Mortgage Pool Insurance
Policy or other applicable Credit Enhancement), after reimbursement to the
Servicer of its expenses incurred in connection with the liquidation of any
such defaulted Mortgage Loan and prior unreimbursed advances of principal and
interest with respect thereto will be deposited in the Certificate Account for
the applicable Series (or, in the case of a Mortgage Loan underlying a Non-
Agency Certificate in an account maintained by the related Certificate Trustee)
when realized, and will be paid or distributed to Holders of the Securities of
such Series on the next Payment Date or Distribution Date following the month
of receipt (or, in the case of a Mortgage Loan underlying a Non-Agency
Certificate, will be distributed to the Trustee for the related Series in
accordance with the terms of such Non-Agency Certificate).
With respect to Cooperative Loans, any prospective purchaser will
generally have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Assets" herein. This approval is usually based on the purchaser's
income and net worth and numerous other factors. Although the Cooperative's
approval is unlikely to be unreasonably withheld or delayed, the necessity of
acquiring such approval could limit the
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number of potential purchasers for those shares and otherwise limit the ability
to sell and realize the value of those shares.
In general, a "tenant-stockholder" (as defined in Code Section
216(b)(2)) of a corporation that qualifies as a "cooperative housing
corporation" within the meaning of Code Section 216(b)(1) is allowed a
deduction for amounts paid or accrued within his taxable year to the
corporation representing his proportionate share of certain interest expenses
and certain real estate taxes allowable as a deduction under Code Section
216(a) to the corporation under Code Sections 163 and 164. In order for a
corporation to qualify under Code Section 216(b)(1) for its taxable year in
which such items are allowable as a deduction to the corporation, such Section
requires, among other things, that at least 80% of the gross income of the
corporation be derived from its tenant-stockholders (as defined in Code Section
216(b)(2). By virtue of this requirement, the status of a corporation for
purposes of Code Section 216(b)(1) must be determined on a year-to-year basis.
Consequently, there can be no assurance that Cooperatives relating to the
Cooperative Loans will qualify under such Section for any particular year. In
the event that such a Cooperative fails to qualify for one or more years, the
value of the collateral securing any related Cooperative Loans could be
significantly impaired because no deduction would be allowable to tenant-
stockholders under Code Section 216(a) with respect to those years. In view of
the significance of the tax benefits accorded tenant-stockholders of a
corporation that qualifies under Code Section 216(b)(1), the likelihood that
such a failure would be permitted to continue over a period of years appears
remote.
The Servicer will expend its own funds to restore property securing a
Mortgage Loan which has sustained uninsured damage only if it determines that
such restoration will increase the proceeds to Holders of liquidation of the
Mortgage Loan after the reimbursement to the Servicer of its expenses.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer will be obligated (to the extent it has knowledge of
such conveyance) to exercise its right 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 the applicable law. If it reasonably
believes it may be restricted by law, for any reason, from enforcing such a
"due-on-sale" clause, the Servicer 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, provided such person satisfies the criteria required to maintain
the coverage provided by applicable insurance policies (unless otherwise
restricted by applicable law). 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 Assets -- The Mortgage Loans and Multifamily 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.
So long as it acts as servicer of the Mortgage Loans, the Servicer will
be required to maintain certain insurance covering errors and omissions in the
performance of its obligations as servicer and certain fidelity bond coverage
ensuring against losses through wrongdoing of its officers, employees and
agents.
Contracts. With respect to Trust Property that includes Contracts,
pursuant to each Servicing Agreement, the Servicer will service and administer
the Contracts assigned to the Trustee as more fully set forth below. The
Administrator, either directly or through Servicers subject to general
supervision by the Administrator, will perform diligently all services and
duties specified in each Pooling Agreement, in the same manner as prudent
lending institutions of manufactured housing installment sales contracts of the
same type as the Contracts in those jurisdictions where the related
Manufactured Homes are located. The Administrator will monitor the performance
of each Servicer, if any, and, unless the related Prospectus Supplement states
otherwise, will remain liable for the servicing of the
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Contracts in accordance with the terms of the Pooling Agreement. The duties to
be performed by the Servicer will include collection and remittance of
principal and interest payments, collection of insurance claims and, if
necessary, repossession.
Each Servicing Agreement will provide that, when any Manufactured Home
securing a Secured Contract is about to be conveyed by the borrower, the
Servicer (to the extent it has knowledge of such prospective conveyance and
prior to the time of the consummation of such conveyance) may exercise its
rights to accelerate the maturity of such Contract under the applicable "due-
on-sale" clause, if any, unless the Servicer reasonably believes it is unable
to enforce such "due-on-sale" clause under applicable law. In such case, the
Servicer is authorized to take or enter into an assumption agreement from or
with the person to whom such Manufactured Home has been or is about to be
conveyed, pursuant to which such person becomes liable under the related
Secured Contract, provided such person satisfies the criteria required to
maintain the coverage provided by applicable insurance policies (unless
otherwise restricted by applicable law). Where authorized by the Contract the
APR may be increased, upon assumption, to the then-prevailing market rate, but
will not be decreased.
Under each Servicing Agreement, the Servicer will repossess or otherwise
comparably convert the ownership of properties securing such of the related
Contracts as come into and continue in default and as to which no satisfactory
arrangements can be made for collection of delinquent payments. In connection
with such repossession or other conversion, the Servicer will follow such
practices and procedures as it deems necessary or advisable and as shall be
normal and usual in its general servicing activities. The Servicer, however,
will not be required to expend its own funds in connection with any
repossession or towards the restoration of any property unless it determines
(i) that such restoration or repossession will increase the proceeds of
liquidation of the related Contract to the Holders after reimbursement to
itself for such expenses and (ii) that such expenses will be recoverable to it
either through liquidation proceeds or through insurance proceeds.
PRIMARY MORTGAGE INSURANCE
Generally, Mortgage Loans that the Company acquires do not have Loan-to-
Value Ratios in excess of 80% of their Original Value. Unless otherwise
specified in the Prospectus Supplement, Mortgage Loans that the Company
acquires that have an original principal amount exceeding 80% of Original Value
usually will have primary mortgage insurance. The Company generally requires
such coverage to continue until the Loan-to-Value Ratio drops below 80%.
The primary mortgage insurance policies will not insure against certain
losses which may be sustained in the event of a personal bankruptcy of the
mortgagor under a Mortgage Loan.
The primary mortgage insurance policies generally provide that no claim
may be validly presented thereunder unless (i) certain cash advances have been
made, and (ii) where there has been physical loss or damage to the Mortgaged
Property, it has been restored to its condition as of the date it was insured,
reasonable wear and tear excepted. Assuming the satisfaction of these
conditions, the issuer of a primary mortgage insurance policy will be required,
within the applicable policy limits, to pay either (a) an amount equal to the
principal balance of the defaulted Mortgage Loan covered thereby, plus accrued
and unpaid interest thereon to the date of claim, property preservation
expenses, certain other costs and other advances made by the insured, against
receipt of good and marketable title to the Mortgaged Property or (b) the
product of the amount described in clause (a), subject to certain exceptions,
multiplied by the applicable percentage of insurance coverage.
Any primary mortgage insurance relating to a pool of Contracts will be
described in the related Prospectus Supplement.
Claim payments, if any, under each primary mortgage insurance policy
will be required to be remitted by the Servicers to the Administrator and will
be treated in the same manner as a prepayment of a Mortgage Loan.
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STANDARD HAZARD INSURANCE
Mortgage Loans
Unless otherwise specified in the Prospectus Supplement, the Servicer
will be required pursuant to a Servicing Agreement to cause to be maintained
for each Mortgage Loan a standard hazard insurance policy. The coverage of such
policy is required to be in an amount not less than the maximum insurable value
of the improvements securing such Mortgage Loan from time to time or the
principal balance owing on such Mortgage Loan from time to time, whichever is
less. In all events, such coverage shall be in an amount sufficient to ensure
avoidance of the applicability of the co-insurance provisions under the terms
and conditions of the applicable policy. The ability of each Servicer to assure
that hazard insurance proceeds are appropriately applied may be dependent on
its being named as an additional insured under any standard hazard insurance
policy and under any flood insurance policy referred to below, or upon the
extent to which information in this regard is furnished to such Servicer by
Mortgagors. All amounts collected by a Servicer under a standard hazard
insurance policy will be deposited in such Servicer's Custodial Account. Unless
otherwise specified in the related Prospectus Supplement, each Servicing
Agreement will provide that the related Servicer may satisfy its obligation to
cause hazard insurance policies to be maintained by maintaining a blanket
policy insuring against hazard losses on the Mortgage Loans serviced by such
Servicer.
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 under
written 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, 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 flood area, the Pooling Agreement will require that flood insurance
be maintained in such amounts as would be required by the Federal National
Mortgage Association in connection with its mortgage loan purchase program. The
Administrator may also purchase special hazard insurance against certain of the
uninsured risks described above. See "Credit Enhancement -- Special Hazard
Insurance".
Since the amount of hazard insurance the Administrator 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 Administrator will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of damaged property, any damage to such borrower's cooperative
dwelling or such Cooperative's building could significantly reduce the value of
the collateral securing such Cooperative Loan to the extent not covered by
other credit support.
Secured Contracts
Unless otherwise specified in the Prospectus Supplement, the terms of
each Servicing Agreement will require the Servicer to cause to be maintained
with respect to each Secured Contract one or more hazard insurance policies
which provide, at a minimum, the same coverage as a standard form fire and
extended coverage insurance policy that is customary for manufactured housing,
issued by a company authorized to issue such policies in the state in which the
Manufactured Home is locate, and in an amount which is not less than the
maximum insurable value of such Manufactured Home or the principal balance due
from the borrower on the related Secured Contract, whichever is less.
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When a Manufactured Home's location was, at the time of origination of the
related Secured Contract, within a federally designated special flood hazard
area, the Administrator also shall cause such flood insurance to be maintained,
which coverage shall be at least equal to the minimum amount specified in the
preceding sentence or such lesser amount as may be available under the federal
flood insurance program.
The Servicer may maintain, in lieu of causing individual hazard
insurance policies to be maintained with respect to each Manufactured Home, and
shall maintain, to the extent that the related Secured Contract does not
require the borrower to maintain a hazard insurance policy with respect to the
related Manufactured Home, one or more blanket insurance policies covering
losses on the borrowers' interests in the Secured Contracts resulting from the
absence or insufficiency of individual hazard insurance policies.
The Servicer, to the extent practicable, will cause the borrowers to pay
all taxes and similar governmental charges when and as due. To the extent that
nonpayment of any taxes or charges would result in the creation of a lien upon
any Manufactured Home having a priority equal or senior to the lien of the
related Secured Contract, the Servicer will pay any such delinquent tax or
charge.
If the Servicer repossesses a Manufactured Home on behalf of the
Trustee, the Servicer will either (i) maintain at its expense hazard insurance
with respect to such Manufactured Home, or (ii) indemnify the Trustee against
any damage to such Manufactured Home prior to resale or other disposition.
Multifamily Loans
Unless otherwise provided in the Prospectus Supplement relating to a
Series of Certificates for which the related Trust Property includes
Multifamily Loans or relating to a Series for which the related Trust Property
includes Non-Agency Certificates backed by Multifamily Loans, the Servicer will
be required to be maintained, for each Multifamily Loan, a standard hazard
insurance policy with extended coverage in an amount which is at least equal to
the lesser of the original principal balance of the Multifamily Loan, or the
replacement cost of the related Multifamily Project. Where any part of any
improvement to the Multifamily Project is located in an area identified by the
Flood Emergency Management Agency as having special flood hazards and flood
insurance has been made available, the Master Servicer is required to cause to
be maintained with a generally acceptable insurance carrier a flood insurance
policy meeting the requirements of the current guidelines of the Federal
Insurance Administration, providing coverage in an amount not less than (i) the
original principal balance of the Multifamily Loan, (ii) the insurable value of
the Multifamily Project, or (iii) the maximum amount of insurance available
under the Flood Disaster Protection Act of 1973, as amended, which ever is
less.
Additional insurance coverage for specific properties in a Multifamily
Loan Pool included in the Trust Property for a Series will be described in the
related Prospectus Supplement.
TITLE INSURANCE POLICIES
The Servicing Agreements will require that a title insurance policy be
in effect on each of the Mortgaged Properties and that such title insurance
policy contain no coverage exceptions, except those permitted pursuant to the
guidelines heretofore established by FNMA.
CLAIMS UNDER PRIMARY MORTGAGE INSURANCE POLICIES AND STANDARD HAZARD INSURANCE
POLICIES; OTHER REALIZATION UPON DEFAULTED LOANS
Each Servicer will present claims to any primary insurer under any
related primary mortgage insurance policy and to the hazard insurer under any
related Standard Hazard Insurance Policy. All collections under any related
primary mortgage insurance policy or any related standard hazard insurance
policy (less any proceeds to be applied to the restoration or repair of the
related Mortgaged Property) will be remitted to the Trustee.
If any Mortgage Property securing a defaulted Mortgage Loan is damaged
and proceeds, if any, from the related standard hazard insurance policy are
insufficient to restore the damaged property to a condition sufficient to
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permit recovery under any applicable Mortgage Pool Insurance Policy or any
related primary mortgage insurance policy, each Servicer will be required to
expend its own funds to restore the damaged property. In the event that a
Servicer fails to make a required expenditure, the Administrator will be
required to make such expenditure. In either case, the Servicer and the
Administrator will be required to make such expenditures only to the extent it
determines such expenditures are recoverable from Insurance Proceeds or
Liquidation Proceeds.
If recovery under any applicable Mortgage Pool Insurance Policy or any
related primary mortgage insurance policy is not available, the Servicer or the
Administrator, as the case may be, will nevertheless be obligated to attempt to
realize upon the defaulted Mortgage Loan. Foreclosure proceedings will be
conducted by the Servicer with the concurrence of the Administrator. If the
proceeds of any liquidation of the Mortgaged Property securing the defaulted
Mortgage Loan are less than the principal balance of the defaulted Mortgage
Loan plus interest accrued thereon, a loss will be realized on such Mortgage
Loan, to the extent the applicable Credit Enhancement is not sufficient, in the
amount of such difference plus the aggregate of expenses incurred by the
Servicer in connection with such proceedings and which are reimbursable under
the Pooling Agreement. Consequently, any default by an insurer under any
insurance policy or bankruptcy bond, any losses in excess of any insurance
policy or bankruptcy limits, any uninsured loss and any interest shortfalls not
otherwise covered as described herein or in the Prospectus Supplement will
likely result in losses being borne by one or more Holders of the affected
Series.
Because Insurance Proceeds cannot exceed deficiency claims and certain
expenses incurred by the Servicer, no payments under the related Mortgage Pool
Insurance Policy, if any, will result in a recovery on the Mortgage Loans which
exceeds the principal balance of the defaulted Mortgage Loan together with
accrued interest thereon. In addition, where a Mortgaged Property securing a
defaulted Mortgage Loan can be resold for an amount exceeding the principal
balance of the related Mortgage Loan together with accrued interest and
expenses, it may be expected that, where retention of any such amount is
legally permissible, the Pool Insurer will exercise its right under the related
Mortgage Pool Insurance Policy, if any, to purchase such Mortgaged Property and
realize for itself any excess proceeds.
Liquidation Proceeds and Insurance Proceeds may initially be credited to
a separate account (the "Advance Account") in order to facilitate the
reimbursement of advances made by Servicers, the Administrator or an insurer.
Such proceeds will be held in the Advance Account until the earlier of the date
of final reimbursement to the appropriate parties and the second Remittance
Date after the date on which they were deposited in the Advance Account.
Interest shortfalls may be suffered on Securities if and to the extent that
Liquidation Proceeds and Insurance Proceeds are retained in the Advance Account
during a period in which Servicers are not making Monthly Advances.
ADMINISTRATION AND SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Mortgage Loan, Multifamily Loan and Contract, the
Administrator may receive compensation with respect to each interest payment
thereon in an amount specified in the related Prospectus Supplement. As
compensation for its servicing duties, each Servicer will be entitled to a
monthly servicing fee in the amount specified in the related Prospectus
Supplement. In addition to the primary compensation, each Servicer will retain
all assumption underwriting fees and late payment charges, to the extent
collected from Mortgagors.
The Administrator and each Servicer will be entitled to reimbursement
for certain expenses incurred by it in connection with the liquidation of
defaulted Mortgage Loans, Multifamily Loans and Contracts. No loss will be
suffered on the Certificates by reason of such expenses to the extent claims
for such expenses are paid directly under any applicable Mortgage Pool
Insurance Policy, a primary mortgage insurance policy, the special hazard
insurance policy or from other forms of Credit Enhancement. In the event,
however, that the defaulted Mortgage Loans are not covered by a Mortgage Pool
Insurance Policy, Primary Mortgage Insurance Policies, Special Hazard Insurance
Policy, Standard Hazard Insurance Policies or another form of Credit
Enhancement, or claims are either not made or not paid under such policies or
Credit Enhancement, or if coverage thereunder has ceased, a loss will occur on
the Securities of the affected Series to the extent that the proceeds from the
liquidation of a defaulted Mortgage Loan, Multifamily Loan or Contract, after
reimbursement of the Administrator's and the Servicer's expenses, are less than
the principal balance of such defaulted Mortgage Loan, Multifamily Loan or
Contract.
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THE INDENTURE
The following summaries describe certain provisions of the Indenture not
described elsewhere in this Prospectus. Where particular provisions or terms
used in the Indenture are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such summaries.
The description set forth below is subject to modification in the Prospectus
Supplement for a Series of Bonds to describe the terms and provisions of the
particular Indenture relating to such Series of Bonds.
MODIFICATION OF INDENTURE
With the consent of the holders of not less than two-thirds of the then
aggregate principal amount of the outstanding Bonds of any Series issued under
an Indenture, the related Trustee and the related Issuer may execute a
supplemental indenture to add provisions to, or change in any manner or
eliminate any provisions of, the Indenture with respect to such Series or
modify (except as provided below) in any manner the rights of the holders of
such Bonds.
Without the consent of the Holder of each outstanding Bond of such
Series affected thereby, however, no supplemental indenture shall (a) change
the Stated Maturity of the principal of, or any installment of interest on, any
Bond of such Series or reduce the principal amount thereof, the interest rate
specified thereon (except as provided in the related Indenture with respect to
any Class of Bonds which are Variable Interest Rate Securities), the redemption
price with respect thereto or the earliest date on which any Bonds of such
Series may be redeemed at the option of the Issuer, or change any place of
payment where, or the coin or currency in which, any Bond of such Series or any
interest thereon is payable, or impair the right to institute suit for the
enforcement of certain provisions of the Indenture regarding payment, (b)
reduce the percentage of the aggregate principal amount of the outstanding
Bonds of such Series, the consent of the Holders of which is required for any
such supplemental indenture, or the consent of the Holders of which is required
for any waiver of compliance with certain provisions of the Indenture or of
certain defaults thereunder and their consequences as provided for in the
Indenture, (c) modify the provisions of the Indenture specifying the
circumstances under which such a supplemental indenture may not change the
provisions of the Indenture without the consent of the Holders of each
outstanding Bond of such Series affected thereby, or the provisions of the
Indenture with respect to certain remedies available in an Event of Default (as
described below), except to increase any percentage specified therein or to
provide that certain other provisions of the Indenture cannot be modified or
waived without the consent of the Holder of each outstanding Bond affected
thereby, (d) modify or alter the provisions of the Indenture regarding the
voting of Bonds held by the Issuer or an affiliate of the Issuer, (e) permit
the creation of any lien ranking prior to or on the parity with the lien of the
Indenture with respect to any part of the property subject to a lien under the
Indenture or terminate the lien of the Indenture on any property at any time
subject thereto or deprive the Holder of any Bond of such Series of the
security afforded by the lien of the Indenture, or (f) modify any of the
provisions of the Indenture in such manner as to affect the rights of the
Holders of Bonds of such Series to the benefits of any provisions for the
redemption at the request of Holders of Bonds of such Series contained therein.
Each Issuer and the respective Trustee may also enter into supplemental
indentures, without obtaining the consent of Holders of such Series, to cure
ambiguities or make minor corrections, to provide for the issuance of Bonds in
bearer or registered form or for the conversion of any outstanding Bonds to or
from bearer form and to do such other things as would not adversely affect the
interests of the Holders of such Series.
EVENTS OF DEFAULT
An "Event of Default" with respect to any Series of Bonds is defined in
the respective Indenture under which such Bonds are issued as being: (a) unless
otherwise specified in the Prospectus Supplement for such Series, a default in
the payment of principal of any Bond of such Series or a default for ten days
or more in the payment of any interest on any Bond of such Series; (b) a
default in the observance of certain negative covenants in the Indenture or in
the observance of certain covenants relating to redemptions of Bonds of such
Series; (c) a default in the observance of any other covenant of the Indenture,
and the continuation of any such default for a period of sixty days after
notice to the Issuer by the Trustee or to the Issuer and the Indenture Trustee
by the Holders of at least 25% in principal amount of the Bonds of such Series
then outstanding; (d) the failure of the lien of the Indenture to constitute a
valid first priority security interest in the Trust Estate, (e) any
representation or warranty made by the Issuer in the Indenture or in any
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certificate delivered pursuant thereto having been incorrect in a material
respect as of the time made, and the circumstance in respect of which such
representation or warranty is incorrect not having been cured within thirty
days after notice thereof is given to the Issuer by the Trustee or by the
Holders of at least 25% in principal amount of the Bonds of such Series then
outstanding; or (f) certain events of bankruptcy, insolvency, receivership or
reorganization of the Issuer.
RIGHTS UPON EVENT OF DEFAULT
In case an Event of Default should occur and be continuing with respect
to a Series of Bonds, the Trustee may, and on request of Holders of more than
50% in principal amount of the Bonds of such Series then outstanding shall,
declare the principal of such Series of Bonds to be due and payable. Such
declaration may under certain circumstances be rescinded by the Holders of a
majority in principal amount of the Bonds of such Series then outstanding.
If, following an Event of Default, a Series of Bonds has been declared
to be due and payable, the Trustee may, in its discretion (provided that the
Holders of the Bonds of such Series have not directed the Trustee to sell the
Assets included in the related Trust Estate), refrain from selling such Assets
and continue to apply all amounts received on such Assets to payments due on
the Bonds of such Series in accordance with their terms, notwithstanding the
acceleration of the maturity of such Bonds. The Trustee, however, must sell
the Assets included in the related Trust Estate for such Series if collections
in respect of such Assets are determined to be insufficient to make all
scheduled payments on Bonds of such Series, in which case payments will be made
on the Bonds in the same manner as described in the next sentence with regard
to instances in which such Assets are sold. In addition, upon an Event of
Default the Trustee may, in its discretion (provided that, unless the Event of
Default relates to a default in payment of principal or interest, the Trustee
must receive the consent of the Holders of all outstanding Bonds of such
Series, and certain other conditions must be met), sell the Assets included in
the related Trust Estate for such Series, in which event the Bonds of such
Series will be payable pro rata, without regard to their Stated Maturities, out
of the collections on, or the proceeds from the sale of, such Assets and any
overdue installments of interest on the Bonds will, to the extent permitted by
applicable law, bear interest at the highest stated interest rate borne by any
Bond of such Series.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
shall be under no obligation to exercise any of the rights and powers under the
Indenture at the request or direction of any of the Holders of Bonds, unless
such Holders have offered to the Trustee reasonable security or indemnity
satisfactory to it against the costs, expenses and liabilities which might be
incurred by it in compliance with such request or direction. Subject to such
provisions for indemnification and certain limitations contained in the
Indenture, the Holders of a majority in principal amount of the outstanding
Bonds of a Series shall have the right to direct the time, method, and place of
conducting any proceeding or any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee with respect to the Bonds of such
Series; and the Holders of a majority in principal amount of the Bonds of a
Series then outstanding may, in certain cases, waive any default with respect
thereto, except a default in the payment of principal or interest or a default
in respect of a covenant or provision of the Indenture that cannot be modified
without the waiver or consent of the Holder of each outstanding Bond affected
thereby.
LIST OF HOLDERS OF BONDS
Three or more Holders of the Bonds of any Series (each of whom has owned
a Bond of such Series for at least six months) may, by written request to the
Trustee, obtain access to the list of all Holders of the Bonds of such Series
maintained by the Trustee for the purpose of communicating with other Holders
with respect to their rights under the Indenture. The Trustee may elect not to
afford the requesting Holders access to the list of Holders if it agrees to
mail the desired communication or proxy, on behalf of the requesting Holders,
to all Holders.
ISSUER'S ANNUAL COMPLIANCE STATEMENT
The Issuer will be required to file annually with the Trustee a written
statement as to the fulfillment of its obligations under the Indenture.
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TRUSTEE'S ANNUAL REPORT
The Trustee will be required to mail each year to all Holders a brief
report relating to its eligibility and qualifications to continue as the
Trustee under the Indenture, any amounts advanced by it under the Indenture,
the amount, interest rate and maturity date of certain indebtedness owing by
the Issuer to it in the Trustee's individual capacity, the property and funds
physically held by the Trustee as such, any release, or release and
substitution, of property subject to the lien of the Indenture which has not
been previously reported, any additional Series of Bonds not previously
reported and any action taken by it which materially affects the Bonds and
which has not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the Assets securing the
Bonds of a Series upon the delivery to the Trustee for cancellation of all of
the Bonds of such Series or, with certain limitations, upon deposit with the
Trustee of funds sufficient for the payment in full of all of the Bonds of such
Series.
REPORTS BY TRUSTEE TO BONDHOLDERS
On each Principal Payment Date or Special Redemption Date, the Trustee
will send a report to each Holder setting forth, among other things, the amount
of such payment representing interest, the amount thereof, if any, representing
principal and the outstanding principal amount of an individual Bond of each
Class (or the aggregate principal amount of the Bonds of each Class in the case
of Holders of Bonds on which payments of interest only are then being made)
after giving effect to the payments made on such Principal Payment Date or
Special Redemption Date.
LIMITATION ON SUITS
No Holder of a Bond of any Series will have any right to institute any
proceedings with respect to the Indenture unless (1) such Holder has previously
given written notice to the Trustee of a continuing Event of Default with
respect to such Series; (2) the Holders of at least 25% in principal amount of
the Bonds of such Series then outstanding have made written request to the
Trustee to institute proceedings in respect of such Event of Default in its own
name as Trustee; (3) such Holders have offered to the Trustee reasonable
indemnity satisfactory to it against the costs, expenses and liabilities to be
incurred in compliance with such request; (4) for 60 days after its receipt of
such notice, request and offer of indemnity the Trustee has failed to institute
any such proceedings; and (5) no direction inconsistent with such written
request has been given to the Trustee during such 60-day period by the Holders
of at least 50% in principal amount of the Bonds of such Series then
outstanding.
THE POOLING AGREEMENT AND
DEPOSIT TRUST AGREEMENT
The following summaries describe certain provisions of the Pooling
Agreement and the Deposit Trust Agreement not described elsewhere in this
Prospectus. Where particular provisions or terms used in the Pooling Agreement
or Deposit Trust Agreement are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as a part of such
summaries. The description set forth below is subject to modification in the
Prospectus Supplement for a Series of Certificates to describe the terms and
provisions of the particular Pooling Agreement or Deposit Trust Agreement
relating to such Series of Certificates.
Generally, the discussion in this section of the Prospectus is
applicable under circumstances when the Administrator is an affiliate of the
Company. If the Administrator is not an affiliate of the Company, the
discussion relating to pooling and administration (or master servicing) as set
forth below may be modified or superseded by any discussion relating to the
pooling and administration (or master servicing) set forth in the Prospectus
Supplement. In addition, certain of the following summaries only apply to a
Pooling Agreement relating to series of Certificates for which the related
Trust Property includes Mortgage Loans, Multifamily Loans or Contracts.
Provisions of Pooling Agreements or Deposit Trust Agreements relating to series
of Certificates for which the related Trust Property includes other types of
Mortgage Assets will be summarized and described in the related Prospectus
Supplement.
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ASSIGNMENT OF MORTGAGE ASSETS
Assignment of Mortgage Loans
At the time of issuance of the Certificates of a Series, the Issuer will
assign the Mortgage Loans to the related Trustee, together with all principal
and interest (subject to exclusions or adjustments specified in the related
Prospectus Supplement received by the Issuer on or with respect to such
Mortgage Loans on or after the Cut-off Date) other than principal and interest
due and payable on or before the Cut-off Date. The Trustee will, concurrently
with such assignment, execute, countersign and deliver the Certificates to the
Issuer in exchange for the Mortgage Loans. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the related pooling or sale
agreement.
In addition, as to each Mortgage Loan, the Issuer will deliver to the
Trustee the Mortgage Note and Mortgage, any assumption and modification
agreement, an assignment of the Mortgage in recordable form, evidence of title
insurance and, if applicable, the certificate of private mortgage insurance. In
instances where recorded documents cannot be delivered due to delays in
connection with recording, the Issuer may deliver copies thereof and deliver
the original recorded documents promptly upon receipt.
With respect to any Mortgage Loans which are Cooperative Loans, the
Issuer, as depositor, will cause to be delivered to the Trustee, the related
original Cooperative note endorsed to the order of the Trustee, the original
security agreement, the proprietary lease or occupancy agreement, the
recognition agreement, an executed financing agreement and the relevant stock
certificate and related blank stock powers. The Issuer will file in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
Unless otherwise specified in the related Prospectus Supplement, in the
Pooling Agreement or Deposit Trust Agreement the Issuer generally will
represent and warrant to the Trustee, among other things, that (i) the
information set forth in the schedule of Mortgage Loans attached thereto is
correct in all material respects; (ii) a lender's title insurance policy or
binder for each Mortgage Loan included in the Trust Property was issued on the
date of origination thereof and each such policy or binder assurance is valid
and remains in full force and effect; (iii) at the date of initial issuance of
the Certificates, the Issuer has good title to the Mortgage Loans and the
Mortgage Loans are free of offsets, defenses or counterclaims; (iv) at the date
of initial issuance of the Certificates, each Mortgage is a valid first lien on
the property securing the Mortgage Note (subject only to (a) the lien of
current real property taxes and assessments, (b) covenants, conditions, and
restrictions, rights of way, easements and other matters of public record as of
the date of the recording of such Mortgage, such exceptions appearing of record
being acceptable to mortgage lending institutions generally in the area wherein
the property subject to the Mortgage is located or specifically reflected in
the appraisal obtained by the Company 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) and such
property is free of material damage and is in good repair or, with respect to
junior Lien Mortgage Loans, that such Mortgage is a valid junior lien Mortgage,
as the case may be, and specifying the percentage of the Mortgage Loan Pool
comprised of junior Lien Mortgage Loans; (v) at the date of initial issuance of
the Certificates, no Mortgage Loan is 30 or more days delinquent and there are
no delinquent tax or assessment liens against the property covered by the
related Mortgage; (vi) at the date of initial issuance of the Certificates, the
portion of each Mortgage Loan, if any, which in the circumstances set forth
above under "Servicing of the Mortgage Loans, Multifamily Loans and Contracts
- -- Primary Mortgage Insurance" should be insured with a private mortgage
insurer is so insured; and (vii) each Mortgage Loan at the time it was made
complied in all material respects with applicable state and federal laws,
including, with out limitation, usury, equal credit opportunity and disclosure
laws.
In the event that the Issuer has acquired the Mortgage Loans for a
Series, if so specified in the related Prospectus Supplement, the Issuer may,
in lieu of making the representations set forth in the preceding paragraph,
cause the entity from which such Mortgage Loans were acquired to make such
representations (other than those regarding the Issuer's title to the Mortgage
Loans, which will in all events be made by the Issuer), in the sales agreement
pursuant to which such Mortgage Loans are acquired, or if such entity is acting
as a Servicer, in its servicing agreement. In such event such representations,
and the Issuer's rights against such entity in the event of a breach thereof,
will be assigned to the Trustee for the benefit of the holders of the
Certificates of such Series.
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Assignment of Contracts
The Issuer will cause the Contracts to be assigned to the Trustee,
together with principal and interest due on or with respect to the Contracts
after the Cut-off Date specified in the related Prospectus Supplement. Each
Contract will be identified in a loan schedule ("Contract Loan Schedule")
appearing as an exhibit to the related pooling or sale agreement.
In addition, with respect to each Contract, the Issuer will deliver or
cause to be delivered to the Trustee, the original Contract and copies of
documents and instruments related to each Contract and the security interest in
the Manufactured Home securing each Contract. To give notice of the right,
title and interest of the Certificateholders to the Contracts, the Issuer will
cause a UCC-1 financing statement to be filed identifying the Trustee as the
secured party and identifying all Contracts as collateral. Unless otherwise
specified in the related Prospectus Supplement, the Contracts will not be
stamped or otherwise marked to reflect their assignment from the Issuer to the
Trustee. Therefore, if a subsequent purchaser were able to take physical
possession of the Contracts without notice of such assignment, the interest of
the Holders of the Certificates of the applicable Series in the Contracts could
be defeated. See "Certain Legal Aspects of the Mortgage Assets."
Unless otherwise specified in the Prospectus Supplement, the Issuer will
provide limited representations and warranties to the Trustee concerning the
Contracts. Such representations and warranties will include: (i) that the
information contained in the Contract Loan Schedule provides an accurate
listing of the Contracts and that the information respecting such Contracts set
forth in such Contract Loan Schedule is true and correct in all material
respects at the date or dates respecting which such information is furnished;
(ii) that, immediately prior to the conveyance of the Contracts, the Issuer had
good title to, and was sole owner of, each such Contract; and (iii) that there
has been no other sale by it of such Contract and that the Contract is not
subject to any lien, charge, security interest or other encumbrance.
Assignment of Multifamily Loans
The Issuer will cause the Multifamily Loans constituting the Multifamily
Loan Pool to be assigned to the Trustee, together with principal and interest
due on or with respect to the Multifamily Loans after the Cut-off Date
specified in the related Prospectus Supplement. The Trustee will, concurrently
with such assignment, authenticate and deliver the Certificates. Each
Multifamily Loan will be identified in a schedule appearing as an exhibit to
the pooling or sale agreement (the "Multifamily Loan Schedule").
In addition, the Issuer, will, as to each Multifamily Loan, deliver or
cause to be delivered to the Trustee, the mortgage note endorsed without
recourse, the mortgage or deed of trust with evidence of recording indicated
thereon and an assignment of the instrument in recordable from (but not
recorded).
The Trustee will review and hold such documents in trust for the benefit
of the Holders of the Certificates of the applicable Series. Unless otherwise
provided in the related Prospectus Supplement, if any such document is found to
be defective in any material respect and the Issuer, the entity from which the
Company acquired such Multifamily Loan (the "Multifamily Loan Seller") or the
Administrator, as the case may be, does not cure such a defect with 60 days, or
within such other period specified in the related Prospectus Supplement, the
Company, the Multifamily Loan Seller or the Administrator, as the case may be,
will, not later than 90 days or within such other period specified in the
related Prospectus Supplement, after the Trustee's notice to the Company, the
Multifamily Loan Seller or the Administrator of the defect, repurchase the
related Multifamily Loan or any property acquired in respect thereof from the
Trustee. Unless otherwise specified in the related Prospectus Supplement, such
repurchase shall be at a price equal to the remaining unpaid principal balance
of such Multifamily Loan (or, in the case of a foreclosed Multifamily Loan, the
unpaid principal balance of such Multifamily Loan immediately prior to
foreclosure), plus accrued but unpaid interest to the date of the next
scheduled payment on such Multifamily Loan at the related Remittance Rate, less
any unreimbursed Advances made with respect to such Multifamily Loan. Unless
otherwise provided in the related Prospectus Supplement, the repurchase
obligation constitutes the sole remedy available to the Holders of the
applicable Series of Certificates or the Trustee for material defect in a
Multifamily Loan document.
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Unless otherwise specified in the related Prospectus Supplement, the
Issuer will, at the time of delivery of the Certificates of a Series, cause the
assignment to the Trustee of the Multifamily Loans constituting a Multifamily
Loan Pool to be recorded in the appropriate public office for real property
records. If specified in the related Prospectus Supplement, the Issuer will
cause such assignments to be so recorded within the time after delivery of the
Certificates as is specified in the related Prospectus Supplement, in which
event, the Pooling Agreement or Deposit Trust Agreement may, as specified in
the Prospectus Supplement, require the Multifamily Loan Seller or the
Administrator to repurchase from the Trustee any Multifamily Loan required to
be recorded but not recorded within such time, at the price described above
with respect to repurchase by any reason of defective documentation. Unless
otherwise provided in the related Prospectus Supplement, the repurchase
obligation would constitute the sole remedy to the Holders of the applicable
Series of Certificates or the Trustee for the failure of a Multifamily Loan to
be recorded.
Unless otherwise specified in the related Prospectus Supplement, each
Multifamily Loan Seller will have represented, among other things, that (i)
immediately prior to the transfer and assignment of the Multifamily Loans, such
Multifamily Loan Seller had good title to, and was the sole owner of, each
Multifamily Loan and there has been no other sale or assignment thereof, (ii)
as of the date of such transfer, the Multifamily Loans are subject to no
offsets, defenses or counterclaims, (iii) each Multifamily Loan at the time it
was made complied in all material respects with applicable state and federal
laws, including usury, and disclosure laws, (iv) a lender's policy of title
insurance was issued on the date of the origination of each Multifamily Loan
and each such policy is valid and remains in full force and effect, (v) as of
the date of such transfer, each mortgage note subject to the agreement is a
valid first lien on the related Multifamily Project (subject only to (a) the
lien of current real property 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 instrument of indebtedness, such exceptions
appearing of record and either being acceptable to mortgage lending
institutions generally or specifically reflected in the appraisal made in
connection with the origination of the related Multifamily Loan and (c) other
matters to which like properties are commonly subject which do not materially
interfere with the benefits of the security intended to be provided by the
instrument of indebtedness) and such property is free of material damage and is
in good repair, (vi) as of the date of such transfer, no Multifamily Loan is
more than 30 days delinquent in payment and there are no delinquent tax or
assessment liens against the related apartment project, and (vii) with respect
to each Multifamily Loan, if the Multifamily Project is located in an area
identified by the Secretary of Housing and Urban Development as having special
flood hazards and subject in certain circumstances to the availability of flood
insurance under the National Flood Insurance Act of 1968, as amended, such
Multifamily Project is covered by flood insurance if applicable regulations at
the time such Multifamily Loan was originated required that such flood
insurance coverage be obtained.
All of the representations and warranties of a Multifamily Loan Seller
in respect of a Multifamily Loan will have been made as of the date on which
such Multifamily Loan Seller sold the Multifamily Loan to the Company or its
affiliate; the date as of which such representations and warranties were made
may be a date prior to the date of the initial issuance of the related Series
of Certificates. A substantial period of time may have elapsed between the date
as of which the representations and warranties were made and the later date of
initial issuance of the related Series of Certificates. Since the
representations and warranties referred to in the preceding paragraph, unless
otherwise specified in the related Prospectus Supplement, are the only
representations and warranties that will be made by a Multifamily Loan Seller,
the Multifamily Loan Seller's repurchase obligations described below will not
arise if, during the period commencing on a date of sale of a Multifamily Loan
by the Multifamily Loan Seller to the Company or its affiliate, the relevant
event occurs that would have given rise to such an obligation had the event
occurred prior to the sale of the affected Multifamily Loan. Nothing, however,
has come to the Company's attention that would cause it to believe that the
representations and warranties referred to in the preceding paragraph will not
be accurate and complete in all material respects in respect of Multifamily
Loans as of the date of initial issuance of the related Series of Certificates.
Assignment of Agency Securities, Non-Agency Certificates, and Private
Mortgage-Backed Securities
With respect to each Series, unless otherwise specified in the related
Prospectus Supplement, the Issuer will cause any Agency Securities, Non-Agency
Certificates, and Private Mortgage-Backed Securities included in the related
Trust Property to be registered in the name of the Trustee. The Trustee (or its
custodian) will have possession of any certificated Agency Securities and
Private Mortgage-Backed Securities. Unless otherwise specified in the related
Prospectus Supplement, the Trustee will not be in possession of or be assignee
of record of any underlying assets for
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an Agency Security, Non-Agency Certificate, or Private Mortgage-Backed
Security. Each Agency Security, Non-Agency Certificate, and Private Mortgage-
Backed Security will be identified in a schedule appearing as an exhibit to the
related pooling or sale agreement. The Issuer will represent and warrant to the
Trustee, among other things, the information contained in such schedule is true
and correct and that immediately prior to the transfer of the related
securities to the Trustee, the Issuer had good title to, and was the sole owner
of, each such security.
REPURCHASE OR SUBSTITUTION OF MORTGAGE LOANS, CONTRACTS AND MULTIFAMILY LOANS
The Trustee will review the documents delivered to it with respect to
the Mortgage Loans, Contracts and Multifamily Loans included in the related
Trust Property. Unless otherwise specified in the related Prospectus
Supplement, if any document is not delivered or is found to be defective in any
material respect and the Issuer cannot deliver such document or cure such
defect within 90 days after notice thereof (which the Trustee will undertake to
give within 45 days of the delivery of such documents), and if any other party
obligated to deliver such document or cure such defect has not done so and has
not substituted or repurchased the affected Mortgage Loan, Multifamily Loan or
Contract, then the Issuer will, not later than the first date designated for
the deposit of payments into the Certificate Account (a "Deposit Date") which
is more than ten days after such 90-day period, (a) if so provided in the
Prospectus Supplement remove the affected Mortgage Loan, Multifamily Loan or
Contract from the Trust Property and substitute one or more other Mortgage
Loans, Multifamily Loans or Contracts therefor or (b) repurchase the Mortgage
Loan, Multifamily Loan or Contract from the Trustee for a price equal to 100%
of its principal balance plus one month's interest thereon at the applicable
Remittance Rate. Such purchase price will be deposited in the Certificate
Account on such Deposit Date. Unless otherwise specified in the Prospectus
Supplement, this repurchase and, if applicable, substitution obligation
constitutes the sole remedy available to Holders of the Certificates of the
applicable Series or the Trustee against the Issuer for a material defect in a
document relating to a Mortgage Loan, Multifamily Loan or Contract.
Unless otherwise specified in the related Prospectus Supplement, the
Issuer will agree to either (a) cure any breach of any representation or
warranty that materially and adversely affects the interests of the Holders of
the Certificates of the applicable Series in a Mortgage Loan, Multifamily Loan
or Contract within 90 days of its discovery by the Company or its receipt of
notice thereof from the Trustee, (b) repurchase such Mortgage Loan, Multifamily
Loan or Contract not later than the first Deposit Date which is more than ten
days after such 90-day period for a price equal to 100% of its principal
balance plus one month's interest thereon at the applicable Remittance Rate, or
(c) if so specified in the Prospectus Supplement, remove such Mortgage Loan,
Multifamily Loan or Contract from the Trust Property and substitute one or more
other mortgage loans or contracts therefor. Such purchase price will be
deposited in the Certificate Account on such Deposit Date. Unless otherwise
specified in the related Prospectus Supplement, this repurchase and, if
applicable, substitution obligation will constitute the sole remedies available
to Holders of the Certificates of the applicable Series or the Trustee for any
such breach.
If the Prospectus Supplement for a Series of Certificates so provides,
then in lieu of agreeing to repurchase or substitute Mortgage Loans, Contracts
or Multifamily Loans as described above, the Issuer may obtain such an
agreement from the entity which sold such Mortgage Loans, Contracts or
Multifamily Loans to the Issuer, which agreement will be assigned to the
Trustee for the benefit of the holders of the Certificates of such series.
If a REMIC election is to be made with respect to all or a portion of
the Trust Property, there may be federal income tax limitations on the right to
substitute Mortgage Loans, Multifamily Mortgage Loans or Contracts as described
above.
EVIDENCE AS TO COMPLIANCE
On or before a specified date in each year, beginning the first such
date that is at least a specified number of months after the Cut-off Date, a
firm of independent public accountants will furnish a statement to the Trustee
to the effect that, based on an examination of certain specified documents and
records relating to the servicing of the Administrator's mortgage loan
portfolio conducted substantially in compliance with the audit program for
mortgages serviced for FNMA or FHLMC, the United States Department of Housing
and Urban Development Mortgage Audit Standards or the Uniform Single Audit
Program for Mortgage Bankers (the "Applicable Accounting Standards"), such
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firm is of the opinion that such servicing has been conducted in compliance
with the Applicable Accounting Standards except for (a) such expenses as such
firm shall believe to be immaterial and (b) such other exceptions as shall be
set forth in such statement.
LIST OF CERTIFICATEHOLDERS
Upon written request of the Trustee, the Registrar for a Series of
Certificates will provide to the Trustee, within fifteen days after receipt of
such request, a list of the names and addresses of all Holders of record of
such Series as of the most recent Record Date for payment of distributions to
Holders of that Series. Upon written request of three or more Holders of record
of a Series of Certificates for purposes of communicating with other Holders
with respect to their rights under the Pooling Agreement or the Deposit Trust
Agreement for such Series, the Trustee will afford such Holders access during
business hours to the most recent list of Holders of that Series held by the
Trustee. With respect to Book Entry Certificates, the only named Holder on the
Certificate Register will be the Clearing Agency.
Neither the Pooling Agreement or the Deposit Trust Agreement will
provide for the holding of any annual or other meetings of Holders of
Certificates.
ADMINISTRATION OF THE CERTIFICATE ACCOUNT
The Pooling Agreement or the Deposit Trust Agreement with respect to a
Series will require that the Certificate Account be any of the following: (i)
an account maintained with a depository institution the debt obligations of
which (or, in the case of a depository institution which is a part of a holding
company structure, the debt obligations of the holding company of which) have a
long-term or short-term rating acceptable to each rating agency that rated the
Certificates, (ii) an account or accounts the deposits in which are fully
insured by either the Bank Insurance Fund (the "BIF") or the Federal Deposit
Insurance Corporation (the "FDIC") or the Savings Association Insurance Fund
(as successor to the Federal Savings and Loan Insurance Corporation) ("SAIF")
of the FDIC, (iii) an account maintained with and in the name of the Trustee,
in trust, and in respect of which the amounts from time to time on deposit
therein are insured by the BIF or the SAIF (to the limits established by the
FDIC), provided that all funds in such account are invested in Permitted
Instruments (as defined below) within one business day of receipt or are
remitted to the Holders within one business day of receipt therein; (iv) a
trust account maintained with the corporate trust department of a federal or
state chartered depository institution or trust company with trust powers and
acting in its fiduciary capacity for the benefit of the Trustee, or (v) an
account which will not cause any rating agency rating the Certificates of such
Series to downgrade or withdraw its then-current rating assigned to the
Certificates. The instruments in which amounts in the Certificate Account may
be invested are limited to Permitted Instruments. Unless otherwise specified
in the related Prospectus Supplement, a Certificate Account may be maintained
as an interest bearing account, or the funds held therein may be invested
pending each succeeding Distribution Date in Permitted Instruments. Unless
otherwise specified in the related Prospectus Supplement, the Administrator or
the Trustee will be entitled to receive any such interest or other income
earned on funds in the Certificate Account as additional compensation. Unless
otherwise specified in the related Prospectus Supplement, the following
payments and collections received or made subsequent to the Cut-off Date
(including scheduled payments of principal and interest due after the Cut-off
Date but received on or before the Cut-off Date) will be deposited in the
Certificate Account:
(i) all Mortgagor payments on account of principal, including Principal
Prepayments and, if specified in the related Prospectus Supplement, prepayment
penalties;
(ii) all Mortgagor payments on account of interest, subject to
exclusions or adjustments as described in the related Prospectus Supplement
adjusted to the Remittance Rate;
(iii) all Liquidation Proceeds net of certain amounts reimbursed to the
Servicers or the Administrator, as described above;
(iv) all Insurance Proceeds, other than proceeds to be applied to the
restoration or repair of the related property or released to the Mortgagor and
net of certain amounts reimbursed to the Servicers or the Administrator, as
described above;
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(v) all condemnation awards or settlements which are not released to
the Mortgagor in accordance with normal servicing procedures;
(vi) any Advances made as described under "Servicing of the Mortgage
Loans, Multifamily Loans and Contracts -- Advances" and certain other amounts
required to be deposited in the Certificate Account;
(vii) all proceeds of any Mortgage Loan, Multifamily Loan or Contract
or property acquired in respect thereof repurchased by the Administrator, the
Company, the Seller or the Servicer or otherwise as described above or under
"Termination" below;
(viii) all amounts, if any, required to be transferred to the
Certificate Account from any Credit Enhancement for the related Series; and
(ix) all other amounts required to be deposited in the Certificate
Account pursuant to the related Pooling Agreement or Deposit Trust Agreement.
REPORTS TO HOLDERS OF CERTIFICATES
Concurrently with each distribution on the Certificates of a Series,
unless otherwise specified in the related Prospectus Supplement, the Trustee
will furnish to Holders of such Certificates a statement generally setting
forth, to the extent applicable to such Series, among other things:
(i) the aggregate amount of such 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 aggregate principal balance of each Class of the Certificates
after giving effect to distributions on such Distribution Date;
(iv) the aggregate principal balance of any Class Certificates which
are Compound Interest Securities after giving effect to any increase in such
principal balance that results from the accrual of interest that is not yet
distributable thereon;
(v) if applicable, the amount otherwise distributable to Holders of
any Class of Certificates that was distributed to Holders of other Classes of
Certificates;
(vi) if any Class of Certificates has priority in the right to receive
Principal Prepayments, the amount of Principal Prepayments in respect of the
related Mortgage Assets;
(vii) the aggregate principal balance and number of Mortgage Loans,
Multifamily Loans and Contracts which were delinquent as to a total of two
installments of principal and interest; and
(viii) as of the most recent date for which information was available,
the aggregate principal balances of Mortgage Loans, Multifamily Loans and
Contracts which (a) were delinquent 30-59 days, 60-89 days, and 90 days or
more, and (b) were in foreclosure; and
(ix) the amount of coverage then remaining under any Credit
Enhancement.
The Administrator or the Trustee will also furnish annually customary
information deemed necessary for Holders of such Certificates to prepare their
tax returns.
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EVENTS OF DEFAULT
"Events of Default" with respect to a Series will consist of (i) any
failure by the Administrator to duly observe or perform in any material respect
any of its covenants or agreements in the Pooling Agreement or Deposit Trust
Agreement materially affecting the rights of Holders of the Certificates of
such Series which continues unremedied for 60 days after the giving of written
notice of such failure to the Company by the Trustee or to the Administrator
and the Trustee by the Holders of such Certificates evidencing interests
aggregating not less than 25% of the affected Class of Certificates; and (ii)
certain events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings and certain actions by the Administrator
indicating its insolvency, reorganization or inability to pay its obligations.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default remains unremedied by the Administrator,
the Trustee, or Holders of Certificates of each Class of Certificates affected
thereby evidencing, as to each such Class interests aggregating not less than
51%, may terminate all of the rights and obligations of the Administrator,
whereupon the Trustee, or a new Administrator appointed pursuant to the Pooling
Agreement or Deposit Trust Agreement, will succeed to all the responsibilities,
duties and liabilities of the Administrator under the Pooling Agreement or
Deposit Trust Agreement, as applicable, and will be entitled to similar
compensation arrangements. Notwithstanding its termination as Administrator,
the Administrator will be entitled to receive amounts earned by it under the
Pooling Agreement or Deposit Trust Agreement prior to such termination.
Following such termination, the Company shall appoint any established housing
finance institution having a net worth of not less than $10,000,000 to act as
successor to the Administrator. If no such successor shall have been appointed
within 30 days following such termination, then either the Company or the
Trustee may petition a court of competent jurisdiction for the appointment of a
successor Administrator. Pending the appointment of a successor Administrator,
the Trustee shall act as Administrator. The Trustee, the Company and such
successor Administrator may agree upon the compensation to be paid to such
successor Administrator, which in no event may be greater than the compensation
previously paid to the terminated Administrator under such Pooling Agreement or
Deposit Trust Agreement.
No Holder of Certificates will have any right under the Pooling
Agreement or Deposit Trust Agreement to institute any proceeding with respect
to the Pooling Agreement or Deposit Trust Agreement, unless such Holder
previously has given to the Trustee written notice of default and unless the
Holders of Certificates as specified in the Prospectus Supplement 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 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 Pooling Agreement or Deposit Trust 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 Holders, unless such Holders have offered to
the Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby.
AMENDMENT
The Pooling Agreement or Deposit Trust Agreement with respect to a
Series may be amended by the Company, the Administrator and the Trustee without
the consent of the Holder of the Certificates of such Series, to cure any
ambiguity, to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein or to add any other
provisions with respect to matters or questions arising under the Pooling
Agreement or Deposit Trust Agreement provided that such amendment is not
materially inconsistent with the provisions of the Pooling Agreement or Deposit
Trust Agreement and that in each case, subject as stated in the next sentence,
such action will not adversely affect in any material respect the interests of
any Holders of that Series. An amendment described above shall not be deemed to
adversely affect in any material respect the interests of the Holders of that
Series if either (a) an opinion of counsel satisfactory to the Trustee is
obtained to such effect, or (b) the person requesting the amendment obtains a
letter from the rating agency then rating the Certificates of that Series that
the amendment would not result in a downgrading or withdrawal of the rating
then assigned by it to such Certificates. Notwithstanding the foregoing, the
Company, the Administrator and the Trustee may amend each Pooling Agreement and
Deposit Trust
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Agreement without the consent of the Holders of the Certificates of the
relevant Series in order to modify, eliminate or add to any of its provisions
to such extent as may be appropriate or necessary to maintain REMIC status of
all or any portion of the Trust Property as to which a REMIC election has been
made with respect to the applicable Certificates or to avoid or minimize the
risk of the imposition of any tax on the Trust created by such agreement that
would be a claim against the Trustee at any time prior to final redemption of
the Certificates, provided that the Trustee has obtained the opinion of
independent counsel to the effect that such action is necessary or appropriate
to maintain REMIC status or to avoid or minimize the risk of the imposition of
such a tax. Unless otherwise specified in the Prospectus Supplement, the
Pooling Agreement and Deposit Trust Agreement may also be amended by the
Company, the Administrator, and the Trustee with the consent of the Holders of
Certificates evidencing interests aggregating not less than 66% of the
aggregate principal balance of the Certificates of the applicable Series 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 Holders of Certificates of that Series; provided, however,
that no such amendment may (i) reduce in any manner the amount of, or delay the
timing of, collections of payments received on the related Mortgage Assets or
distributions which are required to be made on 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 clause (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 of any
Class required to consent to any such amendment, without the consent of the
Holders of all Certificates of such Class then outstanding.
TERMINATION
Unless otherwise specified in the related Prospectus Supplement, the
obligations of the Company, as depositor, the Administrator, as servicer, and
the Trustee created by the Pooling Agreement or Deposit Trust Agreement with
respect to a Series will terminate upon the payment to Holders of the
Certificates of such series of all amounts held by the Administrator or in the
Certificate Account and required to be paid to them pursuant to the Pooling
Agreement or Deposit Trust Agreement after the later of (i) the maturity or
other liquidation of the last Mortgage Loan, Multifamily Loan or Contract
subject thereto or the disposition of all property acquired upon foreclosure of
any such Mortgage Loan, Multifamily Loan or Contract or (ii) the repurchase by
the Company from the Trust of all the outstanding Certificates or all remaining
Assets in the Trust Property. The pooling or sales agreement will establish
the repurchase price for the Assets in the Trust and the allocation of such
purchase price among the Classes of Certificates. The exercise of such right
will effect early retirement of the Certificates of that Series, but the
Company's right so to repurchase will be subject to the conditions set forth in
the related Prospectus Supplement. If a REMIC election is to be made with
respect to all or a portion of Trust Property, there may be additional
conditions to the termination of such Trust which will be described in the
related Prospectus Supplement. In no event, however, will the Trust created by
the Pooling Agreement or Deposit Trust Agreement continue beyond the expiration
of 21 years from the death of the survivor of certain persons named in such
agreement. The Trustee will give written notice of termination of the Trust to
each Holder of Certificates of the applicable Certificates, and the final
distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency of the Trustee specified in such notice of
termination.
USE OF PROCEEDS
Unless otherwise specified in an applicable Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of each
Series of Securities will be applied to the simultaneous purchase of the
Mortgage Assets related to such Series or to reimburse the amounts previously
used to effect such a purchase, the costs of carrying such Mortgage Assets
until sale of the Certificates and other expenses connected with pooling the
Mortgage Assets and issuing the Securities.
THE ISSUER
THE COMPANY
Fund America Investors Corporation II (the "Company") was incorporated
in the State of Delaware on December 14, 1992 as a limited purpose finance
corporation. All of its outstanding capital stock is owned by Steven B.
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Chotin. The Company maintains its principal office at 6400 S. Fiddler's Green
Circle, Suite 1200B, Englewood, Colorado 80111. Its telephone number is (303)
290-6025.
As specified in the related Prospectus Supplement, the Administrator
with respect to any series of Certificates evidencing interests in Mortgage
Loans, Multifamily Loans or Contracts, and the Non-Agency Administrator with
respect to any Non-Agency Certificate, may be an affiliate of the Company. The
Company anticipates that it will acquire Mortgage Loans, Multifamily Loans,
Agency Securities, Non-Agency Certificates, Private Mortgage-Backed Securities
and Contracts in the open market or in privately negotiated transactions, which
may be through or from an affiliate.
Neither the Company nor any of its affiliates will insure or guarantee
the Securities of any Series. See "Special Considerations -- Limited Assets."
OWNER TRUST ISSUER
Any Owner Trust established to act as an Issuer of one or more Series of
Securities will be created pursuant to a Deposit Trust Agreement between Steven
B. Chotin or the Company (the "Initial Depositor"), acting as depositor, and
the related Owner Trustee. The Initial Depositor (if Steven B. Chotin) will
transfer all of the certificates representing beneficial ownership of each such
Owner Trust ("Certificates of Beneficial Ownership") to the Company prior to
any issuance of Securities by such Owner Trust. The Company may sell or assign
such Certificates of Beneficial Ownership, in whole or in part, to another
entity or entities at the time of, or subsequent to, the issuance of any
Securities by such Owner Trust.
The Owner Trust issuing a Series of Bonds will pledge the Assets
securing such Series of Bonds to the Trustee under the Indenture for such
Series. Each Indenture will prohibit such Owner Trust from incurring debt
obligations other than Bonds and similar Series of Bonds unless (i) the
debtholder's sole recourse with respect to such obligations is to collateral
other than the Assets pledged to secure such Bonds or (ii) such obligations are
subordinate to the Bonds.
Each Deposit Trust Agreement will provide that the Owner Trust created
under such agreement may not engage in any activities other than (i) issuing
and selling one or more series of Securities and other similar series of
securities, (ii) purchasing, owning, holding, pledging, or selling Mortgage
Assets; provided, however, that any indebtedness incurred in connection with
such transactions shall be secured only by collateral other than the Assets
pledged to secure the Securities or shall be subordinate to the Securities, and
(iii) other activities which are necessary or convenient to accomplish the
foregoing and are incidental thereto.
No Deposit Trust Agreement will be subject to amendment without the
prior written consent of the related Owner Trustee and holders representing 50%
of the Certificates of Beneficial Ownership of the Owner Trust. In addition,
the amendment of certain provisions of a Deposit Trust Agreement may require
the consent of the Owner Trustee with respect to each Series of Securities
issued by the related Owner Trust. The holders of Certificates of Beneficial
Ownership of an Owner Trust will not be liable for payment of principal or
interest on the Bonds of any series issued by such Owner Trust and each of the
holders of the Bonds of such series will be deemed to have released such
holders of Certificates of Beneficial Ownership from any such claim, liability
or obligation on or with respect to such Bonds.
Each Deposit Trust Agreement will provide that the holders of
Certificates of Beneficial Ownership of the Owner Trust created under such
agreement shall indemnify the related Owner Trustee against all losses and
liability suffered by it in acting upon the holders' instructions, except in
the case of willful misconduct or gross negligence on the part of such Owner
Trustee. The Owner Trustee will have no liability for action taken by it in
good faith in reliance upon direction to it for the disposition of monies or
collateral pursuant to a Deposit Trust Agreement.
MANAGEMENT AGREEMENT
The Issuer with respect to a Series of Bonds may enter into a management
agreement (the "Management Agreement") with Fund America Management Corporation
("FAMC") or another entity (FAMC or such other entity which has entered into a
Management Agreement with the Issuer being referred to herein as the
"Manager"), pursuant
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to which the Manager will, among other things, prepare and make such reports as
are required to be delivered by the Issuer to the Trustee and provide advisory,
accounting, administrative, clerical and other services required in the conduct
of the Issuer's business. As compensation for its services, the Issuer will
pay the Manager a management fee. The Manager will not assume any
responsibility under the Management Agreement other than to render services
called for thereunder and may subcontract to a third party all or a portion of
its duties thereunder. The Manager and its affiliates, shareholders,
directors, officers and employees will not be liable to the Issuer, the Holders
of Bonds or others, except by reason of acts constituting bad faith, gross
negligence or willful misconduct. The Manager and its affiliates will be
indemnified with respect to all expenses, losses, damages, liabilities,
demands, charges and claims of any nature in respect of acts or omissions
performed or omitted by it in accordance with the standards set forth in the
preceding sentence.
All of the outstanding common stock of FAMC is owned by Steven B.
Chotin, who also owns all of the outstanding common stock of the Company and
who may act as Initial Depositor with respect to the formation of any Trust
Issuers. See "The Issuer --The Company" and "-- Owner Trust Issuer."
THE TRUSTEE
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with the Company or the Administrator. In addition, the
Trustee will have the power and the responsibility for appointing co-trustees
or separate trustees of all or any part of the Trust Property relating to a
particular Series of Securities. In the event of such appointment, all rights,
powers, duties and obligations conferred or imposed upon the Trustee by the
Indenture or Pooling Agreement, as applicable, 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 applicable Indenture or Pooling Agreement, the related
Securities or of any Mortgage Loan, Agency Security, Contract, Multifamily Loan
or related document, and will not be accountable for the use or application by
the Company or an Issuer of any funds paid to the Company or such Issuer in
respect of the Securities or the related Assets, or amounts deposited in the
related Collection Account, Certificate Account or deposited into any other
account for purposes of making payments or distributions to Holders. If no
Event of Default has occurred, the Trustee will be required to perform only
those duties specifically required of it under the applicable Indenture or
Pooling 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 applicable Indenture or Pooling Agreement.
The Trustee may resign at any time and the Company or the Issuer, as
applicable, may remove the Trustee if the Trustee ceases to be eligible to
continue as such under the applicable Indenture or Pooling Agreement, if the
Trustee becomes insolvent or in such other instances, if any, as are set forth
in the applicable Indenture or Pooling Agreement. Following any resignation or
removal of the Trustee, the Company, the Issuer or Administrator, as
applicable, will be obligated to appoint a successor Trustee. 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.
Pursuant to the Trust Indenture Act of 1939, as amended, the Trustee may
have a "conflicting interest" if any Event of Default occurs with respect to
one or more Classes of Bonds which are Special Allocation Securities issued
under the Indenture. In such event, the Trustee may be required to resign its
trusteeship with respect to one or more Classes of such Bonds and a successor
Trustee would be appointed for such Classes.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS
The following discussion contains summaries of certain legal aspects of
residential and multi-family 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 or Multifamily
Loans is situated. The
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summaries are qualified in their entirety be reference to the applicable
federal and state laws governing the Mortgage Loans and Multifamily Loans.
In addition, the following discussion also contains a summary of the
Title I Program, which may be applicable to certain of the Mortgage Loans,
Multifamily Loans and Contracts. With respect to each Series for which the
related Trust Property includes Non-Agency Certificates backed by Contracts or
for which the related Trust includes Contracts, the related Prospectus
Supplement will contain a discussion of certain legal aspects of manufactured
housing contracts.
THE MORTGAGE LOANS AND MULTIFAMILY LOANS
General
Mortgages. The Mortgage Loans and Multifamily Loans will be secured
either by 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 (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. Although a deed of trust is similar to a mortgage, a deed
of trust formally 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 law, the express
provisions of the deed of trust or mortgage and, in some cases, the directions
of the beneficiary.
Cooperative Loans. Certain of the Mortgage Loans may be Cooperative
Loans. The private, non-profit, cooperative apartment corporation owns all the
real property that comprises the project, including the land, separate dwelling
units and all common areas. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the cooperative
apartment building and/or underlying land, as is generally the case, the
cooperative, as project mortgagor, is also responsible for meeting these
mortgage obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with the construction or purchase of the
cooperative's apartment building. The interest of the occupant under
proprietary leases or occupancy agreements to which that cooperative is a party
are generally subordinate to the interest of the holder of the blanket mortgage
in that building. If the cooperative is unable to meet the payment obligations
arising under its blanket mortgage, the mortgagee holding the blanket mortgage
could foreclose on that mortgage and terminate all subordinate proprietary
leases and occupancy agreements. In addition, the blanket mortgage on a
cooperative may provide financing in the form of a mortgage that does not fully
amortize with a significant portion of principal being due in one lump sum at
final maturity. The inability of the cooperative to refinance this mortgage and
its consequent inability to make such final payment could lead to foreclosure
by the mortgagee providing the financing. A foreclosure in either event by the
holder of the blanket mortgage could eliminate or significantly diminish the
value of any collateral held by the lender who financed the purchase by an
individual tenant-stockholder of cooperative shares or, in the case of a pool
of Mortgage Loans including Cooperative Loans, the collateral securing the
Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a cooperative must
make a monthly payment to the cooperative representing such tenant-
stockholder's pro rata share of the cooperative's payments for its blanket
mortgage, real property taxes, maintenance expenses and other capital or
ordinary expenses. An ownership interest in a cooperative and accompanying
occupancy rights is financed through a cooperative share loan evidenced by a
promissory note and secured by a security interest in the occupancy agreement
or proprietary lease and in the related cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the cooperative shares is filed in the
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appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in
the security agreement covering the assignment of the proprietary lease or
occupancy agreement and the pledge of cooperative shares.
Foreclosure
Mortgages. Foreclosure of a deed of trust is generally accomplished by
a non-judicial trustee's sale under a specific provision in the deed of trust
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.
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 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 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.
When the beneficiary under a junior deed of trust cures the default and
state law allows the beneficiary to reinstate or redeem by paying the full
amount of the senior deed of trust, then in those states the amount paid by the
beneficiary to so cure or redeem generally becomes a part of the indebtedness
secured by the junior deed of trust. See "Junior Liens; Rights of Senior
Mortgagors or Beneficiaries" below.
A sale conducted in accordance with the terms of the power of sale
contained in a mortgage or deed of trust is generally presumed to be conducted
regularly and fairly, and a conveyance of the real property by the trustee
confers, in most states, legal title to the real property to the purchaser,
free of all junior mortgages or deeds of trust and free of all other liens and
claims subordinate to the mortgage or deed of trust under which the sale is
made (with the exception of certain governmental liens). The purchaser's title
is, however, subject to all senior liens, encumbrances and mortgages and may be
subject to mechanic's and materialman's liens in some states. Thus, if the
mortgage or deed of trust being foreclosed is a junior mortgage or deed of
trust, the sheriff or trustee will convey title to the purchaser of the real
property, subject to any existing first mortgages or deed of trust and any
other prior liens and claims. The foreclosure
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of a junior mortgage or deed of trust, generally, will have an effect on the
first mortgage or deed of trust, if the senior mortgage or deed of trust grants
to the senior mortgagee or beneficiary the right to accelerate its indebtedness
under a "due-on-sale" clause or "due on further encumbrance" clause contained
in the senior mortgage or deed of trust. See "Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
The proceeds received by the sheriff or trustee from the sale are
applied pursuant to the terms of the deed of trust, which may require
application 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. In some states, any surplus money remaining may
be available to satisfy claims of the holders of junior mortgages or deeds of
trust and other junior liens and claims in order of their priority, whether or
not the mortgagor or trustee is in default, while in some states, any surplus
money remaining may be payable directly to the mortgagor or trustor. Any
balance remaining is generally payable to the mortgagor or trustor. Following
the sale, in some states the mortgagee or beneficiary following a foreclosure
of a mortgage or deed of trust may not obtain a deficiency judgment against the
mortgagor or trustor. A junior lienholder whose rights in the property are
terminated by the foreclosure by a senior lienholder will not share in the
proceeds from the subsequent disposition of the property.
Cooperative Loans. The cooperative shares owned by the tenant-
stockholder and pledged to the lender are, in almost all cases, subject to
restrictions on transfer as set forth in the cooperative's Certificate of
Incorporation and Bylaws, as well as the proprietary lease or occupancy
agreement, and may be canceled by the cooperative for failure by the tenant-
stockholder to pay rent or other obligations or charges owned by such tenant-
stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. The proprietary lease or
occupancy agreement generally permits the cooperative to terminate such lease
or agreement in the event an obligor fails to make payments or defaults in the
performance of covenants required thereunder. Typically, the lender and the
cooperative enter into a recognition agreement which establishes the rights and
obligations of both parties in the event of a default by the tenant-stockholder
on its obligations under the proprietary lease or occupancy agreement. A
default by the tenant-stockholder under the proprietary lease or occupancy
agreement will usually constitute a default under the security agreement
between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure
on a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished by
a sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the "UCC") and the security agreement relating to those shares. Article 9
of the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor and
the method, manner, time, place and terms of the foreclosure. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted. Article 9 of the UCC provides that the
proceeds of the sale will be applied first to pay the costs and expenses of the
sale and then to satisfy the indebtedness secured by the lender's security
interest. The recognition agreement, however, generally provides that the
lender's right to reimbursement is subject to the right of the cooperative
corporation to receive sums due under the proprietary lease or occupancy
agreement. If there are proceeds remaining, the lender must account to the
tenant-stockholder for the surplus. Conversely, if a portion of
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the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
Junior Liens; Rights of Senior Mortgagees or Beneficiaries
Certain of the Mortgage Loans, including Title I Loans, may be secured
by mortgages or deeds of trust providing for junior (i.e. second, third, etc.)
liens on the related Mortgaged Properties which are junior to the other
mortgages or deeds of trust held by other lenders or institutional investors.
The rights of the beneficiary under a junior deed of trust or as mortgagee
under a junior mortgage are subordinate to those of the mortgagee or
beneficiary under the senior mortgage or deed of trust, including the prior
rights of the senior mortgagee or beneficiary to receive hazard insurance and
condemnation proceeds and to cause the property securing the Mortgage Loans to
be sold upon default of the mortgagor or trustor. As discussed more fully
below, a junior mortgagee or beneficiary in some states may satisfy a defaulted
senior loan in full and in some states may cure such default and bring the
senior loan current, in either event adding the amounts expended to the balance
due on the junior loan. In most states, absent a provision in the mortgage or
deed of trust, no notice of default is required to be given to a junior
mortgagee or beneficiary.
The forms of the mortgage or deed of trust used by most institutional
lenders generally confer on the mortgagee or beneficiary the right both to
receive all proceeds collected under any hazard insurance policy and all awards
made in connection with any condemnation proceedings, and to apply such
proceeds and awards to any indebtedness secured by the mortgage or deed of
trust, in such order as the mortgagee or beneficiary may determine. Thus, in
the event improvements on the property are damaged or destroyed by fire or
other casualty, or in the event the property is taken by condemnation, the
mortgagee or beneficiary under the underlying first mortgage or deed of trust
may have the prior right to collect any insurance proceeds payable under a
hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the first
mortgage or deed of trust. In those situations, proceeds in excess of the
amount of first mortgage indebtedness generally may be applied to the
indebtedness of a junior mortgage or trust deed.
Other provisions typically found in the form of the mortgagee or deed of
trust generally used by most institutional lenders obligates the mortgagor or
trustor to pay before delinquency all taxes and assessments on the property
and, when due, all encumbrances, charges and liens on the property which appear
prior to the mortgage or deed of trust, to provide and maintain fire insurance
on the property, to maintain and repair the property and not to commit or
permit any waste thereof, and to appear in and defend any action or proceeding
purporting to affect the property or the rights of the mortgagee or beneficiary
under the mortgage or deed of trust. Upon a failure of the mortgagor or trustor
to perform any of these obligations, the mortgagee or beneficiary typically is
given the right under the mortgage or deed of trust to perform the obligation
itself, at its election, with the mortgagor or trustor agreeing to reimburse
the mortgagee or beneficiary for any sums expended by the mortgagee or
beneficiary on behalf of the trustor. All sums so expended by the mortgagee or
beneficiary generally become part of the indebtedness secured by the mortgage
or deed of trust.
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, 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.
Anti-Deficiency Legislation and Other Limitations on Lenders
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
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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.
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, a court with federal bankruptcy jurisdiction may permit a debtor through
his or her Chapter 11 or Chapter 13 rehabilitative plan 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 fact 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.
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.
The Internal Revenue Code of 1986, as amended, provides priority to
certain tax liens over the lien of the mortgage. In addition, 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 include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes. 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.
Generally, Article 9 of the UCC governs foreclosure on cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a Cooperative Loan, would be the shares of the cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
Enforceability of Certain Provisions
Certain 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. 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.
Exempted from the general rule of enforceability of due-on-sale clauses
were mortgage loans (originated other than by federal savings and loan
associations and federal savings banks) that were made or assumed during the
period beginning on the date a state, by statute or final appellate court
decision having statewide effect, prohibited the exercise
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of due-on-sale clauses and ending on October 15, 1982 ("Window Period Loans").
However, this exception applied only to transfers of property underlying Window
Period Loans occurring between October 15, 1982 and October 15, 1985 and does
not restrict enforcement of a due-on-sale clause in connection with current
transfers of property underlying Window Period Loans. 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
Office of Thrift Supervision (the "OTS"), as successor to the Federal Home Loan
Bank Board which preempt state law restrictions on the enforcement of due-on-
sale clauses.
The Garn-St. Germain Act also sets forth nine 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 fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. German 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 Administrator to enforce due-
on-sale clauses may result in the Trust Property 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 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.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles are generally designed to relieve the borrower from
the legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right
of the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages
receive notices in addition to the statutorily-prescribed minimum. For the most
part, these cases have 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.
The standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan
is prepaid. Late charges (to the extent permitted by law and not waived) will
be retained by the Administrator , the Non-Agency Administrator, the Servicer
or the Non-Agency Servicer as additional servicing compensation.
Adjustable Rate Loans
The laws of certain states may provide that mortgage notes relating to
adjustable rate loans are not negotiable instruments under the Uniform
Commercial Code. In such event, the Trustee will not be deemed to be a "holder
in due course" within the meaning of the Uniform Commercial Code and may take
such a mortgage note subject to certain restrictions on its ability to
foreclose and to certain contractual defenses available to a mortgagor.
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Environmental Legislation
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien will generally have priority over all subsequent liens on the property
and, in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In addition, under federal environmental
legislation and under state law in a number of states, a secured party which
takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale or assumes active control over the operation or management of
a property so as to be deemed an "owner" or "operator" of the property may be
liable for the costs of cleaning up a contaminated site. Although such costs
could be substantial, it is unclear whether they would be imposed on a secured
lender (such as a Certificate Trustee, a PMBS Trustee, or a Trust) to
homeowners. In the event that title to a property securing a Mortgage Loan or
Multifamily Loan in a pool of Mortgage Loans was acquired by a Certificate
trustee, a PMBS Trustee, or a Trust and cleanup costs were incurred in respect
of the property, the Holders of the related Securities might realize a loss if
such costs were required to be paid. In addition, the presence of certain
environmental contamination, including, but not limited to, lead-based paint,
asbestos and leaking underground storage tanks could result in the holders of
the related Securities realizing a loss if associated costs were required to be
paid. The Company, the Administrator, the Underwriters, the Sellers, the
Servicers, the Non-Agency Administrator, the Non-Agency Servicers and any of
their respective affiliates (i) have not caused any environmental site
assessments or evaluations to be conducted with respect to any properties
securing the Mortgage Loans or Multifamily Loans, (ii) are not required to make
any such assessments or evaluations and (iii) make no representations or
warranties and assume no liability with respect to the absence or effect of
hazardous wastes or hazardous substances on any property or any casualty
resulting from the presence or effect of hazardous wastes or hazardous
substances.
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. Certain states have enacted legislation
rejecting 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.
With respect to Title I Loans, Section 529 of the National Housing Act
(12 U.S.C. Section 1735f-7) provides that state usury limitations are not
applicable to any loan, mortgage or advance which is insured under Title I. The
statute authorized any state to reimpose interest rate limits by adopting a
provision of law. No state has enacted any reported statute to reimpose
interest rate limits with respect to any loan, mortgage or advance that is
insured under Title I.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), a borrower who enters military
service after the origination of such borrower's Mortgage Loan (including a
borrower who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active
duty) may not be charged interest above an annual rate of 6% during the period
of such borrower's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such interest rate limitation or
similar limitations under state law could have an effect, for an indeterminate
period of time, on the ability of the Servicers to collect full amounts of
interest on certain of the Mortgage Loans. In addition, the Relief Act imposes
limitations which would impair the ability of the Servicers to foreclose on an
affected Mortgage Loan during the borrower's period of active duty status.
Thus, in the event that such a Mortgage Loan goes into default there may be
delays and losses occasioned by the inability to realize upon the related
Mortgaged Property in a timely fashion.
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Unless otherwise specified in the Prospectus Supplement for a Series of
Securities, any shortfalls in interest collections resulting from application
of the Relief Act to the related Mortgage Loans would result in losses to the
holders of such Certificates.
CONSUMER PROTECTION LAWS WITH RESPECT TO CONTRACTS
Numerous Federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include
the Federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity
Act, Regulation "B", the Fair Credit Reporting Act, and related statutes.
These laws can impose specific statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the contract.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale
by the creditor does not involve sufficient state action to afford
constitutional protection to consumers.
The so-called "Holder-in-Due Course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract which is the seller of goods which gave rise to the transaction
(and certain related lenders and assignees) to transfer such contract free of
notice of claims by the debtor thereunder. The effect of this rule is to
subject the assignee of a Contract to all claims and defenses which the debtor
could assert against the related contractor. Liability under this rule is
limited to amounts paid under a Contract; however, the obligor also may be able
to assert the rule to set off remaining amounts due as a defense against a
claim brought by the Trust against such obligor.
The obligations of the obligor under each Unsecured Contract are not
secured by an interest in the related real estate or otherwise, and the related
Issuer, as the owner of an Unsecured Contract, will be a general unsecured
creditor as to such obligations. As a consequence, in the event of a default
under an Unsecured Contract, the related Issuer will have recourse only against
the obligor's assets generally, along with all other general unsecured
creditors of the obligor. In a bankruptcy or insolvency proceeding relating to
an obligor on an Unsecured Contract, the obligations of the obligor under such
Unsecured Contract may be discharged in their entirety, notwithstanding the
fact that the portion of such obligor's assets made available to the Issuer as
a general unsecured creditor to pay amounts due and owing thereunder are
insufficient to pay all such amounts.
THE TITLE I PROGRAM
General
Certain of the Mortgage Loans or Contracts contained in Trust Property
with respect to a Series may be loans insured under the FHA Title I credit
insurance program created pursuant to Sections 1 and 2(a) of the National
Housing Act of 1934 (the "Title I Program"). Under the Title I Program, the FHA
is authorized and empowered to insure qualified lending institutions against
losses on eligible loans. The Title I Program operates as a coinsurance program
in which the FHA insures up to 90% of certain losses incurred on an individual
insured loan, including the unpaid principal balance of the loan, but only to
the extent of the insurance coverage available in the lender's FHA insurance
coverage reserve account. The owner of the loan bears the uninsured loss on
each loan.
The types of loans, which are eligible for insurance by the FHA under
the Title I Program, include property improvement loans ("Property Improvement
Loans" or "Title I Loans") and manufactured home loans ("Manufactured Home
Loans" or "Title I Contracts"). A Property Improvement Loan or Title I Loan is
a loan made to finance actions
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or items that substantially protect or improve the basic livability or utility
of a property and includes: (1) single family, multifamily and nonresidential
property improvement loans; (2) manufactured home improvement loans, where the
home is classified as personalty; (3) historic preservation loans; and (4) fire
safety equipment loans in existing health care facilities. A Manufactured Home
Loan or Title I Contract is a loan for the purchase or refinancing of a
manufactured home and/or the lot on which to place such home and includes: (1)
manufactured home purchase loans; (2) manufactured home lot loans; and (3)
combination loans.
In addition to these types of loans, there are two basic methods of
lending or originating loans which include a "direct loan" or a "dealer loan".
With respect to a direct loan, the borrower makes application directly to a
lender without any assistant from a dealer, which application may be filled out
by the borrower or by a person acting at the direction of the borrower who does
not have a financial interest in the loan transaction, and the lender may
disburse the loan proceeds solely to the borrower or jointly to the borrower
and other parties to the transaction. With respect to a dealer loan, the
dealer, who has a direct or indirect financial interest in the loan
transaction, assists the borrower in preparing the loan application or
otherwise assists the borrower in obtaining the loan from the lender and the
lender may disburse proceeds solely to the dealer or the borrower or jointly to
the borrower and the dealer or other parties. With respect to a dealer Title I
Loan, a dealer may include a seller, a contractor or supplier of goods or
services, and with respect to a dealer Title I Contract, a dealer is a person
engaged in the business of manufactured home retail sales.
Loans insured under the Title I Program are required to have fixed
interest rates and, generally, provide for equal installment payments due
weekly, biweekly, semi-monthly, or monthly, except that a loan may be payable
quarterly or semi-annually in order to correspond with the borrower's irregular
flow of income. The first or last payments (or both) may vary in amount but may
not exceed 150% of the regular installment payment, and the first payment may
be due no later than two months from the date of the loan. The note must
contain a provision permitting full or partial prepayment of the loan. The
interest rate may be established by the lender and must be fixed for the term
of the loan and recited in the note. Interest on an insured loan must accrue
from the date of the loan and be calculated according to the actuarial method.
The lender must assure that the note and all other documents evidencing the
loan are in compliance with applicable Federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker is solvent and an
acceptable credit risk, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required
by the loan, as well as the borrower's other housing and recurring expenses,
which determination must be made in accordance with the expense-to-income
ratios published by the Secretary of HUD.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the time
of approval by the lending institution (as is typically the case with other
federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In such case, provided that the validity of any lien on the property has not
been impaired, the insurance of the loan under the Title I Program will not be
affected unless such material misstatement of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
Requirements for Title I Loans
The maximum principal amounts for Title I Loans must not exceed the
actual cost of the project plus any applicable fees and charges allowed under
the Title I Program; provided that such maximum principal amount does not
exceed the following loan amounts: (i) $25,000 for a single family property
improvement loan and nonresidential property improvement loans; (ii) the lesser
of $60,000 or an average of $12,000 per dwelling unit for multifamily property
improvement loans; and (iii) $17,500 for a manufactured home improvement loan
when the manufactured home qualifies as real property. Generally, the term of
a Title I Loan may not be less than six months nor greater than 20 years and 32
days, except that the maximum term of a single family property improvement loan
on a manufactured
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home is limited to 15 years and 32 days and the maximum term of a manufactured
home improvement loan is limited to 12 years and 32 days. A borrower may obtain
multiple Title I Loans with respect to multiple properties, and a borrower may
obtain more than one Title I Loan with respect to a single property, in each
case as long as the total outstanding balance of all Title I Loans on the same
property does not exceed the maximum loan amount for the type of Title I Loan
thereon having the highest permissible loan amount.
Borrower eligibility for a Title I Loan requires that the borrower have
at least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I Loan or a recorded land installment contract for the purchase of
the real property, and that the borrower have equity in the property being
improved at least equal to the amount of the Title I Loan if such loan amount
exceeds $15,000. Any Title I Loan in excess of $5,000 must be secured by a
recorded lien on the improved property which is evidenced by a mortgage or deed
of trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
Loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD-approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan, the lender is
required to obtain, promptly upon completion of the improvements but not later
than six months after disbursement of the loan proceeds with one six month
extension if necessary, a completion certificate, signed by the borrower. The
lender is required to conduct an on-site inspection on any Title I Loan where
the principal obligation is $7,500 or more, and on any direct Title I Loan
where the borrower fails to submit a completion certificate.
Requirements for Title I Contracts
The maximum principal amount for any Title I Contract must not exceed
the sum of certain itemized amounts, which include a specified percentage of
the purchase price of the manufactured home depending on whether it is a new or
existing home; provided that such maximum amount does not exceed the following
loan amounts: (i) $48,600 for a new or existing manufactured home purchase
loan; (ii) $16,200 for a manufactured home lot purchase; and (iii) $64,800 for
a combination loan (i.e. a loan to purchase a new or existing manufactured home
and the lot for such home). Generally, the term of a Title I Contract may not
be less than six months nor greater than 20 years and 32 days, except that the
maximum term of a manufactured home lot loan is limited to 15 years and 32 days
and the maximum term of a multimodule manufactured home and lot in combination
is limited to 25 years and 32 days.
Borrower eligibility for a Title I Contract requires that the borrower
become the owner of the property to be financed with such loan and occupy the
manufactured home as the borrower's principal residence, except for a
manufactured home lot loan which allows six months from the date of the loan to
occupy the home as the borrower's principal residence. If a manufactured home
is classified as realty, then ownership of the home must be in fee simple, and
also, the ownership of the manufactured home lot must be in fee simple, except
for a lot which consists of a share in a cooperative association that owns and
operates a manufactured home park. The borrower's minimum cash down payment
requirement to obtain financing through a Title I Contract is as follows: (i)
at least 5% of the first $5,000 and 10% of the balance of the purchase price of
a new manufactured home and at least 10% of the purchase price of an existing
manufactured home for a manufactured home purchase loan, or in lieu of a full
or partial cash down payment, the trade-in of the borrower's equity in an
existing manufactured home; (ii) at least 10% of the purchase price and
development costs of a lot for a manufactured home lot loan; and (iii) at least
5% of the first $5,000 and 10% of the balance of the purchase price of the
manufactured home and lot for a combination loan.
Any manufactured home financed by a Title I Contract must be certified
by the manufacturer to have been constructed in compliance with the National
Manufactured Housing Construction and Safety Standards Act of 1974 (42 U.S.C.
Sections 5401-5426), so as to conform to all applicable Federal construction
and safety standards, and with respect to the purchase of a new manufactured
home, the manufacturer must furnish the borrower with a one year written
warranty on a HUD approved form which obligates the manufacturer to correct any
nonconformity with all applicable Federal construction and safety standards or
any defects in materials or workmanship which become evident within one
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year after the date of delivery. The regulations under the Title I Program set
forth certain additional requirements relating to the construction,
transportation and installation of any manufactured home and standards for the
manufactured homesite financed by any Title I Contract. The proceeds from a
Title I Contract may be used as follows: the purchase or refinancing of a
manufactured home, a suitably developed lot for a manufactured home already
owned by the borrower or a manufactured home and suitably developed lot for the
home in combination; or the refinancing of an existing manufactured home
already owned by the borrower in connection with the purchase of a manufactured
home lot or an existing lot already owned by the borrower in connection with
the purchase of a manufactured home. In addition, the proceeds for a Title I
Contract which is a manufactured home purchase loan may be used for the
purchase, construction or installation of a garage, carport, patio or other
comparable appurtenance to the manufactured home, and the proceeds for a Title
I Contract which is a combination loan may be used for the purchase,
construction or installation of a foundation, garage, carport, patio or other
comparable appurtenance to the manufactured home. The proceeds from a Title I
Contract cannot be used for the purchase of furniture or the financing of any
items and activities which are set forth on the list published by the Secretary
of HUD as amended from time to time.
Any Title I Contract must be secured by a recorded lien on the
manufactured home (or lot or home and lot, as appropriate), its furnishings,
equipment, accessories and appurtenance, which lien must be a first lien,
superior to any other lien on the property which is evidenced by a properly
recorded financing statement, a properly recorded security instrument executed
by the borrower and any other owner of the property or other acceptable
instrument. With respect to any Title I Contract involving a manufactured home
purchase loan or combination loan and the sale of the manufactured home by a
dealer, the lender or its agent (other than a manufactured home dealer) must
conduct a site-of-placement inspection within 60 days after the date of the
loan to verify that the terms and conditions of the purchase contract have been
met, the manufactured home and any options and appurtenances included in the
purchase price or financed with the loan have been delivered and installed and
the placement certificate executed by the borrower and the dealer is in order.
FHA Insurance Coverage
Under the Title I Program the FHA establishes an insurance coverage
reserve account for each lender which has been granted a Title I insurance
contract. The amount of insurance coverage in this account is a maximum of 10%
of the amount disbursed, advanced or expended by the lender in originating or
purchasing eligible loans registered with the FHA for Title I insurance, with
certain adjustments permitted or required by the Title I regulations. The
balance in the insurance coverage reserve account is the maximum amount of
insurance claims the FHA is required to pay to the related lender. Loans to be
insured under the Title I Program will be registered for insurance by the FHA,
and the increase in Title I insurance coverage to which the lender is entitled
by reason of the reporting of such loans under the lender's contract of
insurance will be included in the insurance coverage reserve account for the
originating or purchasing lender following the receipt and acknowledgment by
the FHA of a loan report on the prescribed form pursuant to the Title I
regulations. The FHA charges a fee, which is the equivalent of an insurance
premium, of 0.50% of the related loan amount, multiplied by the number of years
of the loan term. Although the total insurance premium charged by the FHA is
0.50%, the annual installment varies depending upon the type and maturity of
the loan. Thus, the effective cost of the insurance premium charge may vary
between 0.50% and 1.0% per annum, unless the loan is held to maturity. The FHA
bills the related lender in advance for the applicable insurance premium charge
on each loan insured under the Title I Program, on approximately the
anniversary date of the date the Secretary of HUD acknowledges the loan report.
If a loan insured under the Title I Program is prepaid during the year, the FHA
will not refund or abate the insurance premium.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect
to loans insured under the lender's contract of insurance by (i) the amount of
the FHA insurance claims approved for payment relating to such insured loans,
(ii) prior to October 1, 1995, the amount of the Annual Reductions attributable
to the contract of insurance and (iii) the amount of reduction of the lender's
FHA insurance coverage reserve account by reason of the sale, assignment or
transfer of loans registered under the lender's contract of insurance. Such
insurance coverage also may be reduced for any FHA insurance claims previously
disbursed to the lender that are subsequently rejected by the FHA. After a
lender has held its Title I contract of insurance for five years, the lender's
FHA insurance coverage reserve account is subject to an annual reduction (the
"Annual Reduction") on each October 1 in an amount equal to 10% of the
insurance coverage reserves available on such date with respect
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to such contract of insurance; provided that such Annual Reduction shall not
reduce the insurance coverage to an amount less than $50,000. On June 5, 1995
the FHA announced the elimination of such annual reductions, effective as of
October 1, 1995.
Upon the receipt and acknowledgment by the FHA of a loan report,
originations of new loans will increase a lender's insurance coverage reserve
account balance by 10% of the amount disbursed, advanced or expended in
originating such loans registered with the FHA for insurance under the Title I
Program. A lender is permitted to sell or otherwise transfer loans reported
for insurance under the Title I Program only to another lender. Upon any such
transfer, except a transfer with recourse or under a guaranty or repurchase
agreement, the seller is required to file a transfer report with the FHA
reporting the transfer of such loans. Upon notification and approval of such
transfer, the insurance coverage reserve account of the selling lender is
reduced, and the insurance coverage reserve account of the purchasing lender is
increased, by an amount equal to the lesser of 10% of the actual purchase price
of the loans or the net unpaid principal balance of the loans, up to the total
amount of the selling lender's insurance coverage reserve account. Thus, in
the event the selling lender's insurance coverage reserve account was less than
10% of the unpaid principal balance of its portfolio of loans reported for
insurance under the Title I Program prior to the sale, the seller's insurance
coverage reserve account may be exhausted as the result of a sale of only a
portion of its total portfolio, with the result that its remaining Title I
Program portfolio may be ineligible for Title I Program benefits until the
lender originates or otherwise acquires additional loans reported for insurance
under the Title I Program. Accordingly, the insurance coverage reserves
transferred to the purchasing lender in such case will be less than 10% of the
lesser of the purchase price or the principal balance of the portfolio of loans
purchased. Additionally, pursuant to FHA regulations, not more than $5,000 in
insurance coverage shall be transferred to or from a lender's insurance
coverage reserve account during any October 1 to September 30 fiscal year
without the approval of the Secretary of HUD. Such HUD approval is generally
viewed as automatic, provided the formal requirements for transfer are
satisfied, but HUD does have the right under FHA regulations to withhold
approval.
Unlike most other FHA insurance programs, the obligation of the FHA to
reimburse a lender for losses in the portfolio of insured loans held by such
lender is limited to the amount in an insurance coverage reserve account
maintained on a lender-by-lender basis and not on a loan-by-loan basis. Except
when to do so would be in HUD's best interest (for instance, to prevent HUD
from paying out claims in excess of 10% of the aggregate original loan balance
for a pool of poorly underwritten loans), the FHA does not track or "earmark"
the loans within a lender's portfolio to determine whether the lender's
insurance coverage reserve account, reduced as the result of an insurance claim
by the lender, are, in fact, attributable to the insured loan with respect to
which the claim was made. For this reason, if a lender is holding insured
loans as a fiduciary on behalf of multiple non-affiliated beneficiaries, in
order for such a lender to cause its insurance coverage reserve account to be
reduced only by an amount to which a particular beneficiary is entitled by
reason of the insured loans beneficially held by it, the lender must segregate
or "earmark" its insurance coverage reserve account on its own books and
records according to which beneficiary is entitled to what portion of the
insurance coverage in the lender's insurance coverage reserve account as if the
insurance coverage were not commingled by the FHA in such insurance coverage
reserve account. In this way the lender can determine at what point the
portion of insurance coverage in such insurance coverage reserve account
"earmarked" for a given beneficiary has been exhausted and stop submitting
additional insurance claims on behalf of such beneficiary. In the event that,
for any reason, such lender continues to submit claims with respect to loans
held on behalf of a beneficiary whose portion of insurance coverage in its
insurance coverage reserve account has been exhausted, the FHA will continue to
honor such claims until all insurance coverage in such lender's insurance
coverage reserve account has been exhausted, even though such insurance
coverage reserve account may, in fact, be held by the lender for the benefit of
a different beneficiary than the beneficiary of the insured loans to which the
claims relate under a separate contractual agreement.
Claims Procedures Under Title I
The term "default" is defined under FHA regulations as the failure of
the borrower to make any payment due under the note for a period of 30 days
after such payment is due. The "date of default" is considered to be the date
30 days after the borrower's first failure to make an installment payment on
the note that is not covered by subsequent payments applied to overdue
installments in the order they became due. When a loan reported for insurance
under the Title I Program goes into default, the lender is required to contact
the borrower and any co-maker and co-signer by telephone or in person to
determine the reasons for the default and to seek a cure. If such lender is
not able to effect
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a cure after diligent efforts, it may provide the borrower with a notice of
default stating that the loan will be accelerated in 30 days if the loan is not
brought current or the borrower does not enter into a loan modification
agreement or repayment plan. The notice of default must meet certain
requirements set forth in the FHA regulations and must conform to applicable
state law provisions. Such lender is permitted to rescind the acceleration of
maturity of the loan only if the borrower brings the loan current, executes a
modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity of a secured property improvement
loan, the lender has the option to proceed against the security or make a claim
under its contract of insurance. If the lender chooses to proceed against the
mortgaged property under a security instrument (or if it accepts a voluntary
conveyance or surrender of the mortgaged property), (i) the lender must proceed
against the loan security by foreclosure and acquire good, marketable title to
the property securing the loan and (ii) the lender must take all actions
necessary under applicable law to preserve its rights, if any, to obtain a
deficiency judgment against the borrower, provided however, the lender may
still file an FHA insurance claim, but only with the prior approval of the
Secretary of HUD.
If a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file, certification of
compliance with applicable state and local laws in carrying out any foreclosure
or repossession and, where the borrower is in bankruptcy or deceased, evidence
that the lender has properly filed proofs of claims. Generally, a lender must
file its claim of insurance with the FHA no later than (i) for any Title I
Loan, nine months after the date of default of such loan or (ii) for any Title
I Contract, three months after the date of sale of the property securing the
loan, but not to exceed 18 months after the date of default of such loan.
Concurrently with filing the insurance claim, the lender is required to assign
to the United States of America it's entire interest in the note (or a judgment
in lieu of the note), in any securities held and in any claims filed in any
legal proceedings. If, at the time the note is assigned to the United States,
the Secretary of HUD has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the lender. If either such defect is discovered after the FHA has paid
a claim, the FHA may require the lender to repurchase the paid claim and to
accept an assignment of the loan note. If the lender subsequently obtains a
valid and enforceable judgment against the borrower, the lender may resubmit a
new insurance claim with an assignment of the judgment. The FHA may contest
any insurance claim previously paid by it and make a demand for repurchase of
the loan with respect to which the claim was paid at any time up to two years
from the date the claim was certified for payment and may do so thereafter in
the event of fraud or misrepresentation on the part of the lender.
A claim for reimbursement of loss with respect to a loan eligible for
insurance under the Title I Program is required to be made on an FHA-approved
form executed by a duly qualified officer of the lender and must be accompanied
by copies of certain relevant documents and documentation specified in the FHA
regulations to support the claim. The lender is required, among other things,
to document its efforts to effect recourse against any dealer in accordance
with any recourse agreement with such dealer. If the loan is subject to an
unsatisfied dealer recourse agreement claim, the lender is also required to
assign its rights under such recourse agreement. The FHA has the right to deny
any claim for insurance in whole or in part based upon a violation of the FHA
regulations unless a waiver of compliance is granted. The lender is permitted
to appeal any such claim denial and resubmit the claim within six months of the
date of the claim denial, subject to a reprocessing fee.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the Claimable Amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. The "Claimable
Amount" is equal to 90% of the sum of: (a) the unpaid loan obligation (net
unpaid principal and the uncollected interest earned to the date of default)
with adjustments thereto if the lender has proceeded against property securing
such loan; (b) the interest on the unpaid amount of the loan obligation from
the date of default to the date of the claim's initial submission for payment
plus 15 calendar days (the total period not to exceed nine months from the date
of default), calculated at the rate of 7% per annum; (c) the uncollected court
costs; (d) the attorneys' fees not to exceed $500; (e) the expenses for
recording the assignment of the security to the United States; and (f) if the
loan is a Title I Contract, certain costs incurred in connection with the
foreclosure or repossession of the manufactured home and/or lot.
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LEGAL INVESTMENT MATTERS
Unless otherwise specified in the related Prospectus Supplement, the
Securities of a Series constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so long as they
are rated in one of the two highest rating categories established for such
Securities by at least one nationally recognized statistical rating
organization. As "mortgage related securities," such Securities 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 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,
Alaska, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois,
Kansas, Louisiana, Maryland, Michigan, Missouri, Nebraska, New Hampshire, New
York, North Carolina, Ohio, South Dakota, Utah, Virginia, and West Virginia
each enacted legislation prior to the October 4, 1991 deadline for such
enactments, limiting to varying extends 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 upon existing state law,
and not SMMEA. Accordingly, the investors affected by such legislation will be
authorized to invest in the Securities only to the extent provided in such
legislation.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be subject
to restrictions on investment in certain Classes of the Securities. Any
financial institution which is subject to the jurisdiction of the Comptroller
of the Currency, the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation ("FDIC"), the Office of Thrift
Supervision ("OTS"), the National Credit Union Administration ("NCUA"), or
other federal or state agencies with similar authority should review any
applicable rules, guidelines and regulations prior to purchasing the
Securities. The Federal Financial Institutions Examination Council, for
example, has issued a Supervisory Policy Statement on Securities Activities
effective February 10, 1992 (the "Policy Statement"). The Policy Statement has
been adopted by the Comptroller of the Currency, the Federal Reserve Board, the
FDIC, the OTS, and the NCUA (with certain modifications), with respect to the
depository institutions that they regulate. The Policy Statement prohibits
depository institutions from investing in certain "high-risk mortgage
securities" (including securities such as certain Classes of Securities),
except under limited circumstances, and sets forth certain investment practices
deemed to be unsuitable for regulated institutions. The NCUA issued final
regulations effective December 2, 1991 that restrict and in some instances
prohibit the investment by federal credit unions in certain types of mortgage
related securities.
Notwithstanding SMMEA, there may be other restrictions on the ability of
certain investors, including depository institutions, either to purchase
Securities or to purchase Securities representing more than a specified
percentage of the investors' assets.
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 and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying", or in securities which are issued in book-entry
form.
If specified in the related Prospectus Supplement, other Classes of
Securities offered pursuant to this Prospectus will not constitute "mortgage
related securities" under SMMEA. The appropriate characterization of those
Securities under various legal investment restrictions, and thus the ability of
investors subject to these restrictions to purchase the Securities, may be
subject to significant interpretive uncertainties. No representation is made as
to the proper characterization of Securities not qualifying as "mortgage
related securities" for legal investment or financial institution regulatory
purposes, or as to the ability of particular investors to purchase such
Securities under applicable legal investment restrictions. The uncertainties
described above (and any unfavorable future determination concerning legal
investment or financial institution regulatory characteristics of such
Certificates) may adversely affect the liquidity of such Securities.
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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 Section 4975 of the Code impose requirements on employee benefit
plans (and on certain other retirement plans and arrangements, including
individual retirement accounts and annuities, Keogh plans and collective
investment funds and separate accounts in which such plans, accounts or
arrangements are invested) (collectively, "Plans") subject to ERISA and Section
4975 of the Code and on persons who are fiduciaries with respect to such Plans.
Among other things, ERISA requires that the assets of Plans 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 Plans. ERISA
also imposes certain duties on persons who are fiduciaries of Plans. Under
ERISA, any person who exercises any authority or control respecting the
management or disposition of the assets of a Plan is considered to be a
fiduciary of such Plan (subject to certain exceptions not here relevant). In
addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA prohibits a broad range of transactions
("Prohibited Transactions") involving Plan assets and persons ("Parties in
Interest") having certain specified relationships to a Plan and imposes
additional prohibitions where Parties in Interest are fiduciaries with respect
to such Plan. Section 4975 of the Code provides many requirements and
prohibitions similar to those under ERISA and applies excise taxes on persons
engaged in Prohibited Transactions.
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, the "Plan Asset Regulations") Under the Plan Asset
Regulations, 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 to be assets of the investing Plan in certain
circumstances. In such case, the fiduciary making such an investment for the
Plan could be deemed to have delegated his or her asset management
responsibility, and the underlying assets and properties could be subject to
ERISA reporting and disclosure. The Certificates of a Series will, and the
Bonds of a Series could, be treated as "equity" for purposes of ERISA. Certain
exceptions to the regulation may apply in the case of a Plan's investment in
the Securities that constitute "equity" investments, but the Company cannot
predict in advance whether such exceptions apply due to the factual nature of
the conditions to be met. Accordingly, because the Mortgage Loans or Agency
Securities may be deemed Plan assets of each Plan that purchases such
Securities, an investment in such Securities by a Plan might give rise to a
prohibited transaction under ERISA Sections 406 and 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 ("PTCE 83-1") exempts
from ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage pool investment trusts and the purchase, sale
and holding of "mortgage pool pass-through certificates" in the initial
issuance of such certificates. PTCE 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 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.
PTCE 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.
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Although the Trustee for any series of Certificates will be unaffiliated
with the Company, 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's assets or the characteristics of one or
more classes of the related series of Certificates may not be included within
the scope of PTCE 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 ERISA prohibited transactions exemptions which are in some respects
broader than PTCE 83-1. Such exemptions can only apply to mortgage-backed
securities which, among 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. Several other underwriters have applied for similar
exemptions. If such an exemption might be applicable to a Series of Securities,
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 Securities must
make its own determination as to whether the general and the specific
conditions of PTCE 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 Securities is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
Any Plan proposing to invest in Securities 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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of
Securities of any Series, to the extent it relates to matters of law or legal
conclusions with respect thereto, represents the opinion of counsel to the
Company with respect to that Series on the material matters associated with
such consequences, subject to any qualifications set forth herein. Counsel to
the Company for each Series will be Andrews & Kurth L.L.P. The discussion
below does not purport to address all federal income tax consequences that may
be applicable to particular categories of investors, some of which may be
subject to special rules. The authorities on which this discussion is based are
subject to change or differing interpretations, and any such change or
interpretation could apply retroactively. This discussion reflects the
enactment of the Tax Reform Act of 1986 (the "1986 Act"), the Technical and
Miscellaneous Revenue Act of 1988 ("TAMRA"), the Revenue Reconciliation Act of
1993, and the Small Business Job Protection Act of 1996 as well as final
Treasury regulations concerning REMICs ("Final REMIC Regulations") promulgated
by the U.S. Department of the Treasury on December 23, 1992. Investors should
consult their own tax advisors in determining the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of
Securities, particularly with respect to federal income tax changes effected by
the 1986 Act, TAMRA and the Final REMIC Regulations. The Prospectus Supplement
for each series of Securities will discuss any special tax consideration
applicable to any Class or Classes of Securities of such Series, and the
discussion below is qualified by any such discussion in the related Prospectus
Supplement.
For purposes of this discussion, where the applicable Prospectus
Supplement provides for a fixed retained yield with respect to the Mortgage
Loans, Agency Securities, Private Mortgage-Backed Securities, Multifamily Loans
or Contracts underlying a Series of Securities, references to the Mortgage
Loans, Agency Securities, Private Mortgage-Backed Securities, Multifamily Loans
or Contracts will be deemed to refer to that portion of the Mortgage Loans,
Agency Securities, Private Mortgage-Backed Securities, Multifamily Loans or
Contracts included as Trust Property which does not include the fixed retained
yield.
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FEDERAL INCOME TAX CONSEQUENCES FOR REMIC SECURITIES
GENERAL
With respect to a particular Series of Securities, an election may be
made to treat the Trust Property or one or more trusts or segregated pools of
assets therein as one or more REMICs within the meaning of Code Section 860D.
Trust Property or a portion or portions thereof as to which a REMIC election
will be made will be referred to as a "REMIC Pool." For purposes of this
discussion, Securities of a Series as to which one or more REMIC elections are
made are referred to as "REMIC Securities" and will consist of one or more
Classes of "Regular Securities" and one Class of "Residual Securities" in the
case of each REMIC Pool. Qualification as a REMIC requires ongoing compliance
with certain conditions. Upon the issuance of each Series of REMIC Securities,
counsel to the Company will give its opinion generally to the effect that,
assuming (i) the making of an appropriate election, (ii) compliance with the
Pooling Agreement or Indenture, as applicable, and (iii) continuing compliance
with the applicable provisions of the Code, as it may be amended from time to
time, and any applicable Treasury regulations adopted thereunder, each REMIC
Pool will qualify as a REMIC. The following general discussion of the
anticipated federal income tax consequences of the purchase, ownership and
disposition of REMIC Securities, to the extent it relates to matters of law or
legal conclusions with respect thereto, represents the opinion of counsel to
the Company, subject to any qualifications set forth herein. In addition,
counsel to the Company has prepared or reviewed the statements in this
Prospectus under the heading "Certain Federal Income Tax Consequences - Federal
Income Tax Consequences for REMIC Securities," and is of the opinion that such
statements are correct in all material respects. Such statements are intended
as an explanatory discussion of the possible effects of the classification of
any Trust Property (or applicable portion thereof) as a REMIC for federal
income tax purposes on investors generally and of related tax matters affecting
investors generally, but do not purport to furnish information in the level of
detail or with the attention to an investor's specific tax circumstances that
would be provided by an investor's own tax advisor. Accordingly, each investor
is advised to consult its own tax advisors with regard to the tax consequences
to it of investing in REMIC Securities. With respect to each Series of REMIC
Securities, the Regular Securities will be considered to be "regular interests"
in the REMIC Pool and generally will be treated for federal income tax purposes
as if they were newly originated debt instruments, and the Residual Securities
will be considered to be "residual interests" in the REMIC Pool. The Prospectus
Supplement for each Series of Securities will indicate whether one or more
REMIC elections with respect to the related Trust Property will be made, in
which event references to "REMIC" or "REMIC Pool" herein shall be deemed to
refer to each such REMIC Pool. For purposes of this discussion, unless
otherwise specified herein or in the applicable Prospectus Supplement, the term
"Mortgage Loans" will be used to refer to Mortgage Loans, Agency Securities,
Private Mortgage-Backed Securities (other than residual interests and
collateralized mortgage loans), Multifamily Loans and Contracts.
STATUS OF REMIC SECURITIES
REMIC Securities held by a domestic building and loan association will
constitute "a regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi) in the same proportion that the assets of the
REMIC Pool would be treated as "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v) or as other
assets described in Code Section 7701(a)(19)(C). REMIC Securities held by a
real estate investment trust (a "REIT") will constitute "real estate assets"
within the meaning of Code Section 856(c)(5)(A), and interest on the REMIC
Securities will be considered "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, for both purposes, the assets
of the REMIC Pool would be so treated. However, if at all times 95% or more of
the assets of the REMIC Pool constitute qualifying assets for REITs, the REMIC
Securities will be treated entirely as qualifying assets for such entities (and
the income will be treated entirely as qualifying income). Moreover, the Final
REMIC Regulations provide that, for purposes of Code Section 856(c)(5)(A),
payments of principal and interest on the Mortgage Loans that are reinvested
pending distribution to holders of REMIC Securities constitute qualifying
assets for such entities. Where two REMIC Pools are part of a tiered structure
they will be treated as one REMIC for purposes of the tests described above
respecting asset ownership of more or less than 95%. Notwithstanding the
foregoing, however, REMIC income received by a REIT owning a residual interest
in a REMIC Pool could be treated in part as non-qualifying REIT income
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if the REMIC Pool holds Mortgage Loans with respect to which income is
contingent on mortgagor profits or property appreciation. In addition, if the
assets of the REMIC include buy-down Mortgage Loans, it is possible that the
percentage of such assets constituting "loans . . . secured by an interest in
real property" for purposes of Code Section 7701(a)(19)(C)(v) may be required
to be reduced by the amount of the related buy-down funds. REMIC Securities
held by a regulated investment company will not constitute "Government
securities" within the meaning of Code Section 851(b)(4)(A)(i). REMIC
Securities held by certain financial institutions will constitute an "evidence
of indebtedness" within the meaning of Code Section 582(c)(1) and REMIC
Securities will not constitute "Government securities" within the meaning of
Code Section 851(b)(4)(A)(i). However, REMIC Securities acquired by another
REMIC on its Startup Day (as defined below) in exchange for regular or residual
interests in the REMIC will constitute "qualified mortgages" within the meaning
of Code Section 860G(a)(3).
QUALIFICATION AS A REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis amount of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Securities) and at all
times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The Final REMIC Regulations provide a "safe harbor"
pursuant to which the de minimis requirement will be met if at all times the
aggregate adjusted basis of any nonqualified assets (i.e. , assets other than
qualified mortgages and permitted investments) is less than 1% of the aggregate
adjusted basis of all the REMIC Pool's assets.
If a REMIC Pool fails to comply with one or more of the requirements of
the Code for REMIC status during any taxable year, the REMIC Pool will not be
treated as a REMIC for such year and thereafter. In this event, the
classification of the REMIC for federal income tax purposes is uncertain. The
REMIC Pool might be entitled to treatment as a grantor trust under the rules
described in "Federal Income Tax Consequences for Securities as to Which No
REMIC Election Is Made" herein. In that case, no entity-level tax would be
imposed on the REMIC Pool. Alternatively, the Regular Securities may continue
to be treated as debt instruments for federal income tax purposes; but the
REMIC Pool could be treated as a taxable mortgage pool (a "TMP"). If the REMIC
Pool is treated as a TMP, any residual income of the REMIC Pool (i.e. , income
from the Mortgage Loans less interest and original issue discount expense
allocable to the Regular Securities and any administrative expenses of the
REMIC Pool) would be subject to corporate income tax at the REMIC Pool level.
On the other hand, an entity with multiple classes of ownership interests may
be treated as a separate association taxable as a corporation under Treasury
regulations, and the Regular Securities may be treated as equity interests
therein. The Code, however, authorizes the Treasury Department to issue
regulations that address situations where failure to meet one or more of the
requirements for REMIC status occurs inadvertently and in good faith, and
disqualification of the REMIC Pool would occur absent regulatory relief.
Investors should be aware, however, that the Conference Committee Report to the
1986 Act (the "Committee Report") indicates that the relief may be accompanied
by sanctions, such as the imposition of a corporate tax on all or a portion of
the REMIC Pool's income for the period of time in which the requirements for
REMIC status are not satisfied.
TAXATION OF REGULAR SECURITIES
General
Payments received by holders of Regular Securities generally should be
accorded the same tax treatment under the Code as payments received on ordinary
taxable corporate debt instruments. In general, interest, original issue
discount and market discount on a Regular Security will be treated as ordinary
income to a holder of the Regular Security (the "Regular Securityholder") as
they accrue, and principal payments on a Regular Security will be treated as a
return of capital to the extent of the Regular Securityholder's basis in the
Regular Security allocable thereto. Regular Securityholders must use the
accrual method of accounting with regard to Regular Securities, regardless of
the method of accounting otherwise used by such Regular Securityholders.
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Original Issue Discount
Regular Securities may be issued with "original issue discount" within
the meaning of Code Section 1273(a). Holders of any class of Regular Securities
having original issue discount generally must include original issue discount
in ordinary income for federal income tax purposes as it accrues, in accordance
with a constant interest method that takes into account the compounding of
interest, in advance of receipt of the cash or a portion of the cash
attributable to such income. Based in part on Treasury regulations issued on
January 27, 1994, as amended on June 14, 1996, under Code Sections 1271 through
1273 and 1275 (the "OID Regulations") and in part on the provisions of the 1986
Act, the Company anticipates that the amount of original issue discount
required to be included in a Regular Securityholder's income in any taxable
year will be computed in a manner substantially as described below. Regular
Securityholders should be aware, however, that the OID Regulations either do
not address, or are subject to varying interpretations with regard to, several
issues relevant to securities, such as the Regular Securities, that are subject
to prepayment. The 1986 Act requires that the amount and rate of accrual or
original issue discount be calculated based on a reasonable assumed prepayment
rate for the Mortgage Loans in a manner prescribed by regulations not yet
issued ("Prepayment Assumption") and provides for adjusting the amount and rate
of accrual of such discount where the actual prepayment rate differs from the
Prepayment Assumption. The Committee Report indicates that the regulations will
require that the Prepayment Assumption be the prepayment assumption that is
used in determining the initial offering price of such Securities. The
Prospectus Supplement for each Series of such Securities will specify the
Prepayment Assumption determined by the Company for the purposes of determining
the amount and rate of accrual of original issue discount. No representation is
made that the Securities will prepay at the Prepayment Assumption or at any
other rate. Moreover, the OID Regulations include an anti-abuse rule allowing
the Internal Revenue Service ("IRS") to apply or depart from the OID
Regulations where necessary or appropriate to ensure a reasonable tax result in
light of the applicable statutory provisions. A tax result will not be
considered unreasonable under the anti-abuse rule in the absence of a
substantial effect on the present value of a taxpayer's tax liability.
Investors are advised to consult their own tax advisors as to the discussion
herein and the appropriate method for reporting interest and original issue
discount with respect to the Regular Securities.
Under the OID Regulations, each Regular Security (except to the extent
described below with respect to a Regular Security on which distributions of
principal are made in a single installment or upon an earlier distribution by
lot of a specified principal amount upon the request of a Regular
Securityholder or by random lot (a "Retail Class Security")) will be treated as
a single installment obligation for purposes of determining the original issue
discount includible in a Regular Securityholder's income. The total amount of
original issue discount on a Regular Security is the excess of the "stated
redemption price at maturity" of the Regular Security over its "issue price."
The issue price of a Regular Security is the first price at which a substantial
amount of Regular Securities of that class are first sold (other than to bond
houses, brokers, underwriters and wholesalers). Unless specified otherwise in
the Prospectus Supplement, the Company will determine original issue discount
by including the amount paid by an initial Regular Securityholder for accrued
interest that relates to a period prior to the issue date of the Regular
Security in the issue price of a Regular Security and will include in the
stated redemption price at maturity any interest paid on the first Distribution
Date (or Payment Date) to the extent such interest is attributable to a period
in excess of the number of days between the issue date and such first
Distribution Date (or Payment Date). The stated redemption price at maturity of
a Regular Security always includes the original principal amount of the Regular
Security, but generally will not include distributions of stated interest if
such interest distributions constitute "qualified stated interest." Under the
OID Regulations, qualified stated interest generally means stated interest that
is unconditionally payable in cash or in property (other than debt instruments
of the issuer), or that will be constructively received, at least annually at a
single fixed rate. Special rules apply for variable rate Regular Securities as
described below. Any stated interest in excess of the qualified stated interest
is included in the stated redemption price at maturity. If the amount of
original issue discount is "de minimis" as described below, the amount of
original issue discount is treated as zero, and all stated interest is treated
as qualified stated interest. Distributions of interest on Regular Securities
with respect to which deferred interest will accrue may not constitute
qualified stated interest, in which case the stated redemption price at
maturity of such Regular Securities includes all distributions of interest as
well as principal thereon. Moreover, if the interval between the issue
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date and the first Distribution Date (or Payment Date) on a Regular Security is
longer than the interval between subsequent Distribution Dates (or Payment
Dates) (and interest paid on the first Distribution Date (or Payment Date) is
less than would have been earned if the stated interest rate were applied to
outstanding principal during each day in such interval), the stated interest
distributions on such Regular Security technically do not constitute qualified
stated interest. The OID Regulations provide that in such case a special rule,
applying solely for the purpose of determining whether original issue discount
is de minimis, provides that the interest shortfall for the long first period
(i.e., the interest that would have been earned if interest had been paid on
the first Distribution Date (or Payment Date) for each day the Regular Security
was outstanding) is treated as original issue discount assuming the stated
interest would otherwise be qualified stated interest. Also in such case the
stated redemption price at maturity is treated as equal to the issue price plus
the greater of the amount of foregone interest or the excess, if any, of the
Security's stated principal amount over its issue price. The OID Regulations
indicate that all interest on a long first period Regular Security that is
issued with non-de minimis original issue discount will be included in the
Regular Security's stated redemption price at maturity. Regular Securityholders
should consult their own tax advisors to determine the issue price and stated
redemption price at maturity of a Regular Security.
Under a de minimis rule, original issue discount on a Regular Security
will be considered to be zero if such original issue discount is less than
0.25% of the stated redemption price at maturity of the Regular Security
multiplied by the weighted average maturity of the Regular Security. For this
purpose, the weighted average maturity of the Regular Security is computed as
the sum of the amounts determined by multiplying the number of full years
(i.e., rounding down partial years) from the issue date until each distribution
in reduction of stated redemption price at maturity is scheduled to be made by
a fraction, the numerator of which is the amount of each distribution included
in the stated redemption price at maturity of the Regular Security and the
denominator of which is the stated redemption price at maturity of the Regular
Security. Although currently unclear, it appears that the schedule of such
distributions should be determined in accordance with the Prepayment
Assumption. In addition, if the original issue discount is de minimis all
stated interest (including stated interest that would otherwise be treated as
original issue discount) is treated as qualified stated interest. Unless the
Holder of a Regular Security elects to accrue all discount under a constant
yield to maturity method, as described below, the holder of a debt instrument
includes any de minimis original issue discount in income pro rata as capital
gain recognized on retirement of the Regular Security as stated principal
payments are received. If a subsequent Holder of a Regular Security issued with
de minimis original issue discount purchases the Regular Security at a premium,
the subsequent Holder does not include any original issue discount in income.
If a subsequent Holder purchases such Regular Security at a discount all
discount is reported as market discount, as described below.
Of the total amount of original issue discount on a Regular Security,
the Regular Securityholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Security accrued during an accrual period for
each day on which he holds the Regular Security, including the date of purchase
but excluding the date of disposition. Although not free from doubt, the
Company intends to treat the monthly period ending on the day before each
Distribution Date or Payment Date as the accrual period, rather than the
monthly period corresponding to the prior calendar month. With respect to each
Regular Security, a calculation will be made of the original issue discount
that accrues during each successive full accrual period (or shorter period from
the date of original issue) that ends on the day before the related
Distribution Date or Payment Date for the Regular Security. The original issue
discount accruing in a full accrual period would be the excess, if any, of (i)
the sum of (a) the present value of all of the remaining distributions to be
made on the Regular Security as of the end of that accrual period that are
included in the Regular Security's stated redemption price at maturity and (b)
the distributions made on the Regular Security during the accrual period that
are included in the Regular Security's stated redemption price at maturity,
over (ii) the adjusted issue price of the Regular Security at the beginning of
the accrual period. The present value of the remaining distributions referred
to in the preceding sentence is calculated based on (i) the yield to maturity
of the Regular Security at the issue date giving the effect to the Prepayment
Assumption, (ii) events (including actual prepayments) that have occurred prior
to the end of the accrual period and (iii) the Prepayment Assumption. The
effect of these rules is to adjust the rate of original issue discount accrual
to correspond to the actual prepayment experience. For these purposes, the
adjusted issue price of a Regular Security at the beginning of any accrual
period equals the issue price of the Regular Security, increased by the
aggregate amount of original issue discount with respect to the Regular
Security that accrued in all prior accrual periods and reduced by the amount of
distributions included in the Regular Security's stated redemption price at
maturity that were made on the Regular Security in such prior periods. The
original
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issue discount accruing during any accrual period (as determined in this
paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. With respect to an initial accrual period shorter than a full accrual
period, the daily portions of original issue discount must be determined using
a reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder
generally will increase to take into account prepayments on the Regular
Securities as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. To the
extent specified in the applicable Prospectus Supplement, an increase in
prepayments on the Mortgage Loans with respect to a Series of Regular
Securities can result in both a change in the priority of principal payments
with respect to certain Classes of Regular Securities and either an increase or
decrease in the daily portions of original issue discount with respect to such
Regular Securities.
In the case of a Retail Class Security, the yield to maturity of such
Security will be determined based upon the anticipated payment characteristics
of the Class as a whole under the Prepayment Assumption. In general, the
original issue discount accruing on each Retail Class Security in a full
accrual period would be its allocable share of the original issue discount with
respect to the entire Class, as determined in accordance with the preceding
paragraph. However, in the case of a distribution of the entire principal
amount of any Retail Class Security (or portion thereof), (a) the remaining
unaccrued original issue discount allocable to such Security (or to such
portion) will accrue at the time of such distribution, and (b) the accrual of
original issue discount allocable to each remaining Security of such Class (or
the remaining principal amount of a Retail Class Security after a distribution
in reduction of a portion of its principal amount has been received) will be
adjusted by reducing the present value of the remaining payments on such Class
and the adjusted issue price of such Class to the extent attributable to the
portion of the principal amount thereof that was distributed.
A subsequent holder of a Security issued with original issue discount
who purchases the Security at a cost less than the remaining stated redemption
price at maturity will also be required to include in gross income the sum of
the daily portions of original issue discount on the Security. In computing the
daily portions of original issue discount for a subsequent purchaser (as well
as an initial purchaser who purchases a Security at a price higher than the
issue price but less than the stated redemption price at maturity), however,
the daily portion for any day is reduced by the amount that would be the daily
portion for such day (computed in accordance with the rules set forth above)
multiplied by a fraction, the numerator of which is the amount, if any, by
which the price paid by such purchaser for the Regular Security exceeds the
excess of (i) the sum of its issue price and the aggregate amount of original
issue discount that would have been includible in the gross income of an
original holder of the Regular Security who purchased the Regular Security at
its issue price, over (ii) the amount of any prior distributions included in
the stated redemption price at maturity, and the denominator of which is the
sum of the daily portions for such Regular Security (computed in accordance
with the rules set forth above) for all days beginning on the date after the
date of purchase and ending on the date on which the remaining principal amount
of such Regular Security is expected to be reduced to zero under the Prepayment
Assumption. Alternatively, such a subsequent holder may accrue original issue
discount by treating the purchase as a purchase at original issuance and
applying the constant yield to maturity method.
The OID Regulations provide that a holder that acquires a Regular
Security on or after April 4, 1994 may elect to include in gross income all
stated interest, original issue discount, de minimis original issue discount,
market discount (as described below under "Market Discount"), de minimis market
discount and unstated interest (as adjusted for any amortizable bond premium or
acquisition premium) currently as it accrues using the constant yield to
maturity method. If such an election were made with respect to a Regular
Security with market discount, the Regular Securityholder would be deemed to
have made an election to include in income currently market discount with
respect to all other debt instruments having market discount that such Regular
Securityholder acquires during the year of the election or thereafter.
Similarly, a Regular Securityholder that makes this election for a Regular
Security that is acquired at a premium will be deemed to have made an election
to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Regular Securityholder owns or acquires. The
election to accrue interest, discount and premium on a constant yield method
with respect to a Regular Security can not be revoked without the consent of
the IRS.
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Regular Securities may provide for interest based on a variable rate.
The OID Regulations provide special rules for variable rate instruments that
meet four requirements. First, the issue price must not exceed the noncontingent
principal payments by more than the lesser of (i) 1.5% of the product of the
noncontingent principal payments and the weighted average maturity or (ii) 15%
of the noncontingent principal payments. Second, the instrument must provide for
stated interest (compounded or paid at least annually) at (i) one or more
qualified floating rates, (ii) a single fixed rate and a single objective rate
that is a qualified inverse floating rate, (iii) a single fixed rate and one or
more qualified floating rates; or (iv) a single objective rate. Third, the
instrument must provide that each qualified floating rate or objective rate in
effect during the term of the Regular Security is set at a current value of that
rate (one occurring in the interval beginning three months before and ending one
year after the rate is first in effect on the Regular Security). Fourth, the
debt instrument must not provide for contingent principal payments. If interest
on a Regular Security is stated at a fixed rate for an initial period of less
than 1 year followed by a variable rate that is either a qualified floating rate
or an objective rate and the value of the variable rate on the issue date is
intended to approximate the fixed rate, the fixed rate and the variable rate
together constitute a single qualified floating rate or objective rate. A rate
is a qualified floating rate if variations in the rate can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds in the Regular Security's currency denomination. A multiple of a qualified
floating rate is not a qualified floating rate unless it is a rate equal to (i)
the product of a qualified floating rate as described in the previous sentence
and a positive number not greater than 1.35 but greater than 0.65 for
instruments issued on or after August 13, 1996, or (ii) a product described in
(i) increased or decreased by a fixed rate. A variable rate is not a qualified
floating rate if it is subject to a cap, floor or a restriction on the amount of
increase or decrease in stated interest rate (governor) unless: (i) the cap,
floor or governor is fixed throughout the Regular Security's term, (ii) the cap
or floor is not reasonably expected to cause the yield on the Regular Security
to be significantly less or more, respectively, than the expected yield without
the cap or floor, or (iii) the governor is not reasonably expected to cause the
yield to be significantly more or less than the expected yield without the
governor. For instruments issued on or after August 13, 1996, an objective rate
is a rate (other than a qualified floating rate) that is determined using a
single fixed formula and that is based on objective financial or economic
information. An objective rate is a qualified inverse floating rate if the rate
is equal to a fixed rate minus a qualified floating rate in which the variations
of such rate can reasonably be expected to inversely reflect contemporaneous
variations in the qualified floating rate. However, a variable rate is not an
objective rate if it is reasonably expected that the average value of the rate
during the first half of the Regular Security's term will be significantly less
or greater than the average value of the rate during the final half of the
Regular Security's term.
If a variable rate Regular Security provides for stated interest at a
single qualified floating rate or objective rate that is unconditionally payable
in cash or property at least annually (i) all stated interest is qualified
stated interest, (ii) the amount of qualified stated interest original issue
discount, if any, that accrues is determined as if the Regular Security had a
fixed rate equal to (A) in the case of a qualified floating rate or qualified
inverse floating rate, the value on the issue date of the qualified floating
rate or qualified inverse floating rate or (B) in the case of any other
objective rate, a fixed rate that reflects the yield that is reasonably expected
for the Regular Security, and (iii) the qualified stated interest that accrues
is adjusted for the interest actually paid. If a variable rate Regular Security
is not described in the previous sentence, the Regular Security is treated as a
fixed rate Regular Security with a fixed rate substitute or substitutes equal to
the value of the qualified floating rates or qualified inverse floating rate at
the date of issue or, in the case of a Regular Security having an objective rate
at a fixed rate that reflects the yield reasonably expected for the Regular
Security. Qualified stated interest or original issue discount allocable to an
accrual period is adjusted to reflect differences in the interest actually
accrued or paid compared to the interest accrued or paid at the fixed rate
substitute. If a variable rate Regular Security provides for stated interest
either at one or more qualified floating rates or at a qualified inverse
floating rate and also provides for interest at an initial fixed rate that is
not intended to approximate the related floating rate or is fixed for a period
of one year or more, original issue discount is determined as described in the
previous two sentences except that the Regular Security is treated as if it
provided for a qualified floating rate or qualified inverse floating rate, as
applicable, rather than a fixed rate. The substitute rate must be one such that
the fair market value of the Regular Security would be approximately the same as
the fair market value of the hypothetical security.
Under the OID Regulations, a variable rate Regular Security not
qualifying for treatment under the variable rate rules described above is
subject to the contingent payment rules. Regulations dealing with contingent
payment debt obligations were issued June 11, 1996 (the "Contingent Debt
Regulations"), and are generally effective August 13, 1996. The Contingent
Debt Regulations by their terms do not apply to REMIC regular interests.
However, the following paragraph describes the applicable Contingent Debt
Regulations as a method that may be considered reasonable.
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The Contingent Debt Regulations apply a "noncontingent bond method" to a
debt instrument that is publicly traded or that is issued for cash or publicly
traded property. Under the noncontingent bond method, the issuer is required to
determine the comparable yield for the instrument and to construct a projected
payment schedule for the Regular Security consisting of all noncontingent
payments and a projected amount for each contingent payment. The issuer is
required to determine interest expense, and a holder is required to determine
interest income, according to the projected payment schedule formulated by the
issuer. Interest generally is accrued under the noncontingent bond method
according to generally applicable rules of the OID Regulations as described
above. Adjustments in the instrument's issue price and the holder's basis are
determined as if the projected payment schedule were the actual payment schedule
for the instrument. If the actual amount of a contingent payment differs from
the projected amount of the payment, adjustments to interest accrual are
generally taken into account at the time the payment is made in order to reflect
this difference. Gain or loss recognized by a holder on the sale, exchange, or
retirement of the instrument generally will be treated as interest income or
ordinary loss to the holder. A loss will be treated as ordinary, however, only
up to the amount of the holder's total interest inclusions with respect to the
Regular Security that were not offset by previous adjustments. Any additional
loss generally will be a capital loss. Investors are urged to consult their tax
advisors as to the proper accrual of original issue discount (including stated
interest) on the Regular Securities, including Regular Securities which may be
subject to the contingent payment rules.
Although unclear at present, the Company intends to treat Securities
bearing an interest rate that is a weighted average of the net interest rates on
the Mortgage Loans or the mortgage loans underlying the Mortgage Assets as
having qualified stated interest if the Mortgage Loans or the underlying
mortgage loans are adjustable rate mortgage loans. In such case, the applicable
index used to compute interest on the Mortgage Loans in effect on the issue date
(or possibly the pricing date) will be deemed to be in effect beginning with the
period in which the first weighted average adjustment date occurring after the
issue date occurs. If the Security interest rate for one or more periods is
less than it would be based upon the fully indexed rate, the excess of the
interest payments projected at the assumed index over interest projected at such
initial rate will be tested under the de minimis rules as described above.
Adjustments will be made in each accrual period increasing or decreasing the
amount of ordinary income reportable to reflect the actual interest rate on the
Securities. It is possible, however, that the IRS may treat some or all of the
interest on Securities with a weighted average rate as taxable under the rules
relating to obligations providing for contingent payments. Such treatment may
affect the timing of income accruals on such Securities.
It is not clear how income should be accrued with respect to Regular
Securities issued at a significant premium and with respect to REMIC Securities
the payments on which consist primarily of a specified portion of the interest
payments on qualified mortgages held by the REMIC ("Premium REMIC Regular
Securities"). One method of income accrual would be to treat the Premium REMIC
Regular Security as a Security having qualified stated interest purchased at a
premium equal to the excess of the price paid by such holder for the Premium
REMIC Regular Security over its stated principal amount. Under this approach, a
holder would be entitled to amortize such premium only if it has in effect an
election under Section 171 of the Code with respect to all bonds held by such
holder, as described below. Alternatively, all of the income derived from a
Premium REMIC Regular Security could be reported as original issue discount by
treating all future payments under the Prepayment Assumption as fixed payments,
in which case the amount and rate of accrual of original issue discount would be
computed by treating the Premium REMIC Regular Security as a Security which has
no qualified stated interest, as described above. Finally, the IRS could assert
that the Premium REMIC Regular Securities should be taxable under the contingent
payment rules governing securities issued with contingent payments.
Market Discount
A purchaser of a Regular Security also may be subject to the market
discount rules of Code Sections 1276 through 1278. Under these sections and the
principles applied by the OID Regulations in the context of original issue
discount, "market discount" is the amount by which a subsequent purchaser's
initial basis in the Regular Security (i) is exceeded by the stated redemption
price at maturity of the Regular Security or (ii) in the case of a Regular
Security having original issue discount, is exceeded by the sum of the issue
price of such Regular Security plus any original issue discount that would have
previously accrued thereon if held by an original Regular Securityholder (who
purchased the
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Regular Security at its issue price), in either case less any prior
distributions included in the stated redemption price at maturity of such
Regular Security. Such purchaser generally will be required to recognize
accrued market discount as ordinary income as distributions includible in the
stated redemption price at maturity of such Regular Security are received, in
an amount not exceeding any such distribution. That recognition rule would
apply regardless of whether the purchaser is a cash-basis or accrual-basis
taxpayer. Such market discount would accrue in a manner to be provided in
Treasury regulations and should take into account the Prepayment Assumption.
The Committee Report provides that until such regulations are issued, such
market discount would accrue either (i) on the basis of a constant interest
rate or (ii) in the ratio of stated interest allocable to the relevant period
to the sum of the interest for such period plus the remaining interest as of
the end of such period, or in the case of a Regular Security issued with
original issue discount, in the ratio of original issue discount accrued for
the relevant period to the sum of the original issue discount accrued for such
period plus the remaining original issue discount as of the end of such period.
Such purchaser also generally will be required to treat a portion of any gain
on a sale or exchange of the Regular Security as ordinary income to the extent
of the market discount accrued to the date of disposition under one of the
foregoing methods, less any accrued market discount previously reported as
ordinary income as partial distributions in reduction of the stated redemption
price at maturity were received. Such purchaser will be required to defer
deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Security over the interest
distributable thereon. The deferred portion of such interest expense in any
taxable year generally will not exceed the accrued market discount on the
Regular Security for such year. 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 or the Regular Security is disposed of. As
an alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Securityholder may elect to include market discount in
income currently as it accrues on all market discount instruments acquired by
such Regular Securityholder in that taxable year or thereafter, in which case
the interest deferral rule will not apply. In Revenue Procedure 92-67, the IRS
set forth procedures for taxpayers (1) electing under Section 1278(b) of the
Code to include market discount in income currently, (2) electing under rules
of Section 1276(b) of the Code to use a constant interest rate to determine
accrued market discount on a security where the holder of the security is
required to determine the amount of accrued market discount at a time prior to
the holder's disposition of the security, and (3) requesting consent to revoke
an election under Section 1278(b) of the Code.
By analogy to the OID Regulations, market discount with respect to a
Regular Security will be considered to be zero if such market discount is less
than 0.25% of the remaining stated redemption price at maturity of such Regular
Security multiplied by the weighted average maturity of the Regular Security
(determined as described above under "Original Issue Discount") remaining after
the date of purchase. Treasury regulations implementing the market discount
rules have not yet been issued, and therefore investors should consult their
own tax advisors regarding the application of these rules as well as the
advisability of making any of the elections with respect thereto.
Premium
A Regular Security purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds such Regular Security as a
"capital asset" within the meaning of Code Section 1221, the Regular
Securityholder may elect under Code Section 171 to amortize such premium under
a constant yield method that reflects compounding based on the interval between
payments on the Regular Securities. The Committee Report indicates a
Congressional intent that the same rules that apply to the accrual of market
discount on installment obligations will also apply to amortizing bond premium
under Code Section 171 on installment obligations such as the Regular
Securities, although it is unclear whether the alternatives to the constant
interest method described above under "Market Discount" are available. Except
as otherwise provided in Treasury regulations yet to be issued, such
amortizable bond premium will be treated as an offset to interest income on a
Regular Security rather than as a separate deduction item. This election, once
made, applies to all taxable obligations held by the taxpayer at the beginning
of the first taxable year to which such election applies and to all taxable
debt obligations thereafter acquired and irrevocable except with the approval
of the IRS. Purchasers who pay a premium for their Regular Securities should
consult their tax advisors regarding the election to amortize premium and the
method to be employed.
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Sale or Exchange of Regular Securities
If a Regular Securityholder sells or exchanges a Regular Security, the
Regular Securityholder will recognize gain or loss equal to the difference, if
any, between the amount received and his adjusted basis in the Regular
Security. The adjusted basis of a Regular Security generally will equal the
cost of the Regular Security to the seller, increased by any original issue
discount or market discount previously included in the seller's gross income
with respect to the Regular Security and reduced by amounts included in the
stated redemption price at maturity of the Regular Security that were
previously received by the seller and by any amortized premium.
Except as described in this paragraph, under "Original Issue Discount"
and under "Market Discount," any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently more than one year). Gain from the
disposition of a Regular Security that might otherwise be capital gain will be
treated as ordinary income (i) if a Regular Security is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the amount
of interest that would have accrued on the Regular Securityholder's net
investment in the conversion transaction at 120% of the appropriate applicable
Federal rate under Code Section 1274(d) in effect at the time the taxpayer
entered into the transaction minus any amount previously treated as ordinary
income with respect to any prior disposition of property that was held as part
of such transaction, (ii) in the case of a noncorporate taxpayer, to the
extent such taxpayer has made an election under Code Section 163(d)(4) to have
net capital gains taxed as investment income at ordinary income rates, or (iii)
in the case of a Regular Security (issued by a REMIC) to the extent that such
gain does not exceed the excess, if any, of (a) the amount that would have been
includible in the gross income of the holder if his yield on such Regular
Security were 110% of the applicable Federal rate under Code Section 1274(d) as
of the date of purchase, over (b) the amount of income actually includible in
the gross income of such holder with respect to the Regular Security. Although
the legislative history to the 1986 Act indicates that the portion of the gain
from disposition of a Regular Security that will be recharacterized as ordinary
income under clause (iii) is limited to the amount of original issue discount
(if any) on the Regular Security that was not previously includible in income,
the applicable Code provision contains no such limitation. In addition, gain
or loss recognized from the sale of a Regular Security by certain banks or
thrift institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c). In the case of a Regular Security subject to the new
contingent payment rules issued on January 19, 1993 as described above under
"Original Issue Discount," any gain on the sale or exchange of such Security is
treated as interest income.
TAXATION OF RESIDUAL SECURITIES
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will
be includible as ordinary income or loss in determining the federal taxable
income of holders of Residual Securities ("Residual Securityholders"), and will
not be taxed separately to the REMIC Pool. The daily portions of REMIC taxable
income or net loss of a Residual Securityholder are determined by allocating
the REMIC Pool's taxable income or net loss for each calendar quarter ratably
to each day in such quarter and by allocating such daily portion among the
Residual Securityholders in proportion to their respective holdings of Residual
Securities in the REMIC Pool on such day. REMIC taxable income is generally
determined in the same manner as the taxable income of an individual using a
calendar year and the accrual method of accounting, except that (i) the
limitation on deductibility of investment interest expense and expenses for the
production of income do not apply, (ii) all bad loans will be deductible as
business bad debts and (iii) the limitation on the deductibility of interest
and expenses related to tax-exempt income will apply. REMIC taxable income
generally means the REMIC Pool's gross income, including interest, original
issue discount income and market discount income, if any, on the Mortgage
Loans, plus income on reinvestment of cash flows and reserve assets, minus
deductions, including interest and original issue discount expense on the
Regular Securities, servicing fees on the Mortgage Loans and other
administrative expenses of the REMIC Pool, amortization of premium, if any,
with respect to the Mortgage Loans, and any tax imposed on the REMIC's income
from foreclosure property. The requirement that Residual Securityholders report
their pro rata share of taxable income or net loss of the REMIC Pool will
continue until there are no Securities of any Class of the related Series
outstanding.
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The taxable income recognized by a Residual Securityholder in any
taxable year will be affected by, among other factors, the relationship between
the timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage Loans,
on the one hand, and the timing of deductions for interest (including original
issue discount) on the Regular Securities, on the other hand. Because of the
way REMIC taxable income is calculated, a Residual Securityholder may recognize
"phantom" income (i.e., income recognized for tax purposes in excess of income
as determined under financial accounting or economic principles) which will be
matched in later years by a corresponding tax loss or reduction in taxable
income, but which could lower the yield to Residual Securityholders due to the
lower present value of such loss or reduction. For example, if an interest in
the Mortgage Loans is acquired by the REMIC Pool at a discount, and one or more
of such Mortgage Loans is prepaid, the Residual Securityholder may recognize
taxable income without being entitled to receive a corresponding amount of cash
because (i) the prepayment may be used in whole or in part to make
distributions in reduction of principal on the Regular Securities and (ii) the
discount income on the Mortgage Loans which is includible in the REMIC's
taxable income may exceed the interest and discount deduction allowed to the
REMIC upon such distributions on the Regular Securities. When there is more
than one class of Regular Securities that distribute principal sequentially,
this mismatching of income and deductions is particularly likely to occur in
the early years following issuance of the Regular Securities when distributions
in reduction of principal are being made in respect of earlier maturing classes
of Regular Securities to the extent that such classes are not issued with
substantial discount. If taxable income attributable to such a mismatching is
realized, in general, losses would be allowed in later years as distributions
on the later classes of Regular Securities are made. Taxable income may also be
greater in earlier years than in later years as a result of the fact that
interest expense deductions, expressed as a percentage of the outstanding
principal amount of such a Series of Regular Securities, may increase over time
as distributions in reduction of principal are made on the lower yielding
classes of Regular Securities, whereas interest income with respect to any
given Mortgage Loan will remain constant over time as a percentage of the
outstanding principal amount of that loan. Consequently, Residual
Securityholders must have sufficient other sources of cash to pay any federal,
state or local income taxes due as a result of such mismatching or unrelated
deductions against which to offset such income. Prospective investors should be
aware, however, that a portion of such income may be ineligible for offset by
such investor's unrelated deductions. See the discussion of "excess inclusions"
below under "-- Treatment of Certain Items of REMIC Income and Expense --
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions." The
timing of such mismatching of income and deductions described in this paragraph,
if present with respect to a Series of Securities, may have a significant
adverse effect upon the Residual Securityholder's after-tax rate of return. In
addition, a Residual Securityholder's taxable income during certain periods may
exceed the income reflected by such Residual Securityholder for such periods in
accordance with generally accepted accounting principles. Investors should
consult their own advisors concerning the proper tax and accounting treatment of
their investment in Residual Securities.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Securityholder is limited to the adjusted basis of the
Residual Security as of the close of the quarter (or time of disposition of the
Residual Security if earlier), determined without taking into account the net
loss for the quarter. The initial adjusted basis of a purchaser of a Residual
Security is the amount paid for such Residual Security. Such adjusted basis
will be increased by the amount of taxable income of the REMIC Pool reportable
by the Residual Securityholder and decreased by the amount of loss of the REMIC
Pool reportable by the Residual Securityholder. A cash distribution from the
REMIC Pool also will reduce such adjusted basis (but not below zero). Any loss
that is disallowed on account of this limitation may be carried over
indefinitely with respect to the Residual Securityholder as to whom such loss
was disallowed and may be used by such Residual Securityholder only to offset
any income generated by the same REMIC Pool. The ability of a Residual
Securityholder to deduct net losses with respect to a Residual Security may be
subject to additional limitations under the Code, as to which Residual
Securityholders should consult their tax advisors.
A Residual Securityholder will not be permitted to amortize directly the
cost of its Residual Security as an offset to its share of the taxable income
of the related REMIC Pool. However, such taxable income will not include cash
received by the REMIC Pool that represents a recovery of the REMIC Pool's basis
in its assets. Such recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Securities over their life.
However, in view of the possible acceleration of the income of Residual
Securityholders described above under "Taxation of REMIC Income," the period of
time over which such issue price is effectively amortized may be longer than
the economic life of the Residual Securities.
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If a Residual Security has a negative value, it is not clear whether its
issue price would be considered to be zero or such negative amount for purposes
of determining the REMIC Pool's basis in its assets. The Final REMIC
Regulations do not address whether residual interests could have a negative
basis and a negative issue price. The Company does not intend to treat a Class
of Residual Securities as having a value of less than zero for purposes of
determining the bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of a Residual
Securityholder (other than an original holder) in the Residual Security is
greater that the corresponding portion of the REMIC Pool's basis in the
Mortgage Loans or the Mortgage Loans underlying the Agency Securities, the
Residual Securityholder will not recover a portion of such basis until
termination of the REMIC Pool unless Treasury regulations yet to be issued
provide for periodic adjustments to the REMIC income otherwise reportable by
such holder. The Final REMIC Regulations do not so provide. See "Treatment of
Certain Items of REMIC Income and Expense -- Market Discount" below regarding
the basis of Mortgage Loans to the REMIC Pool and "Sale or Exchange of a
Residual Security" below regarding possible treatment of a loss upon
termination of the REMIC Pool as a capital loss.
Treatment of Certain Items of REMIC Income and Expense
Original Issue Discount. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original issue
discount income on Regular Securities as described above under "Taxation of
Regular Securities -- Original Issue Discount", without regard to the de
minimis rule described therein.
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool in such
Mortgage Loans is exceeded by their unpaid principal balances.
The REMIC Pool's basis in such Mortgage Loans is generally the fair market
value of the Mortgage Loans immediately after the transfer thereof to the REMIC
Pool. The Final REMIC Regulations provide that such basis is equal in the
aggregate to the issue prices of all regular and residual interests in the
REMIC Pool. In respect of Mortgage Loans that have market discount to which
Code Section 1276 applies, the accrued portion of such market discount would be
recognized currently by the REMIC as an item of ordinary income. Market
discount income generally should accrue in the manner described above under
"Taxation of Regular Securities -- Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage
Loans exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Loans at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in Mortgage
Loans is the fair market value of the Mortgage Loans, based on the aggregate of
the issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner analogous
to the discussion above under "Taxation of Regular Securities -- Premium," a
person that holds a Mortgage Loan as a capital asset under Code Section 1221
may elect under Code Section 171 to amortize premium on Mortgage Loans
originated after September 27, 1985 under a constant yield method. Amortizable
bond premium will be treated as an offset to interest income on the Mortgage
Loans, rather than as a separate deduction item. Because substantially all of
the borrowers with respect to the Mortgage Loans are expected to be
individuals, Code Section 171 will not be available for premium on Mortgage
Loans originated on or prior to September 27, 1985. Premium with respect to
such Mortgage Loans may be deductible in accordance with a reasonable method
regularly employed by the holder thereof. The allocation of such premium pro
rata among principal payments should be considered a reasonable method;
however, the IRS may argue that such premium should be allocated in a different
manner, such as allocating such premium entirely to the final payment of
principal.
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions
A portion of the income allocable to a Residual Security (referred to in
the Code as an "excess inclusion") for any calendar quarter will be subject to
federal income tax in all events. Thus, for example, an excess inclusion (i)
cannot be offset by any unrelated losses or loss carryovers of a Residual
Securityholder, (ii) will be treated as "unrelated business taxable income"
within the meaning of Code Section 512 if the Residual Securityholder is a
pension fund or any other organization that is
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subject to tax only on its unrelated business taxable income and (iii) is not
eligible for any reduction in the rate of withholding tax in the case of a
Residual Securityholder that is a foreign investor, as further discussed in
"Taxation of Certain Foreign Investors -- Residual Securities" below. Members
of an affiliated group are treated as one corporation for purposes of applying
the limitations on offset of excess inclusion income.
Except as discussed in the following paragraph, with respect to excess
inclusions from Residual Securities without "significant value," for any
Residual Securityholder, the excess inclusion for any calendar quarter is the
excess, if any, of (i) the income of such Residual Securityholder for that
calendar quarter from its Residual Security, over (ii) the sum of the "daily
accruals" (as defined below) for all days during the calendar quarter on which
the Residual Securityholder holds such Residual Security. For this purpose, the
daily accruals with respect to a Residual Security are determined by allocating
to each day in the calendar quarter its ratable portion of the product of the
"adjusted issue price" (as defined below) of the Residual Security at the
beginning of the calendar quarter and 120 percent of the "Federal long-term
rate" in effect at the time the Residual Security is issued. For this purpose,
the "adjusted issue price" of a Residual Security at the beginning of any
calendar quarter equals the issue price of the Residual Security (adjusted for
contributions), increased by the amount of daily accruals for all prior
quarters, and decreased (but not below zero) by the aggregate amount of
payments made on the Residual Security before the beginning of such quarter.
The Federal long-term rate is an average of current yields on Treasury
securities with a remaining term of greater than nine years, computed and
published monthly by the IRS.
The Code provides that to the extent provided in regulations, as an
exception to the general rule described above, the entire amount of income
accruing on a Residual Security will be treated as an excess inclusion if the
Residual Securities in the aggregate are considered not to have "significant
value." The Treasury Department has not yet provided regulations in this
respect and the Final REMIC Regulations did not adopt this rule. The Small
Business Job Protection Act ("SBJPA") of 1996 has eliminated the special rule
permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess
inclusion income from Residual Securities that have "significant value" within
the meaning of the Final REMIC Regulations, effective for taxable years
beginning after December 31, 1995, except with respect to Residual Securities
continuously held by thrift institutions since November 1, 1995.
In addition, the SBJPA provides three rules for determining the effect
of excess inclusions on the alternative minimum taxable income of a Residual
Securityholder. First, alternative minimum taxable income for a Residual
Securityholder is determined without regard to the special rule, discussed
above, that taxable income cannot be less than excess inclusions. Second, a
Residual Securityholder's alternative minimum taxable income for a taxable
year cannot be less than the excess inclusions for the year. Third, the amount
of any alternative minimum tax net operating loss deduction must be computed
without regard to any excess inclusions. These rules are effective for taxable
years beginning after December 31, 1986, unless a Residual Securityholder
elects to have such rules apply only to taxable years beginning after August
20, 1996.
Under Treasury regulations to be promulgated, a portion of the dividends
paid by a REIT which owns a Residual Security are to be designated as excess
inclusions in an amount corresponding to the Residual Security's allocable
share of the excess inclusions. Similar rules apply in the case of regulated
investment companies, common trust funds and cooperatives. Thus, investors in
such entities which own a Residual Security will be subject to the limitations
on excess inclusions described above. The Final REMIC Regulations do not
provide guidance on this issue.
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Mark to Market Rules
A REMIC residual interest acquired after January 3, 1995 cannot be
market-to-market.
Tax-Related Restrictions on Transfer of Residual Securities
Disqualified Organizations. If legal title or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Security for periods after the transfer and (ii) the highest marginal
federal income tax rate applicable to corporations. The Final REMIC Regulations
provide that the anticipated excess inclusions are based on actual prepayment
experience to the date of the transfer and projected payments based on the
Prepayment Assumption. The present value discount rate equals the applicable
Federal rate under Code Section 1274(d) that would apply to a debt instrument
that was issued on the date the Disqualified Organization acquired the Residual
Security and whose term ended on the close of the last quarter in which excess
inclusions were expected to accrue with respect to the Residual Security. Such
a tax generally would be imposed on the transferor of the Residual Security,
except that where such transfer is through an agent (including a broker,
nominee, or other middleman) for a Disqualified Organization, the tax would
instead be imposed on such agent. However, a transferor of a Residual Security
would in no event be liable for such tax with respect to a transfer if the
transferee furnishes to the transferor an affidavit that the transferee is not
a Disqualified Organization and, as of the time of the transfer, the transferor
does not have actual knowledge that such affidavit is false. The tax also may
be waived by the Treasury Department if the Disqualified Organization promptly
disposes of the Residual Security and the transferor pays income tax at the
highest corporate rate on the excess inclusions for the period the Residual
Security is actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Security during a taxable year and
a Disqualified Organization is the record holder of an equity interest in such
entity, then a tax is imposed on such entity equal to the product of (i) the
amount of excess inclusions that are allocable to the interest in the Pass-
Through Entity during the period such interest is held by such Disqualified
Organization, and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that (i)
states under penalty of perjury that it is not a Disqualified Organization or
(ii) furnishes a social security number and states under penalties of perjury
that the social security number is that of the transferee, provided that during
the period such person is the record holder of the Residual Security, the
Pass-Through Entity does not have actual knowledge that such affidavit is
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 (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors
is not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, and (ii) "Pass-Through
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
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Treasury regulations yet to be issued, any person holding an interest in a
Pass-Through Entity as a nominee for another will, with respect to such
interest, be treated as a Pass-Through Entity.
The Pooling Agreement or the Indenture, as applicable, with respect to a
Series of Securities will provide that neither legal title nor beneficial
interest in a Residual Security may be transferred or registered unless (i) the
proposed transferee provides to the Company and the Trustee an affidavit to the
effect that such transferee is not a Disqualified Organization, is not
purchasing such Residual Securities on behalf of a Disqualified Organization
(i.e., as a broker, nominee or middleman thereof) and is not an entity 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 provides a statement in
writing to the Company and the Trustee that it has no actual knowledge that
such affidavit is false. Moreover, the Pooling Agreement or Indenture, as
applicable, 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. Each Residual Security with respect to a Series will
bear a legend referring to such restrictions on transfer, and each Residual
Securityholder will be deemed to have agreed, as a condition of ownership
thereof, to any amendments to the related Pooling Agreement or Indenture, as
applicable, required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the IRS and to the requesting party
within 60 days of the request, and the Company or the Trustee may charge a fee
for computing and providing such information.
Noneconomic Residual Interests. The Final REMIC Regulations would
disregard certain transfers of Residual Securities, in which case the
transferor would continue to be treated as the owner of the Residual Securities
and thus would continue to be subject to tax on its allocable portion of the
net income of the REMIC Pool. Under the Final REMIC Regulations, a transfer of
a "noneconomic residual interest" (defined below) to a Residual Securityholder
(other than a Residual Securityholder who is not a U.S. Person, as defined
below under "Foreign Investors") is disregarded for all federal income tax
purposes unless no significant purpose of the transfer is to enable the
transferor to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of the transfer, (i) the
present value of the expected future distributions on the residual interest 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 from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes. The anticipated excess inclusions and the present
value rate are determined in the same manner as set forth above under
"Disqualified Organizations." A significant purpose to impede the assessment or
collection of tax exists if the transferor, at the time of the transfer, either
knew or should have known (had "improper knowledge") that the transferee would
be unwilling or unable to pay taxes due on its share of the taxable income of
the REMIC. Under the Final REMIC Regulations, a transferor is presumed not to
have improper knowledge if (i) the transferor conducted, at the time of the
transfer, a reasonable investigation of the financial condition of the
transferee and, as a result of the investigation, the transferor 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 come due in the future; and (ii) the transferee represents to
the transferor that it understands that, as the holder of the noneconomic
residual interest, the transferee may incur tax liabilities in excess of any
cash flows generated by the residual interest and that the transferee intends
to pay taxes associated with holding of residual interest as they become due.
The Pooling Agreement or Indenture, as applicable, will require the transferee
of a Residual Security to state as part of the affidavit described above under
the heading "Disqualified Organizations" that such transferee (i) has
historically paid its debts as they come due, (ii) intends to continue to pay
its debts as they come due in the future, (iii) understands that, as the holder
of a noneconomic Residual Security, it may incur tax liabilities in excess of
any cash flows generated by the Residual Security, and (iv) intends to pay any
and all taxes associated with holding the Residual Security as they become due.
The transferor must have no reason to believe that such statement is untrue.
Foreign Investors. The Final REMIC Regulations provide that the
transfer of a Residual Security that has "tax avoidance potential" to a
"foreign person" will be disregarded for all federal tax purposes. This rule
appears intended to apply to a transferee who is not a "U.S. Person" (as
defined below), unless such transferee's income is effectively connected with
the conduct of a trade or business within the United States. A Residual
Security is deemed to have tax avoidance potential unless, at the time of the
transfer, the transferor reasonably expects that, for each excess inclusion,
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(i) the REMIC Pool will distribute to the transferee residual interest holder
an amount that will equal at least 30% of the excess inclusions and (ii) that
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. If the non-U.S. Person transfers the Residual
Security back to a U.S. Person, the transfer will be disregarded and the
foreign transferor will continue to be treated as the owner unless arrangements
are made so that the transfer does not have the effect of allowing the
transferor to avoid tax on accrued excess inclusions.
The Prospectus Supplement relating to a Series of Securities may provide
that a Residual Security may not be purchased by or transferred to any person
that is not a U.S. Person or may describe the circumstances and restrictions
pursuant to which such a transfer may be made. The term "U.S. Person" means a
citizen or resident of the United States, a corporation, partnership or other
entity created or organized in or under the laws of the United States or any
political subdivision thereof, an estate that is subject to U.S. federal income
tax regardless of the source of its income or a trust if a court within the
United States is able to exercise primary supervision over the administration of
the trust and one or more United States fiduciaries have authority to control
all substantial decisions of the trust.
Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual
Securityholder will recognize gain or loss equal to the excess, if any, of the
amount realized over the adjusted basis (as described above under "Basis and
Losses") of such Residual Securityholder in such Residual Security at the time
of the sale or exchange. In addition to reporting the taxable income of the
REMIC Pool, a Residual Securityholder will have taxable income to the extent
that any cash distribution to him from the REMIC Pool exceeds such adjusted
basis on that Distribution Date or Payment Date. Such income will be treated as
gain from the sale or exchange of the Residual Security. It is possible that
the termination of the REMIC Pool may be treated as a sale or exchange of a
Residual Securityholder's Residual Security, in which case, if the Residual
Securityholder has an adjusted basis in his Residual Security remaining when
his interest in the REMIC Pool terminates, and if he holds such Residual
Security as a capital asset under Code Section 1221, then he will recognize a
capital loss at that time in the amount of such remaining adjusted basis.
The Committee Report provides that, except as provided in Treasury
regulations yet to be issued, the wash sale rules of Code Section 1091 will
apply to dispositions of Residual Securities. Consequently, losses on
dispositions of Residual Securities will be disallowed where the seller of the
Residual Security, during the period beginning six months before the sale or
disposition of the Residual Security 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 residual interest in any REMIC or any
interest in a "taxable mortgage pool" (such as a non-REMIC owner trust) that is
economically comparable to a Residual Security. In any event, any loss
realized by a Residual Securityholder on the sale will not be deductible, but,
instead, will increase such Residual Securityholder's adjusted basis in the
newly acquired assets.
Taxes That May Be Imposed on the REMIC Pool
Prohibited Transactions. Net income from certain transactions by the
REMIC Pool, called prohibited transactions, will not be part of the calculation
of income or loss includible in the federal income tax returns of Residual
Securityholders, but rather will be taxed directly to the REMIC Pool at a 100%
rate. Prohibited transactions generally include (i) the disposition of a
qualified mortgage other than for (a) substitution within two years of the
Startup Day for a defective (including a defaulted) obligation (or repurchase
in lieu of substitution of a defective (including a defaulted) obligation at
any time) or for any qualified mortgage within three months of the Startup Day,
(b) foreclosure, default or imminent default of a qualified mortgage, (c)
bankruptcy or insolvency of the REMIC Pool or (d) a qualified (complete)
liquidation, (ii) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold, (iii) the
receipt of compensation for services or (iv) the receipt of gain from
disposition of cash flow investments other than pursuant to a qualified
liquidation. Notwithstanding (i) and (iv), it is not a prohibited transaction
to sell REMIC Pool property to prevent a default on Regular Securities as a
result of a default on qualified mortgages or to facilitate a clean-up call
(generally, an optional termination to save administrative costs when no more
than a small percentage of the Securities is outstanding). The Final REMIC
Regulations indicate that the modification of a Mortgage Loan generally will
not be treated as a disposition if it is occasioned by a default or reasonably
foreseeable default, an assumption of the Mortgage Loan, the waiver of a due-
on-sale or encumbrance clause or the conversion of an interest rate by a
borrower pursuant to the terms of a convertible adjustable rate Mortgage Loan.
Final REMIC Regulations also provide that the modification of mortgage loans
underlying pass-through certificates will
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not be treated as a modification of the Agency Securities, provided that the
trust issuing the pass-through certificates was not created to avoid prohibited
transaction rules.
Contributions to the REMIC Pool After the Startup Day. In general, the
REMIC Pool will be subject to a tax at a 100% rate on the value of any property
contributed to the REMIC Pool after the Startup Day. Exceptions are provided
for cash contributions to the REMIC Pool (i) during the three months following
the Startup Day, (ii) made to a qualified reserve fund by a Residual
Securityholder, (iii) in the nature of a guarantee, (iv) made to facilitate a
qualified liquidation or clean-up call and (v) as otherwise permitted in
Treasury regulations yet to be issued.
Net Income from Foreclosure Property. The REMIC Pool will be subject to
federal income tax at the highest corporate rate on "net income from
foreclosure property," determined by reference to the rules applicable to real
estate investment trusts. Generally, property acquired by the REMIC Pool
through foreclosure or deed in lieu of foreclosure would be treated as
"foreclosure property" for a period of two years, with possible extensions. Net
income from foreclosure property generally means (i) gain from the sale of a
foreclosure property that is inventory property and (ii) gross income from
foreclosure property other than qualifying rents and other qualifying income
for a real estate investment trust.
Liquidation of the REMIC Pool
If a REMIC Pool and the Trustee adopt a plan of complete liquidation,
within the meaning of Code Section 860F(a)(4)(A)(i) and sell all of the REMIC
Pool's assets (other than cash) within a 90-day period beginning on the date of
the adoption of the plan of liquidation, any gain on the sale of its assets
will not result in a prohibited transaction tax, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims against the REMIC Pool) to holders
of Regular Securities and Residual Securityholders within the 90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. Treasury
regulations provide that, except where there is a single Residual
Securityholder for an entire taxable year, the REMIC Pool generally will be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination by the IRS of any adjustments to,
among other things, items of REMIC income, gain, loss, deduction or credit in a
unified administrative proceeding. Generally, the Company or the Trustee will
be obligated to act as "tax matters person," as defined in applicable Treasury
regulations, with respect to the REMIC Pool, in its capacity as either Residual
Securityholder or agent of the Residual Securityholders. If the Code or
applicable Treasury regulations do not permit the Company or the Trustee to act
as tax matters person in its capacity as agent of the Residual Securityholders,
the Residual Securityholder chosen by the Residual Securityholders or such
other person specified pursuant to Treasury regulations will be required to act
as tax matters person.
Treasury regulations provide that a holder of a Residual Security is not
required to treat items on its return consistently with their treatment on the
REMIC Pool's return if a holder owns 100% of the Residual Securities for the
entire calendar year. Otherwise, each holder of a Residual Security is required
to treat items on its return consistently with their treatment on the REMIC
Pool's return, unless the holder of a Residual Security either files a
statement identifying the inconsistency or establishes that the inconsistency
resulted from incorrect information received from the REMIC Pool. The IRS may
assess a deficiency resulting from a failure to comply with the consistency
requirement without instituting an administrative proceeding at the REMIC Pool
level.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that such itemized deductions, in the aggregate, do
not exceed 2% of the investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise
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allowable for a taxable year of an individual taxpayer will be reduced by the
lesser of (i) 3% of the excess, if any, of adjusted gross income over a
specified amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for such year. In the case of a REMIC Pool, such deductions may
include deductions under Code Section 212 for servicing fees and all
administrative and other expenses relating to the REMIC Pool or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it holds
in another REMIC. Such investors who hold REMIC Securities either directly or
indirectly through certain pass-through entities may have their pro rata share
of such expenses allocated to them as additional gross income, but may be
subject to such limitation on deductions. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Treasury regulations provide that the additional gross income and corresponding
amount of expenses generally are to be allocated entirely to the holders of
Residual Securities in the case of a REMIC Pool that would not qualify as a
fixed investment trust in the absence of a REMIC election. However, such
additional gross income and limitation on deductions will apply to the allocable
portion of such expenses to holders of Regular Securities, as well as holders of
Residual Securities, where such Regular Securities are issued in a manner that
is similar to pass-through certificates in a fixed investment trust. In general,
such allocable portion will be determined based on the ratio that a REMIC
Securityholder's income, determined on a daily basis, bears to the income of all
holders of Regular Securities and Residual Securities with respect to a REMIC
Pool. As a result, individuals, estates or trusts holding REMIC Securities
(either directly or indirectly through a grantor trust, partnership, S
corporation, REMIC, or certain other pass-through entities described in the
foregoing Treasury regulations) may have taxable income in excess of the
interest income at the pass-through rate or Bond interest rate on Regular
Securities that are issued in a single class or otherwise consistently with
fixed investment trust status or in excess of cash distributions for the related
period on Residual Securities.
TAXATION OF CERTAIN FOREIGN INVESTORS
Regular Securities
Interest, including original issue discount, distributable to Regular
Securityholders who are nonresident aliens, foreign corporations, or other Non-
U.S. Persons (as defined below), will be considered "portfolio interest" and
therefore, generally will not be subject to 30% United States withholding tax,
provided that such Non-U.S. Person (i) is not a "10-percent shareholders"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (ii) provides the
Trustee, or the person who would otherwise be required to withhold tax from
such distributions under Code Section 1441 or 1442, with an appropriate
statement, signed under penalties of perjury, identifying the beneficial owner
and stating, among other things, that the beneficial owner of the Regular
Security is a Non-U.S. Person. If such statement, or any other required
statement, is not provided, 30% withholding will apply unless reduced or
eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Security is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Security. The term "Non-U.S. Person" means any person who is not a U.S. Person.
Payments on Regular Securities may subject a Non-U.S. Person to U.S. federal
income and withholding tax where such foreign person also owns, actually or
constructively, Residual Securities issued by the same REMIC, notwithstanding
compliance with the certification requirements discussed above.
Residual Securities
The Committee Report indicates that amounts paid to Residual
Securityholders who are Non-U.S. Persons are treated as interest for purposes
of the 30% (or lower treaty rate) United States withholding tax. Treasury
regulations provide that amounts distributed to Residual Securityholders
qualify as "portfolio interest," subject to the conditions described in
"Regular Securities" above, but only to the extent that (i) the Mortgage Loans
were issued after July 18, 1984 and (ii) the Trust Property or segregated pool
of assets therein (as to which a separate REMIC election will be made), to
which the Residual Security relates, consists of obligations issued in
"registered form" within the meaning of Code Section 163(f)(1). Generally,
Mortgage Loans will not be, but certificated regular interests in another REMIC
Pool will be, considered obligations issued in registered form. Furthermore, a
Residual Securityholder will not be
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entitled to any exemption from the 30% withholding tax (or lower treaty rate)
to the extent of that portion of REMIC taxable income that constitutes an
"excess inclusion." See "Treatment of Certain Items of REMIC Income and Expense
- -- Limitations on Offset or Exemption of REMIC Income; Excess Inclusions." If
the amounts paid to Residual Securityholders who are Non-U.S. Persons are
effectively connected with the conduct of a trade or business within the United
States by such Non-U.S. Persons, 30% (or lower treaty rate) withholding will
not apply. Instead, the amounts paid to such Non-U.S. Persons will be subject to
United States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account for
purposes of withholding only when paid or otherwise distributed (or when the
Residual Security is disposed of) under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See "--
Tax-Related Restrictions on Transfer of Residual Securities -- Foreign
Investors" above concerning the disregard of certain transfers having "tax
avoidance potential." Investors who are Non-U.S. Persons should consult their
own tax advisors regarding the specific tax consequences to them of owning
Residual Securities.
BACKUP WITHHOLDING
Distributions made on the Regular Securities, and proceeds from the sale
of the Regular Securities to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under certain circumstances, principal distributions) unless the Regular
Securityholder complies with certain reporting and/or certification procedures,
including the provision of its taxpayer identification number to the Trustee,
its agent or the broker who effected the sale of the Regular Security, or such
Securityholder is otherwise an exempt recipient under applicable provisions of
the Code. Any amounts to be withheld from distribution on the Regular
Securities would be refunded by the IRS or allowed as a credit against the
Regular Securityholder's federal income tax liability.
REPORTING REQUIREMENTS
Reports of accrued interest and original issue discount will be made
annually to the IRS and to individuals, estates, nonexempt and non-charitable
trusts, and partnerships who are either holders of record of Regular Securities
or beneficial owners who own Regular Securities through a broker or middleman
as nominee. All brokers, nominees and all other nonexempt holders of record of
Regular Securities (including corporations, noncalendar year taxpayers,
securities or commodities dealers, real estate investment trusts, investment
companies, common trust funds, thrift institutions and charitable trusts) may
request such information for any calendar quarter by telephone or in writing by
contacting the person designated in IRS Publication 938 with respect to a
particular Series of Regular Securities. Holders through nominees must request
such information from the nominee. Treasury regulations provide that
information necessary to compute the accrual of any market discount on the
Regular Securities must also be furnished.
The IRS's Form 1066 has an accompanying Schedule Q, Quarterly Notice to
Residual Interest Holders of REMIC Taxable Income or Net Loss Allocation.
Treasury regulations require that Schedule Q be furnished by the REMIC Pool to
each Residual Securityholder by the end of the month following the close of
each calendar quarter (41 days after the end of a quarter under proposed
Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Securityholders, furnished annually, if applicable, to holders of Regular
Securities, and filed annually with the IRS concerning Code Section 67 expenses
(See "-- Limitations on Deduction of Certain Expenses" above) allocable to such
holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Securityholders, furnished annually to holders of Regular
Securities, and filed annually with the IRS concerning the percentage of the
REMIC Pool's assets meeting the qualified asset tests described above under
"-- Status of REMIC Securities."
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FEDERAL INCOME TAX CONSEQUENCES FOR SECURITIES AS TO
WHICH NO REMIC ELECTION IS MADE
NON-REMIC BONDS
With respect to each Series of Bonds for which the Issuer does not make
a REMIC election, ("Non-REMIC Bonds"), no regulations, published rulings, or
judicial decisions exist that discuss the characterization for federal income
tax purposes of securities with terms substantially the same as the Non-REMIC
Bonds. Counsel to the Company, however, will deliver their opinion that the
Non-REMIC Bonds will be treated for federal income tax purposes as
indebtedness, and not as an ownership interest in the Mortgage Assets, or as an
equity interest in the Issuer or in a separate association taxable as a
corporation. The following general discussion of the anticipated federal
income tax consequences of the purchase, ownership and disposition of Non-REMIC
Bonds, to the extent it relates to matters of law or legal conclusions with
respect thereto, represents the opinion of counsel to the Company, subject to
any qualifications set forth herein. In addition, counsel to the Company has
prepared or reviewed the statements in this Prospectus under the heading
"Certain Federal Income Tax Consequences - Federal Income Tax Consequences for
Securities as to Which No REMIC Election Is Made - Non-REMIC Bonds," and is of
the opinion that such statements are correct in all material respects. Such
statements do not purport to furnish information in the level of detail or with
the attention to an investor's specific tax circumstances that would be
provided by an investor's own tax advisor. Accordingly, each investor is
advised to consult its own tax advisors with regard to the tax consequences to
it of investing in Non-REMIC Bonds.
For federal income tax purposes, (i) Non-REMIC Bonds held by a thrift
institution taxed as a domestic building and loan association will not
constitute "loans . . . secured by an interest in real property" within the
meaning of Code Section 7701(a)(19)(C)(v); (ii) interest on Non-REMIC Bonds held
by a real estate investment trust will not be treated as "interest on
obligations secured by mortgages in real property or on interests in real
property" within the meaning of Code Section 856(c)(3)(B); (iii) Non-REMIC Bonds
held by a real estate investment trust will not constitute "real estate assets"
or "Government securities" and (iv) Non-REMIC Bonds held by a regulated
investment company will not constitute "Government securities" within the
meaning of Code Section 851(b)(4)(A)(i).
Non-REMIC Bonds will be subject to the same rules of taxation as Regular
Securities issued by a REMIC, as described above, except that income reportable
on Non-REMIC Bonds is not required to be reported under the accrual method
unless the Holder otherwise uses the accrual method.
STANDARD CERTIFICATES
General
With respect a Series of Certificates issued under a Pooling Agreement
for which no election is made to treat the related Trust Property (or a
segregated pool of assets therein) as a REMIC, counsel to the Company will
deliver its opinion to the effect that, assuming compliance with all provisions
of the related Pooling Agreement, the related Trust will be classified as a
grantor trust under subpart E, Part 1 of subchapter J of Chapter 1 of Subtitle
A of the Code and not as an association taxable as a corporation. The
following general discussion of the anticipated federal income tax consequences
of the purchase, ownership and disposition of Standard Certificates, to the
extent it relates to matters of law or legal conclusions with respect thereto,
represents the opinion of counsel to the Company, subject to any qualifications
set forth herein. In addition, counsel to the Company has prepared or reviewed
the statements in this Prospectus under the heading "Certain Federal Income Tax
Consequences - Federal Income Tax Consequences for Securities as to Which No
REMIC Election is Made - Standard Certificates," and is of the opinion that
such statements are correct in all material respects. Such statements are
intended as an explanatory discussion of the possible effects of the
classification of any Trust as a grantor trust for federal income tax purposes
on investors generally and of related tax matters affecting investors
generally, but do not purport to furnish information in the level of detail or
with the attention to an investor's specific tax circumstances that would be
provided by an investor's own tax advisor.
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Accordingly, each investor is advised to consult its own tax advisors with
regard to the tax consequences to it of investing in Standard Certificates.
Where there is no fixed retained yield with respect to the Mortgage Loans
underlying the Certificates of such a Series, and where such Certificates are
not designated as "Stripped Securities," the holder of each such Certificates
in such Series will be treated as the owner of a pro rata undivided interest in
the ordinary income and corpus portions of the Trust Property represented by
his Certificate and will be considered the beneficial owner of a pro rata
undivided interest in each of the Mortgage Loans, subject to the discussion
below under "Premium and Discount -- Recharacterization of Servicing Fees."
Accordingly, the holder of a Certificate of a particular Series will be
required to report on its federal income tax return its pro rata share of the
entire income from the Mortgage Loans represented by its Certificate, including
interest at the coupon rate on such Mortgage Loans, original issue discount (if
any), prepayment fees, assumption fees, and late payment charges received by
the Company or another service provider, in accordance with such
Certificateholder's method of accounting. A Certificateholder generally will be
able to deduct its share of servicing fees and all administrative and other
expenses of the Trust in accordance with his method of accounting, provided
that such amounts are reasonable compensation for services rendered to that
Trust. However, investors who are individuals, estates or trusts who own
Certificates, either directly or indirectly through certain pass-through
entities, will be subject to limitation with respect to certain itemized
deductions described in Code Section 67, including deductions under Code
Section 212 for servicing fees and all such administrative and other expenses
of the Trust, to the extent that such deductions, in the aggregate, do not
exceed two percent of an investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser of (i) 3% of the
excess, if any, of adjusted gross income over a specified amount, adjusted
yearly for inflation or (ii) 80% of the amount of itemized deductions otherwise
allowable for such year. As a result such investors holding Certificates,
directly or indirectly through a pass- through entity, may have aggregate
taxable income in excess of the aggregate amount of cash received on such
Certificates with respect to interest at the pass-through rate on such
Certificates or discount thereon. In addition, such expenses are not deductible
at all for purposes of computing the alternative minimum tax, and may cause such
investors to be subject to significant additional tax liability. Moreover, where
there is fixed retained yield with respect to the Mortgage Loans underlying a
Series of Certificates or where the servicing fees are in excess of reasonable
servicing compensation, the transaction will be subject to the application of
the "stripped bond" and "stripped coupon" rules of the Code, as described below
under "Stripped Certificates" and "Premium and Discount -- Recharacterization of
Servicing Fees," respectively.
Tax Status
To the extent disclosed in the related Prospectus Supplement, counsel
for the Company will deliver its opinion with respect to Certificates described
under this subsection "Standard Certificates" that:
1. A Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be considered
to represent "loans . . . secured by an interest in real property" within the
meaning of Code Section 7701(a)(19)(C)(v), provided that the real property
securing the Mortgage Loans represented by that Certificate is of the type
described in such section of the Code.
2. A Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code Section
856(c)(5)(A) to the extent that the assets of the related Trust consist of
qualified assets, and interest income on such assets will be considered
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B).
3. A Certificate owned by a REMIC will be considered to represent
an "obligation (including any participation or certificate of beneficial
ownership therein) which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A) to the extent that
the assets of the related Trust consist of "qualified mortgages" within the
meaning of Code Section 860G(a)(3).
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An issue arises as to whether buy-down Mortgage Loans may be
characterized in their entirety under the Code provisions cited in the
immediately preceding paragraph. Code Section 593(d)(1)(C) provides that the
term "qualifying real property loan" does not include a loan "to the extent
secured by a deposit in or share of the taxpayer." The application of this
provision to a buy-down fund with respect to a buy-down Mortgage Loan is
uncertain, but may require that a taxpayer's investment in a buy-down Mortgage
Loan be reduced by the buy-down fund. As to the treatment of buy-down Mortgage
Loans as "loans . . . secured by an interest in real property" under Code
Section 7701(a)(19)(C)(v), as "real estate assets" under Code Section
856(c)(5)(A), and as "obligations . . . principally secured by an interest in
real property" under Code Section 860G(a)(3)(A), there is indirect authority
supporting treatment of an investment in a buy-down Mortgage Loan as entirely
secured by real property if the fair market value of the real property securing
the loan exceeds the principal amount of the loan at the time of issuance or
acquisition, as the case may be. There is no assurance that the treatment
described above is proper. Accordingly, Certificateholders are urged to consult
their own tax advisors concerning the effects of such arrangements on the
characterization of such Certificateholder's investment for federal income tax
purposes.
Premium and Discount
Certificateholders are advised to consult with their tax advisors as to
the federal income tax treatment of premium and discount arising either upon
initial acquisition of Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase of a
Certificate will be determined generally as described above under "Federal
Income Tax Consequences for REMIC Securities -- Taxation of Residual Securities
- -- Treatment of Certain Items of REMIC Income and Expense -- Premium."
Original Issue Discount. The IRS has stated in published rulings that,
in circumstances similar to those described herein, the original issue discount
rules will be applicable to a Certificateholder's interest in those Mortgage
Loans as to which the conditions for the application of those sections are met.
Rules regarding periodic inclusion of original issue discount income are
applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate borrowers (other than individuals) originated after
July 1, 1982, and mortgages of individuals originated after March 2, 1984. Such
original issue discount could arise by the charging of points by the originator
of the mortgages in an amount greater than a statutory de minimis exception, to
the extent that the points are not for services provided by the lender. It is
generally not anticipated that adjustable rate Mortgage Loans will be treated
as issued with original issue discount. However, the application of the OID
Regulations to adjustable rate mortgage loans with incentive interest rates or
annual or lifetime interest rate caps may result in original issue discount.
Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
However, Code Section 1272 provides for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage Loans
acquired by a Certificateholder are purchased at a price equal to the then
unpaid principal amount of such Mortgage Loans, no original issue discount
attributable to the difference between the issue price and the original
principal amount of such Mortgage Loans (i.e., points) will be includible by
such holder.
Market Discount. Certificateholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Loans will be determined and
will be reported as ordinary income generally in the manner described above
under "Federal Income Tax Consequences for REMIC Securities -- Taxation of
Residual Securities -- Treatment of Certain Items of REMIC Income and Expense
- -- Market Discount."
Recharacterization of Servicing Fees. If the servicing fees paid to
Servicers were deemed to exceed reasonable servicing compensation, the amount
of such excess would be nondeductible under Code Section 162 or 212. In this
regard, there are no authoritative guidelines for federal income tax purposes
as to either the maximum amount of servicing compensation that may be
considered reasonable in the context of this or similar transactions or
whether, in
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the case of the Certificates, the reasonableness of servicing compensation
should be determined on a weighted average or loan-by-loan basis. If a loan-
by-loan basis is appropriate, the likelihood that such amount would exceed
reasonable servicing compensation as to some of the Mortgage Loans would be
increased. Recently issued IRS guidance indicates that a servicing fee in
excess of reasonable compensation ("excess servicing") will cause the Mortgage
Loans to be treated under the "stripped bond" rules. Such guidance provides
safe harbors for servicing deemed to be reasonable and requires taxpayers to
demonstrate that the value of servicing fees in excess of such amounts is not
greater than the value of the services provided.
Accordingly, if the IRS's approach is upheld, a servicer that receives a
servicing fee in excess of such amounts would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage Loans.
Under the rules of Code Section 1286, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from the right
to receive some or all of the principal payments on the obligation would result
in treatment of such Mortgage Loans as "stripped coupons" and "stripped bonds."
While Certificateholders would still be treated as owners of beneficial
interests in a grantor trust for federal income tax purposes, the corpus of
such trust could be viewed as excluding the portion of the Mortgage Loans the
ownership of which is attributed to a servicer, or as including such portion as
a second class of equitable interest. Applicable Treasury regulations treat
such an arrangement as a fixed investment trust, since the multiple classes of
trust interests should be treated as merely facilitating direct investments in
the trust assets and the existence of multiple classes of ownership interests
is incidental to that purpose. In general, such a recharacterization should not
have any significant effect upon the timing or amount of income reported by a
Certificateholder, except that the income reported by a cash method holder may
be slightly accelerated. See "Stripped Certificates" below for a further
description of the federal income tax treatment of stripped bonds and stripped
coupons.
In the alternative, the amount, if any, by which the servicing fees paid
to the servicers are deemed to exceed reasonable compensation for servicing
could be treated as deferred payments of purchase price by the
Certificateholders to purchase an undivided interest in the Mortgage Loans. In
such event, the present value of such additional payments might be included in
the Certificateholder's basis in such undivided interests for purposes of
determining whether the Certificate was acquired at a discount, at par, or at a
premium. Under this alternative, Certificateholders may also be entitled to a
deduction for unstated interest with respect to each deferred payment. The
Internal Revenue Service may take the position that the specific statutory
provisions of Code Section 1286 described above override the alternative
described in this paragraph. Certificateholders are advised to consult their
tax advisors as to the proper treatment of the amounts paid to the servicers as
set forth herein as servicing compensation or under either of the alternatives
set forth above.
Sale or Exchange of Certificates
Upon sale or exchange of a Certificate, a Certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its aggregate adjusted basis in the Mortgage Loans and other
assets represented by the Certificate. In general, the aggregate 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 by the amount of any losses previously reported with respect to the
Certificate and the amount of any distributions received thereon. Except as
provided above with respect to market discount on any Mortgage Loans, and
except for certain financial institutions subject to the provisions of Code
Section 582(c), any such gain or loss would be capital gain or loss if the
Certificate was held as a capital asset.
STRIPPED CERTIFICATES
General
The following general discussion of the anticipated federal income tax
consequences of the purchase, ownership and disposition of Stripped
Certificates, to the extent it relates to matters of law or legal conclusions
with respect thereto, represents the opinion of counsel to the Company, subject
to any qualifications set forth herein. In addition, counsel to the Company
has prepared or reviewed the statements in this Prospectus under the heading
"Certain Federal Income Tax Consequences - Federal Income Tax Consequences for
Securities as to Which No REMIC Election
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<PAGE> 120
is Made - Stripped Certificates," and is of the opinion that such statements
are correct in all material respects. Such statements are intended as an
explanatory discussion of the possible effects of the classification of any
Trust as a grantor trust for federal income tax purposes on investors generally
and of related tax matters affecting investors generally, but do not purport to
furnish information in the level of detail or with the attention to an
investor's specific tax circumstances that would be provided by an investor's
own tax advisor. Accordingly, each investor is advised to consult its own tax
advisors with regard to the tax consequences to it of investing in Stripped
Certificates.
Pursuant to Code Section 1286, the separation of ownership of the right
to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of this
discussion, Certificates for which no REMIC election is made and that are
subject to those rules will be referred to as "Stripped Certificates." The
Certificates will be subject to those rules if (i) the Company or any of its
affiliates retains (for its own account or for purposes of resale), in the form
of fixed retained yield or otherwise, an ownership interest in a portion of the
payments on the Mortgage Loans, (ii) the Company, any of its affiliates or a
servicer is treated as having an ownership interest in the Mortgage Loans to
the extent it is paid (or retains) servicing compensation in an amount greater
than reasonable consideration for servicing the Mortgage Loans (See "Standard
Certificates -- Premium and Discount -- Recharacterization of the Servicing
Fees" above) or (iii) Classes of Certificates are issued in two or more Classes
or subclasses representing the right to non-pro-rata percentages of the
interest and principal payments on the Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or "stripped coupons" with respect
to its pro rata share of all or a portion of the interest payments on each
Mortgage Loan, including the Stripped Certificate's allocable share of the
servicing fees paid, to the extent that such fees represent reasonable
compensation for services rendered. See discussion above under "Standard
Certificates -- Premium and Discount -- Recharacterization of Servicing Fees."
For this purpose the servicing fees will be allocated to the Stripped
Certificates in proportion to the respective offering price of each class (or
subclass) of Stripped Certificates. The holder of a Stripped Certificate
generally will be entitled to a deduction each year in respect of the servicing
fees, as described above under "Standard Certificates -- General," subject to
the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally
as a new obligation issued (i) on the date that the stripped interest is
purchased and (ii) at a price equal to its purchase price or, if more than one
stripped interest is purchased, the share of the purchase price allocable to
such stripped interest. Each stripped interest generally will have original
issue discount equal to the excess of its stated redemption price at maturity
(or, in the case of a stripped coupon, the amount payable on the due date of
such coupon) over its issue price. Although the treatment of Stripped
Certificates for federal income tax purposes is not clear in certain respects
at this time, particularly where such Stripped Certificates are issued with
respect to a Trust containing variable-rate Mortgage Loans, the Company has
been advised by counsel that (i) the Trust will be treated as a grantor trust
under subpart E, Part 1 of subchapter J of Chapter 1 of Subtitle A of the Code
and not as an association taxable as a corporation, and (ii) each Stripped
Certificate should be treated as a single installment obligation for purposes
of calculating original issue discount and gain or loss on disposition. This
treatment is based on the interrelationship of Code Section 1286 and the
regulations thereunder, Code Sections 1272 through 1275, and the OID
Regulations. While under Code Section 1286 computations with respect to
Stripped Certificates arguably should be made in one of the ways described
below under "Taxation of Stripped Certificates -- Possible Alternative
Characterizations," the OID Regulations state, in general, that all debt
instruments issued in connection with the same transaction must be treated as a
single debt instrument. The Trustee will make and report all computations
described below using this aggregate approach, unless substantial legal
authority requires otherwise.
Furthermore, final Treasury regulations issued December 28, 1992 support
the treatment of a Stripped Certificate as a single debt instrument issued on
the date it is originated for purposes of calculating any original issue
discount. The preamble to such regulations states that such regulations are
premised on the assumption that an aggregation approach is appropriate in
determining whether original issue discount on a stripped bond or stripped
coupon is de minimis. In addition, under these regulations, a Stripped
Certificate that represents a right to payments of both interest and principal
may be viewed either as issued with original issue discount or market discount
(as described
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<PAGE> 121
below), at a de minimis original issue discount, or, presumably, at a premium.
The preamble to such regulations also provide that such regulations are
premised on the assumption that generally the interest component of such a
Stripped Certificate would be treated as stated interest under the OID
Regulations. Further, the regulations provide that the purchaser of such a
Stripped Certificate may be required to account for any discount as market
discount rather than original issue discount if either (i) the initial discount
with respect to the Stripped Certificate was treated as zero under the de
minimis rule or (ii) no more than 100 basis points in excess of reasonable
servicing is stripped off the related Mortgage Loans. Any such market discount
would be reportable as described above under "Federal Income Tax Consequences
for REMIC Securities -- Taxation of Regular Securities -- Market Discount,"
without regard to the de minimis rule therein.
Status of Stripped Certificates
Even if Strip Certificates evidence an interest in a Trust consisting of
Mortgage Loans that are "real estate assets" within the meaning of Code Section
856(c)(A), and "loans . . . secured by an interest in real property" within the
meaning of Code Section 7701(a)(19)(C)(v), and the interest (including original
issue discount) income on which is an "interest on obligations secured by
mortgages on real property" within the meaning of Code Section 856(c)(3)(B), it
is unclear whether the Strip Certificates, and the income therefrom, will be so
characterized. However, the policies underlying such sections (namely, to
encourage or require investments in mortgage loans by thrift institutions and
real estate investment trusts) may suggest that such characterization is
appropriate. Counsel to the Company will not deliver any opinion on these
questions. Prospective purchasers to which such characterization of an
investment in Strip Certificates in material should consult their tax advisors
regarding whether the Strip Certificates, and the income therefrom, will be so
characterized.
The Strip Certificates will be "obligation[s] (including any
participation or Certificate of beneficial ownership therein) which . . . [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
Taxation of Stripped Certificates
Original Issue Discount. Except as described above under "General,"
each Stripped Certificate will be considered to have been issued (i) on the
date that the stripped interest is purchased and (ii) at a price equal to its
purchase price or, if more than one stripped interest is purchased, the share
of the purchase price allocable to such stripped interest. Each stripped
interest generally will have original issue discount equal to the excess of its
stated redemption price at maturity (or, in the case of a stripped coupon, the
amount payable on the due date of such coupon) over its issue price. Original
issue discount with respect to a Stripped Certificate must be included in
ordinary income as it accrues, in accordance with a constant yield method that
takes into account the compounding of interest, which may be prior to the
receipt of the cash attributable to such income. Based in part on the OID
Regulations and the amendments to the original issue discount sections of the
Code made by the 1986 Act, counsel has advised the Company that the amount of
original issue discount required to be included in the income of a holder of a
Stripped Certificate (referred to in this discussion as a "Stripped
Certificateholder") in any taxable year likely will be computed generally as
described above under "Federal Income Tax Consequences for REMIC Securities --
Taxation of Regular Securities -- Original Issue Discount." However, with the
apparent exception of a Stripped Certificate issued with de minimis original
issue discount, as described above under "General," the issue price of a
Stripped Certificate will be the purchase price paid by each holder thereof,
and the stated redemption price at maturity will include the aggregate amount
of the payments to be made on the Stripped Certificate to such Stripped
Certificateholder, presumable under the Prepayment Assumption, other than
amounts treated as qualified stated interest.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition of
original issue discount will be either accelerated or decelerated and the
amount of such original issue discount will be either increased or decreased
depending on the relative interests in principal and interest on each Mortgage
Loan represented by such Stripped Certificateholder's Stripped Certificate.
While the matter is not free from doubt, the holder of a Stripped Certificate
should be entitled in the year that it becomes
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<PAGE> 122
certain (assuming no further prepayments) that the holder will not recover a
portion of its adjusted basis in such Stripped Certificate to recognize an
ordinary loss equal to such portion of unrecoverable basis.
Possible Alternative Characterizations. As an alternative to the method
described above, the fact that some or all of the interest payments with
respect to the Stripped Certificates will not be made if the Mortgage Loans are
prepaid could lead to the interpretation that such interest payments are
"contingent" within the meaning of the OID Regulations. Under the rules of the
OID Regulations relating to contingent payments, a projected payment schedule
for the Stripped Certificates would be constructed by the Company. Interest
accrual and adjustments relating to the Stripped Certificates would be
determined under the general rules of the noncontingent bond method described
above. While not free from doubt, counsel for the Company believes that
uncertainty as to the payment of interest arising as a result of the
possibility of prepayment of the Mortgage Loans should not cause the contingent
payment rules under the OID Regulations to apply to interest with respect to
the Stripped Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a
Stripped Certificate prior to its maturity will result in gain or loss equal to
the difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Federal Income Tax Consequences for REMIC Securities -- Taxation
of Regular Securities -- Sale or Exchange of Regular Securities." To the extent
that a subsequent purchaser's purchase price is exceeded by the remaining
payments on the Stripped Certificates, such subsequent purchaser will be
required for federal income tax purposes to accrue and report such excess as if
it were original issue discount in the manner described above. It is not clear
for this purpose whether the assumed prepayment rate that is to be used in the
case of a Stripped Certificateholder other than original Stripped
Certificateholder should be the Prepayment Assumption or a new rate based on
the circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. Where an
investor purchases more than one class of Stripped Certificates, it is
currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of the rules described above.
Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income tax
purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Certificateholder or Stripped Certificateholder at any
time during such year, such information (prepared on the basis described above)
as the Trustee deems to be necessary or desirable to enable such
Certificateholders to prepare their federal income tax returns. Such
information will include the amount of original issue discount accrued on
Certificates held by persons other than Certificateholders exempted from the
reporting requirements. The amounts required to be reported by the Trustee may
not be equal to the proper amount of original issue discount required to be
reported as taxable income by a Certificateholder, other than an original
Certificateholder. The Trustee will also file such original issue discount
information with the IRS. If a Certificateholder fails to supply an accurate
taxpayer identification number or if the Secretary of the Treasury determines
that a Certificateholder has not reported all interest and dividend income
required to be shown on his federal income tax return, 31% backup withholding
may be required in respect of any reportable payments, as described above under
"Federal Income Tax Consequences for REMIC Securities -- Backup Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage Loans
that are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. Persons generally
will be subject to 30% United States withholding tax, or such lower rate as may
be provided for interest by an applicable tax treaty. Accrued original issue
discount recognized by the Certificateholder on the sale or exchange of such a
Certificate also will be subject to federal income tax at the same rate.
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<PAGE> 123
Treasury regulations provide that interest or original issue discount
paid by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements described above under
"Federal Income Tax Consequences for REMIC Securities -- Taxation of Certain
Foreign Investors -- Regular Securities."
PLAN OF DISTRIBUTION
Certificates are being offered hereby in series through one or more
underwriters or groups of underwriters (the "Underwriters"). The related
Prospectus Supplement will set forth the terms of offering of a Series of
Securities, including the public offering or purchase price of each Class of
Securities of such Series being offered thereby or the method by which such
price will be determined and the net proceeds to the Issuer (in the case of a
Series of Bonds) or to the Company (in the case of a Series of Certificates)
from the sale of each such Class. Such Securities will be acquired by the
Underwriters for their own account and may be resold from time to time in one
or more transactions including negotiated transactions, at fixed public
offering prices or at varying prices to be determined at the time of sale or at
the time of commitment therefor. The managing Underwriter or Underwriters with
respect to the offer and sale of a particular Series of Securities will be set
forth on the cover of the Prospectus Supplement relating to such Series and the
members of the underwriting syndicate, if any, will be named in such Prospectus
Supplement.
In connection with the Sale of the Securities, Underwriters may receive
compensation from the related Issuer or the Company or from purchasers of the
Securities in the form of discounts, concessions or commissions. Underwriters
and dealers participating in the distribution of the Securities may be deemed
to be Underwriters in connection with such Certificates, and any discounts or
commissions received by them from the related Issuer or the Company and any
profit on the resale of Securities by them may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended. The
Prospectus Supplement will describe any such compensation paid by the related
Issuer or the Company.
It is anticipated that the underwriting agreement pertaining to the sale
of any Series of Securities will provide that the obligations of the
Underwriters will be subject to certain conditions precedent, that the
Underwriters will be obligated to purchase all such Securities if any are
purchased and that the related Issuer or the Company will indemnify the
underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended.
LEGAL MATTERS
The legality of the Securities and certain federal income tax matters
will be passed upon for the Company by Andrews & Kurth L.L.P., Dallas, Texas.
FINANCIAL INFORMATION AND ADDITIONAL INFORMATION
A new Trust will be formed with respect to each Series of Certificates
and, unless otherwise specified in the Prospectus Supplement, a new Owner Trust
will be formed with respect to each Series of Bonds issued by an Owner Trust.
Unless otherwise specified in the Prospectus Supplement for a Series of
Securities, no Trust will engage in any business activities or have any assets
or obligations prior to the issuance of the related Series of Securities.
Accordingly, no financial statements with respect to any Trust will be included
in this Prospectus or in the related Prospectus Supplement.
Copies of the Registration Statement to which this Prospectus forms a
part and the exhibits thereto are on file at the offices of the Securities and
Exchange Commission in Washington, D.C., and may be obtained at rates
prescribed by the Commission upon request to the Commission and inspected,
without charge, at the offices of the Commission.
Copies of FHLMC's most recent Offering Circular for FHLMC Certificates,
FHLMC's Information Statement and most recent Supplement thereto and any
quarterly report made available by FHLMC can be obtained in writing or calling
FHLMC's Investor Relations Department at 8200 Jones Branch Drive, McLean,
Virginia 22102 (800-336-
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<PAGE> 124
FMPC). The Company did not participate in the preparation of FHLMC's Offering
Circular, Information Statement or any Supplement thereto or any such quarterly
report.
Copies of FNMA's most recent Prospectus for FNMA Certificates and FNMA's
annual report and quarterly financial statements as well as other financial
information are available from the Vice President for Investor Relations of
FNMA, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752-7585). The
Company did not participate in the preparation of FNMA's Prospectus or any such
report, financial statement or other financial information.
EXPERTS
The financial statements incorporated in this prospectus by reference
from the Company's Annual Report (Form 10-K) for the year ended December 31,
1996, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report which is incorporated herein by reference and have been
so incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
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<PAGE> 125
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the Securities, other than underwriting
discounts and commissions*.
<TABLE>
<S> <C>
Filing Fee for Registration Statement....................... $ 303
Legal Fees and Expenses..................................... 696,000
Accounting Fees and Expenses................................ 240,000
Trustee's Fees and Expenses (including counsel fees)........ 150,000
Printing and Engraving Fees................................. 265,000
Blue Sky Fees and Expenses.................................. 60,000
Rating Agency Fees.......................................... 150,000
Miscellaneous............................................... 75,000
----------
Total............................................. $1,636,303
==========
</TABLE>
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* Provided for each Series of Securities on the cover page of the related
Prospectus Supplement.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The form of Underwriting Agreement filed as Exhibit 1.1 hereto will provide
for indemnification by each Underwriter named in the related Terms Agreement of
any officer, director or controlling person of the Company who becomes subject
to liability arising out of an untrue or alleged untrue statement of a material
fact contained in this Registration Statement, the Prospectus filed herewith or
any Preliminary Prospectus, related Prospectus Supplement or related Preliminary
Prospectus Statement, or omission or alleged omission, that was made in reliance
on written information provided to the Issuer by such Underwriter.
The Certificate of Incorporation and Bylaws for Fund America Investors
Corporation II (Exhibit 3.1 and 3.2) provide for indemnification of directors
and officers to the full extent permitted by Delaware law. Section 145 of the
Delaware General Corporation Law provides, in substance, that Delaware
corporations shall have the power, under specified circumstances, to indemnify
their directors, officers, employees and agents in connection with actions,
suits or proceedings brought against them by a third party or in the right of
the corporation, by reason of the fact that they were or are such directors,
officers, employees or agents, against expenses incurred in any such action,
suit or proceeding.
The Bylaws also provide that the Company may, to the full extent permitted
by law, purchase and maintain insurance on behalf of any corporate agent against
any liability which may be asserted against him.
See Item 17(b) below.
ITEM 16. EXHIBITS.
Exhibits --
<TABLE>
<CAPTION>
<C> <S>
1.1 -- Form of Underwriting Agreement.(1)
3.1 -- Certificate of Incorporation of Fund America Investors
Corporation II.(2)
3.2 -- Bylaws of Fund America Investors Corporation II.(2)
3.3 -- Form of Deposit Trust Agreement for Trust Issuer.(1)
4.1 -- Standard Provisions for Pooling and Administration
Agreement.(2)
4.2 -- Standard Provisions for Pooling and Administration
Agreement (Senior Subordinated Structure).(2)
4.3 -- Pooling and Administration Agreement (Series
Provisions).(2)
</TABLE>
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<PAGE> 126
<TABLE>
<CAPTION>
<C> <S>
4.4 -- Pooling and Administration Agreement (Series Provisions
for Senior/Subordinated Structure).(2)
4.5 -- Standard Indenture Provisions.(1)
4.6 -- Form of Terms Indenture.(1)
5.1* -- Opinion of Andrews & Kurth L.L.P. regarding the legality
of the Securities (Asset-Backed Certificates).
5.2* -- Opinion of Andrews & Kurth L.L.P. regarding the legality
of the Securities (Bonds).
8.1* -- Opinion of Andrews & Kurth L.L.P. regarding tax matters.
10.1 -- Representative Form(s) of Mortgage Note(s).(3)
10.2 -- Representative Form of Mortgage.(3)
10.3 -- Specimen of Mortgage Pool Insurance Policy.(2)
10.4 -- Specimen of Special Hazard Insurance Policy.(2)
10.5 -- Specimen of Primary Mortgage Insurance Policy.(3)
10.6 -- Specimen of Standard Hazard Insurance Policy.(3)
10.7 -- Specimen of Bankruptcy Bond.(2)
10.8 -- Form of Servicing Agreement.(2)
10.9 -- Form of Loan Sale Agreement.(2)
10.10 -- Form of Agreement with Clearing Agency.(2)
10.11 -- Representative Form of Note -- Title I Loan.(3)
10.12 -- Representative Form of Contract and Trust Deed -- Title I
Loan.(3)
10.13 -- Form of Management Agreement for Owner Trust.(4)
10.14 -- Form of Funding Agreement.(1)
10.15 -- Form of Management Agreement for Fund America Investors
Corporation II.(1)
23.1* -- Consent of Andrews & Kurth L.L.P. (included as part of
Exhibits 5.1 and 8.1).
23.2* -- Consent of Deloitte & Touche LLP.
24.1** -- Powers of Attorney (included on the signature page
hereto).
25.1 -- Form T-1 Statement of Eligibility (bound separately and
filed with the Commission on October 5, 1995).
27.1* -- Financial Data Schedule.
99.1 -- Form of Senior/Subordinate Prospectus Supplement.(5)
99.2 -- Form of Agency Prospectus Supplement (Pass-Through
Certificates).(1)
99.3 -- Form of Agency Prospectus Supplement (Bonds).(1)
99.4 -- Form of Whole Loan Prospectus Supplement.(1)
99.5 -- Prospectus Supplement dated April 22, 1996, delivered in
connection with the Registrant's Series 1996-A
Certificates issued pursuant to Registration Statement
No. 33-73748.(6)
</TABLE>
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* Filed herewith.
** To be filed by amendment.
(1) Previously filed with the Commission as an exhibit to Amendment No. 3 to the
Registrant's Form S-11 Registration Statement (File No. 33-73748) on October
13, 1994 and incorporated herein by reference.
(2) Previously filed with the Commission as an exhibit to the Registrant's Form
S-11 Registration Statement (File No. 33-56776) on January 7, 1993, and
incorporated herein by reference.
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<PAGE> 127
(3) Previously filed with the Commission as an exhibit to Amendment No. 1 to the
Registrant's Form S-11 Registration Statement (File No. 33-56776) on April
6, 1993, and incorporated herein by reference.
(4) Previously filed with the Commission as an exhibit to Amendment No. 4 to the
Registrant's Form S-3 Registration Statement (File No. 33-73748) on July 14,
1995, and incorporated herein by reference.
(5) Previously filed with the Commission as an exhibit to Amendment No. 1 to the
Registrant's Form S-11 Registration Statement (File No. 33-67202) on
September 7, 1993, and incorporated therein by reference.
(6) Previously filed with the Commission pursuant to Rule 424(b) on April 24,
1996, and incorporated herein by reference.
ITEM 17. UNDERTAKINGS.
(a) The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933, as amended (the "Securities Act"); (ii) to reflect in the
prospectus any facts or events arising after the effective date of this
Registration Statement (or the more recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in this Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement;
provided, however, that no such post-effective amendment shall be required
if the information which would be required to be included in such post-
effective amendment by clauses (i) and (ii) above is contained in periodic
reports filed by the Registrant pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by reference in
this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act, each filing of the Company's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that
is incorporated by reference in this Registration Statement shall be deemed
to be a new registration statement relating to the securities offered
hereby, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(5) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Company pursuant to rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(6) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
II-3
<PAGE> 128
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE> 129
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 (notwithstanding the fact that a security
rating pursuant to Transaction Requirement B.5. has not yet been obtained, which
security rating requirement, in the reasonable belief of the Company, will be
met by the time of sale) and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Denver, State of Colorado, on the 13th day of August, 1997.
FUND AMERICA INVESTORS CORPORATION II
By: /s/ STEVEN B. CHOTIN
-------------------------------------
Steven B. Chotin
President
Each person whose signature appears below does hereby make, constitute and
appoint Steven B. Chotin, Helen M. Dickens and Howard J. Glicksman and each of
them his or her true and lawful attorney with full power of substitution to
execute, deliver and file with the Securities and Exchange Commission, for and
on his or her behalf, and in his or her capacity or capacities as stated below,
any amendment (including post-effective amendments) to the Registration
Statement with all exhibits thereto, making such changes in the Registration
Statement as the Registrant deems appropriate.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ STEVEN B. CHOTIN Director, Chairman, Chief August 13, 1997
- ----------------------------------------------------- Executive Officer and
Steven B. Chotin President (Principal
Executive Officer)
/s/ ANNEL HENDERSON Controller (Principal August 13, 1997
- ----------------------------------------------------- Accounting Officer and
Annel Henderson Principal Financial Officer)
/s/ HOWARD J. GLICKSMAN Director August 13, 1997
- -----------------------------------------------------
Howard J. Glicksman
/s/ M. GARRETT SMITH Director August 14, 1997
- -----------------------------------------------------
M. Garrett Smith
/s/ HELEN M. DICKENS Director, Vice President August 13, 1997
- -----------------------------------------------------
Helen M. Dickens
</TABLE>
II-5
<PAGE> 1
EXHIBIT 5.1
[ANDREW & KURTH LETTERHEAD]
August 15, 1997
Fund America Investors Corporation II
6400 S. Fiddler's Green Circle, Suite 1200B
Englewood, Colorado 80111
Re: Fund America Investors Corporation II
Registration Statement on Form S-3
Dear Gentlemen:
We have acted as counsel for Fund America Investors Corporation II, a
corporation organized under the laws of the State of Delaware (the "Issuer"),
in connection with the proposed issuance by the Issuer of its asset-backed
certificates (the "Certificates"). The Certificates of a Series are to be
issued pursuant to the Standard Provisions for Pooling and Administration
Agreement or Standard Provisions for Pooling and Administration Agreement
(Senior/Subordinated Structure), as applicable, as supplemented by one or more
supplemental Pooling and Administration Agreements (Series Provisions) or
Pooling and Adminsitration Agreements (Series Provisions for
Senior/Subordinated Structure), as applicable, between the Issuer, the
administrator (the "Administrator") and the trustee (the "Trustee") authorizing
such series (the "Series Provisions"). The applicable Standard Provisions for
Pooling and Administration Agreement and the applicable Series Provisions, each
in the form previously filed with the Securities and Exchange Commission on
January 7, 1993 as an exhibit to the Issuer's Registration Statement on Form
S-11 (File No. 33- 56776) are herein referred to collectively as the "Pooling
and Administration Agreement." This opinion is to be filed as Exhibit 5.1 to
the Issuer's Registration Statement relating to the Certificates on Form S-3
(the "Registration Statement") filed as of August 15, 1997 with the Securities
and Exchange Commission under the Securities Act of 1933, as amended (the "1933
Act").
We have examined originals or copies, certified or otherwise identified to
our satisfaction, of the Issuers' organizational documents, the form of Pooling
and Administration Agreement and the form of Certificates included therein and
such other documents, records, certificates of the Issuer and public officials
and other instruments as we have deemed necessary for the purposes of rendering
this opinion. In addition, we have assumed that the Pooling and Administration
Agreement as completed for each series will be duly executed and delivered;
that the Certificates as
<PAGE> 2
Fund America Investors Corporation II
August 15, 1997
Page 2
completed for each series will be duly executed and delivered substantially in
the forms contemplated by the Pooling and Administration Agreement; and that
the Certificates for each series will be sold as described in the Registration
Statement.
Based upon the foregoing, we are of the opinion that the Certificates are
in due and proper form, and assuming the due authorization, execution and
delivery of the Pooling and Administration Agreement for each series by the
Issuer, the Administrator and the Trustee and the due authorization of the
Certificates for each series by all necessary action on the part of the Issuer,
when validly executed, authenticated and issued in accordance with the
applicable Pooling and Administration Agreement delivered against payment
therefor, the Certificates for each series will be validly issued and
outstanding, fully paid and non-assessable, and entitled to the benefits of the
related Pooling and Administration Agreement in accordance with their terms.
The opinion expressed above is subject to the qualification that we do not
purport to be experts as to the laws of any jurisdiction other than the United
States, the States of Texas and New York and the General Corporate Law of the
State of Delaware, and we express no opinion herein as to the effect that the
laws and decisions of courts of any such other jurisdiction may have upon such
opinions.
We consent to the use and filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Prospectus Supplement and Prospectus contained therein.
In giving such consent we do not imply or admit that we are within the category
of persons whose consent is required under Section 7 of the 1933 Act or the
rules and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ ANDREWS & KURTH L.L.P.
--------------------------
<PAGE> 1
EXHIBIT 5.2
[ANDREW & KURTH LETTERHEAD]
August 15, 1997
Fund America Investors Corporation II
6400 S. Fiddler's Green Circle, Suite 1200B
Englewood, Colorado 80111
Re: Fund America Investors Corporation II
Registration Statement on Form S-3
Dear Gentlemen:
We have acted as counsel for Fund America Investors Corporation II, a
corporation organized under the laws of the State of Delaware (the "Company"),
and certain trusts, all of the beneficial ownership of which will be owned by
the Company (together with the Company, each an "Issuer"), in connection with
the proposed issuance by each Issuer of its asset-backed bonds (the "Bonds").
The Bonds are to be issued pursuant to the Standard Indenture Provisions and a
Terms Indenture for each series, each between the applicable Issuer and the
Indenture Trustee (as defined therein). The Standard Indenture Provisions and
the applicable Terms Indenture, each in the form previously filed with the
Securities and Exchange Commission on October 13, 1994 as an exhibit to
Amendment No. 3 to the Company's Registration Statement on Form S-11 (File No.
33-73748) are herein referred to collectively as the "Indenture." This opinion
is to be filed as Exhibit 5.2 to the Company's Registration Statement relating
to the Bonds on Form S-3 (the "Registration Statement") filed as of August 15,
1997 with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "1933 Act").
We have examined originals or copies, certified or otherwise identified to
our satisfaction, of the Issuers' organizational documents, the Indenture and
form of Bonds included therein and such other documents, records, certificates
of the Company and public officials and other instruments as we have deemed
necessary for the purposes of rendering this opinion. In addition, we have
assumed that the Indenture as completed for each series will be duly executed
and delivered; that the Bonds as completed for each series will be duly
executed and delivered substantially in the forms contemplated by the
Indenture; and that the Bonds for each series will be sold as described in the
Registration Statement.
<PAGE> 2
Fund America Investors Corporation II
August 15, 1997
Page 2
Based upon the foregoing, we are of the opinion that the Bonds are in due
and proper form, and assuming the due authorization, execution and delivery of
the Indenture for each series by the applicable Issuer and the Indenture
Trustee and the due authorization of the Bonds for each series by all necessary
action on the part of the applicable Issuer, when validly executed,
authenticated and issued in accordance with the applicable Indenture delivered
against payment therefor, the Bonds for each series will be valid and binding
obligations of the applicable Issuer, enforceable against the applicable Issuer
in accordance with their terms, except that the enforceability thereof may be
subject to (a) bankruptcy, insolvency, reorganization, arrangement, moratorium,
fraudulent or preferential conveyance or other similar laws now or hereinafter
in effect relating to creditors' rights generally, and (b) general principles
of equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
The opinion expressed above is subject to the qualification that we do not
purport to be experts as to the laws of any jurisdiction other than the United
States, the States of Texas and New York and the General Corporate Law of the
State of Delaware, and we express no opinion herein as to the effect that the
laws and decisions of courts of any such other jurisdiction may have upon such
opinions.
We consent to the use and filing of this opinion as Exhibit 5.2 to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Prospectus Supplement and Prospectus contained therein.
In giving such consent we do not imply or admit that we are within the category
of persons whose consent is required under Section 7 of the 1933 Act or the
rules and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ ANDREWS & KURTH L.L.P.
--------------------------
<PAGE> 1
EXHIBIT 8.1
[ANDREW & KURTH LETTERHEAD]
August 15, 1997
Fund America Investors Corporation II
6400 S. Fiddler's Green Circle, Suite 1200B
Englewood, Colorado 80111
Re: Fund America Investors Corporation II
Registration Statement on Form S-3
Gentlemen:
We have acted as counsel for Fund America Investors Corporation II, a
corporation organized under the laws of the State of Delaware (the "Company"),
and certain trusts, all of the beneficial ownership of which will be owned by
the Company (together with the Company, each an "Issuer"), in connection with
the proposed issuance by each Issuer of its asset backed certificates (the
"Certificates") or its collateralized mortgage obligations (the "Bonds" and,
together with the Certificates, the "Securities"). The Certificates of a series
are to be issued pursuant to Standard Provisions for Pooling and Administration
Agreement or Standard Provisions for Pooling and Administration Agreement
(Senior/Subordinated Structure), as applicable, as supplemented by one or more
supplemental Pooling and Administration Agreements (Series Provisions) or
Pooling and Administration Agreements (Series Provisions for
Senior/Subordinated Structure), as applicable, authorizing such series (the
"Series Provisions"). The applicable Standard Provisions for Pooling and
Administration Agreement and the applicable Series Provisions, each in the form
previously filed with the Securities and Exchange Commission (the "Commission")
on January 7, 1993 as an exhibit to the Company's Registration Statement on
Form S-11 (File No. 33-56776), are herein referred to collectively as the
"Pooling and Administration Agreement". The Bonds are to be issued pursuant to
the Standard Indenture Provisions and a Terms Indenture for each series, each
between the applicable Issuer and the Indenture Trustee (as defined therein).
The Standard Indenture Provisions and the applicable Terms Indenture, each in
the form previously filed with the Commission on October 13, 1994 as an exhibit
to Amendment No. 3 to the Company's Registration Statement on Form S-11 (File
No. 33-73748) are herein referred to collectively as the "Indenture". This
opinion is to be filed as Exhibit 8.1 to the Company's Registration Statement
relating to the Mortgage Securities on Form S-3 (the "Registration Statement")
filed as of August 15, 1997 with the Securities and Exchange Commission under
the Securities Act of 1933, as amended (the "1933 Act").
<PAGE> 2
Fund America Investors Corporation II
August 15, 1997
Page 2
We have examined originals or copies, certified or otherwise identified to
our satisfaction of the Issuers' organizational documents, the form of Pooling
and Administration Agreement, the form of Indenture, the form of Certificates
and the form of Bonds included therein, the prospectus contained in the
Registration Statement (the "Prospectus"), and such other documents, records,
certificates of the Company and public officials and other instruments as we
have deemed necessary for the purposes of rendering this opinion. In addition,
we have assumed that the Pooling and Administration Agreement or the Indenture
as applicable and as completed for each series will be duly executed and
delivered; that the Securities as completed for each series will be duly
executed and delivered substantially in the forms contemplated by the Pooling
and Administration Agreement or the Indenture; and that the Securities for each
series will be sold as described in the Registration Statement.
On the basis of the foregoing, we are of the opinion that the description
of federal income tax consequences appearing under the heading "Certain Federal
Income Tax Consequences" in the Prospectus accurately describes the material
federal income tax consequences to holders of Certificates or Bonds, as
applicable, under existing law and subject to the qualifications and
assumptions stated therein.
The opinions herein are based upon our interpretations of current law,
including court authority and existing Final and Temporary Regulations, which
are subject to change both prospectively and retroactively, and upon the facts
and assumptions discussed herein. This opinion letter is limited to the matters
set forth herein, and no opinions are intended to be implied or may be inferred
beyond those expressly stated herein. Our opinion is rendered as of the date
hereof and we assume no obligation to update or supplement this opinion or any
matter related to this opinion to reflect any change of fact, circumstances, or
law after the date hereof. In addition, our opinion is based on the assumption
that the matter will be properly presented to the applicable court.
Furthermore, our opinion is not binding on the Internal Revenue Service or a
court. In addition, we must note that our opinion represents merely our best
legal judgment on the matters presented and that others may disagree with our
conclusion. There can be no assurance that the Internal Revenue Service will
not take a contrary position or that a court would agree with our opinion if
litigated. In the event any one of the statements, representations or
assumptions we have relied upon to issue this opinion is incorrect, our opinion
might be adversely affected and may not be relied upon.
<PAGE> 3
Fund America Investors Corporation II
August 15, 1997
Page 3
We hereby consent to the reference to us under the caption "Certain
Federal Income Tax Consequences" in the Prospectus, and to the filing of this
opinion as an Exhibit to the Registration Statement, without implying or
admitting that we are experts within the meaning of the 1933 Act with respect
to any part of the Registration Statement.
Very truly yours,
/s/ ANDREWS & KURTH L.L.P.
--------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 175,299
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 175,299
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 426,688
<CURRENT-LIABILITIES> 2,010
<BONDS> 0
0
0
<COMMON> 3,490
<OTHER-SE> 424,678
<TOTAL-LIABILITY-AND-EQUITY> 426,688
<SALES> 0
<TOTAL-REVENUES> 3,139
<CGS> 0
<TOTAL-COSTS> 20,905
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (17,766)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,766)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,766)
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Not presented, as all shares of common stock are held by a sole shareholder.
</FN>
</TABLE>
