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PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED NOVEMBER 23, 1994)
$201,764,700
CWMBS, INC.
DEPOSITOR
INDEPENDENT NATIONAL MORTGAGE CORPORATION
SELLER AND MASTER SERVICER
HOME EQUITY MORTGAGE LOAN ASSET-BACKED TRUST,
SERIES SPMD 1996-A
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The Mortgage Pass-Through Certificates, Series SPMD 1996-A (collectively,
the 'Certificates') will represent the entire beneficial interest in Home Equity
Mortgage Loan Asset-Backed Trust, Series SPMD 1996-A (the 'Trust Fund'). The
Trust Fund will consist primarily of a pool (the 'Mortgage Pool') of Mortgage
Loans secured by first liens on one- to four-family residential properties. Only
the Classes identified in the table below (collectively, the 'Offered
Certificates') are offered hereby.
The Mortgage Pool will be divided into two separate groups of Mortgage
Loans (each, a 'Loan Group') based on whether the Mortgage Rate for the related
Mortgage Loan is fixed or adjustable.
The Class A Certificates will be unconditionally and irrevocably guaranteed
as to the payment of the Insured Payments (as defined herein) on each
Distribution Date pursuant to the terms of an irrevocable financial guaranty
insurance policy (the 'Policy') to be issued by
[Logo]
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, THE SELLER, THE MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES. NEITHER THE CERTIFICATES NOR THE MORTGAGE LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL ENTITY, THE DEPOSITOR, THE SELLER, THE
MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR AFFILIATES OR ANY OTHER PERSON
EXCEPT AS DESCRIBED HEREIN. DISTRIBUTIONS ON THE CERTIFICATES WILL BE PAYABLE
SOLELY FROM THE ASSETS TRANSFERRED TO THE TRUST FUND FOR THE BENEFIT OF
CERTIFICATEHOLDERS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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PROCEEDS
INITIAL CLASS CERTIFICATE PRICE TO UNDERWRITING TO
BALANCE PASS-THROUGH RATE PUBLIC(1) CONCESSION DEPOSITOR(1), (2)
<S> <C> <C> <C> <C> <C>
Class A-1 $ 15,700,000 6.71 % 100% .15% 99.85%
Class A-2 $ 50,000,000 6.88 % 99.984375% .175% 99.809375%
Class A-3 $ 13,100,000 6.96 % 100% .2% 99.8%
Class A-4 $ 12,000,000 7.27 % 99.96875% .25% 99.71875%
Class A-5 $ 18,855,000 7.59 % 100% .3175% 99.6825%
Class A-6 $ 9,639,600 7.815 % 99.7391937% .35% 99.3891937%
Class A-7 $ 82,470,000 (3) 100% .21875% 99.78125%
Class R $ 100 7.000 % N/A N/A N/A
Total $201,764,700 N/A $201,727,897 $441,256 $201,286,640
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(1) Plus accrued interest, if any, at the respective Pass-Through Rates from
August 1, 1996 (or in case of the Class A-7 Certificates, from August 28,
1996).
(2) Before deduction of expenses payable by the Depositor estimated to be
$300,000.
(3) The Class A-7 Certificates will bear interest during each Interest Accrual
Period at a per annum rate equal to the lesser of (i) the London interbank
offered rate for one-month U.S. dollar deposits plus 0.32% (the
'Pass-Through Margin') and (ii) the Available Funds Cap (as defined herein).
The Pass-Through Margin may be increased in the limited circumstances
described herein.
------------------------
The Class A Certificates are offered by the Merrill Lynch, Pierce, Fenner &
Smith Incorporated (the 'Underwriter'), subject to prior sale, when, as and if
delivered to and accepted by the Underwriter and subject to its right to reject
orders in whole or in part. It is expected that delivery of the Class A
Certificates will be made in book-entry form only through the facilities of The
Depository Trust Company, Cedel Bank, societe anonyme and the Euroclear System
on or about August 28, 1996. The Class R Certificates will be transferred to the
Seller on or about August 28, 1996 as partial consideration for the sale of the
Mortgage Loans to the Depositor.
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MERRILL LYNCH & CO.
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August 27, 1996
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The Mortgage Loans will be sold to the Depositor by Independent National
Mortgage Corporation ('Indy Mac').
For federal income tax purposes, the Trust Fund will include two segregated
asset pools, with respect to which elections will be made to treat each as a
'real estate mortgage investment conduit' (a 'REMIC'). See 'Description of the
Certificates -- Separate REMIC Structure' herein. As described more fully herein
and in the Prospectus, the Class A Certificates will constitute beneficial
ownership of the 'regular interests' in the Master REMIC. The Class R
Certificates will constitute the beneficial ownership of the 'residual
interests' in the Master REMIC. The Class OC Certificates, which are not offered
hereby, will constitute the beneficial ownership of the 'residual interests' in
the Subsidiary REMIC. Prospective investors are cautioned that a Class R
Certificateholder's REMIC taxable income and the tax liability thereon will
exceed cash distributions in certain periods, in which event such investors must
have sufficient alternative sources of funds to pay such tax liability. See
'Certain Federal Income Tax Consequences' herein and in the Prospectus.
The Class R Certificates will be subject to certain transfer restrictions.
See 'Description of the Certificates -- Restrictions on Transfer of the Class R
Certificates' herein.
THE YIELD TO INVESTORS ON THE CLASS A CERTIFICATES WILL BE SENSITIVE IN
VARYING DEGREES TO, AMONG OTHER THINGS, THE RATE AND TIMING OF PRINCIPAL
PAYMENTS (INCLUDING PREPAYMENTS) OF, AND REALIZED LOSSES ON, THE MORTGAGE LOANS
IN THE RELATED LOAN GROUP AND, IN CERTAIN CIRCUMSTANCES, THE RATE AND TIMING OF
PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) OF, AND REALIZED LOSSES ON, THE
MORTGAGE LOANS IN THE OTHER LOAN GROUP. THE YIELD ON THE CLASS A-7 CERTIFICATES
ALSO WILL BE SENSITIVE TO THE LEVEL OF ONE-MONTH LIBOR (AS DEFINED HEREIN) AND
THE LEVEL OF THE INDEX (AS DEFINED HEREIN). ALTHOUGH ALL OF THE MORTGAGE LOANS
IN LOAN GROUP 2 BEAR INTEREST AT ADJUSTABLE RATES ('ARMS'), THE INTEREST RATES
ON CERTAIN OF THE ARMS WILL NOT ADJUST FOR TWO YEARS FOLLOWING ORIGINATION. THE
YIELD TO MATURITY OF THE CLASS A CERTIFICATES PURCHASED AT A DISCOUNT OR PREMIUM
WILL BE MORE SENSITIVE TO THE RATE AND TIMING OF PAYMENTS THEREON. HOLDERS OF
THE CLASS A CERTIFICATES SHOULD CONSIDER, IN THE CASE OF ANY SUCH CERTIFICATES
PURCHASED AT A DISCOUNT, THE RISK THAT A SLOWER THAN ANTICIPATED RATE OF
PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE
ANTICIPATED YIELD AND, IN THE CASE OF ANY CLASS A CERTIFICATES PURCHASED AT A
PREMIUM, THE RISK THAT A FASTER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS
COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE ANTICIPATED YIELD.
BECAUSE CERTAIN OF THE MORTGAGE LOANS CONTAIN PREPAYMENT PENALTIES, THE RATE OF
PRINCIPAL PAYMENTS MAY BE LESS THAN THE RATE OF PRINCIPAL PAYMENTS FOR MORTGAGE
LOANS WHICH DID NOT HAVE PREPAYMENT PENALTIES. NO REPRESENTATION IS MADE AS TO
THE ANTICIPATED RATE OF PREPAYMENTS ON THE MORTGAGE LOANS, THE AMOUNT AND TIMING
OF REALIZED LOSSES, THE LEVEL OF ONE-MONTH LIBOR OR THE INDEX OR THE RESULTING
YIELD TO MATURITY OF ANY CLASS OF CERTIFICATES.
The Class A Certificates will be entitled to the benefit of an irrevocable
financial guaranty insurance policy (the 'Policy') to be issued by MBIA
Insurance Corporation (the 'Insurer') pursuant to which the Insurer will
unconditionally and irrevocably guarantee the payment of the Insured Payments on
the Class A Certificates. See 'Credit Enhancement -- The Financial Guaranty
Insurance Policy.'
The Underwriter intends to make a secondary market in the Class A
Certificates, but has no obligation to do so. There is currently no secondary
market for the Class A Certificates and there can be no assurance that such a
market will develop or, if it does develop, that it will continue or that it
will provide Certificateholders with a sufficient level of liquidity of
investment.
This Prospectus Supplement does not contain complete information about the
offering of the Offered Certificates. Additional information is contained in the
Prospectus of the Depositor dated November 23, 1994 (the 'Prospectus') and
purchasers are urged to read both this Prospectus Supplement and the Prospectus
in full. Sales of the Offered Certificates may not be consummated unless the
purchaser has received both this Prospectus Supplement and the Prospectus.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
IN CONNECTION WITH THE OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A
CERTIFICATES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
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SUMMARY OF TERMS
This Summary of Terms is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary of
Terms are defined elsewhere in this Prospectus Supplement or in the Prospectus.
<TABLE>
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Title of Certificates............... Mortgage Pass-Through Certificates, Series SPMD 1996-A (the
'Certificates').
Offered Certificates................ Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class A-7
and Class R Certificates. Only the Offered Certificates are offered hereby.
Certificates other than the Offered
Certificates...................... In addition to the Offered Certificates, the Trust Fund will issue the
Class OC Certificates, which are not offered hereby. Any information
contained herein with respect to the Class OC Certificates is provided only
to permit a better understanding of the Offered Certificates.
Designations
Loan Group 1...................... All Mortgage Loans which have Mortgage Rates that are fixed.
Loan Group 2...................... All Mortgage Loans which have Mortgage Rates that adjust.
Certificate Group 1
Certificates................... Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 and Class A-6
Certificates.
Certificate Group 2
Certificates................... Class A-7 Certificates.
Certificate Group................. Either Certificate Group 1 or Certificate Group 2, as the case may be.
Regular Certificates.............. All Classes of Offered Certificates other than the Class R Certificates.
Class A Certificates.............. Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 and Class
A-7 Certificates.
Fixed Rate Certificates........... Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 and Class
R Certificates.
Variable Rate Certificates........ Class A-7 Certificates.
Physical Certificates............. Class R Certificates.
Book-Entry Certificates........... All Classes of Offered Certificates other than the Physical Certificates.
Trust Fund.......................... The Certificates will represent the entire beneficial ownership interest in
the Trust Fund, which will consist primarily of the Mortgage Pool.
Pooling and Servicing Agreement..... The Certificates will be issued pursuant to a Pooling and Servicing
Agreement dated as of August 1, 1996 (the 'Agreement') among the Depositor,
the Seller, the Master Servicer and the Trustee.
Depositor........................... CWMBS, Inc. (the 'Depositor'), a Delaware corporation and a limited purpose
finance subsidiary of Countrywide Credit Industries, Inc. See 'The
Depositor' in the Prospectus.
Seller.............................. The Subprime Mortgage Division ('SPMD') of Independent National Mortgage
Corporation ('Indy Mac' or the 'Seller'). The Mortgage Loans were acquired
in the normal course of its business by the Seller and were acquired by the
Depositor in a privately negotiated transaction.
Master Servicer..................... Independent National Mortgage Corporation (the 'Master Servicer'). See
'Servicing of Mortgage Loans -- The Master Servicer' herein. The Master
Servicer will be responsible for the servicing of the Mortgage Loans and
will receive the Master Servicing Fee from interest collected on the
Mortgage Loans. See 'Servicing of Mortgage Loans -- Servicing Compensation
and Payment of Expenses' herein.
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Trustee............................. The Bank of New York, a banking corporation organized under the laws of the
State of New York (the 'Trustee').
Cut-off Date........................ August 1, 1996.
Closing Date........................ On or about August 28, 1996.
Determination Date.................. The 18th day of each month or, if such day is not a business day, the first
business day thereafter.
Mortgage Loans...................... The Mortgage Pool will consist primarily of 30-year conventional Mortgage
Loans secured by first liens on one- to four-family residential properties.
The Mortgage Loans in Loan Group 1 will bear interest at fixed rates. The
Mortgage Loans in Loan Group 2 will bear interest at rates which are
adjustable on the date set forth in the related Mortgage Note (the 'Initial
Rate Adjustment Date') and every six months thereafter based on changes in
the level of the Index. Approximately 57.04% of the Mortgage Loans in Loan
Group 2 (by Cut-off Date Principal Balance) have Initial Rate Adjustment
Dates occurring on the Due Date following the second anniversary of the
date of origination. The remaining Mortgage Loans in Loan Group 2 have an
Initial Rate Adjustment Date occurring on the sixth Due Date following the
related date or origination. In addition, approximately 47% of the Mortgage
Loans in Loan Group 1 and approximately 56% of the Mortgage Loans in Loan
Group 2 (in each case, based on the Cut-off Date Principal Balance) contain
prepayment penalties. Approximately 59.12% and 40.88% of the Mortgage Loans
in the Mortgage Pool (by Cut-off Date Pool Principal Balance) will be in
Loan Group 1 and Loan Group 2, respectively. See 'The Mortgage Pool'
herein.
The Mortgage Loans in the Mortgage Pool were made to borrowers with prior
credit difficulties and do not satisfy the underwriting guidelines for
mortgage loans eligible for sale to the Federal National Mortgage
Association ('FNMA') or the Federal Home Loan Mortgage Corporation
('FHLMC'). It is expected that the rates of delinquency, bankruptcy and
foreclosure for the Mortgage Loans will be higher, and may be substantially
higher, than that of mortgage loans underwritten in accordance with FNMA
and FHLMC standards. See 'The Mortgage Pool -- Underwriting Standards.'
SPMD began purchasing sub-prime mortgage loans in April 1995. As a result,
the Seller has only limited deliquency, foreclosure and loss experience
with respect to the sub-prime mortgage loans that it has purchased.
Although the Depositor believes that the Seller's underwriting standards
and the Master Servicer's servicing practices are consistent with industry
standards, there can be no assurance that the foreclosure and loss
experience on the Mortgage Loans will be consistent with industry norms.
Index............................... The Mortgage Rates for the Mortgage Loans in Loan Group 2 will be subject
to adjustment on each related Adjustment Date based on the London interbank
offered rate ('LIBOR') for six-month United States dollar deposits as
published either (a) by FNMA forty-five days prior to an Adjustment Date or
(b) in the 'Money Rates' section of The Wall Street Journal as of the first
business day of the month prior to an Adjustment Date, as specified in the
related Mortgage Note. See 'The Mortgage Pool -- General' herein.
Distribution Date................... The 25th day of each month or, if such day is not a business day, the first
business day thereafter, commencing in September 1996 (each, a
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'Distribution Date'). Distributions on each Distribution Date will be made
to Certificateholders of record as of the related Record Date, except that
the final distribution on the Certificates will be made only upon
presentment and surrender of the Certificates at the Corporate Trust Office
of the Trustee.
Record Date......................... The Record Date for each Distribution Date will be the last business day of
the month preceding the month of such Distribution Date.
Priority of Distributions........... Distributions on the Certificates of a Certificate Group on each
Distribution Date will be based on the Available Funds for the related Loan
Group and will be made in the following order of priority: (i) to payment
of such Certificate Group's share of the monthly premium for the Policy to
the Insurer; (ii) to interest on each Class of Certificates; (iii) to
current principal of the Classes of Certificates then entitled to receive
distributions of principal, in the order and subject to the priorities set
forth herein under 'Description of the Certificates -- Distributions of
Interest and Principal,' in each case in an aggregate amount up to the
maximum amount of principal to be distributed on such Classes on such
Distribution Date; (iv) to make payments to the other Certificate Group as
set forth under 'Description of the Certificates -- Distributions of
Interest and Principal' and ' -- Cross Collateralization' herein; (v) to
the Insurer as reimbursement for claims paid under the Policy and other
amounts that may be required to be paid to the Insurer under the Insurance
Agreement (as defined herein); (vi) to principal of the Classes of
Certificates then entitled to receive distributions of principal in order
to maintain the Specified Subordinated Amount (as defined herein) for such
Certificate Group; (vii) to principal of the Classes of Certificates in the
other Certificate Group then entitled to receive distributions of principal
in order to maintain the Specified Subordinated Amount for such Certificate
Group; and (viii) to the Class OC Certificates, subject to the limitations
set forth herein under 'Description of the Certificates -- Distributions of
Interest and Principal.'
Distributions of Interest........... To the extent funds are available therefor, each Class of Offered
Certificates will be entitled to receive interest in the amount of the
Interest Distribution Amount for such Class. See 'Description of the
Certificates -- Distributions of Interest and Principal' herein.
A. Interest Distribution Amount... For each Class of Offered Certificates, the amount of interest accrued
during the related Interest Accrual Period at the applicable Pass-Through
Rate on the related Class Certificate Balance.
B. Pass-Through Rate.............. The Pass-Through Rate for each Class of Offered Certificates for each
Distribution Date will be as set forth or described on the cover page
hereof.
With respect to each Distribution Date, the 'Interest Accrual Period' for
each Class of Fixed Rate Certificates will be the calendar month preceding
the month of such Distribution Date and the 'Interest Accrual Period' for
the Class A-7 Certificates will be the period from and including the
preceding Distribution Date (or, in the case of the first Distribution
Date, from the Closing Date) to and including the day prior to such next
Distribution Date.
Interest on the Fixed Rate Certificates will be calculated on the basis of
a 360-day year consisting of twelve 30-day months. Interest on the Class
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A-7 Certificates will be calculated on the basis of a 360-day year and the
actual number of days elapsed in the applicable Interest Accrual Period.
Supplemental Interest............... Through the May 1998 Distribution Date, Holders of the Class A-7
Certificates may be entitled to supplemental payments of interest (the
'Supplemental Interest') pursuant to the Cap Agreement (as defined herein)
in an amount equal to the excess, if any, of (i) the amount of interest
payable to the Holders of the Class A-7 Certificates calculated on the
basis of the applicable One-Month LIBOR plus the Pass-Through Margin, over
(ii) the amount of interest calculated on the basis of the applicable
Available Funds Cap. See 'Description of the Certificates -- Supplemental
Interest Account' herein.
Distributions of Principal.......... On each Distribution Date, to the extent funds are available therefor,
principal distributions in reduction of the Class Certificate Balance of
each Class of Offered Certificates will be made in the order and subject to
the priorities set forth herein under 'Description of the Certificates --
Distributions of Interest and Principal.' Such reductions with respect to a
Certificate Group will be in an aggregate amount equal to the allocable
portion of the Principal Distribution Amount.
In no event will the Principal Distribution Amount with respect to any
Distribution Date be (x) less than zero or (y) greater than the then
outstanding Certificate Principal Balance of the Class A Certificates. See
'Description of the Certificates -- Distributions of Interest and
Principal' herein.
The Class Certificate Balance of any Class of Offered Certificates as of
any Distribution Date is equal to the initial Class Certificate Balance
thereof reduced by all amounts previously distributed with respect to such
Certificate as payments of principal.
Credit Enhancement.................. The Credit Enhancement provided for the benefit of the Class A
Certificateholders consists of (a) the overcollateralization and
crosscollateralization mechanics which utilize the internal cash flows of
the Trust Fund and (b) the Policy, each as described below.
Overcollateralization: On each Distribution Date, the Net Monthly Excess
Cashflow (as defined herein) for a Loan Group will be distributed as
principal of the Class A Certificates in the related Certificate Group then
entitled to receive principal distributions, until the aggregate principal
balance of the Mortgage Loans in such Loan Group exceeds the aggregate
Class Certificate Balance of the Class A Certificates in such Certificate
Group by the amount specified in the Agreement for such Loan Group (the
'Specified Subordinated Amount'). The application of Net Monthly Excess
Cashflow results in a limited acceleration of the Class A Certificates in a
Certificate Group relative to the amortization of the Mortgage Loans in the
related Loan Group. This acceleration feature creates, with respect to each
Certificate Group, overcollateralization (i.e., the excess of the aggregate
Stated Principal Balance of the Mortgage Loans in the related Loan Group
over the aggregate Class Certificate Balance of the Class A Certifictes in
the related Certificate Group). Once the Specified Subordinated Amount is
reached, the acceleration feature will cease, unless necessary to maintain
the Specified Subordinated Amount.
Subject to certain maximums, minimums and triggering events set forth in
the Agreement, the level of the Specified Subordinated Amount for a
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Certificate Group may increase or decrease over time as described herein.
An increase would result in a temporary period of accelerated amortization
of the Class A Certificates to increase the actual level of
overcollateralization to its required level; a decrease would result in a
temporary period of decelerated amortization of the Class A Certificates to
reduce the actual level of overcollateralization to its required level. See
'Description of the Certificates -- Overcollateralization Provisions'
herein.
As a result of the generally 'sequential pay' feature of the Certificate
Group 1 Certificates, any such accelerated principal distributions will be
paid to that Class of the Certificate Group 1 Certificates then entitled to
receive distributions of principal.
Cross-Collateralization: The Agreement provides for cross-collateralization
through the application of certain excess amounts generated by one Loan
Group to fund shortfalls in Available Funds and the required level of
overcollateralization in the other Loan Group. See 'Description of the
Certificates -- Cross-Collateralization' and 'Yield, Prepayment and
Maturity Considerations -- Overcollateralization Provisions' herein.
The Financial Guaranty Insurance Policy: The Insurer will issue the Policy
as a means of providing additional credit enhancement to the Class A
Certificates. Under the Policy, the Insurer will, subject to the terms of
the Policy, pay to the Trustee, for the benefit of the holders of the Class
A Certificates, as further described herein, an amount (the 'Insured
Payment') equal to the sum of (i) any shortfall on each such Distribution
Date in the amount required to pay the Subordination Deficit for such
Distribution Date from a source other than the Policy, (ii) any shortfall
on each such Distribution Date in the amount required to pay the Interest
Distribution Amount for such Distribution Date from a source other than the
Policy and (iii) any shortfall in the amount required to pay the Preference
Amount from a source other than the Policy. 'Subordination Deficit' means,
with respect to each Loan Group and Distribution Date, the amount, if any,
by which (x) the aggregate of the Certificate Principal Balances of the
Class A Certificates in the related Certificate Group, after giving effect
to all distributions made on such Distribution Date exceeds (y) the
aggregate Principal Balance of the Mortgage Loans in such Loan Group as of
the close of business on the last day of the related Remittance Period. The
effect of the Policy is to guaranty the timely payment of interest on, and
ultimate payment of the principal amount of, each Class of Class A
Certificates. No payments in respect of principal will be made under the
Policy unless a Subordination Deficit occurs. See 'Credit
Enhancement -- The Financial Guaranty Insurance Policy' herein.
Advances............................ The Master Servicer is obligated to make cash advances ('Advances') with
respect to delinquent payments of principal and interest on any Mortgage
Loan to the extent described herein. The Trustee will be obligated to make
any such Advance if the Master Servicer fails in its obligation to do so,
to the extent provided in the Agreement. See 'Servicing of Mortgage
Loans -- Advances' herein.
Prepayment Considerations and Risks;
Reinvestment Risk................. The rate of principal payments on the Class A Certificates, the aggregate
amount of distributions on the Class A Certificates and the yield to
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maturity of the Class A Certificates will be related to the rate and timing
of payments of principal and allocation of Realized Losses on the Mortgage
Loans in the related Loan Group and, in certain circumstances, the rate and
timing of payments of principal and allocation of Realized Losses on the
Mortgage Loans in the other Loan Group.
Since the rate of payment of principal on the Mortgage Loans will depend on
future events and a variety of other factors, no assurance can be given as
to such rate or the rate of principal prepayments.
The extent to which the yield to maturity of a Class A Certificate may vary
from the anticipated yield may depend upon the degree to which it is
purchased at a discount or premium, and the degree to which the timing of
payments thereon is sensitive to prepayments, liquidations and purchases of
the Mortgage Loans in the related Loan Group. Further, an investor should
consider the risk that, in the case of any Offered Certificates purchased
at a discount, a slower than anticipated rate of principal payments
(including prepayments) on the Mortgage Loans in the related Loan Group
could result in an actual yield to such investor that is lower than the
anticipated yield and, in the case of any Offered Certificates purchased at
a premium, a faster than anticipated rate of principal payments on the
Mortgage Loans in the related Loan Group could result in an actual yield to
such investor that is lower than the anticipated yield.
Because the Mortgage Loans may be prepaid at any time, it is not possible
to predict the rate at which distributions of principal of the Offered
Certificates will be received. In addition, the existence of prepayment
penalties with respect to certain of the Mortgage Loans may affect the rate
of distributions of principal. Since prevailing interest rates are subject
to fluctuation, there can be no assurance that investors in the Offered
Certificates will be able to reinvest the distributions thereon at yields
equaling or exceeding the yields on such Offered Certificates. It is
possible that yields on any such reinvestments will be lower, and may be
significantly lower, than the yields on the Offered Certificates. See
'Yield, Prepayment and Maturity Considerations' herein and 'Yield and
Prepayment Considerations' in the Prospectus.
Optional Termination................ On any Distribution Date on which the Pool Principal Balance is less than
10% of the Cut-off Date Pool Principal Balance, the Master Servicer or the
Insurer will have the option to purchase, in whole, the Mortgage Loans and
the REO Property, if any, remaining in the Trust Fund. See 'Description of
the Certificates -- Optional Termination' herein.
Federal Income Tax Considerations... For federal income tax purposes, the Trust Fund will include two segregated
asset pools, with respect to which elections will be made to treat each as
a separate 'real estate mortgage investment conduit' ('REMIC'). The Regular
Certificates will be designated as 'regular interests' in the Master REMIC.
The Class R Certificates will be designated as the sole class of 'residual
interest' in the Master REMIC. The Class OC Certificates, which are not
being offered hereby, will be designated as the sole class of 'residual
interest' in the Subsidiary REMIC. Certain Classes of Offered Certificates
may, depending on their respective issue prices, be issued with original
issue discount ('OID') for federal income tax purposes. See 'Certain
Federal Income Tax Consequences' herein and in the Prospectus.
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The holders of the Class R Certificates will be subject to special federal
income tax rules that may significantly reduce the after-tax yield of such
Certificates. Further, significant restrictions apply to the transfer of
the Class R Certificates. See 'Description of the Certificates --
Restrictions on Transfer of the Class R Certificates' herein.
ERISA Considerations................ The acquisition of an Offered Certificate by a pension or other employee
benefit plan (a 'Plan') subject to the Employee Retirement Income Security
Act of 1974, as amended ('ERISA'), could, in some instances, result in a
prohibited transaction or other violation of the fiduciary responsibility
provisions of ERISA and Section 4975 of the Internal Revenue Code of 1986,
as amended (the 'Code').
Any Plan fiduciary considering whether to purchase any Offered Certificates
on behalf of a Plan should consult with its counsel regarding the
applicability of the provisions of ERISA and the Code. See 'ERISA
Considerations' herein.
Legal Investment.................... The Class A Certificates will constitute 'mortgage related securities' for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA')
so long as they are rated in one of the two highest rating categories by at
least one nationally recognized statistical rating organization and, as
such, are legal investments for certain entities to the extent provided for
in SMMEA. It is anticipated that the Class R Certificates will not be rated
in one of the two highest rating categories by a nationally recognized
statistical rating organization and, therefore, will not constitute
'mortgage related securities' for purposes of SMMEA. See 'Legal Investment'
in the Prospectus.
Ratings............................. It is a condition of the issuance of the Class A Certificates that they be
rated AAA by Standard & Poor's Ratings Services, a division of the
McGraw-Hill Companies, Inc. ('S&P') and Aaa by Moody's Investors Service,
Inc. ('Moody's', and together with S&P, the 'Rating Agencies'). It is a
condition to the issuance of the Class R Certificates that they be rated at
least BBB by S&P and at least Baa3 by Moody's. The ratings of the Offered
Certificates of any Class should be evaluated independently from similar
ratings on other types of securities. A rating is not a recommendation to
buy, sell or hold securities and may be subject to revision or withdrawal
at any time by the Rating Agencies.
The Depositor has not requested a rating of the Offered Certificates by any
rating agency other than the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by such other
rating agency. The rating assigned by such other rating agency to the
Offered Certificates could be lower than the respective ratings assigned by
the Rating Agencies. See 'Ratings' herein.
Registration of Offered
Certificates...................... The Class A Certificates will initially be issued in book-entry form.
Persons acquiring beneficial ownership interests in the Class A Certifi-
cates ('Certificate Owners') will hold their Class A Certificate interests
through The Depository Trust Company ('DTC'), in the United States, or
Cedel Bank, societe anonyme ('CEDEL') or the Euroclear System
('Euroclear'), in Europe. Transfers within DTC, CEDEL or Euroclear, as the
case may be, will be in accordance with the usual rules and operating
procedures of the relevant system. So long as the Class A Certificates are
Book-Entry Certificates (as defined herein), such Certificates will be
</TABLE>
S-9
<PAGE>
<PAGE>
<TABLE>
<S> <C>
evidenced by one or more Certificates registered in the name of Cede & Co.
('Cede'), as the nominee of DTC or one of the relevant depositaries
(collectively, the 'European Depositaries'). Cross-market transfers be-
tween persons holding directly or indirectly through DTC, on the one hand,
and counterparties holding directly or indirectly through CEDEL or
Euroclear, on the other, will be effected in DTC through Citibank, N.A.
('Citibank') or The Chase Manhattan Bank ('Chase'), the relevant
depositaries of CEDEL or Euroclear, respectively, and each participating
member of DTC. The interests of such Certificate Owners will be represented
by book-entries on the records of DTC and participating members thereof. No
Class A Certificate Owner will be entitled to receive a definitive
certificate representing such person's interest, except in the event that
Definitive Certificates (as defined herein) are issued under the limited
circumstances described herein. All references in this Prospectus
Supplement to any Class A Certificates reflect the rights of Certificate
Owners only as such rights may be exercised through DTC and its
participating organizations for so long as such Class A Certificates are
held by DTC. See 'Description of the Certificates -- Book-Entry Certifi-
cates' herein and 'ANNEX I' hereto.
</TABLE>
S-10
<PAGE>
<PAGE>
THE MORTGAGE POOL
GENERAL
The Depositor will purchase the Mortgage Loans from Independent National
Mortgage Corporation ('Indy Mac') pursuant to the Pooling and Servicing
Agreement dated as of the Cut-off Date among Indy Mac, as Seller and Master
Servicer, the Depositor and the Trustee (the 'Agreement') and will cause the
Mortgage Loans to be assigned to the Trustee for the benefit of holders of the
Certificates (the 'Certificateholders') and the Insurer.
Under the Agreement, the Seller will make certain representations,
warranties and covenants to the Depositor relating to, among other things, the
due execution and enforceability of the Agreement and certain characteristics of
the Mortgage Loans and, subject to the limitations described below under
' -- Assignment of Mortgage Loans,' will be obligated to repurchase or
substitute a similar mortgage loan for any Mortgage Loan as to which there
exists deficient documentation or an uncured material breach of any such
representation, warranty or covenant. The Seller will represent and warrant to
the Depositor in the Agreement that the Mortgage Loans were selected from among
the outstanding one- to four-family mortgage loans in the Seller's portfolio as
to which the representations and warranties set forth in the Agreement can be
made and that such selection was not made in a manner that would adversely
affect the interests of the Certificateholders and the Insurer. See 'Mortgage
Loan Program -- Representations by Sellers; Repurchases' in the Prospectus.
Under the Agreement, the Depositor will assign all its right, title and interest
in and to such representations, warranties and covenants (including the Seller's
repurchase obligation) to the Trustee for the benefit of the Certificateholders
and the Insurer. The Depositor will make no representations or warranties with
respect to the Mortgage Loans and will have no obligation to repurchase or
substitute Mortgage Loans with deficient documentation or which are otherwise
defective. Indy Mac is selling the Mortgage Loans without recourse and will have
no obligation with respect to the Certificates in its capacity as Seller other
than the repurchase or substitution obligations described above. The obligations
of Indy Mac, as Master Servicer, with respect to the Certificates are limited to
the Master Servicer's contractual servicing obligations under the Agreement.
Certain information with respect to the Mortgage Loans to be included in
the Mortgage Pool is set forth below. Prior to the Closing Date, Mortgage Loans
may be removed from the Mortgage Pool and other Mortgage Loans may be
substituted therefor. The Depositor believes that the information set forth
herein with respect to the Mortgage Pool as presently constituted is
representative of the characteristics of the Mortgage Pool as it will be
constituted at the Closing Date, although certain characteristics of the
Mortgage Loans in the Mortgage Pool may vary. Unless otherwise indicated,
information presented below expressed as a percentage (other than rates of
interest) are approximate percentages based on the Stated Principal Balances of
the Mortgage Loans as of the Cut-off Date.
As of the Cut-off Date, the aggregate of the Stated Principal Balances of
the Mortgage Loans is expected to be approximately $201,760,407 (the 'Cut-off
Date Principal Balance'). The Mortgage Loans in Loan Group 1 provide for the
amortization of the amount financed over a series of substantially equal monthly
payments. The Mortgage Loans to be included in the Mortgage Pool were acquired
by the Seller in the normal course of its business and substantially in
accordance with the underwriting criteria specified herein. At origination,
substantially all of the Mortgage Loans had stated terms to maturity of 30
years. All of the Mortgage Loans provide for payments due on a specified date
each month (each, a 'Due Date'). The Due Dates occur at different times in the
month. Scheduled monthly payments made by the Mortgagors on the Mortgage Loans
('Scheduled Payments') either earlier or later than the scheduled Due Dates
thereof will not affect the amortization schedule or the relative application of
such payments to principal and interest.
502 Mortgage Loans in Loan Group 1, representing approximately 47% of the
Cut-off Date Principal Balance of the Mortgage Loans in Loan Group 1, and 357
Mortgage Loans in Loan Group 2, representing approximately 56% of the Cut-off
Date Principal Balance of the Mortgage Loans in Loan Group 2, contain prepayment
penalties. Prepayment penalties provide that if the borrower were to prepay the
Mortgage Loan in full at any time from the origination of the Mortgage Loan to a
date set forth in the related Note (the 'Prepayment Penalty Period'), the
borrower would also have to pay a fee in addition to the amount necessary to
repay the Mortgage Loan. The Prepayment Penalty Period for the Mortgage Loans
vary from 12 months to 5 years, depending on the terms set forth in the related
Note. The amount of the prepayment penalty varies from state to state.
S-11
<PAGE>
<PAGE>
With respect to the Mortgage Loans in Loan Group 2, each Mortgage Loan has
a Mortgage Rate subject to adjustment on the Due Date specified in the related
Mortgage Note (the 'Initial Rate Adjustment Date') and every six months
thereafter (each such date, an 'Adjustment Date'), equal to the sum, rounded to
the nearest one-eighth of one percentage point (0.125%), of (i) the average of
interbank offered rates for six month U.S. dollar deposits in the London market
(the 'Index') based on quotations of major banks, as published either (x) by
FNMA 45 days prior to the Adjustment Date or (y) in the 'Money Rates' section of
The Wall Street Journal as of the first business day of the month prior to the
Adjustment Date, as specified in the related Mortgage Note, and (ii) the Margin
specified in the related Mortgage Note; provided, however, that the Mortgage
Rate will not increase or decrease by more than two percentage points (2.0%) on
any Adjustment Date (the 'Periodic Rate Cap'). Approximately 57.04% of the
Mortgage Loans in Loan Group 2 (by Cut-off Date Principal Balance) have Initial
Rate Adjustment Dates occurring on the Due Date following the second anniversary
of the date of origination. The remaining Mortgage Loans in Loan Group 2 have an
Initial Rate Adjustment Date occurring on the sixth Due Date following the
related date of origination.
All of the Mortgage Loans in Loan Group 2 provide that over the life of the
Mortgage Loan the Mortgage Rate will in no event be more than the Mortgage Rate
fixed at origination plus a fixed number of percentage points specified in the
related Mortgage Note (such rate, the 'Maximum Rate'). None of the Mortgage
Loans in Loan Group 2 are subject to minimum Mortgage Rates. Effective with the
first payment due on a Mortgage Loan in Loan Group 2 after each related
Adjustment Date, the Scheduled Payment will be adjusted to an amount which will
pay interest at the adjusted rate and fully amortize the then-outstanding
principal balance of the Mortgage Loan in Loan Group 2 over its remaining term.
If the Index ceases to be published or is otherwise unavailable, the Master
Servicer will select an alternative index based upon comparable information,
subject to the prior written consent of the Insurer.
Each Mortgage Loan in Loan Group 2 is, by its terms, assumable in
connection with a transfer of the related Mortgaged Property if the proposed
transferee submits certain information to the Master Servicer required to enable
it to evaluate the transferee's ability to repay such Mortgage Loan and if the
Master Servicer reasonably determines that the security for such Mortgage Loan
would not be impaired by the assumption. The Mortgage Loans in Loan Group 1 are
subject to the 'due-on-sale' provisions included therein.
Each Mortgage Loan in Loan Group 1 was originated on or after August 1,
1993. Each Mortgage Loan in Loan Group 2 was originated on or after May 1, 1994.
The latest stated maturity date of any Mortgage Loan in Loan Group 1 is
August 1, 2026. The earliest stated maturity date of any Mortgage Loan in Loan
Group 1 is August 1, 2020. The latest stated maturity date of any Mortgage Loan
in Loan Group 2 is August 1, 2026. The earliest stated maturity date of any
Mortgage Loan in Loan Group 2 is June 1, 2024.
As of the Cut-off Date, no Mortgage Loan in either Loan Group was
delinquent more than 30 days.
None of the Mortgage Loans will be subject to any buydown agreement. No
Mortgage Loan provides for deferred interest or negative amortization.
None of the Mortgage Loans in either of the Loan Groups were originated in
connection with the relocation of employees of various corporate employers. None
of the Mortgage Loans in Loan Group 2 are convertible into fixed-rate mortgage
loans.
No Mortgage Loan had a Loan-to-Value Ratio at origination of more than 95%.
Except for 94 Mortgage Loans, representing approximately 9.86% of the Cut-off
Date Principal Balance of the Mortgage Loans in Loan Group 1, and except for 72
Mortgage Loans, representing approximately 11.02% of the Cut-off Date Principal
Balance of the Mortgage Loans in Loan Group 2, each Mortgage Loan with a
Loan-to-Value Ratio at origination of greater than 80% is covered by a primary
mortgage guaranty insurance policy issued by a mortgage insurance company
acceptable to the Federal National Mortgage Association ('FNMA'), the Federal
Home Loan Mortgage Corporation ('FHLMC') or any nationally recognized
statistical rating organization, which policy provides coverage of a portion of
the original principal balance of the related Mortgage Loan equal to the product
of the original principal balance thereof and a fraction, the numerator of which
is the excess of the original principal balance of the related Mortgage Loan
over 75% of the lesser of the appraised value and selling price of the related
Mortgaged Property and the denominator of which is the original principal
balance of the related Mortgage Loan, plus accrued interest thereon and related
foreclosure expenses. No such primary mortgage guaranty insurance policy will be
required with respect to any such Mortgage Loan after the date on
S-12
<PAGE>
<PAGE>
which the related Loan-to-Value Ratio is 80% or less or, based on a new
appraisal, the principal balance of such Mortgage Loan represents 80% or less of
the new appraised value. See ' -- Underwriting Standards' herein.
The 'Loan-to-Value Ratio' of a Mortgage Loan at any given time is a
fraction, expressed as a percentage, the numerator of which is the principal
balance of the related Mortgage Loan at the date of determination and the
denominator of which is (a) in the case of a purchase, the lesser of the selling
price of the Mortgaged Property and its appraised value determined in an
appraisal obtained by the originator at origination of such Mortgage Loan, or
(b) in the case of a refinance, the appraised value of the Mortgaged Property at
the time of such refinance. No assurance can be given that the value of any
Mortgaged Property has remained or will remain at the level that existed on the
appraisal or sales date. If residential real estate values generally or in a
particular geographic area decline, the Loan-to-Value Ratios might not be a
reliable indicator of the rates of delinquencies, foreclosures and losses that
could occur with respect to such Mortgage Loans.
The following information sets forth in tabular format certain information,
as of the Cut-off Date, as to the Mortgage Loans in each Loan Group. Other than
with respect to rates of interest, percentages (approximate) are stated by
Stated Principal Balance of the Mortgage Loans in the related Loan Group as of
the Cut-off Date and have been rounded in order to total 100%.
S-13
<PAGE>
<PAGE>
LOAN GROUP 1
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS(1)
- --------------------------------------------------------------
AGGREGATE PERCENT OF
NUMBER OF PRINCIPAL AGGREGATE
ORIGINAL LOAN-TO-VALUE MORTGAGE BALANCE PRINCIPAL
RATIOS (%) LOANS OUTSTANDING BALANCE
- --------------------------------------------------------------
<S> <C> <C> <C>
Up to 60.00............ 151 $ 13,505,489 11.32%
60.01 - 65.00.......... 79 8,779,654 7.36
65.01 - 70.00.......... 139 14,469,254 12.13
70.01 - 75.00.......... 225 24,623,622 20.64
75.01 - 80.00.......... 320 38,422,899 32.21
80.01 - 85.00.......... 85 10,313,773 8.65
85.01 - 90.00.......... 83 8,747,973 7.33
90.01 - 95.00.......... 4 428,065 0.36
--------- ------------ ------
Total............... 1,086 $119,290,729 100.00%
--------- ------------ ------
--------- ------------ ------
</TABLE>
- ------------------------
(1) The weighted average original Loan-to-Value Ratio of the
Mortgage Loans is approximately 74.14%.
<TABLE>
<CAPTION>
ORIGINAL TERMS TO MATURITY(1)
- --------------------------------------------------------------
AGGREGATE PERCENT OF
NUMBER OF PRINCIPAL AGGREGATE
ORIGINAL TERM TO MORTGAGE BALANCE PRINCIPAL
MATURITY (MONTHS) LOANS OUTSTANDING BALANCE
- --------------------------------------------------------------
<S> <C> <C> <C>
300.................... 1 $ 134,013 0.11%
324.................... 1 239,544 0.20
359.................... 2 80,709 0.07
360.................... 1,082 118,836,463 99.62
--------- ------------ ------
Total............... 1,086 $119,290,729 100.00%
--------- ------------ ------
--------- ------------ ------
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average remaining term to
maturity of the Mortgage Loans is approximately 354 months.
<TABLE>
<CAPTION>
CURRENT MORTGAGE LOAN PRINCIPAL BALANCES(1)
- --------------------------------------------------------------
AGGREGATE PERCENT OF
RANGE OF CURRENT NUMBER OF PRINCIPAL AGGREGATE
MORTGAGE LOAN MORTGAGE BALANCE PRINCIPAL
PRINCIPAL BALANCES LOANS OUTSTANDING BALANCE
- --------------------------------------------------------------
<S> <C> <C> <C>
$ 0 - $ 50,000.... 142 $ 5,580,296 4.68%
$50,001 - $100,000.... 488 36,503,637 30.59
$100,001 - $150,000.... 249 30,122,176 25.25
$150,001 - $200,000.... 106 18,104,734 15.18
$200,001 - $250,000.... 40 8,965,194 7.52
$250,001 - $300,000.... 32 8,621,814 7.23
$300,001 - $350,000.... 10 3,249,278 2.72
$350,001 - $400,000.... 10 3,757,467 3.15
$400,001 - $450,000.... 3 1,294,921 1.09
$450,001 - $500,000.... 3 1,432,706 1.20
$500,001 - $550,000.... 2 1,071,447 0.90
$550,001 - $600,000.... 1 587,058 0.49
--------- ------------ ------
Total............... 1,086 $119,290,729 100.00%
--------- ------------ ------
--------- ------------ ------
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the average current Mortgage Loan
principal balance is approximately $109,844.
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES(1)
- ---------------------------------------------------------------
AGGREGATE PERCENT OF
NUMBER OF PRINCIPAL AGGREGATE
MORTGAGE BALANCE PRINCIPAL
MORTGAGE RATES (%) LOANS OUTSTANDING BALANCE
- ---------------------------------------------------------------
<S> <C> <C> <C>
8.250.................. 2 $ 351,182 0.29%
8.500.................. 2 326,194 0.27
8.625.................. 4 409,977 0.34
8.750.................. 7 749,541 0.63
8.875.................. 17 1,943,263 1.63
8.950.................. 1 113,117 0.09
9.000.................. 28 3,047,463 2.55
9.125.................. 18 2,262,250 1.90
9.250.................. 23 2,420,262 2.03
9.375.................. 27 3,451,842 2.89
9.500.................. 93 10,795,858 9.06
9.625.................. 50 6,037,570 5.07
9.750.................. 73 9,364,791 7.86
9.875.................. 101 12,233,105 10.26
9.880.................. 1 102,307 0.09
9.900.................. 1 116,469 0.10
9.950.................. 1 146,135 0.12
9.975.................. 2 123,408 0.10
9.980.................. 2 159,355 0.13
9.990.................. 6 768,685 0.64
10.000.................. 51 5,200,232 4.36
10.125.................. 46 5,572,468 4.67
10.250.................. 61 6,202,901 5.21
10.375.................. 50 5,346,374 4.48
10.400.................. 1 74,446 0.06
10.475.................. 1 74,384 0.06
10.490.................. 2 183,703 0.15
10.500.................. 83 9,589,231 8.05
10.625.................. 45 4,728,076 3.96
10.650.................. 1 122,059 0.10
10.750.................. 55 6,152,303 5.17
10.850.................. 1 57,292 0.05
10.875.................. 31 3,284,209 2.75
10.950.................. 1 73,309 0.06
10.990.................. 5 673,995 0.57
11.000.................. 33 3,375,032 2.83
11.125.................. 13 1,061,120 0.89
11.175.................. 2 53,213 0.04
11.250.................. 19 1,742,742 1.46
11.375.................. 8 647,573 0.54
11.490.................. 1 104,793 0.09
11.500.................. 31 2,716,480 2.28
11.625.................. 13 1,209,120 1.01
11.750.................. 15 1,090,778 0.91
11.875.................. 3 529,515 0.44
11.980.................. 1 74,751 0.06
11.990.................. 1 43,909 0.04
12.000.................. 4 595,482 0.50
12.050.................. 1 45,934 0.04
12.125.................. 1 77,843 0.07
12.250.................. 6 465,127 0.39
12.375.................. 5 372,249 0.31
12.500.................. 7 401,074 0.34
12.625.................. 1 75,962 0.06
12.750.................. 10 998,478 0.84
12.875.................. 1 24,869 0.02
12.990.................. 2 74,922 0.06
13.000.................. 4 380,248 0.32
13.125.................. 1 51,929 0.04
13.250.................. 2 86,844 0.07
13.375.................. 1 104,840 0.09
13.500.................. 1 63,389 0.05
13.625.................. 2 275,317 0.23
13.750.................. 1 62,793 0.05
14.750.................. 1 111,838 0.09
15.750.................. 1 52,596 0.04
16.000.................. 1 62,212 0.05
--- ------------ -----
Total................ 1,086 $119,290,729 100.00%
--- ------------ -----
--- ------------ -----
</TABLE>
- ------------------------
(1)As of the Cut-off Date, the weighted average Mortgage Rate of the
Mortgage Loans is approximately 10.204% per annum.
S-14
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
OCCUPANCY TYPES(1)
- --------------------------------------------------------------
AGGREGATE PERCENT OF
NUMBER OF PRINCIPAL AGGREGATE
MORTGAGE BALANCE PRINCIPAL
OCCUPANCY TYPE LOANS OUTSTANDING BALANCE
- --------------------------------------------------------------
<S> <C> <C> <C>
Primary Home........... 874 $ 99,828,581 83.68%
Second Home............ 11 1,381,536 1.16
Investor............... 201 18,080,612 15.16
--------- ------------ ------
Total............... 1,086 $119,290,729 100.00%
--------- ------------ ------
--------- ------------ ------
</TABLE>
- ------------------------
(1) Based upon representations of the related Mortgagors at the time
of origination.
<TABLE>
<CAPTION>
STATE DISTRIBUTION OF MORTGAGED
PROPERTIES(1)
- --------------------------------------------------------------
AGGREGATE PERCENT OF
NUMBER OF PRINCIPAL AGGREGATE
MORTGAGE BALANCE PRINCIPAL
STATE LOANS OUTSTANDING BALANCE
- --------------------------------------------------------------
<S> <C> <C> <C>
Arizona................ 46 $ 4,650,046 3.90%
California............. 239 32,719,077 27.42
Colorado............... 30 3,643,911 3.05
Florida................ 139 14,576,820 12.22
Georgia................ 31 2,717,185 2.28
Hawaii................. 25 5,661,351 4.75
Massachusetts.......... 35 3,546,870 2.97
Nevada................. 22 2,885,158 2.42
New York............... 21 3,014,208 2.53
Oregon................. 104 10,223,140 8.57
Utah................... 41 3,892,224 3.26
Washington............. 107 10,544,469 8.84
Other(1)............... 246 21,216,270 17.79
--------- ------------ ------
Total............... 1,086 $119,290,729 100.00%
--------- ------------ ------
--------- ------------ ------
</TABLE>
- ------------------------
(1) Other includes 35 other states, and the District of Columbia, with
under 2% concentrations individually. No more than approximately 0.73% of
the Mortgage Loans will be secured by Mortgaged Properties located in any
one postal zip code.
<TABLE>
<CAPTION>
PURPOSE OF MORTGAGE LOANS
- --------------------------------------------------------------
AGGREGATE PERCENT OF
NUMBER OF PRINCIPAL AGGREGATE
MORTGAGE BALANCE PRINCIPAL
LOAN PURPOSE LOANS OUTSTANDING BALANCE
- --------------------------------------------------------------
<S> <C> <C> <C>
Purchase............... 330 $ 35,173,449 29.49%
Refinance (Rate or
Term)................. 207 26,339,397 22.08
Refinance (Cash-Out)... 549 57,777,883 48.43
--------- ------------ ------
Total............... 1,086 $119,290,729 100.00%
--------- ------------ ------
--------- ------------ ------
</TABLE>
<TABLE>
<CAPTION>
DOCUMENTATION FOR MORTGAGE LOANS
- --------------------------------------------------------------
AGGREGATE PERCENT OF
NUMBER OF PRINCIPAL AGGREGATE
MORTGAGE BALANCE PRINCIPAL
TYPE OF PROGRAM LOANS OUTSTANDING BALANCE
- --------------------------------------------------------------
<S> <C> <C> <C>
Full................... 825 $ 87,527,564 73.37%
Alternative............ 33 3,159,130 2.65
Reduced/No Ratio....... 228 28,604,035 23.98
--------- ------------ ------
Total............... 1,086 $119,290,729 100.00%
--------- ------------ ------
--------- ------------ ------
</TABLE>
<TABLE>
<CAPTION>
TYPE OF MORTGAGED PROPERTIES
- --------------------------------------------------------------
AGGREGATE PERCENT OF
NUMBER OF PRINCIPAL AGGREGATE
MORTGAGE BALANCE PRINCIPAL
PROPERTY TYPE LOANS OUTSTANDING BALANCE
- --------------------------------------------------------------
<S> <C> <C> <C>
Single Family.......... 893 $100,234,134 84.03%
Planned Unit
Development (PUD)..... 3 301,553 0.25
Condo.................. 47 3,207,447 2.69
2-4 Units.............. 139 15,087,280 12.65
High Rise.............. 4 460,315 0.38
--------- ------------ ------
Total............... 1,086 $119,290,729 100.00%
--------- ------------ ------
--------- ------------ ------
</TABLE>
S-15
<PAGE>
<PAGE>
LOAN GROUP 2
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS(1)
- --------------------------------------------------------------
AGGREGATE PERCENT OF
NUMBER OF PRINCIPAL AGGREGATE
ORIGINAL LOAN-TO-VALUE MORTGAGE BALANCE PRINCIPAL
RATIOS (%) LOANS OUTSTANDING BALANCE
- --------------------------------------------------------------
<S> <C> <C> <C>
Up to 60.00............. 51 $ 6,969,005 8.45%
60.01 - 65.00........... 48 5,908,857 7.16
65.01 - 70.00........... 80 11,031,405 13.38
70.01 - 75.00........... 157 21,075,317 25.56
75.01 - 80.00........... 204 28,349,474 34.37
80.01 - 85.00........... 59 7,254,877 8.80
85.01 - 90.00........... 13 1,809,697 2.19
90.01 - 95.00........... 1 71,046 0.09
--- ----------- ------
Total................ 613 $82,469,678 100.00%
--- ----------- ------
--- ----------- ------
</TABLE>
- ------------------------
(1) The weighted average original Loan-to-Value Ratio of the
Mortgage Loans is expected to be 74.05%.
<TABLE>
<CAPTION>
ORIGINAL TERMS TO MATURITY(1)
- --------------------------------------------------------------
AGGREGATE PERCENT OF
NUMBER OF PRINCIPAL AGGREGATE
ORIGINAL TERM TO MORTGAGE BALANCE PRINCIPAL
MATURITY (MONTHS) LOANS OUTSTANDING BALANCE
- --------------------------------------------------------------
<S> <C> <C> <C>
360.................... 613 $ 82,469,678 100.00%
--------- ------------ ------
Total.................. 613 $ 82,469,678 100.00%
--------- ------------ ------
--------- ------------ ------
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average remaining term to
maturity of the Mortgage Loans is expected to be approximately 356 months.
<TABLE>
<CAPTION>
CURRENT MORTGAGE LOAN PRINCIPAL BALANCES(1)
- --------------------------------------------------------------
AGGREGATE PERCENT OF
RANGE OF CURRENT NUMBER OF PRINCIPAL AGGREGATE
MORTGAGE LOAN MORTGAGE BALANCE PRINCIPAL
PRINCIPAL BALANCES LOANS OUTSTANDING BALANCE
- --------------------------------------------------------------
<S> <C> <C> <C>
0 - $ 50,000..... 35 $ 1,516,214 1.84%
$ 50,001 - $100,000..... 245 18,892,421 22.90
$100,001 - $150,000..... 163 20,162,903 24.44
$150,001 - $200,000..... 80 14,147,596 17.15
$200,001 - $250,000..... 36 7,990,513 9.69
$250,001 - $300,000..... 22 5,975,182 7.25
$300,001 - $350,000..... 10 3,242,241 3.93
$350,001 - $400,000..... 8 3,057,245 3.71
$400,001 - $450,000..... 3 1,300,318 1.58
$450,001 - $500,000..... 4 1,880,774 2.28
$500,001 - $550,000..... 1 518,260 0.63
$550,001 - $600,000..... 3 1,746,574 2.12
$600,001 - $650,000..... 2 1,291,470 1.57
$700,001 - $750,000..... 1 747,967 0.91
--- ----------- ------
Total................... 613 $82,469,678 100.00%
--- ----------- ------
--- ----------- ------
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the average current Mortgage Loan
principal balance is expected to be approximately $134,535.
<PAGE>
<TABLE>
<CAPTION>
CURRENT MORTGAGE RATES(1)
- --------------------------------------------------------------
AGGREGATE PERCENT OF
NUMBER OF PRINCIPAL AGGREGATE
CURRENT MORTGAGE BALANCE PRINCIPAL
MORTGAGE RATES (%) LOANS OUTSTANDING BALANCE
- --------------------------------------------------------------
<S> <C> <C> <C>
7.625.................. 2 $ 445,103 0.54%
7.740.................. 1 112,420 0.14
7.750.................. 5 1,223,436 1.48
7.875.................. 3 674,664 0.82
7.950.................. 2 434,303 0.53
7.980.................. 2 323,532 0.39
7.990.................. 1 274,815 0.33
8.000.................. 1 747,967 0.91
8.125.................. 2 205,530 0.25
8.250.................. 3 486,694 0.59
8.375.................. 14 3,080,408 3.74
8.490.................. 3 316,974 0.38
8.500.................. 13 2,109,744 2.56
8.625.................. 14 1,574,632 1.91
8.750.................. 16 1,687,934 2.05
8.875.................. 16 2,441,649 2.96
8.950.................. 1 149,407 0.18
8.990.................. 13 2,962,179 3.59
9.000.................. 9 1,084,157 1.31
9.125.................. 8 941,626 1.14
9.200.................. 2 333,802 0.40
9.240.................. 1 73,204 0.09
9.250.................. 20 3,232,033 3.92
9.365.................. 1 93,952 0.11
9.375.................. 17 2,194,814 2.66
9.490.................. 9 1,600,798 1.94
9.500.................. 24 3,076,335 3.73
9.625.................. 23 2,556,671 3.10
9.740.................. 3 287,287 0.35
9.750.................. 24 3,017,452 3.66
9.865.................. 2 339,845 0.41
9.875.................. 24 2,814,094 3.41
9.900.................. 1 175,260 0.21
9.950.................. 3 380,606 0.46
9.980.................. 1 299,732 0.36
9.990.................. 32 4,583,687 5.57
10.000.................. 10 2,064,335 2.50
10.081.................. 1 214,817 0.26
10.125.................. 17 2,192,165 2.66
10.150.................. 1 73,535 0.09
10.240.................. 3 366,457 0.44
10.250.................. 27 3,557,907 4.31
10.300.................. 1 596,995 0.72
10.365.................. 2 229,889 0.28
10.375.................. 17 1,748,434 2.12
10.450.................. 1 324,471 0.39
10.490.................. 8 1,032,580 1.25
10.500.................. 24 2,726,145 3.31
10.600.................. 2 218,981 0.27
10.625.................. 12 1,602,209 1.94
10.650.................. 1 62,951 0.08
10.750.................. 26 3,289,662 3.99
10.850.................. 2 133,551 0.16
10.865.................. 2 289,294 0.35
10.875.................. 11 1,220,065 1.48
10.950.................. 1 77,814 0.09
10.990.................. 12 1,144,634 1.39
11.000.................. 13 1,641,246 1.99
11.115.................. 4 658,386 0.80
11.125.................. 4 564,384 0.68
11.250.................. 12 1,227,946 1.49
11.375.................. 3 671,590 0.81
11.490.................. 3 246,316 0.30
11.500.................. 13 1,299,970 1.58
11.625.................. 6 637,945 0.77
11.750.................. 13 1,423,763 1.73
11.875.................. 5 336,883 0.41
11.990.................. 4 355,587 0.43
12.000.................. 14 1,441,070 1.75
12.125.................. 2 243,550 0.30
12.250.................. 5 590,860... 0.72
12.375.................. 2 180,299 0.22
12.490.................. 1 75,850 0.09
12.625.................. 1 129,369 0.16
12.750.................. 1 96,921 0.12
12.875.................. 1 97,318 0.12
12.975.................. 1 75,529 0.09
12.990.................. 1 125,271 0.15
13.000.................. 1 233,928 0.28
13.250.................. 3 344,685 0.42
13.844.................. 1 93,334 0.11
14.740.................. 1 94,971 0.12
15.250.................. 1 79,070 0.10
--- ----------- -----
Total................ 613 $82,469,678 100.00%
--- ----------- -----
--- ----------- -----
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of
the Mortgage Loans is expected to be approximately 9.917% per annum.
S-16
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
OCCUPANCY TYPES(1)
- --------------------------------------------------------------
AGGREGATE PERCENT OF
NUMBER OF PRINCIPAL AGGREGATE
MORTGAGE BALANCE PRINCIPAL
OCCUPANCY TYPE LOANS OUTSTANDING BALANCE
- --------------------------------------------------------------
<S> <C> <C> <C>
Primary Home............ 527 $73,273,610 88.84%
Second Home............. 4 482,566 0.59
Investor................ 82 8,713,502 10.57
--- ----------- ------
Total................ 613 $82,469,678 100.00%
--- ----------- ------
--- ----------- ------
</TABLE>
- ------------------------
(1) Based upon representations of the related Mortgagors at the time
of origination.
<TABLE>
<CAPTION>
STATE DISTRIBUTION OF MORTGAGED
PROPERTIES(1)
- --------------------------------------------------------------
AGGREGATE PERCENT OF
NUMBER OF PRINCIPAL AGGREGATE
MORTGAGE BALANCE PRINCIPAL
STATE LOANS OUTSTANDING BALANCE
- --------------------------------------------------------------
<S> <C> <C> <C>
Arizona................. 28 $ 2,616,628 3.17%
California.............. 183 29,832,601 36.18
Colorado................ 39 4,326,059 5.25
Georgia................. 20 2,246,567 2.72
Illinois................ 39 3,944,093 4.78
Maryland................ 19 4,243,038 5.14
Massachusetts........... 10 1,651,604 2.00
Nevada.................. 13 1,795,233 2.18
New Jersey.............. 19 3,240,573 3.93
New Mexico.............. 16 2,040,883 2.47
Oregon.................. 19 1,875,166 2.27
Utah.................... 56 5,360,042 6.50
Virginia................ 18 2,074,941 2.52
Washington.............. 68 7,833,558 9.50
Other(1)................ 66 9,388,691 11.39
--- ----------- ------
Total................ 613 $82,469,678 100.00%
--- ----------- ------
--- ----------- ------
</TABLE>
- ------------------------
(1) Other includes 21 other states, and the District of Columbia, with
under 2% concentrations individually. No more than approximately 1.05% of
the Mortgage Loans will be secured by Mortgaged Properties located in any
one postal zip code area.
<TABLE>
<CAPTION>
PURPOSE OF MORTGAGE LOANS
- --------------------------------------------------------------
AGGREGATE PERCENT OF
NUMBER OF PRINCIPAL AGGREGATE
MORTGAGE BALANCE PRINCIPAL
LOAN PURPOSE LOANS OUTSTANDING BALANCE
- --------------------------------------------------------------
<S> <C> <C> <C>
Purchase................ 203 $24,397,034 29.58%
Refinance (Rate or
Term).................. 108 16,853,284 20.44
Refinance (Cash-Out).... 302 41,219,360 49.98
--- ----------- ------
Total................ 613 $82,469,678 100.00%
--- ----------- ------
--- ----------- ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DOCUMENTATION FOR MORTGAGE LOANS
- --------------------------------------------------------------
AGGREGATE PERCENT OF
NUMBER OF PRINCIPAL AGGREGATE
MORTGAGE BALANCE PRINCIPAL
TYPE OF PROGRAM LOANS OUTSTANDING BALANCE
- -------------------------------------------------------------
<S> <C> <C> <C>
Full.................... 407 $50,537,424 61.28%
Alternative............. 16 1,891,965 2.29
Reduced/No Ratio........ 190 30,040,289 36.43
--------- ----------- ------
Total................ 613 $82,469,678 100.00%
--------- ----------- ------
--------- ----------- ------
</TABLE>
<TABLE>
<CAPTION>
TYPE OF MORTGAGED PROPERTIES
- --------------------------------------------------------------
AGGREGATE PERCENT OF
NUMBER OF PRINCIPAL AGGREGATE
MORTGAGE BALANCE PRINCIPAL
PROPERTY TYPE LOANS OUTSTANDING BALANCE
- --------------------------------------------------------------
<S> <C> <C> <C>
Single Family........... 507 $70,564,362 85.56%
Planned Unit Development
(PUD).................. 2 345,528 0.42
Condo................... 29 3,215,015 3.90
2-4 Units............... 67 7,712,561 9.35
Townhome................ 8 632,212 0.77
--------- ----------- ------
Total................ 613 $82,469,678 100.00%
--------- ----------- ------
--------- ----------- ------
</TABLE>
<TABLE>
<CAPTION>
NEXT ADJUSTMENT DATES(1)
- --------------------------------------------------------------
AGGREGATE PERCENT OF
NUMBER OF PRINCIPAL AGGREGATE
MORTGAGE BALANCE PRINCIPAL
MONTHS LOANS OUTSTANDING BALANCE
- --------------------------------------------------------------
<S> <C> <C> <C>
September 1996.......... 33 $ 3,989,909 4.84%
October 1996............ 33 5,676,252 6.88
November 1996........... 49 6,550,622 7.94
December 1996........... 62 8,550,544 10.37
January 1997............ 45 6,357,632 7.71
February 1997........... 39 4,301,343 5.22
December 1997........... 9 1,505,730 1.83
January 1998............ 26 4,477,679 5.43
February 1998........... 8 2,276,172 2.76
March 1998.............. 4 520,363 0.63
April 1998.............. 83 11,302,958 13.71
May 1998................ 88 9,915,978 12.02
June 1998............... 102 12,948,945 15.69
July 1998............... 20 2,421,576 2.94
August 1998............. 12 1,673,975 2.03
--------- ----------- ------
Total................ 613 $82,469,678 100.00%
--------- ----------- ------
--------- ----------- ------
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average months to the next
Adjustment Date for the Mortgage Loans in Loan Group 2 was approximately 13
months.
S-17
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
MARGIN(1)
- --------------------------------------------------------------
AGGREGATE PERCENT OF
NUMBER OF PRINCIPAL AGGREGATE
MORTGAGE BALANCE PRINCIPAL
MARGIN(%) LOANS OUTSTANDING BALANCE
- --------------------------------------------------------------
<S> <C> <C> <C>
4.250................... 1 $ 321,795 0.39%
4.500................... 5 641,603 0.78
4.750................... 5 621,476 0.75
4.875................... 1 279,403 0.34
5.000................... 13 2,210,036 2.68
5.125................... 4 384,760 0.47
5.225................... 2 324,346 0.39
5.240................... 1 63,550 0.08
5.250................... 24 3,514,156 4.26
5.350................... 1 59,918 0.07
5.375................... 7 1,065,601 1.29
5.390................... 1 73,535 0.09
5.490................... 2 110,670 0.13
5.500................... 41 5,590,368 6.78
5.550................... 1 596,995 0.72
5.625................... 14 2,280,481 2.77
5.750................... 46 7,675,519 9.31
5.800................... 1 167,913 0.20
5.850................... 1 148,321 0.18
5.875................... 18 2,886,507 3.50
5.950................... 1 299,732 0.36
5.990................... 4 334,790 0.41
6.000................... 74 8,640,867 10.48
6.100................... 1 73,450 0.09
6.125................... 23 2,369,064 2.87
6.187................... 1 232,145 0.28
6.200................... 1 251,827 0.31
6.250................... 59 8,043,091 9.75
6.300................... 2 182,758 0.22
6.375................... 8 1,276,033 1.55
6.425................... 1 99,122 0.12
6.450................... 3 276,860 0.34
6.490................... 1 93,216 0.11
6.500................... 75 8,956,818 10.86
6.625................... 6 711,373 0.86
6.675................... 1 214,817 0.26
6.750................... 34 4,137,656 5.02
6.875................... 6 912,501 1.11
6.950................... 10 1,342,136 1.63
6.990................... 6 454,168 0.55
7.000................... 28 3,835,934 4.65
7.125................... 22 3,112,240 3.77
7.200................... 3 580,832 0.70
7.250................... 17 1,849,867 2.24
7.325................... 1 123,216 0.15
7.375................... 3 571,833 0.69
7.450................... 1 62,480 0.08
7.490................... 4 1,135,332 1.38
7.500................... 14 1,338,208 1.62
7.625................... 4 436,630 0.53
7.750................... 3 640,392 0.78
7.875................... 1 111,421 0.14
8.000................... 4 501,303 0.61
8.750................... 2 250,613 0.30
--- ----------- ------
Total................ 613 $82,469,678 100.00%
--- ----------- ------
--- ----------- ------
</TABLE>
- ------------------------
(1) As of the Cut-Off Date, the weighted average margin of the
Mortgage Loans is approximately 6.212%
<TABLE>
<CAPTION>
MAXIMUM RATES(1)
- --------------------------------------------------------------
AGGREGATE PERCENT OF
NUMBER OF PRINCIPAL AGGREGATE
MORTGAGE BALANCE PRINCIPAL
MAXIMUM RATE (%) LOANS OUTSTANDING BALANCE
- --------------------------------------------------------------
<S> <C> <C> <C>
13.950.................. 1 $ 149,086 0.18%
14.240.................. 1 112,420 0.14
14.250.................. 4 506,305 0.61
14.490.................. 1 274,815 0.33
14.500.................. 2 228,641 0.28
14.625.................. 2 445,103 0.54
14.650.................. 1 73,535 0.09
14.750.................. 4 1,061,702 1.29
14.875.................. 6 1,828,278 2.22
14.950.................. 1 285,217 0.35
14.980.................. 2 323,532 0.39
14.990.................. 4 365,564 0.44
15.000.................. 11 2,511,271 3.05
15.125.................. 13 1,506,054 1.83
15.250.................. 13 1,503,547 1.82
15.375.................. 19 3,115,668 3.78
15.450.................. 2 227,222 0.28
15.490.................. 17 3,201,953 3.88
15.500.................. 16 2,155,597 2.61
15.625.................. 12 1,303,239 1.58
15.700.................. 2 333,802 0.40
15.740.................. 1 73,204 0.09
15.750.................. 28 4,003,319 4.85
15.865.................. 1 93,952 0.11
15.875.................. 23 3,213,255 3.90
15.900.................. 1 175,260 0.21
15.980.................. 1 299,732 0.36
15.990.................. 8 1,534,766 1.86
16.000.................. 29 3,738,607 4.53
16.081.................. 1 214,817 0.26
16.125.................. 20 2,665,883 3.23
16.200.................. 1 64,867 0.08
16.240.................. 2 151,579 0.18
16.250.................. 39 4,077,528 4.94
16.300.................. 1 596,995 0.72
16.365.................. 2 339,845 0.41
16.375.................. 24 2,978,494 3.61
16.450.................. 3 380,606 0.46
16.490.................. 33 4,750,129 5.76
16.500.................. 22 2,701,066 3.28
16.550.................. 2 266,987 0.32
16.625.................. 15 1,732,179 2.10
16.650.................. 1 62,951 0.08
16.740.................. 4 502,164 0.61
16.750.................. 29 3,583,568 4.35
16.850.................. 2 133,551 0.16
16.865.................. 2 229,889 0.28
16.875.................. 16 1,732,904 2.10
16.950.................. 2 421,789 0.51
16.990.................. 6 840,457 1.02
17.000.................. 22 3,092,481 3.75
17.100.................. 2 218,981 0.27
17.125.................. 17 2,563,883 3.11
17.200.................. 2 277,634 0.34
17.250.................. 24 3,288,106 3.99
17.365.................. 2 289,294 0.35
17.375.................. 14 1,277,238 1.55
17.490.................. 11 1,092,309 1.32
17.500.................. 16 1,471,078 1.78
17.615.................. 4 658,386 0.80
17.625.................. 4 502,322 0.61
17.750.................. 9 969,445 1.18
17.875.................. 4 624,885 0.76
17.990.................. 3 246,316 0.30
18.000.................. 1 272,960 0.33
18.125.................. 4 414,419 0.50
18.180.................. 2 180,299 0.22
18.250.................. 1 88,644 0.11
18.375.................. 3 165,039 0.20
18.490.................. 3 287,112 0.35
18.500.................. 1 233,928 0.28
18.625.................. 2 134,204 0.16
18.750.................. 3 450,277 0.55
19.475.................. 1 75,529 0.09
19.490.................. 1 125,271 0.15
19.750.................. 1 129,369 0.16
20.500.................. 1 93,334 0.11
20.750.................. 1 79,070 0.10
21.240.................. 1 94,971 0.12
--- ----------- -----
Total................ 613 $82,469,678 100.00%
--- ----------- -----
--- ----------- -----
</TABLE>
- ------------------------
(1) As of the Cut-Off Date, the weighted average Lifetime Cap of the
Mortgage Loans is expected to be approximately 16.30%.
S-18
<PAGE>
<PAGE>
ASSIGNMENT OF THE MORTGAGE LOANS
Pursuant to the Agreement, the Depositor on the Closing Date will sell,
transfer, assign, set over and otherwise convey without recourse to the Trustee
in trust for the benefit of the Certificateholders all right, title and interest
of the Depositor in and to each Mortgage Loan and all right, title and interest
in and to all other assets included in the Trust Fund, including all principal
and interest received on or with respect to the Mortgage Loans, exclusive of
principal and interest due on or prior to the Cut-off Date (or, in the case of a
Mortgage Loan with a Due Date other than the first of the month, on or prior to
the related Due Date occurring immediately prior to the Closing Date).
In connection with such transfer and assignment, the Depositor will deliver
or cause to be delivered to the Trustee, or a custodian for the Trustee, among
other things, the original promissory note (the 'Mortgage Note') (and any
modification or amendment thereto) endorsed in blank without recourse, the
original instrument creating a first lien on the related Mortgaged Property (the
'Mortgage') with evidence of recording indicated thereon, an assignment in
recordable form of the Mortgage, the title policy with respect to the related
Mortgaged Property and, if applicable, all recorded intervening assignments of
the Mortgage and any riders or modifications to such Mortgage Note and Mortgage
(except for any such document not returned from the public recording office,
which will be delivered to the Trustee as soon as the same is available to the
Depositor) (collectively, the 'Mortgage File'). Assignments of the Mortgage
Loans to the Trustee (or its nominee) will be recorded in the appropriate public
office for real property records, except in states such as California where, in
the opinion of counsel, such recording is not required to protect the Trustee's
interest in the Mortgage Loan against the claim of any subsequent transferee or
any successor to or creditor of the Depositor or the Seller.
The Trustee will review each Mortgage File within 90 days of the Closing
Date (or promptly after the Trustee's receipt of any document permitted to be
delivered after the Closing Date) and if any document in a Mortgage File is
found to be missing or defective in a material respect and the Seller does not
cure such defect within 90 days of notice thereof from the Trustee (or within
such longer period not to exceed 720 days after the Closing Date as provided in
the Agreement in the case of missing documents not returned from the public
recording office), the Seller will be obligated to repurchase the related
Mortgage Loan from the Trust Fund. Rather than repurchase the Mortgage Loan as
provided above, the Seller may remove such Mortgage Loan (a 'Deleted Mortgage
Loan') from the Trust Fund and substitute in its place another mortgage loan (a
'Replacement Mortgage Loan'); however, such substitution is permitted only
within two years of the Closing Date and may not be made unless an opinion of
counsel is provided to the effect that such substitution will not disqualify the
Trust Fund as a REMIC or result in a prohibited transaction tax under the Code.
Any Replacement Mortgage Loan generally will, on the date of substitution, among
other characteristics set forth in the Agreement, (i) have a principal balance,
after deduction of all Scheduled Payments due in the month of substitution, not
in excess of, and not more than 10% less than, the Stated Principal Balance of
the Deleted Mortgage Loan (the amount of any shortfall to be deposited by the
Seller and held for distribution to the Certificateholders on the related
Distribution Date (a 'Substitution Adjustment Amount')), (ii) have a current
Mortgage Rate not lower than, and not more than 1% per annum higher than, that
of the Deleted Mortgage Loan, (iii) with respect to the Mortgage Loans in Loan
Group 2, (a) have a Mortgage Rate based upon the Index and a Margin at least
equal to and not greater than 50 basis points higher than the Deleted Mortgage
Loan, (b) have a Mortgage Rate subject to a Maximum Rate that is no less than
the Maximum Rate applicable to the Deleted Mortgage Loan, (c) have Adjustment
Dates that are no more or less frequent than the Deleted Mortgage Loan, (iv)
have a Loan-to-Value Ratio not higher than that of the Deleted Mortgage Loan,
(v) have a remaining term to maturity not greater than (and not more than one
year less than) that of the Deleted Mortgage Loan, and (vi) comply with all of
the representations and warranties set forth in the Agreement as of the date of
substitution. This cure, repurchase or substitution obligation constitutes the
sole remedy available to Certificateholders or the Trustee for omission of, or a
material defect in, a Mortgage Loan document.
UNDERWRITING STANDARDS
Indy Mac, through its Subprime Mortgage Division ('SPMD'), operates a
mortgage conduit program established in April 1995 to purchase mortgage loans
made to borrowers with prior credit difficulties (so-called 'sub-prime mortgage
loans'). All of the mortgage loans purchased by SPMD are 'conventional
non-conforming mortgage loans' (i.e., loans which are not insured by the FHA or
partially guaranteed by the VA and which do not qualify for sale to FNMA or
FHLMC) secured by first liens on one- to four-family residential properties.
S-19
<PAGE>
<PAGE>
Indy Mac purchases all of its sub-prime mortgage loans from unaffiliated
sellers either under flow or bulk purchase arrangements, the terms of which may
vary from seller to seller. Such sellers are required to be HUD approved
mortgagees. Substantially all of the sub-prime mortgage loans purchased by Indy
Mac were reviewed and re-underwritten by a specialized group of underwriters at
SPMD who are familiar with the unique characteristics of sub-prime mortgage
loans.
Indy Mac's underwriting standards are primarily intended to evaluate the
value and adequacy of the mortgaged property as collateral for the proposed
mortgage loan, as well as the type and intended use of the mortgaged property.
Its underwriting standards are less stringent than the standards generally
acceptable to FNMA and FHLMC with regard to the borrower's credit standing and
repayment ability. Borrowers who qualify under the Indy Mac underwriting
standards generally have payment histories and debt-to-income ratios that would
not satisfy FNMA and FHLMC underwriting guidelines and may have a record of
major derogatory credit items such as outstanding judgments or prior
bankruptcies. As a result, the rates of delinquency, bankruptcy and foreclosure
for such mortgage loans could be higher, and may be substantially higher, than
that of mortgage loans underwritten in accordance with FNMA and FHLMC standards.
Each of the sub-prime mortgage loans purchased by Indy Mac is assigned to
one of four credit levels based on the prospective mortgagor's mortgage payment
history within the preceding twelve months, retail and installment debt credit
history, judgments, charge-offs and accounts assigned for collection. Indy Mac
also accepts loans underwritten under one of four documentation programs: Full
Documentation, Alternative Documentation, Reduced Documentation and No Ratio
Documentation. For each credit level and documentation program, Indy Mac has a
maximum permitted loan amount, a maximum Loan-to-Value Ratio and, in some cases,
a limitation on the loan purpose. The maximum debt to income ratio for all
loans, other than those with primary mortgage insurance, is 50%. Such
limitation, however, may be waived on a case by case basis.
Under the Full Documentation Program, the prospective borrower's
employment, income and assets are verified through written or telephonic
communications. The Alternative Documentation Program provides for alternative
methods of employment verification using W-2 forms or pay stubs. Mortgage loans
in all four credit levels may be submitted under these two programs. Under each
of the Reduced Documentation Program and the No Ratio Program, more emphasis is
placed on the value and adequacy of the mortgaged property as collateral and
other assets of the borrower than on credit underwriting. Under these programs,
certain credit underwriting documentation concerning income or income
verification and/or employment verification is waived.
Only mortgage loans in credit Level I and Level II may be submitted under
the Reduced Documentation and No Ratio Programs, and the maximum loan amounts
and/or maximum Loan-to-Value Ratios under these programs are less than those
under the Full and Alternative Documentation Programs.
Set forth forth below are the maximum loan amounts and Loan-to-Value Ratios
for purchase money mortgage loans and refinance mortgage loans for each credit
level and documentation program:
<TABLE>
<CAPTION>
FULL AND ALTERNATIVE LOAN-TO-VALUE
DOCUMENTATION PROGRAMS LOAN AMOUNT RATIO(1)
- ---------------------------------------------------------------------- ----------- -----------------------
<S> <C> <C>
Credit Level I........................................................ $ 500,000 80% owner occupied
$ 400,000 90% owner occupied
$ 500,000 70% non-owner occupied
Credit Level II....................................................... $ 500,000 80% owner occupied
$ 500,000 70% non-owner occupied
Credit Level III...................................................... $ 300,000 75% owner occupied
$ 250,000 65% non-owner occupied
(refinance only)
Credit Level IV....................................................... $ 250,000 Owner occupied
(refinance only)
<CAPTION>
REDUCED LOAN-TO-VALUE
DOCUMENTATION PROGRAMS LOAN AMOUNT RATIO
- ---------------------------------------------------------------------- ----------- -----------------------
<S> <C> <C>
Credit Level I........................................................ $ 300,000 80% owner occupied
$ 300,000 65% non-owner occupied
Credit Level II....................................................... $ 300,000 75% owner occupied
$ 300,000 65% non-owner occupied
</TABLE>
S-20
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NO-RATIO LOAN-TO-VALUE
DOCUMENTATION PROGRAMS LOAN AMOUNT RATIO
- ---------------------------------------------------------------------- ----------- -----------------------
<S> <C> <C>
Credit Level I........................................................ $ 500,000 75% owner occupied
$ 300,000 65% non-owned occupied
Credit Level II....................................................... $ 500,000 70% owner occupied
$ 300,000 60% non-owner occupied
</TABLE>
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(1) Second homes are treated the same as non-owner occupied.
Such limits may be waived, however, on a case by case basis if it is
determined, based on compensating factors, that an underwriting exception is
warranted. Compensating factors may include stable employment, time in the same
residence, cash reserves and savings.
SERVICING OF MORTGAGE LOANS
THE MASTER SERVICER
Indy Mac will act as Master Servicer. The principal executive offices of
Indy Mac are located at 35 North Lake Avenue, Pasadena, California 91101-7139.
The Master Servicer will be responsible for servicing the Mortgage Loans in
accordance with the terms set forth in the Agreement. The Master Servicer
intends to perform its servicing obligations under the Agreement through one or
more Servicers (each, a 'Servicer' and together, the 'Servicers') Two Servicers
are servicing 95.97% of the Mortgage Loans in the Mortgage Pool. Countrywide
Home Loans, Inc., an affiliate of the Depositor, is servicing 87.40% of the
Mortgage Loans in the Mortgage Pool and Advanta Mortgage Corp. USA is servicing
approximately 8.57% of the principal balance of the Mortgage Pool as of the
Cut-off Date. Notwithstanding such servicing arrangements, the Master Servicer
will remain liable for its servicing duties and obligations under the Agreement
as if the Master Servicer alone were servicing the Mortgage Loans.
SERVICING AND COLLECTION PROCEDURES
Indy Mac has entered into contracts (each, a 'Servicer Contract') with each
Servicer to perform, as independent contractors, servicing functions for Indy
Mac subject to its supervision. Such servicing functions include collection and
remittance of principal and interest payments, administration of mortgage escrow
accounts, collection of certain insurance claims and, if necessary, foreclosure.
Indy Mac may permit the Servicers to contract with subservicers to perform some
or all of Servicer's servicing duties, but such Servicer will not thereby be
released from its obligations under the Servicer Contract. Indy Mac also may
enter into servicing contracts directly with an affiliate of a Servicer or
permit a Servicer to transfer its servicing rights and obligations to a third
party. In such instances, the affiliate or third party, as the case may be, will
perform servicing functions comparable to those normally performed by the
Servicer as described above, and the Servicer will not be obligated to perform
such servicing functions. When used herein with respect to servicing
obligations, the term Servicer includes any such affiliate or third party. Indy
Mac may perform certain supervisory functions with respect to servicing by the
Servicers directly or through an agent or independent contractor and will be
responsible for administering and servicing the Mortgage Loans pursuant to the
Agreement. On or before the Closing Date, Indy Mac will establish one or more
accounts (the 'Collection Account') into which each Servicer will remit
collections on the mortgage loans serviced by it (net of its related servicing
compensation). For purposes of the Agreement, Indy Mac, as Master Servicer, will
be deemed to have received any amounts with respect to the Mortgage Loans that
are received by a Servicer regardless of whether such amounts are remitted by
the Servicer to Indy Mac. Indy Mac has reserved the right to remove the Servicer
servicing any Mortgage Loan at any time and will exercise that right if Indy Mac
considers such removal to be in the best interest of the Certificateholders and
the Insurer. In the event that Indy Mac removes a Servicer, Indy Mac will
continue to be responsible for servicing the related Mortgage Loans.
FORECLOSURE AND DELINQUENCY EXPERIENCE
The following table summarizes the delinquency experience of Indy Mac's
sub-prime mortgage loans as of December 31, 1995, March 31, 1996 and June 30,
1996 on approximately $46 million, $135 million and $235
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million, respectively. A mortgage loan is characterized as delinquent if the
borrower has not paid the Scheduled Payment due by the Due Date. The table below
excludes sub-prime mortgage loans where the borrower has filed for bankruptcy.
Since Indy Mac only began master servicing sub-prime mortgage loans in April
1995, the delinquency percentages may be affected by the size and relative lack
of seasoning of the portfolio because many of such loans were not outstanding
long enough to give rise to some or all of the periods of delinquency indicated
in the chart below. Accordingly, the information should not be considered as a
basis for assessing the likelihood, amount, or severity of delinquency or losses
on the Mortgage Loans, and no assurances can be given that the foreclosure
experience presented in the paragraph below the table will be indicative of such
experience on the Mortgage Loans.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996 JUNE 30, 1996
----------------- --------------- ---------------
<S> <C> <C> <C>
Total Number of Sub-Prime Mortgage
Loans in Portfolio................... 387 1,125 1,923
Delinquent Mortgage Loans and Pending
Foreclosures at Period End(1):
30-59 days........................ 3.10% 2.84% 2.91%
60-89 days........................ 0.00 0.18 0.62
90 days or more (excluding pending
foreclosures)................... 0.26 0.18 0.48
------- ------ ------
Total delinquencies.......... 3.36% 3.20% 4.01%
------- ------ ------
------- ------ ------
Foreclosures pending................... 0.00% 0.00% 0.10%
------- ------ ------
Total delinquencies and
foreclosures pending....... 3.36% 3.20% 4.11%
------- ------ ------
------- ------ ------
</TABLE>
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(1) As a percentage of the total number of loans master serviced.
Over the last several years, there has been a general deterioration of the
real estate market and weakening economy in many regions of the country,
including California. The general deterioration of the real estate market has
been reflected in increases in delinquencies of loans secured by real estate,
slower absorption rates of real estate into the market and lower sales prices
for real estate. The general weakening of the economy has been reflected in
decreases in the financial strength of borrowers and decreases in the value of
collateral serving as security for loans. If the real estate market and economy
continue to decline, Indy Mac may experience an increase in delinquencies on the
loans it services and higher net losses on liquidated sub-prime mortgage loans.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Expense Fees with respect to the Mortgage Pool are payable out of the
interest payments on each Mortgage Loan. The Expense Fees will be 0.509% per
annum of the Stated Principal Balance of each Mortgage Loan. The Expense Fees
consist of (a) master servicing compensation payable to the Master Servicer in
respect of its master servicing activities (the 'Master Servicing Fee'), and (b)
fees payable to the Trustee in respect of its activities as trustee under the
Agreement. The Master Servicing Fee will be 0.50% per annum of the Stated
Principal Balance of each Mortgage Loan. The Master Servicer is obligated to pay
certain ongoing expenses associated with the Trust Fund and incurred by the
Master Servicer in connection with its responsibilities under the Agreement and
such amounts will be paid by the Master Servicer out of the Master Servicing
Fee. The amount of the Master Servicing Fee is subject to adjustment with
respect to prepaid Mortgage Loans, as described herein under ' -- Adjustment to
Master Servicing Fee in Connection with Certain Prepaid Mortgage Loans.' The
Master Servicer will also be entitled to receive late payment fees, assumption
fees, prepayment fees and other similar charges. The Master Servicer will be
entitled to receive all reinvestment income earned on amounts on deposit in the
Collection Account and the Distribution Account. The 'Adjusted Net Mortgage
Rate' of a Mortgage Loan is the Mortgage Rate thereof minus the related Expense
Fee Rate.
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ADJUSTMENT TO MASTER SERVICING FEE IN CONNECTION WITH CERTAIN PREPAID MORTGAGE
LOANS
When a borrower prepays a Mortgage Loan between Due Dates, the borrower is
required to pay interest on the amount prepaid only to the date of prepayment
and not thereafter. Principal prepayments by borrowers received during a
Remittance Period will be distributed to Certificateholders on the related
Distribution Date. Pursuant to the Agreement, the Master Servicing Fee for any
month will be reduced, but not more than one-quarter of such Master Servicing
Fee (such amount, the 'Compensating Interest'), by an amount with respect to
each such prepaid Mortgage Loan sufficient to pass through to Certificateholders
the full amount of interest to which they would be entitled in respect of such
Mortgage Loan on the related Distribution Date. See 'Description of the
Certificates -- Distributions of Interest and Principal,' 'Yield, Prepayment and
Maturity Considerations -- Prepayment Considerations and Risks' and 'Credit
Enhancement -- The Financial Guaranty Insurance Policy' herein.
ADVANCES
Subject to the following limitations, the Master Servicer will be required
to advance prior to each Distribution Date, from its own funds or amounts
received with respect to the Mortgage Loans that do not constitute Available
Funds for such Distribution Date, an amount equal to the aggregate of payments
of principal of and interest on the Mortgage Loans (net of the Master Servicing
Fee with respect to the related Mortgage Loans) which were due on the related
Due Date and which were delinquent on the related Determination Date, together
with an amount equivalent to interest on each Mortgage Loan as to which the
related Mortgaged Property has been acquired by the Trust Fund through
foreclosure or deed-in-lieu of foreclosure ('REO Property') (any such advance,
an 'Advance').
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Certificates rather than to guarantee or insure
against losses. The Master Servicer is obligated to make Advances with respect
to delinquent payments of principal of or interest on each Mortgage Loan to the
extent that such Advances are, in its reasonable judgment, recoverable from
future payments and collections or insurance payments or proceeds of liquidation
of the related Mortgage Loan. If the Master Servicer determines on any
Determination Date to make an Advance, such Advance will be included with the
distribution to Certificateholders on the related Distribution Date. Any failure
by the Master Servicer to make an Advance as required under the Agreement with
respect to the Certificates will constitute an Event of Default thereunder, in
which case the Trustee or the successor master servicer will be obligated to
make any such Advance, in accordance with the terms of the Agreement.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Agreement. Set forth below
are summaries of the specific terms and provisions pursuant to which the
Certificates will be issued. The following summaries do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, the provisions of the Agreement. When particular provisions or terms used in
the Agreement are referred to, the actual provisions (including definitions of
terms) are incorporated by reference.
The Mortgage Pass-Through Certificates, Series SPMD 1996-A will consist of
the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 and Class
A-7 Certificates (collectively, the 'Class A Certificates'), the Class OC
Certificates (the 'Class OC Certificates') and the Class R Certificates (the
'Class R Certificates,' and together with the Class A Certificates, the 'Offered
Certificates'). The Classes of Offered Certificates will have the respective
initial Class Certificate Balances (subject to the permitted variance) and
Pass-Through Rates set forth or described on the cover hereof. The Class OC
Certificates are not being offered hereby. Any information contained herein with
respect to the Class OC Certificates is provided only to permit a better
understanding of the Offered Certificates.
The Class Certificate Balance of any Class of Offered Certificates as of
any Distribution Date is the initial Class Certificate Balance thereof reduced
by all amounts previously distributed to holders of Certificates of such Class
as payments of principal.
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The Book-Entry Certificates will be issuable in book-entry form only. The
Physical Certificates will be issued in fully registered certificated form. The
Physical Certificates will be issued as a single certificate.
BOOK-ENTRY CERTIFICATES
The Class A Certificates will be book-entry Certificates (the 'Book-Entry
Certificates'). Persons acquiring beneficial ownership interests in the Class A
Certificates ('Certificate Owners') will hold their Certificates through The
Depository Trust Company ('DTC') in the United States, or CEDEL or Euroclear (in
Europe) if they are participants of such systems, or indirectly through
organizations which are participants in such systems. The Book-Entry
Certificates will be issued in one or more certificates which equal the
aggregate principal balance of the Class A Certificates and will initially be
registered in the name of Cede & Co., the nominee of DTC. CEDEL and Euroclear
will hold omnibus positions on behalf of their participants through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries which in turn will hold such positions in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank
will act as depositary for CEDEL and Chase will act as depositary for Euroclear
(in such capacities, individually the 'Relevant Depositary' and collectively the
'European Depositaries'). Investors may hold such beneficial interests in the
Book-Entry Certificates in minimum denominations representing Certificate
Principal Balances of $25,000 and in multiples of $1,000 in excess thereof.
Except as described below, no person acquiring a Book-Entry Certificate (each, a
'beneficial owner') will be entitled to receive a physical certificate
representing such Certificate (a 'Definitive Certificate'). Unless and until
Definitive Certificates are issued, it is anticipated that the only
'Certificateholder' of the Class A Certificates will be Cede & Co., as nominee
of DTC. Certificate Owners will not be Certificateholders as that term is used
in the Agreement. Certificate Owners are only permitted to exercise their rights
indirectly through participants of DTC ('DTC Participants') and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a 'Financial Intermediary') that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC Participant and on
the records of CEDEL or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Class A Certificates from the Trustee through DTC and DTC
Participants. While the Class A Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the 'Rules'), DTC is required to
make book-entry transfers among DTC Participants on whose behalf it acts with
respect to the Class A Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Class A Certificates.
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Class A Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates, the Rules provide a mechanism by which
Certificate Owners will receive distributions and will be able to transfer their
interest.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Class A Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Certificate Owners who are not DTC Participants may
transfer ownership of Class A Certificates only through DTC Participants and
indirect participants by instructing such DTC Participants and indirect
participants to transfer Class A Certificates, by book-entry transfer, through
DTC for the account of the purchasers of such Class A Certificates, which
account is maintained with their respective DTC Participants. Under the Rules
and in accordance with DTC's normal procedures, transfers of ownership of Class
A Certificates will be executed through DTC and the accounts of the respective
DTC Participants at DTC will be debited and credited. Similarly, the DTC
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Certificate
Owners.
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a DTC Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day.
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Cash received in CEDEL or Euroclear as a result of sales of securities by or
through a CEDEL Participant (as defined below) or Euroclear Participant (as
defined below) to a DTC Participant will be received with value on the DTC
settlement date but will be available in the relevant CEDEL or Euroclear cash
account only as of the business day following settlement in DTC. For information
with respect to tax documentation procedures relating to the Certificates, see
'Global Clearance, Settlement and Tax Documentation Procedures -- Certain U.S.
Federal Income Tax Documentation Requirements' in Annex I hereto.
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC Participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC Participants as in effect from
time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ('CEDEL
Participants') and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
('Euroclear Participants') and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the 'Euroclear Operator'), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
'Cooperative'). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
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The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the 'Terms and Conditions'). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC Participants
in accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held through CEDEL or Euroclear will be credited to the cash accounts of CEDEL
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a beneficial owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Certificates,
may be limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary market since
certain potential investors may be unwilling to purchase Certificates for which
they cannot obtain physical certificates.
Monthly and annual reports on the Trust Fund will be provided to Cede &
Co., as nominee of DTC, and will be made available by Cede & Co. to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting the Depository, and to the Financial Intermediaries to
whose DTC accounts the Book-Entry Certificates of such beneficial owners are
credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Agreement only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Certificates are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Certificates. CEDEL or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a Certificateholder under the Agreement on behalf of a CEDEL
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to the ability of the Relevant Depositary to effect
such actions on its behalf through DTC. DTC may take actions, at the direction
of the related Participants, with respect to some Class A Certificates which
conflict with actions taken with respect to other Class A Certificates.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Class A Certificates among participants of
DTC, CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
None of the Depositor, the Seller, the Master Servicer, the Trustee or the
Insurer will have any responsibility for any aspect of the records relating to
or payments made on account of beneficial ownership interests of the Book-Entry
Certificates held by Cede & Co., as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
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PAYMENTS ON MORTGAGE LOANS; ACCOUNTS
On or prior to the Closing Date, the Trustee will establish an account (the
'Distribution Account'), which shall be maintained with the Trustee in trust for
the benefit of the Certificateholders and the Insurer. On or prior to the
business day immediately preceding each Distribution Date, the Master Servicer
will withdraw from the Certificate Account the amount of Available Funds for
each Loan Group for such Distribution Date and will deposit such Available Funds
in the Distribution Account. Funds credited to the Certificate Account or the
Distribution Account may be invested for the benefit and at the risk of the
Master Servicer in Permitted Investments, as defined in the Agreement, that are
scheduled to mature on or prior to the business day preceding the next
Distribution Date.
SEPARATE REMIC STRUCTURE
For federal income tax purposes, the Trust Fund will include two segregated
asset pools, each of which will be treated as a separate REMIC. The assets of
the Subsidiary REMIC will generally consist of the Mortgage Loans. The assets of
the Master REMIC will generally consist of uncertificated regular interests
issued by the Subsidiary REMIC, which in the aggregate will correspond to the
Certificates.
DISTRIBUTIONS
Distributions on the Certificates will be made by the Trustee on the 25th
day of each month, or if such day is not a business day, on the first business
day thereafter, commencing in September 1996 (each, a 'Distribution Date'), to
the persons in whose names such Certificates are registered at the close of
business on the last business day of the month preceding the month of such
Distribution Date (the 'Record Date').
Distributions on each Distribution Date will be made by check mailed to the
address of the person entitled thereto as it appears on the applicable
certificate register or, in the case of a Certificateholder who holds 100% of a
Class of Certificates or who holds Certificates with an aggregate initial
Certificate Balance of $1,000,000 or more and who has so notified the Trustee in
writing in accordance with the Agreement, by wire transfer in immediately
available funds to the account of such Certificateholder at a bank or other
depository institution having appropriate wire transfer facilities; provided,
however, that the final distribution in retirement of the Certificates will be
made only upon presentment and surrender of such Certificates at the Corporate
Trust Office of the Trustee.
PRIORITY OF DISTRIBUTIONS AMONG CERTIFICATES
As more fully described herein, distributions on the Certificates will be
made on each Distribution Date from Available Funds for the related Loan Group
and will be made in the following order of priority: (i) to payment of such
Certificate Group's share of the monthly premium for the Policy to the Insurer;
(ii) to interest on each Class of Certificates; (iii) to current principal of
the Classes of Certificates then entitled to receive distributions of principal,
in the order and subject to the priorities set forth herein under
' -- Distributions of Interest and Principal'; (iv) to make payments to the
other Certificate Group as set forth under ' -- Distributions of Interest and
Principal' and ' -- Cross-Collateralization' herein; (v) to the Insurer as
reimbursement for claims under the Policy and other amounts that may be required
to be paid to the Insurer under the Insurance Agreement; (vi) to principal of
the Classes of Certificates then entitled to receive distributions of principal
in order to maintain the Specified Subordinated Amount for such Certificate
Group; (vii) to principal of the Classes of Certificates in the other
Certificate Group then entitled to receive distributions of principal in order
to maintain the Specified Subordinated Amount for such Certificate Group; and
(viii) to the Class OC Certificates, subject to certain limitations set forth
herein under ' -- Distributions of Interest and Principal.'
'Available Funds' with respect to any Distribution Date and the Mortgage
Loans in a Loan Group will be equal to the sum of (i) all scheduled installments
of interest (net of the related Expense Fees) and principal due on the Due Date
on such Mortgage Loans in the related Remittance Period and received prior to
the related Determination Date, together with any Advances in respect thereof;
(ii) all proceeds of any primary mortgage guaranty insurance policies and any
other insurance policies with respect to such Mortgage Loans, to the extent such
proceeds are not applied to the restoration of the related Mortgaged Property or
released to the Mortgagor in accordance with the Master Servicer's normal
servicing procedures (collectively, 'Insurance Proceeds') and all other cash
amounts received and retained in connection with the liquidation of defaulted
Mortgage Loans in
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such Loan Group, by foreclosure or otherwise ('Liquidation Proceeds') during the
related Remittance Period (in each case, net of unreimbursed expenses incurred
in connection with a liquidation or foreclosure and unreimbursed Advances, if
any); (iii) all partial or full prepayments on the Mortgage Loans in such Loan
Group received during the related Remittance Period together with all
Compensating Interest thereon; (iv) amounts received with respect to such
Distribution Date as the Substitution Adjustment Amount or purchase price in
respect of a Deleted Mortgage Loan in such Loan Group or a Mortgage Loan
repurchased by the Seller or the Master Servicer in such Loan Group as of such
Distribution Date; and (v) with respect to Loan Group 2, Supplemental Interest
Payments, if any, reduced by amounts in reimbursement for Advances previously
made with respect to the Mortgage Loans in such Loan Group and other amounts as
to which the Master Servicer is entitled to be reimbursed pursuant to the
Agreement with respect to such Loan Group.
The 'Remittance Period' with respect to any Distribution Date is the period
commencing on the second day of the month preceding the month in which the
Distribution Date occurs and ending on the first day of the month in which such
Distribution Date occurs.
DISTRIBUTIONS OF INTEREST AND PRINCIPAL
The Pass-Through Rate for each Class of Fixed Rate Certificates for each
Distribution Date (the 'Pass-Through Rate') is as set forth on the cover hereof.
The Pass-Through Rate on the Class A-7 Certificates for each Interest Accrual
Period will be a per annum rate equal to the lesser of (i) One-Month LIBOR plus
the Pass-Through Margin and (ii) the Available Funds Cap. The Interest
Distribution Amount for each Class of interest-bearing Certificates on any
Distribution Date will equal the related Pass-Through Rate for such Class of
Certificates times the then outstanding Class Certificate Balance thereof for
such Distribution Date. The Interest Distribution Amount for the Class A-7
Certificates will include Supplemental Interest, if any.
The 'Available Funds Cap' for any Distribution Date will equal (i) the
weighted average of the Mortgage Rates of the Mortgage Loans in Loan Group 2,
minus (ii) the Expense Fee Rate, the rate at which the premium for the Policy is
calculated and minus (iii) beginning on the sixth Distribution Date and each
Distribution Date thereafter, 0.50% per annum.
The 'Pass-Through Margin' will equal 0.32% per annum until the aggregate of
the Stated Principal Balances of the Mortgage Loans in Loan Group 2 is less than
or equal to 10% of the aggregate Principal Balances of the Mortgage Loans in
Loan Group 2 as of the Cut-off Date, at which time the 'Pass-Through Margin'
will equal 0.64% per annum.
On each Distribution Date, distributions in reduction of the Class
Certificate Balance of the Class A Certificates will be made in an amount equal
to the Principal Distribution Amount. The 'Principal Distribution Amount' for
each Certificate Group and Distribution Date will equal the lesser of:
(a) the Available Funds for the related Loan Group plus any related
Insured Payments actually made by the Insurer minus the related Interest
Distribution Amounts for the Class A Certificates in such Certificate
Group; and
(b) the excess, if any, of (i) the sum of:
(A) the Preference Amount with respect to principal owed to the
Owners of the Class A Certificates for the related Certificate Group
that remains unpaid as of such Distribution Date;
(B) all scheduled installments of principal actually received or
advanced by the Master Servicer during the related Remittance Period and
all unscheduled collections of principal actually received by the Master
Servicer during the related Remittance Period;
(C) the principal portion of the purchase price with respect to
each Deleted Mortgage Loan in the related Loan Group that was
repurchased as of such Distribution Date;
(D) the principal portion of any Substitution Adjustment Amounts in
connection with a substitution of a Mortgage Loan in the related Loan
Group as of such Distribution Date;
(E) the principal portion of all Liquidation Proceeds actually
collected by the Master Servicer with respect to the Mortgage Loans in
the related Loan Group during the related Remittance Period;
(F) the amount of any Subordination Deficit with respect to the
related Loan Group for such Distribution Date;
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<PAGE>
(G) the allocable portion of the proceeds received with respect to
the termination of the Trust Fund (to the extent such proceeds relate to
principal); and
(H) the amount of any Subordination Increase Amount with respect to
the related Loan Group for such Distribution Date to the extent of any
Net Monthly Excess Cash Flow available for such purpose;
over
(ii) the amount of any Subordination Reduction Amount with respect to
the related Loan Group for such Distribution Date.
On each Distribution Date, the Trustee is required to make the
disbursements and transfers from moneys then on deposit in the Distribution
Account specified below in the following order of priority:
(i) First, out of Total Monthly Excess Spread for each Loan Group, the
Trustee shall disburse the pro rata portion of the monthly premium
(determined by the relative Certificate Principal Balance of the related
Classes of Certificates in such Certificate Group for such Distribution
Date) to the Insurer;
(ii) Second, an amount equal to the sum of (x) the Total Monthly
Excess Spread with respect to such Loan Group (net of the amounts payable
to the Insurer with respect to such Loan Group (the 'Premium Amount') as
described in clause (i) above) plus (y) any Subordination Reduction Amount
with respect to such Loan Group for such Distribution Date (such net sum
being the 'Total Monthly Excess Cashflow' with respect to such Loan Group)
in the following order of priority:
(A) first, such Total Monthly Excess Cashflow shall be allocated
pursuant to clauses (v)(A) and (B) below on such Distribution Date with
respect to the related Certificate Group in an amount equal to the
amount, if any, by which (x) the sum of (i) the Interest Distribution
Amounts for the related Classes of Certificates and (ii) the
Subordination Deficit, if any, for such Distribution Date exceeds (y)
the Available Funds with respect to such Loan Group for such
Distribution Date (the amount of such difference with respect to a Loan
Group being an 'Available Funds Shortfall' for such Loan Group);
(B) second, any portion of the Total Monthly Excess Cashflow with
respect to such Loan Group remaining after the application described in
clause (A) above shall be allocated against any Available Fund Shortfall
with respect to the other Loan Group;
(C) third, any portion of the Total Monthly Excess Cashflow with
respect to such Loan Group remaining after the allocations described in
clauses (A) and (B) above shall be paid to the Insurer in respect of
amounts owed on account of any Reimbursement Amount owed to the Insurer
with respect to the related Loan Group; and
(D) fourth, any portion of the Total Monthly Excess Cashflow with
respect to such Loan Group remaining after the allocations described in
clauses (A), (B) and (C) above shall be paid to the Insurer in respect
of any Reimbursement Amount owed to the Insurer with respect to the
other Loan Group.
(iii) Third, the amount, if any, of the Total Monthly Excess Cashflow
with respect to such Loan Group remaining after the allocations described
in clause (ii) above (the 'Net Monthly Excess Cashflow' with respect to
such Loan Group for such Payment Date) is required to be applied in the
following order of priority:
(A) first, such Net Monthly Excess Cashflow shall be used to reduce
to zero, through the allocation of a Subordination Increase Amount
pursuant to clause (v) below, any Subordination Deficiency Amount with
respect to such Loan Group as of such Distribution Date; and
(B) second, any Net Monthly Excess Cashflow remaining after the
application described in clause (A) above shall be used to reduce to
zero, through the payment of a Subordination Increase Amount, the
Subordination Deficiency Amount, if any, with respect to the other Loan
Group.
(iv) Fourth, following the making by the Trustee of all allocations,
transfers and disbursements described above from amounts then on deposit in
the Distribution Account with respect to each Loan Group, the Trustee shall
distribute:
(A) To the Holders of the Certificates of the related Certificate
Group, the related Interest Distribution Amounts, on a pro rata basis
without any priority among such Certificates in such Certificate Group;
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(B) To the Holders of the related Class of Certificates, (I) the
Principal Distribution Amount applicable to Certificate Group 1 shall be
distributed (a) to the Class R Certificates, the Available Funds Share,
until the Class Certificate Balance thereof has been reduced to zero;
(b) concurrently, 36.5482233503% to the Class A-1 Certificates and
63.4517766497% to the Class A-2 Certificates, until the Class
Certificate Balance of the Class A-1 Certificates has been reduced to
zero; (c) concurrently, 63.4517766497% to the Class A-2 Certificates and
36.5482233503% to the Class A-3 Certificates, until the respective Class
Certificate Balances thereof have been reduced to zero; and (d)
sequentially, to the Class A-4, Class A-5 and Class A-6 Certificates, in
that order, until the Class Certificate Principal Balances thereof have
been reduced to zero; and (II) the Principal Distribution Amount
applicable to Certificate Group 2 shall be distributed (a) to the Class
R Certificates, the Available Funds Share, until the Class Certificate
Balance thereof has been reduced to zero and (b) to the Class A-7
Certificates until the Class Certificate Balance thereof has been
reduced to zero; and
(C) To the Holders of the Class OC Certificates, all remaining
distributable amounts as specified in the Pooling and Servicing
Agreement.
'Total Monthly Excess Spread' as to either Loan Group and any Distribution
Date equals the excess, if any, of (x) the interest which is collected on the
Mortgage Loans during a Remittance Period (net of the related Expense Fees and
the related Premium Amount) plus the interest portion of any Advances if any
over (y) the sum of the interest payable to the Classes of Certificates in the
related Certificate Group.
'Available Funds Share' as to either Loan Group on a Distribution Date will
equal a fraction, the numerator of which is equal to the aggregate of the Stated
Principal Balances of the Mortgage Loans in such Loan Group on such Distribution
Date and the denominator of which is equal to the aggregate of the Stated
Principal Balances of all the Mortgage Loans in the Trust Fund on such
Distribution Date.
In the event that, on a particular Distribution Date, amounts applied in
the order described above are not sufficient to make a full distribution of the
interest entitlement on the Certificates of the related Certificate Group,
interest will be distributed on each Class of Certificates of equal priority
based on the amount of interest each such Class would otherwise have been
entitled to receive in the absence of such shortfall. Any such unpaid amount not
compensated by an Insured Payment will be carried forward and added to the
amount holders of each such Class of Certificates will be entitled to receive on
the next Distribution Date. Such a shortfall could occur, for example, if losses
realized on the Mortgage Loans for the related Loan Group were exceptionally
high or were concentrated in a particular month. Any such unpaid amount will not
bear interest. See ' -- Overcollateralization Provisions' below for the meanings
of certain other defined terms used in this section.
CALCULATION OF ONE-MONTH LIBOR
On the second LIBOR Business Day (as defined below) preceding each
Distribution Date, (each, an 'Interest Determination Date') the Trustee will
determine the London interbank offered rate for one-month United States dollar
deposits ('One-Month LIBOR') for the related Interest Accrual Period for the
Class A-7 Certificates on the basis of the offered rates of the Reference Banks
for one-month United States dollar deposits, as such rates appear on the Reuters
Screen LIBO Page, as of 11:00 a.m. (London time) on such Interest Determination
Date. As used in this section, 'LIBOR Business Day' means a day on which banks
are open for dealing in foreign currency and exchange in London and New York
City; 'Reuters Screen LIBO Page' means the display designated as page 'LIBO' on
the Reuters Monitor Money Rates Service (or such other page as may replace the
LIBO page on that service for the purpose of displaying London interbank offered
rates of major banks); and 'Reference Banks' means leading banks selected by the
Trustee and engaged in transactions in Eurodollar deposits in the international
Eurocurrency market (i) with an established place of business in London, (ii)
whose quotations appear on the Reuters Screen LIBO Page on the Determination
Date in question, (iii) which have been designated as such by the Trustee and
(iv) not controlling, controlled by, or under common control with, the
Depositor, Indy Mac or any successor Master Servicer.
On each Interest Determination Date, One-Month LIBOR for the related
Interest Accrual Period for the Class A-7 Certificates will be established by
the Trustee as follows:
(a) If on such Interest Determination Date two or more Reference Banks
provide such offered quotations, One-Month LIBOR for the related Interest
Accrual Period shall be the arithmetic mean of such offered quotations
(rounded upwards if necessary to the nearest whole multiple of 0.03125%.
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<PAGE>
(b) If on such Interest Determination Date fewer than two Reference
Banks provide such offered quotations, One-Month LIBOR for the related
Interest Accrual Period shall be the higher of (x) One-Month LIBOR as
determined on the previous Determination Date and (y) the Reserve Interest
Rate. The 'Reserve Interest Rate' shall be the rate per annum that the
Trustee determines to be either (i) the arithmetic mean (rounded upwards if
necessary to the nearest whole multiple of 0.03125%) of the one-month
United States dollar lending rates which New York City banks selected by
the Trustee are quoting on the relevant Interest Determination Date to the
principal London offices of leading banks in the London interbank market
or, in the event that the Trustee can determine no such arithmetic mean,
(ii) the lowest one-month United States dollar lending rate which New York
City banks selected by the Trustee are quoting on such Interest
Determination Date to leading European banks.
The establishment of One-Month LIBOR on each Interest Determination Date by
the Trustee and the Trustee's calculation of the rate of interest applicable to
the Class A-7 Certificates for the related Interest Accrual Period shall (in the
absence of manifest error) be final and binding.
SUPPLEMENTAL INTEREST ACCOUNT
The Agreement establishes an account (the 'Supplemental Interest Account'),
which is held in trust, as part of the Trust Fund by the Trustee on behalf of
the Class A-7 Certificateholders. The Supplemental Interest Account will hold
the amounts, if any, received pursuant to the Cap Agreement between the Trustee
and Merrill Lynch Capital Services (the 'Cap Agreement') on behalf of the
Holders of the Class A-7 Certificates. The Supplemental Interest Account will
not be an asset of either REMIC. If One-Month LIBOR rises above a strike price
set forth in the Cap Agreement, the amounts payable under the Cap Agreement are
intended to be sufficient to cover the excess, if any, of (i) the amount of
interest payable to the Holders of the Class A-7 Certificates calculated on the
basis of the applicable One-Month LIBOR plus the Pass-Through Margin, over (ii)
the amount of interest calculated on the basis of the applicable Available Funds
Cap. Such Supplemental Interest will only be paid through the May, 1998
Distribution Date. Any Supplemental Interest will be distributed by the Trustee
on the applicable Distribution Date to the Holders of the Class A-7
Certificates. Under certain scenarios, it is possible that no payments will be
due under the Cap Agreement even though the Pass-Through Rate on the Class A-7
Certificates was calculated by reference to the Available Funds Cap.
OVERCOLLATERALIZATION PROVISIONS
The Agreement requires that the Net Monthly Excess Cashflow, if any, with
respect to each Loan Group on each Distribution Date be applied as an
accelerated payment of principal of the Certificates of the related Certificate
Group, but only to the limited extent hereafter described.
The application of Net Monthly Excess Cashflow to the payment of principal
of the Class A Certificates has the effect of accelerating the amortization of
the Class A Certificates relative to the amortization of the Mortgage Loans. The
portion, if any, of the Available Funds not required to be distributed to
holders of Class A Certificates as described above on any Distribution Date will
be paid to the holders of the Class OC Certificates and will not be available on
any future Distribution Date to cover Realized Losses on the Mortgage Loans or
to make accelerated distributions of principal of the Class A Certificates.
With respect to any Distribution Date and Loan Group, the excess, if any,
of (a) the aggregate Stated Principal Balances of the Mortgage Loans in such
Loan Group immediately following such Distribution Date over (b) the Class
Certificate Balance of the Class A Certificates in the related Certificate Group
as of such date (after taking into account the payment of principal on such
Certificates on such Distribution Date) is the 'Subordinated Amount' for such
Certificate Group as of such Distribution Date. The Agreement requires that the
Net Monthly Excess Cashflow for a Loan Group, will be applied as an accelerated
payment of principal on the Certificates in the related Certificate Group then
entitled to receive distributions of principal to the extent that the Specified
Subordinated Amount for such Certificate Group exceeds the Subordinated Amount
for such Certificate Group as of such Distribution Date (as to either Loan
Group, a 'Subordination Deficiency'). Any amount of Net Monthly Excess Cashflow
actually applied as an accelerated payment of principal with respect to a
Certificate Group is a 'Subordination Increase Amount' for such Certificate
Group. The required level of the Subordinated Amount with respect to a
Distribution Date and Certificate Group is the 'Specified Subordinated Amount.'
The Agreement provides that the Specified Subordinated Amount with respect to a
Certificate Group
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may, over time, decrease or increase, subject to certain floors, caps and
triggers, including triggers that allow the related Specified Subordinated
Amount to decrease or 'step down' based on delinquency rates and cumulative
losses of the Mortgage Loans in the related Loan Group. If certain delinquency
and/or loss levels set forth in the Agreement are exceeded, a Specified
Subordinated Amount may become unlimited. Net Monthly Excess Cashflow will then
be applied to the payment in reduction of principal of the Certificates in the
related Certificate Group during the period that the related Loan Group is
unable to meet the performance tests specified in the Agreement.
Subordination Reduction Amount. In the event that a Specified Subordinated
Amount is permitted to decrease or 'step down' on a Distribution Date in the
future, or in the event that an Excess Subordinated Amount for a Certificate
Group otherwise exists, the Agreement provides that some or all of the principal
which would otherwise be distributed to the Holders of the Certificates in the
related Certificate Group on such Distribution Date will be distributed to the
Holders of the Class OC Certificates on such Distribution Date until such Excess
Subordinated Amount is reduced to zero. This has the effect of decelerating the
amortization of the Certificates in the related Certificate Group relative to
the amortization of the Mortgage Loans in the related Loan Group, and of
reducing the related Subordinated Amount. With respect to a Certificate Group
and any Distribution Date, the excess, if any, of (a) the Subordinated Amount on
such Distribution Date over (b) the Specified Subordinated Amount is the 'Excess
Subordinated Amount' with respect to such Distribution Date. If, on any
Distribution Date, the Excess Subordinated Amount is, or, after taking into
account all other distributions to be made on such Distribution Date, would be,
greater than zero (i.e., the related Subordinated Amount is or would be greater
than the related Specified Subordinated Amount), then any amounts relating to
principal which would otherwise be distributed to the holders of the
Certificates in the related Certificate Group on such Distribution Date will
instead be distributed to the Holders of the Class OC Certificates in an amount
equal to the lesser of (x) the related Excess Subordinated Amount and (y) the
Net Monthly Excess Cashflow for the related Certificate Group is the
'Subordination Reduction Amount' for such Distribution Date. As a result,
Subordination Reduction Amounts may result even prior to the occurrence of any
'step down' in the related Specified Subordinated Amount. This is because the
Class A Certificateholders will generally be entitled to receive 100% of
collected principal, even though the Class Certificate Balances of the Class A
Certificates will, following the accelerated amortization resulting from the
application of Net Monthly Excess Cashflow, represent less than 100% of the
aggregate principal balance of the Mortgage Loans.
CROSS COLLATERALIZATION
In addition to the use of Net Monthly Excess Cashflow with respect to a
Loan Group to pay interest and principal on the Certificates in the related
Certificate Group, Net Monthly Excess Cashflow will be available to pay interest
and principal on the Certificates in the other Certificate Group as described
under ' -- Priority of Distributions Among Certificates.' Furthermore, in
addition to the use of Net Monthly Excess Cashflow with respect to a Loan Group
to distribute Subordination Increase Amounts in reduction of Subordination
Deficiency Amounts on the Certificates in the related Certificate Group, Net
Monthly Excess Cashflow will be available to distribute Subordination Increase
Amounts in reduction of Subordination Deficiency Amounts related to the
Certificates in the other Certificate Group.
STRUCTURING ASSUMPTIONS
The model used in this Prospectus Supplement (the 'Prepayment Assumption')
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of mortgage loans for the life of such
mortgage loans. With respect to the Mortgage Loans in Loan Group 1, a 100%
Prepayment Assumption assumes conditional prepayment rates of 4% per annum of
the then outstanding principal balance of the Mortgage Loans in Loan Group 1 in
the first month of the life of the related Mortgage Loans and an additional
0.947368% per annum (or more precisely 18/19) in each month thereafter until the
nineteenth month. Beginning in the twentieth month and in each month thereafter
during the life of the Mortgage Loans in Loan Group 1, 100% Prepayment
Assumption assumes a conditional prepayment rate of 22% per annum each month. As
used in the table below, 0% Prepayment Assumption assumes prepayment rates equal
to 0% of the Prepayment Assumption i.e., no prepayments. Correspondingly, 100%
Prepayment Assumption assumes prepayment rates equal to 100% of the Prepayment
Assumption, and so forth. The Prepayment Assumption does not purport to be a
historical description of prepayment experience or a prediction of the
anticipated rate of
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prepayment of any pool of mortgage loans, including the related Mortgage Loans.
The Depositor believes that no existing statistics of which it is aware provide
a reliable basis for holder of Certificate Group 1 Certificates to predict the
amount or the timing of receipt of prepayments on the related Mortgage Loans.
The Prepayment Assumption with respect to Loan Group 2, assumes a Constant
Prepayment Rate ('CPR').
Since the tables were prepared on the basis of the assumptions in the
following paragraph, there are discrepancies between the characteristics of the
actual Mortgage Loans and the characteristics of the Mortgage Loans assumed in
preparing the tables. Any such discrepancy may have an effect upon the
percentages of the Certificate Principal Balances outstanding and weighted
average lives of the Class A Certificates set forth in the tables. In addition,
since the actual Mortgage Loans in the Trust have characteristics which differ
from those assumed in preparing the tables set forth below, the distributions of
principal on the Class A Certificates may be made earlier or later than as
indicated in the tables.
Unless otherwise specified, the information in the tables in this
Prospectus Supplement has been prepared on the basis of the following assumed
characteristics of the Mortgage Loans and the following additional assumptions
(collectively, the 'Structuring Assumptions'): (i) the Mortgage Loans of each
Loan Group which consist of pools of loans with level-pay amortization
methodologies, Cut-Off Date Principal Balances, mortgage rates, net mortgage
rates, original and remaining terms to maturity, and original amortization
terms, as applicable, are as set forth below, (ii) the Closing Date for the
Certificates occurs on August 28, 1996, (iii) distributions on the Certificates
are made on the 25th day of each month, commencing in September 1996, in
accordance with the priorities described herein, (iv) the Mortgage Loans'
prepayment rates with respect to the Mortgage Loans in Loan Group 1 Group are a
multiple of the applicable Prepayment Assumption and with respect to the
Adjustable Rate Group are constant percentages of conditional prepayment rates
(CPR) each as stated in the 'Prepayment Scenarios' table below; (v) prepayments
include 30 days' interest thereon, (vi) no optional termination or mandatory
termination is exercised, (vii) the 'Specified Subordinated Amount' (as defined
under 'Credit Enhancement -- Overcollateralization Provisions') for each Home
Equity Loan Group is set initially as specified in the Pooling and Servicing
Agreement and thereafter decreases in accordance with the provisions of the
Pooling and Servicing Agreement, (viii) with respect to Mortgage Loan Group 2,
(a) the Coupon Rate for each Home Equity Loan is adjusted on its next rate
adjustment date (and on subsequent adjustment dates, if necessary) to a rate
equal to the Gross Margin plus the Index (such sum being subject to the
applicable periodic adjustment cap and maximum interest rate), (b) the assumed
level of the applicable Index is 5.6875% and (c) the scheduled monthly payment
on the Mortgage Loans is adjusted to equal a fully amortizing payment, (ix) the
Class A-7 Pass-Through Rate remains constant at 5.7575%, (x) no defaults in the
payment by Mortgagors of principal of and interest on the Mortgage Loans are
experienced, (xi) scheduled payments on the Mortgage Loans are received on the
first day of each month commencing in the calendar month following the Closing
Date and are computed prior to giving effect to prepayments received on the last
day of the prior month, (xii) prepayments represent prepayments in full of
individual Mortgage Loans and are received on the last day of each month,
commencing in the calendar month of the Closing Date, (xiii) the initial Class
Certificate Balance of each Class of Certificates is as set forth on the cover
page hereof, and (xiv) interest accrues on each Class of Certificates at the
applicable interest rate set forth or described on the cover hereof. While it is
assumed that each of the Mortgage Loans prepays at the specified constant
percentages of the Prepayment Assumption, this is not likely to be the case.
Moreover, discrepancies exist between the characteristics of the actual Mortgage
Loans which will be delivered to the Trustee and characteristics of the Mortgage
Loans assumed in preparing the tables herein.
PREPAYMENT SCENARIOS
<TABLE>
<CAPTION>
SCENARIO I SCENARIO II SCENARIO III SCENARIO IV SCENARIO V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Fixed Rate Group(1)............................... 0% 50% 100% 150% 200%
Adjustable Rate Group(2).......................... 0% 10% 18% 24% 32%
</TABLE>
- ------------
(1) As a percentage of the Prepayment Assumption.
(2) As a conditional prepayment rate (CPR) percentage.
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<PAGE>
MORTGAGE LOANS AS OF THE CUT-OFF DATE
LOAN GROUP 1
<TABLE>
<CAPTION>
ORIGINAL REMAINING
GROSS NET TERM TO TERM TO
POOL PRINCIPAL COUPON COUPON MATURITY MATURITY (IN
NUMBER BALANCE RATE RATE (IN MONTHS) MONTHS)
- ------------------------------------------------ -------------- ------ ------ ----------- ------------
<S> <C> <C> <C> <C> <C>
1............................................. $44,592,885.90 10.160% 9.660 % 360 351
2............................................. 36,320,183.09 10.014 9.514 360 355
3............................................. 38,377,660.18 10.433 9.933 360 358
</TABLE>
LOAN GROUP 2
<TABLE>
<CAPTION>
REMAINING
ORIGINAL TERM TO
GROSS NET MONTHS TERM TO MATURITY
PRINCIPAL COUPON COUPON TO RATE PERIODIC LIFE MATURITY (IN
POOL NUMBER BALANCE RATE RATE CHANGE MARGIN CAP CAP (IN MONTHS) MONTHS)
- ------------------ -------------- ------ ------ -------- ------ -------- ------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
4.............. $ 474,715.89 9.674% 9.174% 1 6.308 % 1 16.607% 360 354
5.............. 3,089,835.77 9.144 8.644 2 5.913 1 15.775 360 356
6.............. 4,734,954.77 9.093 8.593 3 5.747 1 15.782 360 356
7.............. 6,593,969.11 9.366 8.866 4 6.085 1 15.904 360 356
8.............. 3,965,480.57 9.283 8.783 5 5.885 1 15.957 360 357
9.............. 861,731.92 9.652 9.152 6 6.605 0.934 16.170 360 359
10.............. 46,090,014.75 9.860 9.360 20 6.255 1 16.400 360 357
11.............. 3,515,193.20 10.651 10.151 1 6.437 1.5 16.274 360 350
12.............. 2,586,415.97 10.398 9.898 2 6.285 1.5 16.760 360 353
13.............. 1,815,667.08 10.901 10.401 3 6.640 1.5 16.782 360 353
14.............. 1,956,574.74 11.248 10.748 4 6.571 1.587 16.940 360 352
15.............. 2,392,151.53 10.729 10.229 5 6.217 1.5 16.254 360 352
16.............. 3,439,610.71 11.320 10.820 6 6.151 1.5 16.226 360 352
17.............. 953,361.74 10.360 9.860 17 6.877 2.803 16.842 360 354
</TABLE>
OPTIONAL PURCHASE OF DEFAULTED LOANS
The Master Servicer may, at its option, purchase from the Trust Fund any
Mortgage Loan which is delinquent in payment by 91 days or more. Any such
purchase shall be at a price equal to 100% of the Stated Principal Balance of
such Mortgage Loan plus accrued interest thereon at the applicable Mortgage Rate
from the date through which interest was last paid by the related Mortgagor or
advanced to the first day of the month in which such amount is to be
distributed.
OPTIONAL TERMINATION
The Master Servicer will have the right to repurchase all remaining
Mortgage Loans and REO Properties in the Mortgage Pool and thereby effect early
retirement of the Certificates, subject to the Pool Principal Balance of such
Mortgage Loans and REO Properties at the time of repurchase being less than or
equal to 10% of the Cut-off Date Pool Principal Balance. Any such purchase of
Mortgage Loans and termination of the Trust Fund requires the consent of the
Insurer if it would result in a draw on the Policy. In the event the Master
Servicer does not exercise this option and the Insurer did not refuse consenting
to such option, the Insurer will have the option to purchase, in whole, the
Mortgage Loans and REO Properties, if any, remaining in the Trust Fund on any
such Distribution Date. In the event the Master Servicer or the Insurer
exercises such option, the purchase price distributed with respect to each
Certificate will be 100% of its then outstanding principal balance and, in the
case of an interest-bearing Certificate, any unpaid accrued interest thereon at
the applicable Pass-Through Rate (in each case subject to reduction as provided
in the Agreement if the purchase price is based in part on the appraised value
of any REO Properties and such appraised value is less than the Stated Principal
Balance of the related Mortgage Loans). Distributions on the Certificates in
respect of any such optional termination will first be paid to the Class A
Certificates and then, except as set forth in the Agreement, to the Class OC
Certificates. Unless covered by the Policy, the proceeds from any such
distribution may not be sufficient to distribute the full
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<PAGE>
amount to which each Class of Certificates is entitled if the purchase price is
based in part on the appraised value of any REO Property and such appraised
value is less than the Stated Principal Balance of the related Mortgage Loan.
THE TRUSTEE
The Bank of New York will be the Trustee under the Agreement. The Depositor
and the Master Servicer may maintain other banking relationships in the ordinary
course of business with The Bank of New York. Offered Certificates may be
surrendered at the Corporate Trust Office of the Trustee located at 101 Barclay
Street, 12E, New York, New York 10286, Attention: Corporate Trust Administration
or at such other addresses as the Trustee may designate from time to time.
RESTRICTIONS ON TRANSFER OF THE CLASS R CERTIFICATES
The Class R Certificates will be subject to the restrictions on transfer
described in the Prospectus under 'Certain Federal Income Tax
Consequences -- REMIC Certificates -- Tax-Related Restrictions on Transfers of
Residual Certificates -- Disqualified Organizations,' ' -- Noneconomic Residual
Interests' and ' -- Foreign Investors.' The Agreement provides that the Class R
Certificates (in addition to certain other Classes of Certificates) may not be
acquired by an ERISA Plan. See 'ERISA Considerations' herein. Each Class R
Certificate will contain a legend describing the foregoing restrictions.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
GENERAL
The effective yields to the holders of the Fixed Rate Certificates will be
lower than the yields otherwise produced by the applicable rate at which
interest is passed through to such holders and the purchase price of such
Certificates because monthly distributions will not be payable to such holders
until the 25th day (or, if such day is not a business day, the following
business day) of the month following the month in which interest accrues on the
Mortgage Loans (without any additional distribution of interest or earnings
thereon in respect of such delay).
Each Interest Accrual Period for the Class A-7 Certificates will consist of
the actual number of days elapsed from the 25th day of the month preceding the
month of the applicable Distribution Date (or, in the case of the first Interest
Accrual Period, from the Closing Date) through the 24th day of the month of such
Distribution Date.
INTEREST RATE FLUCTUATIONS
The yield to investors on the Class A-7 Certificates will be sensitive to,
among other things, the level of One-Month LIBOR and the level of the Index. As
described herein, the Pass-Through Rate may in no event exceed the lesser of
One-Month LIBOR plus the Pass-Through Margin and the Available Funds Cap, which
depends, in large part, on the Net Mortgage Rates in effect during the preceding
calendar month. Disproportionate principal payments (whether resulting from full
or partial payments) on Mortgage Loans having Net Mortgage Rates higher or lower
than the Pass-Through Rate for the Class A-7 Certificates could therefore affect
the yield on such Certificates. In particular, the yield to maturity of the
Class A-7 Certificates could be lower than that otherwise produced if
disproportionate principal payments (including prepayments) are made on Mortgage
Loans having Net Mortgage Rates that exceed the Pass-Through Rate. Although each
of the Mortgage Loans in Loan Group 2 bears interest at an adjustable rate, such
rate is subject to a Periodic Rate Cap and a Maximum Rate. If the Index changes
substantially between Adjustment Dates, the adjusted Mortgage Rate on a related
Mortgage Loan may not equal the Index plus the related Margin due to the
constraint of such caps. In such event, the related Net Mortgage Rate will be
less than would have been the case in the absence of such caps. In addition, the
Mortgage Rate applicable to any Adjustment Date will be based on the Index value
most recently announced as of the date 45 days prior to such Adjustment Date.
Thus, if the Index value with respect to a Mortgage Loan rises, the lag in time
before the corresponding Mortgage Rate increases will, all other things being
equal, slow the upward adjustment of the Available Funds Cap. See 'The Mortgage
Pool' herein.
Although the Mortgage Rates on the ARMs also are subject to adjustment, the
Mortgage Rates adjust less frequently than the Class A-7 Pass-Through Rate and
adjust by reference to the Index. Changes in One-Month LIBOR may not correlate
with changes in the Index and either may not correlate with prevailing interest
rates. It is possible that an increased level of One-Month LIBOR could occur
simultaneously with a lower level of
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<PAGE>
prevailing interest rates, which would be expected to result in faster
prepayments, thereby reducing the weighted average life of the Class A-7
Certificates.
DEFAULTS IN DELINQUENT PAYMENTS
The yield to maturity of the Class A Certificates will be sensitive to
defaults on the Mortgage Loans. If a purchaser of a Class A Certificate
calculates its anticipated yield based on an assumed rate of default and amount
of losses that is lower than the default rate and amount of losses actually
incurred, its actual yield to maturity will be lower than that so calculated.
Realized Losses will reduce the Available Funds for the related Loan Group
which, if not covered by Total Monthly Excess Cashflow from the other Loan
Group, will slow the amortization of the Class A Certificates. A draw on the
Policy in respect of principal will not be made unless a Subordination Deficit
exists. Thus, Holders of the Class A Certificates may not receive reimbursement
for Realized Losses in the month following the occurrence of such losses.
However, such Holders are entitled to receive ultimate reimbursement for
Realized Losses under the Policy. In general, the earlier a loss occurs, the
greater is the effect on an investor's yield to maturity. There can be no
assurance as to the delinquency, foreclosure or loss experience with respect to
the Mortgage Loans. Because the Mortgage Loans are sub-prime mortgage loans,
which are underwritten in accordance with standards less stringent than those
generally acceptable to FNMA and FHLMC with regard to a borrower's credit
standing and repayment ability, the risk of delinquencies with respect to, and
losses on, the Mortgage Loans will be greater than that of mortgage loans
underwritten in accordance with FNMA and FHLMC standards.
In general, a 'Realized Loss' means, with respect to a Liquidated Mortgage
Loan, the amount by which the remaining unpaid principal balance of the Mortgage
Loan exceeds the amount of Liquidation Proceeds applied to the principal balance
of the related Mortgage Loan. A 'Liquidated Mortgage Loan' is a defaulted
Mortgage Loan as to which the Master Servicer has determined that all
recoverable liquidation and insurance proceeds have been received.
PREPAYMENT CONSIDERATIONS AND RISKS
The rate of principal payments on the Offered Certificates, the aggregate
amount of distributions on the Offered Certificates and the yields to maturity
of the Offered Certificates will be related to the rate and timing of payments
of principal on the Mortgage Loans in the related Loan Group. The rate of
principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of the Mortgage Loans and by the rate of principal
prepayments (including for this purpose prepayments resulting from refinancing,
liquidations of the Mortgage Loans due to defaults, casualties or condemnations,
payments under the Policy in respect of Realized Losses and repurchases by the
Seller or Master Servicer). Because certain of the Mortgage Loans contain
prepayment penalties, the rate of principal payments may be less than the rate
of principal payments for mortgage loans which did not have prepayment
penalties. The fixed-rate Mortgage Loans are subject to the 'due-on-sale'
provisions included therein. See 'The Mortgage Pool' herein.
Prepayments, liquidations and purchases of the Mortgage Loans in a Loan
Group (including any optional purchase by the Master Servicer of a defaulted
Mortgage Loan in such Loan Group and any optional repurchase of the remaining
Mortgage Loans in such Loan Group in connection with the termination of the
Trust Fund, in each case as described herein) will result in distributions on
the Offered Certificates in the related Certificate Group of principal amounts
which would otherwise be distributed over the remaining terms of the Mortgage
Loans. Since the rate of payment of principal on the Mortgage Loans will depend
on future events and a variety of other factors, no assurance can be given as to
such rate or the rate of principal prepayments. The extent to which the yield to
maturity of a Class of Offered Certificates may vary from the anticipated yield
will depend upon the degree to which such Offered Certificate is purchased at a
discount or premium, and the degree to which the timing of payments thereon is
sensitive to prepayments, liquidations and purchases of the Mortgage Loans in
the related Loan Group. Further, an investor should consider the risk that, in
the case of any Offered Certificate purchased at a discount, a slower than
anticipated rate of principal payments (including prepayments) on the Mortgage
Loans in the related Loan Group could result in an actual yield to such investor
that is lower than the anticipated yield and, in the case of any Offered
Certificate purchased at a premium, a faster than anticipated rate of principal
payments on the Mortgage Loans in the related Loan Group could result in an
actual yield to such investor that is lower than the anticipated yield.
The rate of principal payments (including prepayments) on pools of mortgage
loans may vary significantly over time and may be influenced by a variety of
economic, geographic, social and other factors, including
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<PAGE>
changes in mortgagors' housing needs, job transfers, unemployment, mortgagors'
net equity in the mortgaged properties and servicing decisions. In general, if
prevailing interest rates were to fall significantly below the Mortgage Rates on
the Mortgage Loans in Loan Group 1, such Mortgage Loans could be subject to
higher prepayment rates than if prevailing interest rates were to remain at or
above the Mortgage Rates on such Mortgage Loans. Conversely, if prevailing
interest rates were to rise significantly, the rate of prepayments on the
Mortgage Loans in Loan Group 1 would generally be expected to decrease. No
assurances can be given as to the rate of prepayments on the Mortgage Loans in
stable or changing interest rate environments.
All of the Mortgage Loans in Loan Group 2 are ARMs. As is the case with
fixed rate Mortgage Loans, the ARMs may be subject to a greater rate of
principal prepayments in a low interest rate environment. For example, if
prevailing interest rates were to fall, Mortgagors with ARMs may be inclined to
refinance their ARMs with a fixed rate loan to 'lock in' a lower interest rate.
The existence of the applicable Periodic Rate Cap and Maximum Rate also may
affect the likelihood of prepayments resulting from refinancings. In addition,
the delinquency and loss experience of the ARMs may differ from that on the
fixed rate Mortgage Loans because the amount of the monthly payments on the ARMs
are subject to adjustment on each Adjustment Date. If such different experience
were to occur, the prepayment experience on the Class A-7 Certificates may
differ from that on the other Classes of Class A Certificates.
The timing of changes in the rate of prepayments on the Mortgage Loans may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments is consistent with an investor's expectation. In
general, the earlier a prepayment of principal on the Mortgage Loans, the
greater the effect on an investor's yield to maturity. The effect on an
investor's yield as a result of principal payments occurring at a rate higher
(or lower) than the rate anticipated by the investor during the period
immediately following the issuance of the Class A Certificates may not be offset
by a subsequent like decrease (or increase) in the rate of principal payments.
OVERCOLLATERALIZATION PROVISIONS
The operation of the overcollateralization provisions of the Agreement will
affect the weighted average lives of the Class A Certificates and consequently
the yields to maturity of such Certificates. Unless and until the Subordinated
Amount equals the Specified Subordinated Amount for a Loan Group, Net Monthly
Excess Cashflow will be applied as distributions of principal of the Class A
Certificates in the related Certificate Group, thereby reducing the weighted
average lives thereof. The actual Subordinated Amount for a Loan Group may
change from Distribution Date to Distribution Date producing uneven
distributions of Net Monthly Excess Cash Flow. There can be no assurance as to
when or whether the Subordinated Amount will equal the Specified Subordinated
Amount.
Net Monthly Excess Cashflow generally is a function of the excess of
interest collected or advanced on the Mortgage Loans over the interest required
to pay interest on the Offered Certificates, the premium for the Policy and
expenses at the Expense Rate. Mortgage Loans with higher Net Mortgage Rates will
contribute more interest to the Net Monthly Excess Cashflow. Mortgage Loans with
higher Net Mortgage Rates may prepay faster than Mortgage Loans with relatively
lower Net Mortgage Rates in response to a given change in market interest rates.
Any such disproportionate prepayments of Mortgage Loans with higher Net Mortgage
Rates may adversely affect the amount of Net Monthly Excess Cashflow available
to make accelerated payments of principal of the Class A Certificates.
As a result of the interaction of the foregoing factors, the effect of the
overcollateralization provisions on the weighted average lives of the Class A
Certificates may vary significantly over time and from Class to Class.
ADDITIONAL INFORMATION
The Depositor intends to file certain additional yield tables and other
computational materials with respect to one or more Classes of Offered
Certificates with the Commission in a report on Form 8-K to be dated August 27,
1996. Such tables and materials were prepared by the Underwriter at the request
of certain prospective investors, based on assumptions provided by, and
satisfying the special requirements of, such prospective investors. Such tables
and assumptions may be based on assumptions that differ from the Structuring
Assumptions. Accordingly, such tables and other materials may not be relevant to
or appropriate for investors other than those specifically requesting them.
S-37
<PAGE>
<PAGE>
WEIGHTED AVERAGE LIVES OF THE OFFERED CERTIFICATES
The weighted average life of an Offered Certificate is determined by (a)
multiplying the amount of the reduction, if any, of the Class Certificate
Balance of such Certificate on each Distribution Date by the number of years
from the date of issuance to such Distribution Date, (b) summing the results and
(c) dividing the sum by the aggregate amount of the reductions in Class
Certificate Balance of such Certificate referred to in clause (a).
For a discussion of the factors which may influence the rate of payments
(including prepayments) of the Mortgage Loans, see ' -- Prepayment
Considerations and Risks' herein and 'Yield and Prepayment Considerations' in
the Prospectus.
In general, the weighted average lives of the Offered Certificates will be
shortened if the level of prepayments of principal of the Mortgage Loans in the
related Loan Group increases. However, the weighted average lives of the Offered
Certificates will depend upon a variety of other factors, including the timing
of changes in such rate of principal payments and the priority sequence of
distributions of principal of the Classes of Certificates. See 'Description of
the Certificates -- Distributions of Interest and Principal' herein.
The interaction of the foregoing factors may have different effects on
various Classes of Offered Certificates and the effects on any Class may vary at
different times during the life of such Class. Accordingly, no assurance can be
given as to the weighted average life of any Class of Offered Certificates.
Further, to the extent the prices of the Offered Certificates represent
discounts or premiums to their respective original Class Certificate Balances,
variability in the weighted average lives of such Classes of Offered
Certificates will result in variability in the related yields to maturity. For
an example of how the weighted average lives of the Classes of Offered
Certificates may be affected at various constant percentages of the Prepayment
Assumption, see the Decrement Tables below.
DECREMENT TABLES
The following tables indicate the percentages of the initial Class
Certificate Balances of the Classes of Offered Certificates that would be
outstanding after each of the dates shown at various constant percentages of the
Prepayment Assumption and the corresponding weighted average lives of such
Classes. The tables have been prepared on the basis of the Structuring
Assumptions. It is not likely that (i) all of the Mortgage Loans will have the
characteristics assumed, (ii) all of the Mortgage Loans will prepay at the
constant percentages of the Prepayment Assumption specified in the tables or at
any other constant rate or (iii) all of the Mortgage Loans will prepay at the
same rate. Moreover, the diverse remaining terms to maturity of the Mortgage
Loans could produce slower or faster principal distributions than indicated in
the tables at the specified constant percentages of the Prepayment Assumption,
even if the weighted average remaining term to maturity of the Mortgage Loans is
consistent with the remaining terms to maturity of the Mortgage Loans specified
in the Structuring Assumptions.
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<PAGE>
<PAGE>
PERCENT OF INITIAL CLASS CERTIFICATE BALANCES OUTSTANDING*
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2
---------------------------------------- ----------------------------------------
DISTRIBUTION DATE I II III IV V I II III IV V
- ------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial.................. 100 100 100 100 100 100 100 100 100 100
August 1997.............. 91 71 52 32 12 95 84 74 63 52
August 1998.............. 89 42 0 0 0 94 68 45 24 5
August 1999.............. 87 15 0 0 0 93 54 22 0 0
August 2000.............. 85 0 0 0 0 92 41 5 0 0
August 2001.............. 82 0 0 0 0 90 30 0 0 0
August 2002.............. 80 0 0 0 0 89 19 0 0 0
August 2003.............. 77 0 0 0 0 87 11 0 0 0
August 2004.............. 74 0 0 0 0 86 3 0 0 0
August 2005.............. 70 0 0 0 0 84 0 0 0 0
August 2006.............. 66 0 0 0 0 82 0 0 0 0
August 2007.............. 62 0 0 0 0 79 0 0 0 0
August 2008.............. 57 0 0 0 0 77 0 0 0 0
August 2009.............. 52 0 0 0 0 74 0 0 0 0
August 2010.............. 46 0 0 0 0 71 0 0 0 0
August 2011.............. 40 0 0 0 0 67 0 0 0 0
August 2012.............. 33 0 0 0 0 63 0 0 0 0
August 2013.............. 25 0 0 0 0 59 0 0 0 0
August 2014.............. 16 0 0 0 0 54 0 0 0 0
August 2015.............. 6 0 0 0 0 49 0 0 0 0
August 2016.............. 0 0 0 0 0 43 0 0 0 0
August 2017.............. 0 0 0 0 0 37 0 0 0 0
August 2018.............. 0 0 0 0 0 30 0 0 0 0
August 2019.............. 0 0 0 0 0 22 0 0 0 0
August 2020.............. 0 0 0 0 0 13 0 0 0 0
August 2021.............. 0 0 0 0 0 4 0 0 0 0
August 2022.............. 0 0 0 0 0 0 0 0 0 0
August 2023.............. 0 0 0 0 0 0 0 0 0 0
August 2024.............. 0 0 0 0 0 0 0 0 0 0
August 2025.............. 0 0 0 0 0 0 0 0 0 0
August 2026.............. 0 0 0 0 0 0 0 0 0 0
August 2027.............. 0 0 0 0 0 0 0 0 0 0
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Weighted Average
Life**................. 11.9 1.8 1.1 0.8 0.6 16.9 3.6 2.0 1.4 1.1
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<CAPTION>
CLASS A-3 CLASS A-4
----------------------------------------- ----------------------------------------
DISTRIBUTION DATE I II III IV V I II III IV V
- ------------------------ ----- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial.................. 100 100 100 100 100 100 100 100 100 100
August 1997.............. 100 100 100 100 100 100 100 100 100 100
August 1998.............. 100 100 98 52 10 100 100 100 100 100
August 1999.............. 100 100 48 0 0 100 100 100 89 0
August 2000.............. 100 90 12 0 0 100 100 100 0 0
August 2001.............. 100 65 0 0 0 100 100 51 0 0
August 2002.............. 100 43 0 0 0 100 100 0 0 0
August 2003.............. 100 24 0 0 0 100 100 0 0 0
August 2004.............. 100 8 0 0 0 100 100 0 0 0
August 2005.............. 100 0 0 0 0 100 79 0 0 0
August 2006.............. 100 0 0 0 0 100 40 0 0 0
August 2007.............. 100 0 0 0 0 100 5 0 0 0
August 2008.............. 100 0 0 0 0 100 0 0 0 0
August 2009.............. 100 0 0 0 0 100 0 0 0 0
August 2010.............. 100 0 0 0 0 100 0 0 0 0
August 2011.............. 100 0 0 0 0 100 0 0 0 0
August 2012.............. 100 0 0 0 0 100 0 0 0 0
August 2013.............. 100 0 0 0 0 100 0 0 0 0
August 2014.............. 100 0 0 0 0 100 0 0 0 0
August 2015.............. 100 0 0 0 0 100 0 0 0 0
August 2016.............. 95 0 0 0 0 100 0 0 0 0
August 2017.............. 81 0 0 0 0 100 0 0 0 0
August 2018.............. 65 0 0 0 0 100 0 0 0 0
August 2019.............. 47 0 0 0 0 100 0 0 0 0
August 2020.............. 29 0 0 0 0 100 0 0 0 0
August 2021.............. 9 0 0 0 0 100 0 0 0 0
August 2022.............. 0 0 0 0 0 60 0 0 0 0
August 2023.............. 0 0 0 0 0 0 0 0 0 0
August 2024.............. 0 0 0 0 0 0 0 0 0 0
August 2025.............. 0 0 0 0 0 0 0 0 0 0
August 2026.............. 0 0 0 0 0 0 0 0 0 0
August 2027.............. 0 0 0 0 0 0 0 0 0 0
------ ---- ---- ---- ---- ---- ---- ---- ---- ----
Weighted Average
Life**................. 22.8 5.8 3.1 2.1 1.6 26.2 9.8 5.1 3.4 2.5
------ ---- ---- ---- ---- ---- ---- ---- ---- ----
------ ---- ---- ---- ---- ---- ---- ---- ---- ----
</TABLE>
- ------------------------------
* Rounded to the nearest whole percentage.
** Determined as specified under 'Weighted Average Lives of the Offered
Certificates' herein.
<PAGE>
<TABLE>
<CAPTION>
CLASS A-5 CLASS A-6
-------------------------------- --------------------------------
DISTRIBUTION DATE I II III IV V I II III IV V
- ------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial.................. 100 100 100 100 100 100 100 100 100 100
August 1997.............. 100 100 100 100 100 100 100 100 100 100
August 1998.............. 100 100 100 100 100 100 100 100 100 100
August 1999.............. 100 100 100 100 81 100 100 100 100 100
August 2000.............. 100 100 100 87 22 100 100 100 100 100
August 2001.............. 100 100 100 41 0 100 100 100 100 78
August 2002.............. 100 100 91 10 0 100 100 100 100 41
August 2003.............. 100 100 58 0 0 100 100 100 78 20
August 2004.............. 100 100 33 0 0 100 100 100 49 8
August 2005.............. 100 100 14 0 0 100 100 100 30 2
August 2006.............. 100 100 0 0 0 100 100 97 18 0
August 2007.............. 100 100 0 0 0 100 100 73 10 0
August 2008.............. 100 84 0 0 0 100 100 54 4 0
August 2009.............. 100 66 0 0 0 100 100 40 1 0
August 2010.............. 100 51 0 0 0 100 100 29 0 0
August 2011.............. 100 37 0 0 0 100 100 20 0 0
August 2012.............. 100 25 0 0 0 100 100 14 0 0
August 2013.............. 100 14 0 0 0 100 100 9 0 0
August 2014.............. 100 4 0 0 0 100 100 5 0 0
August 2015.............. 100 0 0 0 0 100 92 2 0 0
August 2016.............. 100 0 0 0 0 100 76 0 0 0
August 2017.............. 100 0 0 0 0 100 62 0 0 0
August 2018.............. 100 0 0 0 0 100 50 0 0 0
August 2019.............. 100 0 0 0 0 100 39 0 0 0
August 2020.............. 100 0 0 0 0 100 30 0 0 0
August 2021.............. 100 0 0 0 0 100 21 0 0 0
August 2022.............. 100 0 0 0 0 100 14 0 0 0
August 2023.............. 92 0 0 0 0 100 7 0 0 0
August 2024.............. 40 0 0 0 0 100 1 0 0 0
August 2025.............. 0 0 0 0 0 63 0 0 0 0
August 2026.............. 0 0 0 0 0 0 0 0 0 0
August 2027.............. 0 0 0 0 0 0 0 0 0 0
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Weighted Average
Life**................. 27.8 14.3 7.5 4.9 3.6 29.2 22.5 13.0 8.4 6.0
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<CAPTION>
CLASS A-7
---------------------------------
DISTRIBUTION DATE I II III IV V
- ------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial.................. 100 100 100 100 100
August 1997.............. 96 86 78 72 64
August 1998.............. 95 77 63 54 42
August 1999.............. 95 68 51 40 29
August 2000.............. 94 61 41 30 19
August 2001.............. 94 54 34 23 13
August 2002.............. 93 48 27 17 9
August 2003.............. 92 43 22 13 6
August 2004.............. 91 38 18 10 4
August 2005.............. 90 34 15 7 2
August 2006.............. 89 30 12 5 1
August 2007.............. 88 27 10 4 1
August 2008.............. 87 24 8 3 0
August 2009.............. 85 21 6 2 0
August 2010.............. 83 18 5 1 0
August 2011.............. 81 16 4 1 0
August 2012.............. 79 14 3 1 0
August 2013.............. 76 12 2 0 0
August 2014.............. 73 11 2 0 0
August 2015.............. 70 9 1 0 0
August 2016.............. 66 8 1 0 0
August 2017.............. 62 7 1 0 0
August 2018.............. 58 6 0 0 0
August 2019.............. 53 4 0 0 0
August 2020.............. 47 3 0 0 0
August 2021.............. 40 3 0 0 0
August 2022.............. 34 2 0 0 0
August 2023.............. 26 1 0 0 0
August 2024.............. 17 0 0 0 0
August 2025.............. 7 0 0 0 0
August 2026.............. 0 0 0 0 0
August 2027.............. 0 0 0 0 0
------ ---- ---- ---- ----
Weighted Average
Life**................. 21.2 7.8 4.5 3.4 2.4
------ ---- ---- ---- ----
------ ---- ---- ---- ----
</TABLE>
- ------------------------------
* Rounded to the nearest whole percentage.
** Determined as specified under 'Weighted Average Lives of the Offered
Certificates' herein.
S-39
<PAGE>
<PAGE>
LAST SCHEDULED DISTRIBUTION DATE
The Last Scheduled Distribution Date for each Class of Offered Certificates
in Certificate Group 1 and Certificate Group 2 is the Distribution Date in
September, 2026 and September, 2026, respectively, which is the Distribution
Date in the month immediately following the month of the latest scheduled
maturity date for any of the Mortgage Loans. Since the rate of distributions in
reduction of the Class Certificate Balance of each Class of Offered Certificates
will depend on the rate of payment (including prepayments) of the Mortgage
Loans, the Class Certificate Balance of any such Class could be reduced to zero
significantly earlier or later than the Last Scheduled Distribution Date. The
rate of payments on the Mortgage Loans will depend on their particular
characteristics, as well as on prevailing interest rates from time to time and
other economic factors, and no assurance can be given as to the actual payment
experience of the Mortgage Loans. See ' -- Prepayment Considerations and Risks'
and ' -- Weighted Average Lives of the Offered Certificates' herein and 'Yield
and Prepayment Considerations' in the Prospectus.
CREDIT ENHANCEMENT
THE FINANCIAL GUARANTY INSURANCE POLICY
The following information has been supplied by MBIA Insurance Corporation
for inclusion herein.
The Insurer, in consideration of the payment of the premium and subject to
the terms of the Policy, thereby unconditionally and irrevocably guarantees to
any Owner that an amount equal to each full and complete Insured Payment will be
received by the Trustee, or its successor, on behalf of the Owners from the
Insurer, for distribution by the Trustee to each Owner of each Owner's
proportionate share of the Insured Payment. The Insurer's obligations under the
Policy with respect to a particular Insured Payment shall be discharged to the
extent funds equal to the applicable Insured Payment are received by the
Trustee, whether or not such funds are properly applied by the Trustee. Insured
Payments shall be made only at the time set forth in the Policy, and no
accelerated Insured Payments shall be made regardless of any acceleration of the
Class A Certificates, unless such acceleration is at the sole option of the
Insurer.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Trust Fund, any REMIC
or the Trustee for withholding taxes, if any (including interest and penalties
in respect of any such liability).
The Insurer will pay any Insured Payment that is a Preference Amount on the
Business Day following receipt on a Business Day by the Fiscal Agent (as
described below) of (i) a certified copy of the order requiring the return of a
preference payment, (ii) an opinion of counsel satisfactory to the Insurer that
such order is final and not subject to appeal, (iii) an assignment in such form
as is reasonably required by the Insurer, irrevocably assigning to the Insurer
all rights and claims of the Owner relating to or arising under the Class A
Certificates against the debtor which made such preference payment or otherwise
with respect to such preference payment and (iv) appropriate instruments to
effect the appointment of the Insurer as agent for such Owner in any legal
proceeding related to such preference payment, such instruments being in a form
satisfactory to the Insurer, provided that if such documents are received after
12:00 noon New York City time on such Business Day, they will be deemed to be
received on the following Business Day. Such payments shall be disbursed to the
receiver or trustee in bankruptcy named in the final order of the court
exercising jurisdiction on behalf of the Owner and not to any Owner directly
unless such Owner has returned principal or interest paid on the Class A
Certificates to such receiver or trustee in bankruptcy, in which case such
payment shall be disbursed to such Owner.
The Insurer will pay any other amount payable under the Policy no later
than 12:00 noon, New York City time, on the later of the Distribution Date on
which the related Deficiency Amount (as defined below) is due or the second
Business Day following receipt in New York, New York on a Business Day by State
Street Bank and Trust Company, N.A., as the Insurer's fiscal agent or any
successor fiscal agent appointed by the Insurer (the 'Fiscal Agent') of a Notice
(as described below); provided that if such Notice is received after 12:00 noon,
New York City time, on such Business Day, it will be deemed to be received on
the following Business Day. If any such Notice received by the Fiscal Agent is
not in proper form or is otherwise insufficient for the purpose of making a
claim under the Policy it shall be deemed not to have been received by the
Insurer's Fiscal Agent for purposes of this paragraph, and the Insurer or the
Fiscal Agent, as the case may be, shall promptly so advise the Trustee and the
Trustee may submit an amended Notice.
S-40
<PAGE>
<PAGE>
Insured Payments due under the Policy, unless otherwise stated therein,
will be disbursed by the Fiscal Agent to the Trustee on behalf of the Owners by
wire transfer of immediately available funds in the amount of the Insured
Payment less, in respect of Insured Payments related to Preference Amounts, any
amount held by the Trustee for the payment of such Insured Payment and legally
available therefor.
The Fiscal Agent is the agent of the Insurer only and the Fiscal Agent
shall in no event be liable to Owners for any acts of the Fiscal Agent or any
failure of the Insurer to deposit, or cause to be deposited, sufficient funds to
make payments due under the Policy.
As used in the Policy, the following terms shall have the following
meanings:
'Agreement' means the Pooling and Servicing Agreement dated as of August 1,
1996, among Depositor, the Seller, the Master Servicer, and the Trustee, without
regard to any amendment or supplement thereto unless such amendment or
supplement has been approved in writing by the Insurer.
'Business Day' means any day other than a Saturday, a Sunday or a day on
which banking institutions in New York City or in the city in which the
corporate trust office of the Trustee under the Agreement or the Insurer is
located are authorized or obligated by law or executive order to close.
'Deficiency Amount' means, with respect to the Class A Certificates as of
any Distribution Date, the excess of (i) the sum of the Interest Distribution
Amount for such Distribution Date and the then existing Subordination Deficit
for each Loan Group, if any, over (ii) Available Funds (net of the Premium
Amount) for each Loan Group.
'Notice' means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy substantially in the form of Exhibit A attached to the
Policy, the original of which is subsequently delivered by registered or
certified mail, from the Trustee specifying the Insured Payment which shall be
due and owing on the applicable Distribution Date.
'Owner' means each Holder (as defined in the Agreement) of any Class A
Certificate who, on the applicable Distribution Date, is entitled under the
terms of the Class A Certificates to payment thereunder.
'Preference Amount' means any amount previously distributed to an Owner on
the Class A Certificates that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (11 U.S.C.), as amended from time to time, in accordance with a
final nonappealable order of a court having competent jurisdiction.
Capitalized terms used in the Policy and not otherwise defined in the
Policy shall have the respective meanings set forth in the Agreement as of the
date of execution of the Policy, without giving effect to any subsequent
amendment or modification to the Agreement unless such amendment or modification
has been approved in writing by the Insurer.
Any notice under the Policy or service of process on the Insurer's Fiscal
Agent may be made at the address listed below for the Fiscal Agent or such other
address as the Insurer shall specify in writing to the Trustee.
The notice address of the Fiscal Agent is 61 Broadway, 15th Floor, New
York, New York, 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify in writing to the Trustee.
The Policy is being issued under and pursuant to and shall be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
The insurance provided by the Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The Policy is not cancelable for any reason. The premium on the Policy is
not refundable for any reason including payment, or provision being made for
payment, prior to maturity of the Class A Certificates.
The Insurer, formerly known as Municipal Bond Investors Assurance
Corporation, is the principal operating subsidiary of MBIA Inc., a New York
Stock Exchange listed company. MBIA Inc. is not obligated to pay the debts of or
claims against the Insurer. The Insurer is domiciled in the State of New York
and licensed to do business in all 50 states, the District of Columbia, the
Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands,
the Virgin Islands of the United States and the Territory of Guam. The Insurer
has one European branch in the Republic of France.
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<PAGE>
<PAGE>
The tables below present selected financial information of the Insurer
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities ('SAP') and generally accepted
accounting principles ('GAAP').
<TABLE>
<CAPTION>
SAP
----------------------------------
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets...................................................... $ 3,814 $ 4,179
Liabilities.......................................................... 2,540 2,804
Capital and Surplus.................................................. 1,274 1,375
</TABLE>
<TABLE>
<CAPTION>
GAAP
----------------------------------
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets............................................................... $ 4,463 $ 4,691
Liabilities.......................................................... 1,937 2,088
Shareholder's Equity................................................. 2,526 2,602
</TABLE>
Audited financial statements of the Insurer as of December 31, 1995 and
1994 and for each of the three years in the period ended December 31, 1995 are
included herein as Appendix A. Unaudited financial statements of the Insurer for
the six-month period ended June 30, 1996 are included herein as Appendix B. Such
financial statements have been prepared on the basis of generally accepted
accounting principles. Copies of the Insurer's 1995 year-end audited financial
statements prepared in accordance with statutory accounting practices are
available from the Insurer. The address of the Insurer is 113 King Street,
Armonk, New York 10504.
A copy of the Annual Report on Form 10-K of MBIA Inc. is available from the
Insurer or the Securities and Exchange Commission.
The Insurer does not accept any responsibility for the accuracy or
completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Policy and the Insurer set forth under the
'Credit Enhancement -- The Financial Guaranty Insurance Policy' and in
Appendices A and B.
Moody's Investors Service ('Moody's') rates the claims paying ability of
the Insurer 'Aaa.'
Standard & Poor's Rating Group, a division of The McGraw-Hill Companies,
Inc. ('S&P'), rates the claims paying ability of the Insurer 'AAA.'
Fitch Investors Service, L.P. rates the claims paying ability of the
Insurer 'AAA.'
Each rating of the Insurer should be evaluated independently. The ratings
reflect the respective rating agency's current assessment of the
creditworthiness of the Insurer and its ability to pay claims on its policies of
insurance. Any further explanation as to the significance of the above ratings
may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Class A
Certificates and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the Class A
Certificates. The Insurer does not guaranty the market price of the Class A
Certificates nor does it guaranty that the ratings on the Class A Certificates
will not be reversed or withdrawn.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Certificates
against the purchase price of the Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Trust fund will include two segregated
asset pools, with respect to which elections will be made to treat each as a
separate REMIC. One REMIC (the 'Subsidiary REMIC') will issue several
uncertificated subclasses of nonvoting interests ('Subsidiary REMIC Regular
Interests'), which
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<PAGE>
<PAGE>
will be designated as the regular interests in the Subsidiary REMIC. The assets
of the Subsidiary REMIC will consist of the Mortgage Loans and all other
property in the Trust Fund except for the property in the Trust Fund allocated
to the second REMIC (the 'Master REMIC'). The Master REMIC will issue the
Regular Certificates, which will be designated as the regular interests in the
Master REMIC. The Class R Certificates will be designated as the residual
interest in the Master REMIC. The Class OC Certificates, which are not offered
hereby, will be designated as the residual interest in the Subsidiary REMIC. The
assets of the Master REMIC will consist of the Subsidiary REMIC Regular
Interests. Aggregate distributions on the Subsidiary REMIC Regular Interests
will equal the aggregate distributions on the Regular Certificates issued by the
Master REMIC. See 'Description of the Certificates -- Separate REMIC Structure'
herein.
The Regular Certificates generally will be treated as debt instruments
issued by the REMIC for federal income tax purposes. Income on the Regular
Certificates must be reported under an accrual method of accounting.
The Regular Certificates, depending on their respective issue prices (as
described in the Prospectus under 'Certain Federal Income Tax Consequences'),
may be treated as having been issued with OID for federal income tax purposes.
For purposes of determining the amount and rate of accrual of OID and market
discount, the Trust Fund intends to assume that there will be prepayments on the
Mortgage Loans in each Loan Group at a rate equal to the Prepayment Assumption
relating to each Loan Group. No representation is made as to whether the
Mortgage Loans will prepay at the foregoing rates or any other rate. See 'Yield,
Prepayment and Maturity Considerations' herein and 'Certain Federal Income Tax
Consequences' in the Prospectus. Computing accruals of OID in the manner
described in the Prospectus may (depending on the actual rate of prepayments
during the accrual period) result in the accrual of negative amounts of OID on
the Certificates issued with OID in an accrual period. Holders will be entitled
to offset negative accruals of OID only against future OID accrual on such
Certificates.
If the holders of any Regular Certificates are treated as holding such
Certificates at a premium, such holders should consult their tax advisors
regarding the election to amortize bond premium and the method to be employed.
Because the Class A-7 Certificates evidence a right to receive Supplemental
Interest and not solely an interest in Mortgage Loans secured by interests in
real property, the Class A-7 Certificates, to the extent such Certificates
evidence the right to receive Supplemental Interest, will not be treated in
their entirety as assets described in Section 593(d) of the Code, Section
7701(a)(19)(C) of the Code, and Section 856(c)(5)(A) of the Code and income to
the extent attributable to the Class A-7 Certificates will not be treated
entirely as income described in such sections. In general, the Class A-7
Certificates will not be suitable for inclusion in a real estate mortgage
investment conduit during the period the Cap Agreement is in existence because
the Supplemental Interest would be income from a nonpermitted asset and subject
to the 100% tax on 'prohibited transactions' under Section 860F of the Code.
Each Class A-7 Certificateholder is deemed to own an undivided beneficial
ownership interest in two assets, a REMIC regular interest and the Supplemental
Interest. The Supplemental Interest is not an asset of the either REMIC. The
treatment of amounts received by a Class A-7 Certificateholder under such
Certificateholder's right to receive Supplemental Interest will depend on the
portion, if any, of the Class A-7 Certificateholder's purchase price allocable
thereto. Under the REMIC Regulations, each Class A-7 Certificateholder must
allocate its purchase price for the Class A-7 Certificate between its undivided
interest in the regular interest and its undivided interest in the Supplemental
Interest in accordance with the relative fair market values of each property
right. Payments made to the Class A-7 Certificateholders under the Supplemental
Interest will be included in income based on the regulations relating to
notional principal contracts (the 'Notional Principal Contract Regulations').
The OID Regulations provide that the issuer's allocations of the issue price are
binding on all holders unless the holder explicitly discloses on its tax return
that its allocation is different from the issuer's allocation. A de minimis
value will be assigned to the Supplemental Interest, based upon the price paid
therefor by the Depositor. Under the REMIC Regulations, the Servicer is required
to account for the regular interest and the Cap Agreement as discrete property
rights. Class A-7 Certificateholders are advised to consult their own tax
advisors regarding the allocation of issue price, timing, character, and source
of income and deductions resulting from the ownership of the Class A-7
Certificates. Treasury regulations have been promulgated under Section 1275 of
the Code generally providing for the integration of a 'qualifying debt
instrument' with a hedge if the combined cash flows of the components are
substantially equivalent to the cash
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<PAGE>
<PAGE>
flows on a variable rate debt instrument. However, such regulations specifically
disallow integration of debt instruments subject to Section 1272(a)(6) of the
Code. Therefore, holders of Class A-7 Certificates will be unable to use the
integration method provided for under such regulations with respect to such
Certificates. Ownership of the Supplemental Interest will nevertheless entitle
the owner to amortize the separate price paid for the Supplemental Interest
under the Notional Principal Contract Regulations.
The holders of the Class R Certificates must include the taxable income of
the REMIC in their federal taxable income. The resulting tax liability of the
holders may exceed cash distributions to such holders during certain periods.
All or a portion of the taxable income from a Class R Certificate recognized by
a holder may be treated as 'excess inclusion' income, which, with limited
exceptions, is subject to U.S. federal income tax.
Prospective purchasers of a Class R Certificate should be aware that the
Internal Revenue Service (the 'IRS') released proposed regulations (the
'Proposed Mark-to-Market Regulations') which provide that a Class R Certificate
acquired after January 3, 1995 cannot be marked-to-market. The Proposed
Mark-to-Market Regulations change the temporary regulations discussed in the
Prospectus which allowed a Class R Certificate to be marked-to-market provided
that it was not a 'negative value' residual interest and did not have the same
economic effect as a 'negative value' residual interest. Also, purchasers of a
Class R Certificate should consider carefully the tax consequences of an
investment in Residual Certificates discussed in the Prospectus and should
consult their own tax advisors with respect to those consequences. See 'Certain
Federal Income Tax Consequences -- REMIC Certificates -- b. Residual
Certificates' in the Prospectus. Specifically, prospective holders of Class R
Certificates should consult their tax advisors regarding whether, at the time of
acquisition, a Class A-R Certificate will be treated as a 'noneconomic' residual
interest, a 'non-significant value' residual interest and a 'tax avoidance
potential' residual interest. See 'Certain Federal Income Tax
Consequences -- Tax-Related Restrictions on Transfer of Residual
Certificates -- Noneconomic Residual Certificates,' 'Certain Federal Income Tax
Consequences -- b. Residual Certificates -- Mark to Market Rules,' ' -- Excess
Inclusions' and 'Certain Federal Income Tax Consequences -- Tax-Related
Restrictions on Transfers of Residual Certificates -- Foreign Investors' in the
Prospectus. Additionally, for information regarding Prohibited Transactions and
Treatment of Realized Losses, see 'Certain Federal Income Tax
Consequences -- Prohibited Transactions and Other Taxes' and ' -- REMIC
Certificates -- a. Regular Certificates -- Treatment of Realized Losses' in the
Prospectus.
ERISA CONSIDERATIONS
Any plan fiduciary which proposes to cause a Plan (as defined below) to
acquire any of the Offered Certificates should consult with its counsel with
respect to the potential consequences under the Employee Retirement Income
Security Act of 1974, as amended ('ERISA'), and/or the Code, of the Plan's
acquisition and ownership of such Certificates. See 'ERISA Considerations' in
the Prospectus. Section 406 of ERISA prohibits 'parties in interest' with
respect to an employee benefit plan subject to ERISA and/or the excise tax
provisions set forth under Section 4975 of the Code (a 'Plan') from engaging in
certain transactions involving such Plan and its assets unless a statutory or
administrative exemption applies to the transaction. Section 4975 of the Code
imposes certain excise taxes on prohibited transactions involving Plans and
other arrangements (including, but not limited to, individual retirement
accounts) described under that Section; ERISA authorizes the imposition of civil
penalties for prohibited transactions involving Plans not subject to the
requirements of Section 4975 of the Code.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
such plans may be invested in the Offered Certificates without regard to the
ERISA considerations described herein and in the Prospectus, subject to the
provisions of other applicable federal and state law. Any such plan that is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code
may nonetheless be subject to the prohibited transaction rules set forth in
Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary that decides to
invest the assets of a Plan in the Offered Certificates should consider, among
other factors, the extreme sensitivity of the investment to the rate of
principal payments (including prepayments) on the Mortgage Loans.
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<PAGE>
<PAGE>
The U.S. Department of Labor has granted an individual administrative
exemption to Merrill Lynch, Pierce, Fenner & Smith Incorporated (Prohibited
Transaction Exemption 90-29, Exemption Application No. D-8012, 55 Fed. Reg.
21459 (1990) (the 'Exemption'), from certain of the prohibited transaction rules
of ERISA and the related excise tax provisions of Section 4975 of the Code with
respect to the initial purchase, the holding and the subsequent resale by Plans
of certificates in pass-through trusts that consist of certain receivables,
loans and other obligations that meet the conditions and requirements of the
Exemption. The Exemption applies to mortgage loans such as the Mortgage Loans in
the Trust Fund.
For a general description of the Exemption and the conditions that must be
satisfied for the Exemption to apply, see 'ERISA Considerations' in the
Prospectus.
It is expected that the Exemption will apply to the acquisition and holding
by Plans of the Class A Certificates and that all conditions of the Exemption
other than those within the control of the investors will be met. In addition,
as of the date hereof, there is no single Mortgagor that is the obligor on five
percent (5%) of the Mortgage Loans included in the Trust Fund by aggregate
unamortized principal balance of the assets of the Trust Fund.
Any person purchasing a Class A-7 Certificate with the related right to
receive Supplemental Interest will have acquired, for purposes of ERISA and for
federal income tax purposes, such Class A-7 Certificate without the right to
receive Supplemental Interest, together with the right to receive Supplement
Interest. The Exemption does not apply to the acquisition, holding or resale of
the right to receive Supplemental Interest. Accordingly, the acquisition,
holding or resale of the right to receive Supplemental Interest by a Plan could
result in a prohibited transaction unless another administrative exemption to
ERISA's prohibited transaction rules is applicable. One or more alternative
exemptions may be available with respect to certain prohibited transaction rules
of ERISA that might apply in connection with the initial purchase, holding and
resale of the Supplemental Interest, including, but not limited to: (i)
Prohibited Transaction Class Exemption ('PTCE') 95-60, regarding investments by
insurance company general accounts; (ii) PTCE 91-38, regarding investments by
bank collective investment funds; (iii) PTCE 90-1, regarding investments by
insurance company pooled separate accounts; (iv) PTCE 84-14, regarding
transactions negotiated by qualified professional asset managers; or (v) PTCE
75-1, Part II, regarding principal transactions by broker-dealers (the
'Principal Transactions Exemption'). The Underwriter believes that the
conditions of the Principal Transactions Exemption will be met with respect to
the acquisition of a right to Supplemental Interest by a Plan, so long as the
Underwriter is not a fiduciary with respect to the Plan (and is not a party in
interest with respect to the Plan by reason of being a participating employer or
affiliate thereof).
BECAUSE THE CHARACTERISTICS OF THE CLASS R CERTIFICATES MAY NOT MEET THE
REQUIREMENTS OF PTCE 83-1, THE EXEMPTION OR ANY OTHER ISSUED EXEMPTION UNDER
ERISA, THE PURCHASE AND HOLDING OF THE CLASS R CERTIFICATES BY A PLAN OR BY
INDIVIDUAL RETIREMENT ACCOUNTS OR OTHER PLANS SUBJECT TO SECTION 4975 OF THE
CODE MAY RESULT IN PROHIBITED TRANSACTIONS OR THE IMPOSITION OF EXCISE TAXES OR
CIVIL PENALTIES. CONSEQUENTLY, TRANSFERS OF THE CLASS R CERTIFICATES WILL NOT BE
REGISTERED BY THE TRUSTEE UNLESS THE TRUSTEE RECEIVES: (I) A REPRESENTATION FROM
THE TRANSFEREE OF SUCH CERTIFICATE, ACCEPTABLE TO AND IN FORM AND SUBSTANCE
SATISFACTORY TO THE TRUSTEE, TO THE EFFECT THAT SUCH TRANSFEREE IS NOT AN
EMPLOYEE BENEFIT PLAN SUBJECT TO SECTION 406 OF ERISA OR A PLAN OR ARRANGEMENT
SUBJECT TO SECTION 4975 OF THE CODE, NOR A PERSON ACTING ON BEHALF OF ANY SUCH
PLAN OR ARRANGEMENT NOR USING THE ASSETS OF ANY SUCH PLAN OR ARRANGEMENT TO
EFFECT SUCH TRANSFER; (II) IF THE PURCHASER IS AN INSURANCE COMPANY, A
REPRESENTATION THAT THE PURCHASER IS AN INSURANCE COMPANY WHICH IS PURCHASING
SUCH CERTIFICATES WITH FUNDS CONTAINED IN AN 'INSURANCE COMPANY GENERAL ACCOUNT'
(AS SUCH TERM IS DEFINED IN SECTION V(e) OF PROHIBITED TRANSACTION CLASS
EXEMPTION 95-60 ('PTCE 95-60')) AND THAT THE PURCHASE AND HOLDING OF SUCH
CERTIFICATES ARE COVERED UNDER PTCE 95-60; OR (III) AN OPINION OF COUNSEL
SATISFACTORY TO THE TRUSTEE THAT THE PURCHASE OR HOLDING OF SUCH CERTIFICATE BY
A PLAN, ANY PERSON ACTING ON BEHALF OF A PLAN OR USING SUCH PLAN'S ASSETS, WILL
NOT RESULT IN THE ASSETS OF THE TRUST FUND BEING DEEMED TO BE 'PLAN ASSETS' AND
SUBJECT TO THE PROHIBITED TRANSACTION REQUIREMENTS OF ERISA AND THE CODE AND
WILL NOT SUBJECT THE TRUSTEE TO ANY OBLIGATION IN ADDITION TO THOSE UNDERTAKEN
IN THE AGREEMENT. IN THE EVENT THAT SUCH REPRESENTATION IS VIOLATED, OR ANY
ATTEMPT TO TRANSFER TO A PLAN OR PERSON ACTING ON BEHALF OF A PLAN OR USING SUCH
PLAN'S ASSETS IS ATTEMPTED WITHOUT SUCH OPINION OF COUNSEL, SUCH ATTEMPTED
TRANSFER OR ACQUISITION SHALL BE VOID AND OF NO EFFECT.
S-45
<PAGE>
<PAGE>
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1 as
described in the Prospectus and the Exemption, and the potential consequences in
their specific circumstances, prior to making an investment in the Offered
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in the Offered Certificates is appropriate for the Plan, taking into
account the overall investment policy of the Plan and the composition of the
Plan's investment portfolio.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement,
dated August 27, 1996 (the 'Underwriting Agreement'), Merrill, Lynch, Pierce,
Fenner & Smith Incorporated (the 'Underwriter') has agreed to purchase, and the
Depositor has agreed to sell to the Underwriter, the Class A Certificates.
The Underwriter initially proposes to offer the Class A Certificates
directly to the public at the public offering price set forth on the cover page
of this Prospectus Supplement and to certain dealers at such price less the
concessions set forth below. The Underwriter may allow, and such dealers may
reallow, concessions to certain other dealers. After the initial public
offering, the public offering price and such concessions may be changed by the
Underwriter.
<TABLE>
<CAPTION>
CLASS CONCESSION REALLOWANCE
- ----- ---------- -----------
<S> <C> <C>
A-1 0.09% 0.050%
A-2 0.10% 0.070%
A-3 0.12% 0.075%
A-4 0.15% 0.120%
A-5 0.18% 0.125%
A-6 0.21% 0.125%
A-7 0.11475% 0.075%
</TABLE>
The Underwriter intends to make a secondary market in the Class A
Certificates, but has no obligation to do so. There can be no assurance that a
secondary market for the Offered Certificates will develop or, if it does
develop, that it will continue or that it will provide Certificateholders with a
sufficient level of liquidity of investment.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
The Class R Certificates may be offered by the Seller from time to time
directly or through underwriters or agents (either of which may include
Countrywide Securities Corporation, an affiliate of the Depositor, the Seller
and the Master Servicer) in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale, in one or more separate
transactions. Any underwriters or agents that participate in the distribution of
the Class R Certificates may be deemed to be 'underwriters' within the meaning
of the Securities Act of 1933, as amended, and any profit on the sale of such
Certificates, discounts, commissions, concessions or other compensation received
by any such underwriter or agent may be deemed to be underwriting discounts and
commissions under such Act.
S-46
<PAGE>
<PAGE>
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation (formerly
known as Municipal Bond Investors Assurance Corporation) as of December 31, 1995
and 1994 and the related consolidated statements of income, changes in
shareholder's equity, and cash flows for each of the three years in the period
ended December 31, 1995, included as Appendix A to this Prospectus Supplement,
have been audited by Coopers & Lybrand L.L.P., independent auditors, as set
forth in their report thereon appearing in this Prospectus Supplement and are
included in reliance upon the authority of that firm as experts in accounting
and auditing.
LEGAL MATTERS
The validity of the Certificates, including certain federal income tax
consequences with respect thereto, will be passed upon for the Depositor by
Brown & Wood LLP, New York, New York. Stroock & Stroock & Lavan, New York, New
York, will pass upon certain legal matters on behalf of the Underwriter.
RATINGS
It is a condition to the issuance of the Class A Certificates that they be
rated AAA by S&P and Aaa by Moody's (S&P and Moody's, together, the 'Rating
Agencies'). It is a condition to the issuance of the Class R Certificates that
they be rated at least Baa3 by Moody's and at least BBB by S&P.
S&P's ratings on mortgage pass-through certificates address the likelihood
of the receipt by Certificateholders of payments required under the Agreement.
S&P's ratings take into consideration the credit quality of the mortgage pool,
structural and legal aspects associated with the Certificates, and the extent to
which the payment stream in the mortgage pool is adequate to make payments
required under the Certificates. S&P's rating on the Class A Certificates is
based on the claims-paying ability of the Insurer. S&P's rating on the Class A
Certificates does not, however, constitute a statement regarding frequency of
prepayments on the mortgages. See 'Yield, Prepayment and Maturity
Considerations' herein.
The rating assigned by Moody's to the Class A Certificates is based on the
claims-paying ability of the Insurer. The rating assigned by Moody's to the
Class R Certificates addresses the likelihood of receipt by such
Certificateholders of all distributions to which such Certificateholders are
entitled. Ratings by Moody's address the structural, legal and issuer-related
aspects associated with the Certificates, including the nature and quality of
the underlying mortgage loans. Such ratings do not represent any assessment of
the likelihood of principal prepayments by mortgagors or of the degree by which
such prepayments might differ from those originally anticipated.
The ratings of the Rating Agencies do not address the possibility that, as
a result of principal prepayments, Certificateholders may receive a lower than
anticipated yield.
The ratings assigned to the Offered Certificates should be evaluated
independently from similar ratings on other types of securities. A rating is not
a recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time by the Rating Agencies.
The Depositor has not requested a rating of the Offered Certificates by any
rating agency other than the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by such other rating
agency. The rating assigned by such other rating agency to the Offered
Certificates could be lower than the respective ratings assigned by the Rating
Agencies.
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<PAGE>
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, a class of Book-Entry Certificates
(the 'Global Securities') will be available only in book-entry form. Investors
in the Global Securities may hold such Global Securities through any of DTC,
CEDEL or Euroclear. The Global Securities will be traceable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Residential Mortgage Pass-Through
Certificates issues.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their Participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior Residential Mortgage Pass-Through
Certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no 'lock-up' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading Between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior
Residential Mortgage Pass-Through Certificates issues in same-day funds.
Trading Between CEDEL And/Or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading Between DTC Seller And CEDEL Or Euroclear Purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. CEDEL or Euroclear
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
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<PAGE>
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debt
will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading Between CEDEL Or Euroclear Seller And DTC Purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at
least one business day prior to settlement. In these cases CEDEL or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of the CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
CEDEL Participant's or Euroclear Participant's account will be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the CEDEL Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
A-2
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<PAGE>
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption For Non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status). If the information shown on Form W-8 changes, a new Form W-8 must
be filed within 30 days of such change.
Exemption For Non-U.S. Persons With Actively Connected Income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption Or Reduced Rate For Non-U.S. Persons Resident In Treaty
Countries (Form 1001). Non-U.S. Persons that are Certificate Owners
residing in a country that has a tax treaty with the United States can
obtain an exemption or reduced tax rate (depending on the treaty terms) by
filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate). If the
treaty provides only for a reduced rate, withholding tax will be imposed at
that rate unless the filer alternatively files Form W-8. Form 1001 may be
filed by the Certificate Owners or his agent.
Exemption For U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of
a Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom
it holds (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8 and Form 1001 are effective for
three calendar years and Form 4224 is effective for one calendar year.
The term 'U.S. Person' means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate or trust
the income of which is includable in gross income for United States tax
purposes, regardless of its source. This summary does not deal with all aspects
of U.S. Federal income tax withholding that may be relevant to foreign holders
of the Global Securities. Investors are advised to consult their own tax
advisors for specific tax advice concerning their holding and disposing of the
Global Securities.
A-3
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<PAGE>
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APPENDIX A
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1995 and 1994
and for the years ended
December 31, 1995, 1994 and 1993
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<PAGE>
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REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
MBIA INSURANCE CORPORATION:
We have audited the accompanying consolidated balance sheets of MBIA Insurance
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in shareholder's equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MBIA Insurance
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 7 to the consolidated financial statements, effective
January 1, 1993 the Company adopted Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes." As discussed in Note 2 to the
consolidated financial statements, effective January 1, 1994 the Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
\s\ COOPERS & LYBRAND L.L.P.
New York, New York
January 22, 1996
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------- ----------------
ASSETS
<S> <C> <C>
Investments:
Fixed maturity securities held as available-for-sale
at fair value (amortized cost $3,428,986 and
$3,123,838 $3,652,621 3,051,906
Short-term investments, at amortized cost
(which approximates fair value) 198,035 121,384
Other investments 14,064 11,970
------------ ------------
Total investments 3,864,720 3,185,260
Cash and cash equivalents 2,135 1,332
Accrued investment income 60,247 55,347
Deferred acquisition costs 140,348 133,048
Prepaid reinsurance premiums 200,887 186,492
Goodwill (less accumulated amortization of
$37,366 and $32,437) 105,614 110,543
Property and equipment, at cost (less accumulated
depreciation of $12,137 and $9,501) 41,169 39,648
Receivable for investments sold 5,729 945
Other assets 42,145 46,552
------------ ------------
TOTAL ASSETS $4,462,994 $3,759,167
============ ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue $ 1,616,315 $ 1,512,211
Loss and loss adjustment expense reserves 42,505 40,148
Deferred income taxes 212,925 97,828
Payable for investments purchased 10,695 6,552
Other liabilities 54,682 46,925
------------ ------------
TOTAL LIABILITIES 1,937,122 1,703,664
------------ ------------
Shareholder's Equity:
Common stock, par value $150 per share; authorized,
issued and outstanding - 100,000 shares 15,000 15,000
Additional paid-in capital 1,021,584 953,655
Retained earnings 1,341,855 1,134,061
Cumulative translation adjustment 2,704 427
Unrealized appreciation (depreciation) of investments,
net of deferred income tax provision (benefit)
of $78,372 and $(25,334) 144,729 (47,640)
------------ ------------
TOTAL SHAREHOLDER'S EQUITY 2,525,872 2,055,503
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $4,462,994 $3,759,167
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
-2-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------
1995 1994 1993
--------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Gross premiums written $349,812 $361,523 $479,390
Ceded premiums (45,050) (49,281) (47,552)
---------- ---------- ----------
Net premiums written 304,762 312,242 431,838
Increase in deferred premium revenue (88,365) (93,226) (200,519)
---------- ---------- ----------
Premiums earned (net of ceded
premiums of $30,655
$33,340 and $41,409) 216,397 219,016 231,319
Net investment income 219,834 193,966 175,329
Net realized gains 7,777 10,335 8,941
Other income 2,168 1,539 3,996
---------- ---------- ----------
Total revenues 446,176 424,856 419,585
---------- ---------- ----------
Expenses:
Losses and loss adjustment expenses 10,639 8,093 7,821
Policy acquisition costs, net 21,283 21,845 25,480
Underwriting and operating expenses 41,812 41,044 38,006
---------- ---------- ----------
Total expenses 73,734 70,982 71,307
---------- ---------- ----------
Income before income taxes and cumulative
effect of accounting changes 372,442 353,874 348,278
Provision for income taxes 81,748 77,125 86,684
---------- ---------- ----------
Income before cumulative effect of
accounting changes 290,694 276,749 261,594
Cumulative effect of accounting changes --- --- 12,923
---------- ---------- ----------
Net income $290,694 $276,749 $274,517
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
-3-
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<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
For the years ended December 31, 1995, 1994 and 1993
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Unrealized
Additional Cumulative Appreciation
Common Stock Paid-in Retained Translation (Depreciation)
Shares Amount Capital Earnings Adjustment of Investments
------- -------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 100,000 $ 15,000 $ 931,943 $ 670,795 $ (474) $ 2,379
Net income --- --- --- 274,517 --- ---
Change in foreign currency translation --- --- --- --- (729) ---
Change in unrealized appreciation
of investments net of change in
deferred income taxes of $(1,381) --- --- --- --- --- 2,461
Dividends declared (per
common share $500.00) --- --- --- (50,000) --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 11,851 --- --- ---
------- -------- ---------- ---------- ---------- ------------
Balance, December 31, 1993 100,000 15,000 943,794 895,312 (1,203) 4,840
------- -------- ---------- ---------- ---------- ------------
Net income --- --- --- 276,749 --- ---
Change in foreign currency translation --- --- --- --- 1,630 ---
Change in unrealized depreciation
of investments net of change in
deferred income taxes of $27,940 --- --- --- --- --- (52,480)
Dividends declared (per
common share $380.00) --- --- --- (38,000) --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 9,861 --- --- ---
------- -------- ---------- ---------- ---------- ------------
Balance, December 31, 1994 100,000 15,000 953,655 1,134,061 427 (47,640)
------- -------- ---------- ---------- ---------- ------------
Exercise of stock options --- --- 5,403 --- --- ---
Net income --- --- --- 290,694 --- ---
Change in foreign currency translation --- --- --- --- 2,277 ---
Change in unrealized appreciation
of investments net of change in
deferred income taxes of $(103,707) --- --- --- --- --- 192,369
Dividends declared (per
common share $829.00) --- --- --- (82,900) --- ---
Capital contribution from MBIA Inc. --- --- 52,800 --- --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 9,726 --- --- ---
======= ======== ========== ========== ======== ===========
Balance, December 31, 1995 100,000 $ 15,000 $1,021,584 $1,341,855 $ 2,704 $144,729
======= ======== ========== ========== ======== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
-4-
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<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
-----------------------------------------
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $290,694 $276,749 $274,517
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accrued investment income (4,900) (3,833) (5,009)
Increase in deferred acquisition costs (7,300) (12,564) (10,033)
Increase in prepaid reinsurance premiums (14,395) (15,941) (6,143)
Increase in deferred premium revenue 104,104 109,167 206,662
Increase in loss and loss adjustment expense reserves 2,357 6,413 8,225
Depreciation 2,676 1,607 1,259
Amortization of goodwill 4,929 4,961 5,001
Amortization of bond (discount) premium, net (2,426) 621 (743)
Net realized gains on sale of investments (7,778) (10,335) (8,941)
Deferred income taxes 11,391 19,082 7,503
Other, net 29,080 (8,469) 15,234
----------- ------------ ------------
Total adjustments to net income 117,738 90,709 213,015
----------- ------------ ------------
Net cash provided by operating activities 408,432 367,458 487,532
----------- ------------ ------------
Cash flows from investing activities:
Purchase of fixed maturity securities, net
of payable for investments purchased (897,128) (1,060,033) (786,510)
Sale of fixed maturity securities, net of
receivable for investments sold 473,352 515,548 205,342
Redemption of fixed maturity securities,
net of receivable for investments redeemed 83,448 128,274 225,608
(Purchase) sale of short-term investments, net (32,281) 3,547 (40,461)
(Purchase) sale of other investments, net (692) 87,456 (37,777)
Capital expenditures, net of disposals (4,228) (3,665) (3,601)
----------- ------------ ------------
Net cash used in investing activities (377,529) (328,873) (437,399)
----------- ------------ ------------
Cash flows from financing activities:
Capital contribution from MBIA Inc. 52,800 --- ---
Dividends paid (82,900) (38,000) (50,000)
----------- ------------ ------------
Net cash used by financing activities (30,100) (38,000) (50,000)
----------- ------------ ------------
Net increase in cash and cash equivalents 803 585 133
Cash and cash equivalents - beginning of year 1,332 747 614
----------- ------------ ------------
Cash and cash equivalents - end of year $2,135 $1,332 $747
=========== ============ ============
Supplemental cash flow disclosures:
Income taxes paid $ 50,790 $ 53,569 $ 52,967
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
-5-
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<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
MBIA Insurance Corporation ("MBIA Corp."), formerly known as Municipal Bond
Investors Assurance Corporation, is a wholly owned subsidiary of MBIA Inc. MBIA
Inc. was incorporated in Connecticut on November 12, 1986 as a licensed insurer
and, through the following series of transactions during December 1986, became
the successor to the business of the Municipal Bond Insurance Association (the
"Association"), a voluntary unincorporated association of insurers writing
municipal bond and note insurance as agent for the member insurance companies:
o MBIA Inc. acquired for $17 million all of the outstanding common stock of
New York domiciled insurance company and changed the name of the
insurance company to Municipal Bond Investors Assurance Corporation. In
April 1995, the name was again changed to MBIA Insurance Corp. Prior to
the acquisition, all of the obligations of this company were reinsured
and/or indemnified by the former owner.
o Four of the five member companies of the Association, together with their
affiliates, purchased all of the outstanding common stock of MBIA Inc.
and entered into reinsurance agreements whereby they ceded to MBIA Inc.
substantially all of the net unearned premiums on existing and future
Association business and the interest in, or obligation for, contingent
commissions resulting from their participation in the Association. MBIA
Inc.'s reinsurance obligations were then assumed by MBIA Corp. The
participation of these four members aggregated approximately 89% of the
net insurance in force of the Association. The net assets transferred
from the predecessor included the cash transferred in connection with the
reinsurance agreements, the related deferred acquisition costs and
contingent commissions receivable, net of the related unearned premiums
and contingent commissions payable. The deferred income taxes inherent in
these assets and liabilities were recorded by MBIA Corp. Contingent
commissions receivable (payable) with respect to premiums earned prior to
the effective date of the reinsurance agreements by the Association in
accordance with statutory accounting practices, remained as assets
(liabilities) of the member companies.
Effective December 31, 1989, MBIA Inc. acquired for $288 million all of
the outstanding stock of Bond Investors Group, Inc. ("BIG"), the parent company
of Bond Investors Guaranty Insurance Company ("BIG Ins."), which was
subsequently renamed MBIA Insurance Corp. of Illinois ("MBIA Illinois").
-6-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In January 1990, MBIA Illinois ceded its portfolio of net insured
obligations to MBIA Corp. in exchange for cash and investments equal to its
unearned premium reserve of $153 million. Subsequent to this cession, MBIA Inc.
contributed the common stock of BIG to MBIA Corp. resulting in additional
paid-in capital of $200 million. The insured portfolio acquired from BIG Ins.
consists of municipal obligations with risk characteristics similar to those
insured by MBIA Corp. On December 31, 1990, BIG was merged into MBIA Illinois.
Also in 1990, MBIA Inc. formed MBIA Assurance S.A. ("MBIA Assurance"),
a wholly owned French subsidiary, to write financial guarantee insurance in the
international community. MBIA Assurance provides insurance for public
infrastructure financings, structured finance transactions and certain
obligations of financial institutions. The stock of MBIA Assurance was
contributed to MBIA Corp. in 1991 resulting in additional paid-in capital of $6
million. Pursuant to a reinsurance agreement with MBIA Corp., a substantial
amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp.
In 1993, MBIA Inc. formed a wholly owned subsidiary, MBIA Investment
Management Corp. ("IMC"). IMC, which commenced operations in August 1993,
principally provides guaranteed investment agreements to states, municipalities
and municipal authorities which are guaranteed as to principal and interest.
MBIA Corp. insures IMC's outstanding investment agreement liabilities.
In 1993, MBIA Corp. assumed the remaining business from the fifth
member of the Association.
In 1994, MBIA Inc. formed a wholly owned subsidiary, MBIA Securities
Corp. ("SECO"), to provide fixed-income investment management services for MBIA
Inc.'s municipal cash management service businesses. In 1995, portfolio
management for a portion of MBIA Corp.'s insurance related investment portfolio
was transferred to SECO; the management of the balance of this portfolio was
transferred in January 1996.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP"). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
-7-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant accounting policies are as follows:
CONSOLIDATION
The consolidated financial statements include the accounts of MBIA Corp., MBIA
Illinois, MBIA Assurance and BIG Services, Inc. All significant intercompany
balances have been eliminated. Certain amounts have been reclassified in prior
years' financial statements to conform to the current presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand deposits with banks.
INVESTMENTS
Effective January 1, 1994, MBIA Corp. adopted Statement of Financial Accounting
Standards ("SFAS") 115 "Accounting for Certain Investments in Debt and Equity
Securities." In accordance with SFAS 115, MBIA Corp. reclassified its entire
investment portfolio ("Fixed-maturity securities") as "available-for-sale."
Pursuant to SFAS 115, securities classified as available-for-sale are required
to be reported in the financial statements at fair value, with unrealized gains
and losses reflected as a separate component of shareholder's equity. The
cumulative effect of MBIA Corp.'s adoption of SFAS 115 was a decrease in
shareholder's equity at December 31, 1994 of $46.8 million, net of taxes. The
adoption of SFAS 115 had no effect on MBIA Corp.'s earnings.
Bond discounts and premiums are amortized on the effective-yield method
over the remaining term of the securities. For pre-refunded bonds the remaining
term is determined based on the contractual refunding date. Short-term
investments are carried at amortized cost, which approximates fair value and
include all fixed-maturity securities with a remaining term to maturity of less
than one year. Investment income is recorded as earned. Realized gains or losses
on the sale of investments are determined by specific identification and are
included as a separate component of revenues.
Other investments consist of MBIA Corp.'s interest in limited
partnerships and a mutual fund which invests principally in marketable equity
securities. MBIA Corp. records dividends from its investment in marketable
equity securities and its share of limited partnerships and
-8-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
mutual funds as a component of investment income. In addition, MBIA Corp.
records its share of the unrealized gains and losses on these investments, net
of applicable deferred income taxes, as a separate component of shareholder's
equity.
PREMIUM REVENUE RECOGNITION
Premiums are earned pro rata over the period of risk. Premiums are allocated to
each bond maturity based on par amount and are earned on a straight-line basis
over the term of each maturity. When an insured issue is retired early, is
called by the issuer, or is in substance paid in advance through a refunding or
defeasance accomplished by placing U.S. Government securities in escrow, the
remaining deferred premium revenue, net of the portion which is credited to a
new policy in those cases where MBIA Corp. insures the refunding issue, is
earned at that time, since there is no longer risk to MBIA Corp. Accordingly,
deferred premium revenue represents the portion of premiums written that is
applicable to the unexpired risk of insured bonds and notes.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate primarily to,
and vary with, premium production. For business produced directly by MBIA Corp.,
such costs include compensation of employees involved in marketing, underwriting
and policy issuance functions, certain rating agency fees, state premium taxes
and certain other underwriting expenses, reduced by ceding commission income on
premiums ceded to reinsurers. For business assumed from the Association, such
costs were comprised of management fees, certain rating agency fees and
marketing and legal costs, reduced by ceding commissions received by the
Association on premiums ceded to reinsurers. Policy acquisition costs are
deferred and amortized over the period in which the related premiums are earned.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Reserves for losses and loss adjustment expenses ("LAE") are established in an
amount equal to MBIA Corp.'s estimate of the identified and unidentified losses,
including costs of settlement on the obligations it has insured.
To the extent that specific insured issues are identified as currently
or likely to be in default, the present value of expected payments, including
loss and LAE associated with these issues, net of expected recoveries, is
allocated within the total loss reserve as case basis reserves. Management of
MBIA Corp. periodically evaluates its estimates for losses and LAE and any
resulting adjustments are reflected in current earnings. Management
-9-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
believes that the reserves are adequate to cover the ultimate net cost of
claims, but the reserves are necessarily based on estimates, and there can be no
assurance that the ultimate liability will not exceed such estimates.
CONTINGENT COMMISSIONS
Contingent commissions may be receivable from MBIA Corp.'s and the Association's
reinsurers under various reinsurance treaties and are accrued as the related
premiums are earned.
INCOME TAXES
MBIA Corp. is included in the consolidated tax return of MBIA Inc. The tax
provision for MBIA Corp. for financial reporting purposes is determined on a
stand alone basis. Any benefit derived by MBIA Corp. as a result of the tax
sharing agreement with MBIA Inc. and its subsidiaries is reflected directly in
shareholder's equity for financial reporting purposes.
Deferred income taxes are provided in respect of temporary differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
The Internal Revenue Code permits financial guarantee insurance
companies to deduct from taxable income additions to the statutory contingency
reserve, subject to certain limitations. The tax benefits obtained from such
deductions must be invested in non-interest bearing U. S. Government tax and
loss bonds. MBIA Corp. records purchases of tax and loss bonds as payments of
Federal income taxes. The amounts deducted must be restored to taxable income
when the contingency reserve is released, at which time MBIA Corp. may present
the tax and loss bonds for redemption to satisfy the additional tax liability.
PROPERTY AND EQUIPMENT
Property and equipment consists of MBIA Corp.'s headquarters and equipment and
MBIA Assurance's furniture, fixtures and equipment, which are recorded at
cost and, exclusive of land, are depreciated on the straight-line method over
their estimated service lives ranging from 4 to 31 years. Maintenance and
repairs are charged to expenses as incurred.
GOODWILL
Goodwill represents the excess of the cost of the acquired and contributed
subsidiaries over the tangible net assets at the time of acquisition or
contribution. Goodwill attributed to the acquisition of the licensed insurance
-10-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
company includes recognition of the value of the state licenses held by that
company, and is amortized by the straight-line method over 25 years. Goodwill
related to the wholly owned subsidiary of MBIA Inc. contributed in 1988 is
amortized by the straight-line method over 25 years. Goodwill attributed to the
acquisition of MBIA Illinois is amortized according to the recognition of future
profits from its deferred premium revenue and installment premiums, except for a
minor portion attributed to state licenses, which is amortized by the
straight-line method over 25 years.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
year-end exchange rates. Operating results are translated at average rates of
exchange prevailing during the year. Unrealized gains or losses resulting from
translation are included as a separate component of shareholder's equity.
3. STATUTORY ACCOUNTING PRACTICES
The financial statements have been prepared on the basis of GAAP, which differs
in certain respects from the statutory accounting practices prescribed or
permitted by the insurance regulatory authorities. Statutory accounting
practices differ from GAAP in the following respects:
o premiums are earned only when the related risk has expired rather than over
the period of the risk;
o acquisition costs are charged to operations as incurred rather than as the
related premiums are earned;
o a contingency reserve is computed on the basis of statutory requirements and
reserves for losses and LAE are established, at present value, for specific
insured issues which are identified as currently or likely to be in default.
Under GAAP reserves are established based on MBIA Corp.'s reasonable estimate
of the identified and unidentified losses and LAE on the insured obligations
it has written;
o Federal income taxes are only provided on taxable income for which income
taxes are currently payable, while under GAAP, deferred income taxes are
provided with respect to temporary differences;
o fixed-maturity securities are reported at amortized cost rather than fair
value;
-11-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
o tax and loss bonds purchased are reflected as admitted assets as well as
payments of income taxes; and
o certain assets designated as "non-admitted assets" are charged directly
against surplus but are reflected as assets under GAAP.
The following is a reconciliation of consolidated shareholder's equity
presented on a GAAP basis to statutory capital and surplus for MBIA Corp. and
its subsidiaries, MBIA Illinois and MBIA Assurance:
As of December 31
------------------------------------------
(In thousands) 1995 1994 1993
-------------- ---- ---- ----
GAAP shareholder's equity $ 2,525,872 $ 2,055,503 $ 1,857,743
Premium revenue recognition (328,450) (296,524) (242,577)
Deferral of acquisition costs (140,348) (133,048) (120,484)
Unrealized (gains) losses (223,635) 71,932 --
Contingent commissions (1,645) (1,706) (1,880)
Contingency reserve (743,510) (620,988) (539,103)
Loss and loss adjustment
expense reserves 28,024 18,181 26,262
Deferred income taxes 205,425 90,328 99,186
Tax and loss bonds 70,771 50,471 25,771
Goodwill (105,614) (110,543) (115,503)
Other (12,752) (13,568) (11,679)
------------ ----------- -----------
Statutory capital
and surplus $ 1,274,138 $1,110,038 $ 977,736
=========== ========== ===========
Consolidated net income of MBIA Corp. determined in accordance with
statutory accounting practices for the years ended December 31, 1995, 1994 and
1993 was $278.3 million, $224.9 million and $258.4 million, respectively.
4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS
Premiums earned include $34.0 million, $53.0 million and $85.6 million for 1995,
1994 and 1993, respectively, related to refunded and called bonds.
5. INVESTMENTS
MBIA Corp.'s investment objective is to optimize long-term, after-tax returns
while emphasizing the preservation of capital and claims-paying capability
through maintenance of high-quality investments with adequate liquidity. MBIA
Corp.'s investment policies limit the amount of credit exposure to any one
issuer. The fixed-maturity portfolio is comprised of high-quality (average
-12-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
rating Double-A) taxable and tax-exempt investments of diversified maturities.
The following tables set forth the amortized cost and fair value of the
fixed-maturities and short-term investments included in the consolidated
investment portfolio of MBIA Corp. as of December 31, 1995 and 1994.
Gross Gross
Amortized Unrealized Unrealized
(In thousands) Cost Gains Losses Fair Value
- -------------- ---- ----- ------ ----------
December 31, 1995
Taxable bonds
United States Treasury
and Government Agency $ 6,742 $ 354 $ -- $ 7,096
Corporate and other
obligations 592,604 30,536 (212) 622,928
Mortgage-backed 389,943 21,403 (932) 410,414
Tax-exempt bonds
State and Municipal
obligations 2,637,732 175,081 (2,595) 2,810,218
--------- ------- --------- ---------
Total fixed-
maturities $3,627,021 $ 227,374 $ (3,739) $3,850,656
========== ========== ========= ==========
Gross Gross
Amortized Unrealized Unrealized
(In thousands) Cost Gains Losses Fair Value
- -------------- ---- ----- ------ ----------
December 31, 1994
Taxable bonds
United States Treasury
and Government Agency $ 15,133 $ -- $ (149) $ 14,984
Corporate and other
obligations 461,601 2,353 (23,385) 440,569
Mortgage-backed 317,560 3,046 (12,430) 308,176
Tax-exempt bonds
State and municipal
obligations 2,450,928 36,631 (77,998) 2,409,561
--------- ------ ------- ---------
Total fixed-
maturities $3,245,222 $ 42,030 $ (113,962) $3,173,290
========== ========== ========== ==========
Fixed-maturity investments carried at fair value of $8.1 million and
$7.4 million as of December 31, 1995 and 1994, respectively, were on deposit
with various regulatory authorities to comply with insurance laws.
-13-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below sets forth the distribution by expected maturity of the
fixed-maturities and short-term investments at amortized cost and fair value at
December 31, 1995. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations.
Amortized Fair
(In thousands) Cost Value
- ------------- --------- -----
Maturity
Within 1 year $ 178,328 $ 178,256
Beyond 1 year but within 5 years 448,817 477,039
Beyond 5 years but within 10 years 1,133,527 1,211,645
Beyond 10 years but within 15 years 742,790 804,421
Beyond 15 years but within 20 years 686,871 730,030
Beyond 20 years 46.745 38,851
---------- ----------
3,237,078 3,440,242
Mortgage-backed 389,943 410,414
---------- ----------
Total fixed-maturities and short-term
investments $3,627,021 $3,850,656
========== ==========
6. INVESTMENT INCOME AND GAINS AND LOSSES
Investment income consists of:
Years ended December 31
-------------------------------------
(In thousands) 1995 1994 1993
- ------------------------------- ---- ---- ----
Fixed-maturities $216,653 $193,729 $173,070
Short-term investments 6,008 3,003 2,844
Other investments 17 12 2,078
-------- -------- --------
Gross investment income 222,678 196,744 177,992
Investment expenses 2,844 2,778 2,663
-------- -------- --------
Net investment income 219,834 193,966 175,329
Net realized gains (losses):
Fixed-maturities:
Gains 9,941 9,635 9,070
Losses (2,537) (8,851) (744)
-------- -------- --------
Net 7,404 784 8,326
Other investments:
Gains 382 9,551 615
Losses (9) -- --
-------- -------- --------
Net 373 9,551 615
-------- -------- --------
Net realized gains 7,777 10,335 8,941
-------- -------- --------
Total investment income $227,611 $204,301 $184,270
======== ======== ========
-14-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unrealized gains (losses) consist of:
As of December 31
--------------------------
(In thousands) 1995 1994
- --------------------------------- ---- ----
Fixed-maturities:
Gains $ 227,374 $ 42,030
Losses (3,739) (113,962)
--------- ---------
Net 223,635 (71,932)
Other investments:
Gains 287 --
Losses (821) (1,042)
--------- ---------
Net (534) (1,042)
--------- ---------
Total 223,101 (72,974)
Deferred income tax (benefit) 78,372 (25,334)
--------- ---------
Unrealized gains (losses) - net $ 144,729 $ (47,640)
========= =========
The deferred taxes in 1995 and 1994 relate primarily to unrealized
gains and losses on MBIA Corp.'s fixed-maturity investments, which are reflected
in shareholders' equity in 1995 and 1994 in accordance with MBIA Corp.'s
adoption of SFAS 115.
The change in net unrealized gains (losses) consists of:
Years ended December 31
-----------------------------------
In thousands 1995 1994 1993
- ------------ ---- ---- ----
Fixed-maturities $ 295,567 $(289,327) $ 101,418
Other investments 508 (8,488) 3,842
--------- --------- ---------
Total 296,075 (297,815) 105,260
Deferred income taxes (benefit) 103,706 (27,940) 1,381
--------- --------- ---------
Unrealized gains (losses), net $ 192,369 $(269,875) $ 103,879
========= ========= =========
7. INCOME TAXES
Effective January 1, 1993, MBIA Corp. changed its method of accounting for
income taxes from the income statement-based deferred method to the balance
sheet-based liability method required by SFAS 109 "Accounting for Income Taxes."
MBIA Corp. adopted the new pronouncement on the cumulative catch-up basis and
recorded a cumulative adjustment, which increased net income and reduced the
deferred tax liability by $13.0 million. The cumulative effect represents the
impact of adjusting the deferred tax liability to reflect the January 1, 1993
tax rate of 34% as opposed to the higher tax rates in effect when certain of the
deferred taxes originated.
-15-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SFAS 109 requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The effect on tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1995 and 1994 are as presented below:
(In thousands) 1995 1994
- ----------------------------------------------- ---- ----
Deferred tax assets
Tax and loss bonds $ 71,183 $ 50,332
Unrealized losses -- 25,334
Alternative minimum tax credit carry forwards 39,072 22,391
Loss and loss adjustment expense reserves 9,809 6,363
Other 954 3,981
-------- --------
Total gross deferred tax assets 121,018 108,401
======== ========
Deferred tax liabilities
Contingency reserve 131,174 91,439
Deferred premium revenue 64,709 54,523
Deferred acquisition costs 49,122 48,900
Unrealized gains 78,372 --
Contingent commissions 7,158 4,746
Other 3,408 6,621
-------- --------
Total gross deferred tax liabilities 333,943 206,229
-------- --------
Net deferred tax liability $212,925 $ 97,828
======== ========
Under SFAS 109, a change in the Federal tax rate requires a restatement
of deferred tax assets and liabilities. Accordingly, the restatement for the
change in the 1993 Federal tax rate resulted in a $5.4 million increase in the
tax provision, of which $3.2 million resulted from the recalculation of deferred
taxes at the new Federal rate.
The provision for income taxes is composed of:
Years ended December 31
---------------------------
(In thousands) 1995 1994 1993
- --------------------------------- ---- ---- ----
Current $70,357 $58,043 $66,086
Deferred 11,391 19,082 20,598
------- ------- -------
Total $81,748 $77,125 $86,684
======= ======= =======
-16-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision for income taxes gives effect to permanent differences
between financial and taxable income. Accordingly, MBIA Corp.'s effective income
tax rate differs from the statutory rate on ordinary income. The reasons for
MBIA Corp.'s lower effective tax rates are as follows:
Years ended December 31
------------------------
1995 1994 1993
---- ---- ----
Income taxes computed on pre-tax
financial income at statutory rates 35.0% 35.0% 35.0%
Increase (reduction) in taxes resulting from:
Tax-exempt interest (12.5) (12.0) (10.6)
Amortization of goodwill 0.5 0.5 0.5
Other (1.1) (1.7) --
---- ---- ----
Provision for income taxes 21.9% 21.8% 24.9%
==== ==== ====
8. DIVIDENDS AND CAPITAL REQUIREMENTS
Under New York state insurance law, MBIA Corp. may pay a dividend only from
earned surplus subject to the maintenance of a minimum capital requirement. The
dividends in any 12-month period may not exceed the lesser of 10% of its
policyholders' surplus as shown on its last filed statutory-basis financial
statements, or of adjusted net investment income, as defined, for such 12-month
period, without prior approval of the superintendent of the New York State
Insurance Department.
In accordance with such restrictions on the amount of dividends which
can be paid in any 12-month period, MBIA Corp. had approximately $44 million
available for the payment of dividends as of December 31, 1995. In 1995, 1994
and 1993, MBIA Corp. declared and paid dividends of $83 million, $38 million and
$50 million, respectively, to MBIA Inc.
Under Illinois Insurance Law, MBIA Illinois may pay a dividend from unassigned
surplus, and the dividends in any 12-month period may not exceed the greater of
10% of policyholders' surplus (total capital and surplus) at the end of the
preceding calendar year, or the net income of the preceding calendar year
without prior approval of the Illinois State Insurance Department.
In accordance with such restrictions on the amount of dividends which
can be paid in any 12-month period, MBIA Illinois may pay a dividend only with
prior approval as of December 31, 1995.
-17-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The insurance departments of New York state and certain other statutory
insurance regulatory authorities and the agencies which rate the bonds insured
by MBIA Corp. have various requirements relating to the maintenance of certain
minimum ratios of statutory capital and reserves to net insurance in force. MBIA
Corp. and MBIA Assurance were in compliance with these requirements as of
December 31, 1995.
9. LINES OF CREDIT
MBIA Corp. has a standby line of credit commitment in the amount of $650 million
with a group of major banks to provide loans to MBIA Corp. after it has incurred
cumulative losses (net of any recoveries) from September 30, 1995 in excess of
the greater of $500 million and 6.25% of average annual debt service. The
obligation to repay loans made under this agreement is a limited recourse
obligation payable solely from, and collateralized by, a pledge of recoveries
realized on defaulted insured obligations including certain installment premiums
and other collateral. This commitment has a seven-year term and expires on
September 30, 2002 and contains an annual renewal provision subject to the
approval by the bank group.
MBIA Corp. and MBIA Inc. maintain bank liquidity facilities aggregating
$275 million. At December 31, 1995, MBIA Inc. had $18 million outstanding under
these facilities.
10. NET INSURANCE IN FORCE
MBIA Corp. guarantees the timely payment of principal and interest on municipal,
asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate
exposure to credit loss in the event of nonperformance by the insured is
represented by the insurance in force as set forth below.
The insurance policies issued by MBIA Corp. are unconditional
commitments to guarantee timely payment on the bonds and notes to bondholders.
The creditworthiness of each insured issue is evaluated prior to the issuance of
insurance and each insured issue must comply with MBIA Corp.'s underwriting
guidelines. Further, the payments to be made by the issuer on the bonds or notes
may be backed by a pledge of revenues, reserve funds, letters of credit,
investment contracts or collateral in the form of mortgages or other assets. The
right to such money or collateral would typically become MBIA Corp.'s upon the
payment of a claim by MBIA Corp.
-18-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 1995, insurance in force, net of cessions to
reinsurers, has a range of maturity of 1-43 years. The distribution of net
insurance in force by geographic location and type of bond, including $2.7
billion and $1.5 billion relating to IMC's municipal investment agreements
guaranteed by MBIA Corp. in 1995 and 1994, respectively, is set forth in the
following tables:
<TABLE>
<CAPTION>
As of December 31
--------------------------------------------------------------------------
($ in billions) 1995 1994
- --------------- ---------------------------------- -----------------------------------
Net Number % of Net Net Number % of Net
Georgraphic Insurance of Issues Insurance Insurance of Issues Insurance
Location In Force Outstanding In Force In Force Outstanding In Force
- -------- -------- ----------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
California $51.2 3,122 14.8% $43.9 2,832 14.3%
New York 30.1 4,846 8.7 25.0 4,447 8.2
Florida 26.9 1,684 7.7 25.4 1,805 8.3
Texas 20.4 2,031 5.9 18.6 2,102 6.1
Pennsylvania 19.7 2,143 5.7 19.5 2,108 6.4
New Jersey 16.4 1,730 4.7 15.0 1,590 4.9
Illinois 15.0 1,090 4.3 14.7 1,139 4.8
Massachusetts 9.3 1,070 2.7 8.6 1,064 2.8
Ohio 9.1 1,017 2.6 8.3 996 2.7
Michigan 7.9 1,012 2.3 5.7 972 1.9
------ ------ ----- ------ ------ -----
Subtotal 206.0 19,745 59.4 184.7 19,055 60.4
Other 135.6 11,147 39.1 118.8 10,711 38.8
------ ------ ----- ------ ------ -----
Total U.S. 341.6 30,892 98.5 303.5 29,766 99.2
International 5.1 53 1.5 2.5 18 0.8
------ ------ ----- ------ ------ -----
$346.7 30,945 100.0% $306.0 29,784 100.0%
====== ====== ===== ====== ====== =====
</TABLE>
-19-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
As of December 31
--------------------------------------------------------------------
($ in billions) 1995 1994
- --------------- ---------------------------------- --------------------------------
Net Number % of Net Net Number % of Net
Insurance of Issues Insurance Insurance of Issues Insurance
Type of Bond In Force Outstanding In Force In Force Outstanding In Force
- ------------ -------- ----------- -------- -------- ----------- --------
Municipal
<S> <C> <C> <C> <C> <C> <C>
General Obligation $ 91.6 11,445 26.4% $ 84.2 11,029 27.5%
Utilities 60.3 4,931 17.4 56.0 5,087 18.3
Health Care 51.9 2,458 15.0 50.6 2,670 16.5
Transportation 25.5 1,562 7.4 21.3 1,486 7.0
Special Revenue 24.4 1,445 7.0 22.7 1,291 7.4
Industrial
development and
pollution control
revenue 17.2 924 5.0 15.1 1,016 4.9
Housing 15.8 2,671 4.5 13.6 2,663 4.5
Higher education 15.2 1,261 4.4 14.0 1,208 4.6
Other 7.3 134 2.1 3.8 124 1.2
------ ------ ----- ------ ------ -----
309.2 26,831 89.2 281.3 26,574 91.9
------ ------ ----- ------ ------ -----
Non-municipal
Asset/mortgage-
backed 20.2 256 5.8 12.8 151 4.2
Investor-owned
utilities 6.4 3,559 1.8 5.7 2,918 1.9
International 5.1 53 1.5 2.5 18 0.8
Other 5.8 246 1.7 3.7 123 1.2
------ ------ ----- ------ ------ -----
37.5 4,114 10.8 24.7 3,210 8.1
------ ------ ----- ------ ------ -----
$346.7 30,945 100.0% $306.0 29,784 100.0%
====== ====== ===== ====== ====== =====
</TABLE>
11. REINSURANCE
MBIA Corp. reinsures portions of its risks with other insurance companies
through various quota and surplus share reinsurance treaties and facultative
agreements. In the event that any or all of the reinsurers were unable to meet
their obligations, MBIA Corp. would be liable for such defaulted amounts.
Amounts deducted from gross insurance in force for reinsurance ceded by
MBIA Corp., MBIA Assurance and MBIA Illinois were $50.1 billion and
-20-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$42.6 billion, at December 31, 1995 and 1994, respectively. The distribution of
ceded insurance in force by geographic location and type of bond is set forth
in the tables below:
As of December 31
-------------------------------------------------------
(In billions) 1995 1994
- ------------- ------------------------ ------------------------
% of % of
Ceded Ceded Ceded Ceded
Insurance Insurance Insurance Insurance
Geographic Location In Force In Force In Force In Force
- ------------------- -------- -------- -------- --------
California $ 8.8 $ 17.5% $ 7.5 17.6%
New York 5.7 11.4 4.9 11.5
New Jersey 3.1 6.1 2.0 4.7
Texas 2.8 5.6 2.5 5.9
Pennsylvania 2.7 5.4 2.6 6.1
Florida 2.3 4.6 2.1 4.9
Illinois 2.2 4.5 2.3 5.4
District of Columbia 1.5 3.0 1.6 3.8
Washington 1.4 2.7 1.2 2.8
Puerto Rico 1.3 2.6 1.1 2.6
Massachusetts 1.1 2.1 0.9 2.1
Ohio 1.0 2.1 0.9 2.1
------ ----- ----- -----
Subtotal 33.9 67.6 29.6 69.5
Other 14.4 28.8 12.3 28.9
------ ----- ----- -----
Total U. S 48.3 96.4 41.9 98.4
International 1.8 3.6 0.7 1.6
------ ----- ----- -----
$ 50.1 100.0% $42.6 100.0%
====== ===== ===== =====
-21-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31
-----------------------------------------------------
(In billions) 1995 1994
- ------------- ----------------------- ----------------------
% of % of
Ceded Ceded Ceded Ceded
Insurance Insurance Insurance Insurance
Type of Bond In Force In Force In Force In Force
- ------------ -------- -------- -------- --------
Municipal
General obligation $11.7 23.3% $ 9.7 22.8%
Utilities 9.0 18.0 8.5 20.0
Health care 6.6 13.1 6.5 15.3
Transportation 5.5 11.0 4.5 10.6
Special revenue 3.2 6.4 2.7 6.3
Industrial development
and pollution
control revenue 3.0 6.0 2.9 6.8
Housing 1.4 2.8 1.0 2.3
Higher education 1.2 2.4 1.2 2.8
Other 2.4 4.8 1.5 3.5
----- ----- ----- -----
44.0 87.8 38.5 90.4
----- ----- ----- -----
Non-municipal
Asset-/mortgage-backed 3.6 7.2 2.7 6.3
International 1.8 3.6 0.7 1.6
Other 0.7 1.4 0.7 1.7
----- ----- ----- -----
6.1 12.2 4.1 9.6
----- ----- ----- -----
$50.1 100.0% $42.6 100.0%
===== ===== ===== =====
Included in gross premiums written are assumed premiums from other
insurance companies of $11.7 million, $6.3 million and $20.4 million for the
years ended December 31, 1995, 1994 and 1993, respectively. The percentages of
the amounts assumed to net premiums written were 3.8%, 2.0% and 4.7% in 1995,
1994 and 1993, respectively.
Gross premiums written include $0.2 million in 1994 and $5.4 million in
1993 related to the reassumption by MBIA Corp. of reinsurance previously ceded
by the Association. Also included in gross premiums in 1993 is $10.8 million of
premiums assumed from a member of the Association. Ceded premiums written are
net of $0.2 million in 1995, $1.6 million in 1994 and $2.5 million in 1993
related to the reassumption of reinsurance previously ceded by MBIA Corp. or
MBIA Illinois.
-22-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. EMPLOYEE BENEFITS
MBIA Corp. participates in MBIA Inc.'s pension plan covering all eligible
employees. The pension plan is a defined contribution plan and MBIA Corp.
contributes 10% of each eligible employee's annual total compensation. Pension
expense for the years ended December 31, 1995, 1994 and 1993 was $3.2 million,
$3.0 million and $3.1 million, respectively. MBIA Corp. also has a profit
sharing/401(k) plan which allows eligible employees to contribute up to 10% of
eligible compensation. MBIA Corp. matches employee contributions up to the first
5% of total compensation. MBIA Corp. contributions to the profit sharing plan
aggregated $1.4 million, $1.4 million and $1.3 million for the years ended
December 31, 1995, 1994 and 1993, respectively. The 401(k) plan amounts are
invested in common stock of MBIA Inc. Amounts relating to the above plans that
exceed limitations established by Federal regulations are contributed to a
non-qualified deferred compensation plan. Of the above amounts for the pension
and profit sharing plans, $2.7 million, $2.6 million and $2.6 million for the
years ended December 31, 1995, 1994 and 1993, respectively, are included in
policy acquisition costs.
MBIA Corp. also participates in MBIA Inc.'s common stock incentive plan
which enables employees of MBIA Corp. to acquire shares of MBIA Inc. or to
benefit from appreciation in the price of the common stock of MBIA Inc.
MBIA Corp. also participates in MBIA Inc.'s restricted stock program,
adopted in December 1995, whereby key executive officers of MBIA Corp. are
granted restricted shares of MBIA Inc. common stock.
Effective January 1, 1993, MBIA Corp. adopted SFAS 106 "Employers'
Accounting for Postretirement Benefits Other than Pensions." Under SFAS 106,
companies are required to accrue the cost of employee post-retirement benefits
other than pensions during the years that employees render service. Prior to
January 1, 1993, MBIA Corp. had accounted for these post-retirement benefits on
a cash basis. In 1993, MBIA Corp. adopted the new pronouncement on the
cumulative catch-up basis and recorded a cumulative effect adjustment which
decreased net income and increased other liabilities by $0.1 million. As of
January 1, 1994, MBIA Corp. eliminated these post-retirement benefits.
-23-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. RELATED PARTY TRANSACTIONS
The business assumed from the Association, relating to insurance on unit
investment trusts sponsored by two members of the Association, includes deferred
premium revenue of $1.6 million and $1.9 million at December 31, 1995 and 1994,
respectively.
In 1993, MBIA Corp. assumed the balance of $10.8 million of deferred
premium revenue from a member of the Association which had not previously ceded
its insurance portfolio to MBIA Corp. Also in 1993, MBIA Corp. assumed $0.4
million of deferred premium revenue relating to one of the trusts which was
previously ceded to an affiliate of an Association member.
Since 1989, MBIA Corp. has executed five surety bonds to guarantee the
payment obligations of the members of the Association, one of which is a
principal shareholder of MBIA Inc., which had their Standard & Poor's
claims-paying rating downgraded from Triple-A on their previously issued
Association policies. In the event that they do not meet their Association
policy payment obligations, MBIA Corp. will pay the required amounts directly to
the paying agent instead of to the former Association member as was previously
required. The aggregate amount payable by MBIA Corp. on these surety bonds is
limited to $340 million. These surety bonds remain outstanding as of December
31, 1995.
MBIA Corp. has investment management and advisory agreements with an
affiliate of a principal shareholder of MBIA Inc., which provides for payment of
fees on assets under management. Total related expenses for the years ended
December 31, 1995, 1994 and 1993 amounted to $2.5 million, $2.6 million and $2.4
million, respectively. These agreements were terminated on January 1, 1996 at
which time SECO commenced management of MBIA Corp.'s consolidated investment
portfolios. In addition, investment management expenses of $0.1 million were
paid to SECO for the portion of the investment portfolio transferred in 1995.
MBIA Corp. has various insurance coverages provided by a principal
shareholder of MBIA Inc., the cost of which was $1.9 million, $1.9 million and
$2.0 million for the years ended December 31, 1995, 1994 and 1993, respectively.
-24-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Included in other assets at December 31, 1995 and 1994 is $1.1 million
and $14.5 million of net receivables from MBIA Inc. and other subsidiaries.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of financial instruments shown in the following
table have been determined by MBIA Corp. using available market information and
appropriate valuation methodologies. However, in certain cases considerable
judgment is necessarily required to interpret market data to develop estimates
of fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amount MBIA Corp. could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
FIXED-MATURITY SECURITIES - The fair value of fixed-maturity securities equals
quoted market price, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities.
SHORT-TERM INVESTMENTS - Short-term investments are carried at amortized cost
which, because of their short duration, is a reasonable estimate of fair value.
OTHER INVESTMENTS - Other investments consist of MBIA Corp.'s interest in
limited partnerships and a mutual fund which invests principally in marketable
equity securities. The fair value of other investments is based on quoted market
prices.
CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD AND PAYABLE FOR
INVESTMENTS PURCHASED - The carrying amounts of these items are a reasonable
estimate of their fair value.
PREPAID REINSURANCE PREMIUMS - The fair value of MBIA Corp.'s prepaid
reinsurance premiums is based on the estimated cost of entering into an
assumption of the entire portfolio with third party reinsurers under current
market conditions.
-25-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DEFERRED PREMIUM REVENUE - The fair value of MBIA Corp.'s deferred premium
revenue is based on the estimated cost of entering into a cession of the entire
portfolio with third party reinsurers under current market conditions.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES - The carrying amount is composed of
the present value of the expected cash flows for specifically identified claims
combined with an estimate for unidentified claims. Therefore, the carrying
amount is a reasonable estimate of the fair value of the reserve.
INSTALLMENT PREMIUMS - The fair value is derived by calculating the present
value of the estimated future cash flow stream at 9% and 13.25% at December 31,
1995 and December 31, 1994, respectively.
As of December 31,
-------------------------------------------------
1995 1994
--------------------- -----------------------
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
- -------------- ------ ---------- ------ ----------
ASSETS:
Fixed-maturity securuities $3,652,621 $3,652,621 $3,051,906 $3,051,906
Short-term investments 198,035 198,035 121,384 121,384
Other investments 14,064 14,064 11,970 11,970
Cash and cash equivalents 23,258 23,258 1,332 1,332
Prepaid reinsurance
premiums 200,887 174,444 186,492 159,736
Receivable for
investments sold 5,729 5,729 945 945
LIABILITIES:
Deferred premium
revenue 1,616,315 1,395,159 1,512,211 1,295,305
Loss and loss adjustment
expense reserves 42,505 42,505 40,148 40,148
Payable for investments
purchased 10,695 10,695 6,552 6,552
OFF-BALANCE-SHEET
INSTRUMENTS:
Installment premiums ---- 235,371 --- 176,944
-26-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1996 AND DECEMBER 31, 1995
AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
I N D E X
PAGE
Consolidated Balance Sheets -
June 30, 1996 (Unaudited) and December 31, 1995 (Audited) ............ 3
Consolidated Statements of Income -
Three months and six months ended June 30, 1996
and 1995 (Unaudited) ............................................... 4
Consolidated Statement of Changes in Shareholder's Equity -
Six months ended June 30, 1996 (Unaudited) ........................... 5
Consolidated Statements of Cash Flows -
Six months ended June 30, 1996 and 1995 (Unaudited) .................. 6
Notes to Consolidated Financial Statements (Unaudited) ................... 7
-2-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
--------------- ------------------
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $3,735,457 and $3,428,986) ...... $3,813,749 $3,652,621
Short-term investments, at amortized cost
(which approximates fair value) ............................... 219,945 198,035
Other investments ............................................... 13,781 14,064
---------- ----------
TOTAL INVESTMENTS ........................................... 4,047,475 3,864,720
Cash and cash equivalents ........................................... 4,649 2,135
Accrued investment income ........................................... 64,494 60,247
Deferred acquisition costs .......................................... 143,536 140,348
Prepaid reinsurance premiums ........................................ 208,614 200,887
Goodwill (less accumulated amortization of $39,814 and $37,366) ..... 103,166 105,614
Property and equipment, at cost (less accumulated depreciation
of $13,540 and $12,137) ......................................... 42,845 41,169
Receivable for investments sold ..................................... 1,430 5,729
Securities purchased under agreement to resell ...................... 36,750 ---
Other assets ........................................................ 37,614 42,145
---------- ----------
TOTAL ASSETS ................................................ $4,690,573 $4,462,994
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue ........................................ $1,728,845 $1,616,315
Loss and loss adjustment expense reserves ....................... 50,437 42,505
Deferred income taxes ........................................... 168,981 212,925
Payable for investments purchased ............................... 30,857 10,695
Securities sold under agreement to repurchase ................... 36,750 ---
Other liabilities ............................................... 72,506 54,682
---------- ----------
TOTAL LIABILITIES ........................................... 2,088,376 1,937,122
---------- ----------
Shareholder's Equity:
Common stock, par value $150 per share; authorized,
issued and outstanding - 100,000 shares ....................... 15,000 15,000
Additional paid-in capital ...................................... 1,030,998 1,021,584
Retained earnings ............................................... 1,506,726 1,341,855
Cumulative translation adjustment ............................... (1,109) 2,704
Unrealized appreciation of investments, net of deferred
income tax provision of $27,542 and $78,372 .................... 50,582 144,729
---------- ----------
TOTAL SHAREHOLDER'S EQUITY .................................. 2,602,197 2,525,872
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY .................. $4,690,573 $4,462,994
========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-3-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
------------------ -------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Gross premiums written $134,443 $106,665 $255,454 $177,777
Ceded premiums (11,914) (12,049) (26,629) (19,129)
-------- -------- -------- --------
Net premiums written 122,529 94,616 228,825 158,648
Increase in deferred premium revenue (60,021) (40,406) (105,553) (53,086)
-------- -------- -------- --------
Premiums earned (net of ceded
premiums of $9,682, $6,814
$18,902 and $14,652) 62,508 54,210 123,272 105,562
Net investment income 61,653 53,783 120,656 106,848
Net realized gains 3,895 1,698 6,587 3,422
Other income 354 224 1,323 1,132
-------- -------- -------- --------
Total revenues 128,410 109,915 251,838 216,964
-------- -------- -------- --------
Expenses:
Losses and loss adjustment expenses 4,288 2,710 7,466 4,743
Policy acquisition costs, net 5,990 5,130 11,890 10,270
Underwriting and operating expenses 11,777 9,247 22,326 18,999
-------- -------- -------- --------
Total expenses 22,055 17,087 41,682 34,012
-------- -------- -------- --------
Income before income taxes 106,355 92,828 210,156 182,952
Provision for income taxes 22,786 20,604 45,285 40,080
-------- -------- -------- --------
Net income $83,569 $72,224 $164,871 $142,872
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-4-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (Unaudited)
For the six months ended June 30, 1996
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Common Stock Additional Cumulative Unrealized
------------------------- Paid-In Retained Translation Appreciation
Shares Amount Capital Earnings Adjustment of Investments
---------- ---------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 ............... 100,000 $15,000 $1,021,584 $1,341,855 $ 2,704 $144,729
Exercise of stock options .............. -- -- 3,740 -- -- --
Net income ............................. -- -- -- 164,871 -- --
Change in foreign
currency transactions ................ -- -- -- -- (3,813) --
Change in unrealized
appreciation of
investment net of change
in deferred income taxes
of $50,830 ........................... -- -- -- -- -- (94,147)
Tax reduction related to
tax sharing agreement
with MBIA Inc. ....................... -- -- 5,674 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 1996 ................ 100,000 $15,000 $1,030,998 $1,506,726 $(1,109) $ 50,582
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-5-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................. $164,871 $142,872
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accrued investment income ................ (4,247) (2,129)
Increase in deferred acquisition costs ............... (3,188) (4,081)
Increase in prepaid reinsurance premiums ............. (7,727) (4,477)
Increase in deferred premium revenue ................. 113,280 59,123
Increase in loss and loss adjustment expense reserves. 7,932 3,872
Depreciation ......................................... 1,442 1,295
Amortization of goodwill ............................. 2,448 2,465
Amortization of bond discount, net ................... (2,870) (620)
Net realized gains on sale of investments ............ (6,587) (3,422)
Deferred income taxes ................................ 6,886 6,092
Other, net ........................................... 27,690 20,094
--------- --------
Total adjustments to net income ...................... 135,059 78,212
--------- --------
Net cash provided by operating activities ............ 299,930 221,084
--------- --------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased ................. (698,356) (381,468)
Sale of fixed-maturity securities, net of
receivable for investments sold ...................... 334,470 237,019
Redemption of fixed-maturity securities,
net of receivable for investments redeemed ........... 75,960 31,546
Purchase of short-term investments, net ................ (6,763) (60,631)
Securities purchased under agreement to resell ......... (36,750) ---
Sale (purchase) of other investments, net .............. 402 (807)
Capital expenditures, net of disposals ................. (3,129) (2,326)
--------- --------
Net cash used in investing activities ................ (334,166) (176,667)
--------- --------
Cash flows from financing activities:
Dividends paid ......................................... --- (43,500)
Securities sold under agreement to repurchase .......... 36,750 ---
--------- --------
Net cash provided (used) by financing activities ..... 36,750 (43,500)
--------- --------
Net increase in cash and cash equivalents ................ 2,514 917
Cash and cash equivalents - beginning of period .......... 2,135 1,332
--------- --------
Cash and cash equivalents - end of period ................ $ 4,649 $ 2,249
========= ========
Supplemental cash flow disclosures:
Income taxes paid ...................................... $ 32,978 $ 26,201
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-6-
<PAGE>
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
- ----------------------------
The accompanying consolidated financial statements are unaudited and
include the accounts of MBIA Insurance Corporation and its Subsidiaries (the
"Company"). The statements do not include all of the information and disclosures
required by generally accepted accounting principles. These statements should be
read in conjunction with the Company's consolidated financial statements and
notes thereto for the year ended December 31, 1995. The accompanying
consolidated financial statements have not been audited by independent
accountants in accordance with generally accepted auditing standards but in the
opinion of management such financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary to summarize fairly
the Company's financial position and results of operations. The results of
operations for the six months ended June 30, 1996 may not be indicative of the
results that may be expected for the year ending December 31, 1996. The December
31, 1995 condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles.
2. Dividends Declared
- ---------------------
No dividends were declared by the Company during the six months ended June
30, 1996.
-7-
<PAGE>
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
<PAGE>
PROSPECTUS
CWMBS, INC.
Depositor
Mortgage Pass-Through Certificates
(Issuable in Series)
------------------------------
This Prospectus relates to Mortgage Pass-Through Certificates (the
'Certificates'), which may be sold from time to time in one or more Series
(each, a 'Series') by CWMBS, Inc. (the 'Depositor') on terms determined at the
time of sale and described in this Prospectus and the related Prospectus
Supplement. The Certificates of a Series will evidence beneficial ownership of a
trust fund (a 'Trust Fund'). As specified in the related Prospectus Supplement,
the Trust Fund for a Series of Certificates will include certain mortgage
related assets (the 'Mortgage Assets') consisting of (i) first lien mortgage
loans (or participation interests therein) secured by one- to four-family
residential properties ('Mortgage Loans'), (ii) mortgage pass-through securities
(the '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') or (iii)
Private Mortgage-Backed Securities (defined herein). The Mortgage Assets will be
acquired by the Depositor, either directly or indirectly, from one or more
institutions (each, a 'Seller'), which may be affiliates of the Depositor, and
conveyed by the Depositor to the related Trust Fund. A Trust Fund also may
include insurance policies, cash accounts, reinvestment income, guaranties,
letters of credit or other assets to the extent described in the related
Prospectus Supplement.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust Fund. A Series of
Certificates may include one or more classes that are senior in right of payment
to one or more other classes of Certificates of such Series. One or more classes
of Certificates of a Series may be entitled to receive distributions of
principal, interest or any combination thereof prior to one or more other
classes of Certificates of such Series or after the occurrence of specified
events, in each case as specified in the related Prospectus Supplement.
Distributions to holders of Certificates (the 'Certificateholders') will be
made monthly, quarterly, semi-annually or at such other intervals and on the
dates specified in the related Prospectus Supplement. Distributions on the
Certificates of a Series will be made from the assets of the related Trust Fund
or Funds or other assets pledged for the benefit of the Certificateholders as
specified in the related Prospectus Supplement.
The Certificates of any Series will not be insured or guaranteed by any
governmental agency or instrumentality or, unless otherwise specified in the
related Prospectus Supplement, by any other person. Unless otherwise specified
in the related Prospectus Supplement, the only obligations of the Depositor with
respect to a Series of Certificates will be to obtain certain representations
and warranties from each Seller and to assign to the Trustee for the related
Series of Certificates the Depositor's rights with respect to such
representations and warranties. The principal obligations of the Master Servicer
named in the related Prospectus Supplement with respect to the related Series of
Certificates will be limited to obligations pursuant to certain representations
and warranties and to its contractual servicing obligations, including any
obligation it may have to advance delinquent payments on the Mortgage Assets in
the related Trust Fund.
The yield on each class of Certificates of a Series will be affected by,
among other things, the rate of payment of principal (including prepayments) on
the Mortgage Assets in the related Trust Fund and the timing of receipt of such
payments as described herein and in the related Prospectus Supplement. A Trust
Fund may be subject to early termination under the circumstances described
herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement, one or more elections may be made
to treat the related Trust Fund or specified portions thereof as a 'real estate
mortgage investment conduit' ('REMIC') for federal income tax purposes. See
'Certain Federal Income Tax Consequences' herein.
------------------------------
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 THE RELATED PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------
Prior to issuance there will have been no market for the Certificates of any
Series, and there can be no assurance that a secondary market for any
Certificates will develop or, if it does develop, that it will continue. This
Prospectus may not be used to consummate sales of a Series of Certificates
unless accompanied by a Prospectus Supplement.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described under
'Method of Distribution' herein and in the related Prospectus Supplement.
November 23, 1994
<PAGE>
<PAGE>
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus and Prospectus Supplement when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to the Certificates of each Series to be
offered hereunder will, among other things, set forth with respect to such
Certificates, as appropriate: (i) a description of the class or classes of
Certificates and the related Pass-Through Rate or method of determining the
amount of interest, if any, to be passed through to each such class; (ii) the
initial aggregate Certificate Balance of each class of Certificates included in
such Series, Distribution Dates relating to such Series and, if applicable, the
initial and final scheduled Distribution Dates for each class; (iii) information
as to the assets comprising the Trust Fund, including the general
characteristics of the Mortgage Assets included therein and, if applicable, the
insurance, surety bonds, guaranties, letters of credit or other instruments or
agreements included in the Trust Fund, and the amount and source of any Reserve
Fund; (iv) the circumstances, if any, under which the Trust Fund may be subject
to early termination; (v) the method used to calculate the amount of principal
to be distributed with respect to each class of Certificates; (vi) the order of
application of distributions to each of the classes within such Series, whether
sequential, pro rata, or otherwise; (vii) the Distribution Dates with respect to
such Series; (viii) additional information with respect to the plan of
distribution of such Certificates; (ix) whether one or more REMIC elections will
be made and designation of the regular interests and residual interests; (x) the
aggregate original percentage ownership interest in the Trust Fund to be
evidenced by each class of Certificates; (xi) information as to the nature and
extent of subordination with respect to any class of Certificates that is
subordinate in right of payment to any other class; and (xii) information as to
the Seller, the Master Servicer and the Trustee.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission a
Registration Statement under the Securities Act of 1933, as amended, with
respect to the Certificates. This Prospectus, which forms a part of the
Registration Statement, and the Prospectus Supplement relating to each Series of
Certificates contain summaries of the material terms of the documents referred
to herein and therein, but do not contain all of the information set forth in
the Registration Statement pursuant to the Rules and Regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its Regional Offices located as follows:
Chicago Regional Office, 500 West Madison Street, Chicago, Illinois 60661; and
New York Regional Office, Seven World Trade Center, New York, New York 10048.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Certificates
offered hereby and thereby nor an offer of the Certificates to any person in any
state or other jurisdiction in which such offer would be unlawful. The delivery
of this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund referred
to in the accompanying Prospectus Supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the 'Exchange Act'), after the date of this Prospectus and prior to the
termination of any offering of the Certificates issued by such Trust Fund shall
be deemed to be incorporated by reference in this Prospectus and to be a part of
this Prospectus from the date of the filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for all purposes of this
Prospectus to the extent that a statement contained herein (or in the
accompanying Prospectus Supplement) or in any other subsequently filed document
which also is or is deemed to be incorporated by reference modifies or replaces
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Trustee on behalf of any Trust Fund will provide without charge to each
person to whom this Prospectus is delivered, on the written or oral request of
such person, a copy of any or all of the documents referred to above that have
been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Such requests should be directed to the Corporate
Trust Office of the Trustee specified in the accompanying Prospectus Supplement.
2
<PAGE>
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement with respect to the Series offered thereby. The Prospectus Supplement
for each Series will specify the extent (if any) to which the terms of such
Series or the related Trust Fund vary from the description of the Certificates
and Trust Funds in general that is contained in this Prospectus.
<TABLE>
<S> <C>
Title of Securities....................... Mortgage Pass-Through Certificates (the 'Certificates'), issuable in
series (each, a 'Series'). Each Series will be issued under a
separate pooling and servicing agreement (each, an 'Agreement') to be
entered into with respect to each such Series.
Depositor................................. CWMBS, Inc., a Delaware corporation (the 'Depositor').
Trustee................................... The trustee (the 'Trustee') for each Series of Certificates will be
specified in the related Prospectus Supplement. See 'The Pooling and
Servicing Agreement' herein for a description of the Trustee's rights
and obligations.
Master Servicer........................... The entity or entities named as master servicer (the 'Master
Servicer') in the related Prospectus Supplement, which may be an
affiliate of the Depositor. See 'The Pooling and Servicing
Agreement -- Certain Matters Regarding the Master Servicer and the
Depositor' herein.
Seller.................................... The entity or entities named as seller (the 'Seller') in the related
Prospectus Supplement, which may be an affiliate of the Depositor.
Closing Date.............................. The date (the 'Closing Date') of initial issuance of a Series of
Certificates, as specified in the related Prospectus Supplement.
Trust Fund................................ The trust fund for a Series of Certificates (each, a 'Trust Fund')
will include certain mortgage related assets (the 'Mortgage Assets')
consisting of (a) first lien mortgage loans (or participation
interests therein) secured by one- to four-family residential
properties (the 'Mortgage Loans'), (b) mortgage pass-through
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') (the
'Agency Securities') or (c) other mortgage pass-through certificates
or collateralized mortgage obligations (the 'Private Mortgage-Backed
Securities'), together with payments in respect of such Mortgage
Assets and certain other accounts, obligations or agreements, in each
case as specified in the related Prospectus Supplement.
A. Mortgage Loans......................... Unless otherwise specified in the related Prospectus Supplement,
Mortgage Loans will be secured by first mortgage liens on one- to
four-family residential properties (each, a 'Mortgaged Property'). If
so specified, the Mortgage Loans may include cooperative apartment
loans ('Cooperative Loans') secured by security interests in shares
issued by private, nonprofit, 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. If so specified in the related
Prospectus Supplement, the Mortgage Assets of the related Trust Fund
may include mortgage participation certificates evidencing interests
in mortgage loans. Such mortgage loans may be conventional loans
(i.e., loans that are not insured or guaranteed by any governmental
agency), insured by the Federal Housing Authority ('FHA') or
partially guaranteed by the
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Veterans' Administration ('VA') as specified in the related
Prospectus Supplement.
B. General Attributes of
Mortgage Loans......................... The payment terms of the Mortgage Loans to be included in a Trust
Fund 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 (which will be specified in
the related Prospectus Supplement), a rate that is fixed for a
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. The loan agreement or promissory note (the 'Mortgage
Note') in respect of a Mortgage Loan may provide for the payment
of interest at a rate lower than the interest rate (the 'Mortgage
Rate') specified in such Mortgage Note for a period of time or
for the life of the loan, and the amount of any difference may be
contributed from funds supplied by a third party.
(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 assumed 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 ('balloon payments'). 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) The Mortgage Loans generally may be prepaid at any time without
payment of any prepayment fee. If so specified in the related
Prospectus Supplement, prepayments of principal may be subject to
a prepayment fee, which may be fixed for the life of any such
Mortgage Loan or may decline over time, and may be prohibited for
the life of any such Mortgage Loan or for certain periods
('lockout periods'). Certain Mortgage 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 Mortgage Loans may permit
prepayments without payment of a fee unless the prepayment occurs
during specified time periods. The Mortgage Loans may include
'due-on-sale' clauses which
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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 Seller.
(e) The real property constituting security for repayment of a
Mortgage Loan may be located in any one of the fifty states, the
District of Columbia, Guam, Puerto Rico or any other territory of
the United States. Unless otherwise specified in the related
Prospectus Supplement, all of the Mortgage Loans will be covered
by standard hazard insurance policies insuring against losses due
to fire and various other causes. The Mortgage Loans will be
covered by primary mortgage insurance policies to the extent
provided in the related Prospectus Supplement.
All Mortgage Loans will have been purchased by the Depositor, either
directly or through an affiliate, from one or more Sellers.
C. Agency Securities...................... The Agency Securities evidenced by a Series of Certificates will
consist of (i) 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 Federal Home Loan Mortgage Corporation ('FHLMC
Certificates'), (ii) certificates ('Guaranteed Mortgage Pass-Through
Certificates') issued and guaranteed as to timely payment of
principal and interest by the Federal National Mortgage Association
('FNMA Certificates'), (iii) fully modified pass-through
mortgage-backed certificates guaranteed as to timely payment of
principal and interest by the Government National Mortgage
Association ('GNMA Certificates'), (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
FHLMC, FNMA or GNMA Certificates and, unless otherwise specified in
the related Prospectus Supplement, guaranteed to the same extent as
the underlying securities, (v) another type of pass-through
certificate issued or guaranteed by GNMA, FNMA or FHLMC and 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 Agency Securities may consist of pass-through securities issued
under FHLMC's Cash or Guarantor Program, the GNMA I Program, the GNMA
II Program or another program specified in the related Prospectus
Supplement. The payment characteristics of the mortgage loans
underlying the Agency Securities will be described in the related
Prospectus Supplement.
D. Private Mortgage-Backed Securities..... Private Mortgage-Backed Securities may include (a) mortgage pass-
through certificates representing beneficial interests in certain
mortgage loans or (b) collateralized mortgage obligations secured by
such mortgage loans. Private Mortgage-Backed Securities may include
stripped mortgage-backed securities representing an undivided
interest in all or a part of any of the principal
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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. 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. Unless otherwise specified in the related Prospectus
Supplement relating to a Series of Certificates, payments on the
Private Mortgage-Backed Securities will be distributed directly to
the Trustee as registered owner of such Private Mortgage-Backed
Securities. See 'The Trust Fund -- Private Mortgage-Backed
Securities' herein.
The related Prospectus Supplement for a Series will specify, among
other things, (i) the approximate aggregate principal amount and type
of any Private Mortgage-Backed Securities to be included in the Trust
Fund for such Series; (ii) certain characteristics of the mortgage
loans that comprise the underlying assets for the Private
Mortgage-Backed Securities including (A) the payment features of such
mortgage loans, (B) the approximate aggregate principal amount, if
known, of the underlying mortgage loans that are insured or
guaranteed by a governmental entity, (C) the servicing fee or range
of servicing fees with respect to the mortgage loans and (D) the
minimum and maximum stated maturities of the mortgage loans at
origination; (iii) the maximum original term to stated maturity of
the Private Mortgage-Backed Securities; (iv) the weighted average
term-to-stated maturity of the Private Mortgage-Backed Securities;
(v) the pass-through or certificate rate or ranges thereof for the
Private Mortgage-Backed Securities; (vi) the weighted average
pass-through or certificate rate of the Private Mortgage-Backed
Securities; (vii) the issuer of the Private Mortgage-Backed
Securities (the 'PMBS Issuer'), the servicer of the Private
Mortgage-Backed Securities (the 'PMBS Servicer') and the trustee of
the Private Mortgage-Backed Securities (the 'PMBS Trustee'); (viii)
certain characteristics of credit support, if any, such as reserve
funds, insurance policies, surety bonds, letters of credit or
guaranties, relating to the mortgage loans underlying the Private
Mortgage-Backed Securities or to such Private Mortgage-Backed
Securities themselves; (ix) the terms on which underlying mortgage
loans for such Private Mortgage-Backed Securities may, or are
required to, be repurchased prior to stated maturity; and (x) the
terms on which substitute mortgage loans may be delivered to replace
those initially deposited with the PMBS Trustee. See 'The Trust Fund'
herein.
Description of the Certificates........... Each Certificate will represent a beneficial ownership interest in a
Trust Fund created by the Depositor pursuant to an Agreement among
the Depositor, the Master Servicer and the Trustee for the related
Series. The Certificates of any Series may be issued in one or more
classes as specified in the related Prospectus Supplement. A Series
of Certificates may include one or more classes of senior
Certificates (collectively, the 'Senior Certificates') and one or
more classes of subordinate Certificates (collectively, the
'Subordinated Certificates'). Certain Series or classes of
Certificates may be
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covered by insurance policies or other forms of credit enhancement,
in each case as described herein and in the related Prospectus
Supplement.
One or more classes of Certificates of each Series (i) may be
entitled to receive distributions allocable only to principal, only
to interest or to any combination thereof; (ii) may be entitled to
receive distributions only of prepayments of principal throughout the
lives of the Certificates or during specified periods; (iii) may be
subordinated in the right to receive distributions of scheduled
payments of principal, prepayments of principal, interest or any
combination thereof to one or more other classes of Certificates of
such Series throughout the lives of the Certificates or during
specified periods; (iv) may be entitled to receive such distributions
only after the occurrence of events specified in the related
Prospectus Supplement; (v) may be entitled to receive distributions
in accordance with a schedule or formula or on the basis of
collections from designated portions of the assets in the related
Trust Fund; (vi) as to Certificates entitled to distributions
allocable to interest, may be entitled to receive interest at a fixed
rate or a rate that is subject to change from time to time; and (vii)
as to Certificates entitled to distributions allocable to interest,
may be entitled to distributions allocable to interest only after the
occurrence of events specified in the related Prospectus Supplement
and may accrue interest until such events occur, in each case as
specified in the related Prospectus Supplement. The timing and
amounts of such distributions may vary among classes, over time, or
otherwise as specified in the related Prospectus Supplement.
Distributions on the Certificates......... Distributions on the Certificates entitled thereto will be made
monthly, quarterly, semi-annually or at such other intervals and on
the dates specified in the related Prospectus Supplement (each, a
'Distribution Date') out of the payments received in respect of the
assets of the related Trust Fund or other assets pledged for the
benefit of the Certificates as specified in the related Prospectus
Supplement. The amount allocable to payments of principal and
interest on any Distribution Date will be determined as specified in
the related Prospectus Supplement. Unless otherwise specified in the
related Prospectus Supplement, all distributions will be made pro
rata to Certificateholders of the class entitled thereto.
Unless otherwise specified in the related Prospectus Supplement, the
aggregate original balance of the Certificates (the 'Certificate
Balance') will equal the aggregate distributions allocable to
principal that such Certificates will be entitled to receive. If
specified in the related Prospectus Supplement, the Certificates will
have an aggregate original Certificate Balance equal to the aggregate
unpaid principal balance of the Mortgage Assets as of the first day
of the month of creation of the Trust Fund and will bear interest at
a rate (the 'Pass-Through Rate') equal to the interest rate borne by
the underlying Mortgage Loans, Agency Securities or Private
Mortgage-Backed Securities, net of the aggregate servicing fees and
any other amounts specified in the related Prospectus Supplement. If
specified in the related Prospectus Supplement, the aggregate
original Certificate Balance of the Certificates and interest rates
on the classes of Certificates will be determined based on the cash
flow on the Mortgage Assets.
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The rate at which interest will be passed through to holders of each
class of Certificates entitled thereto may be a fixed rate or a rate
that is subject to change from time to time from the time and for the
periods, in each case, as specified in the related Prospectus
Supplement. Any such rate may be calculated on a loan-by-loan,
weighted average or other basis, in each case as described in the
related Prospectus Supplement.
Credit Enhancement........................ The assets in a Trust Fund or the Certificates of one or more classes
in the related Series may have the benefit of one or more types of
credit enhancement as described in the related Prospectus Supplement.
The protection against losses afforded by any such credit support may
be limited. The type, characteristics and amount of credit
enhancement will be determined based on the characteristics of the
Mortgage Loans underlying or comprising the Mortgage Assets and other
factors and will be established on the basis of requirements of each
Rating Agency rating the Certificates of such Series. See 'Credit
Enhancement' herein.
A. Subordination.......................... A Series of Certificates may consist of one or more classes of Senior
Certificates and one or more classes of Subordinated Certificates.
The rights of the holders of the Subordinated Certificates of a
Series (the 'Subordinated Certificateholders') to receive
distributions with respect to the assets in the related Trust Fund
will be subordinated to such rights of the holders of the Senior
Certificates of the same Series (the 'Senior Certificateholders') to
the extent described in the related Prospectus Supplement. This
subordination is intended to enhance the likelihood of regular
receipt by Senior Certificateholders of the full amount of their
scheduled monthly payments of principal and interest. The protection
afforded to the Senior Certificateholders of a Series by means of the
subordination feature will be accomplished by (i) the preferential
right of such holders to receive, prior to any distribution being
made in respect of the related Subordinated Certificates, the amounts
of principal and interest due them on each Distribution Date out of
the funds available for distribution on such date in the related
Certificate Account and, to the extent described in the related
Prospectus Supplement, by the right of such holders to receive future
distributions on the assets in the related Trust Fund that would
otherwise have been payable to the Subordinated Certificateholders;
(ii) reducing the ownership interest of the related Subordinated
Certificates; (iii) a combination of clauses (i) and (ii) above; or
(iv) as otherwise described in the related Prospectus Supplement. If
so specified in the related Prospectus Supplement, subordination may
apply only in the event of certain types of losses not covered by
other forms of credit support, such as hazard losses not covered by
standard hazard insurance policies or losses due to the bankruptcy or
fraud of the borrower. The related Prospectus Supplement will set
forth information concerning, among other things, the amount of
subordination of a class or classes of Subordinated Certificates in a
Series, the circumstances in which such subordination will be
applicable and the manner, if any, in which the amount of
subordination will decrease over time.
B. Reserve Fund........................... One or more reserve funds (the 'Reserve Fund') may be established and
maintained for each Series. The related Prospectus Supplement will
specify whether or not any such Reserve Fund will
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be included in the corpus of the Trust Fund for such Series and will
also specify the manner of funding the related Reserve Fund and the
conditions under which the amounts in any such Reserve Fund will be
used to make distributions to holders of Certificates of a particular
class or released from the related Trust Fund.
C. Mortgage Pool
Insurance Policy....................... A mortgage pool insurance policy or policies (the 'Mortgage Pool
Insurance Policy') may be obtained and maintained for a Series, which
shall be limited in scope, covering defaults on the related Mortgage
Loans in an initial amount equal to a specified percentage of the
aggregate principal balance of all Mortgage Loans included in the
Mortgage Pool as of the first day of the month of issuance of the
related Series of Certificates or such other date as is specified in
the related Prospectus Supplement (the 'Cut-off Date').
D. Special Hazard Insurance
Policy................................. A special hazard insurance policy or policies (the 'Special Hazard
Insurance Policy'), may be obtained and maintained for a Series,
covering certain physical risks that are not otherwise insured
against by standard hazard insurance policies. Each Special Hazard
Insurance Policy will be limited in scope and will cover losses
pursuant to the provisions of each such Special Hazard Insurance
Policy as described in the related Prospectus Supplement.
E. Bankruptcy Bond........................ A bankruptcy bond or bonds (the 'Bankruptcy Bonds') may be obtained
to cover certain losses resulting from action that may be taken by a
bankruptcy court in connection with a Mortgage Loan. The level of
coverage and the limitations in scope of each Bankruptcy Bond will be
specified in the related Prospectus Supplement.
F. FHA Insurance and VA
Guaranty............................... All or a portion of the Mortgage Loans in a Mortgage Pool may be
insured by FHA insurance ('FHA Insurance') and may be partially
guaranteed by the VA (a 'VA Guaranty').
G. Cross Support.......................... If specified in the related Prospectus Supplement, the beneficial
ownership of separate groups of assets included in a Trust Fund may
be evidenced by separate classes of the related Series of
Certificates. In such case, credit support may be provided by a
cross-support feature which requires that distributions be made with
respect to Certificates evidencing beneficial ownership of one or
more asset groups prior to distributions to Subordinated Certificates
evidencing a beneficial ownership interest in other asset groups
within the same Trust Fund.
H. Other Arrangements..................... Other arrangements as described in the related Prospectus Supplement
including, but not limited to, one or more letters of credit, surety
bonds, other insurance or third party guaranties, may be used to
provide coverage for certain risks of default or various types of
losses.
Advances.................................. Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer and, if applicable, each mortgage servicing
institution that services a Mortgage Loan in a Mortgage Pool on
behalf of the Master Servicer (each, a 'Sub-Servicer') will be
obligated to advance amounts (each, an 'Advance') corresponding to
delinquent principal and interest payments on such Mortgage Loan
(including, in the case of Cooperative Loans, unpaid maintenance fees
or other charges under the related proprietary
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lease) until the first day of the month following the date on which
the related Mortgaged Property is sold at a foreclosure sale or the
related Mortgage Loan is otherwise liquidated. Any obligation to make
Advances may be subject to limitations as specified in the related
Prospectus Supplement. Advances will be reimbursable to the extent
described herein and in the related Prospectus Supplement.
Optional Termination...................... The Master Servicer or, if specified in the related Prospectus
Supplement, the holder of the residual interest in a REMIC may have
the option to effect early retirement of a Series of Certificates
through the purchase of the Mortgage Assets and other assets in the
related Trust Fund under the circumstances and in the manner
described in 'The Pooling and Servicing Agreement -- Termination;
Optional Termination' herein.
Legal Investment.......................... The Prospectus Supplement for each Series of Certificates will
specify which, if any, of the classes of Certificates offered thereby
will constitute 'mortgage related securities' for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA'). Classes
of Certificates that qualify as 'mortgage related securities' will be
legal investments for certain types of institutional investors to the
extent provided in SMMEA, subject, in any case, to any other
regulations that may govern investments by such institutional
investors. Institutions whose investment activities are subject to
review by federal or state authorities should consult with their
counsel or the applicable authorities to determine whether an
investment in a particular class of Certificates (whether or not such
class constitutes a 'mortgage related security') complies with
applicable guidelines, policy statements or restrictions. See 'Legal
Investment' herein.
Certain Federal Income Tax Consequences... The federal income tax consequences to Certificateholders will vary
depending on whether one or more elections are made to treat the
Trust Fund or specified portions thereof as a 'real estate mortgage
investment conduit' ('REMIC') under the provisions of the Internal
Revenue Code of 1986, as amended (the 'Code'). The Prospectus
Supplement for each Series of Certificates will specify whether such
an election will be made. See 'Certain Federal Income Tax
Consequences' herein and in the related Prospectus Supplement.
ERISA Considerations...................... A fiduciary of any employee benefit plan or other retirement plan or
arrangement subject to the Employee Retirement Income Security Act of
1974, as amended ('ERISA'), or the Code should carefully review with
its legal advisors whether the purchase or holding of Certificates
could give rise to a transaction prohibited or not otherwise
permissible under ERISA or the Code. See 'ERISA Considerations'
herein and in the related Prospectus Supplement. Certain classes of
Certificates may not be transferred unless the Trustee and the
Depositor 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 Depositor or the Master
Servicer to additional obligations. See 'Description of the
Certificates -- General' and 'ERISA Considerations' herein and in the
related Prospectus Supplement.
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THE TRUST FUND*
The Trust Fund for each Series will be held by the Trustee for the benefit
of the related Certificateholders. Each Trust Fund will consist of certain
mortgage-related assets (the 'Mortgage Assets') consisting of (A) a mortgage
pool (a 'Mortgage Pool') comprised of Mortgage Loans, (B) Agency Securities or
(C) Private Mortgage-Backed Securities, in each case as specified in the related
Prospectus Supplement, together with payments in respect of such Mortgage Assets
and certain other accounts, obligations or agreements, in each case as specified
in the related Prospectus Supplement.
The Certificates will be entitled to payment from the assets of the related
Trust Fund or other assets pledged for the benefit of the holders of such
Certificates (the 'Certificateholders') as specified in the related Prospectus
Supplement and will not be entitled to payments in respect of the assets of any
other trust fund established by the Depositor. Unless otherwise specified in the
related Prospectus Supplement, the Mortgage Assets of any Trust Fund will
consist of Mortgage Loans, Agency Securities or Private Mortgage-Backed
Securities but not a combination thereof.
The Mortgage Assets may be acquired by the Depositor, either directly or
through affiliates, from originators or sellers that may be affiliates of the
Depositor (the 'Sellers') and conveyed by the Depositor to the related Trust
Fund. Mortgage Loans acquired by the Depositor will have been originated in
accordance with the underwriting criteria specified below under 'Mortgage Loan
Program -- Underwriting Standards' or as otherwise described in a related
Prospectus Supplement.
The following is a brief description of the Mortgage Assets expected to be
included in the Trust Funds. If specific information respecting the Mortgage
Assets is not known at the time the related Series of Certificates initially is
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 Certificates (the
'Detailed Description'). A schedule of the Mortgage Assets relating to such
Series will be attached to the Agreement delivered to the Trustee upon delivery
of the Certificates.
THE MORTGAGE LOANS -- GENERAL
For purposes hereof, the real property that secures repayment of the
Mortgage Loans is referred to collectively as 'Mortgaged Properties'. The
Mortgaged Properties may be located in any one of the fifty states, the District
of Columbia, Guam, Puerto Rico or any other territory of the United States.
Mortgage Loans with certain Loan-to-Value Ratios and/or certain principal
balances may be covered wholly or partially by primary mortgage guaranty
insurance policies (each, a 'Primary Mortgage Insurance Policy'). The existence,
extent and duration of any such coverage will be described in the applicable
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans in a Mortgage Pool will have monthly payments due on the first
day of each month. The payment terms of the Mortgage Loans to be included in a
Trust Fund will be described in the related Prospectus Supplement and may
include any of the following features or combination 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 (which will be specified in the
related Prospectus Supplement), a rate that is fixed for a 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. A Mortgage Note may
provide for
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* Whenever the terms 'Mortgage Pool' and 'Certificates' are used in this
Prospectus, such terms will be deemed to apply, unless the context indicates
otherwise, to one specific Mortgage Pool and the Certificates representing
certain undivided interests, as described below, in a single trust fund (the
'Trust Fund') consisting primarily of the Mortgage Assets in such Mortgage
Pool. Similarly, the term 'Pass-Through Rate' will refer to the Pass-Through
Rate borne by the Certificates of one specific Series and the term 'Trust
Fund' will refer to one specific Trust Fund.
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the payment of interest at a rate lower than the Mortgage Rate specified in
such Mortgage Note for a period of time or for the life of the loan, and
the amount of any difference may be 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 Mortgage Loan over its term, may be calculated on the basis of
an assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from the
Mortgage Rate 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 ('balloon payments'). 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 Mortgage Loan, may increase over a specified period of time or
may change from period to period. The terms of a Mortgage Loan 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) The Mortgage Loans generally may be prepaid at any time without
the payment of any prepayment fee. If so specified in the related
Prospectus Supplement, some prepayments of principal may be subject to a
prepayment fee, which may be fixed for the life of any such Mortgage Loan
or may decline over time, and may be prohibited for the life of such
Mortgage Loan or for certain periods ('lockout periods'). Certain Mortgage
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 Mortgage 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 that 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 Seller.
A Trust Fund may contain certain Mortgage Loans ('Buydown Loans') that
include provisions whereby a third party partially subsidizes the monthly
payments of the obligors on such Mortgage Loans (each, a 'Mortgagor') during the
early years of such Mortgage Loans, the difference to be made up from a fund (a
'Buydown Fund') contributed by such third party at the time of origination of
the Mortgage Loan. A Buydown Fund will be in an amount equal either to the
discounted value or full aggregate amount of future payment subsidies. The
underlying assumption of buydown plans is that the income of the Mortgagor will
increase during the buydown period as a result of normal increases in
compensation and inflation, so that the Mortgagor will be able to meet the full
mortgage payments at the end of the buydown period. To the extent that this
assumption as to increased income is not fulfilled, the possibility of defaults
on Buydown Loans is increased. The related Prospectus Supplement will contain
information with respect to any Buydown Loan concerning limitations on the
interest rate paid by the Mortgagor initially, on annual increases in the
interest rate and on the length of the buydown period.
Each Prospectus Supplement will contain information, as of the date of such
Prospectus Supplement and to the extent then specifically known to the
Depositor, with respect to the Mortgage Loans contained in the related Mortgage
Pool, including (i) the aggregate outstanding principal balance and the average
outstanding principal balance of the Mortgage Loans as of the applicable Cut-off
Date, (ii) the type of property securing the Mortgage Loans (e.g., separate
residential properties, individual units in condominium apartment buildings or
in buildings owned by Cooperatives, vacation and second homes, or other real
property), (iii) the original terms to maturity of the Mortgage Loans, (iv) the
largest principal balance and the smallest principal balance of any of the
Mortgage Loans, (v) the earliest origination date and latest maturity date of
any of the Mortgage Loans, (vi) the aggregate principal balance of Mortgage
Loans having Loan-to-Value Ratios at origination exceeding 80%, (vii) the
maximum and minimum per annum Mortgage Rates and (viii) the geographical
distribution of the Mortgage Loans. If specific information respecting the
Mortgage Loans is not known to the Depositor at the time the related
Certificates are initially offered, more general information of the nature
described above will be provided in the Detailed Description.
The 'Loan-to-Value Ratio' of a Mortgage Loan at any given time is the
fraction, expressed as a percentage, the numerator of which is the original
principal balance of the related Mortgage Loan and the denominator of which is
the Collateral Value of the related Mortgaged Property. Unless otherwise
specified in the related Prospectus Supplement, the 'Collateral Value' of a
Mortgaged Property is the lesser of (a) the
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appraised value determined in an appraisal obtained by the originator at
origination of such Mortgage Loan and (b) the sales price for such property.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding principal
balances of the Mortgage Loans, and any secondary financing on the Mortgaged
Properties, in a particular Mortgage Pool become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, adverse economic conditions and
other factors (which may or may not affect real property values) may affect the
timely payment by Mortgagors of scheduled payments of principal and interest on
the Mortgage Loans and, accordingly, the actual rates of delinquencies,
foreclosures and losses with respect to any Mortgage Pool. To the extent that
such losses are not covered by subordination provisions or alternative
arrangements, such losses will be borne, at least in part, by the holders of the
Certificates of the related Series.
The Depositor will cause the Mortgage Loans comprising each Mortgage Pool
to be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the Certificateholders of the related Series. The Master Servicer
named in the related Prospectus Supplement will service the Mortgage Loans,
either directly or through other mortgage servicing institutions
('Sub-Servicers'), pursuant to a Pooling and Servicing Agreement (each, an
'Agreement'), and will receive a fee for such services. See 'Mortgage Loan
Program' and 'The Pooling and Servicing Agreement' herein. With respect to
Mortgage Loans serviced by the Master Servicer through a Sub-Servicer, the
Master Servicer will remain liable for its servicing obligations under the
related Agreement as if the Master Servicer alone were servicing such Mortgage
Loans.
Unless otherwise specified in the related Prospectus Supplement, the only
obligations of the Depositor with respect to a Series of Certificates will be to
obtain certain representations and warranties from the Sellers and to assign to
the Trustee for such Series of Certificates the Depositor's rights with respect
to such representations and warranties. See 'The Pooling and Servicing
Agreement -- Assignment of Mortgage Assets' herein. The obligations of the
Master Servicer with respect to the Mortgage Loans will consist principally of
its contractual servicing obligations under the related Agreement (including its
obligation to enforce the obligations of the Sub-Servicers or Sellers, or both,
as more fully described herein under 'Mortgage Loan Program -- Representations
by Sellers; Repurchases' and its obligation to make certain cash advances (each,
an 'Advance') in the event of delinquencies in payments on or with respect to
the Mortgage Loans in the amounts described herein under 'Description of the
Certificates -- Advances'. The obligations of the Master Servicer to make
Advances may be subject to limitations, to the extent provided herein and in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, Mortgage
Loans will consist of mortgage loans, deeds of trust or participations or other
beneficial interests therein, secured by first liens on one- to four-family
residential properties. If so specified, 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. If so specified in the related Prospectus Supplement,
the Mortgage Assets of the related Trust Fund may include mortgage participation
certificates evidencing interests in Mortgage Loans. Such loans may be
conventional loans (i.e., loans that are not insured or guaranteed by any
governmental agency) or loans insured by the FHA or partially guaranteed by the
VA, as specified in the related Prospectus Supplement.
The Mortgaged Properties relating to Mortgage Loans will consist of
detached or semi-detached one-family dwelling units, two- to four-family
dwelling units, townhouses, rowhouses, individual condominium units, individual
units in planned unit developments and certain other dwelling units. Such
Mortgaged Properties may include vacation and second homes, investment
properties and leasehold interests. In the case of leasehold interests, the term
of the leasehold will exceed the scheduled maturity of the Mortgage Loan by at
least five years, unless otherwise specified in the related Prospectus
Supplement.
AGENCY SECURITIES
Government National Mortgage Association. GNMA is a wholly-owned corporate
instrumentality of the United States with the United States Department of
Housing and Urban Development. Section 306(g) of Title II
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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 (the 'GNMA Certificates') that represent an interest in a pool of
mortgage loans insured by the FHA under the Housing Act or Title V of the
Housing Act of 1949 ('FHA Loans'), or partially guaranteed by the VA under the
Servicemen's Readjustment Act of 1944, as amended, or Chapter 37 of Title 38,
United States Code ('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 guaranty under this subsection.' In order to meet
its obligations under any such guaranty, GNMA may, under Section 306(d) of the
Housing Act, borrow from the United States Treasury in an unlimited amount which
is at any time sufficient to enable GNMA to perform its obligations under its
guarantee.
GNMA Certificates. Each GNMA Certificate held in a Trust Fund (which may
be issued under either the GNMA I program (each such certificate, a 'GNMA I
Certificate') or the GNMA II program (each such certificate, a 'GNMA II
Certificate')) 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 by FNMA as a seller-servicer of FHA
Loans and/or VA Loans. The mortgage loans underlying the GNMA Certificates will
consist of FHA Loans and/or VA Loans. Each such mortgage loan is secured by a
one-to four-family or multifamily residential property. GNMA will approve the
issuance of each such GNMA Certificate in accordance with a guaranty 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 each such GNMA Certificate
if the payments received by the GNMA Issuer on the FHA Loans or VA Loans
underlying each such GNMA Certificate are less than the amounts due on each such
GNMA Certificate.
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. Each such GNMA Certificate will have an
original maturity of not more than 30 years (but may have original maturities of
substantially less than 30 years). Each such GNMA Certificate will be based on
and backed by a pool of FHA Loans or VA Loans secured by one- to four-family
residential properties and 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 or VA Loan underlying such GNMA Certificate,
less the applicable servicing and guaranty fee, which together equal the
difference between the interest on the FHA 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 or VA Loans underlying such GNMA Certificate and liquidation proceeds in
the event of a foreclosure or other disposition of any such FHA Loans or VA
Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate as it
becomes due, it must promptly notify GNMA and request GNMA to make such payment.
Upon notification and request, GNMA will make such payments directly to the
registered holder of such 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 such GNMA Certificate will have recourse only against
GNMA to obtain such payment. The Trustee or its nominee, as registered holder of
the GNMA Certificates held in a Trust Fund, 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.
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 such 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).
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Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate are 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 or VA Loans underlying a GNMA Certificate held in a Trust Fund or
any other early recovery of principal on such loans 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 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 Loans
will be computed in the same manner as payments derived from other 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
subsequent years. The obligations of GNMA and of a GNMA Issuer will be the same
irrespective of whether the GNMA Certificates are backed by graduated payment
mortgage loans or Buydown 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 Loans. GNMA Certificates
related to a Series of Certificates may be held in book-entry form.
The GNMA Certificates included in a Trust Fund, and the related underlying
mortgage loans, may have characteristics and terms different from those
described above. Any such different characteristics and terms will be described
in the related Prospectus Supplement.
Federal Home Loan Mortgage Corporation. 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 and its preferred stock
is owned by stockholders of 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.
Mortgage loans underlying the FHLMC Certificates held by a Trust Fund will
consist of mortgage loans with original terms to maturity of between 10 and 40
years. Each such mortgage loan must meet the applicable standards set forth in
the 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 interest 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 related Prospectus Supplement for a Series of Certificates,
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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 guaranties, 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
guaranty of collection of principal at any time after default on an underlying
mortgage loan, but not later than (i) 30 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 that 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
guaranty are obligations solely of FHLMC and are not backed by, or 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.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial prepayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC certificateholder's pro rata share of principal payments on the
underlying mortgage loans, interest at the FHLMC pass-through rate and any other
sums such as prepayment fees, within 60 days of the date on which such payments
are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, there is no limitation on the amount by which
interest rates on the mortgage loans underlying a FHLMC Certificate may exceed
the pass-through rate on the FHLMC Certificate. Under such program, FHLMC
purchases groups of whole mortgage loans from sellers 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 and participations
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. The range of
interest rates on the mortgage loans and participations in a FHLMC Certificate
group under the Cash Program will vary since mortgage loans and participations
are purchased and assigned to a FHLMC Certificate group based upon their yield
to FHLMC rather than on the interest rate on the underlying mortgage loans.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC Certificate 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.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of such FHLMC Certificate. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, and makes payments of principal and interest each month to the
registered holders thereof in accordance with such holders' instructions.
Federal National Mortgage Association. FNMA is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act, as amended. FNMA was
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originally established in 1938 as a United States government agency to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder-owned and privately-managed corporation by legislation enacted in
1968.
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 held by a Trust Fund 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 40 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. Under a
regular servicing option (pursuant to which the mortgagee or each other servicer
assumes the entire risk of foreclosure losses), the annual interest rates on the
mortgage loans underlying a FNMA Certificate will be between 50 basis points and
250 basis points greater than is its annual pass-through rate and under a
special servicing option (pursuant to which FNMA assumes the entire risk for
foreclosure losses), the annual interest rates on the mortgage loans underlying
a FNMA Certificate will generally be between 55 basis points and 255 basis
points greater than the annual FNMA Certificate pass-through rate. If specified
in the related Prospectus Supplement, FNMA Certificates may be backed by
adjustable rate mortgages.
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 guaranties are obligations solely of FNMA and are not backed by, or 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.
FNMA Certificates evidencing interests in pools of mortgage loans formed on
or after May 1, 1985 (other than FNMA Certificates backed by pools containing
graduated payment mortgage loans or mortgage loans secured by multifamily
projects) are available in book-entry form only. Distributions of principal and
interest on each FNMA Certificate will be made by FNMA on the 25th day of each
month to the persons in whose name the FNMA Certificate is entered in the books
of the Federal Reserve Banks (or registered on the FNMA Certificate register in
the case of fully registered FNMA Certificates) as of the close of business on
the last day of the preceding month. With respect to FNMA Certificates issued in
book-entry form, distributions thereon will be made by wire, and with respect to
fully registered FNMA Certificates, distributions thereon will be made by check.
The FNMA Certificates included in a Trust Fund, and the related underlying
mortgage loans, may have characteristics and terms different from those
described above. Any such different characteristics and terms will be described
in the related Prospectus Supplement.
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Stripped Mortgage-Backed 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 FHLMC, FNMA or GNMA
Certificates. The underlying securities will be held under a trust agreement by
FHLMC, FNMA or GNMA, 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, a Trust Fund may include other mortgage pass-through certificates
issued or guaranteed by GNMA, FNMA or FHLMC. The characteristics of any such
mortgage pass-through certificates will be described in such Prospectus
Supplement. If so specified, a combination of different types of Agency
Securities may be held in a Trust Fund.
PRIVATE MORTGAGE-BACKED SECURITIES
Private Mortgage-Backed Securities may consist of (a) mortgage pass-through
certificates or participation certificates evidencing an undivided interest in a
pool of mortgage loans or (b) collateralized mortgage obligations secured by
mortgage loans. 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 will have been issued pursuant to a pooling and servicing agreement,
an indenture or similar agreement (a 'PMBS Agreement'). Unless otherwise
specified in the related Prospectus Supplement, 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 mortgage loans underlying such Private
Mortgage-Backed Security. Mortgage loans underlying a Private Mortgage-Backed
Security will be serviced by a servicer (the 'PMBS Servicer') directly or by one
or more subservicers who may be subject to the supervision of the PMBS Servicer.
The 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 an
affiliate of the Depositor. The obligations of the PMBS Issuer will generally be
limited to certain representations and warranties with respect to the assets
conveyed by it to the related Trust Fund. Unless otherwise specified in the
related Prospectus Supplement, the PMBS Issuer will not have guaranteed any of
the assets conveyed to the related Trust Fund or any of the Private
Mortgage-Backed Securities issued under the PMBS Agreement. Additionally,
although the mortgage loans underlying the Private Mortgage-Backed Securities
may be guaranteed by an agency or instrumentality of the United States, the
Private Mortgage-Backed Securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
The mortgage loans underlying 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 mortgage loans may be
secured by single family property or multifamily property 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.
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The Prospectus Supplement for a Series for which the Trust Fund includes
Private Mortgage-Backed Securities will specify (i) the aggregate approximate
principal amount and type of the Private Mortgage-Backed Securities to be
included in the Trust Fund; (ii) certain characteristics of the mortgage loans
that comprise the underlying assets for the Private Mortgage-Backed Securities
including (A) the payment features of such mortgage loans, (B) the approximate
aggregate principal balance, if known, of underlying mortgage loans insured or
guaranteed by a governmental entity, (C) the servicing fee or range of servicing
fees with respect to the mortgage loans and (D) the minimum and maximum stated
maturities of the underlying mortgage loans at origination; (iii) the maximum
original term-to-stated maturity of the Private Mortgage-Backed Securities; (iv)
the weighted average term-to-stated maturity of the Private Mortgage-Backed
Securities; (v) the pass-through or certificate rate of the Private
Mortgage-Backed Securities; (vi) the weighted average pass-through or
certificate rate of the Private Mortgage-Backed Securities; (vii) the PMBS
Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the PMBS Trustee
for such Private Mortgage-Backed Securities; (viii) certain characteristics of
credit support, if any, such as reserve funds, insurance policies, surety bonds,
letters of credit or guaranties relating to the mortgage loans underlying the
Private Mortgage-Backed Securities or to such Private Mortgage-Backed Securities
themselves; (ix) the terms on which the underlying mortgage loans for such
Private Mortgage-Backed Securities may, or are required to, be purchased prior
to their stated maturity or the stated maturity of the Private Mortgage-Backed
Securities; and (x) the terms on which mortgage loans may be substituted for
those originally underlying the Private Mortgage-Backed Securities.
SUBSTITUTION OF MORTGAGE ASSETS
Substitution of Mortgage Assets will be permitted in the event of breaches
of representations and warranties with respect to any original Mortgage Asset or
in the event the documentation with respect to any Mortgage Asset is determined
by the Trustee to be incomplete. The period during which such substitution will
be permitted generally will be indicated in the related Prospectus Supplement.
The related Prospectus Supplement will describe any other conditions upon which
Mortgage Assets may be substituted for Mortgage Assets initially included in the
Trust Fund.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by the Depositor to the purchase of Mortgage Assets or will be used by
the Depositor for general corporate purposes. The Depositor expects to sell
Certificates in Series from time to time, but the timing and amount of offerings
of Certificates will depend on a number of factors, including the volume of
Mortgage Assets acquired by the Depositor, prevailing interest rates,
availability of funds and general market conditions.
THE DEPOSITOR
CWMBS, Inc., a Delaware corporation (the 'Depositor'), was organized on May
27, 1993 for the limited purpose of acquiring, owning and transferring Mortgage
Assets and selling interests therein or bonds secured thereby. The Depositor is
a subsidiary of Countrywide Credit Industries, Inc., a Delaware corporation. The
Depositor maintains its principal office at 155 North Lake Avenue, Pasadena,
California 91101-7139. Its telephone number is (818) 584-3547.
Neither the Depositor nor any of the Depositor's affiliates will ensure or
guarantee distributions on the Certificates of any Series.
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Depositor, either
directly or through affiliates, from Sellers. Unless otherwise specified in the
related Prospectus Supplement, the Mortgage Loans so acquired by the Depositor
will have been originated in accordance with the underwriting criteria specified
below under 'Underwriting Standards'.
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UNDERWRITING STANDARDS
Unless otherwise specified in the related Prospectus Supplement, each
Seller will represent and warrant that all Mortgage Loans originated and/or sold
by it to the Depositor or one of its affiliates will have been underwritten in
accordance with standards consistent with those utilized by mortgage lenders
generally during the period of origination for similar types of loans. As to any
Mortgage Loan insured by the FHA or partially guaranteed by the VA, the Seller
will represent that it has complied with underwriting policies of the FHA or the
VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the mortgaged property as collateral. In general, a prospective borrower
applying for a mortgage loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information. As
part of the description of the borrower's financial condition, the borrower
generally is required to provide a current list of assets and liabilities and a
statement of income and expenses, as well as an authorization to apply for a
credit report which summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy. In most cases, an employment
verification is obtained from an independent source (typically the borrower's
employer), which verification reports the length of employment with that
organization, the borrower's current salary and whether it is expected that the
borrower will continue such employment in the future. If a prospective borrower
is self-employed, the borrower may be required to submit copies of signed tax
returns. The borrower may also be required to authorize verification of deposits
at financial institutions where the borrower has demand or savings accounts.
In determining the adequacy of the mortgaged property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good repair and that
construction, if new, has been completed. The appraisal is based on the market
value of comparable homes, the estimated rental income (if considered applicable
by the appraiser) and the cost of replacing the home.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligations on the proposed mortgage loan (generally determined on the
basis of the monthly payments due in the year of origination) and other expenses
related to the mortgaged property (such as property taxes and hazard insurance)
and (ii) to meet monthly housing expenses and other financial obligations and
monthly living expenses. The underwriting standards applied by Sellers,
particularly with respect to the level of loan documentation and the mortgagor's
income and credit history, may be varied in appropriate cases where factors such
as low Loan-to-Value Ratios or other favorable credit exist.
In the case of a Mortgage Loan secured by a leasehold interest in real
property, the title to which is held by a third party lessor, the Seller will
represent and warrant, among other things, that the remaining term of the lease
and any sublease is at least five years longer than the remaining term on the
Mortgage Note.
Certain of the types of Mortgage Loans that may be included in a Trust Fund
are recently developed and may involve additional uncertainties not present in
traditional types of loans. For example, certain of such Mortgage Loans may
provide for escalating or variable payments by the Mortgagor. These types of
Mortgage Loans are underwritten on the basis of a judgment that the Mortgagors
have the ability to make the monthly payments required initially. In some
instances, however, a Mortgagor's income may not be sufficient to permit
continued loan payments as such payments increase. These types of Mortgage Loans
may also be underwritten primarily upon the basis of Loan-to-Value Ratios or
other favorable credit factors.
QUALIFICATIONS OF SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Seller will be required to satisfy the qualifications set forth herein. Each
Seller must be an institution experienced in originating and servicing mortgage
loans of the type contained in the related Mortgage Pool in accordance with
accepted practices and prudent guidelines, and must maintain satisfactory
facilities to originate and service those mortgage loans. Each Seller must be a
seller/servicer approved by either FNMA or FHLMC. Each Seller must be a
mortgagee approved by the FHA or an institution the deposit accounts in which
are insured by the Federal Deposit Insurance Corporation. The Resolution Trust
Corporation, acting in its capacity as conservator or receiver of a depository
institution, may be a Seller if so specified in the related Prospectus
Supplement.
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REPRESENTATIONS BY SELLERS; REPURCHASES
Each Seller will have made representations and warranties in respect of the
Mortgage Loans sold by such Seller and evidenced by a Series of Certificates.
Such representations and warranties unless otherwise provided in the related
Prospectus Supplement generally include, among other things: (i) that title
insurance (or in the case of Mortgaged Properties located in areas where such
policies are generally not available, an attorney's certificate of title) and
any required hazard insurance policy and Primary Mortgage Insurance Policy were
effective at the origination of each Mortgage Loan other than Cooperative Loans,
and that each policy (or certificate of title as applicable) remained in effect
on the date of purchase of the Mortgage Loan from the Seller by or on behalf of
the Depositor; (ii) that the Seller had good title to each such Mortgage Loan
and such Mortgage Loan was subject to no offsets, defenses, counterclaims or
rights of rescission except to the extent that any buydown agreement described
herein may forgive certain indebtedness of a Mortgagor; (iii) that each Mortgage
Loan constituted a valid first lien on, or a first perfected security interest
with respect to, the Mortgaged Property (subject only to permissible title
insurance exceptions, if applicable, and certain other exceptions described in
the Agreement) and that the Mortgaged Property was free from damage and was in
good repair; (iv) that there were no delinquent tax or assessment liens against
the Mortgaged Property; (v) that no required payment on a Mortgage Loan was more
than 31 days delinquent at any time during the twelve months prior to the
Cut-off Date; and (vi) that each Mortgage Loan was made in compliance with, and
is enforceable under, all applicable local, state and federal laws and
regulations in all material respects.
If so specified in the related Prospectus Supplement, the representations
and warranties of a Seller in respect of a Mortgage Loan will be made not as of
the Cut-off Date but as of the date on which such Seller sold the Mortgage Loan
to the Depositor or one of its affiliates. Under such circumstances, a
substantial period of time may have elapsed between such date and the date of
initial issuance of the Series of Certificates evidencing an interest in such
Mortgage Loan. Since the representations and warranties of a Seller do not
address events that may occur following the sale of a Mortgage Loan by such
Seller, its repurchase obligation described below will not arise if the relevant
event that would otherwise have given rise to such an obligation with respect to
a Mortgage Loan occurs after the date of sale of such Mortgage Loan by such
Seller to the Depositor or its affiliates. However, the Depositor will not
include any Mortgage Loan in the Trust Fund for any Series of Certificates if
anything has come to the Depositor's attention that would cause it to believe
that the representations and warranties of a Seller will not be accurate and
complete in all material respects in respect of such Mortgage Loan as of the
date of initial issuance of the related Series of Certificates. If the Master
Servicer is also a Seller of Mortgage Loans with respect to a particular Series,
such representations will be in addition to the representations and warranties
made by the Master Servicer in its capacity as the Master Servicer.
The Master Servicer or the Trustee, if the Master Servicer is the Seller,
will promptly notify the relevant Seller of any breach of any representation or
warranty made by it in respect of a Mortgage Loan that materially and adversely
affects the interests of the Certificateholders in such Mortgage Loan. Unless
otherwise specified in the related Prospectus Supplement, if such Seller cannot
cure such breach within 90 days after notice from the Master Servicer or the
Trustee, as the case may be, then such Seller will be obligated to repurchase
such Mortgage Loan from the Trust Fund at a price (the 'Purchase Price') equal
to 100% of the outstanding principal balance thereof as of the date of the
repurchase plus accrued interest thereon to the first day of the month in which
the Purchase Price is to be distributed at the Mortgage Rate (less any
unreimbursed Advances or amount payable as related servicing compensation if the
Seller is the Master Servicer with respect to such Mortgage Loan). If a REMIC
election is to be made with respect to a Trust Fund, unless otherwise provided
in the related Prospectus Supplement, the Master Servicer or a holder of the
related residual certificate will be obligated to pay any prohibited transaction
tax that may arise in connection with any such repurchase. The Master Servicer,
unless otherwise specified in the related Prospectus Supplement, will be
entitled to reimbursement for any such payment from the assets of the related
Trust Fund or from any holder of the related residual certificate. See
'Description of the Certificates -- General' herein and in the related
Prospectus Supplement. Except in those cases in which the Master Servicer is the
Seller, the Master Servicer will be required under the applicable Agreement to
enforce this obligation for the benefit of the Trustee and the
Certificateholders, following the practices it would employ in its good faith
business judgment were it the owner of such Mortgage Loan. This repurchase
obligation will constitute the sole remedy available to Certificateholders or
the Trustee for a breach of representation by a Seller.
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Neither the Depositor nor the Master Servicer (unless the Master Servicer
is the Seller) will be obligated to purchase a Mortgage Loan if a Seller
defaults on its obligation to do so, and no assurance can be given that Sellers
will carry out their respective repurchase obligations with respect to Mortgage
Loans. However, to the extent that a breach of a representation and warranty of
a Seller may also constitute a breach of a representation made by the Master
Servicer, the Master Servicer may have a repurchase obligation as described
below under 'The Pooling and Servicing Agreement -- Assignment of Mortgage
Assets'.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an Agreement, dated
as of the related Cut-off Date, among the Depositor, the Master Servicer and the
Trustee for the benefit of the holders of the Certificates of such Series. The
provisions of each Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust Fund. A
form of an Agreement is an exhibit to the Registration Statement of which this
Prospectus is a part. The following summaries describe certain provisions that
may appear in each Agreement. The Prospectus Supplement for a Series of
Certificates will describe any provision of the Agreement relating to such
Series that materially differs from the description thereof contained in this
Prospectus. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
Agreement for each Series of Certificates and the applicable Prospectus
Supplement. The Depositor will provide a copy of the Agreement (without
exhibits) relating to any Series without charge upon written request of a holder
of record of a Certificate of such Series addressed to CWMBS, Inc., 155 North
Lake Avenue, Pasadena, California 91101-7139, Attention: Secretary.
GENERAL
Unless otherwise specified in the Prospectus Supplement, the Certificates
of each Series will be issued in either fully registered or book-entry form in
the authorized denominations specified in the related Prospectus Supplement,
will evidence specified beneficial ownership interests in the related Trust Fund
created pursuant to the related Agreement and will not be entitled to payments
in respect of the assets included in any other Trust Fund established by the
Depositor. The Certificates will not represent obligations of the Depositor or
any affiliate of the Depositor. The Mortgage Assets will not be insured or
guaranteed by any governmental entity or other person, unless otherwise
specified in the related Prospectus Supplement. Each Trust Fund will consist of,
to the extent provided in the related Agreement, (i) the Mortgage Assets that
from time to time are subject to the related Agreement (exclusive of any amounts
specified in the related Prospectus Supplement (the 'Retained Interest')); (ii)
such assets as from time to time are required to be deposited in the related
Certificate Account; (iii) property that secured a Mortgage Loan and that is
acquired on behalf of the Certificateholders by foreclosure or deed in lieu of
foreclosure; and (iv) any Primary Mortgage Insurance Policies, FHA Insurance and
VA Guaranties, and any other insurance policies or other forms of credit
enhancement required to be maintained pursuant to the related Agreement. If so
specified in the related Prospectus Supplement, a Trust Fund may also include
one or more of the following: reinvestment income on payments received on the
Mortgage Assets, a reserve fund, a mortgage pool insurance policy, a special
hazard insurance policy, a bankruptcy bond, one or more letters of credit, a
surety bond, guaranties or similar instruments or other agreements.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust Fund. A Series of
Certificates may include one or more classes that are senior in right to payment
to one or more other classes of Certificates of such Series. Certain Series or
classes of Certificates may be covered by insurance policies, surety bonds or
other forms of credit enhancement, in each case as described herein and in the
related Prospectus Supplement. One or more classes of Certificates of a Series
may be entitled to receive distributions of principal, interest or any
combination thereof. Distributions on one or more classes of a Series of
Certificates may be made prior to one or more other classes, after the
occurrence of specified events, in accordance with a schedule or formula, on the
basis of collections from designated portions of the Mortgage Assets in the
related Trust Fund, or on a different basis, in each case as specified in the
related Prospectus Supplement. The timing and amounts of such distributions may
vary among classes or over time as specified in the related Prospectus
Supplement.
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Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Certificates will be made by the Trustee on
each Distribution Date (i.e., monthly, quarterly, semi-annually or at such other
intervals and on the dates as are specified in the Prospectus Supplement) in
proportion to the percentages specified in the related Prospectus Supplement.
Distributions will be made to the persons in whose names the Certificates are
registered at the close of business on the dates specified in the related
Prospectus Supplement (each, a 'Record Date'). Distributions will be made by
check or money order mailed to the persons entitled thereto at the address
appearing in the register maintained for holders of Certificates (the
'Certificate Register') or, if specified in the related Prospectus Supplement,
in the case of Certificates that are of a certain minimum denomination, upon
written request by the Certificateholder, by wire transfer or by such other
means as are described therein; provided, however, that the final distribution
in retirement of the Certificates will be made only upon presentation and
surrender of the Certificates at the office or agency of the Trustee or other
person specified in the notice to Certificateholders of such final distribution.
The Certificates will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Certificates of any Series, but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding 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 of a class of Certificates entitled only to a specified
percentage of payments of either interest or principal or a notional amount of
either interest or principal on the related Mortgage Assets or a class of
Certificates entitled to receive payments of interest and principal on the
Mortgage Assets only after payments to other classes or after the occurrence of
certain specified events may result in 'prohibited transactions' within the
meaning of ERISA and the Code. See 'ERlSA Considerations' herein. Unless
otherwise specified in the related Prospectus Supplement, transfer of
Certificates of such a class will not be registered unless the transferee (i)
represents 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 Trustee and the Depositor that the purchase of Certificates of such a class
by or on behalf of such plan, account or arrangement is permissible under
applicable law and will not subject the Trustee, the Master Servicer or the
Depositor to any obligation or liability in addition to those undertaken in the
Agreement.
As to each Series, an election may be made to treat the related Trust Fund
or designated portions thereof as a 'real estate mortgage investment conduit' or
'REMIC' as defined in the Code. The related Prospectus Supplement will specify
whether a REMIC election is to be made. Alternatively, the Agreement for a
Series may provide that a REMIC election may be made at the discretion of the
Depositor or the Master Servicer and may be made only 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 Certificateholders 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 of the classes will be designated as evidencing the
sole class of 'residual interests' in the related REMIC, as defined in the Code.
All other classes of Certificates in such a Series will constitute 'regular
interests' in the related REMIC, as defined in the Code. As to each Series with
respect to which a REMIC election is to be made, the Master Servicer or a holder
of the related residual certificate 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 Master Servicer, unless
otherwise specified in the related Prospectus Supplement, will be entitled to
reimbursement for any such payment from the assets of the Trust Fund or from any
holder of the related residual certificate.
DISTRIBUTIONS ON CERTIFICATES
General. In general, the method of determining the amount of distributions
on a particular Series of Certificates will depend on the type of credit
support, if any, that is used with respect to such Series. See 'Credit
Enhancement' herein and in the related Prospectus Supplement. Set forth below
are descriptions of various methods that may be used to determine the amount of
distributions on the Certificates of a particular Series. The
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Prospectus Supplement for each Series of Certificates will describe the method
to be used in determining the amount of distributions on the Certificates of
such Series.
Distributions allocable to principal of and interest on the Certificates
will be made by the Trustee out of, and only to the extent of, funds in the
related Certificate Account, including any funds transferred from any Reserve
Fund. As between Certificates of different classes and as between distributions
of principal (and, if applicable, between distributions of Principal Prepayments
and scheduled payments of principal) and interest, distributions made on any
Distribution Date will be applied as specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
distributions to any class of Certificates will be made pro rata to all
Certificateholders of that class.
Available Funds. All distributions on the Certificates of each Series on
each Distribution Date will be made from the Available Funds, in accordance with
the terms described in the related Prospectus Supplement and specified in the
Agreement. Unless otherwise provided in the related Prospectus Supplement,
'Available Funds' for each Distribution Date will generally equal the amount on
deposit in the related Certificate Account on such Distribution Date (net of
related fees and expenses payable by the related Trust Fund) other than amounts
to be held therein for distribution on future Distribution Dates.
Distributions of Interest. Unless otherwise specified in the related
Prospectus Supplement, interest will accrue on the aggregate Certificate Balance
(or, in the case of Certificates entitled only to distributions allocable to
interest, the aggregate notional amount) of each class of Certificates (the
'Class Certificate Balance') entitled to interest at the Pass-Through Rate
(which may be a fixed rate or a rate adjustable as specified in such Prospectus
Supplement) from the date and for the periods specified in such Prospectus
Supplement. To the extent funds are available therefor, interest accrued during
each such specified period on each class of Certificates entitled to interest
(other than a class of Certificates that provides for interest that accrues, but
is not currently payable, referred to hereafter as 'Accrual Certificates') will
be distributable on the Distribution Dates specified in the related Prospectus
Supplement until the Class Certificate Balance of such class has been
distributed in full or, in the case of Certificates entitled only to
distributions allocable to interest, until the aggregate notional amount of such
Certificates is reduced to zero or for the period of time designated in the
related Prospectus Supplement. The original Certificate Balance of each
Certificate will equal the aggregate distributions allocable to principal to
which such Certificate is entitled. Unless otherwise specified in the related
Prospectus Supplement, distributions allocable to interest on each Certificate
that is not entitled to distributions allocable to principal will be calculated
based on the notional amount of such Certificate. The notional amount of a
Certificate will not evidence an interest in or entitlement to distributions
allocable to principal but will be used solely for convenience in expressing the
calculation of interest and for certain other purposes.
With respect to any class of Accrual Certificates, any interest that has
accrued but is not paid on a given Distribution Date will be added to the Class
Certificate Balance of such class of Certificates on that Distribution Date.
Unless otherwise specified in the related Prospectus Supplement, distributions
of interest on each class of Accrual Certificates will commence only after the
occurrence of the events specified in such Prospectus Supplement and, prior to
such time, the beneficial ownership interest of such class of Accrual
Certificates in the Trust Fund, as reflected in the Class Certificate Balance of
such class of Accrual Certificates, will increase on each Distribution Date by
the amount of interest that accrued on such class of Accrual Certificates during
the preceding interest accrual period but that was not required to be
distributed to such class on such Distribution Date. Any such class of Accrual
Certificates will thereafter accrue interest on its outstanding Class
Certificate Balance as so adjusted.
Distributions of Principal. Unless otherwise specified in the related
Prospectus Supplement, the Class Certificate Balance of any class of
Certificates entitled to distributions of principal will be the original Class
Certificate Balance of such class of Certificates specified in such Prospectus
Supplement, reduced by all distributions reported to the holders of such
Certificates as allocable to principal and (i) in the case of Accrual
Certificates, unless otherwise specified in the related Prospectus Supplement,
increased by all interest accrued but not then distributable on such Accrual
Certificates and (ii) in the case of adjustable rate Certificates, unless
otherwise specified in the related Prospectus Supplement, subject to the effect
of negative amortization. The related Prospectus Supplement will specify the
method by which the amount of principal to be distributed on the Certificates on
each Distribution Date will be calculated and the manner in which such amount
will be allocated among the classes of Certificates entitled to distributions of
principal.
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If so provided in the related Prospectus Supplement, one or more classes of
Senior Certificates will be entitled to receive all or a disproportionate
percentage of the payments of principal that are received from borrowers 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 such Prospectus Supplement. Any such allocation of Principal
Prepayments to such class or classes of Certificates will have the effect of
accelerating the amortization of such Senior Certificates while increasing the
interests evidenced by the Subordinated Certificates in the Trust Fund.
Increasing the interests of the Subordinated Certificates relative to that of
the Senior Certificates is intended to preserve the availability of the
subordination provided by the Subordinated Certificates. See 'Credit
Enhancement -- Subordination' herein and 'Credit Enhancement -- Subordination of
the Subordinated Certificates' in the related Prospectus Supplement.
Unscheduled Distributions. If specified in the related Prospectus
Supplement, the Certificates will be subject to receipt of distributions before
the next scheduled Distribution Date under the circumstances and in the manner
described below and in such Prospectus Supplement. If applicable, the Trustee
will be required to make such unscheduled distributions on the day and in the
amount specified in the related Prospectus Supplement if, due to substantial
payments of principal (including Principal Prepayments) on the Mortgage Assets,
the Trustee or the Master Servicer determines that the funds available or
anticipated to be available from the Certificate Account and, if applicable, any
Reserve Fund, may be insufficient to make required distributions on the
Certificates on such Distribution Date. Unless otherwise specified in the
related Prospectus Supplement, the amount of any such unscheduled distribution
that is allocable to principal will not exceed the amount that would otherwise
have been required to be distributed as principal on the Certificates on the
next Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, all unscheduled distributions will include interest at the
applicable Pass-Through Rate (if any) on the amount of the unscheduled
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
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
Certificates would have been made on the next Distribution Date, and with
respect to Certificates of the same class, unscheduled distributions of
principal will be made on a pro rata basis. Notice of any unscheduled
distribution will be given by the Trustee prior to the date of such
distribution.
ADVANCES
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will be required to advance on or before each Distribution Date (from
its own funds, funds advanced by Sub-Servicers or funds held in the Certificate
Account for future distributions to Certificateholders), an amount equal to the
aggregate of payments of principal and interest that were delinquent on the
related Determination Date, subject to the Master Servicer's determination that
such advances will be recoverable out of late payments by obligors on the
Mortgage Assets, Liquidation Proceeds, Insurance Proceeds or otherwise. In the
case of Cooperative Loans, the Master Servicer also will be required to advance
any unpaid maintenance fees and other charges under the related proprietary
leases as specified in the related Prospectus Supplement.
In making Advances, the Master Servicer will endeavor to maintain a regular
flow of scheduled interest and principal payments to Certificateholders, rather
than to guarantee or insure against losses. If Advances are made by the Master
Servicer from cash being held for future distribution to Certificateholders, the
Master Servicer will replace such funds on or before any future Distribution
Date to the extent that funds in the applicable Certificate Account on such
Distribution Date would be less than the amount required to be available for
distributions to Certificateholders on such date. Any Advances will be
reimbursable to the Master Servicer out of recoveries on the specific Mortgage
Assets with respect to which such Advances were made (e.g., late payments made
by the related obligors, any related Insurance Proceeds, Liquidation Proceeds or
proceeds of any Mortgage Loan repurchased by the Depositor, a Sub-Servicer or a
Seller pursuant to the related Agreement). In addition, Advances by the Master
Servicer (and any advances by a Sub-Servicer) also will be reimbursable to the
Master Servicer (or Sub-Servicer) from cash otherwise distributable to
Certificateholders (including Senior Certificateholders) to the extent that the
Master Servicer determines that any such Advances previously made are not
ultimately recoverable as described in the immediately preceding sentence. The
Master Servicer also will be obligated to make Advances, to the extent
recoverable out of Insurance Proceeds, Liquidation Proceeds or
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otherwise, in respect of certain taxes and insurance premiums not paid by
Mortgagors on a timely basis. Funds so advanced are reimbursable to the Master
Servicer to the extent permitted by the Agreement. If specified in the related
Prospectus Supplement, the obligations of the Master Servicer to make Advances
may be supported by a cash advance reserve fund, a surety bond or other
arrangement, in each case as described in such Prospectus Supplement.
REPORTS TO CERTIFICATEHOLDERS
Prior to or concurrently with each distribution on a Distribution Date and
except as otherwise set forth in an applicable Prospectus Supplement, the Master
Servicer or the Trustee will furnish to each Certificateholder of record of the
related Series a statement setting forth, to the extent applicable to such
Series of Certificates, among other things:
(i) the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and, if so
specified in the related Prospectus Supplement, prepayment penalties
included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the aggregate amount (a) otherwise allocable to the Subordinated
Certificateholders on such Distribution Date and (b) withdrawn from the
Reserve Fund, if any, that is included in the amounts distributed to the
Certificateholders;
(v) the Class Certificate Balance or notional amount of each class of
the related Series after giving effect to the distribution of principal on
such Distribution Date;
(vi) the percentage of principal payments on the Mortgage Assets
(excluding prepayments), if any, which each such class will be entitled to
receive on the following Distribution Date;
(vii) the percentage of Principal Prepayments with respect to the
Mortgage Assets, if any, which each such class will be entitled to receive
on the following Distribution Date;
(viii) the related amount of the servicing compensation retained or
withdrawn from the Certificate Account by the Master Servicer, and the
amount of additional servicing compensation received by the Master Servicer
attributable to penalties, fees, excess Liquidation Proceeds and other
similar charges and items;
(ix) the number and aggregate principal balances of Mortgage Loans (A)
delinquent (exclusive of Mortgage Loans in foreclosure) (1) 1 to 30 days,
(2) 31 to 60 days, (3) 61 to 90 days and (4) 91 or more days and (B) in
foreclosure and delinquent (1) 1 to 30 days, (2) 31 to 60 days, (3) 61 to
90 days and (4) 91 or more days, as of the close of business on the last
day of the calendar month preceding such Distribution Date;
(x) the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure;
(xi) the Pass-Through Rate, if adjusted from the date of the last
statement, of any such class expected to be applicable to the next
distribution to such class;
(xii) if applicable, the amount remaining in the Reserve Fund at the
close of business on the Distribution Date;
(xiii) the Pass-Through Rate as of the day prior to the immediately
preceding Distribution Date; and
(xiv) any amounts remaining under letters of credit, pool policies or
other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Certificate of the relevant class having the Percentage
Interest specified in the related Prospectus Supplement. The report to
Certificateholders for any Series of Certificates may include additional or
other information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Certificateholder of record at any time during such calendar year a report (a)
as to
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the aggregate of amounts reported pursuant to (i) and (ii) for such calendar
year or, in the event such person was a Certificateholder of record during a
portion of such calendar year, for the applicable portion of such year and (b)
such other customary information as may be deemed necessary or desirable for
Certificateholders to prepare their tax returns.
CATEGORIES OF CLASSES OF CERTIFICATES
In general, classes of pass-through certificates fall into different
categories. The following chart identifies and generally defines certain of the
more typical categories. The Prospectus Supplement for a series of Certificates
may identify the classes which comprise such Series by reference to the
following categories.
<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
<S> <C>
PRINCIPAL TYPES
Accretion Directed............ A class that receives principal payments from the accreted interest from
specified Accrual Classes. An Accretion Directed Class also may receive principal
payments from principal paid on the underlying Mortgage Assets or other assets of
the Trust Fund for the related Series.
Component Certificates........ A class consisting of 'Components.' The Components of a class of Component
Certificates may have different principal and/or interest payment characteristics
but together constitute a single class. Each Component of a class of Component
Certificates may be identified as falling into one or more of the categories in
this chart.
Notional Amount
Certificates................ A class having no principal balance and bearing interest on the related notional
amount. The notional amount is used for purposes of the determination of interest
distributions.
Planned Principal Class (also
sometimes referred to as
'PACs')..................... A class that is designed to receive principal payments using a predetermined
principal balance schedule derived by assuming two constant prepayment rates for
the underlying Mortgage Assets. These two rates are the endpoints for the
'structuring range' for the Planned Principal Class. The Planned Principal
Classes in any Series of Certificates may be subdivided into different categories
(e.g., Primary Planned Principal Classes, Secondary Planned Principal Classes and
so forth) having different effective structuring ranges and different principal
payment priorities. The structuring range for the Secondary Planned Principal
Class of a Series of Certificates will be narrower than that for the Primary
Planned Principal Class of such Series.
Scheduled Principal Class..... A class that is designed to receive principal payments using a predetermined
principal balance schedule but is not designated as a Planned Principal Class or
Targeted Principal Class. In many cases, the schedule is derived by assuming two
constant prepayment rates for the underlying Mortgage Assets. These two rates are
the endpoints for the 'structuring range' for the Scheduled Principal Class.
Sequential Pay................ Classes that receive principal payments in a prescribed sequence, that do not
have predetermined principal balance schedules and that under all circumstances
receive payments of principal continuously from the first Distribution Date on
which they receive principal until they are retired. A single class that receives
principal payments before or after all other classes in the same Series of
Certificates may be identified as a Sequential Pay Class.
Strip......................... A class that receives a constant proportion, or 'strip,' of the principal
payments on the underlying Mortgage Assets or other assets of the Trust Fund.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
<S> <C>
Support Class (also sometimes
referred to as 'companion
classes')................... A class that receives principal payments on any Distribution Date only if
scheduled payments have been made on specified Planned Principal Classes,
Targeted Principal Classes and/or Scheduled Principal Classes.
Targeted Principal Class (also
sometimes referred to as
'TACs')..................... A class that is designed to receive principal payments using a predetermined
principal balance schedule derived by assuming a single constant prepayment rate
for the underlying Mortgage Assets.
INTEREST TYPES
Fixed Rate.................... A class with an interest rate that is fixed throughout the life of the class.
Floating Rate................. A class with an interest rate that resets periodically based upon a designated
index and that varies directly with changes in such index.
Inverse Floating Rate......... A class with an interest rate that resets periodically based upon a designated
index and that varies inversely with changes in such index.
Variable Rate................. A class with an interest rate that resets periodically and is calculated by
reference to the rate or rates of interest applicable to specified assets or
instruments (e.g., the Mortgage Rates borne by the underlying Mortgage Loans).
Interest Only................. A class that receives some or all of the interest payments made on the underlying
Mortgage Assets or other assets of the Trust Fund and little or no principal.
Interest Only Classes have either a nominal principal balance or a notional
amount. A nominal principal balance represents actual principal that will be paid
on the class. It is referred to as nominal since it is extremely small compared
to other classes. A notional amount is the amount used as a reference to
calculate the amount of interest due on an Interest Only Class that is not
entitled to any distributions in respect of principal.
Principal Only................ A class that does not bear interest and is entitled to receive only distributions
in respect of principal.
Partial Accrual............... A class that accretes a portion of the amount of accrued interest thereon, which
amount will be added to the principal balance of such class on each applicable
Distribution Date, with the remainder of such accrued interest to be distributed
currently as interest on such class. Such accretion may continue until a
specified event has occurred or until such Partial Accrual Class is retired.
Accrual....................... A class that accretes the amount of accrued interest otherwise distributable on
such class, which amount will be added as principal to the principal balance of
such class on each applicable Distribution Date. Such accretion may continue
until some specified event has occurred or until such Accrual Class is retired.
</TABLE>
INDICES APPLICABLE TO FLOATING RATE AND INVERSE FLOATING RATE CLASSES
LIBOR
Unless otherwise specified in the related Prospectus Supplement, on the
LIBOR Determination Date for each class of Certificates of a Series as to which
the applicable interest rate is determined by reference to an index denominated
as LIBOR, the Person designated in the related Agreement (the 'Calculation
Agent') will determine LIBOR by reference to the quotations, as set forth on the
Reuters Screen LIBO Page (as defined in the International Swap Dealers
Association, Inc. Code of Standard Wording, Assumptions and Provisions for
Swaps, 1986 Edition), offered by the principal London office of each of the
designated reference banks meeting the criteria set forth herein (the 'Reference
Banks') for making one-month United States dollar deposits in
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leading banks in the London Interbank market, as of 11:00 a.m. (London time) on
such LIBOR Determination Date. In lieu of relying on the quotations for those
Reference Banks that appear at such time on the Reuters Screen LIBO Page, the
Calculation Agent will request each of the Reference Banks to provide such
offered quotations at such time.
LIBOR will be established by the Calculation Agent on each LIBOR
Determination Date as follows:
(a) If on any LIBOR Determination Date two or more Reference Banks
provide such offered quotations, LIBOR for the next Interest Accrual Period
shall be the arithmetic mean of such offered quotations (rounded upwards if
necessary to the nearest whole multiple of 1/32%).
(b) If on any LIBOR Determination Date only one or none of the
Reference Banks provides such offered quotations, LIBOR for the next
Interest Accrual Period shall be whichever is the higher of (i) LIBOR as
determined on the previous LIBOR Determination Date or (ii) the Reserve
Interest Rate. The 'Reserve Interest Rate' shall be the rate per annum
which the Calculation Agent determines to be either (i) the arithmetic mean
(rounded upwards if necessary to the nearest whole multiple of 1/32%) of
the one-month United States dollar lending rates that New York City banks
selected by the Calculation Agent are quoting, on the relevant LIBOR
Determination Date, to the principal London offices of at least two of the
Reference Banks to which such quotations are, in the opinion of the
Calculation Agent being so made, or (ii) in the event that the Calculation
Agent can determine no such arithmetic mean, the lowest one-month United
States dollar lending rate which New York City banks selected by the
Calculation Agent are quoting on such LIBOR Determination Date to leading
European banks.
(c) If on any LIBOR Determination Date for a class specified in the
related Prospectus Supplement, the Calculation Agent is required but is
unable to determine the Reserve Interest Rate in the manner provided in
paragraph (b) above, LIBOR for the next Interest Accrual Period shall be
LIBOR as determined on the preceding LIBOR Determination Date, or, in the
case of the first LIBOR Determination Date, LIBOR shall be deemed to be the
per annum rate specified as such in the related Prospectus Supplement.
Each Reference Bank (i) shall be a leading bank engaged in transactions in
Eurodollar deposits in the international Eurocurrency market; (ii) shall not
control, be controlled by, or be under common control with the Calculation
Agent; and (iii) shall have an established place of business in London. If any
such Reference Bank should be unwilling or unable to act as such or if
appointment of any such Reference Bank is terminated, another leading bank
meeting the criteria specified above will be appointed.
The establishment of LIBOR on each LIBOR Determination Date by the
Calculation Agent and its calculation of the rate of interest for the applicable
classes for the related Interest Accrual Period shall (in the absence of
manifest error) be final and binding.
COFI
The Eleventh District Cost of Funds Index is designed to represent the
monthly weighted average cost of funds for savings institutions in Arizona,
California and Nevada that are member institutions of the Eleventh Federal Home
Loan Bank District (the 'Eleventh District'). The Eleventh District Cost of
Funds Index for a particular month reflects the interest costs paid on all types
of funds held by Eleventh District member institutions and is calculated by
dividing the cost of funds by the average of the total amount of those funds
outstanding at the end of that month and of the prior month and annualizing and
adjusting the result to reflect the actual number of days in the particular
month. If necessary, before these calculations are made, the component figures
are adjusted by the Federal Home Loan Bank of San Francisco ('FHLBSF') to
neutralize the effect of events such as member institutions leaving the Eleventh
District or acquiring institutions outside the Eleventh District. The Eleventh
District Cost of Funds Index is weighted to reflect the relative amount of each
type of funds held at the end of the relevant month. The major components of
funds of Eleventh District member institutions are: (i) savings deposits, (ii)
time deposits, (iii) FHLBSF advances, (iv) repurchase agreements and (v) all
other borrowings. Because the component funds represent a variety of maturities
whose costs may react in different ways to changing conditions, the Eleventh
District Cost of Funds Index does not necessarily reflect current market rates.
A number of factors affect the performance of the Eleventh District Cost of
Funds Index, which may cause it to move in a manner different from indices tied
to specific interest rates, such as United States Treasury Bills or LIBOR.
Because the liabilities upon which the Eleventh District Cost of Funds Index is
based were issued at
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various times under various market conditions and with various maturities, the
Eleventh District Cost of Funds Index may not necessarily reflect the prevailing
market interest rates on new liabilities of similar maturities. Moreover, as
stated above, the Eleventh District Cost of Funds Index is designed to represent
the average cost of funds for Eleventh District savings institutions for the
month prior to the month in which it is due to be published. Additionally, the
Eleventh District Cost of Funds Index may not necessarily move in the same
direction as market interest rates at all times, since as longer term deposits
or borrowings mature and are renewed at prevailing market interest rates, the
Eleventh District Cost of Funds Index is influenced by the differential between
the prior and the new rates on those deposits or borrowings. In addition,
movements of the Eleventh District Cost of Funds Index, as compared to other
indices tied to specific interest rates, may be affected by changes instituted
by the FHLBSF in the method used to calculate the Eleventh District Cost of
Funds Index.
The FHLBSF publishes the Eleventh District Cost of Funds Index in its
monthly Information Bulletin. Any individual may request regular receipt by mail
of Information Bulletins by writing the Federal Home Loan Bank of San Francisco,
P.O. Box 7948, 600 California Street, San Francisco, California 94120, or by
calling (415) 616-1000. The Eleventh District Cost of Funds Index may also be
obtained by calling the FHLBSF at (415) 616-2600.
Listed below are historical values of the Eleventh District Cost of Funds
Index since January 1989 as reported by the FHLBSF:
<TABLE>
<CAPTION>
YEAR
----------------------------------------------
MONTH (1) 1993 1992 1991 1990 1989
- --------------------------------------------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
January............................................ 4.360% 6.002% 7.858% 8.369% 8.125%
February........................................... 4.330 5.800 7.848 8.403 8.346
March.............................................. 4.245 5.611 7.654 8.258 8.423
April.............................................. 4.171 5.427 7.501 8.211 8.648
May................................................ 4.103 5.290 7.329 8.171 8.797
June............................................... 4.050 5.258 7.155 8.086 8.923
July............................................... 3.998 5.069 6.998 8.109 8.844
August............................................. 3.958 4.874 6.845 8.075 8.763
September.......................................... 3.881 4.805 6.714 8.091 8.807
October............................................ 3.823 4.597 6.566 8.050 8.643
November........................................... 3.822 4.508 6.414 8.044 8.595
December........................................... 4.432 6.245 7.963 8.476
</TABLE>
- ------------------------------
(1) The Eleventh District Cost of Funds Index reflects the weighted average
cost of funds of the members of the Eleventh District for the month
indicated. It is usually announced by the FHLBSF on the last working day of
the month following the month in which the cost of funds was incurred.
The FHLBSF has stated in its Information Bulletin that the Eleventh
District Cost of Funds Index for a month 'will be announced on or near the last
working day' of the following month and also has stated that it 'cannot
guarantee the announcement' of such index on an exact date. So long as such
index for a month is announced on or before the tenth day of the second
following month, the interest rate for each class of Certificates of a Series as
to which the applicable interest rate is determined by reference to an index
denominated as COFI (each, a class of 'COFI Certificates') for the Interest
Accrual Period commencing in such second following month will be based on the
Eleventh District Cost of Funds Index for the second preceding month. If
publication is delayed beyond such tenth day, such interest rate will be based
on the Eleventh District Cost of Funds Index for the third preceding month.
Unless otherwise specified in the related Prospectus Supplement, if on the
tenth day of the month in which any Interest Accrual Period commences for a
class of COFI Certificates the most recently published Eleventh District Cost of
Funds Index relates to a month prior to the third preceding month, the index for
such current Interest Accrual Period and for each succeeding Interest Accrual
Period will, except as described in the next to last sentence of this paragraph,
be based on the National Monthly Median Cost of Funds Ratio to SAIF-Insured
Institutions (the 'National Cost of Funds Index') published by the Office of
Thrift Supervision (the 'OTS') for the third preceding month (or the fourth
preceding month if the National Cost of Funds Index for the third preceding
month has not been published on such tenth day of an Interest Accrual Period).
Information on the
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National Cost of Funds Index may be obtained by writing the OTS at 1700 G
Street, N.W., Washington, D.C. 20552 or calling (202) 906-6677, and the current
National Cost of Funds Index may be obtained by calling (202) 906-6988. If on
any such tenth day of the month in which an Interest Accrual Period commences
the most recently published National Cost of Funds Index relates to a month
prior to the fourth preceding month, the applicable index for such Interest
Accrual Period and each succeeding Interest Accrual Period will be based on
LIBOR, as determined by the Calculation Agent in accordance with the Agreement
relating to such Series of Certificates. A change of index from the Eleventh
District Cost of Funds Index to an alternative index will result in a change in
the index level, and, particularly if LIBOR is the alternative index, could
increase its volatility.
The establishment of COFI by the Calculation Agent and its calculation of
the rates of interest for the applicable classes for the related Interest
Accrual Period shall (in the absence of manifest error) be final and binding.
Treasury Index
Unless otherwise specified in the related Prospectus Supplement, on the
Treasury Index Determination Date for each class of Certificates of a Series as
to which the applicable interest rate is determined by reference to an index
denominated as a Treasury Index, the Calculation Agent will ascertain the
Treasury Index for Treasury securities of the maturity and for the period (or,
if applicable, date) specified in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, the Treasury Index for
any period means the average of the yield for each business day during the
period specified therein (and for any date means the yield for such date),
expressed as a per annum percentage rate, on (i) U.S. Treasury securities
adjusted to the 'constant maturity' (as further described below) specified in
such Prospectus Supplement or (ii) if no 'constant maturity' is so specified,
U.S. Treasury securities trading on the secondary market having the maturity
specified in such Prospectus Supplement, in each case as published by the
Federal Reserve Board in its Statistical Release No. H.15 (519). Statistical
Release No. H.15 (519) is published on Monday or Tuesday of each week and may be
obtained by writing or calling the Publications Department at the Board of
Governors of the Federal Reserve System, 21st and C Streets, Washington, D.C.
20551 (202) 452-3244. If the Calculation Agent has not yet received Statistical
Release No. H.15 (519) for such week, then it will use such Statistical Release
from the immediately preceding week.
Yields on U.S. Treasury securities at 'constant maturity' are derived from
the U.S. Treasury's daily yield curve. This curve, which relates the yield on a
security to its time to maturity, is based on the closing market bid yields on
actively traded Treasury securities in the over-the-counter market. These market
yields are calculated from composites of quotations reported by five leading
U.S. Government securities dealers to the Federal Reserve Bank of New York. This
method provides a yield for a given maturity even if no security with that exact
maturity is outstanding. In the event that the Treasury Index is no longer
published, a new index based upon comparable data and methodology will be
designated in accordance with the Agreement relating to the particular Series of
Certificates. The Calculation Agent's determination of the Treasury Index, and
its calculation of the rates of interest for the applicable classes for the
related Interest Accrual Period shall (in the absence of manifest error) be
final and binding.
Prime Rate
Unless otherwise specified in the related Prospectus Supplement, on the
Prime Rate Determination Date for each class of Certificates of a Series as to
which the applicable interest rate is determined by reference to an index
denominated as the Prime Rate, the Calculation Agent will ascertain the Prime
Rate for the related Interest Accrual Period. Unless otherwise specified in the
related Prospectus Supplement, the Prime Rate for an Interest Accrual Period
will be the 'Prime Rate' as published in the 'Money Rates' section of The Wall
Street Journal (or if not so published, the 'Prime Rate' as published in a
newspaper of general circulation selected by the Calculation Agent in its sole
discretion) on the related Prime Rate Determination Date. If a prime rate range
is given, then the average of such range will be used. In the event that the
Prime Rate is no longer published, a new index based upon comparable data and
methodology will be designated in accordance with the Agreement relating to the
particular Series of Certificates. The Calculation Agent's determination of the
Prime Rate and its calculation of the rates of interest for the related Interest
Accrual Period shall (in the absence of manifest error) be final and binding.
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BOOK-ENTRY CERTIFICATES
If so specified in the related Prospectus Supplement, one or more classes
of the Certificates of any Series (each, a class of 'Book-Entry Certificates')
may be initially issued through the book-entry facilities of The Depository
Trust Company (together with any successor depository selected by the Depositor,
the 'Depository'). Each class of Book-Entry Certificates of a Series will be
issued in one or more certificates which equal the aggregate initial Class
Certificate Balance (as defined herein) of each such class and which will be
held by a nominee of the Depository. Unless otherwise provided in the related
Prospectus Supplement, the following generally describes the procedures that
will be applicable to any class of Book-Entry Certificates.
Beneficial interests in the Book-Entry Certificates of a Series will be
held indirectly by investors through the book-entry facilities of the
Depository, as described herein. Investors may hold such beneficial interests in
the Book-Entry Certificates in minimum denominations representing an original
principal amount of $1,000 and integral multiples in excess thereof.
Accordingly, the Depository or its nominee is expected to be the holder of
record of the Book-Entry Certificates. Except as described below, no person
acquiring a Book-Entry Certificate (each, a 'beneficial owner') will be entitled
to receive a physical certificate representing such Certificate (a 'Definitive
Certificate').
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a 'Financial Intermediary') that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of the Depository (or of a participating firm that acts as agent for the
Financial Intermediary, whose interest will in true be recorded on the records
of the Depository, if the beneficial owner's Financial Intermediary is not a
Depository participant). Therefore, the beneficial owner must rely on the
foregoing procedures to evidence its beneficial ownership of a Book-Entry
Certificate. Beneficial ownership of a Book-Entry Certificate may only be
transferred by compliance with the procedures of such Financial Intermediaries
and Depository participants.
In accordance with its normal procedures, the Depository is expected to
record the positions held by each Depository participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the rules, regulations and procedures governing the Depository and
Depository participants as in effect from time to time.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to the Depository. The Depository will be
responsible for crediting the amount of such payments to the accounts of the
applicable Depository participants in accordance with the Depository's normal
procedures. Each Depository participant will be responsible for disbursing such
payments to the beneficial owners of the Book-Entry Certificates that it
represents and to each Financial Intermediary for which it acts as agent. Each
such Financial Intermediary will be responsible for disbursing funds to the
beneficial owners of the Book-Entry Certificates that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since payments will be
forwarded by the Trustee to the Depository or its nominee, as the case may be,
as holder of record of the Book-Entry Certificates. Because the Depository can
act only on behalf of Financial Intermediaries, the ability of a beneficial
owner to pledge Book-Entry Certificates to persons or entities that do not
participate in the Depository system, or otherwise take actions in respect of
such Book-Entry Certificates, may be limited due to the lack of physical
certificates for such Book-Entry Certificates. In addition, issuance of the
Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Unless and until Definitive Certificates are issued, it is anticipated that
the only 'Certificateholder' of the Book-Entry Certificates will be the
Depository or its nominee. Beneficial owners of the Book-Entry Certificates will
not be Certificateholders, as that term will be used in the Agreement relating
to such series of Certificates. Beneficial owners are only permitted to exercise
the rights of Certificateholders indirectly through Financial Intermediaries and
the Depository. Monthly and annual reports on the related Trust Fund provided to
the Depository or its nominee, as the case may be, as holder of record of the
Book-Entry Certificates, may be made available to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating
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and affecting the Depository, and to the Financial Intermediaries to whose
Depository accounts the Book-Entry Certificates of such beneficial owners are
credited.
Unless otherwise specified in the related Prospectus Supplement, unless and
until Definitive Certificates are issued, the Depository will take any action
permitted to be taken by the holders of the Book-Entry Certificates of a
particular Series under the related Agreement only at the direction of one or
more Financial Intermediaries to whose Depository accounts such Book-Entry
Certificates are credit to the extent that such actions are taken on behalf of
Financial Intermediaries whose holdings include such Book-Entry Certificates.
Unless otherwise specified in the related Prospectus Supplement, Definitive
Certificates will be issued to beneficial owners of Book-Entry Certificates, or
their nominees, rather than to the Depository, only if (a) the Depository or the
Depositor advises the Trustee in writing that the Depository is no longer
willing, qualified or able to discharge properly its responsibilities as nominee
and depository with respect to the Book-Entry Certificates and the Depositor or
the Trustee is unable to locate a qualified successor; (b) the Depositor, at its
sole option, elects to terminate the book-entry system through the Depository;
or (c) after the occurrence of an Event of Default, beneficial owners of
Certificates representing not less than 51% of the aggregate Percentage
Interests evidenced by each class of Certificates of the related Series issued
as Book-Entry Certificates advise the Trustee and the Depository through the
Financial Intermediaries in writing that the continuation of a book-entry system
through the Depository (or a successor thereto) is no longer in the best
interests of the beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability of Definitive
Certificates. Upon surrender by the Depository of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue the Definitive Certificates, and
thereafter the Trustee will recognize the holders of such Definitive
Certificates as Certificateholders under the Agreement relating to such Series
of Certificates.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes of a
Series of Certificates or with respect to the Mortgage Assets in the related
Trust Fund. Credit enhancement may be in the form of a limited financial
guaranty policy issued by an entity named in the related Prospectus Supplement,
the subordination of one or more classes of the Certificates 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, bankruptcy bond, special hazard
insurance policy, surety bond, letter of credit, guaranteed investment contract
or other method of credit enhancement described in the related Prospectus
Supplement, or any combination of the foregoing. Unless otherwise specified in
the related Prospectus Supplement, no credit enhancement will provide protection
against all risks of loss or guarantee repayment of the entire principal balance
of the Certificates and interest thereon. If losses occur which exceed the
amount covered by credit enhancement or which are not covered by the credit
enhancement, Certificateholders will bear their allocable share of any
deficiencies.
SUBORDINATION
If so specified in the related Prospectus Supplement, the rights of holders
of one or more classes of Subordinated Certificates (the 'Subordinated
Certificateholders') will be subordinate to the rights of holders of one or more
other classes of Senior Certificates (the 'Senior Certificateholders') of such
Series to distributions in respect of scheduled principal, Principal
Prepayments, interest or any combination thereof that otherwise would have been
payable to holders of Subordinated Certificates under the circumstances and to
the extent specified in the related Prospectus Supplement. If specified in the
related Prospectus Supplement, delays in receipt of scheduled payments on the
Mortgage Assets and losses with respect to the Mortgage Assets will be borne
first by the various classes of Subordinated Certificates and thereafter by the
various classes of Senior Certificates, in each case under the circumstances and
subject to the limitations specified in such related Prospectus Supplement. The
aggregate distributions in respect of delinquent payments on the Mortgage Assets
over the lives of the Certificates or at any time, the aggregate losses in
respect of Mortgage Assets which must be borne by the Subordinated Certificates
by virtue of subordination and the amount of the distributions
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otherwise distributable to the Subordinated Certificateholders that will be
distributable to Senior Certificateholders on any Distribution Date may be
limited as specified in the related Prospectus Supplement. If aggregate
distributions in respect of delinquent payments on the Mortgage Assets or
aggregate losses in respect of such Mortgage Assets were to exceed the amount
specified in the related Prospectus Supplement, Senior Certificateholders would
experience losses on the Certificates.
If specified in the related Prospectus Supplement, various classes of
Senior Certificates and Subordinated Certificates may themselves be subordinate
in their right to receive certain distributions to other classes of Senior and
Subordinated Certificates, respectively, through a cross support mechanism or
otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events or
(iv) otherwise, in each case as specified in the related Prospectus Supplement.
As between classes of Subordinated Certificates, payments to Senior
Certificateholders on account of delinquencies or losses and payments to the
Reserve Fund will be allocated as specified in the related Prospectus
Supplement.
MORTGAGE POOL INSURANCE POLICIES
If specified in the related Prospectus Supplement relating to a Mortgage
Pool, a separate mortgage pool insurance policy ('Mortgage Pool Insurance
Policy') will be obtained for the Mortgage Pool and issued by the insurer (the
'Pool Insurer') named in such Prospectus Supplement. Each Mortgage Pool
Insurance Policy will, subject to the limitations described below, cover loss by
reason of default in payment on Mortgage Loans in the Mortgage Pool in an amount
equal to a percentage specified in such Prospectus Supplement of the aggregate
principal balance of such Mortgage Loans on the Cut-off Date which are not
covered as to their entire outstanding principal balances by Primary Mortgage
Insurance Policies. As more fully described below, the Master Servicer will
present claims thereunder to the Pool Insurer on behalf of itself, the Trustee
and the Certificateholders. The Mortgage Pool Insurance Policies, however, are
not blanket policies against loss, since claims thereunder may be made only
respecting particular defaulted Mortgage Loans and only upon satisfaction of
certain conditions precedent described below. Unless otherwise specified in the
related Prospectus Supplement, the Mortgage Pool Insurance Policies will not
cover losses due to a failure to pay or denial of a claim under a Primary
Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool Insurance Policy will provide that no claims may be validly
presented unless (i) any required Primary Mortgage Insurance Policy is in effect
for the defaulted Mortgage Loan and a claim thereunder has been submitted and
settled; (ii) hazard insurance on the related Mortgaged Property has been kept
in force and real estate taxes and other protection and preservation expenses
have been paid; (iii) if there has been physical loss or damage to the Mortgaged
Property, it has been restored to its physical condition (reasonable wear and
tear excepted) at the time of issuance of the policy; and (iv) the insured has
acquired good and merchantable title to the Mortgaged Property free and clear of
liens except certain permitted encumbrances. Upon satisfaction of these
conditions, the Pool Insurer will have the option either (a) to purchase the
Mortgaged Property at a price equal to the principal balance of the related
Mortgage Loan plus accrued and unpaid interest at the Mortgage Rate to the date
of such purchase and certain expenses incurred by the Master Servicer on behalf
of the Trustee and Certificateholders or (b) to pay the amount by which the sum
of the principal balance of the defaulted Mortgage Loan plus accrued and unpaid
interest at the Mortgage Rate to the date of payment of the claim and the
aforementioned expenses exceeds the proceeds received from an approved sale of
the Mortgaged Property, in either case net of certain amounts paid or assumed to
have been paid under the related Primary Mortgage Insurance Policy. If any
Mortgaged Property is damaged, and proceeds, if any, from the related hazard
insurance policy or the applicable Special Hazard Insurance Policy are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under the Mortgage Pool Insurance Policy, the Master Servicer will not
be required to expend its own funds to restore the damaged property unless it
determines that (i) such restoration will increase the proceeds to
Certificateholders on liquidation of the Mortgage Loan after reimbursement of
the Master Servicer for its expenses and (ii) such expenses will be recoverable
by it through proceeds of the sale of the Mortgaged Property or proceeds of the
related Mortgage Pool Insurance Policy or any related Primary Mortgage Insurance
Policy.
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Unless otherwise specified in the related Prospectus Supplement, no
Mortgage Pool Insurance Policy will insure (and many Primary Mortgage Insurance
Policies do not insure) against loss sustained by reason of a default arising
from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Mortgagor, the
originator or persons involved in the origination thereof, or (ii) failure to
construct a Mortgaged Property in accordance with plans and specifications. A
failure of coverage attributable to one of the foregoing events might result in
a breach of the related Seller's representations described above and, in such
event, might give rise to an obligation on the part of such Seller to repurchase
the defaulted Mortgage Loan if the breach cannot be cured by such Seller. No
Mortgage Pool Insurance Policy will cover (and many Primary Mortgage Insurance
Policies do not cover) a claim in respect of a defaulted Mortgage Loan occurring
when the servicer of such Mortgage Loan, at the time of default or thereafter,
was not approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Mortgage Pool Insurance Policy will be
reduced over the life of the related Certificates by the aggregate dollar amount
of claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims paid
will include certain expenses incurred by the Master Servicer as well as accrued
interest on delinquent Mortgage Loans to the date of payment of the claim,
unless otherwise specified in the related Prospectus Supplement. Accordingly, if
aggregate net claims paid under any Mortgage Pool Insurance Policy reach the
original policy limit, coverage under that Mortgage Pool Insurance Policy will
be exhausted and any further losses will be borne by the Certificateholders.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy will be obtained for the Mortgage Pool and will be
issued by the insurer (the 'Special Hazard Insurer') named in such Prospectus
Supplement. Each Special Hazard Insurance Policy will, subject to limitations
described below, protect holders of the related Certificates from (i) loss by
reason of damage to Mortgaged Properties caused by certain hazards (including
earthquakes and, to a limited extent, tidal waves and related water damage or as
otherwise specified in the related Prospectus Supplement) not insured against
under the standard form of hazard insurance policy for the respective states in
which the Mortgaged Properties are located or under a flood insurance policy if
the Mortgaged Property is located in a federally designated flood area and (ii)
loss caused by reason of the application of the coinsurance clause contained in
hazard insurance policies. See 'The Pooling and Servicing Agreement -- Hazard
Insurance'. No Special Hazard Insurance Policy will cover losses occasioned by
fraud or conversion by the Trustee or Master Servicer, war, insurrection, civil
war, certain governmental action, errors in design, faulty workmanship or
materials (except under certain circumstances), nuclear or chemical reaction,
flood (if the Mortgaged Property is located in a federally designated flood
area), nuclear or chemical contamination and certain other risks. The amount of
coverage under any Special Hazard Insurance Policy will be specified in the
related Prospectus Supplement. Each Special Hazard Insurance Policy will provide
that no claim may be paid unless hazard and, if applicable, flood insurance on
the property securing the Mortgage Loan have been kept in force and other
protection and preservation expenses have been paid.
Subject to the foregoing limitations, and unless otherwise specified in the
related Prospectus Supplement, each Special Hazard Insurance Policy will provide
that where there has been damage to property securing a foreclosed Mortgage Loan
(title to which has been acquired by the insured) and to the extent such damage
is not covered by the hazard insurance policy or flood insurance policy, if any,
maintained by the Mortgagor or the Master Servicer, the Special Hazard Insurer
will pay the lesser of (i) the cost of repair or replacement of such property or
(ii) upon transfer of the property to the Special Hazard Insurer, the unpaid
principal balance of such Mortgage Loan at the time of acquisition of such
property by foreclosure or deed in lieu of foreclosure, plus accrued interest to
the date of claim settlement and certain expenses incurred by the Master
Servicer with respect to such property. If the unpaid principal balance of a
Mortgage Loan plus accrued interest and certain expenses is paid by the Special
Hazard Insurer, the amount of further coverage under the related Special Hazard
Insurance Policy will be reduced by such amount less any net proceeds from the
sale of the property. Any amount paid as the cost of repair of such property
will further reduce coverage by such amount. So long as a Mortgage Pool
Insurance Policy remains in effect, the payment by the Special Hazard Insurer of
the cost of repair or of the unpaid principal balance of the related Mortgage
Loan plus accrued interest and certain expenses
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will not affect the total insurance proceeds paid to Certificateholders, but
will affect the relative amounts of coverage remaining under the related Special
Hazard Insurance Policy and Mortgage Pool Insurance Policy.
To the extent specified in the Prospectus Supplement, the Master Servicer
may deposit cash, an irrevocable letter of credit or any other instrument
acceptable to each nationally recognized rating agency rating the Certificates
of the related Series in a special trust account to provide protection in lieu
of or in addition to that provided by a Special Hazard Insurance Policy. The
amount of any Special Hazard Insurance Policy or of the deposit to the special
trust account in lieu thereof relating to such Certificates may be reduced so
long as any such reduction will not result in a downgrading of the rating of
such Certificates by any such rating agency.
BANKRUPTCY BONDS
If specified in the related Prospectus Supplement, a bankruptcy bond (the
'Bankruptcy Bond') to cover losses resulting from proceedings under the federal
Bankruptcy Code with respect to a Mortgage Loan will be issued by an insurer
named in such Prospectus Supplement. Each Bankruptcy Bond will cover, to the
extent specified in the related Prospectus Supplement, certain losses resulting
from a reduction by a bankruptcy court of scheduled payments of principal 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. The
required amount of coverage under each Bankruptcy Bond will be set forth in the
related Prospectus Supplement. Coverage under a Bankruptcy Bond may be cancelled
or reduced by the Master Servicer if such cancellation or reduction would not
adversely affect the then current rating or ratings of the related Certificates.
See 'Certain Legal Aspects of the Mortgage Loans -- Anti-Deficiency Legislation
and Other Limitations on Lenders' herein.
To the extent specified in the Prospectus Supplement, the Master Servicer
may deposit cash, an irrevocable letter of credit or any other instrument
acceptable to each nationally recognized rating agency rating the Certificates
of the related Series in a special trust account to provide protection in lieu
of or in addition to that provided by a Bankruptcy Bond. The amount of any
Bankruptcy Bond or of the deposit to the special trust account in lieu thereof
relating to such Certificates may be reduced so long as any such reduction will
not result in a downgrading of the rating of such Certificates by any such
rating agency.
RESERVE FUND
If so specified in the related Prospectus Supplement, credit support with
respect to a Series of Certificates may be provided by the establishment and
maintenance with the Trustee for such Series of Certificates, in trust, of one
or more reserve funds (the 'Reserve Fund') for such Series. The related
Prospectus Supplement will specify whether or not a Reserve Fund will be
included in the Trust Fund for such Series.
The Reserve Fund for a Series will be funded (i) by the deposit therein of
cash, U.S. Treasury securities or 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 the
related Prospectus Supplement, (ii) by the deposit therein from time to time of
certain amounts, as specified in the related Prospectus Supplement, to which the
Subordinated Certificateholders, if any, would otherwise be entitled or (iii) in
such other manner as may be specified in the related Prospectus Supplement.
Any amounts on deposit in the Reserve Fund and the proceeds of any other
instrument deposited therein upon maturity will be held in cash or will be
invested in 'Permitted Investments' which, unless otherwise specified in the
related Prospectus Supplement, will include obligations of the United States and
certain agencies thereof, certificates of deposit, certain commercial paper,
time deposits and bankers acceptances sold by eligible commercial banks and
certain repurchase agreements of United States government securities with
eligible commercial banks. If a letter of credit is deposited with the Trustee,
such letter of credit will be irrevocable. Unless otherwise specified in the
related Prospectus Supplement, any instrument deposited therein will name the
Trustee, in its capacity as trustee for the Certificateholders, as beneficiary
and will be issued by an entity acceptable to each rating agency that rates the
Certificates. Additional information with respect to such instruments deposited
in the Reserve Funds will be set forth in the related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Fund for distribution to the
Certificateholders for the purposes, in the manner and at the times specified in
the related Prospectus Supplement.
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CROSS SUPPORT
If specified in the related Prospectus Supplement, the beneficial ownership
of separate groups of assets included in a Trust Fund may be evidenced by
separate classes of the related Series of Certificates. In such case, credit
support may be provided by a cross support feature which requires that
distributions be made with respect to Certificates evidencing a beneficial
ownership interest in other asset groups within the same Trust Fund. The related
Prospectus Supplement for a Series that includes a cross support feature will
describe the manner and conditions for applying such cross support feature.
If specified in the related Prospectus Supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two or more
related Trust Funds. If applicable, the related Prospectus Supplement will
identify the Trust Funds to which such credit support relates and the manner of
determining the amount of the coverage provided thereby and of the application
of such coverage to the identified Trust Funds.
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR
INSTRUMENTS OR AGREEMENTS
If specified in the related Prospectus Supplement, a Trust Fund may also
include insurance, guaranties, surety bonds, letters of credit or similar
arrangements for the purpose of (i) maintaining timely payments or providing
additional protection against losses on the assets included in such Trust Fund,
(ii) paying administrative expenses or (iii) establishing a minimum reinvestment
rate on the payments made in respect of such assets or principal payment rate on
such assets. Such arrangements may include agreements under which
Certificateholders are entitled to receive amounts deposited in various accounts
held by the Trustee upon the terms specified in such Prospectus Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Certificates will
be affected primarily by the amount and timing of principal payments received on
or in respect of the Mortgage Assets included in the related Trust Fund. The
original terms to maturity of the underlying mortgage loans with respect to the
Mortgage Assets in a given Mortgage Pool will vary depending upon the type of
mortgage loans included therein, and each Prospectus Supplement will contain
information with respect to the type and maturities of such mortgage loans.
Unless otherwise specified in the related Prospectus Supplement, the mortgage
loans may be prepaid without penalty in full or in part at any time. The
prepayment experience on the underlying mortgage loans with respect to the
Mortgage Assets will affect the life of the related Series of Certificates.
A number of factors, including homeowner mobility, economic conditions, the
presence and enforceability of due-on-sale clauses, mortgage market interest
rates and the availability of mortgage funds, may affect the prepayment
experience of mortgage loans.
Unless otherwise provided in the related Prospectus Supplement, all
conventional Mortgage Loans will contain due-on-sale provisions permitting the
mortgagee to accelerate the maturity of the loan upon sale or certain transfers
by the Mortgagor of the underlying Mortgaged Property. Mortgage Loans insured by
the FHA and Mortgage Loans partially guaranteed by the VA are assumable with the
consent of the FHA and the VA, respectively. Thus, the rate of prepayments on
such Mortgage Loans may be lower than that on conventional Mortgage Loans
bearing comparable interest rates. Unless otherwise provided in the related
Prospectus Supplement, the Master Servicer generally will enforce any
due-on-sale or due-on-encumbrance clause, to the extent it has knowledge of the
conveyance or further encumbrance or the proposed conveyance or proposed further
encumbrance of the Mortgaged Property and reasonably believes that it is
entitled to do so under applicable law; provided, however, that the Master
Servicer will not take any enforcement action that would impair or threaten to
impair any recovery under any related insurance policy. See 'The Pooling and
Servicing Agreement -- Collection Procedures' and 'Certain Legal Aspects of the
Mortgage Loans' herein for a description of certain provisions of each Agreement
and certain legal developments that may affect the prepayment experience on the
Mortgage Loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Mortgage Rates borne by the Mortgage Loans, the Mortgage
Loans are likely to be subject to higher prepayment rates than if prevailing
interest rates remain at or above such Mortgage Rates. Conversely, if prevailing
interest rates rise appreciably above the Mortgage Rates
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borne by the Mortgage Loans, the Mortgage Loans are likely to experience a lower
prepayment rate than if prevailing rates remain at or below such Mortgage Rates.
However, there can be no assurance that such will be the case.
When a full prepayment is made on a Mortgage Loan, the Mortgagor is charged
interest on the principal amount of the Mortgage Loan so prepaid only for the
number of days in the month actually elapsed up to the date of the prepayment
rather than for a full month. Unless otherwise specified in the related
Prospectus Supplement, the effect of prepayments in full will be to reduce the
amount of interest passed through in the following month to Certificateholders
because interest on the principal amount of any Mortgage Loan so prepaid will be
paid only to the date of prepayment. Partial prepayments in a given month may be
applied to the outstanding principal balances of the Mortgage Loans so prepaid
on the first day of the month of receipt or the month following receipt. In the
latter case, partial prepayments will not reduce the amount of interest passed
through in such month. Unless otherwise specified in the related Prospectus
Supplement, both full and partial prepayments will not be passed through until
the month following receipt.
The effective yield to Certificateholders will be slightly lower than the
yield otherwise produced by the applicable Pass-Through Rate and purchase price
because while interest will accrue on each Mortgage Loan from the first day of
the month (unless otherwise provided in the related Prospectus Supplement), the
distribution of such interest will not be made earlier than the month following
the month of accrual.
Under certain circumstances, the Master Servicer or the holders of the
residual interests in a REMIC may have the option to purchase the assets of a
Trust Fund thereby effecting earlier retirement of the related Series of
Certificates. See 'The Pooling and Servicing Agreement -- Termination; Optional
Termination' herein.
Factors other than those identified herein and in the related Prospectus
Supplement could significantly affect principal prepayments at any time and over
the lives of the Certificates. The relative contribution of the various factors
affecting prepayment may also vary from time to time. There can be no assurance
as to the rate of payment of principal of the Mortgage Assets at any time or
over the lives of the Certificates.
The Prospectus Supplement relating to a Series of Certificates will discuss
in greater detail the effect of the rate and timing of principal payments
(including Principal Prepayments), delinquencies and losses on the yield,
weighted average lives and maturities of such Certificates.
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THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of certain provisions of the Agreement which
are not described elsewhere in this Prospectus. Where particular provisions or
terms used in the Agreement are referred to, such provisions or terms are as
specified in the related Agreement.
ASSIGNMENT OF MORTGAGE ASSETS
Assignment of the Mortgage Loans. At the time of issuance of the
Certificates of a Series, the Depositor will cause the Mortgage Loans comprising
the related Trust Fund to be assigned to the Trustee, together with all
principal and interest received by or on behalf of the Depositor on or with
respect to such Mortgage Loans after the Cut-off Date, other than principal and
interest due on or before the Cut-off Date and other than any Retained Interest
specified in the related Prospectus Supplement. The Trustee will, concurrently
with such assignment, deliver the Certificates to the Depositor in exchange for
the Mortgage Loans. Each Mortgage Loan will be identified in a schedule
appearing as an exhibit to the related Agreement. Such schedule will include
information as to the outstanding principal balance of each Mortgage Loan after
application of payments due on the Cut-off Date, as well as information
regarding the Mortgage Rate, the current scheduled monthly payment of principal
and interest, the maturity of the loan, the Loan-to-Value Ratio at origination
and certain other information.
In addition, the Depositor will deliver or cause to be delivered to the
Trustee (or to the custodian hereinafter referred to) as to each Mortgage Loan,
among other things, (i) the Mortgage Note endorsed without recourse in blank or
to the order of the Trustee, (ii) the mortgage, deed of trust or similar
instrument (the 'Mortgage') with evidence of recording indicated thereon (except
for any Mortgage not returned from the public recording office, in which case
the Depositor will, unless otherwise specified in the related Prospectus
Supplement, deliver or cause to be delivered a copy of such Mortgage together
with a certificate that the original of such Mortgage was delivered to such
recording office), (iii) an assignment of the Mortgage to the Trustee, which
assignment will be in recordable form and (iv) such other security documents as
may be specified in the related Prospectus Supplement or the related Agreement.
Unless otherwise specified in the related Prospectus Supplement, the Depositor
will promptly cause the assignments of the related loans to be recorded in the
appropriate public office for real property records, except in states in which,
in the opinion of counsel acceptable to the Trustee, such recording is not
required to protect the Trustee's interest in such loans against the claim of
any subsequent transferee or any successor to or creditor of the Depositor or
the originator of such loans.
With respect to any Mortgage Loans that are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee the related original
cooperative note endorsed without recourse in blank or 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, related blank stock powers and any other document
specified in the related Prospectus Supplement. The Depositor will cause to be
filed in the appropriate office an assignment and a financing statement
evidencing the Trustee's security interest in each Cooperative Loan.
The Trustee (or the custodian hereinafter referred to) will review such
Mortgage Loan documents within the time period specified in the related
Prospectus Supplement after receipt thereof, and the Trustee will hold such
documents in trust for the benefit of the Certificateholders. Unless otherwise
specified in the related Prospectus Supplement, if any such document is found to
be missing or defective in any material respect, the Trustee (or such custodian)
will notify the Master Servicer and the Depositor, and the Master Servicer will
notify the related Seller. If the Seller cannot cure the omission or defect
within the time period specified in the related Prospectus Supplement after
receipt of such notice, the Seller will be obligated to purchase the related
Mortgage Loan from the Trustee at the Purchase Price or, if so specified in the
related Prospectus Supplement, replace such Mortgage Loan with another mortgage
loan that meets certain requirements set forth therein. There can be no
assurance that a Seller will fulfill this purchase obligation. Although the
Master Servicer may be obligated to enforce such obligation to the extent
described above under 'Mortgage Loan Program -- Representations by Sellers;
Repurchases,' neither the Master Servicer nor the Depositor will be obligated to
purchase such Mortgage Loan if the Seller defaults on its purchase obligation,
unless such breach also constitutes a breach of the representations or
warranties of the Master Servicer or the Depositor, as the case may be. Unless
otherwise specified in the related Prospectus Supplement, this purchase
obligation constitutes the sole remedy available to the Certificateholders or
the Trustee for omission of, or a material defect in, a constituent document.
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The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Mortgage Loans as agent of the Trustee.
Notwithstanding the foregoing provisions, with respect to a Trust Fund for
which a REMIC election is to be made, unless the related Prospectus Supplement
otherwise provides, no purchase of a Mortgage Loan will be made if such purchase
would result in a prohibited transaction tax under the Code.
Assignment of Agency Securities. The Depositor will cause the Agency
Securities to be registered in the name of the Trustee or its nominee, and the
Trustee concurrently will execute, countersign and deliver the Certificates.
Each Agency Security will be identified in a schedule appearing as an exhibit to
the Agreement, which will specify as to each Agency Security the original
principal amount and outstanding principal balance as of the Cut-off Date, the
annual pass-through rate (if any) and the maturity date.
Assignment of Private Mortgage-Backed Securities. The Depositor will cause
the Private Mortgage-Backed Securities to be registered in the name of the
Trustee. The Trustee (or the custodian) will have possession of any certificated
Private Mortgage-Backed Securities. Unless otherwise specified in the related
Prospectus Supplement, the Trustee will not be in possession of or be assignee
of record of any underlying assets for a Private Mortgage-Backed Security. See
'The Trust Fund -- Private Mortgage-Backed Securities' herein. Each Private
Mortgage-Backed Security will be identified in a schedule appearing as an
exhibit to the related Agreement which will specify the original principal
amount, outstanding principal balance as of the Cut-off Date, annual
pass-through rate or interest rate and maturity date and certain other pertinent
information for each Private Mortgage-Backed Security conveyed to the Trustee.
PAYMENTS ON MORTGAGE ASSETS; DEPOSITS TO CERTIFICATE ACCOUNT
The Master Servicer will establish and maintain or cause to be established
and maintained with respect to the related Trust Fund a separate account or
accounts for the collection of payments on the related Mortgage Assets in the
Trust Fund (the 'Certificate Account'), which unless otherwise specified in the
related Prospectus Supplement, must be either (i) maintained with a depository
institution the short-term debt obligations of which (or in the case of a
depository institution that is the principal subsidiary of a holding company,
the short-term debt obligations of which) are rated in the highest short-term
rating category by the nationally recognized statistical rating organization(s)
that rated one or more classes of the related Series of Certificates (each, a
'Rating Agency'), (ii) an account or accounts the deposits in which are fully
insured by either the BIF or SAIF, (iii) an account or accounts the deposits in
which are insured by the BIF or SAIF to the limits established by the FDIC, and
the uninsured deposits in which are otherwise secured such that, as evidenced by
an opinion of counsel, the Certificateholders have a claim with respect to the
funds in the Certificate Account or a perfected first priority security interest
against any collateral securing such funds that is superior to the claims of any
other depositors or general creditors of the depository institution with which
the Certificate Account is maintained, (iv) a trust account or accounts
maintained with the trust department of a federal or a state chartered
depository institution or trust company, acting in a fiduciary capacity or (v)
an account or accounts otherwise acceptable to each Rating Agency. The
collateral eligible to secure amounts in the Certificate Account is limited to
Permitted Investments. 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 Investments. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer or its
designee will be entitled to receive any such interest or other income earned on
funds in the Certificate Account as additional compensation and will be
obligated to deposit in the Certificate Account the amount of any loss
immediately as realized. The Certificate Account may be maintained with the
Master Servicer or with a depository institution that is an affiliate of the
Master Servicer, provided it meets the standards set forth above.
The Master Servicer will deposit or cause to be deposited in the
Certificate Account for each Trust Fund on a daily basis, to the extent
applicable and unless otherwise specified in the related Prospectus Supplement
and provided in the Agreement, the following payments and collections received
or Advances made by or on behalf of it subsequent to the Cut-off Date (other
than payments due on or before the Cut-off Date and exclusive of any amounts
representing Retained Interest):
(i) all payments on account of principal, including Principal
Prepayments and, if specified in the related Prospectus Supplement,
prepayment penalties, on the Mortgage Loans;
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(ii) all payments on account of interest on the Mortgage Loans, net of
applicable servicing compensation;
(iii) all proceeds (net of unreimbursed payments of property taxes,
insurance premiums and similar items ('Insured Expenses') incurred, and
unreimbursed Advances made, by the Master Servicer, if any) of the hazard
insurance policies and any Primary Mortgage Insurance Policies, to the
extent such proceeds are not applied to the restoration of the property or
released to the Mortgagor in accordance with the Master Servicer's normal
servicing procedures (collectively, 'Insurance Proceeds') and all other
cash amounts (net of unreimbursed expenses incurred in connection with
liquidation or foreclosure ('Liquidation Expenses') and unreimbursed
Advances, if any) received and retained in connection with the liquidation
of defaulted Mortgage Loans, by foreclosure or otherwise ('Liquidation
Proceeds'), together with any net proceeds received on a monthly basis with
respect to any properties acquired on behalf of the Certificateholders by
foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Mortgage Loan or property in respect thereof
purchased by the Master Servicer, the Depositor or any Seller as described
under 'Mortgage Loan Program -- Representations by Sellers; Repurchases' or
'The Pooling and Servicing Agreement -- Assignment of Mortgage Assets'
above and all proceeds of any Mortgage Loan repurchased as described under
'The Pooling and Servicing Agreement -- Termination; Optional Termination'
below;
(v) all payments required to be deposited in the Certificate Account
with respect to any deductible clause in any blanket insurance policy
described under ' -- Hazard Insurance' below;
(vi) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments for the benefit of the
Master Servicer of funds held in the Certificate Account and, to the extent
specified in the related Prospectus Supplement, any payments required to be
made by the Master Servicer in connection with prepayment interest
shortfalls; and
(vii) all other amounts required to be deposited in the Certificate
Account pursuant to the Agreement.
The Master Servicer (or the Depositor, as applicable) may from time to time
direct the institution that maintains the Certificate Account to withdraw funds
from the Certificate Account for the following purposes:
(i) to pay to the Master Servicer the servicing fees described in the
related Prospectus Supplement, the master servicing fees (subject to
reduction) and, as additional servicing compensation, earnings on or
investment income with respect to funds in the amounts in the Certificate
Account credited thereto;
(ii) to reimburse the Master Servicer for Advances, such right of
reimbursement with respect to any Mortgage Loan being limited to amounts
received that represent late recoveries of payments of principal and/or
interest on such Mortgage Loan (or Insurance Proceeds or Liquidation
Proceeds with respect thereto) with respect to which such Advance was made;
(iii) to reimburse the Master Servicer for any Advances previously
made which the Master Servicer has determined to be nonrecoverable;
(iv) to reimburse the Master Servicer from Insurance Proceeds for
expenses incurred by the Master Servicer and covered by the related
insurance policies;
(v) to reimburse the Master Servicer for unpaid master servicing fees
and unreimbursed out-of-pocket costs and expenses incurred by the Master
Servicer in the performance of its servicing obligations, such right of
reimbursement being limited to amounts received representing late
recoveries of the payments for which such advances were made;
(vi) to pay to the Master Servicer, with respect to each Mortgage Loan
or property acquired in respect thereof that has been purchased by the
Master Servicer pursuant to the Agreement, all amounts received thereon and
not taken into account in determining the principal balance of such
repurchased Mortgage Loan;
(vii) to reimburse the Master Servicer or the Depositor for expenses
incurred and reimbursable pursuant to the Agreement;
(viii) to withdraw any amount deposited in the Certificate Account and
not required to be deposited therein; and
(ix) to clear and terminate the Certificate Account upon termination
of the Agreement.
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In addition, unless otherwise specified in the related Prospectus
Supplement, on or prior to the business day immediately preceding each
Distribution Date, the Master Servicer shall withdraw from the Certificate
Account the amount of Available Funds, to the extent on deposit, for deposit in
an account maintained by the Trustee for the related Series of Certificates.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers, will
make reasonable efforts to collect all payments called for under the Mortgage
Loans and will, consistent with each Agreement and any Mortgage Pool Insurance
Policy, Primary Mortgage Insurance Policy, FHA Insurance, VA Guaranty and
Bankruptcy Bond or alternative arrangements, follow such collection procedures
as are customary with respect to mortgage loans that are comparable to the
Mortgage Loans. Consistent with the above, the Master Servicer may, in its
discretion, (i) waive any assumption fee, late payment or other charge in
connection with a Mortgage Loan and (ii) to the extent not inconsistent with the
coverage of such Mortgage Loan by a Mortgage Pool Insurance Policy, Primary
Mortgage Insurance Policy, FHA Insurance, VA Guaranty or Bankruptcy Bond or
alternative arrangements, if applicable, arrange with a Mortgagor a schedule for
the liquidation of delinquencies running for no more than 125 days after the
applicable due date for each payment. To the extent the Master Servicer is
obligated to make or to cause to be made Advances, such obligation will remain
during any period of such an arrangement.
Unless otherwise specified in the related Prospectus Supplement, in any
case in which property securing a conventional Mortgage Loan has been, or is
about to be, conveyed by the Mortgagor, the Master Servicer will, to the extent
it has knowledge of such conveyance or proposed conveyance, exercise or cause to
be exercised its rights to accelerate the maturity of such Mortgage Loan under
any due-on-sale clause applicable thereto, but only if the exercise of such
rights is permitted by applicable law and will not impair or threaten to impair
any recovery under any related Primary Mortgage Insurance Policy. If these
conditions are not met or if the Master Servicer reasonably believes it is
unable under applicable law to enforce such due-on-sale clause or if such
Mortgage Loan is insured by the FHA or partially guaranteed by the VA, the
Master Servicer will enter into or cause to be entered 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 for repayment
of the Mortgage Loan and, to the extent permitted by applicable law, the
Mortgagor also remains liable thereon. Any fee collected by or on behalf of the
Master Servicer for entering into an assumption agreement will be retained by or
on behalf of the Master Servicer as additional servicing compensation. See
'Certain Legal Aspects of the Mortgage Loans -- Due-on-Sale Clauses' herein. In
connection with any such assumption, the terms of the related Mortgage Loan may
not be changed.
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 Loans' herein. This approval is usually based on the purchaser's income
and net worth and numerous other factors. Although the Cooperative's approval is
unlikely to be unreasonably withheld or delayed, the necessity of acquiring such
approval could limit the number of potential purchasers for those shares and
otherwise limit the Trust Fund's ability to sell and realize the value of those
shares.
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
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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.
HAZARD INSURANCE
The Master Servicer will require the Mortgagor on each Mortgage Loan to
maintain a hazard insurance policy providing for no less than the coverage of
the standard form of fire insurance policy with extended coverage customary for
the type of Mortgaged Property in the state in which such Mortgaged Property is
located. Such coverage will be in an amount that is at least equal to the lesser
of (i) the maximum insurable value of the improvements securing such Mortgage
Loan or (ii) the greater of (y) the outstanding principal balance of the
Mortgage Loan and (z) an amount such that the proceeds of such policy shall be
sufficient to prevent the mortgagor and/or the mortgagee from becoming a
co-insurer. All amounts collected by the Master Servicer under any hazard policy
(except for amounts to be applied to the restoration or repair of the Mortgaged
Property or released to the Mortgagor in accordance with the Master Servicer's
normal servicing procedures) will be deposited in the related Certificate
Account. In the event that the Master Servicer maintains a blanket policy
insuring against hazard losses on all the Mortgage Loans comprising part of a
Trust Fund, it will conclusively be deemed to have satisfied its obligation
relating to the maintenance of hazard insurance. Such blanket policy may contain
a deductible clause, in which case the Master Servicer will be required to
deposit from its own funds into the related Certificate Account the amounts that
would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements securing a Mortgage Loan
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 may have been
underwritten by different insurers under different state laws in accordance with
different applicable forms and therefore may not contain identical terms and
conditions, the basic terms thereof are dictated by the respective state laws,
and most 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
flows), 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 Mortgaged Property securing a Mortgage Loan is located in a
federally designated special flood area at the time of origination, the Master
Servicer will require the Mortgagor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Mortgage
Loans typically contain a clause which in effect requires the insured at all
times to carry insurance of a specified percentage (generally 80% to 90%) of the
full replacement value of the insured property in order to recover the full
amount of any partial loss. If the insured's coverage falls below this specified
percentage, then the insurer's liability in the event of partial loss will not
exceed the larger of (i) the actual cash value (generally defined as replacement
cost at the time and place of loss, less physical depreciation) of the
improvements damaged or destroyed or (ii) such proportion of the loss as the
amount of insurance carried bears to the specified percentage of the full
replacement cost of such improvements. Since the amount of hazard insurance the
Master Servicer may cause to be maintained on the improvements securing the
Mortgage Loans declines as the principal balances owing thereon decrease, and
since improved real estate generally has appreciated in value over time in the
past, the effect of this requirement in the event of partial loss may be that
hazard insurance proceeds will be insufficient to restore fully the damaged
property. If specified in the related Prospectus Supplement, a special hazard
insurance policy will be obtained to insure against certain of the uninsured
risks described above. See 'Credit Enhancement -- Special Hazard Insurance
Policies' herein and 'Credit Enhancements -- Insurance -- Special Hazard
Insurance Policy' in the related Prospectus Supplement.
The Master Servicer 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
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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.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
Primary Mortgage Insurance Policies. The Master Servicer will maintain or
cause to be maintained, as the case may be, in full force and effect, to the
extent specified in the related Prospectus Supplement, a Primary Mortgage
Insurance Policy with regard to each Mortgage Loan for which such coverage is
required. The Master Servicer will not cancel or refuse to renew any such
Primary Mortgage Insurance Policy in effect at the time of the initial issuance
of a Series of Certificates that is required to be kept in force under the
applicable Agreement unless the replacement Primary Mortgage Insurance Policy
for such cancelled or nonrenewed policy is maintained with an insurer whose
claims-paying ability is sufficient to maintain the current rating of the
classes of Certificates of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary, the
amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Mortgage Loan will consist of the insured percentage of the unpaid
principal amount of the covered Mortgage Loan and accrued and unpaid interest
thereon and reimbursement of certain expenses, less (i) all rents or other
payments collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Mortgaged
Property, (ii) hazard insurance proceeds in excess of the amount required to
restore the Mortgaged Property and which have not been applied to the payment of
the Mortgage Loan, (iii) amounts expended but not approved by the issuer of the
related Primary Mortgage Insurance Policy (the 'Primary Insurer'), (iv) claim
payments previously made by the Primary Insurer and (v) unpaid premiums.
Primary Mortgage Insurance Policies reimburse certain losses sustained by
reason of defaults in payments by borrowers. Primary Mortgage Insurance Policies
will not insure against, and exclude from coverage, a loss sustained by reason
of a default arising from or involving certain matters, including (i) fraud or
negligence in origination or servicing of the Mortgage Loans, including
misrepresentation by the originator, Mortgagor or other persons involved in the
origination of the Mortgage Loan; (ii) failure to construct the Mortgaged
Property subject to the Mortgage Loan in accordance with specified plans; (iii)
physical damage to the Mortgaged Property; and (iv) the related Sub-Servicer not
being approved as a servicer by the Primary Insurer.
Recoveries Under a Primary Mortgage Insurance Policy. As conditions
precedent to the filing of or payment of a claim under a Primary Mortgage
Insurance Policy covering a Mortgage Loan, the insured will be required to (i)
advance or discharge (a) all hazard insurance policy premiums and (b) as
necessary and approved in advance by the Primary Insurer, (1) real estate
property taxes, (2) all expenses required to maintain the related Mortgaged
Property in at least as good a condition as existed at the effective date of
such Primary Mortgage Insurance Policy, ordinary wear and tear excepted, (3)
Mortgaged Property sales expenses, (4) any outstanding liens (as defined in such
Primary Mortgage Insurance Policy) on the Mortgaged Property and (5) foreclosure
costs, including court costs and reasonable attorneys' fees; (ii) in the event
of any physical loss or damage to the Mortgaged Property, have the Mortgaged
Property restored and repaired to at least as good a condition as existed at the
effective date of such Primary Mortgage Insurance Policy, ordinary wear and tear
excepted; and (iii) tender to the Primary Insurer good and merchantable title to
and possession of the Mortgaged Property.
The Master Servicer, on behalf of itself, the Trustee and the
Certificateholders, will present claims to the insurer under each Primary
Mortgage Insurance Policy, and will take such reasonable steps as are necessary
to receive payment or to permit recovery thereunder with respect to defaulted
Mortgage Loans. As set forth above, all collections by or on behalf of the
Master Servicer under any Primary Mortgage Insurance Policy and, when the
Mortgaged Property has not been restored, the hazard insurance policy, are to be
deposited in the Certificate Account, subject to withdrawal as heretofore
described.
If the Mortgaged Property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy are insufficient to
restore the damaged Mortgaged Property to a condition sufficient to permit
recovery under the related Primary Mortgage Insurance Policy, if any, the Master
Servicer is not required to expend its own funds to restore the damaged
Mortgaged Property unless it determines (i) that such restoration will increase
the proceeds to Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
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If recovery on a defaulted Mortgage Loan under any related Primary Mortgage
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Mortgage Loan is not covered by a Primary
Mortgage Insurance Policy, the Master Servicer will be obligated to follow or
cause to be followed such normal practices and procedures as it deems necessary
or advisable to realize upon the defaulted Mortgage Loan. If the proceeds of any
liquidation of the Mortgaged Property securing the defaulted Mortgage Loan are
less than the principal balance of such Mortgage Loan plus interest accrued
thereon that is payable to Certificateholders, the Trust Fund will realize a
loss in the amount of such difference plus the aggregate of expenses incurred by
the Master Servicer in connection with such proceedings that are reimbursable
under the Agreement. In the unlikely event that any such proceedings result in a
total recovery which is, after reimbursement to the Master Servicer of its
expenses, in excess of the principal balance of such Mortgage Loan plus interest
accrued thereon that is payable to Certificateholders, the Master Servicer will
be entitled to withdraw or retain from the Certificate Account amounts
representing its normal servicing compensation with respect to such Mortgage
Loan and, unless otherwise specified in the related Prospectus Supplement,
amounts representing the balance of such excess, exclusive of any amount
required by law to be forwarded to the related Mortgagor, as additional
servicing compensation.
If the Master Servicer or its designee recovers Insurance Proceeds which,
when added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the Master Servicer, exceed the principal balance of a
Mortgage Loan plus interest accrued thereon that is payable to
Certificateholders, the Master Servicer will be entitled to withdraw or retain
from the Certificate Account amounts representing its normal servicing
compensation with respect to such Mortgage Loan. In the event that the Master
Servicer has expended its own funds to restore the damaged Mortgaged Property
and such funds have not been reimbursed under the related hazard insurance
policy, it will be entitled to withdraw from the Certificate Account out of
related Liquidation Proceeds or Insurance Proceeds an amount equal to such
expenses incurred by it, in which event the Trust Fund may realize a loss up to
the amount so charged. Since Insurance Proceeds cannot exceed deficiency claims
and certain expenses incurred by the Master Servicer, no such payment or
recovery will result in a recovery to the Trust Fund that exceeds the principal
balance of the defaulted Mortgage Loan together with accrued interest thereon.
See 'Credit Enhancement' herein and in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement or the
related Agreement, the proceeds from any liquidation of a Mortgage Loan will be
applied in the following order of priority: first, to reimburse the Master
Servicer for any unreimbursed expenses incurred by it to restore the related
Mortgaged Property and any unreimbursed servicing compensation payable to the
Master Servicer with respect to such Mortgage Loan; second, to reimburse the
Master Servicer for any unreimbursed Advances with respect to such Mortgage
Loan; third, to accrued and unpaid interest (to the extent no Advance has been
made for such amount) on such Mortgage Loan; and fourth, as a recovery of
principal of such Mortgage Loan.
FHA Insurance; VA Guaranties. Mortgage Loans designated in the related
Prospectus Supplement as insured by the FHA will be insured by the FHA as
authorized under the United States Housing Act of 1937, as amended. Such
Mortgage Loans will be insured under various FHA programs including the standard
FHA 203(b) program to finance the acquisition of one-to four-family housing
units and the FHA 245 graduated payment mortgage program. These programs
generally limit the principal amount and interest rates of the mortgage loans
insured. Mortgage Loans insured by the FHA generally require a minimum down
payment of approximately 5% of the original principal amount of the loan. No
FHA-insured Mortgage Loans relating to a Series may have an interest rate or
original principal amount exceeding the applicable FHA limits at the time of
origination of such loan.
The insurance premiums for Mortgage Loans insured by the FHA are collected
by lenders approved by the Department of Housing and Urban Development ('HUD')
or by the Master Servicer or any Sub-Servicers and are paid to the FHA. The
regulations governing FHA single-family mortgage insurance programs provide that
insurance benefits are payable either upon foreclosure (or other acquisition of
possession) and conveyance of the mortgaged premises to HUD or upon assignment
of the defaulted Mortgage Loan to HUD. With respect to a defaulted FHA-insured
Mortgage Loan, the Master Servicer or any Sub-Servicer is limited in its ability
to initiate foreclosure proceedings. When it is determined, either by the Master
Servicer or any Sub-Servicer or HUD, that default was caused by circumstances
beyond the Mortgagor's control, the Master Servicer or any Sub-Servicer is
expected to make an effort to avoid foreclosure by entering, if feasible, into
one of a number of available forms of forbearance plans with the Mortgagor. Such
plans may involve the reduction or suspension of
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regular mortgage payments for a specified period, with such payments to be made
up on or before the maturity date of the mortgage, or the recasting of payments
due under the mortgage up to or beyond the maturity date. In addition, when a
default caused by such circumstances is accompanied by certain other criteria,
HUD may provide relief by making payments to the Master Servicer or any
Sub-Servicer in partial or full satisfaction of amounts due under the Mortgage
Loan (which payments are to be repaid by the Mortgagor to HUD) or by accepting
assignment of the loan from the Master Servicer or any Sub-Servicer. With
certain exceptions, at least three full monthly installments must be due and
unpaid under the Mortgage Loan and HUD must have rejected any request for relief
from the Mortgagor before the Master Servicer or any Sub-Servicer may initiate
foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. The Master Servicer of any Sub-Servicer of each
FHA-insured Mortgage Loan will be obligated to purchase any such debenture
issued in satisfaction of such Mortgage Loan upon default for an amount equal to
the principal amount of any such debenture.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted Mortgage Loan adjusted to
reimburse the Master Servicer or Sub-Servicer for certain costs and expenses and
to deduct certain amounts received or retained by the Master Servicer or
Sub-Servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
Master Servicer or Sub-Servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to such date but in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD. When entitlement to insurance benefits results
from assignment of the Mortgage Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Mortgage Loan,
bears interest from a date 30 days after the Mortgagor's first uncorrected
failure to perform any obligation to make any payment due under the Mortgage
Loan and, upon assignment, from the date of assignment to the date of payment of
the claim, in each case at the same interest rate as the applicable HUD
debenture interest rate as described above.
Mortgage Loans designated in the related Prospectus Supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended (a 'VA Guaranty'). The
Serviceman's Readjustment Act of 1944, as amended, permits a veteran (or in
certain instances the spouse of a veteran) to obtain a mortgage loan guaranty by
the VA covering mortgage financing of the purchase of a one- to four-family
dwelling unit at interest rates permitted by the VA. The program has no mortgage
loan limits, requires no down payment from the purchaser and permits the
guarantee of mortgage loans of up to 30 years' duration. However, no Mortgage
Loan guaranteed by the VA will have an original principal amount greater than
five times the partial VA guaranty for such Mortgage Loan.
The maximum guaranty that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. As of
January 1, 1990, the maximum guaranty that may be issued by the VA under a VA
guaranteed mortgage loan of more than $144,000 is the lesser of 25% of the
original principal amount of the mortgage loan and $46,000. The liability on the
guaranty is reduced or increased pro rata with any reduction or increase in the
amount of indebtedness, but in no event will the amount payable on the guaranty
exceed the amount of the original guaranty. The VA may, at its option and
without regard to the guaranty, make full payment to a mortgage holder of
unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA guaranteed Mortgage Loan, the Master
Servicer or Sub-Servicer is, absent exceptional circumstances, authorized to
announce its intention to foreclose only when the default has continued for
three months. Generally, a claim for the guaranty is submitted after liquidation
of the Mortgaged Property.
The amount payable under the guaranty will be the percentage of the
VA-insured Mortgage Loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guaranty will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of
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the Mortgaged Property. The amount payable under the guaranty may in no event
exceed the amount of the original guaranty.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal servicing compensation to be paid to the Master Servicer in
respect of its master servicing activities for each Series of Certificates will
be equal to the percentage per annum described in the related Prospectus
Supplement (which may vary under certain circumstances) of the outstanding
principal balance of each Mortgage Loan, and such compensation will be retained
by it from collections of interest on such Mortgage Loan in the related Trust
Fund (the 'Master Servicing Fee'). Unless otherwise specified in the related
Prospectus Supplement, as compensation for its servicing duties, a Sub-Servicer
or, if there is no Sub-Servicer, the Master Servicer will be entitled to a
monthly servicing fee as described in the related Prospectus Supplement. In
addition, the Master Servicer or a Sub-Servicer will retain all prepayment
charges, assumption fees and late payment charges, to the extent collected from
Mortgagors, and any benefit that may accrue as a result of the investment of
funds in the applicable Certificate Account (unless otherwise specified in the
related Prospectus Supplement).
The Master Servicer will pay or cause to be paid certain ongoing expenses
associated with each Trust Fund and incurred by it in connection with its
responsibilities under the related Agreement, including, without limitation,
payment of any fee or other amount payable in respect of any credit enhancement
arrangements, payment of the fees and disbursements of the Trustee, any
custodian appointed by the Trustee, the certificate registrar and any paying
agent, and payment of expenses incurred in enforcing the obligations of
Sub-Servicers and Sellers. The Master Servicer will be entitled to reimbursement
of expenses incurred in enforcing the obligations of Sub-Servicers and Sellers
under certain limited circumstances. In addition, as indicated in the preceding
section, the Master Servicer will be entitled to reimbursement for certain
expenses incurred by it in connection with any defaulted Mortgage Loan as to
which it has determined that all recoverable Liquidation Proceeds and Insurance
Proceeds have been received (a 'Liquidated Mortgage'), and in connection with
the restoration of Mortgaged Properties, such right of reimbursement being prior
to the rights of Certificateholders to receive any related Liquidation Proceeds
(including Insurance Proceeds).
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Audit Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC, the
servicing by or on behalf of the Master Servicer of Mortgage Loans, Private
Mortgage-Backed Securities or Agency Securities, under Agreements substantially
similar to each other (including the related Agreement) was conducted in
compliance with such agreements except for any significant exceptions or errors
in records that, in the opinion of the firm, the Audit Program for Mortgages
serviced for FHLMC or the Uniform Single Audit Program for Mortgage Bankers
requires it to report. In rendering its statement such firm may rely, as to
matters relating to the direct servicing of Mortgage Loans, Private
Mortgage-Backed Securities or Agency Securities by Sub-Servicers, upon
comparable statements for examinations conducted substantially in compliance
with the Uniform Single Audit Program for Mortgage Bankers or the Audit Program
for Mortgages serviced for FHLMC (rendered within one year of such statement) of
firms of independent public accountants with respect to the related
Sub-Servicer.
Each Agreement will also provide for delivery to the Trustee, on or before
a specified date in each year, of an annual statement signed by two officers of
the Master Servicer to the effect that the Master Servicer has fulfilled its
obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers
of the Master Servicer may be obtained by Certificateholders of the related
Series without charge upon written request to the Master Servicer at the address
set forth in the related Prospectus Supplement.
LIST OF CERTIFICATEHOLDERS
Each Agreement will provide that three or more holders of Certificates of
any Series may, by written request to the Trustee, obtain access to the list of
all Certificateholders maintained by the Trustee for the purpose
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of communicating with other Certificateholders with respect to their rights
under the Agreement and the Certificates.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The Master Servicer under each Agreement will be named in the related
Prospectus Supplement. The entity serving as Master Servicer may have normal
business relationships with the Depositor or the Depositor's affiliates.
Each Agreement will provide that the Master Servicer may not resign from
its obligations and duties under the Agreement except upon a determination that
the performance by it of its duties thereunder is no longer permissible under
applicable law. No such resignation will become effective until the Trustee or a
successor servicer has assumed the Master Servicer's obligations and duties
under the Agreement.
Each Agreement will further provide that neither the Master Servicer, the
Depositor nor any director, officer, employee, or agent of the Master Servicer
or the Depositor will be under any liability to the related Trust Fund or
Certificateholders for any action taken or for refraining from the taking of any
action in good faith pursuant to the Agreement, or for errors in judgment;
provided, however, that neither the Master Servicer, the Depositor nor any such
person will be protected against any liability that would otherwise be imposed
by reason of willful misfeasance, bad faith or negligence in the performance of
duties thereunder or by reason of reckless disregard of obligations and duties
thereunder. Each Agreement will further provide that the Master Servicer, the
Depositor and any director, officer, employee or agent of the Master Servicer or
the Depositor will be entitled to indemnification by the related Trust Fund and
will be held harmless against any loss, liability or expense incurred in
connection with any legal action relating to the Agreement or the Certificates,
other than any loss, liability or expense related to any specific Mortgage Asset
or Mortgage Assets (except any such loss, liability or expense otherwise
reimbursable pursuant to the Agreement) and any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, each Agreement will provide that
neither the Master Servicer nor the Depositor will be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
respective responsibilities under the Agreement and which in its opinion may
involve it in any expense or liability. The Master Servicer or the Depositor
may, however, in its discretion undertake any such action which it may deem
necessary or desirable with respect to the Agreement and the rights and duties
of the parties thereto and the interests of the Certificateholders thereunder.
In such event, the legal expenses and costs of such action and any liability
resulting therefrom will be expenses, costs and liabilities of the Trust Fund,
and the Master Servicer or the Depositor, as the case may be, will be entitled
to be reimbursed therefor out of funds otherwise distributable to
Certificateholders.
Any person into which the Master Servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Agreement,
provided that such person is qualified to sell mortgage loans to, and service
mortgage loans on behalf of, FNMA or FHLMC and further provided that such
merger, consolidation or succession does not adversely affect the then current
rating or ratings of the class or classes of Certificates of such Series that
have been rated.
EVENTS OF DEFAULT
Unless otherwise specified in the related Prospectus Supplement, Events of
Default under each Agreement will consist of (i) any failure by the Master
Servicer to distribute or cause to be distributed to Certificateholders of any
class any required payment (other than an Advance) which continues unremedied
for five business days after the giving of written notice of such failure to the
Master Servicer by the Trustee or the Depositor, or to the Master Servicer, the
Depositor and the Trustee by the holders of Certificates of such class
evidencing the right to not less than 25% of the total distributions allocated
to such class (the 'Percentage Interest'); (ii) any failure by the Master
Servicer to make an Advance as required under the Agreement, unless cured as
specified therein; (iii) any failure by the Master Servicer duly to observe or
perform in any material respect any of its other covenants or agreements in the
Agreement which continues unremedied for thirty days after the giving of written
notice of such failure to the Master Servicer by the Trustee or the Depositor,
or to the Master Servicer, the Depositor and the Trustee by the holders of
Certificates of any class evidencing not less than 25% of the aggregate
Percentage
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Interests constituting such class; and (iv) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceeding and certain actions by or on behalf of the Master Servicer indicating
its insolvency, reorganization or inability to pay its obligations.
If specified in the related Prospectus Supplement, the Agreement will
permit the Trustee to sell the Mortgage Assets and the other assets of the Trust
Fund in the event that payments in respect thereto are insufficient to make
payments required in the Agreement. The assets of the Trust Fund will be sold
only under the circumstances and in the manner specified in the related
Prospectus Supplement.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under an Agreement remains unremedied, the
Depositor or the Trustee may, and at the direction of holders of Certificates
having not less than 25% of the aggregate Percentage Interests constituting such
class and under such other circumstances as may be specified in such Agreement,
the Trustee shall, terminate all of the rights and obligations of the Master
Servicer under the Agreement relating to such Trust Fund and in and to the
Mortgage Assets, whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Master Servicer under the
Agreement, including, if specified in the related Prospectus Supplement, the
obligation to make Advances, and will be entitled to similar compensation
arrangements. In the event that the Trustee is unwilling or unable so to act, it
may appoint, or petition a court of competent jurisdiction for the appointment
of, a mortgage loan servicing institution with a net worth of at least
$10,000,000 to act as successor to the Master Servicer under the Agreement.
Pending such appointment, the Trustee is obligated to act in such capacity. The
Trustee and any such successor may agree upon the servicing compensation to be
paid to the successor servicer, which in no event may be greater than the
compensation payable to the Master Servicer under the Agreement.
No Certificateholder, solely by virtue of such holder's status as a
Certificateholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of any
class of Certificates of such Series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class have made written request
upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
AMENDMENT
Unless otherwise specified in the related Prospectus Supplement, each
Agreement may be amended by the Depositor, the Master Servicer and the Trustee,
without the consent of any of the Certificateholders, (i) to cure any ambiguity;
(ii) to correct or supplement any provision therein which may be defective or
inconsistent with any other provision therein; or (iii) to make any other
revisions with respect to matters or questions arising under the Agreement that
are not inconsistent with the provisions thereof, provided that such action will
not adversely affect in any material respect the interests of any
Certificateholder. An amendment will be deemed to not adversely affect in any
material respect the interests of the Certificateholders if the person
requesting such amendment obtains a letter from each rating agency requested to
rate the class or classes of Certificates of such Series stating that such
amendment will not result in the downgrading or withdrawal of the respective
ratings then assigned to such Certificates. In addition, to the extent provided
in the related Agreement, an Agreement may be amended without the consent of any
of the Certificateholders to change the manner in which the Certificate Account
is maintained, provided that any such change does not adversely affect the then
current rating of the class or classes of Certificates of such Series that have
been rated. In addition, if a REMIC election is made with respect to a Trust
Fund, the related Agreement may be amended to modify, eliminate or add to any of
its provisions to such extent as may be necessary to maintain the qualification
of the related Trust Fund as a REMIC, provided that the Trustee has received an
opinion of counsel to the effect that such action is necessary or helpful to
maintain such qualification. Unless otherwise specified in the related
Prospectus Supplement, each Agreement may also be amended by the Depositor, the
Master Servicer and the Trustee with the consent of holders of Certificates of
such Series evidencing not less than 66% of the aggregate Percentage Interests
of each class affected thereby for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Agreement or
of modifying in any manner the rights of the holders of the related
Certificates; provided, however, that no such amendment may (i) reduce in any
manner the amount of, or delay
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the timing of, payments received on Mortgage Assets that are required to be
distributed on any Certificate without the consent of the holder of such
Certificate or (ii) reduce the aforesaid percentage of Certificates of any class
of holders that is required to consent to any such amendment without the consent
of the holders of all Certificates of such class covered by such Agreement then
outstanding. If a REMIC election is made with respect to a Trust Fund, the
Trustee will not be entitled to consent to an amendment to the related Agreement
without having first received an opinion of counsel to the effect that such
amendment will not cause such Trust Fund to fail to qualify as a REMIC.
TERMINATION; OPTIONAL TERMINATION
Unless otherwise specified in the related Agreement, the obligations
created by each Agreement for each Series of Certificates will terminate upon
the payment to the related Certificateholders of all amounts held in the
Certificate Account or by the Master Servicer and required to be paid to them
pursuant to such Agreement following the later of (i) the final payment or other
liquidation of the last of the Mortgage Assets subject thereto or the
disposition of all property acquired upon foreclosure of any such Mortgage
Assets remaining in the Trust Fund and (ii) the purchase by the Master Servicer
or, if REMIC treatment has been elected and if specified in the related
Prospectus Supplement, by the holder of the residual interest in the REMIC (see
'Certain Federal Income Tax Consequences' below and in the related Prospectus
Supplement), from the related Trust Fund of all of the remaining Mortgage Assets
and all property acquired in respect of such Mortgage Assets.
Unless otherwise specified in the related Prospectus Supplement, any
purchase of Mortgage Assets and property acquired in respect of Mortgage Assets
evidenced by a Series of Certificates will be made at the option of the Master
Servicer or, if applicable, the holder of the REMIC residual interest, at a
price, and in accordance with the procedures, specified in the related
Prospectus Supplement. The exercise of such right will effect early retirement
of the Certificates of that Series, but the right of the Master Servicer or, if
applicable, such holder of the REMIC residual interest, to so purchase is
subject to the principal balance of the related Mortgage Assets being less than
the percentage specified in the related Prospectus Supplement of the aggregate
principal balance of the Mortgage Assets at the Cut-off Date for the Series. The
foregoing is subject to the provision that if a REMIC election is made with
respect to a Trust Fund, any repurchase pursuant to clause (ii) above will be
made only in connection with a 'qualified liquidation' of the REMIC within the
meaning of Section 860F(g)(4) of the Code.
THE TRUSTEE
The Trustee under each Agreement will be named in the applicable Prospectus
Supplement. The commercial bank or trust company serving as Trustee may have
normal banking relationships with the Depositor, the Master Servicer and any of
their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Mortgage Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete or to reflect the
laws of any particular state or to encompass the laws of all states in which the
security for the Mortgage Loans is situated. The summaries are qualified in
their entirety by reference to the appropriate laws of the states in which
Mortgage Loans may be originated.
GENERAL
The Mortgage Loans will be secured by deeds of trust, mortgages, security
deeds or deeds to secure debt, depending upon the prevailing practice in the
state in which the property subject to the loan is located. Deeds of trust are
used almost exclusively in California instead of mortgages. A mortgage creates a
lien upon the real property encumbered by the mortgage, which lien is generally
not prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording with a
state or county office. There are two parties to a mortgage, the mortgagor, who
is the borrower and owner of the mortgaged property, and the mortgagee, who is
the lender. Under the mortgage instrument, the mortgagor delivers to the
mortgagee a note or bond and the mortgage. Although a deed of trust is similar
to a mortgage, a
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deed of trust formally has three parties, the borrower-property owner 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, generally with a power of sale, to the trustee to secure payment of the
obligation. A security deed and a deed to secure debt are special types of deeds
which indicate on their face that they are granted to secure an underlying debt.
By executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until such time as the underlying debt is repaid. The trustee's
authority under a deed of trust, the mortgagee's authority under a mortgage and
the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of the
beneficiary.
Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans. The
Cooperative 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 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 Trust Fund
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 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 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/REPOSSESSION
Deed of Trust. Foreclosure of a deed of trust is generally accomplished by
a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In certain states,
such foreclosure also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages. In some states, such as California, the
trustee must record a notice of default and send a copy to the borrower-trustor
and to any person who has recorded a request for a copy of any notice of default
and notice of sale. In addition, the trustee must provide notice in some states
to any other individual having an interest of record in the real property,
including any junior lienholders. If the deed of trust is not reinstated within
any applicable cure period, a notice of sale
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must be posted in a public place and, in most states, including California,
published for a specified period of time in one or more newspapers. In addition,
these notice provisions require that a copy of the notice of sale be posted on
the property and sent to all parties having an interest of record in the
property. In California, the entire process from recording a notice of default
to a non-judicial sale usually takes four to five months.
In some states, including California, the borrower-trustor has the right to
reinstate the loan at any time following default until shortly before the
trustee's sale. In general, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Certain state laws control the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recoverable by a lender.
Mortgages. 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. Judicial foreclosure proceedings are often not contested by any of the
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property. In general, the borrower, or any other person having a
junior encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated 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. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. 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.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure. Thereafter,
the lender will assume the burden of ownership, including obtaining hazard
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.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. 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 does not involve sufficient state
action to afford constitutional protection to the borrower.
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
cancelled by the Cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. 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
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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 the 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 to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See 'Anti-Deficiency Legislation and Other
Limitations on Lenders' below.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
Cooperative when the building was so converted.
RIGHTS OF REDEMPTION
In some states after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, including California, this right of redemption applies
only to sales following judicial foreclosure, and not to sales pursuant to a
non-judicial power of sale. In most states where the right of redemption is
available, statutory redemption may occur upon payment of the foreclosure
purchase price, accrued interest and taxes. In some states, the right to redeem
is an equitable right. The effect of a right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The exercise of a right
of redemption would defeat the title of any purchaser at a foreclosure sale, or
of any purchaser from the lender subsequent to judicial 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 restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, including California, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or sale under a deed of trust. A deficiency judgment is a personal
judgment against the borrower equal in most cases to the difference between the
amount due to the lender and the current fair market value of the property at
the time
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of the foreclosure sale. As a result of these prohibitions, it is anticipated
that in most instances the Master Servicer will utilize the non-judicial
foreclosure remedy and will not seek deficiency judgments against defaulting
Mortgagors.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, in the event of waste of the
property.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon its security. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on a
mortgaged property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the mortgaged
property is not the debtor's principal residence and the court determines that
the value of the mortgaged property is less than the principal balance of the
mortgage loan, for the reduction of the secured indebtedness to the value of the
mortgaged property as of the date of the commencement of the bankruptcy,
rendering the lender a general unsecured creditor for the difference, and also
may reduce the monthly payments due under such mortgage loan, change the rate of
interest and alter the mortgage loan repayment schedule. The effect of any such
proceedings under the federal Bankruptcy Code, including but not limited to any
automatic stay, could result in delays in receiving payments on the Mortgage
Loans underlying a Series of Certificates and possible reductions in the
aggregate amount of such payments.
The federal tax laws provide priority to certain tax liens over the lien of
a mortgage or secured party. Numerous federal and state consumer protection laws
impose substantive requirements upon mortgage lenders in connection with the
origination, servicing and enforcement of mortgage loans. These laws include the
federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes and regulations. These federal and state laws impose specific
statutory liabilities upon lenders who fail to comply with the provisions of the
law. In some cases, this liability may affect assignees of the loans or
contracts.
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.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states such a lien has priority over the lien of
an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
('CERCLA'), the United States Environmental Protection Agency ('EPA') may impose
a lien on property where the EPA has incurred clean-up costs. However, a CERCLA
lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
lender may be held liable, as an 'owner' or 'operator', for costs of addressing
releases or threatened releases of hazardous substances at a Mortgaged Property,
regardless of whether or not the environmental damage or threat was caused by a
prior owner or operator. CERCLA imposes liability on any and all 'responsible
parties' (which includes, inter alia,
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the property owner and operator) for the cost of clean-up of releases of
hazardous substances. However, CERCLA excludes from the definition of 'owner or
operator' secured creditors who hold indicia of ownership for the purpose of
protecting their security interest, but 'without participating in the management
of the facility.' That exclusion was substantially narrowed by a May 1990
decision of the United States Court of Appeals for the Eleventh Circuit in
United States v. Fleet Factors Corp., which held that a lender need not have
involved itself in the day-to-day operations of the facility or participated in
decisions relating to hazardous waste management in order to be liable; rather,
liability could attach to the lender if its involvement with the management of
the facility is broad enough to support the inference that the lender could
affect hazardous waste management practices if it so chose. The court added that
a lender's capacity to influence such decisions could be inferred from the
extent of its involvement in the facility's financial management. In response to
Fleet Factors, the EPA promulgated regulations designed to clarify the range of
activities a lender may engage in without losing the benefit of the statutory
exclusion. Under the regulations, which took effect in April 1992, a lender is
permitted to monitor the borrower's environmental practices in order to
determine if the facility is in compliance with applicable law, and to require
the borrower to take measures necessary to achieve or maintain compliance or
conduct necessary clean-ups. The lender may not, however, exercise control over
or assume responsibility for the borrower's environmental practices. Such
actions would be considered 'participation in the management of the facility'.
Also, if the lender takes title to or possession of the property, it might be
deemed to have obviated the security interest exclusion and to be liable for
clean-up costs pursuant to CERCLA. The EPA regulations allow lenders to take
certain actions with respect to foreclosure without losing the benefit of the
statutory exclusion. Essentially, the regulations allow the lender to take
actions consistent with protecting its security interest, but not actions which
demonstrate an intent to exercise long-term ownership interest in the property.
While the EPA regulations offer some protection to lenders, it must be noted
that such protection may not be available under applicable state law.
Furthermore, the regulations are binding only on the EPA with respect to the
EPA's enforcement powers and cost recovery rights. It has not yet been
determined whether the federal courts will apply the regulations in cost
recovery actions brought against lenders by other responsible parties, although
the regulations may well be considered persuasive by the courts. (Two judicial
challenges have been brought against the EPA regulations in the United States
Court of Appeals for the District of Columbia Circuit. The challenges both
allege that the regulations are inconsistent with the statutory requirements of
CERCLA and, therefore, should be invalidated. The challenges were filed on July
28, 1992 and are still pending.) If a lender is or becomes liable, it can bring
an action for contribution against any other 'responsible parties', including a
previous owner or operator, who created the environmental hazard, but those
persons or entities may be bankrupt or otherwise judgment proof. The costs
associated with environmental clean-up may be substantial. It is conceivable
that such remedial costs arising from the circumstances set forth above would
become a liability of the Trust Fund and occasion a loss to Certificateholders.
Except as otherwise specified in the applicable Prospectus Supplement, at
the time the Mortgage Loans were originated, no environmental assessment or a
very limited environmental assessment of the Mortgage Properties was conducted.
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
conventional Mortgage Loan will contain a due-on-sale clause which will
generally provide that if the mortgagor or obligor sells, transfers or conveys
the Mortgaged Property, the loan may be accelerated by the mortgagee. In recent
years, court decisions and legislative actions have placed substantial
restriction on the right of lenders to enforce such clauses in many states. For
instance, the California Supreme Court in August 1978 held that due-on-sale
clauses were generally unenforceable. However, the Garn-St Germain Depository
Institutions Act of 1982 (the 'Garn-St Germain Act'), subject to certain
exceptions, preempts state constitutional, statutory and case law prohibiting
the enforcement of due-on-sale clauses. As to loans secured by an owner-occupied
residence, the Garn-St Germain Act sets forth nine specific instances in which a
mortgagee covered by the Garn-St Germain Act may not exercise its rights under a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. The inability to enforce a due-on-sale clause may result in
transfer of the related Mortgaged Property to an uncreditworthy person, which
could increase the likelihood of default or may result in a mortgage bearing an
interest rate below the current market rate being assumed by a new home buyer,
which may affect the average life of the Mortgage Loans and the number of
Mortgage Loans which may extend to maturity.
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PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans with respect
to prepayments on loans secured by liens encumbering owner-occupied residential
properties. Since many of the Mortgaged Properties will be owner-occupied, it is
anticipated that prepayment charges may not be imposed with respect to many of
the Mortgage Loans. The absence of such a restraint on prepayment, particularly
with respect to fixed rate Mortgage Loans having higher Mortgage Rates, may
increase the likelihood of refinancing or other early retirement of such loans
or contracts.
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 Office of Thrift
Supervision, 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 the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the 'Relief Act'), a borrower who enters military service
after the origination of such borrower's mortgage loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the mortgage loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such interest rate limitation could have an effect,
for an indeterminate period of time, on the ability of the Master Servicer to
collect full amounts of interest on certain of the Mortgage Loans. Unless
otherwise provided in the applicable Prospectus Supplement, any shortfall in
interest collections resulting from the application of the Relief Act could
result in losses to the holders of the Certificates. In addition, the Relief Act
imposes limitations which would impair the ability of the Master Servicer to
foreclose on an affected Mortgage Loan during the borrower's period of active
duty status. Thus, in the event that such a Mortgage Loan goes into default,
there may be delays and losses occasioned by the inability to realize upon the
Mortgaged Property in a timely fashion.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Certificates is based
on the advice of Brown & Wood, counsel to the Depositor. This summary is based
on laws, regulations, including the REMIC regulations promulgated by the
Treasury Department on December 23, 1992 and generally effective for REMICs with
start-up dates on or after November 12, 1991 (the 'REMIC Regulations'), rulings
and decisions now in effect or (with respect to regulations) proposed, all of
which are subject to change either prospectively or retroactively. This summary
does not address the federal income tax consequences of an investment in
Certificates applicable to all categories of investors, some of which (for
example, banks and insurance companies) may be subject to special rules.
Prospective investors should consult their tax advisors regarding the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of Certificates.
GENERAL
The federal income tax consequences to Certificateholders will vary
depending on whether an election is made to treat the Trust Fund relating to a
particular Series of Certificates as a REMIC under the Code. The Prospectus
Supplement for each Series of Certificates will specify whether a REMIC election
will be made.
NON-REMIC CERTIFICATES
If a REMIC election is not made, Brown & Wood will deliver its opinion that
the Trust Fund will not be classified as an association taxable as a corporation
and that each such Trust Fund will be classified as a grantor trust under
subpart E, Part I of subchapter J of the Internal Revenue Code of 1986 (the
'Code' referred to in this section unless otherwise indicated). In this case,
owners of Certificates will be treated for federal income tax purposes as owners
of a portion of the Trust Fund's assets as described below.
A. SINGLE CLASS OF CERTIFICATES
Characterization. The Trust Fund may be created with one class of
Certificates. In this case, each Certificateholder will be treated as the owner
of a pro rata undivided interest in the interest and principal portions of the
Trust Fund represented by the Certificates and will be considered the equitable
owner of a pro rata undivided interest in each of the Mortgage Loans in the
Pool. Any amounts received by a Certificateholder in lieu of amounts due with
respect to any Mortgage Loans because of a default or delinquency in payment
will be treated for federal income tax purposes as having the same character as
the payments they replace.
Each Certificateholder will be required to report on its federal income tax
return in accordance with such Certificateholder's method of accounting its pro
rata share of the entire income from the Mortgage Loans in the Trust Fund
represented by Certificates, including interest, original issue discount
('OID'), if any, prepayment fees, assumption fees, any gain recognized upon an
assumption and late payment charges received by the Master Servicer. Under Code
Sections 162 or 212 each Certificateholder will be entitled to deduct its pro
rata share of servicing fees, prepayment fees, assumption fees, any loss
recognized upon an assumption and late payment charges retained by the Master
Servicer, provided that such amounts are reasonable compensation for services
rendered to the Trust Fund. Certificateholders that are individuals, estates or
trusts will be entitled to deduct their share of expenses only to the extent
such expenses plus such taxpayer's other miscellaneous itemized deductions (as
defined in the Code) exceed two percent of its adjusted gross income. A
Certificateholder using the cash method of accounting must take into account its
pro rata share of income and deductions as and when collected by or paid to the
Master Servicer. A Certificateholder using an accrual method of accounting must
take into account its pro rata share of income and deductions as they become due
(or received if received prior to when due) or are paid (or accrued if accrued
prior to payment) to the Master Servicer. If the servicing fees paid to the
Master Servicer are deemed to exceed reasonable servicing compensation, the
amount of such excess could be considered as an ownership interest retained by
the Master Servicer (or any person to whom the Master Servicer assigned for
value all or a portion of the servicing fees) in a portion of the interest
payments on the Mortgage Loans. The Mortgage Loans would then be subject to the
'coupon stripping' rules of the Code discussed below.
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Unless otherwise specified in the related Prospectus Supplement, as to each
Series of Certificates Brown & Wood will have advised the Depositor that:
(i) a Certificate owned by a 'domestic building and loan association'
within the meaning of Code Section 7701(a)(19) representing principal and
interest payments on Mortgage Loans will be considered to represent 'loans
. . . secured by an interest in real property which is . . . residential
property' within the meaning of Code Section 7701(a)(19)(C)(v), to the
extent that the Mortgage Loans represented by that Certificate are of a
type described in such Code section;
(ii) a Certificate owned by a financial institution described in Code
Section 593(a) representing principal and interest payments on Mortgage
Loans will be considered to represent 'qualifying real property loans'
within the meaning of Code Section 593(d) and the Treasury regulations
under Code Section 593, to the extent that the Mortgage Loans represented
by that Certificate are of a type described in such Code section;
(iii) a Certificate owned by a real estate investment trust
representing an interest in Mortgage Loans will be considered to represent
'real estate assets' within the meaning of Code Section 856(c)(5)(A), and
interest income on the Mortgage Loans will be considered 'interest on
obligations secured by mortgages on real property' within the meaning of
Code Section 856(c)(3)(B), to the extent that the Mortgage Loans
represented by that Certificate are of a type described in such Code
section; and
(iv) a Certificate owned by a REMIC will represent an 'obligation . .
. which is principally secured, directly or indirectly, by an interest in
real property' within the meaning of Code Section 860G(a)(3).
Buydown Loans. The assets constituting certain Trust Funds may include
Buydown Loans. The characterization of any investment in Buydown Loans will
depend upon the precise terms of the related buydown agreement, but to the
extent that such Buydown Loans are secured in part by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the foregoing sections of the Code. There are no directly applicable
precedents with respect to the federal income tax treatment or the
characterization of investments in Buydown Loans. Accordingly,
Certificateholders should consult their own tax advisors with respect to the
characterization of investments in Certificates representing an interest in a
Trust Fund that includes Buydown Loans.
Premium. The price paid for a Certificate by a holder will be allocated to
such holder's undivided interest in each Mortgage Loan based on each Mortgage
Loan's relative fair market value, so that such holder's undivided interest in
each Mortgage Loan will have its own tax basis. A Certificateholder that
acquires an interest in Mortgage Loans at a premium may elect, under Code
section 171, to amortize such premium under a constant interest method, provided
that the underlying mortgage loans with respect to such Mortgage Loans were
originated after September 27, 1985. Premium allocable to mortgage loans
originated on or before September 27, 1985 should be allocated among the
principal payments on such mortgage loans and allowed as an ordinary deduction
as principal payments are made. Amortizable bond premium will be treated as an
offset to interest income on such Certificate. The basis for such Certificate
will be reduced to the extent that amortizable premium is applied to offset
interest payments. It is not clear whether a reasonable prepayment assumption
should be used in computing amortization of premium allowable under Code Section
171.
If a premium is not subject to amortization using a reasonable prepayment
assumption, the holder of a Certificate acquired at a premium should recognize a
loss if a Mortgage Loan (or an underlying mortgage loan with respect to a
Mortgage Loan) prepays in full, equal to the difference between the portion of
the prepaid principal amount of such Mortgage Loan (or underlying mortgage loan)
that is allocable to the Certificate and the portion of the adjusted basis of
the Certificate that is allocable to such Mortgage Loan (or underlying mortgage
loan). If a reasonable prepayment assumption is used to amortize such premium,
it appears that such a loss would be available, if at all, only if prepayments
have occurred at a rate faster than the reasonable assumed prepayment rate. It
is not clear whether any other adjustments would be required to reflect
differences between an assumed prepayment rate and the actual rate of
prepayments.
Original Issue Discount. The Internal Revenue Service (the 'IRS') has
stated in published rulings that, in circumstances similar to those described
herein, the special rules of the Code relating to 'original issue discount'
(currently Code Sections 1271 through 1273 and 1275) will be applicable to a
Certificateholder's interest in those Mortgage Loans meeting the conditions
necessary for these sections to apply. OID generally must be reported as
ordinary gross income as it accrues under a constant interest method. See
' -- Multiple Classes of Certificates -- Certificates Representing Interests in
Loans Other Than ARM Loans' below.
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Market Discount. A Certificateholder that acquires an undivided interest
in Mortgage Loans may be subject to the market discount rules of Code Sections
1276 through 1278 to the extent an undivided interest in a Mortgage Loan is
considered to have been purchased at a 'market discount.' Generally, the amount
of market discount is equal to the excess of the portion of the principal amount
of such Mortgage Loan allocable to such holder's undivided interest over such
holder's tax basis in such interest. Market discount with respect to a
Certificate will be considered to be zero if the amount allocable to the
Certificate is less than 0.25% of the Certificate's stated redemption price at
maturity multiplied by the weighted average maturity remaining after the date of
purchase. Treasury regulations implementing the market discount rules have not
yet been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986, shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. Although the
Treasury Department has not yet issued regulations, rules described in the
relevant legislative history describes how market discount should be accrued on
such instruments. According to such legislative history, the holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest rate or according to one of the following methods. If a
Certificate is issued with OID, the amount of market discount that accrues
during any accrual period would be equal to the product of (i) the total
remaining market discount and (ii) a fraction, the numerator of which is the OID
accruing during the period and the denominator of which is the total remaining
OID at the beginning of the accrual period. For Certificates issued without OID,
the amount of market discount that accrues during a period is equal to the
product of (i) the total remaining market discount and (ii) a fraction, the
numerator of which is the amount of stated interest paid during the accrual
period and the denominator of which is the total amount of stated interest
remaining to be paid at the beginning of the accrual period. For purposes of
calculating market discount under any of the above methods in the case of
instruments that provide for payments that may be accelerated by reason of
prepayments of other obligations (which technically does not include the
Certificates) securing such instruments, the same prepayment assumption
applicable to calculating the accrual of OID will apply. Because the regulations
described above have not been issued, it is impossible to predict what effect
those regulations might have on the tax treatment of a Certificate purchased at
a discount or premium in the secondary market.
A holder who acquired a Certificate at a market discount also may be
required to defer, until the maturity date of such Certificate or its earlier
disposition in a taxable transaction, the deduction of a portion of the amount
of interest that the holder paid or accrued during the taxable year on
indebtedness incurred or maintained to purchase or carry such Certificate in
excess of the aggregate amount of interest (including OID) includible in such
holder's gross income for the taxable year with respect to such Certificate. The
amount of such net interest expense deferred in a taxable year may not exceed
the amount of market discount accrued on the Certificate for the days during the
taxable year on which the holder held the Certificate and, in general, would be
deductible when such market discount is includible in income. The amount of any
remaining deferred deduction is to be taken into account in the taxable year in
which the Certificate matures or is disposed of in a taxable transaction. In the
case of a disposition in which gain or loss is not recognized in whole or in
part, any remaining deferred deduction will be allowed to the extent of gain
recognized on the disposition. This deferral rule does not apply if the
Certificateholder elects to include such market discount in income currently as
it accrues on all market discount obligations acquired by such Certificateholder
in that taxable year or thereafter.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method for Certificates acquired on or after April 4,
1994. If such an election were to be made with respect to a Certificate with
market discount, the Certificateholder 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 Certificateholder acquires during
the year of the election or thereafter. Similarly, a Certificateholder that
makes this election for a Certificate that is acquired at a premium will be
deemed to have
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made an election to amortize bond premium with respect to all debt instruments
having amortizable bond premium that such Certificateholder owns or acquires.
See ' -- Single Class of Certificates -- Premium' herein. The election to accrue
interest, discount and premium on a constant yield method with respect to a
Certificate cannot be revoked without the consent of the Internal Revenue
Service ('IRS').
B. MULTIPLE CLASSES OF CERTIFICATES
1. Stripped Bonds and Stripped Coupons
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the interest payments on an obligation from ownership of
the right to receive some or all of the principal payments results in the
creation of 'stripped bonds' with respect to principal payments and 'stripped
coupons' with respect to interest payments. For purposes of Code Sections 1271
through 1288, Code Section 1286 treats a stripped bond or a stripped coupon as
an obligation issued on the date that such stripped interest is created. If a
Trust Fund is created with two classes of Certificates, one class of
Certificates may represent the right to principal and interest, or principal
only, on all or a portion of the Mortgage Loans (the 'Stripped Bond
Certificates'), while the second class of Certificates may represent the right
to some or all of the interest on such portion (the 'Stripped Coupon
Certificates').
Servicing fees in excess of reasonable servicing fees ('excess servicing')
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e., 1% interest on the Mortgage Loan principal
balance) or the Certificates are initially sold with a de minimis discount
(which amount may be calculated without a prepayment assumption), any non-de
minimis discount arising from a subsequent transfer of the Certificates should
be treated as market discount. The IRS appears to require that reasonable
servicing fees be calculated on a Mortgage Loan by Mortgage Loan basis, which
could result in some Mortgage Loans being treated as having more than 100 basis
points of interest stripped off. See ' -- Non-REMIC Certificates' and 'Multiple
Classes of Senior Certificates -- Stripped Bonds and Stripped Coupons' herein.
Although not entirely clear, a Stripped Bond Certificate generally should
be treated as an interest in Mortgage Loans issued on the day such Certificate
is purchased for purposes of calculating any OID. Generally, if the discount on
a Mortgage Loan is larger than a de minimis amount (as calculated for purposes
of the OID rules) a purchaser of such a Certificate will be required to accrue
the discount under the OID rules of the Code. See ' -- Non-REMIC Certificates'
and ' -- Single Class of Certificates -- Original Issue Discount' herein.
However, a purchaser of a Stripped Bond Certificate will be required to account
for any discount on the Mortgage Loans as market discount rather than OID if
either (i) the amount of OID with respect to the Mortgage Loan is treated as
zero under the OID de minimis rule when the Certificate was stripped or (ii) no
more than 100 basis points (including any amount of servicing fees in excess of
reasonable servicing fees) is stripped off of the Trust Fund's Mortgage Loans.
The precise tax treatment of Stripped Coupon Certificates is substantially
uncertain. The Code could be read literally to require that OID computations be
made for each payment from each Mortgage Loan. However, based on the recent IRS
guidance, it appears that all payments from a Mortgage Loan underlying a
Stripped Coupon Certificate should be treated as a single installment obligation
subject to the OID rules of the Code, in which case, all payments from such
Mortgage Loan would be included in the Mortgage Loan's stated redemption price
at maturity for purposes of calculating income on such certificate under the OID
rules of the Code.
It is unclear under what circumstances, if any, the prepayment of Mortgage
Loans will give rise to a loss to the holder of a Stripped Bond Certificate
purchased at a premium or a Stripped Coupon Certificate. If such Certificate is
treated as a single instrument (rather than an interest in discrete mortgage
loans) and the effect of prepayments is taken into account in computing yield
with respect to such Certificate, it appears that no loss will be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the assumed prepayment rate. However, if such Certificate is treated as an
interest in discrete Mortgage Loans, or if no prepayment assumption is used,
then when a Mortgage Loan is prepaid, the holder of such Certificate should be
able to recognize a loss equal to the portion of the unrecovered premium of such
Certificate that is allocable to such Mortgage Loan.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates are
urged to consult with their own tax advisors regarding the proper treatment of
these Certificates for federal income tax purposes.
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2. Certificates Representing Interests in Loans Other Than ARM Loans
The original issue discount rules of Code Sections 1271 through 1275 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 in income are applicable
to mortgages of corporations originated after May 27, 1969, mortgages of
noncorporate mortgagors (other than individuals) originated after July 1, 1982,
and mortgages of individuals originated after March 2, 1984. Under the OID
Regulations, such original issue discount could arise by the charging of points
by the originator of the mortgage in an amount greater than the statutory de
minimis exception, including a payment of points that is currently deductible by
the borrower under applicable Code provisions, or under certain circumstances,
by the presence of 'teaser' rates (i.e., the initial rates on the Mortgage Loans
are lower than subsequent rates on the Mortgage Loans) on the Mortgage Loans.
OID on each Certificate must be included in the owner's 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 attributable to such income. The amount of OID required
to be included in an owner's income in any taxable year with respect to a
Certificate representing an interest in Mortgage Loans other than Mortgage Loans
with interest rates that adjust periodically ('ARM Loans') likely will be
computed as described below under ' -- Accrual of Original Issue Discount.' The
following discussion is based in part on Treasury regulations issued on January
27, 1994, under Code Sections 1271 through 1273 and 1275 (the 'OID Regulations')
and in part on the provisions of the Tax Reform Act of 1986 (the '1986 Act').
The OID Regulations generally are effective for debt instruments issued on or
after April 4, 1994, but may be relied upon as authority with respect to debt
instruments issued after December 21, 1992. Alternatively, proposed Treasury
regulations issued December 21, 1992 may be treated as authority for debt
instruments issued after December 21, 1992 and prior to April 4, 1994, and
proposed Treasury regulations issued in 1986 and 1991 may be treated as
authority for instruments issued before December 21, 1992. In applying these
dates, the issued date of the Mortgage Loans should be used, or, in the case of
Stripped Bond Certificates or Stripped Coupon Certificates, the date such
Certificates are acquired. The holder of a Certificate should be aware, however,
that neither the proposed OID Regulations nor the OID Regulations adequately
address certain issues relevant to prepayable securities.
Under the Code, the Mortgage Loans underlying the Certificates will be
treated as having been issued on the date the were originated with an amount of
OID equal to the excess of such Mortgage Loan's stated redemption price at
maturity over its issue price. The issue price of a Mortgage Loan is generally
the amount lent to the mortgagee, which may be adjusted to take into account
certain loan origination fees. The stated redemption price at maturity of a
Mortgage Loan is the sum of all payments to be made on such Mortgage Loan other
than payments that are treated as qualified stated interest payments. The
accrual of this OID, as described below under ' -- Accrual of Original Issue
Discount,' will, unless otherwise specified in the related Prospectus
Supplement, utilize the original yield to maturity of the Certificates
calculated based on a reasonable assumed prepayment rate for the mortgage loans
underlying the Certificates (the 'Prepayment Assumption'), and will take into
account events that occur during the calculation period. The Prepayment
Assumption will be determined in the manner prescribed by regulations that have
not yet been issued. The legislative history of the 1986 Act (the 'Legislative
History') provides, however, that the regulations will require that the
Prepayment Assumption be the prepayment assumption that is used in determining
the offering price of such Certificate. No representation is made that any
Certificate will prepay at the Prepayment Assumption or at any other rate. The
prepayment assumption contained in the Code literally only applies to debt
instruments collateralized by other debt instruments that are subject to
prepayment rather than direct ownership interests in such debt instruments, such
as the Certificates represent. However, no other legal authority provides
guidance with regard to the proper method for accruing OID on obligations that
are subject to prepayment, and, until further guidance is issued, the Master
Servicer intends to calculate and report OID under the method described below.
Accrual of Original Issue Discount. Generally, the owner of a Certificate
must include in gross income the sum of the 'daily portions,' as defined below,
of the OID on such Certificate for each day on which it owns such Certificate,
including the date of purchase but excluding the date of disposition. In the
case of an original owner, the daily portions of OID with respect to each
component generally will be determined as set forth under the OID Regulations. A
calculation will be made by the Master Servicer or such other entity specified
in the related Prospectus Supplement of the portion of OID that accrues during
each successive monthly accrual period (or shorter period from the date of
original issue) that ends on the day in the calendar year corresponding to
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each of the Distribution Dates on the Certificates (or the day prior to each
such date). This will be done, in the case of each full month accrual period, by
adding (i) the present value at the end of the accrual period (determined by
using as a discount factor the original yield to maturity of the respective
component under the Prepayment Assumption) of all remaining payments to be
received under the Prepayment Assumption on the respective component and (ii)
any payments received during such accrual period, and subtracting from that
total the 'adjusted issue price' of the respective component at the beginning of
such accrual period. The adjusted issue price of a Certificate at the beginning
of the first accrual period is its issue price; the adjusted issue price of a
Certificate at the beginning of a subsequent accrual period is the adjusted
issue price at the beginning of the immediately preceding accrual period plus
the amount of OID allocable to that accrual period reduced by the amount of any
payment made at the end of or during that accrual period. The OID accruing
during such accrual period will then be divided by the number of days in the
period to determine the daily portion of OID for each day in the period. With
respect to an initial accrual period shorter than a full monthly accrual period,
the daily portions of OID must be determined according to an appropriate
allocation under any reasonable method.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest as it accrues rather than when received. However, the
amount of original issue discount includible in the income of a holder of an
obligation is reduced when the obligation is acquired 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 Loan, no original
issue discount attributable to the difference between the issue price and the
original principal amount of such Mortgage Loan (e.g., due to points) will be
includible by such holder. Other original issue discount on the Mortgage Loans
(e.g., that arising from a 'teaser' rate) would still need to be accrued.
3. Certificates Representing Interests in ARM Loans
The OID Regulations do not address the treatment of instruments, such as
the Certificates, which represent interests in ARM Loans. Additionally, the IRS
has not issued guidance under the Code's coupon stripping rules with respect to
such instruments. In the absence of any authority, the Master Servicer will
report OID on Certificates attributable to ARM Loans ('Stripped ARM
Obligations') to holders in a manner it believes is consistent with the rules
described above under the heading ' -- Certificates Representing Interests in
Loans Other Than ARM Loans' and with the OID Regulations. In general,
application of these rules may require inclusion of income on a Stripped ARM
Obligation in advance of the receipt of cash attributable to such income.
Further, the addition of interest deferred by reason of negative amortization
('Deferred Interest') to the principal balance of an ARM Loan may require the
inclusion of such amount in the income of the Certificateholder when such amount
accrues. Furthermore, the addition of Deferred Interest to the Certificate's
principal balance will result in additional income (including possibly OID
income) to the Certificateholder over the remaining life of such Certificates.
Because the treatment of Stripped ARM Obligations is uncertain, investors
are urged to consult their tax advisors regarding how income will be includible
with respect to such Certificates.
C. SALE OR EXCHANGE OF A CERTIFICATE
Sale or exchange of a Certificate prior to its maturity will result in gain
or loss equal to the difference, if any, between the amount received and the
owner's adjusted basis in the Certificate. Such adjusted basis generally will
equal the seller's purchase price for the Certificate, increased by the OID
included in the seller's gross income with respect to the Certificate, and
reduced by principal payments on the Certificate previously received by the
seller. Such gain or loss will be capital gain or loss to an owner for which a
Certificate is a 'capital asset' within the meaning of Code Section 1221, and
will be long-term or short-term depending on whether the Certificate has been
owned for the long-term capital gain holding period (currently more than one
year).
The Certificates will be 'evidences of indebtedness' within the meaning of
Code Section 582(c)(1), so that gain or loss recognized from the sale of a
Certificate by a bank or a thrift institution to which such section applies will
be ordinary income or loss.
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D. NON-U.S. PERSONS
Generally, to the extent that a Certificate evidences ownership in
underlying Mortgage Loans that were issued on or before July 18, 1984, interest
or OID paid by the person required to withhold tax under Code Section 1441 or
1442 to (i) an owner that is not a U.S. Person (as defined below) or (ii) a
Certificateholder holding on behalf of an owner that is not a U.S. Person will
be subject to federal income tax, collected by withholding, at a rate of 30% or
such lower rate as may be provided for interest by an applicable tax treaty.
Accrued OID recognized by the owner on the sale or exchange of such a
Certificate also will be subject to federal income tax at the same rate.
Generally, such payments would not be subject to withholding to the extent that
a Certificate evidences ownership in Mortgage Loans issued after July 18, 1984,
by natural persons if such Certificateholder complies with certain
identification requirements (including delivery of a statement, signed by the
Certificateholder under penalties of perjury, certifying that such
Certificateholder is not a U.S. Person and providing the name and address of
such Certificateholder). Additional restrictions apply to Mortgage Loans where
the mortgagor is not a natural person in order to qualify for the exemption from
withholding.
As used herein, a 'U.S. Person' means a citizen or resident of the United
States, a corporation or a partnership organized in or under the laws of the
United States or any political subdivision thereof or an estate or trust, the
income of which from sources outside the United States is includible in gross
income for federal income tax purposes regardless of its connection with the
conduct of a trade or business within the United States.
E. INFORMATION REPORTING AND BACKUP WITHHOLDING
The Master Servicer will furnish or make available, within a reasonable
time after the end of each calendar year, to each person who was a
Certificateholder at any time during such year, such information as may be
deemed necessary or desirable to assist Certificateholders in preparing their
federal income tax returns, or to enable holders to make such information
available to beneficial owners or financial intermediaries that hold such
Certificates as nominees on behalf of beneficial owners. If a holder, beneficial
owner, financial intermediary or other recipient of a payment on behalf of a
beneficial owner fails to supply a certified taxpayer identification number or
if the Secretary of the Treasury determines that such person has not reported
all interest and dividend income required to be shown on its federal income tax
return, 31% backup withholding may be required with respect to any payments. Any
amounts deducted and withheld from a distribution to a recipient would be
allowed as a credit against such recipient's federal income tax liability.
REMIC CERTIFICATES
The Trust Fund relating to a Series of Certificates may elect to be treated
as a REMIC. Qualification as a REMIC requires ongoing compliance with certain
conditions. Although a REMIC is not generally subject to federal income tax
(see, however ' -- Residual Certificates' and ' -- Prohibited Transactions'
below), if a Trust Fund with respect to which a REMIC election is made fails to
comply with one or more of the ongoing requirements of the Code for REMIC status
during any taxable year, including the implementation of restrictions on the
purchase and transfer of the residual interests in a REMIC as described below
under 'Residual Certificates,' the Code provides that a Trust Fund will not be
treated as a REMIC for such year and thereafter. In that event, such entity may
be taxable as a separate corporation, and the related Certificates (the 'REMIC
Certificates') may not be accorded the status or given the tax treatment
described below. While the Code authorizes the Treasury Department to issue
regulations providing relief in the event of an inadvertent termination of the
status of a trust fund as a REMIC, no such regulations have been issued. Any
such relief, moreover, may be accompanied by sanctions, such as the imposition
of a corporate tax on all or a portion of the REMIC's income for the period in
which the requirements for such status are not satisfied. With respect to each
Trust Fund that elects REMIC status, Brown & Wood will deliver its opinion
generally to the effect that, under then existing law and assuming compliance
with all provisions of the related Agreement, such Trust Fund will qualify as a
REMIC, and the related Certificates will be considered to be regular interests
('Regular Certificates') or residual interests ('Residual Certificates') in the
REMIC. The related Prospectus Supplement for each Series of Certificates will
indicate whether the Trust Fund will make a REMIC election and whether a class
of Certificates will be treated as a regular or residual interest in the REMIC.
In general, with respect to each Series of Certificates for which a REMIC
election is made, (i) Certificates held by a thrift institution taxed as a
'mutual savings bank' or 'domestic building and loan association' will
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represent interests in 'qualifying real property loans' within the meaning of
Code Section 593(d)(1); (ii) Certificates held by a thrift institution taxed as
a 'domestic building and loan association' will constitute assets described in
Code Section 7701(a)(19)(C); (iii) Certificates held by a real estate investment
trust will constitute 'real estate assets' within the meaning of Code Section
856(c)(5)(A); and (iv) interest on Certificates held by a real estate investment
trust will be considered 'interest on obligations secured by mortgages on real
property' within the meaning of Code Section 856(c)(3)(B). If less than 95% of
the REMIC's assets are assets qualifying under any of the foregoing Code
sections, the Certificates will be qualifying assets only to the extent that the
REMIC's assets are qualifying assets. In addition, payments on Mortgage Loans
held pending distribution on the REMIC Certificates will be considered to be
qualifying real property loans for purposes of Code Section 593(d)(1) and real
estate assets for purposes of Code Section 856(c).
In some instances the Mortgage Loans may not be treated entirely as assets
described in the foregoing sections. See, in this regard, the discussion of
Buydown Loans contained in ' -- Non-REMIC Certificates -- Single Class of
Certificates' above. REMIC Certificates held by a real estate investment trust
will not constitute 'Government Securities' within the meaning of Code Section
856(c)(5)(A), and REMIC Certificates held by a regulated investment company will
not constitute 'Government Securities' within the meaning of Code Section
851(b)(4)(A)(ii). REMIC Certificates held by certain financial institutions will
constitute 'evidences of indebtedness' within the meaning of Code Section
582(c)(1).
A 'qualified mortgage' for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally secured
by an interest in real property and that is transferred to the REMIC within a
prescribed time period in exchange for regular or residual interests in the
REMIC. The REMIC Regulations provide that manufactured housing or mobile homes
(not including recreational vehicles, campers or similar vehicles) that are
'single family residences' under Code Section 25(e)(10) will qualify as real
property without regard to state law classifications. Under Code Section
25(e)(10), a single family residence includes any manufactured home that has a
minimum of 400 square feet of living space and a minimum width in excess of 102
inches and that is of a kind customarily used at a fixed location.
Tiered REMIC Structures. For certain Series of Certificates, two separate
elections may be made to treat designated portions of the related Trust Fund as
REMICs (respectively, the 'Subsidiary REMIC' and the 'Master REMIC') for federal
income tax purposes. Upon the issuance of any such Series of Certificates, Brown
& Wood, counsel to the Depositor, will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Agreement,
the Master REMIC as well as any Subsidiary REMIC will each qualify as a REMIC,
and the REMIC Certificates issued by the Master REMIC and the Subsidiary REMIC,
respectively, will be considered to evidence ownership of Regular Certificates
or Residual Certificates in the related REMIC within the meaning of the REMIC
provisions.
Only REMIC Certificates, other than the residual interest in the Subsidiary
REMIC, issued by the Master REMIC will be offered hereunder. The Subsidiary
REMIC and the Master REMIC will be treated as one REMIC solely for purposes of
determining whether the REMIC Certificates will be (i) 'qualifying real property
loans' under Section 593(d) of the Code; (ii) 'real estate assets' within the
meaning of Section 856(c)(5)(A) of the Code; (iii) 'loans secured by an interest
in real property' under Section 7701(a)(19)(C) of the Code; and (iv) whether the
income on such Certificates is interest described in Section 856(c)(3)(B) of the
Code.
A. REGULAR CERTIFICATES
General. Except as otherwise stated in this discussion, Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of Regular Certificates that otherwise report income under a
cash method of accounting will be required to report income with respect to
Regular Certificates under an accrual method.
Original Issue Discount and Premium. The Regular Certificates may be
issued with original issue discount ('OID'). Generally, such OID, if any, will
equal the difference between the 'stated redemption price at maturity' of a
Regular Certificate and its 'issue price.' Holders of any class of Certificates
issued with OID will be required to include such OID in gross income for federal
income tax purposes as it accrues, in accordance with a constant interest method
based on the compounding of interest as it accrues rather than in accordance
with receipt of the interest payments. The following discussion is based in part
on Treasury regulations issued on January 27, 1994, under Code Sections 1271
through 1273 and 1275 (the 'OID Regulations') and in part on the provisions of
the Tax Reform Act of 1986 (the '1986 Act'). The OID Regulations generally are
effective for
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debt instruments issued on or after April 4, 1994. Holders of Regular
Certificates (the 'Regular Certificateholders') should be aware, however, that
the OID Regulations do not adequately address certain issues relevant to
prepayable securities, such as the Regular Certificates.
Rules governing OID are set forth in Code Sections 1271 through 1273 and
1275. These rules require that the amount and rate of accrual of OID be
calculated based on the Prepayment Assumption and the anticipated reinvestment
rate, if any, relating to the Regular Certificates and prescribe a method for
adjusting the amount and rate of accrual of such discount where the actual
prepayment rate differs from the Prepayment Assumption. Under the Code, the
Prepayment Assumption must be determined in the manner prescribed by
regulations, which regulations have not yet been issued. The Legislative History
provides, however, that Congress intended the regulations to require that the
Prepayment Assumption be the prepayment assumption that is used in determining
the initial offering price of such Regular Certificates. The Prospectus
Supplement for each Series of Regular Certificates will specify the Prepayment
Assumption to be used for the purpose of determining the amount and rate of
accrual of OID. No representation is made that the Regular Certificates will
prepay at the Prepayment Assumption or at any other rate.
In general, each Regular Certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of its
'stated redemption price at maturity' over its 'issue price.' The issue price of
a Regular Certificate is the first price at which a substantial amount of
Regular Certificates of that class are first sold to the public (excluding bond
houses, brokers, underwriters or wholesalers). The issue price of a Regular
Certificate also includes the amount paid by an initial Certificateholder for
accrued interest that relates to a period prior to the issue date of the Regular
Certificate. The stated redemption price at maturity of a Regular Certificate
includes the original principal amount of the Regular Certificate, but generally
will not include distributions of interest if such distributions constitute
'qualified stated interest.' Qualified stated interest generally means interest
payable at a single fixed rate or qualified variable rate (as described below)
provided that such interest payments are unconditionally payable at intervals of
one year or less during the entire term of the Regular Certificate. Interest is
payable at a single fixed rate only if the rate appropriately takes into account
the length of the interval between payments. Distributions of interest on
Regular Certificates with respect to which Deferred Interest will accrue will
not constitute qualified stated interest payments, and the stated redemption
price at maturity of such Regular Certificates includes all distributions of
interest as well as principal thereon.
Where the interval between the issue date and the first Distribution Date
on a Regular Certificate is longer than the interval between subsequent
Distribution Dates, the greater of any original issue discount disregarding the
rate in the first period and any interest foregone during the first period is
treated as the amount by which the stated redemption price of the Certificate
exceeds its issue price for purposes of the de minimis rule described below. The
OID Regulations suggest that all or a portion of the interest on a long first
period Regular Certificate that is issued with non-de minimis OID will be
treated as OID. Where the interval between the issue date and the first
Distribution Date on a Regular Certificate is shorter than the interval between
subsequent Distribution Dates, interest due on the first Distribution Date in
excess of the amount that accrued during the first period would be added to the
Certificates stated redemption price at maturity. Regular Certificateholders
should consult their own tax advisors to determine the issue price and stated
redemption price at maturity of a Regular Certificate. Additionally, it is
possible that the IRS could assert that the stated Pass-Through Rate of interest
on the Regular Certificates is not unconditionally payable because late payments
or nonpayments on the Mortgage Loans are not penalized nor are there reasonable
remedies in place to compel payment on such Mortgage Loans. Such position, if
successful, would require all holders of Regular Certificates to accrue income
on such certificates under the OID Regulations.
Under the de minimis rule, OID on a Regular Certificate will be considered
to be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the Regular Certificate multiplied by the weighted average maturity
of the Regular Certificate. For this purpose, the weighted average maturity of
the Regular Certificate 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 Certificate and the denominator of which is the stated redemption
price at maturity of the Regular Certificate. Although currently unclear, it
appears that the schedule of such distributions should be determined in
accordance with the Prepayment Assumption. The Prepayment Assumption with
respect to a Series of Regular Certificates will be set forth in the related
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Prospectus Supplement. Holders generally must report de minimis OID pro rata as
principal payments are received, and such income will be capital gain if the
Regular Certificate is held as a capital asset. However, accrual method holders
may elect to accrue all de minimis OID as well as market discount under a
constant interest method.
The Prospectus Supplement with respect to a Trust Fund may provide for
certain Regular Certificates to be issued at prices significantly exceeding
their principal amounts or based on notional principal balances (the
'Super-Premium Certificates'). The income tax treatment of such Regular
Certificates is not entirely certain. For information reporting purposes, the
Trust Fund intends to take the position that the stated redemption price at
maturity of such Regular Certificates is the sum of all payments to be made on
such Regular Certificates determined under the Prepayment Assumption, with the
result that such Regular Certificates would be issued with OID. The calculation
of income in this manner could result in negative original issue discount (which
delays future accruals of OID rather than being immediately deductible) when
prepayments on the Mortgage Loans exceed those estimated under the Prepayment
Assumption. The IRS might contend, however, that certain contingent payment
rules contained in regulations proposed on April 8, 1986, with respect to
original issue discount should apply to such Certificates. Under those rules, a
Super-Premium Certificate would not be required to report income on the basis of
a yield based on the Prepayment Assumption, but rather would use a yield equal
to the applicable Federal rate (which is an average yield on Treasury
obligations), until the initial price of the respective Super-Premium
Certificate is fully recovered. The IRS recently proposed and then withdrew a
revised set of proposed contingent payment regulations which differed
substantially from the contingent payment regulation proposed in 1986. If the
Super-Premium Certificates were treated as contingent payment obligations, it is
unclear how holders of those Certificates would report income or recover their
basis. In the alternative, the IRS could assert that the stated redemption price
at maturity of such Regular Certificates should be limited to their principal
amount (subject to the discussion below under ' -- Accrued Interest
Certificates'), so that such Regular Certificates would be considered for
federal income tax purposes to be issued at a premium. If such a position were
to prevail, the rules described below under ' -- Regular
Certificates -- Premium' would apply. It is unclear when a loss may be claimed
for any unrecovered basis for a Super-Premium Certificate. It is possible that a
holder of a Super-Premium Certificate may only claim a loss when its remaining
basis exceeds the maximum amount of future payments, assuming no further
prepayments or when the final payment is received with respect to such
Super-Premium Certificate.
Under the REMIC Regulations, if the issue price of a Regular Certificate
(other than those based on a notional amount) does not exceed 125% of its actual
principal amount, the interest rate is not considered disproportionately high.
Accordingly, such Regular Certificate generally should not be treated as a
Super-Premium Certificate and the rules described below under ' -- Regular
Certificates -- Premium' should apply. However, it is possible that certificates
issued at a premium, even if the premium is less than 25% of such Certificate's
actual principal balance, will be required to amortize the premium under an
original issue discount method or contingent interest method even though no
election under Code section 171 is made to amortize such premium.
Generally, a Regular Certificateholder must include in gross income the
'daily portions,' as determined below, of the OID that accrues on a Regular
Certificate for each day a Certificateholder holds the Regular Certificate,
including the purchase date but excluding the disposition date. The daily
portions of OID are determined by allocating to each day in an accrual period
the ratable portion of OID allocable to the accrual period. Accrual periods may
be of any length and may vary in length over the term of the Regular
Certificates, provided that each accrual period (i) is not longer than one year,
(ii) begins or ends on a Distribution Date (except for the first accrual period
which begins on the issue date) and (iii) begins on the day after the preceding
accrual period ends. This will be done, in the case of each full accrual period,
by (i) adding (a) the present value at the end of the accrual period (determined
by using as a discount factor the original yield to maturity of the Regular
Certificates as calculated under the Prepayment Assumption) of all remaining
payments to be received on the Regular Certificates under the Prepayment
Assumption and (b) any payments included in the stated redemption price at
maturity received during such accrual period, and (ii) subtracting from that
total the adjusted issue price of the Regular Certificates at the beginning of
such accrual period. The adjusted issue price of a Regular Certificate at the
beginning of the first accrual period is its issue price; the adjusted issue
price of a Regular Certificate at the beginning of a subsequent accrual period
is the adjusted issue price at the beginning of the immediately preceding
accrual period plus the amount of OID allocable to that accrual period and
reduced by the amount of any payment other than a payment of qualified stated
interest made at the end of or during that
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accrual period. The OID accrued during an accrual period will then be divided by
the number of days in the period to determine the daily portion of OID for each
day in the accrual period. The calculation of OID under the method described
above will cause the accrual of OID to either increase or decrease (but never
below zero) in a given accrual period to reflect the fact that prepayments are
occurring faster or slower than under the Prepayment Assumption. With respect to
an initial accrual period shorter than a full accrual period, the daily portions
of OID may be determined according to an appropriate allocation under any
reasonable method.
A subsequent purchaser of a Regular Certificate issued with OID who
purchases the Regular Certificate 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 OID on that Regular Certificate. In computing
the daily portions of OID for such a purchaser (as well as an initial purchaser
that purchases at a price higher than the adjusted issue price but less than the
stated redemption price at maturity), however, the daily portion 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 holder for that Regular
Certificate exceeds the following amount: (a) the sum of the issue price plus
the aggregate amount of OID that would have been includible in the gross income
of an original Regular Certificateholder (who purchased the Regular Certificate
at its issue price), less (b) any prior payments included in the stated
redemption price at maturity, and the denominator of which is the sum of the
daily portions for that Regular Certificate for all days beginning on the date
after the purchase date and ending on the maturity date computed under the
Prepayment Assumption. A holder who pays an acquisition premium instead may
elect to accrue OID by treating the purchase as a purchase at original issue.
Variable Rate Regular Certificates. Regular Certificates may provide for
interest based on a variable rate. Interest is treated as payable at a variable
rate and not as contingent interest if, generally, (i) the issue price does not
exceed the original principal balance by more than a specified amount and (ii)
the interest compounds or is payable at least annually at current values of
certain objective rates matured by or based on lending rates for newly borrowed
funds. The variable interest generally will be qualified stated interest to the
extent it is unconditionally payable at least annually and, to the extent
successive variable rates are used, interest is not significantly accelerated or
deferred.
The amount of OID with respect to a Regular Certificate bearing a variable
rate of interest will accrue in the manner described above under ' -- Original
Issue Discount and Premium' by assuming generally that the index used for the
variable rate will remain fixed throughout the term of the Certificate.
Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the Depositor intends to treat Regular
Certificates bearing an interest rate that is a weighted average of the net
interest rates on Mortgage Loans as variable rate certificates. In such case,
the weighted average rate used to compute the initial pass-through rate on the
Regular Certificates will be deemed to be the index in effect through the life
of the Regular Certificates. It is possible, however, that the IRS may treat
some or all of the interest on Regular Certificates with a weighted average rate
as taxable under the rules relating to obligations providing for contingent
payments. Such treatment may effect the timing of income accruals on such
Regular Certificates. Additionally, if some or all of the Mortgage Loans are
subject to 'teaser rates' (i.e., the initial rates on the Mortgage Loans are
less than subsequent rates on the Mortgage Loans) the interest paid on some or
all of the Regular Certificates may be subject to accrual using a constant yield
method notwithstanding the fact that such Certificates may not have been issued
with 'true' non-de minimis original issue discount.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimus market or original issue discount) and premium in income as interest,
based on a constant yield method for Certificates acquired on or after April 4,
1994. If such an election were to be made with respect to a Regular Certificate
with market discount, the Certificateholder 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 Certificateholder
acquires during the year of the election or thereafter. Similarly, a
Certificateholder that makes this election for a Certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder owns or acquires. See ' -- Regular Certificates -- Premium'
herein. The election to accrue interest, discount and premium on a constant
yield method with respect to a Certificate cannot be revoked without the consent
of the IRS.
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Market Discount. A purchaser of a Regular Certificate may also be subject
to the market discount provisions of Code Sections 1276 through 1278. Under
these provisions and the OID Regulations, 'market discount' equals the excess,
if any, of (i) the Regular Certificate's stated principal amount or, in the case
of a Regular Certificate with OID, the adjusted issue price (determined for this
purpose as if the purchaser had purchased such Regular Certificate from an
original holder) over (ii) the price for such Regular Certificate paid by the
purchaser. A Certificateholder that purchases a Regular Certificate at a market
discount will recognize income upon receipt of each distribution representing
stated redemption price. In particular, under Section 1276 of the Code such a
holder generally will be required to allocate each such principal distribution
first to accrued market discount not previously included in income, and to
recognize ordinary income to that extent. A Certificateholder may elect to
include market discount in income currently as it accrues rather than including
it on a deferred basis in accordance with the foregoing. If made, such election
will apply to all market discount bonds acquired by such Certificateholder on or
after the first day of the first taxable year to which such election applies.
Market discount with respect to a Regular Certificate will be considered to
be zero if the amount allocable to the Regular Certificate is less than 0.25% of
such Regular Certificate's stated redemption price at maturity multiplied by
such Regular Certificate's weighted average maturity remaining after the date of
purchase. If market discount on a Regular Certificate is considered to be zero
under this rule, the actual amount of market discount must be allocated to the
remaining principal payments on the Regular Certificate, and gain equal to such
allocated amount will be recognized when the corresponding principal payment is
made. Treasury regulations implementing the market discount rules have not yet
been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986, shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest rate or according to one of the following methods. For Regular
Certificates issued with OID, the amount of market discount that accrues during
a period is equal to the product of (i) the total remaining market discount and
(ii) a fraction, the numerator of which is the OID accruing during the period
and the denominator of which is the total remaining OID at the beginning of the
period. For Regular Certificates issued without OID, the amount of market
discount that accrues during a period is equal to the product of (a) the total
remaining market discount and (b) a fraction, the numerator of which is the
amount of stated interest paid during the accrual period and the denominator of
which is the total amount of stated interest remaining to be paid at the
beginning of the period. For purposes of calculating market discount under any
of the above methods in the case of instruments (such as the Regular
Certificates) that provide for payments that may be accelerated by reason of
prepayments of other obligations securing such instruments, the same Prepayment
Assumption applicable to calculating the accrual of OID will apply.
A holder of a Regular Certificate that acquires such Regular Certificate at
a market discount also may be required to defer, until the maturity date of such
Regular Certificate or its earlier disposition in a taxable transaction, the
deduction of a portion of the amount of interest that the holder paid or accrued
during the taxable year on indebtedness incurred or maintained to purchase or
carry the Regular Certificate in excess of the aggregate amount of interest
(including OID) includible in such holder's gross income for the taxable year
with respect to such Regular Certificate. The amount of such net interest
expense deferred in a taxable year may not exceed the amount of market discount
accrued on the Regular Certificate for the days during the taxable year on which
the holder held the Regular Certificate and, in general, would be deductible
when such market discount is includible in income. The amount of any remaining
deferred deduction is to be taken into account in the taxable year in which the
Regular Certificate matures or is disposed of in a taxable transaction. In the
case of a disposition in which gain or loss is not recognized in whole or in
part, any remaining deferred deduction will be
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allowed to the extent of gain recognized on the disposition. This deferral rule
does not apply if the Regular Certificateholder elects to include such market
discount in income currently as it accrues on all market discount obligations
acquired by such Regular Certificateholder in that taxable year or thereafter.
Premium. A purchaser of a Regular Certificate that purchases the Regular
Certificate at a cost (not including accrued qualified stated interest) greater
than its remaining stated redemption price at maturity will be considered to
have purchased the Regular Certificate at a premium and may elect to amortize
such premium under a constant yield method. It is not clear whether the
Prepayment Assumption would be taken into account in determining the life of the
Regular Certificate for this purpose. However, the Legislative History states
that the same rules that apply to accrual of market discount (which rules
require use of a Prepayment Assumption in accruing market discount with respect
to Regular Certificates without regard to whether such Certificates have OID)
will also apply in amortizing bond premium under Code Section 171. The Code
provides that amortizable bond premium will be allocated among the interest
payments on such Regular Certificates and will be applied as an offset against
such interest payment.
Deferred Interest. Certain classes of Regular Certificates will provide
for the accrual of Deferred Interest with respect to one or more ARM Loans. Any
Deferred Interest that accrues with respect to a class of Regular Certificates
will constitute income to the holders of such Certificates prior to the time
distributions of cash with respect to such Deferred Interest are made. It is
unclear, under the OID Regulations, whether any of the interest on such
Certificates will constitute qualified stated interest or whether all or a
portion of the interest payable on such Certificates must be included in the
stated redemption price at maturity of the Certificates and accounted for as OID
(which could accelerate such inclusion). Interest on Regular Certificates must
in any event be accounted for under an accrual method by the holders of such
Certificates and, therefore, applying the latter analysis may result only in a
slight difference in the timing of the inclusion in income of interest on such
Regular Certificates.
Effects of Defaults and Delinquencies. Certain Series of Certificates may
contain one or more classes of Subordinated Certificates, and in the event there
are defaults or delinquencies on the Mortgage Loans, amounts that would
otherwise be distributed on the Subordinated Certificates may instead be
distributed on the Certificates. Subordinated Certificateholders nevertheless
will be required to report income with respect to such Certificates under an
accrual method without giving effect to delays and reductions in distributions
on such Subordinated Certificates attributable to defaults and delinquencies on
the Mortgage Loans, except to the extent that it can be established that such
amounts are uncollectible. As a result, the amount of income reported by a
Subordinated Certificateholder in any period could significantly exceed the
amount of cash distributed to such holder in that period. The holder will
eventually be allowed a loss (or will be allowed to report a lesser amount of
income) to the extent that the aggregate amount of distributions on the
Subordinated Certificate is reduced as a result of defaults and delinquencies on
the Mortgage Loans. However, the timing and characterization of such losses or
reductions in income are uncertain, and, accordingly, Subordinated
Certificateholders should consult their own tax advisors on this point.
Sale, Exchange or Redemption. If a Regular Certificate is sold, exchanged,
redeemed or retired, the seller will recognize gain or loss equal to the
difference between the amount realized on the sale, exchange, redemption, or
retirement and the seller's adjusted basis in the Regular Certificate. Such
adjusted basis generally will equal the cost of the Regular Certificate to the
seller, increased by any OID and market discount included in the seller's gross
income with respect to the Regular Certificate, and reduced (but not below zero)
by payments included in the stated redemption price at maturity previously
received by the seller and by any amortized premium. Similarly, a holder who
receives a payment that is part of the stated redemption price at maturity of a
Regular Certificate will recognize gain equal to the excess, if any, of the
amount of the payment over the holder's adjusted basis in the Regular
Certificate. A Regular Certificateholder who receives a final payment that is
less than the holder's adjusted basis in the Regular Certificate will generally
recognize a loss. Except as provided in the following paragraph and as provided
under 'Market Discount' above, any such gain or loss will be capital gain or
loss, provided that the Regular Certificate is held as a 'capital asset'
(generally, property held for investment) within the meaning of Code Section
1221.
Gain from the sale or other disposition of a Regular Certificate that might
otherwise be capital gain will be treated as ordinary income to the extent that
such gain does not exceed the excess, if any, of (i) the amount that would have
been includible in such holder's income with respect to the Regular Certificate
had income accrued
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thereon at a rate equal to 110% of the AFR as defined in Code Section 1274(d)
determined as of the date of purchase of such Regular Certificate, over (ii) the
amount actually includible in such holder's income.
The Regular Certificates will be 'evidences of indebtedness' within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the sale
of a Regular Certificate by a bank or a thrift institution to which such section
applies will be ordinary income or loss.
The Regular Certificate information reports will include a statement of the
adjusted issue price of the Regular Certificate at the beginning of each accrual
period. In addition, the reports will include information necessary to compute
the accrual of any market discount that may arise upon secondary trading of
Regular Certificates. Because exact computation of the accrual of market
discount on a constant yield method would require information relating to the
holder's purchase price which the REMIC may not have, it appears that the
information reports will only require information pertaining to the appropriate
proportionate method of accruing market discount.
Accrued Interest Certificates. Certain of the Regular Certificates
('Payment Lag Certificates') may provide for payments of interest based on a
period that corresponds to the interval between Distribution Dates but that ends
prior to each such Distribution Date. The period between the Closing Date for
Payment Lag Certificates and their first Distribution Date may or may not exceed
such interval. Purchasers of Payment Lag Certificates for which the period
between the Closing Date and the first Distribution Date does not exceed such
interval could pay upon purchase of the Regular Certificates accrued interest in
excess of the accrued interest that would be paid if the interest paid on the
Distribution Date were interest accrued from Distribution Date to Distribution
Date. If a portion of the initial purchase price of a Regular Certificate is
allocable to interest that has accrued prior to the issue date ('pre-issuance
accrued interest') and the Regular Certificate provides for a payment of stated
interest on the first payment date (and the first payment date is within one
year of the issue date) that equals or exceeds the amount of the pre-issuance
accrued interest, then the Regular Certificates' issue price may be computed by
subtracting from the issue price the amount of pre-issuance accrued interest,
rather than as an amount payable on the Regular Certificate. However, it is
unclear under this method how the OID Regulations treat interest on Payment Lag
Certificates. Therefore, in the case of a Payment Lag Certificate, the Trust
Fund intends to include accrued interest in the issue price and report interest
payments made on the first Distribution Date as interest to the extent such
payments represent interest for the number of days that the Certificateholder
has held such Payment Lag Certificate during the first accrual period.
Investors should consult their own tax advisors concerning the treatment
for federal income tax purposes of Payment Lag Certificates.
Non-Interest Expenses of the REMIC. Under the temporary Treasury
regulations, if the REMIC is considered to be a 'single-class REMIC,' a portion
of the REMIC's servicing, administrative and other non-interest expenses will be
allocated as a separate item to those Regular Certificateholders that are
'pass-through interest holders.' Certificateholders that are pass-through
interest holders should consult their own tax advisors about the impact of these
rules on an investment in the Regular Certificates. See 'Pass-Through of
Non-Interest Expenses of the REMIC' under 'Residual Certificates' below.
Treatment of Realized Losses. Although not entirely clear, it appears that
holders of Regular Certificates that are corporations should in general be
allowed to deduct as an ordinary loss any loss sustained during the taxable year
on account of any such Certificates becoming wholly or partially worthless, and
that, in general, holders of Certificates that are not corporations should be
allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of any such Certificates becoming wholly worthless.
Although the matter is unclear, non-corporate holders of Certificates may be
allowed a bad debt deduction at such time that the principal balance of any such
Certificate is reduced to reflect realized losses resulting from any liquidated
Mortgage Loans. The Internal Revenue Service, however, could take the position
that non-corporate holders will be allowed a bad debt deduction to reflect
realized losses only after all Mortgage Loans remaining in the related Trust
Fund have been liquidated or the Certificates of the related Series have been
otherwise retired. Potential investors and Holders of the Certificates are urged
to consult their own tax advisors regarding the appropriate timing, amount and
character of any loss sustained with respect to such Certificates, including any
loss resulting from the failure to recover previously accrued interest or
discount income. Special loss rules are applicable to banks and thrift
institutions, including rules regarding reserves for bad debts. Such taxpayers
are advised to consult their tax advisors regarding the treatment of losses on
Certificates.
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Non-U.S. Persons. Generally, payments of interest (including any payment
with respect to accrued OID) on the Regular Certificates to a Regular
Certificateholder who is not a U.S. Person and is not engaged in a trade or
business within the United States will not be subject to federal withholding tax
if such Regular Certificateholder complies with certain identification
requirements (including delivery of a statement, signed by the Regular
Certificateholder under penalties of perjury, certifying that such Regular
Certificateholder is a foreign person and providing the name and address of such
Regular Certificateholder). If a Regular Certificateholder is not exempt from
withholding, distributions of interest, including distributions in respect of
accrued OID, such holder may be subject to a 30% withholding tax, subject to
reduction under any applicable tax treaty.
Further, it appears that a Regular Certificate would not be included in the
estate of a non-resident alien individual and would not be subject to United
States estate taxes. However, Certificateholders who are non-resident alien
individuals should consult their tax advisors concerning this question.
Regular Certificateholders who are not U.S. Persons and persons related to
such holders should not acquire any Residual Certificates, and holders of
Residual Certificates (the 'Residual Certificateholder') and persons related to
Residual Certificateholders should not acquire any Regular Certificates without
consulting their tax advisors as to the possible adverse tax consequences of
doing so.
Information Reporting and Backup Withholding. The Master Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a Regular Certificateholder at any time
during such year, such information as may be deemed necessary or desirable to
assist Regular Certificateholders in preparing their federal income tax returns,
or to enable holders to make such information available to beneficial owners or
financial intermediaries that hold such Regular Certificates on behalf of
beneficial owners. If a holder, beneficial owner, financial intermediary or
other recipient of a payment on behalf of a beneficial owner fails to supply a
certified taxpayer identification number or if the Secretary of the Treasury
determines that such person has not reported all interest and dividend income
required to be shown on its federal income tax return, 31% backup withholding
may be required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability.
B. RESIDUAL CERTIFICATES
Allocation of the Income of the REMIC to the Residual Certificates. The
REMIC will not be subject to federal income tax except with respect to income
from prohibited transactions and certain other transactions. See ' -- Prohibited
Transactions and Other Taxes' below. Instead, each original holder of a Residual
Certificate will report on its federal income tax return, as ordinary income,
its share of the taxable income of the REMIC for each day during the taxable
year on which such holder owns any Residual Certificates. The taxable income of
the REMIC for each day will be determined by allocating the taxable income of
the REMIC for each calendar quarter ratably to each day in the quarter. Such a
holder's share of the taxable income of the REMIC for each day will be based on
the portion of the outstanding Residual Certificates that such holder owns on
that day. The taxable income of the REMIC will be determined under an accrual
method and will be taxable to the holders of Residual Certificates without
regard to the timing or amounts of cash distributions by the REMIC. Ordinary
income derived from Residual Certificates will be 'portfolio income' for
purposes of the taxation of taxpayers subject to the limitations on the
deductibility of 'passive losses.' As residual interests, the Residual
Certificates will be subject to tax rules, described below, that differ from
those that would apply if the Residual Certificates were treated for federal
income tax purposes as direct ownership interests in the Certificates or as debt
instruments issued by the REMIC.
A Residual Certificateholder may be required to include taxable income from
the Residual Certificate in excess of the cash distributed. For example, a
structure where principal distributions are made serially on regular interests
(that is, a fast-pay, slow-pay structure) may generate such a mismatching of
income and cash distributions (that is, 'phantom income'). This mismatching may
be caused by the use of certain required tax accounting methods by the REMIC,
variations in the prepayment rate of the underlying Mortgage Loans and certain
other factors. Depending upon the structure of a particular transaction, the
aforementioned factors may significantly reduce the after-tax yield of a
Residual Certificate to a Residual Certificateholder. Investors should consult
their own tax advisors concerning the federal income tax treatment of a Residual
Certificate and the impact of such tax treatment on the after-tax yield of a
Residual Certificate.
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A subsequent Residual Certificateholder also will report on its federal
income tax return amounts representing a daily share of the taxable income of
the REMIC for each day that such Residual Certificateholder owns such Residual
Certificate. Those daily amounts generally would equal the amounts that would
have been reported for the same days by an original Residual Certificateholder,
as described above. The Legislative History indicates that certain adjustments
may be appropriate to reduce (or increase) the income of a subsequent holder of
a Residual Certificate that purchased such Residual Certificate at a price
greater than (or less than) the adjusted basis such Residual Certificate would
have in the hands of an original Residual Certificateholder. See ' -- Sale or
Exchange of Residual Certificates' below. It is not clear, however, whether such
adjustments will in fact be permitted or required and, if so, how they would be
made. The REMIC Regulations do not provide for any such adjustments.
Taxable Income of the REMIC Attributable to Residual Interests. The
taxable income of the REMIC will reflect a netting of (i) the income from the
Mortgage Loans and the REMIC's other assets and (ii) the deductions allowed to
the REMIC for interest and OID on the Regular Certificates and, except as
described above under ' -- Regular Certificates -- Non-Interest Expenses of the
REMIC,' other expenses. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using the accrual method of
accounting, except that (i) the limitations 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 is
more restrictive than with respect to individual. The REMIC's gross income
includes interest, original issue discount income, and market discount income,
if any, on the Mortgage Loans, as well as, income earned from temporary
investments on reverse assets, reduced by the amortization of any premium on the
Mortgage Loans. In addition, a Residual Certificateholder will recognize
additional income due to the allocation of realized losses to the Regular
Certificates due to defaults, delinquencies and realized losses on the Mortgage
Loans. The timing of the inclusion of such income by Residual Certificateholders
may differ from the time the actual loss is allocated to the Regular
Certificates. The REMIC's deductions include interest and original issue
discount expense on the Regular Certificates, servicing fees on the Mortgage
Loans, other administrative expenses of the REMIC and realized losses on the
Mortgage Loans. The requirement that Residual Certificateholders report their
pro rata share of taxable income or net loss of the REMIC will continue until
there are no Certificates of any class of the related Series outstanding.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the Regular Certificates and the Residual Certificates (or, if a class of
Certificates is not sold initially, its fair market value). Such aggregate basis
will be allocated among the Mortgage Loans and other assets of the REMIC in
proportion to their respective fair market value. A Mortgage Loan will be deemed
to have been acquired with discount or premium to the extent that the REMIC's
basis therein is less than or greater than its principal balance, respectively.
Any such discount (whether market discount or OID) will be includible in the
income of the REMIC as it accrues, in advance of receipt of the cash
attributable to such income, under a method similar to the method described
above for accruing OID on the Regular Certificates. The REMIC expects to elect
under Code Section 171 to amortize any premium on the Mortgage Loans. Premium on
any Mortgage Loan to which such election applies would be amortized under a
constant yield method. It is not clear whether the yield of a Mortgage Loan
would be calculated for this purpose based on scheduled payments or taking
account of the Prepayment Assumption. Additionally, such an election would not
apply to the yield with respect to any underlying mortgage loan originated on or
before September 27, 1985. Instead, premium with respect to such a mortgage loan
would be allocated among the principal payments thereon and would be deductible
by the REMIC as those payments become due.
The REMIC will be allowed a deduction for interest and OID on the Regular
Certificates. The amount and method of accrual of OID will be calculated for
this purpose in the same manner as described above with respect to Regular
Certificates except that the 0.25% per annum de minimis rule and adjustments for
subsequent holders described therein will not apply.
A Residual Certificateholder will not be permitted to amortize the cost of
the Residual Certificate as an offset to its share of the REMIC's taxable
income. However, that taxable income will not include cash received by the REMIC
that represents a recovery of the REMIC's basis in its assets, and, as described
above, the issue price of the Residual Certificates will be added to the issue
price of the Regular Certificates in determining the REMIC's initial basis in
its assets. See ' -- Sale or Exchange of Residual Certificates' below. For a
discussion of possible adjustments to income of a subsequent holder of a
Residual Certificate to reflect any difference between
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the actual cost of such Residual Certificate to such holder and the adjusted
basis such Residual Certificate would have in the hands of an original Residual
Certificateholder, see ' -- Allocation of the Income of the REMIC to the
Residual Certificates' above.
Net Losses of the REMIC. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. Such net loss would be
allocated among the Residual Certificateholders in the same manner as the
REMIC's taxable income. The net loss allocable to any Residual Certificate will
not be deductible by the holder to the extent that such net loss exceeds such
holder's adjusted basis in such Residual Certificate. Any net loss that is not
currently deductible by reason of this limitation may only be used by such
Residual Certificateholder to offset its share of the REMIC's taxable income in
future periods (but not otherwise). The ability of Residual Certificateholders
that are individuals or closely held corporations to deduct net losses may be
subject to additional limitations under the Code.
Mark to Market Rules. Prospective purchasers of a Residual Certificate
should be aware that on December 28, 1993, the Internal Revenue Service released
temporary Treasury regulations (the 'Temporary Mark to Market Regulations')
relating to the requirement that a securities dealer mark-to-market securities
held for sale to customers. This mark-to-market requirement applies to all
securities of a dealer, except to the extent that the dealer has specifically
identified a security as held for investment. The Temporary Mark to Market
Regulations provide that for purposes of this mark-to-market requirement, a
'negative value' REMIC residual interest is not treated as a security and thus
may not be marked to market. In addition, a dealer is not required to identify
such Residual Certificate as held for investment. In general, a Residual
Certificate has negative value if, as of the date a taxpayer acquires the
Residual Certificate, the present value of the tax liabilities associated with
holding the Residual Certificate exceeds the sum of (i) the present value of the
expected future distributions on the Residual Certificate, and (ii) the present
value of the anticipated tax savings associated with holding the Residual
Certificate as the REMIC generates losses. The amounts and present values of the
anticipated tax liabilities, expected future distributions and anticipated tax
savings are all to be determined using (i) the prepayment and reinvestment
assumptions adopted under Section 1272(a)(6), or that would have been adopted
had the REMIC's regular interests been issued with original issue discount, (ii)
any required or permitted clean up calls, or required qualified liquidation
provided for in the REMIC's organizational documents and (iii) a discount rate
equal to the 'applicable Federal rate' (as specified in Section 1274(d)(1) that
would apply to a debt instrument issued on the date of acquisition of the
Residual Certificate. Furthermore, the Temporary Mark to Market Regulations
provide the IRS with the authority to treat any Residual Certificate having
substantially the same economic effect as a 'negative value' residual interest
as a 'negative value' residual interest. The IRS could issue subsequent
regulations, which could apply retroactively, providing additional or different
requirements with respect to such deemed negative value residual interests.
Prospective purchasers of a Residual Certificate should consult their tax
advisors regarding the possible application of the Temporary Mark to Market
Regulations.
Pass-Through of Non-Interest Expenses of the REMIC. As a general rule, all
of the fees and expenses of a REMIC will be taken into account by holders of the
Residual Certificates. In the case of a single class REMIC, however, the
expenses and a matching amount of additional income will be allocated, under
temporary Treasury regulations, among the Regular Certificateholders and the
Residual Certificateholders on a daily basis in proportion to the relative
amounts of income accruing to each Certificateholder on that day. In general
terms, a single class REMIC is one that either (i) would qualify, under existing
Treasury regulations, as a grantor trust if it were not a REMIC (treating all
interests as ownership interests, even if they would be classified as debt for
federal income tax purposes) or (ii) is similar to such a trust and is
structured with the principal purpose of avoiding the single class REMIC rules.
Unless otherwise stated in the applicable Prospectus Supplement, the expenses of
the REMIC will be allocated to holders of the related Residual Certificates in
their entirety and not to holders of the related Regular Certificates.
In the case of individuals (or trusts, estates or other persons that
compute their income in the same manner as individuals) who own an interest in a
Regular Certificate or a Residual Certificate directly or through a pass-through
interest holder that is required to pass miscellaneous itemized deductions
through to its owners or beneficiaries (e.g. a partnership, an S corporation or
a grantor trust), such expenses will be deductible under Code Section 67 only to
the extent that such expenses, plus other 'miscellaneous itemized deductions' of
the individual, exceed 2% of such individual's adjusted gross income. In
addition, Code Section 68 provides that the amount of itemized deductions
otherwise allowable for an individual whose adjusted gross income exceeds a
certain amount (the 'Applicable Amount') will be reduced by the lesser of (i) 3%
of the excess of the
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individual's adjusted gross income over the Applicable Amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income recognized by Residual Certificateholders
who are subject to the limitations of either Code Section 67 or Code Section 68
may be substantial. Further, holders (other than corporations) subject to the
alternative minimum tax may not deduct miscellaneous itemized deductions in
determining such holders' alternative minimum taxable income. The REMIC is
required to report to each pass-through interest holder and to the IRS such
holder's allocable share, if any, of the REMIC's non-interest expenses. The term
'pass-through interest holder' generally refers to individuals, entities taxed
as individuals and certain pass-through entities, but does not include real
estate investment trusts. Residual Certificateholders that are pass-through
interest holders should consult their own tax advisors about the impact of these
rules on an investment in the Residual Certificates.
Excess Inclusions. A portion of the income on a Residual Certificate
(referred to in the Code as an 'excess inclusion') for any calendar quarter
will, with an exception discussed below for certain thrift institutions, be
subject to federal income tax in all events. Thus, for example, an excess
inclusion (i) may not, except as described below, be offset by any unrelated
losses, deductions or loss carryovers of a Residual Certificateholder; (ii) will
be treated as 'unrelated business taxable income' within the meaning of Code
Section 512 if the Residual Certificateholder is a pension fund or any other
organization that is subject to tax only on its unrelated business taxable
income (see ' -- Tax-Exempt Investors' below); and (iii) is not eligible for any
reduction in the rate of withholding tax in the case of a Residual
Certificateholder that is a foreign investor. See ' -- Non-U.S. Persons' below.
The exception for thrift institutions is available only to the institution
holding the Residual Certificate and not to any affiliate of the institution,
unless the affiliate is a subsidiary all the stock of which, and substantially
all the indebtedness of which, is held by the institution, and which is
organized and operated exclusively in connection with the organization and
operation of one or more REMICs.
Except as discussed in the following paragraph, with respect to any
Residual Certificateholder, the excess inclusions for any calendar quarter is
the excess, if any, of (i) the income of such Residual Certificateholder for
that calendar quarter from its Residual Certificate over (ii) the sum of the
'daily accruals' (as defined below) for all days during the calendar quarter on
which the Residual Certificateholder holds such Residual Certificate. For this
purpose, the daily accruals with respect to a Residual Certificate 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
Certificate at the beginning of the calendar quarter and 120 percent of the
'Federal long-term rate' in effect at the time the Residual Certificate is
issued. For this purpose, the 'adjusted issue price' of a Residual Certificate
at the beginning of any calendar quarter equals the issue price of the Residual
Certificate, 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 Certificate 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.
As an exception to the general rule described above, the Treasury
Department has authority to issue regulations that would treat the entire amount
of income accruing on a Residual Certificate as excess inclusions if the
Residual Certificates in the aggregate are considered not to have 'significant
value.' Under the REMIC Regulations, Residual Certificateholders that are thrift
institutions described in Code Section 593 can offset excess inclusions with
unrelated deductions, losses and loss carryovers provided the Residual
Certificates have 'significant value.' For purposes of applying this rule,
thrift institutions that are members of an affiliated group filing a
consolidated return, together with their subsidiaries formed to issue REMICs,
are treated as separate corporations. Residual Certificates have 'significant
value' if: (i) the Residual Certificates have an aggregate issue price that is
at least equal to 2% of the aggregate issue price of all Residual Certificates
and Regular Certificates with respect to the REMIC and (ii) the anticipated
weighted average life of the Residual Certificates is at least 20% of the
anticipated weighted average life of the REMIC based on the anticipated
principal payments to be received with respect thereto (using the Prepayment
Assumption and any required or permitted clean up calls or required liquidation
provided for in the REMIC's organizational documents), except that all
anticipated distributions are to be used to calculate the weighted average life
of Regular Certificates that are not entitled to any principal payments or are
entitled to a disproportionately small principal amount relative to interest
payments thereon and all anticipated distributions are to be used to calculate
the weighted average life of the Residual Certificates. The principal amount
will be considered disproportionately small if the issue price of the Residual
Certificates exceeds 125% of their initial principal amount. Finally, an
ordering rule under the
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REMIC Regulations provides that a thrift institution may only offset its excess
inclusion income with deductions after it has first applied its deductions
against income that is not excess inclusion income.
In the case of any Residual Certificates held by a real estate investment
trust, the aggregate excess inclusions with respect to such Residual
Certificates, reduced (but not below zero) by the real estate investment trust
taxable income (within the meaning of Code Section 857(b)(2), excluding any net
capital gain), will be allocated among the shareholders of such trust in
proportion to the dividends received by such shareholders from such trust, and
any amount so allocated will be treated as an excess inclusion with respect to a
Residual Certificate as if held directly by such shareholder. Regulated
investment companies, common trust funds and certain cooperatives are subject to
similar rules.
Payments. Any distribution made on a Residual Certificate to a Residual
Certificateholder will be treated as a non-taxable return of capital to the
extent it does not exceed the Residual Certificateholder's adjusted basis in
such Residual Certificate. To the extent a distribution exceeds such adjusted
basis, it will be treated as gain from the sale of the Residual Certificate.
Sale or Exchange of Residual Certificates. If a Residual Certificate is
sold or exchanged, the seller will generally recognize gain or loss equal to the
difference between the amount realized on the sale or exchange and its adjusted
basis in the Residual Certificate (except that the recognition of loss may be
limited under the 'wash sale' rules described below). A holder's adjusted basis
in a Residual Certificate generally equals the cost of such Residual Certificate
to such Residual Certificateholder, increased by the taxable income of the REMIC
that was included in the income of such Residual Certificateholder with respect
to such Residual Certificate, and decreased (but not below zero) by the net
losses that have been allowed as deductions to such Residual Certificateholder
with respect to such Residual Certificate and by the distributions received
thereon by such Residual Certificateholder. In general, any such gain or loss
will be capital gain or loss provided the Residual Certificate is held as a
capital asset. However, Residual Certificates will be 'evidences of
indebtedness' within the meaning of Code Section 582(c)(1), so that gain or loss
recognized from sale of a Residual Certificate by a bank or thrift institution
to which such section applies would be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the seller
of a Residual Certificate reacquires such Residual Certificate, or acquires any
other Residual Certificate, any residual interest in another REMIC or similar
interest in a 'taxable mortgage pool' (as defined in Code Section 7701(i))
during the period beginning six months before, and ending six months after, the
date of such sale, such sale will be subject to the 'wash sale' rules of Code
Section 1091. In that event, any loss realized by the Residual Certificateholder
on the sale will not be deductible, but, instead, will increase such Residual
Certificateholder's adjusted basis in the newly acquired asset.
PROHIBITED TRANSACTIONS AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100 percent of the net income
derived from 'prohibited transactions' (the 'Prohibited Transactions Tax'). In
general, subject to certain specified exceptions, a prohibited transaction means
the disposition of a Mortgage Loan, the receipt of income from a source other
than a Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the Certificates. It is not anticipated that the Trust Fund for
any Series of Certificates will engage in any prohibited transactions in which
it would recognize a material amount of net income.
In addition, certain contributions to a Trust Fund as to which an election
has been made to treat such Trust Fund as a REMIC made after the day on which
such Trust Fund issues all of its interests could result in the imposition of a
tax on the Trust Fund equal to 100% of the value of the contributed property
(the 'Contributions Tax'). No Trust Fund for any Series of Certificates will
accept contributions that would subject it to such tax.
In addition, a Trust Fund as to which an election has been made to treat
such Trust Fund as a REMIC may also 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 'Net income
from foreclosure property' generally means income from foreclosure property
other than qualifying income for a real estate investment trust.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net income
from foreclosure property or state or local income or franchise tax that may be
imposed on a REMIC relating to any Series of Certificates
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arises out of, or results from, (i) a breach of the related Master Servicer's,
Trustee's or Seller's obligations, as the case may be, under the related
Agreement for such Series, such tax will be borne by such Master Servicer,
Trustee or Seller, as the case may be, out of its own funds or (ii) the Seller's
obligation to repurchase a Mortgage Loan, such tax will be borne by the Seller.
In the event that such Master Servicer, Trustee or Seller, as the case may be,
fails to pay or is not required to pay any such tax as provided above, such tax
will be payable out of the Trust Fund for such Series and will result in a
reduction in amounts available to be distributed to the Certificateholders of
such Series.
LIQUIDATION AND TERMINATION
If the REMIC adopts a plan of complete liquidation, within the meaning of
Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMIC's final tax return a date on which such adoption is deemed to occur, and
sells all of its assets (other than cash) within a 90-day period beginning on
such date, the REMIC will not be subject to any Prohibited Transactions Tax,
provided that the REMIC credits or distributes in liquidation all of the sale
proceeds plus its cash (other than the amounts retained to meet claims) to
holders of Regular and Residual Certificates within the 90-day period.
The REMIC will terminate shortly following the retirement of the Regular
Certificates. If a Residual Certificateholder's adjusted basis in the Residual
Certificate exceeds the amount of cash distributed to such Residual
Certificateholder in final liquidation of its interest, then it would appear
that the Residual Certificateholder would be entitled to a loss equal to the
amount of such excess. It is unclear whether such a loss, if allowed, will be a
capital loss or an ordinary loss.
ADMINISTRATIVE MATTERS
Solely for the purpose of the administrative provisions of the Code, the
REMIC generally will be treated as a partnership and the Residual
Certificateholders will be treated as the partners. Certain information will be
furnished quarterly to each Residual Certificateholder who held a Residual
Certificate on any day in the previous calendar quarter.
Each Residual Certificateholder is required to treat items on its return
consistently with their treatment on the REMIC's return, unless the Residual
Certificateholder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information received
from the REMIC. The IRS may assert a deficiency resulting from a failure to
comply with the consistency requirement without instituting an administrative
proceeding at the REMIC level. The REMIC does not intend to register as a tax
shelter pursuant to Code Section 6111 because it is not anticipated that the
REMIC will have a net loss for any of the first five taxable years of its
existence. Any person that holds a Residual Certificate as a nominee for another
person may be required to furnish the REMIC, in a manner to be provided in
Treasury regulations, with the name and address of such person and other
information.
TAX-EXEMPT INVESTORS
Any Residual Certificateholder that is a pension fund or other entity that
is subject to federal income taxation only on its 'unrelated business taxable
income' within the meaning of Code Section 512 will be subject to such tax on
that portion of the distributions received on a Residual Certificate that is
considered an excess inclusion. See ' -- Residual Certificates -- Excess
Inclusions' above.
NON-U.S. PERSONS
Amounts paid to Residual Certificateholders who are not U.S. persons (see
' -- Regular Certificates -- Non-U.S. Persons' above) are treated as interest
for purposes of the 30% (or lower treaty rate) United States withholding tax.
Amounts distributed to holders of Residual Certificates should qualify as
'portfolio interest,' subject to the conditions described in ' -- Regular
Certificates' above, but only to the extent that the underlying mortgage loans
were originated after July 18, 1984. Furthermore, the rate of withholding on any
income on a Residual Certificate that is excess inclusion income will not be
subject to reduction under any applicable tax treaties. See ' -- Residual
Certificates -- Excess Inclusions' above. If the portfolio interest exemption is
unavailable, such amount will be subject to United States withholding tax when
paid or otherwise distributed (or when the Residual Certificate is disposed of)
under rules similar to those for withholding upon disposition of
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debt instruments that have OID. The Code, however, grants the Treasury
Department authority to issue regulations requiring that those amounts be taken
into account earlier than otherwise provided where necessary to prevent
avoidance of tax (for example, where the Residual Certificates do not have
significant value). See ' -- Residual Certificates -- Excess Inclusions' above.
If the amounts paid to Residual Certificateholders that are not U.S. persons are
effectively connected with their conduct of a trade or business within the
United States, the 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such non-U.S. Person will be subject to U. S.
federal income taxation at regular graduated rates. For special restrictions on
the transfer of Residual Certificates, see ' -- Tax-Related Restrictions on
Transfers of Residual Certificates' below.
Regular Certificateholders and persons related to such holders should not
acquire any Residual Certificates, and Residual Certificateholders and persons
related to Residual Certificateholders should not acquire any Regular
Certificates, without consulting their tax advisors as to the possible adverse
tax consequences of such acquisition.
TAX-RELATED RESTRICTIONS ON TRANSFERS OF RESIDUAL CERTIFICATES
Disqualified Organizations. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests in
such entity are not held by 'disqualified organizations' (as defined below).
Further, a tax is imposed on the transfer of a residual interest in a REMIC to a
'disqualified organization.' The amount of the tax equals the product of (A) an
amount (as determined under the REMIC Regulations) equal to the present value of
the total anticipated 'excess inclusions' with respect to such interest for
periods after the transfer and (B) the highest marginal federal income tax rate
applicable to corporations. The tax is imposed on the transferor unless the
transfer is through an agent (including a broker or other middleman) for a
disqualified organization, in which event the tax is imposed on the agent. The
person otherwise liable for the tax shall be relieved of liability for the tax
if the transferee furnished to such person an affidavit that the transferee is
not a disqualified organization and, at the time of the transfer, such person
does not have actual knowledge that the affidavit is false. A 'disqualified
organization' means (A) the United States, any State, possession or political
subdivision thereof, any foreign government, any international organization or
any agency or instrumentality of any of the foregoing (provided that such term
does not include an instrumentality if all its activities are subject to tax
and, except for FHLMC, a majority of its board of directors is not selected by
any such governmental agency), (B) any organization (other than certain farmers'
cooperatives) generally exempt from federal income taxes unless such
organization is subject to the tax on 'unrelated business taxable income' and
(C) a rural electric or telephone cooperative.
A tax is imposed on a 'pass-through entity' (as defined below) holding a
residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of (A)
the amount of excess inclusions for the taxable year allocable to the interest
held by the disqualified organization and (B) the highest marginal federal
income tax rate applicable to corporations. The pass-through entity otherwise
liable for the tax, for any period during which the disqualified organization is
the record holder of an interest in such entity, will be relieved of liability
for the tax if such record holder furnishes to such entity an affidavit that
such record holder is not a disqualified organization and, for such period, the
pass-through entity does not have actual knowledge that the affidavit is false.
For this purpose, a 'pass-through entity' means (i) a regulated investment
company, real estate investment trust or common trust fund, (ii) a partnership,
trust or estate and (iii) certain cooperatives. Except as may be provided in
Treasury regulations not yet 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 tax on pass-through entities is generally
effective for periods after March 31, 1988, except that in the case of regulated
investment companies, real estate investment trusts, common trust funds and
publicly-traded partnerships the tax shall apply only to taxable years of such
entities beginning after December 31, 1988. Under proposed legislation, large
partnerships (generally with 250 or more partners) will be taxable on excess
inclusion income as if all partners were disqualified organizations.
In order to comply with these rules, the Agreement will provide that no
record or beneficial ownership interest in a Residual Certificate may be
purchased, transferred or sold, directly or indirectly, without the express
written consent of the Master Servicer. The Master Servicer will grant such
consent to a proposed transfer only if it receives the following: (i) an
affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the Residual Certificate as a
nominee or agent for a disqualified organization
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and (ii) a covenant by the proposed transferee to the effect that the proposed
transferee agrees to be bound by and to abide by the transfer restrictions
applicable to the Residual Certificate.
Noneconomic Residual Certificates. The REMIC Regulations disregard, for
federal income tax purposes, any transfer of a Noneconomic Residual Certificate
to a 'U.S. Person,' as defined in the following section of this discussion,
unless no significant purpose of the transfer is to enable the transferor to
impede the assessment or collection of tax. A Noneconomic Residual Certificate
is any Residual Certificate (including a Residual Certificate with a positive
value at issuance) unless, at the time of transfer, taking into account the
Prepayment Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents, (i) the
present value of the expected future distributions on the Residual Certificate
at least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs and (ii) the transferor reasonably expects that the
transferee will receive distributions 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. 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 that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC. A transferor is
presumed not to have such knowledge if (i) the transferor conducted a reasonable
investigation of the transferee and (ii) the transferee acknowledges to the
transferor that the residual interest may generate tax liabilities in excess of
the cash flow and the transferee represents that it intends to pay such taxes
associated with the residual interest as they become due. If a transfer of a
Noneconomic Residual Certificate is disregarded, the transferor would continue
to be treated as the owner of the Residual Certificate and would continue to be
subject to tax on its allocable portion of the net income of the REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has a 'tax avoidance potential' to a 'foreign person'
will be disregarded for federal income tax purposes. This rule appears to apply
to a transferee who is not a U.S. Person unless such transferee's income in
respect of the Residual Certificate is effectively connected with the conduct of
a United States trade or business. A Residual Certificate is deemed to have a
tax avoidance potential unless, at the time of transfer, the transferor
reasonably expects that the REMIC will distribute to the transferee amounts that
will equal at least 30 percent of each excess inclusion, and that such amounts
will be distributed at or after the time the excess inclusion accrues and not
later than the end of the calendar year following the year of accrual. If the
non-U.S. Person transfers the Residual Certificate to a U.S. Person, the
transfer will be disregarded, and the foreign transferor will continue to be
treated as the owner, if the transfer has the effect of allowing the transferor
to avoid tax on accrued excess inclusions. The provisions in the REMIC
Regulations regarding transfers of Residual Certificates that have tax avoidance
potential to foreign persons are effective for all transfers after June 30,
1992. The Agreement will provide that no record or beneficial ownership interest
in a Residual Certificate may be transferred, directly or indirectly, to a
non-U.S. Person unless such person provides the Trustee with a duly completed
I.R.S. Form 4224 and the Trustee consents to such transfer in writing.
Any attempted transfer or pledge in violation of the transfer restrictions
shall be absolutely null and void and shall vest no rights in any purported
transferee. Investors in Residual Certificates are advised to consult their own
tax advisors with respect to transfers of the Residual Certificates and, in
addition, pass-through entities are advised to consult their own tax advisors
with respect to any tax which may be imposed on a pass-through entity.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in 'Certain
Federal Income Tax Considerations,' potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Certificates. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Certificates.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the Code,
which apply only to Certificates of a Series that are not divided into
subclasses. If Certificates are divided into subclasses the related Prospectus
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Supplement will contain information concerning considerations relating to ERISA
and the Code that are applicable to such Certificates.
ERISA imposes 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 on persons who are fiduciaries with respect to such Plans.
Generally, ERISA applies to investments made by 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). Certain employee benefit plans, such as
governmental plans (as defined in ERISA Section 3(32)) and, if no election has
been made under Section 410(d) of the Code, church plans (as defined in ERISA
Section 3(33)), are not subject to ERISA requirements. Accordingly, assets of
such plans may be invested in Senior Certificates without regard to the ERISA
considerations described above and below, subject to the provisions of
applicable state law. Any such plan which is qualified and exempt from taxation
under Code Sections 401(a) and 501(a), however, is subject to the prohibited
transaction rules set forth in Code Section 503.
On November 13, 1986, the United States Department of Labor (the 'DOL')
issued final regulations concerning the definition of what constitutes the
assets of a Plan. (Labor Reg. Section 2510.3-101) Under this regulation, the
underlying assets and properties of corporations, partnerships and certain other
entities in which a Plan makes an 'equity' investment could be deemed for
purposes of ERISA to be assets of the investing Plan in certain circumstances.
However, the regulation provides that, generally, the assets of a corporation or
partnership in which a Plan invests will not be deemed for purposes of ERISA to
be assets of such Plan if the equity interest acquired by the investing Plan is
a publicly-offered security. A publicly-offered security, as defined in Labor
Reg. Section 2510.3-101, is a security that is widely held, freely transferable
and registered under the Securities Exchange Act of 1934, as amended.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA prohibits a broad range of 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. Because the
Mortgage Loans may be deemed Plan assets of each Plan that purchases
Certificates, an investment in the Certificates by a Plan might be a prohibited
transaction under ERISA Sections 406 and 407 and subject to an excise tax under
Code Section 4975 unless a statutory or administrative exemption applies.
In Prohibited Transaction Exemption 83-1 ('PTE 83-1'), which amended
Prohibited Transaction Exemption 81-7, the DOL exempted 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.
PTE 83-1 permits, subject to certain conditions, transactions that might
otherwise be prohibited between Plans and Parties in Interest with respect to
those Plans related to 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. If the general conditions (discussed below) of PTE
83-1 are satisfied, investments by a Plan in certificates that represent
interests in a mortgage pool consisting of mortgage loans representing loans for
single family homes ('Single Family Certificates') will be exempt from the
prohibitions of ERISA Sections 406(a) and 407 (relating generally to
transactions with Parties in Interest who are not fiduciaries) if the Plan
purchases the Single Family Certificates at no more than fair market value and
will be exempt from the prohibitions of ERISA Sections 406(b)(1) and (2)
(relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid to
the pool sponsor, the Plan does not purchase more than twenty-five percent (25%)
of all Single Family Certificates and at least fifty percent (50%) of all Single
Family Certificates are purchased by persons independent of the pool sponsor or
pool trustee. PTE 83-1 does not provide an exemption for transactions involving
Subordinated Certificates. Accordingly, unless otherwise provided in the related
Prospectus Supplement, no transfer of a Subordinated Certificate may be made to
a Plan.
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The discussion in this and the next succeeding paragraph applies only to
Single Family Certificates. The Depositor believes that, for purposes of PTE
83-1, the term 'mortgage pass-through certificate' would include: (i)
Certificates issued in a Series consisting of only a single class of
Certificates; and (ii) Senior Certificates issued in a Series in which there is
only one class of Senior Certificates; provided that the Certificates in the
case of clause (i), or the Senior Certificates in the case of clause (ii),
evidence the beneficial ownership of both a specified percentage of future
interest payments (greater than zero percent (0%)) and a specified percentage
(greater than zero percent(0%)) of future principal payments on the Mortgage
Loans. It is not clear whether a class of Certificates that evidences the
beneficial ownership in a Trust Fund divided into mortgage loan groups,
beneficial ownership of a specified percentage of interest payments only or
principal payments only, or a notional amount of either principal or interest
payments, or a class of Certificates entitled to receive payments of interest
and principal on the Mortgage Loans only after payments to other classes or
after the occurrence of certain specified events would be a 'mortgage
pass-through certificate' for purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system of
insurance or other protection for the pooled mortgage loans and property
securing such loans and for indemnifying certificateholders against reductions
in pass-through payments due to property damage or defaults in loan payments in
an amount not less than the greater of one percent (1%) 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 payment 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. The Depositor believes that the first
general condition referred to above will be satisfied with respect to the
Certificates in a Series issued without a subordination feature, or the Senior
Certificates only in a Series issued with a subordination feature, provided that
the subordination and Reserve Fund, subordination by shifting of interests, the
pool insurance or other form of credit enhancement described herein (such
subordination, pool insurance or other form of credit enhancement being the
system of insurance or other protection referred to above) with respect to a
Series of Certificates is maintained in an amount not less than the greater of
one percent of the aggregate principal balance of the Mortgage Loans or the
principal balance of the largest Mortgage Loan. See 'Description of the
Certificates' herein. In the absence of a ruling that the system of insurance or
other protection with respect to a Series of Certificates satisfies the first
general condition referred to above, there can be no assurance that these
features will be so viewed by the DOL. The Trustee will not be affiliated with
the Depositor.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Single Family Certificates
must make its own determination as to whether the first and third general
conditions, and the specific conditions described briefly in the preceding
paragraph, of PTE 83-1 have been satisfied, or as to the availability of any
other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Certificates is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
The DOL has granted to certain underwriters individual administrative
exemptions (the 'Underwriter Exemptions') from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section 4975
of the Code with respect to the initial purchase, the holding and the subsequent
resale by Plans of certificates in pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the Underwriter Exemptions.
While each Underwriter Exemption is an individual exemption separately
granted to a specific underwriter, the terms and conditions which generally
apply to the Underwriter Exemptions are substantially the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as favorable
to the Plan as they would be in an arm's length transaction with an
unrelated party;
(2) the rights and interest evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust fund;
(3) the certificates required by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from Standard & Poor's Ratings Group, a division of
McGraw-Hill, Inc. ('S&P'), Moody's Investors Service, Inc. ('Moody's'),
Duff & Phelps Credit Rating Co. ('D&P') or Fitch Investors Service, Inc.
('Fitch');
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(4) the trustee must not be an affiliate of any other member of the
Restricted Group;
(5) the sum of all payments made to and retained by the underwriters
in connection with the distribution of the certificates represents not more
than reasonable compensation for underwriting the certificates; the sum of
all payments made to and retained by the seller pursuant to the assignment
of the loans to the trust fund represents not more than the fair market
value of such loans; the sum of all payments made to and retained by the
servicer and any other servicer represents not more than reasonable
compensation for such person's services under the agreement pursuant to
which the loans are pooled and reimbursements of such person's reasonable
expenses in connection therewith; and
(6) the Plan investing in the certificates is an 'accredited investor'
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933 as amended.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of the
type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated
in one of the three highest rating categories of S&P, Moody's, Fitch or D&P
for at least one year prior to the Plan's acquisition of certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of certificates.
Moreover, the Underwriter Exemptions generally provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust as to which
the fiduciary (or its affiliate) is an obligor on the receivables held in the
trust provided that, among other requirements: (i) in the case of an acquisition
in connection with the initial issuance of certificates, at least fifty percent
(50%) of each class of certificates in which Plans have invested is acquired by
persons independent of the Restricted Group, (ii) such fiduciary (or its
affiliate) is an obligor with respect to five percent (5%) or less of the fair
market value of the obligations contained in the trust; (iii) the Plan's
investment in certificates of any class does not exceed twenty-five percent
(25%) of all of the certificates of that class outstanding at the time of the
acquisition; and (iv) immediately after the acquisition, no more than
twenty-five percent (25%) of the assets of the Plan with respect to which such
person is a fiduciary is invested in certificates representing an interest in
one or more trusts containing assets sold or serviced by the same entity. The
Underwriter Exemptions do not apply to Plans sponsored by the Seller, the
related Underwriter, the Trustee, the Master Servicer, any insurer with respect
to the Mortgage Loans, any obligor with respect to Mortgage Loans included in
the Trust Fund constituting more than five percent (5%) of the aggregate
unamortized principal balance of the assets in the Trust Fund, or any affiliate
of such parties.
The Prospectus Supplement for each Series of Certificates will indicate the
classes of Certificates, if any, offered thereby as to which it is expected that
an Underwriter Exemption will apply.
Any Plan fiduciary which proposes to cause a Plan to purchase Certificates
should consult with its counsel concerning the impact of ERISA and the Code, the
applicability of PTE 83-1, the availability and applicability of any Underwriter
Exemption or any other exemptions from the prohibited transaction provisions of
ERISA and the Code and the potential consequences in their specific
circumstances, prior to making such investment. Moreover, each Plan fiduciary
should determine whether under the general fiduciary standards of investment
procedure and diversification an investment in the Certificates is appropriate
for the Plan, taking into account the overall investment policy of the Plan and
the composition of the Plan's investment portfolio.
LEGAL INVESTMENT
The Prospectus Supplement for each Series of Certificates will specify
which, if any, of the classes of Certificates offered thereby will constitute
'mortgage related securities' for purposes of SMMEA. Classes of Certificates
that qualify as 'mortgage related securities' will be legal investments for
persons, trusts, corporations, partnerships, associations, business trusts and
business entities (including depository institutions, life insurance companies
and pension funds) created pursuant to or existing under the laws of the United
States or of any state (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulation to the same extent
as, under applicable law, obligations issued by or guaranteed as to principal
and interest by the United States or any such entities. Under SMMEA, if a state
enacts legislation prior to
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October 4, 1991 specifically limiting the legal investment authority of any such
entities with respect to 'mortgage related securities,' the Certificates will
constitute legal investments for entities subject to such legislation only to
the extent provided therein. Approximately twenty-one states adopted such
legislation prior to the October 4, 1991 deadline. SMMEA provides, however, that
in no event will the enactment of any such legislation affect the validity of
any contractual commitment to purchase, hold or invest in Certificates, or
require the sale or other disposition of Certificates, so long as such
contractual commitment was made or such Certificates acquired prior to the
enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Certificates
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase Certificates for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to such regulations as the applicable federal
authority may prescribe. In this connection, federal credit unions should review
the National Credit Union Administration ('NCUA') Letter to Credit Unions No.
96, as modified by Letter to Credit Unions No. 108, which includes guidelines to
assist federal credit unions in making investment decisions for mortgage related
securities, and the NCUA's regulation 'Investment and Deposit Activities' (12
C.F.R. Part 703), (whether or not the class of Certificates under consideration
for purchase constitutes a 'mortgage related security').
All depository institutions considering an investment in the Certificates
(whether or not the class of certificates under consideration for purchase
constitutes a 'mortgage related security' should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on Securities
Activities (to the extent adopted by their respective regulators) (the 'Policy
Statement'), setting forth, in relevant part, certain securities trading and
sales practices deemed unsuitable for an institution's investment portfolio, and
guidelines for (and restrictions on) investing in mortgage derivative products,
including 'mortgage related securities' that are 'high-risk mortgage securities'
as defined in the Policy Statement. According to the Policy Statement, such
'high-risk mortgage securities' include securities such as Certificates not
entitled to distributions allocated to principal or interest, or Subordinated
Certificates. Under the Policy Statement, it is the responsibility of each
depository institution to determine, prior to purchase (and at stated intervals
thereafter), whether a particular mortgage derivative product is a 'high-risk
mortgage security', and whether the purchase (or retention) of such a product
would be consistent with the Policy Statement.
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
that may restrict or prohibit investment in securities that are not 'interest
bearing' or 'income paying.'
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Certificates or to
purchase Certificates representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Certificates constitute legal
investments for such investors.
METHOD OF DISTRIBUTION
Certificates are being offered hereby in Series from time to time (each
Series evidencing a separate Trust Fund) through any of the following methods:
1. By negotiated firm commitment underwriting and public reoffering by
underwriters;
2. By agency placements through one or more placement agents primarily
with institutional investors and dealers; and
3. By placement directly by the Depositor with institutional
investors.
A Prospectus Supplement will be prepared for each Series which will
describe the method of offering being used for that Series and will set forth
the identity of any underwriters thereof and either the price at which such
Series is being offered, the nature and amount of any underwriting discounts or
additional compensation to such underwriters and the proceeds of the offering to
the Depositor, or the method by which the price at which the underwriters will
sell the Certificates will be determined. Each Prospectus Supplement for an
underwritten offering will also contain information regarding the nature of the
underwriters' obligations, any material
82
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relationship between the Depositor and any underwriter and, where appropriate,
information regarding any discounts or concessions to be allowed or reallowed to
dealers or others and any arrangements to stabilize the market for the
Certificates so offered. In firm commitment underwritten offerings, the
underwriters will be obligated to purchase all of the Certificates of such
Series if any such Certificates are purchased. Certificates may be acquired by
the underwriters for their own accounts and may be resold from time to time in
one or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale.
Underwriters and agents may be entitled under agreements entered into with
the Depositor to indemnification by the Depositor against certain civil
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribution with respect to payments which such underwriters or agents
may be required to make in respect thereof.
If a Series is offered other than through underwriters, the Prospectus
Supplement relating thereto will contain information regarding the nature of
such offering and any agreements to be entered into between the Depositor and
purchasers of Certificates of such Series.
LEGAL MATTERS
The validity of the Certificates, including certain federal income tax
consequences with respect thereto, will be passed upon for the Depositor by
Brown & Wood, One World Trade Center, New York, New York 10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of Certificates
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Certificates.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of the Certificates of each Series
offered hereby and by the Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies specified in the related Prospectus
Supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the credit enhancer or guarantor, if any. Ratings on
mortgage pass-through certificates do not represent any assessment of the
likelihood of principal prepayments by mortgagors or of the degree by which such
prepayments might differ from those originally anticipated. As a result,
certificateholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped pass-through certificates in extreme cases might
fail to recoup their underlying investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
83
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INDEX TO DEFINED TERMS
<TABLE>
<CAPTION>
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<S> <C>
1986 Act....................................... 64
Accretion Directed Certificates................ 27
Accrual Certificates........................... 24
Accrual Class.................................. 28
accrual period................................. 66
adjusted issue price........................... 62
Advance........................................ 9
Agency Securities.............................. 5
Agreement...................................... 13
Applicable Amount.............................. 73
ARM Loans...................................... 61
Available Funds................................ 24
balloon payments............................... 4
Bankruptcy Bonds............................... 9
beneficial owner............................... 32
Book-Entry Certificates........................ 32
Buydown Fund................................... 12
Buydown Loans.................................. 12
Calculation Agent.............................. 28
CERCLA......................................... 54
Certificate Account............................ 40
Certificate Balance............................ 7
Certificate Register........................... 23
Certificateholders............................. 11
Certificates................................... 3
Class Certificate Balance...................... 24
Closing Date................................... 3
Code........................................... 10
COFI........................................... 29
COFI Certificates.............................. 30
Collateral Value............................... 12
Component Certificates......................... 27
Components..................................... 27
Contributions Tax.............................. 75
Cooperative Loans.............................. 3
Cooperatives................................... 3
Cut-Off Date................................... 9
D&P............................................ 80
Deferred Interest.............................. 62
Definitive Certificates........................ 32
Depositor...................................... 19
Depository..................................... 32
Detailed Description........................... 11
Distribution Date.............................. 7
DOL............................................ 79
Eleventh District.............................. 29
EPA............................................ 54
ERISA.......................................... 10
excess servicing............................... 60
FHA............................................ 3
FHA Insurance.................................. 9
FHA Loans...................................... 14
FHLBSF......................................... 29
FHLMC.......................................... 3
FHLMC Act...................................... 15
FHLMC Certificate group........................ 15
FHLMC Certificates............................. 5
Financial Intermediary......................... 32
Fitch.......................................... 80
Fixed Rate Class............................... 28
Floating Rate Class............................ 28
FNMA........................................... 3
<PAGE>
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<S> <C>
FNMA Certificates.............................. 5
Garn-St Germain Act............................ 55
GNMA........................................... 3
GNMA Certificates.............................. 5
GNMA I Certificate............................. 14
GNMA II Certificate............................ 14
GNMA Issuer.................................... 14
Guaranty Agreement............................. 14
Guaranteed Mortgage Pass-Through
Certificates................................. 5
Housing Act.................................... 14
HUD............................................ 45
Insurance Proceeds............................. 41
Insured Expenses............................... 41
Interest Only Class............................ 28
Inverse Floating Rate Class.................... 28
IRS............................................ 58
Issuer......................................... 63
Legislative History............................ 61
LIBOR.......................................... 28
LIBOR Determination Date....................... 29
Liquidated Mortgage............................ 47
Liquidation Expenses........................... 41
Liquidation Proceeds........................... 41
Loan-to-Value Ratio............................ 12
lockout periods................................ 4
Master REMIC................................... 64
Master Servicer................................ 3
Master Servicing Fee........................... 47
Moody's........................................ 80
Mortgage....................................... 39
Mortgage Assets................................ 11
Mortgage Loans................................. 3
Mortgage Note.................................. 4
Mortgage Pool.................................. 11
Mortgage Pool Insurance Policy................. 9
Mortgage Rate.................................. 4
Mortgaged Property............................. 11
Mortgagor...................................... 12
National Cost of Funds Index................... 30
NCUA........................................... 82
Notional Amount Certificates................... 27
OID............................................ 64
OID Regulations................................ 64
OTS............................................ 30
Partial Accrual Class.......................... 28
Parties in Interest............................ 79
pass-through entity............................ 77
pass-through interest holder................... 70
Pass-Through Rate.............................. 7
Payment Lag Certificates....................... 70
Percentage Interest............................ 48
Permitted Investments.......................... 36
Plans.......................................... 79
PMBS Agreement................................. 18
PMBS Issuer.................................... 6
PMBS Servicer.................................. 6
PMBS Trustee................................... 6
Policy Statement............................... 82
Pool Insurer................................... 34
pre-issuance accrued interest.................. 70
Prepayment Assumption.......................... 61
Primary Insurer................................ 44
</TABLE>
84
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<CAPTION>
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<S> <C>
Primary Mortgage Insurance Policy.............. 11
Prime Rate..................................... 31
Principal Only Class........................... 28
Principal Prepayments.......................... 25
Private Mortgage-Backed Securities............. 5
Prohibited Transactions Tax.................... 75
PTE 83-1....................................... 81
Purchase Price................................. 21
Rating Agency.................................. 40
Record Date.................................... 23
Reference Banks................................ 28
Regular Certificateholders..................... 65
Regular Certificates........................... 64
Relief Act..................................... 56
REMIC.......................................... 10
REMIC Certificates............................. 63
REMIC Regulations.............................. 57
Reserve Fund................................... 8
Reserve Interest Rate.......................... 29
Residual Certificateholder..................... 71
Residual Certificates.......................... 63
Retained Interest.............................. 22
S&P............................................ 80
Scheduled Principal Class...................... 27
Seller......................................... 3
Senior Certificateholders...................... 8
Senior Certificates............................ 6
Sequential Pay................................. 27
<CAPTION>
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<S> <C>
Series......................................... 3
Single Family Certificates..................... 79
SMMEA.......................................... 10
Special Hazard Insurance Policy................ 9
Special Hazard Insurer......................... 35
Strip.......................................... 27
Stripped ARM Obligations....................... 62
Stripped Bond Certificates..................... 60
Stripped Coupon Certificates................... 60
Subordinated Certificateholders................ 8
Subordinated Certificates...................... 6
Sub-Servicer................................... 9
Subsidiary REMIC............................... 64
Super-Premium Certificates..................... 66
Support Class.................................. 28
Targeted Principal Class....................... 28
Temporary Mark to Market Regulations........... 73
Title V........................................ 56
Treasury Index................................. 31
Trust Fund..................................... 6
Trustee........................................ 3
UCC............................................ 53
Underwriter Exemption.......................... 80
U.S. Person.................................... 63
VA............................................. 4
VA Guaranty.................................... 9
VA Loans....................................... 14
Variable Rate.................................. 28
</TABLE>
85
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_____________________________ _____________________________
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY, NOR AN OFFER OF OFFERED CERTIFICATES IN ANY STATE OR
JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE UNLAWFUL.
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AT ANY TIME DOES
NOT IMPLY THAT THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED
ACCORDINGLY.
------------------------------
TABLE OF CONTENTS
<TABLE>
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<S> <C>
PROSPECTUS SUPPLEMENT
Summary of Terms............................................................................................................ S-3
The Mortgage Pool........................................................................................................... S-11
Servicing of Mortgage Loans................................................................................................. S-21
Description of the Certificates............................................................................................. S-23
Yield, Prepayment and Maturity Considerations............................................................................... S-35
Credit Enhancement.......................................................................................................... S-40
Use of Proceeds............................................................................................................. S-42
Certain Federal Income Tax Consequences..................................................................................... S-42
ERISA Considerations........................................................................................................ S-44
Method of Distribution...................................................................................................... S-46
Experts..................................................................................................................... S-47
Legal Matters............................................................................................................... S-47
Ratings..................................................................................................................... S-47
PROSPECTUS
Prospectus Supplement....................................................................................................... 2
Available Information....................................................................................................... 2
Incorporation of Certain Documents by Reference............................................................................. 2
Summary of Terms............................................................................................................ 3
The Trust Fund.............................................................................................................. 11
Use of Proceeds............................................................................................................. 19
The Depositor............................................................................................................... 19
Mortgage Loan Program....................................................................................................... 19
Description of the Certificates............................................................................................. 22
Credit Enhancement.......................................................................................................... 33
Yield and Prepayment Considerations......................................................................................... 37
The Pooling and Servicing Agreement......................................................................................... 39
Certain Legal Aspects of the Mortgage Loans................................................................................. 50
Certain Federal Income Tax Consequences..................................................................................... 57
State Tax Considerations.................................................................................................... 78
ERISA Considerations........................................................................................................ 78
Legal Investment............................................................................................................ 81
Method of Distribution...................................................................................................... 82
Legal Matters............................................................................................................... 83
Financial Information....................................................................................................... 83
Rating...................................................................................................................... 83
Index to Defined Terms...................................................................................................... 84
</TABLE>
$201,764,700
CWMBS, INC.
DEPOSITOR
INDEPENDENT
NATIONAL
MORTGAGE
CORPORATION
SELLER AND
MASTER SERVICER
HOME EQUITY
MORTGAGE LOAN
ASSET-BACKED TRUST,
SERIES SPMD 1996-A
-----------------------------------------
PROSPECTUS SUPPLEMENT
-----------------------------------------
MERRILL LYNCH & CO.
AUGUST 27, 1996
_____________________________ _____________________________
