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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY , 1999
REGISTRATION NO. 333-72655
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CWMBS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
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<S> <C>
DELAWARE 95-4449516
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
</TABLE>
4500 PARK GRANADA
CALABASAS, CALIFORNIA 91302
(818) 225-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
SANDOR E. SAMUELS, ESQ.
COUNTRYWIDE HOME LOANS, INC.
4500 PARK GRANADA
CALABASAS, CALIFORNIA 91302
(818) 225-3505
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
WITH A COPY TO:
EDWARD J. FINE, ESQ.
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time on or after the effective date of the registration statement, as
determined by market conditions.
------------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [x]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]_______________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]_______________
If delivery of this Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
Mortgage Pass-Through Certificates(3)................. $12,495,711,571 100% $12,495,711,571 $3,550,234.91
</TABLE>
(1) This Registration Statement relates to the offering from time to time of
$12,495,711,571 aggregate principal amount of Mortgage Pass-Through
Certificates and to any resales of them in market making transactions by
Countrywide Securities Corporation, an affiliate of the Registrant, to the
extent required.
(2) Estimated for the purpose of calculating the registration fee.
(3) $4,495,711,571 in securities are being carried forward and $1,326,234.91 of
the filing fee is associated with the securities being carried forward and
was previously paid with the Registrant's registration statement No.
333-53861. The remaining $2,224,000 was paid with the initial filing of this
registration statement No. 333-72655 on February 19, 1999.
------------------------
Pursuant to Rule 429 under the Securities Act of 1933, the Prospectus
included in this Registration Statement is a combined prospectus and relates to
Registration Statement No. 333-53861 as previously filed by the Registrant. That
Registration Statement was declared effective on August 14, 1998.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY
ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, OR
UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
________________________________________________________________________________
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THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING
OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED , 1999
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 1999)
$
(APPROXIMATE)
CWMBS, INC.
DEPOSITOR
[LOGO]
SELLER AND MASTER SERVICER]
CHL MORTGAGE PASS-THROUGH TRUST 1999-
ISSUER
DISTRIBUTIONS PAYABLE MONTHLY, BEGINNING , 1999
- ----------------------------------------------------------
The following classes of certificates are being offered pursuant to this
prospectus supplement and the accompanying prospectus:
<TABLE>
<CAPTION>
INITIAL CLASS INITIAL CLASS
CERTIFICATE PASS-THROUGH CERTIFICATE PASS-THROUGH
BALANCE RATE BALANCE RATE
<S> <C> <C> <C> <C> <C>
Class A-1 $ % Class A-R $ %
Class A-2 $ % Class M $ %
Class A-3 $ % Class B-1 $ %
Class PO $ Class B-2 $ %
Class X
</TABLE>
<TABLE>
<S> <C>
CONSIDER CAREFULLY THE The Class PO Certificates are principal only
RISK FACTORS BEGINNING ON certificates, and the Class X Certificates are interest
PAGE S-7 IN THIS only notional amount certificates. The pass-through rate
PROSPECTUS SUPPLEMENT AND for the Class X Certificates is calculated as described
ON PAGE 4 IN THE under 'Description of the Certificates -- Interest.'
PROSPECTUS.
The assets of the trust will consist primarily of a pool
of 30-year conventional fixed-rate mortgage loans secured
by first liens on one- to four-family residential
properties.
</TABLE>
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE
SECURITIES OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Class PO and Class X Certificates will not be purchased by the
Underwriters. They will be transferred to the seller on or about ,
1999 as partial consideration for the sale of the mortgage loans to the
depositor. See 'Method of Distribution.'
[NAME OF UNDERWRITER] [NAME OF UNDERWRITER]
, 1999
<PAGE>
<PAGE>
TABLE OF CONTENTS
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<CAPTION>
PROSPECTUS SUPPLEMENT PAGE
- --------------------------------------------- --------
<S> <C>
Summary...................................... S-3
Risk Factors................................. S-6
The Mortgage Pool............................ S-10
Servicing of Mortgage Loans.................. S-22
Description of the Certificates.............. S-27
Yield, Prepayment and Maturity
Considerations............................. S-41
Credit Enhancement........................... S-48
Use of Proceeds.............................. S-49
Material Federal Income Tax Consequences..... S-50
ERISA Considerations......................... S-51
Method of Distribution....................... S-53
Legal Matters................................ S-53
Ratings...................................... S-54
<CAPTION>
PROSPECTUS PAGE
- --------------------------------------------- --------
<S> <C>
Important Notice About Information in This
Prospectus and Each Accompanying Prospectus
Supplement................................. 3
Risk Factors................................. 4
The Trust Fund............................... 13
Use of Proceeds.............................. 25
The Depositor................................ 26
Mortgage Loan Program........................ 26
Description of the Certificates.............. 29
Credit Enhancement........................... 44
Yield and Prepayment Considerations.......... 49
The Pooling and Servicing Agreement.......... 50
Certain Legal Aspects of the Mortgage
Loans...................................... 67
Material Federal Income Tax Consequences..... 75
State Tax Considerations..................... 103
ERISA Considerations......................... 103
Legal Investment............................. 107
Method of Distribution....................... 108
Legal Matters................................ 109
Financial Information........................ 109
Rating....................................... 109
Index to Defined Terms....................... 110
</TABLE>
S-2
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SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND DOES NOT
CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN MAKING YOUR
INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF AN OFFERING OF THE
CERTIFICATES, READ CAREFULLY THIS ENTIRE DOCUMENT AND THE ACCOMPANYING
PROSPECTUS.
OFFERED CERTIFICATES
CHL Mortgage Pass-Through Trust 1999- will issue classes of
certificates, of which are being offered by this prospectus
supplement and the accompanying prospectus. The assets of the trust that will
support both the offered certificates and other classes of certificates will
consist of a pool of mortgage loans with a principal balance of approximately
$ as of , 1999. The mortgage loans will consist primarily
of 30-year conventional fixed-rate mortgage loans secured by first liens on one-
to four-family residential properties.
The following chart lists certain characteristics of the classes of the offered
certificates. The classes of certificates listed below will not be offered
unless they are assigned the following ratings by and
by .
<TABLE>
<CAPTION>
CLASS RATING RATING TYPE
- --------- --------- ---------- ---------------------
<S> <C> <C> <C>
Class A-1 Senior
Class A-2 Senior
Class A-3 Senior
Class PO Senior/Principal Only
Class X Senior/Interest Only
Class A-R Senior/Residual
Class M Subordinate
Class B-1 Subordinate
Class B-2 Subordinate
</TABLE>
A rating is not a recommendation to buy, sell or hold securities. These ratings
may be lowered or withdrawn at any time by either of the rating agencies.
See 'Ratings.'
See 'Description of the Certificates -- General' and ' -- Book-Entry
Certificates' in this prospectus supplement and 'The Mortgage Pool' in this
prospectus supplement and 'The Trust Fund -- The Mortgage Loans -- General' in
the propectus.
CUT-OFF DATE
, 1999
CLOSING DATE
On or about, 1999
DEPOSITOR
CWMBS, Inc. is a limited purpose finance subsidiary of Countrywide Credit
Industries, Inc. Its address is 4500 Park Granada, Calabasas, California 91302,
and its telephone number is (818) 225-3300.
SELLER AND MASTER SERVICER
[Countrywide Home Loans, Inc.]
TRUSTEE
[The Bank of New York]
S-3
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DISTRIBUTION DATES
We will make distributions on the th day of each month. If the th day of
a month is not a business day, then we will make distributions on the next
business day. The first distribution is scheduled for .
INTEREST PAYMENTS
Interest will accrue at the rate specified or described on the cover page on
each interest bearing class of certificates on the basis of a 360-day year
divided into twelve 30-day months. The interest accrual period for the interest
bearing classes of certificates for any distribution date will be the calendar
month before the distribution date.
See 'Description of the Certificates -- Interest.'
PRINCIPAL PAYMENTS
Principal will be paid on the certificates on the th day of each month as
described in this prospectus supplement beginning at page S-39.
See 'Description of the Certificates -- Principal.'
OPTIONAL TERMINATION
The master servicer may purchase all of the remaining assets of the trust after
the principal balance of the mortgage loans and real estate owned by the trust
declines below 10% of the principal balance of the mortgage loans on
, 1999.
See 'Description of the Certificates -- Optional Termination.'
COLLECTION ACCOUNT; PRIORITY
OF DISTRIBUTIONS
On each distribution date amounts available in the trust to make distributions
on the certificates will be applied in the following order of priority:
(1) to interest on the interest bearing classes of senior certificates;
(2) to principal on the classes of senior certificates in the manner, order and
priority described under 'Description of the Certificates -- Principal';
(3) to any deferred amounts payable on the Class PO Certificates, as described
under 'Description of the Certificates -- Principal'; and
(4) to interest on and then principal of each class of subordinated
certificates, in order of their numerical class designations, beginning with
the Class M Certificates, as described under 'Description of the
Certificates -- Principal.'
ADVANCES
The master servicer will make cash advances with respect to delinquent payments
of principal and interest on the mortgage loans to the extent the master
servicer reasonably believes that the cash advances can be repaid from future
payments on the mortgage loans. These cash advances are only intended to
maintain a regular flow of scheduled interest and principal payments on the
certificates and are not intended to guarantee or insure against losses.
See 'Servicing of Mortgage Loans -- Advances.'
CREDIT ENHANCEMENT
The issuance of senior certificates and subordinated certificates by the trust
is designed to increase the likelihood that senior certificateholders will
receive regular payments of interest and principal.
SUBORDINATION
The senior certificates will have a payment priority over the subordinated
certificates. Within the classes of subordinated certificates, the Class M
Certificates will have payment priority over the Class B-1 and B-2 Certificates,
and the Class B-1 Certificates will have a payment priority over the Class B-2
Certificates. The Class B-3, Class B-4, and Class B-5 Certificates, which are
S-4
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not being offered to the public, are also subordinated, in that order, with the
Class B-5 Certificates having the lowest priority of payment.
Subordination is designed to provide the holders of certificates with a higher
payment priority with protection against most losses realized when the remaining
unpaid principal balance on a mortgage loan exceeds the amount of proceeds
recovered upon the liquidation of that mortgage loan. In general, this loss
protection is accomplished by allocating the realized losses among the
subordinated certificates, beginning with the subordinated certificates with the
lowest payment priority, before realized losses are allocated to the senior
certificates. However, some losses such as special hazard losses, bankruptcy
losses, and fraud losses in excess of the amounts set forth in this prospectus
supplement are, in general, allocated pro rata to each class of certificates
instead of first being allocated among the subordinated certificates.
See 'Description of the Certificates -- Allocation of Losses' and 'Credit
Enhancement -- Subordination.'
TAX STATUS
The trust will elect to be treated, for federal income tax purposes as a real
estate mortgage investment conduit. The classes of certificates that are
designated as the regular certificates will constitute regular interests in the
REMIC. The Class A-R Certificates will represent the sole class of residual
interests in the REMIC.
See 'Material Federal Income Tax Consequences' in this prospectus supplement and
in the prospectus.
ERISA CONSIDERATIONS
The Class A Certificates, other than the Class A-R Certificates, may be
purchased by a pension or other employee benefit plan subject to the Employee
Retirement Income Security Act of 1974 or Section 4975 of the Internal Revenue
Code of 1986, so long as the conditions described under 'ERISA Considerations'
are met.
See 'ERISA Considerations' in this prospectus supplement and in the prospectus.
LEGAL INVESTMENT
The senior certificates [and the Class M Certificates] will be mortgage related
securities for purposes of the Secondary Mortgage Market Enhancement Act of 1984
as long as they are rated in one of the two highest rating categories by at
least one
nationally recognized statistical rating organization. The [Class B-1 and Class
B-2] Certificates will not be rated in one of the two highest rating categories
by a nationally recognized statistical rating organization, and therefore, will
not be mortgage related securities for purposes of that Act.
See 'Legal Investment' in this prospectus supplement and in the prospectus.
S-5
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RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE CERTIFICATES.
YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION UNDER 'RISK FACTORS'
BEGINNING ON PAGE 5 IN THE PROSPECTUS.
<TABLE>
<S> <C>
YOUR YIELD WILL BE AFFECTED BY PREPAYMENTS Borrowers may prepay their mortgage loans in whole or in part at any
time. We cannot predict the rate at which borrowers will repay their
mortgage loans. A prepayment of a mortgage loan, however, will
usually result in a prepayment on the certificates.
The timing of principal payments on certificates will be affected by
a number of factors, including:
the extent of prepayments on the loans held in the applicable
trust fund or on loans backing securities held in the
applicable trust fund,
how payments of principal are allocated among the classes of
certificates of a series as specified in the applicable
prospectus supplement,
whether a party exercises a right to terminate the applicable
trust,
the rate and timing of payment defaults and losses on the
assets in the applicable trust fund, and repurchases of assets
in the applicable trust fund for material breaches of
representations and warranties.
For the purposes of the certificates, prepayments on loans may happen
in many different ways in addition to the owner repaying the loan
upon the sale or refinancing of the underlying property. Some of
these other ways include the application of the proceeds of a
foreclosure sale or fire insurance or a condemnation award, as well
as repurchases of a loan by the depositor or the seller or the
termination of the trust by an optional purchase of the entire
remaining mortgage pool.
The rate and timing of prepayment of loans held in the applicable
trust fund or on loans backing securities held in the applicable
trust fund will affect the yields to maturity and weighted average
lives of the certificates. Any reinvestment risks from faster or
slower prepayments of loans will be borne entirely by the holders of
one or more classes of the related series of certificates.
If you purchase principal only certificates or you purchase your
certificates at a discount and principal is repaid slower than you
anticipate, then your yield may be lower than you anticipate.
If you purchase interest only certificates or you purchase your
certificates at a premium and principal is repaid faster than you
anticipate, then your yield may be lower than you anticipate.
If you purchase interest only certificates and principal is repaid
faster than you anticipate, you may lose your initial investment.
See 'Yield, Prepayment and Maturity Considerations' for a description
of factors that may influence the rate and timing of prepayments on
the mortgage loans.
CREDIT ENHANCEMENT MAY NOT BE SUFFICIENT The certificates are not insured by any financial guaranty insurance
TO PROTECT SENIOR CERTIFICATES FROM LOSSES policy. The subordination features are intended to enhance the
likelihood that senior certificateholders will receive regular
payments of interest and principal.
SUBORDINATION. Credit enhancement will be provided for the
certificates, first, by the right of the holders of certificates to
receive payments of principal before the classes subordinated to them
and, second, by the allocation of realized losses to subordinated
classes in the inverse order of their subordination. This form of
credit enhancement is provided by using collections on the mortgage
loans otherwise payable to holders of subordinated classes to pay
amounts due on more senior classes. Collections otherwise payable to
subordinated classes comprise the sole source of funds from which
this type of credit enhancement is provided. Realized losses are
allocated to the subordinated certificates, beginning with the
subordinated certificates with the lowest payment priority, until the
principal amount of that class has been reduced to zero. Subsequent
realized losses will be allocated to the next most junior classes of
subordinated certificates sequentially, until the principal balances
of each succeeding class has been reduced to zero.
</TABLE>
S-6
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<TABLE>
<S> <C>
Accordingly, if the aggregate principal balance of each subordinated
class were to be reduced to zero, delinquencies and defaults on the
mortgage loans would reduce the amount of funds available for monthly
distributions to holders of the senior certificates. Furthermore, the
subordinated classes will provide only limited protection against
some categories of losses such as special hazard losses, bankruptcy
losses and fraud losses in excess of the amounts specified in this
prospectus supplement. Any losses in excess of those amounts will be
allocated pro rata to each class, even if the principal balance of
each subordinated class has not been reduced to zero. Among the
subordinated certificates the Class M Certificates are the least
subordinated, that is, they have the highest payment priority. Then
come the Class B-1, Class B-2, Class B-3, Class B-4 and Class B-5
Certificates, in that order.
See 'Credit Enhancement -- Subordination.'
CERTIFICATES MAY NOT BE APPROPRIATE FOR The offered certificates may not be an appropriate investment for
SOME INVESTORS investors who do not have sufficient resources or expertise to
evaluate the particular characteristics of the applicable class of
offered certificates. This may be the case because, among other
things:
The yield to maturity of offered certificates purchased at a price
other than par will be sensitive to the uncertain rate and timing
of principal prepayments on the mortgage loans;
The rate of principal distributions on and the weighted average
lives of the offered certificates will be sensitive to the
uncertain rate and timing of principal prepayments on the mortgage
loans and the priority of principal distributions among the classes
of certificates. Accordingly, the offered certificates may be an
inappropriate investment if you require a distribution of a
particular amount of principal on a specific date or an otherwise
predictable stream of distributions;
You may not be able to reinvest distributions on an offered
certificate (which, in general, are expected to be greater during
periods of relatively low interest rates) at a rate at least as
high as the pass-through rate applicable to your certificate; or
A secondary market for the offered certificates may not develop or
provide certificateholders with liquidity of investment.
</TABLE>
S-7
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<TABLE>
<S> <C>
GEOGRAPHIC CONCENTRATION INCREASES RISK Approximately % of the mortgage loans expected to be in the trust
THAT CERTIFICATE YIELDS COULD BE IMPAIRED on the cut-off date are secured by property in [California]. Property
in [California] may be more susceptible than homes located in other
parts of the country to some types of uninsurable hazards, such as
[earthquakes, floods, mudslides] and other natural disasters. In
addition,
Economic conditions in [California] (which may or may not affect
real property values) may affect the ability of borrowers to repay
their loans on time;
Declines in the [California] residential real estate market may
reduce the values of properties located in [California], which
would result in an increase in the loan-to-value ratios; and
Any increase in the market value of properties located in
[California] would reduce the loan-to-value ratios and could,
therefore, make alternative sources of financing available to the
borrowers at lower interest rates, which could result in an
increased rate of prepayment of the mortgage loans.
YOU MAY HAVE DIFFICULTY RESELLING No market for any of the certificates will exist before they are
CERTIFICATES issued. Each underwriter intends to make a secondary market in the
classes of certificates actually purchased by it, but neither underwriter has
any obligation to do so. We cannot assure you that a secondary market
will develop or, if it develops, that it will continue.
Consequently, you may not be able to sell your certificates readily or at
prices that will enable you to realize your desired yield. The market values
of the certificates are likely to fluctuate; these fluctuations may be
significant and could result in significant losses to you.
The secondary markets for mortgage backed securities have experienced
periods of illiquidity and can be expected to do so in the future.
Illiquidity can have a severely adverse effect on the prices of
securities that are especially sensitive to prepayment, credit, or
interest rate risk, or that have been structured to meet the
investment requirements of limited categories of investors.
See 'Risk Factors -- Ability to Resell Certificates May Be Limited'
in the prospectus.
YEAR 2000 COMPUTER PROBLEMS COULD DISRUPT Many computer systems and microprocessors with data functions,
DISTRIBUTIONS ON CERTIFICATES including those in non-information technology equipment and systems,
use only two digits to identify a year in the date field with the
assumption that the first two digits of the year are always '19.'
Consequently, on January 1, 2000, computers that are not year 2000
compliant may read the year as 1900 and malfunction.
We have developed a plan to become year 2000 compliant by mid-1999.
We cannot guarantee, however, that our efforts to achieve year 2000
readiness will be fully effective. Moreover, we cannot guarantee that
any of our third-party service providers, such as trustees,
borrowers' banks, [loan servicers] and DTC, will be year 2000 ready.
We also cannot assure you that any future developments in connection
with our year 2000 readiness or the readiness of third parties will
be those that we have anticipated.
</TABLE>
S-8
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<TABLE>
<S> <C>
Our failure, or the failure of any of our third-party service
providers, to become fully year 2000 ready could disrupt, at least
temporarily, our ability to carry out our servicing duties, including
the calculation of amounts distributable to you and the timely
transfer of funds to the trustee for your benefit. Your investment in
the certificates could consequently suffer.
</TABLE>
SOME OF THE STATEMENTS CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS CONSIST OF
FORWARD-LOOKING STATEMENTS RELATING TO FUTURE ECONOMIC PERFORMANCE OR
PROJECTIONS AND OTHER FINANCIAL ITEMS. THESE STATEMENTS CAN BE IDENTIFIED BY
THE USE OF FORWARD-LOOKING WORDS SUCH AS 'MAY,' 'WILL,' 'SHOULD,' 'EXPECTS,'
'BELIEVES,' 'ANTICIPATES,' 'ESTIMATES,' OR OTHER COMPARABLE WORDS.
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THE PROJECTED RESULTS. THOSE
RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, GENERAL ECONOMIC AND BUSINESS
CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL
REGULATIONS, CUSTOMER PREFERENCES AND VARIOUS OTHER MATTERS, MANY OF WHICH ARE
BEYOND OUR CONTROL. BECAUSE WE CANNOT PREDICT THE FUTURE, WHAT ACTUALLY HAPPENS
MAY BE VERY DIFFERENT FROM WHAT WE PREDICT IN OUR FORWARD-LOOKING STATEMENTS.
S-9
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THE MORTGAGE POOL
GENERAL
The depositor, CWMBS, Inc., will purchase mortgage loans in the mortgage
pool from [Countrywide Home Loans, Inc. ('Countrywide')] pursuant to a pooling
and servicing agreement dated as of the cut-off date among Countrywide, as
seller and master servicer, the depositor and [The Bank of New York], as
trustee, and will cause the mortgage loans to be assigned to the trustee for the
benefit of the holders of the certificates.
Under the pooling and servicing agreement, the seller will make
representations, warranties and covenants to the depositor relating to, among
other things, the due execution and enforceability of the pooling and servicing
agreement and some of the characteristics of the mortgage loans and, subject to
the limitations described under ' -- Assignment of the 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 as to which there has
been an uncured breach of any representation or warranty relating to the
characteristics of the mortgage loans that materially and adversely affect the
interests of the certificateholders in the mortgage loan. The seller will
represent and warrant to the depositor in the pooling and servicing 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 pooling and servicing agreement
can be made and that the selection was not made in a manner intended to affect
the interests of the certificateholders adversely. See 'Mortgage Loan Program --
Representations by Sellers; Repurchases' in the prospectus. Under the pooling
and servicing agreement, the depositor will assign all its interest in the
representations, warranties and covenants (including the seller's repurchase
obligation) to the trustee for the benefit of certificateholders. 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. Countrywide 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 obligation
described above. The obligations of Countrywide, as master servicer, with
respect to the certificates are limited to the master servicer's contractual
servicing obligations under the pooling and servicing agreement.
Information with respect to the mortgage loans expected to be included in
the mortgage pool is set forth under this heading. Before the closing date,
mortgage loans may be removed from the mortgage pool and other mortgage loans
may be substituted for them. The depositor believes that the information set
forth in this prospectus supplement 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, but some characteristics of
the mortgage loans in the mortgage pool may vary. Unless otherwise indicated,
information presented in this prospectus supplement 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 $ , which is referred to as
the cut-off date pool principal balance. The mortgage loans provide for the
amortization of the amount financed over a series of substantially equal monthly
payments. All the mortgage loans provide for payments due as of the first day of
each month (the 'Due Date'). At origination, substantially all of the mortgage
loans had stated terms to maturity of 30 years. Scheduled monthly payments made
by the mortgagors on the mortgage loans (referred to as scheduled payments)
either earlier or later than their scheduled Due Dates will not affect the
amortization schedule or the relative application of
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the payments to principal and interest. The mortgagors may prepay their mortgage
loans at any time without penalty.
Each mortgage loan was originated after .
The latest stated maturity date of any mortgage loan is . The
earliest stated maturity date of any mortgage loan is .
As of the cut-off date, no mortgage loan was delinquent more than 30 days.
[No] mortgage loan will be subject to buydown agreements. [No] mortgage
loan provides for deferred interest or negative amortization.
As of the cut-off date, mortgage loans, representing approximately % of
the cut-off date pool principal balance, were each originated as an adjustable
rate mortgage loan but converted to a fixed rate mortgage loan before its
inclusion in the mortgage pool.
No mortgage loan has a Loan-to-Value Ratio at origination of more than 95%.
Generally, 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 Fannie Mae or Freddie Mac.
The policy provides coverage in an amount equal to a specified percentage times
the sum of the remaining principal balance of the related mortgage loan, the
accrued interest on it and the related foreclosure expenses. The specified
percentage is either 12% for Loan-to-Value Ratios between 80.01% and 85.00%, 25%
for Loan-to-Value Ratios between 85.01% and 90.00% and 30% for Loan-to-Value
Ratios between 90.01% and 95.00%. With respect to mortgage loans, the
lender (rather than the borrower) acquired the primary mortgage guaranty
insurance and charged the related borrower an interest premium. Except for these
lender acquired mortgage insurance mortgage loans, no primary mortgage guaranty
insurance policy will be required with respect to any mortgage loan if
maintaining the policy is prohibited by applicable law or after the date on
which the related Loan-to-Value Ratio is 80% or less or, based on a new
appraisal, the principal balance of the mortgage loan represents 80% or less of
the new appraised value. The primary mortgage guaranty insurance policy will be
maintained for the life of the lender acquired mortgage insurance mortgage
loans.
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
in the case of a purchase, the lesser of the selling price of the
mortgaged property or its appraised value at the time of sale, or
[in the case of a refinance, the appraised value of the mortgaged
property at the time of the refinance, except in the case of a
mortgage loan underwritten pursuant to [Countrywide's] Streamlined
Documentation Program as described under ' -- Underwriting Process.'
With respect to mortgage loans originated pursuant to the Streamlined
Documentation Program
if the loan-to-value ratio at the time of the origination of the
mortgage loan being refinanced was 90% or less, the 'Loan-to-Value
Ratio' will be the ratio of the principal amount of the mortgage loan
outstanding at the date of determination divided by the appraised
value of the related mortgaged property at the time of the
origination of the mortgage loan being refinanced or
if the loan-to-value ratio at the time of the origination of the
mortgage loan being refinanced was greater than 90%, then the
'Loan-to-Value Ratio' will be the ratio of the principal amount of
the mortgage loan outstanding at the date of determination
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divided by the appraised value as determined by a limited appraisal
report at the time of the origination of the mortgage loan.] See
' -- Underwriting Process.'
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 the
mortgage loans.
The following information sets forth in tabular format information, as of
the cut-off date, as to the mortgage loans. Other than with respect to rates of
interest, percentages (approximate) are stated by Stated Principal Balance of
the mortgage loans as of the cut-off date and have been rounded in order to
total 100%.
MORTGAGE RATES
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE BALANCE MORTGAGE
MORTGAGE RATES(%) LOANS OUTSTANDING POOL
- --------------------------------------------------------------------- --------- ----------- -------------
<S> <C> <C> <C>
6.375................................................................ $ %
6.500................................................................
6.625................................................................
6.750................................................................
6.875................................................................
7.000................................................................
7.125................................................................
7.250................................................................
7.375................................................................
7.500................................................................
7.625................................................................
7.750................................................................
7.875................................................................
8.000................................................................
8.125................................................................
8.250................................................................
8.375................................................................
8.500................................................................
8.625................................................................
8.750................................................................
--------- ----------- -------------
Total........................................................... $ 100.00%
--------- ----------- -------------
--------- ----------- -------------
</TABLE>
The lender acquired mortgage insurance mortgage loans are shown in the
preceding table at the mortgage rates net of the interest premium charged by the
related lenders. As of the cut-off date, the weighted average mortgage rate of
the mortgage loans (as so adjusted) is expected to be approximately %. Without
the adjustment, the weighted average mortgage rate of the mortgage loans is
expected to be approximately % per annum.
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<PAGE>
<PAGE>
CURRENT MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
CURRENT MORTGAGE MORTGAGE BALANCE MORTGAGE
LOAN AMOUNTS LOANS OUTSTANDING POOL
- --------------------------------------------------------------------- --------- ----------- -------------
<S> <C> <C> <C>
$ 0 - $ 50,000.............................................. $ %
$ 50,001 - $ 100,000..............................................
$ 100,001 - $ 150,000..............................................
$ 150,001 - $ 200,000..............................................
$ 200,001 - $ 250,000..............................................
$ 250,001 - $ 300,000..............................................
$ 300,001 - $ 350,000..............................................
$ 350,001 - $ 400,000..............................................
$ 400,001 - $ 450,000..............................................
$ 450,001 - $ 500,000..............................................
$ 500,001 - $ 550,000..............................................
$ 550,001 - $ 600,000..............................................
$ 600,001 - $ 650,000..............................................
$ 650,001 - $ 750,000..............................................
$ 750,001 - $1,000,000..............................................
$1,500,001 - $2,000,000..............................................
$2,000,001 - $2,500,000..............................................
--------- ----------- -------------
Total........................................................... $ 100.00%
--------- ----------- -------------
--------- ----------- -------------
</TABLE>
As of the cut-off date, the average current mortgage loan principal balance is
expected to be approximately $ .
DOCUMENTATION PROGRAM FOR MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL PERCENT OF
MORTGAGE BALANCE MORTGAGE
TYPE OF PROGRAM LOANS OUTSTANDING POOL
- --------------------------------------------------------------------- --------- ----------- -------------
<S> <C> <C> <C>
Full................................................................. $ %
Alternative..........................................................
Reduced..............................................................
No Income/No Asset...................................................
Streamlined..........................................................
--------- ----------- -------------
Total........................................................... $ 100.00%
--------- ----------- -------------
--------- ----------- -------------
</TABLE>
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The weighted average original Loan-to-Value Ratio of the mortgage loans is
expected to be approximately %.
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL
ORIGINAL LOAN-TO-VALUE MORTGAGE BALANCE PERCENT OF
RATIOS (%) LOANS OUTSTANDING MORTGAGE POOL
- --------------------------------------------------------------- --------- -------------- -------------
<S> <C> <C> <C>
50.00 and below................................................ $ %
50.01 to 55.00.................................................
55.01 to 60.00.................................................
60.01 to 65.00.................................................
65.01 to 70.00.................................................
70.01 to 75.00.................................................
75.01 to 80.00.................................................
80.01 to 85.00.................................................
85.01 to 90.00.................................................
90.01 to 95.00.................................................
--------- -------------- -------------
Total..................................................... $ 100.00%
--------- -------------- -------------
--------- -------------- -------------
</TABLE>
STATE DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL
MORTGAGE BALANCE PERCENT OF
STATE LOANS OUTSTANDING MORTGAGE POOL
- --------------------------------------------------------------- --------- -------------- -------------
<S> <C> <C> <C>
California..................................................... $ %
Colorado.......................................................
Georgia........................................................
Illinois.......................................................
Massachusetts..................................................
Michigan.......................................................
New Jersey.....................................................
Texas..........................................................
Washington.....................................................
Other (less than 2%)...........................................
--------- -------------- -------------
Total..................................................... $ 100.00%
--------- -------------- -------------
--------- -------------- -------------
</TABLE>
The Other row in the preceding table includes other states and the
District of Columbia with under [2]% concentrations individually. No more than
approximately % of the mortgage loans will be secured by mortgaged properties
located in any one postal zip code area.
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<PAGE>
PURPOSE OF MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL
MORTGAGE BALANCE PERCENT OF
LOAN PURPOSE LOANS OUTSTANDING MORTGAGE POOL
- --------------------------------------------------------------- --------- -------------- -------------
<S> <C> <C> <C>
Purchase....................................................... $ %
Refinance (rate/term)..........................................
Refinance (cash out)...........................................
--------- -------------- -------------
Total..................................................... $ 100.00%
--------- -------------- -------------
--------- -------------- -------------
</TABLE>
TYPES OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL
MORTGAGE BALANCE PERCENT OF
PROPERTY TYPE LOANS OUTSTANDING MORTGAGE POOL
- --------------------------------------------------------------- --------- -------------- -------------
<S> <C> <C> <C>
Single Family.................................................. $ %
Condominium....................................................
High Rise Condo................................................
2-4 Family.....................................................
Planned Unit Development.......................................
--------- -------------- -------------
Total..................................................... $ 100.00%
--------- -------------- -------------
--------- -------------- -------------
</TABLE>
OCCUPANCY TYPES
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL
MORTGAGE BALANCE PERCENT OF
OCCUPANCY TYPES LOANS OUTSTANDING MORTGAGE POOL
- --------------------------------------------------------------- --------- -------------- -------------
<S> <C> <C> <C>
Primary Residence.............................................. $ %
Investor Property..............................................
Second Residence...............................................
--------- -------------- -------------
Total..................................................... $ 100.00%
--------- -------------- -------------
--------- -------------- -------------
</TABLE>
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<PAGE>
<PAGE>
As of the cut-off date, the weighted average remaining term to maturity of
the mortgage loans in the following table is expected to be approximately
months.
REMAINING TERMS TO MATURITY
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL
REMAINING TERM TO MORTGAGE BALANCE PERCENT OF
MATURITY (MONTHS) LOANS OUTSTANDING MORTGAGE POOL
- --------------------------------------------------------------- --------- -------------- -------------
<S> <C> <C> <C>
360............................................................ $ %
359............................................................
358............................................................
357............................................................
356............................................................
355............................................................
354............................................................
353............................................................
351............................................................
339............................................................
333............................................................
311............................................................
300............................................................
299............................................................
287............................................................
240............................................................
239............................................................
238............................................................
--------- -------------- -------------
Total..................................................... $ 100.00%
--------- -------------- -------------
--------- -------------- -------------
</TABLE>
ASSIGNMENT OF THE MORTGAGE LOANS
Pursuant to the pooling and servicing 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
interest of the depositor in each mortgage loan and all interest in all other
assets included in CHL Mortgage Pass-Through Trust 1999- , including all
principal and interest received on or with respect to the mortgage loans,
exclusive of principal and interest due on or before the cut-off date.
In connection with the transfer and assignment, the depositor will deliver
or cause to be delivered to the trustee, or a custodian for the trustee, the
mortgage file, which contains among other things, the original mortgage note
(and any modification or amendment to it) endorsed in blank without recourse,
except that the depositor may deliver or cause to be delivered a lost note
affidavit in lieu of any original mortgage note that has been lost, the original
mortgage creating a first lien on the related mortgaged property 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 the mortgage note and mortgage (except for any
documents not returned from the public recording office, which will be delivered
to the trustee as soon as the same is available to the depositor). With respect
to up to 50% of the mortgage loans, the depositor may deliver all or a portion
of each related mortgage file to the trustee not later than thirty days after
the closing date. Assignments of the mortgage loans to the trustee (or
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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
recording is not required to protect the trustee's interests 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 the defect within 90 days of notice of the defect from the trustee (or
within such longer period not to exceed 720 days after the closing date as
provided in the pooling and servicing 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 the mortgage loan
(referred to as a deleted mortgage loan) from the trust fund and substitute in
its place another mortgage loan (referred to as a replacement mortgage loan);
however, 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 trustee to the
effect that the substitution will not disqualify the 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 pooling and servicing agreement,
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 in the Certificate
Account and held for distribution to the certificateholders on the related
Distribution Date (a 'Substitution Adjustment Amount')),
have a mortgage rate not lower than, and not more than 1% per annum higher
than, that of the deleted mortgage loan,
have a Loan-to-Value Ratio not higher than that of the deleted mortgage
loan,
have a remaining term to maturity not greater than (and not more than one
year less than) that of the deleted mortgage loan, and
comply with all of the representations and warranties set forth in the
pooling and servicing 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 PROCESS
[GENERAL
All mortgage loans must meet credit, appraisal and underwriting standards
acceptable to Countrywide. Countrywide's underwriting standards are applied in
accordance with applicable federal and state laws and regulations. Except as
otherwise provided in this prospectus supplement, the underwriting procedures
are consistent with those identified under 'Mortgage Loan
Program -- Underwriting Process' in the prospectus.
Sometimes the data used by Countrywide to complete the underwriting
analysis may be obtained by a third party, particularly for mortgage loans
originated through a loan correspondent or mortgage broker. In those instances,
the initial determination as to whether a mortgage loan
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complies with Countrywide's underwriting guidelines may be made by an
independent company hired to perform underwriting services on behalf of
Countrywide, the loan correspondent or mortgage broker. In addition, Countrywide
may acquire mortgage loans from approved correspondent lenders under a program
pursuant to which Countrywide delegates to the correspondent the obligation to
underwrite the mortgage loans to Countrywide's standards. Under these
circumstances, the underwriting of a mortgage loan may not have been reviewed by
Countrywide before acquisition of the mortgage loan and the correspondent
represents that Countrywide's underwriting standards have been met. After
purchasing mortgage loans under those circumstances, Countrywide conducts a
quality control review of a sample of the mortgage loans. The number of loans
reviewed in the quality control process varies based on a variety of factors,
including Countrywide's prior experience with the correspondent lender and the
results of the quality control review process itself.
Countrywide's underwriting standards are applied by or on behalf of
Countrywide to evaluate the prospective borrower's credit standing and repayment
ability and the value and adequacy of the mortgaged property as collateral.
Under those standards, a prospective borrower must generally demonstrate that
the ratio of the borrower's monthly housing expenses (including principal and
interest on the proposed mortgage loan and, as applicable, the related monthly
portion of property taxes, hazard insurance and mortgage insurance) to the
borrower's monthly gross income and the ratio of total monthly debt to the
monthly gross income (the 'debt-to-income' ratios) are within acceptable limits.
If the prospective borrower has applied for an adjustable rate loan and the
Loan-to-Value Ratio is less than or equal to 75%, the interest component of the
monthly housing expense is calculated based on the initial loan interest rate;
if the Loan-to-Value Ratio exceeds 75%, the interest component of the monthly
housing expense calculation is based on the maximum possible interest rate
payable in the second year of the mortgage loan. The maximum acceptable
debt-to-income ratio, which is determined on a loan-by-loan basis varies
depending on a number of underwriting criteria, including the Loan-to-Value
Ratio, loan purpose, loan amount and credit history of the borrower. In addition
to meeting the debt-to-income ratio guidelines, each prospective borrower is
required to have sufficient cash resources to pay the down payment and closing
costs. Exceptions to Countrywide's underwriting guidelines may be made if
compensating factors are demonstrated by a prospective borrower.
The nature of the information that a borrower is required to disclose and
whether the information is verified depends, in part, on the documentation
program used in the origination process. In general under the Full Documentation
Loan Program (the 'Full Documentation Program'), each prospective borrower is
required to complete an application which includes information with respect to
the applicant's assets, liabilities, income, credit history, employment history
and other personal information. Self-employed individuals are generally required
to submit their two most recent federal income tax returns. Under the Full
Documentation Program, the underwriter verifies the information contained in the
application relating to employment, income, assets or mortgages.
A prospective borrower may be eligible for a loan approval process that
limits or eliminates Countrywide's standard disclosure or verification
requirements or both. Countrywide offers the following documentation programs as
alternatives to its Full Documentation Program: an Alternative Documentation
Loan Program (the 'Alternative Documentation Program'), a Reduced Documentation
Loan Program (the 'Reduced Documentation Program'), a No Income/No Asset
Documentation Loan Program (the 'No Income/No Asset Documentation Program') and
a Streamlined Documentation Loan Program (the 'Streamlined Documentation
Program').
Countrywide obtains a credit report relating to the applicant from a credit
reporting company. The credit report typically contains information relating to
such matters as credit
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history with local and national merchants and lenders, installment debt payments
and any record of defaults, bankruptcy, dispossession, suits or judgments. All
adverse information in the credit report is required to be explained by the
prospective borrower to the satisfaction of the lending officer.
Except with respect to its Streamlined Documentation Program, Countrywide
obtains appraisals from independent appraisers or appraisal services for
properties that are to secure mortgage loans. The appraisers inspect and
appraise the proposed mortgaged property and verify that the property is in
acceptable condition. Following each appraisal, the appraiser prepares a report
which includes a market data analysis based on recent sales of comparable homes
in the area and, when deemed appropriate, a replacement cost analysis based on
the current cost of constructing a similar home. All appraisals are required to
conform to Fannie Mae or Freddie Mac appraisal standards then in effect. Every
independent appraisal is reviewed by a Countrywide underwriter before the loan
is approved.
Countrywide requires title insurance on all of its mortgage loans secured
by first liens on real property. Countrywide also requires that fire and
extended coverage casualty insurance be maintained on the mortgaged property in
an amount at least equal to the principal balance of the related single-family
mortgage loan or the replacement cost of the mortgaged property, whichever is
less.
In addition to Countrywide's standard underwriting guidelines (the
'Standard Underwriting Guidelines'), which are consistent in many respects with
the guidelines applied to mortgage loans purchased by Fannie Mae and Freddie
Mac, Countrywide uses underwriting guidelines featuring expanded criteria (the
'Expanded Underwriting Guidelines'). The Standard Underwriting Guidelines and
the Expanded Underwriting Guidelines are described further under the next two
headings.
STANDARD UNDERWRITING GUIDELINES
Countrywide's Standard Underwriting Guidelines generally allow
Loan-to-Value Ratios at origination of up to 95% for purchase money or rate and
term refinance mortgage loans with original principal balances of up to
$300,000, up to 90% for mortgage loans with original principal balances of up to
$400,000, up to 85% for mortgage loans with original principal balances of up to
$500,000, up to 80% for mortgage loans with original principal balances of up to
$650,000, up to 75% for mortgage loans with original principal balances of up to
$750,000 and up to 70% for mortgage loans with original principal balances of up
to $1,000,000.
For cash out refinance mortgage loans with original principal balances of
up to $650,000, Countrywide's Standard Underwriting Guidelines generally allow
Loan-to-Value Ratios at origination of up to 75%. The maximum 'cash-out' amount
permitted is $150,000 and is based in part on the original Loan-to-Value Ratio
of the related mortgage loan. As used in this prospectus supplement, a refinance
mortgage loan is classified as a cash-out refinance mortgage loan by Countrywide
if the borrower retains greater than 1.0% of the entire amount of the proceeds
from the refinancing of the existing loan.
Under its Standard Underwriting Guidelines, Countrywide generally permits a
debt-to-income ratio based on the borrower's monthly housing expenses of up to
33% and a debt-to-income ratio based on the borrower's total monthly debt of up
to 38%.
In connection with the Standard Underwriting Guidelines, Countrywide
originates or acquires mortgage loans under the Full Documentation Program, the
Alternative Documentation Program, the Reduced Documentation Program or the
Streamlined Documentation Program.
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The Alternative Documentation Program permits a borrower to provide W-2
forms instead of tax returns covering the most recent two years, permits bank
statements in lieu of verification of deposits and permits alternative methods
of employment verification. Mortgage loans which have been originated under the
Alternative Documentation Program may be eligible for sale to Fannie Mae or
Freddie Mac.
Under the Reduced Documentation Program, some underwriting documentation
concerning income and employment verification is waived. Countrywide obtains
from a prospective borrower either a verification of deposit or bank statements
for the two-month period immediately before the date of the mortgage loan
application. Since information relating to a prospective borrower's income and
employment is not verified, the borrower's debt-to-income ratios are calculated
based on the information provided by the borrower in the mortgage loan
application. The maximum Loan-to-Value Ratio, including secondary financing,
ranges up to 70% maximum.
The Streamlined Documentation Program is available for borrowers who are
refinancing an existing Countrywide mortgage loan provided that, among other
things, the mortgage loan has not been more than 30 days delinquent in payment
during the previous twelve-month period. Under the Streamlined Documentation
Program, appraisals are obtained only if the loan being refinanced had a
Loan-to-Value Ratio at the time of origination in excess of 90%. In addition,
under the Streamlined Documentation Program, a credit report is obtained but
only a limited credit review is conducted, no income or asset verification is
required, and telephonic verification of employment is permitted. The maximum
Loan-to-Value Ratio under the Streamlined Documentation Program ranges up to
90%.
Mortgage loans comprising approximately % of the mortgage pool were
underwritten pursuant to Countrywide's Standard Underwriting Guidelines.
EXPANDED UNDERWRITING GUIDELINES
Mortgage loans which are underwritten pursuant to the Expanded Underwriting
Guidelines may have higher Loan-to-Value Ratios, higher loan amounts and
different documentation requirements than those associated with the Standard
Underwriting Guidelines. The Expanded Underwriting Guidelines also permit higher
debt-to-income ratios than mortgage loans underwritten pursuant to the Standard
Underwriting Guidelines.
Countrywide's Expanded Underwriting Guidelines generally allow
Loan-to-Value Ratios at origination of up to 95% for purchase money or rate and
term refinance mortgage loans with original principal balances of up to
$300,000, up to 90% for mortgage loans with original principal balances of up to
$400,000, up to 85% for mortgage loans with original principal balances of up to
$500,000, up to 80% for mortgage loans with original principal balances of up to
$650,000, up to 70% for mortgage loans with original principal balances of up to
$750,000, up to 65% for mortgage loans with original principal balances of up to
$1,000,000 and up to 70% for mortgage loans with original principal balances of
up to $3,000,000.
For cash-out refinance mortgage loans with original principal balances of
up to $3,000,000, Countrywide's Expanded Underwriting Guidelines generally allow
Loan-to-Value Ratios at origination of up to 90%. The maximum 'cash-out' amount
permitted is $600,000 and is based in part on the original Loan-to-Value Ratio
of the related mortgage loan.
Under its Expanded Underwriting Guidelines, Countrywide generally permits a
debt-to-income ratio based on the borrower's monthly housing expenses of up to
36% and a debt-to-income ratio based on the borrower's total monthly debt of up
to 40%; provided, however, that if the Loan-to-Value Ratio exceeds 80%, the
maximum permitted debt-to-income ratios are 33% and 38%, respectively.
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In connection with the Expanded Underwriting Guidelines, Countrywide
originates or acquires mortgage loans under the Full Documentation Program, the
Alternative Documentation Program, the Reduced Documentation Loan Program and
the No Income/No Asset Documentation Program. The No Income/No Asset
Documentation Program is not available under the Standard Underwriting
Guidelines.
The same documentation and verification requirements apply to mortgage
loans documented under the Alternative Documentation Program regardless of
whether the loan has been underwritten under the Expanded Underwriting
Guidelines or the Standard Underwriting Guidelines. However, under the
Alternative Documentation Program, mortgage loans that have been underwritten
pursuant to the Expanded Underwriting Guidelines may have higher loan balances
and Loan-to-Value Ratios than those permitted under the Standard Underwriting
Guidelines.
Similarly, the same documentation and verification requirements apply to
mortgage loans documented under the Reduced Documentation Program regardless of
whether the loan has been underwritten under the Expanded Underwriting
Guidelines or the Standard Underwriting Guidelines. However, under the Reduced
Documentation Program, higher loan balances and Loan-to-Value Ratios are
permitted for mortgage loans underwritten pursuant to the Expanded Underwriting
Guidelines than those permitted under the Standard Underwriting Guidelines. The
maximum Loan-to-Value Ratio, including secondary financing, ranges up to 90%.
The borrower is not required to disclose any income information for some
mortgage loans originated under the Reduced Documentation Program, and
accordingly debt-to-income ratios are not calculated or included in the
underwriting analysis. The maximum Loan-to-Value Ratio, including secondary
financing, for those mortgage loans ranges up to 80%.
Under the No Income/No Asset Documentation Program, no documentation
relating to a prospective borrower's income, employment or assets is required
and therefore debt-to-income ratios are not calculated or included in the
underwriting analysis, or if the documentation or calculations are included in a
mortgage loan file, they are not taken into account for purposes of the
underwriting analysis. This program is limited to borrowers with excellent
credit histories. Under the No Income/No Asset Documentation Program, the
maximum Loan-to-Value Ratio, including secondary financing, ranges up to 75%.
Mortgage loans originated under the No Income/No Asset Documentation Program are
not eligible for sale to Fannie Mae or Freddie Mac.
Mortgage loans originated under either the No Income/No Asset Documentation
Program or the Reduced Documentation Program pursuant to which debt-to-income
ratios are not calculated as described above are expected to comprise
approximately % of the mortgage pool.
Under the Expanded Underwriting Guidelines, Countrywide may also provide
mortgage loans to borrowers who are not U.S. citizens, including permanent and
non-permanent residents. The borrower is required to have a valid U.S. social
security number or a certificate of foreign status (IRS form W-8). The
borrower's income and assets must be verified under the Full Documentation
Program or the Alternative Documentation Program. The maximum Loan-to-Value
Ratio, including secondary financing, is 80%. Mortgage Loans comprising
approximately % of the mortgage pool were underwritten pursuant to
Countrywide's Expanded Underwriting Guidelines.]
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<PAGE>
<PAGE>
SERVICING OF MORTGAGE LOANS
GENERAL
The master servicer will service the mortgage loans in accordance with the
terms set forth in the pooling and servicing agreement. The master servicer may
perform any of its obligations under the pooling and servicing agreement through
one or more subservicers. Notwithstanding any subservicing arrangement, the
master servicer will remain liable for its servicing duties and obligations
under the pooling and servicing agreement as if the master servicer alone were
servicing the mortgage loans.
THE MASTER SERVICER
[Countrywide Home Loans, Inc. ('Countrywide'), a New York corporation and a
subsidiary of Countrywide Credit Industries, Inc., will act as master servicer
for the mortgage loans pursuant to the pooling and servicing agreement.
Countrywide is engaged primarily in the mortgage banking business, and as such,
originates, purchases, sells and services mortgage loans. Countrywide originates
mortgage loans through a retail branch system and through mortgage loan brokers
and correspondents nationwide. Countrywide's mortgage loans are principally
first-lien, fixed or adjustable rate mortgage loans secured by single-family
residences.
At , 1999, Countrywide provided servicing for approximately
$ billion aggregate principal amount of mortgage loans, substantially all of
which are being serviced for unaffiliated persons.
The principal executive offices of Countrywide are located at 4500 Park
Granada, Calabasas, California 91302.
Countrywide initially services substantially all of the mortgage loans it
originates or acquires. In addition, Countrywide has purchased in bulk the
rights to service mortgage loans originated by other lenders. Servicing includes
collecting and remitting loan payments, accounting for principal and interest,
holding escrow (impound) funds for payment of taxes and insurance, making
inspections as required of the mortgaged premises, contacting delinquent
mortgagors, supervising foreclosures in the event of unremedied defaults and
generally administering the loans, for which Countrywide receives servicing
fees. Countrywide has in the past and may in the future sell to other mortgage
bankers a portion of its portfolio of loan servicing rights. In addition, see
'The Pooling and Servicing Agreement -- Evidence as to Compliance' in the
prospectus for a description of the annual servicing report and the report of
the independent public accountants required to be provided by Countrywide in its
capacity as master servicer under the pooling and servicing agreement.]
MORTGAGE LOAN PRODUCTION
The following table sets forth, by number and dollar amount of mortgage
loans, [Countrywide's] residential mortgage loan production for the periods
indicated.
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<PAGE>
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED , QUARTER ENDED
----------------------------- ------------------
------- ------- ------- ------- -------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT AVERAGE LOAN
BALANCE)
<S> <C> <C> <C> <C> <C>
FHA/VA Loans
Number of Loans...................................
Volume of Loans................................... $ $ $ $ $
Conventional Loans
Number of Loans...................................
Volume of Loans................................... $ $ $ $ $
Other Loans
Number of Loans...................................
Volume of Loans................................... $ $ $ $ $
Total Loans
Number of Loans...................................
Volume of Loans................................... $ $ $ $ $
Average Loan Balance................................... $ $ $ $ $
</TABLE>
FORECLOSURE, DELINQUENCY AND LOSS EXPERIENCE
Historically, a variety of factors, including the appreciation of real
estate values, have limited the master servicer's loss and delinquency
experience on its portfolio of serviced mortgage loans. There can be no
assurance that factors beyond the master servicer's control, such as national or
local economic conditions or downturns in the real estate markets of its lending
areas, will not result in increased rates of delinquencies and foreclosure
losses in the future.
A general deterioration of the real estate market in regions where the
mortgaged properties are located may result and weakening 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. A general
weakening of the economy may result 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 were to decline, the master
servicer may experience an increase in delinquencies on the loans it services
and higher net losses on liquidated loans.
The following table summarizes the delinquency, foreclosure and loss
experience, respectively, on the dates indicated, of all mortgage loans
originated or acquired by Countrywide, serviced or master serviced by the master
servicer and securitized by the depositor, excluding mortgage loans subserviced
for others. The delinquency, foreclosure and loss percentages may be affected by
the size and relative lack of seasoning of the servicing portfolio which
increased from approximately $ billion at to approximately $
billion at , to approximately $ billion at , to
approximately $ billion at and to approximately $ billion at
. 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, delinquency
and loss experience presented in the following table will be indicative of the
actual experience on the mortgage loans:
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<PAGE>
<PAGE>
<TABLE>
<CAPTION>
AT , AT
-------------------- ------------
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Delinquent Mortgage Loans and Pending Foreclosures at Period End:
30-59 days......................................................... % % % % %
60-89 days.........................................................
90 days or more (excluding pending foreclosures)...................
---- ---- ---- ---- ----
Total of delinquencies....................................... % % % % %
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Foreclosures pending.................................................... % % % % %
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Total delinquencies and foreclosures pending............................ % % % % %
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Net Gains/(Losses) on liquidated loans(1)...............................
Percentage of Net Gains/(Losses) on liquidated loans(1)(2).............. % % % % %
Percentage of Net Gains/(Losses) on liquidated loans (based on average
outstanding principal balance)(1)..................................... % % % % %
</TABLE>
- ------------
(1) 'Net Gains (Losses)' are actual gains or losses incurred on liquidated
properties that are calculated as net liquidation proceeds less book value
(excluding loan purchase premium or discount).
(2) Based upon the total principal balance of the mortgage loans outstanding on
the last day of the indicated period.
------------------------
The following table summarizes the delinquency and foreclosure experience,
respectively, on the dates indicated, of all mortgage loans serviced or master
serviced by the master servicer, excluding mortgage loans subserviced for
others. The mortgage loans have a variety of underwriting, payment and other
characteristics, many of which differ from those of the mortgage loans, and no
assurances can be given that the delinquency and foreclosure experience
presented in the following table will be indicative of such actual experience of
the mortgage loans. The delinquency and foreclosure percentages may be affected
by the size and relative lack of seasoning of the servicing portfolio which
increased from approximately $ billion at to approximately $
billion at, to approximately $ billion at , to approximately
$ billion at , and to approximately $ billion at .
<TABLE>
<CAPTION>
AT , AT
-------------------- ------------
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Delinquent mortgage loans and pending foreclosures at period end:
30-59 days......................................................... % % % % %
260-89 days........................................................
90 days or more (excluding pending foreclosures)...................
---- ---- ---- ---- ----
Total of delinquencies....................................... % % % % %
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Foreclosures pending.................................................... % % % % %
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Total delinquencies and foreclosures pending............................ % % % % %
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
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<PAGE>
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 % per annum
of the Stated Principal Balance of each mortgage loan. The Expense Fees consist
of (a) servicing compensation payable to the master servicer in respect of its
master servicing activities and (b) fees payable to the trustee in respect of
its activities as trustee under the pooling and servicing agreement. The master
servicing fee will be % per annum of the Stated Principal Balance of each
mortgage loan. The master servicer is obligated to pay some but not all ongoing
expenses associated with the trust fund and incurred by the master servicer in
connection with its responsibilities under the pooling and servicing agreement
and those 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 under ' -- Adjustment to
Master Servicing Fee in Connection with Prepaid Mortgage Loans.' The master
servicer is also entitled to receive, as additional servicing compensation, all
late payment fees, assumption fees and other similar charges and all
reinvestment income earned on amounts on deposit in the Certificate Account and
Distribution Account. The net mortgage rate of a mortgage loan is its mortgage
rate (net of the interest premium charged by the related lenders for the lender
acquired mortgage insurance mortgage loans) less the Expense Fees on the
mortgage loan (expressed as a per annum percentage of its Stated Principal
Balance).
ADJUSTMENT TO MASTER SERVICING FEE IN CONNECTION WITH 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. Except with respect to the month of the cut-off date,
principal prepayments by borrowers received by the master servicer from the
first day through the fifteenth day of a calendar month will be distributed to
certificateholders on the Distribution Date in the same month in which the
prepayments are received and, accordingly, no shortfall in the amount of
interest to be distributed to certificateholders with respect to the prepaid
mortgage loans results. Conversely, principal prepayments by borrowers received
by the master servicer from the sixteenth day (or, in the case of the first
Distribution Date, from the cut-off date) through the last day of a calendar
month will be distributed to certificateholders on the Distribution Date in the
month following the month of receipt and, accordingly, a shortfall in the amount
of interest to be distributed to certificateholders with respect to the prepaid
mortgage loans would result. Pursuant to the pooling and servicing agreement,
the master servicing fee for any month will be reduced, but not by more than
one-half of the master servicing fee, by an amount sufficient to pass through to
certificateholders the full amount of interest to which they would be entitled
for each prepaid mortgage loan on the related Distribution Date. If shortfalls
in interest as a result of prepayments in any Prepayment Period exceed an amount
equal to one-half of the master servicing fee otherwise payable on the related
Distribution Date, the amount of interest available to be distributed to
certificateholders will be reduced by the amount of the excess. See 'Description
of the Certificates -- Interest.'
ADVANCES
Subject to the following limitations, the master servicer will be required
to advance before each Distribution Date, from its own funds or funds in the
Certificate Account that do not constitute Available Funds for the Distribution
Date, an amount equal to the aggregate of payments of principal 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
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<PAGE>
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. The 'Determination Date' is the day of each month or, if
that day is not a business day, the preceding business day; provided that the
Determination Date in each month will be at least two business days before the
related Distribution Date.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the certificates rather than to guarantee or insure
against losses. The master servicer is obligated to make advances with respect
to delinquent payments of principal of or interest on each mortgage loan to the
extent that the 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, the advance will be included with the
distribution to certificateholders on the related Distribution Date. Any failure
by the master servicer to make a deposit in the Certificate Account as required
under the pooling and servicing agreement, including any failure to make an
advance, will constitute an Event of Default under the pooling and servicing
agreement if the failure remains unremedied for five days after written notice
of it. If the master servicer is terminated as a result of the occurrence of an
Event of Default, the trustee or the successor master servicer will be obligated
to make any the advance, in accordance with the terms of the pooling and
servicing agreement.
[YEAR 2000 COMPLIANCE
Many computer systems and microprocessors with data functions, including
those in the non-information technology equipment and systems, use only two
digits to identify a year in the date field with the assumption that the first
two digits of the year are always '19.' Consequently, on January 1, 2000,
computers that are not year 2000 compliant may read the year as 1900 and
malfunction.
In anticipation of the issues associated with the year 2000 we have
undertaken five distinct year 2000 projects, each of which focuses on a critical
area of our business operations.
Our primary loan servicing platform is the IBM AS/400, which contains all
of the data relating to the mortgage loans that we service. As of December 1998,
we have reprogrammed and re-engineered our primary loan servicing platform
system to incorporate four-digit century date fields, tested the function and
accuracy of the reprogrammed fields and implemented the revised code in more
than 17,000 programs on the AS/400.
Many of our client server applications have been developed in-house and in
a year 2000 compliant format. The majority of those applications interface with
the AS/400. We have reviewed each of our mission critical client server
applications to confirm their year 2000 readiness. All of our critical client
server applications have been forward-date tested. We anticipate that less
critical client server applications will be forward-date tested by mid-1999.
We have inventoried, assessed and corrected and forward-date tested our
mission critical wide area network components, telecommunications systems and
unique business systems.
In addition, we participate in the Mortgage Bankers Association
inter-industry testing project. Other participants include Ginnie Mae, Fannie
Mae and Freddie Mac, as well as banks, insurance companies and credit bureaus.
The Mortgage Bankers Association project involves inter-industry testing of
transactions from loan origination, secondary marketing and loan servicing areas
and its mission is to make sure the various interfaces work together across the
entire industry.
S-26
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<PAGE>
We have retained a vendor specializing in business continuity planning to
review our business continuity procedures on a company-wide basis and assist in
assessing the contingency plans of each of our business units, as well as those
of mission critical business partners, vendors and suppliers. The year 2000
aspect of this process is expected to be completed in early 1999.
Due to the global nature of the year 2000 issue, we cannot determine all of
the consequences that the year 2000 may have on our business and operations. We
believe that in light of the efforts of our year 2000 projects, including the
contingency planning aspect, material business interruptions are unlikely.
However, there may be instances where we will rely on third party information
that may be unreliable or unverifiable. We cannot be assured that third parties
upon which we rely, including utilities and telecommunications service
providers, will not have business interruptions that could have an adverse
effect on our business operations.
Our failure, or the failure of any of our third-party service providers, to
become fully year 2000 ready could disrupt, at least temporarily, our ability to
carry out our servicing duties, including the calculation of amounts
distributable to you and the timely transfer of funds to the trustee for your
benefit. Your investment in the certificates could consequently suffer.]
DESCRIPTION OF THE CERTIFICATES
GENERAL
The certificates will be issued pursuant to the pooling and servicing
agreement. The following summaries of the material terms pursuant to which the
certificates will be issued do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, the provisions of the
pooling and servicing agreement. When particular provisions or terms used in the
pooling and servicing agreement are referred to, the actual provisions
(including definitions of terms) are incorporated by reference. The certificates
represent obligations of the trust only and do not represent an interest in or
obligation of CWMBS, Inc., Countrywide Home Loans, Inc. or any of their
affiliates.
The Mortgage Pass-Through Certificates, Series 1999- will consist of
the Class A-1, Class A-2, Class A-3, Class PO, Class X and Class A-R
Certificates (senior certificates) and the Class M, Class B-1, Class B-2, Class
B-3, Class B-4 and Class B-5 Certificates (subordinated certificates). Only the
classes of certificates listed on the cover page are offered by this prospectus
supplement. The classes of offered certificates will have the respective initial
Class Certificate Balances or initial Notional Amounts and pass-through rates
set forth on the cover page or described in this prospectus supplement. The
initial Class Certificate Balances may vary in the aggregate by plus or minus
%.
The 'Class Certificate Balance' of any class of certificates as of any
Distribution Date is the initial Class Certificate Balance of the class reduced
by the sum of
all amounts previously distributed to holders of certificates of the class
as payments of principal,
the amount of Realized Losses (including Excess Losses) allocated to the
class and
in the case of any class of subordinated certificates, any amounts
allocated to the class in reduction of its Class Certificate Balance in
respect of payments of class PO Deferred Amounts, as described under
' -- Allocation of Losses.'
In addition, the Class Certificate Balance of the class of subordinated
certificates then outstanding with the highest numerical class designation will
be reduced if and to the extent that
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<PAGE>
the aggregate of the Class Certificate Balances of all classes of certificates,
following all distributions and the allocation of Realized Losses on a
Distribution Date, exceeds the pool principal balance as of the Due Date
occurring in the month of the Distribution Date. The Notional Amount
Certificates do not have principal balances and are not entitled to any
distributions in respect of principal of the mortgage loans.
The Notional Amount of the Class X Certificates for any Distribution Date
will be equal to the aggregate of the Stated Principal Balances of the
Non-Discount mortgage loans with respect to the Distribution Date. The initial
Notional Amount of the Class X Certificates will be equal to the aggregate of
the Stated Principal Balance of the Non-Discount mortgage loans as of the
cut-off date.
The senior certificates will have an initial aggregate principal balance of
approximately $ and will evidence in the aggregate an initial
beneficial ownership interest of approximately % in the trust fund. The
Class M, Class B-1, Class B-2, Class B-3, Class B-4 and Class B-5 Certificates
will each evidence in the aggregate an initial beneficial ownership interest of
approximately %, %, %, %, % and %, respectively, in the
trust fund.
The Class PO, Class X, Class A-R, Class M, Class B-1 and Class B-2
Certificates will be issued in fully registered certificated form. All of
the remaining Classes will be represented by book-entry certificates. The
book-entry certificates will be issuable in book-entry form only. The
Class A-R Certificates will be issued as a single certificate in a
denomination of $100.
BOOK-ENTRY CERTIFICATES
Each class of book-entry certificates will be issued in one or more
certificates which equal the aggregate initial Class Certificate Balance of each
class of certificates and which will be held by a depository, initially a
nominee of The Depository Trust Company. Beneficial interests in the book-entry
certificates will be held indirectly by investors through the book-entry
facilities of the depository, as described in this prospectus supplement.
Investors may hold the beneficial interests in the book-entry certificates in
minimum denominations representing an original principal amount of $25,000 and
integral multiples of $1,000 in excess thereof. One investor of each class of
book-entry certificates may hold a beneficial interest therein that is not an
integral multiple of $1,000. The depositor has been informed by the depository
that its nominee will be CEDE & Co. Accordingly, CEDE is expected to be the
holder of record of the book-entry certificates. Except as described in the
prospectus under 'Description of the Certificates -- Book-Entry Certificates,'
no beneficial owner acquiring a Book-Entry Certificate will be entitled to
receive a physical certificate representing the Certificate.
Unless and until definitive certificates are issued, it is anticipated that
the only certificateholder of the book-entry certificates will be CEDE, as
nominee of the depository. Beneficial owners of the book-entry certificates will
not be certificateholders, as that term is used in the pooling and servicing
agreement. Beneficial owners are only permitted to exercise the rights of
certificateholders indirectly through financial intermediaries and the
depository. Monthly and annual reports on the trust fund provided to CEDE, as
nominee of the depository, may be made available 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
depository accounts the book-entry certificates of the beneficial owners are
credited.
For a description of the procedures generally applicable to the book-entry
certificates, see 'Description of the Certificates -- Book-Entry Certificates'
in the prospectus.
S-28
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<PAGE>
PAYMENTS ON MORTGAGE LOANS; ACCOUNTS
On or before the closing date, the master servicer will establish an
account (the 'Certificate Account'), which will be maintained in trust for the
benefit of the certificateholders. Funds credited to the Certificate Account may
be invested for the benefit and at the risk of the master servicer in Permitted
Investments, as defined in the pooling and servicing agreement, that are
scheduled to mature on or before the business day preceding the next
Distribution Date. On or before the business day immediately preceding each
Distribution Date, the master servicer will withdraw from the Certificate
Account the amount of Available Funds and will deposit the Available Funds in an
account established and maintained with the trustee on behalf of the
certificateholders (the 'Distribution Account').
DISTRIBUTIONS
Distributions on the certificates will be made by the trustee on the
[25th] day of each month or, if that day is not a business day, on the first
business day thereafter, commencing in 1999 (each, a 'Distribution
Date'), to the persons in whose names the certificates are registered at the
close of business on the last business day of the month preceding the month of
the Distribution Date.
Distributions on each Distribution Date will be made by check mailed to the
address of the person entitled to it 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 or who holds an Interest Only Certificate and who
has so notified the trustee in writing in accordance with the pooling and
servicing agreement, by wire transfer in immediately available funds to the
account of the 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 the certificates at the Corporate Trust Office of
the trustee.
PRIORITY OF DISTRIBUTIONS AMONG CERTIFICATES
As more fully described in this prospectus supplement, distributions will
be made on each Distribution Date from Available Funds in the following order of
priority:
to interest on each interest bearing class of senior certificates;
to principal on the classes of senior certificates then entitled to
receive distributions of principal, in the order and subject to the
priorities set forth under 'Description of the Certificates -- Principal,'
in each case in an aggregate amount up to the maximum amount of principal
to be distributed on the classes on the Distribution Date;
to any Class PO Deferred Amounts with respect to the Class PO
Certificates, but only from amounts that would otherwise be distributed on
the Distribution Date as principal of the subordinated certificates; and
to interest on and then principal of each class of subordinated
certificates, in the order of their numerical class designations,
beginning with the Class M Certificates, in each case subject to the
limitations set forth under 'Description of the
Certificates -- Principal.'
'Available Funds' for any Distribution Date will be equal to the sum of
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all scheduled installments of interest (net of the related Expense Fees)
and principal due on the Due Date in the month in which the Distribution
Date occurs and received before the related Determination Date, together
with any advances with respect to them;
all proceeds of any primary mortgage guaranty insurance policies and any
other insurance policies with respect to the mortgage loans, to the extent
the 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 and all other cash amounts received and
retained in connection with the liquidation of defaulted mortgage loans,
by foreclosure or otherwise during the calendar month preceding the month
of the Distribution Date (in each case, net of unreimbursed expenses
incurred in connection with a liquidation or foreclosure and unreimbursed
advances, if any);
all partial or full prepayments received during the related Prepayment
Period; and
amounts received with respect to the Distribution Date as the Substitution
Adjustment Amount or purchase price in respect of a deleted mortgage loan
or a mortgage loan repurchased by the seller or the master servicer as of
the Distribution Date, reduced by amounts in reimbursement for advances
previously made and other amounts as to which the master servicer is
entitled to be reimbursed from the Certificate Account pursuant to the
pooling and servicing agreement.
INTEREST
The classes of offered certificates will have the respective pass-through
rates set forth or described on the cover page hereof.
The pass-through rate for the Class X Certificates for any Distribution
Date will be equal to the excess of the average of the net mortgage rates of the
Non-Discount mortgage loans, weighted on the basis of their Stated Principal
Balances, over % per annum. The pass-through rate for the Class X
Certificates for the first Distribution Date is expected to be approximately
% per annum. The net mortgage rate for each mortgage loan is its mortgage
rate (net of the interest premium charged by the related lenders for the lender
acquired mortgage insurance mortgage loans) less the expense fee rate for the
mortgage loan.
On each Distribution Date, to the extent of funds available therefor, each
interest bearing class of certificates will be entitled to receive an amount
allocable to interest for the related interest accrual period. This interest
distribution amount for any interest bearing class will be equal to the sum of
(a) interest at the applicable pass-through rate on the related Class
Certificate Balance or Notional Amount, as the case may be, and (b) the sum of
the amounts, if any, by which the amount described in clause (a) above on each
prior Distribution Date exceeded the amount actually distributed as interest on
the prior Distribution Dates and not subsequently distributed (which are called
unpaid interest amounts). The Class PO Certificates are Principal Only
Certificates and will not bear interest.
With respect to each Distribution Date, the interest accrual period for
each interest bearing class of certificates will be the calendar month preceding
the month of the Distribution Date.
The interest entitlement described above for each class of certificates for
any Distribution Date will be reduced by the amount of 'Net Interest Shortfalls'
for the Distribution Date. With respect to any Distribution Date, the 'Net
Interest Shortfall' is equal to
any net prepayment interest shortfalls for the Distribution Date and
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the amount of interest that would otherwise have been received with
respect to any mortgage loan that was the subject of a Relief Act
Reduction or a Special Hazard Loss, Fraud Loss, Debt Service Reduction or
Deficient Valuation, after the exhaustion of the respective amounts of
coverage provided by the subordinated certificates for those types of
losses.
A 'Relief Act Reduction' is a reduction in the amount of monthly interest
payment on a mortgage loan pursuant to the Soldiers' and Sailors' Civil Relief
Act of 1940. See 'Legal Aspects of the Mortgage Loans -- Soldiers' and Sailors'
Civil Relief Act' in the prospectus. With respect to any Distribution Date, a
net prepayment interest shortfall is the amount by which the aggregate of
prepayment interest shortfalls during the portion of the Prepayment Period
occurring in the calendar month preceding the month of the Distribution Date
exceeds the aggregate amount payable on the Distribution Date by the master
servicer as described under 'Servicing of Mortgage Loans -- Adjustment to Master
Servicing Fee in Connection with Prepaid Mortgage Loans.' A prepayment interest
shortfall is the amount by which interest paid by a borrower in connection with
a prepayment of principal on a mortgage loan is less than one month's interest
at the related mortgage rate on the Stated Principal Balance of the mortgage
loan. Each class' pro rata share of the Net Interest Shortfalls will be based on
the amount of interest the class otherwise would have been entitled to receive
on the Distribution Date.
Interest will be calculated and payable on the basis of a 360-day year
divided into twelve 30-day months.
If on a particular Distribution Date, Available Funds in the Certificate
Account applied in the order described above under ' -- Priority of
Distributions Among Certificates' are not sufficient to make a full distribution
of the interest entitlement on the certificates, interest will be distributed on
each class of certificates of equal priority based on the amount of interest it
would otherwise have been entitled to receive in the absence of the shortfall.
Any unpaid interest amount will be carried forward and added to the amount
holders of each class of certificates will be entitled to receive on the next
Distribution Date. A shortfall could occur, for example, if losses realized on
the mortgage loans were exceptionally high or were concentrated in a particular
month. Any unpaid interest amount so carried forward will not bear interest.
PRINCIPAL
General. All payments and other amounts received in respect of principal of
the mortgage loans will be allocated between the Class PO Certificates, on the
one hand, and the senior certificates (other than the Notional Amount
Certificates and the Class PO Certificates) and the subordinated certificates,
on the other hand, in each case based on the applicable Non-PO Percentage and
the applicable PO Percentage, respectively, of those amounts.
The Non-PO Percentage with respect to any mortgage loan with a net mortgage
rate less than % (each a 'Discount mortgage loan') will be equal to the net
mortgage rate divided by %. The Non-PO Percentage with respect to any
mortgage loan with a net mortgage rate equal to or greater than % (each a
'Non-Discount mortgage loan') will be 100%. The PO Percentage with respect to
any Discount mortgage loan will be equal to ( % minus the net mortgage rate)
divided by %. The PO Percentage with respect to any Non-Discount mortgage
loan will be 0%.
Non-PO Formula Principal Amount. On each Distribution Date, the Non-PO
Formula Principal Amount will be distributed as principal of the senior
certificates (other than the Notional Amount Certificates and the Class PO
Certificates) in an amount up to the Senior
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Principal Distribution Amount and as principal of the subordinated certificates,
in an amount up to the Subordinated Principal Distribution Amount.
The 'Non-PO Formula Principal Amount' for any Distribution Date will equal
the sum of the applicable Non-PO Percentage of
(a) all monthly payments of principal due on each mortgage loan on the
related Due Date,
(b) the principal portion of the purchase price of each mortgage loan that
was repurchased by the seller or another person pursuant to the pooling
and servicing agreement as of the Distribution Date,
(c) the Substitution Adjustment Amount in connection with any deleted
mortgage loan received with respect to the Distribution Date,
(d) any insurance proceeds or liquidation proceeds allocable to recoveries
of principal of mortgage loans that are not yet Liquidated mortgage
loans received during the calendar month preceding the month of the
Distribution Date,
(e) with respect to each mortgage loan that became a Liquidated mortgage
loan during the calendar month preceding the month of the Distribution
Date, the amount of the liquidation proceeds allocable to principal
received with respect to the mortgage loan and
(f) all partial and full principal prepayments by borrowers received during
the related Prepayment Period.
Senior Principal Distribution Amount. On each Distribution Date before the
Senior Credit Support Depletion Date, the Non-PO Formula Principal Amount, up to
the amount of the Senior Principal Distribution Amount for the Distribution
Date, will be distributed as principal of the following classes of senior
certificates, in the following order of priority:
to the Class A-R Certificates, until their Class Certificate Balance is
reduced to zero;
concurrently, to the Class A- , Class and Class Certificates, pro rata,
based on their then outstanding Class Certificate Balances, until their
Class Certificate Balances are reduced to zero;
sequentially, to the Class Certificates, in that order, until their Class
Certificate Balances are reduced to zero;
sequentially, to the Class and Class Certificates, in that order, until
their Class Certificate Balances are reduced to zero; and
to the Class Certificates, until their Class Certificate Balance is
reduced to zero.
Notwithstanding the foregoing, on each Distribution Date on and after the
Senior Credit Support Depletion Date, the Non-PO Formula Principal Amount will
be distributed, concurrently as principal of the classes of senior certificates
(other than the Notional Amount Certificates and the Class PO Certificates), pro
rata, in accordance with their respective Class Certificate Balances immediately
before the Distribution Date.
The Senior Credit Support Depletion Date is the date on which the Class
Certificate Balance of each class of subordinated certificates has been reduced
to zero.
'Prepayment Period' means the period from the sixteenth day of a calendar
month (or in the case of the first Distribution Date, from the cut-off date)
through the fifteenth day of the succeeding calendar month.
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The Senior Principal Distribution Amount for any Distribution Date will
equal the sum of
the Senior Percentage of the applicable Non-PO Percentage of all amounts
described in clauses (a) through (d) of the definition of 'Non-PO Formula
Principal Amount' for the Distribution Date,
for each mortgage loan that became a Liquidated mortgage loan during the
calendar month preceding the month of the Distribution Date, the lesser of
the Senior Percentage of the applicable Non-PO Percentage of the Stated
Principal Balance of the mortgage loan and
either
the Senior Prepayment Percentage or
if an Excess Loss was sustained on the Liquidated mortgage loan
during the preceding calendar month, the Senior Percentage of the
applicable Non-PO Percentage of the amount of the liquidation
proceeds allocable to principal received on the mortgage loan, and
the Senior Prepayment Percentage of the applicable Non-PO Percentage of
amounts described in clause (f) of the definition of 'Non-PO Formula
Principal Amount' for the Distribution Date;
provided, however, that if a Bankruptcy Loss that is an Excess Loss is sustained
on a mortgage loan that is not a Liquidated mortgage loan, the Senior Principal
Distribution Amount will be reduced on the related Distribution Date by the
Senior Percentage of the applicable Non-PO Percentage of the principal portion
of the Bankruptcy Loss.
'Stated Principal Balance' means for any mortgage loan and Due Date, the
unpaid principal balance of the mortgage loan as of the Due Date, as specified
in its amortization schedule at the time (before any adjustment to the
amortization schedule for any moratorium or similar waiver or grace period),
after giving effect to any previous partial prepayments and liquidation proceeds
received and to the payment of principal due on the Due Date and irrespective of
any delinquency in payment by the related mortgagor. The pool principal balance
with respect to any Distribution Date equals the aggregate of the Stated
Principal Balances of the mortgage loans outstanding on the Due Date in the
month preceding the month of the Distribution Date.
The Senior Percentage for any Distribution Date is the percentage
equivalent of a fraction the numerator of which is the aggregate of the Class
Certificate Balances of each class of senior certificates (other than the Class
PO Certificates) immediately before the Distribution Date and the denominator of
which is the aggregate of the Class Certificate Balances of all classes of
certificates, other than the Class PO Certificates, immediately before the
Distribution Date. The Subordinated Percentage for any Distribution Date will be
calculated as the difference between 100% and the Senior Percentage for the
Distribution Date.
The Senior Prepayment Percentage for any Distribution Date occurring during
the five years beginning on the first Distribution Date will equal 100%.
Thereafter, the Senior Prepayment Percentage will be subject to gradual
reduction as described in the following paragraph. This disproportionate
allocation of unscheduled payments of principal will have the effect of
accelerating the amortization of the senior certificates (other than the Class
PO Certificates) which receive these unscheduled payments of principal while, in
the absence of Realized Losses, increasing the interest in the pool principal
balance evidenced by the subordinated certificates. Increasing the respective
interest of the subordinated certificates relative to that of the senior
certificates is intended to preserve the availability of the subordination
provided by the
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subordinated certificates. The Subordinated Prepayment Percentage as of any
Distribution Date will be calculated as the difference between 100% and the
Senior Prepayment Percentage.
The Senior Prepayment Percentage for any Distribution Date occurring on or
after the fifth anniversary of the first Distribution Date will be as follows:
for any Distribution Date in the first year thereafter, the Senior Percentage
plus 70% of the Subordinated Percentage for the Distribution Date; for any
Distribution Date in the second year thereafter, the Senior Percentage plus 60%
of the Subordinated Percentage for the Distribution Date; for any Distribution
Date in the third year thereafter, the Senior Percentage plus 40% of the
Subordinated Percentage for the Distribution Date; for any Distribution Date in
the fourth year thereafter, the Senior Percentage plus 20% of the Subordinated
Percentage for the Distribution Date; and for any Distribution Date thereafter,
the Senior Percentage for the Distribution Date (unless on any Distribution Date
the Senior Percentage exceeds the initial Senior Percentage, in which case the
Senior Prepayment Percentage for the Distribution Date will once again equal
100%). Notwithstanding the foregoing, no decrease in the Senior Prepayment
Percentage will occur unless both of the step down conditions are satisfied:
the outstanding principal balance of all mortgage loans delinquent 60 days
or more (averaged over the preceding six month period), as a percentage of
the aggregate principal balance of the subordinated certificates on the
Distribution Date, does not equal or exceed 50%, and
cumulative Realized Losses on the mortgage loans do not exceed
for the Distribution Date on the fifth anniversary of the first
Distribution Date, 30% of the aggregate of the principal balances of
the subordinated certificates as of the cut-off date,
for the Distribution Date on the sixth anniversary of the first
Distribution Date, 35% of the aggregate of the principal balances of
the subordinated certificates as of the cut-off date,
for the Distribution Date on the seventh anniversary of the first
Distribution Date, 40% of the aggregate of the principal balances of
the subordinated certificates as of the cut-off date,
for the Distribution Date on the eighth anniversary of the first
Distribution Date, 45% of the aggregate of the principal balances of
the subordinated certificates as of the cut-off date, and
for the Distribution Date on the ninth anniversary of the first
Distribution Date, 50% of the aggregate of the principal balances of
the subordinated certificates as of the cut-off date.
If on any Distribution Date the allocation to the class or classes of
senior certificates (other than the Class PO Certificates) then entitled to
distributions of principal of full and partial principal prepayments and other
amounts in the percentage required above would reduce the outstanding Class
Certificate Balance of the class or classes below zero, the distribution to the
class or classes of certificates of the Senior Prepayment Percentage of those
amounts for the Distribution Date will be limited to the percentage necessary to
reduce the related Class Certificate Balance(s) to zero.
Subordinated Principal Distribution Amount. On each Distribution Date, to
the extent of Available Funds therefor, the Non-PO Formula Principal Amount, up
to the amount of the Subordinated Principal Distribution Amount for the
Distribution Date, will be distributed as principal of the subordinated
certificates. Except as provided in the next paragraph, each class of
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subordinated certificates will be entitled to receive its pro rata share of the
Subordinated Principal Distribution Amount (based on its respective Class
Certificate Balance), in each case to the extent of the amount available from
Available Funds for distribution of principal. Distributions of principal of the
subordinated certificates will be made sequentially to the classes of
subordinated certificates in the order of their numerical class designations,
beginning with the Class M Certificates, until their respective Class
Certificate Balances are reduced to zero.
With respect to each class of subordinated certificates, if on any
Distribution Date the sum of the related Class Subordination Percentages of the
class and all classes of subordinated certificates which have higher numerical
class designations than the class (the 'Applicable Credit Support Percentage')
is less than the Applicable Credit Support Percentage for the class on the date
of issuance of the certificates (the 'Original Applicable Credit Support
Percentage'), no distribution of partial principal prepayments and principal
prepayments in full will be made to any of those classes (the 'Restricted
Classes') and the amount of partial principal prepayments and principal
prepayments in full otherwise distributable to the Restricted Classes will be
allocated among the remaining classes of subordinated certificates, pro rata,
based upon their respective Class Certificate Balances, and distributed in the
sequential order described above.
The Class Subordination Percentage with respect to any Distribution Date
and each class of subordinated certificates, will equal the fraction (expressed
as a percentage) the numerator of which is the Class Certificate Balance of the
class of subordinated certificates immediately before the Distribution Date and
the denominator of which is the aggregate of the Class Certificate Balances of
all classes of certificates immediately before the Distribution Date.
The approximate Original Applicable Credit Support Percentages for the
subordinated certificates on the date of issuance of the certificates are
expected to be as follows:
<TABLE>
<S> <C>
Class M............................ %
Class B-1.......................... %
Class B-2.......................... %
Class B-3.......................... %
Class B-4.......................... %
Class B-5.......................... %
</TABLE>
For purposes of calculating the Applicable Credit Support Percentages of
the subordinated certificates, the Class M Certificates will be considered to
have a lower numerical class designation than each other class of subordinated
certificates.
The Subordinated Principal Distribution Amount for any Distribution Date
will equal
the sum of
the Subordinated Percentage of the applicable Non-PO Percentage of
all amounts described in clauses (a) through (d) of the definition
of 'Non-PO Formula Principal Amount' for the Distribution Date,
for each mortgage loan that became a Liquidated mortgage loan during
the calendar month preceding the month of the Distribution Date, the
applicable Non-PO Percentage of the liquidation proceeds allocable
to principal received on the mortgage loan, after application of the
amounts pursuant to the second bulleted item of the definition of
Senior Principal Distribution Amount up to the Subordinated
Percentage of the applicable Non-PO Percentage of the Stated
Principal Balance of the mortgage loan and
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the Subordinated Prepayment Percentage of the applicable Non-PO
Percentage of the amounts described in clause (f) of the definition
of 'Non-PO Formula Principal Amount' for the Distribution Date
reduced by the amount of any payments in respect of Class PO Deferred
Amounts on the related Distribution Date.
Residual Certificates. The Class A-R Certificates will remain outstanding
for so long as the trust fund shall exist, whether or not they are receiving
current distributions of principal or interest. In addition to distributions of
interest and principal as described above, on each Distribution Date, the
holders of the Class A-R Certificates will be entitled to receive any Available
Funds remaining after payment of interest and principal on the senior
certificates and Class PO Deferred Amounts on the Class PO Certificates and
interest and principal on the subordinated certificates, as described above. It
is not anticipated that there will be any significant amounts remaining for that
distribution.
Class PO Principal Distribution Amount. On each Distribution Date,
distributions of principal of the Class PO Certificates will be made in an
amount equal to the lesser of (x) the PO Formula Principal Amount for the
Distribution Date and (y) the product of
Available Funds remaining after distribution of interest on the senior
certificates and
a fraction, the numerator of which is the PO Formula Principal Amount and
the denominator of which is the sum of the PO Formula Principal Amount and
the Senior Principal Distribution Amount.
If the Class PO principal distribution amount on a Distribution Date is
calculated as provided in clause (y) above, principal distributions to holders
of the senior certificates (other than the Class PO Certificates) will be in an
amount equal to the product of Available Funds remaining after distribution of
interest on the senior certificates and a fraction, the numerator of which is
the Senior Principal Distribution Amount and the denominator of which is the sum
of the Senior Principal Distribution Amount and the PO Formula Principal Amount.
The PO Formula Principal Amount for any Distribution Date will equal the
sum of the applicable PO Percentage of
all monthly payments of principal due on each mortgage loan on the related
Due Date,
the principal portion of the purchase price of each mortgage loan that was
repurchased by the seller or another person pursuant to the pooling and
servicing agreement as of the Distribution Date,
the Substitution Adjustment Amount in connection with any deleted mortgage
loan received for the Distribution Date,
any insurance proceeds or liquidation proceeds allocable to recoveries of
principal of mortgage loans that are not yet Liquidated mortgage loans
received during the calendar month preceding the month of the Distribution
Date,
for each mortgage loan that became a Liquidated mortgage loan during the
calendar month preceding the month of the Distribution Date, the amount of
liquidation proceeds allocable to principal received on the mortgage loan
and
all partial and full principal prepayments by borrowers received during
the related Prepayment Period;
provided, however, that if a Bankruptcy Loss that is an Excess Loss is sustained
on a Discount mortgage loan that is not a Liquidated mortgage loan, the PO
Formula Principal Amount will be
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reduced on the related Distribution Date by the applicable PO Percentage of the
principal portion of the Bankruptcy Loss.
ALLOCATION OF LOSSES
On each Distribution Date, the applicable PO Percentage of any Realized
Loss, including any Excess Loss, on a Discount mortgage loan will be allocated
to the Class PO Certificates until their Class Certificate Balance is reduced to
zero. The amount of any Realized Loss, other than an Excess Loss, allocated on
or before the Senior Credit Support Depletion Date will be treated as a Class PO
Deferred Amount. To the extent funds are available on the Distribution Date or
on any future Distribution Date from amounts that would otherwise be allocable
to the Subordinated Principal Distribution Amount, Class PO Deferred Amounts
will be paid on the Class PO Certificates before distributions of principal on
the subordinated certificates. Any distribution of Available Funds in respect of
unpaid Class PO Deferred Amounts will not further reduce the Class Certificate
Balance of the Class PO Certificates. The Class PO Deferred Amounts will not
bear interest. The Class Certificate Balance of the class of subordinated
certificates then outstanding with the highest numerical class designation will
be reduced by the amount of any payments in respect of Class PO Deferred
Amounts. After the Senior Credit Support Depletion Date, no new Class PO
Deferred Amounts will be created.
For purposes of allocating losses to the subordinated certificates, the
Class M Certificates will be considered to have a lower numerical class
designation than each other class of subordinated certificates.
On each Distribution Date, the applicable Non-PO Percentage of any Realized
Loss, other than any Excess Loss, will be allocated first to the subordinated
certificates, in the reverse order of their numerical class designations
(beginning with the class of subordinated certificates then outstanding with the
highest numerical class designation), in each case until the Class Certificate
Balance of the respective class of certificates has been reduced to zero, and
then to the senior certificates (other than the Notional Amount Certificates and
the Class PO Certificates) pro rata, based upon their respective Class
Certificate Balances.
On each Distribution Date, the applicable Non-PO Percentage of Excess
Losses will be allocated pro rata among the classes of senior certificates
(other than the Notional Amount Certificates and the Class PO Certificates) and
the subordinated certificates based upon their respective Class Certificate
Balances.
Because principal distributions are paid to some classes of certificates
(other than the Class PO Certificates) before other classes of certificates,
holders of the certificates that are entitled to receive principal later bear a
greater risk of being allocated Realized Losses on the mortgage loans than
holders of classes that are entitled to receive principal earlier.
In general, a 'Realized Loss' means, for a Liquidated mortgage loan, the
amount by which the remaining unpaid principal balance of the mortgage loan
exceeds the amount of liquidation proceeds applied to the principal balance of
the related mortgage loan. 'Excess Losses' are Special Hazard Losses in excess
of the Special Hazard Loss Coverage Amount, Bankruptcy Losses in excess of the
Bankruptcy Loss Coverage Amount and Fraud Losses in excess of the Fraud Loss
Coverage Amount. 'Bankruptcy Losses' are losses that are incurred as a result of
Debt Service Reductions and Deficient Valuations. 'Special Hazard Losses' are
Realized Losses in respect of Special Hazard mortgage loans. 'Fraud Losses' are
losses sustained on a Liquidated mortgage loan by reason of a default arising
from fraud, dishonesty or misrepresentation. See 'Credit
Enhancement -- Subordination of Certain Classes.'
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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. A 'Special Hazard mortgage loan' is a Liquidated
mortgage loan as to which the ability to recover the full amount due thereunder
was substantially impaired by a hazard not insured against under a standard
hazard insurance policy of the type described in the prospectus under 'Credit
Enhancement -- Special Hazard Insurance Policies.' See 'Credit
Enhancement -- Subordination of Certain Classes.'
STRUCTURING ASSUMPTIONS
Unless otherwise specified, the information in the tables in this
prospectus supplement has been prepared on the basis of the following assumed
characteristics of the mortgage loans and the following additional assumptions,
which combined are the structuring assumptions:
the mortgage pool consists of two mortgage loans with the following
characteristics:
<TABLE>
<CAPTION>
REMAINING
ORIGINAL TERM TERM
MORTGAGE NET TO MATURITY TO MATURITY
PRINCIPAL BALANCE RATE MORTGAGE RATE (IN MONTHS) (IN MONTHS)
- ---------------------------------------- -------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
$
% %
% %
</TABLE>
the mortgage loans prepay at the specified constant percentages of SPA,
no defaults in the payment by mortgagors of principal of and interest on
the mortgage loans are experienced,
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 before giving effect to prepayments received on the last day
of the prior month,
prepayments are allocated as described in this prospectus supplement
without giving effect to loss and delinquency tests,
there are no Net Interest Shortfalls and 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,
the scheduled monthly payment for each mortgage loan has been calculated
such that each mortgage loan will amortize in amounts sufficient to repay
the current balance of the mortgage loan by its respective remaining term
to maturity,
the initial Class Certificate Balance or Notional Amount, as applicable,
of each class of certificates is as set forth on the cover page hereof and
under 'Summary of Terms -- Certificates other than the Offered
Certificates,'
interest accrues on each interest bearing class of certificates at the
applicable interest rate set forth or described on the cover page hereof
and as described in this prospectus supplement,
distributions in respect of the certificates are received in cash on the
day of each month commencing in the calendar month following the closing
date,
the closing date of the sale of the certificates is , 1999,
the seller is not required to repurchase or substitute for any mortgage
loan,
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the master servicer does not exercise the option to repurchase the
mortgage loans described under ' -- Optional Purchase of Defaulted Loans'
and ' -- Optional Termination' and
no class of certificates becomes a Restricted Class. While it is assumed
that each of the mortgage loans prepays at the specified constant
percentages of SPA, this is not likely to be the case. Moreover,
discrepancies may exist between the characteristics of the actual mortgage
loans which will be delivered to the trustee and characteristics of the
mortgage loans used in preparing the tables.
Prepayments of mortgage loans commonly are measured relative to a
prepayment standard or model. The model used in this prospectus supplement is
the Standard Prepayment Assumption ('SPA'), which represents an assumed rate of
prepayment each month of the then outstanding principal balance of a pool of new
mortgage loans. SPA does not purport to be either a historical description of
the prepayment experience of any pool of mortgage loans or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
mortgage loans. 100% SPA assumes prepayment rates of 0.2% per annum of the then
unpaid principal balance of the pool of mortgage loans in the first month of the
life of the mortgage loans and an additional 0.2% per annum in each month
thereafter (for example, 0.4% per annum in the second month) until the 30th
month. Beginning in the 30th month and in each month thereafter during the life
of the mortgage loans, 100% SPA assumes a constant prepayment rate of 6% per
annum. Multiples may be calculated from this prepayment rate sequence. For
example, % SPA assumes prepayment rates will be % per annum in month one,
% per annum in month two, and increasing by % in each succeeding month until
reaching a rate of % per annum in month 30 and remaining constant at % per
annum thereafter. 0% SPA assumes no prepayments. There is no assurance that
prepayments will occur at any SPA rate or at any other constant rate.
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 purchase
shall be at a price equal to 100% of the Stated Principal Balance of the
mortgage loan plus accrued interest on it at the applicable mortgage rate from
the date through which interest was last paid by the related mortgagor or
advanced (and not reimbursed) to the first day of the month in which the amount
is to be distributed.
OPTIONAL TERMINATION
The master servicer will have the right to repurchase all remaining
mortgage loans and foreclosed or otherwise repossessed properties in the
mortgage pool and thereby effect early retirement of the certificates, subject
to the pool principal balance of the mortgage loans and foreclosed or otherwise
repossessed properties at the time of repurchase being less than 10% of the
cut-off date pool principal balance. If the master servicer exercises the
option, the purchase price distributed with respect to each Certificate will be
100% of its then outstanding principal balance plus any Class PO Deferred
Amounts in the case of the Class PO Certificates 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 pooling
and servicing agreement if the purchase price is based in part on the appraised
value of any foreclosed or otherwise repossessed properties and the appraised
value is less than the Stated Principal Balance of the related mortgage loans.
Distributions on the certificates in respect of any optional termination will
first be paid to the senior certificates and then to the subordinated
certificates.
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The proceeds from any optional termination distribution may not be sufficient to
distribute the full amount to which each class of certificates is entitled if
the purchase price is based in part on the appraised value of any foreclosed or
otherwise repossessed property and the 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 pooling and servicing
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 any other address the trustee
designates from time to time.
RESTRICTIONS ON TRANSFER OF THE CLASS A-R CERTIFICATES
The Class A-R Certificates will be subject to the restrictions on transfer
described in the prospectus under 'Material Federal Income Tax
Consequences -- REMIC Certificates -- Tax-Related Restrictions on Transfers of
Residual Certificates -- Disqualified Organizations,' ' -- Noneconomic Residual
Interests' and ' -- Foreign Investors.' The pooling and servicing agreement
provides that the Class A-R Certificates (in addition to other ERISA restricted
classes of certificates) may not be acquired by an ERISA Plan. See 'ERISA
Considerations.' Each Class A-R Certificate will contain a legend describing the
foregoing restrictions.
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YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
GENERAL
The effective yield to the holders of each interest bearing class of
certificates will be lower than the yield otherwise produced by the applicable
rate at which interest is passed through to the holders and the purchase price
of the certificates because monthly distributions will not be payable to the
holders until the day (or, if that day is not a business day, the following
business day) of the month following the month in which interest accrues on the
mortgage loans (without any additional distribution of interest or earnings on
them for the delay).
Delinquencies on the mortgage loans which are not advanced by or on behalf
of the master servicer (because amounts, if advanced, would be nonrecoverable),
will adversely affect the yield on the certificates. Because of the priority of
distributions, shortfalls resulting from delinquencies not so advanced will be
borne first by the subordinated certificates, in the reverse order of their
numerical class designations, and then by the senior certificates. If, as a
result of the shortfalls, the aggregate of the Class Certificate Balances of all
classes of certificates exceeds the pool principal balance, the Class
Certificate Balance of the class of subordinated certificates then outstanding
with the highest numerical class designation will be reduced by the amount of
the excess.
Net Interest Shortfalls will adversely affect the yields on the classes of
offered certificates. In addition, although all losses initially will be borne
by the subordinated certificates, in the reverse order of their numerical class
designations (either directly or through distributions in respect of Class PO
Deferred Amounts on the Class PO Certificates), Excess Losses will be borne by
all classes of certificates (other than the Notional Amount Certificates) on a
pro rata basis. Moreover, since the Subordinated Principal Distribution Amount
for each Distribution Date will be reduced by the amount of any distributions on
the Distribution Date in respect of Class PO Deferred Amounts, the amount
distributable as principal on each Distribution Date to each class of
subordinated certificates then entitled to a distribution of principal will be
less than it otherwise would be in the absence of the Class PO Deferred Amounts.
As a result, the yields on the offered certificates will depend on the rate and
timing of Realized Losses, including Excess Losses. Excess Losses could occur at
a time when one or more classes of subordinated certificates are still
outstanding and otherwise available to absorb other types of Realized Losses.
For purposes of allocating losses and shortfalls resulting from
delinquencies to the subordinated certificates, the Class M Certificates will be
considered to have a lower numerical class designation than each other class of
subordinated certificates.
PREPAYMENT CONSIDERATIONS AND RISKS
The rate of principal payments on the offered certificates, the aggregate
amount of distributions on the offered certificates and the yield to maturity of
the offered certificates will be related to the rate and timing of payments of
principal on the mortgage loans. The rate of principal payments on the mortgage
loans will in turn be affected by the amortization schedules of the mortgage
loans and by the rate of principal prepayments, including for this purpose
prepayments resulting from refinancing, liquidations of the mortgage loans due
to defaults, casualties, condemnations and repurchases by the seller or master
servicer. The mortgage loans may be prepaid by the mortgagors at any time
without a prepayment penalty. The mortgage loans are subject to the
'due-on-sale' provisions included therein. See 'The Mortgage Pool.'
Prepayments, liquidations and purchases of the mortgage loans will result
in distributions on the offered certificates of principal amounts which would
otherwise be distributed over the
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remaining terms of the mortgage loans. This includes any optional purchase by
the master servicer of a defaulted mortgage loans and any optional repurchase of
the remaining mortgage loans in connection with the termination of the trust
fund, in each case as described in this prospectus supplement. Since the rate of
payment of principal of the mortgage loans will depend on future events and a
variety of factors, no assurance can be given as to the rate of payment of
principal of the mortgage loans 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 the 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. Further, an investor should consider the risk
that, in the case of the Principal Only Certificates and any other offered
certificate purchased at a discount, a slower than anticipated rate of principal
payments (including prepayments) on the mortgage loans could result in an actual
yield to the investor that is lower than the anticipated yield and, in the case
of the Interest Only Certificates and any other offered certificate purchased at
a premium, a faster than anticipated rate of principal payments could result in
an actual yield to the investor that is lower than the anticipated yield.
Investors in the Interest Only Certificates should carefully consider the risk
that a rapid rate of principal payments on the mortgage loans could result in
the failure of the investors to recover their initial investments.
The rate of principal payments (including prepayments) on pools of mortgage
loans may vary significantly over time and may be influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties, servicing decisions, as well as the characteristics of the
mortgage loans included in the mortgage pool as described under 'The Mortgage
Pool -- General' and ' -- Underwriting Process.' [In addition, Countrywide's
Streamlined Documentation Program may affect the rate of prepayments on the
mortgage loans.] In general, if prevailing interest rates were to fall
significantly below the mortgage rates on the mortgage loans, the mortgage loans
could be subject to higher prepayment rates than if prevailing interest rates
were to remain at or above the mortgage rates on the mortgage loans. Conversely,
if prevailing interest rates were to rise significantly, the rate of prepayments
on the mortgage loans would generally be expected to decrease. No assurances can
be given as to the rate of prepayments on the mortgage loans in stable or
changing interest rate environments. Furthermore, with respect to up to 50% of
the mortgage loans, the depositor may deliver all or a portion of each related
Mortgage File to the trustee not later than thirty days after the closing date,
a delayed delivery. Should the seller fail to deliver all or a portion of any
mortgage files to the depositor or other designee of the depositor or, at the
depositor's direction, to the trustee within that period, the seller will be
required to use its best efforts to deliver a Substitute mortgage loan for the
related delayed delivery mortgage loan or repurchase the related delayed
delivery mortgage loan. Any repurchases pursuant to this provision would also
have the effect of accelerating the rate of prepayments on the mortgage loans.
As described under 'Description of the Certificates -- Principal,' the
Senior Prepayment Percentage of the applicable Non-PO Percentage of all
principal prepayments will be initially distributed to the classes of senior
certificates (other than the Class PO Certificates) then entitled to receive
principal prepayment distributions. This may result in all (or a
disproportionate percentage) of the principal prepayments being distributed to
holders of the classes of senior certificates and none (or less than their pro
rata share) of the principal prepayments being distributed to holders of the
subordinated certificates during the periods of time described in the definition
of 'Senior Prepayment Percentage.'
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
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consistent with an investor's expectation. In general, the earlier a prepayment
of principal on the mortgage loans, the greater the effect on an investor's
yield to maturity. The effect on an investor's yield as a result of principal
payments occurring at a rate higher (or lower) than the rate anticipated by the
investor during the period immediately following the issuance of the offered
certificates may not be offset by a subsequent like decrease (or increase) in
the rate of principal payments.
The tables in the 'Yield, Prepayment and Maturity Considerations' section
indicate the sensitivity of the pre-tax corporate bond equivalent yields to
maturity of the illustrated classes of certificates to various constant
percentages of SPA. The yields set forth in the tables were calculated by
determining the monthly discount rates that, when applied to the assumed streams
of cash flows to be paid on the applicable classes of certificates, would cause
the discounted present value of the assumed streams of cash flows to equal the
assumed aggregate purchase prices of the applicable classes and converting the
monthly rates to corporate bond equivalent rates. Those calculations do not take
into account variations that may occur in the interest rates at which investors
may be able to reinvest funds received by them as distributions on the
certificates and consequently do not purport to reflect the return on any
investment in any the class of certificate when the reinvestment rates are
considered.
SENSITIVITY OF THE CLASS X CERTIFICATES
AS INDICATED IN THE FOLLOWING TABLE, THE YIELD TO INVESTORS IN THE CLASS X
CERTIFICATES WILL BE SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS) OF THE NON-DISCOUNT MORTGAGE LOANS (PARTICULARLY THOSE WITH HIGH
NET MORTGAGE RATES), WHICH GENERALLY CAN BE PREPAID AT ANY TIME. ON THE BASIS OF
THE ASSUMPTIONS DESCRIBED UNDER THIS HEADING, THE YIELD TO MATURITY ON THE
CLASS X CERTIFICATES WOULD BE APPROXIMATELY 0% IF PREPAYMENTS WERE TO OCCUR AT A
CONSTANT RATE OF APPROXIMATELY % SPA. IF THE ACTUAL PREPAYMENT RATE OF THE
NON-DISCOUNT MORTGAGE LOANS WERE TO EXCEED THE FOREGOING LEVEL FOR AS LITTLE AS
ONE MONTH WHILE EQUALING THE LEVEL FOR THE REMAINING MONTHS, THE INVESTORS IN
THE CLASS X CERTIFICATES WOULD NOT FULLY RECOUP THEIR INITIAL INVESTMENTS.
As described under 'Description of the Certificates -- General,' the
pass-through rate of the Class X Certificates in effect from time to time is
calculated by reference to the net mortgage rates of the Non-Discount mortgage
loans. The Non-Discount mortgage loans will have higher net mortgage rates (and
higher mortgage rates) than the other mortgage loans. In general, mortgage loans
with higher mortgage rates tend to prepay at higher rates than mortgage loans
with relatively lower mortgage rates in response to a given change in market
interest rates. As a result, the Non-Discount mortgage loans may prepay at
higher rates, thereby reducing the pass-through rate and Notional Amount of the
Class X Certificates.
The information set forth in the following table has been prepared on the
basis of the structuring assumptions and on the assumption that the purchase
price of the Class X Certificates (expressed as a percentage of initial Notional
Amount) is as follows:
<TABLE>
<CAPTION>
CLASS PRICE*
- --------------------------------------------------------------------------------- ------
<S> <C>
Class X.......................................................................... %
</TABLE>
- ------------------------
*The price does not include accrued interest. Accrued interest has been added to
the price in calculating the yields in the following table.
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<PAGE>
SENSITIVITY OF THE CLASS X CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
<TABLE>
<CAPTION>
PERCENTAGE OF SPA
---------------------------------------------------
CLASS 0% % % % %
- -------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Class X................... % % % % %
</TABLE>
It is unlikely that the Non-Discount mortgage loans will have the precise
characteristics described in this prospectus supplement or that the Non-Discount
mortgage loans will all prepay at the same rate until maturity or that all of
the Non-Discount mortgage loans will prepay at the same rate or time. As a
result of these factors, the pre-tax yields on the Class X Certificates are
likely to differ from those shown in the table above, even if all of the
Non-Discount mortgage loans prepay at the indicated percentages of SPA. No
representation is made as to the actual rate of principal payments on the
Non-Discount mortgage loans for any period or over the life of the Class X
Certificates or as to the yield on the Class X Certificates. Investors must make
their own decisions as to the appropriate prepayment assumptions to be used in
deciding whether to purchase the Class X Certificates.
SENSITIVITY OF THE PRINCIPAL ONLY CERTIFICATES
THE CLASS PO CERTIFICATES WILL BE 'PRINCIPAL ONLY' CERTIFICATES AND WILL
NOT BEAR INTEREST. AS INDICATED IN THE FOLLOWING TABLE, A LOWER THAN ANTICIPATED
RATE OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) ON THE DISCOUNT MORTGAGE
LOANS WITH RESPECT TO THE CLASS PO CERTIFICATES WILL HAVE A NEGATIVE EFFECT ON
THE YIELD TO INVESTORS IN THE PRINCIPAL ONLY CERTIFICATES.
As described above under 'Description of the Certificates -- Principal,'
the Class PO principal distribution amount is calculated by reference to the
principal payments (including prepayments) on the Discount mortgage loans. The
Discount mortgage loans will have lower net mortgage rates (and lower mortgage
rates) than the other mortgage loans. In general, mortgage loans with higher
mortgage rates tend to prepay at higher rates than mortgage loans with
relatively lower mortgage rates in response to a given change in market interest
rates. As a result, the Discount mortgage loans may prepay at lower rates,
thereby reducing the rate of payment of principal and the resulting yield of the
Class PO Certificates.
The information set forth in the following table has been prepared on the
basis of the structuring assumptions and on the assumption that the aggregate
purchase price of the Principal Only Certificates (expressed as a percentage of
its initial Class Certificate Balance) is as follows:
<TABLE>
<CAPTION>
CLASS PRICE
- ---------------------------------------------------------------------------------- -----
<S> <C>
Class PO.......................................................................... %
</TABLE>
SENSITIVITY OF THE PRINCIPAL ONLY CERTIFICATES TO PREPAYMENTS
4 (PRE-TAX YIELDS TO MATURITY)
<TABLE>
<CAPTION>
PERCENTAGE OF SPA
---------------------------------------------------
CLASS 0% % % % %
- -------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Class X................... % % % % %
</TABLE>
It is unlikely that the Discount mortgage loans will have the precise
characteristics described in this prospectus supplement or that the Discount
mortgage loans will all prepay at the same rate until maturity or that all of
the Discount mortgage loans will prepay at the same rate or time. As a result of
these factors, the pre-tax yield on the Principal Only Certificates is
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likely to differ from those shown in the table above, even if all of the
Discount mortgage loans prepay at the indicated percentages of SPA. No
representation is made as to the actual rate of principal payments on the
Discount mortgage loans for any period or over the life of the Principal Only
Certificates or as to the yield on the Principal Only Certificates. Investors
must make their own decisions as to the appropriate prepayment assumptions to be
used in deciding whether to purchase the Principal Only Certificates.
ADDITIONAL INFORMATION
The depositor intends to file 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. The tables and
materials were prepared by the Underwriter at the request of prospective
investors, based on assumptions provided by, and satisfying their special
requirements. The tables and assumptions may be based on assumptions that differ
from the structuring assumptions. Accordingly, the tables and other materials
may not be relevant to or appropriate for investors other than those
specifically requesting them.
WEIGHTED AVERAGE LIVES OF THE OFFERED CERTIFICATES
The weighted average life of an offered certificate is determined by (a)
multiplying the amount of the net reduction, if any, of the Class Certificate
Balance of the Certificate on each Distribution Date by the number of years from
the date of issuance to the Distribution Date, (b) summing the results and (c)
dividing the sum by the aggregate amount of the net reductions in Class
Certificate Balance of the 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' in this prospectus supplement 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
increases. However, the weighted average lives of the offered certificates will
depend upon a variety of other factors, including the timing of changes in the
rate of principal payments, the priority sequence of distributions of principal
of the classes of certificates. See 'Description of the
Certificates -- Principal.'
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 the 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 the 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 SPA, see the Decrement Tables under
the next heading.
DECREMENT TABLES
The following tables indicate the percentages of the initial Class
Certificate Balances of the classes of offered certificates (other than the
Class X Certificates) that would be outstanding after each of the dates shown at
various constant percentages of SPA and the corresponding weighted average lives
of the classes. The tables have been prepared on the basis of the structuring
assumptions. It is not likely that the mortgage loans will have the precise
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characteristics described in this prospectus supplement or all of the mortgage
loans will prepay at the constant percentages of SPA specified in the tables or
at any other constant rate. Moreover, the diverse remaining terms to maturity of
the mortgage loans could produce slower or faster principal distributions than
indicated in the tables, which have been prepared using the specified constant
percentages of SPA, even if the 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.
PERCENT OF INITIAL CLASS CERTIFICATE BALANCES OUTSTANDING*
<TABLE>
<CAPTION>
CLASS PERCENTAGES OF
CLASS A-PERCENTAGES OF SPA SPA
------------------------------------------------ --------------------
DISTRIBUTION DATE 0% % % % % 0% % % % %
- ---------------------------------- --- --- ---- ---- ---- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial........................... 100 100 100 100 100 100 100 100 100 100
1999..............................
2000..............................
2001..............................
2002..............................
2003..............................
2004..............................
2005..............................
2006..............................
2007..............................
2008..............................
2009..............................
2010..............................
2011..............................
2012..............................
2013..............................
2014..............................
2015..............................
2016..............................
2017..............................
2018..............................
2019..............................
2020..............................
2021..............................
2022..............................
2023..............................
2024..............................
2025..............................
2026..............................
2027..............................
2028..............................
Weighted Average Life
(in years)**....................
</TABLE>
LAST SCHEDULED DISTRIBUTION DATE
The Last Scheduled Distribution Date for each class of offered certificates
is the Distribution Date in 20 , which is the Distribution Date in the
month following the
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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 or
Notional Amount of each class of offered certificates will depend on the rate of
payment (including prepayments) of the mortgage loans, the Class Certificate
Balance or Notional Amount of any 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 'Yield, Prepayment and Maturity Considerations -- Prepayment
Considerations and Risks' and ' -- Weighted Average Lives of the Offered
Certificates' in this prospectus supplement and 'Yield and Prepayment
Considerations' in the prospectus.
THE SUBORDINATED CERTIFICATES
The weighted average life of, and the yield to maturity on, the
subordinated certificates, in increasing order of their numerical class
designation, will be progressively more sensitive to the rate and timing of
mortgagor defaults and the severity of ensuing losses on the mortgage loans. In
particular, the rate and timing of mortgagor defaults and the severity of
ensuing losses on the mortgage loans may be affected by the characteristics of
the mortgage loans included in the mortgage pool as described under 'The
Mortgage Pool -- General' and ' -- Underwriting Process.' If the actual rate and
severity of losses on the mortgage loans is higher than those assumed by a
holder of a subordinated certificate, the actual yield to maturity of the
Certificate may be lower than the yield expected by the holder based on the
holder's assumptions. The timing of losses on mortgage loans will also affect an
investor's actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the mortgage pool are consistent with an investor's
expectations. In general, the earlier a loss occurs, the greater the effect on
an investor's yield to maturity. Realized Losses on the mortgage loans will
reduce the Class Certificate Balances of the applicable class of subordinated
certificates to the extent of any losses allocated to it (as described under
'Description of the Certificates -- Allocation of Losses'), without the receipt
of cash attributable to the reduction. In addition, shortfalls in cash available
for distributions on the subordinated certificates will result in a reduction in
the Class Certificate Balance of the class of subordinated certificates then
outstanding with the highest numerical class designation if and to the extent
that the aggregate of the Class Certificate Balances of all classes of
certificates, following all distributions and the allocation of Realized Losses
on a Distribution Date, exceeds the pool principal balance as of the Due Date
occurring in the month of the Distribution Date. As a result of the reductions,
less interest will accrue on the class of subordinated certificates than
otherwise would be the case. The yield to maturity of the subordinated
certificates will also be affected by the disproportionate allocation of
principal prepayments to the senior certificates, Net Interest Shortfalls, other
cash shortfalls in Available Funds and distribution of funds to Class PO
certificateholders otherwise available for distribution on the subordinated
certificates to the extent of reimbursement for Class PO Deferred Amounts. See
'Description of the Certificates -- Allocation of Losses.'
If on any Distribution Date, the Applicable Credit Support Percentage for
any class of subordinated certificates is less than its Original Applicable
Credit Support Percentage, all partial principal prepayments and principal
prepayments in full available for distribution on the subordinated certificates
will be allocated solely to that class and all other classes of subordinated
certificates with lower numerical class designations, thereby accelerating their
amortization relative to that of the Restricted Classes and reducing the
weighted average lives of the classes of subordinated certificates receiving the
distributions. Accelerating the amortization of the classes of subordinated
certificates with lower numerical class designations relative to the
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other classes of subordinated certificates is intended to preserve the
availability of the subordination provided by the other classes.
For purposes of allocating losses and prepayments to the subordinated
certificates, the Class M Certificates will be considered to have a lower
numerical class designation than each other class of subordinated certificates.
CREDIT ENHANCEMENT
SUBORDINATION
The rights of the holders of the subordinated certificates to receive
distributions with respect to the mortgage loans will be subordinated to the
rights of the holders of the senior certificates and the rights of the holders
of each class of subordinated certificates (other than the Class M Certificates)
to receive the distributions will be further subordinated to the rights of the
class or classes of subordinated certificates with lower numerical class
designations, in each case only to the extent described in this prospectus
supplement. The subordination of the subordinated certificates to the senior
certificates and the subordination of the classes of subordinated certificates
with higher numerical class designations to those with lower numerical class
designations is intended to increase the likelihood of receipt, respectively, by
the senior certificateholders and the holders of subordinated certificates with
lower numerical class designations of the maximum amount to which they are
entitled on any Distribution Date and to provide the holders protection against
Realized Losses, other than Excess Losses. In addition, the subordinated
certificates will provide limited protection against Special Hazard Losses,
Bankruptcy Losses and Fraud Losses up to the Special Hazard Loss Coverage
Amount, Bankruptcy Loss Coverage Amount and Fraud Loss Coverage Amount,
respectively, as described in the following paragraphs. The applicable Non-PO
Percentage of Realized Losses, other than Excess Losses, will be allocated to
the class of subordinated certificates then outstanding with the highest
numerical class designation. In addition, the Class Certificate Balance of the
class of subordinated certificates will be reduced by the amount of
distributions on the Class PO Certificates in reimbursement for Class PO
Deferred Amounts.
For purposes of allocating losses to the subordinated certificates, the
Class M Certificates will be considered to have a lower numerical class
designation than each other class of subordinated certificates.
The subordinated certificates will provide limited protection to the
classes of certificates of higher relative priority against
Special Hazard Losses in an initial amount expected to be up to
approximately $ (the 'Special Hazard Loss Coverage Amount'),
Bankruptcy Losses in an initial amount expected to be up to
approximately $ (the 'Bankruptcy Loss Coverage Amount') and
Fraud Losses in an initial amount expected to be up to approximately
$ (the 'Fraud Loss Coverage Amount').
The Special Hazard Loss Coverage Amount will be reduced, from time to time,
to be an amount equal on any Distribution Date to the lesser of
the Special Hazard Loss Coverage Amount as of the closing date less
the amount, if any, of losses attributable to Special Hazard mortgage
loans incurred since the closing date
the greatest of
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1% of the aggregate of the principal balances of the mortgage
loans,
twice the principal balance of the largest mortgage loan and
the aggregate principal balances of the mortgage loans secured by
mortgaged properties located in the single California postal zip
code area having the highest aggregate principal balance of any
zip code area.
All principal balances for the purpose of this definition will be calculated as
of the first day of the month preceding the Distribution Date after giving
effect to scheduled installments of principal and interest on the mortgage loans
then due, whether or not paid.
The Fraud Loss Coverage Amount will be reduced, from time to time, by the
amount of Fraud Losses allocated to the certificates. In addition, the Fraud
Loss Coverage Amount will be reduced on the fifth anniversary of the cut-off
date, to zero and on the first, second, third and fourth anniversaries of the
cut-off date, to an amount equal to the lesser of 1% of the then current pool
principal balance and the excess of the Fraud Loss Coverage Amount as of the
preceding anniversary of the cut-off date over the cumulative amount of Fraud
Losses allocated to the certificates since the preceding anniversary.
The Bankruptcy Loss Coverage Amount will be reduced, from time to time, by
the amount of Bankruptcy Losses allocated to the certificates.
The amount of coverage provided by the subordinated certificates for
Special Hazard Losses, Bankruptcy Losses and Fraud Losses may be cancelled or
reduced from time to time for each of the risks covered, provided that the then
current ratings of the certificates assigned by the rating agencies are not
adversely affected as a result. In addition, a reserve fund or other form of
credit enhancement may be substituted for the protection provided by the
subordinated certificates for Special Hazard Losses, Bankruptcy Losses and
Fraud Losses.
A 'Deficient Valuation' is a bankruptcy proceeding whereby the bankruptcy
court may establish the value of the mortgaged property at an amount less than
the then outstanding principal balance of the mortgage loan secured by the
mortgaged property or may reduce the outstanding principal balance of a mortgage
loan. In the case of a reduction in that value of the related mortgaged
property, the amount of the secured debt could be reduced to that value, and the
holder of the mortgage loan thus would become an unsecured creditor to the
extent the outstanding principal balance of the mortgage loan exceeds the value
so assigned to the mortgaged property by the bankruptcy court. In addition,
other modifications of the terms of a mortgage loan can result from a bankruptcy
proceeding, including the reduction (a 'Debt Service Reduction') of the amount
of the monthly payment on the related mortgage loan. However, none of these
shall be considered a Debt Service Reduction or Deficient Valuation so long as
the master servicer is pursuing any other remedies that may be available with
respect to the related mortgage loan and either the mortgage loan has not
incurred payment default or scheduled monthly payments of principal and interest
are being advanced by the master servicer without giving effect to any Debt
Service Reduction or Deficient Valuation.
USE OF PROCEEDS
The depositor will apply the net proceeds of the sale of the certificates
against the purchase price of the mortgage loans.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, an election will be made to treat the
trust fund as a REMIC. The Residual Certificates will constitute the sole class
of residual interests in the REMIC.
All classes of the certificates except the Class A-R Certificates (the
'Regular Certificates,' and the Class A-R Certificates, the 'Residual
Certificates') 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. Under the accrual method of accounting,
interest income may be required to be included in a holder's gross income in
advance of the holder's actual receipt of that interest income.
The Principal Only Certificates will be treated for federal income tax
purposes as having been issued with an amount of Original Issue Discount ('OID')
equal to the difference between their principal balance and their issue price.
Although the tax treatment is not entirely certain, Notional Amount Certificates
will be treated as having been issued with OID for federal income tax purposes
equal to the excess of all expected payments of interest on the certificates
over their issue price. Although unclear, a holder of a Notional Amount
Certificate may be entitled to deduct a loss to the extent that its remaining
basis exceeds the maximum amount of future payments to which the
Certificateholder would be entitled if there were no further prepayments of the
mortgage loans. The remaining classes of Regular Certificates, depending on
their respective issue prices (as described in the prospectus under 'Material
Federal Income Tax Consequences'), may be treated as having been issued with OID
for federal income tax purposes. For purposes of determining the amount and rate
of accrual of OID and market discount, the trust fund intends to assume that
there will be prepayments on the mortgage loans at a rate equal to % SPA. No
representation is made as to whether the mortgage loans will prepay at the
foregoing rate or any other rate. See 'Yield, Prepayment and Maturity
Considerations' and 'Material Federal Income Tax Consequences' in the
prospectus. Computing accruals of OID in the manner described in the prospectus
may (depending on the actual rate of prepayments during the accrual period)
result in the accrual of negative amounts of OID on the certificates issued with
OID in an accrual period. Holders will be entitled to offset negative accruals
of OID only against future OID accrual on their certificates.
If the holders of any Regular Certificates are treated as holding their
certificates at a premium, the holders are encouraged to consult their tax
advisors regarding the election to amortize bond premium and the method to be
employed. See 'Material Federal Income Tax Consequences -- REMIC
Certificates -- a. Regular Certificates' in the prospectus.
As is described more fully under 'Material Federal Income Tax Consequences'
in the prospectus, the offered certificates will represent qualifying assets
under Sections 856(c)(4)(A) and 7701(a)(19)(C) of the Code, and net interest
income attributable to the offered certificates will be 'interest on obligations
secured by mortgages on real property' within the meaning of Section
856(c)(3)(B) of the Internal Revenue Code of 1986, as amended (the 'Code'), to
the extent the assets of the trust fund are assets described in those sections.
The Regular Certificates will represent qualifying assets under Section
860G(a)(3) if acquired by a REMIC within the prescribed time periods of the
Code.
The holders of the Residual Certificates must include the taxable income of
the REMIC in their federal taxable income. The resulting tax liability of the
holders may exceed cash distributions to them during certain periods. All or a
portion of the taxable income from a Residual Certificate recognized by a holder
may be treated as 'excess inclusion' income, which with limited exceptions, is
subject to U.S. federal income tax.
S-50
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In computing alternative minimum taxable income, the special rule providing
that taxable income cannot be less than the sum of the taxpayer's excess
inclusions for the year does not apply. However, a taxpayer's alternative
minimum taxable income cannot be less than the sum of the taxpayer's excess
inclusions for the year. In addition, the amount of any alternative minimum tax
net operating loss is determined without regard to any excess inclusions.
Purchasers of a Residual Certificate are encouraged to consider carefully
the tax consequences of an investment in Residual Certificates discussed in the
prospectus and consult their own tax advisors with respect to those
consequences. See 'Material Federal Income Tax Consequences -- REMIC
Certificates -- b. Residual Certificates' in the prospectus. Specifically,
prospective holders of Residual Certificates should consult their tax advisors
regarding whether, at the time of acquisition, a Residual Certificate will be
treated as a 'noneconomic' residual interest, a 'non-significant value' residual
interest and a 'tax avoidance potential' residual interest. See 'Material
Federal Income Tax Consequences -- Tax-Related Restrictions on Transfer of
Residual Certificates -- Noneconomic Residual Certificates,' 'Material Federal
Income Tax Consequences -- b. Residual Certificates -- Mark to Market Rules,'
' -- Excess Inclusions' and 'Material 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 'Material 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 fiduciary of an employee benefit or other plan or arrangement (such as
an individual retirement plan or Keogh plan) that is subject to the Employee
Retirement Income Security Act of 1974, as amended, or to Section 4975 of the
Code (a 'Plan') that proposes to cause the Plan to acquire any of the offered
certificates is encouraged to consult with its counsel with respect to the
potential consequences of the Plan's acquisition and ownership of the
certificates under ERISA and Section 4975 of the Code. See 'ERISA
Considerations' in the prospectus. Section 406 of ERISA prohibits 'parties in
interest' with respect to an employee benefit plan subject to ERISA from
engaging in various different types of transactions involving the Plan and its
assets unless a statutory, regulatory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes excise taxes on prohibited
transactions involving 'disqualified persons' and Plans 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.
Some employee benefit plans, including governmental plans and some church
plans, are not subject to ERISA's requirements. Accordingly, assets of those
plans may be invested in the offered certificates without regard to the ERISA
considerations described in this prospectus supplement and in the prospectus,
subject to the provisions of other applicable federal and state law. Any of
those plans 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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The U.S. Department of Labor has granted an individual administrative
exemption to (Prohibited Transaction Exemption , Exemption Application
No. D- Fed. Reg. ( )) (the 'Exemption') from some 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 specified 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 (other than the Class A-R Certificates) and
that all conditions of the Exemption other than those within the control of the
investors will be met. In addition, as of the date hereof, there is no single
mortgagor that is the obligor on five percent (5%) of the mortgage loans
included in the trust fund by aggregate unamortized principal balance of the
assets of the trust fund. BECAUSE THE CLASS PO AND CLASS X CERTIFICATES ARE NOT
BEING PURCHASED BY ANY UNDERWRITER TO WHOM AN EXEMPTION SIMILAR TO THE EXEMPTION
HAS BEEN GRANTED, THOSE CLASSES OF CERTIFICATES DO NOT CURRENTLY MEET THE
REQUIREMENTS OF THE EXEMPTION OR ANY COMPARABLE INDIVIDUAL ADMINISTRATIVE
EXEMPTION GRANTED TO ANY UNDERWRITER. CONSEQUENTLY, THE CLASS PO AND CLASS X
CERTIFICATES MAY BE TRANSFERRED ONLY IF THE CONDITIONS IN THE FIRST OR THIRD
BULLET POINTS IN THE NEXT PARAGRAPH ARE MET.
BECAUSE THE CHARACTERISTICS OF THE CLASS M, CLASS B-1, CLASS B-2 AND CLASS
A-R CERTIFICATES MAY NOT MEET THE REQUIREMENTS OF PROHIBITED TRANSACTION CLASS
EXEMPTION 83-1 ('PTE 83-1'), THE EXEMPTION, OR ANY OTHER ISSUED EXEMPTION UNDER
ERISA, A PLAN MAY HAVE ENGAGED IN A PROHIBITED TRANSACTION OR INCUR EXCISE TAXES
OR CIVIL PENALTIES IF IT PURCHASES AND HOLDS CLASS M, CLASS B-1, CLASS B-2 AND
CLASS A-R CERTIFICATES. CONSEQUENTLY, TRANSFERS OF THE CLASS M, CLASS B-1, B-2
AND CLASS A-R CERTIFICATES WILL NOT BE REGISTERED BY THE TRUSTEE UNLESS THE
TRUSTEE RECEIVES:
A REPRESENTATION FROM THE TRANSFEREE OF THE CERTIFICATE, ACCEPTABLE
TO AND IN FORM AND SUBSTANCE SATISFACTORY TO THE TRUSTEE, THAT THE
TRANSFEREE IS NOT A PLAN, OR A PERSON ACTING ON BEHALF OF A PLAN OR
USING A PLAN'S ASSETS TO EFFECT THE TRANSFER;
IF THE PURCHASER IS AN INSURANCE COMPANY, A REPRESENTATION THAT THE
PURCHASER IS AN INSURANCE COMPANY WHICH IS PURCHASING THE
CERTIFICATES WITH FUNDS CONTAINED IN AN 'INSURANCE COMPANY GENERAL
ACCOUNT' (AS DEFINED IN SECTION V(e) OF PROHIBITED TRANSACTION CLASS
EXEMPTION 95-60 ('PTE 95-60')) AND THAT THE PURCHASE AND HOLDING OF
THE CERTIFICATES ARE COVERED UNDER SECTIONS I AND III OF PTE 95-60;
OR
AN OPINION OF COUNSEL SATISFACTORY TO THE TRUSTEE THAT THE PURCHASE
OR HOLDING OF THE CERTIFICATE BY A PLAN, OR ANY PERSON ACTING ON
BEHALF OF A PLAN OR USING A 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 POOLING AND SERVICING AGREEMENT.
THIS REPRESENTATION SHALL BE CONSIDERED TO HAVE BEEN MADE TO THE
TRUSTEE BY THE TRANSFEREE'S ACCEPTANCE OF A CLASS M, CLASS B-1, OR
CLASS B-2 CERTIFICATE. IF THE REPRESENTATION IS NOT TRUE, OR ANY
ATTEMPT TO TRANSFER TO A PLAN OR PERSON ACTING
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ON BEHALF OF A PLAN OR USING THE PLAN'S ASSETS IS INITIATED WITHOUT
THE REQUIRED OPINION OF COUNSEL, THE ATTEMPTED TRANSFER OR
ACQUISITION SHALL BE VOID.
Prospective Plan investors are encourged to consult with their legal
advisors concerning the impact of ERISA and the Code, the applicability of the
Exemption and PTE 83-1 described in the prospectus, and the potential
consequences in their specific circumstances, before making an investment in any
of the offered certificates. Moreover, each Plan fiduciary is encouraged to
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in any of 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 the Underwriting Agreement
among the depositor, (' ') and (' ' and,
together with , the 'Underwriters'), the depositor has agreed to sell
the certificates to the Underwriters, has agreed to purchase from the
depositor the senior certificates, other than the Class PO and Class X
Certificates (the ' Underwritten Certificates') and has agreed to
purchase from the depositor the Class M, Class B-1 and Class B-2 Certificates
(the ' Underwritten Certificates' and, together with the
Underwritten Certificates, the 'Underwritten Certificates'). Distribution of the
Underwritten Certificates will be made by and distribution of the
Underwritten Certificates will be made by , in each case from time
to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. In connection with the sale of the Underwritten
Certificates, the Underwriters may be deemed to have received compensation from
the depositor in the form of underwriting discounts.
intends to make a secondary market in the Underwritten
Certificates and intends to make a secondary market in the
Underwritten Certificates, but neither Underwriter has any 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 Underwriters against, or make
contributions to the Underwriters with respect to, liabilities, customarily
indemnified against, including liabilities under the Securities Act of 1933, as
amended.
The Class PO and Class X Certificates may be offered by the seller or the
depositor 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 at prices to be negotiated at the
time of each sale. Any underwriters or agents that participate in the
distribution of the Class PO and Class X Certificates may be deemed to be
'underwriters' within the meaning of the Securities Act of 1933 and any profit
on the sale of those Certificates by them and any discounts, commissions,
concessions or other compensation received by any of them may be deemed to be
underwriting discounts and commissions under the Securities Act.
LEGAL MATTERS
The validity of the certificates, including their material federal income
tax consequences, will be passed upon for the depositor by Brown & Wood LLP, New
York, New York. Stroock &
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Stroock & Lavan LLP, New York, New York, will pass upon certain legal matters on
behalf of the Underwriters.
RATINGS
It is a condition to the issuance of the senior certificates that they be
rated by and by . It is a condition to the
issuance of the Class , Class PO and Class X Certificates that they be rated
by . It is a condition to the issuance of the Class M, Class B-1
and Class B-2 Certificates that they be rated at least , and ,
respectively, by .
The ratings assigned by to mortgage pass-through certificates
address the likelihood of the receipt of all distributions on the mortgage loans
by the related certificateholders under the agreements pursuant to which the
certificates are issued. ratings take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with the certificates, and the extent to
which the payment stream on the mortgage pool is adequate to make the payments
required by the certificates.
ratings on the certificates do not, however, constitute a statement
regarding frequency of prepayments of the mortgage loans. The ' ' symbol is
appended to the rating by of those certificates that believes
may experience high volatility or high variability in expected returns due to
non-credit risks. The absence of an ' ' symbol in the ratings of the
other offered certificates should not be taken as an indication that the
certificates will exhibit no volatility or variability in total return.
The ratings assigned by to mortgage pass-through certificates
address the likelihood of the receipt by certificateholders of all distributions
to which they are entitled under the transaction structure. 's ratings
reflect its analysis of the riskiness of the mortgage loans and its analysis of
the structure of the transaction as set forth in the operative documents.
's ratings do not address the effect on the certificates' yield
attributable to prepayments or recoveries on the underlying mortgage loans.
Further the rating on the Class X Certificates does not address whether
investors will recoup their initial investment. The rating assigned by
to the Class PO Certificates only addresses the return of its Stated Principal
Balance. The rating assigned by to the Class A-R Certificates only
addresses the return of its Class Certificate Balance and interest thereon at
its stated pass-through rate.
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 security ratings assigned to the offered certificates should be
evaluated independently from similar ratings on other types of securities. A
security rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the 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 the other rating
agency. The rating assigned by the other rating agency to the offered
certificates could be lower than the respective ratings assigned by the rating
agencies.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, ISSUED FEBRUARY , 1999
PROSPECTUS
CWMBS, INC.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
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PLEASE CAREFULLY CONSIDER THE TRUSTS
OUR DISCUSSION OF SOME OF
THE RISKS OF INVESTING IN Each trust will be established to hold assets in its
THE CERTIFICATES UNDER trust fund transferred to it by CWMBS, Inc. The assets in
'RISK FACTORS' BEGINNING each trust fund will be specified in the prospectus
ON PAGE 4. supplement for the particular trust and will generally
consist of:
first lien mortgage loans secured by one- to four-family
residential properties or participations in that type of
loan,
mortgage pass-through securities issued or guaranteed by
Ginnie Mae, Fannie Mae, or Freddie Mac, or
private mortgage-backed securities backed by first lien
mortgage loans secured by one- to four-family
residential properties or participations in that type of
loan.
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THE CERTIFICATES
CWMBS, Inc. will sell the certificates pursuant to a prospectus supplement. The
certificates will be grouped into one or more series, each having its own
distinct designation. Each series will be issued in one or more classes and each
class will evidence beneficial ownership of a specified portion of future
payments on the assets in the trust fund that the series relates to. A
prospectus supplement for a series will specify all of the terms of the series
and of each of the classes in the series.
OFFERS OF CERTIFICATES
The certificates may be offered through several different methods, including
offerings through underwriters.
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THE SEC AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
, 1999
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TABLE OF CONTENTS
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Important Notice About Information In
This Prospectus and Each Accompanying
Prospectus Supplement........................ 3
Risk Factors................................... 4
Ability to Resell Certificates May Be
Limited................................. 4
Limited Source of Payments -- No Recourse
to Sellers, Depositor or Servicer....... 4
Credit Enhancement May Not Be Sufficient
To Protect You From Losses.............. 5
Prepayments Are Unpredictable and Affect
Yield................................... 6
Losses on Balloon Payment Mortgages Are
Borne By You............................ 6
Nature of Mortgages....................... 7
You Could Be Adversely Affected By
Violations of Environmental Laws........ 8
Ratings of the Certificates Does Not
Assure Their Payment.................... 9
Book-Entry Registration................... 10
Bankruptcy or Insolvency May Affect the
Timing and Amount of Distributions on
the Certificates........................ 10
The Trust Fund................................. 13
The Mortgage Loans -- General............. 14
Agency Securities......................... 17
Private Mortgage-Backed Securities........ 23
Substitution of Mortgage Assets........... 24
Available Information..................... 25
Incorporation of Certain Documents by
Reference............................... 25
Use of Proceeds................................ 25
The Depositor.................................. 26
Mortgage Loan Program.......................... 26
Underwriting Process...................... 26
Qualifications of Sellers................. 27
Representations by Sellers; Repurchases... 27
Description of the Certificates................ 29
General................................... 30
Distributions on Certificates............. 32
Advances.................................. 34
Reports to Certificateholders............. 34
Categories of Classes of Certificates..... 36
Indices Applicable to Floating Rate and
Inverse Floating Rate Classes........... 38
Book-Entry Certificates................... 42
Credit Enhancement............................. 44
General................................... 44
Subordination............................. 44
Mortgage Pool Insurance Policies.......... 45
Special Hazard Insurance Policies......... 46
Bankruptcy Bonds.......................... 47
Reserve Fund.............................. 47
Cross Support............................. 48
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Insurance Policies, Surety Bonds and
Guaranties.............................. 48
Over-Collateralization.................... 49
Yield and Prepayment Considerations............ 49
The Pooling and Servicing Agreement............ 50
Assignment of Mortgage Assets............. 50
Payments on Mortgage Assets; Deposits to
Certificate Account..................... 52
Collection Procedures..................... 55
Hazard Insurance.......................... 56
Realization Upon Defaulted Mortgage
Loans................................... 57
Servicing and Other Compensation and
Payment of Expenses..................... 61
Evidence as to Compliance................. 62
List of Certificateholders................ 62
Certain Matters Regarding the Master
Servicer and the Depositor.............. 62
Events of Default......................... 63
Rights Upon Event of Default.............. 64
Amendment................................. 64
Termination; Optional Termination......... 66
The Trustee............................... 66
Certain Legal Aspects of the Mortgage Loans.... 67
General................................... 67
Foreclosure and Repossession.............. 68
Rights of Redemption...................... 70
Anti-Deficiency Legislation and Other
Limitations on Lenders.................. 70
Environmental Risks....................... 71
Due-on-Sale Clauses....................... 73
Prepayment Charges........................ 73
Applicability of Usury Laws............... 73
Soldiers' and Sailors' Civil Relief Act... 74
Material Federal Income Tax Consequences....... 75
General................................... 75
Non-REMIC Certificates.................... 75
REMIC Certificates........................ 84
Prohibited Transactions and Other Taxes... 99
Liquidation and Termination............... 99
Administrative Matters.................... 100
Tax-Exempt Investors...................... 100
Non-U.S. Persons.......................... 100
Tax-Related Restrictions on Transfers of
Residual Certificates................... 101
State Tax Considerations....................... 103
ERISA Considerations........................... 103
Legal Investment............................... 107
Method of Distribution......................... 108
Legal Matters.................................. 109
Financial Information.......................... 109
Rating......................................... 109
Index to Defined Terms......................... 110
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IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS AND EACH
ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of certificates is contained in two separate
documents:
this prospectus, which provides general information, some of which may not
apply to a particular series; and
the accompanying prospectus supplement for a particular series, which
describes the specific terms of the certificates of that series.
The prospectus supplement will contain information about a particular series
that supplements the information contained in this prospectus, and you should
rely on that supplementary information in the prospectus supplement.
You should rely only on the information in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with information that is different from that contained in this prospectus and
the accompanying prospectus supplement.
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If you require additional information, the mailing address of our principal
executive offices is CWMBS, Inc., 4500 Park Granada, Calabasas, California 91302
and the telephone number is (818) 225-3000. For other means of acquiring
additional information about us or a series of securities, see 'The Trust
Fund -- Incorporation of Certain Documents by Reference' beginning on page 25.
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RISK FACTORS
You should carefully consider the following information since it identifies
significant risks associated with an investment in the certificates.
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LIMITED SOURCE OF PAYMENTS -- NO RECOURSE The applicable prospectus supplement may provide that certificates
TO SELLERS, DEPOSITOR OR SERVICER will be payable from other trust funds in addition to their
associated trust fund, but if it does not, they will be payable
solely from their associated trust fund. If the trust fund does not
have sufficient assets to distribute the full amount due to you as a
certificateholder, your yield will be impaired, and perhaps even the
return of your principal may be impaired, without your having
recourse to anyone else. Furthermore, at the times specified in the
applicable prospectus supplement, certain assets of the trust fund
may be released and paid out to other people, such as the depositor,
a servicer, a credit enhancement provider, or any other person
entitled to payments from the trust fund. Those assets will no longer
be available to make payments to you. Those payments are generally
made after other specified payments that may be set forth in the
applicable prospectus supplement have been made.
You will not have any recourse against the depositor or any servicer
if you do not receive a required distribution on the certificates.
Nor will you have recourse against the assets of the trust fund of
any other series of certificates.
The certificates will not represent an interest in the depositor, any
servicer, any seller to the depositor, or any one else except the
trust fund. The only obligation of the depositor to a trust fund
comes from certain representations and warranties made by it about
assets transferred to the trust fund. If these representations and
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warranties turn out to be untrue, the depositor may be required to
repurchase some of the transferred assets. CWMBS, Inc., which is the
depositor, does not have significant assets and is unlikely to have
significant assets in the future. So if the depositor were required
to repurchase a loan because of a breach of a representation, its
only sources of funds for the repurchase would be:
funds obtained from enforcing a corresponding obligation of a
seller or originator of the loan, or
funds from a reserve fund or similar credit enhancement
established to pay for loan repurchases.
The only obligations of the master servicer to a trust fund (other
than its master servicing obligations) comes from certain
representations and warranties made by it in connection with its loan
servicing activities. If these representations and warranties turn
out to be untrue, the master servicer may be required to repurchase
some of the loans. However, the master servicer may not have the
financial ability to make the required repurchase.
The only obligations to a trust fund of a seller of loans to the
depositor comes from certain representations and warranties made by
it in connection with its sale of the loans and certain document
delivery requirements. If these representations and warranties turn
out to be untrue, or the seller fails to deliver required documents,
it may be required to repurchase some of the loans. However, the
seller may not have the financial ability to make the required
repurchase.
CREDIT ENHANCEMENT MAY NOT BE SUFFICIENT Credit enhancement is intended to reduce the effect of loan losses.
TO PROTECT YOU FROM LOSSES But credit enhancements may benefit only some classes of a series of
certificates and the amount of any credit enhancement will be limited
as described in the applicable prospectus supplement. Furthermore,
the amount of a credit enhancement may decline over time pursuant to
a schedule or formula or otherwise, and could be depleted from
payments or for other reasons before the certificates covered by the
credit enhancement are paid in full. In addition, a credit
enhancement may not cover all potential sources of loss. For example,
a credit enhancement may or may not cover fraud or negligence by a
loan originator or other parties. Also, the trustee may be permitted
to reduce, substitute for, or even eliminate all or a portion of a
credit enhancement so long as the rating agencies that have rated the
certificates at the request of the depositor indicate that that would
not cause them to
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change adversely their rating of the certificates. Consequently,
certificateholders may suffer losses even though a credit enhancement
exists and its provider does not default.
LOSSES ON BALLOON PAYMENT MORTGAGES ARE Some of the underlying loans may not be fully amortizing over their
BORNE BY YOU terms to maturity and, thus, will require substantial principal
payments (that is, balloon payments) at their stated maturity. Loans
with balloon payments involve a greater degree of risk than fully
amortizing loans because typically the borrower must be able to
refinance the loan or sell the property to make the balloon payment
at maturity. The ability of a borrower to do this will depend on such
factors as mortgage rates at the time of sale or refinancing, the
borrower's equity in the
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property, the relative strength of the local housing market, the
financial condition of the borrower, and tax laws. Losses on these
loans that are not otherwise covered by a credit enhancement will be
borne by the holders of one or more classes of certificates.
NATURE OF MORTGAGES The value of the properties underlying the loans held in the trust
Declines in Property Values May fund may decline over time. Among the factors that could adversely
Adversely Affect You affect the value of the properties are:
an overall decline in the residential real estate market in
the areas in which they are located,
a decline in their general condition from the failure of
borrowers to maintain their property adequately, and
natural disasters that are not covered by insurance, such as
earthquakes and floods.
If property values decline, the actual rates of delinquencies,
foreclosures, and losses on all underlying loans could be higher than
those currently experienced in the mortgage lending industry in
general. These losses, to the extent not otherwise covered by a
credit enhancement, will be borne by the holder of one or more
classes of certificates.
Delays In Liquidation May Adversely Even if the properties underlying the loans held in the trust fund
Affect You provide adequate security for the loans, substantial delays could
occur before defaulted loans are liquidated and their proceeds are
forwarded to investors. Property foreclosure actions are regulated by
state statutes and rules and are subject to many of the delays and
expenses of other lawsuits if defenses or counterclaims are made,
sometimes requiring several years to complete. Furthermore, in some
states if the proceeds of the foreclosure are insufficient to repay
the loan, the borrower is not liable for the deficit. Thus, if a
borrower defaults, these restrictions may impede the trust's ability
to dispose of the property and obtain sufficient proceeds to repay
the loan in full. In addition, the servicer will be entitled to
deduct from liquidation proceeds all expenses reasonably incurred in
attempting to recover on the defaulted loan, including legal fees and
costs, real estate taxes, and property maintenance and preservation
expenses.
Disproportionate Effect of Liquidation expenses of defaulted loans generally do not vary
Liquidation Expenses May Adversely directly with the outstanding principal balance of the loan at the
Affect You time of default. Therefore, if a servicer takes the same steps for a
defaulted loan having a small remaining principal balance as it does
for a defaulted loan
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having a large remaining principal balance, the amount realized after
expenses is smaller as a percentage of the outstanding principal
balance of the small loan than it is for the defaulted loan having a
large remaining principal balance.
Consumer Protection Laws May State laws generally regulate interest rates and other charges,
Adversely Affect You require certain disclosures, and require licensing of mortgage loan
originators and servicers. In addition, most states have other laws
and public policies for the protection of consumers that prohibit
unfair and deceptive practices in the origination, servicing, and
collection of mortgage loans. Depending on the particular law and the
specific facts involved, violations may limit the ability to collect
all or part of the principal or interest on the underlying loans held
in the trust fund. In some cases, the borrower may even be entitled
to a refund of amounts previously paid.
The loans held in the trust fund may also be subject to certain
federal laws, including:
the Federal Truth in Lending Act and its regulations, which
require disclosures to the borrowers regarding the terms of
any mortgage loan;
the Equal Credit Opportunity Act and its regulations, which
prohibit discrimination in the extension of credit on the
basis of age, race, color, sex, religion, marital status,
national origin, receipt of public assistance, or the exercise
of any right under the Consumer Credit Protection Act; and
the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrowers credit
experience.
Some violations of these federal laws may limit the ability to
collect the principal or interest on the loans held in the trust
fund, and in addition could subject the trust fund to damages and
administrative enforcement. Losses on loans from the application of
those laws that are not otherwise covered by a credit enhancement
will be borne by the holders of one or more classes of certificates.
YOU COULD BE ADVERSELY AFFECTED BY Federal, state, and local laws and regulations impose a wide range of
VIOLATIONS OF ENVIRONMENTAL LAWS requirements on activities that may affect the environment, health,
and safety. In certain circumstances, these laws and regulations
impose obligations on owners or operators of residential properties
such as those that secure the loans held in the trust fund.
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Failure to comply with these laws and regulations can result in fines
and penalties that could be assessed against the trust as owner of
the related property.
In some states, a lien on the property due to contamination has
priority over the lien of an existing mortgage. Also, a mortgage
lender may be held liable as an 'owner' or 'operator' for costs
associated with the release of petroleum from an underground storage
tank under certain circumstances. If the trust is considered the
owner or operator of a property, it will suffer losses as a result of
any liability imposed for environmental hazards on the property.
RATINGS OF THE CERTIFICATES DOES NOT Any class of certificates issued under this prospectus and the
ASSURE THEIR PAYMENT accompanying prospectus supplement will be rated in one of the four
highest rating categories of at least one nationally recognized
rating agency. A rating is based on the adequacy of the value of the
trust assets and any credit enhancement for that class, and reflects
the rating agency's assessment of how likely it is that holders of
the class of certificates will receive the payments to which they are
entitled. A rating does not constitute an assessment of how likely it
is that principal prepayments on the underlying loans will be made,
the degree to which the rate of prepayments might differ from that
originally anticipated, or the likelihood that the certificates will
be redeemed early. A rating is not a recommendation to purchase,
hold, or sell certificates because it does not address the market
price of the certificates or the suitability of the certificates for
any particular investor.
A rating may not remain in effect for any given period of time and
the rating agency could lower or withdraw the rating entirely in the
future. For example, the rating agency could lower or withdraw its
rating due to:
a decrease in the adequacy of the value of the trust assets or
any related credit enhancement,
an adverse change in the financial or other condition of a
credit enhancement provider, or
a change in the rating of the credit enhancement provider's
long-term debt.
The amount, type, and nature of credit enhancement established for a
class of certificates will be determined on the basis of criteria
established by each rating agency rating classes of the certificates.
These criteria are sometimes based upon an actuarial analysis of the
behavior of similar loans in a larger group. That analysis
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is often the basis upon which each rating agency determines the
amount of credit enhancement required for a class. The historical
data supporting any actuarial analysis may not accurately reflect
future experience, and the data derived from a large pool of similar
loans may not accurately predict the delinquency, foreclosure, or
loss experience of any particular pool of mortgage loans. Mortgaged
properties may not retain their values. If residential real estate
markets experience an overall decline in property values such that
the outstanding principal balances of the loans held in a particular
trust fund and any secondary financing on the related mortgaged
properties become equal to or greater than the value of the mortgaged
properties, the rates of delinquencies, foreclosures, and losses
could be higher than those now generally experienced in the mortgage
lending industry. In addition, adverse economic conditions may affect
timely payment by mortgagors on their loans whether or not the
conditions affect real property values and, accordingly, the rates of
delinquencies, foreclosures, and losses in any trust fund. Losses
from this that are not covered by a credit enhancement will be borne,
at least in part, by the holders of one or more classes of
certificates.
BOOK-ENTRY REGISTRATION Certificates issued in book-entry form may have only limited
Limit on Liquidity liquidity in the resale market, since investors may be unwilling to
purchase certificates for which they cannot obtain physical
instruments.
Limit on Ability to Transfer or Pledge Transactions in book-entry certificates can be effected only through
The Depository Trust Company, its participating organizations, its
indirect participants, and certain banks. Therefore, your ability to
transfer or pledge certificates issued in book-entry form may be
limited.
Delays in Distributions You may experience some delay in the receipt of distributions on
book-entry certificates since the distributions will be forwarded by
the trustee to The Depository Trust Company for it to credit the
accounts of its participants. In turn, these participants will then
credit the distributions to your account either directly or
indirectly through indirect participants.
BANKRUPTCY OR INSOLVENCY MAY AFFECT THE The seller and the depositor will treat the transfer of the loans
TIMING AND AMOUNT OF DISTRIBUTIONS ON THE held in the trust fund by the seller to the depositor as a sale for
CERTIFICATES accounting purposes. The depositor and the trust fund will treat the
transfer of the loans from the depositor to the trust fund as a sale
for accounting purposes. If these characterizations are correct, then
if the seller were to become bankrupt, the loans would not be part of
the seller's bankruptcy estate and would not be
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available to the seller's creditors. On the other hand, if the seller
becomes bankrupt, its bankruptcy trustee or one of its creditors may
attempt to recharacterize the sale of the loans as a borrowing by the
seller, secured by a pledge of the loans. Presenting this position to
a bankruptcy court could prevent timely payments on the certificates
and even reduce the payments on the certificates. Similarly, if the
characterizations of the transfers as sales are correct, then if the
depositor were to become bankrupt, the loans would not be part of the
depositor's bankruptcy estate and would not be available to the
depositor's creditors. On the other hand, if the depositor becomes
bankrupt, its bankruptcy trustee or one of its creditors may attempt
to recharacterize the sale of the loans as a borrowing by the
depositor, secured by a pledge of the loans. Presenting this position
to a bankruptcy court could prevent timely payments on the
certificates and even reduce the payments on the certificates.
If the master servicer becomes bankrupt, the bankruptcy trustee may
have the power to prevent the appointment of a successor master
servicer. The period during which cash collections may be commingled
with the master servicer's own funds before each distribution date
for certificates will be specified in the applicable prospectus
supplement. If the master servicer becomes bankrupt and cash
collections have been commingled with the master servicer's own funds
for at least ten days, the trust fund will likely not have a
perfected interest in those collections. In this case the trust might
be an unsecured creditor of the master servicer as to the commingled
funds and could recover only its share as a general creditor, which
might be nothing. Collections commingled less than ten days but still
in an account of the master servicer might also be included in the
bankruptcy estate of the master servicer even though the trust may
have a perfected security interest in them. Their inclusion in the
bankruptcy estate of the master servicer may result in delays in
payment and failure to pay amounts due on the certificates.
Federal and state statutory provisions affording protection or relief
to distressed borrowers may affect the ability of the secured
mortgage lender to realize upon its security in other situations as
well. 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. And in certain instances a
bankruptcy court may allow a borrower to reduce the monthly payments,
change the rate of interest, and alter
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the mortgage loan repayment schedule for under collateralized
mortgage loans. The effect of these types of proceedings can be to
cause delays in receiving payments on the loans underlying
certificates and even to reduce the aggregate amount of payments on
the loans underlying certificates.
Certain capitalized terms are used in this prospectus to assist you
in understanding the terms of the certificates. The capitalized terms
used in this prospectus are defined on the pages indicated under the
caption 'Index to Defined Terms' beginning on page 110.
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THE TRUST FUND*
This prospectus relates to Mortgage Pass-Through Certificates, which may be
sold from time to time in one or more series by the depositor, CWMBS, Inc., on
terms determined at the time of sale and described in this prospectus and the
related prospectus supplement. Each series will be issued under a separate
pooling and servicing agreement to be entered into with respect to each series.
The certificates of a series will evidence beneficial ownership of a trust fund.
The trust fund for a series of certificates will include certain mortgage
related assets (the 'Mortgage Assets') consisting of
a pool of first lien mortgage loans (or participation interests in them)
secured by one- to four-family residential properties,
mortgage pass-through securities (the 'Agency Securities') issued or
guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac or
other mortgage pass-through certificates or collateralized mortgage
obligations (the 'Private Mortgage-Backed Securities') evidencing an
interest in, or secured by, mortgage loans of the type that would
otherwise be eligible to be mortgage loans.
The Mortgage Assets will be acquired by the depositor, either directly or
indirectly, from one or more institutions, which may be affiliates of the
depositor, and conveyed by the depositor to the related trust fund. The trustee
for each series of certificates will be specified in the related prospectus
supplement. See 'The Pooling and Servicing Agreement' for a description of the
trustee's rights and obligations. The entity or entities named as 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.' The mortgage loans will be secured by
first mortgage liens on one- to four-family residential properties and, if so
specified in the related prospectus supplement, may include cooperative
apartment loans secured by security interests in shares issued by private,
nonprofit, cooperative housing corporations and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. In addition, the Mortgage Assets
of the related trust fund may include mortgage participation certificates
evidencing interests in mortgage loans. The mortgage loans may be conventional
loans (i.e., loans that are not insured or guaranteed by any governmental
agency), insured by the FHA or partially guaranteed by the VA as specified in
the related prospectus supplement. All or a portion of the mortgage loans in a
mortgage pool may be insured by FHA insurance and may be partially guaranteed by
the VA.
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 the
certificates 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. The applicable prospectus supplement may specify
the Mortgage Assets that a trust fund will consist of, but if it does not, the
Mortgage Assets of any trust fund will consist of mortgage loans, Agency
Securities or Private Mortgage-Backed Securities but not a combination of them.
Mortgage loans acquired by the depositor will have been originated in accordance
with the underwriting criteria specified below under 'Mortgage
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* Whenever the terms mortgage pool and certificates are used in this prospectus,
those terms will be considered to apply, unless the context indicates
otherwise, to one specific mortgage pool and the certificates representing
certain undivided interests in a single trust fund consisting primarily of the
Mortgage Assets in the 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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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 about 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 SEC within fifteen days after the
initial issuance of the certificates. A maximum of 5% of the Mortgage Assets as
they will be constituted at the time that the applicable detailed description of
Mortgage Assets is filed will deviate in any material respect from the Mortgage
Asset pool characteristics described in the related prospectus supplement, other
than the aggregate number or amount of mortgage loans. A schedule of the
Mortgage Assets relating to the series will be attached to the pooling and
servicing agreement delivered to the trustee upon delivery of the certificates.
THE MORTGAGE LOANS -- GENERAL
The real property that secures repayment of the mortgage loans is referred
to collectively as mortgaged properties. The mortgaged properties will 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 or certain principal balances or both may be covered wholly
or partially by primary mortgage guaranty insurance policies. The existence,
extent and duration of coverage will be described in the applicable prospectus
supplement.
The applicable prospectus supplement may specify the day on which monthly
payments on the mortgage loans in a mortgage pool will be due, but if it does
not, 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:
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 the limitations. Accrued interest may be deferred and added
to the principal of a loan for the periods and under the circumstances as
may be specified in the related prospectus supplement.
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 interest rate specified in its mortgage note 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, called
balloon payments. Principal may include interest that has been deferred
and added to the principal balance of the mortgage loan.
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.
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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 the mortgage loan or may decline
over time, and may be prohibited for the life of the mortgage loan or for
certain periods, which are called 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
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 buydown loans that include provisions whereby a
third party partially subsidizes the monthly payments of the obligors on the
mortgage loans during the early years of the mortgage loans, the difference to
be made up from a buydown fund contributed by the 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. Thereafter, buydown funds are applied to the applicable mortgage loan
upon receipt by the master servicer of the mortgagor's portion of the monthly
payment on the mortgage loan. The master servicer administers the buydown fund
to ensure that the monthly allocation from the buydown fund combined with the
monthly payment received from the mortgagor equals the scheduled monthly payment
on the applicable mortgage loan. 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 the
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
the aggregate outstanding principal balance and the average outstanding
principal balance of the mortgage loans as of the first day of the month
of issuance of the related series of certificates or another date
specified in the related prospectus supplement called a cut-off date,
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),
the original terms to maturity of the mortgage loans,
the largest principal balance and the smallest principal balance of any of
the mortgage loans,
the earliest origination date and latest maturity date of any of the
mortgage loans,
the aggregate principal balance of mortgage loans having Loan-to-Value
Ratios at origination exceeding 80%,
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the maximum and minimum per annum mortgage rates and
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 of Mortgage Assets.
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. The applicable
prospectus supplement may specify how the collateral value of a mortgaged
property will be calculated, but if it does not, the collateral value of a
mortgaged property is the lesser of the sales price for the property and the
appraised value determined in an appraisal obtained by the originator at
origination of the mortgage loan.
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
the losses are not covered by subordination provisions or alternative
arrangements, the 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 sub-servicers, pursuant to the pooling and servicing
agreement, and will receive a fee for its services. See 'Mortgage Loan Program'
and 'The Pooling and Servicing Agreement.' 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 pooling and
servicing agreement as if the master servicer alone were servicing the mortgage
loans.
The applicable prospectus supplement may provide for additional obligations
of the depositor, but if it does not, 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 the series of
certificates the depositor's rights with respect to the representations and
warranties. See 'The Pooling and Servicing Agreement -- Assignment of Mortgage
Assets.' The obligations of the master servicer with respect to the mortgage
loans will consist principally of its contractual servicing obligations under
the related pooling and servicing agreement (including its obligation to enforce
the obligations of the sub-servicers or sellers, or both, as more fully
described under 'Mortgage Loan Program -- Representations by Sellers;
Repurchases' and its obligation to make cash advances upon delinquencies in
payments on or with respect to the mortgage loans in the amounts described under
'Description of the Certificates -- Advances.' The obligations of the master
servicer to make advances may be subject to limitations, to the extent provided
in this prospectus and in the related prospectus
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supplement. The master servicer may also be a seller in which case a breach of
its obligations in one capacity will not constitute a breach of its obligations
in the other capacity.
The 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 and, if so specified in the related
prospectus supplement, may include cooperative apartment loans secured by
security interests in shares issued by private, non-profit, cooperative housing
corporations and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the cooperatives'
buildings. In addition, Mortgage Assets of the related trust fund may include
mortgage participation certificates evidencing interests in mortgage loans.
These 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. The mortgaged properties may
include vacation and second homes, investment properties and leasehold
interests. In the case of leasehold interests, the applicable prospectus
supplement may specify that the term of the leasehold may be less than five
years beyond the scheduled maturity of the mortgage loan, but if it does not,
the term of the leasehold will exceed the scheduled maturity of the mortgage
loan by at least five years.
AGENCY SECURITIES
Government National Mortgage Association. Ginnie Mae 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 of the National
Housing Act of 1934, as amended, authorizes Ginnie Mae to guarantee the timely
payment of the principal of and interest on certificates that represent an
interest in a pool of mortgage loans insured by the FHA under the National
Housing Act of 1934 or Title V of the Housing Act of 1949, 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.
Section 306(g) of the National Housing Act of 1934 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 that guaranty, Ginnie Mae may, under Section
306(d) of the National Housing Act of 1934, borrow from the United States
Treasury in an unlimited amount which is at any time sufficient to enable Ginnie
Mae to perform its obligations under its guarantee.
Ginnie Mae Certificates. Each Ginnie Mae certificate held in a trust fund
will be a 'fully modified pass-through' mortgage backed certificate issued and
serviced by a Ginnie Mae issuer approved by Ginnie Mae or by Fannie Mae as a
seller-servicer of FHA loans or VA loans. The Ginnie Mae certificates may be
issued under either the Ginnie Mae I program or the Ginnie Mae II program. The
mortgage loans underlying the Ginnie Mae certificates will consist of FHA loans
or VA loans. Each mortgage loan is secured by a one- to four-family or
multifamily residential property. Ginnie Mae will approve the issuance of each
Ginnie Mae certificate in accordance with a guaranty agreement between Ginnie
Mae and the Ginnie Mae issuer. Pursuant to its guaranty agreement, a Ginnie Mae
issuer will be required to advance its own funds in order to make timely
payments of all amounts due on each Ginnie Mae certificate if the payments
received by the Ginnie Mae issuer on the FHA loans or VA loans underlying each
Ginnie Mae certificate are less than the amounts due on each Ginnie Mae
certificate.
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The full and timely payment of principal of and interest on each Ginnie Mae
certificate will be guaranteed by Ginnie Mae, which obligation is backed by the
full faith and credit of the United States. Each Ginnie Mae certificate will
have an original maturity of not more than 30 years (but may have original
maturities of substantially less than 30 years). Each Ginnie Mae 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 Ginnie Mae issuer to the registered holder of the Ginnie Mae
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
the Ginnie Mae 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 Ginnie Mae certificate. In addition, each
payment will include proportionate pass-through payments of any prepayments of
principal on the FHA loans or VA loans underlying the Ginnie Mae certificate and
liquidation proceeds upon a foreclosure or other disposition of the FHA loans or
VA loans.
If a Ginnie Mae issuer is unable to make the payments on a Ginnie Mae
certificate as it becomes due, it must promptly notify Ginnie Mae and request
Ginnie Mae to make the payment. Upon notification and request, Ginnie Mae will
make the payments directly to the registered holder of the Ginnie Mae
certificate. If no payment is made by a Ginnie Mae issuer and the Ginnie Mae
issuer fails to notify and request Ginnie Mae to make the payment, the holder of
the Ginnie Mae certificate will have recourse only against Ginnie Mae to obtain
the payment. The trustee or its nominee, as registered holder of the Ginnie Mae
certificates held in a trust fund, will have the right to proceed directly
against Ginnie Mae under the terms of the guaranty agreements relating to the
Ginnie Mae certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular Ginnie Mae I certificate must
have the same interest rate over the term of the loan, except in pools of
mortgage loans secured by manufactured homes. The interest rate on the Ginnie
Mae I certificate will equal the interest rate on the mortgage loans included in
the pool of mortgage loans underlying the Ginnie Mae I certificate, less
one-half percentage point per annum of the unpaid principal balance of the
mortgage loans.
Mortgage loans underlying a particular Ginnie Mae II certificate may have
per annum interest rates that vary from each other by up to one percentage
point. The interest rate on each Ginnie Mae 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 the Ginnie Mae II certificate, except for pools of mortgage
loans secured by manufactured homes.
Regular monthly installment payments on each Ginnie Mae certificate held in
a trust fund will be comprised of interest due as specified on the Ginnie Mae
certificate plus the scheduled principal payments on the FHA loans or VA loans
underlying the Ginnie Mae certificate due on the first day of the month in which
the scheduled monthly installments on the Ginnie Mae certificate are due. The
regular monthly installments on each Ginnie Mae certificate are required to be
paid to the trustee as registered holder by the 15th day of each month in the
case of a Ginnie Mae I certificate and are required to be mailed to the trustee
by the 20th day of each month in the case of a Ginnie Mae II certificate. Any
principal prepayments on any FHA loans or VA loans underlying a Ginnie Mae
certificate held in a trust fund or any other early recovery of principal on the
loans will be passed through to the trustee as the registered holder of the
Ginnie Mae certificate.
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Ginnie Mae 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 the mortgage loan. Payments due the
registered holders of Ginnie Mae certificates backed by pools containing buydown
loans will be computed in the same manner as payments derived from other Ginnie
Mae 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 the
mortgage loans, will be less than the amount of stated interest on the mortgage
loans. The interest not so paid will be added to the principal of the graduated
payment mortgage loans and, together with interest on them, will be paid in
subsequent years. The obligations of Ginnie Mae and of a Ginnie Mae issuer will
be the same irrespective of whether the Ginnie Mae 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 for graduated payment or buydown loans. Ginnie Mae certificates
related to a series of certificates may be held in book-entry form.
The Ginnie Mae certificates included in a trust fund, and the related
underlying mortgage loans, may have characteristics and terms different from
those described above. Any different characteristics and terms will be described
in the related prospectus supplement.
Federal Home Loan Mortgage Corporation. Freddie Mac is a corporate
instrumentality of the United States created pursuant to Title III of the
Emergency Home Finance Act of 1970, as amended. The common stock of Freddie Mac
is owned by the Federal Home Loan Banks and its preferred stock is owned by
stockholders of the Federal Home Loan Banks. Freddie Mac was
established primarily to increase the availability of mortgage credit to finance
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 Freddie
Mac currently consists of the purchase of first lien conventional mortgage loans
or participation interests in mortgage loans and the sale of the mortgage loans
or participations so purchased in the form of mortgage securities, primarily
mortgage participation certificates issued and either guaranteed as to timely
payment of interest or guaranteed as to timely payment of interest and ultimate
payment of principal by Freddie Mac. Freddie Mac 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.
Freddie Mac Certificates. Each Freddie Mac certificate represents an
undivided interest in a pool of mortgage loans that may consist of first lien
conventional loans, FHA loans or VA loans. Freddie Mac certificates are sold
under the terms of a Mortgage Participation Certificate Agreement. A Freddie Mac
certificate may be issued under either Freddie Mac's Cash Program or Guarantor
Program.
Mortgage loans underlying the Freddie Mac certificates held by a trust fund
will consist of mortgage loans with original terms to maturity of between 10 and
40 years. Each mortgage loan must meet the applicable standards set forth in the
Emergency Home Finance Act of 1970. A Freddie Mac certificate group may include
whole loans, participation interests in whole loans and undivided interests in
whole loans and participations comprising another Freddie Mac certificate group.
Under the Guarantor Program, a Freddie Mac certificate group may include only
whole loans or participation interests in whole loans.
Freddie Mac guarantees to each registered holder of a Freddie Mac
certificate the timely payment of interest on the underlying mortgage loans to
the extent of the applicable certificate
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interest rate on the registered holder's pro rata share of the unpaid principal
balance outstanding on the underlying mortgage loans in the Freddie Mac
certificate group represented by the Freddie Mac certificate, whether or not
received. Freddie Mac also guarantees to each registered holder of a Freddie Mac
certificate collection by the holder of all principal on the underlying mortgage
loans, without any offset or deduction, to the extent of the holder's pro rata
share of it, but does not, except if and to the extent specified in the related
prospectus supplement for a series of certificates, guarantee the timely payment
of scheduled principal. Under Freddie Mac's Gold PC Program, Freddie Mac
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 the month of distribution. Pursuant to its guaranties,
Freddie Mac indemnifies holders of Freddie Mac certificates against any
diminution in principal from charges for property repairs, maintenance and
foreclosure. Freddie Mac 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 30 days following foreclosure sale, 30 days following
payment of the claim by any mortgage insurer or 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 Freddie Mac certificates,
including the timing of demand for acceleration, Freddie Mac 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 Freddie Mac to determine that a mortgage loan should be
accelerated varies with the particular circumstances of each mortgagor, and
Freddie Mac has not adopted standards which require that the demand be made
within any specified period.
Freddie Mac 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 Freddie Mac under its
guaranty are obligations solely of Freddie Mac and are not backed by, or
entitled to, the full faith and credit of the United States. If Freddie Mac were
unable to satisfy its obligations, distributions to holders of Freddie Mac
certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac certificates would be affected by delinquent payments and defaults
on the mortgage loans.
Registered holders of Freddie Mac certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial prepayments of principal and principal received by
Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure,
and repurchases of the mortgage loans by Freddie Mac or their seller. Freddie
Mac is required to remit each registered Freddie Mac certificateholder's pro
rata share of principal payments on the underlying mortgage loans, interest at
the Freddie Mac pass-through rate and any other sums such as prepayment fees,
within 60 days of the date on which the payments are deemed to have been
received by Freddie Mac.
Under Freddie Mac's Cash Program, there is no limitation on the amount by
which interest rates on the mortgage loans underlying a Freddie Mac certificate
may exceed the pass-through rate on the Freddie Mac certificate. Under that
program, Freddie Mac 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 required by Freddie Mac.
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
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participations in a Freddie Mac certificate group under the Cash Program will
vary since mortgage loans and participations are purchased and assigned to a
Freddie Mac certificate group based upon their yield to Freddie Mac rather than
on the interest rate on the underlying mortgage loans. Under Freddie Mac's
Guarantor Program, the pass-through rate on a Freddie Mac certificate is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of Freddie Mac's management
and guaranty income as agreed upon between the seller and Freddie Mac.
Freddie Mac 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 Freddie Mac
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 the Freddie Mac certificate. Thereafter, the 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 for Freddie Mac certificates sold by Freddie Mac on or after
January 2, 1985, and makes payments of principal and interest each month to
their registered holders in accordance with the holders' instructions.
Federal National Mortgage Association. Fannie Mae is a federally chartered
and privately owned corporation organized and existing under the Federal
National Mortgage Association Charter Act, as amended. Fannie Mae was originally
established in 1938 as a United States government agency to provide supplemental
liquidity to the mortgage market and was transformed into a stockholder owned
and privately-managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for additional
lending. Fannie Mae 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, Fannie
Mae helps to redistribute mortgage funds from capital-surplus to capital-short
areas.
Fannie Mae Certificates. These are guaranteed mortgage pass-through
certificates issued and guaranteed as to timely payment of principal and
interest by Fannie Mae representing fractional undivided interests in a pool of
mortgage loans formed by Fannie Mae. Each mortgage loan must meet the applicable
standards of the Fannie Mae purchase program. Mortgage loans comprising a pool
are either provided by Fannie Mae from its own portfolio or purchased pursuant
to the criteria of the Fannie Mae purchase program.
Mortgage loans underlying Fannie Mae 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 Fannie Mae 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 Fannie Mae 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 Fannie Mae 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 Fannie Mae's guaranty fee.
Under a regular servicing option, the annual interest rates on the mortgage
loans underlying a Fannie Mae certificate will be between 50 basis points and
250 basis points greater than is its annual pass through rate. Under this option
the mortgagee or each other servicer assumes the entire risk of foreclosure
losses. Under a special servicing option, the annual
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interest rates on the mortgage loans underlying a Fannie Mae certificate will
generally be between 55 basis points and 255 basis points greater than the
annual Fannie Mae certificate pass-through rate. Under this option Fannie Mae
assumes the entire risk for foreclosure losses. If specified in the related
prospectus supplement, Fannie Mae certificates may be backed by adjustable rate
mortgages.
Fannie Mae guarantees to each registered holder of a Fannie Mae certificate
that it will distribute amounts representing the holder's proportionate share of
scheduled principal and interest payments at the applicable pass through rate
provided for by the Fannie Mae certificate on the underlying mortgage loans,
whether or not received, and the holder's proportionate share of the full
principal amount of any foreclosed or other finally liquidated mortgage loan,
whether or not the principal amount is actually recovered. The obligations of
Fannie Mae under its guaranties are obligations solely of Fannie Mae 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 Fannie Mae up to $2.25 billion outstanding at any time,
neither the United States nor any of its agencies is obligated to finance Fannie
Mae's operations or to assist Fannie Mae in any other manner. If Fannie Mae were
unable to satisfy its obligations, distributions to holders of Fannie Mae
certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Fannie Mae certificates would be affected by delinquent payments and defaults on
the mortgage loans.
Except for Fannie Mae certificates backed by pools containing graduated
payment mortgage loans or mortgage loans secured by multifamily projects, Fannie
Mae certificates evidencing interests in pools of mortgage loans formed on or
after May 1, 1985 are available in book-entry form only. Distributions of
principal and interest on each Fannie Mae certificate will be made by Fannie Mae
on the 25th day of each month to the persons in whose name the Fannie Mae
certificate is entered in the books of the Federal Reserve Banks or registered
on the Fannie Mae certificate register as of the close of business on the last
day of the preceding month. Distributions on Fannie Mae certificates issued in
book-entry form will be made by wire. Distributions on fully registered Fannie
Mae certificates will be made by check.
The Fannie Mae certificates included in a trust fund, and the related
underlying mortgage loans, may have characteristics and terms different from
those described above. Any different characteristics and terms will be described
in the related prospectus supplement.
Stripped Mortgage-Backed Securities. Agency Securities may consist of one
or more stripped mortgage-backed securities, each as described in this
prospectus and in the related prospectus supplement. Each 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 the distributions) on certain
Freddie Mac, Fannie Mae or Ginnie Mae certificates. The underlying securities
will be held under a trust agreement by Freddie Mac, Fannie Mae or Ginnie Mae,
each as trustee, or by another trustee named in the related prospectus
supplement. The applicable prospectus supplement may specify that Freddie Mac,
Fannie Mae or Ginnie Mae will not guarantee each stripped Agency Security to the
same extent it guarantees the underlying securities backing the stripped Agency
Security, but if it does not, then Freddie Mac, Fannie Mae or Ginnie Mae will
guarantee each stripped Agency Security to the same extent it guarantees the
underlying securities backing the stripped Agency Security.
Other Agency Securities. If specified in the related prospectus supplement,
a trust fund may include other mortgage pass-through certificates issued or
guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac. The characteristics of
those mortgage pass-through certificates will be
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described in the 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 mortgage pass-through
certificates or participation certificates evidencing an undivided interest in a
pool of mortgage loans or 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 the
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. The applicable prospectus supplement may provide
that the seller/servicer of the underlying mortgage loans will not have entered
into a pooling and servicing agreement with a private trustee, but if it does
not, the seller/servicer of the underlying mortgage loans will have entered into
the pooling and servicing agreement with a private trustee. The private trustee
or its agent, or a custodian, will possess the mortgage loans underlying the
Private Mortgage-Backed Security. Mortgage loans underlying a Private
Mortgage-Backed Security will be serviced by a private servicer directly or by
one or more subservicers who may be subject to the supervision of the private
servicer.
The issuer of the Private Mortgage-Backed Securities 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 the
trusts and selling beneficial interests in the trusts. If so specified in the
related prospectus supplement, the issuer of Private Mortgage-Backed Securities
may be an affiliate of the depositor. The obligations of the issuer of Private
Mortgage-Backed Securities will generally be limited to certain representations
and warranties with respect to the assets conveyed by it to the related trust
fund. The issuer of Private Mortgage-Backed Securities 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 pooling and servicing 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 private trustee or the private servicer. The issuer of Private
Mortgage-Backed Securities or the private 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. The 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 the cooperative.
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The prospectus supplement for a series for which the trust fund includes
Private Mortgage-Backed Securities will specify
the aggregate approximate principal amount and type of the Private
Mortgage-Backed Securities to be included in the trust fund;
certain characteristics of the mortgage loans that comprise the underlying
assets for the Private Mortgage-Backed Securities including
the payment features of the mortgage loans,
the approximate aggregate principal balance, if known, of underlying
mortgage loans insured or guaranteed by a governmental entity,
the servicing fee or range of servicing fees with respect to the
mortgage loans and
the minimum and maximum stated maturities of the underlying mortgage
loans at origination;
the maximum original term-to-stated maturity of the Private
Mortgage-Backed Securities;
the weighted average term-to stated maturity of the Private
Mortgage-Backed Securities;
the pass-through or certificate rate of the Private Mortgage-Backed
Securities;
the weighted average pass-through or certificate rate of the Private
Mortgage-Backed Securities;
the issuer of Private Mortgage-Backed Securities, the private servicer (if
other than the issuer of Private Mortgage-Backed Securities) and the
private trustee for the Private Mortgage-Backed Securities;
certain characteristics of credit support, if any, the 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 the Private Mortgage-Backed Securities themselves;
the terms on which the underlying mortgage loans for the Private
Mortgage-Backed Securities may, or are required to, be purchased before
their stated maturity or the stated maturity of the Private
Mortgage-Backed Securities; and
the terms on which mortgage loans may be substituted for those originally
underlying the Private Mortgage-Backed Securities.
Private Mortgage-Backed Securities included in the trust fund for a series
of certificates that were issued by an issuer of Private Mortgage-Backed
Securities that is not affiliated with the depositor must be acquired in bona
fide secondary market transactions or either have been previously registered
under the Securities Act of 1933 or have been held for at least the holding
period required to be eligible for sale under Rule 144(k) under the Securities
Act of 1933.
SUBSTITUTION OF MORTGAGE ASSETS
Substitution of Mortgage Assets will be permitted upon breaches of
representations and warranties with respect to any original Mortgage Asset or if
the documentation with respect to any Mortgage Asset is determined by the
trustee to be incomplete. The period during which the 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.
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AVAILABLE INFORMATION
The depositor has filed with the SEC a Registration Statement under the
Securities Act of 1933, as amended, covering 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 in this prospectus and in the prospectus
supplement, but do not contain all of the information in the Registration
Statement pursuant to the rules and regulations of the SEC. For further
information, reference is made to the Registration Statement and its exhibits.
The Registration Statement and exhibits can be inspected and copied at
prescribed rates at the public reference facilities maintained by the SEC at its
Public Reference Room at 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. You may obtain information on the
operation of the Public Reference Room by calling the SEC a 1-800-SEC-0330. The
SEC maintains an Internet Web site that contains reports, information statements
and other information regarding the registrants that file electronically with
the SEC, including the depositor. The address of that Internet Web site is
http://www.sec.gov.
This prospectus and any applicable prospectus supplement do not constitute
an offer to sell or a solicitation of an offer to buy any securities other than
the certificates offered by this prospectus and the prospectus supplement nor an
offer of the certificates to any person in any state or other jurisdiction in
which the offer would be unlawful.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed for the trust fund referred to in the accompanying
prospectus supplement after the date of this prospectus and before the end of
the related offering with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934, as amended, are incorporated by
reference in this prospectus and are a part of this prospectus from the date of
their filing. Any statement contained in a document incorporated by reference in
this prospectus is modified or superseded for all purposes of this prospectus to
the extent that a statement contained in this prospectus (or in the accompanying
prospectus supplement) or in any other subsequently filed document that also is
incorporated by reference differs from that statement. Any statement so modified
or superseded shall not, except as so modified or superseded, 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 person's written or oral
request, 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 the exhibits are
specifically incorporated by reference into the information that this prospectus
incorporates). Requests should be directed to the corporate trust office of the
trustee specified in the accompanying prospectus supplement.
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
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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, was organized on May 27, 1993 for the
limited purpose of acquiring, owning and transferring Mortgage Assets and
selling interests in them or bonds secured by them. The depositor is a
subsidiary of Countrywide Credit Industries, Inc., a Delaware corporation. The
depositor maintains its principal office at 4500 Park Granada, Calabasas,
California 91302. Its telephone number is (818) 225-3000.
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. The applicable prospectus
supplement may specify the mortgage loans acquired by the depositor will have
been originated the under different criteria than the servicer's underwriting
criteria, but if it does not, the mortgage loans acquired by the depositor will
have been originated in accordance with the underwriting criteria specified
under 'Underwriting Process.'
UNDERWRITING PROCESS
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. The verification reports the length of employment with that
organization, the borrower's current salary and whether it is expected that the
borrower will continue 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 to meet monthly housing
expenses and other financial obligations and monthly living expenses and 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
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expenses related to the mortgaged property such as property taxes and hazard
insurance). 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 as low Loan-to-Value
Ratios or other favorable credit factors 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 as long as the remaining term on the loan agreement
or promissory note for the mortgage loan.
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 the 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 the payments increase. These types of mortgage loans
may also be underwritten primarily on the basis of Loan-to-Value Ratios or other
favorable credit factors.
QUALIFICATIONS OF SELLERS
Each seller must be an institution experienced in originating and servicing
mortgage loans of the type contained in the related mortgage pool and must
maintain satisfactory facilities to originate and service those mortgage loans.
REPRESENTATIONS BY SELLERS; REPURCHASES
Each seller will have made representations and warranties in respect of the
mortgage loans sold by it and evidenced by a series of certificates. The
applicable prospectus supplement may specify the different representations and
warranties, but if it does not, the representations and warranties will
generally include, among other things:
that title insurance (or in the case of mortgaged properties located in
areas where title insurance 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;
that the seller had good title to each mortgage loan and the mortgage loan
was subject to no valid offsets, defenses, counterclaims or rights of
rescission except to the extent that any buydown agreement described in
this prospectus may forgive certain indebtedness of a mortgagor;
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 pooling and servicing
agreement);
that there were no delinquent tax or assessment liens against the
mortgaged property; and
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.
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In addition, if any required payment on a mortgage loan was more than 31
days delinquent at any time during the twelve months before the cut-off date,
the related prospectus supplement shall so indicate.
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.
As indicated in the related pooling and servicing agreement, the
representations and warranties of a seller in respect of a mortgage loan will be
made as of the date of initial issuance of the series of certificates, the
related cut-off date, the date on which the seller sold the mortgage loan to the
depositor or one of its affiliates, or the date of origination of the related
mortgage loan, as the case may be. If representations and warranties are made as
of a date other than the closing date or cut-off date, a substantial period of
time may have elapsed between the other date and the date of initial issuance of
the series of certificates evidencing an interest in the 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 the seller or following the
origination of the mortgage loan, as the case may be, its repurchase obligation
will not arise if the relevant event that would otherwise have given rise to a
repurchase obligation with respect to a mortgage loan occurs after the date of
sale of the mortgage loan by the seller to the depositor or its affiliates or
after the origination of the mortgage loan, as the case may be. In addition,
certain representations, including the condition of the related mortgaged
property, will be limited to the extent the seller has knowledge and the seller
will be under no obligation to investigate the substance of the representation.
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
the 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, the representations will be in addition to the
representations and warranties made by the master servicer in its capacity as
the master servicer.
The trustee, if the master servicer is the seller, or the master servicer
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 the mortgage loan. The
applicable prospectus supplement may specify that the seller has a different
repurchase obligation, but if it does not, then if the seller cannot cure the
breach within 90 days after notice from the master servicer or the trustee, as
the case may be, then the seller will be obligated to repurchase the mortgage
loan from the trust fund at a price equal to 100% of the outstanding principal
balance of the mortgage as of the date of the repurchase plus accrued interest
on it 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 the mortgage loan. If an election is to be made to treat a trust
fund or designated portions of it as a 'real estate mortgage investment conduit'
as defined in the Internal Revenue Code of 1986, as amended (the 'Code'), 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 the repurchase. The applicable prospectus supplement may contain different
reimbursement options, but if it does not, the master servicer will be entitled
to reimbursement for that payment from the assets of the related trust fund or
from any holder of the related residual certificate. See 'Description of the
Certificates -- General' 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 pooling and servicing agreement to enforce this
obligation for the benefit of the trustee and the
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certificateholders, following the practices it would employ in its good faith
business judgment were it the owner of the mortgage loan. This repurchase
obligation will constitute the sole remedy available to certificateholders or
the trustee for a breach of representation by a seller.
Neither the depositor nor the master servicer 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 under 'The Pooling and Servicing
Agreement -- Assignment of Mortgage Assets.'
DESCRIPTION OF THE CERTIFICATES
The prospectus supplement relating to the certificates of each series to be
offered under this prospectus will, among other things, set forth for the
certificates, as appropriate:
a description of the class or classes of certificates and the rate at
which interest will be passed through to holders of each class of
certificates entitled to interest or the method of determining the amount
of interest, if any, to be passed through to each class;
the initial aggregate certificate balance of each class of certificates
included in the series, the dates on which distributions on the
certificates will be made and, if applicable, the initial and final
scheduled distribution dates for each class;
information as to the assets comprising the trust fund, including the
general characteristics of the Mortgage Assets included in the trust fund
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;
the circumstances, if any, under which the trust fund may be subject to
early termination;
the method used to calculate the amount of principal to be distributed
with respect to each class of certificates;
the order of application of distributions to each of the classes within
the series, whether sequential, pro rata, or otherwise;
the distribution dates with respect to the series;
additional information with respect to the plan of distribution of the
certificates;
whether one or more REMIC elections will be made and designation of the
regular interests and residual interests;
the aggregate original percentage ownership interest in the trust fund to
be evidenced by each class of certificates;
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
information as to the seller, the master servicer and the trustee.
Each series of certificates will be issued pursuant to an pooling and
servicing 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 the series. The provisions of each pooling and servicing
agreement will vary depending upon the nature of the certificates to be issued
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thereunder and the nature of the related trust fund. A form of an pooling and
servicing agreement is an exhibit to the Registration Statement of which this
prospectus is a part.
The prospectus supplement for a series of certificates will describe any
provision of the pooling and servicing agreement relating to the series that
materially differs from its description 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 pooling and
servicing agreement for each series of certificates and the applicable
prospectus supplement. The depositor will provide a copy of the pooling and
servicing agreement (without exhibits) relating to any series without charge
upon written request of a holder of record of a certificate of the series
addressed to CWMBS, Inc., 4500 Park Granada, Calabasas, California 91302,
Attention: Secretary. The following summaries describe material provisions that
may appear in each pooling and servicing agreement.
GENERAL
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 pooling and servicing
agreement and will not be entitled to payments in respect of the assets included
in any other trust fund established by the depositor. The applicable prospectus
supplement may provide for guarantees by a governmental entity or other person,
but if it does not, the Mortgage Assets will not be insured or guaranteed by any
governmental entity or other person. Each trust fund will consist of, to the
extent provided in the related pooling and servicing agreement,
the Mortgage Assets that from time to time are subject to the related
pooling and servicing agreement (exclusive of any amounts specified in the
related prospectus supplement as a retained interest);
the assets required to be deposited in the related Certificate Account
from time to time;
property that secured a mortgage loan and that is acquired on behalf of
the certificateholders by foreclosure or deed in lieu of foreclosure; and
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 pooling and servicing
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 or portion of future interest payments and a specified
percentage or portion of future principal payments on the Mortgage Assets in the
related trust fund. These specified percentages may be 0%. 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 the 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 in this prospectus
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 of
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principal and interest. Distributions on one or more classes of a series of
certificates may be made before 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 the distributions may vary
among classes or over time as specified in the related prospectus supplement.
Distributions of either or both of principal and interest on the related
certificates will be made by the trustee on each distribution date (i.e.,
monthly, quarterly, semi-annually or at other intervals and on the dates
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.
Distributions will be made by check or money order mailed to the persons
entitled to them at the address appearing in the certificates register
maintained for holders of certificates 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 another means described in the prospectus supplement; 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 the
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 subject to provisions of the
Employee Retirement Income Security Act of 1974, as amended, or the Code of
certain classes of certificates may result in 'prohibited transactions' within
the meaning of ERISA and the Code. See 'ERlSA Considerations.' Retirement
arrangements subject to these provisions include individual retirement accounts
and annuities, Keogh plans and collective investment funds in which the plans,
accounts or arrangements are invested. The applicable prospectus supplement may
specify other conditions under which transfers of this type would be permitted,
but if it does not, transfer of the certificates will not be registered unless
the transferee represents that it is not, and is not purchasing on behalf of, a
plan, account or other retirement arrangement or provides an opinion of counsel
satisfactory to the trustee and the depositor that the purchase of the
certificates by or on behalf of a plan, account or other retirement 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 pooling and servicing agreement.
As to each series, an election may be made to treat the related trust fund
or designated portions of it 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 pooling and servicing
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. The terms applicable to the making of a REMIC
election, as well as any material federal income tax consequences to
certificateholders not described in this prospectus, will be set forth in the
related prospectus supplement. If a REMIC 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 the series will constitute regular interests in the
related REMIC, as defined in the
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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 to comply with applicable laws and
regulations and will be obligated to pay any prohibited transaction taxes. The
applicable prospectus supplement may restrict the master servicer's
reimbursement rights, but if it does not, the master servicer will be entitled
to reimbursement for that 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 the series. See 'Credit
Enhancement' and in the related prospectus supplement. Various methods that may
be used to determine the amount of distributions on the certificates of a
particular series. The prospectus supplement for each series of certificates
will describe the method to be used in determining the amount of distributions
on the certificates of its 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. The applicable prospectus supplement may provide for payment
distinctions within classes, but if it does not, 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
pooling and servicing agreement. The applicable prospectus supplement may define
Available Funds with reference to different accounts or different amounts, but
if it does not, 'Available Funds' for each distribution date will generally
equal the amount on deposit in the related Certificate Account on the
distribution date (net of related fees and expenses payable by the related trust
fund) other than amounts to be held in the Certificate Account for distribution
on future distribution dates.
Distributions of Interest. Interest will accrue on the aggregate original
balance of the certificates (or, in the case of certificates entitled only to
distributions allocable to interest, the aggregate notional amount) of each
class of certificates (the initial 'Class Certificate Balance') entitled to
interest at the pass-through rate (which may be a fixed rate or a rate
adjustable as specified in the prospectus supplement) from the date and for the
periods specified in the prospectus supplement. To the extent funds are
available therefor, interest accrued during each 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) will be
distributable on the distribution dates specified in the related prospectus
supplement until the Class Certificate Balance of the 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 the 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 the certificate is
entitled. The applicable prospectus supplement may specify some other basis for
these distributions, but if it does not, distributions allocable to interest on
each certificate that is not entitled to distributions allocable to principal
will be calculated based
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on the notional amount of the 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 the class of certificates on that distribution date. The
applicable prospectus supplement may specify some other basis for these
distributions, but if it does not, distributions of interest on each class of
accrual certificates will commence only after the occurrence of the events
specified in the prospectus supplement and, before that time, the beneficial
ownership interest of the class of accrual certificates in the trust fund, as
reflected in the Class Certificate Balance of the class of accrual certificates,
will increase on each distribution date by the amount of interest that accrued
on the class of accrual certificates during the preceding interest accrual
period but that was not required to be distributed to the class on the
distribution date. The class of accrual certificates will thereafter accrue
interest on its outstanding Class Certificate Balance as so adjusted.
Distributions of Principal. 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 that amount will be allocated among the classes of certificates entitled
to distributions of principal. The Class Certificate Balance of any class of
certificates entitled to distributions of principal will be the original Class
Certificate Balance of the class of certificates specified in the prospectus
supplement, reduced by all distributions reported to the holders of the
certificates as allocable to principal and in the case of accrual certificates,
unless otherwise specified in the related prospectus supplement, increased by
all interest accrued but not then distributable on the accrual certificates and
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 that amount will be allocated among the
classes of certificates entitled to distributions of principal.
A series of certificates may include one or more classes of senior
certificates and one or more classes of subordinate certificates. 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 the payments in the percentages and under the circumstances
or for the periods specified in the prospectus supplement. Any disproportionate
allocation of these principal prepayments to senior certificates will have the
effect of accelerating the amortization of the 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' 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. If applicable, the trustee will be
required to make 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
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on the certificates on the distribution date. The applicable prospectus
supplement may specify some other basis for these distributions, but if it does
not, the amount of the 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. The
applicable prospectus supplement may provide that unscheduled distributions will
not include interest or that interest will be computed on a different basis, but
if it does not, all unscheduled distributions will include interest at the
applicable pass-through rate on the amount of the unscheduled distribution
allocable to principal for the period and to the date specified in the
prospectus supplement.
ADVANCES
To the extent 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
the advances will be recoverable out of late payments by obligors on the
Mortgage Assets, liquidation proceeds, insurance proceeds not used to restore
the property 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 the funds on or before any future distribution date
to the extent that funds in the applicable Certificate Account on the
distribution date would be less than the amount required to be available for
distributions to certificateholders on the Distribution Date. Any advances will
be reimbursable to the master servicer out of recoveries on the specific
Mortgage Assets with respect to which the 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 pooling and
servicing agreement). In addition, advances by the master servicer or
sub-servicer also will be reimbursable to the master servicer or a sub-servicer
from cash otherwise distributable to certificateholders to the extent that the
master servicer determines that the advances previously made are not ultimately
recoverable as described in the preceding sentence. The master servicer also
will be obligated to make advances, to the extent recoverable out of insurance
proceeds not used to restore the property, liquidation proceeds or otherwise,
for 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 pooling and servicing 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 the prospectus supplement.
REPORTS TO CERTIFICATEHOLDERS
The applicable prospectus supplement may specify different items to be
reported, but if it does not, before or concurrently with each distribution on a
distribution date the master servicer
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or the trustee will furnish to each certificateholder of record of the related
series a statement setting forth, to the extent applicable to the series of
certificates, among other things:
the amount of the distribution allocable to principal, separately
identifying the aggregate amount of any principal prepayments and, if so
specified in the related prospectus supplement, prepayment penalties;
the amount of the distribution allocable to interest;
the amount of any advance;
the aggregate amount otherwise allocable to the subordinated
certificateholders on the distribution date and the aggregate amount
withdrawn from the reserve fund, if any, that is included in the amounts
distributed to the certificateholders;
the Class Certificate Balance or notional amount of each class of the
related series after giving effect to the distribution of principal on the
distribution date;
the percentage of principal payments on the Mortgage Assets (excluding
prepayments), if any, which each class will be entitled to receive on the
following distribution date;
the percentage of principal prepayments with respect to the Mortgage
Assets, if any, which each class will be entitled to receive on the
following distribution date;
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;
the number and aggregate principal balances of mortgage loans (A)
delinquent (exclusive of mortgage loans in foreclosure) 1 to 30 days, 31
to 60 days, 61 to 90 days and 91 or more days and (B) in foreclosure and
delinquent 1 to 30 days, 31 to 60 days, 61 to 90 days and 91 or more days,
as of the close of business on the last day of the calendar month
preceding the distribution date;
the book value of any real estate acquired through foreclosure or grant of
a deed in lieu of foreclosure;
the pass-through rate, if adjusted from the date of the last statement, of
a class expected to be applicable to the next distribution to the class;
if applicable, the amount remaining in the reserve fund at the close of
business on the distribution date;
the pass-through rate as of the day before the preceding distribution
date; and
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 the calendar year a report as to
the aggregate of amounts reported pursuant to the first two items for the
calendar year or, if the person was a certificateholder of record during a
portion of the
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calendar year, for the applicable portion of the year and other customary
information deemed appropriate 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 the more
typical categories. The prospectus supplement for a series of certificates may
identify the classes which comprise the 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 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 or PACs........... A class that is designed to receive principal payments using a
predetermined principal balance schedule derived by assuming two
constant prepayment rates for the underlying Mortgage Assets. These
two rates are the endpoints for the 'structuring range' for the
planned principal class. The planned principal classes in any series
of 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
the 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.
</TABLE>
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<TABLE>
<S> <C>
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.
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 or scheduled principal
classes.
Targeted Principal Class or TACs.......... A class that is designed to receive principal payments using a
predetermined principal balance schedule derived by assuming a single
constant prepayment rate for the underlying Mortgage Assets.
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 inversely with changes in the index.
Inverse Floating Rate..................... A class with an interest rate that resets periodically based upon a
designated index and that varies directly with changes in the index.
Variable Rate............................. A class with an interest rate that resets periodically and is
calculated by reference to the rate or rates of interest applicable
to specified assets or instruments (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 of principal.
</TABLE>
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<TABLE>
<S> <C>
Principal Only............................ A class that does not bear interest and is entitled to receive only
distributions of principal.
Partial Accrual........................... A class that accretes a portion of the amount of accrued interest on
it, which amount will be added to the principal balance of the class
on each applicable distribution date, with the remainder of the
accrued interest to be distributed currently as interest on the
class. The accretion may continue until a specified event has
occurred or until the partial accrual class is retired.
Accrual................................... A class that accretes the amount of accrued interest otherwise
distributable on the class, which amount will be added as principal
to the principal balance of the class on each applicable distribution
date. The accretion may continue until some specified event has
occurred or until the accrual class is retired.
</TABLE>
INDICES APPLICABLE TO FLOATING RATE AND INVERSE FLOATING RATE CLASSES
LIBOR
The applicable prospectus supplement may specify some other basis for
determining LIBOR, but if it does not, on the LIBOR determination date (as
defined in the related prospectus supplement) for each class of certificates of
a series for which the applicable interest rate is determined by reference to an
index denominated as LIBOR, the person designated in the related pooling and
servicing agreement as the calculation agent will determine LIBOR in accordance
with one of the two methods described below (which method will be specified in
the related prospectus supplement):
LIBO Method
If using this method to calculate LIBOR, the calculation agent will
determine LIBOR by reference to the quotations, as set forth on the Reuters
Screen LIBO Page, offered by the principal London office of each of the
designated reference banks meeting the criteria set forth in this prospectus for
making one-month United States dollar deposits in leading banks in the London
Interbank market, as of 11:00 a.m. (London time) on the LIBOR determination
date. In lieu of relying on the quotations for those reference banks that appear
at the time on the Reuters Screen LIBO Page, the calculation agent will request
each of the reference banks to provide the offered quotations at the time.
Under this method 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 offered quotations, LIBOR for the next interest accrual period
shall be the arithmetic mean of the 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 offered quotations, LIBOR for the next interest
accrual period shall be whichever is the higher of
LIBOR as determined on the previous LIBOR determination date or
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the reserve interest rate.
The reserve interest rate shall be the rate per annum which the calculation
agent determines to be either
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 the quotations are, in the opinion of the calculation agent
being so made, or
if the calculation agent cannot determine the arithmetic mean, the
lowest one-month United States dollar lending rate which New York
City banks selected by the calculation agent are quoting on the 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 considered to be
the per annum rate specified as such in the related prospectus supplement.
Each reference bank shall be a leading bank engaged in transactions in
Eurodollar deposits in the international Eurocurrency market; shall not control,
be controlled by, or be under common control with the calculation agent; and
shall have an established place of business in London. If reference bank should
be unwilling or unable to act as such or if appointment of a reference bank is
terminated, another leading bank meeting the criteria specified above will be
appointed.
BBA Method
If using this method of determining LIBOR, the calculation agent will
determine LIBOR on the basis of the British Bankers' Association 'Interest
Settlement Rate' for one-month deposits in United States dollars as found on
Telerate page 3750 as of 11:00 a.m. London time on each LIBOR determination
date. Interest Settlement Rates currently are based on rates quoted by eight
British Bankers' Association designated banks as being, in the view of the
banks, the offered rate at which deposits are being quoted to prime banks in the
London interbank market. The Interest Settlement Rates are calculated by
eliminating the two highest rates and the two lowest rates, averaging the four
remaining rates, carrying the result (expressed as a percentage) out to six
decimal places, and rounding to five decimal places.
If on any LIBOR determination date, the calculation agent is unable to
calculate LIBOR in accordance with the method set forth in the immediately
preceding paragraph, LIBOR for the next interest accrual period shall be
calculated in accordance with the LIBOR method described under 'LIBO Method.'
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.
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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: savings deposits, time
deposits, FHLBSF advances, repurchase agreements and 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 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 before 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.
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 the index on an exact date. So long as the 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 for which
the applicable interest rate is determined by reference to an index denominated
as COFI for the interest accrual period commencing in the second following month
will be based on the Eleventh District Cost of Funds Index for the second
preceding month. If publication is delayed beyond the tenth day, the interest
rate will be based on the Eleventh District Cost of Funds Index for the third
preceding month.
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The applicable prospectus supplement may specify some other basis for
determining COFI, but if it does not, then 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
before the third preceding month, the index for the 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 the tenth
day of an interest accrual period). Information on the 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 the 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 before the fourth preceding
month, the applicable index for the interest accrual period and each succeeding
interest accrual period will be based on LIBOR, as determined by the calculation
agent in accordance with the pooling and servicing agreement relating to the
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 could increase its volatility, particularly if LIBOR is the alternative
index.
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
The applicable prospectus supplement may specify some other basis for
determining and defining the Treasury index, but if it does not, on the Treasury
index determination date for each class of certificates of a series for 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. The Treasury index for any
period means the average of the yield for each business day during the specified
period (and for any date means the yield for the date), expressed as a per annum
percentage rate, on U.S. Treasury securities adjusted to the 'constant maturity'
specified in the prospectus supplement or if no 'constant maturity' is so
specified, U.S. Treasury securities trading on the secondary market having the
maturity specified in the 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 a week, then it will use the Statistical Release from
the 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. If the Treasury index is no longer published, a new
index based upon comparable data and methodology will be designated in
accordance with the pooling and servicing 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
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classes for the related interest accrual period shall (in the absence of
manifest error) be final and binding.
Prime Rate
The applicable prospectus supplement may specify some other basis for
determining and defining the prime rate, but if it does not, on the prime rate
determination date for each class of certificates of a series for 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. 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 on the related prime rate determination date, 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. If a prime rate range
is given, then the average of the range will be used. If the prime rate is no
longer published, a new index based upon comparable data and methodology will be
designated in accordance with the pooling and servicing 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.
BOOK-ENTRY CERTIFICATES
If so specified in the related prospectus supplement, one or more classes
of the certificates of any series may be initially issued through the book-entry
facilities of The Depository Trust Company. 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 of each class and which will be
held by a nominee of the depository. The applicable prospectus supplement may
specify other procedures for book-entry certificates, but if it does not, 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 in this prospectus. 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 beneficial interest in a book-
entry certificate will be entitled to receive a physical certificate
representing the 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 that maintains the beneficial owner's account for that
purpose. In turn, the financial intermediary's ownership of a 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 the 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 the payments to the accounts of the
applicable depository participants in accordance with the
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depository's normal procedures. Each depository participant will be responsible
for disbursing the 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 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
the book-entry certificates, may be limited due to the lack of physical
certificates for the book-entry certificates. In addition, issuance of the
book-entry certificates in book-entry form may reduce the liquidity of the
certificates in the secondary market since some potential investors may be
unwilling to purchase certificates for which they cannot obtain physical
certificates.
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 pooling and servicing
agreement relating to the 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 and affecting the depository, and to the financial
intermediaries to whose depository accounts the book-entry certificates of the
beneficial owners are credited.
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 pooling and servicing agreement only at the
direction of one or more financial intermediaries to whose depository accounts
the book-entry certificates are credited to the extent that the actions are
taken on behalf of financial intermediaries whose holdings include the
book-entry certificates.
The applicable prospectus supplement may when and for what reasons
definitive certificates may be issued, but if it does not, definitive
certificates will be issued to beneficial owners of book-entry certificates, or
their nominees, rather than to the depository, only if 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; the depositor, at its
sole option, elects to terminate the book-entry system through the depository;
or 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 to it) is no longer in the best interests
of the beneficial owners.
Upon the occurrence of any of the events described in the preceding
paragraph, the trustee will be required to notify all beneficial owners of the
occurrence of the 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 the definitive certificates as certificateholders
under the pooling and servicing agreement relating to the series of
certificates.
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CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided for 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 the 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 them. Credit enhancement may not provide
protection against all risks of loss or guarantee repayment of the entire
principal balance of the certificates and interest on them. 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 will be subordinate to the
rights of holders of one or more other classes of senior certificates of the
series to distributions of scheduled principal, principal prepayments, interest
or any combination of them 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 the related prospectus supplement. The aggregate
distributions of delinquent payments on the Mortgage Assets over the lives of
the certificates or at any time, the aggregate losses on Mortgage Assets which
must be borne by the subordinated certificates by virtue of subordination and
the amount of the distributions otherwise distributable to the subordinated
certificateholders that will be distributable to senior certificateholders on
any distribution date may be limited as specified in the related prospectus
supplement. If aggregate distributions of delinquent payments on the Mortgage
Assets or aggregate losses on the 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 the classes in
the order of their scheduled final distribution dates, in accordance with a
schedule or formula, in relation to the occurrence of events, or 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.
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MORTGAGE POOL INSURANCE POLICIES
If specified in the related prospectus supplement relating to a mortgage
pool, a separate mortgage pool insurance policy will be obtained for the
mortgage pool and issued by the insurer named in the prospectus supplement. Each
mortgage pool insurance policy will, subject to policy limitations, cover loss
from default in payment on mortgage loans in the mortgage pool in an amount
equal to a percentage specified in the prospectus supplement of the aggregate
principal balance of the mortgage loans on the cut-off date that 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
under the insurance 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 under them may be made only for
particular defaulted mortgage loans and only upon satisfaction of conditions
precedent in the policy. The applicable prospectus supplement may specify that
mortgage pool insurance will cover the failure to pay or the denial of a claim
under a primary mortgage insurance policy, but if it does not, 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.
In general, each mortgage pool insurance policy will provide that no claims
may be validly presented unless
any required primary mortgage insurance policy is in effect for the
defaulted mortgage loan and a claim under it has been submitted and
settled;
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;
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
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 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 the purchase and certain expenses incurred by the
master servicer on behalf of the trustee and certificateholders or 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 a special hazard insurance policy or policies
maintained for a series 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 the restoration will
increase the proceeds to certificateholders on liquidation of the mortgage loan
after reimbursement of the master servicer for its expenses and the 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.
The applicable prospectus supplement may specify that mortgage pool
insurance will cover various origination and servicing defaults, but if it does
not, then no mortgage pool insurance policy will insure (and many primary
mortgage insurance policies do not insure) against loss
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sustained from a default arising from, among other things, fraud or negligence
in the origination or servicing of a mortgage loan, including misrepresentation
by the mortgagor, the originator or persons involved in its origination, or
failure to construct a mortgaged property in accordance with plans and
specifications. A failure of coverage for one of these reasons might result in a
breach of the related seller's representations and, in that case, might result
in an obligation on the part of the seller to repurchase the defaulted mortgage
loan if the breach cannot be cured by the seller. No mortgage pool insurance
policy will cover (and many primary mortgage insurance policies do not cover) a
claim with respect to a defaulted mortgage loan occurring when the servicer of
the mortgage loan, at the time of default or thereafter, was not approved by the
applicable insurer.
The original amount of coverage under each mortgage pool insurance policy
will be maintained to the extent provided in the related prospectus supplement
and may 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 applicable
prospectus supplement may provide that the claims paid will be net of master
servicer expenses and accrued interest, but if it does not, then 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. 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 named in the prospectus supplement. Each special hazard
insurance policy will, subject to policy limitations, protect holders of the
related certificates from loss caused by the application of the coinsurance
clause contained in hazard insurance policies and loss from damage to mortgaged
properties caused by certain hazards not insured against under the standard form
of hazard insurance policy in the states where the mortgaged properties are
located or under a flood insurance policy if the mortgaged property is located
in a federally designated flood area. Some of the losses covered include
earthquakes and, to a limited extent, tidal waves and related water damage or as
otherwise specified in the related prospectus supplement. See 'The Pooling and
Servicing Agreement -- Hazard Insurance.' No special hazard insurance policy
will cover losses from 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.
The applicable prospectus supplement may provide for other payment
coverage, but if it does not, then, subject to these limitations, 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 the 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 the
cost of repair or replacement of the property or, upon transfer of the property
to the special hazard insurer, the unpaid principal
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balance of the mortgage loan at the time of acquisition of the 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 the 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 that amount less any net proceeds from the sale of the
property. Any amount paid to repair the property will further reduce coverage by
that 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 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 at the request of the depositor 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 relating to the certificates may be
reduced so long as the reduction will not result in a downgrading of the rating
of the certificates by a rating agency rating certificates at the request of the
depositor.
BANKRUPTCY BONDS
If specified in the related prospectus supplement, a 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 the 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 the court of the principal amount of a mortgage loan and
will cover certain unpaid interest on the amount of 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 the 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.'
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 at the request of the depositor 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 relating to the certificates may be reduced so long as the reduction
will not result in a downgrading of the rating of the certificates by a rating
agency rating certificates at the request of the depositor.
RESERVE FUND
If so specified in the related prospectus supplement, credit support with
respect to a series of certificates may be provided by one or more reserve funds
held by the trustee, in trust, for the series of certificates. The related
prospectus supplement will specify whether or not a reserve fund will be
included in the trust fund for a series.
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The reserve fund for a series will be funded by a deposit of cash, U.S.
Treasury securities or instruments evidencing ownership of principal or interest
payments on U.S. Treasury securities, letters of credit, demand notes,
certificates of deposit, or a combination of them in an aggregate amount
specified in the related prospectus supplement; by the deposit from time to time
of amounts specified in the related prospectus supplement to which the
subordinated certificateholders, if any, would otherwise be entitled; or in any
other manner specified in the related prospectus supplement.
Any amounts on deposit in the reserve fund and the proceeds of any other
instrument deposited in it upon maturity will be held in cash or will be
invested in permitted investments. The applicable prospectus supplement may
specify a different definition of permitted investments, but if it does not,
then permitted investments will include obligations of the United States and
specified agencies of the United States, certificates of deposit, specified
commercial paper, time deposits and bankers acceptances sold by eligible
commercial banks, and specified repurchase agreements for United States
government securities with eligible commercial banks. If a letter of credit is
deposited with the trustee, the letter of credit will be irrevocable. Generally,
any deposited instrument 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 at the request of
the depositor. Additional information about the 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.
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 that case, credit
support may be provided by a cross support feature that requires that
distributions be made on 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 the 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 the credit support relates and the manner of
determining the amount of the coverage provided by it and of the application of
the coverage to the identified trust funds.
INSURANCE POLICIES, SURETY BONDS AND GUARANTIES
If so provided in the prospectus supplement for a series of certificates,
deficiencies in amounts otherwise payable on the certificates or certain of
their classes will be covered by insurance policies or surety bonds provided by
one or more insurance companies or sureties. These instruments may cover timely
distributions of interest or full distributions of principal or both on the
basis of a schedule of principal distributions set forth in or determined in the
manner specified in the related prospectus supplement. In addition, if specified
in the related prospectus supplement, a trust fund may also include bankruptcy
bonds, special hazard insurance policies, other insurance or guaranties for the
purpose of maintaining timely payments or providing additional protection
against losses on the assets included in the trust fund, paying
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administrative expenses, or establishing a minimum reinvestment rate on the
payments made on the assets or principal payment rate on the assets. These
arrangements may include agreements under which certificateholders are entitled
to receive amounts deposited in various accounts held by the trustee on the
terms specified in the prospectus supplement.
OVER-COLLATERALIZATION
If so provided in the prospectus supplement for a series of certificates, a
portion of the interest payment on each Loan may be applied as an additional
distribution of principal to reduce the principal balance of a particular class
or classes of certificates and, thus, accelerate the rate of payment of
principal on the class or classes of certificates. Reducing the principal
balance of the certificates without a corresponding reduction in the principal
balance of the underlying Mortgage Assets will result in over-collateralization.
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 of the Mortgage
Assets in a given mortgage pool will vary depending upon the type of mortgage
loans included in it, and each prospectus supplement will contain information
about the type and maturities of the mortgage loans. The applicable prospectus
supplement may indicate that some mortgage loans provide for prepayment
penalties, but if it does not, then the mortgage loans may be prepaid without
penalty in full or in part at any time. The prepayment experience on the
underlying mortgage loans of the Mortgage Assets will affect the life of the
related series of certificates.
A number of factors may affect the prepayment experience of mortgage loans,
including homeowner mobility, economic conditions, the presence and
enforceability of due-on-sale clauses, mortgage market interest rates and the
availability of mortgage funds.
The applicable prospectus supplement may indicate that some conventional
mortgage loans do not have due-on-sale provisions, but if it does not, then all
conventional mortgage loans will contain due-on-sale provisions permitting the
mortgagee to accelerate the maturity of the loan upon sale or specified
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 those mortgage loans may be lower than that on conventional
mortgage loans bearing comparable interest rates. 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. However, 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' for a description of certain provisions of each pooling and servicing
agreement and certain legal developments that may affect the prepayment
experience on the mortgage loans.
The rate of prepayments of 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 those mortgage rates. Conversely, if
prevailing
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interest rates rise appreciably above the mortgage rates borne by the mortgage
loans, the mortgage loans are likely to experience a lower prepayment rate than
if prevailing rates remain at or below those mortgage rates. However, there can
be no assurance that this 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 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. Thus, in most instances, the effect of prepayments
in full will be to reduce the amount of interest passed through in the following
month to certificateholders. Partial prepayments in a given month may be applied
to the outstanding principal balances of the mortgage loans so prepaid in 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 the month.
Interest payable on the certificates on any given distribution date will
include all interest accrued during their related interest accrual period. The
interest accrual period for the certificates of each series will be specified in
the applicable prospectus supplement. If the interest accrual period ends two or
more days before the related distribution date, your effective yield will be
less than it would be if the interest accrual period ended the day before the
distribution date, and your effective yield at par would be less than the
indicated coupon rate.
Under specified 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.'
Factors other than those identified in this prospectus 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 the certificates.
THE POOLING AND SERVICING AGREEMENT
The following is a summary of the material provisions of the pooling and
servicing agreement which are not described elsewhere in this prospectus. Where
particular provisions or terms used in the pooling and servicing agreement are
referred to, the provisions or terms are as specified in the related pooling and
servicing 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 the 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 the 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 pooling and servicing agreement. The
schedule will include information as to the outstanding principal balance of
each mortgage loan after
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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 other specified information.
In addition, the depositor will deliver or cause to be delivered to the
trustee (or to the custodian) for each mortgage loan
the mortgage note endorsed without recourse in blank or to the order of
the trustee, except that the depositor may deliver or cause to be
delivered a lost note affidavit in lieu of any original mortgage note that
has been lost,
the mortgage, deed of trust or similar instrument with evidence of
recording indicated on it (except for any mortgage not returned from the
public recording office, in which case the depositor will deliver or cause
to be delivered a copy of the mortgage together with a certificate that
the original of the mortgage was delivered to the recording office or some
other arrangement will be provided for),
an assignment of the mortgage to the trustee in recordable form and
any other security documents specified in the related prospectus
supplement or the related pooling and servicing agreement.
The applicable prospectus supplement may provide other arrangements for assuring
the priority of the assignments, but if it does not, then 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 recording is not required to protect the trustee's
interest in the loans against the claim of any subsequent transferee or any
successor to or creditor of the depositor or the originator of the 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 (or, to the extent the related pooling and
servicing agreement so provides, a lost note affidavit),
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) will review the mortgage loan documents
within the time period specified in the related prospectus supplement after
receipt of them, and the trustee will hold the documents in trust for the
benefit of the certificateholders. Generally, if the document is found to be
missing or defective in any material respect, the trustee (or the 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 the 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
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prospectus supplement, replace the mortgage loan with another mortgage loan that
meets specified requirements. There can be no assurance that a seller will
fulfill this purchase obligation. Although the master servicer may be obligated
to enforce the obligation to the extent described under 'Mortgage Loan
Program -- Representations by Sellers; Repurchases,' neither the master servicer
nor the depositor will be obligated to purchase the mortgage loan if the seller
defaults on its purchase obligation, unless the breach also constitutes a breach
of the representations or warranties of the master servicer or the depositor.
The applicable prospectus supplement may provide other remedies but if it does
not, then 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.
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 these provisions, unless the related prospectus supplement
otherwise provides, no mortgage loan will be purchased from a trust fund for
which a REMIC election is to be made if the 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 pooling and servicing 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 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. Generally, 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.' Each Private Mortgage-Backed Security will be identified in a
schedule appearing as an exhibit to the related pooling and servicing 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 other specified 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 for 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'). The applicable prospectus supplement may provide for
other requirements for the Certificate Account, but if it does not, then the
Certificate Account must be either
maintained with a depository institution the short-term unsecured debt
obligations of which are rated in the highest short-term rating category
by the nationally recognized statistical rating organizations that rated
one or more classes of the related series of certificates at the request
of the depositor, or in the case of a depository institution that is the
principal subsidiary of a holding company, the short-term debt obligations
of the holding company are so rated,
an account or accounts the deposits in which are insured by the FDIC or
SAIF to the limits established by the FDIC or the SAIF, and the uninsured
deposits in which are
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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 the 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,
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
an account or accounts otherwise acceptable to each rating agency that
rated one or more classes of the related series of certificates at the
request of the depositor.
The collateral eligible to secure amounts in the Certificate Account is limited
to defined permitted investments. A Certificate Account may be maintained as an
interest bearing account or the funds held in it may be invested pending each
succeeding distribution date in defined permitted investments. To the extent
provided in the related prospectus supplement, the master servicer or its
designee will be entitled to receive the 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 the related pooling and servicing agreement provides for a
different deposit arrangement, the following payments and collections received
or advances made by or on behalf of it after the cut-off date (other than
payments due on or before the cut-off date and exclusive of any amounts
representing any retained interest specified in the related prospectus
supplement):
all payments on account of principal, including principal prepayments and,
if specified in the related prospectus supplement, prepayment penalties,
on the mortgage loans;
all payments on account of interest on the mortgage loans, net of
applicable servicing compensation;
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) of the hazard insurance policies
and any primary mortgage insurance policies, to the extent the 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 and all other cash amounts (net of unreimbursed expenses
incurred in connection with liquidation or foreclosure and unreimbursed
advances, if any) received and retained in connection with the liquidation
of defaulted mortgage loans, by foreclosure or otherwise, 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;
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';
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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';
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
all other amounts required to be deposited in the Certificate Account
pursuant to the pooling and servicing 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:
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;
to reimburse the master servicer for advances, the right of reimbursement
with respect to any mortgage loan being limited to amounts received that
represent late recoveries of payments of principal and interest on the
mortgage loan (or insurance proceeds or liquidation proceeds from the
mortgage loan) with respect to which the advance was made;
to reimburse the master servicer for any advances previously made that the
master servicer has determined to be nonrecoverable;
to reimburse the master servicer from insurance proceeds not used to
restore the property for expenses incurred by the master servicer and
covered by the related insurance policies;
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, the right of
reimbursement being limited to amounts received representing late
recoveries of the payments for which the advances were made;
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 pooling and servicing agreement, all amounts
received on them and not taken into account in determining the principal
balance of the repurchased mortgage loan;
to reimburse the master servicer or the depositor for expenses incurred
and reimbursable pursuant to the pooling and servicing agreement;
to withdraw any amount deposited in the Certificate Account that was not
required to be deposited in it; and
to clear and terminate the Certificate Account upon termination of the
pooling and servicing agreement.
In addition, the pooling and servicing agreement will generally provide
that on or before the business day 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.
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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 pooling and servicing agreement and any
mortgage pool insurance policy, primary mortgage insurance policy, FHA
insurance, VA guaranty and bankruptcy bond or alternative arrangements, follow
the collection procedures it customarily follows for mortgage loans that are
comparable to the mortgage loans. Consistent with the above, the master servicer
may, in its discretion, waive any assumption fee, late payment or other charge
in connection with a mortgage loan and 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 not inconsistent with the
coverage of the mortgage loan by a mortgage pool insurance policy, primary
mortgage insurance policy, FHA insurance, VA guaranty or bankruptcy bond or
alternative arrangements, if applicable. To the extent the master servicer is
obligated to make or to cause to be made advances, the obligation will remain
during any period of such an arrangement.
The applicable prospectus supplement may provide for other alternatives
regarding due-on-sale clauses, but if it does not, then 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 the conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of the mortgage loan under any
due-on-sale clause applicable to it, but only if permitted by applicable law and
the exercise 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 the due-on-sale clause or if the 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
the property has been or is about to be conveyed, pursuant to which that person
becomes liable for repayment of the mortgage loan and, to the extent permitted
by applicable law, the mortgagor also remains liable on it. 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.' The terms of the related mortgage loan may not be changed in
connection with an assumption.
Any prospective purchaser of a cooperative apartment 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.' 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 the 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 shares securing a
cooperative loan.
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 the items are allowable as a deduction
to the corporation, the 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
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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
Section 216(b)(1) for any particular year. If a cooperative fails to qualify for
one or more years, the value of the collateral securing any related cooperative
loans could be significantly impaired because no deduction would be allowable to
tenant-stockholders under Code Section 216(a) with respect to those years. In
view of the significance of the tax benefits accorded tenant-stockholders of a
corporation that qualifies under Code Section 216(b)(1), the likelihood that a
failure to qualify 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 the mortgaged property is
located. The coverage will be in an amount that is at least equal to the lesser
of
the maximum insurable value of the improvements securing the mortgage loan
or
the greater of
the outstanding principal balance of the mortgage loan and
an amount such that the proceeds of the policy shall be sufficient to
prevent the mortgagor 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. If
the master servicer maintains a blanket policy insuring against hazard losses on
all the mortgage loans comprising part of a trust fund, it will have satisfied
its obligation relating to the maintenance of hazard insurance. The 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 the 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, their
basic terms are dictated by the respective state laws, and most policies
typically do not cover any physical damage resulting from 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. This list is merely indicative of certain kinds of uninsured risks
and is not 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 that in effect requires the insured at all
times to carry insurance of a specified
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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 upon partial loss will not exceed the larger of 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 and the
proportion of the loss that the amount of insurance carried bears to the
specified percentage of the full replacement cost of the 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 on them decrease, and since improved real estate generally has appreciated
in value over time in the past, the effect of this requirement upon partial loss
may be that hazard insurance proceeds will be insufficient to fully restore 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' 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 insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to the borrower's cooperative dwelling or the
cooperative's building could significantly reduce the value of the collateral
securing the cooperative loan.
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 effect, to the extent specified
in the related prospectus supplement, a primary mortgage insurance policy with
regard to each mortgage loan for which coverage is required. The master servicer
will not cancel or refuse to renew any 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 pooling and servicing
agreement unless the replacement primary mortgage insurance policy for the
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 the series that have been rated.
Although the terms 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 on it and
reimbursement of certain expenses, less 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, 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, amounts
expended but not approved by the issuer of the related primary mortgage
insurance policy, claim payments previously made by the primary insurer and
unpaid premiums.
Primary mortgage insurance policies reimburse certain losses sustained from
defaults in payments by borrowers. Primary mortgage insurance policies will not
insure against, and exclude from coverage, a loss sustained from a default
arising from or involving certain matters,
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including 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; failure to construct the
mortgaged property subject to the mortgage loan in accordance with specified
plans; physical damage to the mortgaged property; and 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
advance or discharge
all hazard insurance policy premiums and
as necessary and approved in advance by the primary insurer, real
estate property taxes, all expenses required to maintain the related
mortgaged property in at least as good a condition as existed at the
effective date of the primary mortgage insurance policy, ordinary wear
and tear excepted, mortgaged property sales expenses, any specified
outstanding liens on the mortgaged property and foreclosure costs,
including court costs and reasonable attorneys' fees;
upon 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 the primary mortgage insurance policy,
ordinary wear and tear excepted; and
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 any reasonable steps consistent with
its practices regarding comparable mortgage loans and necessary to receive
payment or to permit recovery under the policy 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 that the restoration will increase the
proceeds to certificateholders on liquidation of the mortgage loan after
reimbursement of the master servicer for its expenses and that the expenses will
be recoverable by it from related insurance proceeds or liquidation proceeds.
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 the normal practices and procedures that it deems
appropriate 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 the mortgage loan plus interest accrued on it
that is payable to certificateholders, the trust fund will realize a loss in the
amount of the difference plus the aggregate of expenses incurred by the master
servicer in connection with the proceedings that are reimbursable under the
pooling
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and servicing agreement. In the unlikely event that the proceedings result in a
total recovery which is, after reimbursement to the master servicer of its
expenses, in excess of the principal balance of the mortgage loan plus interest
accrued on it 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 the mortgage loan and, unless
otherwise specified in the related prospectus supplement, amounts representing
the balance of the 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 not used
to restore the property 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 the mortgage loan. If the master servicer
has expended its own funds to restore the damaged mortgaged property and the
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 the 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 insurance 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 on it. See
'Credit Enhancement' in this prospectus and in the related prospectus
supplement.
Unless the related pooling and servicing agreement provides for a different
application of liquidation proceeds, 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 the mortgage loan;
second, to reimburse the master servicer for any unreimbursed advances
with respect to the mortgage loan;
third, to accrued and unpaid interest (to the extent no advance has
been made for the amount) on the mortgage loan;
and fourth, as a recovery of principal of the 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 National Housing Act of 1934 of 1937, as
amended. Those 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 the loan.
The insurance premiums for mortgage loans insured by the FHA are collected
by lenders approved by the 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
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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.
These plans may involve the reduction or suspension of regular mortgage payments
for a specified period, with the 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 circumstances beyond the mortgagor's control 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 the debenture issued in
satisfaction of the mortgage loan upon default for an amount equal to the
principal amount of the 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 accrued and unpaid interest 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. 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 the mortgage loan.
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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 3703(a), as amended. As of
February 1996, 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 $50,750. 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 the amounts have not been recovered through
liquidation of 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 the compensation will be retained
by it from collections of interest on the mortgage loan in the related trust
fund. 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, generally 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.
The master servicer will, to the extent provided in the related pooling and
servicing agreement, 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 pooling and servicing agreement, including, without
limitation, 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
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properties, the right of reimbursement being before the rights of
certificateholders to receive any related liquidation proceeds (including
insurance proceeds).
EVIDENCE AS TO COMPLIANCE
Each pooling and servicing 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 the firm conducted substantially in compliance with the Uniform
Single Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for Freddie Mac, the servicing by or on behalf of the master
servicer of mortgage loans, Private Mortgage-Backed Securities or Agency
Securities, under pooling and servicing agreements substantially similar to each
other (including the related pooling and servicing agreement) was conducted in
compliance with those agreements except for any significant exceptions or errors
in records that, in the opinion of the firm, the Audit Program for Mortgages
serviced for Freddie Mac or the Uniform Single Attestation Program for Mortgage
Bankers requires it to report. In rendering its statement the 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 Attestation Program for Mortgage Bankers or the Audit
Program for Mortgages serviced for Freddie Mac (rendered within one year of the
statement) of firms of independent public accountants with respect to the
related sub-servicer.
Each pooling and servicing 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 pooling and servicing 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 pooling and servicing 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 of communicating with other certificateholders with respect to
their rights under the pooling and servicing agreement and the certificates.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The master servicer under each pooling and servicing agreement will be
named in the related prospectus supplement. The entity serving as master
servicer may be an affiliate of the depositor and may have other business
relationships with the depositor or the depositor's affiliates.
Each pooling and servicing agreement will provide that the master servicer
may not resign from its obligations and duties under the pooling and servicing
agreement except upon a determination that the performance by it of its duties
under the pooling and servicing agreement is no longer permissible under
applicable law. No resignation will become effective until the trustee or a
successor servicer has assumed the master servicer's obligations and duties
under the pooling and servicing agreement.
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Each pooling and servicing 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 pooling and servicing
agreement, or for errors in judgment. However, neither the master servicer, the
depositor nor any director, officer, employee, or agent of the master servicer
or the depositor will be protected against any liability that would otherwise be
imposed for willful misfeasance, bad faith or negligence in the performance of
duties under the pooling and servicing agreement or for reckless disregard of
obligations and duties under the pooling and servicing agreement. Each pooling
and servicing agreement will further provide that the master servicer, the
depositor and any director, officer, employee or agent of the master servicer or
the depositor 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 pooling and servicing agreement
or the certificates, other than any loss, liability or expense related to any
specific Mortgage Asset or Mortgage Assets (except any loss, liability or
expense otherwise reimbursable pursuant to the pooling and servicing agreement)
and any loss, liability or expense incurred for willful misfeasance, bad faith
or negligence in the performance of duties under the pooling and servicing
agreement or for reckless disregard of obligations and duties under the pooling
and servicing agreement. In addition, each pooling and servicing 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 that is not
incidental to its respective responsibilities under the pooling and servicing
agreement and that in its opinion may involve it in any expense or liability.
The master servicer or the depositor may, however, in its discretion undertake
any action that it deems appropriate with respect to the pooling and servicing
agreement and the rights and duties of the parties to the pooling and servicing
agreement and the interests of the certificateholders under the pooling and
servicing agreement. In that event, the legal expenses and costs of the action
and any liability resulting from it 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 for them 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 pooling and
servicing agreement, provided that the person is qualified to sell mortgage
loans to, and service mortgage loans on behalf of, Fannie Mae or Freddie Mac and
further provided that the merger, consolidation or succession does not adversely
affect the then current rating or ratings of the class or classes of
certificates of any series that have been rated.
EVENTS OF DEFAULT
The applicable prospectus supplement may provide for other events of
default, but if it does not, then events of default under each pooling and
servicing agreement will consist of
any failure by the master servicer to deposit in the Certificate Account
or remit to the trustee any payment which continues unremedied for five
days after the giving of written notice of the failure to the master
servicer by the trustee or the depositor, or to the master servicer and
the trustee by the holders of certificates having not less than 25% of the
voting rights evidenced by the certificates;
any failure by the master servicer to observe or perform in any material
respect any of its other covenants or agreements in the pooling and
servicing agreement which failure materially affects the rights of
certificateholders that continues unremedied for sixty days
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after the giving of written notice of the failure to the master servicer
by the trustee or the depositor, or to the master servicer and the trustee
by the holders of certificates of any class evidencing not less than 25%
of the voting rights evidenced by the certificate; and
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.
'Voting rights' are the portion of voting rights of all of the certificates that
is allocated to any certificate pursuant to the terms of the pooling and
servicing agreement.
If specified in the related prospectus supplement, the pooling and
servicing agreement will permit the trustee to sell the Mortgage Assets and the
other assets of the trust fund if payments on them are insufficient to make
payments required in the pooling and servicing 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 pooling and servicing agreement
remains unremedied, the depositor or the trustee may, and at the direction of
holders of certificates having not less than 66 2/3% of the voting rights and
under any other circumstances specified in the pooling and servicing agreement,
the trustee shall, terminate all of the rights and obligations of the master
servicer under the pooling and servicing agreement relating to the trust fund
and in the Mortgage Assets, whereupon the trustee will succeed to all of the
responsibilities, duties and liabilities of the master servicer under the
pooling and servicing agreement, including, if specified in the related
prospectus supplement, the obligation to make advances, and will be entitled to
similar compensation arrangements. If 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 pooling
and servicing agreement. Pending appointment, the trustee is obligated to act as
master servicer. The trustee and any successor may agree upon the servicing
compensation to be paid to the successor servicer, which may not be greater than
the compensation payable to the master servicer under the pooling and servicing
agreement.
No certificateholder, solely by virtue of its status as a
certificateholder, will have any right under any pooling and servicing agreement
to institute any proceeding with respect to the pooling and servicing agreement,
unless the holder previously has given to the trustee written notice of default
and unless the holders of any class of certificates of the series evidencing not
less than 25% of the voting rights have requested the trustee in writing to
institute a proceeding in its own name as trustee and have offered to the
trustee reasonable indemnity, and the trustee for 60 days has neglected or
refused to institute the proceeding.
AMENDMENT
The applicable prospectus supplement may specify other amendment
provisions, but if it does not, then each pooling and servicing agreement may be
amended by the depositor, the master servicer and the trustee, without the
consent of any of the certificateholders,
(a) to cure any ambiguity or mistake;
(b) to correct any defective provision therein or to supplement any
provision in the pooling and servicing agreement that may be inconsistent
with any other provision in it;
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(c) to add to the duties of the depositor, the seller or the master
servicer;
(d) to add any other provisions with respect to matters or questions
arising under the pooling and servicing agreement; or
(e) to modify, alter, amend, add to or rescind any of the terms or
provisions contained in the pooling and servicing agreement.
However, no action pursuant to clauses (d) or (e) may, as evidenced by an
opinion of counsel, adversely affect in any material respect the interests of
any certificateholder. But no opinion of counsel will be required if the person
requesting the amendment obtains a letter from each rating agency requested to
rate the class or classes of certificates of the series stating that the
amendment will not result in the downgrading or withdrawal of the respective
ratings then assigned to the certificates.
In addition, to the extent provided in the related pooling and servicing
agreement, an pooling and servicing agreement may be amended without the consent
of any of the certificateholders to change the manner in which the Certificate
Account is maintained, if the change does not adversely affect the then current
rating of the class or classes of certificates of the series that have been
rated at the request of the depositor. Moreover, the related pooling and
servicing agreement may be amended to modify, eliminate or add to any of its
provisions to the extent necessary to maintain the qualification of the related
trust fund as a REMIC or to avoid or minimize the risk of imposition of any tax
on the REMIC, if a REMIC election is made with respect to the trust fund, or to
comply with any other requirements of the Code, if the trustee has received an
opinion of counsel to the effect that the action is necessary or helpful to
maintain the qualification, avoid or minimize that risk or comply with those
requirements, as applicable.
The applicable prospectus supplement may specify other amendment
provisions, but if it does not, then each pooling and servicing agreement may
also be amended by the depositor, the master servicer and the trustee with the
consent of holders of certificates of the series evidencing a majority in
interest 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 pooling
and servicing agreement or of modifying in any manner the rights of the holders
of the related certificates. However, no amendment may
(a) reduce in any manner the amount of, or delay the timing of,
payments received on Mortgage Assets that are required to be distributed on
any certificate without the consent of the holder of the certificate,
(b) adversely affect in any material respect the interests of the
holders of any class of certificates in a manner other than as described in
(a), without the consent of the holders of certificates of the class
evidencing, as to the class, percentage interests aggregating 66%, or
(c) reduce the aforesaid percentage of certificates of any class of
holders that is required to consent to the amendment without the consent of
the holders of all certificates of the class covered by the pooling and
servicing 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 pooling and servicing
agreement without having first received an opinion of counsel to the effect that
the amendment will not cause the trust fund to fail to qualify as a REMIC.
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TERMINATION; OPTIONAL TERMINATION
Generally, the obligations created by each pooling and servicing 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 the pooling and
servicing agreement following the later of
the final payment or other liquidation of the last of the Mortgage Assets
subject to it or the disposition of all property acquired upon foreclosure
of the Mortgage Assets remaining in the trust fund and
the purchase by the master serviceer 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 'Material Federal Income
Tax Consequences' in this prospectus 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 the Mortgage Assets.
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 the party specified in the related prospectus
supplement, including 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 that right will effect early retirement of the
certificates of that series, but the right of the master servicer or the other
party or, if applicable, the 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 the second
bulleted item above will be made only in connection with a 'qualified
liquidation' of the REMIC within the meaning of Section 860F(a)(4) of the Code.
THE TRUSTEE
The trustee under each pooling and servicing 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.
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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 the 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.
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 before 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 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 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 or underlying land or both, 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 the 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.
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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 the 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 AND 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,
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 lien holders. If the deed of trust is not reinstated within
any applicable cure period, a notice of sale 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
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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 repairs at its own expense 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 the tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by the
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate the lease or agreement if an obligor fails
to make payments or defaults in the performance of covenants required under it.
Typically, the lender and the cooperative enter into a recognition agreement,
which establishes the rights and obligations of both parties upon a default by
the tenant-stockholder on its obligations under the proprietary lease or
occupancy agreement. A default by the tenant-stockholder under the proprietary
lease or occupancy agreement will usually constitute a default under the
security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, if the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate the 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
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to sums due under the proprietary lease or occupancy agreement. The total amount
owed to the cooperative by the tenant-stockholder, which the lender generally
cannot restrict and does not monitor, could reduce the value of the collateral
below the outstanding principal balance of the cooperative loan and accrued and
unpaid interest on it.
Recognition agreements also provide that upon foreclosure of 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 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.'
In the case of foreclosure on a building 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 that 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 a sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, 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 after 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,
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statutes limit the right of the beneficiary or mortgagee to obtain a deficiency
judgment against the borrower following foreclosure or a 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 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 that security.
However, in some of these states, following judgment on a personal action, the
lender may be considered to have elected a remedy and may be precluded from
exercising other 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, upon 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 on 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. And in certain
instances a bankruptcy court may allow a borrower to reduce the monthly
payments, change the rate of interest, and alter the mortgage loan repayment
schedule for under collateralized mortgage loans. The effect of these types of
proceedings can be to cause delays in receiving payments on the loans underlying
certificates and even to reduce the aggregate amount of payments on the loans
underlying certificates.
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 on 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
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the property to assure the payment of the costs of clean-up. In several states
that lien has priority over the lien of an existing mortgage on the property. In
addition, under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ('CERCLA'), the 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
secured lender may be held liable as an 'owner' or 'operator' for the costs of
addressing releases or threatened releases of hazardous substances at a
mortgaged property, even though the environmental damage or threat was caused by
a prior or current owner or operator. CERCLA imposes liability for the costs on
any and all 'responsible parties,' including owners or operators. However,
CERCLA excludes from the definition of 'owner or operator' a secured creditor
who holds indicia of ownership primarily to protect its security interest but
does not 'participate in the management' of the property. Thus, if a lender's
activities begin to encroach on the actual management of a contaminated facility
or property, the lender may incur liability as an 'owner or operator' under
CERCLA. Similarly, if a lender forecloses and takes title to a contaminated
facility or property, the lender may incur CERCLA liability in various
circumstances, including when it holds the facility or property as an investment
(including leasing the facility or property to a third party), or fails to
market the property in a timely fashion.
Whether actions taken by a lender would constitute participation in the
management of a property causing the lender to lose the protection of the
secured creditor exclusion has been a matter of judicial interpretation of the
statutory language, and court decisions have historically been inconsistent. In
United States v. Fleet Factors Corp. (1990), the United States Court of Appeals
for the Eleventh Circuit suggested that the mere capacity of the lender to
influence a borrower's decisions regarding disposal of hazardous substances was
sufficient participation in the management of the borrower's business to deny
the protection of the secured creditor exclusion to the lender, regardless of
whether the lender actually exercised influence. Other judicial decisions did
not interpret the secured creditor exclusion as narrowly as did the Eleventh
Circuit.
This ambiguity appears to have been resolved by the enactment of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996 (the
'Asset Conservation Act'), which took effect on September 30, 1996. The Asset
Conservation Act provides that to be deemed to have participated in the
management of a secured property, a lender must actually participate in the
operational affairs of the property or of the borrower. The Asset Conservation
Act also provides that participation in the management of the property does not
include 'merely having the capacity to influence, or unexercised right to
control' operations. Rather, a lender will lose the protection of the secured
creditor exclusion only if it exercises decision-making control over the
borrower's environmental compliance and hazardous substance handling and
disposal practices, or assumes day-to-day management of all operational
functions of the secured property.
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
cleanup may be substantial. It is conceivable that the costs arising from the
circumstances set forth above would result in a loss to certificateholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ('RCRA' ), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender
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liability rule for underground storage tanks under Subtitle I of RCRA. Under
that rule, a holder of a security interest in an underground storage tank or
real property containing an underground storage tank is not considered an
operator of the underground storage tank as long as petroleum is not added to,
stored in or dispensed from the tank. Moreover, under the Asset Conservation
Act, the protections accorded to lenders under CERCLA are also accorded to
holders of security interests in underground petroleum storage tanks. It should
be noted, however, that liability for cleanup of petroleum contamination may be
governed by state law, which may not provide for any specific protection for
secured creditors.
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
Generally, 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 these 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
specified 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.
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 on many of the mortgage
loans. The absence of this 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 the 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 that expressly rejects an application of the
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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 or to limit discount points or other charges,
or both.
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 the 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 the borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that this 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 some of the mortgage loans. Unless the
applicable prospectus supplement provides a special feature for a particular
trust fund, 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, if an affected 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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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion is the opinion of Brown & Wood LLP, counsel to the
depositor, as to the material federal income tax consequences of the purchase,
ownership, and disposition of certificates. The opinion of Brown & Wood LLP is
based on laws, regulations, administrative rulings, and judicial decisions now
in effect, all of which are subject to change either prospectively or
retroactively. The following discussion does not describe aspects of federal tax
law that are unique to insurance companies, securities dealers and investors who
hold certificates as part of a straddle within the meaning of Section 1092 of
the Internal Revenue Code of 1986, as amended. Prospective investors are
encouraged to 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, the trust fund will not be classified as
an association taxable as a corporation and that each trust fund will be
classified as a grantor trust under subpart E, Part I of subchapter J of
chapter 1 of subtitle A 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. Brown & Wood LLP will
issue an opinion confirming the above-stated conclusions for each trust fund for
which no REMIC election is made.
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 its 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 the 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 expenses of the
trust fund plus their other miscellaneous itemized deductions (as defined in the
Code) exceed two percent of their adjusted gross income. A certificateholder
using the cash method of accounting must
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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 ust take into account its pro rata share of income
as it accrues, or when received if the income is received before it accrues, and
must take into account its pro rata share of deductions as they accrue. If the
servicing fees paid to the master servicer are deemed to exceed reasonable
servicing compensation, the amount of any 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.
Generally, as to each series of certificates:
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 that Code section;
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)(4)(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 that Code section; and
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. Certain trust funds may hold buydown loans. These loans can
be secured not only by a mortgage on real property but also by a pledged account
that is drawn upon to subsidize the mortgagor's monthly mortgage payments for a
limited period of time. So long as the loan value of the real property at least
equals the amount of the loan, then for purposes of the above-described
requirements, the mortgage loan will be treated as fully secured by real
property. If the loan value of the real property is less than the amount of the
loan, then, a certificateholder could be required to treat the loan as one
secured by an interest in real property only to the extent of the loan value of
the real property. The related prospectus supplement for any series of
certificates will specify whether apportionment would be required.
Premium. The price paid for a certificate by a holder will be allocated to
the holder's undivided interest in each mortgage loan based on each mortgage
loan's relative fair market value, so that the 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 the premium under a constant interest method, provided
that the underlying mortgage loans with respect to the 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 the 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 the certificate. The basis for the 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.
However, recent changes to the Code require the
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use of a prepayment assumption to accrue original issue discount on pools of
receivables the yield on which may be affected by prepayments for tax years
beginning after August 5, 1997 and prior legislative history indicated that if a
prepayment assumption applied to an instrument for purposes of the OID rules,
that prepayment assumption should be applied in amortizing bond premium.
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) prepays in full, equal
to the difference between the portion of the prepaid principal amount of the
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
the mortgage loan (or underlying mortgage loan). If a reasonable prepayment
assumption is used to amortize premium, it appears that any 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. In addition, under recent
legislation, amounts received on the redemption of an obligation issued by a
natural person are considered received in exchange for the obligation if the
debt obligation is purchased or issued after June 8, 1997 (i.e., treated the
same as obligations issued by corporations). This change could affect the
character of any loss (e.g., cause the loss to be treated as capital if the
assets are held as capital assets by the taxpayer).
On December 30, 1997 the IRS issued final regulations (the 'Amortizable
Bond Premium Regulations') dealing with amortizable bond premium. These
regulations specifically do not apply to prepayable debt instruments subject to
Code Section 1272(a)(6). Absent further guidance from the IRS, the trustee
intends to account for amortizable bond premium in the manner described above.
Prospective purchasers of the certificates are encouraged to consult their tax
advisors regarding the possible application of the Amortizable Bond Premium
Regulations.
Original Issue Discount. The IRS has stated in published rulings that, in
circumstances similar to those described in this prospectus, 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.'
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.' The amount of market
discount is equal to the excess of the portion of the principal amount of the
mortgage loan allocable to the holder's undivided interest in the mortgage loans
over the holder's tax basis in the undivided 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 are advised to 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
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accrued market discount at the time of the 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
instruments bearing market discount. According to the 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 the total
remaining market discount and 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 the total remaining market discount and 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 these methods in the case of instruments that provide for
payments that may be accelerated due to prepayments of other obligations
securing the instruments, the same prepayment assumption applicable to
calculating the accrual of OID will apply. Recent legislation expands the
required use of a prepayment assumption for purposes of calculating OID for tax
years beginning after August 5, 1997 to pools of receivables the yield on which
may be affected due to prepayments and previous legislative history states
Congress intends that if a prepayment assumption would be used to calculate OID
it should also be used to accrue marked discount. 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 the 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 certificate in
excess of the aggregate amount of interest (including OID) includible in the
holder's gross income for the taxable year with respect to the certificate. The
amount of the 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 the 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 the market discount in income currently as
it accrues on all market discount obligations acquired by the 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 an election to treat all interest as OID 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
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market discount that the 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 the certificateholder owns or acquires. See
' -- Single Class of Certificates -- Premium.' 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.
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 the 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 the same mortgage loans (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.'
Although current authority is not entirely clear, a Stripped Bond
Certificate should be treated as an interest in mortgage loans issued on the day
the 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 the 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.' 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 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 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 the
mortgage loan would be included in the mortgage loan's stated redemption price
at maturity
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for purposes of calculating income on the Stripped Coupon Certificate under the
OID rules of the Code.
Based on current authority 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 the 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 the 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
a certificate is treated as an interest in discrete mortgage loans, or if no
prepayment assumption is used, then when a mortgage loan is prepaid, any
certificate so treated should be able to recognize a loss equal to the portion
of the unrecovered premium of the certificate that is allocable to the mortgage
loan. In addition, amounts received in redemption for debt instruments issued by
natural persons purchased or issued after June 8, 1997 are treated as received
in exchange therefore (i.e., treated the same as obligations issued by
corporations). This change could affect the character of any loss.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates are
encouraged to consult with their own tax advisors regarding the proper treatment
of these certificates for federal income tax purposes.
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 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, 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 the 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 under ' -- Accrual of Original Issue Discount.' The
following discussion is based in part on Treasury regulations issued on January
27, 1994, and amended on June 11, 1996, 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
before 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 the 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.
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Under the Code, the mortgage loans underlying the certificates will be
treated as having been issued on the date they were originated with an amount of
OID equal to the excess of the 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 the mortgage loan other
than payments that are treated as qualified stated interest payments. The
accrual of this OID, as described 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 the 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 debt instruments, and, in
tax years beginning after August 5, 1997, to pools of receivables the yield on
which may be affected by prepayments of receivables such as those 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 in ' -- Accrual of
Original Issue Discount.'
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 any certificate for each day on which it owns the 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 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 each of the
distribution dates on the certificates (or the day before each date). This will
be done, in the case of each full month accrual period, by adding 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 any payments received during the same
accrual period, and subtracting from that total the 'adjusted issue price' of
the respective component at the beginning of the same 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 the 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.
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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 mortgage loans acquired by a certificateholder are purchased at a price equal
to the then unpaid principal amount of those mortgage loans, no original issue
discount attributable to the difference between the issue price and the original
principal amount of those mortgage loans (e.g., due to points) will be
includible by the 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
instruments that represent interests in ARM Loans. 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 under the heading ' -- Certificates
Representing Interests in Loans Other Than ARM Loans' and with the OID
Regulations. As such, for purposes of projecting the remaining payments and the
projected yield, the assumed rate payable on the ARM Loans will be the fixed
rate equivalent on the issue date. Application of these rules may require
inclusion of income on a Stripped ARM Obligation in advance of the receipt of
cash attributable to the income. Further, the addition of interest deferred due
to negative amortization ('Deferred Interest') to the principal balance of an
ARM Loan may require the inclusion of the interest deferred due to negative
amortization in the income of the certificateholder when it 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 the certificates.
Because the treatment of Stripped ARM Obligations is uncertain, investors
are encouraged to consult their tax advisors regarding how income will be
includible with respect to the certificates.
C. SALE OR EXCHANGE OF A CERTIFICATE
Sale or exchange of a certificate before 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. The adjusted basis of a certificate
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. The 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 that 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 an owner that is not a U.S. Person or 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 any lower rate provided for
interest by an applicable tax treaty. Accrued OID recognized by the owner on the
sale or exchange of a certificate also will be subject to federal income tax at
the same rate. Generally, accrued OID 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 the certificateholder
complies with certain identification requirements (including delivery of a
statement, signed by the certificateholder under penalties of perjury,
certifying that the certificateholder is not a U.S. Person and providing the
name and address of the certificateholder). Additional restrictions apply to
mortgage loans where the mortgagor is not a natural person in order to qualify
for the exemption from withholding. Any foreclosure property owned by the trust
could be treated as a U.S. real property interest owned by certificateholders.
As used in this prospectus, a 'U.S. Person' means
a citizen or resident of the United States,
a corporation or a partnership (including an entity treated as a
corporation or partnership for U.S. federal income tax purposes) organized
in or created under the laws of the United States or any State thereof or
the District of Columbia (unless in the case of a partnership Treasury
Regulations provide otherwise),
an estate, 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, or
a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United
States persons have authority to control all substantial decisions of the
trust.
In addition, U.S. Persons would include certain trusts that can elect to be
treated as U.S. Persons. A 'Non-U.S. Person' is a person other than a U.S.
Person.
Interest paid (or accrued) on the mortgage loans to a certificateholder who
is a non-U.S. Person will be considered 'portfolio interest,' and generally will
not be subject to United States federal income tax and withholding tax,
provided, that the interest is not effectively connected with the conduct of a
trade or business within the United States by the non-U.S. Person, and the
non-U.S. Person provides the trust or other person who is otherwise required to
withhold U.S. tax with respect to the mortgage loans with an appropriate
statement (on Form W-8 or other similar form), signed under penalties of
perjury, certifying that the beneficial owner of the mortgage loan is a foreign
person and providing that non-U.S. person's name and address. If an interest in
a mortgage loan is held through a securities clearing organization or certain
other financial institutions, the organization or institution may provide the
relevant signed statement to the withholding agent. In that case, however, the
signed statement must be accompanied by a Form W-8 or substitute form provided
by the non-U.S. Person that owns that interest in the mortgage loan. If interest
does not constitute portfolio interest, then it will be subject to U.S. federal
income and withholding tax at a rate of 30%, unless reduced or eliminated
pursuant to an applicable tax treaty and the non-U.S. Person provides the trust,
or an organization or financial institution described above, with an appropriate
statement (e.g., a Form 1001), signed under penalties of perjury, to that
effect.
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Final regulations dealing with backup withholding and information reporting
on income paid to foreign person and related matters (the 'New Withholding
Regulations') were published in the Federal Register on October 14, 1997. In
general, the New Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements, but do unify
current certification procedures and forms and clarify reliance standards. The
New Withholding Regulations generally will be effective for payments made after
December 31, 1999, subject to certain transition rules. The discussion set forth
above does not take the New Withholding Regulations into account. Prospective
Non-U.S. Persons who own interests in mortgage loans are strongly urged to
consult their own tax advisor with respect to the New Withholding Regulations.
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 the year, the information deemed
appropriate to assist certificateholders in preparing their federal income tax
returns, or to enable holders to make any information available to beneficial
owners or financial intermediaries that hold 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 the 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 a
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'), 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 under 'Residual
Certificates,' the Code provides that a trust fund will not be treated as a
REMIC for that year and thereafter. In that event, the 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 upon an inadvertent termination of the status of a trust fund as a REMIC,
no such regulations have been issued. Any 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 REMIC status are
not satisfied. Assuming compliance with all provisions of the related pooling
and servicing agreement, each trust fund that elects REMIC status 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. With respect to each trust fund for which a REMIC
election is to be made, Brown & Wood LLP will issue an opinion confirming the
conclusions expressed above concerning the status of the trust fund as a REMIC
and the status of the certificates as representing regular or residual interests
in a REMIC.
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In general, with respect to each series of certificates for which a REMIC
election is made, 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); certificates held by a real estate investment trust will
constitute 'real estate assets' within the meaning of Code Section 856(c)(4)(A);
and 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 these 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 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.' REMIC Certificates held by a real estate investment trust will
not constitute 'Government Securities' within the meaning of Code Section
856(c)(4)(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 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 or more
separate elections may be made to treat designated portions of the related trust
fund as REMICs (respectively, the 'Subsidiary REMIC or REMICs' and the 'Master
REMIC') for federal income tax purposes. Upon the issuance of such a series of
certificates, assuming compliance with all provisions of the related pooling and
servicing agreement, the Master REMIC as well as each Subsidiary REMIC will each
qualify as a REMIC, and the REMIC Certificates issued by the Master REMIC and
each 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. With respect to each trust fund for which more
than one REMIC election is to be made, Brown & Wood LLP will issue an opinion
confirming the conclusions expressed above concerning the status of the Master
REMIC and each Subsidiary REMIC as a REMIC and the status of the certificates as
regular or residual interests in a REMIC.
Only REMIC Certificates, other than the residual interest in any Subsidiary
REMIC, issued by the Master REMIC will be offered under this prospectus. All
Subsidiary REMICs and the Master REMIC will be treated as one REMIC solely for
purposes of determining whether the REMIC Certificates will be 'real estate
assets' within the meaning of Section 856(c)(4)(A) of the Code; 'loans secured
by an interest in real property' under Section 7701(a)(19)(C) of the Code; and
whether the income on the certificates is interest described in Section
856(c)(3)(B) of the Code.
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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 OID. Generally, 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
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 the OID Regulations and in part on the
provisions of the 1986 Act. The OID Regulations generally are effective for 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 the 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 the 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.
The IRS issued final regulations (the 'Contingent Regulations') in June
1996 governing the calculation of OID on instruments having contingent interest
payments. The Contingent Regulations specifically do not apply for purposes of
calculating OID on debt instruments subject to Code Section 1272(a)(6), such as
the Regular Certificates. Additionally, the OID Regulations do not contain
provisions specifically interpreting Code Section 1272(a)(6). The trustee
intends to base its computations on Code Section 1272(a)(6) and the OID
Regulations as described in this prospectus. However, because no regulatory
guidance currently exists under Code Section 1272(a)(6), there can be no
assurance that this methodology represents the correct manner of calculating
OID.
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 before 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 that constitute 'qualified stated
interest.' Qualified stated
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interest generally means interest unconditionally payable at intervals of one
year or less at a single fixed rate or qualified variable rate (as described
below) 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 the 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 the mortgage loans. That position, if
successful, would require all holders of Regular Certificates to accrue income
on the certificates under the OID Regulations.
Under the de minimis rule, OID on a Regular Certificate will be considered
to be zero if it 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 these 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
prospectus supplement. Holders generally must report de minimis OID pro rata as
principal payments are received, and 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 Super-Premium
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 Super-Premium Certificates is the sum of all payments to be made on
these Regular Certificates determined under the Prepayment Assumption, with the
result that these 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
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Assumption. As discussed above, the Contingent Regulations specifically do not
apply to prepayable debt instruments subject to Code Section 1272(a)(6), such as
the Regular Certificates. However, 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 Super-Premium
Certificates should be limited to their principal amount (subject to the
discussion under ' -- Accrued Interest Certificates'), so that the Regular
Certificates would be considered for federal income tax purposes to be issued at
a premium. If this position were to prevail, the rules described 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 the
Super-Premium Certificate. Absent further guidance, the trustee intends to treat
the Super-Premium Certificates as described in this prospectus.
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, the Regular Certificate generally should not be treated as a
Super-Premium Certificate and the rules described 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 the 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 the 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 is not longer than one year,
begins or ends on a distribution date (except for the first accrual period which
begins on the issue date) and begins on the day after the preceding accrual
period ends. This will be done, in the case of each full accrual period, by
adding
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
any payments included in the stated redemption price at maturity
received during the same accrual period, and
subtracting from that total the adjusted issue price of the Regular
Certificates at the beginning of the same 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 accrual period. The OID accrued during an accrual period will
then be divided by the number
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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 a subsequent purchaser of a Regular Certificate
(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 the 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 the holder for that Regular Certificate exceeds the following
amount:
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
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, the issue price does not
exceed the original principal balance by more than a specified amount and 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.
For a debt instrument issued after August 13, 1996, an objective rate is a rate
(other than a qualified floating rate) that is determined using a single fixed
formula and that is based on objective financial or economic information. 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 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. This treatment may effect the timing of income accruals on the Regular
Certificates. Additionally, if some or all of the mortgage loans are
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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 these 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, a 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 the 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 the
certificateholder owns or acquires. See ' -- Regular Certificates -- Premium.'
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.
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 a 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 the Regular Certificate from an
original holder) over the price for the 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 a holder
generally will be required to allocate each 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, the election will
apply to all market discount bonds acquired by the electing certificateholder on
or after the first day of the first taxable year to which the 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
the Regular Certificate's stated redemption price at maturity multiplied by the
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 the
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
the 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
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payable in more than one installment. Until 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 the
total remaining market discount and 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 the total remaining market discount and 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
due to prepayments of other obligations securing the instruments, the same
Prepayment Assumption applicable to calculating the accrual of OID will apply.
A holder of a Regular Certificate that acquires the Regular Certificate at
a market discount also may be required to defer, until the maturity date of the
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 the holder's gross income for the taxable year
with respect to the Regular Certificate. The amount of the 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
the 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 allowed to the extent of gain
recognized on the disposition. This deferral rule does not apply if the Regular
Certificateholder elects to include the market discount in income currently as
it accrues on all market discount obligations acquired by the 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
the 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. The Amortizable Bond Premium Regulations
described above specifically do not apply to prepayable debt instruments subject
to Code Section 1272(a)(6) such as the Regular Certificates. Absent further
guidance from the IRS, the trustee intends to account for amortizable bond
premium in the manner described in this prospectus. 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 the 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 the Regular Certificates and will be applied as an offset against
the interest payment. Prospective purchasers of the Regular Certificates should
consult their tax advisors regarding the possible application of the Amortizable
Bond Premium Regulations.
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On December 30, 1997 the IRS issued final Amortizable Bond Premium
Regulations. These regulations specifically do not apply to prepayable debt
instruments subject to Code Section 1272(a)(6). Absent further guidance from the
IRS, the trustee intends to account for amortizable bond premium in the manner
described above. Prospective purchasers of the certificates should consult their
tax advisors regarding the possible application of the Amortizable Bond Premium
Regulations.
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 the certificates before the time
distributions of cash with respect to the Deferred Interest are made. It is
unclear, under the OID Regulations, whether any of the interest on the
certificates will constitute qualified stated interest or whether all or a
portion of the interest payable on the certificates must be included in the
stated redemption price at maturity of the certificates and accounted for as OID
(which could accelerate the inclusion). Interest on Regular Certificates must in
any event be accounted for under an accrual method by the holders of the
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 the
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 their certificates under an
accrual method without giving effect to delays and reductions in distributions
on the subordinated certificates attributable to defaults and delinquencies on
the mortgage loans, except to the extent that it can be established that the
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 the 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 any losses or
reductions in income are uncertain, and, accordingly, subordinated
certificateholders are urged to 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. The
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,' any 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.
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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
the gain does not exceed the excess, if any, of the amount that would have been
includible in the holder s income with respect to the Regular Certificate had
income accrued on it at a rate equal to 110% of the AFR as defined in Code
Section 1274(d) determined as of the date of purchase of the Regular
Certificate, over the amount actually includible in the 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 this 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
before each distribution date. The period between the Closing Date for Payment
Lag Certificates and their first distribution date may or may not exceed that
interval. Purchasers of Payment Lag Certificates for which the period between
the Closing Date and the first distribution date does not exceed that 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 before 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 the
payments represent interest for the number of days that the certificateholder
has held the Payment Lag Certificate during the first accrual period.
Investors are encouraged to 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.'
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
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loss sustained during the taxable year on account of the 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 the certificates
becoming wholly worthless. Although the matter is unclear, non-corporate holders
of certificates may be allowed a bad debt deduction at the time that the
principal balance of a 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
their certificates, including any loss resulting from the failure to recover
previously accrued interest or discount income.
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 the Regular Certificateholder complies with certain identification
requirements (including delivery of a statement, signed by the Regular
Certificateholder under penalties of perjury, certifying that the Regular
Certificateholder is a foreign person and providing the name and address of the
Regular Certificateholder). If a Regular Certificateholder is not exempt from
withholding, distributions of interest, including distributions in respect of
accrued OID, the 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 are encouraged to consult their tax advisors concerning this
question.
It is recommended that Regular Certificateholders who are not U.S. Persons
and persons related to them not acquire any Residual Certificates, and holders
of Residual Certificates (the 'Residual Certificateholder') and persons related
to Residual Certificateholders not acquire any Regular Certificates without
consulting their tax advisors as to the possible adverse tax consequences of
doing so.
As previously mentioned, the New Withholding Regulations were published in
the Federal Register on October 14, 1997 and generally will be effective for
payments made after December 31, 1999, subject to certain transition rules. The
discussion set forth above does not take the New Withholding Regulations into
account. Prospective Non-U.S. Persons who own Regular Certificates are urged to
consult their own tax advisor with respect to the New Withholding Regulations.
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 the year, any information deemed appropriate to assist Regular
Certificateholders in preparing their federal income tax returns, or to enable
holders to make the information available to beneficial owners or financial
intermediaries that hold the 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 the 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
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payments. Any amounts deducted and withheld from a distribution to a recipient
would be allowed as a credit against a recipient's federal income tax liability.
In addition, prospective investors are encouraged to consult their tax advisors
with respect to the New Withholding Regulations.
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.' 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 it 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. An original
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 the 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 that sort of 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 the tax treatment on the after-tax yield of a
Residual Certificate.
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 the Residual Certificateholder owns the 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 the Residual Certificate at a price
greater than (or less than) the adjusted basis the Residual Certificate would
have in the hands of an original Residual Certificateholder. See ' -- Sale or
Exchange of Residual Certificates.' It is not clear, however, whether these
adjustments will in fact be permitted or required and, if so, how they would be
made. The REMIC Regulations do not provide for these adjustments.
Taxable Income of the REMIC Attributable to Residual Interests. The taxable
income of the REMIC will reflect a netting of the income from the mortgage loans
and the REMIC's other assets and the deductions allowed to the REMIC for
interest and OID on the Regular
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Certificates and, except as described 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 the
limitations on deductibility of investment interest expense and expenses for the
production of income do not apply, all bad loans will be deductible as business
bad debts, and 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 the 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). The 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 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
this 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 the 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, the 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 that 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.' For a
discussion of possible adjustments to income of a subsequent holder of a
Residual Certificate to reflect any difference between the actual cost of the
Residual Certificate to the holder and the adjusted basis the Residual
Certificate would have in the hands of an original Residual Certificateholder,
see ' -- Allocation of the Income of the REMIC to the Residual Certificates.'
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Net Losses of the REMIC. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. The 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 the net loss exceeds the
holder's adjusted basis in the Residual Certificate. Any net loss that is not
currently deductible due to this limitation may only be used by the 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. A Residual Certificate acquired after January 3, 1995
cannot be marked-to-market.
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 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 is similar to a grantor trust and is structured
with the principal purpose of avoiding the single class REMIC rules. The
applicable prospectus supplement may apportion expenses to the Regular
Certificates, but if it does not, then 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), the trust expenses will be deductible under Code Section 67
only to the extent that those expenses, plus other 'miscellaneous itemized
deductions' of the individual, exceed 2% of the 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 3% of the excess of the individual's adjusted gross income over the
Applicable Amount or 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 their alternative minimum
taxable income. The REMIC is required to report to each pass-through interest
holder and to the IRS the 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 are encouraged to 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
generally will be subject to federal income tax in all events. Thus, for
example, an excess inclusion may not be offset by any
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unrelated losses, deductions or loss carryovers of a Residual Certificateholder;
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'); and 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.' An exception to the excess
inclusion rules that applied to thrifts holding certain residuals was repealed
by the Small Business Tax Act of 1996.
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 the income of the Residual Certificateholder for that
calendar quarter from its Residual Certificate over the sum of the 'daily
accruals' for all days during the calendar quarter on which the Residual
Certificateholder holds the 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' 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 the same 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.
In the case of any Residual Certificates held by a real estate investment
trust, the aggregate excess inclusions with respect to the 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 the trust in
proportion to the dividends received by the shareholders from the trust, and any
amount so allocated will be treated as an excess inclusion with respect to a
Residual Certificate as if held directly by the 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 the
Residual Certificate. To the extent a distribution exceeds the 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). A holder's adjusted basis in a Residual
Certificate generally equals the cost of the Residual Certificate to the
Residual Certificateholder, increased by the taxable income of the REMIC that
was included in the income of the Residual Certificateholder with respect to the
Residual Certificate, and decreased (but not below zero) by the net losses that
have been allowed as deductions to the Residual Certificateholder with respect
to the Residual Certificate and by the distributions received thereon by the
Residual Certificateholder. In general, the 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 that section applies would
be ordinary income or loss.
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Except as provided in Treasury regulations yet to be issued, if the seller
of a Residual Certificate reacquires the 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 the sale, the 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 the 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' ) and
prohibits deducting any loss with respect to prohibited transactions. 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 the trust fund as a REMIC made after the day on which the
trust fund issues all of its interest 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 a Contributions Tax.
In addition, a trust fund as to which an election has been made to treat
the 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 results from
a breach of the related master servicer's, trustee's or seller's
obligations under the related pooling and servicing agreement for the
series, the tax will be borne by the master servicer, trustee or seller,
as the case may be, out of its own funds or
the seller's obligation to repurchase a mortgage loan, the tax will be
borne by the seller.
If the master servicer, trustee or seller, as the case may be, fails to pay or
is not required to pay the tax as provided above, the tax will be payable out of
the trust fund for the series and will result in a reduction in amounts
available to be distributed to the certificateholders of the 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 the adoption is deemed to occur, and
sells all of its assets (other than cash) within a 90-day period beginning on
that date, the REMIC will not be subject to any Prohibited
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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 the 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 the excess. It is unclear whether the 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 if there is more than one
holder of the Residual Certificate. 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 the 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 the tax on
that portion of the distributions received on a Residual Certificate that is
considered an excess inclusion. See ' -- Residual Certificates -- Excess
Inclusions.'
NON-U.S. PERSONS
Amounts paid to Residual Certificateholders who are not U.S. persons (see
' -- Regular Certificates -- Non-U.S. Persons') 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,' 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.' If the portfolio interest exemption is
unavailable, the 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 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
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the Residual Certificates do not have significant value). See ' -- Residual
Certificates -- Excess Inclusions.' 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 the
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.'
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
the entity are not held by 'disqualified organizations.' 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 an amount (as
determined under the REMIC Regulations) equal to the present value of the total
anticipated 'excess inclusions' with respect to the interest for periods after
the transfer and 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 it an affidavit that the transferee is not a
disqualified organization and, at the time of the transfer, the person does not
have actual knowledge that the affidavit is false. A 'disqualified organization'
means the United States, any State, possession or political subdivision of the
United States, any foreign government, any international organization or any
agency or instrumentality of any of the foregoing entities (provided that the
term does not include an instrumentality if all its activities are subject to
tax and, except for Freddie Mac, a majority of its board of directors is not
selected by a governmental agency), any organization (other than certain farmers
cooperatives) generally exempt from federal income taxes unless the organization
is subject to the tax on 'unrelated business taxable income' and a rural
electric or telephone cooperative.
A tax is imposed on a 'pass-through entity' 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 the entity. The
amount of the tax is equal to the product of the amount of excess inclusions for
the taxable year allocable to the interest held by the disqualified organization
and 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 the entity,
will be relieved of liability for the tax if the record holder furnishes to the
entity an affidavit that the record holder is not a disqualified organization
and, for the applicable period, the pass-through entity does not have actual
knowledge that the affidavit is false. For this purpose, a 'pass-through entity'
means a regulated investment company, real estate investment trust, or common
trust fund; a partnership, trust, or estate; and 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
the 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 the entities beginning after December 31, 1988. Under the
Taxpayer Relief Act of 1997, large partnerships (generally with 250 or more
partners) will be taxable on excess inclusion income as if all partners were
disqualified organizations.
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To comply with these rules, the pooling and servicing 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 consent to a proposed transfer only if it receives 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 and 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. In general, the definition of a U.S.
Person is the same as provided under 'Certain Federal Income Tax
Consequences -- Non-REMIC Certificates -- Non-U.S. Persons,' except that
entities or individuals that would otherwise be treated as Non-U.S. Persons, may
be considered U.S. Persons for this purpose if their income from the residual is
subject to tax under Code Section 871(b) or Code Section 882 (income effectively
connected with a U.S. trade or business). 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, 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 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 that knowledge if the transferor conducted a reasonable investigation of
the transferee and 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 the 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 the 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 the 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 pooling and servicing agreement will provide that no record or
beneficial ownership interest in a
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Residual Certificate may be transferred, directly or indirectly, to a non-U.S.
Person unless the person provides the trustee with a duly completed I.R.S. Form
4224 and the trustee consents to the 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 encouraged to consult their
own tax advisors with respect to transfers of the Residual Certificates and
pass-through entities are encouraged 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 are encouraged to
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 are encouraged to 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
supplement will contain information concerning considerations relating to ERISA
and the Code that are applicable to them.
ERISA imposes requirements on employee benefit plans subject to ERISA (and
the Code imposes requirements on certain other retirement plans and
arrangements, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which the plans,
accounts or arrangements are invested) (collectively 'Plans') and on persons who
bear specified relationships to Plans ('Parties in Interest') or are fiduciaries
with respect to 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 the 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 the 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
those plans may be invested in certificates without regard to the described
ERISA considerations, subject to the provisions of applicable state law.
However, any of those plans that are qualified and exempt from taxation under
Code Sections 401(a) and 501(a) are subject to the prohibited transaction rules
set forth in Code Section 503.
On November 13, 1986, the United States Department of Labor 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
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which a Plan invests will not be deemed for purposes of ERISA to be assets of
the 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 and the Code prohibit a broad range of
transactions involving Plan assets of a Plan and Parties in Interest with
respect to the Plan and impose additional prohibitions where Parties in Interest
are fiduciaries with respect to the 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, regulatory or administrative exemption applies.
In Prohibited Transaction Exemption 83-1 ('PTE 83-1'), the DOL exempted
from ERISA's prohibited transaction rules and from the excise tax imposed under
Code Section 4975 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 the 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
those mortgage pools by Plans. If the general conditions 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, no transfer of a subordinated certificate generally
may be made to a Plan.
The discussion in this and the next 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: (1) certificates issued in a
series consisting of only a single class of certificates; and (2) 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 (1), or the
senior certificates in the case of clause (2), evidence the beneficial ownership
of both a specified percentage of future interest payments (greater than zero
percent) and a specified percentage (greater than zero percent) 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.
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PTE 83-1 sets forth three general conditions that must be satisfied for any
transaction to be eligible for exemption:
the maintenance of a system of insurance or other protection for the
pooled mortgage loans and property securing the loans and for indemnifying
certificateholders against reductions in pass-through payments due to
property damage or defaults in loan payments in an amount not less than
the greater of one percent of the aggregate principal balance of all
covered pooled mortgage loans or the principal balance of the largest
covered pooled mortgage loan;
the existence of a pool trustee who is not an affiliate of the pool
sponsor; and
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 in this prospectus (that 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.' 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:
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;
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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;
the certificates acquired by the Plan have received a rating at the time
of acquisition that is one of the three highest generic rating categories
from Standard & Poor's Ratings Group, a division of McGraw-Hill Companies,
Inc., Moody's Investors Service, Inc., Duff & Phelps Credit Rating Co. or
Fitch IBCA, Inc.;
the trustee is not an affiliate of any other member of the Restricted
Group;
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 the loans; the sum of all payments made to and retained by the
master servicer and any other servicer represents not more than reasonable
compensation for its services under the agreement pursuant to which the
loans are pooled and reimbursements of its reasonable expenses in
connection therewith; and
the Plan investing in the certificates is an 'accredited investor' as
defined in Rule 501(a)(1) of Regulation D of the SEC under the Securities
Act of 1933 as amended.
The trust fund must also meet the following requirements:
the corpus of the trust fund must consist solely of assets of the type
that have been included in other investment pools;
certificates in 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 before the Plan's acquisition of certificates; and
certificates evidencing interests in the other investment pools must have
been purchased by investors other than Plans for at least one year before
any Plan's acquisition of certificates.
Moreover, the Underwriter Exemptions generally provide relief from certain
self-dealing and conflict of interest prohibited transactions that may occur
when the Plan fiduciary causes a Plan to acquire certificates in a trust holding
receivables as to which the fiduciary (or its affiliate) is an obligor provided
that, among other requirements:
in the case of an acquisition in connection with the initial issuance of
certificates, at least fifty percent of each class of certificates in
which Plans have invested is acquired by persons independent of the
Restricted Group,
the fiduciary (or its affiliate) is an obligor with respect to five
percent or less of the fair market value of the obligations contained in
the trust;
the Plan's investment in certificates of any class does not exceed
twenty-five percent of all of the certificates of that class outstanding
at the time of the acquisition; and
immediately after the acquisition, no more than twenty-five percent of the
assets of any Plan with respect to which the 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 Underwriter, the trustee, the master servicer, any 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
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<PAGE>
percent of the aggregate unamortized principal balance of the assets in the
trust fund, or any affiliate of those parties (the 'Restricted Group').
On July 21, 1997, DOL published in the Federal Register an amendment to the
Exemption, which extends exemptive relief to specified mortgage-backed and
asset-backed securities transactions using pre-funded accounts for trusts
issuing pass-through certificates. The amendment generally allows mortgage loans
or other secured receivables supporting payments to certificateholders, and
having a value equal to no more than twenty-five percent of the total principal
amount of the certificates being offered by the trust, to be transferred to the
trust within a 90-day or three-month period following the closing date, instead
of requiring that all obligations be either identified or transferred on or
before the closing date. The relief is available when certain conditions are
met.
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 that proposes to cause a Plan to purchase certificates
is encouraged to 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, before making the investment. Moreover, each Plan
fiduciary should 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.
LEGAL INVESTMENT
The prospectus supplement for each series of certificates will specify
which, if any, of the classes of certificates offered by it 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 those investors
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 constitute legal investments for them. Those
investors are 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). Under SMMEA, if a state enacts legislation before October 4,
1991 specifically limiting the legal investment authority of those entities with
respect to 'mortgage related securities,' the certificates will constitute legal
investments for entities subject to the legislation only to the extent provided
in it. Approximately twenty-one states adopted limiting legislation before the
October 4, 1991 deadline.
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 by them,
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 regulations that the applicable federal
authority may prescribe. In this connection, federal credit unions should review
the National Credit Union Administration Letter to Credit Unions
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<PAGE>
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 its 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), 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, '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, each depository institution must determine, before
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 '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 are encouraged to consult their own legal advisors
in determining whether and to what extent the certificates constitute legal
investments for them.
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:
by negotiated firm commitment underwriting and public reoffering by
underwriters;
by agency placements through one or more placement agents primarily with
institutional investors and dealers; and
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 of its underwriters and either the price at which the series
is being offered, the nature and amount of any underwriting discounts or
additional compensation to the 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 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 the series if any
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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.
This prospectus, together with the related prospectus supplement, may be
used by Countrywide Securities Corporation, an affiliate of CWMBS, Inc., in
connection with offers and sales related to market making transactions in the
certificates in which Countrywide Securities Corporation acts as principal.
Countrywide Securities Corporation may also act as agent in those transactions.
Sales in those transactions will be made at prices related to prevailing prices
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 the underwriters or agents may
be required to make in respect thereof.
If a series is offered other than through underwriters, the prospectus
supplement relating to it will contain information regarding the nature of the
offering and any agreements to be entered into between the depositor and
purchasers of certificates of the series.
LEGAL MATTERS
The validity of the certificates, including certain federal income tax
consequences with respect to the certificates, will be passed upon for the
depositor by Brown & Wood llp, One World Trade Center, New York, New York 10048.
FINANCIAL INFORMATION
A new trust fund will be formed for each series of certificates and no
trust fund will engage in any business activities or have any assets or
obligations before the issuance of the related series of certificates.
Accordingly, no financial statements for 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 by this prospectus 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 the 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 the
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.
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<PAGE>
INDEX TO DEFINED TERMS
<TABLE>
<S> <C>
1986 Act................................. 80
Agency Securities........................ 13
Amortizable Bond Premium Regulations..... 77
Applicable Amount........................ 97
ARM Loans................................ 80
Asset Conservation Act................... 72
CERCLA................................... 72
Certificate Account...................... 52
Class Certificate Balance................ 32
Code..................................... 28, 75
Contingent Regulations................... 86
Contributions Tax........................ 99
Deferred Interest........................ 82
Eleventh District........................ 39
excess inclusion......................... 97
FHLBSF................................... 40
Garn-St Germain Act...................... 73
Insured Expenses......................... 53
Legislative History...................... 81
Liquidated Mortgage...................... 61
Loan-to-Value Ratio...................... 16
Master REMIC............................. 85
Mortgage Assets.......................... 13
National Cost of Funds Index............. 40
New Withholding Regulations.............. 83
Non-U.S. Person.......................... 83
OID...................................... 75
OID Regulations.......................... 80
OTS...................................... 40
Parties in Interest...................... 103
Payment Lag Certificates................. 93
Plans.................................... 103
pre-issuance accrued interest............ 93
Prepayment Assumption.................... 81
Private Mortgage-Backed Securities....... 13
Prohibited Transactions Tax.............. 99
PTE 83-1................................. 104
RCRA..................................... 72
Regular Certificateholders............... 86
Regular Certificates..................... 84
Relief Act............................... 74
REMIC Certificates....................... 84
REMICs................................... 31
Residual Certificateholder............... 94
Residual Certificates.................... 84
Restricted Group......................... 107
Single Family Certificates............... 104
SMMEA.................................... 107
Stripped ARM Obligations................. 82
Stripped Bond Certificates............... 79
Stripped Coupon Certificates............. 79
Subsidiary REMIC......................... 85
Super-Premium Certificates............... 87
Title V.................................. 73
U.S. Person.............................. 83
Underwriter Exemptions................... 105
</TABLE>
110
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<PAGE>
CHL MORTGAGE PASS-THROUGH TRUST 1999-
ISSUER
CWMBS, INC.
DEPOSITOR
[LOGO]
SELLER AND MASTER SERVICER]
$
(APPROXIMATE)
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1999-
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
[NAME OF UNDERWRITER]
[NAME OF UNDERWRITER]
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the Series 1999- Mortgage Pass-Through Certificates in
any state where the offer is not permitted.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Series 1999- Mortgage Pass-Through Certificates and with
respect to their unsold allotments or subscriptions. In addition, all dealers
selling the Series 1999- Mortgage Pass-Through Certificates will be required to
deliver a prospectus supplement and prospectus until , 1999.
, 1999
<PAGE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
II-1
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that (i) it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and (ii) it reasonably believes that the
security rating requirement of Transaction Requirement B.5 of Form S-3 will be
met by the time of sale of each Series of Certificates to which this Amendment
No. 2 to the Registration Statement relates and has duly caused this Amendment
No. 2 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Calabasas, State of
California, on the day of May, 1999.
CWMBS, INC.
By: /s/ STANFORD L. KURLAND
...................................
STANFORD L. KURLAND
CHAIRMAN OF THE BOARD,
PRESIDENT AND DIRECTOR
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------------------- -------------------
<C> <S> <C>
/S/ STANFORD L. KURLAND Chairman of the Board, May , 1999
......................................... President and Director
STANFORD L. KURLAND (principal executive officer)
CARLOS GARCIA* Executive Vice President and Director May , 1999
......................................... (principal financial and accounting
CARLOS GARCIA officer)
THOMAS H. BOONE* Executive Vice President and Director May , 1999
.........................................
THOMAS H. BOONE
KEVIN W. BARLETT* Senior Vice President, May , 1999
......................................... Assistant Secretary and Director
KEVIN W. BARLETT
JEFFREY P. GROGIN* Director May , 1999
.........................................
JEFFREY P. GROGIN
*By: /s/ STANFORD L. KURLAND
.........................................
(STANFORD L. KURLAND, ATTORNEY-IN-FACT,
PURSUANT TO THE POWER OF ATTORNEY
FILED WITH THE COMMISSION ON
FEBRUARY 19, 1999 AS PART OF
THIS REGISTRATION STATEMENT)
</TABLE>
II-2
<PAGE>
