<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-72655
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 17, 1999)
$251,568,842
(ESTIMATED)
CWMBS, INC.
DEPOSITOR
RESECURITIZATION MORTGAGE TRUST 2000-7R
ISSUER
DISTRIBUTIONS PAYABLE MONTHLY, BEGINNING NOVEMBER 27, 2000
------------------------
The following classes of certificates are being offered pursuant to this
prospectus supplement and the accompanying prospectus:
<TABLE>
<CAPTION>
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ESTIMATED CLASS CERTIFICATE BALANCE PASS-THROUGH RATE
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<S> <C> <C>
Class A-1 $50,000,000 6.50%
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Class A-2 $50,500,000 6.50%
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Class A-3 $42,475,350 6.50%
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Class A-4 $21,780,242 6.50%
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Class A-5 $86,813,150 6.50%
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Class A-R $100 6.50%
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</TABLE>
<TABLE>
<S> <C>
The estimated class certificate balances listed above are
CONSIDER CAREFULLY THE RISK not the actual initial principal balances of the
FACTORS BEGINNING ON PAGE certificates. The estimated class certificate balances have
S-7 IN THIS PROSPECTUS been calculated on the basis of the principal balance of the
SUPPLEMENT AND ON PAGE 5 IN underlying mortgage pass-through certificate after giving
THE PROSPECTUS. effect to distributions on that certificate on September 25,
2000 and as further reduced by assumed distributions on the
certificate on October 25, 2000, which are projected on the
assumption that underlying mortgage loans prepaid during the
related prepayment period at an SPA of 150%. The actual
class certificate balances as of the closing date may be
lower or higher than the estimated class certificate
principal balances listed above, depending upon the actual
rate of prepayments on the underlying mortgage loans during
that prepayment period.
</TABLE>
The certificates represent ownership interests in the assets of the trust.
The trust assets will consist primarily of a previously issued mortgage
pass-through certificate representing a percentage interest in a class of senior
ownership interests in a pool of 30-year conventional fixed-rate mortgage loans
secured by first liens on one-to four-family residential properties.
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.
Countrywide Securities Corporation will offer the certificates to the public at
varying prices to be determined at the time of sale. The proceeds to the
depositor from the sale of the certificates to Countrywide Securities
Corporation, as underwriter, will consist of the underlying mortgage
pass-through certificate, which the depositor will receive from Countrywide
Securities Corporation, as underlying certificate seller. See "Method of
Distribution."
COUNTRYWIDE SECURITIES CORPORATION
October 26, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT PAGE
--------------------- -----
<S> <C>
Summary.............................. S-3
Risk Factors......................... S-7
Description of the Deposited
Underlying Certificate............. S-13
Description of the Underlying
Mortgage Loans..................... S-18
Description of the Certificates...... S-21
Yield, Prepayment and Maturity
Considerations..................... S-28
Use of Proceeds...................... S-34
Material Federal Income Tax
Consequences....................... S-34
ERISA Considerations................. S-35
Method of Distribution............... S-37
Legal Matters........................ S-37
Ratings.............................. S-38
</TABLE>
<TABLE>
<S> <C> <C>
Exhibit A-1 Excerpts From the GE A-1-1
Capital Mortgage
Services 1999-1
Prospectus Supplement....
Exhibit A-2 Excerpts From the GE A-2-1
Capital Mortgage
Services 1999-1 Base
Prospectus...............
Exhibit B September 25, 2000 B-1
Underlying Trust Monthly
Statement................
Appendix I Mortgage Loan I-1
Characteristics of the
Underlying Mortgage
Loans as of the
Reference Date...........
</TABLE>
<TABLE>
<CAPTION>
PROSPECTUS PAGE
---------- ----
<S> <C>
Important Notice About Information in
This Prospectus and Each
Accompanying Prospectus
Supplement.......................... 4
Risk Factors.......................... 5
The Trust Fund........................ 13
Use of Proceeds....................... 24
The Depositor......................... 24
Mortgage Loan Program................. 24
Description of the Certificates....... 27
Credit Enhancement.................... 40
Yield and Prepayment Considerations... 45
The Pooling and Servicing Agreement... 46
Certain Legal Aspects of the Mortgage
Loans............................... 60
Material Federal Income Tax
Consequences........................ 68
State Tax Considerations.............. 92
ERISA Considerations.................. 93
Legal Investment...................... 96
Method of Distribution................ 97
Legal Matters......................... 98
Financial Information................. 98
Rating................................ 98
Index to Defined Terms................ 99
</TABLE>
S-2
<PAGE> 3
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.
CERTIFICATES
On the closing date, Resecuritization Mortgage Trust 2000-7R will issue six
classes of certificates, each of which is being offered by this prospectus
supplement and the accompanying prospectus.
See "Description of the Certificates -- General" and "-- Book-Entry
Certificates" in this prospectus supplement.
TRUST ASSETS
The trust assets will consist of a GE Capital Mortgage Services, Inc., Class A2,
REMIC Multi-Class Pass-Through Certificate, Series 1999-1, having an aggregate
principal balance as of the reference date of approximately $253,743,005 (the
aggregate principal balance actually conveyed to the trust will be lower since
payments made on such deposited underlying certificate on October 25, 2000 in
reduction of such aggregate principal balance will not be part of the trust
assets). The trust assets represent an approximate 53.21% interest of all GE
Capital Mortgage Services, Inc., Class A2, REMIC Multi-Class Pass-Through
Certificates, Series 1999-1.
The GE Capital Mortgage Services, Inc., Class A2, REMIC Multi-Class Pass-Through
Certificates, Series 1999-1, represent senior ownership interests in an
underlying trust. The assets of the underlying trust consist primarily of a pool
of 30-year conventional fixed-rate mortgage loans secured by first liens on
one-to four-family residential properties.
See "Description of the Deposited Underlying Certificate" in this prospectus
supplement.
CUT-OFF DATE
October 25, 2000. All payments due on the deposited underlying certificate after
the cut-off date will be passed-through to the certificateholders as described
in this prospectus supplement.
CLOSING DATE
On or about October 30, 2000.
REFERENCE DATE
The close of business on September 1, 2000, after giving effect to scheduled
payments and prepayments in part on the underlying mortgage loans as of
September 1, 2000 and prepayments in full on the underlying mortgage loans as of
September 15, 2000. Certain numerical information included in this prospectus
supplement regarding the certificates, the deposited underlying certificate and
the underlying mortgage loans is presented as of the reference date. Such
information has been obtained from data compiled by the servicer of the
underlying mortgage loans and presented in the monthly statement provided by the
underlying trustee in connection with the September 25, 2000 distribution date
for the underlying trust, a copy of which is attached to this prospectus
supplement as Exhibit B. Such information does not reflect payments on the
underlying mortgage loans as of the end of the underlying prepayment period
related to the October 25, 2000 distribution date for the underlying trust.
None of the depositor, the underwriter or the trustee has the ability
independently to verify the accuracy of such information, and prospective
investors are advised to consider the
S-3
<PAGE> 4
limited nature of such available information when evaluating the suitability of
any investment in the certificates.
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.
TRUSTEE
State Street Bank and Trust Company.
DESIGNATIONS
Each class of certificates will have different characteristics. Certain of those
characteristics are reflected in the following general designations.
- OFFERED CERTIFICATES
All certificates.
- REGULAR CERTIFICATES
All classes of certificates, other than the Class A-R Certificate.
- RESIDUAL CERTIFICATES
Class A-R Certificate.
- FIXED RATE CERTIFICATES
All classes of certificates.
- ACCRUAL CERTIFICATES
Class A-4 Certificates.
- ACCRETION DIRECTED CERTIFICATES
Class A-1, Class A-2, Class A-3 and Class A-5 Certificates.
- PHYSICAL CERTIFICATES
Class A-R Certificate.
- BOOK-ENTRY CERTIFICATES
All classes of certificates, other than the Class A-R Certificate.
DISTRIBUTION DATES
The trustee will make distributions on the certificates on the 25th day of each
calendar month beginning in November 2000 to the holders of record of the
certificates as of the last business day of the month preceding the
distributions. If the 25th day of a month is not a business day, then the
distributions will be made on the next business day after the 25th day of the
month.
INTEREST PAYMENTS
The interest rate for each class of certificates is specified on the cover page
of this prospectus supplement.
Interest will accrue on each class of certificates on the basis of a 360-day
year divided into twelve 30-day months. The "Interest Accrual Period" for the
classes of certificates for any distribution date will be the calendar month
preceding the month of the applicable distribution date.
See "Description of the Certificates -- Interest" in this prospectus supplement.
PRINCIPAL PAYMENTS
Principal will be paid on the certificates on each distribution date as
described in this prospectus supplement beginning at page S-24.
See "Description of the Certificates -- Principal" in this prospectus
supplement.
OPTIONAL TERMINATION OF THE TRUST
The depositor may purchase all of the remaining assets of the trust after the
principal balance of the certificates declines below 10%
S-4
<PAGE> 5
of the principal balance of the certificates on the closing date.
See "Description of the Certificates -- Optional Termination" in this prospectus
supplement.
OPTIONAL TERMINATION OF THE UNDERLYING TRUST
The servicer of the mortgage loans held in the underlying trust may terminate
the underlying trust on any distribution date on which the aggregate outstanding
principal balance of the underlying mortgage loans and any real estate owned by
the underlying trust is less than 10% of the aggregate principal balance of the
underlying mortgage loans on the date on which the underlying mortgage pass-
through certificates were issued. Any termination of the underlying trust will
terminate the trust and result in early repayment of the certificates.
See "Description of the Certificates -- Optional Termination of the Underlying
Trust" in this prospectus supplement.
COLLECTION ACCOUNT; PRIORITY OF DISTRIBUTIONS
On each distribution date amounts available in the trust to make distributions
on the certificates will be applied as follows:
- from available amounts received on account of interest on the deposited
underlying certificate, as interest on each class of certificates -- except
that, with respect to the Class A-4 Certificates, on and prior to the
distribution date on which the class certificate balance of the Class A-3
Certificates has been reduced to zero, interest will be added to the class
certificate balance of the Class A-4 Certificates,
- from the portion of available amounts received on account of interest equal to
the amount added to the class certificate balance of the Class A-4
Certificates, as described in the preceding paragraph, as principal on the
accretion directed certificates in the manner, order and priority described
under "Description of the Certificates -- Principal -- Class A-4 Accrual
Amount" in this prospectus supplement, and
- from available amounts received on account of payments of principal on the
deposited underlying certificate, as principal on the classes of certificates
in the manner, order and priority described under "Description of the
Certificates -- Principal -- Priority of Principal Distributions" in this
prospectus supplement.
RATINGS
The classes of certificates listed below will not be offered unless they are
assigned the following ratings by Fitch, Inc. ("Fitch") and by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P").
<TABLE>
<CAPTION>
FITCH S&P
CLASS RATING RATING
----- ------ ------
<S> <C> <C>
A-1 AAA AAA
A-2 AAA AAA
A-3 AAA AAA
A-4 AAA AAA
A-5 AAA AAA
A-R AAA AAA
</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" in this prospectus supplement.
TAX STATUS
For federal income tax purposes, the trust will comprise a real estate mortgage
investment conduit. The REMIC will hold the deposited underlying certificate and
will issue the several classes of certificates, which, other than the Class A-R
Certificate, will represent regular interests in the REMIC. The Class A-R
Certificate will represent ownership of the residual interest in the REMIC.
See "Material Federal Income Tax Consequences" in this prospectus supplement and
in the prospectus.
S-5
<PAGE> 6
ERISA CONSIDERATIONS
The certificates (other than the Class A-R Certificate) 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 certain conditions are met. A fiduciary of an employee benefit plan must
determine that the purchase of a certificate is consistent with its fiduciary
duties under applicable law and does not result in a nonexempt prohibited
transaction under applicable law.
See "ERISA Considerations" in this prospectus supplement and in the prospectus.
LEGAL INVESTMENT
Each class of 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.
See "Legal Investment" in the prospectus.
S-6
<PAGE> 7
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER, IDENTIFIES
CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN THE
CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER
"RISK FACTORS" IN THE PROSPECTUS.
YOUR YIELD WILL BE AFFECTED BY
PREPAYMENTS Borrowers may, at their option, prepay the
underlying mortgage loans in whole or in part
at any time. We cannot predict the rate at
which borrowers will repay the underlying
mortgage loans. A prepayment of an underlying
mortgage loan, however, will usually result
in a prepayment on the deposited underlying
certificate. In turn, a prepayment on the
deposited underlying certificate will result
in a prepayment on the certificates.
The rate and timing of prepayment of the
underlying mortgage loans will affect the
yield to maturity and weighted average life
of the deposited underlying certificate,
which, in turn, will affect the yields to
maturity and weighted average lives of the
certificates. Any reinvestment risks from
faster or slower prepayments will be borne
entirely by the holders of the certificates.
If you purchase your certificates at a
discount and principal is repaid slower than
you anticipate, then your yield may be lower
than you anticipate.
See the discussions under the heading "Yield,
Prepayment and Maturity Considerations" in
this prospectus supplement for a description
of factors that may influence the rate and
timing of payments on the underlying mortgage
loans and the deposited underlying
certificate.
THE TRUST DOES NOT INCLUDE ANY
CREDIT ENHANCEMENT The certificates are not insured by any
financial guaranty insurance policy, and
there is no credit enhancement mechanism in
the trust. The only protection against losses
for the certificates is the protection
afforded to the deposited underlying
certificate in the underlying trust. Thus,
any shortfalls or losses on the deposited
underlying certificate will be borne by the
certificates. Credit enhancement is generally
provided to the deposited underlying
certificate by allocation of realized losses
to subordinated certificates issued by the
underlying trust until the class certificate
balances of such subordinated certificates
are reduced to zero. However, these
subordinated certificates will provide
limited protection against net interest
shortfalls and certain categories of realized
losses such as special hazard losses,
bankruptcy losses and fraud losses that are
in excess of coverage amounts specified in
the underlying prospectus supplement and
described herein.
S-7
<PAGE> 8
Any net interest shortfalls or losses in
excess of such amounts will be allocated pro
rata to all classes of certificates issued by
the underlying trust (including the class
that includes the deposited underlying
certificate), even if the principal balances
of the subordinated certificates issued by
the underlying trust have not been reduced to
zero.
See "Description of the Certificates --
Interest" and "-- Allocation of Losses" in
this prospectus supplement for a description
of the application of net interest shortfalls
and realized losses to the certificates.
CERTIFICATES MAY NOT BE
APPROPRIATE
FOR CERTAIN INVESTORS The certificates may not be an appropriate
investment for investors who do not have
sufficient resources or expertise to evaluate
the particular characteristics of the
applicable class of certificates. This may be
the case because, among other things:
- The yield to maturity of certificates
purchased at a price other than par will be
sensitive to the rate of principal
distributions on, and the weighted average
lives of, the certificates.
- The rate of principal distributions on and
the weighted average lives of the
certificates will be sensitive to the rate
and timing of principal payments on the
deposited underlying certificate. The rate
and timing of principal payments on the
deposited underlying certificate, in turn,
will be sensitive to the uncertain rate and
timing of principal prepayments on the
underlying mortgage loans and the priority
of principal distributions among the
classes of mortgage pass-through
certificates issued by the underlying
trust. Accordingly, the 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 amounts
distributed in respect of principal on a
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. In
particular, the senior classes of
underlying certificates are divided into
two groups: the group I senior
certificates, which include the deposited
underlying certificate, and the group II
senior certificates. The group II senior
certificates are "lockout" certificates
that are entitled to receive either none
of, or a disproportionately small
percentage of, the principal
S-8
<PAGE> 9
prepayment collections or the underlying
mortgage loans during a substantial period.
As a result, the allocation of principal
distributions on the underlying senior
certificates may produce faster or slower
principal distributions on the deposited
underlying certificate than would be the
case if the underlying senior certificates
were not divided into two groups.
- A secondary market for the certificates may
not develop or provide you with liquidity
of investment.
You should also carefully consider the
further risks discussed above and under the
heading "Yield, Prepayment and Maturity
Considerations" in this prospectus
supplement, and under the heading "Risk
Factors" in the prospectus.
YOU MAY HAVE DIFFICULTY
RESELLING
CERTIFICATES No market for any of the certificates will
exist before they are issued. The underwriter
intends to make a secondary market in the
certificates, but has no 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.
Fluctuations in the market values of the
certificates issued by the underlying trust
may affect the market values of the
certificates.
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.
ONLY LIMITED INFORMATION IS
AVAILABLE ABOUT THE DEPOSITED
UNDERLYING CERTIFICATES AND THE
RELATED UNDERLYING MORTGAGE
LOANS The information about the deposited
underlying certificate and the related
underlying mortgage loans disclosed in this
prospectus supplement has been obtained from
the prospectus supplement dated January 21,
1999 prepared in connection with the initial
offering of the deposited underlying
certificate as well as from certain reports
supplied to holders of underlying
certificates by the trustee of the underlying
trust and other information supplied to the
depositor by the servicer of the underlying
mortgage loans. Such information has not
S-9
<PAGE> 10
been independently verified or represented to
the trust as being accurate and complete.
Additionally, the agreement under which the
deposited underlying certificate was issued
and the prospectus supplement dated January
21, 1999 prepared in connection with its
public offering contain information only as
of the dates of such documents. None of the
depositor, the underlying certificate seller,
the trustee or the underwriter makes any
representation as to the accuracy or
completeness of information provided in such
documents. You should consider the limited
nature of such available information when
evaluating the suitability of any investment
in the certificates.
DELAYS IN PAYMENTS ON THE
DEPOSITED UNDERLYING
CERTIFICATES MAY CAUSE DELAYS
IN PAYMENTS TO THE HOLDERS
OF THE CERTIFICATES Only funds and information actually received
by the trustee, as the holder of the
deposited underlying certificate, no later
than the distribution date for the deposited
underlying certificate, will be passed
through to the holders of the certificates on
a distribution date. To the extent funds or
information have not been received by the
applicable distribution date for the
deposited underlying certificate, funds will
not be passed through until the distribution
date in the following month, and no
additional interest will be paid thereon. The
trustee has requested The Depository Trust
Company to make payments by wire transfer of
immediately available funds. However, no
assurance can be given that any payments will
be made by wire transfer.
The deposited underlying certificate is held
through the book-entry facilities of The
Depository Trust Company. Some delay in
receipt of distributions on the book-entry
deposited underlying certificate may be
experienced since such distributions first
will be forwarded to Cede & Co., as nominee
for The Depository Trust Company. The
Depository Trust Company will then forward
such distributions to its participants, one
of which will forward such distributions to
State Street Bank and Trust Company.
Thereafter, State Street Bank and Trust
Company will credit such distributions to the
account of the trustee, as holder of the
deposited underlying certificate. Only then
will the trustee be able to make such
distributions to the holders of the
certificates. Similarly, distributions on the
certificates first will be forwarded to Cede
& Co., as nominee for The Depository Trust
Company. The Depository Trust Company will
then forward such distributions to brokers
that, in turn, will credit the appropriate
amounts to the accounts of the beneficial
owners of certificates that
S-10
<PAGE> 11
such brokers represent. Any delay that you
experience in receipt of distributions on the
certificates will have an adverse effect on
your yield on those certificates.
THE RATINGS OF THE CERTIFICATES
ARE DEPENDANT SOLELY ON THE
RATINGS OF THE DEPOSITED
UNDERLYING CERTIFICATE The ratings of the certificates by Fitch and
S&P are based solely on the ratings of the
deposited underlying certificate by Fitch and
S&P. Any negative change in the ratings of
the deposited underlying certificate will
result in a negative change in the ratings of
the certificates.
S-11
<PAGE> 12
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-12
<PAGE> 13
DESCRIPTION OF THE DEPOSITED UNDERLYING CERTIFICATE
ALL OF THE INFORMATION CONTAINED HEREIN WITH RESPECT TO THE DEPOSITED
UNDERLYING CERTIFICATE (AS DEFINED BELOW) IS DERIVED SOLELY FROM (i) INFORMATION
CONTAINED IN THE PROSPECTUS SUPPLEMENT RELATED TO THE DEPOSITED UNDERLYING
CERTIFICATE (THE "UNDERLYING PROSPECTUS SUPPLEMENT"), EXCERPTS FROM WHICH ARE
ATTACHED TO THIS PROSPECTUS SUPPLEMENT AS EXHIBIT A-1, AND (ii) INFORMATION
OBTAINED FROM THE MONTHLY STATEMENT PROVIDED BY THE UNDERLYING TRUSTEE (AS
DEFINED BELOW) IN CONNECTION WITH THE SEPTEMBER 25, 2000 DISTRIBUTION DATE FOR
THE UNDERLYING TRUST (AS DEFINED BELOW), ATTACHED TO THIS PROSPECTUS SUPPLEMENT
AS EXHIBIT B (THE "SEPTEMBER 25, 2000 UNDERLYING TRUST MONTHLY STATEMENT"). NONE
OF THE DEPOSITOR, THE UNDERWRITER OR THE TRUSTEE HAS THE ABILITY INDEPENDENTLY
TO VERIFY THE ACCURACY OF THIS INFORMATION. PROSPECTIVE INVESTORS ARE ADVISED TO
CONSIDER THE LIMITED NATURE OF SUCH AVAILABLE INFORMATION WHEN EVALUATING THE
SUITABILITY OF ANY INVESTMENT IN THE CERTIFICATES.
GENERAL
The assets of the Resecuritization Mortgage Trust 2000-7R (the "Trust")
will consist primarily of a certificate evidencing approximately 53.21%
percentage interest in the GE Capital Mortgage Services, Inc., Class A2, REMIC
Multi-Class Pass-Through Certificates, Series 1999-1 (such certificate
comprising the Trust assets, the "Deposited Underlying Certificate") issued
pursuant to a pooling and servicing agreement dated as of January 1, 1999 (the
"Underlying Agreement") between GE Capital Mortgage Services, Inc. ("GECMS"), as
seller and servicer, and State Street Bank and Trust Company, as trustee (in
such capacity, the "Underlying Trustee").
The Deposited Underlying Certificate evidences a percentage interest in a
class of senior interests in a trust fund (the "Underlying Trust") created by
the Underlying Agreement and was issued together with additional certificates of
such class and certain other classes of senior certificates, including certain
residual interests (collectively, the "Underlying Senior Certificates"), and
certain classes of subordinated certificates (the "Underlying Subordinated
Certificates" and, together with the Underlying Senior Certificates, the
"Underlying Certificates"). The Underlying Trust consists primarily of a pool of
conventional fixed-rate mortgage loans (the "Underlying Mortgage Loans") secured
by first liens on one-to four-family residential properties. The aggregate
outstanding principal balance of the Underlying Mortgage Loans (the "Underlying
Mortgage Pool Principal Balance") in the Underlying Trust as of the Reference
Date was approximately $608,618,176.
As of the Reference Date, the GE Capital Mortgage Services, Inc., Class A2,
REMIC Multi-Class Pass-Through Certificates, Series 1999-1 (the "Underlying
Class A2 Certificates") had an aggregate principal balance of approximately
$476,838,198, and the Deposited Underlying Certificate had an aggregate
principal balance of approximately $253,743,005. In addition, as of the
Reference Date, the Underlying Subordinated Certificates had an aggregate
principal balance of approximately $27,692,471, representing an approximate
4.55% interest, as of the Reference Date, of the aggregate principal balance of
all certificates issued by the Underlying Trust.
The Trust will be entitled to receive all distributions on the Deposited
Underlying Certificate due after October 25, 2000. As a result of scheduled
payments on the Underlying Mortgage Loans due on October 1, 2000, principal
prepayments in part received during September 2000 and principal prepayments in
full received during the related prepayment period ending on October 15, 2000,
the principal balance of the Deposited Underlying Certificate actually conveyed
to the Trust will be less than the principal balance reflected in the preceding
paragraph.
OTHER UNDERLYING SENIOR CERTIFICATES
The GE Capital Mortgage Services, Inc., REMIC Multi-Class Pass-Through
Certificates, Series 1999-1 (the Underlying Certificates) include sixteen
classes of senior certificates in addition to the Underlying Class A2
Certificates.
S-13
<PAGE> 14
The class of Underlying Senior Certificates designated as Class PO (the
"Underlying Class PO Certificates") is entitled only to principal payments based
on the PO Percentage of principal payments on the Discount Mortgage Loans (each
as defined in "Description of the Certificates -- Distributions on the
Certificates -- Principal" in Exhibit A-1). Scheduled and unscheduled principal
amounts due on Discount Mortgage Loans will be allocated between the Underlying
Class PO Certificates and the other Underlying Senior Certificates based on the
related Non-PO Percentage (as defined in "Description of the
Certificates -- Distributions on the Certificates -- Principal" in Exhibit A-1)
and PO Percentage of such payments.
Pursuant to the Underlying Agreement, the Underlying Senior Certificates
other than the Underlying Class PO Certificates are divided into two certificate
groups: the Group I Senior Certificates and the Group II Senior Certificates.
The Group II Senior Certificates consist of the Underlying Senior Certificates
designated as Class A1 (the "Underlying Class A1 Certificates"). The Group I
Senior Certificates consist of the Underlying A2 Certificates and Underlying
Senior Certificates designated as Class A3, Class A4, Class A5, Class A6, Class
A7, Class A8, Class A9, Class A10, Class A11, Class A12, Class A13, Class A14,
Class A15 or Class R. As of the Reference Date, the outstanding class
certificate principal balance of the Underlying Class A1 Certificates was
$66,364,892, which constitutes approximately 11.42% of the aggregate outstanding
principal balance of the Underlying Senior Certificates as of the Reference
Date. The Underlying Class A1 Certificates are "lockout" certificates that are
entitled to receive either none of the collections in respect of principal
prepayments on the Underlying Mortgage Loans or disproportionately small
percentages of such prepayment collections (depending upon the Underlying
Distribution Date in question) until the Underlying Distribution Date in January
2008. As outlined in "-- Distributions on the Deposited Underlying Certificate"
below, the amount of principal to be distributed on the Deposited Underlying
Certificate (as well as the other Group I Senior Certificates) is affected by
the amount of principal to be distributed on the Underlying Class A1
Certificates. The order of priority in which distributions of principal are
allocated among the Underlying Certificates is discussed further in "Description
of the Certificates -- Distributions on the Certificates -- Principal" in the
excerpts from the Underlying Prospectus Supplement that are attached to this
Prospectus Supplement as Exhibit A-1.
For a description in additional detail of the Underlying Senior
Certificates, see "Description of the Certificates" in the excerpts from the
Underlying Prospectus Supplement that are attached to this Prospectus Supplement
as Exhibit A-1.
UNDERLYING SUBORDINATED CERTIFICATES
The Underlying Senior Certificates, which represent senior interests in the
Underlying Trust, evidence the right of the holders thereof to receive
distributions on the Underlying Mortgage Loans before any distributions have
been made to holders of the Underlying Subordinate Certificates. This
subordination is intended to enhance the likelihood of regular receipt by
holders of the Underlying Senior Certificates (including the Deposited
Underlying Certificate) of the full amount of monthly distributions due them and
to protect holders of the Underlying Senior Certificates against losses and
other cash flow shortfalls. If, on any Underlying Distribution Date, holders of
the Underlying Senior Certificates are paid less than the amount due to them on
such date, the interest of the holders of such Underlying Senior Certificates in
the Underlying Trust will vary so as to preserve the entitlement of such
Underlying Senior Certificates to unpaid principal of the Underlying Mortgage
Loans and interest thereon. This subordination is subject to certain limitations
described under "Description of the Certificates -- Subordination" and
"-- Allocation of Realized Losses on the Certificates" in Exhibit A-1.
Amounts with respect to principal (other than scheduled monthly
distributions of principal) will be disproportionately allocated to the
Underlying Senior Certificates (including the Deposited Underlying Certificate)
under certain conditions specified in the Underlying Agreement. This will have
the effect of accelerating the amortization of the Underlying Senior
Certificates and reducing their proportionate share in the Underlying Trust
while increasing the proportionate share of the Underlying Subordinate
Certificates in the Underlying Trust. Increasing the interest of the Underlying
Subordinate Certificates in
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<PAGE> 15
the Underlying Trust relative to that of the Underlying Senior Certificates is
intended to preserve the availability of the benefits of the subordination
provided by such Underlying Subordinate Certificates. See "Description of the
Certificates -- Distributions on the Certificates -- Principal" and
"-- Subordination" in Exhibit A-1.
If at any time the Underlying Subordinate Certificates have been
extinguished, all future losses or shortfalls due to delinquent payments on the
Underlying Mortgage Loans for which no advance is made by GECMS, as servicer, or
the Underlying Trustee will be borne by the Underlying Senior Certificates,
including the Deposited Underlying Certificate.
For a description in additional detail of the credit enhancement for the
Underlying Senior Certificates that the Underlying Subordinated Certificates
provide, see "Description of the Certificates -- Subordination" and
"-- Allocation of Realized Losses on the Certificates" in the excerpts from the
Underlying Prospect Supplement that are attached to this Prospectus Supplement
as Exhibit A-1.
DISTRIBUTIONS ON THE DEPOSITED UNDERLYING CERTIFICATE
Distributions of principal and interest on the Deposited Underlying
Certificate will be made on the 25th day of each month or, if that day is not a
business day, on the first business day thereafter (each such date, an
"Underlying Distribution Date").
The Deposited Underlying Certificate is generally entitled to a monthly
distribution of interest at its annual certificate interest rate of 6.50% on
their outstanding class certificate principal balance and to accrued but
previously unpaid interest. However, the amount of interest distributed on the
Deposited Underlying Certificate may be less than the amount calculated at the
annual certificate interest rate indicated above as a result of net prepayment
interest shortfalls, other interest shortfalls and realized losses applicable to
interest allocated to the Deposited Underlying Certificate.
Interest on the Deposited Underlying Certificate is computed on the basis
of a 360-day year consisting of twelve 30-day months.
The Deposited Underlying Certificate is entitled to a monthly principal
distribution equal to a percentage of the Group I Senior Principal Distribution
Amount until the class certificate principal balance thereof is reduced to zero.
The Group I Senior Principal Distribution Amount (as defined in "Description of
the Certificates -- Distributions on the Certificates -- Allocation of Available
Funds" in Exhibit A-1) equals, with respect to any Underlying Distribution Date,
the Senior Optimal Principal Distribution Amount for such Underlying
Distribution Date minus the Group II Senior Principal Distribution Amount for
such Underlying Distribution Date. The Group II Senior Principal Distribution
Amount (which is defined in full in "Description of the
Certificates -- Distributions on the Certificates -- Principal" in Exhibit A-1)
equals, with respect to any Underlying Distribution Date, a certain portion of
the Senior Optimal Principal Amount that is allocable on such Underlying
Distribution Date to the Underlying Class A1 Certificates. The Senior Optimal
Principal Amount (which is defined in full in "Description of the
Certificates -- Distributions on the Certificates -- Principal" in Exhibit A-1),
for any Underlying Distribution Date is generally equal to: (i) the Senior
Percentage (as defined in "Description of the Certificates -- Distributions on
the Certificates -- Principal" in Exhibit A-1) of the applicable Non-PO
percentage of all scheduled principal payments due on the Underlying Mortgage
Loans in the month of that Underlying Distribution Date; (ii) the Senior
Prepayment Percentage (as defined in "Description of the
Certificates -- Distributions on the Certificates -- Principal" in Exhibit A-1)
of the applicable Non-PO percentage of the principal prepayments received, in
the case of partial prepayments, during the prior calendar month and, in the
case of prepayments in full, from the 16th day of the prior calendar month
through the 15th day of the month of that Underlying Distribution Date; (iii) a
portion of the liquidation proceeds received on any liquidated Underlying
Mortgage Loan during the prior calendar month; and (iv) a certain portion of
amounts in respect of (A) repurchases of Underlying Mortgage Loans by GECMS
pursuant to the Underlying Agreement and (B) the positive difference (if any)
between the outstanding principal balance of an Underlying Mortgage Loan that is
replaced in the Underlying Trust by
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<PAGE> 16
GECMS pursuant to the Underlying Agreement and the outstanding principal balance
of the Underlying Mortgage Loan that is substituted therefor.
Pursuant to the Underlying Agreement, after the class certificate principal
balance of the Underlying Senior Certificates designated as Class R has been
reduced to zero (which has occurred), the Underlying Class A2 Certificates
(including the Deposited Underlying Certificate) are entitled to receive 100% of
the Group I Senior Principal Distribution Amount until the class certificate
principal balance of the Underlying Class A2 Certificates has been reduced to
zero.
For a description in additional detail of the distribution of interest on
and principal of the Deposited Underlying Certificate, see "Description of the
Certificates -- Distributions on the Certificates -- Interest" and
"-- Principal" in the excerpts from the Underlying Prospectus Supplement that
are attached to this Prospectus Supplement as Exhibit A-1.
ALLOCATION OF LOSSES ON THE UNDERLYING MORTGAGE LOANS
The applicable Non-PO percentage of all Realized Losses, other than Excess
Losses or Debt Service Reductions (each as defined in "Description of the
Certificates -- Allocation of Realized Losses on the Certificates" in Exhibit
A-1) incurred on an Underlying Mortgage Loan will be allocated in the following
order: first, to the Underlying Subordinate Certificates, in decreasing order of
their numerical class designations, in each case until the class certificate
principal balance of the respective class of certificates has been reduced to
zero; and second, to the Underlying Senior Certificates, pro rata, based on
their respective class certificate principal balances. The applicable PO
Percentage of all Realized Losses, including Excess Losses but not including
Debt Service Reductions, will be allocated to the Class PO Underlying
Certificates until the class certificate principal balance thereof is reduced to
zero.
The applicable Non-PO Percentage of Bankruptcy Losses, Special Hazard
Losses and Fraud Losses (each as defined in "Description of the
Certificates -- Allocation of Realized Losses on the Certificates" in Exhibit
A-1) that are realized on the Underlying Mortgage Loans before the reduction of
the related Bankruptcy Loss Amount, Special Hazard Loss Amount and Fraud Loss
Amount (each as defined in "Description of the Certificates -- Allocation of
Realized Losses on the Certificates" in Exhibit A-1), respectively, have been
reduced to zero, will generally be allocated to the Underlying Subordinate
Certificates. Thereafter, the applicable Non-PO Percentage of all Bankruptcy
Losses, Special Hazard Losses and Fraud Losses realized on the Underlying
Mortgage Loans (i.e., Excess Losses) will be allocated to all of the Underlying
Senior Certificates and the Underlying Subordinate Certificates, pro rata, based
on their respective class certificate principal balances.
If at any time the Underlying Subordinate Certificates have been
extinguished, all future losses on the Underlying Mortgage Loans or shortfalls
due to delinquent payments on the Underlying Mortgage Loans for which no advance
is made by GECMS will be borne by the Underlying Senior Certificates.
For a description in additional detail of the allocation of Realized Losses
on the Deposited Underlying Certificate, see "Description of the
Certificates -- Allocation of Realized Losses on the Certificates" in the
excerpts from the Underlying Prospectus Supplement that are attached to this
Prospectus Supplement as Exhibit A-1.
ADVANCES
If a mortgagor on an Underlying Mortgage Loan fails to make any payment of
principal or interest required under the terms of that Underlying Mortgage Loan,
GECMS, as servicer of the Underlying Mortgage Loans, will advance the entire
amount of such payment, net of the applicable servicing fee, less the amount
that GECMS reasonably believes will not be recoverable out of liquidation
proceeds or otherwise. GECMS is not under any obligation to make an advance with
respect to any Underlying Mortgage Loan if GECMS determines, in its sole
discretion, that such advance will not be recoverable from future payments and
collections on such Underlying Mortgage Loan. Advances are intended to maintain
a regular flow of scheduled interest and principal payments on the Underlying
Certificates, not to
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<PAGE> 17
guarantee or insure against losses. Accordingly, any funds so advanced are
recoverable by GECMS out of amounts received on the related Underlying Mortgage
Loans.
The Underlying Trustee will make advances of interest and principal in the
event that GECMS fails to perform its obligation to make a required advance,
except that the Trustee will not make any such advance to the extent that it
reasonably believes that the payment will not be recoverable out of related
liquidation or insurance proceeds or otherwise. The Underlying Trustee will be
entitled to reimbursement for advances in a manner similar to GECMS's
entitlement thereto.
ADJUSTMENT TO SERVICING FEES IN THE UNDERLYING TRUST FUND IN CONNECTION WITH
PREPAID MORTGAGE LOANS
When a mortgagor on an Underlying Mortgage Loan makes a full or partial
principal prepayment of that Underlying Mortgage Loan between due dates, that
mortgagor may be required to pay interest on the principal balance thereof only
to the date of prepayment. In order to minimize any resulting shortfall in
interest, the amount of the servicing fee owed to GECMS, as servicer, will be
reduced to the extent necessary to include an amount in payments in respect of
the related Underlying Certificates equal to a full month's interest payment at
the applicable pass-through rate with respect to such prepaid Underlying
Mortgage Loan. Such reductions will be made only to the extent that the
aggregate amount of such interest shortfalls does not exceed the lesser of (i)
the aggregate amount of GECMS's base servicing fee (net of any servicing
compensation paid to any direct servicer) on such Underlying Distribution Date
and (ii) 1/12th of 0.125% of the aggregate scheduled principal balance of the
Underlying Mortgage Loans for such Underlying Distribution Date. Because the net
amount received by GECMS in respect of its base servicing fee is generally less
in the case of Underlying Mortgage Loans that it master-services than in the
case of Underlying Mortgage Loans that it services directly, the amounts
available for the compensating interest payments described herein will be
reduced to the extent that there is an increase in the percentage (by
outstanding principal balance) of Underlying Mortgage Loans that are
master-serviced, rather than directly serviced, by GECMS. With respect to each
Underlying Mortgage Loan, the base servicing fee payable to GECMS is a fixed
rate per annum of the outstanding principal balance of such Underlying Mortgage
Loan. As of the Reference Date, the weighted average of such base servicing fee
rate was 0.256%.
ASSIGNMENT OF THE DEPOSITED UNDERLYING CERTIFICATE TO THE TRUST; REPRESENTATIONS
AND WARRANTIES
Countrywide Securities Corporation (in such capacity, the "Underlying
Certificate Seller") acquired the Deposited Underlying Certificate in a
secondary market transaction and on the Closing Date, pursuant to a bill of
sale, will convey the Deposited Underlying Certificate, together with the right
to receive all distributions due thereon after October 25, 2000, to CWMBS, Inc.
(the "Depositor"). In turn, the Depositor will, on the Closing Date, convey the
Deposited Underlying Certificate to State Street Bank and Trust Company, as
trustee (in such capacity, the "Trustee") under the Trust Agreement (as defined
below). Beneficial interests in the Deposited Underlying Certificate will be
held in book-entry form indirectly by the Trustee or its nominee through the
book-entry facilities of the Depository (as defined below).
The Underlying Certificate Seller will represent and warrant to the
Depositor and the Trustee in the Trust Agreement as of the Closing Date that,
among other things, (i) immediately prior to the transfer of the Deposited
Underlying Certificate to the Depositor, the Underlying Certificate Seller was
the sole owner of the Deposited Underlying Certificate free and clear of any
lien, pledge, charge or encumbrance of any kind; and (ii) the Underlying
Certificate Seller had not assigned any interest in the Deposited Underlying
Certificate or any distributions thereon, except as contemplated in the Trust
Agreement. Upon discovery of a breach of any of the foregoing representations
and warranties which materially and adversely affects the interests of the
Certificateholders in the Deposited Underlying Certificate, the Underlying
Certificate Seller, the Depositor, or the Trustee shall give prompt written
notice to the others and to the Certificateholders. The Underlying Certificate
Seller will be obligated to cure such breach in all material respects or, if
such breach cannot be cured within 90 days after notice to, or discovery by, the
Underlying Certificate Seller, to repurchase the Deposited Underlying
Certificate if so directed in writing by holders of
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<PAGE> 18
at least 51% of the Percentage Interests of the Certificates other than the
Class A-R Certificate. The "Percentage Interest" for any Certificate will equal
the percentage obtained by dividing the Certificate Principal Balance of such
Certificate by the Class Principal Balance of such Class of Certificates.
FOR ADDITIONAL INFORMATION ON THE DEPOSITED UNDERLYING CERTIFICATE,
PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW THE EXCERPTS FROM THE UNDERLYING
PROSPECTUS SUPPLEMENT THAT ARE ATTACHED TO THIS PROSPECTUS SUPPLEMENT AS EXHIBIT
A-1, THE EXCERPTS FROM THE BASE PROSPECTUS RELATED TO THE DEPOSITED UNDERLYING
CERTIFICATE (THE "UNDERLYING BASE PROSPECTUS") THAT ARE ATTACHED TO THIS
PROSPECTUS SUPPLEMENT AS EXHIBIT A-2 AND THE SEPTEMBER 25, 2000 UNDERLYING TRUST
MONTHLY STATEMENT THAT IS ATTACHED TO THIS PROSPECTUS SUPPLEMENT AS EXHIBIT B.
INFORMATION REGARDING THE DEPOSITED UNDERLYING CERTIFICATES, AS OF THE DATE OF
ISSUANCE THEREOF, INCLUDING BUT NOT LIMITED TO INFORMATION REGARDING RELATED
PAYMENT PRIORITIES AND ALLOCATION OF LOSSES IS SET FORTH IN THE ATTACHED
EXHIBITS. ANY INFORMATION SET FORTH IN THIS PROSPECTUS SUPPLEMENT (INCLUDING
APPENDIX I AND THE EXHIBITS HERETO) WITH RESPECT TO THE DEPOSITED UNDERLYING
CERTIFICATE OR THE UNDERLYING MORTGAGE LOANS HAS BEEN OBTAINED BY THE DEPOSITOR
FROM THE UNDERLYING PROSPECTUS SUPPLEMENT OR FROM DATA COMPILED BY THE SERVICER
OF THE UNDERLYING MORTGAGE LOANS AND PRESENTED IN THE SEPTEMBER 25, 2000
UNDERLYING TRUST MONTHLY STATEMENT THAT IS ATTACHED TO THIS PROSPECTUS
SUPPLEMENT AS EXHIBIT B AND HAS NOT BEEN INDEPENDENTLY VERIFIED BY THE DEPOSITOR
OR THE UNDERWRITER. THE UNDERLYING PROSPECTUS AND ALL OTHER OFFERING MATERIALS
DESCRIBED ABOVE FOR THE DEPOSITED UNDERLYING CERTIFICATE WERE PREPARED BY THE
ISSUER OF THE DEPOSITED UNDERLYING CERTIFICATE.
ADDITIONAL INFORMATION CONCERNING THE DEPOSITED UNDERLYING CERTIFICATE IS
ALSO AVAILABLE ON BLOOMBERG L.P. ("BLOOMBERG") PAGE "DES." THE INFORMATION ON
BLOOMBERG PAGE "DES" HAS NOT BEEN INDEPENDENTLY VERIFIED BY EITHER THE DEPOSITOR
OR THE UNDERWRITER, AND NEITHER THE DEPOSITOR NOR THE UNDERWRITER MAKES ANY
REPRESENTATION AS TO THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION.
DESCRIPTION OF THE UNDERLYING MORTGAGE LOANS
EXCEPT FOR CERTAIN INFORMATION PROVIDED IN THE TABLES ATTACHED AS APPENDIX
I TO THIS PROSPECTUS SUPPLEMENT, ALL OF THE INFORMATION CONTAINED HEREIN WITH
RESPECT TO THE UNDERLYING MORTGAGE LOANS IS BASED SOLELY ON (i) INFORMATION
CONTAINED IN THE UNDERLYING PROSPECTUS SUPPLEMENT, EXCERPTS FROM WHICH ARE
ATTACHED TO THIS PROSPECTUS SUPPLEMENT AS EXHIBIT A-1, (ii) INFORMATION
CONTAINED IN THE UNDERLYING BASE SUPPLEMENT, EXCERPTS FROM WHICH ARE ATTACHED TO
THIS PROSPECTUS SUPPLEMENT AS EXHIBIT A-2, AND (iii) INFORMATION OBTAINED FROM
DATA COMPILED BY THE SERVICER OF THE UNDERLYING MORTGAGE LOANS AND PRESENTED IN
THE SEPTEMBER 25, 2000 UNDERLYING TRUST MONTHLY STATEMENT THAT IS ATTACHED TO
THIS PROSPECTUS SUPPLEMENT AS EXHIBIT B. NONE OF THE DEPOSITOR, THE UNDERWRITER
OR THE TRUSTEE HAS THE ABILITY INDEPENDENTLY TO VERIFY THE ACCURACY OF THIS
INFORMATION AND, ACCORDINGLY, NONE OF THE DEPOSITOR, THE UNDERWRITER OR THE
TRUSTEE WILL MAKE ANY REPRESENTATION OR WARRANTY AS TO THE ACCURACY OF SUCH
INFORMATION. PROSPECTIVE INVESTORS ARE ADVISED TO CONSIDER THE LIMITED NATURE OF
SUCH AVAILABLE INFORMATION WHEN EVALUATING THE SUITABILITY OF ANY INVESTMENT IN
THE CERTIFICATES.
ORIGINATION AND UNDERWRITING
The Underlying Mortgage Loans were originated or acquired by GECMS. For a
complete description of the sources from which GECMS acquires mortgage loans and
the underwriting policies that GECMS applies to mortgage loans, see "The Trust
Fund -- The Mortgage Loans -- Loan Production Sources" and "-- Loan Underwriting
Policies" in the excerpts from the Underlying Base Prospectus attached to this
Prospectus Supplement as Exhibit A-2.
SERVICING OF THE UNDERLYING MORTGAGE LOANS
GECMS, a New Jersey Corporation, is a wholly-owned subsidiary of GE Capital
Mortgage Corporation ("GECMC"). GECMC is a wholly-owned subsidiary of General
Electric Capital Corporation, which, in turn, is a wholly-owned indirect
subsidiary of General Electric Company. GECMS is
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<PAGE> 19
engaged in the business of refinancing, acquiring and servicing residential
mortgage loans secured by one-to four-family homes. It obtains servicing through
the acquisition and origination of mortgage loans and the purchase of servicing
rights. GECMS is also engaged in the home-equity-loan business through its Home
Equity Services unit.
GECMS acts as servicer of the Underlying Mortgage Loans. As of the
Reference Date, GECMS directly serviced approximately 73% (by aggregate
scheduled principal balance) of the Underlying Mortgage Loans and functioned as
master servicer with respect to the remainder of the Underlying Mortgage Loans.
Such master-serviced Underlying Mortgage Loans are directly serviced by entities
that originated or acquired those loans and sold them to GECMS, pursuant to
servicing agreements between GECMS and those direct servicers. GECMS remains
directly liable to the Underlying Trust for the performance by such direct
servicers of their obligations with respect to the master-serviced Underlying
Mortgage Loans.
SELECTED UNDERLYING MORTGAGE LOAN DATA
The tables in Appendix I to this Prospectus Supplement summarize certain
characteristics of the Underlying Mortgage Loans as of the Reference Date (which
is also the date as of which information regarding the Underlying Mortgage Loans
is provided in the September 25, 2000 Underlying Trust Monthly Statement).
Accordingly, while the information set forth in Appendix I will be
representative of the characteristics of the Underlying Mortgage Loans as of the
Reference Date, the characteristics of the Underlying Mortgage Loans as of the
Closing Date will be different, and may be significantly different from the data
presented in Appendix I. The representations and warranties made with respect to
the Underlying Mortgage Loans at the time of formation of the Underlying Trust
will not be brought down or otherwise updated in connection with the formation
of the Trust.
The following table sets forth certain delinquency information with respect
to the Underlying Mortgage Loans as of the Reference Date, as set forth in the
September 25, 2000 Underlying Trust Monthly Statement. The information contained
in the following table may not be indicative of future delinquent payment rates
of the Underlying Mortgage Loans or reductions in the principal balance of the
Deposited Underlying Certificate.
FOR ADDITIONAL INFORMATION ON THE UNDERLYING MORTGAGE LOANS, PROSPECTIVE
INVESTORS SHOULD CAREFULLY REVIEW THE EXCERPTS FROM THE UNDERLYING PROSPECTUS
SUPPLEMENT ATTACHED TO THIS PROSPECTUS SUPPLEMENT AS EXHIBIT A-1, THE EXCERPTS
FROM THE UNDERLYING PROSPECTUS SUPPLEMENT ATTACHED TO THIS PROSPECTUS SUPPLEMENT
AS EXHIBIT A-2, THE SEPTEMBER 25, 2000 UNDERLYING TRUST MONTHLY STATEMENT
ATTACHED HERETO AS EXHIBIT B, AND THE TABLES IN APPENDIX I TO THIS PROSPECTUS
SUPPLEMENT. INVESTORS ARE CAUTIONED THAT THERE HAVE BEEN CHANGES IN THE
COMPOSITION OF THE UNDERLYING MORTGAGE LOANS SINCE THE DATE OF THE UNDERLYING
PROSPECTUS SUPPLEMENT, AND INVESTORS SHOULD RELY PRIMARILY ON THE INFORMATION IN
APPENDIX I HERETO FOR A MORE ACCURATE DESCRIPTION OF THE UNDERLYING MORTGAGE
LOANS.
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<PAGE> 20
UNDERLYING MORTGAGE LOAN DELINQUENCY INFORMATION AS OF THE REFERENCE DATE
<TABLE>
<CAPTION>
UNDERLYING
UNDERLYING MORTGAGE
MORTGAGE POOL POOL
PRINCIPAL PRINCIPAL NUMBER OF 30-59 NUMBER OF 60-89 NUMBER OF
BALANCE AS OF BALANCE AS UNDERLYING DAYS UNDERLYING DAYS UNDERLYING 90+ DAYS
ORIGINAL ISSUE OF THE MORTGAGE DELINQUENT MORTGAGE DELINQUENT MORTGAGE DELINQUENT
DATE REFERENCE DATE LOANS BALANCE(1) %(2) LOANS BALANCE(1) %(2) LOANS BALANCE(1) %(2)
-------------- -------------- ---------- ---------- ---- ---------- ---------- ---- ---------- ---------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$704,839,386 $608,618,176 1,883 $4,012,003 0.66% 14 $908,183 0.15% 3 $1,369,632 0.23%
(approximate)
<CAPTION>
UNDERLYING
MORTGAGE POOL
PRINCIPAL NUMBER OF NUMBER OF
BALANCE AS OF UNDERLYING IN UNDERLYING
ORIGINAL ISSUE MORTGAGE FORECLOSURE MORTGAGE REO CUMULATIVE CUMULATIVE
DATE LOANS BALANCE(1) %(2) LOANS BALANCE(1) %(2) LOSSES(1) LOSSES %
-------------- ---------- ----------- ---- ---------- ---------- ---- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$704,839,386 2 $0 0.00% 0 $0 0.00% $ 0 0.00%
(approximate)
</TABLE>
------------
(1) Reflects the application of payments on the Underlying Mortgage Loans due on
or before the Reference Date.
(2) Delinquency, Foreclosure and mortgaged properties acquired in respect of
Underlying Mortgage Loans percentages are represented as percentages of the
aggregate Underlying Mortgage Pool Principal Balance as of September 1,
2000.
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<PAGE> 21
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to a trust agreement dated as of
October 30, 2000 (the "Trust Agreement") among the Depositor, the Underlying
Certificate Seller and the Trustee. Set forth below are summaries of the
material terms and provisions pursuant to which the Certificates will be issued.
The following summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, the provisions of the Trust
Agreement. When particular provisions or terms used in the Trust Agreement are
referred to, the actual provisions (including definitions of terms) are
incorporated by reference.
The Resecuritization Mortgage Certificates, Series 2000-7R, will consist of
the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 and Class A-R
Certificates (collectively, the "Certificates"). The Classes of Certificates
will have the respective initial Class Certificate Balances (subject to the
permitted variance) and the Pass-Through Rates set forth on the cover page
hereof.
The Class Certificate Balance of any Class of Certificates as of any
Distribution Date is the initial Class Certificate Balance thereof reduced by
the sum of (i) all amounts previously distributed to holders of Certificates of
such Class as payments of principal and (ii) the amount of Underlying Realized
Losses allocated to such Class, as described below under "-- Allocation of
Losses".
The Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5 Certificates
will evidence an initial beneficial ownership interest of approximately 19.88%,
20.07%, 16.88%, 8.66% and 34.51%, respectively, in the Trust (subject to the
permitted variance). Such initial beneficial ownership interests will change as
the respective Class Certificate Balances of the Classes of Certificates change.
The Class A-R Certificate will remain outstanding for so long as the Trust
shall exist, whether or not it is receiving current distributions of principal
or interest. On each Distribution Date, the holders of the Class A-R Certificate
will be entitled to receive any Available Funds remaining after payment of
interest and principal on the other Certificates as described below. It is not
anticipated that there will be any significant amounts remaining for any such
distribution.
The Book-Entry Certificates will be issuable in book-entry form only. The
Physical Certificates will be issued in fully registered certificated form. The
Class A-R Certificate will be issued as a single Certificate in a denomination
of approximately $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
such Class of Certificates and which will be held by a nominee of The Depository
Trust Company (together with any successor depository selected by the Depositor,
the "Depository"). Beneficial interests in the Book-Entry Certificates will be
held indirectly by investors through the book-entry facilities of the
Depository, as described herein. Investors may hold such beneficial interests in
the Book-Entry Certificates in minimum denominations representing an original
principal amount of $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. ("CEDE").
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 person acquiring a Book-Entry
Certificate (each, a "beneficial owner") will be entitled to receive a physical
certificate representing such Certificate (a "Definitive Certificate").
Unless and until Definitive Certificates are issued, it is anticipated that
the only "Certificateholder" of the 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 Trust Agreement.
Beneficial
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<PAGE> 22
owners are only permitted to exercise the rights of Certificateholders
indirectly through Financial Intermediaries and the Depository. Monthly and
annual reports on the Trust 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 such 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.
DEPOSITS TO THE DISTRIBUTION ACCOUNT
On or prior to the Closing Date, the Trustee will establish an account (the
"Distribution Account"), which will be maintained in trust for the benefit of
the Certificateholders. The Trustee will deposit or cause to be deposited in the
Distribution Account all amounts it receives in respect of the Deposited
Underlying Certificate. It is expected that payments on the Deposited Underlying
Certificate will be received by the Trustee on each Distribution Date and will
then be used to make distributions on that day to Certificateholders as
described below. Amounts on deposit in the Distribution Account will not be
invested.
WITHDRAWALS FROM THE DISTRIBUTION ACCOUNT
The Trustee is permitted from time to withdraw funds from the Distribution
Account for the following purposes: (i) to make payments to the
Certificateholders as described herein, (ii) to reimburse the Depositor for
certain expenses and liabilities reimbursable to the Depositor under the Trust
Agreement, (iii) to pay any taxes imposed on the Trust, (iv) to withdraw any
amount deposited in the Distribution Account and not required to be deposited
therein and (v) to clear and terminate the Distribution Account upon termination
of the Trust Agreement.
DISTRIBUTIONS
Distributions on the Certificates will be made by the Trustee on the 25th
day of each month or, if such day is not a business day, on the first business
day thereafter, commencing in November 2000 (each, a "Distribution Date"), to
the persons in whose names such Certificates are registered at the close of
business on the last business day of the month preceding the month of such
Distribution Date (each, a "Record Date").
Distributions on each Distribution Date will be made by check mailed to the
address of the person entitled thereto as it appears on the applicable
certificate register or, in the case of a Certificateholder who holds 100% of a
Class of Certificates or who holds Certificates with an aggregate initial
Certificate Balance of $1,000,000 or more and who has so notified the Trustee in
writing in accordance with the Trust Agreement, by wire transfer in immediately
available funds to the account of such Certificateholder at a bank or other
depository institution having appropriate wire transfer facilities; provided,
however, that the final distribution in retirement of the Certificates will be
made only upon presentment and surrender of such Certificates at the Corporate
Trust Office of the Trustee.
Notwithstanding anything to the contrary in this Prospectus Supplement, if,
on any Distribution Date, the Trustee is not in receipt of distributions on the
Deposited Underlying Certificate for the related Underlying Distribution Date
(any such late distributions, "Delayed Underlying Distributions"), then such
Delayed Underlying Distributions will be distributed on the immediately
succeeding Distribution Date to each holder of a Certificate entitled thereto
(as of such original Distribution Date). No interest will accrue on such Delayed
Underlying Distributions during the related Delayed Underlying Distributions
Deposit Period, and no such interest will be distributed to any holder entitled
to receive any Delayed Underlying Distributions. The "Delayed Underlying
Distributions Deposit Period," with respect to any Delayed Underlying
Distributions, is the period from (i) the Underlying Distribution Date on which
such Delayed Underlying Distributions were due to be distributed on the
Deposited Underlying Certificate to (ii) the
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Distribution Date on which such Delayed Underlying Distributions are distributed
to holders of Certificates, as described in the preceding sentence.
PRIORITY OF DISTRIBUTIONS AMONG CERTIFICATES
As more fully described herein, Available Interest Funds (as defined below)
will be distributed on each Distribution Date as interest on each Class of
Certificates (except that, with respect to the Class A-4 Certificates, on and
prior to the Accrual Termination Date, interest will be added to the Class
Certificate Balance of the Class A-4 Certificates). Similarly, Available
Principal Funds will be distributed on each Distribution Date as principal on
the Classes of Certificates then entitled to receive distributions of principal,
in the order and subject to the priorities set forth herein under "Description
of the Certificates -- Principal." In addition, on each Distribution Date on and
prior to the Accrual Termination Date, the amount of Available Interest Funds
equal to the amount of interest accrued on the Class A-4 Certificates will be
distributed as principal on the Class A-1, Class A-2 Class A-3 and Class A-5
Certificates (collectively, the "Accretion Directed Certificates"), in the order
and subject to the priorities set forth herein under "Description of the
Certificates -- Principal -- Class A-4 Accrual Amount."
"Available Interest Funds" with respect to any Distribution Date will be
equal to the aggregate of all previously undistributed amounts received by the
Trustee on or prior to such Distribution Date as distributions of interest on
the Deposited Underlying Certificate. "Available Principal Funds" with respect
to any Distribution Date will be equal to (i) the aggregate of all previously
undistributed amounts received by the Trustee on or prior to such Distribution
Date as distributions of principal on the Deposited Underlying Certificate,
reduced by (ii) the sum of certain expenses and liabilities reimbursable to the
Depositor under the Trust Agreement and any taxes imposed on the Trust that have
not previously been paid by a reduction of Available Funds. "Available Funds"
with respect to any Distribution Date will be equal to the sum of Available
Interest Funds and Available Principal Funds for such Distribution Date.
INTEREST
The Classes of Certificates will have the respective Pass-Through Rates set
forth on the cover.
On each Distribution Date, each Class of Certificates will be entitled to
receive (or, in the case of the Class A-4 Certificates, to have added to its
Class Certificate Balance until the Accrual Termination Date, as defined below)
from Available Interest Funds an amount allocable to interest (as to each such
Class, the "Interest Distribution Amount") with respect to the related Interest
Accrual Period. The Interest Distribution Amount for any Class will be equal to
the sum of (i) interest at the applicable Pass-Through Rate on the related Class
Certificate Balance and (ii) the sum of the amounts, if any, by which the amount
described in clause (i) above on each prior Distribution Date exceeded the
amount actually distributed or accreted as interest on such prior Distribution
Dates and not subsequently distributed or accreted ("Unpaid Interest Amounts").
The Class A-4 Certificates are accrual certificates. Interest will accrue
on the Class A-4 Certificates during each Interest Accrual Period at a per annum
rate of 6.50%. However, this interest will not be distributed on the Class A-4
Certificates until the Distribution Date on which the Class Certificate Balance
of the Class A-3 Certificates has been reduced to zero (such date, the "Accrual
Termination Date"). This amount of accrued and unpaid interest will be added to
the Class Certificate Balance of the Class A-4 Certificates on the related
Distribution Date.
With respect to each Distribution Date, the "Interest Accrual Period" for
each Class of Certificates will be the calendar month preceding the month of
such Distribution Date.
If the interest entitlement of the Underlying Class A2 Certificates is
reduced as provided in the Underlying Agreement, the interest entitlement of
each Class of Certificates for the corresponding Interest Accrual Period will be
reduced proportionately. A reduction in such interest entitlement may result
from Special Hazard Losses, Fraud Losses or Bankruptcy Losses (each as defined
in the Underlying Prospectus Supplement) in excess of the coverages for such
losses provided by the Underlying Subordinated
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Certificates, or Net Interest Shortfalls (as defined in the Underlying
Prospectus Supplement). See "Description of the Certificates -- Distributions on
the Certificates -- Interest" and "-- Allocation of Realized Losses on the
Certificates" in the excerpts from the Underlying Prospectus Supplement that are
attached to this Prospectus Supplement as Exhibit A-1.
Accrued interest to be distributed or accreted on any Distribution Date
will be calculated, in the case of each Class of Certificates, on the basis of
the related Class Certificate Balance immediately prior to such Distribution
Date. Interest will be calculated and payable on the basis of a 360-day year
divided into twelve 30-day months.
In the event that, on a particular Distribution Date, Available Interest
Funds in the Distribution 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 or accreted on each Class of Certificates based on the amount of
interest each such Class would otherwise have been entitled to receive or
accrete in the absence of such shortfall. Any Unpaid Interest Amount will be
carried forward and added to the amount holders of each such Class of
Certificates will be entitled to receive or accrete on the next Distribution
Date. Any Unpaid Interest Amount so carried forward will not bear interest.
PRINCIPAL
Class A-4 Accrual Amount. On each Distribution Date up to and including
the Accrual Termination Date, an amount of Available Interest Funds for such
Distribution Date equal to Class A-4 Accrual Amount for such Distribution Date
will be distributed as principal on the Accretion Directed Certificates in the
following order of priority:
(i) concurrently, 29.72293668% to the Class A-1 Certificates,
23.93053079% to the Class A-2 Certificates, and 46.34653253%
to the Class A-5 Certificates until the Class Certificate
Balance of the Class A-1 Certificates is reduced to zero;
(ii) concurrently, 53.65346747% to the Class A-2 Certificates, and
46.34653253% to the Class A-5 Certificates until the
respective Class Certificate Balances thereof are reduced to
zero;
(iii) to the Class A-3 Certificates until the Class Certificate
Balance thereof is reduced to zero; and
(iv) to the Class A-4 Certificates until the Class Certificate
Balance thereof is reduced to zero.
The "Class A-4 Accrual Amount" is, with respect to any Distribution Date prior
to or on the Accrual Termination Date, the amount of Available Interest Funds
for such Distribution Date equal to the amount that is allocable to interest on,
but is added to the Class Certificate Balance of, the Class A-4 Certificates.
Priority of Principal Distributions. On each Distribution Date, Available
Principal Funds will be distributed to the following Classes of Certificates, in
the following order of priority:
(i) to the Class A-R Certificate until the Class Certificate
Balance thereof is reduced to zero;
(ii) concurrently, 29.72293668% to the Class A-1 Certificates,
23.93053079% to the Class A-2 Certificates, and 46.34653253%
to the Class A-5 Certificates until the Class Certificate
Balance of the Class A-1 Certificates is reduced to zero;
(iii) concurrently, 53.65346747% to the Class A-2 Certificates, and
46.34653253% to the Class A-5 Certificates until the
respective Class Certificate Balances thereof are reduced to
zero;
(iv) to the Class A-3 Certificates until the Class Certificate
Balance thereof is reduced to zero; and
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(v) to the Class A-4 Certificates until the Class Certificate
Balance thereof is reduced to zero.
ALLOCATION OF LOSSES
On each Distribution Date, the Certificates will be allocated, pro rata in
accordance with their Class Certificate Balances, all Realized Losses (including
Excess Losses) (each as defined in the Underlying Prospectus Supplement) that
are allocated to the Deposited Underlying Certificate (collectively, "Underlying
Realized Losses"). The Deposited Underlying Certificate represents approximately
53.21% of all Underlying Class A2 Certificates and the Underlying Realized
Losses allocated thereto will represent such percentage of all Realized Losses
(including Excess Losses) allocated to such class. See "Description of the
Certificates -- Allocation of Realized Losses on the Certificates" and
"-- Subordination" in the excerpts from the Underlying Prospectus Supplement
attached to this Prospectus Supplement as Exhibit A-1 for a description of the
allocation of Realized Losses (including Excess Losses). As reported in the
September 25, 2000 Underlying Trust Monthly Statement, there were no Special
Hazard Losses, Bankruptcy Losses or Fraud Losses as of the Reference Date, and
the Special Hazard Loss Amount, the Bankruptcy Loss Amount and the Fraud Loss
Amount equaled $7,048,394, $234,320 and $7,048,394, respectively, as of the
Reference Date.
Because principal distributions are paid to certain Classes of Certificates
before other Classes, holders of such Certificates that are entitled to receive
principal later bear a greater risk of being allocated Underlying Realized
Losses than holders of Classes that are entitled to receive principal earlier.
STATEMENTS TO CERTIFICATEHOLDERS
Concurrently with each distribution on a Distribution Date, the Trustee
will forward to the holder of each Certificate a statement generally setting
forth the following information:
(i) Available Interest Funds and Available Principal Funds for
such Distribution Date, and the amount (if any) by which
Available Principal Funds has been reduced on account of the
payment of certain expenses, liabilities and taxes described
in the definition thereof;
(ii) with respect to such Distribution Date, the aggregate amount
of principal and interest, stated separately, distributed to
holders of each Class of Certificates;
(iii) with respect to such Distribution Date, the amount of any
interest shortfall (including, without limitation, any net
prepayment interest shortfall allocated to the Deposited
Underlying Certificate) for each Class of Certificates,
together with the amount of any unpaid interest shortfall for
such Class immediately following such Distribution Date;
(iv) with respect to each Class of Certificates, the losses
allocated to such Class with respect to such Distribution
Date;
(v) the Class Certificate Balance of each Class of Certificates,
after giving effect to distributions of principal of such
Certificates on such Distribution Date; and
(vi) any additional amount distributed to the holder of the Class
A-R Certificate on such Distribution Date.
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 Underlying Mortgage Loans and the following additional
assumptions (collectively, the "Structuring Assumptions"):
(i) all scheduled payments on the Underlying Mortgage Loans are
timely received on the first day of each month, commencing in
October 2000;
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(ii) the Underlying Mortgage Loans prepaid at an assumed SPA of
150% for September 2000 and thereafter will prepay monthly at
the specified percentages of SPA;
(iii) all principal prepayments constitute prepayments in full of
the Underlying Mortgage Loans are received on the last day
of each month, commencing in September 2000 and include 30
days' interest thereon;
(iv) there are no defaults, losses or interest shortfalls on the
mortgage loans in the Underlying Trust prior to or after the
Closing Date;
(v) the Closing Date is October 30, 2000, and cash distributions
are received by the Certificateholders on the 25th day of
each month, commencing in November 2000 (distributions will
not include any distributions received on the Deposited
Underlying Certificate on or before the October 25, 2000
distribution date for the Underlying Trust);
(vi) the Underlying Mortgage Loans have been amortized using the
respective scheduled payment, outstanding principal balance
(prior to giving effect to prepayments received during the
related prepayment period), and interest rate;
(vii) no optional termination of the Trust or Underlying Trust
occurs;
(viii) the Classes of Certificates have the initial principal
amounts reflected on the cover page hereof;
(ix) payments of principal on the Underlying Trust are made in
accordance with the methodologies and priorities set forth in
the Underlying Prospectus Supplement; and
(x) the initial principal balance of each Certificate is as set
forth herein on the cover page.
Prepayments of mortgage loans commonly are measured relative to a
prepayment standard or model. The model used in preparing certain tables and
schedules 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 Underlying Mortgage Loans. 100% SPA
assumes prepayment rates of 0.2% per annum of the then unpaid principal balance
of such pool of mortgage loans in the first month of the life of such 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 such mortgage loans, 100%
SPA assumes a constant prepayment rate of 6.0% per annum. Multiples may be
calculated from this prepayment rate sequence. For example, 300% SPA assumes
prepayment rates will be 0.6% per annum in month one, 1.2% per annum in month
two, and increasing by 0.6% in each succeeding month until reaching a rate of
18.0% per annum in month 30 and remaining constant at 18.0% 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 TERMINATION OF THE TRUST
The Depositor will have the right to repurchase the Deposited Underlying
Certificate and thereby effect early retirement of the Certificates, subject to
the aggregate Certificate Principal Balances of all Certificates at the time of
repurchase being less than 10% of the aggregate Certificate Principal Balances
of all Certificates on the Closing Date. In the event the Depositor exercises
such option, the purchase price distributed with respect to each Certificate
will be 100% of its then outstanding principal balance and any unpaid accrued
interest thereon at the applicable Pass-Through Rate.
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OPTIONAL TERMINATION OF THE UNDERLYING TRUST
The servicer of the Underlying Mortgage Loans has the right to repurchase
all remaining Underlying Mortgage Loans and all mortgaged properties acquired in
respect of Underlying Mortgage Loans in the Underlying Trust and thereby effect
early retirement of the Deposited Underlying Certificate, subject to the pool
principal balance of such Underlying Mortgage Loans and mortgaged properties
acquired in respect of Underlying Mortgage Loans at the time of repurchase being
less than 10% of the cut-off date pool principal balance of the Underlying
Mortgage Loans.
Upon the servicer effecting such repurchase with respect to the Underlying
Trust, the Trust will terminate and the Trustee will distribute amounts received
in respect of the Deposited Underlying Certificate in connection with such
repurchase to the Certificateholders as described herein on the related
Distribution Date. The proceeds from any such distribution may not be sufficient
to distribute the full amount to which each Class of Certificates is entitled if
the amount received on the Deposited Underlying Certificate is less than the
principal balance thereof plus all accrued and unpaid interest thereon. See "The
Pooling and Servicing Agreement -- Termination" in the excerpts from the
Underlying Prospectus Supplement that are attached to this Prospectus Supplement
as Exhibit A-1.
THE TRUSTEE
State Street Bank and Trust Company will be the Trustee under the Trust
Agreement. The Depositor may maintain other banking relationships in the
ordinary course of business with State Street Bank and Trust Company.
Certificates may be surrendered at the Corporate Trust Office of the Trustee
located at 2 Avenue de Lafayette, 6th Floor, Boston, Massachusetts 02111,
Attention: Global Investor Services Group -- Corporate Trust, Ref. CWMBS, Inc.
Resecuritization Mortgage Trust Series 2000-7R, or at such other addresses as
the Trustee may designate from time to time.
As compensation for its services under the Trust Agreement, the Trustee
will be entitled to receive from the Depositor on the Closing Date a fee (the
"Trustee Fee") in an amount that has been agreed upon by the Depositor and the
Trustee.
AMENDMENT OF THE TRUST AGREEMENT
The Trust Agreement may be amended by the Depositor and the Trustee,
without the consent of any of the Certificateholders: (i) to cure any ambiguity
or mistake; (ii) to correct any defective provision therein or to supplement any
provision therein which may be inconsistent with any other provision therein;
(iii) to add to the duties of the Depositor; (iv) to add any other provisions
with respect to matters or questions arising thereunder; or (v) to modify,
alter, amend, add to or rescind any of the terms or provisions contained in the
Trust Agreement; provided, however, that any action pursuant to clause (iv) or
(v) will not, as evidenced by an opinion of counsel, adversely affect in any
material respect the interests of any Certificateholder; provided, further, that
no such opinion of counsel will be required if the person requesting such
amendment obtains a letter from each Rating Agency (as defined herein) stating
that such amendment will not result in the downgrading or withdrawal of the
respective ratings then assigned to any Class of Certificates. Moreover, the
Trust Agreement may be amended (i) to modify, eliminate or add to any of its
provisions to such extent as may be necessary to maintain the qualification of
the Trust's REMIC election or to avoid or minimize the risk of imposition of any
tax on the REMIC, or (ii) to comply with any other requirements of the Code,
provided that the Trustee has received an opinion of counsel to the effect that
such action is necessary or helpful to maintain such qualification, avoid or
minimize such risk or comply with such requirements, as applicable. The Trust
Agreement may also be amended by the Depositor and the Trustee with the consent
the Underlying Certificate Seller (which will not be unreasonably withheld) and
the consent of the holders of Certificates 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 Trust
Agreement or of modifying in any manner the rights of the holders of the related
Certificates; provided, however, that no such amendment may (i) reduce in any
manner the amount of, or delay the timing of, payments received on Trust assets
that
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are required to be distributed on any Certificate without the consent of the
holder of such Certificate, (ii) adversely affect in any material respect the
interests of the holders of any Class of Certificates in a manner other than as
described in (i), without the consent of the holders of Certificates of such
Class evidencing, as to such Class, Percentage Interests aggregating 66%, (iii)
reduce the aforesaid percentage of Certificates of any Class of holders that is
required to consent to any such amendment without the consent of the holders of
all Certificates of such Class covered by the Trust Agreement then outstanding.
The Trustee will not be entitled to consent to an amendment to the Trust
Agreement without having first received an opinion of counsel to the effect that
such amendment will not cause such Trust's REMIC election to fail. "Majority in
Interest" means as to any Class, the holders of Certificates of such Class
evidencing in aggregate, at least 51% of the Percentage Interests evidenced by
all Certificates of such Class.
VOTING UNDER THE UNDERLYING AGREEMENT
In the event that there are any matters arising under the Underlying
Agreement which require the vote or direction of the holders of Underlying Class
A2 Certificates, the Trustee, as holder of the Deposited Underlying Certificate
on behalf of the Trust, will vote the Deposited Underlying Certificate in
accordance with instructions received from the holders of a Majority in Interest
of each Class of Certificates. In the absence of receipt by the Trustee of
consistent instructions from the holders of a Majority in Interest of each Class
of Certificates, the Trustee will not vote the Deposited Underlying Certificate,
provided, however, that, notwithstanding the absence of such instructions, in
the event a required distribution pursuant to the Underlying Agreement shall not
have been made, the Trustee shall, subject to the provisions of the Trust
Agreement, pursue such remedies as may be available to it as holder of the
Deposited Underlying Certificate in accordance with the terms of the Underlying
Agreement.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
GENERAL
The effective yield to the holders of each Class of Certificates will be
lower than the yield otherwise produced by the applicable Pass-Through Rate and
the purchase price of such Certificates because monthly distributions will not
be payable to such holders until the 25th day (or, if such day is not a business
day, the following business day) of the month following the month in which
interest accrues on the Underlying Mortgage Loans (without any additional
distribution of interest or earnings thereon in respect of such delay).
PREPAYMENT CONSIDERATIONS AND RISKS
If the purchaser of a Certificate offered at a discount calculates the
anticipated yield to maturity of such Certificate based on an assumed rate of
payment of principal that is faster than that actually received, the actual
yield to maturity will be lower than that so calculated. If the purchaser of a
Certificate offered at a premium calculates the anticipated yield to maturity of
such Certificate based on an assumed rate of payment of principal that is slower
than that actually received, the actual yield to maturity will be lower than
that so calculated.
The yield to maturity of the Certificates and the aggregate amount of
distributions on the Certificates will be related to the timing and amount of
principal payments on the Deposited Underlying Certificate, which will be
related to the rate of payment of principal (including prepayments) on the
Underlying Mortgage Loans and the allocation of such principal payments to the
Deposited Underlying Certificate in accordance with the priorities discussed in
the Underlying Prospectus Supplement. The rate of principal payments on the
Underlying Mortgage Loans will be affected by the amortization schedules of the
Underlying Mortgage Loans and by the timing and amount of principal prepayments
thereon. Since the rate of payment of principal of the Underlying Mortgage Loans
will depend on future events and a variety of factors, no assurance can be given
as to such rate or the rate of principal prepayments. The rate of
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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
Underlying Mortgage Loans included in the underlying mortgage pool as described
under "Description of the Mortgage Pool and the Mortgaged Properties" in the
excerpts from the Underlying Prospectus Supplement that are attached to this
Prospectus Supplement as Exhibit A-1 and "The Trust Fund -- The Mortgage Loans
-- Loan Production Sources" and "-- Loan Underwriting Policies" in the excerpts
from the Underlying Base Prospectus attached to this Prospectus Supplement as
Exhibit A-2. In general, if prevailing interest rates were to fall significantly
below the mortgage rates on the Underlying Mortgage Loans, the Underlying
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 Underlying
Mortgage Loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on the Underlying Mortgage Loans would
generally be expected to decrease. No assurances can be given as to the rate of
prepayments on the Underlying Mortgage Loans in stable or changing interest rate
environments.
ACCRETION DIRECTED CERTIFICATES AND ACCRUAL CERTIFICATES
On each Distribution Date prior to or on the Accrual Termination Date,
holders of the Accretion Directed Certificates will receive as monthly principal
distributions an amount of Available Interest Funds for such Distribution Date
equal to the Class A-4 Accrual Amount for such Distribution Date, in the order
and subject to the priorities set forth herein under "Description of the
Certificates -- Principal -- Class A-4 Accrual Amount." On or prior to the
Accrual Termination Date, interest shortfalls allocated to the Class A-4
Certificates will reduce the amount added to the Class Certificate Balance of
such Certificates in respect of interest accrued thereon and will result in a
corresponding reduction of the amount available for distributions in respect of
principal on the Accretion Directed Certificates. Furthermore, because such
interest shortfalls will result in the Class Certificate Balance of the Class
A-4 Certificates being less than it otherwise would be, the amount of interest
that will accrue in the future on the Class A-4 Certificates and be available
for distributions in respect of principal in respect of the Accretion Directed
Certificates will be reduced. Accordingly, the weighted average lives of the
Accretion Directed Certificates would be extended.
In addition, investors in the Class A-4 Certificates should also be aware
that the Accrual Termination Date may be later (or earlier) than otherwise
anticipated if prepayments occur slower (or faster) than anticipated. You should
be aware that the Accrual Termination Date could be different from that assumed
at the time of purchase. Because the Class A-4 Certificates are not entitled to
receive any distributions of interest until the occurrence of the Accrual
Termination Date, such Certificates will likely experience greater price and
yield volatility than would mortgage pass-through certificates that are
otherwise similar but which are entitled to current distributions of interest.
You should consider whether such volatility is suitable to your investment
needs.
WEIGHTED AVERAGE LIVES OF THE CERTIFICATES
The weighted average life of a Certificate is determined by (a) multiplying
the amount of the net reduction, if any, of the Class Certificate Balance of
such Certificate on each Distribution Date by the number of years from the date
of issuance to such Distribution Date, (b) summing the results and (c) dividing
the sum by the aggregate amount of the net reductions in Class Certificate
Balance of such Certificate referred to in clause (a).
The weighted average life of each Class of Certificates will be influenced
by the priority sequence of distributions of principal of the Classes of
Certificates, and the rate of the prepayment of principal (including
prepayments) on the Underlying Mortgage Loans and the allocation of such
principal payments to the Deposited Underlying Certificate in accordance with
the priorities discussed in the Underlying Prospectus Supplement.
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For a discussion of additional factors which may influence the rate of
payments (including prepayments) of the Underlying Mortgage Loans and the
Deposited Underlying Certificate, see
"-- Prepayment Considerations and Risks" herein and "Yield and Prepayment
Considerations" in the Prospectus.
The interaction of the foregoing factors may have different effects on
various Classes of Certificates and the effects on any Class may vary at
different times during the life of such Class. Accordingly, no assurance can be
given as to the weighted average life of any Class of Certificates. Further, to
the extent the prices of the Certificates represent discounts or premiums to
their respective original Class Certificate Balances, variability in the
weighted average lives of such Classes of Certificates will result in
variability in the related yields to maturity. For an example of how the
weighted average lives of the Classes of Certificates may be affected at various
constant percentages of SPA, see the Decrement Tables below.
DECREMENT TABLES
The following tables indicate the percentages of the initial Class
Certificate Balances of the Classes of Certificates that would be outstanding
after each of the dates shown at various constant percentages of SPA and the
corresponding weighted average lives of such Classes. The tables have been
prepared on the basis of the Structuring Assumptions. It is not likely that (i)
the Underlying Mortgage Loans will have the precise characteristics described
herein or (ii) all of the Underlying 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 Underlying 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 Underlying Mortgage Loans is
consistent with the remaining terms to maturity of the Underlying Mortgage Loans
specified in the Structuring Assumptions.
S-30
<PAGE> 31
PERCENT OF INITIAL CLASS CERTIFICATE BALANCES OUTSTANDING*
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2
PERCENTAGES OF SPA PERCENTAGES OF SPA
----------------------------------------------- ---------------------------------------
DISTRIBUTION DATE 100% 150% 200% 250% 300% 400% 100% 150% 200% 250% 300% 400%
----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial................ 100 100 100 100 100 100 100 100 100 100 100 100
October 2001........... 87 81 76 71 65 55 89 85 81 77 72 64
October 2002........... 73 63 53 44 35 18 79 71 63 55 48 34
October 2003........... 60 47 34 21 10 0 68 57 47 37 28 2
October 2004........... 49 32 17 3 0 0 59 46 34 23 4 0
October 2005........... 38 19 3 0 0 0 51 36 22 0 0 0
October 2006........... 28 8 0 0 0 0 43 26 4 0 0 0
October 2007........... 19 0 0 0 0 0 35 16 0 0 0 0
October 2008........... 10 0 0 0 0 0 28 1 0 0 0 0
October 2009........... 2 0 0 0 0 0 22 0 0 0 0 0
October 2010........... 0 0 0 0 0 0 10 0 0 0 0 0
October 2011........... 0 0 0 0 0 0 0 0 0 0 0 0
October 2012........... 0 0 0 0 0 0 0 0 0 0 0 0
October 2013........... 0 0 0 0 0 0 0 0 0 0 0 0
October 2014........... 0 0 0 0 0 0 0 0 0 0 0 0
October 2015........... 0 0 0 0 0 0 0 0 0 0 0 0
October 2016........... 0 0 0 0 0 0 0 0 0 0 0 0
October 2017........... 0 0 0 0 0 0 0 0 0 0 0 0
October 2018........... 0 0 0 0 0 0 0 0 0 0 0 0
October 2019........... 0 0 0 0 0 0 0 0 0 0 0 0
October 2020........... 0 0 0 0 0 0 0 0 0 0 0 0
October 2021........... 0 0 0 0 0 0 0 0 0 0 0 0
October 2022........... 0 0 0 0 0 0 0 0 0 0 0 0
October 2023........... 0 0 0 0 0 0 0 0 0 0 0 0
October 2024........... 0 0 0 0 0 0 0 0 0 0 0 0
October 2025........... 0 0 0 0 0 0 0 0 0 0 0 0
October 2026........... 0 0 0 0 0 0 0 0 0 0 0 0
October 2027........... 0 0 0 0 0 0 0 0 0 0 0 0
October 2028........... 0 0 0 0 0 0 0 0 0 0 0 0
October 2029........... 0 0 0 0 0 0 0 0 0 0 0 0
October 2030........... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)**......... 4.2 3.0 2.3 1.9 1.6 1.2 5.4 3.9 3.0 2.4 2.1 1.5
</TABLE>
------------
* Rounded to the nearest whole percentage.
** Determined as specified under "Weighted Average Lives of the Certificates"
herein.
S-31
<PAGE> 32
PERCENT OF INITIAL CLASS CERTIFICATE BALANCES OUTSTANDING*
<TABLE>
<CAPTION>
CLASS A-3 CLASS A-4
PERCENTAGES OF SPA PERCENTAGES OF SPA
--------------------------------------- ---------------------------------------
DISTRIBUTION DATE 100% 150% 200% 250% 300% 400% 100% 150% 200% 250% 300% 400%
----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 2000............ 100 100 100 100 100 100 100 100 100 100 100 100
October 2001............ 100 100 100 100 100 100 107 107 107 107 107 107
October 2002............ 100 100 100 100 100 100 114 114 114 114 114 114
October 2003............ 100 100 100 100 100 100 121 121 121 121 121 121
October 2004............ 100 100 100 100 100 26 130 130 130 130 130 130
October 2005............ 100 100 100 99 50 0 138 138 138 138 138 84
October 2006............ 100 100 100 52 5 0 148 148 148 148 148 22
October 2007............ 100 100 69 15 0 0 157 157 157 157 102 0
October 2008............ 100 100 36 0 0 0 168 168 168 139 63 0
October 2009............ 100 69 6 0 0 0 179 179 179 99 32 0
October 2010............ 100 39 0 0 0 0 191 191 151 67 8 0
October 2011............ 92 11 0 0 0 0 204 204 115 39 0 0
October 2012............ 63 0 0 0 0 0 218 188 85 16 0 0
October 2013............ 35 0 0 0 0 0 232 154 58 0 0 0
October 2014............ 7 0 0 0 0 0 248 123 35 0 0 0
October 2015............ 0 0 0 0 0 0 225 95 15 0 0 0
October 2016............ 0 0 0 0 0 0 191 69 0 0 0 0
October 2017............ 0 0 0 0 0 0 159 47 0 0 0 0
October 2018............ 0 0 0 0 0 0 128 26 0 0 0 0
October 2019............ 0 0 0 0 0 0 100 8 0 0 0 0
October 2020............ 0 0 0 0 0 0 73 0 0 0 0 0
October 2021............ 0 0 0 0 0 0 48 0 0 0 0 0
October 2022............ 0 0 0 0 0 0 24 0 0 0 0 0
October 2023............ 0 0 0 0 0 0 1 0 0 0 0 0
October 2024............ 0 0 0 0 0 0 0 0 0 0 0 0
October 2025............ 0 0 0 0 0 0 0 0 0 0 0 0
October 2026............ 0 0 0 0 0 0 0 0 0 0 0 0
October 2027............ 0 0 0 0 0 0 0 0 0 0 0 0
October 2028............ 0 0 0 0 0 0 0 0 0 0 0 0
October 2029............ 0 0 0 0 0 0 0 0 0 0 0 0
October 2030............ 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)**.......... 12.5 9.7 7.6 6.1 5.1 3.7 18.3 14.9 12.1 9.8 7.9 5.3
</TABLE>
------------
* Rounded to the nearest whole percentage.
** Determined as specified under "Weighted Average Lives of the Certificates"
herein.
S-32
<PAGE> 33
PERCENT OF INITIAL CLASS CERTIFICATE BALANCES OUTSTANDING*
<TABLE>
<CAPTION>
CLASS A-5 CLASS A-R
PERCENTAGES OF SPA PERCENTAGES OF SPA
--------------------------------------- ---------------------------------------
DISTRIBUTION DATE 100% 150% 200% 250% 300% 400% 100% 150% 200% 250% 300% 400%
----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial.............. 100 100 100 100 100 100 100 100 100 100 100 100
October 2001......... 88 83 78 74 69 60 0 0 0 0 0 0
October 2002......... 76 67 58 50 42 26 0 0 0 0 0 0
October 2003......... 64 52 40 29 19 1 0 0 0 0 0 0
October 2004......... 54 39 25 13 2 0 0 0 0 0 0 0
October 2005......... 44 27 13 0 0 0 0 0 0 0 0 0
October 2006......... 35 17 2 0 0 0 0 0 0 0 0 0
October 2007......... 27 8 0 0 0 0 0 0 0 0 0 0
October 2008......... 19 0 0 0 0 0 0 0 0 0 0 0
October 2009......... 12 0 0 0 0 0 0 0 0 0 0 0
October 2010......... 5 0 0 0 0 0 0 0 0 0 0 0
October 2011......... 0 0 0 0 0 0 0 0 0 0 0 0
October 2012......... 0 0 0 0 0 0 0 0 0 0 0 0
October 2013......... 0 0 0 0 0 0 0 0 0 0 0 0
October 2014......... 0 0 0 0 0 0 0 0 0 0 0 0
October 2015......... 0 0 0 0 0 0 0 0 0 0 0 0
October 2016......... 0 0 0 0 0 0 0 0 0 0 0 0
October 2017......... 0 0 0 0 0 0 0 0 0 0 0 0
October 2018......... 0 0 0 0 0 0 0 0 0 0 0 0
October 2019......... 0 0 0 0 0 0 0 0 0 0 0 0
October 2020......... 0 0 0 0 0 0 0 0 0 0 0 0
October 2021......... 0 0 0 0 0 0 0 0 0 0 0 0
October 2022......... 0 0 0 0 0 0 0 0 0 0 0 0
October 2023......... 0 0 0 0 0 0 0 0 0 0 0 0
October 2024......... 0 0 0 0 0 0 0 0 0 0 0 0
October 2025......... 0 0 0 0 0 0 0 0 0 0 0 0
October 2026......... 0 0 0 0 0 0 0 0 0 0 0 0
October 2027......... 0 0 0 0 0 0 0 0 0 0 0 0
October 2028......... 0 0 0 0 0 0 0 0 0 0 0 0
October 2029......... 0 0 0 0 0 0 0 0 0 0 0 0
October 2030......... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)**....... 4.8 3.5 2.7 2.2 1.8 1.4 0.1 0.1 0.1 0.1 0.1 0.1
</TABLE>
------------
* Rounded to the nearest whole percentage.
** Determined as specified under "Weighted Average Lives of the Certificates"
herein.
LAST SCHEDULED DISTRIBUTION DATE
The Last Scheduled Distribution Date for each Class of Certificates is
January 25, 2031, which is the latest possible maturity date of the Deposited
Underlying Certificate. Since the rate of distributions in reduction of the
Class Certificate Balance of each Class of Certificates will depend on the rate
of payment (including prepayments) of the Underlying Mortgage Loans and
resultant payments of principal on the Deposited Underlying Certificate, the
Class Certificate Balance of any such Class could be reduced to zero
significantly earlier or later than the Last Scheduled Distribution Date. The
rate of payments on the Underlying 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 Underlying Mortgage Loans. See "Yield, Prepayment and
Maturity
S-33
<PAGE> 34
Considerations -- Prepayment Considerations and Risks" and "-- Weighted Average
Lives of the Certificates" herein and "Yield and Prepayment Considerations" in
the Prospectus.
USE OF PROCEEDS
The Depositor's transfer of the Certificates to the Underwriter will serve
as consideration for the Underlying Certificate Seller's transfer of the
Deposited Underlying Certificate, and for the Underlying Certificate Seller's
fulfillment, on behalf of the Depositor, of the Depositor's obligation to pay
the Trustee Fee.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, an election will be made to treat the
Trust Fund as a REMIC. The REMIC will issue the Regular Certificates, which will
be designated as the regular interests in the REMIC. The Class A-R Certificate
will represent the beneficial ownership of the residual interest in the REMIC.
The Regular 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 Class A-4 Certificates will be treated as having been issued with
Original Issue Discount ("OID") for federal income tax purposes equal to the
excess of all expected payments of interest on such Certificates over their
issue price. The Classes of Regular Certificates (other than the Class A-4
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
intends to assume that there will be prepayments on the Underlying Mortgage
Loans at a rate equal to 300% SPA. No representation is made as to whether the
Underlying Mortgage Loans will prepay at the foregoing rate or any other rate.
See "Yield, Prepayment and Maturity Considerations" herein 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
such Certificates.
If the holders of any Regular Certificates are treated as holding such
Certificates at a premium, such holders should consult their tax advisors
regarding the election to amortize bond premium and the method to be employed.
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 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 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 are assets described in such 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 holder of the Residual Certificate must include the taxable income of
the REMIC in its federal taxable income. The resulting tax liability of the
holders may exceed cash distributions to such holders during certain periods.
All or a portion of the taxable income from the 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-34
<PAGE> 35
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.
The Internal Revenue Service has issued proposed Treasury regulations that
would add to the conditions necessary to ensure that a transfer of a noneconomic
residual interest would be respected for federal income tax purposes. The
proposed additional condition provides that the transfer of a noneconomic
residual interest will not qualify under this safe harbor unless the present
value of the anticipated tax liabilities associated with holding the residual
interest does not exceed the present value of the sum of: (i) any consideration
given to the transferee to acquire the interest (the inducement payment), (ii)
future distributions on the interest, and (iii) any anticipated tax savings
associated with holding the interest as the REMIC generates losses. For purposes
of this calculation, the present value is calculated using a discount rate equal
to the lesser of the applicable federal rate and the transferee's cost of
borrowing. The proposed effective date for the changes is February 4, 2000.
It is recommended that a purchaser of the Residual Certificate 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 the Residual Certificate should consult their tax
advisors regarding whether, at the time of acquisition, the 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 Underlying
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 Plan fiduciary which proposes to cause a Plan (as defined below) to
acquire any of the Certificates should consult with its counsel with respect to
the potential consequences under the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and/or the Code, of the Plan's acquisition and
ownership of such Certificates. See "ERISA Considerations" in the Prospectus.
Section 406 of ERISA prohibits "parties in interest" with respect to an employee
benefit plan subject to ERISA from engaging in certain transactions involving
such plan and its assets unless a statutory, regulatory or administrative
exemption applies to the transaction. Section 4975 of the Code imposes certain
excise taxes on prohibited transactions involving "disqualified persons" and
employee benefit plans or other arrangements (including, but not limited to,
individual retirement accounts) described under that Section (together with
employee benefit plans subject to ERISA, "Plans"); ERISA authorizes the
imposition of civil penalties for prohibited transactions involving Plans not
subject to the requirements of Section 4975 of the Code.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
such plans may be invested in the Certificates without regard to the ERISA
considerations described herein and in the Prospectus, subject to the provisions
of other applicable federal and state law. Any such plan that is qualified and
exempt from taxation under Sections 401(a) and 501(a) of the Code may
nonetheless be subject to the prohibited transaction rules set forth in Section
503 of the Code.
S-35
<PAGE> 36
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 Certificates should consider, among other
factors, the extreme sensitivity of the investment to the rate of principal
payments (including prepayments) on the Underlying Mortgage Loans.
The U.S. Department of Labor has proposed an individual administrative
exemption for Countrywide Securities Corporation, Exemption Application No.
D-10863, 65 Fed. Reg. 56720 (September 19, 2000) (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. If granted in the form proposed,
the Exemption would apply to mortgage pass-through certificates such as the
Deposited Underlying Certificate in the Trust Fund, and would be effective for
transactions occurring on or after January 28, 2000.
For a general description of the Exemption and the conditions that must be
satisfied for the Exemption to apply if it is granted in the form proposed, see
"ERISA Considerations" in the prospectus.
If it is granted in the form in which it was proposed, it is expected that
the Exemption will apply to the acquisition and holding by Plans of the
Certificates (other than the Class A-R Certificate) 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 Underlying Mortgage Loans included in the
Underlying Trust by aggregate unamortized principal balance of the assets of the
Underlying Trust.
BECAUSE THE CHARACTERISTICS OF THE CLASS A-R CERTIFICATE MAY NOT MEET THE
REQUIREMENTS OF PROHIBITED TRANSACTION CLASS EXEMPTION 83-1 ("PTE 83-1"), THE
EXEMPTION OR ANY OTHER ISSUED EXEMPTION UNDER ERISA, THE PURCHASE AND HOLDING OF
THE CLASS A-R CERTIFICATE BY A PLAN OR BY INDIVIDUAL RETIREMENT ACCOUNTS OR
OTHER PLANS SUBJECT TO SECTION 4975 OF THE CODE MAY RESULT IN PROHIBITED
TRANSACTIONS OR THE IMPOSITION OF EXCISE TAXES OR CIVIL PENALTIES. CONSEQUENTLY,
TRANSFERS OF THE CLASS A-R CERTIFICATE WILL NOT BE REGISTERED BY THE TRUSTEE
UNLESS THE TRUSTEE RECEIVES: (I) A REPRESENTATION FROM THE TRANSFEREE OF SUCH
CERTIFICATE, ACCEPTABLE TO AND IN FORM AND SUBSTANCE SATISFACTORY TO THE
TRUSTEE, TO THE EFFECT THAT SUCH TRANSFEREE IS NOT AN EMPLOYEE BENEFIT PLAN
SUBJECT TO SECTION 406 OF ERISA OR A PLAN OR ARRANGEMENT SUBJECT TO SECTION 4975
OF THE CODE, NOR A PERSON ACTING ON BEHALF OF ANY SUCH PLAN OR ARRANGEMENT OR
USING THE ASSETS OF ANY SUCH PLAN OR ARRANGEMENT TO EFFECT SUCH TRANSFER; (II)
IF THE PURCHASER IS AN INSURANCE COMPANY, A REPRESENTATION THAT THE PURCHASER IS
AN INSURANCE COMPANY WHICH IS PURCHASING SUCH CERTIFICATE WITH FUNDS CONTAINED
IN AN "INSURANCE COMPANY GENERAL ACCOUNT' (AS SUCH TERM IS DEFINED IN SECTION
V(E) OF PROHIBITED TRANSACTION CLASS EXEMPTION 95-60 ("PTE 95-60")) AND THAT THE
PURCHASE AND HOLDING OF SUCH CERTIFICATES ARE COVERED UNDER SECTIONS I AND III
OF PTE 95-60; OR (III) AN OPINION OF COUNSEL SATISFACTORY TO THE TRUSTEE THAT
THE PURCHASE OR HOLDING OF SUCH CERTIFICATE BY A PLAN, OR ANY PERSON ACTING ON
BEHALF OF A PLAN OR USING SUCH PLAN'S ASSETS, WILL NOT RESULT IN THE ASSETS OF
THE TRUST 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 TRUST AGREEMENT.
Prospective Plan investors should 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, prior to making an investment in any of the
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in any of 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.
S-36
<PAGE> 37
RIGHT TO COMMENT ON PROPOSED EXEMPTION
You are hereby notified that the United States Department of Labor is
considering granting an exemption from the prohibited transaction restrictions
of the Employee Retirement Income Security Act of 1974, the Internal Revenue
Code of 1986, or the Federal Employees' Retirement System Act of 1986. The
exemption under consideration is explained in the Notice of Proposed Exemption,
which is available at 65 Fed. Reg. 56720 (September 19, 2000). A copy of the
Notice of Proposed Exemption may be obtained from Countrywide Securities
Corporation by writing to Countrywide Securities Corporation, 4500 Park Granada,
Calabasas, California 91320, Attention: Compliance Officer or calling
1-800-669-6091. As a person who may be affected by this exemption, you have the
right to comment on the proposed exemption by November 3, 2000. If you may be
adversely affected by the grant of the exemption, you also have the right to
request a hearing on the exemption by November 3, 2000.
Comments or requests for a hearing should be addressed to: Office of
Exemption Determinations, Pension and Welfare Benefits Administration, Room
5649, U.S. Department of Labor, 200 Constitution Avenue N.W., Washington, D.C.
20210, ATTENTION: Application No. D-10863.
The Department will make no final decision on the proposed exemption until
it reviews all comments received in response to the enclosed notice. If the
Department decides to hold a hearing on the exemption before making its final
decision, persons who have contacted Countrywide Securities Corporation in
writing at Countrywide Securities Corporation, 4500 Park Granada, Calabasas,
California 91320, Attention: Compliance Officer or by phone at 1-800-669-6091 to
request a copy of the Notice of Proposed Exemption or to request that they be
notified of any hearing concerning the proposed exemption will be notified of
the time and place of the hearing.
When the proposed exemption is granted, any current or prospective plan
investor in a Certificate, other than the Class A-R Certificate, may receive a
copy of the Exemption published in the Federal Register by writing to
Countrywide Securities Corporation, 4500 Park Granada, Calabasas, California
91320, Attention: Compliance Officer or calling 1-800-669-6091.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Depositor and Countrywide Securities Corporation (in such capacity,
the "Underwriter"), the Depositor has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from the Depositor, the Certificates.
Distribution of the Certificates will be made by the Underwriter 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 Certificates, the
Underwriter may be deemed to have received compensation from the Depositor in
the form of underwriting discounts.
The Underwriter intends to make a secondary market in the Certificates, but
has no obligation to do so. There can be no assurance that a secondary market
for the Certificates will develop or, if it does develop, that it will continue
or that it will provide Certificateholders with a sufficient level of liquidity
of investment.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Certificates, including certain federal income tax
consequences with respect thereto, will be passed upon for the Depositor by
Brown & Wood LLP, New York, New York. Stroock & Stroock & Lavan LLP, New York,
New York, will pass upon certain legal matters on behalf of the Underwriter.
S-37
<PAGE> 38
RATINGS
It is a condition to the issuance of the Certificates that each lass of
Certificates be assigned the ratings designated below by Fitch, Inc. ("Fitch")
and Standard and Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"
and, together with Fitch, the "Rating Agencies").
<TABLE>
<CAPTION>
FITCH S&P
CLASS RATING RATING
----- ------ ------
<S> <C> <C>
A-1 AAA AAA
A-2 AAA AAA
A-3 AAA AAA
A-4 AAA AAA
A-5 AAA AAA
A-R AAA AAA
</TABLE>
The ratings assigned by Fitch to mortgage pass-through certificates address
the likelihood of the receipt by certificateholders of all distributions to
which such certificateholders are entitled. Fitch's rating opinions address the
structural and legal aspects associated with the certificates, including the
nature of the underlying mortgage loans. Fitch's ratings on pass-through
certificates do not represent any assessment of the likelihood or rate of
principal prepayments and consequently any adverse effect the timing of such
prepayments could have on an investor's anticipated yield. The rating assigned
by Fitch to the Class A-R Certificate only addresses the return of its Class
Certificate Balance and interest thereon at its stated Pass-Through Rate.
The ratings assigned by S&P 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 such
certificates are issued. S&P ratings take into consideration the credit quality
of the related mortgage pool, including any credit support providers, structural
and legal aspects associated with such certificates, and the extent to which the
payment stream on the mortgage pool is adequate to make the payments required by
such certificates. S&P ratings on such certificates do not, however, constitute
a statement regarding frequency of prepayments of the mortgage loans.
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 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 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 Certificates or, if it does, what
rating would be assigned by such other rating agency. The rating assigned by
such other rating agency to the Certificates could be lower than the respective
ratings assigned by the Rating Agencies.
S-38
<PAGE> 39
EXHIBIT A-1
EXCERPTS FROM THE GE CAPITAL MORTGAGE SERVICES 1999-1 PROSPECTUS SUPPLEMENT
THE INFORMATION ABOUT THE GE CAPITAL MORTGAGE SERVICES, INC. REMIC
MULTI-CLASS PASS-THROUGH CERTIFICATES, SERIES 1999-1, CLASS A2 (THE "UNDERLYING
CERTIFICATES") CONTAINED IN THIS EXHIBIT A-1 HAS BEEN OBTAINED FROM THE
PROSPECTUS SUPPLEMENT DATED JANUARY 21, 1999 (THE "GE CAPITAL MORTGAGE SERVICES
1999-1 PROSPECTUS SUPPLEMENT") WHICH WAS PREPARED IN CONNECTION WITH THE INITIAL
OFFERING OF THE PUBLICLY OFFERED CERTIFICATES OF SUCH SERIES. SUCH INFORMATION
HAS NOT BEEN INDEPENDENTLY REPRESENTED TO THE DEPOSITOR OR THE UNDERWRITER AS
BEING ACCURATE AND COMPLETE AND NEITHER THE DEPOSITOR NOR THE UNDERWRITER MAKES
ANY REPRESENTATION AS TO THE ACCURACY OR COMPLETENESS OF THE INFORMATION IN THIS
EXHIBIT A-1, THE GE CAPITAL MORTGAGE SERVICES 1999-1 PROSPECTUS SUPPLEMENT OR
ANY RELATED DOCUMENTS. COPIES OF THE GE CAPITAL MORTGAGE SERVICES 1999-1
PROSPECTUS SUPPLEMENT, THE GE CAPITAL MORTGAGE SERVICES 1999-1 BASE PROSPECTUS
(AS DEFINED IN EXHIBIT A-2) AND THE RELATED UNDERLYING AGREEMENT CAN BE OBTAINED
BY PURCHASERS OF THE CERTIFICATES, AT NO COST TO SUCH PURCHASERS, BY WRITTEN
REQUEST TO THE TRUSTEE, AT THE FOLLOWING ADDRESS: STATE STREET BANK AND TRUST
COMPANY, CORPORATE TRUST DEPARTMENT, 2 AVENUE DE LAFAYETTE, 6TH FLOOR, BOSTON,
MASSACHUSETTS 02111, REFERENCE: GECMS 1999-1. ALL CAPITALIZED TERMS CONTAINED IN
THE FOLLOWING EXCERPTS FROM THE GE CAPITAL MORTGAGE SERVICES 1999-1 PROSPECTUS
SUPPLEMENT HAVE THE MEANINGS SPECIFIED IN THE GE CAPITAL MORTGAGE SERVICES
1999-1 PROSPECTUS SUPPLEMENT.
* * *
DESCRIPTION OF THE MORTGAGE POOL AND THE MORTGAGED PROPERTIES
GENERAL
The Certificates will represent the entire beneficial ownership interest in
a trust fund (the "Trust Fund"). The assets of the Trust Fund will consist
primarily of a pool (the "Mortgage Pool") of conventional, fixed-rate,
fully-amortizing mortgage loans (the "Mortgage Loans"). The Mortgage Loans are
secured by mortgages, deeds of trust or other security instruments (each, a
"Mortgage") creating a first lien on one- to four-family residential properties
(the "Mortgaged Properties").
* * *
The "Scheduled Principal Balance" of a Mortgage Loan as of the Cut-off Date
is the then outstanding principal balance thereof, after deducting payments of
principal due on or before such date. The "Scheduled Principal Balance" of a
Mortgage Loan as of any Distribution Date (as defined herein) is the unpaid
principal balance of such Mortgage Loan as specified in the amortization
schedule at the time relating thereto (before any adjustment to such schedule by
reason of bankruptcy or similar proceeding or any moratorium or similar waiver
or grace period) as of the first day of the month preceding the month of such
Distribution Date, after giving effect to any previously applied partial
principal prepayments, the payment of principal due on such first day of the
month and Deficient Valuations occurring after the Bankruptcy Coverage
Termination Date (as such terms are defined herein), irrespective of any
delinquency in payment by the related borrower (the "Mortgagor"). The "Pool
Scheduled Principal Balance" as of any Distribution Date is equal to the
aggregate Scheduled Principal Balances of all of the Mortgage Loans that were
Outstanding Mortgage Loans on the first day of the month preceding the month of
such Distribution Date (or such other date as is specified). An "Outstanding
Mortgage Loan" is any Mortgage Loan which has not been prepaid in full, has not
become a Liquidated Mortgage Loan and has not been repurchased.
It is expected that at least 95% (by Scheduled Principal Balance as of the
Cut-off Date) of the Mortgage Loans (and substantially all of the Mortgage Loans
with loan-to-value ratios in excess of 80%) will have been originated under the
Company's full or alternative documentation program or other full or alternative
documentation programs acceptable to the Company, that no more than 2.50% (by
Scheduled Principal Balance as of the Cut-off Date) of the Mortgage Loans will
have been originated under the Company's "No Income Verification Program" or
other no income verification programs acceptable to the
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<PAGE> 40
Company, that no more than 1.50% (by Scheduled Principal Balance as of the
Cut-off Date) of the Mortgage Loans will have been originated under the
Company's "Enhanced Streamlined Refinance Program" or other streamlined
refinance programs acceptable to the Company, that none of the Mortgage Loans
will have been originated under the Company's "No Ratio Program" or other no
ratio programs acceptable to the Company and that no more than 0.50% (by
Scheduled Principal Balance as of the Cut-off Date) of the Mortgage Loans will
have been originated under the Company's "No Income, No Asset Verification
Program" or other no income, no asset verification programs acceptable to the
Company. It is expected that no more than 0.31% (by Scheduled Principal Balance
as of the Cut-off Date) of the Mortgage Loans will have been acquired under the
Company's "Relocation Loan" program or other relocation programs acceptable to
the Company. See "The Trust Fund -- The Mortgage Loans -- Loan Underwriting
Policies" in the Prospectus.
It is expected that approximately 28 Mortgage Loans, having an aggregate
Scheduled Principal Balance as of the Cut-off Date of approximately $5,552,236,
will be Pledged Asset Mortgage Loans. "Pledged Asset Mortgage Loans" are
Mortgage Loans that will be master-serviced by the Company and directly serviced
by Merrill Lynch Credit Corporation ("MLCC") and that had a loan-to-value ratio
at origination of greater than 80% (but not greater than 100%) and which, in
addition to being secured by the related Mortgaged Property, are either (i)
secured by a security interest in a limited amount of additional collateral
(normally securities) owned by the Mortgagor or (ii) supported by a third-party
guarantee (usually by a parent of the Mortgagor), which guarantee in turn is
secured by a security interest in collateral (normally securities) or by a lien
on residential real estate of the guarantor and/or supported by the right to
draw on a home equity line of credit extended by MLCC to the guarantor. The
amount of such additional collateral referred to in clauses (i) and (ii) of the
immediately preceding sentence (the "Additional Collateral") generally does not
exceed 30% of the original principal balance of any such Pledged Asset Mortgage
Loan, although the amount of the Additional Collateral may exceed 30% of such
original principal balance if the original principal balance of the loan exceeds
$1,000,000. In limited cases, MLCC may have required Additional Collateral in
excess of 30% of the original principal balance of any such Pledged Asset
Mortgage Loan as part of the underwriting decision. The requirement to maintain
Additional Collateral generally terminates when the principal balance of such
Pledged Asset Mortgage Loan is reduced to a predetermined amount set forth in
the related pledge agreement or guaranty agreement, as applicable, or the
loan-to-value ratio for such Pledged Asset Mortgage Loan is reduced to MLCC's
applicable loan-to-value ratio limit for such Mortgage Loan (generally an 80%
loan-to-value ratio) by virtue of a reduction in the principal balance of the
related Mortgage Loan or an increase in the appraised value of the Mortgaged
Property as determined by MLCC. Pursuant to a separate agreement between the
Company and MLCC, MLCC will be responsible for administering any pledge
agreements or guaranty agreements, as applicable, relating to any Additional
Collateral. MLCC has advised the Company that its normal servicing procedures
provide that it will attempt to realize on the security interest in any
Additional Collateral if the related Mortgage Loan is liquidated upon default.
The pledge agreement or guaranty agreement, as applicable, and the security
interest in such Additional Collateral, if any, will be assigned by the Company
to the Trustee, for the benefit of the holders of the Certificates, but will not
be part of the REMIC. To the extent that the Mortgage Loans include any Pledged
Asset Mortgage Loans that are supported by a guarantee that is secured by a lien
on residential real estate, such lien will not be transferred to the Trustee.
The right to receive proceeds from the realization of any Additional Collateral
upon any liquidation thereof will be assigned by the Company to the Trustee. No
assurance can be given as to the amount of proceeds, if any, that might be
realized from the liquidation of such Additional Collateral. Ambac Assurance
Corporation, a Wisconsin-domiciled stock insurance corporation regulated by the
Office of the Commissioner of Insurance of the State of Wisconsin and licensed
to do business in 50 states, the District of Columbia, the Commonwealth of
Puerto Rico and Guam, has previously issued a limited purpose surety bond (the
"Limited Purpose Surety Bond") relating to the Pledged Asset Mortgage Loans. The
Limited Purpose Surety Bond, which is limited in amount, is intended to
guarantee receipt by the Trust Fund of certain shortfalls in the net proceeds
realized from the liquidation of any required Additional Collateral (such amount
not to exceed 30% of the original principal balance of the related Pledged Asset
Mortgage Loan) to the extent any such shortfall results in a loss of principal
on the related
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<PAGE> 41
Pledged Asset Mortgage Loan that becomes a Liquidated Mortgage Loan, as more
particularly described in, and as limited by, the terms and provisions of the
Limited Purpose Surety Bond. The Company will assign its rights as beneficiary
under the Limited Purpose Surety Bond with respect to the Pledged Asset Mortgage
Loans to the Trustee. The Limited Purpose Surety Bond will not cover any
payments on the Certificates that are recoverable or sought to be recovered as a
voidable preference under applicable law.
Each Mortgage Loan other than a Cooperative Loan (as defined in the
accompanying Prospectus) is required to be covered by a standard hazard
insurance policy. Each Mortgage Loan which had a loan-to-value ratio at
origination in excess of 80% (other than Pledged Asset Mortgage Loans) also will
be covered by a private mortgage insurance policy. See "Servicing of the
Mortgage Loans and Contracts -- Hazard Insurance" and "-- Private Mortgage
Insurance" in the Prospectus.
All payments due on each Mortgage Loan on which at least one payment of
principal and interest was due prior to the Cut-off Date will have been paid
through the first day of the month preceding the Cut-off Date. The Mortgage Pool
will include a substantial number of recently originated loans on which the
first monthly payments are not due until the Cut-off Date or on a date
subsequent to the initial issuance of the Certificates.
For a description of the underwriting standards generally applicable to the
Mortgage Loans, see "The Trust Fund -- The Mortgage Loans -- Loan Underwriting
Policies" in the Prospectus.
THE MORTGAGE LOANS
The Mortgage Loans will have an aggregate Scheduled Principal Balance as of
the Cut-off Date of approximately $704,839,386. This amount is subject to a
permitted variance such that the aggregate Scheduled Principal Balance thereof
will not be less than $665,000,000 or greater than $735,000,000.
The Mortgage Rates borne by the Mortgage Loans are expected to range from
6.000% to 9.750% per annum, and the weighted average Mortgage Rate as of the
Cut-off Date of the Mortgage Loans is expected to be between 7.18% and 7.22% per
annum. The original principal balances of the Mortgage Loans are expected to
range from $40,000 to $1,455,000 and, as of the Cut-off Date, the average
Scheduled Principal Balance of the Mortgage Loans is not expected to exceed
$333,000 after application of payments due on or before the Cut-off Date. It is
expected that the month and year of the earliest origination date of any
Mortgage Loan will be March 1991 and the month and year of the latest scheduled
maturity date of any Mortgage Loan will be January 2029. All of the Mortgage
Loans will have original terms to maturity of 20 to 30 years, and it is expected
that the weighted average scheduled remaining term to maturity of the Mortgage
Loans will be between 355 and 357 months as of the Cut-off Date.
The Mortgage Loans are expected to have the following additional
characteristics (by Scheduled Principal Balance of all the Mortgage Loans) as of
the Cut-off Date:
No more than 12% of the Mortgage Loans will have a Scheduled Principal
Balance of more than $500,000 and up to and including $750,000. No more
than 4% of the Mortgage Loans will have a Scheduled Principal Balance of
more than $750,000 and up to and including $1,000,000. No more than 1.7% of
the Mortgage Loans will have a Scheduled Principal Balance of more than
$1,000,000.
No more than 13% of the Mortgage Loans will have a loan-to-value ratio
at origination in excess of 80%, no more than 5% of the Mortgage Loans will
have a loan-to-value ratio at origination in excess of 90%, and none of the
Mortgage Loans will have a loan-to-value ratio at origination in excess of
95%. As of the Cut-off Date, the weighted average loan-to-value ratio at
origination of the Mortgage Loans is expected to be between 73% and 75%.
(Pledged Asset Mortgage Loans are not included in the percentages set forth
in this paragraph.)
None of the Pledged Asset Mortgage Loans will have a Pledged Asset
Loan-to-Value Ratio at origination in excess of 71%. As of the Cut-off
Date, the weighted average Pledged Asset Loan-to-Value Ratio at origination
of the Pledged Asset Mortgage Loans is expected to be approximately 70%.
With respect to any Pledged Asset Mortgage Loan, the "Pledged Asset
Loan-to-Value Ratio" is
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<PAGE> 42
calculated as (i) the original loan amount less the portion of any required
Additional Collateral which is covered by the Limited Purpose Surety Bond,
divided by (ii) the Original Value (as defined in the accompanying
Prospectus) of the related Mortgaged Property.
No more than 1.5% of the Mortgage Loans (including the Pledged Asset
Mortgage Loans) will have a loan-to-value ratio at origination calculated
on the basis of an appraisal conducted more than one year before the
origination date thereof.
The proceeds of at least 43% of the Mortgage Loans will have been used
to acquire the related Mortgaged Property. The proceeds of the remainder of
the Mortgage Loans will have been used to refinance an existing loan. No
more than 16% of the Mortgage Loans will have been the subject of
"cash-out" refinancings.
No more than 1% of the Mortgage Loans will be temporary buy-down
Mortgage Loans. The portion of the interest rate paid by the related
Mortgagor will not increase by more than one percentage point for each
six-month period. No Mortgage Rate may exceed the "bought down" rate by
more than three percentage points, and no buy-down period will exceed three
years.
No more than 2% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one postal zip code area.
No more than 50% of the Mortgage Loans will be secured by Mortgaged
Properties located in California. The majority of the Mortgage Loans will
be secured by Mortgaged Properties located in California, New Jersey,
Massachusetts, Virginia, Florida and Maryland. No more than 4% of the
Mortgage Loans will be secured by Mortgaged Properties located in any one
state except the states specified in the preceding sentence.
At least 96% of the Mortgage Loans will be secured by Mortgaged
Properties determined by the Company to be the primary residence of the
Mortgagor. The basis for such determination will be the making of a
representation by the Mortgagor at origination that the underlying property
will be used as the Mortgagor's primary residence.
At least 87% of the Mortgage Loans will be secured by single-family,
detached residences.
No more than 10% of the Mortgage Loans will be secured by
condominiums.
No more than 1% of the Mortgage Loans will be Cooperative Loans
secured by shares of stock in cooperative housing corporations and
assignments of the proprietary leases to cooperative apartment units
therein (see "The Trust Fund -- The Mortgage Loans" in the Prospectus.)
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated as of the Cut-off Date (the "Agreement") between the
Company, as seller and servicer, and State Street Bank and Trust Company, as
trustee (the "Trustee"). Reference is made to the Prospectus for important
additional information regarding the terms and conditions of the Agreement and
the Certificates. The Certificates will be issued in the nineteen Classes
offered hereby, together with the Class PO, Class B3, Class B4 and Class B5
Certificates, none of which are offered [by the GE Capital Mortgage Services
1999-1 Prospectus Supplement], and in the aggregate original Certificate
Principal Balance of approximately $704,839,386, subject to a permitted variance
such that the aggregate original Certificate Principal Balance will not be less
than $665,000,000 or greater than $735,000,000. Any such variance will be
allocated so as to approximate the material characteristics of the Classes of
Certificates described herein.
As described below, each Class of Certificates offered [by the GE Capital
Mortgage Services 1999-1 Prospectus Supplement], other than the Class R
Certificates (the "Residual Certificates"), will be issued in book-entry form,
and beneficial interests therein will be held by investors through the
book-entry
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<PAGE> 43
facilities of the Depository (as defined below), in minimum denominations in
Certificate Principal Balance of $25,000 (in the case of the Class A1 and Class
A2 Certificates)... and, in each case, in integral multiples of $1,000 in excess
thereof.... Notwithstanding the integral multiple requirements described above,
one Certificate of each Class other than the Residual Certificates may evidence
an additional amount equal to the remaining Class Certificate Principal Balance
thereof.
BOOK-ENTRY CERTIFICATES
Each Class of Certificates offered [by the GE Capital Mortgage Services
1999-1 Prospectus Supplement] other than the Residual Certificates (the
"Book-Entry Certificates") will be registered as a single certificate held by a
nominee of The Depository Trust Company (together with any successor depository
selected by the Company, the "Depository"). Beneficial interests in the
Book-Entry Certificates will be held by investors through the book-entry
facilities of the Depository, as described herein. The Company has been informed
by the Depository that its nominee will be Cede & Co. ("Cede"). Accordingly,
Cede is expected to be the holder of record of the Book-Entry Certificates.
Except as described below, no person acquiring a Book-Entry Certificate (each, a
"beneficial owner") will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate").
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of the Depository (or of a participating firm (each, a "Participant")
that acts as agent for the Financial Intermediary, whose interest will in turn
be recorded on the records of the Depository, if the beneficial owner's
Financial Intermediary is not a Participant). Therefore, the beneficial owner
must rely on the foregoing procedures to evidence its beneficial ownership of a
Book-Entry Certificate. Beneficial ownership of a Book-Entry Certificate may
only be transferred by compliance with the procedures of such Financial
Intermediaries and Participants.
The Depository, which is a New York-chartered limited purpose trust
company, performs services for its Participants, some of which (and/or their
representatives) own the Depository. In accordance with its normal procedures,
the Depository is expected to record the positions held by each 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 Participants as in effect from time to time.
Distributions of principal of and interest on the Book-Entry Certificates
will be made on each Distribution Date by the Trustee to the Depository. The
Depository will be responsible for crediting the amount of such payments to the
accounts of the applicable Participants in accordance with the Depository's
normal procedures. Each Participant will be responsible for disbursing such
payments to the beneficial owners of the Book-Entry Certificates that it
represents and to each Financial Intermediary for which it acts as agent. Each
such Financial Intermediary will be responsible for disbursing funds to the
beneficial owners of the Book-Entry Certificates that it represents.
As a result, under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments. Because the
Depository can: only act on behalf of Financial Intermediaries, the ability of a
beneficial owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the Depository system, or otherwise take actions in
respect of such Book-Entry Certificates, may be limited due to the lack of
physical certificates for such Book-Entry Certificates. In addition, issuance of
the Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
The Depository has advised the Company and the Trustee that, unless and
until Definitive Certificates are issued, the Depository will take any action
permitted to be taken by a Certificateholder under the Agreement only at the
direction of one or more Financial Intermediaries to whose Depository accounts
the Book-Entry Certificates are credited. The Depository may take conflicting
actions with
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<PAGE> 44
respect to other Book-Entry Certificates to the extent that such actions are
taken on behalf of Financial Intermediaries whose holdings include such
Book-Entry Certificates.
Definitive Certificates will be issued to beneficial owners of the related
Book-Entry Certificates, or their nominees, rather than to the Depository, only
if (a) the Depository or the Company 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 Certificates and
the Company or the Trustee is unable to locate a qualified successor; (b) the
Company, at its sole option, elects to terminate the book-entry system through
the Depository; or (c) after the occurrence of an Event of Default (as described
in the accompanying Prospectus) beneficial owners of the Book-Entry Certificates
aggregating not less than 51% of the aggregate voting rights allocated thereto
advise the Trustee and the Depository through the Financial Intermediaries in
writing that the continuation of a book-entry system through the Depository (or
a successor thereto) is no longer in the best interests of beneficial owners of
the Certificates.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through the
Depository of Definitive Certificates. Upon surrender by the Depository of the
global certificate or certificates representing the Certificates and
instructions for re-registration, the Trustee will issue the Definitive
Certificates, and thereafter the Trustee will recognize the holders of such
Definitive Certificates as Certificateholders under the Agreement. Following the
issuance of Definitive Certificates, distribution of principal and interest, if
any, on the Certificates will be made by the Trustee directly to holders of
Definitive Certificates in accordance with the procedures set forth in the
Agreement.
* * *
AVAILABLE FUNDS
The amount of funds ("Available Funds") in respect of the Mortgage Pool
that will be available for distribution to holders of the Certificates on each
Distribution Date is as described in the accompanying Prospectus under
"Servicing of the Mortgage Loans and Contracts -- Loan Payment Record."
DISTRIBUTIONS ON THE CERTIFICATES
Allocation of Available Funds. Interest and principal on the Certificates
will be distributed monthly on the 25th day of each month or, if such 25th day
is not a business day, on the succeeding business day (each, a "Distribution
Date"), commencing in February 1999, in an aggregate amount equal to the
Available Funds for such Distribution Date . . . . Distributions will be made to
holders of record on the close of business on the last business day of the month
preceding the month of such Distribution Date (the "Record Date").
On each Distribution Date, the Available Funds will be distributed in the
following order of priority among the Certificates:
first, to the Classes of Senior Certificates (other than the Class PO
Certificates), the Accrued Certificate Interest on each such Class for such
Distribution Date, any shortfall in available amounts being allocated among
such Classes in proportion to the amount of Accrued Certificate Interest
otherwise distributable thereon; provided that it shall be assumed for
purposes of distributions of Available Funds in respect of interest on the
Class A7 and Class A13 Certificates that each such Class accrues interest
at an annual rate of 6.50%;
second, to the Classes of Senior Certificates (other than the Class PO
Certificates), any Accrued Certificate Interest thereon remaining
undistributed from previous Distribution Dates, to the extent of remaining
Available Funds, any shortfall in available amounts being allocated among
such Classes in proportion to the amount of such Accrued Certificate
Interest remaining undistributed for each such Class for such Distribution
Date;
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<PAGE> 45
third, to the Classes of Senior Certificates, in reduction of the
Class Certificate Principal Balances thereof, to the extent of remaining
Available Funds, concurrently as follows:
(a) to the Class A1, Class A2, Class A3, Class A4, Class A5, Class
A6, Class A7, Class A8, Class A9, Class A10, Class A11, Class A12, Class
A13, Class A14, Class A15 and Class R Certificates, the Senior Optimal
Principal Amount for such Distribution Date in the following order of
priority:
(i) to the Class A1 Certificates (the "Group II Senior
Certificates"), the Group II Senior Principal Distribution Amount (as
defined herein) for such Distribution Date, until the Class
Certificate Principal Balance thereof has been reduced to zero; and
(ii) to the Class A2, Class A3, Class A4, Class A5, Class A6,
Class A7, Class A8, Class A9, Class A10, Class A11, Class A12, Class
A13, Class A14, Class A15 and Class R Certificates (together, the
"Group I Senior Certificates"), the Senior Optimal Principal Amount
for such Distribution Date, less the Group II Senior Principal
Distribution Amount for such Distribution Date (such reduced amount,
the "Group I Senior Principal Distribution Amount") in the following
order of priority:
(A) to the Class R Certificates, until the Class Certificate
Principal Balance thereof has been reduced to zero;
(B) to the Class A2 and Class A4 Certificates, in the
following order of priority:
(I) to the Class A2 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to
zero;
(II) to the Class A4 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to
zero; and
(C) to the Class A3, Class A5, Class A6, Class A7, Class A8,
Class A9, Class A10, Class A11, Class A12, Class A13, Class A14
and Class A15 Certificates, the remaining amount distributable
pursuant to clause (a)(ii) above, after giving effect to the
distributions in clause (a)(ii)(A) and clause (a)(ii)(B) above,
concurrently, as follows:
(I) to the Class A5 Certificates, approximately
26.5864372342% of the amount distributable pursuant to clause
(a)(ii)(C) above, until the Class Certificate Principal
Balance thereof has been reduced to zero;
(II) to the Class A6 Certificates, approximately
12.2941373053% of the amount distributable pursuant to clause
(a)(ii)(C) above, until the Class Certificate Principal
Balance thereof has been reduced to zero;
(III) to the Class A7 Certificates, approximately
7.3764823832% of the amount distributable pursuant to clause
(a)(ii)(C) above, until the Class Certificate Principal
Balance thereof has been reduced to zero;
(IV) to the Class A13 Certificates, approximately
11.5916151736% of the amount distributable pursuant to clause
(a)(ii)(C) above, until the Class Certificate Principal
Balance thereof has been reduced to zero;
(V) to the Class A14 and Class A15 Certificates,
approximately 7.0252213173% of the amount distributable
pursuant to clause (a)(ii)(C) above, in the following order
of priority:
(1) to the Class A14 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to
zero; and
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<PAGE> 46
(2) to the Class A15 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to
zero; and
(VI) to the Class A3, Class A8, Class A9, Class A10,
Class A11 and Class A12 Certificates, approximately
35.1261065864% of the amount distributable pursuant to clause
(a)(ii)(C) above, in the following order of priority:
(1) to the Class A3 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to
zero;
(2) to the Class A8 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to
zero;
(3) to the Class A9 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to
zero;
(4) to the Class A10 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to
zero;
(5) to the Class Al l Certificates, until the Class
Certificate Principal Balance thereof has been reduced to
zero; and
(6) to the Class A12 Certificates, until the Class
Certificate Principal Balance thereof has been reduced to
zero; and
(b) to the Class PO Certificates, the Class PO Principal
Distribution Amount for such Distribution Date, until the Class
Certificate Principal Balance thereof has been reduced to zero;
fourth, to the Class PO Certificates, to the extent of remaining
Available Funds, the Class PO Deferred Amount for such Distribution Date,
until the Class Certificate Principal Balance thereof has been reduced to
zero; provided that, (i) on any Distribution Date, distributions pursuant
to this priority fourth shall not exceed the Junior Optimal Principal
Amount for such Distribution Date, (ii) such distributions shall not reduce
the Class Certificate Principal Balance of the Class PO Certificates and
(iii) no distribution will be made in respect of the Class PO Deferred
Amount after the Distribution Date on which the respective Class
Certificate Principal Balances of the Junior Certificates have been reduced
to zero (the "Cross-Over Date");
fifth, to the Class M Certificates, to the extent of remaining
Available Funds, in the following order: (a) the Accrued Certificate
Interest thereon for such Distribution Date, (b) any Accrued Certificate
Interest thereon remaining undistributed from previous Distribution Dates
and (c) such Class's Allocable Share (as defined under "-- Principal"
below) for such Distribution Date;
sixth, to the Class B1 Certificates, to the extent of remaining
Available Funds, in the following order: (a) the Accrued Certificate
Interest thereon for such Distribution Date, (b) any Accrued Certificate
Interest thereon remaining undistributed from previous Distribution Dates
and (c) such Class's Allocable Share for such Distribution Date;
seventh, to the Class B2 Certificates, to the extent of remaining
Available Funds, in the following order: (a) the Accrued Certificate
Interest thereon for such Distribution Date, (b) any Accrued Certificate
Interest thereon remaining undistributed from previous Distribution Dates
and (c) such Class's Allocable Share for such Distribution Date; and
eighth, to each of the Class B3, Class B4 and Class B5 Certificates,
to the extent of remaining Available Funds: (a) the Accrued Certificate
Interest thereon for such Distribution Date, (b) any Accrued Certificate
Interest thereon remaining undistributed from previous Distribution Dates
and (c) such Classes' Allocable Share for such Distribution Date.
* * *
The percentages set forth in priority third above were calculated on the
basis of the Class Certificate Principal Balances of the related Certificates
set forth on the cover hereof or described herein. If such
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<PAGE> 47
Class Certificate Principal Balances are increased or decreased in accordance
with the variance permitted hereby, the applicable percentages will be increased
or decreased substantially correspondingly.
On each Distribution Date after the Cross-Over Date, distributions of
principal on the outstanding Senior Certificates (other than the Class PO
Certificates) will be made pro rata among all such Certificates, regardless of
the allocation, or sequential nature, of principal payments described in
priority third above.
"Pro rata" distributions among Classes of Certificates will be made in
proportion to the then-current Class Certificate Principal Balances of such
Classes.
If, after distributions have been made pursuant to priorities first and
second above on any Distribution Date, the remaining Available Funds are less
than the sum of the Senior Optimal Principal Amount and the Class PO Principal
Distribution Amount for such Distribution Date, the amounts distributable under
priority third above shall be proportionately reduced, and such remaining
Available Funds will be distributed on the Senior Certificates in accordance
with the applicable clauses of priority third above on the basis of such reduced
amounts. Notwithstanding such allocation, Realized Losses will be allocated to
the Certificates as described under "-- Allocation of Realized Losses on the
Certificates" herein.
Interest. Interest will accrue on the Certificates offered hereby entitled
to interest distributions at the respective Certificate Interest Rates set forth
on the cover hereof during each Interest Accrual Period. The "Interest Accrual
Period" for each Class of Certificates entitled to distributions of interest
will be the one-month period ending on the last day of the month preceding the
month in which a Distribution Date occurs. Interest will be calculated on the
basis of a 360-day year consisting of twelve 30-day months.
Interest will accrue on the Class B3, Class B4 and Class B5 Certificates at
the Certificate Interest Rate of 6.50% per annum during each Interest Accrual
Period.
The Class PO Certificates are principal-only Certificates and will not
accrue interest.
The "Accrued Certificate Interest" for any Certificate entitled to
distributions of interest for any Distribution Date will equal the interest
accrued during the related Interest Accrual Period at the applicable Certificate
Interest Rate on the Certificate Principal Balance of such Certificate
immediately prior to such Distribution Date, less such Certificate's share of
any allocable Net Interest Shortfall (as defined below), the interest portion of
any Excess Losses (as defined herein) allocable to Certificateholders through
the Cross-Over Date and, after the Cross-Over Date, the interest portion of
Realized Losses allocable to Certificateholders, including Excess Losses.
The "Certificate Principal Balance" of any Certificate as of any
Distribution Date will equal such Certificate's Certificate Principal Balance on
the Closing Date as reduced by (i) all amounts distributed on previous
Distribution Dates on such Certificate on account of principal, (ii) the
principal portion of all Realized Losses previously allocated to such
Certificate and (iii) in the case of a Junior Certificate, such Certificate's
pro rata share, if any, of the Junior Certificate Writedown Amount (as defined
below) and the Class PO Deferred Payment Writedown Amount (as defined below) for
previous Distribution Dates. As of any Distribution Date, the "Junior
Certificate Writedown Amount" will equal the amount by which (a) the sum of the
Class Certificate Principal Balances of all of the Certificates (after giving
effect to the distribution of principal and the application of Realized Losses
in reduction of the Certificate Principal Balances of the Certificates on such
Distribution Date) exceeds (b) the Pool Scheduled Principal Balance on the first
day of the month of such Distribution Date less any Deficient Valuations
occurring on or prior to the Bankruptcy Coverage Termination Date. For any
Distribution Date, the "Class PO Deferred Payment Writedown Amount" will equal
the amount, if any, distributed on such date in respect of the Class PO Deferred
Amount pursuant to priority fourth under "-- Allocation of Available Funds"
above. The Junior Certificate Writedown Amount and the Class PO Deferred Payment
Writedown Amount will
A-1-9
<PAGE> 48
be allocated to the Classes of Junior Certificates in inverse order of priority,
until the Class Certificate Principal Balance of each such Class has been
reduced to zero.
With respect to any Distribution Date, the "Net Interest Shortfall"
allocable to Certificateholders will equal the excess of the aggregate Interest
Shortfalls allocable to Certificateholders with respect to such Distribution
Date over the Compensating Interest Payment (as defined under "The Pooling and
Servicing Agreement -- Servicing Compensation, Compensating Interest and Payment
of Expenses" herein), if any, for such Distribution Date. For purposes of making
the foregoing determinations, any Interest Shortfalls will be allocated on each
Distribution Date between the outstanding Certificates entitled to distributions
of interest and the Company in respect of its Supplemental Servicing Fees (as
defined herein) in proportion to the aggregate amount of Accrued Certificate
Interest and Supplemental Servicing Fees, respectively, that would have been
allocated thereto in the absence of such Interest Shortfalls.
With respect to any Distribution Date, an "Interest Shortfall" in respect
of a Mortgage Loan will result from (i) any voluntary prepayment of principal in
full on such Mortgage Loan received from the sixteenth day (or, in the case of
the first Distribution Date, from the Cut-off Date) through the last day of the
month preceding such Distribution Date; (ii) any partial prepayment of principal
on such Mortgage Loan by the Mortgagor during the month preceding such
Distribution Date; or (iii) a reduction in the interest rate on such Mortgage
Loan due to the application of the Soldiers' and Sailors' Civil Relief Act of
1940 whereby, in general, members of the Armed Forces who entered into mortgages
prior to the commencement of military service may have the interest rates on
those mortgage loans reduced for the duration of their active military service.
See "Certain Legal Aspects of the Mortgage Loans and Contracts -- The Mortgage
Loans -- Soldiers' and Sailors' Civil Relief Act" in the Prospectus. As to any
Distribution Date and any Mortgage Loan with respect to which a prepayment in
full has occurred as described above, the resulting "Interest Shortfall"
generally will equal the difference between (a) one month's interest at the
Mortgage Rate net of the applicable Base Servicing Fee (as defined herein) (the
"Net Mortgage Rate") on the Scheduled Principal Balance of such Mortgage Loan,
and (b) the amount of interest at the Net Mortgage Rate actually received with
respect to such Mortgage Loan. In the case of a partial prepayment, the
resulting "Interest Shortfall" will equal one month's interest at the applicable
Net Mortgage Rate on the amount of such prepayment.
Any Net Interest Shortfall, the interest portion of any Excess Losses
allocable to Certificateholders through the Cross-Over Date and, after the
Cross-Over Date, the interest portion of any Realized Losses allocable to
Certificateholders (see "-- Allocation of Realized Losses on the Certificates")
will, on each Distribution Date, be allocated among all the outstanding
Certificates entitled to distributions of interest in proportion to the amount
of Accrued Certificate Interest that would have been allocated thereto in the
absence of such shortfall and losses. . . .
The interest portion of any Realized Losses (other than Excess Losses)
occurring prior to the Cross-Over Date will not be allocated among any
Certificates, but will reduce the amount of Available Funds on the related
Distribution Date. As a result of the subordination of the Junior Certificates
in right of distribution, such losses will be borne first by the Junior
Certificates (to the extent then outstanding) in inverse order of priority.
If Available Funds are insufficient on any Distribution Date to distribute
the aggregate Accrued Certificate Interest on the Senior Certificates entitled
to distributions of interest to their Certificateholders (assuming for this
purpose that interest on the Class A7 and Class A13 Certificates accrues at an
annual rate of 6.50%), any shortfall in available amounts will be allocated
among such Classes of Senior Certificates in proportion to the amounts of
Accrued Certificate Interest otherwise distributable thereon. The amount of any
such undistributed Accrued Certificate Interest will be added to the amount to
be distributed in respect of interest on the Senior Certificates entitled to
distributions of interest on subsequent Distribution Dates in accordance with
priority second under "-- Allocation of Available Funds" above. No interest will
accrue on any Accrued Certificate Interest remaining undistributed from previous
Distribution Dates.
* * *
A-1-10
<PAGE> 49
Principal. All payments and other amounts received in respect of principal
of the Mortgage Loans will be allocated between (i) the Senior Certificates
(other than the Class PO Certificates) and the Junior Certificates, on the one
hand, and (ii) the Class PO Certificates, on the other, in each case based on
the applicable Non-PO Percentage and the applicable PO Percentage, respectively,
of such amounts.
The "Non-PO Percentage" with respect to any Mortgage Loan with a Net
Mortgage Rate ("NMR") less than 6.50% per annum (each such Mortgage Loan, a
"Discount Mortgage Loan") will be the fraction, expressed as a percentage, equal
to NMR / 6.50%. The "Non-PO Percentage" with respect to any Mortgage Loan with a
Net Mortgage Rate equal to or greater than 6.50% (each such Mortgage Loan, a
"Non-Discount Mortgage Loan") will be 100%. The "PO Percentage" with respect to
any Discount Mortgage Loan will be the fraction, expressed as a percentage,
equal to (6.50% -- NMR) / 6.50%. The "PO Percentage" with respect to any
Non-Discount Mortgage Loan will be 0%.
The initial Class Certificate Principal Balance of the Class PO
Certificates, which are not offered hereby, will be approximately $987,919,
subject to the variance described herein.
Distributions in reduction of the Class Certificate Principal Balance of
each Class of Senior Certificates entitled to principal distributions will be
made on each Distribution Date pursuant to priority third under "-- Allocation
of Available Funds" above. In accordance with priority third, the Available
Funds remaining after the distribution of interest will be allocated to such
Senior Certificates in an aggregate amount not to exceed the sum of the Senior
Optimal Principal Amount and the Class PO Principal Distribution Amount for such
Distribution Date. Distributions in reduction of the Class Certificate Principal
Balances of the Class M, Class B1 and Class B2 Certificates will be made
pursuant to priorities fifth, sixth and seventh, respectively, under
"-- Allocation of Available Funds" above. In accordance with each such priority,
the Available Funds, if any, remaining after distributions of principal and
interest on the Senior Certificates and payments in respect of the Class PO
Deferred Amount on such Distribution Date will be allocated to the Class M,
Class B1 and Class B2 Certificates in an amount equal to each such Class's
Allocable Share for such Distribution Date, provided that no distribution of
principal will be made on any such Class until any Class ranking prior thereto
has received distributions of interest and principal, and such Class has
received distributions of interest, on such Distribution Date. The Group II
Senior Certificates will not receive any distributions in respect of prepayments
or certain other unscheduled recoveries of principal on the Mortgage Loans
during the first five years after the date of initial issuance of the
Certificates, except as otherwise described herein on or following the earlier
of the Group I Final Distribution Date and the Cross-Over Date.
The "Senior Optimal Principal Amount" with respect to each Distribution
Date will be an amount equal to the sum of (i) the Senior Percentage (as defined
herein) of the applicable Non-PO Percentage of all scheduled payments of
principal due on each Mortgage Loan on the first day of the month in which the
Distribution Date occurs, as specified in the amortization schedule at the time
applicable thereto (after adjustment for previous principal prepayments and the
principal portion of Debt Service Reductions after the Bankruptcy Coverage
Termination Date, but before any adjustment to such amortization schedule by
reason of any other bankruptcy or similar proceeding or any moratorium or
similar waiver or grace period), (ii) the Senior Prepayment Percentage (as
defined herein) of the applicable Non-PO Percentage of the Scheduled Principal
Balance of each Mortgage Loan which was the subject of a prepayment in full
received by the Company (or, in the case of a Mortgage Loan master-serviced by
the Company, of which the Company receives notice) during the applicable
Prepayment Period (as defined below), (iii) the Senior Prepayment Percentage of
the applicable Non-PO Percentage of all partial prepayments of principal
received during the applicable Prepayment Period, (iv) the lesser of (a) the
Senior Prepayment Percentage of the applicable Non-PO Percentage of the sum of
(w) the net liquidation proceeds allocable to principal on each Mortgage Loan
which became a Liquidated Mortgage Loan during the related Prepayment Period
(other than Mortgage Loans described in clause (x)) and (x) the principal
balance of each Mortgage Loan that was purchased by a private mortgage insurer
during the related Prepayment Period as an alternative to paying a claim under
the related insurance policy, and (b) the Senior Percentage of the applicable
Non-PO Percentage of the sum of (w) the Scheduled Principal Balance of each
Mortgage Loan which became a Liquidated Mortgage Loan during the related
Prepayment Period
A-1-11
<PAGE> 50
(other than Mortgage Loans described in clause (x)) and (x) the Scheduled
Principal Balance of each Mortgage Loan that was purchased by a private mortgage
insurer during the related Prepayment Period as an alternative to paying a claim
under the related insurance policy less (y) in the case of clause (b), the
Senior Percentage of the applicable Non-PO Percentage of the principal portion
of Excess Losses (other than Debt Service Reductions) during the related
Prepayment Period, and (v) the Senior Prepayment Percentage of the applicable
Non-PO Percentage of the sum of (a) the Scheduled Principal Balance of each
Mortgage Loan which was repurchased by the Company in connection with such
Distribution Date and (b) the difference, if any, between the Scheduled
Principal Balance of a Mortgage Loan that has been replaced by the Company with
a substitute Mortgage Loan pursuant to the Agreement in connection with such
Distribution Date and the Scheduled Principal Balance of such substitute
Mortgage Loan.
With respect to any Mortgage Loan that was the subject of a voluntary
prepayment in full and any Distribution Date, the "Prepayment Period" is the
period from the sixteenth day of the month preceding the month of such
Distribution Date (or, in the case of the first Distribution Date, from the
Cut-off Date) through the fifteenth day of the month of such Distribution Date.
With respect to any other unscheduled prepayment of principal of any Mortgage
Loan and any Distribution Date, the "Prepayment Period" is the month preceding
the month of such Distribution Date.
The "Group II Senior Principal Distribution Amount" for any Distribution
Date will equal the sum of (a) the total of the amounts described in clauses (i)
and (iv) of the definition of Senior Optimal Principal Amount (without
application of the Senior Percentage or Senior Prepayment Percentage) for such
date multiplied by the Group II Senior Percentage for such date, and (b) the
total of the amounts described in clauses (ii), (iii) and (v) of the definition
of Senior Optimal Principal Amount (without application of the Senior Prepayment
Percentage) for such date multiplied by the product of (x) the Group II Senior
Percentage for such date and (y) the Group II Senior Prepayment Distribution
Percentage for such date. Notwithstanding the foregoing, (i) on the Group I
Final Distribution Date, the Group II Senior Principal Distribution Amount will
be increased by any Senior Optimal Principal Amount remaining after
distributions of principal have been made on the Group I Senior Certificates,
and (ii) following the Group I Final Distribution Date, the Group II Senior
Principal Distribution Amount will equal the Senior Optimal Principal Amount.
The "Group II Senior Percentage" for any Distribution Date will equal the
percentage (carried to six places rounded up) obtained by dividing (x) the
Certificate Principal Balance of the Group II Senior Certificates immediately
preceding such Distribution Date by (y) the aggregate Certificate Principal
Balance of all the Certificates (less the Class Certificate Principal Balance of
the Class PO Certificates) immediately preceding such Distribution Date. The
initial Group II Senior Percentage is expected to be approximately 9.60%.
The "Group II Senior Prepayment Distribution Percentage" for any
Distribution Date will equal 0% through the Distribution Date in January 2004;
30% thereafter through the Distribution Date in January 2005; 40% thereafter
through the Distribution Date in January 2006; 60% thereafter through the
Distribution Date in January 2007; 80% thereafter through the Distribution Date
in January 2008; and 100% thereafter.
The "Senior Percentage" on any Distribution Date will equal the lesser of
(i) 100% and (ii) the percentage (carried to six places rounded up) obtained by
dividing the aggregate Certificate Principal Balances of all the Senior
Certificates (less the Class Certificate Principal Balance of the Class PO
Certificates) immediately preceding such Distribution Date by the aggregate
Certificate Principal Balances of all the Certificates (less the Class
Certificate Principal Balance of the Class PO Certificates) immediately
preceding such Distribution Date. The initial Senior Percentage is expected to
be approximately 95.99%.
A-1-12
<PAGE> 51
The "Senior Prepayment Percentage" on any Distribution Date occurring
during the periods set forth below will be as follows:
<TABLE>
<CAPTION>
PERIOD (DATES INCLUSIVE) SENIOR PREPAYMENT PERCENTAGE
------------------------ ----------------------------
<S> <C>
February 1999 -- January 2004 100%
February 2004 -- January 2005 Senior Percentage plus 70% of the Junior Percentage
February 2005 -- January 2006 Senior Percentage plus 60% of the Junior Percentage
February 2006 -- January 2007 Senior Percentage plus 40% of the Junior Percentage
February 2007 -- January 2008 Senior Percentage plus 20% of the Junior Percentage
February 2008 and thereafter Senior Percentage
</TABLE>
Notwithstanding the foregoing, if the Senior Percentage on any Distribution
Date exceeds the initial Senior Percentage, the Senior Prepayment Percentage for
such Distribution Date will equal 100%.
In addition, no reduction of the Senior Prepayment Percentage below the
level in effect for the most recent prior period specified in the table above
shall be effective on any Distribution Date (such limitation being the "Senior
Prepayment Percentage Stepdown Limitation") unless, as of the last day of the
month preceding such Distribution Date, either:
(A) (i) the aggregate Scheduled Principal Balance of Mortgage Loans
delinquent 60 days or more (including for this purpose any Mortgage Loans
in foreclosure and Mortgage Loans with respect to which the related
Mortgaged Property has been acquired by the Trust Fund) does not exceed 50%
of the aggregate Class Certificate Principal Balance of the Junior
Certificates as of such date and (ii) cumulative Realized Losses do not
exceed (a) 30% of the aggregate Class Certificate Principal Balance of the
Junior Certificates as of the date of issuance of the Certificates (the
"Original Junior Principal Balance") if such Distribution Date occurs
between and including February 2004 and January 2005, (b) 35% of the
Original Junior Principal Balance if such Distribution Date occurs between
and including February 2005 and January 2006, (c) 40% of the Original
Junior Principal Balance if such Distribution Date occurs between and
including February 2006 and January 2007, (d) 45% of the Original Junior
Principal Balance if such Distribution Date occurs between and including
February 2007 and January 2008, and (e) 50% of the Original Junior
Principal Balance if such Distribution Date occurs during or after February
2008; or
(B) (i) the aggregate Scheduled Principal Balance of Mortgage Loans
delinquent 60 days or more (including for this purpose any Mortgage Loans
in foreclosure and Mortgage Loans with respect to which the related
Mortgaged Property has been acquired by the Trust Fund), averaged over the
last three months, as a percentage of the aggregate Scheduled Principal
Balance of all Mortgage Loans averaged over the last three months, does not
exceed 4%, and (ii) cumulative Realized Losses do not exceed (a) 10% of the
Original Junior Principal Balance if such Distribution Date occurs between
and including February 2004 and January 2005, (b) 15% of the Original
Junior Principal Balance if such Distribution Date occurs between and
including February 2005 and January 2006, (c) 20% of the Original Junior
Principal Balance if such Distribution Date occurs between and including
February 2006 and January 2007, (d) 25% of the Original Junior Principal
Balance if such Distribution Date occurs between and including February
2007 and January 2008, and (e) 30% of the Original Junior Principal Balance
if such Distribution Date occurs during or after February 2008.
The "Class PO Principal Distribution Amount" with respect to each
Distribution Date will be an amount equal to the sum of (i) the applicable PO
Percentage of all scheduled payments of principal due on each Mortgage Loan on
the first day of the month in which the Distribution Date occurs, as specified
in the amortization schedule at the time applicable thereto (after adjustment
for previous principal prepayments and the principal portion of Debt Service
Reductions after the Bankruptcy Coverage Termination Date, but before any
adjustment to such amortization schedule by reason of any other bankruptcy or
similar proceeding or any moratorium or similar waiver or grace period), (ii)
the applicable PO Percentage of the Scheduled Principal Balance of each Mortgage
Loan which was the subject of a prepayment in full received by the Company (or,
in the case of a Mortgage Loan master-serviced by the
A-1-13
<PAGE> 52
Company, of which the Company receives notice) during the related Prepayment
Period, (iii) the applicable PO Percentage of all partial prepayments of
principal received during the related Prepayment Period, (iv) the applicable PO
Percentage of the sum of (w) the net liquidation proceeds allocable to principal
on each Mortgage Loan which became a Liquidated Mortgage Loan during the related
Prepayment Period (other than Mortgage Loans described in clause (x)) and (x)
the principal balance of each Mortgage Loan that was purchased by a private
mortgage insurer during the related Prepayment Period as an alternative to
paying a claim under the related insurance policy, and (v) the applicable PO
Percentage of the sum of (a) the Scheduled Principal Balance of each Mortgage
Loan which was repurchased by the Company in connection with such Distribution
Date and (b) the difference, if any, between the Scheduled Principal Balance of
a Mortgage Loan that has been replaced by the Company with a substitute Mortgage
Loan pursuant to the Agreement in connection with such Distribution Date and the
Scheduled Principal Balance of such substitute Mortgage Loan. For purposes of
clauses (ii) and (v) above, the Scheduled Principal Balance of a Mortgage Loan
will be reduced by the amount of any Deficient Valuation that occurred on or
before the Bankruptcy Coverage Termination Date.
The "Group I Final Distribution Date" is the Distribution Date on which the
Class Certificate Principal Balance of each of the Group I Senior Certificates
has been reduced to zero.
The "Junior Percentage" on any Distribution Date will equal 100% minus the
Senior Percentage. The "Junior Prepayment Percentage" will equal 100% minus the
Senior Prepayment Percentage, except that on any Distribution Date after the
respective Class Certificate Principal Balances of the Senior Certificates
(other than the Class PO Certificates) have each been reduced to zero (the
"Senior Final Distribution Date"), the Junior Prepayment Percentage will equal
100%. The initial Junior Percentage is expected to be approximately 4.01%.
The "Junior Optimal Principal Amount" with respect to each Distribution
Date will be an amount equal to the sum of the following (but in no event
greater than the aggregate Class Certificate Principal Balances of the Junior
Certificates immediately prior to such Distribution Date): (i) the Junior
Percentage of the applicable Non PO Percentage of all scheduled payments of
principal due on each outstanding Mortgage Loan on the first day of the month in
which the Distribution Date occurs, as specified in the amortization schedule at
the time applicable thereto (after adjustment for previous principal prepayments
and the principal portion of Debt Service Reductions after the Bankruptcy
Coverage Termination Date, but before any adjustment to such amortization
schedule by reason of any other bankruptcy or similar proceeding or any
moratorium or similar waiver or grace period), (ii) the Junior Prepayment
Percentage of the applicable Non-PO Percentage of the Scheduled Principal
Balance of each Mortgage Loan which was the subject of a prepayment in full
received by the Company (or, in the case of a Mortgage Loan master-serviced by
the Company, of which the Company receives notice) during the related Prepayment
Period, (iii) the Junior Prepayment Percentage of the applicable Non-PO
Percentage of all partial prepayments of principal received during the related
Prepayment Period (plus, on the Senior Final Distribution Date, 100% of any
Senior Optimal Principal Amount remaining undistributed on such date), (iv) the
excess, if any, of the sum of (a) the applicable Non-PO Percentage of the net
liquidation proceeds allocable to principal received during the related
Prepayment Period in respect of each Liquidated Mortgage Loan (other than
Mortgage Loans described in clause (b)) and (b) the applicable Non-PO Percentage
of the principal balance of each Mortgage Loan that was purchased by a private
mortgage insurer during the related Prepayment Period as an alternative to
paying a claim under the related insurance policy over (c) the sum of the
amounts distributable to Senior Certificateholders (other than the holders of
the Class PO Certificates) pursuant to clause (iv) of the definition of Senior
Optimal Principal Amount on such Distribution Date, and (v) the Junior
Prepayment Percentage of the applicable Non-PO Percentage of the sum of (a) the
Scheduled Principal Balance of each Mortgage Loan which was repurchased by the
Company in connection with such Distribution Date and (b) the difference, if
any, between the Scheduled Principal Balance of a Mortgage Loan that has been
replaced by the Company with a substitute Mortgage Loan pursuant to the
Agreement in connection with such Distribution Date and the Scheduled Principal
Balance of such substitute Mortgage Loan.
A-1-14
<PAGE> 53
The "Allocable Share" with respect to any Class of Junior Certificates on
any Distribution Date will generally equal such Class's pro rata share (based on
the Class Certificate Principal Balance of each Class entitled thereto) of each
of the components of the Junior Optimal Principal Amount described above;
provided, that, except as described in the second succeeding sentence, no Class
B1, Class B2, Class B3, Class B4 or Class B5 Certificate (together, the "Class B
Certificates") shall be entitled on any Distribution Date to receive
distributions pursuant to clauses (ii), (iii) and (v) of the definition of
Junior Optimal Principal Amount unless the Class Prepayment Distribution Trigger
for the related Class is satisfied for such Distribution Date. The "Class
Prepayment Distribution Trigger" for a Class of Class B Certificates for any
Distribution Date is satisfied if the fraction (expressed as a percentage), the
numerator of which is the aggregate Class Certificate Principal Balance of such
Class and each Class subordinate thereto, if any, and the denominator of which
is the Pool Scheduled Principal Balance with respect to such Distribution Date,
equals or exceeds such percentage calculated as of the Closing Date. If, on any
Distribution Date, the Class Certificate Principal Balance of the Class M
Certificates or of any Class of Class B Certificates for which the related Class
Prepayment Distribution Trigger was satisfied on such Distribution Date is
reduced to zero, any amounts distributable to such Class pursuant to clauses
(ii), (iii) and (v) of the definition of Junior Optimal Principal Amount, to the
extent of such Class's remaining Allocable Share, shall be distributed to the
remaining Classes of Junior Certificates in reduction of their respective Class
Certificate Principal Balances in order of priority. If the Class Prepayment
Distribution Trigger is not satisfied for any Class of Class B Certificates on
any Distribution Date, this may have the effect of accelerating the amortization
of more senior ranking Classes of Junior Certificates because the amount
otherwise distributable to such Class pursuant to clauses (ii), (iii) and (v) of
the definition of Junior Optimal Principal Amount will be distributable among
the outstanding Class M Certificates and each Class of the Class B Certificates
as to which the related Class Prepayment Distribution Trigger has been satisfied
on a pro rata basis subject to the priority of payments described herein. On any
Distribution Date, any reduction in funds available for distribution to the
Classes of Junior Certificates resulting from a distribution of the Class PO
Deferred Amount to the Class PO Certificates will be allocated to the Classes of
Junior Certificates, in reduction of the Allocable Shares thereof, in inverse
order of priority.
Example of Distributions. For an example of hypothetical distributions on
the Certificates for a particular Distribution Date, see "Description of the
Certificates -- Example of Distributions" in the accompanying Prospectus.
* * *
ALLOCATION OF REALIZED LOSSES ON THE CERTIFICATES
A "Realized Loss" with respect to a Mortgage Loan is (i) a Bankruptcy Loss
(as defined below) or (ii) as to any Liquidated Mortgage Loan, the unpaid
principal balance thereof plus accrued and unpaid interest thereon at the Net
Mortgage Rate through the last day of the month of liquidation less the net
proceeds from the liquidation of, and any insurance proceeds from, such Mortgage
Loan and the related Mortgaged Property. A "Liquidated Mortgage Loan" is any
defaulted Mortgage Loan as to which the Company has determined that all amounts
which it expects to recover from or on account of such Mortgage Loan have been
recovered.
In the event of a personal bankruptcy of a Mortgagor, 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 such
Mortgaged Property and could reduce the secured debt to such value. In such
case, the holder of such Mortgage Loan would become an unsecured creditor to the
extent of the difference between the outstanding principal balance of such
Mortgage Loan and such reduced secured debt (such difference, a "Deficient
Valuation"). In addition, certain other modifications of the terms of a Mortgage
Loan can result from a bankruptcy proceeding, including the reduction of the
amount of the monthly payment on the related Mortgage Loan (a "Debt Service
Reduction").
A "Bankruptcy Loss" with respect to any Mortgage Loan is a Deficient
Valuation or Debt Service Reduction.
A-1-15
<PAGE> 54
A "Fraud Loss" is any Realized Loss attributable to fraud in the
origination of the related Mortgage Loan.
A "Special Hazard Loss" is a Realized Loss attributable to damage or a
direct physical loss suffered by a Mortgaged Property (including any Realized
Loss due to the presence or suspected presence of hazardous wastes or substances
on a Mortgaged Property) other than any such damage or loss covered by a hazard
policy or a flood insurance policy required to be maintained in respect of such
Mortgaged Property under the Agreement or any loss due to normal wear and tear
or certain other causes.
On each Distribution Date, the applicable PO Percentage of the principal
portion of any Realized Loss (including any Excess Loss, but not including any
Debt Service Reduction) on a Discount Mortgage Loan will be allocated to the
Class PO Certificates until the Class Certificate Principal Balance thereof is
reduced to zero. With respect to any Distribution Date through the Cross-Over
Date, the aggregate of all amounts so allocable to the Class PO Certificates on
such date in respect of Realized Losses other than Excess Losses in respect of
the Discount Mortgage Loans and all amounts previously allocated in respect of
such losses to the Class PO Certificates and not distributed on prior
Distribution Dates will be the "Class PO Deferred Amount." To the extent funds
are available therefor on any Distribution Date through the Cross-Over Date,
distributions in respect of the Class PO Deferred Amount will be made on the
Class PO Certificates in accordance with priority fourth under "-- Distributions
on the Certificates -- Allocation of Available Funds" above. Any distribution of
Available Funds in respect of the Class PO Deferred Amount will not reduce the
Class Certificate Principal Balance of the Class PO Certificates. No interest
will accrue on the Class PO Deferred Amount. On each Distribution Date through
the Cross-Over Date, the Class Certificate Principal Balance of the lowest
ranking Class of Junior Certificates then outstanding will be reduced by the
amount of any distributions in respect of the Class PO Deferred Amount on such
Distribution Date, through the operation of the Class PO Deferred Payment
Writedown Amount. After the Cross-Over Date, no distributions will be made in
respect of, and losses allocated to the Class PO Certificates will not be added
to, the Class PO Deferred Amount. Any distribution of Unanticipated Recoveries
(as defined in the accompanying Prospectus) on the Class PO Certificates will be
adjusted to take into account the Class PO Deferred Amount previously paid to
such Class as specified in the Agreement. . . .
The applicable Non-PO Percentage of the principal portion of any Realized
Loss (other than an Excess Loss or a Debt Service Reduction) on a Mortgage Loan
for any Distribution Date will not be allocated to any Senior Certificates until
the Cross-Over Date. Prior to the Cross-Over Date (and on such date under
certain circumstances), the applicable Non-PO Percentage of the principal
portion of any such Realized Loss will be allocated among the outstanding
Classes of Junior Certificates, in inverse order of priority, until the Class
Certificate Principal Balance of each such Class has been reduced to zero (i.e.,
such Realized Losses will be allocated first to the Class B5 Certificates while
such Certificates are outstanding, second to the Class B4 Certificates, and so
on). The applicable Non-PO Percentage of the principal portion of any Excess
Loss (other than a Debt Service Reduction) on a Mortgage Loan for any
Distribution Date will be allocated pro rata among all outstanding Classes of
Certificates entitled to principal distributions (other than the Class PO
Certificates) based on their Class Certificate Principal Balances. An "Excess
Loss" is any Bankruptcy Loss, Fraud Loss and Special Hazard Loss (each a type of
Realized Loss) occurring after the Bankruptcy Coverage Termination Date, Fraud
Coverage Termination Date and Special Hazard Termination Date, respectively, as
described more fully below. Commencing on the Cross-Over Date, the applicable
Non-PO Percentage of the principal portion of any Realized Loss (other than a
Debt Service Reduction) will be allocated among the outstanding Classes of
Senior Certificates entitled to principal distributions (other than the Class PO
Certificates) pro rata based upon their Class Certificate Principal Balances.
No reduction of the Class Certificate Principal Balance of any Class shall
be made on any Distribution Date on account of any Realized Loss to the extent
that such reduction would have the effect of reducing the aggregate Certificate
Principal Balance of all of the Certificates as of such Distribution Date to an
amount less than the Pool Scheduled Principal Balance as of the first day of the
month of such
A-1-16
<PAGE> 55
Distribution Date, less any Deficient Valuations occurring on or prior to the
Bankruptcy Coverage Termination Date (such limitation being the "Loss Allocation
Limitation").
The principal portion of Debt Service Reductions will not be allocated in
reduction of the Certificate Principal Balance of any Certificate. However,
after the Bankruptcy Coverage Termination Date, the amounts distributable under
clause (i) of the definitions of Senior Optimal Principal Amount, Class PO
Principal Distribution Amount and Junior Optimal Principal Amount will be
reduced by the amount of the principal portion of any Debt Service Reductions.
Regardless of when they occur, Debt Service Reductions may reduce the amount of
Available Funds otherwise available for distribution on a Distribution Date. As
a result of the subordination of the Junior Certificates in right of
distribution, any Debt Service Reductions prior to the Bankruptcy Coverage
Termination Date will be borne by the Junior Certificates (to the extent then
outstanding) in inverse order of priority. All allocations of Realized Losses to
a Class of Certificates will be accomplished on a Distribution Date by reducing
the applicable Class Certificate Principal Balance by the appropriate pro rata
share of any such losses occurring during the month preceding the month of such
Distribution Date and, accordingly, will be taken into account in determining
the distributions of principal and interest on the Certificates commencing on
the following Distribution Date, except that the aggregate amount of the
principal portion of any Realized Losses (other than Excess Losses and Debt
Service Reductions) to be allocated to the Class PO Certificates on any
Distribution Date through the Cross-Over Date will also be taken into account in
determining distributions in respect of the Class PO Deferred Amount for such
Distribution Date.
The interest portion of all Realized Losses will be allocated among the
outstanding Classes of Certificates offered hereby entitled to distributions of
interest to the extent described under "-- Distributions on the
Certificates -- Interest" above. For purposes of making certain calculations
under the Agreement, the interest portion of any Realized Loss in respect of a
Mortgage Loan will be allocated among the Base Servicing Fee, the Supplemental
Servicing Fee and interest at the excess of the Mortgage Rate over the sum of
the Base Servicing Fee and the Supplemental Servicing Fee (as defined herein) in
proportion to the amount of accrued interest in respect of such Mortgage Loan
that would have been so allocated in the absence of any such shortfall.
The applicable Non-PO Percentage of any Deficient Valuation will on each
Distribution Date be allocated solely to the outstanding Junior Certificates
until the Bankruptcy Coverage Termination Date. The "Bankruptcy Coverage
Termination Date" is the Distribution Date upon which the Bankruptcy Loss Amount
has been reduced to zero or a negative number (or the Cross-Over Date, if
earlier). On each Distribution Date, the "Bankruptcy Loss Amount" will equal
approximately $234,320 (approximately 0.03% of the aggregate Scheduled Principal
Balances of the Mortgage Loans as of the Cut-off Date), subject to reduction as
described in the Agreement, minus the aggregate amount of previous Bankruptcy
Losses. The Bankruptcy Loss Amount and the manner of reduction thereof described
in the Agreement may be reduced or modified upon written confirmation from Fitch
and S&P (each as defined herein) that such reduction or modification will not
adversely affect the then current ratings of the Senior Certificates by Fitch
and S&P. Such reduction may adversely affect the coverage provided by
subordination with respect to Bankruptcy Losses.
The applicable Non-PO Percentage of any Fraud Loss will on each
Distribution Date be allocated solely to the outstanding Junior Certificates
until the Fraud Coverage Termination Date. The "Fraud Coverage Termination Date"
is the Distribution Date upon which the Fraud Loss Amount has been reduced to
zero or a negative number (or the Cross-Over Date, if earlier). Upon the initial
issuance of the Certificates, the "Fraud Loss Amount" will equal approximately
$7,048,394 (approximately 1.00% of the aggregate Scheduled Principal Balances of
the Mortgage Loans as of the Cut-off Date). As of any Distribution Date prior to
the first anniversary of the Cut-off Date, the Fraud Loss Amount will equal
approximately $7,048,394, minus the aggregate amount of Fraud Losses that would
have been allocated to the Junior Certificates in the absence of the Loss
Allocation Limitation since the Cut-off Date. As of any Distribution Date from
the first to the fifth anniversaries of the Cutoff Date, the Fraud Loss Amount
will equal (1) the lesser of (a) the Fraud Loss Amount as of the most recent
anniversary of the Cut-off Date and (b) 1% (from the first to but excluding the
third anniversaries of the Cut-off Date) or 0.5% (from
A-1-17
<PAGE> 56
and including the third to but excluding the fifth anniversaries of the Cut-off
Date) of the aggregate outstanding principal balance of all of the Mortgage
Loans as of the most recent anniversary of the Cut-off Date minus (2) the Fraud
Losses that would have been allocated to the Junior Certificates in the absence
of the Loss Allocation Limitation since the most recent anniversary of the
Cut-off Date. As of any Distribution Date on or after the fifth anniversary of
the Cut-off Date, the Fraud Loss Amount shall be zero.
The applicable Non-PO Percentage of any Special Hazard Loss will on each
Distribution Date be allocated solely to the outstanding Junior Certificates
until the Special Hazard Termination Date. The "Special Hazard Termination Date"
is the Distribution Date upon which the Special Hazard Loss Amount has been
reduced to zero or a negative number (or the Cross-Over Date, if earlier). Upon
the initial issuance of the Certificates, the "Special Hazard Loss Amount" will
equal approximately $7,048,394 (approximately 1.00% of the aggregate Scheduled
Principal Balances of the Mortgage Loans as of the Cut-off Date). As of any
Distribution Date, the Special Hazard Loss Amount will equal approximately
$7,048,394 minus the sum of (i) the aggregate amount of Special Hazard Losses
that would have been previously allocated to the Junior Certificates in the
absence of the Loss Allocation Limitation and (ii) the Adjustment Amount. For
each anniversary of the Cut-off Date, the "Adjustment Amount" shall be equal to
the amount, if any, by which the Special Hazard Loss Amount (without giving
effect to the deduction of the Adjustment Amount for such anniversary) exceeds
the lesser of (A) an amount calculated by the Company and approved by each of
Fitch and S&P, which amount shall not be less than $500,000, and (B) the greater
of (x) 1% (or if greater than 1%, the highest percentage of Mortgage Loans by
principal balance secured by Mortgaged Properties in any California zip code) of
the outstanding principal balance of all the Mortgage Loans on the Distribution
Date immediately preceding such anniversary and (y) twice the outstanding
principal balance of the Mortgage Loan which has the largest outstanding
principal balance on the Distribution Date immediately preceding such
anniversary.
* * *
SUBORDINATION
Priority of Senior Certificates. As of the date of the initial issuance of
the Certificates, the aggregate Certificate Principal Balance of the Junior
Certificates will equal approximately 4.00% of the aggregate Certificate
Principal Balance of all the Classes of Certificates. The rights of the holders
of the Junior Certificates to receive distributions with respect to the Mortgage
Loans will be subordinate to such rights of the holders of the Senior
Certificates, to the extent described above. The subordination of the Junior
Certificates is intended (a) to enhance the likelihood of timely receipt by the
holders of the Senior Certificates (to the extent of the subordination of the
Junior Certificates) of the full amount of the scheduled monthly distributions
of principal and interest allocable to the Senior Certificates and (b) to afford
the holders of the Senior Certificates (to the extent of the subordination of
the Junior Certificates) protection against Realized Losses, to the extent
described above. If Realized Losses exceed the credit support provided to the
Senior Certificates through subordination, or if Excess Losses occur, all or a
portion of such losses will be borne by the Senior Certificates.
The protection afforded to the holders of Senior Certificates by means of
the subordination feature will be accomplished by (i) the preferential right of
such holders to receive, prior to any distribution being made on a Distribution
Date in respect of the Junior Certificates, in accordance with the paydown rules
specified above under "-- Distributions on the Certificates -- Allocation of
Available Funds," the amounts due to the Senior Certificateholders on each
Distribution Date out of the Available Funds with respect to such date and, if
necessary, by the right of such holders to receive future distributions on the
Mortgage Loans that would otherwise have been payable to the holders of the
Junior Certificates, (ii) the allocation to the Junior Certificates of the
principal portion of the applicable Non-PO Percentage of any Realized Loss
(other than an Excess Loss or a Debt Service Reduction) to the extent set forth
herein and (iii) the allocation to the Junior Certificates of the applicable PO
Percentage of the principal portion of any Realized Loss (other than an Excess
Loss or a Debt Service Reduction) to the extent set forth herein through the
operation of the Class PO Deferred Payment Writedown Amount. The allocation of
the
A-1-18
<PAGE> 57
principal portion of Realized Losses (as set forth herein) to the Junior
Certificates on any Distribution Date will decrease the protection provided to
the Senior Certificates then outstanding on future Distribution Dates by
reducing the aggregate Certificate Principal Balance of the Junior Certificates
then outstanding.
In addition, in order to extend the period during which the Junior
Certificates remain available as credit enhancement for the Senior Certificates,
the entire amount of the applicable Non-PO Percentage of any prepayment or other
unscheduled recovery of principal with respect to a Mortgage Loan will be
allocated to the Senior Certificates entitled to principal distributions (other
than the Class PO Certificates) during the first five years after the date of
initial issuance of the Certificates, with such allocation being subject to
reduction thereafter as described herein. This allocation has the effect of
accelerating the amortization of such Senior Certificates as a group while, in
the absence of losses in respect of the Mortgage Loans, increasing the
percentage interest in the principal balance of the Mortgage Loans evidenced by
the Junior Certificates. Among such Senior Certificates, such amounts will be
allocated to the outstanding Group I Senior Certificates during the first five
years after the date of initial issuance of the Certificates (except as
otherwise described herein on or following the Group I Final Distribution Date)
with such allocation being subject to reduction thereafter as described herein,
except that such amounts will be allocated pro rata among all of the outstanding
Senior Certificates (other than the Class PO Certificates) on each Distribution
Date after the Cross-Over Date.
After the payment of amounts distributable in respect of the Senior
Certificates on each Distribution Date, the Junior Certificates will be entitled
on such date to the remaining portion, if any, of the Available Funds in an
aggregate amount equal to the Accrued Certificate Interest on the Junior
Certificates for such date, any remaining undistributed Accrued Certificate
Interest thereon from previous Distribution Dates and the sum of the Allocable
Shares of the Classes of Junior Certificates. Amounts so distributed to Junior
Certificateholders will not be available to cover any delinquencies or any
Realized Losses in respect of subsequent Distribution Dates.
* * *
As a result of the subordination of any Class of Certificates, such Class
of Certificates will be more sensitive than more senior ranking Classes of
Certificates to the rate of delinquencies and defaults on the Mortgage Loans,
and under certain circumstances investors in such Certificates may not recover
their initial investment.
* * *
THE POOLING AND SERVICING AGREEMENT
* * *
SERVICING ARRANGEMENT WITH RESPECT TO THE MORTGAGE LOANS
It is expected that the Company will directly service at least 71% (by
aggregate Scheduled Principal Balance as of the Cut-off Date) of the Mortgage
Loans and will function as master servicer with respect to the remaining
Mortgage Loans pursuant to a Direct Master Servicing Arrangement. Such master-
serviced loans will be directly serviced by entities which originated or
acquired those loans and sold them to the Company. The Agreement permits the
Company to use other primary servicing agents from time to time. . . .
The Agreement may permit the Company, at its option, to grant certain
rights in connection with the foreclosure of defaulted Mortgage Loans to the
holders of the Class B5 Certificates and, when such Certificates are no longer
outstanding, to the holders of the Class B4 Certificates. . . .
* * *
A-1-19
<PAGE> 58
COLLECTION ACCOUNT
The Agreement provides that if the Company or the Trustee obtains actual
notice or knowledge of the occurrence of a Trigger Event or the downgrade by S&P
of GE Capital's short-term senior unsecured rating below A-1+, the Company will,
in lieu of the Loan Payment Record described under the caption "Servicing of the
Mortgage Loans and Contracts -- Loan Payment Record" in the accompanying
Prospectus, establish and maintain or cause to be established and maintained a
separate account (the "Collection Account") for the Certificates for the
collection of payments on the Mortgage Loans; provided, however, that such
action will not be required if the Company delivers to the Trustee a letter from
each rating agency which originally rated the Certificates to the effect that
the failure to take such action would not cause such rating agency to withdraw
or reduce its then current rating of such Certificates.
* * *
TERMINATION
The Company may, at its option, repurchase all of the Mortgage Loans
underlying the Certificates and thereby effect the early retirement of the
Certificates and cause the termination of the Trust Fund and the REMIC
constituted by the Trust Fund, on any Distribution Date after the aggregate
Scheduled Principal Balance of the Mortgage Loans is less than 10% of the
aggregate Scheduled Principal Balance thereof as of the Cut-off Date, provided
that the Trustee has received an opinion of counsel that the exercise of such
option will not subject the Trust Fund to a tax on prohibited transactions or
result in the failure of the Trust Fund to qualify as a REMIC.
Any such repurchase by the Company of the assets included in the Trust Fund
will be at a price equal to the sum of (a) 100% of the unpaid principal balance
of each Mortgage Loan in the Trust Fund (other than a Mortgage Loan described in
clause (b)) as of the first day of the month of repurchase, plus accrued and
unpaid interest thereon to such day at the related Net Mortgage Rate minus the
Supplemental Servicing Fee Rate (less any amounts representing previously
unreimbursed advances), and (b) the appraised value of any property acquired in
respect of a related Mortgage Loan (less any amounts representing previously
unreimbursed advances in respect thereof and a good faith estimate of
liquidation expenses). The Available Funds on the final Distribution Date will
be allocated to each Class of Certificates in accordance with the priorities
described under "Description of the Certificates -- Distributions on the
Certificates -- Allocation of Available Funds." Accordingly, if the Available
Funds on the final Distribution Date are less than the aggregate Certificate
Principal Balance of all outstanding Certificates plus accrued and unpaid
interest thereon, then in the event that such Distribution Date occurs (x) prior
to the Cross-Over Date, the resulting shortfall will be borne by the
Certificates in inverse order of their related payment priorities, and (y) on or
after the Cross-Over Date, such shortfall will be borne pro rata among such
Certificates.
In no event will the Trust Fund created by the Agreement continue beyond
the expiration of 21 years from the death of the last survivor of a certain
person named in such Agreement.
* * *
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the Trust Fund as a REMIC for federal
income tax purposes.
The Certificates other than the Residual Certificates (the "Regular
Certificates") will be designated as "regular interests" in the REMIC and the
Residual Certificates will be designated as the "residual interest" in the
REMIC.
Regular Certificates. The Regular Certificates generally will be treated
as debt instruments issued by the REMIC for federal income tax purposes. Income
on Regular Certificates must be reported under an accrual method of accounting.
Certain Classes of Regular Certificates may be issued with original issue
discount in an amount equal to the excess of their initial respective Class
Certificate Principal Balances
A-1-20
<PAGE> 59
(plus accrued interest from the last day preceding the issue date corresponding
to a Distribution Date through the issue date . . .), over their issue prices
(including all accrued interest). The prepayment assumption that is to be used
in determining the rate of accrual of original issue discount and whether the
original issue discount is considered de minimis, and that may be used by a
holder of a Regular Certificate to amortize premium, will be 275% of the
Prepayment Assumption. No representation is made as to the actual rate at which
the Mortgage Loans will prepay. . . .
The requirement to report income on a Regular Certificate under an accrual
method may result in the inclusion of amounts in income that are not currently
distributed in cash. . . .
* * *
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<PAGE> 60
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<PAGE> 61
EXHIBIT A-2
EXCERPTS FROM THE GE CAPITAL MORTGAGE SERVICES 1999-1 BASE PROSPECTUS
THE INFORMATION ABOUT THE UNDERLYING CERTIFICATES CONTAINED IN THIS EXHIBIT
A-2 HAS BEEN OBTAINED FROM THE PROSPECTUS DATED OCTOBER 22, 1998 (THE "GE
MORTGAGE CAPITAL MORTGAGE SERVICES 1999-1 BASE PROSPECTUS") THAT WAS ATTACHED TO
THE GE MORTGAGE CAPITAL MORTGAGE SERVICES 1999-1 PROSPECTUS SUPPLEMENT IN
CONNECTION WITH THE INITIAL OFFERING OF THE PUBLICLY OFFERED CERTIFICATE OF SUCH
SERIES. SUCH INFORMATION HAS NOT BEEN INDEPENDENTLY REPRESENTED TO THE DEPOSITOR
OR THE UNDERWRITER AS BEING ACCURATE AND COMPLETE AND NEITHER THE DEPOSITOR NOR
THE UNDERWRITER MAKES ANY REPRESENTATION AS TO THE ACCURACY OR COMPLETENESS OF
THE INFORMATION IN THIS EXHIBIT A-2, THE GE MORTGAGE CAPITAL MORTGAGE SERVICES
1999-1 BASE PROSPECTUS OR ANY RELATED DOCUMENTS. COPIES OF THE GE MORTGAGE
CAPITAL MORTGAGE SERVICES 1999-1 BASE PROSPECTUS, THE GE MORTGAGE CAPITAL
MORTGAGE SERVICES 1999-1 PROSPECTUS SUPPLEMENT AND THE RELATED UNDERLYING
AGREEMENT CAN BE OBTAINED BY PURCHASERS OF THE CERTIFICATES, AT NO COST TO SUCH
PURCHASERS, BY WRITTEN REQUEST TO THE TRUSTEE, AT THE FOLLOWING ADDRESS: STATE
STREET BANK AND TRUST COMPANY, CORPORATE TRUST DEPARTMENT, 2 AVENUE DE
LAFAYETTE, 6TH FLOOR, BOSTON, MASSACHUSETTS 02111. REFERENCE: GECMS 1999-1. ALL
CAPITALIZED TERMS CONTAINED IN THE FOLLOWING EXCERPTS FROM THE GE MORTGAGE
CAPITAL MORTGAGE SERVICES 1999-1 BASE PROSPECTUS HAVE THE MEANINGS SPECIFIED IN
THE GE MORTGAGE CAPITAL MORTGAGE SERVICES 1999-1 BASE PROSPECTUS.
* * *
THE TRUST FUND
* * *
THE MORTGAGE LOANS
* * *
Loan Production Sources. The Company acquires the mortgage loans that may
underlie a series of Certificates by purchasing mortgage loans originated or
otherwise acquired by its approved correspondents or other approved third
parties, by closing mortgage loans originated through loan brokers eligible to
refer applications to the Company, by refinancing mortgage loans in its own
servicing portfolio and by originating loans with borrowers who currently have
mortgage loans serviced by the Company. The Company may purchase loans from
correspondents or other third parties either for contemporaneous delivery or for
delivery in one or more pools on a "forward-delivery" basis at some future date.
The Company's mortgage loan correspondents and loan brokers are certain
lending institutions that satisfy the Company's financial and operational
criteria, demonstrate experience in originating mortgage loans and follow the
Company's loan underwriting standards or other loan underwriting standards
approved by the Company. Except as described below, the Company generally
reviews each mortgage loan for compliance with its underwriting standards before
accepting delivery from its correspondents. Under the Company's "delegated
underwriting" program, however, the Company delegates all underwriting functions
to certain approved correspondents. In such cases, the Company will not perform
any underwriting functions prior to its acquisition of the loans, instead
relying on the representations and warranties of its correspondents and on
post-purchase reviews of the material loan documents and samplings of the loans
for compliance with applicable underwriting standards. Mortgage loans originated
by a correspondent may be closed in the name of such correspondent and acquired
by the Company or, to a lesser extent, closed in the name of the Company.
Mortgage loans originated by the Company through loan brokers are generally
underwritten by the Company, processed by the broker on behalf of the Company as
well as by the Company, and closed in the Company's name.
The Company purchases portfolios of loans from other third-party sellers in
negotiated transactions. Before making such purchases, the Company generally
determines that such sellers satisfy the Company's financial and operational
criteria, have demonstrated experience in originating or acquiring single-family
mortgage loans and have followed loan underwriting standards acceptable to the
Company.
A-2-1
<PAGE> 62
Loans acquired from the Company's correspondents and brokers will generally
have been recently originated. Loans acquired in bulk whole loan sales from
correspondents and from other third parties in negotiated transactions are more
likely to include loans that have been outstanding for a period of time. The
Prospectus Supplement will provide information with respect to the origination
dates and the remaining terms to maturity of the Mortgage Loans included in the
related Trust Fund.
Loan Underwriting Policies. The Mortgage Loans underlying a series of
Certificates will generally have been originated in accordance with the
underwriting standards described below. In the case of mortgage loans sold to
the Company by certain approved correspondents who have exhibited strong
financial performance and have delinquency and foreclosure rates with respect to
their conventional loan portfolios acceptable to the Company, the Company may
vary some of the generally acceptable underwriting standards and program
criteria described herein, such as required documentation levels, loan-to-value
ratios and the mortgagors' debt and income ratios. If a material portion of the
Mortgage Loans included in any Trust Fund has been originated or acquired by the
Company under materially different standards from those described herein, the
related Prospectus Supplement will describe such standards.
The underwriting standards applied by the Company in acquiring or
originating mortgage loans are intended to evaluate the prospective borrower's
credit standing and ability to repay the loan and the value and adequacy of the
underlying mortgaged property as collateral for the loan. In applying these
standards, the Company must be satisfied that the value of the property being
financed supports, and will continue to support, the outstanding loan balance.
The Company may require that mortgage loans that are not eligible for purchase
by FHLMC or FNMA be underwritten by a nationally-recognized third-party
underwriter approved by the Company. In such cases (as well as in cases of loans
originated under the Company's delegated underwriting program, as described
above in "-- Loan Production Sources" and in the case of loans sold by certain
third-party sellers), the determination of a mortgage loan's compliance with the
underwriting standards described herein will be made by the related underwriter.
In acquiring or originating residential mortgage loans, the Company follows
procedures established to comply with applicable federal and state laws and
regulations. In applying for a loan, a prospective borrower is generally
required to supply detailed information for a loan application designed to
provide pertinent credit information about the prospective mortgagor, the
property to be purchased or that will serve as the security for the loan, and
the type of loan desired. The application generally includes a description of
the prospective borrower's assets and liabilities and income and expenses. The
Company also usually requires a credit report that summarizes the prospective
mortgagor's credit with merchants and lenders and, in the case of second-lien
Home Equity Loans, a written or telephonic verification of the first mortgage
balance and payment history. The Company may, as part of its overall evaluation
of the prospective borrower's creditworthiness, use a credit scoring model
and/or mortgage scoring model to evaluate in a statistical manner the expected
performance of a mortgage loan based on the pertinent credit information
concerning the prospective mortgagor supplied through national credit bureaus,
certain other information provided by the prospective borrower and an assessment
of specific mortgage loan characteristics, including loan-to-value ratio, type
of loan product and geographic location. The Company expects to place greater
reliance on a prospective mortgagor's credit and/or mortgage scores in the
underwriting process.
The extensiveness of the documentation that the Company requires in
connection with the verification of a prospective borrower's employment status,
income, assets and adequacy of funds to close varies from full documentation to
limited documentation, as further described below. The Company may raise or
lower its documentation requirements depending upon such factors as the net
worth and financial performance of the correspondent or other third party
selling the mortgage loans and the performance of such correspondent's mortgage
loan portfolio. In addition, the Company will take into account the performance
of those mortgage loans previously sold to it by such correspondent or third
party seller, as well as factors particular to a mortgage loan such as the
credit history of the individual borrower, the loan-to-value ratio of the loan
and the prospective mortgagor's credit and/or mortgage scores.
A-2-2
<PAGE> 63
Under a typical full or alternative documentation loan approval process,
verification of the prospective borrower's employment status and current salary
is obtained from records prepared by the employer or by other means satisfactory
to the Company. Each prospective borrower who is self-employed is generally
required to submit a copy of his or her federal income tax returns. In the case
of purchase money mortgage loans, the Company also generally requires
verification that the borrower has adequate funds to close the mortgage loan. A
prospective borrower may be eligible for a loan approval process permitting
limited documentation if the amount of the Mortgage Loan, together with, in the
case of a second-lien Home Equity Loan, the unpaid principal balance of the
senior mortgage loan, would not exceed a certain percentage of the Original
Value of the related Mortgaged Property and certain other requirements are
satisfied. The limited documentation process differs from the full or
alternative documentation process primarily in that it does not require a
verification of the borrower's employment, income and/or assets or, in certain
circumstances, verification of funds to close, and generally places greater
reliance on a prospective mortgagor's credit and/or mortgage scores. Certain of
the Company's Programs that utilize the limited documentation loan approval
process are described below. A loan application and credit report and, when
applicable, a mortgage or rental reference are usually obtained. A current
appraisal is also generally obtained, except as described below.
Certain of the Mortgage Loans (other than Home Equity Loans) may have been
originated or acquired under the Company's Relocation Loan program. Under the
Relocation Loan program, the related borrower must be a relocating employee, the
Relocation Loan must be secured by the related borrower's primary residence and
the employer generally must have paid all or a substantial portion of the
relocating employee's closing costs. A relocating employee may be either an
employee transferring from one location to another, a new hire or a participant
in a group relocation. Loan documentation for a Relocation Loan will generally
be similar to that required for other mortgage loans originated or acquired by
the Company, except with respect to the treatment of the income of the spouse of
the relocating employee. If the spouse confirms an intention to seek employment
at the new location, under certain circumstances, a portion of such spouse's
income at the old location may be counted for qualifying for a Relocation Loan.
Generally, for all Relocation Loans, the spouse's income at the old location
must also be verified.
Certain of the Mortgage Loans (other than Home Equity Loans) may have been
originated or acquired under the Company's No Income Verification program,
pursuant to which the Company generally will not verify any self-employment or
other income of the borrower. Unless otherwise specified in the Prospectus
Supplement, in order to qualify for the No Income Verification program, the
related borrower generally must have (i) no delinquent mortgage or rental
payments during the preceding 24 months, (ii) a minimum of two months'
principal, interest, tax and insurance payments in reserves after the closing of
the related loan and (iii) acceptable credit scores.
Certain of the Mortgage Loans (other than Home Equity Loans) may have been
originated or acquired under the Company's No Ratio program, pursuant to which
the Company will verify the assets of the borrower but will not require the
borrower to either complete the income section on the loan application or
satisfy any qualifying housing to income or debt to income ratios. Unless
otherwise specified in the Prospectus Supplement, in order to qualify for the No
Ratio program, the related borrower generally must have (i) no delinquent
mortgage or rental payments during the preceding 24 months, (ii) a minimum of
six months' principal, interest, tax and insurance payments in reserves after
the closing of the related loan and (iii) strong credit scores.
Certain of the Mortgage Loans (other than Home Equity Loans) may have been
originated or acquired under the Company's No Income No Asset Verification
program, pursuant to which the Company will not verify any income or assets of
the borrower. This program is only available to certain approved correspondents
who have exhibited strong financial performance and have delinquency and
foreclosure rates with respect to their conventional loan portfolios acceptable
to the Company. Unless otherwise specified in the Prospectus Supplement, in
order to qualify for the No Income No Asset Verification program, the related
borrower generally must have (i) no delinquent mortgage or rental payments
during the preceding 24 months, (ii) a minimum of six months' principal,
interest, tax and insurance payments in reserves after the closing of the
related loan and (iii) strong credit scores.
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<PAGE> 64
Certain of the Mortgage Loans (other than Home Equity Loans) may have been
originated or acquired under the Company's Enhanced Streamlined Refinance
program. Under this program, if the Company is currently the servicer of a
borrower's first-lien mortgage loan, the Company may originate a rate-and-term
(rather than "cash-out") refinance loan which pays off the existing mortgage
loan so long as the existing mortgage loan is current, and the borrower has no
more than one 30-day delinquent mortgage payment on the existing mortgage loan
during the preceding 12 months. Under this program the Company generally will
not verify any income or assets of the borrower, and no new appraisal will be
required. The Company will, however, represent and warrant in the Agreement that
the value of the related Mortgaged Property is no less than the value
established at the time the existing mortgage loan was originated.
Upon receipt of appropriate verification, where required, the credit
report, and, in certain cases, the prospective borrower's credit score or
mortgage score, the Company (or the delegated underwriter) makes a determination
as to whether the prospective borrower has sufficient monthly income to meet the
monthly payment obligations on the proposed mortgage loan (including real estate
taxes and insurance on the subject property), plus other financial obligations
not expected to be fully repaid within the next ten months and normal monthly
living expenses. In the case of a mortgage loan with more than one borrower
where all the borrowers intend to occupy the mortgaged property, the combined
gross income of all such borrowers is considered for the above computation.
However, the Company may depart from a strict application of its guidelines in
favor of other credit considerations, and may permit such a departure in the
case of loans acquired from certain of its approved correspondents and other
third-party sellers. In its evaluation of seasoned mortgage loans which have 24
or more months of payment experience, the Company generally places greater
emphasis on payment history and may take into account market and other economic
trends while placing less emphasis on underwriting factors generally applied to
newly originated mortgage loans.
In assessing the adequacy of properties as collateral for mortgage loans,
an independent appraisal is generally used with respect to each property
considered for financing. Such appraisal generally entails physical inspection
of the property as well as a verification that the property is in good
condition. The appraiser estimates the value of the property based on market
values of comparable homes and, to a lesser extent, the cost of replacing the
property.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at the levels which existed on the dates of appraisal of
such Mortgaged Properties. The appraisal of any Mortgaged Property reflects the
individual appraiser's judgment as to value, based on the market value of
comparable homes sold within the recent past in comparable nearby locations and
on the estimated replacement cost. Because of the unique locations and special
features of certain Mortgaged Properties, identifying comparable properties in
nearby locations may be difficult. The appraised values of such Mortgaged
Properties will be based to a greater extent on adjustments made by the
appraisers to the appraised values of reasonably similar properties. If
residential real estate values generally or in particular geographic areas
decline such that the outstanding principal balances of the Mortgage Loans and
any secondary financing on the Mortgaged Properties become equal to or greater
than the values of such Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be significantly higher than those now generally
experienced in the mortgage lending industry and those now experienced on the
Company's servicing portfolios. To the extent that such losses are not covered
by any of the credit enhancement features described herein, they will be borne
by the holders of the related Certificates.
The Company may not require a current appraisal in connection with certain
purchase money mortgage loans, certain refinancings and certain home equity loan
programs. The percentage of Mortgage Loans representing such purchase money
mortgage loans, refinancings and home equity loans (by Principal Balance of all
of the Mortgage Loans included in the related Trust Fund as of the Cut-off Date)
where an appraisal dated within the past year has not been obtained will be
specified in the related Prospectus Supplement, if material. In addition, the
percentage of Mortgage Loans in respect of which no appraisal has been obtained
will be specified in the related Prospectus Supplement, if material. Generally,
appraisals in connection with a Home Equity Loan will be dated within six months
prior to the origination of such mortgage loan. In the event that there has been
a decline in value of the Mortgaged Properties with
A-2-4
<PAGE> 65
respect to Mortgage Loans originated without current appraisals, the use of
other methods in establishing the "Original Value" of a Mortgaged Property and
in calculating the loan-to-value ratios of such Mortgage Loans may result in
substantially lower loan-to-value ratios than would be the case if new
appraisals were obtained at the time of refinancing. This may be particularly
true in geographic areas where there has been a substantial decline in property
values since the date of origination of the refinanced mortgage loans. In
addition, the use of methods other than a current appraisal to establish the
Original Value of a Mortgaged Property (e.g., a broker's price opinion, an
automated appraisal or a drive-by appraisal) may not provide as thorough a
review or as accurate an assessment of the value of the related Mortgaged
Property. In certain circumstances, the Company may require a current appraisal
where, as a result of deterioration in conditions in the local real estate
market since the date of origination of the refinanced mortgage loan, there is a
greater probability that the original appraisal may not accurately reflect the
current market value of the Mortgaged Property.
Generally, mortgage loans that the Company originates or acquires do not
have loan-to-value ratios in excess of 95% of the Original Value. In certain
cases, secondary financing (or subordination of existing secondary financing) is
permitted, provided that the combined loan-to-value ratio does not exceed the
Company's underwriting guidelines for the specific loan program. Unless
otherwise specified in the Prospectus Supplement, mortgage loans (other than
Home Equity Loans) that the Company acquires or originates which have an
original principal amount exceeding 80% of Original Value will have private
mortgage insurance. The Company generally requires such coverage to continue
until the loan-to-value ratio is 80% or less. . . .
* * *
SERVICING OF THE MORTGAGE LOANS AND CONTRACTS
* * *
LOAN PAYMENT RECORD
The Agreement will require that the Company, as servicer, establish and
maintain a Loan Payment Record to which will be credited the following payments
received by the Company with respect to the Mortgage Loans or Contracts included
in the related Trust Fund:
(i) All payments on account of principal, including Principal
Prepayments (other than principal payments due and payable on or before,
and Principal Prepayments received before, the Cut-off Date), received from
borrowers (excluding any amount specified in the Prospectus Supplement);
(ii) All payments (other than those due and payable on or before the
Cut-off Date) on account of interest received from borrowers (adjusted to
the applicable Remittance Rate) and excluding any other amounts specified
in the Prospectus Supplement;
(iii) All amounts received by the Company, or the applicable servicer,
in connection with the liquidation of any Mortgaged Property. . ., and the
purchase price including applicable interest thereon, of any Mortgage Loan
or Contract purchased by the Company pursuant to the applicable Agreement
or any amount paid in connection with the substitution of a Mortgage Loan;
(iv) All proceeds received by the Company, or the applicable servicer,
under any private mortgage insurance or any title, hazard, special hazard,
pool or other insurance policy covering any Mortgage Loan or Contract,
other than proceeds to be applied to the restoration or repair of the
property subject to the related Mortgage or Contract or released to the
borrower in accordance with the normal servicing procedures of the Company;
(v) All proceeds received in respect of any Mortgaged Property
acquired on behalf of the Trustee; and
A-2-5
<PAGE> 66
(vi) Unanticipated Recoveries.
The Company will not be required to credit to the Loan Payment Record payments
on any Mortgage Loan or Contract that has been previously released from the
Trust Fund, amounts representing fees or late charge penalties payable by
borrowers or amounts received by the Company for the account of borrowers for
application towards the payment of taxes, insurance premiums, assessments and
similar items.
Unless otherwise specified in the Prospectus Supplement, the Company, as
servicer, may, from time to time, make debits to the Loan Payment Record for the
following purposes:
(i) To reimburse the Company, or the applicable servicer, for expenses
incurred by it in connection with the liquidation of any Mortgage Loan
(including amounts advanced on any senior mortgage loans). . . and prior
unreimbursed advances of delinquent installments of principal and interest,
delinquent taxes, assessments, insurance premiums and comparable items and
property protection expenses with respect thereto, in an amount not to
exceed the amount of the proceeds from any such liquidation (including
insurance proceeds) credited to the Loan Payment Record, and, if specified
in the Prospectus Supplement, to the extent such proceeds, net of such
expenses, exceed the Principal Balance of such Mortgage Loan or Contract
plus one month's interest thereon at the applicable Remittance Rate, to pay
to the Company such excess as additional servicing compensation;
(ii) To reimburse the Company, or, the applicable servicer, for
expenses reimbursable under any insurance policy covering a Mortgage Loan
and amounts expended by the Company in good faith in connection with the
restoration of a Mortgaged Property damaged by an uninsured cause, in an
amount not to exceed the proceeds from any insurance covering such Mortgage
Loan and any liquidation thereof credited to the Loan Payment Record;
(iii) To reimburse the Company for certain expenses relating to the
Agreement as to which the Company is entitled to indemnification or
reimbursement pursuant to the Agreement;
(iv) To pay to the Company amounts received in respect of any Mortgage
Loan or Contract purchased by the Company as required by the Agreement to
the extent that the distribution of any such amounts on the Distribution
Date upon which the proceeds of such purchase are distributed would make
the total amount distributed in respect thereof greater than the Principal
Balance thereof plus, unless otherwise specified in the Prospectus
Supplement, one month's interest thereon at the applicable Remittance Rate,
net of any unreimbursed advances of delinquent installments of principal
and interest made by the Company;
(v) To reimburse the Company (or, if applicable, the Guarantor or any
other entity) for any previous advance of delinquent installments of
principal and interest (adjusted to the applicable Remittance Rate) in
respect of any Mortgage Loan or Contract to the extent of recoveries,
including late payments and liquidation proceeds, on such Mortgage Loan or
Contract;
(vi) To reimburse the Company from any borrower payment of interest or
other recovery with respect to a particular Mortgage Loan, to the extent
not previously retained by the Company, for unpaid servicing fees with
respect to such Mortgage Loan, subject to certain limitations;
(vii) To reimburse the Company (or, if applicable, the Trustee, the
Guarantor or any other entity) for any Nonrecoverable Advance;
(viii) To transfer funds to the Certificate Account; and
(ix) To deduct any amount credited to the Loan Payment Record in
error.
. . . . On the date or dates specified in the Prospectus Supplement (each,
a "Deposit Date") prior to each Distribution Date, unless otherwise specified in
the Prospectus Supplement, the Company will transfer to the Certificate Account
the payments in respect of a Mortgage Loans or Contracts described above, net of
any debits made thereto as described above, which are received by it after the
Cut-off Date and before the fifth business day next preceding such Distribution
Date (the "Determination Date"), together with any required advances of
delinquent principal and interest payments to be made by it, except
A-2-6
<PAGE> 67
(i) Principal Prepayments received during the month of such deposit (other an as
described in the next sentence) and all related payments of interest
representing interest for the month of deposit or any portion thereof and (ii)
payments which represent early receipt of scheduled payments of principal and
interest due on a date or dates subsequent to the first day of the month of
deposit. In addition, unless otherwise specified in the Prospectus Supplement,
the Company will transfer to the Certificate Account (i) the amount of any
voluntary prepayment in full (net of any interest thereon) received by the
Company (or, in the case of a Mortgage Loan master-serviced by the Company, of
which the Company receives notice) during the period from the first day through
the fifteenth day of the month of such Distribution Date and any payment made by
the Company in connection with the repurchase of a Mortgage Loan that has been
modified in lieu of refinancing during such period and (ii) the amount of any
Compensating Interest Payment for such Distribution Date, as described in the
Prospectus Supplement. The net amounts described in the two preceding sentences
are the "Available Funds" for a series of Certificates with respect to any
Distribution Date, provided that such Available Funds shall not include
Unanticipated Recoveries. Unless otherwise specified in the Prospectus
Supplement, all transfers by the Company to the Certificate Account will be made
by transfer of next-day funds. Although such next-day funds may have been
credited to the Certificate Account, until such funds become available to the
Trustee under applicable law and procedures relating to such transfers, such
funds will not be available to Certificateholders. Unless otherwise specified in
the Prospectus Supplement, prior to transferring such funds, the Company may
commingle payments received in respect of the Mortgage Loans or Contracts and
may invest such payments for its own account. Income realized on the investment
of such payments pending deposit into the Certificate Account will be retained
by the Company as additional servicing compensation.
As a result of the Company's access to payments received in respect of the
Mortgage Loans prior to the time such payments become available to the Trustee
in the Certificate Account, creditors or a trustee-in-bankruptcy for the Company
may be able to assert rights in such payments superior to those of the Trustee.
If specified in the Prospectus Supplement, the Company may establish, or
provide for the establishment of, an account (the "Collection Account") in lieu
of the Loan Payment Record described above. If so specified, all amounts to be
credited or debited to the Loan Payment Record will instead be deposited in or
withdrawn from the Collection Account.
* * *
A-2-7
<PAGE> 68
EXHIBIT B
GE CAPITAL MORTGAGE SERVICES, INC.
SERVICER'S CERTIFICATE
SEPTEMBER, 2000
SERIES 1999-01, REMIC MULTI-CLASS PASS-THROUGH CERTIFICATES
Pursuant to the Pooling and Servicing Agreement dated as of January 1, 1999
(the "Agreement") between GE Capital Mortgage Services, Inc. (the "Company") and
State Street Bank (the "Trustee"), governing the Certificates referred to above,
the Company hereby certifies to the Trustee:
With respect to the Agreement and as of the Determination Date for this
month:
A. Mortgage Loan Information:
<TABLE>
<C> <S> <C>
1. Aggregate scheduled Monthly Payments:
(a) Principal............................................... $ 601,465.95
---------------
(b) Interest................................................ $ 3,641,044.20
---------------
(c) Total................................................... $ 4,242,510.15
---------------
2. Aggregate scheduled Monthly Payments received this month:
(a) Principal............................................... $ 426,105.26
---------------
(b) Interest................................................ $ 2,566,037.34
---------------
(c) Total................................................... $ 2,992,142.60
---------------
3. Aggregate Monthly Advances this month:
(a) Principal............................................... $ 175,360.69
---------------
(b) Interest................................................ $ 1,075,006.86
---------------
(c) Total................................................... $ 1,250,367.55
---------------
4. Aggregate Principal Prepayments in part received in the
applicable Prepayment Period:
(a) Principal............................................... $ 205,946.84
---------------
5. Aggregate Principal Prepayments in full received in the
applicable Prepayment Period:
(a) Principal............................................... $ 3,575,511.65
---------------
(b) Interest................................................ $ 21,026.73
---------------
(c) Total................................................... $ 3,596,538.38
---------------
6. Aggregate Insurance Proceeds received:
(a) Principal............................................... $ 0.00
---------------
(b) Interest................................................ $ 0.00
---------------
(c) Total................................................... $ 0.00
---------------
</TABLE>
B-1
<PAGE> 69
<TABLE>
<C> <S> <C>
7. Aggregate Liquidation Proceeds received:
(a) Principal............................................... $ 0.00
---------------
(b) Interest................................................ $ 0.00
---------------
(c) Total................................................... $ 0.00
---------------
8. Aggregate Deficient Valuations with respect to the Mortgage
Loans during the prior month:............................... $ 0.00
---------------
9. Aggregate Debt Service Reductions with respect to the
Mortgage Loans during the prior month:...................... $ 0.00
---------------
10. Aggregate Purchase Prices for Defaulted Mortgage Loans:
(a) Principal............................................... $ 0.00
---------------
(b) Interest................................................ $ 0.00
---------------
(c) Total................................................... $ 0.00
---------------
11. Aggregate Purchase Prices for Defective Mortgage Loans:
(a) Principal............................................... $ 0.00
---------------
(b) Interest................................................ $ 0.00
---------------
(c) Total................................................... $ 0.00
---------------
12. Pool Scheduled Principal Balance:........................... $608,618,175.90
---------------
13. Available Funds:............................................ $ 7,699,272.46
---------------
14. Realized Losses for prior month:............................ 0.00
---------------
15. Aggregate Realized Losses
(a) Aggregate Realized Losses:.............................. $ 0.00
---------------
(b) Deficient Valuations:................................... $ 0.00
---------------
(c) Debt Service Reductions:................................ $ 0.00
---------------
(d) Bankruptcy Losses:...................................... $ 0.00
---------------
(e) Special Hazard Losses:.................................. $ 0.00
---------------
(f) Fraud Losses:........................................... $ 0.00
---------------
(g) Excess Bankruptcy Losses:............................... $ 0.00
---------------
(h) Excess Special Hazard Losses:........................... $ 0.00
---------------
(i) Excess Fraud Losses:.................................... $ 0.00
---------------
16. Non-Credit Losses:.......................................... $ 0.00
---------------
17. Compensating Interest Payment:.............................. $ 4,477.21
---------------
18. Total interest payments:.................................... $ 3,316,348.01
---------------
</TABLE>
B-2
<PAGE> 70
19. Interest
<TABLE>
<CAPTION>
UNPAID CLASS
ACCRUED CERTIFICATE INTEREST INTEREST
CLASS INTEREST SHORTFALLS PAYABLE PAY-OUT RATE
----- ------------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
PO.............................. $ 0.00 $0.00 $ 0.00 %0.000000000
A1.............................. $ 359,829.49 $0.00 $ 359,829.49 %6.499999983
A2.............................. $2,606,107.85 $0.00 $2,606,107.85 %6.499999995
A3.............................. $ 7,583.33 $0.00 $ 7,583.33 %6.499997143
A4.............................. $ 45,181.21 $0.00 $ 45,181.21 %6.500000360
A5.............................. $ 40,997.96 $0.00 $ 40,997.96 %6.500000132
A6.............................. $ 18,958.33 $0.00 $ 18,958.33 %6.499998857
A7.............................. $ 12,250.00 $0.00 $ 12,250.00 %7.000000000
A8.............................. $ 7,583.33 $0.00 $ 7,583.33 %6.499997143
A9.............................. $ 7,583.33 $0.00 $ 7,583.33 %6.499997143
A10............................. $ 7,583.33 $0.00 $ 7,583.33 %6.499997143
A11............................. $ 7,583.33 $0.00 $ 7,583.33 %6.499997143
A12............................. $ 16,250.00 $0.00 $ 16,250.00 %6.500000000
A13............................. $ 17,875.00 $0.00 $ 17,875.00 %6.500000000
A14............................. $ 5,416.67 $0.00 $ 5,416.67 %6.500004000
A15............................. $ 5,416.67 $0.00 $ 5,416.67 %6.500004000
M............................... $ 69,443.53 $0.00 $ 69,443.53 %6.500000238
B1.............................. $ 30,029.63 $0.00 $ 30,029.63 %6.499999018
B2.............................. $ 16,891.67 $0.00 $ 16,891.67 %6.500000612
B3.............................. $ 16,891.67 $0.00 $ 16,891.67 %6.500000612
B4.............................. $ 7,507.40 $0.00 $ 7,507.40 %6.499996006
B5.............................. $ 9,384.28 $0.00 $ 9,384.28 %6.500003420
R............................... $ 0.00 $0.00 $ 0.00 %0.000000000
20. Principal Distribution Amount: $4,382,924.45
------------
21. Principal Distribution Amount per Certificate:
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL DISTRIBUTION ACCRUAL AMOUNT
---------------------- --------------
<S> <C> <C>
Class PO................................... $ 1,157.89 $0.00
Class A1................................... $ 65,167.76 $0.00
Class A2................................... $4,289,405.85 $0.00
Class A3................................... $ 0.00 $0.00
Class A4................................... $ 0.00 $0.00
Class A5................................... $ 0.00 $0.00
Class A6................................... $ 0.00 $0.00
Class A7................................... $ 0.00 $0.00
Class A8................................... $ 0.00 $0.00
Class A9................................... $ 0.00 $0.00
Class A10.................................. $ 0.00 $0.00
Class A11.................................. $ 0.00 $0.00
Class A12.................................. $ 0.00 $0.00
Class A13.................................. $ 0.00 $0.00
Class A14.................................. $ 0.00 $0.00
Class A15.................................. $ 0.00 $0.00
</TABLE>
B-3
<PAGE> 71
<TABLE>
<CAPTION>
PRINCIPAL DISTRIBUTION ACCRUAL AMOUNT
---------------------- --------------
<S> <C> <C>
Class SUP.................................. $ 0.00 $0.00
Class M.................................... $ 12,576.73 $0.00
Class B1................................... $ 5,438.59 $0.00
Class B2................................... $ 3,059.21 $0.00
Class B3................................... $ 3,059.21 $0.00
Class B4................................... $ 1,359.65 $0.00
Class B5................................... $ 1,699.56 $0.00
Class R.................................... $ 0.00 $0.00
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
22. Additional distributions to the Class R Certificate pursuant to the Agreement: $0.00
-----
23. Additional distributions to the Class RL Certificate pursuant to the Agreement: $0.00
-----
24. Subordinate Certificate Writedown Amount: $0.00
-----
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATIVE
CLASS SUPPORTED SHORTFALL SUPPORTED SHORTFALL
----- ------------------- -------------------
<S> <C> <C>
B1........................................ $0.00 $0.00
B2........................................ $0.00 $0.00
B3........................................ $0.00 $0.00
B4........................................ $0.00 $0.00
B5........................................ $0.00 $0.00
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
25. Unanticipated Recoveries: $0.00
-----
</TABLE>
<TABLE>
<S> <C> <C> <C>
B. Other Amounts for such Distribution Date:
</TABLE>
<TABLE>
<C> <S> <C> <C>
1. Prepayment Distribution
Triggers satisfied: Yes No
--- ---
Class-B1.................................................... X
Class-B2.................................................... X
Class-B3.................................................... X
Class-B4.................................................... X
Class-B5.................................................... X
</TABLE>
<TABLE>
<C> <S> <C>
2. Base Servicing Fee amount: $132,504.24
-----------
3. Supplemental Servicing Fee amount: $217,020.74
-----------
</TABLE>
<TABLE>
<C> <S> <C>
4. Credit Losses for prior month: $0.00
-----
</TABLE>
<TABLE>
<CAPTION>
CATEGORY A CATEGORY B CATEGORY C
---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
5. Senior Percentage: % 95.471289 N/A N/A N/A
----------- --- --- ---
6. Group I Senior Percentage: % N/A N/A N/A N/A
----------- --- --- ---
7. Group II Senior Percentage: % N/A N/A N/A N/A
----------- --- --- ---
8. Senior Prepayment Percentage: %100.000000 N/A N/A N/A
----------- --- --- ---
9. Group I Senior Prepayment Percentage: % N/A N/A N/A N/A
----------- --- --- ---
10. Group II Senior Prepayment Percentage: % N/A N/A N/A N/A
----------- --- --- ---
11. Junior Percentage: % 4.528711
-----------
12. Junior Prepayment Percentage: % 0.000000
-----------
</TABLE>
B-4
<PAGE> 72
Capitalized terms used in this Certificate shall have the same meanings as
in the Agreement.
GE CAPITAL MORTGAGE SERVICES, INC.
By: /s/ JANET BROGDEN
------------------------------------
Janet Brogden
Vice President
Finance
B-5
<PAGE> 73
GE CAPITAL MORTGAGE SERVICES, INC.
DISTRIBUTION DATE STATEMENT
SEPTEMBER, 2000
SERIES 1999-01, REMIC MULTI-CLASS PASS-THROUGH CERTIFICATES
Pursuant to the Pooling and Servicing Agreement dated as of January 1, 1999
(the "Agreement") between GE Capital Mortgage Services, Inc. (the "Company") and
State Street Bank (the "Trustee"), governing the Certificates referred to above,
the Company hereby certifies to the Trustee:
<TABLE>
<S> <C>
Weighted average coupon..................................... %7.17149
--------
Weighted average maturity................................... 335.77
--------
</TABLE>
A. Amount of distribution allocable to principal and interest:
The amounts below are for a Single Certificate of $1,000:
1.
<TABLE>
<CAPTION>
PRINCIPAL
PRINCIPAL PER PREPAYMENTS INTEREST PER
CLASS CERTIFICATE PER CERTIFICATE CERTIFICATE PAYOUT RATE
----- ------------- --------------- ------------ -----------
<S> <C> <C> <C> <C>
PO................................. $1.17204970 $0.15028562 $0.00000000 %0.00000000
A1................................. $0.96450824 $0.83753436 $5.32561664 %6.49999998
A2................................. $7.50838611 $6.51993470 $4.56185884 %6.49999999
A3................................. $0.00000000 $0.00000000 $5.41666429 %6.49999714
A4................................. $0.00000000 $0.00000000 $5.41666697 %6.50000036
A5................................. $0.00000000 $0.00000000 $5.41666678 %6.50000013
A6................................. $0.00000000 $0.00000000 $5.41666571 %6.49999886
A7................................. $0.00000000 $0.00000000 $5.83333333 %7.00000000
A8................................. $0.00000000 $0.00000000 $5.41666429 %6.49999714
A9................................. $0.00000000 $0.00000000 $5.41666429 %6.49999714
A10................................ $0.00000000 $0.00000000 $5.41666429 %6.49999714
A11................................ $0.00000000 $0.00000000 $5.41666429 %6.49999714
A12................................ $0.00000000 $0.00000000 $5.41666667 %6.50000000
A13................................ $0.00000000 $0.00000000 $5.41666667 %6.50000000
A14................................ $0.00000000 $0.00000000 $5.41667000 %6.50000400
A15................................ $0.00000000 $0.00000000 $5.41667000 %6.50000400
M.................................. $0.96450807 $0.00000000 $5.32561685 %6.50000024
B1................................. $0.96450876 $0.00000000 $5.32561585 %6.49999902
B2................................. $0.96450980 $0.00000000 $5.32561715 %6.50000061
B3................................. $0.96450980 $0.00000000 $5.32561715 %6.50000061
B4................................. $0.96451104 $0.00000000 $5.32561337 %6.49999601
B5................................. $0.96450764 $0.00000000 $5.32561945 %6.50000342
R.................................. $0.00000000 $0.00000000 $0.00000000 %0.00000000
</TABLE>
B-6
<PAGE> 74
<TABLE>
<S> <C>
2. Unanticipated Recoveries: $0.00
-----
B. Accrual Amount
1.
</TABLE>
<TABLE>
<CAPTION>
CLASS ACCRUAL AMOUNT
----- --------------
<S> <C> <C>
N/A $ N/A
2. The amount of servicing compensation received by the Company
during the month preceding the month of distribution: $ 132,504.24
---------------
C. The amounts below are for the aggregate of all Certificates:
1. The Pool Scheduled Principal Balance: $608,618,175.90
---------------
2. The aggregate number of Mortgage Loans included in the Pool
Scheduled Principal Balance set forth above: 1,882
---------------
3.
</TABLE>
<TABLE>
<CAPTION>
BEGINNING AGGREGATE ENDING AGGREGATE ENDING
CLASS CERTIFICATE CLASS CERTIFICATE SINGLE CERTIFICATE
CLASS PRINCIPAL BALANCE PRINCIPAL BALANCE BALANCE CUSIP
----- ------------------- ----------------- ------------------ ----------
<S> <C> <C> <C> <C>
PO........................ $ 913,773.27 $ 912,615.38 $ 923.78 GEC9901PO
A1........................ $ 66,430,059.87 $ 66,364,892.11 $ 982.23 36157RZH1
A2........................ $481,127,603.47 $476,838,197.63 $ 834.68 36157RZJ7
A3........................ $ 1,400,000.00 $ 1,400,000.00 $1,000.00 36157RZK4
A4........................ $ 8,341,146.00 $ 8,341,146.00 $1,000.00 36157RZL2
A5........................ $ 7,568,854.00 $ 7,568,854.00 $1,000.00 36157RZM0
A6........................ $ 3,500,000.00 $ 3,500,000.00 $1,000.00 36157RZN8
A7........................ $ 2,100,000.00 $ 2,100,000.00 $1,000.00 36157RZP3
A8........................ $ 1,400,000.00 $ 1,400,000.00 $1,000.00 36157RZQ1
A9........................ $ 1,400,000.00 $ 1,400,000.00 $1,000.00 36157RZR9
A10....................... $ 1,400,000.00 $ 1,400,000.00 $1,000.00 36157RZS7
A11....................... $ 1,400,000.00 $ 1,400,000.00 $1,000.00 36157RZT5
A12....................... $ 3,000,000.00 $ 3,000,000.00 $1,000.00 36157RZU2
A13....................... $ 3,300,000.00 $ 3,300,000.00 $1,000.00 36157RZV0
A14....................... $ 1,000,000.00 $ 1,000,000.00 $1,000.00 36157RZW8
A15....................... $ 1,000,000.00 $ 1,000,000.00 $1,000.00 36157RZX6
SUP....................... $575,646,446.04 $571,308,645.48 $ 860.31 GEC991SUP
M......................... $ 12,820,343.53 $ 12,807,766.80 $ 982.23 36157RZZ1
B1........................ $ 5,543,932.53 $ 5,538,493.94 $ 982.23 36157RA21
B2........................ $ 3,118,461.86 $ 3,115,402.66 $ 982.23 36157RA39
B3........................ $ 3,118,461.86 $ 3,115,402.66 $ 982.23 36157RA47
B4........................ $ 1,385,982.39 $ 1,384,622.75 $ 982.23 36157RA54
B5........................ $ 1,732,481.55 $ 1,730,781.99 $ 982.23 36157RA62
R......................... $ 0.00 $ 0.00 $ 0.00 36157RZY4
</TABLE>
B-7
<PAGE> 75
D. The aggregate number and aggregate Principal Balances of Mortgage Loans
which, as of the close of business on the last day of the month preceding the
related Determination Date, were delinquent:
<TABLE>
<S> <C> <C> <C> <C>
1.
30-59 days Number....................... 14 Principal Balance $4,012,002.97
--- -------------
2.
60-89 days Number....................... 3 Principal Balance $ 908,182.62
--- -------------
3.
90 days or more Number.................. 2 Principal Balance $1,369,632.30
--- -------------
4.
In Foreclosure Number................... 0 Principal Balance $ 0.00
--- -------------
5.
Real Estate Owned Number................ 0 Principal Balance $ 0.00
--- -------------
6.
The Scheduled Principal Balance of any Mortgage Loan replaced
pursuant to the Pooling And Servicing Agreement: $ 0.00
-------------
</TABLE>
E. Other Information:
<TABLE>
<S> <C> <C>
1. Special Hazard Loss Amount: $7,048,394.00
-------------
2. Bankruptcy Loss Amount: $ 234,320.00
-------------
3. Fraud Loss Amount: $7,048,394.00
-------------
4. Certificate Interest Rate of the Class S Certificate: % 0.00000000
-------------
</TABLE>
G.
<TABLE>
<CAPTION>
ROUNDING
OPENING REIMBURSEMENT AMOUNT CLOSING
CLASS BALANCE AMOUNT (WITHDRAWAL) BALANCE
----- ---------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
A7 INT.................................. $42,000.00 $0.00 $0.00 $3,500.00
A13 INT................................. $49,500.00 $0.00 $0.00 $ 0.00
A6...................................... $ 999.99 $0.00 $0.00 $ 999.99
A12..................................... $ 999.99 $0.00 $0.00 $ 999.99
A14..................................... $ 999.99 $0.00 $0.00 $ 999.99
A15..................................... $ 999.99 $0.00 $0.00 $ 999.99
</TABLE>
B-8
<PAGE> 76
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 77
APPENDIX I
MORTGAGE LOAN CHARACTERISTICS OF THE UNDERLYING MORTGAGE LOANS AS OF THE
REFERENCE DATE
The following information sets forth in tabular format certain information,
as of the Reference Date (September 1, 2000, the date as of which the
information regarding the Underlying Mortgage Loans is presented in the
September 25, 2000 Underlying Trust Monthly Statement), as to the Underlying
Mortgage Loans. Other than with respect to rates of interest, percentages
(approximate) are stated by Stated Principal Balance of the Underlying Mortgage
Loans as of the Reference Date and have been rounded in order to total 100%.
MORTGAGE RATES(1)
<TABLE>
<CAPTION>
PERCENT OF TOTAL
AGGREGATE AGGREGATE
UNDERLYING UNDERLYING
NUMBER OF MORTGAGE POOL MORTGAGE POOL
UNDERLYING PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE AS OF THE AS OF THE
MORTGAGE RATES(%) LOANS REFERENCE DATE REFERENCE DATE
----------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
6.0000%........................................... 2 $ 1,006,504 0.17%
6.2500%........................................... 6 1,878,729 0.31
6.3750%........................................... 6 1,784,218 0.29
6.5000%........................................... 29 10,143,012 1.67
6.6250%........................................... 46 15,235,013 2.50
6.7500%........................................... 117 38,407,037 6.31
6.8750%........................................... 239 78,367,719 12.88
7.0000%........................................... 267 88,158,809 14.49
7.1250%........................................... 266 88,019,193 14.46
7.1500%........................................... 1 104,999 0.02
7.2000%........................................... 1 169,744 0.03
7.2500%........................................... 307 99,178,506 16.30
7.3000%........................................... 1 37,554 0.01
7.3500%........................................... 4 433,294 0.07
7.3750%........................................... 241 80,826,804 13.28
7.4000%........................................... 1 39,113 0.01
7.5000%........................................... 146 49,179,989 8.08
7.5500%........................................... 2 269,073 0.04
7.6000%........................................... 6 470,430 0.08
7.6250%........................................... 77 26,717,743 4.39
7.6500%........................................... 4 367,462 0.06
7.7000%........................................... 1 187,979 0.03
7.7500%........................................... 46 12,536,939 2.06
7.8000%........................................... 2 222,232 0.04
7.8500%........................................... 2 88,168 0.01
7.8750%........................................... 26 7,120,038 1.17
8.0000%........................................... 4 1,131,063 0.19
8.1250%........................................... 1 299,529 0.05
8.2000%........................................... 1 49,048 0.01
8.2500%........................................... 2 552,368 0.09
8.5000%........................................... 6 1,175,321 0.19
8.6250%........................................... 4 968,196 0.16
8.7500%........................................... 2 401,526 0.07
8.8750%........................................... 1 175,027 0.03
9.0000%........................................... 6 1,084,093 0.18
9.1250%........................................... 2 211,264 0.03
9.2500%........................................... 1 197,325 0.03
9.3750%........................................... 4 753,660 0.12
9.5000%........................................... 1 61,267 0.01
9.7500%........................................... 2 608,191 0.10
----- ------------ ------
Total........................................ 1,883 $608,618,176 100.00%
===== ============ ======
</TABLE>
------------
(1) As of the Reference Date, the weighted average Mortgage Rate of the
Underlying Mortgage Loans was approximately 7.171% per annum.
I-1
<PAGE> 78
UNDERLYING MORTGAGE LOAN PRINCIPAL BALANCES(1)
<TABLE>
<CAPTION>
PERCENT OF TOTAL
AGGREGATE AGGREGATE
UNDERLYING UNDERLYING
NUMBER OF MORTGAGE POOL MORTGAGE POOL
UNDERLYING PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE AS OF THE AS OF THE
ORIGINAL BALANCES($) LOANS REFERENCE DATE REFERENCE DATE
-------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
$ 0.00 - $ 50,000.00......................... 12 $ 477,059 0.08%
$ 50,000.01 - $ 100,000.00.......................... 24 1,810,770 0.30
$ 100,000.01 - $ 150,000.00........................... 40 5,105,739 0.84
$ 150,000.01 - $ 200,000.00........................... 46 8,417,841 1.38
$ 200,000.01 - $ 250,000.00........................... 240 57,189,768 9.40
$ 250,000.01 - $ 300,000.00........................... 659 180,983,004 29.74
$ 300,000.01 - $ 350,000.00........................... 354 114,568,709 18.82
$ 350,000.01 - $ 400,000.00........................... 212 79,425,151 13.05
$ 400,000.01 - $ 450,000.00........................... 105 44,436,034 7.30
$ 450,000.01 - $ 500,000.00........................... 65 31,039,628 5.10
$ 500,000.01 - $ 550,000.00........................... 34 17,708,160 2.91
$ 550,000.01 - $ 600,000.00........................... 25 14,449,540 2.37
$ 600,000.01 - $ 650,000.00........................... 21 13,230,459 2.17
$ 650,000.01 - $ 700,000.00........................... 6 4,104,771 0.67
$ 700,000.01 - $ 750,000.00........................... 14 10,105,975 1.66
$ 750,000.01 - $1,000,000.00.......................... 19 16,989,144 2.79
$1,000,000.01 - $1,500,000.00......................... 7 8,576,423 1.41
----- ------------ ------
Total............................................ 1,883 $608,618,176 100.00%
===== ============ ======
</TABLE>
------------
(1) As of the Reference Date, the average original Underlying Mortgage Loan
principal balance was approximately $323,217.
LOAN-TO-VALUE RATIOS AT ORIGINATION(1)
<TABLE>
<CAPTION>
PERCENT OF TOTAL
AGGREGATE AGGREGATE
UNDERLYING UNDERLYING
NUMBER OF MORTGAGE POOL MORTGAGE POOL
UNDERLYING PRINCIPAL BALANCE PRINCIPAL BALANCE
LOAN-TO-VALUE RATIOS AT MORTGAGE AS OF THE AS OF THE
ORIGINATION(%) LOANS REFERENCE DATE REFERENCE DATE
----------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
0.01 - 50.00..................................... 80 $ 27,133,574 4.46%
50.01 - 55.00..................................... 44 17,177,249 2.82
55.01 - 60.00..................................... 81 28,394,706 4.67
60.01 - 65.00..................................... 98 35,980,933 5.91
65.01 - 70.00..................................... 202 71,225,449 11.70
70.01 - 75.00..................................... 274 89,693,093 14.74
75.01 - 80.00..................................... 840 266,357,344 43.76
80.01 - 85.00..................................... 32 9,199,444 1.51
85.01 - 90.00..................................... 134 38,750,037 6.37
90.01 - 95.00..................................... 98 24,706,346 4.06
----- ------------ ------
Total........................................ 1,883 $608,618,176 100.00%
===== ============ ======
</TABLE>
------------
(1) As of the Reference Date, the weighted average original Loan-to-Value Ratio
of the Underlying Mortgage Loans was approximately 74.03%.
I-2
<PAGE> 79
STATE DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENT OF TOTAL
AGGREGATE AGGREGATE
UNDERLYING UNDERLYING
NUMBER OF MORTGAGE POOL MORTGAGE POOL
UNDERLYING PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE AS OF THE AS OF THE
STATE LOANS REFERENCE DATE REFERENCE DATE
----- ---------- ----------------- -----------------
<S> <C> <C> <C>
Alabama........................................... 3 $ 863,323 0.14%
Arkansas.......................................... 1 319,907 0.05
Arizona........................................... 22 6,203,386 1.02
California........................................ 905 297,399,614 48.86
Colorado.......................................... 31 10,542,914 1.73
Connecticut ...................................... 23 10,053,275 1.65
District of Columbia.............................. 7 2,625,840 0.43
Delaware.......................................... 4 1,118,562 0.18
Florida........................................... 85 25,204,064 4.14
Georgia........................................... 58 19,125,599 3.14
Hawaii............................................ 8 4,406,372 0.72
Idaho............................................. 1 441,165 0.07
Illinois.......................................... 34 9,349,335 1.54
Indiana........................................... 6 1,450,705 0.24
Iowa.............................................. 3 1,010,365 0.17
Kentucky.......................................... 2 539,513 0.09
Louisiana......................................... 3 678,726 0.11
Maine............................................. 3 1,086,228 0.18
Maryland.......................................... 83 26,827,094 4.41
Massachusetts..................................... 94 31,112,517 5.11
Michigan ......................................... 40 12,692,187 2.09
Minnesota......................................... 4 1,429,288 0.23
Missouri.......................................... 4 988,254 0.16
Mississippi....................................... 1 286,593 0.05
North Carolina.................................... 12 3,349,708 0.55
New Hampshire..................................... 5 1,560,701 0.26
New Jersey........................................ 106 32,851,750 5.40
New Mexico........................................ 4 1,025,550 0.17
Nevada............................................ 4 1,164,674 0.19
New York.......................................... 70 21,635,758 3.55
Ohio.............................................. 19 5,492,766 0.90
Oklahoma.......................................... 2 1,139,418 0.19
Oregon............................................ 10 3,411,954 0.56
Pennsylvania...................................... 41 13,040,773 2.14
Rhode Island...................................... 2 504,944 0.08
South Carolina.................................... 7 2,468,608 0.41
Tennessee......................................... 8 2,926,253 0.48
Texas............................................. 34 8,548,827 1.40
Utah.............................................. 2 1,710,978 0.28
Virginia.......................................... 94 29,711,200 4.88
Vermont........................................... 1 332,367 0.05
Washington........................................ 36 11,708,013 1.92
Wisconsin......................................... 1 279,111 0.05
----- ------------ ------
Total........................................ 1,883 $608,618,176 100.00%
===== ============ ======
</TABLE>
I-3
<PAGE> 80
LOAN PROGRAMS
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF TOTAL
UNDERLYING AGGREGATE
NUMBER OF MORTGAGE POOL UNDERLYING MORTGAGE POOL
UNDERLYING PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE AS OF THE AS OF THE
LOAN PROGRAMS LOANS REFERENCE DATE REFERENCE DATE
------------- ---------- ---------------------- ------------------------
<S> <C> <C> <C>
Fixed 20 year........................... 14 $ 4,142,406 0.68%
Fixed 25 year........................... 15 5,160,078 0.85
Fixed 30 year........................... 1,854 599,315,692 98.47
----- ------------ ------
1,883 $608,618,176 100.00%
===== ============ ======
</TABLE>
PURPOSE OF UNDERLYING MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF TOTAL
UNDERLYING AGGREGATE
NUMBER OF MORTGAGE POOL UNDERLYING MORTGAGE POOL
UNDERLYING PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE AS OF THE AS OF THE
PURPOSE OF LOAN LOANS REFERENCE DATE REFERENCE DATE
--------------- ---------- ----------------- ------------------------
<S> <C> <C> <C>
Purchase.................................... 881 $274,438,806 45.09%
Refinance................................... 728 247,920,970 40.74
Cash-Out Refinance.......................... 274 86,258,400 14.17
----- ------------ ------
Total.................................. 1,883 $608,618,176 100.00%
===== ============ ======
</TABLE>
TYPES OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF TOTAL
UNDERLYING AGGREGATE
NUMBER OF MORTGAGE POOL UNDERLYING MORTGAGE POOL
UNDERLYING PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE AS OF THE AS OF THE
TYPE OF DWELLING LOANS REFERENCE DATE REFERENCE DATE
---------------- ---------- ----------------- ------------------------
<S> <C> <C> <C>
2 Family Homes.............................. 11 $ 3,404,419 0.56%
3 Family Homes.............................. 2 672,568 0.11
4 Family Homes.............................. 1 301,504 0.05
Condominium................................. 153 43,206,072 7.10
Not Available............................... 1 235,106 0.04
Planned Development......................... 493 158,760,530 26.09
Single Family Residence..................... 1,222 402,037,977 66.06
----- ------------ ------
Total.................................. 1,883 $608,618,176 100.00%
===== ============ ======
</TABLE>
DOCUMENTATION TYPE
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF TOTAL
UNDERLYING AGGREGATE
NUMBER OF MORTGAGE POOL UNDERLYING MORTGAGE POOL
UNDERLYING PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE AS OF THE AS OF THE
DOCUMENT TYPE LOANS REFERENCE DATE REFERENCE DATE
------------- ---------- ---------------------- ------------------------
<S> <C> <C> <C>
Full Documentation...................... 1,789 $583,947,385 95.95%
Limited Documentation................... 63 14,815,260 2.43
No Income No Asset Verification......... 1 348,201 0.06
PDQ..................................... 5 1,681,248 0.28
Streamline.............................. 18 6,011,172 0.99
Simplified Refinance Program............ 7 1,814,910 0.30
----- ------------ ------
1,883 $608,618,176 100.00%
===== ============ ======
</TABLE>
I-4
<PAGE> 81
OCCUPANCY TYPES(1)
<TABLE>
<CAPTION>
PERCENT OF TOTAL
AGGREGATE AGGREGATE
UNDERLYING UNDERLYING
NUMBER OF MORTGAGE POOL MORTGAGE POOL
UNDERLYING PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE AS OF THE AS OF THE
OCCUPANCY LOANS REFERENCE DATE REFERENCE DATE
--------- ---------- ----------------- -----------------
<S> <C> <C> <C>
2nd Home.......................................... 26 $ 8,561,049 1.41%
Non-Owner Occupied................................ 10 2,341,962 0.38
Owner Occupied.................................... 1,847 597,715,165 98.21
----- ------------ ------
Total........................................ 1,883 $608,618,176 100.00%
===== ============ ======
</TABLE>
---------------
(1) Based upon representations of the related mortgagors at the time of
origination.
REMAINING TERMS TO MATURITY(1)
<TABLE>
<CAPTION>
PERCENT OF TOTAL
AGGREGATE AGGREGATE
UNDERLYING UNDERLYING
NUMBER OF MORTGAGE POOL MORTGAGE POOL
UNDERLYING PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE AS OF THE AS OF THE
REMAINING TERM TO MATURITY (MONTHS) LOANS REFERENCE DATE REFERENCE DATE
----------------------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
1 - 120......................................... 8 $ 720,653 0.12%
121 - 180......................................... 5 1,110,319 0.18
181 - 300......................................... 98 26,959,977 4.43
301 - 360......................................... 1,772 579,827,227 95.27
----- ------------ ------
Total........................................ 1,883 $608,618,176 100.00%
===== ============ ======
</TABLE>
---------------
(1) As of the Reference Date, the weighted average remaining term to maturity of
the Underlying Mortgage Loans was approximately 332 months.
I-5
<PAGE> 82
PROSPECTUS
CWMBS, INC.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
PLEASE CAREFULLY
CONSIDER OUR
DISCUSSION OF SOME OF
THE RISKS OF
INVESTING IN THE
CERTIFICATES UNDER
"RISK FACTORS"
BEGINNING ON PAGE 5.
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.
------------------------
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.
May 17, 1999
THE TRUSTS
Each trust will be established to hold assets in its trust fund transferred to
it by CWMBS, Inc. The assets in each trust fund will be
specified in the prospectus 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.
<PAGE> 83
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Important Notice About Information
In This Prospectus and Each
Accompanying Prospectus
Supplement........................ 4
Risk Factors........................ 5
Limited Source of Payments -- No
Recourse to Sellers, Depositor
or Servicer.................... 5
Credit Enhancement May Not Be
Sufficient To Protect You From
Losses......................... 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........................... 9
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................... 11
The Trust Fund...................... 13
The Mortgage Loans -- General..... 14
Agency Securities................. 16
Private Mortgage-Backed
Securities..................... 21
Substitution of Mortgage Assets... 23
Available Information............. 23
Incorporation of Certain Documents
by Reference................... 23
Use of Proceeds..................... 24
The Depositor....................... 24
Mortgage Loan Program............... 24
Underwriting Process.............. 24
Qualifications of Sellers......... 25
Representations by Sellers;
Repurchases.................... 25
Description of the Certificates..... 27
General........................... 28
Distributions on Certificates..... 29
Advances.......................... 31
Reports to Certificateholders..... 32
Categories of Classes of
Certificates................... 33
Indices Applicable to Floating
Rate and Inverse Floating Rate
Classes........................ 35
Book-Entry Certificates........... 36
Credit Enhancement.................. 40
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General........................... 40
Subordination..................... 40
Mortgage Pool Insurance
Policies....................... 41
Special Hazard Insurance
Policies....................... 42
Bankruptcy Bonds.................. 43
Reserve Fund...................... 43
Cross Support..................... 44
Insurance Policies, Surety Bonds
and Guaranties................. 44
Over-Collateralization............ 44
Yield and Prepayment
Considerations.................... 45
The Pooling and Servicing
Agreement......................... 46
Assignment of Mortgage Assets..... 46
Payments on Mortgage Assets;
Deposits to Certificate
Account........................ 48
Collection Procedures............. 50
Hazard Insurance.................. 51
Realization Upon Defaulted
Mortgage Loans................. 52
Servicing and Other Compensation
and Payment of Expenses........ 55
Evidence as to Compliance......... 56
List of Certificateholders........ 56
Certain Matters Regarding the
Master Servicer and the
Depositor...................... 57
Events of Default................. 57
Rights Upon Event of Default...... 58
Amendment......................... 59
Termination; Optional
Termination.................... 60
The Trustee....................... 60
Certain Legal Aspects of the
Mortgage Loans.................... 60
General........................... 60
Foreclosure and Repossession...... 61
Rights of Redemption.............. 63
Anti-Deficiency Legislation and
Other Limitations on Lenders... 64
Environmental Risks............... 64
Due-on-Sale Clauses............... 66
Prepayment Charges................ 66
Applicability of Usury Laws....... 66
Soldiers' and Sailors' Civil
Relief Act..................... 66
Material Federal Income Tax
Consequences...................... 68
General........................... 68
Non-REMIC Certificates............ 68
</TABLE>
2
<PAGE> 84
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REMIC Certificates................ 76
Prohibited Transactions and Other
Taxes.......................... 89
Liquidation and Termination....... 90
Administrative Matters............ 90
Tax-Exempt Investors.............. 90
Non-U.S. Persons.................. 90
Tax-Related Restrictions on
Transfers of Residual
Certificates................... 91
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
State Tax Considerations............ 92
ERISA Considerations................ 93
Legal Investment.................... 96
Method of Distribution.............. 97
Legal Matters....................... 98
Financial Information............... 98
Rating.............................. 98
Index to Defined Terms.............. 99
</TABLE>
3
<PAGE> 85
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.
------------------------
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 23.
4
<PAGE> 86
RISK FACTORS
You should carefully consider the following information since it identifies
significant risks associated with an investment in the certificates.
LIMITED SOURCE OF PAYMENTS -- NO
RECOURSE TO SELLERS, DEPOSITOR
OR
SERVICER The applicable prospectus supplement may
provide that certificates 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 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.
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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 TO PROTECT YOU FROM
LOSSES Credit enhancement is intended to reduce the
effect of loan 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 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 BORNE BY YOU Some of the underlying loans may not be fully
amortizing over their 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
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mortgage rates at the time of sale or
refinancing, the borrower's equity in the
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
Declines in Property Values
May
Adversely Affect You The value of the properties underlying the
loans held in the trust fund may decline over
time. Among the factors that could adversely
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 Affect You Even if the properties underlying the loans
held in the trust fund 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.
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Disproportionate Effect of
Liquidation Expenses May
Adversely Affect You Liquidation expenses of defaulted loans
generally do not vary directly with the
outstanding principal balance of the loan at
the 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 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
Adversely Affect You State laws generally regulate interest rates
and other charges, 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.
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<PAGE> 90
YOU COULD BE ADVERSELY AFFECTED
BY
VIOLATIONS OF ENVIRONMENTAL LAWS Federal, state, and local laws and
regulations impose a wide range of
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. 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 ASSURE THEIR PAYMENT Any class of certificates issued under this
prospectus and the 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.
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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 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
Limit on Liquidity Certificates issued in book-entry form may
have only limited 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
orPledge 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.
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BANKRUPTCY OR INSOLVENCY MAY
AFFECT
THE TIMING AND AMOUNT OF
DISTRIBUTIONS ON THE
CERTIFICATES The seller and the depositor will treat the
transfer of the loans held in the trust fund
by the seller to the depositor as a sale for
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 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.
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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 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" on page 99.
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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 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
---------------
* 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 certificate of one specific
series and the term trust fund will refer to one specific trust fund.
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<PAGE> 95
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.
- 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
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<PAGE> 96
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%,
- 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
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<PAGE> 97
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 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
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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.
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.
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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.
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.
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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 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
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loans and 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 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
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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 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
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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.
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;
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- 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.
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 at 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
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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 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
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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 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;
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- 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.
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
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.
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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 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
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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 "ERISA 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 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.
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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 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
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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 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,
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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 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;
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- 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 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.
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CATEGORIES OF CLASSES DEFINITION
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.
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Scheduled Principal Class..... A class that is designed to receive principal payments using
a predetermined principal balance schedule but is not
designated as a planned principal class or targeted
principal class. In many cases, the schedule is derived by
assuming two constant prepayment rates for the underlying
Mortgage Assets. These two rates are the endpoints for the
"structuring range" for the scheduled principal class.
Sequential Pay................ Classes that receive principal payments in a prescribed
sequence, that do not have predetermined principal balance
schedules and that under all circumstances receive payments
of principal continuously from the first distribution date
on which they receive principal until they are retired. A
single class that receives principal payments before or
after all other classes in the same series of certificates
may be identified as a sequential pay class.
Strip......................... A class that receives a constant proportion, or "strip," of
the principal payments on the underlying Mortgage Assets or
other assets of the trust fund.
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 directly 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 inversely 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.
Principal Only................ A class that does not bear interest and is entitled to
receive only distributions of principal.
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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.
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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
- 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
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- 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.
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.
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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.
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.
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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 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.
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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 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.
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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.
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.
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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.
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
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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 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
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hazard insurer, the unpaid principal 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.
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.
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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 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.
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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 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.
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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 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
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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 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
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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 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
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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";
- 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;
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- 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.
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
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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 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 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
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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, 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.
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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 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
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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 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
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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.
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
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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 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.
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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.
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
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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 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.
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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;
(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 servicer or, if REMIC treatment has been
elected and if specified in the related prospectus supplement, by the
holder of the residual interest in the REMIC (see "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.
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,
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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.
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
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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 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
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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 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
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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, 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 the property to assure the
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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 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,
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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 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
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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 take into account its pro rata share of
income and deductions as and when collected by or paid to the master servicer. A
certificateholder using an accrual method of accounting must take into account
its pro rata share of income 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
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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 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
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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 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
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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 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
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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 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
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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.
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
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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.
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.
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
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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.
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).
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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.
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.
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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 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
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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
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
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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 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
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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 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;
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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 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
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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.
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.
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
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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 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
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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 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
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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 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
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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."
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
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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 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
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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.
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.
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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 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 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
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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.
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.
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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 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
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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 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
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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 (greater than zero percent) of future interest
payments 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 of a specified percentage
of interest payments only or principal payments only, or of a notional amount of
either principal or interest payments, would be a "mortgage pass-through
certificate" for purposes of PTE 83-1.
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
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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;
- 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.
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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 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
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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 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
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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 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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INDEX TO DEFINED TERMS
<TABLE>
<S> <C>
1986 Act............................ 70
Agency Securities................... 14
Amortizable Bond Premium
Regulations....................... 68
Applicable Amount................... 85
ARM Loans........................... 70
Asset Conservation Act.............. 63
CERCLA.............................. 63
Certificate Account................. 47
Class Certificate Balance........... 30
Code................................ 27, 66
Contingent Regulations.............. 75
Contributions Tax................... 86
Deferred Interest................... 72
Eleventh District................... 36
excess inclusion.................... 85
FHLBSF.............................. 36
Garn-St Germain Act................. 64
Insured Expenses.................... 48
Legislative History................. 71
Liquidated Mortgage................. 55
Loan-to-Value Ratio................. 16
Master REMIC........................ 74
Mortgage Assets..................... 14
National Cost of Funds Index........ 37
New Withholding Regulations......... 73
Non-U.S. Person..................... 73
OID................................. 66
OID Regulations..................... 70
OTS................................. 37
Parties in Interest................. 90
Payment Lag Certificates............ 81
Plans............................... 90
pre-issuance accrued interest....... 81
Prepayment Assumption............... 71
Private Mortgage-Backed
Securities........................ 14
Prohibited Transactions Tax......... 86
PTE 83-1............................ 90
RCRA................................ 64
Regular Certificateholders.......... 75
Regular Certificates................ 74
Relief Act.......................... 65
REMIC Certificates.................. 74
REMICs.............................. 74
Residual Certificateholder.......... 82
Residual Certificates............... 74
Restricted Group.................... 93
Single Family Certificates.......... 90
SMMEA............................... 93
Stripped ARM Obligations............ 72
Stripped Bond Certificates.......... 69
Stripped Coupon Certificates........ 69
Subsidiary REMIC.................... 74
Super-Premium Certificates.......... 76
Title V............................. 64
U.S. Person......................... 72
Underwriter Exemptions.............. 91
</TABLE>
99
<PAGE> 181
RESECURITIZATION MORTGAGE TRUST 2000-7R
ISSUER
CWMBS, INC.
DEPOSITOR
$251,568,842
(ESTIMATED)
RESECURITIZATION MORTGAGE CERTIFICATES, SERIES 2000-7R
-------------------------
PROSPECTUS SUPPLEMENT
-------------------------
COUNTRYWIDE SECURITIES CORPORATION
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 2000-7R Resecuritization Mortgage
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 2000-7R Resecuritization Mortgage Certificates and
with respect to their unsold allotments or subscriptions. In addition, all
dealers selling the Series 2000-7R Resecuritization Mortgage Certificates will
be required to deliver a prospectus supplement and prospectus until January 24,
2001.
October 26, 2000
