<PAGE>
As filed with the Securities and Exchange Commission on January 20, 1999
Registration No. 333-64451
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
Amendment No.2 to
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
MORTGAGE CAPITAL FUNDING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3408716
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
399 Park Avenue
New York, New York 10043
(212) 793-6899
(Address, including zip code, and telephone number, including area code,
of principal executive offices)
Stephen E. Dietz, Esq.
Associate General Counsel
Citibank, N.A.
425 Park Avenue, 2nd Floor
New York, New York 10043
(212) 559-1000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
William J. Cullen, Esq.
Sidley & Austin
875 Third Avenue
New York, New York 10022
Approximate date of commencement of proposed sale to the public: From time
to time on or after the effective date of this Registration Statement.
If the only securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering.[ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier registration statement for the same
offering. [ ] _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================================
Title of each class of Amount Proposed maximum Proposed maximum Amount of
securities to be registered to be offering price aggregate offering registration fee
registered per unit (2) price
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Pass-Through Certificates $4,000,000,000 (1) 100% $4,000,000,000 $1,180,000
==================================================================================================================
</TABLE>
(1) $566,352,521 aggregate principal amount of Mortgage Pass-Through
Certificates registered by the Registrant under Registration Statement No.
333-24489 referred to below are consolidated with this Registration
Statement pursuant to Rule 429. All registration fees in connection with
such unsold amount of Mortgage Pass-Through Certificates have been
previously paid by the Registrant under the foregoing Registration
Statement. Accordingly, the total amount registered under the Registration
Statement as so consolidated as of the date of this filing is
$4,566,352,521.
(2) Estimated solely for purposes of calculating the registration fee
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 429 under the Securities Act of 1933, the prospectus which
is a part of this Registration Statement is a combined prospectus and includes
all the information currently required in a prospectus relating to the
securities covered by Registration Statement No. 333-24489 previously filed by
the Registrant.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted without the delivery of a final form of this
prospectus supplement and the prospectus to which it relates. This prospectus
supplement and the prospectus to which it relates shall not constitute an offer
to sell or the solicitation of an offer to buy nor shall there be any sale of
these securities in any State in which such offer, solicitation or sale would
be unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED SEPTEMBER 28, 1998
PROSPECTUS SUPPLEMENT
(To Prospectus dated _______________, 1998)
MORTGAGE CAPITAL FUNDING, INC.
Mortgage Pass-Through Certificates
Series 199 -
$ Class A Certificates
$ Class B Certificates
The Series 199__ -__ Mortgage Pass-Through Certificates (the
"Certificates") will consist of four classes (each, a "Class") of Certificates,
designated as the Class A Certificates, the Class B Certificates, the Class C
Certificates and the Class R Certificates. As and to the extent described
herein, the Class B, Class C and Class R Certificates will be subordinate to
the Class A Certificates; and the Class C and Class R Certificates will be
subordinate to the Class B Certificates. Only the Class A and Class B
Certificates (collectively, the "Offered Certificates") are offered hereby. It
is a condition of their issuance that the Class A and Class B Certificates be
rated not lower than "__" and "__", respectively, by ___________________.
(cover continued on next page)
--------------------------
THE OFFERED CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
CITIBANK, N.A. CITIBANK REAL ESTATE, INC., CITICORP BANKING CORPORATION,
MORTGAGE CAPITAL FUNDING, INC. OR THEIR ULTIMATE PARENT, CITICORP, EXCEPT AS
SET FORTH HEREIN. NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE
INSURED OR GUARANTEED BY THE UNITED STATES GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The Offered Certificates will be purchased by [Citicorp Securities,
Inc.] [Citibank, N.A.] (the "Underwriter") from the Sponsor and will be offered
by the Underwriter from time to time to the public in negotiated transactions
or otherwise at varying prices to be determined at the time of sale. Proceeds
to the Sponsor from the sale of the Offered Certificates, before deducting
expanses payable by the Sponsor estimated to be approximately $__, will be __%
of the initial aggregate Certificate Balance of the Offered Certificates, plus
accrued interest.
The Offered Certificates are offered by the Underwriter, subject to
prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to approval of certain legal matters by counsel. It is expected that
the Class A Certificates will be delivered in book- entry form through the
Same-Day Funds Settlement System of The Depository Trust Company and that the
Class B Certificates will be delivered at the offices of the Underwriter, _____
, on or about _____ , 1998 (the "Delivery Date"), against payment therefor in
immediately available funds.
CITICORP SECURITIES, INC.
- OR -
, 1998
[Citibank Logo]
<PAGE>
(cover continued)
The Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (the "Trust Fund"), to be
established by Mortgage Capital Funding, Inc. (the "Sponsor"), that will
consist primarily of a segregated pool (the "Mortgage Pool") of__ conventional,
multifamily, balloon mortgage loans (the "Mortgage Loans"). As of
_____________, 199__ (the "Cut-off Date"), the Mortgage Loans had an aggregate
principal balance (the "Initial Pool Balance") of $______, after application of
all payments of principal due on or before such date, whether or not received.
The initial principal balance of the Class A Certificates will be $____, which
represents __% of the Initial Pool Balance; and the initial principal balance
of the Class B Certificates will be $____, which represents__ % of the Initial
Pool Balance.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" BEGINNING ON PAGE S-_______ OF THIS PROSPECTUS SUPPLEMENT AND
THE INFORMATION SET FORTH UNDER "RISK FACTORS" BEGINNING ON PAGE 11 IN THE
PROSPECTUS BEFORE PURCHASING ANY OF THE OFFERED CERTIFICATES.
The Mortgage Loans provide for monthly payments of principal and/or
interest ("Monthly Payments"), in all cases based on amortization schedules
that are significantly longer than their remaining terms, thereby leaving
substantial principal amounts due and payable on their respective maturity
dates. As more fully described herein, (i) __ of the Mortgage Loans (the "ARM
Loans"), which represent __% of the Initial Pool Balance, provide for periodic
adjustments (which may occur monthly, semi-annually or annually) to the
respective annualized rates at which they accrue interest (their "Mortgage
Rate") based on fluctuations in a base index (an "Index") and subject to the
limitations described herein, and (ii) the remaining Mortgage Loans (the "Fixed
Rate Loans") bear interest at fixed Mortgage Rates. Adjustments to the Mortgage
Rates on __ of the ARM Loans (the "COFI ARM Loans"), which represent __% of the
Initial Pool Balance, are based upon changes in the monthly weighted average
cost of funds of member savings institutions of the Eleventh Federal Home Loan
Bank District (the "COFI Index"). ____________of the ARM Loans, which represent
% of the Initial Pool Balance, provide for Monthly Payment adjustments that
occur less frequently than Mortgage Rate adjustments and/or payment caps that
limit the amount by which a Monthly Payment can change in response to a change
in the Mortgage Rate, which in either case may result in Monthly Payments that
are greater or less than the amount necessary to amortize the loan fully over
its remaining amortization term and pay interest at the then applicable
Mortgage Rate. Consequently, those ARM Loans (and, accordingly, the Offered
Certificates) may from time to time be subject to periods of accelerated,
slower or negative amortization.
All of the Mortgage Loans are currently held by ____________ (the
"Mortgage Loan Seller"), which either originated the Mortgage Loans or acquired
them from their respective originators. On or before the date of initial
issuance of the Certificates, the Sponsor will acquire the Mortgage Loans from
the Mortgage Loan Seller and will transfer them to the Trustee in exchange for
the Certificates.
Distributions of interest on and principal of the Certificates will
be made, to the extent of available funds, on the 25th day of each month or, if
any such 25th day is not a business day, then on the next succeeding business
day, beginning in ______, 199 __ (each, a "Distribution Date"). As more fully
described herein, distributions allocable to interest accrued on each Class of
Offered Certificates will be made on each Distribution Date based on the
variable pass-through rate (the "Pass-Through Rate") then applicable to such
Class and the stated principal amount (the "Certificate Balance") of such Class
outstanding immediately prior to such Distribution Date. The Pass-Through Rates
for the Class A and Class B Certificates applicable to the first Distribution
Date will be ___% and ___% per annum, respectively. Subsequent to the initial
Distribution Date, the Pass-Through Rate for the Class A Certificates will
equal from time to time monthly LIBOR plus __ basis points (i. e., _ percentage
points), subject to a maximum of % per annum and a minimum of __% per annum;
except when such rate exceeds a "funds-available cap rate" calculated as
described herein, at which time the Pass-Through Rate for the Class A
Certificates will equal the weighted average of, subject to certain adjustments
described herein, the Net Mortgage Rates on the Mortgage Loans. Subsequent to
the initial Distribution Date, the Pass-Through Rate for the Class B
Certificates will equal from time to time the weighted average of, subject to
certain adjustments described herein, the Net Mortgage Rates on the Mortgage
Loans. The Net Mortgage Rate for any Mortgage Loan is its Mortgage Rate less __
basis points. Distributions allocable to principal of each Class of Offered
Certificates will be made in the amounts and in accordance with the priorities
described herein. See "Description of the Certificates-Distribution" herein.
The yield to maturity on each Class of Offered Certificates will
depend on, among other things, fluctuations in its respective Pass-Through Rate
and the rate and timing of principal payments (including by reason of
prepayments, defaults
ii
<PAGE>
and liquidations) on the Mortgage Loans. See "Yield and Maturity
Considerations" herein and "Yield and Maturity Considerations" and "Risk
Factors-Prepayments; Average Life of Certificates; Yields" in the Prospectus.
An election will be made to treat the Trust Fund as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes. The
Offered and the Class C Certificates (collectively; the "REMIC Regular
Certificates") will constitute "regular interests", and the Class R
Certificates will constitute the sole class of "residual interests", in the
Trust Fund. See "Certain Federal Income Tax Consequences" herein and "Material
Federal Income Tax Consequences" in the Prospectus.
There is currently no secondary market for the Offered
Certificates, and there can be no assurance that such a market will develop or,
if it does develop, that it will continue. See "Special Considerations-Limited
Liquidity" herein.
THE PROSPECTUS THAT ACCOMPANIES THIS PROSPECTUS SUPPLEMENT CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING THAT IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL TO OBTAIN MATERIAL INFORMATION CONCERNING THE OFFERED
CERTIFICATES. SALES OF THE OFFERED CERTIFICATES MAY NOT BE CONSUMMATED UNLESS
THE PURCHASER HAS RECEIVED BOTH THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT.
UNTIL [NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT],
ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS MAY BE USED BY
CITIBANK, N.A., CITICORP SECURITIES, INC. OR CITIBANK INTERNATIONAL PLC,
AFFILIATES OF THE SPONSOR AND WHOLLY-OWNED SUBSIDIARIES OF CITICORP, IN
CONNECTION WITH OFFERS AND SALES RELATED TO MARKET-MAKING TRANSACTIONS IN THE
CERTIFICATES. CITIBANK, N.A., CITICORP SECURITIES, INC OR CITIBANK
INTERNATIONAL PLC MAY ACT AS PRINCIPAL OR AGENT IN SUCH TRANSACTIONS. SUCH SALE
WILL BE MADE AT PRICES RELATED TO PREVAILING MARKET PRICES AT THE TIME OF SALE.
iii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY OF PROSPECTUS SUPPLEMENT..................................................................................... S-1
RISK FACTORS.........................................................................................................S-17
The Certificates.........................................................................................S-17
Limited Liquidity............................................................................S-17
Variability in Yield; Priority of Payments...................................................S-17
Conflicts of Interest Involving Parties to the Pooling and Servicing Agreement...............S-18
The Mortgage Loans.......................................................................................S-18
Nature of the Mortgaged Properties...........................................................S-18
Limited Recourse.............................................................................S-19
Environmental Law Considerations.............................................................S-19
Geographic Concentration.....................................................................S-19
Concentration of Mortgage Loans and Borrowers................................................S-19
Adjustable Rate Mortgage Loans; Negative Amortization........................................S-20
Balloon Payments.............................................................................S-20
DESCRIPTION OF THE MORTGAGE POOL.....................................................................................S-20
General..................................................................................................S-20
Certain Payment Characteristics..........................................................................S-21
The Eleventh District Cost of Funds Index................................................................S-22
Additional Mortgage Loan Information.....................................................................S-23
The Mortgage Loan Seller.................................................................................S-32
Underwriting Standards...................................................................................S-32
Assignment of the Mortgage Loans; Repurchase.............................................................S-33
Representations and Warranties; Repurchases..............................................................S-34
Changes in Mortgage Pool Characteristics.................................................................S-35
SERVICING OF THE MORTGAGE LOANS......................................................................................S-35
General..................................................................................................S-35
The Master Servicer......................................................................................S-36
The Special Servicer.....................................................................................S-36
Servicing and Other Compensation and Payment of Expenses.................................................S-37
Modifications, Waivers and Amendments....................................................................S-38
Inspections; Collection of Operating Information.........................................................S-39
Additional Obligations of the Master Servicer with Respect to ARM Loans..................................S-40
DESCRIPTION OF THE CERTIFICATES......................................................................................S-40
General..................................................................................................S-40
Distributions............................................................................................S-41
Method, Timing and Amount....................................................................S-41
Priority S-42
Pass-Through Rates...........................................................................S-44
Determination of LIBOR.......................................................................S-44
Distributable Certificate Interest...........................................................S-45
Scheduled Principal Distribution Amount and
Unscheduled Principal Distribution Amount....................................................S-46
<PAGE>
Certain Calculations with Respect to Individual Mortgage Loans...............................S-47
Subordination............................................................................................S-47
P&I Advances.............................................................................................S-48
Reports to Certificateholders; Certain Available Information.............................................S-49
Voting Rights............................................................................................S-50
Termination..............................................................................................S-50
The Trustee..............................................................................................S-51
YIELD AND MATURITY CONSIDERATIONS....................................................................................S-51
Yield Considerations.....................................................................................S-51
General......................................................................................S-51
Pass-Through Rate............................................................................S-51
Rate and Timing of Principal Payments........................................................S-53
Losses and Shortfalls........................................................................S-55
Certain Relevant Factors.....................................................................S-55
Delay in Payment of Distributions............................................................S-56
Unpaid Distributable Certificate Interest....................................................S-56
Weighted Average Life....................................................................................S-56
USE OF PROCEEDS......................................................................................................S-60
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..............................................................................S-60
ERISA CONSIDERATIONS.................................................................................................S-61
LEGAL INVESTMENT.....................................................................................................S-63
METHOD OF DISTRIBUTION...............................................................................................S-64
LEGAL MATTERS........................................................................................................S-64
RATING...............................................................................................................S-65
INDEX OF PRINCIPAL DEFINITIONS.......................................................................................S-66
</TABLE>
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is qualified in its entirety by reference to
the detailed information appearing elsewhere in this Prospectus Supplement and
in the accompanying Prospectus. Certain capitalized terms used in this Summary
may be defined elsewhere in this Prospectus Supplement or in the Prospectus. An
"Index of Principal Definitions" is included at the end of both this Prospectus
Supplement and the Prospectus. Terms that are used but not defined in this
Prospectus Supplement will have the meanings specified in the Prospectus.
<TABLE>
<CAPTION>
<S> <C>
TITLE OF CERTIFICATES ..... Mortgage Capital Funding, Inc., Mortgage
Pass-Through Certificates, Series 199__-__ (the
"Certificates"), to be issued in four Classes
designated as the Class A, Class B, Class C and
Class R Certificates. The Class A, Class B and
Class C Certificates are herein collectively
referred to from time to time as the "REMIC
Regular Certificates". Only the Class A and Class
B Certificates (collectively, the "Offered
Certificates") are offered hereby. The Class C and
Class R Certificates are herein collectively
referred to from time to time as the "Private
Certificates".
SPONSOR ................... Mortgage Capital Funding, Inc., a Delaware
corporation. The Sponsor is a direct wholly-owned
subsidiary of Citicorp Banking Corporation, which
is a direct wholly-owned subsidiary of Citicorp.
The Sponsor is an affiliate of [Citicorp
Securities, Inc.] [Citibank, N.A.] (the
"Underwriter"). See "Mortgage Capital Funding,
Inc." in the Prospectus and "Method of
Distribution" herein. Neither the Sponsor nor any
of its affiliates has insured or guaranteed the
Offered Certificates.
MASTER SERVICER ........... _______, a ______. See "Servicing of the Mortgage
Loans-The Master Servicer" herein.
SPECIAL SERVICER .......... _______, a ______. See "Servicing of the Mortgage
Loans-The Special Servicer" herein.
TRUSTEE ................... _______, a ______. See "Description of the
Certificates-The Trustee" herein.
REMIC ADMINISTRATOR ....... _______, a ______. See "Certain Federal Income Tax
Consequences" herein.
MORTGAGE LOAN SELLER ...... _______, a ______. See "Description of the
Mortgage Pool-The Mortgage Loan Seller" herein.
CUT-OFF DATE .............. ________________, 199__.
DELIVERY DATE ............. ________________, 199__.
S-1
<PAGE>
REGISTRATION OF THE
CLASS A CERTIFICATES .. The Class A Certificates will be represented by
one or more global Certificates registered in the
name of Cede & Co., as nominee of The Depository
Trust Company ("DTC"). No person acquiring an
interest in the Class A Certificates (any such
person, a "Class A Certificate Owner") will be
entitled to receive a Class A Certificate in fully
registered, certificated form (a "Definitive Class
A Certificate"), except under the limited
circumstances described in the Prospectus under
"Description of the Certificates-Book Entry
Registration and Definitive Certificates".
Instead, DTC will effect payments and transfers in
respect of the Class A Certificates by means of
its electronic record keeping services, acting
through certain participating organizations
("Participants"). This may result in certain
delays in receipt of payments by an investor and
may restrict an investor's ability to pledge its
securities. Unless and until Definitive Class A
Certificates are issued, all references herein to
the rights of holders of the Class A Certificates
are to the rights of Class A Certificate Owners as
they may be exercised through DTC and its
Participants, except as otherwise specified
herein. See "Description of the
Certificates-General" herein and "Description of
the Certificates-Book-Entry Registration and
Definitive Certificates" in the Prospectus.
DENOMINATIONS ............. The Class A Certificates will be issued,
maintained and transferred on the book-entry
records of DTC and its Participants in
denominations of $1,000 and in integral multiples
thereof. The Class B Certificates will be issuable
in fully registered, certificated form in
denominations of $___ and in integral multiples of
$1,000 in excess thereof, with one Class B
Certificate evidencing an additional amount equal
to the remainder of the initial Certificate
Balance of such Class.
THE MORTGAGE POOL ......... The Mortgage Pool will consist of __ conventional,
balloon Mortgage Loans with an Initial Pool
Balance of $______. On or prior to the Delivery
Date, the Sponsor will acquire the Mortgage Loans
from the Mortgage Loan Seller pursuant to a
Mortgage Loan Purchase Agreement, dated [the date
hereof], between the Sponsor and the Mortgage Loan
Seller (the "Mortgage Loan Purchase Agreement").
In the Mortgage Loan Purchase Agreement, the
Mortgage Loan Seller has made certain
representations and warranties to the Sponsor
regarding the characteristics and quality of the
Mortgage Loans and, as more particularly described
herein, has agreed to cure any material breach
thereof or repurchase the affected Mortgage Loan.
In connection with the assignment of its interests
in the Mortgage Loans to the Trustee, the Sponsor
will also assign its rights under the Mortgage
Loan Purchase Agreement insofar as they relate to
or arise out of the Mortgage Loan Seller's
representations and warranties regarding the
Mortgage Loans. See "Description of the Mortgage
Pool-Representations and Warranties; Repurchases"
herein.
Each Mortgage Loan is secured by a first mortgage
lien on a fee simple estate in a multifamily
rental property (each, a "Mortgaged
S-2
<PAGE>
Property"). _______ of the Mortgage Loans, which
represent ___% of the Initial Pool Balance, are
secured by liens on Mortgaged Properties located
in ____. The remaining Mortgaged Properties are
located throughout ______ other states. See
"Description of the Mortgage Pool-Additional
Mortgage Loan Information" herein.
_______ of the Mortgage Loans, which represent __%
of the Initial Pool Balance, provide for scheduled
payments of principal and/or interest ("Monthly
Payments") to be due on the first day of each
month; the remainder of the Mortgage Loans provide
for Monthly Payments to be due on the ___, ___, __
or __ day of each month (the date in any month on
which a Monthly Payment on a Mortgage Loan is
first due, the "Due Date"). The annualized rate at
which interest accrues (the "Mortgage Rate") on __
of the Mortgage Loans (the "ARM Loans"), which
represent __% of the Initial Pool Balance, is
subject to adjustment on specified Due Dates (each
such date of adjustment, an "Interest Rate
Adjustment Date") by adding a fixed number of
basis points (a "Gross Margin") to the value of a
base index (an "Index"), subject, in [most] cases,
to lifetime maximum and/or minimum Mortgage Rates,
and in __ cases, to periodic maximum and/or
minimum Mortgage Rates, in each case as described
herein; and the remaining Mortgage Loans (the
"Fixed Rate Loans") bear interest at fixed
Mortgage Rates. ___ of the ARM Loans, which
represent __% of the Initial Pool Balance, provide
for Interest Rate Adjustment Dates that occur
monthly, while the remainder of the ARM Loans
provide for adjustments of the Mortgage Rate to
occur semi-annually or annually. _______ of the
ARM Loans (the "COFI ARM Loans"), which represent
__% of the Initial Pool Balance, provide for
Mortgage Rate adjustments based on changes in the
monthly weighted average cost of funds of member
savings institutions of the Eleventh Federal Home
Loan Bank District (the "COFI Index"); and the
remaining ARM Loans, which represent __% of the
Initial Pool Balance, provide for Mortgage Rate
adjustments based on United States Treasury yield
indices (each, a "Treasury Index"). See
"Description of the Mortgage Pool-Certain Payment
Characteristics" herein.
The amount of the Monthly Payment on all of the
ARM Loans is subject to adjustment on specified
Due Dates (each such date, a "Payment Adjustment
Date") generally to an amount that would amortize
the outstanding principal balance of the Mortgage
Loan over its then remaining amortization schedule
and pay interest at the then applicable Mortgage
Rate, subject, in the case of [most] of the ARM
Loans, to payment caps ("Payment Caps"), which
limit the amount by which the Monthly Payment may
adjust on any Payment Adjustment Date as described
herein. _________ of the ARM Loans, which
represent ___% of the Initial Pool Balance,
provide for Payment Adjustment Dates that occur
annually, while the remainder of the ARM Loans
provide for adjustments of the Monthly Payment to
occur monthly or semi-annually.
S-3
<PAGE>
_______ of the ARM Loans, which represent ___% of
the Initial Pool Balance, have Payment Adjustment
Dates that occur less frequently than Interest
Rate Adjustment Dates and/or provide for Payment
Caps that limit the amount by which a Monthly
Payment can change in response to a change in the
Mortgage Rate. As a result, the amount of a
Monthly Payment in those cases may be greater or
less than the amount necessary to amortize the
loan fully over its then remaining amortization
schedule and pay interest at the then applicable
Mortgage Rate, and accordingly, those ARM Loans
may be subject to periods of slower amortization
(if the Monthly Payment due on a Due Date is
sufficient to pay interest accrued to such Due
Date at the applicable Mortgage Rate but is not
sufficient to reduce principal in accordance with
the applicable amortization schedule), to negative
amortization (if interest accrued to a Due Date at
the applicable Mortgage Rate is greater than the
entire Monthly Payment due on such Due Date), or
to accelerated amortization (if the Monthly
Payment due on a Due Date is greater than the
amount necessary to pay interest accrued to such
Due Date at the applicable Mortgage Rate and to
reduce principal in accordance with the applicable
amortization schedule). All of the Mortgage Loans
that permit negative amortization limit the amount
by which the original principal balance may be
exceeded as a result of negative amortization. In
addition, the ARM Loans with Payment Caps provide
by their terms that the Payment Caps will not be
applicable on specified Payment Adjustment Dates.
No ARM Loan that permits negative amortization had
a Cut-off Date Balance (that is, a principal
balance as of the Cut-off Date, after the
application of all payments due on or before such
date, whether or not received) in excess of its
original principal balance.
All of the Mortgage Loans provide for monthly
payments of principal based on amortization
schedules significantly longer than the remaining
terms of such Mortgage Loans, thereby leaving
substantial principal amounts due and payable
(each such payment, a "Balloon Payment") on their
respective maturity dates, unless prepaid prior
thereto.
As of the Cut-off Date, the Mortgage Loans had the
following additional characteristics:
(i) Mortgage Rates ranging from ___% per annum to
___% per annum, and a weighted average Mortgage
Rate of ___% per annum;
(ii) in the case of the ARM Loans, Gross Margins
ranging from __ basis points to __ basis points,
and a weighted average Gross Margin of ____basis
points;
(iii) for those ___ ARM Loans as to which such
characteristic applies, minimum lifetime Mortgage
Rates ranging from ___% per annum to ___% per
annum, and a weighted
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<PAGE>
average minimum lifetime Mortgage Rate of
___% per annum;
(iv) for those ___ ARM Loans as to which such
characteristic applies, maximum lifetime Mortgage
Rates ranging from ___% per annum to ___% per
annum, and a weighted average maximum lifetime
Mortgage Rate of ___% per annum;
(v) Cut-off Date Balances ranging from $____ to
$____, and an average Cut-off Date Balance of
$____;
(vi) original terms to scheduled maturity ranging
from ___ months to ____ months, and a weighted
average original term to scheduled maturity of
____ months;
(vii) remaining terms to scheduled maturity
ranging from ___ months to ___ months, and a
weighted average remaining term to scheduled
maturity of ___ months;
(viii) Cut-off Date LTV Ratios (that is, in each
case, a loan-to-value ratio based upon (a) the
Cut-off Date Balance of the Mortgage Loan, and (b)
the appraised value of the related Mortgaged
Property determined at the time of origination of
such loan), ranging from __ % to __%, and a
weighted average Cut-off Date LTV Ratio of __%;
and
(ix) for those ____ Mortgage Loans as to which
such characteristic was determinable, Debt Service
Coverage Ratios (calculated as more particularly
described under "Description of the Mortgage
Pool-Additional Mortgage Loan Information")
ranging from ___x to ___x, and a weighted average
Debt Service Coverage Ratio of ___x.
The Mortgage Loans were originated between 19__
and 19__.
DESCRIPTION OF THE
CERTIFICATES .. The Certificates will be issued pursuant to a
Pooling and Servicing Agreement, to be dated as of
the Cut-off Date, among the Sponsor, the Master
Servicer, the Special Servicer, the Trustee and
the REMIC Administrator (the "Pooling and
Servicing Agreement"), and will represent in the
aggregate the entire beneficial ownership interest
in a trust fund (the "Trust Fund") consisting of
the Mortgage Pool and certain related assets.
A. CERTIFICATE BALANCE .... The aggregate Certificate Balance of the
Certificates as of the Delivery Date will equal
the Initial Pool Balance. The Class A Certificates
will have an initial Certificate Balance of $___
which represents ___% of the Initial Pool Balance;
the Class B Certificates will have an initial
Certificate Balance of $___, which represents ___%
of the Initial Pool Balance; the Class C
Certificates will have an initial Certificate
S-5
<PAGE>
Balance of $___, which represents ___% of the
Initial Pool Balance; and the Class R Certificates
will have an initial Certificate Balance of
[zero]. The Certificate Balance of each Class of
Certificates outstanding at any time represents
the maximum amount that the holders thereof are
entitled to receive as distributions allocable to
principal from the cash flow on the Mortgage Loans
and other assets in the Trust Fund. As more
specifically described herein, the Certificate
Balance of each Class of REMIC Regular
Certificates will be adjusted from time to time on
each Distribution Date to reflect any additions
thereto resulting from the allocation of Mortgage
Loan negative amortization to such Class and any
reductions therein resulting from the distribution
of principal of such Class. The aggregate amount
of monthly Mortgage Loan negative amortization
allocable to the Certificates on any Distribution
Date is herein referred to as the "Aggregate
Mortgage Loan Negative Amortization" for such
date, and the portion thereof allocable to any
particular Class constitutes the "Certificate
Negative Amortization" in respect of such Class
for such date. The Certificate Balance of the
Class R Certificates will at all times equal the
excess, if any, of the aggregate Stated Principal
Balance of the Mortgage Pool, over the aggregate
Certificate Balance of the REMIC Regular
Certificates (such excess, if any, the "Excess
Pool Balance"). See "Description of the
Certificates-General" herein.
Losses experienced with respect to the Mortgage
Loans or otherwise with respect to the Trust Fund
will not be applied to reduce either the
Certificate Balance or the absolute entitlement to
interest of any Class of REMIC Regular
Certificates, even though such losses may cause
one or more of such Classes to receive less than
the full amount of principal and interest to which
it is entitled. As a result, the aggregate Stated
Principal Balance of the Mortgage Pool at any time
subsequent to the initial Distribution Date may be
less than the aggregate Certificate Balance of the
REMIC Regular Certificates. Such deficit will be
allocated to the respective Classes of REMIC
Regular Certificates (in each case to the extent
of its Certificate Balance) in reverse
alphabetical order of their Class designations
(i.e., C, B, A). Such allocation will not reduce
the Certificate Balance of any such Class and is
intended solely to identify the portion (the
"Uncovered Portion") of the Certificate Balance of
each such Class for which there is at such time no
corresponding principal amount of Mortgage Loans.
See "Description of the Certificates-Subordination"
herein.
The "Stated Principal Balance" of each Mortgage
Loan outstanding at any time represents the
principal balance of such Mortgage Loan ultimately
due and payable to the Certificateholders, subject
to the Special Servicer's right to receive any
Workout Fee in respect thereof. As more
particularly described herein, the Stated
Principal Balance of each Mortgage Loan will equal
the Cut-off Date Balance thereof, increased on
each Distribution Date by any negative
amortization experienced by such Mortgage Loan
that is allocated to the Certificates on such
date, and reduced on each Distribution Date
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<PAGE>
generally by any payments or other collections (or
advances in lieu thereof) of principal of such
Mortgage Loan that are distributed on the
Certificates on such date (or that would have been
so distributed on such date if they had not
otherwise been paid to the Special Servicer in
respect of any related Workout Fee). The "Workout
Fee" is a fee, separate from its servicing fee,
payable to the Special Servicer with respect to
any Mortgage Loan that is or has been serviced by
it, and is equal to a specified percentage
(calculated as described herein) of the principal
collections on or in respect of such Mortgage
Loan. See "Description of the Certificates-
Distributions-Certain Calculations with Respect to
Individual Mortgage Loans" and "Servicing of the
Mortgage Loans-Servicing and Other Compensation and
Payment of Expenses herein.
B. PASS-THROUGH RATES ..... The Pass-Through Rates applicable to the Class A
and Class B Certificates for the initial
Distribution Date will equal __% and __% per
annum, respectively. With respect to any
Distribution Date subsequent to the initial
Distribution Date, the Pass-Through Rate for the
Class A Certificates will equal LIBOR for such
Distribution Date plus __ basis points (i.e., ____
percentage points) subject to a maximum of __% per
annum and a minimum of ___% per annum; unless,
however, the rate so calculated exceeds the
Funds-Available Cap Rate in respect of the Class A
Certificates for such Distribution Date, in which
case the Pass-Through Rate for the Class A
Certificates will equal the Weighted Average
Effective Net Mortgage Rate for such Distribution
Date. With respect to any Distribution Date
subsequent to the initial Distribution Date, the
Pass-Through Rate for the Class B Certificates
will equal the Weighted Average Effective Net
Mortgage Rate for such Distribution Date.
[The Pass-Through Rate applicable to the Class C
Certificates for any Distribution Date will equal
the Weighted Average Effective Net Mortgage Rate
for such Distribution Date. The Class R
Certificates will have no specified Pass-Through
Rate.]
"LIBOR" for each Distribution Date will be the
average of the interbank offered rates for one
month United States dollar deposits in the London
market as determined during the preceding month in
accordance with the method described herein. The
"Weighted Average Effective Net Mortgage Rate" for
each Distribution Date is the weighted average of
the applicable Effective Net Mortgage Rates for
the Mortgage Loans, weighted on the basis of their
respective Stated Principal Balances immediately
prior to such Distribution Date. For purposes of
calculating the Weighted Average Effective Net
Mortgage Rate for any Distribution Date, the
"applicable Effective Net Mortgage Rate" for each
Mortgage Loan is an annualized rate equal to the
Mortgage Rate in effect for such Mortgage Loan as
of the commencement of the related Due Period, (a)
reduced by __ basis points (the Mortgage Rate, as
so reduced, the "Net Mortgage Rate"), and (b) if
the accrual of interest on such Mortgage Loan is
computed other than on the basis of a 360-day year
consisting of twelve 30-day
S-7
<PAGE>
months (which is the basis of accrual for interest
on the REMIC Regular Certificates), then adjusted
to reflect that difference in computation.
The "Funds-Available Cap Rate" applicable to the
determination of the Pass-Through Rate on the
Class A Certificates for each Distribution Date
will be an annualized rate equal to the product of
(a) the Weighted Average Effective Net Mortgage
Rate for such Distribution Date, multiplied by (b)
a fraction, expressed in decimal form, the
numerator of which is the sum of (i) the
Certificate Balance of the Class A Certificates
immediately prior to such Distribution Date, plus
(ii) any Excess Pool Balance immediately prior to
such Distribution Date, and the denominator of
which is the Certificate Balance of the Class A
Certificates immediately prior to such
Distribution Date. Accordingly, in the absence of
Excess Pool Balance, the Funds-Available Cap Rate
applicable to the determination of the
Pass-Through Rate for the Class A Certificates for
any Distribution Date will be the Weighted Average
Effective Net Mortgage Rate for such Distribution
Date.
The "Due Period" for each Distribution Date will
be the period that begins on the__ day of the
month preceding the month in which such
Distribution Date occurs and ends on the ___ day
of the month in which such Distribution Date
occurs. See "Description of the
Certificates-Distributions-Pass-Through Rates" and
"--Distributions-Determination of LIBOR" herein.
C. DISTRIBUTIONS .......... Distributions on the Certificates will be made by
the Master Servicer, to the extent of available
funds, on the 25th day of each month or, if any
such 25th day is not a business day, then on the
next succeeding business day, beginning in ____,
199__ (each, a "Distribution Date"), to the
holders of record as of the close of business on
the last business day of the month preceding the
month of each such distribution (each, a "Record
Date"). Notwithstanding the above, the final
distribution on any Certificate will be made after
due notice by the Master Servicer of the pendency
of such distribution and only upon presentation
and surrender of such Certificates at the location
to be specified in such notice. The total of all
payments or other collections (or advances in lieu
thereof) on or in respect of the Mortgage Loans
that are available for distribution to
Certificateholders on any Distribution Date is
herein referred to as the "Available Distribution
Amount" for such date. See "Description of the
Certificates-Distributions-Method, Timing and
Amount" herein.
On each Distribution Date, for so long as the
Class A and/or Class B Certificates remain
outstanding, the Master Servicer will (except as
otherwise described under "Description of the
Certificates-Termination" herein) apply the
Available Distribution Amount for such date for
the following purposes and in the following order
of priority, in each case to the extent of
remaining available funds:
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<PAGE>
(1) to distributions of interest to the holders of
the Class A Certificates in an amount equal to all
Distributable Certificate Interest in respect of
the Class A Certificates for such Distribution
Date and, to the extent not previously paid, for
all prior Distribution Dates;
(2) to distributions of principal to the holders
of the Class A Certificates in an amount equal to
the sum of (a) the product of (i) the Class A
Certificates' Ownership Percentage (as calculated
immediately prior to such Distribution Date),
multiplied by (ii) the Scheduled Principal
Distribution Amount for such Distribution Date,
plus (b) the entire Unscheduled Principal
Distribution Amount for such Distribution Date
(but not more than would be necessary to reduce
the Certificate Balance of the Class A
Certificates to zero);
(3) to distributions of principal to the holders
of the Class A Certificates in an amount equal to
any Uncovered Portion of the Certificate Balance
of the Class A Certificates immediately prior to
such Distribution Date;
(4) to distributions of interest to the holders of
the Class B Certificates in an amount equal to all
Distributable Certificate Interest in respect of
the Class B Certificates for such Distribution
Date and, to the extent not previously paid, for
all prior Distribution Dates;
(5) to distributions of principal to the holders
of the Class B Certificates in an amount equal to
the sum of (a) the product of (i) the Class B
Certificates' Ownership Percentage (as calculated
immediately prior to such Distribution Date),
multiplied by (ii) the Scheduled Principal
Distribution Amount for such Distribution Date,
plus (b) if the Class A Certificates have been
retired, then to the extent not distributed in
retirement thereof on such Distribution Date, the
entire Unscheduled Principal Distribution Amount
for such Distribution Date (but not more than
would be necessary to reduce the Certificate
Balance of the Class B Certificates to zero);
(6) to distributions of principal to the holders
of the Class A Certificates in an amount equal to
any Uncovered Portion of the Certificate Balance
of the Class B Certificates immediately prior to
such Distribution Date (but not more than would be
necessary to reduce the Certificate Balance of the
Class A Certificates to zero);
(7) to distributions of principal to the holders
of the Class B Certificates in an amount equal to
any Uncovered Portion of the Certificate Balance
of the Class B Certificates
S-9
<PAGE>
immediately prior to such Distribution Date, net
of any distributions of principal made on such
Distribution Date in respect of the Class A
Certificates as described in the immediately
preceding clause (6);
(8) to distributions of interest to the holders of
the Class C Certificates in an amount equal to all
Distributable Certificate Interest in respect of
the Class C Certificates for such Distribution
Date and, to the extent not previously
distributed, for all prior Distribution Dates;
(9) to distributions of principal to the holders
of the Class C Certificates in an amount equal to
the product of (a) the Class C Certificates'
Ownership Percentage (as calculated immediately
prior to such Distribution Date), multiplied by
(b) the Scheduled Principal Distribution Amount
for such Distribution Date;
(10) to distributions of principal to the holders
of the respective Classes of REMIC Regular
Certificates, in reverse alphabetical order of
their Class designations (i.e., C, B, A), in an
aggregate amount equal to the product of (a) the
Class R Certificates' Ownership Percentage (as
calculated immediately prior to such Distribution
Date), multiplied by (b) the Scheduled Principal
Distribution Amount for such Distribution Date
(but, in each case, not more than would be
necessary to reduce the related Certificate
Balance to zero);
(11) to distributions of principal to the holders
of the respective Classes of REMIC Regular
Certificates, in alphabetical order of their Class
designations (i.e., A, B, C), in an aggregate
amount equal to any Uncovered Portion of the
Certificate Balance of the Class C Certificates
immediately prior to such Distribution Date (but,
in each case, not more than would be necessary to
reduce the related Certificate Balance to zero);
(12) to distributions of principal to the holders
of the respective Classes of REMIC Regular
Certificates, in reverse alphabetical order of
their Class designations (i.e., C, B, A,), in an
aggregate amount equal to __% of the remaining
balance, if any, of the Available Distribution
Amount (such remaining balance, if any, herein
referred to as "Excess Funds") (but, in each case,
not more than would be necessary to reduce the
related Certificate Balance to zero); and
(13) to distributions to the holders of the Class
R Certificates in an amount equal to the remaining
balance of any Excess Funds. See "Description of
the Certificates-Distributions-Priority" herein.
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<PAGE>
The "Distributable Certificate Interest" in
respect of any Class of REMIC Regular Certificates
for any Distribution Date will equal 30 days'
interest at the applicable Pass-Through Rate
accrued on the Certificate Balance of such Class
of REMIC Regular Certificates immediately prior to
such Distribution Date, reduced (to not less than
zero) by such Class of REMIC Regular Certificates'
allocable share (in each case, calculated as
described herein) of any Aggregate Mortgage Loan
Negative Amortization and any Net Aggregate
Prepayment Interest Shortfall (as described below)
for such Distribution Date. See "Servicing of the
Mortgage Loans-Servicing and Other Compensation
and Payment of Expenses" and "Description of the
Certificates-Distributions-Distributable
Certificate Interest" herein.
The "Scheduled Principal Distribution Amount" for
any Distribution Date will equal the aggregate of
all scheduled payments of principal (including the
principal portion of any Balloon Payments)[, net
of any related Workout Fees payable to the Special
Servicer therefrom,] due on the Mortgage Loans
during or, if and to the extent not previously
received or advanced and distributed on prior
Distribution Dates, prior to the related Due
Period that were either received from the
borrowers as of the ___ day of the month in which
such Distribution Date occurs or advanced by the
Master Servicer in respect of such Distribution
Date. The "Unscheduled Principal Distribution
Amount" for any Distribution Date will, in
general, equal the aggregate of (i) all
prepayments of principal of the Mortgage Loans
received from the borrowers during the related Due
Period[, net of any related Workout Fees payable
to the Special Servicer therefrom,] and (ii) any
other unscheduled collections on or in respect of
the Mortgage Loans and any Mortgaged Properties
acquired in respect of defaulted Mortgage Loans
through foreclosure, deed in lieu of foreclosure
or otherwise (each, an "REO Property"), which
other unscheduled collections were received during
the related Due Period and were identified and
applied by the Master Servicer as recoveries of
previously unadvanced principal of the related
Mortgage Loans [, net of any related Workout Fees
payable to the Special Servicer therefrom]. The
respective amounts which constitute the Scheduled
Principal Distribution Amount and Unscheduled
Principal Distribution Amount for any Distribution
Date are herein collectively referred to from time
to time as the "Distributable Principal
Collections and Advances". The "Ownership
Percentage" evidenced by any Class of Certificates
as of any date of determination will equal a
fraction, expressed as a percentage, the numerator
of which is the then Certificate Balance of such
Class of Certificates, net (in the case of a Class
of REMIC Regular Certificates) of any Uncovered
Portion of such Certificate Balance, and the
denominator of which is the then aggregate Stated
Principal Balance of the Mortgage Pool. See
"Description of the
Certificates-Distributions-Scheduled Principal
Distribution Amount and Unscheduled Principal
Distribution Amount" herein.
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<PAGE>
P&I ADVANCES .............. [Subject to a recoverability determination as
described herein, the Master Servicer is required
to make advances (each, a "P&I Advance") with
respect to each Distribution Date in an amount
that is generally equal to the aggregate of: (i)
all delinquent payments of principal (net of any
related Workout Fees) and interest (net of related
servicing fees) on the Mortgage Loans, other than
delinquent Balloon Payments, scheduled to be due
during the related Due Period; (ii) in the case of
each Mortgage Loan delinquent in respect of its
Balloon Payment, an amount equal to 30 days'
interest thereon (net of related servicing fees),
but only to the extent that the related borrower
has not made a payment sufficient to cover such
amount under any forbearance arrangement or
otherwise, which payment has been included in the
Available Distribution Amount for such
Distribution Date; and (iii) in the case of each
REO Property, an amount equal to 30 days' imputed
interest with respect thereto (net of related
servicing fees), but only to the extent that such
amount is not covered by any net income from such
REO Property included in the Available
Distribution Amount for such Distribution Date.
As more fully described herein, the Master
Servicer will be entitled to interest on any P&I
Advances made, and the Master Servicer and the
Special Servicer will each be entitled to interest
on certain servicing expenses incurred, by or on
behalf of it. Such interest will accrue from the
date any such P&I Advance is made or such
servicing expense is incurred at an annualized
rate equal to ___% (the "Reimbursement Rate") and
will be paid, contemporaneously with the
reimbursement of such P&I Advance or such
servicing expense, out of general collections on
the Mortgage Pool then on deposit in the
Certificate Account. See "Description of the
Certificates-P&I Advances" herein and "Description
of the Certificates-Advances in Respect of
Delinquencies" and "Description of the Pooling
Agreements-Certificate Account" in the
Prospectus.]
COMPENSATING INTEREST
PAYMENTS................... [To the extent of its servicing compensation for
the related Due Period, the Master Servicer is
required to make a non-reimbursable payment (a
"Compensating Interest Payment") with respect to
each Distribution Date to cover the amount, if
any, by which Prepayment Interest Shortfalls
incurred during the related Due Period exceed
Prepayment Interest Excesses and prepayment
premiums collected during such Due Period. A
"Prepayment Interest Shortfall" is a shortfall in
the collection of a full month's interest (net of
related servicing fees) on any Mortgage Loan by
reason of a full or partial principal prepayment
made prior to its Due Date in any Due Period. A
"Prepayment Interest Excess" is a payment of
interest (net of related servicing fees) made in
connection with any full or partial prepayment of
a Mortgage Loan subsequent to its Due Date in any
Due Period, which payment of interest is intended
to cover the period on and after such Due Date.
The "Net Aggregate Prepayment Interest Shortfall"
for any Distribution Date will be the amount, if
any, by which (a) the aggregate of any Prepayment
Interest Shortfalls incurred
S-12
<PAGE>
during the related Due Period exceeds (b) the sum
of (i) the aggregate of any Prepayment Interest
Excesses and prepayment premiums collected during
the related Due Period and (ii) any Compensating
Interest Payment made by the Master Servicer with
respect to such Distribution Date. See "Servicing
of the Mortgage Loans-Servicing and Other
Compensation and Payment of Expenses" and
"Description of the Certificates-Distributions-
Distributable Certificate Interest" herein.]
SUBORDINATION ............. The rights of holders of the Class B Certificates
and each Class of the Private Certificates
(collectively, the "Subordinate Certificates") to
receive distributions of amounts collected or
advanced on the Mortgage Loans will, in each case,
be subordinated, to the extent described herein,
to the rights of holders of the Class A
Certificates and each other Class of Subordinate
Certificates, if any, with an earlier alphabetical
Class designation. This subordination is intended
to enhance the likelihood of timely receipt by the
holders of the Class A Certificates of the full
amount of Distributable Certificate Interest
payable in respect of such Certificates on each
Distribution Date, and the ultimate receipt by
such holders of principal equal to the entire
Certificate Balance of the Class A Certificates.
Similarly, but to a lesser degree, this
subordination is also intended to enhance the
likelihood of timely receipt by the holders of the
Class B Certificates of the full amount of
Distributable Certificate Interest payable in
respect of such Certificates on each Distribution
Date, and the ultimate receipt by such holders of
principal equal to the entire Certificate Balance
of the related Class of Certificates. The
protection afforded to the holders of each Class
of Offered Certificates by means of the
subordination of each other Class of Certificates
with a later alphabetical Class designation will
be accomplished by the application of the
Available Distribution Amount on each Distribution
Date in the order described above in this Summary
under "-Description of the Certificates-Distributions".
No other form of Credit Support will be available
for the benefit of the holders of the Offered Certificates.
OPTIONAL TERMINATION ...... At its option, the Master Servicer may purchase
all of the Mortgage Loans and REO Properties, and
thereby effect termination of the Trust Fund and
early retirement of the then outstanding
Certificates, on any Distribution Date on which
the remaining aggregate Stated Principal Balance
of the Mortgage Pool is less than ___% of the
Initial Pool Balance. See "Description of the
Certificates-Termination" herein and in the
Prospectus.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES .............. An election will be made to treat the Trust Fund
as a real estate mortgage investment conduit (a
"REMIC") for federal income tax purposes. Upon the
issuance of the Offered Certificates, _________,
counsel to the Sponsor, will deliver its opinion
generally to the effect that, assuming compliance
with all provisions of the Pooling and Servicing
Agreement, for federal income tax purposes, the
Trust Fund
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<PAGE>
will qualify as a REMIC under Sections 860A
through 860G of the Internal Revenue Code of 1986
(the "Code"). For federal income tax purposes, the
Class A, Class B and Class C Certificates will be
the "regular interests" in the Trust Fund, and the
Class R Certificates will be the sole class of
"residual interests" in the Trust Fund.
The Offered Certificates generally will be treated
as debt obligations of the Trust Fund for federal
income tax purposes. Holders of Offered
Certificates must report income with respect
thereto on the accrual method, regardless of their
method of tax accounting generally. In addition,
the Offered Certificates will be treated as
qualifying assets and income under Sections
856(c)(5)(B), 856(c)(3)(B) and 7701 (a)(19)(C) of
the Code.
The ____ Certificates [will] [will not] [may] be
treated as having been issued with original issue
discount for federal income tax purposes. The
prepayment assumption that will be used for
purposes of computing the accrual of [original
issue discount,] market discount and premium, if
any, for Federal income tax purposes will be equal
to [a CPR of ___%]. However, no representation is
made that the Mortgage Loans will prepay at that
rate or at any other rate.
For further information regarding the federal
income tax consequences of investing in the
Offered Certificates, see "Certain Federal Income
Tax Consequences" herein and "Material Federal
Income Tax Consequences" in the Prospectus.
ERISA CONSIDERATIONS ...... A fiduciary of any employee benefit plan or other
retirement arrangement subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code (a "Plan")
should review carefully with its legal advisors
whether the purchase or holding of Offered
Certificates could give rise to a transaction that
is prohibited or is not otherwise permitted either
under ERISA or Section 4975 of the Code or whether
there exists any statutory or administrative
exemption applicable to an investment therein.
[The U.S. Department of Labor has issued to
Citicorp an individual prohibited transaction
exemption, Prohibited Transaction Exemption 90-88,
which generally exempts from the application of
certain of the prohibited transaction provisions
of Section 406 of ERISA and the excise taxes
imposed on such prohibited transactions by Section
4975(a) and (b) of the Code and Section 502(i) of
ERISA, transactions relating to the purchase, sale
and holding of pass-through certificates
underwritten by the Underwriter, as an affiliate
of Citicorp, and the servicing and operation of
related asset pools, provided that certain
conditions are satisfied.]
[The Sponsor expects that Prohibited Transaction
Exemption 90-88 will generally apply to the Class
A Certificates, but it will not apply to the Class
B Certificates. As a result,] no transfer of a
[Class B]
S-14
<PAGE>
Certificate or any interest therein may be made to
a Plan or to any person who is directly or
indirectly purchasing such [Class B] Certificate
or interest therein on behalf of, as named
fiduciary of, as trustee of, or with assets of a
Plan, unless the prospective transferee (at its
own expense) provides the Certificate Registrar
(as identified herein) with a certification and an
opinion of counsel which establish to the
Certificate Registrar's satisfaction that such
transfer will not result in a violation of Section
406 of ERISA or Section 4975 of the Code or cause
the Master Servicer, the Special Servicer or the
Trustee to be deemed a fiduciary of such Plan or
result in the imposition of an excise tax under
Section 4975 of the Code. See "ERISA
Considerations" herein and in the Prospectus.
RATING .................... It is a condition of their issuance that the Class
A and Class B Certificates be rated not lower than
"___" and "___", respectively, by _______
([collectively,] the "Rating Agenc[ies]"). 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. A security rating
does not address the frequency of prepayments of
Mortgage Loans, or the corresponding effect on
yield to investors. See "Rating" herein and "Risk
Factors-Limited Nature of Credit Ratings" in the
Prospectus.
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<PAGE>
LEGAL INVESTMENT .......... [The Class A Certificates will constitute
"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984
("SMMEA") for so long as they are rated in one of
the two highest ratings categories by one or more
nationally recognized statistical rating
organizations and, as such, are legal investments
for certain entities to the extent provided in
SMMEA. Such investments, however, will be subject
to general regulatory considerations governing
investment practices under state and federal law.
In addition, institutions whose investment
activities are subject to review by federal or
state regulatory authorities may be or may become
subject to restrictions, which may be
retroactively imposed by such regulatory
authorities, on the investment by such
institutions in certain forms of mortgage related
securities. Furthermore, certain states have
recently enacted legislation overriding the legal
investment provisions of SMMEA.]
The [Class B] Certificates will not be "mortgage
related securities" within the meaning of the
Secondary Mortgage Market Enhancement Act of 1984.
As a result, the appropriate characterization of
the [Class B] Certificates under various legal
investment restrictions, and thus the ability of
investors subject to these restrictions to
purchase the [Class B] Certificates, may be
subject to significant interpretative
uncertainties.
Investors should consult their own legal advisors
to determine whether and to what extent the
Offered Certificates constitute legal investments
for them. See "Legal Investment" herein and in the
Prospectus.
</TABLE>
S-16
<PAGE>
RISK FACTORS
Prospective purchasers of Offered Certificates should consider,
among other things, the following factors (as well as the factors set forth
under "Risk Factors" in the Prospectus) in connection with an investment
therein.
THE CERTIFICATES
Limited Liquidity. There is currently no secondary market for the
Offered Certificates. The Sponsor has been advised by the Underwriter that it
presently intends to make a secondary market in the Offered Certificates;
however, it has no obligation to do so and any market making may be
discontinued at any time. There can be no assurance that a secondary market for
the Offered Certificates will develop or, if it does develop, that it will
provide holders of Offered Certificates with liquidity of investment or that it
will continue for the life of the Offered Certificates. The Offered
Certificates will not be listed on any securities exchange. See "Risk
Factors-Certain Factors Adversely Affecting Resale of the Offered Certificates"
in the Prospectus.
Variability in Yield; Priority of Payments. The yield on any
Offered Certificate will depend on, among other things, the Pass-Through Rate
in effect from time to time for such Certificate. The Pass-Through Rate
applicable to the Class A Certificates for any Distribution Date will equal
LIBOR for such Distribution Date, plus __ basis points, subject to a maximum of
___% per annum and a minimum of__% per annum; unless, however, the rate so
calculated exceeds the Funds-Available Cap Rate applicable to the Class A
Certificates for such Distribution Date, in which case the Pass-Through Rate
for the Class A Certificates for such Distribution Date will equal the Weighted
Average Effective Net Mortgage Rate for such date. Accordingly, the yield on
the Class A Certificates will, in general, be highly sensitive to monthly
changes in LIBOR. The Pass-Through Rate applicable to the Class B Certificates
for any Distribution Date will equal the Weighted Average Effective Net
Mortgage Rate for such date. Accordingly, the yield on the Class B Certificates
will be sensitive to adjustments to the Mortgage Rates on the ARM Loans and to
changes in the relative composition of the Mortgage Pool as a result of
scheduled amortization, voluntary prepayments and involuntary liquidations of
Mortgage Loans. See "Description of the Certificates-Distributions-Pass-Through
Rate" herein.
The yield on any Offered Certificate that is purchased at a
discount or premium will also be affected by the rate and timing of principal
payments on such Certificate, which in turn will be affected by (i) the rate
and timing of principal payments (including principal prepayments) and other
principal collections on the Mortgage Loans, (ii) the availability from time to
time of amounts other than Distributable Principal Collections and Advances to
amortize the Certificate Balances of the respective Classes of Certificates,
and (iii) the extent to which the items described in subclauses (i) and (ii)
are applied on any Distribution Date in reduction of the Certificate Balance of
the Class to which such Certificate belongs. As and to the extent described
herein, the holders of each Class of Offered Certificates will be entitled to
receive on each Distribution Date their allocable share (calculated on the
basis of the Ownership Percentage evidenced by such Class of Certificates
immediately prior to such date) of the Scheduled Principal Distribution Amount
for such Distribution Date; however, the Unscheduled Principal Distribution
Amount for each Distribution Date will be distributable entirely in respect of
the Class A Certificates, until the Certificate Balance thereof is reduced to
zero, and will thereafter be distributable entirely in respect of the Class B
Certificates. In addition, as and to the extent described herein, distributions
of the Class R Certificates' allocable share of the Scheduled Principal
Distribution Amount for each Distribution Date, together with ___% of all
Excess Funds, if any, for such Distribution Date, will be applied in reduction
of the Certificate Balances of the respective Classes of REMIC Regular
Certificates, in reverse alphabetical order of their Class designations; while
any distributions in respect of an Uncovered Portion of the Certificate Balance
of any Class of REMIC Regular Certificates will be applied, to the extent of
such Uncovered Portion, in reduction of the Certificate Balance(s) of such
Class of REMIC Regular Certificates and each other Class of REMIC Regular
Certificates, if any, with an earlier alphabetical Class designation, in
alphabetical order of such Class designations. See "Description of the
Certificates-Distributions-Priority" and "-Distributions-Scheduled Principal
Distribution Amount and Unscheduled Principal Distribution Amount" herein.
Because it
S-17
<PAGE>
is impossible to predict accurately the timing and amount of
principal prepayments and other unscheduled recoveries of principal, if any,
that will be received, or the availability from time to time of any amounts
other than Distributable Principal Collections and Advances to amortize the
Certificate Balances of the respective Classes of Certificates, investors may
find it difficult to analyze the effect that such items might have on the yield
and weighted average lives of the Offered Certificates.
Furthermore, the yield on any Offered Certificate also will be
affected by the rate and timing of delinquencies and defaults on the Mortgage
Loans and the severity of ensuing losses. As and to the extent described
herein, the Private Certificates are subordinate in right and time of payment
to the Offered Certificates and will bear shortfalls in collections and losses
incurred in respect of the Mortgage Loans prior to the Offered Certificates;
and the Class B Certificates are subordinate in right and time of payment to
the Class A Certificates and will bear shortfalls in collections and losses
incurred in respect of the Mortgage Loans prior to the Class A Certificates.
See "Description of the Mortgage Pool", "Description of the
Certificates-Distributions" and "-Subordination" and "Yield and Maturity
Considerations" herein and "Yield and Maturity Considerations" in the
Prospectus.
[Conflicts of Interest Involving Parties to the Pooling and
Servicing Agreement. ______________[an affiliate of the Sponsor, will perform
the functions of Master Servicer, Special Servicer and REMIC Administrator. In
addition, any party to the Pooling and Servicing Agreement or any affiliate
thereof may acquire and own Certificates. Investors in the Offered Certificates
should consider that any resulting conflicts of interests could affect the
performance of duties under the Pooling and Servicing Agreement. For example,
______'s obligation to make P&I Advances in its capacity as Master Servicer, or
its acquisition and holding of Private Certificates, could influence its
servicing decisions in respect of defaulted Mortgage Loans in its capacity as
Special Servicer notwithstanding the servicing standard described herein under
"Servicing of the Mortgage Loans - General".]
THE MORTGAGE LOANS
Nature of the Mortgaged Properties. The Mortgaged Properties
consist solely of multifamily rental properties. Lending on the security of
multifamily residential property is generally viewed as exposing the lender to
a greater risk of loss than lending upon the security of owner-occupied one- to
four-family residences. In contrast to lending on the security of single-family
residences, multifamily residential lending typically involves larger loans to
a single obligor or group of related obligors. Furthermore, the repayment of
loans secured by income producing properties is typically dependent upon the
successful operation of the related real estate project, which in turn is
dependent upon, in the case of multifamily rental properties, among other
things, the supply and demand for rental units in the relevant locale and the
performance of the managing agent. If the cash flow from the project is reduced
(for example, if leases are not obtained or renewed), the obligor's ability to
repay the loan may be impaired and the resale value of the particular property
may decline. In addition, the successful operation of a multifamily rental
property may be affected by circumstances outside the control of the borrower
or lender, such as the deterioration of the surrounding neighborhood, the
imposition of rent control or changes in the tax laws. See "Risk
Factors-Certain Risks Associated with Mortgage Loans Secured by Commercial and
Multifamily Properties" in the Prospectus.
[In addition, although lease terms for multifamily rental
properties are generally one year, units at the Mortgaged Properties may be let
on a week-to-week or month-to-month basis. Properties leased, occupied or used
on a short-term basis (i.e., six months or less) tend to be affected more
rapidly by changes in market or business conditions in the relevant locale than
do properties leased for longer periods.]
Limited Recourse. The Mortgage Loans are not insured or guaranteed
by any governmental entity or private mortgage insurer. The Sponsor has not
undertaken any evaluation of the significance of the recourse provisions of any
of a number of the Mortgage Loans that provide for recourse against the related
borrower or
S-18
<PAGE>
another person in the event of a default. Accordingly, investors
should consider all of the Mortgage Loans to be non-recourse loans as to which
recourse in the case of default will be limited to the specific property and
such other assets, if any, as were pledged to secure a Mortgage Loan.
Environmental Law Considerations. [The Mortgage Loan Seller has
represented and warranted in the Mortgage Loan Purchase Agreement that as of
[the Delivery Date] [specify any representation and warranty as to
environmental matters]. Furthermore, the Mortgage Loan Seller has agreed that,
in the event of a material breach of such representation and warranty, it will
either cure the breach or repurchase the affected Mortgage Loan. The Mortgage
Loan Seller's representations and warranties regarding the Mortgage Loans set
forth in the Mortgage Loan Purchase Agreement will be assigned, together with
the related cure and repurchase obligations, by the Sponsor to the Trustee in
connection with the Sponsor's assignment of its interests in the Mortgage
Loans. Notwithstanding the foregoing, however, no environmental site
assessments have been conducted with respect to any of the Mortgaged
Properties, and thus, the Mortgage Loan Seller's representation and warranty as
to environmental matters should be regarded as an absence of knowledge on the
part of the Mortgage Loan Seller of the inaccuracy of such representation and
warranty and as an allocation of risk in the event any breach thereof is
subsequently discovered. Furthermore, the Mortgage Loan Seller's repurchase
obligation will constitute the sole remedy to Certificateholders and the
Trustee for any material breach of such representation and warranty, and
neither the Sponsor nor any of its affiliates will be obligated to repurchase
the affected Mortgage Loan if the Mortgage Loan Seller defaults on its
obligation to do so. See "Description of the Mortgage Pool-Representations and
Warranties; Repurchases" herein.]
The Pooling and Servicing Agreement requires that the Special
Servicer obtain an environmental site assessment of a Mortgaged Property prior
to acquiring title thereto or assuming its operation. Such prohibition
effectively precludes enforcement of the security for the related Mortgage Note
until a satisfactory environmental site assessment is obtained (or until any
required remedial action is thereafter taken), but will decrease the likelihood
that the Trust Fund will become liable for a material adverse environmental
condition at the Mortgaged Property. However, there can be no assurance that
the requirements of the Pooling and Servicing Agreement will effectively
insulate the Trust Fund from potential liability for a materially adverse
environmental condition at any Mortgaged Property. See "Description of the
Pooling Agreements-Realization Upon Defaulted Mortgage Loans", "Risk
Factors-Environmental Risks" and "Certain Legal Aspects of Mortgage
Loans-Environmental Legislation" in the Prospectus.
Geographic Concentration. __ Mortgage Loans, which represent __% of
the Initial Pool Balance, are secured by liens on Mortgaged Properties located
in _____. In general, that concentration increases the exposure of the Mortgage
Pool to any adverse economic or other developments that may occur in _____. In
recent periods, (along with other regions of the United States) has experienced
a significant downturn in the market value of real estate.
Concentration of Mortgage Loans and Borrowers. Several of the
Mortgage Loans have Cut-off Date Balances that are substantially higher than
the average Cut-off Date Balance. The [two] largest Mortgage Loans have Cut-off
Date Balances that represent approximately __% and __%, respectively, of the
Initial Pool Balance, and the _____ largest Mortgage Loans have Cut-off Date
Balances that represent in the aggregate approximately __% of the Initial Pool
Balance. There are also several pairs of Mortgage Loans that have the same
borrower. The [three] largest of those pairs, by aggregate Cut-off Date Balance
of the Mortgage Loans, represent __%, __% and __%, respectively, of the Initial
Pool Balance.
In general, concentrations in a mortgage pool of loans with
larger-than-average balances can result in losses that are more severe,
relative to the size of the pool, than would be the case if the aggregate
balance of the pool were more evenly distributed. Concentration of borrowers
also poses increased risks. For instance, if a borrower that owns several
Mortgaged Properties experiences financial difficulty at one Mortgaged
Property, or at another income-producing property that it owns, it could
attempt to avert foreclosure by filing a bankruptcy
S-19
<PAGE>
petition that might have the effect of interrupting Monthly Payments for an
indefinite period on all of the related Mortgage Loans.
Adjustable Rate Mortgage Loans; Negative Amortization. ________of
the Mortgage Loans, which represent ___% of the Initial Pool Balance, are ARM
Loans. In addition, ___ of the ARM Loans, which represent __% of the Initial
Pool Balance, allow negative amortization to occur. Increases in the required
Monthly Payments on ARM Loans in excess of those assumed in the original
underwriting of such loans may result in a default rate higher than that on
mortgage loans with fixed mortgage rates. Moreover, increases in the principal
balances of ARM Loans due to the deferral and capitalization of interest
payments may result in a default rate that is higher than that of adjustable
rate mortgage loans that do not provide for negative amortization.
Balloon Payments. None of the Mortgage Loans is fully amortizing
over its term to maturity. Thus, each Mortgage Loan will have a substantial
payment (that is, a Balloon Payment) due at its stated maturity unless prepaid
prior thereto. In addition, ARM Loans that permit negative amortization could
require, under certain interest rate scenarios, balloon payments substantially
larger than expected. Loans with Balloon Payments involve a greater risk to the
lender than self-amortizing loans because the ability of a borrower to make a
balloon payment typically will depend upon its ability either to refinance the
loan or to sell the related mortgaged property. See "Risk Factors-Balloon
Payments" in the Prospectus.
In order to maximize recoveries on defaulted Mortgage Loans, the
Pooling and Servicing Agreement enables the Special Servicer to extend and
modify Mortgage Loans that are in material default or as to which a payment
default (including the failure to make a Balloon Payment) is imminent; subject,
however, to the limitations described under "Servicing of the Mortgage
Loans-Modifications, Waivers and Amendments" herein. There can be no assurance,
however, that any such extension or modification will increase the present
value of recoveries in a given case. Any delay in collection of a Balloon
Payment that would otherwise be distributable in respect of a Class of Offered
Certificates, whether such delay is due to borrower default or to modification
of the related Mortgage Loan by the Special Servicer, will likely extend the
weighted average life of such Class of Offered Certificates. See "Yield and
Maturity Considerations" herein and in the Prospectus.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Trust Fund will consist primarily of ___ conventional, balloon
Mortgage Loans with an Initial Pool Balance of $____. Each Mortgage Loan is
evidenced by a promissory note (a "Mortgage Note") and secured by a mortgage,
deed of trust or other similar security instrument (a "Mortgage") that creates
a first mortgage lien on a fee simple estate in a multifamily rental property
(a "Mortgaged Property"). All percentages of the Mortgage Loans, or of any
specified group of Mortgage Loans, referred to herein without further
description are approximate percentages by aggregate Cut-off Date Balance.
The Mortgage Loans will be acquired by the Sponsor on or before the
Delivery Date from _______ (the "Mortgage Loan Seller"), which either
originated the Mortgage Loans or acquired them from their respective
originators. See "-The Mortgage Loan Seller" herein.
The Mortgage Loans were originated between 19__ and 19__. [While
the Sponsor has caused to be undertaken a limited review of the records and
files related to the Mortgage Loans in connection with the issuance of the
Certificates, none of the Mortgage Loans was "re-underwritten" or subjected to
the type of review that would typically be made in respect of a newly
originated mortgage loan. All of the Mortgaged Properties were inspected by or
on behalf of the Sponsor within the __ month period preceding the Cut-off Date
to assess their general condition, which in virtually all cases was determined
to be average or better. However, no Mortgaged Property was re-appraised by or
on behalf of the Sponsor to assess its current value, and no evaluation was
made
S-20
<PAGE>
as to the extent of deferred maintenance at any Mortgaged Property or
whether adequate reserves, if any, have been escrowed to cover such.]
CERTAIN PAYMENT CHARACTERISTICS
_____ of the Mortgage Loans, which represent ___% of the Initial
Pool Balance, have Due Dates that occur on the first day of each month. The
remaining Mortgage Loans have Due Dates that occur on the ___(___% of the
Mortgage Loans), ___ ( ___ % of the Mortgage Loans), ___ ( ___% of the Mortgage
Loans), and___(___% of the Mortgage Loans) day of each month.
______ of the Mortgage Loans (the "ARM Loans"), which represent __%
of the Initial Pool Balance, bear interest at Mortgage Rates that are subject
to adjustment on periodically occurring Interest Rate Adjustment Dates by
adding the related Gross Margin to the value of a base index (an "Index"),
subject in [most] cases to rounding conventions and lifetime minimum and/or
maximum Mortgage Rates and, in the case of Mortgage Loans, which represent __%
of the Initial Pool Balance, to periodic minimum and/or maximum Mortgage Rates.
The remaining Mortgage Loans (the "Fixed Rate Loans") bear interest at fixed
Mortgage Rates. None of the ARM Loans is convertible into a Fixed Rate Loan.
Adjustments to the Mortgage Rates on ___ of the ARM Loans (the
"COFI ARM Loans"), which represent ___% of the Initial Pool Balance, are based
upon the COFI Index (See "-The Eleventh District Cost of Funds Index" herein).
Adjustments to the Mortgage Rates on the remaining ARM Loans are based upon
Treasury Indices. The adjustments to the Mortgage Rates on the ARM Loans may in
each case be based on the value of the related Index as available a specified
number of days prior to an Interest Rate Adjustment Date, or may be based on
the value of the related Index as most recently published as of an Interest
Rate Adjustment Date or as of a designated date preceding an Interest Rate
Adjustment Date. ___ of the ARM Loans, which represent ___% of the Initial Pool
Balance, provide for Interest Rate Adjustment Dates that occur monthly; __ of
the ARM Loans, which represent ___% of the Initial Pool Balance, provide for
Interest Rate Adjustment Date that occur semi-annually; and the remaining ARM
Loans provide for Interest Rate Adjustment Dates that occur annually.
Subject, in the case of [most] of the ARM Loans, to the Payment
Caps described below, the Monthly Payments on each ARM Loan are subject to
adjustment on each Payment Adjustment Date to an amount that would amortize
fully the principal balance of the Mortgage Loan over its then remaining
amortization schedule and pay interest at the Mortgage Rate in effect during
the one month period preceding such Payment Adjustment Date. ____ of the ARM
Loans, which represent ___% of the Initial Pool Balance, provide for Payment
Adjustment Dates that occur annually; ___ of the ARM Loans, which represent
___% of the Initial Pool Balance, provide for Payment Adjustment Dates that
occur semi-annually; and the remaining ARM Loans provide for Payment Adjustment
Dates that occur monthly. ___ of the ARM Loans, which represent % of the
Initial Pool Balance, provide that an adjustment of the amount of the Monthly
Payment on a Payment Adjustment Date may not result in a Monthly Payment that
is more than ___% greater or, in the case of [some] of those Mortgage Loans,
less than the amount of the Monthly Payment in effect immediately prior to such
Payment Adjustment Date (each such provision, a "Payment Cap"); however, those
Mortgage Loans also provide that the Payment Cap will not apply on certain
Payment Adjustment Dates.
________ of the ARM Loans, which represent __% of the Initial Pool
Balance, provide for Payment Adjustment Dates that occur less frequently than
Interest Rate Adjustment Dates and/or provide for Payment Caps that limit the
amount by which a Monthly Payment can increase (or, in [some] cases, decrease)
in response to a change in the Mortgage Rate. As a result, the amount of a
Monthly Payment in those cases may be greater or less than the amount necessary
to amortize the loan fully over its then remaining amortization schedule and
pay interest at the applicable Mortgage Rate, and accordingly, those ARM Loans
may be subject to slower amortization (if the Monthly Payment due on a Due Date
is sufficient to pay interest accrued to such Due Date at the applicable
Mortgage Rate but is not sufficient to reduce principal in accordance with the
applicable amortization schedule), to negative amortization (if interest
accrued to a Due Date at the applicable Mortgage Rate is greater than the
entire Monthly Payment due on such Due Date) or to accelerated amortization (if
the Monthly Payment due on a Due Date is greater than the amount necessary to
pay interest accrued to such Due Date at the applicable Mortgage Rate and to
reduce principal in accordance with the applicable
S-21
<PAGE>
amortization schedule), to negative amortization (if interest accrued to a Due
Date at the applicable Mortgage Rate is greater than the entire Monthly Payment
due on such Due Date) or to accelerated amortization (if the Monthly Payment
due on a Due Date is greater than the amount necessary to pay interest accrued
to such Due Date at the applicable Mortgage Rate and to reduce principal in
accordance with the applicable amortization schedule). All of the Mortgage
Loans that permit negative amortization provide that if, as a result of
negative amortization, the respective principal balance of the Mortgage Loan
reaches an amount specified therein (which in no case is greater than [125%] of
the original principal balance thereof), the amount of the Monthly Payments due
thereunder will be increased (irrespective of any Payment Cap and whether or
not such increase will occur on a Payment Adjustment Date) as necessary to
prevent negative amortization in excess of such amount.
All of the Mortgage Loans provide for monthly payments of principal
based on amortization schedules significantly longer than the remaining terms
of such Mortgage Loans, thereby leaving substantial principal amounts due and
payable (each such payment, a "Balloon Payment") on their respective maturity
dates, unless prepaid prior thereto.
No Mortgage Loan currently prohibits principal prepayments;
however, [certain] of the Mortgage Loans impose fees or penalties ("Prepayment
Premiums") in connection with full or partial prepayments. Prepayment Premiums
are payable to the Master Servicer as additional servicing compensation, to the
extent not otherwise applied to offset Prepayment Interest Shortfalls, and may
be waived by the Master Servicer in accordance with the servicing standard
described under "Servicing of the Mortgage Loans-General" herein.
THE ELEVENTH DISTRICT COST OF FUNDS INDEX
The COFI Index reflects the monthly weighted average cost of funds
of savings and loan associations and savings banks, the home offices of which
are located in Arizona, California and Nevada, that are member institutions of
the Eleventh District of the Federal Home Loan Bank System. The COFI Index is
computed from statistics tabulated and published by the Federal Home Loan Bank
of San Francisco (the "FHLB of San Francisco "), which normally announces the
COFI Index on the last working day of the month following the month as to which
the weighted average cost of funds was computed. The FHLB of San Francisco
publishes the COFI Index in its monthly Information Bulletin, copies of which
may be obtained from the FHLB of San Francisco's Office of Public Information,
the mailing address of which is 600 California Street, P.O. Box 7948, San
Francisco, California 94120, and the telephone number of which is (415)
616-2600.
The COFI Index reflects the interest costs paid on all types of
funds held by Eleventh District member institutions. The COFI Index is weighted
to reflect the relative amount of each type of funds held at the end of the
relevant month. There are three major components of funds of Eleventh District
member institutions: (1) savings deposits, (2) FHLB of San Francisco advances
and (3) all other borrowings, such as reverse repurchase agreements and
mortgage-backed bonds. Unlike most other interest rate measures, the COFI Index
does not necessarily reflect current market rates, since the component funds
represent a variety of maturities the costs of which may react in different
ways to changing conditions.
A number of factors affect the performance of the COFI Index and
may cause the COFI Index to move in a manner different from indices based upon
specific interest rates, such as the United States Treasury rates and LIBOR.
Because the COFI Index is based on, among other things, the various maturities
of the liabilities of member institutions of the Eleventh District of the
Federal Home Loan Bank System for the month prior to the month in which the
COFI Index is published, the COFI Index may not reflect the average prevailing
market interest rates on new liabilities of similar maturities and, in general,
the COFI Index tends to respond more slowly to interest rate movements than do
other interest rate indices. Moreover, there can be no assurance that the COFI
Index will necessarily move in the same direction as prevailing interest rates
since, as longer term deposits or borrowings mature and are renewed at market
interest rates, the COFI Index will rise or fall depending upon the
differential between the prior and the new rates on such deposits and
borrowings. Furthermore, any movement
S-22
<PAGE>
in the COFI Index, as compared to other indices based upon specific interest
rates, may be affected by changes instituted by the FHLB of San Francisco in
the method used to calculate the COFI Index. Because __% of the Mortgage Loans
are COFI ARM Loans, the performance of the COFI Index, to the extent that it
moves within a range that affects the Mortgage Rates on the COFI ARM Loans,
will have a substantial effect on the Weighted Average Effective Net Mortgage
Rate in effect from time to time. The Pass-Through Rate from time to time of
the Class B Certificates is the Weighted Average Effective Net Mortgage Rate,
and thus, the yield on the Class B Certificates will be extremely sensitive to
movements in the COFI Index that result in adjustments to the Mortgage Rates of
the COFI ARM Loans. The Pass-Through Rate from time to time of the Class A
Certificates, under certain circumstances described herein, will equal the
Weighted Average Effective Net Mortgage Rate, and thus, the yield on the Class
A Certificates may in those circumstances also be affected by movements in the
COFI Index. See "Yield and Maturity Considerations" herein.
Listed below are some historical values of the COFI Index since
January 1990. Such values may fluctuate significantly over time and may not
increase or decrease in a constant pattern from period to period. The following
does not purport to be representative of past or future values of the COFI
Index.
<TABLE>
<CAPTION>
MONTH 1990 1991 1992 1993 1994 1995 1996 1997
- ------ ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January.............. % % % % % % % %
February.............
March................
April................
May..................
June.................
July.................
August...............
September............
October..............
November.............
December.............
</TABLE>
ADDITIONAL MORTGAGE LOAN INFORMATION
The following tables set forth the specified characteristics of, in
each case as indicated, the ARM Loans, the Fixed Rate Loans or all the Mortgage
Loans. The sum in any column may not equal the indicated total due to rounding.
The following table sets forth the range of Mortgage Rates on the
Mortgage Loans as of the Cut-off Date:
S-23
<PAGE>
MORTGAGE RATES AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Number of Percent by
Mortgage Aggregate Cut-off Percent by Aggregate Cut-off
Range of Mortgage Rates(%) Loans Date Balance Number Date Balance
- -------------------------- ----- ------------ ------ ------------
<S> <C> <C> <C> <C>
---------- -------------- ----------- -------------
Total .....................
========== ============== =========== =============
Weighted Average
Mortgage Rate (All Loans): __% per annum
Weighted Average
Mortgage Rate (ARM Loans): __% per annum
Weighted Average
Mortgage Rate (Fixed Rate Loans): __% per annum
</TABLE>
The following table sets forth the range of Gross Margins for the
ARM Loans:
GROSS MARGINS FOR THE ARM LOANS
<TABLE>
<CAPTION>
Percent by
Number of Aggregate Cut-off Percent by Aggregate Cut-off
Range of Gross Margins(%) ARM Loans Date Balance Number Date Balance
- --------------------- --------- ------------ -------- ------------
<S> <C> <C> <C> <C>
---------- -------------- ----------- -------------
Total .....................
========== ============== =========== =============
Weighted Average
Gross Margin: ___%
</TABLE>
The following table sets forth for the ARM Loans the Indices upon
which Mortgage Rate adjustments are based, and the frequency of adjustments to
the Mortgage Rates and Monthly Payments of the ARM Loans.
S-24
<PAGE>
INDICES AND FREQUENCY OF ADJUSTMENTS TO MORTGAGE RATES AND
MONTHLY PAYMENTS FOR THE ARM LOANS
<TABLE>
<CAPTION>
Monthly
Mortgage Rate Payment Number of Percent by
Adjustment Adjustment Mortgage Aggregate Cut-off Percent by Aggregate Cut-off
Index Frequency Frequency Loans Date Balance Number Date Balance
- ----- --------- --------- ----- ------------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
---------- -------------- ----------- ------------- ------------- ------------
Total ..
========== ============== =========== ============= ============= ============
</TABLE>
The following table sets forth the range of maximum lifetime
Mortgage Rates for the ARM Loans to which such characteristic applies:
MAXIMUM LIFETIME MORTGAGE RATES FOR THE ARM LOANS
<TABLE>
<CAPTION>
Percent by
Range of Maximum Number of Aggregate Cut-off Percent by Aggregate Cut-off
Lifetime Mortgage Rates(%) ARM Loans Date Balance Number Date Balance
- --------------------------- --------- ------------ ------ ------------
<S> <C> <C> <C> <C>
None
---------- -------------- ----------- -------------
Total .....................
========== ============== =========== =============
Weighted Average Maximum Lifetime
Mortgage Rate (ARM Loans): __% per annum (A)
</TABLE>
- ---------------
(A) This calculation does not include the ___ ARM Loans without maximum
lifetime Mortgage Rates.
S-25
<PAGE>
The following table sets forth the range of minimum lifetime
Mortgage Rates for the ARM Loans to which such characteristic applies:
MINIMUM LIFETIME MORTGAGE RATES FOR THE ARM LOAN
<TABLE>
<CAPTION>
Percent by
Range of Minimum Number of Aggregate Cut-off Percent by Aggregate Cut-off
Lifetime Mortgage Rates(%) ARM Loans Date Balance Number Date Balance
- -------------------------- --------- ------------ ------ ------------
<S> <C> <C> <C> <C>
None.....................
---------- -------------- ----------- -------------
Total .....................
========== ============== =========== =============
Weighted Average Minimum
Lifetime Mortgage Rate (ARM Loans):___% per annum (A)
</TABLE>
- -------------
(A) This calculation does not include the __ ARM Loans without minimum lifetime
Mortgage Rates.
S-26
<PAGE>
The following table sets forth the range of Cut-off Date Balances of the
Mortgage Loans:
CUT-OFF DATE BALANCES
<TABLE>
<CAPTION>
Number of Percent by
Cut-off Date Mortgage Aggregate Cut-off Percent by Aggregate Cut-off
Balance Range ($) Loans Date Balance Number Date Balance
- ----------------- ----- ------------ ------ ------------
<S> <C> <C> <C> <C>
---------- -------------- ----------- -------------
Total ......
========== ============== =========== =============
Average Cut-off Date
Balance (All Loans): $_____
Average Cut-off Date
Balance (ARM Loans): $_____
Average Cut-off Date
Balance (Fixed Rate Loans): $_____
</TABLE>
The following tables set forth the range of original and remaining
terms to stated maturity (in months) of the Mortgage Loans:
ORIGINAL TERM TO STATED MATURITY (IN MONTHS)
<TABLE>
<CAPTION>
Number of Percent by
Range of Original Mortgage Aggregate Cut-off Percent by Aggregate Cut-off
Terms (in Months) Loans Date Balance Number Date Balance
- ----------------- ----- ------------ ---------- -------------
<S> <C> <C> <C> <C>
---------- -------------- ----------- -------------
Total ......
========== ============== =========== =============
Weighted Average Original
Term to Stated Maturity
(All Loans): __ months
Weighted Average Original
Term to Stated Maturity
(ARM Loans): __ months
Weighted Average Original
Term to Stated Maturity
(Fixed Rate Loans): __ months
</TABLE>
S-27
<PAGE>
REMAINING TERM TO STATED MATURITY (IN MONTHS)
AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Number of Percent by
Range of Remaining Mortgage Aggregate Cut-off Percent by Aggregate Cut-off
Terms (in Months) Loans Date Balance Number Date Balance
- ----------------- ------ ------------ ------- --------------
<S> <C> <C> <C> <C>
---------- -------------- ----------- -------------
Total .......
========== ============== =========== =============
</TABLE>
Weighted Average Remaining
Term to Stated Maturity
(All Loans): ___ months
Weighted Average Remaining
Term to Stated Maturity
(ARM Loans): ___ months
Weighted Average Remaining
Term to Stated Maturity
(Fixed Rate Loans): ___ months
S-28
<PAGE>
The following table sets forth the respective years in which the
Mortgage Loans were originated:
YEAR OF ORIGINATION
<TABLE>
<CAPTION>
Number of Percent by
Mortgage Aggregate Cut-off Percent by Aggregate Cut-off
Year Loans Date Balance Number Date Balance
- ---- -------- ----------------- ------- ------------
<S> <C> <C> <C> <C>
---------- -------------- ----------- -------------
Total ........
========== ============== =========== =============
</TABLE>
The following table sets forth the respective years in which the
Mortgage Loans are scheduled to mature. The table provides an indication (which
does not account for any scheduled amortization, prepayments or negative
amortization) of the concentration of Balloon Payments that will be due in
those years with respect to the Mortgage Loans. See "Special
Considerations-Balloon Payments" herein.
YEAR OF SCHEDULED MATURITY
<TABLE>
<CAPTION>
Number of Percent by
Mortgage Aggregate Cut-off Percent by Aggregate Cut-off
Year Loans Date Balance Number Date Balance
- ---- ----- ------------ ------ -------------
<S> <C> <C> <C> <C>
---------- -------------- ----------- -------------
Total .......
========== ============== =========== =============
</TABLE>
S-29
<PAGE>
The following table sets forth the range of Cut-off Date LTV Ratios
of the Mortgage Loans. A "Cut-off Date LTV Ratio" is a fraction, expressed as a
percentage, the numerator of which is the Cut-off Date Balance of a Mortgage
Loan, and the denominator of which is the appraised value of the related
Mortgaged Property as determined by an appraisal thereof obtained in connection
with the origination of such Mortgage Loan. A Cut-off Date LTV Ratio, because
it is based on the value of a Mortgaged Property determined as of loan
origination, is not necessarily a reliable measure of the borrower's current
equity in that Mortgaged Property. In a declining real estate market, the fair
market value of the Mortgaged Property could have decreased from the value
determined at origination, and the actual loan-to-value ratio of a Mortgage
Loan may be higher than its Cut-off Date LTV Ratio.
CUT-OFF DATE LTV RATIOS
<TABLE>
<CAPTION>
Number of Percent by
Mortgage Aggregate Cut-off Percent by Aggregate Cut-off
Year Loans Date Balance Number Date Balance
- ---- -------- ------------ -------- ------------
<S> <C> <C> <C> <C>
---------- -------------- ----------- -------------
Total ........
========== ============== =========== =============
Weighted Average Cut-off
Date LTV Ratio (All Loans): ___%
Weighted Average Cut-off
Date LTV Ratio (ARM Loans): ___%
Weighted Average Cut-off
Date LTV Ratio (Fixed Rate Loans): ___%
</TABLE>
The following table sets forth the range of Debt Service Coverage
Ratios for the Mortgage Loans as of the Cut-off Date. The "Debt Service
Coverage Ratio" for any Mortgage Loan is the ratio of Net Operating Income
produced by the related Mortgaged Property for the period (annualized if the
period was less than one year) covered by an operating statement to the amount
of the Monthly Payment in effect as of the Cut-off Date multiplied by 12. "Net
Operating Income" is the revenue derived from the use and operation of a
Mortgaged Property (consisting primarily of rental income and deposit
forfeitures) less operating expenses (such as utilities, general administrative
expenses, management fees, advertising, repairs and maintenance) and less fixed
expenses (such as insurance and real estate taxes). Net Operating Income
generally does not reflect capital expenditures. The following table was
prepared using operating statements obtained from the respective mortgagors. In
each case, the information contained in such operating statements was
unaudited, and the Sponsor has made no attempt to verify its accuracy. In the
case of __ Mortgage Loans (___ ARM Loans and ___Fixed Rate Loans), operating
statements could not be obtained, and accordingly, Debt Service Coverage Ratios
for those Mortgage Loans were not calculated. The last day of .the period
covered by each operating statement from which a Debt Service Coverage Ratio
was calculated may not correspond to the end of the calendar year most recent
to the Cut-off Date, but in no event was a Debt Service Coverage Ratio
calculated using an operating statement for a period ending prior to_________.
S-30
<PAGE>
DEBT SERVICE COVERAGE RATIOS AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
Range of Number of Percent by
Debt Service Mortgage Aggregate Cut-off Percent by Aggregate Cut-off
Coverage Ratios Loans Date Balance Number Date Balance
- --------------- ----- ------------ ------- --------------
<S> <C> <C> <C> <C>
---------- -------------- ----------- -------------
Total ...........
========== ============== =========== =============
Weighted Average
Debt Service Coverage
Ratio (All Loans): __x(B)
Weighted Average
Debt Service Coverage
Ratio (ARM Loans):__x(C)
Weighted Average
Debt Service Coverage
Ratio (Fixed Rate Loans): __x(D)
</TABLE>
- ------------------------
(A) The Debt Service Coverage Ratios for these Mortgage Loans were
not calculated due to a lack of available operating statements.
(B) This calculation does not include the _____ Mortgage Loans as
to which Debt Service Coverage Ratios were not calculated.
(C) This calculation does not include the _____ ARM Loans as to
which Debt Service Coverage Ratios were not calculated.
(D) This calculation does not include the _____ Fixed Rate Loans as
to which Debt Service Coverage Ratios were not calculated.
The Mortgage Loans are secured by Mortgaged Properties located in
__different states. The following table sets forth the states in which the
Mortgaged Properties are located:
S-31
<PAGE>
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
Number of Percent by
Mortgage Aggregate Cut-off Percent by Aggregate Cut-off
State Loans Date Balance Number Date Balance
- ------ -------- ------------ ------ ------------
<S> <C> <C> <C> <C>
---------- -------------- ----------- -------------
Total ........
========== ============== =========== =============
</TABLE>
[The single largest Mortgage Loan in the Mortgage Pool has a
Cut-off Date Balance of $ , which represents [101% of the Initial Pool Balance.
It is a Fixed Rate Loan with a Mortgage Rate of__% per annum, an original term
to stated maturity of __ months and a remaining term to stated maturity of __
months. It was originated in ____ 19__ and its stated maturity date is _______,
19__. It may be prepaid at any time without penalty. It has a Cut-off Date LTV
Ratio of __% and a Debt Service Coverage Ratio (calculated on the basis ___ of
an unaudited operating statement for the related Mortgaged Property covering
the period ___, 19__ to ____,19__) of ____x. The related Mortgaged Property is
located in ______, has ___ rental units and an occupancy rate as of _____, 19__
of ___% .]
Certain additional information regarding the Mortgage Loans is
contained herein under "-Underwriting Standards", "-Assignment of the Mortgage
Loans; Repurchases" and "- Representations and Warranties; Repurchases" and in
the Prospectus under "Description of the Trust Funds" and "Certain Legal
Aspects of Mortgage Loans".
THE MORTGAGE LOAN SELLER
On or prior to the Delivery Date, the Sponsor will acquire the
Mortgage Loans from ____ (the "Mortgage Loan Seller") pursuant to a Mortgage
Loan Purchase Agreement, dated [the date hereof], between the Sponsor and the
Mortgage Loan Seller (the "Mortgage Loan Purchase Agreement"). [The Mortgage
Loan Seller originated ___ of the Mortgage Loans, which represent ___% of the
Initial Pool Balance, and acquired the remaining Mortgage Loans from the
respective originators thereof, generally in accordance with the underwriting
criteria described below under "-Underwriting Standards" .]
[The Mortgage Loans Seller [, a wholly-owned subsidiary of ____,]
is a ______ organized in ______ under the laws of __________. [As of December
31, 199_, the Mortgage Loan Seller had a net worth of approximately $
_________, and currently holds and services for its own account a total
multifamily and commercial mortgage loan portfolio of approximately $______, of
which approximately $______ constitutes multifamily mortgage loans.] [Because
more than ___% of its multifamily and commercial mortgage loan portfolio was
acquired or originated during the ___ month period preceding the Cut-off Date,
no meaningful information can be given as to the delinquency and foreclosure
experience of such portfolio.]
The information set forth herein concerning the Mortgage Loan
Seller and its underwriting standards has been provided by the Mortgage Loan
Seller, and neither the Sponsor nor the Underwriter makes any representation or
warranty as to the accuracy or completeness of such information.
UNDERWRITING STANDARDS
All of the Mortgage Loans were originated or acquired by the
Mortgage Loan Seller, generally in accordance with the underwriting criteria
described herein.
[Description of underwriting standards.]
S-32
<PAGE>
The Sponsor believes that the Mortgage Loans selected for inclusion
in the Mortgage Pool from the Mortgage Loan Seller's portfolio were not so
selected on any basis which would have a material adverse effect on the
Certificateholders.]
ASSIGNMENT OF THE MORTGAGE LOANS; REPURCHASE
On or prior to the Delivery Date, the Sponsor will assign its
interests in the Mortgage Loans, without recourse, to the Trustee for the
benefit of the Certificateholders. In connection with such -assignment, the
Sponsor will require the Mortgage Loan Seller to deliver to the Trustee or to a
document custodian appointed by the Trustee (a "Custodian"), among other
things, the following documents with respect to each Mortgage Loan
(collectively, as to such Mortgage Loan, the "Mortgage File"): [(i) the
original Mortgage Note, endorsed (without recourse) to the order of Trustee;
(ii) the original Mortgage or a certified copy thereof, together with originals
or certified copies of any intervening assignments of such document, in each
case with evidence of recording thereon; (iii) the original or a certified copy
of any related assignment of leases, rents and profits (if such item is a
document separate from the Mortgage), together with originals or certified
copies of any intervening assignments of such document, in each case with
evidence of recording thereon; (iv) the original or a certified copy of any
related security agreement (if such item is a document separate from the
Mortgage), together with originals or certified copies of any intervening
assignments of such document; (v) an assignment of the Mortgage in favor of the
Trustee, in recordable form; (vi) an assignment of any related assignment of
leases, rents and profits (if such item is a document separate from the
Mortgage) in favor of the Trustee, in recordable form; (vii) an assignment of
any related security agreement (if such item is a document separate from the
Mortgage) in favor of the Trustee; (viii) originals or certified copies of all
assumption, modification and substitution agreements in those instances where
the terms or provisions of the Mortgage or Mortgage Note have been modified or
the Mortgage or Mortgage Note has been assumed; (ix) the original lender's
title insurance policy issued on the date of the origination of such Mortgage
Loan or, with respect to each Mortgage Loan as to which a lender's title
insurance policy has not yet been issued, a preliminary title report or a title
insurance commitment or binder or, with respect to each Mortgage Loan not
covered by a lender's title insurance policy, an attorney's opinion of title
given by an attorney licensed to practice law in the jurisdiction where the
Mortgaged Property is located; and (x) the original of any guaranty of the
borrower's obligations under the related Mortgage Note].
The Trustee or a Custodian on its behalf will be required to review
each Mortgage File within a period of ___ days of the receipt thereof, and the
Trustee or a Custodian on its behalf will hold such documents in trust for the
benefit of the Certificateholders. If any of the above-described documents is
found during the course of such review to be missing from any Mortgage File or
defective, and in either case such omission or defect materially and adversely
affects the value of any Mortgage Loan or the interests of Certificateholders
therein, the Trustee will be required to notify the Master Servicer, the
Special Servicer, the Sponsor and the Mortgage Loans Seller. In any such case,
and if the Mortgage Loan Seller cannot deliver the document or cure the defect
within a period of ___ days following its receipt of such notice, then, except
as otherwise provided below, the Mortgage Loan Seller will be obligated
pursuant to the Mortgage Loan Purchase Agreement (the relevant rights under
which will be assigned, together with its interests in the Mortgage Loans, by
the Sponsor to the Trustee) to repurchase the affected Mortgage Loan within
such ___ day period at a price (the "Purchase Price") equal to the sum of (i)
the unpaid principal balance of such Mortgage Loan, (ii) unpaid accrued
interest on such Mortgage Loan at the Mortgage Rate from the date to which
interest was last paid to the Due Date in the Due Period in which the purchase
is to occur (exclusive of any portion of such interest representing negative
amortization previously added to the principal balance of such Mortgage Loan),
(iii) certain servicing expenses that are reimbursable to the Master Servicer
or Special Servicer, and (iv) any unpaid accrued interest at the Reimbursement
Rate that may be payable to the Master Servicer in respect of related
unreimbursed P&I Advances, or to the Master Servicer or Special Servicer in
respect of related unreimbursed servicing expenses, as described under
"Description of the Certificates-P&l Advances" herein. This repurchase
obligation will constitute the sole remedy available to the Certificateholders
and the Trustee for any defect in or omission from a Mortgage File, and neither
the Sponsor
S-33
<PAGE>
nor any of its affiliates will be obligated to repurchase the affected Mortgage
Loan if the Mortgage Loan Seller defaults on its obligation to do so.
Notwithstanding the foregoing, if a document is missing from any Mortgage File
because it has been submitted for recording, and neither such document nor a
certified copy thereof, in either case with evidence of recording thereon, can
be obtained because of delays on the part of the applicable recording office,
then the Mortgage Loan Seller will not be required to repurchase the affected
Mortgage Loan on the basis of such missing document so long as it continues in
good faith to obtain such document or such certified copy.
The Pooling and Servicing Agreement will require the Master
Servicer promptly (and in any event within ___ days of the Delivery Date) to
cause each assignment of a Mortgage described in clause (v) of the second
preceding paragraph and each assignment of an assignment of leases, rents and
profits described in clause (vi) of the second preceding paragraph to be
submitted for recording in the real property records of the appropriate
jurisdictions, except in states where, in the written opinion of local counsel
acceptable to the Sponsor, such recordation is not required to protect the
Trustee's interests in the related Mortgage Loans against sale, further
assignment, satisfaction or discharge by the Mortgage Loan Seller, the Master
Servicer, the Special Servicer, any Sub-Servicers or the Sponsor. See
"Description of the Pooling Agreements-Assignment of Mortgage Loans;
Repurchases" in the Prospectus.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
In the Mortgage Loan Purchase Agreement, the Mortgage Loan Seller
has represented and warranted with respect to each Mortgage Loan, as of [the
Delivery Date], or as of such other date specifically provided in the
representation and warranty, among other things, that:
[Specify significant representations and warranties.]
If the Master Servicer, the Special Servicer, the Trustee or the
Sponsor discovers a breach of any of the foregoing representations and
warranties, and such breach materially and adversely affects the value of any
Mortgage Loan or the interests of Certificateholders therein, the party making
such discovery will be required to so notify each of the other parties and the
Mortgage Loan Seller. In any such case, and if the Mortgage Loan Seller cannot
cure such breach within a period of ___ days following its receipt of such
notice, then the Mortgage Loan Seller will be obligated pursuant to the
Mortgage Loan Purchase Agreement (the relevant rights under which will be
assigned, together with its interests in the Mortgage Loans, by the Sponsor to
the Trustee) to repurchase the affected Mortgage Loan within such ___ day
period at the applicable Purchase Price.
The foregoing repurchase obligation will constitute the sole remedy
available to the Certificateholders and the Trustee for any breach of the
Mortgage Loan Seller's representations and warranties regarding the Mortgage
Loans. [Thus, if the Mortgage Loan Seller were found to have breached its
representation set forth in clause __ above regarding environmental matters [or
its representation in clause ___ above regarding the servicing practices
utilized in respect of the Mortgage Loans], it would have no obligation to
indemnify the Trust Fund for any consequent liability that the Trust Fund might
have incurred. See "Risk Factors-Environmental Law Considerations" herein and
"Description of the Pooling Agreements-Realization Upon Defaulted Mortgage
Loans", "Risk Factors-Environmental Risks" and "Certain Legal Aspects of
Mortgage Loans-Environmental Legislation" in the Prospectus.]
The Mortgage Loan Seller will be the sole Warranting Party in
respect of the Mortgage Loans, and neither the Sponsor nor any of its
affiliates will be obligated to repurchase any affected Mortgage Loan in
connection with a breach of the Mortgage Loan Seller's representations and
warranties if the Mortgage Loan Seller defaults on its obligation to do so.
However, the Sponsor will not include any Mortgage Loan in the Mortgage Pool if
anything has come to the Sponsor's attention that would cause it to believe
that the representations and warranties made by the Mortgage Loan Seller
regarding such Mortgage Loan will not be
S-34
<PAGE>
correct in all material respects. See "Description of the Pooling
Agreements-Representations and Warranties; Repurchases" in the Prospectus.
CHANGES IN MORTGAGE POOL CHARACTERISTICS
The description in this Prospectus Supplement of the Mortgage Pool
and the Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the time the Offered Certificates are issued, as adjusted for
the scheduled principal payments due on or before the Cut-off Date. Prior to
the issuance of the Offered Certificates, a Mortgage Loan may be removed from
the Mortgage Pool if the Sponsor deems such removal necessary or appropriate or
if it is prepaid. A limited number of other mortgage loans may be included in
the Mortgage Pool prior to the issuance of the Offered Certificates, unless
including such Mortgage Loans would materially alter the characteristics of the
Mortgage Pool as described herein. The Sponsor believes that the information
set forth herein will be representative of the characteristics of the Mortgage
Pool as it will be constituted at the time the Offered Certificates are issued,
although the range of Mortgage Rates and maturities, as well as the other
characteristics of the Mortgage Loans described herein, may vary.
A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the Offered Certificates on or shortly after the Delivery Date
and will be filed, together with the Pooling and Servicing Agreement, with the
Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates. In the event Mortgage Loans are removed
from or added to the Mortgage Pool as set forth in the preceding paragraph,
such removal or addition will be noted in the Form 8-K.
SERVICING OF THE MORTGAGE LOANS
GENERAL
The Master Servicer and the Special Servicer will, either directly
or through sub-servicers, each be required to service and administer the
Mortgage Loans for which it is responsible, on behalf of the Trustee and in the
best interests of and for the benefit of the Certificateholders (as determined
by the Master Servicer or the Special Servicer, as the case may be, in its good
faith and reasonable judgment), in accordance with applicable law, the terms of
the Pooling and Servicing Agreement, the terms of the respective Mortgage Loans
and, to the extent consistent with the foregoing, in the same manner as would
prudent institutional mortgage lenders and loan servicers servicing mortgage
loans comparable to such Mortgage Loans in the jurisdictions where the related
Mortgaged Properties are located, and with a view to the maximization of timely
and complete recovery of principal and interest, but without regard to: (i) any
relationship that the Master Servicer or the Special Servicer, as the case may
be, or any affiliate thereof may have with the related mortgagor; (ii) the
ownership of any Certificate by the Master Servicer or the Special Servicer, as
the case may be, or any affiliate thereof; (iii) the Master Servicer's or the
Special Servicer's, as the case may be, obligation to make advances, whether in
respect of delinquent payments of principal and/or interest or to cover certain
servicing expenses; and (iv) the Master Servicer's or the Special Servicer's,
as the case may be, right to receive compensation for its services under the
Pooling and Servicing Agreement or with respect to any particular transaction.
Except as otherwise described under "-Inspections; Collection of
Operating Information" below, the Master Servicer initially will be responsible
for the servicing and administration of the entire Mortgage Pool. With respect
to any Mortgage Loan (i) which has a Balloon Payment which is past due or any
other payment which is more than [60] days past due, (ii) as to which the
borrower has entered into or consented to bankruptcy, appointment of a receiver
or conservator or a similar insolvency proceeding, or the borrower has become
the subject of a decree or order for such a proceeding which shall have
remained in force undischarged or unstayed for a period of [60] days, (iii) as
to which the Master Servicer shall have received notice of the foreclosure or
proposed foreclosure of any other lien on the Mortgaged Property, or (iv) as to
which, in the judgment of the Master Servicer, a payment default has occurred
or is imminent and is not likely to be cured by the borrower
S-35
<PAGE>
within [60] days, and prior to acceleration of amounts due under the related
Mortgage Note or commencement of any foreclosure or similar proceedings, the
Master Servicer will transfer its servicing responsibilities to the Special
Servicer, but will continue to receive payments on such Mortgage Loan
(including amounts collected by the Special Servicer), to make certain
calculations with respect to such Mortgage Loan and to make remittances and
prepare certain reports to the Certificateholders with respect to such Mortgage
Loan. If the related Mortgaged Property is acquired in respect of any such
Mortgage Loan (upon acquisition, an "REO Property"), whether through
foreclosure, deed-in-lieu of foreclosure or otherwise, the Special Servicer
will continue to be responsible for the operation and management thereof. The
Mortgage Loans serviced by the Special Servicer are referred to herein as the
"Specially Serviced Mortgage Loans" and, together with any REO Properties,
constitute the "Specially Serviced Mortgage Assets". The Master Servicer shall
have no responsibility for the performance by the Special Servicer of its
duties under the Pooling and Servicing Agreement.
If any Specially Serviced Mortgage Loan, in accordance with its
original terms or as modified in accordance with the Pooling and Servicing
Agreement, becomes a performing Mortgage Loan for at least [90] days, the
Special Servicer will return servicing of such Mortgage Loan to the Master
Servicer.
Set forth below, following the subsections captioned "-The Master
Servicer" and "-The Special Servicer", is a description of certain pertinent
provisions of the Pooling and Servicing Agreement relating to the servicing of
the Mortgage Loans. Reference is also made to the Prospectus, in particular to
the section captioned "Description of the Pooling Agreements", for important
information in addition to that set forth herein regarding the terms and
conditions of the Pooling and Servicing Agreement as they relate to the rights
and obligations of the Master Servicer and the Special Servicer thereunder.
THE MASTER SERVICER
[______, a ________, will act as Master Servicer with respect to
the Mortgage Pool. Founded in ___ as a ___, the Master Servicer today furnishes
a variety of wholesale banking services. As of December 31, 19__, the Master
Servicer had a net worth of approximately $____, and ____ a total mortgage loan
servicing portfolio of approximately $____, of which approximately $____
represented multifamily mortgage loans.
The offices of the Master Servicer that will be primarily
responsible for its servicing and administrative duties with respect to the
Mortgage Pool are located at _____________.]
The information set forth herein concerning the Master Servicer has
been provided by the Master Servicer, and neither the Sponsor nor the
Underwriter makes any representation or warranty as to the accuracy or
completeness of such information.
THE SPECIAL SERVICER
[_________, a _________, will be responsible for the servicing and
administration of the Specially Serviced Mortgage Assets. As of December 31,
19___, the Special Servicer had a total mortgage loan servicing portfolio of
approximately $___, of which approximately $___ represented multifamily
mortgage loans.
The Special Servicer has ___ offices in ___ states with a total
staff of ____ employees. Its principal executive offices are located
at _______.]
S-36
<PAGE>
The information set forth herein concerning the Special Servicer
has been provided by the Special Servicer, and neither the Sponsor nor the
Underwriter makes any representation or warranty as to the accuracy or
completeness of such information.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in
respect of its master servicing activities will be the Master Servicing Fee.
The "Master Servicing Fee" will be payable monthly on a loan-by-loan basis from
amounts received in respect of interest on each Mortgage Loan, will accrue in
accordance with the terms of the related Mortgage Note at a rate equal to ____%
per annum, in the case of Mortgage Loans other than Specially Serviced Mortgage
Loans, and ____% per annum, in the case of Specially Serviced Mortgage Loans,
and will be computed on the basis of the same principal amount and for the same
period respecting which any related interest payment on the related Mortgage
Loan is computed. As additional servicing compensation, the Master Servicer
will be entitled to retain all assumption and modification fees received on
Mortgage Loans serviced thereby and, as and to the extent described below,
Prepayment Premiums and Prepayment Interest Excesses collected on any of the
Mortgage Loans. In addition, the Master Servicer is authorized but not required
to invest or direct the investment of funds held in the Certificate Account in
certain [short-term] United States government securities and other obligations
acceptable to the Rating Agenc[ies] ("Permitted Investments"), and the Master
Servicer will be entitled to retain any interest or other income earned on such
funds.
The principal compensation to be paid to the Special Servicer in
respect of its special servicing activities will consist of the Special
Servicing Fee (together with the Master Servicing Fee, the "Servicing Fees")
and the Workout Fee. Like the Master Servicing Fee, the "Special Servicing Fee"
will be payable monthly on a loan-by-loan basis from amounts received in
respect of interest on each Mortgage Loan, will accrue in accordance with the
terms of the related Mortgage Note at a rate equal to ___% per annum, in the
case of Mortgage Loans other than Specially Serviced Mortgage Loans, and ___%
per annum, in the case of Specially Serviced Mortgage Loans, and will be
computed on the basis of the same principal amount and for the same period
respecting which any related interest payment on the related Mortgage Loan is
computed. The "Workout Fee" will equal a specified percentage (varying from
___% to ___% (the "Workout Fee Rate") depending on the related unpaid principal
balance) of, and will be payable from, all collections and proceeds received in
respect of principal of each Mortgage Loan which is or has been a Specially
Serviced Mortgage Loan (including those for which servicing has been returned
to the Master Servicer); provided that, in the case of Liquidation Proceeds,
the otherwise fixed Workout Fee Rate will be proportionately reduced to reflect
the extent to which, if at all, the principal portion of such Liquidation
Proceeds is less than the unpaid principal balance of the related Mortgage Loan
immediately prior to the receipt thereof. As additional servicing compensation,
the Special Servicer will be entitled to retain all assumption and modification
fees received on Mortgage Loans serviced thereby and, as and to the extent
described below, Penalty Charges collected on any of the Mortgage Loans.
Although the Master Servicer and Special Servicer are each required
to service and administer the Mortgage Pool in accordance with the general
servicing standard described under "-General" above and, accordingly, without
regard to its right to receive compensation under the Pooling and Servicing
Agreement, additional servicing compensation in the nature of assumption and
modification fees, Prepayment Premiums, Prepayment Interest Excesses and
Penalty Charges may under certain circumstances provide the Master Servicer or
the Special Servicer, as the case may be, with an economic disincentive to
comply with such standard.
[If a borrower voluntarily prepays a Mortgage Loan in whole or in
part during any Due Period on a date that is prior to its Due Date in such Due
Period, the amount of interest (net of related Servicing Fees) that accrues on
the amount of such principal prepayment will be less (such shortfall, a
"Prepayment Interest Shortfall") than the corresponding amount of interest
accruing on the Certificates. If such a principal prepayment occurs during any
Due Period after the Due Date for such Mortgage Loan in such Due Period, the
amount of interest (net of related Servicing Fees) that accrues on the amount
of such principal prepayment will exceed (such excess, a
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"Prepayment Interest Excess") the corresponding amount of interest accruing on
the Certificates. As to any Due Period, to the extent Prepayment Interest
Excesses and Prepayment Premiums collected for all Mortgage Loans are greater
than Prepayment Interest Shortfalls incurred, such excess will be paid to the
Master Servicer as additional servicing compensation. To the extent Prepayment
Interest Shortfalls incurred during any Due Period are greater than Prepayment
Interest Excesses and Prepayment Premiums collected in such Due Period, the
Master Servicer will be required to deposit into the Certificate Account (such
deposit, a "Compensating Interest Payment"), without any right of reimbursement
therefor, an amount equal to the lesser of (i) its servicing compensation for
such Due Period, and (ii) an amount sufficient to eliminate such net shortfall.
Compensating Interest Payments will not cover shortfalls in Mortgage Loan
interest accruals that result from any liquidation of a defaulted Mortgage
Loan, or of any REO Property acquired in respect thereof, that occurs during a
Due Period prior to the related Due Date therein.]
[As and to the extent described herein under "Description of the
Certificates-P&I Advances", the Master Servicer will be entitled to receive
interest on P&I Advances, and the Master Servicer and the Special Servicer will
be entitled to receive interest on reimbursable servicing expenses, any such
interest to be paid, contemporaneously with the reimbursement of the related
P&I Advance or servicing expense, in the first instance out of late charges and
penalty interest ("Penalty Charges") received on the Mortgage Pool as a whole
during the Due Period of reimbursement, and thereafter out of any other
collections on the Mortgage Loans. As to any Due Period, to the extent that
Penalty Charges collected for all Mortgage Loans are greater than the amount of
interest paid to the Master Servicer in respect of P&I Advances and to the
Master Servicer and Special Servicer in respect of reimbursable servicing
expenses, such excess will be paid to the Special Servicer as additional
servicing compensation.]
The Master Servicer and the Special Servicer generally will each be
required to pay all expenses incurred by it in connection with its servicing
activities under the Pooling and Servicing Agreement, including the fees of any
sub-servicers retained by it, and will not be entitled to reimbursement
therefor except as expressly provided in the Pooling and Servicing Agreement.
However, the Master Servicer and the Special Servicer will each be permitted to
pay, or to direct the payment of, certain such expenses directly out of the
Certificate Account and at times without regard to the relationship between the
expense and the funds from which it is being paid. See "Description of the
Pooling Agreements-Certificate Account" and "-Servicing Compensation and
Payment of Expenses" in the Prospectus.
MODIFICATIONS, WAIVERS AND AMENDMENTS
The Master Servicer or the Special Servicer may agree to modify,
waive or amend any term of any Mortgage Loan being serviced thereby in a manner
consistent with the servicing standard described herein, provided that such
modification, waiver or amendment will not (i) affect the amount or timing of
any scheduled payments of principal or interest on the Mortgage Loan or (ii) in
its judgment, materially impair the security for the Mortgage Loan or reduce
the likelihood of timely payment of amounts due thereon. The Special Servicer
also may agree to any other modification, waiver or amendment of the terms of a
Specially Serviced Mortgage Loan, but only if, in its judgment, a material
default on the Mortgage Loan has occurred or a payment default is imminent, and
such modification, waiver or amendment is reasonably likely to produce a
greater recovery with respect to the Mortgage Loan on a present value basis
than would liquidation.
To the extent consistent with the foregoing, the Special Servicer
will be permitted: (1) to reduce scheduled monthly payments of principal and
interest on any Specially Serviced Mortgage Loan, provided that [(a) no such
payment may be reduced to an amount less than [1/12 of 5%] of the unpaid
principal balance of such Mortgage Loan and (b) no single modification or
amendment may provide for a reduction of more than [12]
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consecutive monthly payments]; and (2) to extend the date on which any Balloon
Payment is scheduled to be due on a Specially Serviced Mortgage Loan for a
period of not more than [36] months, but only if:
[(x) the related mortgagor is required to continue to make monthly
payments of principal and/or interest thereon in an amount at least equal to
the greater of (i) the amount of the Monthly Payment due on the Due Date
immediately preceding the scheduled maturity date and (ii) an amount equal to
thirty days' interest at the related Mortgage Rate;
(y) no Monthly Payment due during the preceding 12 months has
been more than 30 days delinquent (without regard to any grace period provided
for in the related Mortgage Note); and
(z) the Special Servicer has previously determined in its good
faith judgment that:
(i) such extension is reasonably likely to
produce a greater recovery than liquidation
of the related Mortgage Loan;
(ii) on the basis of an inspection report, no
deferred maintenance, material damage or
waste exists at the related Mortgaged
Property; and
(iii) on the basis of a review of the most recent
annual operating statement for the related
Mortgaged Property, and calculated with
respect to the amount described in clause
(x) above, the debt service coverage ratio
for the Mortgage Loan is not less than
___x.]
The Master Servicer and the Special Servicer are each required to.
notify the Trustee of any modification, waiver or amendment of any term of any
Mortgage Loan to which it has agreed, and must deliver to the Trustee or the
related Custodian for deposit in the related Mortgage File (with a copy to the
other such party), an original counterpart of the agreement related to such
modification, waiver or amendment, promptly (and in any event within [10]
business days) following the execution thereof. Copies of each agreement
whereby any such modification, waiver or amendment of any term of any Mortgage
Loan is effected are to be available for review during normal business hours at
the offices of the Trustee. See "Description of the Certificates-Reports to
Certificateholders; Available Information" herein.
INSPECTIONS; COLLECTION OF OPERATING INFORMATION
The Special Servicer is required to perform a physical inspection
of each Mortgaged Property at such times and in such manner as are consistent
with the servicing standard set forth herein, but in any event (i) at least
once per calendar year and (ii), if any scheduled payment becomes more than 60
days delinquent on the related Mortgage Loan, as soon as practicable
thereafter. The Special Servicer will be required to prepare a written report
of each such inspection describing the condition of the Mortgaged Property and
specifying the existence of any material vacancies in the Mortgaged Property,
of any sale, transfer or abandonment of the Mortgaged Property, of any material
change in the condition or value of the Mortgaged Property, or of any waste
committed thereon.
With respect to each Mortgage Loan that requires the borrower to
deliver such statements, the Special Servicer is also required to collect and
review the annual operating statements of the related Mortgaged Property. Most
of the Mortgages obligate the related borrower to deliver annual property
operating statements. However, there can be no assurance that any operating
statements required to be delivered will in fact be delivered, nor is the
Special Servicer likely to have any practical means of compelling such delivery
in the case of an otherwise performing Mortgage Loan.
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Copies of the inspection reports and operating statements referred
to above are to be available for review by Certificateholders during normal
business hours at the offices of the Trustee. See "Description of the
Certificates-Reports to Certificateholders; Available Information" herein.
ADDITIONAL OBLIGATIONS OF THE MASTER SERVICER WITH RESPECT TO ARM LOANS
The Master Servicer is responsible for calculating adjustments in
the Mortgage Rate and the Monthly Payment for each ARM Loan and for notifying
the related borrower of such adjustments. If the base index for any ARM Loan is
not published or is otherwise unavailable, then the Master Servicer is required
to select a comparable alternative index over which it has no direct control,
that is readily verifiable and that is acceptable under the terms of the
related Mortgage Note. If the Mortgage Rate or the Monthly Payment with respect
to any ARM Loan is not properly adjusted by the Master Servicer pursuant to the
terms of such Mortgage Loan and applicable law, the Master Servicer is required
to deposit in the Certificate Account on or prior to the Due Date of the
affected Monthly Payment, an amount equal to the excess, if any, of (i) the
amount that would have been received from the borrower if the Mortgage Rate or
Monthly Payment had been properly adjusted, over (ii) the amount of such
improperly adjusted Monthly Payment, subject to reimbursement only out of such
amounts as are recovered from the borrower in respect of such excess.
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, among the Sponsor, the Master
Servicer, the Special Servicer, the Trustee and the REMIC Administrator (the
"Pooling and Servicing Agreement"), and will represent in the aggregate the
entire beneficial ownership interest in a Trust Fund consisting of: (i) the
Mortgage Loans and all payments under and proceeds of the Mortgage Loans
received after the Cut-off Date (exclusive of payments of principal and
interest due on or before the Cut-off Date); (ii) any Mortgaged Property
acquired on behalf of the Trust Fund through foreclosure, deed in lieu of
foreclosure or otherwise (upon acquisition, an "REO Property"); (iii) such
funds or assets as from time to time are deposited in the Certificate Account;
(iv) the rights of the mortgagee under all insurance policies with respect to
the Mortgage Loans; and (v) certain rights of the Sponsor under the Mortgage
Loan Purchase Agreement relating to Mortgage Loan document delivery
requirements and the representations and warranties of the Mortgage Loan Seller
regarding the Mortgage Loans.
The Certificates will consist of four classes to be designated as
the Class A Certificates, the Class B Certificates, the Class C Certificates
and the Class R Certificates. The Class A Certificates will have an initial
Certificate Balance of $_____, which represents ____% of the Initial Pool
Balance; the Class B Certificates will have an initial Certificate Balance of
$_____, which represents ___% of the Initial Pool Balance; the Class C
Certificates will have an initial Certificate Balance of $ ____, which
represents ___% of the Initial Pool Balance; and the Class R Certificates will
have an initial Certificate Balance of [zero]. The Certificate Balance of any
Class of Certificates outstanding at any time represents the maximum amount
which the holders thereof are entitled to receive as distributions allocable to
principal from the cash flow on the Mortgage Loans and the other assets in the
Trust Fund. On each Distribution Date, the respective Certificate Balances of
the Class A, Class B and Class C Certificates (the "REMIC Regular
Certificates") will in each case be (a) increased by any amounts allocated to
such Class of Certificates on such Distribution Date in respect of negative
amortization on the Mortgage Loans, and (b) reduced by any amounts actually
distributed on such Class of Certificates on such Distribution Date that are
allocable to principal. The Certificate Balance of the Class R Certificates
will at all times equal the amount, if any, by which the aggregate Stated
Principal Balance of the Mortgage Pool exceeds the aggregate Certificate
Balance of the REMIC Regular Certificates (the "Excess Pool Balance").
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Only the Class A and Class B Certificates (the "Offered
Certificates") are offered hereby. The Class C and Class R Certificates (the
"Private Certificates") have not been registered under the Securities Act of
1933 and are not offered hereby.
The Class A Certificates will be issued, maintained and transferred
on the book-entry records of DTC and its Participants in denominations of
$1,000 and in integral multiples thereof. The Class B Certificates will be
issuable in fully registered, certificated form in denominations of $____ and
integral multiples of $1,000 in excess thereof, with one Class B Certificate
evidencing an additional amount equal to the remainder of the initial
Certificate Balance of such Class.
The Class A Certificates will initially be represented by one or
more global Certificates registered in the name of the nominee of DTC. The
Sponsor has been informed by DTC that DTC's nominee will be Cede & Co. No Class
A Certificate Owner will be entitled to receive a Definitive Class A
Certificate representing its interest in such Class, except under the limited
circumstances described in the Prospectus under "Description of the
Certificates-Book-Entry Registration and Definitive Certificates". Unless and
until Definitive Class A Certificates are issued, all references to actions by
holders of the Class A Certificates will refer to actions taken by DTC upon
instructions received from Class A Certificate Owners through its Participants,
and all references herein to payments, notices, reports and statements to
holders of the Class A Certificates will refer to payments notices, reports and
statements to DTC or Cede & Co., as the registered holder of the Class A
Certificates, for distribution to Class A Certificate Owners through its
Participants in accordance with DTC procedures. See "Description of the
Certificates-Book-Entry Registration and Definitive Certificates" in the
Prospectus.
Until Definitive Class A Certificates are issued, interests in such
Class will be transferred on the book-entry records of DTC and its
Participants. The Class B Certificates may be transferred or exchanged, subject
to certain restrictions on the transfer of such Certificates to Plans (see
"ERISA Considerations" herein), at the offices of _____ located at _____,
without the payment of any service charges, other than any tax or other
governmental charge payable in connection therewith. _____ will initially serve
as registrar (in such capacity, the "Certificate Registrar") for purposes of
recording and otherwise providing for the registration of the Offered
Certificates and of transfers and exchanges of the Class B and, if issued, the
Definitive Class A Certificates.
DISTRIBUTIONS
Method, Timing and Amount. Distributions on the Certificates will
be made by the Master Servicer, to the extent of available funds, on the 25th
day of each month or, if any such 25th day is not a business day, then on the
next succeeding business day, commencing in _____ 199__ (each, a "Distribution
Date"). All such distributions (other than the final distribution on any
Certificate) will be made to the persons in whose names the Certificates are
registered at the close of business on each Record Date, which will be the last
business day of the month preceding the month in which the related Distribution
Date occurs. Each such distribution will be made by wire transfer in
immediately available funds to the account specified by the Certificateholder
at a bank or other entity having appropriate facilities therefor, if such
Certificateholder will have provided the Master Servicer with wiring
instructions [no less than five business days prior to the related Record Date
(which wiring instructions may be in the form of a standing order applicable to
all subsequent distributions) and is the registered owner of Certificates with
an aggregate initial principal amount of at least $5,000,000], or otherwise by
check mailed to such Certificateholder. The final distribution on any
Certificate will be made in like manner, but only upon presentation and
surrender of such Certificate at the location that will be specified in a
notice of the pendency of such final distribution. All distributions made with
respect to a Class of Certificates will be allocated pro rata among the
outstanding Certificates of such Class based on their respective Percentage
Interests. The "Percentage Interest" evidenced by any Offered Certificate is
equal to the initial denomination thereof as of the Delivery Date, divided by
the initial Certificate Balance of the Class to which it belongs.
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The aggregate amount available for distribution to
Certificateholders on each Distribution Date (the "Available Distribution
Amount") will, in general, equal the sum of the following amounts:
(a) the total amount of all cash received on the
Mortgage Loans and any REO Properties that is on deposit in the
Certificate Account as of the related Determination Date, exclusive
of:
(i) all Monthly Payments collected
but due on a Due Date
subsequent to the related
Due Period,
(ii) all principal prepayments
(together with related payments
of the interest thereon and
related Prepayment Premiums),
Liquidation Proceeds, Insurance
Proceeds and other unscheduled
recoveries received subsequent
to the related Due Period, and
(iii) all amounts in the Certificate
Account that are due or
reimbursable to any person
other than the
Certificateholders;
(b) all P&I Advances made by the Master Servicer with
respect to such Distribution Date; and
(c) any Compensating Interest Payment made by the
Master Servicer to cover or reduce the amount, if any, by which
Prepayment Interest Shortfalls incurred during the related Due
Period exceed Prepayment Interest Excesses and Prepayment Premiums
collected during the related Due Period. See "Description of the
Pooling Agreements-Certificate Account" in the Prospectus.
The "Due Period" for each Distribution Date will be the period that
begins on the __ day of the month preceding the month in which such
Distribution Date occurs and ends on the __ day of the month in which such
Distribution Date occurs. The "Determination Date" for each Distribution Date
is the __ day of the month in which such Distribution Date occurs or, if any
such ___ day is not a business day, then the next preceding business day.
Priority. On each Distribution Date, for so long as the Class A
and/or Class B Certificates are outstanding, the Master Servicer will (except as
otherwise described under "-Termination" below) apply amounts on deposit in the
Certificate Account, to the extent of the Available Distribution Amount, in the
following order of priority:
(1) to distributions of interest to the holders of the
Class A Certificates in an amount equal to all
Distributable Certificate Interest in respect of the
Class A Certificates for such Distribution Date and, to
the extent not previously paid, for all prior
Distribution Dates;
(2) to distributions of principal to the holders of the
Class A Certificates in an amount equal to the sum of
(a) the product of (i) the Class A Certificates'
Ownership Percentage (as calculated immediately prior
to such Distribution Date), multiplied by (ii) the
Scheduled Principal Distribution Amount for such
Distribution Date, plus (b) the entire Unscheduled
Principal Distribution Amount for such Distribution
Date (but not more than would be necessary to reduce
the Certificate Balance of the Class A Certificates to
zero);
(3) to distributions of principal to the holders of the
Class A Certificates in an amount equal to any
Uncovered Portion of the Certificate Balance of the
Class A Certificates immediately prior to such
Distribution Date;
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(4) to distributions of interest to the holders of the
Class B Certificates in an amount equal to all
Distributable Certificate Interest in respect of the
Class B Certificates for such Distribution Date and, to
the extent not previously paid, for all prior
Distribution Dates;
(5) to distributions of principal to the holders of the
Class B Certificates in an amount equal to the sum of
(a) the product of (i) the Class B Certificates'
Ownership Percentage (as calculated immediately prior
to such Distribution Date), multiplied by (ii) the
Scheduled Principal Distribution Amount for such
Distribution Date, plus (b) if the Class A Certificates
have been retired, then to the extent not distributed
in retirement thereof on such Distribution Date, the
entire Unscheduled Principal Distribution Amount for
such Distribution Date (but not more than would be
necessary to reduce the Certificate Balance of the
Class B Certificates to zero);
(6) to distributions of principal to the holders of the
Class A Certificates in an amount equal to any
Uncovered Portion of the Certificate Balance of the
Class B Certificates immediately prior to such
Distribution Date (but not more than would be necessary
to reduce the Certificate Balance of the Class A
Certificates to zero);
(7) to distributions of principal to the holders of the
Class B Certificates in an amount equal to any
Uncovered Portion of the Certificate Balance of the
Class B Certificates immediately prior to such
Distribution Date, net of any distributions of
principal made on such Distribution Date in respect of
the Class A Certificates as described in the
immediately preceding clause (6);
(8) to distributions of interest to the holders of the
Class C Certificates in an amount equal to all
Distributable Certificate Interest in respect of the
Class C Certificates for such Distribution Date and, to
the extent not previously distributed, for all prior
Distribution Dates;
(9) to distributions of principal to the holders of the
Class C Certificates in an amount equal to the product
of (a) the Class C Certificates' Ownership Percentage
(as calculated immediately prior to such Distribution
Date), multiplied by (b) the Scheduled Principal
Distribution Amount for such Distribution Date;
(10) to distributions of principal to the holders of the
respective Classes of REMIC Regular Certificates, in
reverse alphabetical order of their Class designations
(i.e., C, B, A), in an aggregate amount equal to the
product of (a) the Class R Certificates' Ownership
Percentage (as calculated immediately prior to such
Distribution Date), multiplied by (b) the Scheduled
Principal Distribution Amount for such Distribution
Date (but, in each case, not more than would be
necessary to reduce the related Certificate Balance to
zero);
(11) to distributions of principal to the holders of the
respective Classes of REMIC Regular Certificates, in
alphabetical order of their Class designations (i.e.,
A, B, C), in an aggregate amount equal to any Uncovered
Portion of the Certificate Balance of the Class C
Certificates immediately prior to such Distribution
Date (but, in each case, not more than would be
necessary to reduce the related Certificate Balance to
zero);
(12) to distributions of principal to the holders of the
respective Classes of REMIC Regular Certificates, in
reverse alphabetical order of their Class designations
(i.e., C, B, A,), in an aggregate amount equal to __%
of the balance, if any, of the Available Distribution
Amount remaining after the distributions to be made as
described in clauses (1) through (11) above (such
remaining balance, if any, herein referred to as
"Excess Funds") (but, in each case, not more than would
be necessary to reduce the related Certificate Balance
to zero); and
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(13) to distributions to the holders of the Class R
Certificates in an amount equal to the remaining
balance of any Excess Funds.
Pass-Through Rates. The Pass-Through Rates applicable to the
Class A and Class B Certificates for the initial Distribution Date will
equal __ % and __% per annum, respectively. With respect to any Distribution
Date subsequent to the initial Distribution Date, the Pass-Through Rate for
the Class A Certificates will equal LIBOR for such Distribution Date, plus
__ basis points (i.e., ___ percentage points), subject to a maximum of __%
per annum and a minimum of __% per annum; unless, however, the rate so
calculated exceeds the Funds-Available Cap Rate in respect of the Class A
Certificates for such Distribution Date, in which case the Pass-Through Rate
for the Class A Certificates will equal the Weighted Average Effective Net
Mortgage Rate for such Distribution Date. With respect to any Distribution
Date subsequent to the initial Distribution Date, the Pass-Through Rate for
the Class B Certificates will equal the Weighted Average Effective Net
Mortgage Rate for such Distribution Date.
[The Pass-Through Rate applicable to the Class C Certificates for
any Distribution Date will equal the Weighted Average Effective Net Mortgage
Rate for such Distribution Date. The Class R Certificates will have no
specified Pass-Through Rate.]
"LIBOR" for each Distribution Date will be the average of the
interbank offered rates for one month United States dollar deposits in the
London market as determined during the preceding month in accordance with the
method described below. The "Weighted Average Effective Net Mortgage Rate" for
each Distribution Date is the weighted average of the applicable Effective Net
Mortgage Rates for the Mortgage Loans, weighted on the basis of their
respective Stated Principal Balances immediately prior to such Distribution
Date. For purposes of calculating the Weighted Average Effective Net Mortgage
Rate for any Distribution Date, the "applicable Effective Net Mortgage Rate"
for each Mortgage Loan is: (a) if such Mortgage Loan accrues interest on the
basis of a 360-day year consisting of twelve 30-day months (a "360/360 basis",
which is the basis of accrual for interest on the REMIC Regular Certificates),
the Net Mortgage Rate in effect for such Mortgage Loan as of the commencement
of the related Due Period; and (b) if such Mortgage Loan does not accrue
interest on a 360/360 basis, the annualized rate at which interest would have
to accrue during the one month period preceding the Due Date for such Mortgage
Loan during the related Due Period on a 360/360 basis in order to produce the
aggregate amount of interest (adjusted to the actual Net Mortgage Rate) accrued
during such period. The "Net Mortgage Rate" for each Mortgage Loan is equal to
the related Mortgage Rate in effect from time to time less ___ basis points.
The "Funds-Available Cap Rate" applicable to the determination of
the Pass-Through Rate on the Class A Certificates for each Distribution Date
will be an annualized rate equal to the product of (a) the Weighted Average
Effective Net Mortgage Rate for such Distribution Date, multiplied by (b) a
fraction, expressed in decimal form, the numerator of which is the sum of (i)
the Certificate Balance of the Class A Certificates immediately prior to such
Distribution Date and (ii) the Excess Pool Balance immediately prior to such
Distribution Date, and the denominator of which is the Certificate Balance of
the Class A Certificates immediately prior to such Distribution Date.
Accordingly, if the Excess Pool Balance is zero (i. e., the aggregate Stated
Principal Balance of the Mortgage Pool is less than or equal to the aggregate
Certificate Balance of the REMIC Regular Certificates), the Funds-Available Cap
Rate applicable to the determination of the Pass-Through Rate for the Class A
Certificates for any Distribution Date will be the Weighted Average Effective
Net Mortgage Rate for such Distribution Date.
Determination of LIBOR. LIBOR for the initial Distribution Date
will equal ___% per annum. LIBOR for each subsequent Distribution Date will be
determined as described below on' the second LIBOR business day preceding the
Distribution Date in the prior month (each, a "LIBOR Adjustment Date"). A
"LIBOR business day" is any day on which banking institutions in London, New
York City and ___, are open for dealing in foreign currency and exchange.
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On each LIBOR Adjustment Date, the Master Servicer will determine
LIBOR on the basis of the LIBOR quotations of the Reference Banks (as defined
below), as such quotations are available to the Master Servicer as of 11:00
a.m. (London time) on such LIBOR Adjustment Date. As used herein with respect
to a LIBOR Adjustment Date, "Reference Banks" means four leading banks engaged
in transactions in one-month Eurodollar deposits in the international
Eurocurrency market (i) with an established place of business in London, (ii)
whose quotations appear on the Reuters Screen LIBO Page on the LIBOR Adjustment
Date in question and (iii) which have been designated as such by the Master
Servicer and are able and willing to provide such quotations to the Master
Servicer on each LIBOR Adjustment Date, and "Reuters Screen LIBO Page" means
the display designated as page "LIBO" on the Reuters Monitor Money Rates
Service (or such other page as may replace the LIBO page on that service for
the purpose of displaying London interbank offered rate quotations of major
banks). The initial Reference Banks will be ______, ____, ____ and ___. If any
Reference Bank designated by the Master Servicer should be removed from the
Reuters Screen LIBO Page or in any other way fails to meet the qualifications
of a Reference Bank, the Master Servicer will be required to designate an
alternative Reference Bank.
On each LIBOR Adjustment Date, LIBOR will be established by the
Master Servicer as follows:
(i) if on any LIBOR Adjustment Date two or more
of the Reference Banks provide such offered
rate quotations, LIBOR will be the
arithmetic mean of such offered rate
quotations (rounding such arithmetic mean
upwards if necessary to the nearest whole
multiple of 1/16%);
(ii) if on any LIBOR Adjustment Date only one of
the Reference Banks provides such offered
rate quotations, LIBOR will be whichever is
the higher of (A) LIBOR as determined on
the previous LIBOR Adjustment Date and (B)
a rate per annum (the "Reserve Interest
Rate") determined by the Master Servicer to
be either (1) the arithmetic mean (rounding
such arithmetic mean upwards if necessary
to the nearest whole multiple of 1/16 % )
of the one-month Eurodollar lending rates
that the New York City banks selected by
the Master Servicer are quoting, on the
relevant LIBOR Adjustment Date, to the
principal London offices of leading banks
in the London interbank market or (2) if
the Master Servicer can determine no such
arithmetic mean, the lowest one-month
Eurodollar lending rate that the New York
City banks selected by the Master Servicer
are quoting on such LIBOR Adjustment Date
to leading European banks; and
(iii) if on any LIBOR Adjustment Date the Master
Servicer is required but is unable to
determine the Reserve Interest Rate in the
manner provided in the immediately
preceding clause (ii), LIBOR will be LIBOR
as determined on the previous LIBOR
Adjustment Date, or, in the case of the
first LIBOR Adjustment Date, __% per annum.
The establishment of LIBOR by the Master Servicer on any LIBOR
Adjustment Date, in the absence of manifest error, will be final and binding.
Distributable Certificate Interest. The "Distributable Certificate
Interest" in respect of each Class of REMIC Regular Certificates for each
Distribution Date represents that portion of the Accrued Certificate Interest
in respect of such Class of Certificates for such Distribution Date that is net
of such Class's allocable share (calculated as described below) of (i) the
aggregate of any Prepayment Interest Shortfalls resulting from voluntary
principal prepayments made on the Mortgage Loans during the related Due Period
that are not offset by Prepayment Interest Excesses and Prepayment Premiums
collected during the related Due Period or covered by the Master Servicer's
Compensating Interest Payment for such Distribution Date (the aggregate of such
Prepayment Interest Shortfalls that are not so offset or covered, as to such
Distribution Date, the "Net Aggregate Prepayment Interest Shortfall"), and
(ii) the aggregate of any negative amortization in respect of the Mortgage
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Loans for their respective Due Dates during the related Due Period (the
aggregate of such negative amortization, as to such Distribution Date, the
"Aggregate Mortgage Loan Negative Amortization").
The "Accrued Certificate Interest" in respect of each Class of
REMIC Regular Certificates for each Distribution Date is equal to 30 days'
interest at the Pass-Through Rate applicable to such Class of Certificates for
such Distribution Date accrued on the related Certificate Balance outstanding
immediately prior to such Distribution Date.
The portion of the Net Aggregate Prepayment Interest Shortfall for
any Distribution Date that is allocable to each Class of REMIC Regular
Certificates will equal the product of (a) such Net Aggregate Prepayment
Interest Shortfall, multiplied by (b) a fraction, the numerator of which is
equal to 30 days' interest at the Pass-Through Rate applicable to such Class of
REMIC Regular Certificates for such Distribution Date accrued on the related
Certificate Balance (net of any Uncovered Portion thereof) outstanding
immediately prior to such Distribution Date, and the denominator of which is
equal to 30 days' interest at the Weighted Average Effective Net Mortgage Rate
for such Distribution Date accrued on the aggregate Stated Principal Balance of
the Mortgage Pool outstanding immediately prior to such Distribution Date. Any
portion of the Net Aggregate Prepayment Interest Shortfall for any Distribution
Date that is not otherwise allocated to the REMIC Regular Certificates will be
deemed to be allocated to the Class R Certificates.
The Aggregate Mortgage Loan Negative Amortization, if any, for each
Distribution Date will be allocated among the respective Classes of
Certificates in a manner identical to that described in the preceding paragraph
for the allocation of any Net Aggregate Prepayment Interest Shortfall. That
portion of the Aggregate Mortgage Loan Negative Amortization for any
Distribution Date that is allocable to a Class of REMIC Regular Certificates
will be added to the Certificate Balance of such Class of REMIC Regular
Certificates and, accordingly, will constitute the "Certificate Negative
Amortization" in respect thereof for such Distribution Date.
Scheduled Principal Distribution Amount and Unscheduled Principal
Distribution Amount. The "Scheduled Principal Distribution Amount" for each
Distribution Date will equal the aggregate of the principal portions of all
Monthly Payments (including Balloon Payments)[, net of any related Workout Fees
payable therefrom to the Special Servicer,] due during or, if and to the extent
not previously received or advanced and distributed to Certificateholders on a
preceding Distribution Date, prior to the related Due Period, in each case to
the extent paid by the related borrower or advanced by the Master Servicer and
included in the Available Distribution Amount for such Distribution Date. The
Scheduled Principal Distribution Amount from time to time will include all late
payments of principal made by a borrower, including late payments in respect of
a delinquent Balloon Payment, regardless of the timing of such late payments,
except to the extent such late payments are otherwise reimbursable to the
Master Servicer for prior P&I Advances.
The "Unscheduled Principal Distribution Amount" for each
Distribution Date will equal the aggregate off: (a) all voluntary prepayments
of principal received on the Mortgage Loans during the related Due Period [,
net of any related Workout Fees payable therefrom to the Special Servicer]; and
(b) any other collections (exclusive of payments by borrowers) received on the
Mortgage Loans and any REO Properties during the related Due Period, whether in
the form of Liquidation Proceeds, Insurance Proceeds, net income from REO
Property or otherwise, that were identified and applied by the Master Servicer
as recoveries of previously unadvanced principal of the related Mortgage Loan[,
net of any related Workout Fees payable therefrom to the Special Servicer].
The respective amounts which constitute the Scheduled Principal
Distribution Amount and Unscheduled Principal Distribution Amount for any
Distribution Date are herein collectively referred to from time to time as the
"Distributable Principal Collections and Advances".
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<PAGE>
The "Ownership Percentage" evidenced by any Class of Certificates
as of any date of determination will equal a fraction, expressed as a
percentage, the numerator of which is the then Certificate Balance of such
Class of Certificates, net (in the case of a Class of REMIC Regular
Certificates) of any Uncovered Portion of such Certificate Balance, and the
denominator of which is the then aggregate Stated Principal Balance of the
Mortgage Pool.
Certain Calculations with Respect to Individual Mortgage Loans.
The "Stated Principal Balance" of each Mortgage Loan outstanding at any time
represents the principal balance of such Mortgage Loan ultimately due and
payable to the Certificateholders, subject to the Special Servicer's right to
receive any Workout Fee with respect to such Mortgage Loan. The Stated
Principal Balance of each Mortgage Loan will initially equal the Cut-off Date
Balance thereof and, on each Distribution Date, will be increased by any
negative amortization experienced by such Mortgage Loan that is allocated to
the Certificates on such date, and reduced by any payments or other collections
(or advances in lieu thereof) of principal of such Mortgage Loan that are
distributed on the Certificates on such date (or that would have been so
distributed if they had not otherwise been paid to the Special Servicer in
respect of any related Workout Fees). The Stated Principal Balance of a
Mortgage Loan may also be reduced in connection with any forced reduction of
the actual unpaid principal balance thereof imposed by a court presiding over a
bankruptcy proceeding wherein the related borrower is the debtor. See "Certain
Legal Aspects of Mortgage Loans-Foreclosure-Bankruptcy Laws" in the Prospectus.
For purposes of calculating distributions on the Certificates, as
well as the amount of Servicing Fees and Workout Fees payable each month, each
REO Property will be treated as if there exists with respect thereto an
outstanding mortgage loan (an "REO Loan"), and all references to "Mortgage
Loan", "Mortgage Loans" and "Mortgage Pool" herein and in the Prospectus, when
used in such context, will be deemed to also be references to or to also
include, as the case may be, any "REO Loans". Each REO Loan will generally be
deemed to have the same characteristics as its actual predecessor Mortgage
Loan, including the same adjustable or fixed Mortgage Rate (and, accordingly,
the same Net Mortgage Rate and Effective Net Mortgage Rate) and the same unpaid
principal balance and Stated Principal Balance. Amounts due on such predecessor
Mortgage Loan, including any portion thereof payable or reimbursable to the
Master Servicer or the Special Servicer, will continue to be "due" in respect
of the REO Loan; and amounts received in respect of the related REO Property,
net of payments to be made, or reimbursement to the Special Servicer for
payments previously advanced, in connection with the operation and management
of such property, generally will be applied by the Master Servicer as if
received on the predecessor Mortgage Loan. However, notwithstanding the terms
of the predecessor Mortgage Loan, the Monthly Payment "due" on an REO Loan will
in all cases, for so long as the related Mortgaged Property is part of the
Trust Fund, equal one month's interest thereon at the applicable Mortgage Rate.
SUBORDINATION
The rights of holders of the Class B Certificates and each Class of
the Private Certificates (collectively, the "Subordinate Certificates") to
receive distributions of amounts collected or advanced on the Mortgage Loans
will be subordinated, to the extent described herein, to the rights of holders
of the Class A Certificates and each other Class of Subordinate Certificates
with an earlier alphabetical Class designation. This subordination is intended
to enhance the likelihood of timely receipt by the holders of the Class A
Certificates of the full amount of all Distributable Certificate Interest
payable in respect of such Certificates on each Distribution Date, and the
ultimate receipt by such holders of principal in an amount equal to the entire
Certificate Balance of the Class A Certificates. Similarly, but to a lesser
degree, this subordination is also intended to enhance the likelihood of timely
receipt by the holders of the Class B Certificates of the full amount of all
Distributable Certificate Interest payable in respect of such Certificates on
each Distribution Date, and the ultimate receipt by such holders of principal
in an amount equal to the entire Certificate Balance of the Class B
Certificates. The protection afforded to the holders of each Class of Offered
Certificates by means of the subordination of each other Class of Certificates
with a later alphabetical Class designation, will be accomplished by the
application of the Available Distribution Amount on each Distribution Date in
accordance with the order of priority described under "-
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<PAGE>
Distributions-Priority" above. No other form of Credit Support will be
available for the benefit of the holders of the Offered Certificates.
Allocation to the Class A Certificates, for so long as they are
outstanding, of the entire Unscheduled Principal Distribution Amount for each
Distribution Date will generally accelerate the amortization of the Class A
Certificates relative to the actual amortization of the Mortgage Loans. To the
extent that the Class A Certificates are amortized faster than the Mortgage
Loans, the percentage interest evidenced by the Class A Certificates in the
Trust Fund will be decreased (with a corresponding increase in the interest in
the Trust Fund evidenced by the Subordinate Certificates), thereby increasing,
relative to their respective Certificate Balances, the subordination afforded
the Class A Certificates by the Subordinate Certificates. Following retirement
of the Class A Certificates, allocation to the Class B Certificates, for so
long as they are outstanding, of the entire Unscheduled Principal Distribution
Amount for each Distribution Date will provide a similar benefit to such Class
of Certificates as regards the relative amount of subordination afforded
thereto by the Private Certificates.
Losses and other shortfalls experienced with respect to the
Mortgage Loans will not, with the exception of any Net Aggregate Prepayment
Interest Shortfalls, be applied to reduce either the Certificate Balance or the
absolute entitlement to interest of any Class of REMIC Regular Certificates,
even though such losses and shortfalls may cause one or more of such Classes to
receive less than the full amount of principal and interest to which it is
entitled. As a result, the aggregate Stated Principal Balance of the Mortgage
Pool at any time may be less than the aggregate Certificate Balance of the
REMIC Regular Certificates. Such deficit will be allocated to the respective
Classes of REMIC Regular Certificates (in each case to the extent of its
Certificate Balance) in reverse alphabetical order of their Class designations
(i.e., C, B, A). Such allocation will not reduce the Certificate Balance of any
such Class and is intended solely to identify the portion (the "Uncovered
Portion") of the Certificate Balance of each such Class for which there is at
such time no corresponding principal amount of Mortgage Loans.
P&I ADVANCES
[On the business day immediately preceding each Distribution Date,
the Master Servicer will be obligated, subject to the recoverability
determination described in the next paragraph, to make advances (each, a "P&I
Advance") out of its own funds or, subject to the replacement thereof as
provided in the Pooling and Servicing Agreement, funds held in the Certificate
Account that are not required to be part of the Available Distribution Amount
for such Distribution Date, in an amount equal to the aggregate of: (i) all
Monthly Payments (net of related Servicing Fees and any related Workout Fees),
other than Balloon Payments, which were due on the Mortgage Loans during the
related Due Period and delinquent as of the related Determination Date; (ii) in
the case of each Mortgage Loan delinquent in respect of its Balloon Payment as
of the related Determination Date, an amount equal to 30 days' interest thereon
at the related Mortgage Rate in effect as of the commencement of the related
Due Period (net of related Servicing Fees), but only to the extent that the
related mortgagor has not made a payment sufficient to cover such amount under
any forbearance arrangement or otherwise that has been included in the
Available Distribution Amount for such Distribution Date; and (iii) in the case
of each REO Property, an amount equal to thirty days' imputed interest with
respect thereto at the related Mortgage Rate in effect as of the commencement
of the related Due Period (net of related Servicing Fees), but only to the
extent that such amount is not covered by any net income from such REO Property
included in the Available Distribution Amount for such Distribution Date. The
Master Servicer's obligations to make P&I Advances in respect of any Mortgage
Loan or REO Property will continue through liquidation of such Mortgage Loan or
disposition of such REO Property, as the case may be.
The Master Servicer will be entitled to recover any P&I Advance
made out of its own funds from any amounts collected in respect of the Mortgage
Loan as to which such P&I Advance was made, whether in the form of late
payments, Insurance Proceeds, Liquidation Proceeds or otherwise ("Related
Proceeds"). Notwithstanding the foregoing, the Master Servicer will not be
obligated to make any P&I Advance that it determines in its
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<PAGE>
reasonable good faith judgment would, if made, not be recoverable out of
Related Proceeds (a "Nonrecoverable P&I Advance"), and the Master Servicer will
be entitled to recover any P&I Advance that it so determines to be a
Nonrecoverable P&I Advance out of general funds on deposit in the Certificate
Account. See "Description of the Certificates-Advances in Respect of
Delinquencies" and "Description of the Pooling Agreements-Certificate Account"
in the Prospectus.
In connection with its recovery of any P&I Advance made by it (in
the case of the Master Servicer only) or any reimbursable servicing expense
incurred by it (each, an "Advance"), each of the Master Servicer and the
Special Servicer will be entitled to retain, out of any amounts then on deposit
in the Certificate Account, interest at a per annum rate equal to ___ (the
"Reimbursement Rate"), accrued on the amount of such Advance from the date made
to but not including the date of reimbursement. The Special Servicer is
entitled to receive as additional servicing compensation the aggregate amount
of Penalty Charges received during each Due Period, but only to the extent that
such Penalty Charges exceed the aggregate amount of interest paid to the Master
Servicer and/or the Special Servicer during such Due Period in respect of
unreimbursed Advances. Accordingly, Penalty Charges are deemed to be the first
source of funds for paying the Master Servicer and Special Servicer interest on
Advances. However, if the aggregate amount of interest paid to the Master
Servicer and/or the Special Servicer in respect of unreimbursed Advances during
any Due Period exceeds the aggregate amount of Penalty Charges collected during
such Due Period, such excess will likely be paid out of amounts received on the
Mortgage Loans representing previously unadvanced interest (net of related
Servicing Fees) and principal (net of any related Workout Fees). If such is the
case, shortfalls on the Certificates will result.
To the extent not offset or covered by Penalty Charges or amounts
otherwise payable on the Private Certificates, interest accrued on outstanding
Advances will result in a reduction in amounts payable on the Class B
Certificates; and to the extent not offset or covered by Penalty Charges or
amounts otherwise payable on the Class B and the Private Certificates, interest
accrued on outstanding Advances will result in a reduction in amounts payable
on the Class A Certificates. To the extent that any holder of an Offered
Certificate must bear the cost of the Master Servicer's and/or Special
Servicer's Advances, the benefits of such Advances to such holder will be
contingent on the ability of such holder to reinvest the amounts received as a
result of such Advances at a rate of return equal to or greater than the
Reimbursement Rate to the Master Servicer and Special Servicer.]
REPORTS TO CERTIFICATEHOLDERS; CERTAIN AVAILABLE INFORMATION
On each Distribution Date, the Master Servicer will be required to
forward by mail to each holder of an Offered Certificate a statement (a
"Distribution Date Statement") providing various items of information relating
to distributions made on such date with respect to the relevant Class and the
recent status of the Mortgage Pool. For a more detailed discussion of the
particular items of information to be provided in each Distribution Date
Statement, as well as a discussion of certain annual information reports to be
furnished by the Master Servicer to persons who at any time during the prior
calendar year were holders of the Offered Certificates, see "Description of the
Certificates-Reports to Certificateholders" in the Prospectus.
The Pooling and Servicing Agreement requires that the Trustee make
available at its Corporate Trust Office, during normal business hours, for
review by any holder of an Offered Certificate or any person identified to the
Trustee as a prospective transferee of an Offered Certificate, originals or
copies of, among other things, the following items: (a) the Pooling and
Servicing Agreement and any amendments thereto, (b) all Distribution Date
Statements delivered to holders of the relevant Class of Offered Certificates
since the Delivery Date, (c) all officer's certificates delivered to the
Trustee since the Delivery Date as described under "Description of the Pooling
Agreements-Evidence as to Compliance" in the Prospectus, (d) all accountants'
reports delivered to the Trustee since the Delivery Date as described under
"Description of the Pooling Agreements-Evidence as to Compliance" in the
Prospectus, (e) the most recent property inspection report prepared by or on
behalf of the Special Servicer in respect of each Mortgaged Property, (f) the
most recent Mortgaged Property annual operating statements, if any, collected
by or on behalf of the Special Servicer, and (g) any and all modifications,
waivers
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<PAGE>
and amendments of the terms of a Mortgage Loan entered into by the Master
Servicer or the Special Servicer. Copies of any and all of the foregoing items
will be available from the Trustee upon request; however, the Trustee will be
permitted to require payment of a sum sufficient to cover the reasonable costs
and expenses of providing such copies.
Until such time as Definitive Class A Certificates are issued, the
foregoing information will be available to Class A Certificate Owners only to
the extent it is forwarded by or otherwise available through DTC and its
Participants. Conveyance of notices and other communications by DTC to
Participants, and by Participants to Class A Certificate Owners, will be
governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time. The Master Servicer, the
Special Servicer, the Trustee, the Sponsor, the REMIC Administrator and the
Certificate Registrar are required to recognize as Certificateholders only
those persons in whose names the Certificates are registered on the books and
records of the Certificate Registrar. The initial registered holder of the
Class A Certificates will be Cede & Co. as nominee for DTC.
VOTING RIGHTS
At all times during the term of the Pooling and Servicing
Agreement, the Voting Rights for the series offered hereby shall be allocated
among the respective Classes of Certificateholders in proportion to the
Certificate Balances of their Certificates (net, in the case of a Class of
REMIC Regular Certificates, of any Uncovered Portion of the related Certificate
Balance). Voting Rights allocated to a Class of Certificateholders shall be
allocated among such Certificateholders in proportion to the Percentage
Interests evidenced by their respective Certificates. See "Description of the
Certificates Voting Rights" in the Prospectus.
TERMINATION
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of (i) the final payment (or advance in
respect thereof) or other liquidation of the last Mortgage Loan or REO Property
subject thereto, and (ii) the purchase of all of the assets of the Trust Fund
by the Master Servicer. Written notice of termination of the Pooling and
Servicing Agreement will be given to each Certificateholder, and the final
distribution will be made only upon surrender and cancellation of the
Certificates at the office of the Certificate Registrar or other location
specified in such notice of termination.
Any such purchase by the Master Servicer of all the Mortgage Loans
and other assets in the Trust Fund is required to be made at a price equal to
the excess of (a) the sum of (i) the aggregate Purchase Price of all the
Mortgage Loans then included in the Trust Fund and (ii) the fair market value
of all REO Properties then included in the Trust Fund, as determined by an
appraiser mutually agreed upon by the Master Servicer and the Trustee, over (b)
the aggregate of amounts payable or reimbursable to the Master Servicer under
the Pooling and Servicing Agreement. Such purchase will effect early retirement
of the then outstanding Offered Certificates, but the right of the Master
Servicer to effect such termination is subject to the requirement that the then
aggregate Stated Principal Balance of the Mortgage Pool be less than ___% of
the Initial Pool Balance.
On the final Distribution Date, the aggregate amount paid by the
Master Servicer for the Mortgage Loans and other assets in the Trust Fund (if
the Trust Fund is to be terminated as a result of the purchase described in the
preceding paragraph), together with all other amounts on deposit in the
Certificate Account and not otherwise payable to a person other than the
Certificateholders (see "Description of the Pooling Agreements-Certificate
Account" in the Prospectus), will be applied: first, to distributions of
interest to the holders of the Class A Certificates in an amount equal to all
Distributable Certificate Interest in respect of the Class A Certificates for
such Distribution Date and, to the extent not previously paid, for all prior
Distribution Dates; second, to distributions of principal to the holders of the
Class A Certificates in an amount equal to the sum of the Certificate Balance
of the Class A Certificates outstanding immediately prior to such Distribution
Date, plus any Certificate Negative Amortization in respect of the Class A
Certificates for such Distribution Date; third, to
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distributions of interest to the holders of the Class B Certificates in an
amount equal to all Distributable Certificate Interest in respect of the Class
B Certificates for such Distribution Date and, to the extent not previously
paid, for all prior Distribution Dates; fourth, to distributions of principal
to the holders of the Class B Certificates in an amount equal to the sum of the
Certificate Balance of the Class B Certificates outstanding immediately prior
to such Distribution Date, plus any Certificate Negative Amortization in
respect of the Class B Certificates for such Distribution Date; and thereafter,
to distributions to holders of the Private Certificates.
THE TRUSTEE
______, a ______, will act as Trustee on behalf of the
Certificateholders. [The Master Servicer will be responsible for the fees and
normal disbursements of the Trustee.] The Corporate Trust Office of the Trustee
is located at _____. See "Description of the Pooling Agreements-the Trustee",
"-Duties of the Trustee", "-Certain Matters Regarding the Trustee" and
"-Resignation and Removal of the Trustee" in the Prospectus.
YIELD AND MATURITY CONSIDERATIONS
YIELD CONSIDERATIONS
General. The yield on any Offered Certificate will depend on: (i)
the Pass-Through Rate in effect from time to time for such Certificate; (ii) the
price paid for such Certificate and, if the price was other than par, the rate
and timing of payments of principal on such Certificate; and (iii) the
aggregate amount of distributions on such Certificate.
Pass-Through Rate. The Pass-Through Rate applicable to the Class A
Certificates for any Distribution Date will equal LIBOR for such Distribution
Date, plus __ basis points, subject to a maximum of __% per annum and a minimum
of ___% per annum; unless, however, the rate so calculated exceeds the
Funds-Available Cap Rate applicable to the Class A Certificates for such
Distribution Date, in which case the Pass-Through Rate for the Class A
Certificates for such Distribution Date will equal the Weighted Average
Effective Net Mortgage Rate for such date. See "Description of the
Certificates-Distributions-Pass-Through Rates" herein. Accordingly, the yield
on the Class A Certificates, in general, will be highly sensitive to monthly
changes in LIBOR.
Listed below are some historical values of LIBOR since January
1986. LIBOR values may fluctuate significantly over time and may not increase
or decrease in a constant pattern from period to period. The following does not
purport to be representative of future values of LIBOR, and no assurance can be
given as to the value of LIBOR on any LIBOR Adjustment Date.
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<PAGE>
<TABLE>
<CAPTION>
MONTH 1990 1991 1992 1993 1994 1995 1996 1997
- ------ ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January........... % % % % % % % %
February..........
March.............
April.............
May...............
June..............
July..............
August............
September.........
October...........
November..........
December..........
</TABLE>
Whether the Pass-Through Rate for the Class A Certificates for any
Distribution Date will equal the Weighted Average Effective Net Mortgage Rate
rather than the LIBOR-based rate described above will depend on whether and to
what extent LIBOR for that Distribution Date plus __ basis points (subject to
the maximum and minimum rates per annum described above) exceeds the then
Weighted Average Effective Net Mortgage Rate and, if so, whether and to what
extent there then exists an Excess Pool Balance.
Although ___ of the Mortgage Loans, which represent __% of the
Initial Pool Balance, are ARM Loans, future fluctuations in LIBOR will not
necessarily be accompanied by corresponding proportionate changes in the then
Weighted Average Effective Net Mortgage Rate because the Indices upon which
adjustments to the Mortgage Rates for the ARM Loans are based may not rise and
fall in a manner consistent with LIBOR. In particular, the COFI Index, which
serves as the Index for ARM Loans that represent __% of the Initial Pool
Balance, is generally referred to as a lagging index because it tends to rise
and fall more slowly than LIBOR, which is generally referred to as a market
index. See "Description of the Mortgage Pool-Certain Payment Characteristics"
and "-The Eleventh District Cost of Funds Index" herein. Furthermore, the
Mortgage Rates on the ARM Loans may not fully and promptly reflect changes in
the corresponding Indices due to the effect of periodic and lifetime floors and
caps on changes to such Mortgage Rates and the periodicity of Interest Rate
Adjustment Dates for the ARM Loans. [For example, although the initial Weighted
Average Effective Net Mortgage Rate exceeds by __ percentage points the initial
Pass-Through Rate for the Class A Certificates, most of the Mortgage Rates in
effect for the ARM Loans that provide for minimum lifetime Mortgage Rates are
at their minimum permitted lifetime levels. Consequently, an increase of __
percentage points in each of the Indices applicable to the ARM Loans would
result, even if the Mortgage Rates thereon could be contemporaneously adjusted,
in an increase of only ___ percentage points in the Weighted Average Effective
Net Mortgage Rate. A simultaneous increase of ___ percentage points in LIBOR
would therefore narrow, to __ percentage points, the gap between the
Pass-Through Rate for the Class A Certificates and the Weighted Average
Effective Net Mortgage Rate. In addition, changes in the Weighted Average
Effective Net Mortgage Rate from time to time will depend on changes in the
relative composition of the Mortgage Pool as a result of scheduled
amortization, voluntary prepayments and involuntary liquidations of the
Mortgage Loans. See "Description of the Mortgage Pool" herein and "-Yield
Considerations-Rate and Timing of Principal Payments" below.
As described above, whether the Pass-Through Rate on the Class A
Certificates at any time is based on LIBOR or is equal to the then applicable
Weighted Average Effective Net Mortgage Rate may depend in part upon the
presence of Excess Pool Balance, that is, an excess of the aggregate Stated
Principal Balance of the Mortgage Pool over the aggregate Certificate Balance
of all of the Classes of REMIC Regular Certificates. If the sum of monthly
LIBOR for any Distribution Date plus ___ basis points exceeds the Weighted
Average Effective Net Mortgage Rate for such Distribution Date, then the
Pass-Through Rate for the Class A Certificates will equal (subject to a maximum
rate of __% per annum) the higher LIBOR-based rate rather than the lower
Weighted
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<PAGE>
Average Effective Net Mortgage Rate only if the LIBOR-based rate does not
exceed the applicable Funds-Available Cap Rate. The Funds-Available Cap Rate
applicable to the calculation of the Pass-Through Rate in respect of the Class
A Certificates for any Distribution Date is an annualized rate equal to the
product of the Weighted Average Effective Net Mortgage Rate and a fraction,
expressed as a decimal, the numerator of which is the sum of the Certificate
Balance of the Class A Certificates and the Excess Pool Balance immediately
prior to such Distribution Date, and the denominator of which is the
Certificate Balance of the Class A Certificates immediately prior to such
Distribution Date. Accordingly, the Funds-Available Cap Rate rises with the
expansion of the Excess Pool Balance; and, for any Distribution Date, 30 days'
interest at the Weighted Average Effective Net Mortgage Rate for such
Distribution Date accrued on the Excess Pool Balance, if any, immediately prior
thereto represents the maximum amount by which interest accrued on the Class A
Certificates at a LIBOR-based Pass-Through Rate can exceed interest accrued on
such Certificates at the Weighted Average Effective Net Mortgage Rate. See
"Description of the Certificates-Distributions -Pass-Through Rates" herein. The
amount of Excess Pool Balance outstanding from time to time will depend on the
aggregate amount of Excess Funds, and on the aggregate amount of the Class R
Certificates' allocable share (based on the Ownership Percentage evidenced
thereby from time to time) of Distributable Principal Collections and Advances,
in each case applied to amortize the Certificate Balances of the respective
Classes of REMIC Regular Certificates. As discussed under "Description of the
Certificates-Distributions-Priority" herein, __% of Excess Funds, and 100% of
the Class R Certificates' allocable share of Distributable Principal
Collections and Advances, will be so applied on each Distribution Date. Excess
Funds for any Distribution Date will generally equal the amount, if any, by
which (a) the portion of the Available Distribution Amount that represents
interest on the Mortgage Loans, exceeds (b) the sum of (i) the aggregate amount
of Distributable Certificate Interest to be paid in respect of the REMIC
Regular Certificates on such Distribution Date, and (ii) the aggregate
Uncovered Portion of the Certificate Balances of the REMIC Regular Certificates
immediately prior to such Distribution Date.
The Pass-Through Rate applicable to the Class B Certificates for
any Distribution Date will equal the Weighted Average Effective Net Mortgage
Rate for such date. Accordingly, the yield on the Class B Certificates will be
sensitive to (x) adjustments to the Mortgage Rates on the ARM Loans and (y)
changes in the relative composition of the Mortgage Pool as a result of
scheduled amortization, voluntary prepayments and involuntary liquidations of
the Mortgage Loans. See "Description of the Mortgage Pool" herein and "-Yield
Considerations-Rate and Timing of Principal Payments" below.
Rate and Timing of Principal Payments. The yield to holders of
Offered Certificates that are purchased at a discount or premium will be
affected by the rate and timing of principal payments on such Certificates. As
and to the extent described herein, the holders of each Class of Offered
Certificates will be entitled to receive on each Distribution Date their
allocable share (calculated on the basis of the Ownership Percentage evidenced
by such Class of Certificates immediately prior to such date) of the Scheduled
Principal Distribution Amount for such Distribution Date; however, the
Unscheduled Principal Distribution Amount for each Distribution Date will be
distributable entirely in respect of the Class A Certificates, until the
Certificate Balance thereof is reduced to zero, and will thereafter be
distributable entirely in respect of the Class B Certificates. In addition, as
and to the extent described herein, distributions of the Class R Certificates'
allocable share of the Scheduled Principal Distribution Amount for each
Distribution Date will be applied in reduction of the Certificate Balances of
the respective Classes of REMIC Regular Certificates, in reverse alphabetical
order of their Class designations. See "Description of the
Certificates-Distributions-Priority" and "-Distributions-Scheduled Principal
Distribution Amount and Unscheduled Principal Distribution Amount" herein.
Consequently, the rate and timing of principal payments on the Offered
Certificates will be directly related to the rate and timing of principal
payments on or in respect of the Mortgage Loans (including principal
prepayments on the Mortgage Loans resulting from both voluntary prepayments by
the mortgagors and involuntary liquidations). The rate and timing of principal
payments on the Mortgage Loans will in turn be affected by the amortization
schedules thereof, the dates on which Balloon Payments are due and the rate and
timing of principal prepayments and other unscheduled collections thereon
(including for this purpose, collections made in connection with liquidations
of Mortgage Loans due to defaults, casualties or condemnations affecting the
Mortgaged Properties, or purchases of Mortgage
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<PAGE>
Loans out of the Trust Fund). Prepayments and, assuming the respective stated
maturity dates therefor have not occurred, liquidations and purchases of the
Mortgage Loans, will result in distributions on the Offered Certificates of
amounts that would otherwise be distributed over the remaining terms of the
Mortgage Loans. Defaults on the Mortgage Loans, particularly at or near their
stated maturity dates, may result in significant delays in payments of
principal on the Mortgage Loans (and, accordingly, on the Offered Certificates)
while work-outs are negotiated or foreclosures are completed. See "Servicing of
the Mortgage Loans-Modifications, Waivers and Amendments" herein and
"Description of the Pooling Agreements-Realization Upon Defaulted Mortgage
Loans" and "Certain Legal Aspects of Mortgage Loans-Foreclosure" in the
Prospectus.
The extent to which the yield to maturity of any Class of Offered
Certificates may vary from the anticipated yield will depend upon the degree to
which they are purchased at a discount or premium and when, and to what degree,
payments of principal on the Mortgage Loans are in turn distributed on such
Certificates. An investor should consider, in the case of any Offered
Certificate purchased at a discount, the risk that a slower than anticipated
rate of principal payments on the Mortgage Loans could result in an actual
yield to such investor that is lower than the anticipated yield and, in the
case of any Offered Certificate purchased at a premium, the risk that a faster
than anticipated rate of principal payments could result in an actual yield to
such investor that is lower than the anticipated yield. In general, the earlier
a payment of principal on the Mortgage Loans is distributed on an Offered
Certificate purchased at a discount or premium, the greater will be the effect
on an investor's yield to maturity. As a result, the effect on an investor's
yield of principal payments (to the extent distributable on such investor's
Offered Certificates) occurring at a rate higher (or lower) than the rate
anticipated by the investor during any particular period would not be fully
offset by a subsequent like reduction (or increase) in the rate of principal
payments. Because the rate of principal payments on the Mortgage Loans will
depend on future events and a variety of factors (as described more fully
below), no assurance can be given as to such rate or the rate of principal
prepayments in particular. The Sponsor is not aware of any relevant publicly
available or authoritative statistics with respect to the historical prepayment
experience of a large group of mortgage loans comparable to the Mortgage Loans.
The yield to maturity of Offered Certificates that are purchased at
a discount or premium will be similarly affected by payments of principal
thereon made with funds in excess of the Distributable Principal Collections
and Advances to which the holders of such Certificates may be then entitled.
As described herein under "Description of the Certificates-Distributions-
Priority", if there exists an Uncovered Portion of the Certificate Balance of
any Class of REMIC Regular Certificates outstanding immediately prior to a
Distribution Date, distributions will be made, to the extent of the lesser of
available funds and such Uncovered Portion, in reduction of the Certificate
Balance(s) of such Class of REMIC Regular Certificates and each other Class of
REMIC Regular Certificates, if any, with an earlier alphabetical Class
designation, in alphabetical order of such Class designations. Accordingly,
losses incurred in respect of the Mortgage Pool, to the extent creating an
Uncovered Portion of the Certificate Balance of [the Class C] Certificates,
could speed amortization of the Offered Certificates, to the extent described
above, beyond any positive effect on such amortization that would generally
result from liquidations of Mortgage Loans prior to their maturity.
In addition, ___% of the Excess Funds, if any, for each
Distribution Date will be applied in reduction of the Certificate Balances of
the respective Classes of REMIC Regular Certificates, in reverse alphabetical
order of their Class designations. See "Description of the
Certificates-Distributions-Priority" herein. The aggregate amount of Excess
Funds on each Distribution Date will largely be a function of (i) whether the
Class A Certificates are outstanding as of such Distribution Date and, if so,
the extent to which the Pass-Through Rate on the Class A Certificates for such
Distribution Date is higher or lower than the Weighted Average Effective Net
Mortgage Rate for such date, and (ii) the size of the Excess Pool Balance or,
conversely, of the aggregate Uncovered Portion of the Certificate Balances of
the REMIC Regular Certificates immediately prior to such Distribution Date.
Because such variables are in turn dependent on a variety of factors,
including, among other things, monthly fluctuations in LIBOR, adjustments of
the Mortgage Rates on the ARM Loans, the relative composition of the Mortgage
Pool from time to time, and the rate and timing of principal payments and the
S-54
<PAGE>
severity of losses on the Mortgage Loans, no assurance can be given as to the
amount of Excess Funds that will be available on any Distribution Date.
Losses and Shortfalls. The yield to holders of the Offered
Certificates will also depend on the extent to which such holders are required
to bear the effects of any losses or shortfalls on the Mortgage Loans. Losses
and other shortfalls on the Mortgage Loans will, with the exception of any Net
Aggregate Prepayment Interest Shortfalls, generally be borne: first, by the
holders of the Private Certificates, to the extent of amounts otherwise
distributable in respect of their Certificates; second, by the holders of the
Class B Certificates, to the extent of amounts otherwise distributable in
respect of their Certificates; and last, by the holders of the Class A
Certificates. As more fully described herein under "Description of the
Certificates-Distributions-Distributable Certificate Interest", Net Aggregate
Prepayment Interest Shortfalls will generally be borne by the respective
Classes of Certificateholders on a pro rata basis.
Certain Relevant Factors. The rate and timing of principal
payments and defaults and the severity of losses on the Mortgage Loans may be
affected by a number of factors, including, without limitation, prevailing
interest rates, the terms of the Mortgage Loans (for example, Prepayment
Premiums, adjustable Mortgage Rates, amortization terms that require balloon
payments and provisions that permit negative amortization), the demographics
and relative economic vitality of the areas in which the Mortgaged Properties
are located and the general supply and demand for rental units in such areas,
the quality of management of the Mortgaged Properties, the servicing of the
Mortgage Loans, possible changes in tax laws and other opportunities for
investment. See "Risk Factors-The Mortgage Loans" and "Description of the
Mortgage Pool" herein and "Yield and Maturity Considerations-Principal
Prepayments" in the Prospectus.
The rate of prepayment on the Mortgage Pool is likely to be
affected by prevailing market interest rates for mortgage loans of a comparable
type, term and risk level. When the prevailing market interest rate is below a
mortgage coupon, a borrower may have an increased incentive to refinance its
mortgage loan. Although most of the Mortgage Loans are ARM Loans, adjustments
to the Mortgage Rates thereon will generally be limited by lifetime and/or
periodic caps and floors and, in each case, will be based on the related Index
(which may not rise and fall consistently with mortgage interest rates then
available) plus the related Gross Margin (which may be different from margins
then offered on adjustable rate mortgage loans). See "Description of the
Mortgage Pool-Certain Payment Characteristics" and "-The Eleventh District Cost
of Funds Index" herein. As a result, the Mortgage Rates on the ARM Loans at any
time may not be comparable to prevailing market interest rates. In addition, as
prevailing market interest rates decline, and without regard to whether the
Mortgage Rates on the ARM Loans decline in a manner consistent therewith,
related borrowers may have an increased incentive to refinance for purposes of
either (i) converting to a fixed rate loan and thereby "locking in" such rate,
or (ii) taking advantage of an initial "teaser rate" (a mortgage interest rate
below what it would otherwise be if the applicable index and gross margin were
applied) on another adjustable rate mortgage loan. The Mortgage Loans may be
prepaid at any time and, in [most] cases (approximately __% of the Initial Pool
Balance), may be prepaid in whole or in part without payment of a Prepayment
Premium.
Depending on prevailing market interest rates, the outlook for
market interest rates and economic conditions generally, some borrowers may
sell Mortgaged Properties in order to realize their equity therein, to meet
cash flow needs or to make other investments. In addition, some borrowers may
be motivated by Federal and state tax laws (which are subject to change) to
sell Mortgaged Properties prior to the exhaustion of tax depreciation benefits.
The Sponsor makes no representation as to the particular factors
that will affect the rate and timing of prepayments and defaults on the
Mortgage Loans, as to the relative importance of such factors, as to the
percentage of the principal balance of the Mortgage Loans that will be prepaid
or as to which a default will have occurred as of any date or as to the overall
rate of prepayment or default on the Mortgage Loans.
S-55
<PAGE>
Delay in Payment of Distributions. Because monthly distributions
will not be made to Certificateholders until a date that is scheduled to be at
least __ days and as many as __ days following the Due Dates for the Mortgage
Loans during the related Due Period, the effective yield to the holders of the
Offered Certificates will be lower than the yield that would otherwise be
produced by the applicable Pass-Through Rates and purchase prices (assuming
such prices did not account for such delay).
Unpaid Distributable Certificate Interest. As described under
"Description of the Certificates-Distributions-Priority" herein, if the portion
of the Available Distribution Amount distributable in respect of interest on
either Class of Offered Certificates on any Distribution Date is less than the
Distributable Certificate Interest then payable for such Class, the shortfall
will be distributable to holders of such Class of Certificates on subsequent
Distribution Dates, to the extent of available funds. Any such shortfall will
not bear interest, however, and will therefore negatively affect the yield to
maturity of such Class of Certificates for so long as it is outstanding.
WEIGHTED AVERAGE LIFE
The weighted average life of an Offered Certificate refers to the
average amount of time that will elapse from the date of its issuance until
each dollar allocable to principal of such Certificate is distributed to the
investor. The weighted average life of an Offered Certificate will be
influenced by, among other things, the rate at which principal on the Mortgage
Loans is paid or otherwise collected or advanced and by the availability of any
amounts other than Distributable Principal Collections and Advances to amortize
the Certificate Balance of its Class. As and to the extent described herein,
the holders of each Class of Offered Certificates will be entitled to receive
on each Distribution Date their allocable share (calculated on the basis of the
Ownership Percentage evidenced by such Class of Certificates immediately prior
to such date) of the Scheduled Principal Distribution Amount for such
Distribution Date; however, the Unscheduled Principal Distribution Amount for
each Distribution Date will be distributable entirely in respect of the Class A
Certificates, until the Certificate Balance thereof is reduced to zero, and
will thereafter be distributable entirely in respect of the Class B
Certificates. In addition, as and to the extent described herein, distributions
of the Class R Certificates' allocable share of the Scheduled Principal
Distribution Amount for each Distribution Date, together with __% of all Excess
Funds, if any, for such Distribution Date, will be applied in reduction of the
Certificate Balances of the respective Classes of REMIC Regular Certificates,
in reverse alphabetical order of their Class designations; while any
distributions in respect of an Uncovered Portion of the Certificate Balance of
any Class of REMIC Regular Certificates will be applied, to the extent of such
Uncovered Portion, in reduction of the Certificate Balance(s) of such Class of
REMIC Regular Certificates and each other Class of REMIC Regular Certificates,
if any, with an earlier alphabetical Class designation, in alphabetical order
of such Class designations. See "Description of the Certificates-Distributions-
Priority" and "-Distributions-Scheduled Principal Distribution Amount and
Unscheduled Principal Distribution Amount" herein. As a consequence of the
foregoing, the weighted average life of the Class A Certificates will be
shorter, and the weighted average life of the Class B Certificates may be
longer, than would otherwise be the case if Distributable Principal Collections
and Advances and any other amounts being applied in reduction of the
Certificate Balances of the REMIC Regular Certificates were being distributed
on a pro rata basis among the respective Classes thereof.
__ Mortgage Loans, which represent __% of the Initial Pool
Balance, permit negative amortization. Although it is impossible to predict the
degree of Mortgage Loan negative amortization that will actually be experienced
with respect to the Mortgage Pool following the Cut-off Date, the allocation of
negative amortization to any Class of Offered Certificates (and the
corresponding increase in the Certificate Balance of such Class) will have the
effect of extending the weighted average life of such Certificates. As more
fully described herein under "Description of the Certificates-Distributions-
Distributable Certificate Interest", any negative amortization experienced by
the Mortgage Loans during a particular Due Period will be allocated among the
respective Classes of Certificates generally on a pro rata basis on the related
Distribution Date.
S-56
<PAGE>
Prepayments on mortgage loans may be measured by a prepayment
standard or model. The model used in this Prospectus Supplement is the
["Constant Prepayment Rate" or "CPR" model. The CPR model represents an assumed
constant annual rate of prepayment each month, expressed as a per annum
percentage of the then scheduled principal balance of the pool of mortgage
loans. As used in each of the following tables, the column headed "0%" assumes
that none of the Mortgage Loan is prepaid before maturity. The columns headed
"__ %", "__ %", "__ %" and "__%" assume that prepayments on the Mortgage Loans
are made at those CPRs. There is no assurance, however, that prepayments of the
Mortgage Loan will conform to any level of CPR, and no representation is made
that the Mortgage Loans will prepay at the CPRs shown or at any other
prepayment rate.]
The following tables indicate the percentage of the initial
Certificate Balance of each Class of Offered Certificates that would be
outstanding after each of the dates shown at various CPRs and the corresponding
weighted average life of each such Class of Offered Certificates. The tables
have been prepared on the basis of the following assumptions, among others:
[(i) scheduled monthly payments of principal and interest on the Mortgage Loans
will be timely received (with no defaults) and will be distributed on the 25th
day of each month commencing in ____ 199__ ; (ii) the Mortgage Rate in effect
for each Mortgage Loan as of the Cut-off Date will remain in effect (a) in the
case of each Fixed Rate Loan, to maturity and, (b) in the case of each ARM
Loan, until its next Interest Rate Adjustment Date, when a new Mortgage Rate
that is to remain in effect to maturity will be calculated reflecting the value
of the related Index as of _____,199__, subject to such Mortgage Loan's
lifetime and/or periodic rate caps and floors, if any; (iii) all Mortgage Loans
accrue and pay interest on a 360/360 basis; (iv) the monthly principal and
interest payment due for each Mortgage Loan on the first Due Date following the
Cut-off Date will continue to be due (a) in the case of each Fixed Rate Loan,
on each Due Date until maturity and, (b) in the case of each ARM Loan, until
its next Payment Adjustment Date, when a new payment that is to be due on each
Due Date until maturity will be calculated reflecting the appropriate Mortgage
Rate and remaining amortization term, subject to such Mortgage Loan's periodic
payment cap or negative amortization limits, if any; (v) principal prepayments
on the Mortgage Loans will be received on their respective Due Dates at the
respective CPRs set forth in the tables, and there will be no Net Aggregate
Prepayment Interest Shortfalls in connection therewith; (vi) the Mortgage Loan
Seller will not be required to repurchase any Mortgage Loan, and the Master
Servicer will not exercise its option to purchase all the Mortgage Loans and
thereby cause an early termination of the Trust Fund; and (vii) the
Pass-Through Rate for the Class A Certificates will remain at ___% per annum.]
To the extent that the Mortgage Loans have characteristics that differ from
those assumed in preparing the tables set forth below, each Class of the
Offered Certificates may mature earlier or later than indicated by the tables.
It is highly unlikely that the Mortgage Loans will prepay at any constant rate
until maturity or that all the Mortgage Loans will prepay at the same rate. In
addition, variations in the actual prepayment experience and the balance of the
Mortgage Loans that prepay may increase or decrease the percentages of initial
Certificate Balances (and weighted average lives) shown in the following
tables. Such variations may occur even if the average prepayment experience of
the Mortgage Loans were to equal any of the specified CPR percentages.
Investors are urged to conduct their own analyses of the rates at
which the Mortgage Loans may be expected to prepay.
S-57
<PAGE>
Based on the foregoing assumptions, the following table indicates
the resulting weighted average lives of the Class A Certificates and sets forth
the percentage of the initial Certificate Balance of the Class A Certificates
that would be outstanding after each of the dates shown at the indicated CPRs.
PERCENT OF THE INITIAL CERTIFICATE BALANCE OF THE
CLASS A CERTIFICATES AT THE RESPECTIVE CPRS
SET FORTH BELOW:
<TABLE>
<CAPTION>
Date 0% % % % %
- ---- -- - - - -
<S> <C> <C> <C> <C> <C>
Delivery Date............................................................ 100.0 100.0 100.0 100.0 100.0
____________25, 1998............................................
____________25, 1999............................................
____________25, 2000............................................
____________25, 2001............................................
____________25, 2002............................................
____________25, 2003............................................
____________25, 2004............................................
____________25, 2005............................................
Weighted Average Life (years)(A) ...........
</TABLE>
- ----------
(A) The weighted average life of a Class A Certificate is determined by
(i) multiplying the amount of each principal distribution thereon
by the number of years from the date of issuance of the Class A
Certificates to the related Distribution Date, (ii) summing the
results and (iii) dividing the sum by the aggregate amount of the
reductions in the principal balance of such Class A Certificate.
S-58
<PAGE>
Based on the foregoing assumptions, the following table indicates
the resulting weighted average lives of the Class B Certificates and sets forth
the percentage of the initial Certificate Balance of the Class B Certificates
that would be outstanding after each of the dates shown at the indicated CPRs.
PERCENT OF THE INITIAL CERTIFICATE BALANCE OF THE
CLASS B CERTIFICATES AT THE RESPECTIVE CPRS
SET FORTH BELOW:
<TABLE>
<CAPTION>
Date 0% % % % %
- ---- -- - - - -
<S> <C> <C> <C> <C> <C>
Delivery Date................................................... 100.0 100.0 100.0 100.0 100.0
____________25, 1998............................................
____________25, 1999............................................
____________25, 2000............................................
____________25, 2001............................................
____________25, 2002............................................
____________25, 2003............................................
____________25, 2004............................................
____________25, 2005............................................
____________25, 2006............................................
Weighted Average Life (years)(A) ...........
</TABLE>
- --------------
(A) The weighted average life of a Class B Certificate is determined by
(i) multiplying the amount of each principal distribution thereon
by the number of years from the date of issuance of the Class B
Certificates to the related Distribution Date, (ii) summing the
results and (iii) dividing the sum by the aggregate amount of the
reductions in the principal balance of such Class B Certificate.
S-59
<PAGE>
USE OF PROCEEDS
Substantially all of the proceeds from the sale of the Offered
Certificates will be used by the Sponsor to purchase the Mortgage Loans and to
pay certain expenses in connection with the issuance of the Certificates.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, ________________,
counsel to the Sponsor, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the Pooling and Servicing Agreement,
for federal income tax purposes, the Trust Fund will qualify as a REMIC under
the Internal Revenue Code of 1986 (the "Code"). For federal income tax
purposes, the Class R Certificates will be the sole class of "residual
interests" in the Trust Fund, and the Class A, Class B and Class C Certificates
will be the "regular interests" in the Trust Fund and will be treated as debt
instruments of the REMIC. See "Material Federal Income Tax Consequences-REMICs"
in the Prospectus.
The _____ Certificates [may] [will] [will not] be treated as having
been issued with original issue discount for Federal income tax reporting
purposes. The prepayment assumption that will be used in determining the rate
of accrual of [original issue discount,] market discount and premium, if any,
for federal income tax purposes will be based on the assumption that subsequent
to the date of any determination the Mortgage Loans will prepay at a rate equal
to [a CPR of __%]. No representation is made that the Mortgage Loans will
prepay at that rate or at any other rate. See "Material Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Regular Certificates-Original
Issue Discount" in the Prospectus.
The _____ Certificates may be treated for Federal income tax
purposes as having been issued at a premium. Whether any holder of [either]
such Class of Certificates will be treated as holding a Certificate with
amortizable bond premium will depend on such Certificateholder's purchase price
and the distributions remaining to be made on such Certificate at the time of
its acquisition by such Certificateholder. Holders of [each] such Class of
Certificates should consult their own tax advisors regarding the possibility of
making an election to amortize such premium. See "Material Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Regular Certificates-Premium"
in the Prospectus.
The Offered Certificates will be treated as "loans secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C) of the
Code, and "real estate assets" within the meaning of Section 856(c)(5)(B) of
the Code, and interest (including original issue discount, if any) on the
Offered Certificates will be interest described in Section 856(c)(3)(B) of the
Code. Moreover, the Offered Certificates will be "obligation[s]....which....
[are] principally secured by an interest in real property" within the meaning
of Section 860(G)(a)(3) of the Code. See "Material Federal Income Tax
Consequences-REMICs-Characterization of Investments in REMIC Certificates" in
the Prospectus.
_____, a _____, will act as REMIC Administrator for the Trust Fund.
[The Master Servicer will be responsible for the fees and normal disbursements
of the REMIC Administrator.] See "Material Federal Income Tax
Consequences-REMICs-Reporting and Other Administrative Matters" and
"Description of the Pooling Agreements-Certain Matters Regarding the Master
Servicer, the Special Servicer, the REMIC Administrator and the Sponsor",
"-Events of Default" and "-Rights Upon Event of Default" in the Prospectus.
For further information regarding the federal income tax
consequences of investing in the Offered Certificates, see "Material Federal
Income Tax Consequences-REMICs" in the Prospectus.
S-60
<PAGE>
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plan
or arrangement, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which such
plans, accounts or arrangements are invested, that is subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975
of the Code (each, a "Plan") should carefully review with its legal advisors
whether the purchase or holding of Offered Certificates could give rise to a
transaction that is prohibited or is not otherwise permitted either under ERISA
or Section 4975 of the Code or whether there exists any statutory or
administrative exemption applicable thereto.
[The U.S. Department of Labor issued to Citicorp an individual
prohibited transaction exemption, Prohibited Transaction Exemption 90-88 (the
"Exemption"), which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Sections 4975(a) and (b) of the Code
and Section 501 (i) of ERISA, certain transactions, among others, relating to
the servicing and operation of mortgage pools, such as the Mortgage Pool, and
the purchase, sale and holding of mortgage pass-through certificates, such as
the Class A Certificates, underwritten by an Underwriter (as hereinafter
defined), provided that certain conditions set forth in the Exemption are
satisfied. For purposes of this Section "ERISA Considerations", the term
"Underwriter" shall include (a) Citicorp, (b) any person directly or
indirectly, through one or more intermediaries, controlling, controlled by or
under common control with Citicorp (such as [Citicorp Securities, Inc.]
[Citibank, N.A.]), and (c) any member of the underwriting syndicate or selling
group of which a person described in (a) or (b) is a manager or co-manager with
respect to the Class A Certificates.
The Exemption sets forth six general conditions which must be
satisfied for a transaction involving the purchase, sale and holding of the
Class A Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of the Class A Certificates by a Plan must be on terms that are at
least as favorable to the Plan as they would be in an arm's-length transaction
with an unrelated party. Second, the rights and interests evidenced by the
Class A Certificates must not be subordinated to the rights and interests
evidenced by the other certificates of the same trust. Third, the Class A
Certificates at the time of acquisition by the Plan must be rated in one of the
three highest generic rating categories by Standard & Poor's Corporation
("Standard & Poor's"), Moody's Investors Service, Inc. ("Moody's"), Duff &
Phelps Credit Rating Co. ("Duff & Phelps") or Fitch Investors Service, Inc.
("Fitch"). Fourth, the Trustee cannot be an affiliate of any other member of
the "Restricted Group", which consists of any Underwriter, the Sponsor, the
Trustee, the Master Servicer, the Special Servicer, any sub-servicer, and any
mortgagor with respect to Mortgage Loans constituting more than 5 % of the
aggregate unamortized principal balance of the Mortgage Loans as of the date of
initial issuance of the Class A Certificates. Fifth, the sum of all payments
made to and retained by the Underwriter must represent not more than reasonable
compensation for underwriting the Class A Certificates; the sum of all payments
made to and retained by the Sponsor pursuant to the assignment of the Mortgage
Loans to the Trust Fund must represent not more than the fair market value of
such obligations; and the sum of all payments made to and retained by the
Master Servicer, the Special Servicer and any sub-servicer must represent not
more than reasonable compensation for such person's services under the Pooling
and Servicing Agreement and reimbursement of such person's reasonable expenses
in connection therewith. Sixth, the investing Plan must be an accredited
investor as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
Because the Class A Certificates are not subordinated to any other
Class of Certificates, the second general condition set forth above is
satisfied with respect to such Certificates. It is a condition of the issuance
of the Class A Certificates that they be rated not lower than "__" by
___________. As of the Delivery Date, the fourth general condition set forth
above will be satisfied with respect to the Class A Certificates. A fiduciary
of a Plan contemplating purchasing a Class A Certificate in the secondary
market must make its own determination that, at the time of such purchase, the
Class A Certificates continue to satisfy the third and fourth general
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<PAGE>
conditions set forth above. A fiduciary of a Plan contemplating purchasing a
Class A Certificate, whether in the initial issuance of such Certificates or in
the secondary market, must make its own determination that the first, fifth and
sixth general conditions set forth above will be satisfied with respect to such
Class A Certificate.
[The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) certificates in such other
investment pools must have been rated in one of the three highest categories of
Standard & Poor's, Moody's, Duff & Phelps or Fitch for at least one year prior
to the Plan's acquisition of Class A Certificates; and (iii) certificates in
such other investment pools must have been purchased by investors other than
Plans for at least one year prior to any Plan's acquisition of Class A
Certificates. [The Sponsor has confirmed to its satisfaction that such
requirements have been satisfied as of the date hereof.]]
If the general conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a) and 407(a) of ERISA (as well as the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Sections 4975(c)(1) (A) through (D) of
the Code) in connection with (i) the direct or indirect sale, exchange or
transfer of Class A Certificates in the initial issuance of Certificates
between the Sponsor or an Underwriter and a Plan when the Sponsor, the
Underwriter, the Trustee, the Master Servicer, the Special Servicer, a
Sub-Servicer or a mortgagor is a Party in Interest with respect to the
investing Plan, (ii) the direct or indirect acquisition or disposition in the
secondary market of the Class A Certificates by a Plan and (iii) the holding of
Class A Certificates by a Plan. However, no exemption is provided from the
restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the
acquisition or holding of a Class A Certificate on behalf of an "Excluded Plan"
by any person who has discretionary authority or renders investment advice with
respect to the assets of such Excluded Plan. For purposes hereof, an Excluded
Plan is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied,
the Exemption may provide an exemption from the restrictions imposed by
Sections 406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section
4975(c)(1)(E) of the Code in connection with (1) the direct or indirect sale,
exchange or transfer of Class A Certificates in the initial issuance of
Certificates between the Sponsor or an Underwriter and a Plan when the person
who has discretionary authority or renders investment advice with respect to
the investment of Plan assets in such Certificates is (a) a mortgagor with
respect to 5% or less of the fair market value of the Mortgage Loans or (b) an
affiliate of such a person, (2) the direct or indirect acquisition or
disposition in the secondary market of Class A Certificates by a Plan and (3)
the holding of Class A Certificates by a Plan.
Further, if certain specific conditions of the Exemption are
satisfied, the Exemption may provide an exemption from the restrictions imposed
by Sections 406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code
for transactions in connection with the servicing, management and operation of
the Mortgage Pool. [The Sponsor expects that the specific conditions of the
Exemption required for this purpose will be satisfied with respect to the Class
A Certificates.]
The Exemption also may provide an exemption from the restrictions
imposed by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Sections 4975(c)(1) (A)
through (D) of the Code if such restrictions are deemed to otherwise apply
merely because a person is deemed to be a Party in Interest with respect to an
investing Plan by virtue of providing services to the Plan (or by virtue of
having certain specified relationships to such a person) solely as a result of
the Plan's ownership of Offered Certificates.
[Before purchasing a Class A Certificate, a fiduciary of a Plan
should itself confirm that (i) the Class A Certificates constitute
"certificates" for purposes of the Exemption and (ii) the specific and general
conditions and the other requirements set forth in the Exemption would be
satisfied. In addition to making its own determination as to the availability
of the exemptive relief provided in the Exemption, the Plan fiduciary should
S-62
<PAGE>
consider the availability of any other prohibited transaction exemptions. See
"ERISA Considerations" in the Prospectus. A purchaser of a Class A Certificate
should be aware, however, that even if the conditions specified in one or more
exemptions are satisfied, the scope of relief provided by an exemption may not
cover all acts which might be construed as prohibited transactions.]
[Because the characteristics of the Class B Certificates do not
meet the requirements of the Exemption, the purchase or holding of such
Certificates by a Plan may result in prohibited transactions or the imposition
of excise taxes or civil penalties. As a result,] no transfer of a [Class B]
Certificate or any interest therein may be made to a Plan or to any person who
is directly or indirectly purchasing such [Class B] Certificate or interest
therein on behalf of, as named fiduciary of, as trustee of, or with assets of a
Plan, unless the prospective transferee provides the Certificate Registrar with
a certification of facts and an opinion of counsel which establish to the
satisfaction of the Certificate Registrar that such transfer will not result in
a violation of Section 406 of ERISA or Section 4975 of the Code or cause the
Master Servicer, the Special Servicer or the Trustee to be deemed a fiduciary
of such Plan or result in the imposition of an excise tax under Section 4975 of
the Code. See "ERISA Considerations" in the Prospectus.
Any Plan fiduciary considering whether to purchase an Offered
Certificate on behalf of a Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment.
LEGAL INVESTMENT
[As long as the Class A Certificates are rated in one of the two
highest rating categories by at least one nationally recognized statistical
rating organization, the Class A Certificates will constitute "mortgage related
securities" within the meaning of the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA"), and as such will be legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including depository institutions, life insurance companies and pension funds)
created pursuant to or existing under the laws of the United States or of any
State whose authorized investments are subject to state regulation to the same
extent that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Under SMMEA, however,
if a State enacted legislation on or prior to October 3, 1991 specifically
limiting the legal investment authority of any such entities with respect to
"mortgage related securities," such securities will constitute legal
investments for entities subject to such legislation only to the extent
provided therein. Certain States have enacted legislation which overrides the
preemption provisions of SMMEA.
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 with "mortgage related securities" without limitation as to the percentage
of their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe.]
The [Class B] Certificates will not be "mortgage related
securities" for purposes of SMMEA. As a result, the appropriate
characterization of the [Class B] Certificates under various legal investment
restrictions, and thus the ability of investors subject to these restrictions
to purchase the [Class B] Certificates, is subject to significant interpretive
uncertainties.
The Sponsor makes no representation as to the ability of particular
investors to purchase the Offered Certificates under applicable legal
investment or other restrictions. All institutions whose investment activities
are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory
S-63
<PAGE>
authorities should consult with their own legal advisors in determining whether
and to what extent the Offered Certificates constitute legal investments for
them or are subject to investment, capital or other restrictions.
See "Legal Investment" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Sponsor and the Underwriter, the Offered Certificates
will be purchased from the Sponsor by the Underwriter, an affiliate of the
Sponsor, upon issuance. Proceeds to the Sponsor from the sale of the Offered
Certificates, before deducting expenses payable by the Sponsor estimated to be
approximately $____, will be __ % of the initial aggregate Certificate Balance
thereof, plus accrued interest.
Distribution of the Offered 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. The Underwriter may effect
such transactions by selling the Offered Certificates to or through dealers,
and such dealers' may receive compensation in the form of underwriting
discounts, concessions or commissions from the Underwriter. In connection with
the purchase and sale of the Offered Certificates, the Underwriter may be
deemed to have received compensation from the Sponsor in the form of
underwriting discounts. The Underwriter and any dealers that participate with
the Underwriter in the distribution of the Offered Certificates may be deemed
to be underwriters and any profit on the resale of the Offered Certificates
positioned by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended (the "Securities Act").
Purchasers of the Offered Certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to he
"underwriters" within the meaning of the Securities Act in connection with
reoffers and sales by them of Offered Certificates. Certificateholders should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
The Sponsor also has been advised by the Underwriter that it
presently intends to make a market in the Offered Certificates; however, it has
no obligation to do so, any market making may be discontinued at any time and
there can be no assurance that an active public market for the Offered
Certificates will develop. See "Risk Factors-Limited Liquidity" herein and
"Risk Factors-Certain Factors Adversely Affecting Resale of the Offered
Certificates" in the Prospectus.
THE SPONSOR HAS AGREED TO INDEMNIFY THE UNDERWRITER AND EACH
PERSON, IF ANY, WHO CONTROLS THE UNDERWRITER WITHIN THE MEANING OF SECTION 15
OF THE SECURITIES ACT AGAINST, OR MAKE CONTRIBUTIONS TO THE UNDERWRITER AND
EACH SUCH CONTROLLING PERSON WITH RESPECT TO, CERTAIN LIABILITIES, INCLUDING
LIABILITIES UNDER THE SECURITIES ACT.
LEGAL MATTERS
Certain legal matters will be passed upon for the Sponsor by
Stephen E. Dietz, as an Associate General Counsel of Citibank, N.A., and for
the Underwriter by __________, New York, New York. Mr. Dietz owns or has the
right to acquire a number of shares of common stock of Citicorp equal to less
than .01% of the outstanding common stock of Citicorp. __________ will act as
special tax counsel to the Sponsor with respect to certain federal income tax
and ERISA matters.
RATING
It is a condition to issuance that the Class A Certificates be
rated not lower than "__", and the Class B Certificates be rated not lower than
"_", by ______.
S-64
<PAGE>
A securities rating on mortgage pass-through certificates addresses
the likelihood of the receipt by holders thereof of payments to which they are
entitled. The rating takes into consideration the credit quality of the
mortgage pool, structural and legal aspects associated with the certificates,
and the extent to which the payment stream from the mortgage pool is adequate
to make payments required under the certificates. The ratings on the Offered
Certificates do not, however, constitute a statement regarding frequency of
prepayments on the Mortgage Loans.
There can be no assurance as to whether any rating agency not
requested to rate the Offered Certificates will nonetheless issue a rating to
either or both Classes thereof and, if so, what such rating or ratings would
be. A rating assigned to either Class of Offered Certificates by a rating
agency that has not been requested by the Sponsor to do so may be lower than
the rating assigned thereto by ______.
The ratings on the Offered Certificates should be evaluated
independently from similar ratings on other types of securities. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating agency.
See "Risk Factors-Limited Nature of Credit Ratings" in the Prospectus.
S-65
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
<S> <C>
360/360 basis...................................................................S-45
Accrued Certificate Interest ...................................................S-46
Advance.........................................................................S-50
Aggregate Mortgage Loan Negative Amortization..............................S-6, S-46
ARM Loans .............................................................ii, S-3, S-21
Available Distribution Amount .............................................S-9, S-42
Balloon Payment ...........................................................S-4, S-22
Certificate Balance ..............................................................ii
Certificate Negative Amortization .........................................S-6, S-47
Certificate Registrar ..........................................................S-41
Certificates .................................................................i, S-1
Class .............................................................................i
Class A Certificate Owner .......................................................S-2
Code .....................................................................S-14, S-62
COFI ARM Loans ........................................................ii, S-3, S-21
COFI Index ..................................................................ii, S-3
Compensating Interest Payment ............................................S-13, S-38
Constant Prepayment Rate .......................................................S-58
Corporate Trust Office .........................................................S-52
CPR ............................................................................S-58
Custodian ......................................................................S-33
Cut-off Date .....................................................................ii
Cut-off Date Balance ............................................................S-4
Cut-off Date LTV Ratio .........................................................S-30
Debt Service Coverage Ratio ....................................................S-30
Definitive Class A Certificate ..................................................S-2
Delivery Date .....................................................................i
Determination Date .............................................................S-42
Distributable Certificate Interest .......................................S-11, S-46
Distributable Principal Collections and Advances ........................S-12, S-47
Distribution Date ....................................................S-2, S-8, S-42
Distribution Date Statement.....................................................S-50
DTC..............................................................................S-1
Due Date.........................................................................S-3
Due Period ................................................................S-8, S-42
Duff & Phelps ..................................................................S-63
Effective Net Mortgage Rate ...............................................S-8, S-45
ERISA ....................................................................S-15, S-63
ERISA Considerations ...........................................................S-63
Exemption.......................................................................S-63
Excess Funds .............................................................S-11, S-44
Excess Pool Balance .......................................................S-6, S-41
FHILB of San Francisco .........................................................S-22
Fitch...........................................................................S-63
Fixed Rate Loans ......................................................ii, S-3, S-21
Form 8-K........................................................................S-35
Funds-Available Cap Rate ..............................................ii, S-8, S-45
Gross Margin.....................................................................S-3
Index .................................................................ii, S-3, S-20
Initial Pool Balance..............................................................ii
Interest Rate Adjustment Date ...................................................S-3
LIBO............................................................................S-45
LIBOR .....................................................................S-8, S-44
LIBOR Adjustment Date...........................................................S-45
Master Servicing Fee............................................................S-39
Monthly Payments ............................................................ii, S-3
Moody's.........................................................................S-63
Mortgage .......................................................................S-20
Mortgage File ..................................................................S-33
Mortgage Loan Purchase Agreement ..........................................S-2, S-32
Mortgage Loan Seller .......................................................ii, S-21
Mortgage Loan(s) ...........................................................ii, S-48
Mortgage Note ..................................................................S-20
Mortgage Pool ..............................................................ii, S-58
Mortgage Rate ...............................................................ii, S-3
Mortgaged Property ........................................................S-3, S-20
Net Aggregate Prepayment Interest Shortfall ..............................S-13, S-46
Net Mortgage Rate .........................................................S-8, S-45
Net Operating Income............................................................S-30
Nonrecoverable P&I Advance .....................................................S-49
Offered Certificates....................................................i, S-1, S-41
Ownership Percentage............................................................S-47
P&I Advance ..............................................................S-12, S-49
Participants.....................................................................S-2
Pass-Through Rate ................................................................ii
Payment Adjustment Date .........................................................S-3
Payment Cap(s).............................................................S-3, S-22
Penalty Charges ................................................................S-38
Percentage Interest.............................................................S-44
Permitted Investments ..........................................................S-37
Plan......................................................................S-15, S-63
Pooling and Servicing Agreement ...........................................S-5, S-40
Prepayment Interest Excess ...............................................S-13, S-38
Prepayment Interest Shortfall ............................................S-13, S-38
Prepayment Premiums ............................................................S-22
Private Certificates ......................................................S-1, S-41
Purchase Price..................................................................S-33
Rating Agenc[ies] ..............................................................S-16
Record Date .....................................................................S-9
Reimbursement Rate........................................................S-13, S-50
Related Proceeds ...............................................................S-49
REMIC .....................................................................iii, S-14
REMIC Regular Certificates ...........................................iii, S-2, S-41
REO Loan(s) ....................................................................S-48
REO Property .......................................................S-12, S-36, S-40
Reserve Interest Rate...........................................................S-46
Scheduled Principal Distribution Amount ..................................S-11, S-47
Securities Act..................................................................S-66
Servicing Fees .................................................................S-37
SMMEA ....................................................................S-16, S-65
Special Servicing Fee ..........................................................S-37
Specially Serviced Mortgage Assets .............................................S-36
Specially Serviced Mortgage Loans ..............................................S-36
Sponsor ..........................................................................ii
Standard & Poor's...............................................................S-63
Stated Principal Balance ..................................................S-7, S-47
Subordinate Certificates .................................................S-13, S-48
The Depositor .....................................................................i
Treasury Index...................................................................S-3
Trust Fund ..................................................................ii, S-6
Uncovered Portion..........................................................S-6, S-49
Underwriter ............................................................i, S-1, S-63
Unscheduled Principal Distribution Amount ................................S-11, S-47
Weighted Average Effective Net Mortgage Rate....................................S-45
Workout Fee................................................................S-7, S-37
Workout Fee Rate................................................................S-37
</TABLE>
S-66
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted without the delivery of a final form of this
prospectus supplement and the prospectus to which it relates. This prospectus
supplement and the prospectus to which it relates shall not constitute an offer
to sell or the solicitation of an offer to buy nor shall there be any sale of
these securities in any State in which such offer, solicitation or sale would
be unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED SEPTEMBER 28, 1998
P R O S P E C T U S
MORTGAGE CAPITAL FUNDING, INC.
(SPONSOR)
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
The mortgage pass-through certificates (the "Offered Certificates")
offered hereby and by the supplements hereto (each, a "Prospectus Supplement")
will be offered from time to time in series. The Offered Certificates of each
series, together with any other mortgage pass-through certificates of such
series, are collectively referred to herein as the "Certificates".
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any series, the
"Trust Fund") consisting primarily of a segregated pool (a "Mortgage Asset
Pool") of one or more of various types of multifamily or commercial real estate
loans or participations therein (the "Mortgage Loans"), mortgage-backed
securities ("MBS") that evidence interests in, or that are secured by pledges
of, one or more of various types of multifamily or commercial real estate
loans, or a combination of Mortgage Loans and MBS (collectively, "Mortgage
Assets"). If so specified in the related Prospectus Supplement, the Trust Fund
for a series of Certificates may include letters of credit, insurance policies,
guarantees, reserve funds or other types of credit support, or any combination
thereof (with respect to any series, collectively, "Credit Support"), and
currency or interest rate exchange agreements and other financial assets, or
any combination thereof (with respect to any series, collectively, "Cash Flow
Agreements"). See "Description of the Trust Funds", "Description of the
Certificates" and "Description of Credit Support".
As described in the related Prospectus Supplement, the Certificates of
each series, including the Offered Certificates of such series, may consist of
one or more classes of Certificates that: (i) provide for the accrual of
interest thereon based on a fixed, variable or adjustable interest rate; (ii)
are senior or subordinate to one or more other classes of Certificates in
entitlement to certain distributions on the Certificates; (iii) are entitled to
distributions of principal, with disproportionately small, nominal or no
distributions of interest; (iv) are entitled to distributions of interest, with
disproportionately small, nominal or no distributions of principal; (v) provide
for distributions of interest thereon or principal thereof that commence only
following the occurrence of certain events, such as the retirement of one or
more other classes of Certificates of such series; (vi) provide for
distributions of principal thereof to be made, from time to time or for
designated periods, at a rate that is faster (and, in some cases, substantially
faster) or slower (and, in some cases, substantially slower) than the rate at
which payments or other collections of principal are received on the Mortgage
Assets in the related Trust Fund; or (vii) provide for distributions of
principal thereof to be made, subject to available funds, based on a specified
principal payment schedule or other methodology. See "Description of the
Certificates".
(cover continued on next page)
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE 14 AND SUCH
INFORMATION AS MAY BE SET FORTH UNDER THE CAPTION "RISK FACTORS" IN THE RELATED
PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The Offered Certificates of any series may be offered through one or
more different methods, including offerings through underwriters, as more fully
described under "Method of Distribution" and in the related Prospectus
Supplement.
Prior to issuance there will have been no market for the Certificates
of any series and there can be no assurance that a secondary market for any
Offered Certificates will develop or that, if it does develop, it will
continue. See "Risk Factors".
This Prospectus may not be used to consummate sales of the Offered
Certificates of any series unless accompanied by the Prospectus Supplement for
such series.
September __, 1998
<PAGE>
(cover continued)
Distributions in respect of the Certificates of each series will be made
on a monthly, quarterly, semi-annual, annual or other periodic basis as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, such distributions will be made only from
the assets of the related Trust Fund. No series of Certificates will represent
an obligation of or interest in the Sponsor or any of its affiliates, except to
the limited extent described herein and in the related Prospectus Supplement.
Neither the Certificates of any series nor the assets in any Trust Fund will be
guaranteed or insured by any governmental agency or instrumentality or by any
other person, unless otherwise provided in the related Prospectus Supplement.
The assets in each Trust Fund will be held in trust for the benefit of the
holders of the related series of Certificates (the "Certificateholders")
pursuant to a Pooling Agreement, as more fully described herein.
The yield on each class of Certificates of a series will be affected by,
among other things, the rate of payment of principal (including prepayments) on
the Mortgage Assets in the related Trust Fund and the timing of receipt of such
payments as described herein and in the related Prospectus Supplement. See
"Yield and Maturity Considerations". A Trust Fund may be subject to early
termination under the circumstances described herein and in the related
Prospectus Supplement. See "Description of the Certificates".
If so provided in the related Prospectus Supplement, one or more
elections may be made to treat the related Trust Fund or a designated portion
thereof as a "real estate mortgage investment conduit" (a "REMIC") for federal
income tax purposes. See "Material Federal Income Tax Consequences" herein.
2
<PAGE>
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement
relating to each series of Offered Certificates will, among other things, set
forth, as and to the extent appropriate: (i) a description of the class or
classes of such Offered Certificates, including the payment provisions with
respect to each such class, the aggregate principal amount of each such class
(the "Certificate Balance"), the rate at which interest accrues from time to
time, if at all, with respect to each such class (the "Pass-Through Rate") or
the method of determining such rate, and whether interest with respect to each
such class will accrue from time to time on its aggregate principal amount or a
specified notional amount, if at all; (ii) information with respect to any
other classes of Certificates of the same series; (iii) the respective dates on
which distributions are to be made; (iv) information as to the assets
constituting the related Trust Fund, including the general characteristics of
the assets included therein, including the Mortgage Assets and any Credit
Support and Cash Flow Agreements (with respect to the Certificates of any
series, the "Trust Assets"); (v) the circumstances, if any, under which the
related Trust Fund may be subject to early termination; (vi) additional
information with respect to the method of distribution of such Offered
Certificates; (vii) the initial percentage ownership interest in the related
Trust Fund to be evidenced by each class of Certificates of such series; (viii)
information concerning the trustee (as to any series, the "Trustee") of the
related Trust Fund; (ix) if the related Trust Fund includes Mortgage Loans,
information concerning the master servicer (as to any series, the "Master
Servicer") and, if different than the Master Servicer, the special servicer (as
to any series, the "Special Servicer") of such Mortgage Loans and the
circumstances under which all or a portion, as specified, of the servicing of a
Mortgage Loan would transfer from the Master Servicer to the Special Servicer;
(x) whether one or more REMIC elections will be made, the designation of the
"regular interests" and "residual interests" in each REMIC to be created and
the identity of the person (the "REMIC Administrator") responsible for the
various tax-related administrative duties in respect of each REMIC to be
created; (xi) information as to the nature and extent of subordination of any
class of Certificates of such series, including a class of Offered
Certificates; and (xii) whether such Offered Certificates will be initially
issued in definitive or book-entry form.
AVAILABLE INFORMATION
The Sponsor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a part)
under the Securities Act of 1933, as amended, with respect to the Offered
Certificates. This Prospectus and the Prospectus Supplement relating to each
series of Offered Certificates contain summaries of the material terms of the
documents referred to herein and therein, but do not contain all of the
information set forth in the Registration Statement pursuant to the rules and
regulations of the Commission. For further information, reference is made to
such Registration Statement and the exhibits thereto. Such Registration
Statement and exhibits can be inspected and copied at prescribed rates at the
public reference facilities maintained by the Commission at its Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
Regional Offices located as follows: Midwest Regional Office, Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and
Northeast Regional Office, Seven World Trade Center, Suite 1300, New York, New
York 10048. The Commission maintains a Web site at http://www.sec.gov
containing reports, proxy and information statements and other information
regarding registrants, including the Sponsor, that file electronically with the
Commission.
No person has been authorized to give any information or to make any
representation not contained in this Prospectus and any related Prospectus
Supplement and, if given or made, such information or representation must not
be relied upon. This Prospectus and any related Prospectus Supplement do not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the Offered Certificates, or an offer of the Offered
3
<PAGE>
Certificates to any person in any state or other jurisdiction in which such
offer would be unlawful. The delivery of this Prospectus at any time does not
imply that information herein is correct as of any time subsequent to its date;
however, if any material change occurs while this Prospectus is required by law
to be delivered, this Prospectus will be amended or supplemented accordingly.
The related Master Servicer or Trustee will be required to mail to
holders of the Offered Certificates of each series periodic unaudited reports
concerning the related Trust Fund. If beneficial interests in a class or series
of Offered Certificates are being held and transferred in book-entry format
through the facilities of The Depository Trust Company ("DTC") as described
herein, then unless otherwise provided in the related Prospectus Supplement,
such reports will be sent on behalf of the related Trust Fund to a nominee of
DTC as the registered holder of the Offered Certificates. Conveyance of notices
and other communications by DTC to its participating organizations, and
directly or indirectly through such participating organizations to the
beneficial owners of the applicable Offered Certificates, will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time. See "Description of the
Certificates--Reports to Certificateholders" and "--Book-Entry Registration and
Definitive Certificates" and "Description of the Pooling Agreements--Evidence
as to Compliance."
The Sponsor or the Trustee will file or cause to be filed with the
Commission such periodic reports with respect to each Trust Fund as are
required under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations of the Commission thereunder. The Sponsor
intends to make a written request to the staff of the Commission that the staff
either (i) issue an order pursuant to Section 12(h) of the Exchange Act
exempting the Sponsor from certain reporting requirements under the Exchange
Act with respect to each Trust Fund or (ii) state that the staff will not
recommend that the Commission take enforcement action if the Sponsor fulfills
its reporting obligations as described in its written request. If such request
is granted, the Sponsor will file or cause to be filed with the Commission as
to each Trust Fund the periodic unaudited reports to holders of the Offered
Certificates referenced in the preceding paragraph; however, because of the
nature of the Trust Funds, it is unlikely that any significant additional
information will be filed. In addition, because of the limited number of
Certificateholders expected for each series, the Sponsor anticipates that a
significant portion of such reporting requirements will be permanently
suspended following the first fiscal year for the related Trust Fund.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by the Sponsor with respect to a Trust Fund
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the
termination of an offering of Offered Certificates evidencing interests
therein. The Sponsor will provide or cause to be provided without charge to
each person to whom this Prospectus is delivered in connection with the
offering of one or more classes of Offered Certificates, upon written or oral
request of such person, a copy of any or all documents or reports incorporated
herein by reference, in each case to the extent such documents or reports
relate to one or more of such classes of such Offered Certificates, other than
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests to the Sponsor should be
directed in writing to its principal executive offices specified herein under
"Mortgage Capital Funding, Inc." The Sponsor has determined that its financial
statements will not be material to the offering of any Offered Certificates.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUPPLEMENT...........................................................................................S-3
AVAILABLE INFORMATION...........................................................................................S-3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE...............................................................S-4
SUMMARY OF PROSPECTUS...........................................................................................S-9
Title of Certificates..................................................................................S-9
Sponsor................................................................................................S-9
Master Servicer........................................................................................S-9
Special Servicer.......................................................................................S-9
Trustee................................................................................................S-9
REMIC Administrator....................................................................................S-9
The Trust Assets.......................................................................................S-9
Description of Certificates...........................................................................S-13
Distributions of Interest
on the Certificates................................................................................S-14
Distributions of Principal
of the Certificates.................................................................................S-14
Advances..............................................................................................S-15
Termination...........................................................................................S-16
Registration of Book-Entry
Certificates........................................................................................S-16
Tax Status of the Certificates........................................................................S-16
ERISA Considerations..................................................................................S-19
Legal Investment......................................................................................S-19
Rating................................................................................................S-19
RISK FACTORS...................................................................................................S-20
Certain Factors Adversely Affecting Resale of the Offered Certificates................................S-20
Limited Assets for Payment of Certificates............................................................S-21
Prepayments; Average Life of Certificates; Yields.....................................................S-21
Limited Nature of Credit Ratings......................................................................S-23
Certain Risks Associated with Mortgage Loans Secured by Commercial
and Multifamily Properties..........................................................................S-23
Balloon Payments; Borrower Default....................................................................S-24
Credit Support Limitations............................................................................S-25
Enforceability........................................................................................S-25
Leases and Rents as Security for a Mortgage Loan......................................................S-26
Environmental Risks...................................................................................S-26
Special Hazard Losses.................................................................................S-26
ERISA Considerations..................................................................................S-27
Certain Federal Tax Considerations Regarding REMIC Residual Certificates..............................S-27
Book-Entry Registration...............................................................................S-27
Potential Conflicts of Interest.......................................................................S-28
Delinquent Mortgage Loans.............................................................................S-28
</TABLE>
5
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<TABLE>
<CAPTION>
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<S> <C>
DESCRIPTION OF THE TRUST FUNDS.................................................................................S-28
General...............................................................................................S-28
Mortgage Loans........................................................................................S-29
MBS...................................................................................................S-32
Certificate Accounts..................................................................................S-33
Credit Support........................................................................................S-33
Cash Flow Agreements..................................................................................S-33
YIELD AND MATURITY CONSIDERATIONS..............................................................................S-34
General...............................................................................................S-34
Pass-Through Rate.....................................................................................S-34
Payment Delays........................................................................................S-34
Certain Shortfalls in Collections of Interest.........................................................S-34
Yield and Prepayment Considerations...................................................................S-35
Weighted Average Life and Maturity....................................................................S-37
Controlled Amortization Classes and Companion Classes.................................................S-37
Other Factors Affecting Yield, Weighted Average Life and Maturity.....................................S-38
MORTGAGE CAPITAL FUNDING, INC..................................................................................S-41
USE OF PROCEEDS................................................................................................S-41
DESCRIPTION OF THE CERTIFICATES................................................................................S-41
General...............................................................................................S-41
Distributions.........................................................................................S-42
Distributions of Interest on the Certificates.........................................................S-42
Distributions of Principal of the Certificates........................................................S-43
Distributions on the Certificates in Respect of Prepayment Premiums or in
Respect of Equity Participations....................................................................S-44
Allocation of Losses and Shortfalls...................................................................S-44
Advances in Respect of Delinquencies..................................................................S-44
Reports to Certificateholders.........................................................................S-45
Voting Rights.........................................................................................S-47
Termination...........................................................................................S-47
Book-Entry Registration and Definitive Certificates...................................................S-48
DESCRIPTION OF THE POOLING AGREEMENTS..........................................................................S-49
General...............................................................................................S-49
Assignment of Mortgage Loans; Repurchases.............................................................S-50
Representations and Warranties; Repurchases...........................................................S-51
Collection and Other Servicing Procedures.............................................................S-52
Sub-Servicers.........................................................................................S-53
Certificate Account...................................................................................S-53
Escrow Accounts.......................................................................................S-57
Modifications, Waivers and Amendments of Mortgage Loans...............................................S-57
Realization Upon Defaulted Mortgage Loans.............................................................S-58
Hazard Insurance Policies.............................................................................S-60
Due-on-Sale and Due-on-Encumbrance Provisions.........................................................S-61
Servicing Compensation and Payment of Expenses........................................................S-61
Evidence as to Compliance.............................................................................S-62
</TABLE>
6
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<TABLE>
<CAPTION>
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<S> <C>
Certain Matters Regarding the Master Servicer, the Special Servicer,
the REMIC Administrator and the Sponsor.............................................................S-63
Events of Default.....................................................................................S-64
Rights Upon Event of Default..........................................................................S-65
Amendment.............................................................................................S-65
List of Certificateholders............................................................................S-66
The Trustee...........................................................................................S-66
Duties of the Trustee.................................................................................S-66
Certain Matters Regarding the Trustee.................................................................S-66
Resignation and Removal of the Trustee................................................................S-67
DESCRIPTION OF CREDIT SUPPORT..................................................................................S-67
General...............................................................................................S-67
Subordinate Certificates..............................................................................S-68
Cross-Support Provisions..............................................................................S-68
Insurance or Guarantees with Respect to Mortgage Loans................................................S-68
Letter of Credit......................................................................................S-69
Certificate Insurance and Surety Bonds................................................................S-69
Reserve Funds.........................................................................................S-69
Credit Support with Respect to MBS....................................................................S-70
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS........................................................................S-70
General...............................................................................................S-70
Types of Mortgage Instruments.........................................................................S-70
Leases and Rents......................................................................................S-71
Cooperative Loans.....................................................................................S-71
Personalty............................................................................................S-72
Foreclosure on Mortgages..............................................................................S-73
Foreclosure on Cooperative Shares.....................................................................S-76
Bankruptcy Laws.......................................................................................S-77
Environmental Risks...................................................................................S-78
Due-on-Sale and Due-on-Encumbrance....................................................................S-80
Subordinate Financing.................................................................................S-80
Default Interest and Limitations on Prepayments.......................................................S-80
Applicability of Usury Laws...........................................................................S-81
Soldiers' and Sailors' Civil Relief Act of 1940.......................................................S-81
Americans with Disabilities Act.......................................................................S-81
Forfeitures in Drug and RICO Proceedings..............................................................S-82
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.......................................................................S-82
General...............................................................................................S-82
REMICs................................................................................................S-83
New Withholding Regulations...........................................................................S-99
Grantor Trust Funds..................................................................................S-100
STATE AND OTHER TAX CONSEQUENCES..............................................................................S-110
ERISA CONSIDERATIONS..........................................................................................S-110
General..............................................................................................S-110
Plan Asset Regulations...............................................................................S-111
</TABLE>
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<TABLE>
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<S> <C>
LEGAL INVESTMENT..............................................................................................S-112
METHOD OF DISTRIBUTION........................................................................................S-114
FINANCIAL INFORMATION.........................................................................................S-115
RATING........................................................................................................S-116
INDEX OF PRINCIPAL TERMS......................................................................................S-117
</TABLE>
8
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in
its entirety by reference to the more detailed information appearing elsewhere
in this Prospectus and by reference to the information with respect to each
series of Certificates contained in the Prospectus Supplement to be prepared
and delivered in connection with the offering of Offered Certificates of such
series. An Index of Principal Definitions is included at the end of this
Prospectus.
<TABLE>
<S> <C>
TITLE OF CERTIFICATES............................ Mortgage Pass-Through Certificates, issuable in series (the
"Certificates").
SPONSOR.......................................... Mortgage Capital Funding, Inc., a wholly-owned subsidiary of
Citicorp Banking Corporation, which in turn is a wholly-owned
subsidiary of Citicorp. See "Mortgage Capital Funding, Inc."
MASTER SERVICER.................................. The master servicer (the "Master Servicer"), if any, for a series
of Certificates will be named in the related Prospectus
Supplement. Any Master Servicer may be an affiliate of the
Sponsor. See "Description of the Pooling
Agreements--Collection and Other Servicing Procedures".
SPECIAL SERVICER................................. The special servicer (the "Special Servicer"), if any, for a series
of Certificates will be named in the related Prospectus
Supplement. Any Special Servicer may be an affiliate of the
Sponsor and/or may also be acting as Master Servicer. See
"Description of the Pooling Agreements--Collection and Other
Servicing Procedures".
TRUSTEE.......................................... The trustee (the "Trustee") for each series of Certificates will
be named in the related Prospectus Supplement. See
"Description of the Pooling Agreements--The Trustee".
REMIC ADMINISTRATOR.............................. The person (the "REMIC Administrator") responsible for the
various tax-related administrative duties for a series of
Certificates as to which one or more REMIC elections have
been made, will be named in the related Prospectus
Supplement. Any REMIC Administrator may be an affiliate of
the Sponsor and/or may also be acting as Master Servicer,
Special Servicer or Trustee. See "Material Federal Income Tax
Consequences--REMICs--Reporting and Other
Administrative Matters."
THE TRUST ASSETS................................. Each series of Certificates will represent in the aggregate the
entire beneficial ownership interest in a Trust Fund consisting
primarily of:
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<PAGE>
A. Mortgage Assets.............................. The Mortgage Assets with respect to each series of Certificates
will, in general, consist of a pool of real estate loans, including
participations therein (collectively, the "Mortgage Loans"),
secured by liens on, or security interests in fee and/or leasehold
estates in, or cooperative shares relating to, properties (the
"Mortgaged Properties") consisting of, without limitation,
(1) residential buildings with multiple dwelling units and
mobile home parks or (2) office buildings, shopping centers,
retail stores, hotels or motels, nursing homes, hospitals or other
health-care related facilities, recreational vehicle parks,
warehouse facilities, mini-warehouse facilities or self-storage
facilities, industrial facilities, mixed use or various other types
of income-producing properties or unimproved land (the
"Commercial Properties"). Certain of the Mortgaged
Properties may be owned by a private cooperative corporation
(a "Cooperative"). If so specified in the related Prospectus
Supplement, certain Mortgage Loans (the "Cooperative
Loans") will be secured by security interests in shares in a
Cooperative that give the owner thereof the right to occupy
particular multiple dwelling units or a particular commercial
unit in the cooperative building or complex. If so specified in
the related Prospectus Supplement, a Trust Fund may include
Mortgage Loans secured by liens on real estate projects under
construction. The Mortgage Loans will not be guaranteed or
insured by the Sponsor or any of its affiliates or, unless
otherwise provided in the related Prospectus Supplement, by
any governmental agency or instrumentality or by any other
person. If so specified in the related Prospectus Supplement,
a Trust Fund may include some Mortgage Loans that are delinquent
as of the date the related Trust Fund is formed.
The Mortgaged Properties securing the Mortgage Loans in any
Mortgage Asset Pool may be located in the United States,
its territories and possessions, the Commonwealth of Puerto
Rico and, in a limited number of cases, outside the
foregoing jurisdictions.
As and to the extent described in the related Prospectus
Supplement, a Mortgage Loan (i) may provide for accrual of
interest thereon at an interest rate (a "Mortgage Rate")
that is fixed over its term or that adjusts from time to
time, or that may be converted at the borrower's election
from an adjustable to a fixed Mortgage Rate, or from a
fixed to an adjustable Mortgage Rate, and in some cases
back again, (ii) may provide for level payments to maturity
or for payments that adjust from time to time to
accommodate changes in the Mortgage Rate or to reflect the
occurrence of certain events, and may permit negative
amortization, (iii) may be fully amortizing over its
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<PAGE>
term to maturity or may require a balloon payment on its
stated maturity date, (iv) may provide for no amortization
prior to its stated maturity date, (v) may contain a
prohibition on prepayment and/or require payment of a
premium or a yield maintenance amount in connection with a
prepayment and (vi) may provide for payments of principal,
interest or both, on due dates that occur monthly,
quarterly, semi-annually, annually or at such other
interval as is specified in the related Prospectus
Supplement. Unless otherwise provided in the related
Prospectus Supplement, each Mortgage Loan will have had an
original term to maturity of not more than approximately 40
years. Unless otherwise provided in the related Prospectus
Supplement, no Mortgage Loan will have been originated by
the Sponsor; however, some or all of the Mortgage Loans in
any Trust Fund may have been originated by an affiliate of
the Sponsor. See "Description of the Trust Funds--Mortgage
Loans".
If and to the extent specified in the related Prospectus
Supplement, the Mortgage Assets with respect to a series of
Certificates may also include, or consist of, (i) mortgage
pass-through certificates or other mortgage-backed
securities or (ii) certificates insured or guaranteed by
the Federal Home Loan Mortgage Corporation ("FHLMC"), the
Federal National Mortgage Association ("FNMA"), the
Government National Mortgage Association ("GNMA") or the
Federal Agricultural Mortgage Corporation ("FAMC")
(collectively, the mortgage-backed securities referred to
in clauses (i) and (ii), "MBS"), provided that each MBS
will evidence an interest in, or will be secured by a
pledge of, one or more real estate loans that conform to
the descriptions of the Mortgage Loans contained herein.
See "Description of the Trust Funds--MBS".
Each Mortgage Asset will be selected by the Sponsor for
inclusion in a Trust Fund from among those purchased,
either directly or indirectly, from a prior holder thereof
(a "Mortgage Asset Seller"), which prior holder may or may
not be the originator of such Mortgage Loan or the issuer
of such MBS and may be an affiliate of the Sponsor.
B. Certificate Account.......................... Each Trust Fund will include one or more accounts
(collectively, the "Certificate Account") established and
maintained on behalf of the Certificateholders into which
the person or persons designated in the related Prospectus
Supplement will, to the extent provided in the related
Pooling Agreement (as defined below) described herein and
in the related Prospectus Supplement, deposit all payments
and other collections received or advanced with respect to
the Mortgage
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Assets and other assets in such Trust Fund. A Certificate
Account may be maintained as an interest bearing or a
non-interest bearing account, and funds held therein may be
held as cash or invested in certain obligations acceptable
to each Rating Agency (as defined below) rating one or more
classes of the related series of Offered Certificates. See
"Description of the Trust Funds--Certificate Accounts" and
"Description of the Pooling Agreements--Certificate
Account".
C. Credit Support............................... If so provided in the related Prospectus Supplement, partial or
full protection against certain defaults and losses on the
Mortgage Assets in the related Trust Fund may be provided to
one or more classes of Certificates of the related series in the
form of subordination of one or more other classes of
Certificates of such series, which other classes may include one
or more classes of Offered Certificates, or by one or more other
types of credit support, such as a letter of credit, insurance
policy, guarantee, reserve fund or another type of credit
support, or a combination thereof (any such coverage with
respect to the Certificates of any series, "Credit Support"). If so
specified in the related Prospectus Supplement, any form of
Credit Support may offer protection only against specific types
of losses and shortfalls. The amount and types of any Credit
Support, the coverage afforded by it, the identification of the
entity providing it (if applicable) and related information will
be set forth in the Prospectus Supplement for a series of
Offered Certificates. See "Risk Factors--Credit Support
Limitations", "Description of the Trust Funds--Credit
Support" and "Description of Credit Support".
D. Cash Flow Agreements......................... If so provided in the related Prospectus Supplement, a Trust
Fund may include guaranteed investment contracts pursuant to
which moneys held in the funds and accounts established for
the related series will be invested at a specified rate. The Trust
Fund may also include certain other agreements, such as
interest rate exchange agreements, interest rate cap or floor
agreements, currency exchange agreements or similar
agreements designed to reduce the effects of interest rate or
currency exchange rate fluctuations on the Mortgage Assets or
on one or more classes of Certificates. The principal terms of
any such guaranteed investment contract or other agreement
(any such agreement, a "Cash Flow Agreement"), including,
without limitation, provisions relating to the timing, manner
and amount of payments thereunder and provisions relating to
the termination thereof, will be described in the Prospectus
Supplement for the related series. In addition, the related
Prospectus Supplement will contain certain information that
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<PAGE>
pertains to the obligor under any such Cash Flow Agreement.
See "Description of the Trust Funds--Cash Flow Agreements".
DESCRIPTION OF CERTIFICATES...................... Each series of Certificates will be issued in one or more classes
pursuant to a pooling and servicing agreement or other
agreement specified in the related Prospectus Supplement (in
either case, a "Pooling Agreement") and will represent in the
aggregate the entire beneficial ownership interest in the related
Trust Fund. As described in the related Prospectus
Supplement, the Certificates of each series, including the
Offered Certificates of such series, may consist of one or more
classes of Certificates that: (i) are senior (collectively, "Senior
Certificates") or subordinate (collectively, "Subordinate
Certificates") to one or more other classes of Certificates in
entitlement to certain distributions on the Certificates; (ii) are
entitled to distributions of principal, with disproportionately
small, nominal or no distributions of interest (collectively,
"Stripped Principal Certificates"); (iii) are entitled to
distributions of interest, with disproportionately small, nominal
or no distributions of principal (collectively, "Stripped Interest
Certificates"); (iv) provide for distributions of interest thereon
or principal thereof that commence only after the occurrence of
certain events, such as the retirement of one or more other
classes of Certificates of such series; (v) provide for
distributions of principal thereof to be made, from time to time
or for designated periods, at a rate that is faster (and, in some
cases, substantially faster) or slower (and, in some cases,
substantially slower) than the rate at which payments or other
collections of principal are received on the Mortgage Assets in
the related Trust Fund; or (vi) provide for distributions of
principal thereof to be made, subject to available funds, based
on a specified principal payment schedule or other method.
Each class of Certificates, other than certain classes of
Stripped Interest Certificates and certain classes of REMIC
Residual Certificates (as defined below), will have a
stated principal amount (a "Certificate Balance"); and each
class of Certificates, other than certain classes of
Stripped Principal Certificates and certain REMIC Residual
Certificates, will accrue interest at a fixed, variable or
adjustable interest rate (a "Pass-Through Rate") on its
Certificate Balance or, in the case of certain classes of
Stripped Interest Certificates, on a hypothetical or
notional amount (a "Notional Amount") used solely for such
purpose and not evidencing a right to receive distributions
of principal. The related Prospectus Supplement will
specify the Certificate Balance, Notional Amount and/or
Pass-Through Rate (or, in the case of a variable or
adjustable
13
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Pass-Through Rate, the method for determining such), as
applicable, for each class of Offered Certificates.
The Certificates will not be guaranteed or insured by the
Sponsor or any of its affiliates, by any governmental
agency or instrumentality or by any other person, unless
otherwise provided in the related Prospectus Supplement.
See "Risk Factors--Limited Assets for Payment of
Certificates" and "Description of the Certificates".
DISTRIBUTIONS OF INTEREST
ON THE CERTIFICATES........................... Interest on each class of Offered Certificates (other than certain
classes of Stripped Principal Certificates and certain classes of
REMIC Residual Certificates) of each series will accrue at the
applicable Pass-Through Rate on the Certificate Balance or, in
the case of certain classes of Stripped Interest Certificates, the
Notional Amount thereof outstanding from time to time and
will be distributed to Certificateholders as provided in the
related Prospectus Supplement (each of the specified dates on
which distributions are to be made, a "Distribution Date").
Distributions of interest with respect to one or more classes of
Certificates (collectively, "Accrual Certificates") may not
commence until the occurrence of certain events, such as the
retirement of one or more other classes of Certificates, and
interest accrued with respect to a class of Accrual Certificates
prior to the occurrence of such an event will either be added to
the Certificate Balance thereof or otherwise deferred.
Distributions of interest with respect to one or more classes of
Certificates may be reduced to the extent of certain
delinquencies, losses and other contingencies described herein
and in the related Prospectus Supplement. See "Risk
Factors--Prepayments; Average Life of Certificates; Yields",
"Yield and Maturity Considerations", and "Description of the
Certificates--Distributions of Interest on the Certificates".
DISTRIBUTIONS OF PRINCIPAL
OF THE CERTIFICATES............................ Each class of Certificates of each series (other than certain
classes of Stripped Interest Certificates and certain classes of
REMIC Residual Certificates) will have a Certificate Balance.
The Certificate Balance of a class of Certificates outstanding
from time to time will represent the maximum amount that the
holders thereof are then entitled to receive in respect of
principal from future cash flow on the assets in the related
Trust Fund. Unless otherwise specified in the related
Prospectus Supplement, the initial aggregate Certificate
Balance of all classes of a series of Certificates will not be
greater than the outstanding principal balance of the related
Mortgage Assets as of a specified date (the "Cut-off Date"),
14
<PAGE>
after application of scheduled payments due on or before
such date, whether or not received. As and to the extent
described in the related Prospectus Supplement,
distributions of principal with respect to each series of
Certificates will be made on each Distribution Date to the
holders of the class or classes of Certificates of such
series entitled thereto until the Certificate Balances of
such Certificates have been reduced to zero. Distributions
of principal with respect to one or more classes of
Certificates may be made at a rate that is faster (and, in
some cases, substantially faster) than the rate at which
payments or other collections of principal are received on
the Mortgage Assets in the related Trust Fund.
Distributions of principal with respect to one or more
classes of Certificates may not commence until the
occurrence of certain events, such as the retirement of one
or more other classes of Certificates of the same series,
or may be made at a rate that is slower (and, in some
cases, substantially slower) than the rate at which
payments or other collections of principal are received on
the Mortgage Assets in the related Trust Fund.
Distributions of principal with respect to one or more
classes of Certificates (each such class, a "Controlled
Amortization Class") may be made, subject to available
funds, based on a specified principal payment schedule.
Distributions of principal with respect to one or more
classes of Certificates (each such class, a "Companion
Class") may be contingent on the specified principal
payment schedule for a Controlled Amortization Class of the
same series and the rate at which payments and other
collections of principal on the Mortgage Assets in the
related Trust Fund are received. Unless otherwise specified
in the related Prospectus Supplement, distributions of
principal of any class of Certificates will be made on a
pro rata basis among all of the Certificates of such class.
See "Description of the Certificates--Distributions of
Principal of the Certificates".
ADVANCES......................................... If and to the extent provided in the related Prospectus
Supplement, if a Trust Fund includes Mortgage Loans, the
Master Servicer, the Special Servicer, the Trustee, any provider
of Credit Support and/or any other specified person may be
obligated to make, or have the option of making, certain
advances with respect to delinquent scheduled payments of
principal and/or interest on such Mortgage Loans. Any such
advances made with respect to a particular Mortgage Loan will
be reimbursable from subsequent recoveries in respect of such
Mortgage Loan and otherwise to the extent described herein
and in the related Prospectus Supplement. If and to the extent
provided in the Prospectus Supplement for a series of
Certificates, any entity making such advances may be entitled
to receive interest thereon for the period that such advances are
15
<PAGE>
outstanding, payable from amounts in the related Trust
Fund. See "Description of the Certificates--Advances in
Respect of Delinquencies". If a Trust Fund includes MBS,
any comparable advancing obligation of a party to the
related Pooling Agreement, or of a party to the related MBS
Agreement, will be described in the related Prospectus
Supplement.
TERMINATION...................................... If so specified in the related Prospectus Supplement, a series of
Certificates may be subject to optional early termination
through the repurchase of the Mortgage Assets in the related
Trust Fund by the party or parties specified therein, under the
circumstances and in the manner set forth therein. If so
provided in the related Prospectus Supplement, upon the
reduction of the Certificate Balance of a specified class or
classes of Certificates by a specified percentage or amount, a
party specified therein may be authorized or required to solicit
bids for the purchase of all of the Mortgage Assets of the
related Trust Fund, or of a sufficient portion of such Mortgage
Assets to retire such class or classes, under the circumstances
and in the manner set forth therein. See "Description of the
Certificates--Termination."
REGISTRATION OF BOOK-ENTRY
CERTIFICATES................................... If so provided in the related Prospectus Supplement, one or
more classes of the Offered Certificates of any series will be
offered in book-entry format (collectively, "Book-Entry
Certificates") through the facilities of The Depository Trust
Company ("DTC"). Each class of Book-Entry Certificates will
be initially represented by one or more Certificates registered
in the name of a nominee of DTC. No person acquiring an
interest in a class of Book-Entry Certificates (a "Certificate
Owner") will be entitled to receive a Certificate of such class in
fully registered, definitive form (a "Definitive Certificate"),
except under the limited circumstances described herein. See
"Risk Factors--Book-Entry Registration" and "Description of
the Certificates--Book-Entry Registration and Definitive
Certificates".
TAX STATUS OF THE CERTIFICATES................... The Certificates of each series will constitute either (i) "regular
interests" ("REMIC Regular Certificates") and "residual
interests" ("REMIC Residual Certificates") in a Trust Fund, or
a designated portion thereof, treated as a real estate mortgage
investment conduit (a "REMIC") under Sections 860A through
860G of the Internal Revenue Code of 1986 (the "Code"), or
(ii) interests ("Grantor Trust Certificates") in a Trust Fund
treated as a grantor trust under applicable provisions of the
Code.
16
<PAGE>
A. REMIC........................................ REMIC Regular Certificates generally will be treated as debt
obligations of the applicable REMIC for federal income tax
purposes. In general, to the extent the assets and income of the
REMIC are treated as qualifying assets and income under the
following sections of the Code, REMIC Regular Certificates
owned by a real estate investment trust will be treated as "real
estate assets" for purposes of Section 856(c)(5)(B) of the Code
and interest income therefrom will be treated as "interest on
obligations secured by mortgages on real property" for
purposes of Section 856(c)(3)(B) of the Code. In addition,
REMIC Regular Certificates will be "qualified mortgages"
within the meaning of Section 860G(a)(3) of the Code.
Moreover, if 95% or more of the assets and the income of the
REMIC qualify for any of the foregoing treatments, the
REMIC Regular Certificates will qualify for the foregoing
treatments in their entirety. However, REMIC Regular
Certificates owned by a thrift institution will constitute "loans
. . . secured by an interest in real property" for purposes of
Section 7701(a)(19)(C)(v) of the Code only if so specified in
the related Prospectus Supplement. Holders of REMIC Regular
Certificates must report income with respect thereto on the
accrual method, regardless of their method of tax accounting
generally. Holders of any class of REMIC Regular Certificates
issued with original issue discount generally will be required to
include the original issue discount in income as it accrues,
which will be determined using an initial prepayment
assumption and taking into account, from time to time, actual
prepayments occurring at a rate different than the prepayment
assumption. See "Material Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC
Regular Certificates" and "--REMICs--Foreign Investors in
REMIC Certificates".
REMIC Residual Certificates generally will be treated as
representing an interest in qualifying assets and income to
the same extent described above for institutions subject to
Sections 856(c)(5)(B) and 856(c)(3)(B) of the Code, but not
for purposes of Section 7701(a)(19)(C)(v) of the Code
unless otherwise stated in the related Prospectus
Supplement. A portion (or, in certain cases, all) of the
income from REMIC Residual Certificates (i) may not be
offset by any losses from other activities of the holder of
such REMIC Residual Certificates, (ii) may be treated as
unrelated business taxable income for holders of REMIC
Residual Certificates that are subject to tax on unrelated
business taxable income (as defined in Section 511 of the
Code), and (iii) may be subject to foreign withholding
rules. In addition, transfers of certain REMIC Residual
Certificates may be prohibited, or may be disregarded
17
<PAGE>
under some circumstances for federal income tax purposes. See
"Material Federal Income Tax Consequences--REMICs--Taxation of
Owners of REMIC Residual Certificates" and "--REMICs--Foreign
Investors in REMIC Certificates".
B. Grantor Trust................................ Unless otherwise provided in the related Prospectus
Supplement, Grantor Trust Certificates may be either (i)
Certificates that have a Certificate Balance and a Pass-Through
Rate or that are Stripped Principal Certificates (collectively,
"Grantor Trust Fractional Interest Certificates") or (ii) Stripped
Interest Certificates.
Owners of Grantor Trust Fractional Interest Certificates
will be treated for federal income tax purposes as owners
of an undivided pro rata interest in the assets of the
related Trust Fund, and generally will be required to
report their pro rata share of the entire gross income
(including amounts incurred as servicing or other fees and
expenses) from the Mortgage Assets and will be entitled,
subject to certain limitations, to deduct their pro rata
shares of any servicing or other fees and expenses incurred
during the year. Holders of Grantor Trust Fractional
Interest Certificates generally will be treated as owning
an interest in qualifying assets and income under Sections
856(c)(5)(B), 856(c)(3)(B) and 860G(a)(3)(A) of the Code,
but will not be so treated for purposes of Section
7701(a)(19)(C)(v) of the Code unless otherwise stated in
the related Prospectus Supplement.
It is unclear whether Stripped Interest Certificates will
be treated as representing an ownership interest in
qualifying assets and income under Sections 856(c)(5)(A)
and 856(c)(3)(B) of the Code. However, such Certificates
will not be treated as representing an ownership interest
in assets described in Section 7701(a)(19)(C)(v) of the
Code unless otherwise stated in the related Prospectus
Supplement. The taxation of holders of Stripped Interest
Certificates is uncertain in various respects, including in
particular the method such holders should use to recover
their purchase price and to report their income with
respect to such Stripped Interest Certificates. See
"Material Federal Income Tax Consequences--Grantor Trust
Funds".
Investors are advised to consult their tax advisors and to
review "Material Federal Income Tax Consequences" herein
and "Certain Federal Income Tax Consequences" in the
related Prospectus Supplement.
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ERISA CONSIDERATIONS............................. Fiduciaries of employee benefit plans and certain other
retirement plans and arrangements, including individual
retirement accounts, annuities, Keogh plans, and collective
investment funds and separate accounts in which such plans,
accounts, annuities or arrangements are invested, that are
subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of the Code,
should carefully review with their legal advisors whether the
purchase or holding of Offered Certificates could give rise to
a transaction that is prohibited or is not otherwise permissible
either under ERISA or Section 4975 of the Code. See "ERISA
Considerations" herein and in the related Prospectus
Supplement.
LEGAL INVESTMENT................................. The Offered Certificates will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 only if so specified in the related
Prospectus Supplement. Investors whose investment authority
is subject to legal restrictions should consult their own legal
advisors to determine whether and to what extent the Offered
Certificates constitute legal investments for them. See "Legal
Investment" herein and in the related Prospectus Supplement.
RATING........................................... At their respective dates of issuance, each class of Offered
Certificates will be rated not lower than investment grade by
one or more nationally recognized statistical rating agencies
(each, a "Rating Agency"). See "Rating" herein and in the
related Prospectus Supplement.
</TABLE>
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RISK FACTORS
In considering an investment in the Offered Certificates of any
series, investors should consider, among other things, the following factors
and any other factors set forth under the heading "Risk Factors" in the related
Prospectus Supplement. In general, to the extent that the factors discussed
below pertain to or are influenced by the characteristics or behavior of
Mortgage Loans included in a particular Trust Fund, they would similarly
pertain to and be influenced by the characteristics or behavior of the real
estate loans underlying any MBS included in such Trust Fund.
CERTAIN FACTORS ADVERSELY AFFECTING RESALE OF THE OFFERED CERTIFICATES
There can be no assurance that a secondary market for the Offered
Certificates of any series will develop or, if it does develop, that it will
provide holders with liquidity of investment or will continue for as long as
such Certificates remain outstanding. The Prospectus Supplement for any series
of Offered Certificates may indicate that an underwriter specified therein
intends to make a secondary market in such Offered Certificates; however, no
underwriter will be obligated to do so. Any such secondary market may provide
less liquidity to investors than any comparable market for securities that
evidence interests in single-family mortgage loans.
The primary source of ongoing information regarding the Offered
Certificates of any series, including information regarding the status of the
related Mortgage Assets and any Credit Support for such Certificates, will be
the periodic reports to Certificateholders to be delivered pursuant to the
related Pooling Agreement as described herein under the heading "Description of
the Certificates--Reports to Certificateholders". There can be no assurance
that any additional ongoing information regarding the Offered Certificates of
any series will be available through any other source. The limited nature of
such information in respect of a series of Offered Certificates may adversely
affect the liquidity thereof, even if a secondary market for such Certificates
does develop.
Insofar as a secondary market does develop for any series of Offered
Certificates or class thereof, the market value of such Certificates will be
affected by several factors, including the perceived liquidity and riskiness
thereof, the anticipated cash flow thereon (which may vary widely depending
upon the prepayment and default assumptions applied in respect of the
underlying Mortgage Loans) and prevailing interest rates. The price payable at
any given time in respect of certain classes of Offered Certificates (in
particular, a class with a relatively long average life, a Companion Class or a
class of Stripped Interest Certificates or Stripped Principal Certificates) may
be extremely sensitive to small fluctuations in prevailing interest rates; and
the relative change in price for an Offered Certificate in response to an
upward or downward movement in prevailing interest rates may not necessarily
equal the relative change in price for such Offered Certificate in response to
an equal but opposite movement in such rates. Accordingly, the sale of Offered
Certificates by a holder in any secondary market that may develop may be at a
discount from the price paid by such holder. The Sponsor is not aware of any
source through which price information about the Offered Certificates will be
generally available on an ongoing basis.
Except to the extent described herein and in the related Prospectus
Supplement, Certificateholders will have no redemption rights, and the Offered
Certificates of each series are subject to early retirement only under certain
specified circumstances described herein and in the related Prospectus
Supplement. See "Description of the Certificates--Termination".
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LIMITED ASSETS FOR PAYMENT OF CERTIFICATES
Unless otherwise specified in the related Prospectus Supplement,
neither the Offered Certificates of any series nor the Mortgage Assets in the
related Trust Fund will be guaranteed or insured by the Sponsor or any of its
affiliates, by any governmental agency or instrumentality or by any other
person; and no Offered Certificate of any series will represent a claim against
or security interest in the Trust Funds for any other series. Accordingly, if
the related Trust Fund has insufficient assets to make payments on a series of
Offered Certificates, no other assets will be available for payment of the
deficiency. Additionally, certain amounts on deposit from time to time in
certain funds or accounts constituting part of a Trust Fund, including the
Certificate Account and any accounts maintained as Credit Support, may be
withdrawn under certain conditions, as described in the related Prospectus
Supplement, for purposes other than the payment of principal of or interest on
the related series of Certificates. If so provided in the Prospectus Supplement
for a series of Certificates consisting of one or more classes of Subordinate
Certificates, on any Distribution Date in respect of which losses or shortfalls
in collections on the Mortgage Assets have been incurred, the amount of such
losses or shortfalls will be borne first by one or more classes of the
Subordinate Certificates, and, thereafter, by the remaining classes of
Certificates in the priority and manner and subject to the limitations
specified in such Prospectus Supplement.
PREPAYMENTS; AVERAGE LIFE OF CERTIFICATES; YIELDS
As a result of, among other things, prepayments on the Mortgage Loans
in any Trust Fund, the amount and timing of distributions of principal and/or
interest on the Offered Certificates of the related series may be highly
unpredictable. Prepayments on the Mortgage Loans in any Trust Fund will result
in a faster rate of principal payments on one or more classes of the related
series of Certificates than if payments on such Mortgage Loans were made as
scheduled. Thus, the prepayment experience on the Mortgage Loans may affect the
average life of each class of such Certificates, including a class of Offered
Certificates. The rate of principal payments on pools of mortgage loans varies
among pools and from time to time is influenced by a variety of economic,
demographic, geographic, social, tax and legal factors, as well as acts of God.
For example, if prevailing interest rates fall significantly below the Mortgage
Rates borne by the Mortgage Loans included in a Trust Fund, principal
prepayments thereon are likely to be higher than if prevailing interest rates
remain at or above the rates borne by those Mortgage Loans. Conversely, if
prevailing interest rates rise significantly above the Mortgage Rates borne by
the Mortgage Loans included in a Trust Fund, principal prepayments thereon are
likely to be lower than if prevailing interest rates remain at or below the
rates borne by those Mortgage Loans. The foregoing is subject, however, to,
among other things, the particular terms of the Mortgage Loans (e.g.,
provisions which prohibit voluntary prepayments during specified periods or
impose penalties in connection therewith) and the ability of borrowers to get
new financing. There can be no assurance as to the actual rate of prepayment on
the Mortgage Loans in any Trust Fund or that such rate of prepayment will
conform to any model described herein or in any Prospectus Supplement. As a
result, depending on the anticipated rate of prepayment for the Mortgage Loans
in any Trust Fund, the retirement of any class of Certificates of the related
series could occur significantly earlier or later than expected.
The extent to which prepayments on the Mortgage Loans in any Trust
Fund ultimately affect the average life of any class of Certificates of the
related series will depend on the terms of such Certificates. A class of
Certificates, including a class of Offered Certificates, may provide that on
any Distribution Date the holders of such Certificates are entitled to a pro
rata share of the prepayments on the Mortgage Loans in the related Trust Fund
that are distributable on such date, to a disproportionately large share
(which, in some cases, may be all) of such prepayments, or to a
disproportionately small share (which, in some cases, may be none) of such
prepayments. A class of Certificates that entitles the holders thereof to a
disproportionately large share of the prepayments on the Mortgage Loans in the
related Trust Fund enhances the risk of early retirement of such class
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("call risk") if the rate of prepayment is relatively fast; while a class of
Certificates that entitles the holders thereof to a disproportionately small
share of the prepayments on the Mortgage Loans in the related Trust Fund
enhances the risk of an extended average life of such class ("extension risk")
if the rate of prepayment is relatively slow. As and to the extent described in
the related Prospectus Supplement, the respective entitlements of the various
classes of Certificateholders of any series to receive payments (and, in
particular, prepayments) of principal of the Mortgage Loans in the related
Trust Fund may vary based on the occurrence of certain events (e.g., the
retirement of one or more classes of Certificates of such series) or subject to
certain contingencies (e.g., prepayment and default rates with respect to such
Mortgage Loans).
A series of Certificates may include one or more Controlled
Amortization Classes that will entitle the holders thereof to receive principal
distributions according to a specified principal payment schedule. Although
prepayment risk cannot be eliminated entirely for any class of Certificates, a
Controlled Amortization Class will generally provide a relatively stable cash
flow so long as the actual rate of prepayment on the Mortgage Loans in the
related Trust Fund remains relatively constant at the rate, or within the range
of rates, of prepayment used to establish the specific principal payment
schedule for such Certificates. Prepayment risk with respect to a given
Mortgage Asset Pool does not disappear, however, and the stability afforded to
a Controlled Amortization Class comes at the expense of one or more Companion
Classes of the same series, any of which Companion Classes may also be a class
of Offered Certificates. In general, and as more specifically described in the
related Prospectus Supplement, a Companion Class may entitle the holders
thereof to a disproportionately large share of prepayments on the Mortgage
Loans in the related Trust Fund when the rate of prepayment is relatively fast,
and/or may entitle the holders thereof to a disproportionately small share of
prepayments on the Mortgage Loans in the related Trust Fund when the rate of
prepayment is relatively slow. As and to the extent described in the related
Prospectus Supplement, a Companion Class absorbs some (but not all) of the
"call risk" and/or "extension risk" that would otherwise belong to the related
Controlled Amortization Class if all payments of principal of the Mortgage
Loans in the related Trust Fund were allocated on a pro rata basis.
A series of Certificates may include one or more classes of Offered
Certificates offered at a premium or discount. Yields on such classes of
Certificates will be sensitive, and in some cases extremely sensitive, to
prepayments on the Mortgage Loans in the related Trust Fund and, where the
amount of interest payable with respect to a class is disproportionately large,
as compared to the amount of principal, as with certain classes of Stripped
Interest Certificates, a holder might fail to recoup its original investment
under some prepayment scenarios. The extent to which the yield to maturity of
any class of Offered Certificates may vary from the anticipated yield will
depend upon the degree to which they are purchased at a discount or premium and
the amount and timing of distributions thereon. An investor should consider, in
the case of any Offered Certificate purchased at a discount, the risk that a
slower than anticipated rate of principal payments on the Mortgage Loans could
result in an actual yield to such investor that is lower than the anticipated
yield and, in the case of any Offered Certificate purchased at a premium, the
risk that a faster than anticipated rate of principal payments could result in
an actual yield to such investor that is lower than the anticipated yield. See
"Yield and Maturity Considerations" herein.
When considering the effects of prepayments on the average life and
yield of an Offered Certificate, an investor should also consider provisions of
the related Pooling Agreement that permit the optional early termination of the
class of Certificates to which such Offered Certificate belongs. If so
specified in the related Prospectus Supplement, a series of Certificates may be
subject to optional early termination through the repurchase of the Mortgage
Assets in the related Trust Fund by the party or parties specified therein,
under the circumstances and in the manner set forth therein. If so provided in
the related Prospectus Supplement, upon the reduction of the Certificate
Balance of a specified class or classes of Certificates by a specified
percentage or amount, a party specified therein may be authorized or required
to solicit bids for the purchase of all of the
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Mortgage Assets of the related Trust Fund, or of a sufficient portion of such
Mortgage Assets to retire such class or classes, under the circumstances and in
the manner set forth therein. See "Description of the Certificates--
Termination".
LIMITED NATURE OF CREDIT RATINGS
Any rating assigned by a Rating Agency to a class of Offered
Certificates will reflect only its assessment of the likelihood that holders of
such Offered Certificates will receive payments to which such
Certificateholders are entitled under the related Pooling Agreement. Such
rating will not constitute an assessment of the likelihood that principal
prepayments on the related Mortgage Loans will be made, the degree to which the
rate of such prepayments might differ from that originally anticipated or the
likelihood of early optional termination of the related Trust Fund.
Furthermore, such rating will not address the possibility that prepayment of
the related Mortgage Loans at a higher or lower rate than anticipated by an
investor may cause such investor to experience a lower than anticipated yield
or that an investor that purchases an Offered Certificate at a significant
premium might fail to recoup its initial investment under certain prepayment
scenarios.
The amount, type and nature of Credit Support, if any, provided with
respect to a series of Certificates will be determined on the basis of criteria
established by each Rating Agency rating classes of the Certificates of such
series. Those criteria are sometimes based upon an actuarial analysis of the
behavior of mortgage loans in a larger group. However, there can be no
assurance that the historical data supporting any such actuarial analysis will
accurately reflect future experience, or that the data derived from a large
pool of mortgage loans will accurately predict the delinquency, foreclosure or
loss experience of any particular pool of Mortgage Loans. In other cases, such
criteria may be based upon determinations of the values of the Mortgaged
Properties that provide security for the Mortgage Loans. However, no assurance
can be given that those values will not decline in the future. If the
commercial or multifamily residential real estate markets should experience an
overall decline in property values such that the outstanding principal balances
of the Mortgage Loans 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 by institutional lenders.
In addition, adverse economic conditions (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
rates of delinquencies, foreclosures and losses with respect to any Trust Fund.
To the extent that such losses are not covered by Credit Support, such losses
may be borne, at least in part, by the holders of one or more classes of
Offered Certificates of the related series. See "Description of Credit Support"
and "Rating".
CERTAIN RISKS ASSOCIATED WITH MORTGAGE LOANS SECURED BY COMMERCIAL AND
MULTIFAMILY PROPERTIES
Mortgage Loans made on the security of multifamily or commercial
property may entail risks of delinquency and foreclosure, and risks of loss in
the event thereof, that are greater than similar risks associated with loans
made on the security of single-family property. See "Description of the Trust
Funds--Mortgage Loans". The ability of a borrower to repay a loan secured by an
income-producing property typically is dependent primarily upon the successful
operation of such property rather than upon the existence of independent income
or assets of the borrower; thus, the value of an income-producing property is
directly related to the net operating income derived from such property. If the
net operating income of the property is reduced (for example, if rental or
occupancy rates decline or real estate tax rates or other operating expenses
increase), the borrower's ability to repay the loan may be impaired. A number
of the Mortgage Loans may be secured by liens on owner-occupied Mortgaged
Properties or on Mortgaged Properties leased to a single tenant. Accordingly, a
decline in the financial condition of the borrower or single tenant, as
applicable, may have a disproportionately greater effect on the net operating
income from such Mortgaged Properties than would be the case with respect to
Mortgaged Properties
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with multiple tenants. Furthermore, the value of any Mortgaged Property may be
adversely affected by risks generally incident to interests in real property,
including various events which the Sponsor, a Master Servicer and a Special
Servicer may be unable to predict or control such as changes in general or
local economic conditions and/or specific industry segments; declines in real
estate values; declines in rental or occupancy rates; increases in interest
rates, real estate tax rates and other operating expenses; changes in
governmental rules, regulations and fiscal policies, including environmental
legislation; acts of God; environmental hazards; and social unrest and civil
disturbances.
In addition, additional risk may be presented by the type and use of a
particular Mortgaged Property. For instance, Mortgaged Properties that operate
as hospitals and nursing homes may present special risks to lenders due to the
significant governmental regulation of the ownership, operation, maintenance
and financing of health care institutions. Hotel and motel properties are often
operated pursuant to franchise, management or operating agreements which may be
terminable by the franchisor or operator. Moreover, the transferability of a
hotel's operating, liquor and other licenses upon a transfer of the hotel,
whether through purchase or foreclosure, is subject to local law requirements.
It is anticipated that some or all of the Mortgage Loans included in
any Trust Fund will be nonrecourse loans or loans for which recourse may be
restricted or unenforceable. As to those Mortgage Loans, recourse in the event
of borrower default will be limited to the specific real property and other
assets, if any, that were pledged to secure the Mortgage Loan. However, even
with respect to those Mortgage Loans that provide for recourse against the
borrower and its assets generally, there can be no assurance that enforcement
of such recourse provisions will be practicable, or that the assets of the
borrower will be sufficient to permit a recovery in respect of a defaulted
Mortgage Loan in excess of the liquidation value of the related Mortgaged
Property.
Further, the concentration of default, foreclosure and loss risks in
individual Mortgage Loans in a particular Trust Fund will generally be greater
than for pools of single-family loans because Mortgage Loans in a Trust Fund
will generally consist of a smaller number of higher balance loans than would a
pool of single-family loans of comparable aggregate unpaid principal balance.
BALLOON PAYMENTS; BORROWER DEFAULT
Certain of the Mortgage Loans included in a Trust Fund may not be
fully amortizing, and in some cases may provide for no amortization over their
terms to maturity and, thus, will require substantial principal payments (that
is, balloon payments) at their stated maturity. Mortgage Loans of this type
involve a greater degree of risk than self-amortizing loans because the ability
of a borrower to make a balloon payment typically will depend upon its ability
either to refinance the loan or to sell the related Mortgaged Property. The
ability of a borrower to accomplish either of these goals will be affected by a
number of factors, including the value of the related Mortgaged Property, the
level of available mortgage rates at the time of sale or refinancing, the
borrower's equity in the related Mortgaged Property, the financial condition
and operating history of the borrower and the related Mortgaged Property, tax
laws, rent control laws (with respect to certain residential properties),
Medicaid and Medicare reimbursement rates (with respect to hospitals and
nursing homes), prevailing general economic conditions and the availability of
credit for loans secured by commercial or multifamily, as the case may be, real
properties generally. Neither the Sponsor nor any of its affiliates will be
required to refinance any Mortgage Loan.
If and to the extent described herein and in the related Prospectus
Supplement, in order to maximize recoveries on defaulted Mortgage Loans, the
Master Servicer and/or Special Servicer for a Trust Fund will be permitted
(within prescribed limits) to extend and modify the Mortgage Loans in such
Trust Fund that are in default or as to which a payment default is either
reasonably foreseeable or imminent. In addition, if any such Mortgage Loan
thereafter comes current in accordance with its modified terms, the Special
Servicer may receive
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a workout fee based on receipts from or proceeds of such Mortgage Loans. While
a Master Servicer and/or Special Servicer generally will be required to
determine that any such extension or modification is reasonably likely to
produce a greater recovery on a present value basis than liquidation, there can
be no assurance that any such extension or modification (particularly taking
account of the payment of a workout fee to the Special Servicer) will in fact
increase the present value of receipts from or proceeds of the affected
Mortgage Loans.
CREDIT SUPPORT LIMITATIONS
The Prospectus Supplement for a series of Offered Certificates will
describe any Credit Support provided with respect thereto. Use of Credit
Support will be subject to the conditions and limitations described herein and
in the related Prospectus Supplement. Moreover, such Credit Support may not
cover all potential losses or risks; for example, Credit Support may or may not
cover fraud or negligence by a mortgage loan originator or other parties.
A series of Certificates may include one or more classes of
Subordinate Certificates (which may include Offered Certificates) if so
provided in the related Prospectus Supplement. Although subordination is
intended to reduce the risk to holders of Senior Certificates of delinquent
distributions or ultimate losses, the amount of subordination will be limited
and may decline under certain circumstances. In addition, if principal payments
on one or more classes of Certificates of a series are made in a specified
order of priority, any limits with respect to the aggregate amount of claims
under any related Credit Support may be exhausted before the principal of the
later paid classes of Certificates of such series has been repaid in full. As a
result, the impact of losses and shortfalls experienced with respect to the
Mortgage Assets may fall primarily upon those classes of Certificates having a
later right of payment. Moreover, if a form of Credit Support covers more than
one series of Certificates, holders of Certificates of one series will be
subject to the risk that such Credit Support will be exhausted by the claims of
the holders of Certificates of one or more other series.
The amount of any applicable Credit Support supporting one or more
classes of Offered Certificates, including the subordination of one or more
classes of Certificates, will be determined on the basis of criteria
established by each Rating Agency rating such classes of Certificates that take
into account an assumed level of defaults, delinquencies and losses on the
underlying Mortgage Assets. There can, however, be no assurance that the loss
experience on the related Mortgage Assets will not exceed such assumed levels.
See "--Limited Nature of Credit Ratings", "Description of the Certificates" and
"Description of Credit Support".
ENFORCEABILITY
Mortgages may contain a due-on-sale clause, which permits the lender
to accelerate the maturity of the Mortgage Loan if the mortgagor sells,
transfers or conveys the related Mortgaged Property or its interest in the
Mortgaged Property. Mortgages may also include a debt-acceleration clause,
which permits the lender to accelerate the debt upon a monetary or non-monetary
default of the mortgagor. Such clauses are generally enforceable subject to
certain exceptions. The courts of all states will generally enforce clauses
providing for acceleration in the event of a material payment default. The
equity courts of any state, however, may refuse the foreclosure of a mortgage
or deed of trust when an acceleration of the indebtedness would be inequitable
or unjust or the circumstances would render the acceleration unconscionable.
Notes and mortgages may contain provisions that obligate the Mortgagor
to pay a late charge or additional interest if payments are not timely made,
and in some circumstances, may prohibit prepayments for a specified period
and/or condition prepayments upon the Mortgagor's payment of prepayment fees or
yield maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a Mortgagor
for delinquent payments. Certain states also limit the amounts that a lender
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may collect from a Mortgagor as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.
LEASES AND RENTS AS SECURITY FOR A MORTGAGE LOAN
The Mortgage Loans included in any Trust Fund typically will be
secured by an assignment of leases and rents pursuant to which the borrower
assigns to the lender its right, title and interest as landlord under the
leases of the related Mortgaged Property, and the income derived therefrom, as
further security for the related Mortgage Loan, while retaining a license to
collect rents for so long as there is no default. If the borrower defaults, the
license terminates and the lender is entitled to collect rents. Some state laws
may require that the lender take possession of the Mortgaged Property and
obtain a judicial appointment of a receiver before becoming entitled to collect
the rents. In addition, if bankruptcy or similar proceedings are commenced by
or in respect of the borrower, the lender's ability to collect the rents may be
adversely affected. See "Certain Legal Aspects of Mortgage Loans--Leases and
Rents".
ENVIRONMENTAL RISKS
Under the laws of certain states, contamination of real property may
give rise to a lien on the property to assure the costs of cleanup. In several
states, such a lien has priority over an existing mortgage lien on such
property. In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), a lender may be liable, as an "owner" or "operator", for costs of
addressing releases or threatened releases of hazardous substances on a
property, if agents or employees of the lender have become sufficiently
involved in the operations of the borrower, regardless of whether or not the
environmental damage or threat was caused by the borrower or a prior owner. A
lender also risks such liability on foreclosure of the mortgage. Unless
otherwise specified in the related Prospectus Supplement, if a Trust Fund
includes Mortgage Loans, then the related Pooling Agreement will contain
provisions generally to the effect that neither the Master Servicer nor the
Special Servicer may, on behalf of the Trust Fund, acquire title to a Mortgaged
Property or assume control of its operation unless the Special Servicer, based
upon a report prepared by a person who regularly conducts environmental site
assessments, has made the determination that it is appropriate to do so, as
described under "Description of the Pooling Agreements--Realization Upon
Defaulted Mortgage Loans". See "Certain Legal Aspects of Mortgage
Loans--Environmental Risks".
SPECIAL HAZARD LOSSES
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer and Special Servicer for any Trust Fund will each be required
to cause the borrower on each Mortgage Loan serviced by it to maintain such
insurance coverage in respect of the related Mortgaged Property as is required
under the related Mortgage, including hazard insurance; provided that, as and
to the extent described herein and in the related Prospectus Supplement, each
of the Master Servicer and the Special Servicer may satisfy its obligation to
cause hazard insurance to be maintained with respect to any Mortgaged Property
through acquisition of a blanket policy. In general, the standard form of fire
and extended coverage policy covers physical damage to or destruction of the
improvements of the property by fire, lightning, explosion, smoke, windstorm
and hail, and riot, strike and civil commotion, subject to the conditions and
exclusions specified in each policy. Although the policies covering the
Mortgaged Properties will be underwritten by different insurers under different
state laws in accordance with different applicable state forms, and therefore
will not contain identical terms and conditions, most such 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 mudflows), wet or dry rot, vermin, domestic animals
and other kinds of risks not specified in the preceding sentence. Unless
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the related Mortgage specifically requires the mortgagor to insure against
physical damage arising from such causes, then, to the extent any consequent
losses are not covered by Credit Support, such losses may be borne, at least in
part, by the holders of one or more classes of Offered Certificates of the
related series. See "Description of the Pooling Agreements--Hazard Insurance
Policies".
ERISA CONSIDERATIONS
Generally, ERISA applies to investments made by employee benefit plans
and transactions involving the assets of such plans. Due to the complexity of
regulations that govern such plans, prospective investors that are subject to
ERISA are urged to consult their own counsel regarding consequences under ERISA
of acquisition, ownership and disposition of the Offered Certificates of any
series. See "ERISA Considerations".
CERTAIN FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES
Holders of REMIC Residual Certificates will be required to report on
their federal income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC, regardless of the amount or timing of their
receipt of cash payments, as described under "Material Federal Income Tax
Consequences--REMICs". REMIC Residual Certificates may have "phantom income"
associated with them, which is to say that taxable income may be reportable
with respect to a REMIC Residual Certificate early in the term of the related
REMIC with a corresponding amount of tax losses reportable in later years of
that REMIC's term. Under these circumstances, the present value of the tax
detriments with respect to the related REMIC Residual Certificates exceeds the
present value of the related tax benefits accruing later. Therefore, the
after-tax yield on a REMIC Residual Certificate may be significantly less than
that of a corporate bond or stripped instrument having similar cash flow
characteristics, and certain REMIC Residual Certificates may have a negative
"value". The requirement that holders of REMIC Residual Certificates report
their pro rata share of the taxable income and net loss of the REMIC will
continue until the Certificate Balances of all classes of Certificates of the
related series have been reduced to zero. All or a portion of such a
Certificateholder's share of the REMIC taxable income may be treated as "excess
inclusion" income to such holder, which (i) generally will not be subject to
offset by losses from other activities, (ii) for a tax-exempt holder, will be
treated as unrelated business taxable income and (iii) for a foreign holder,
will not qualify for exemption from withholding tax. Moreover, because an
amount of gross income equal to the fees and non-interest expenses of each
REMIC will be allocated to the REMIC Residual Certificates, but such expenses
will be deductible by holders of REMIC Residual Certificates who are
individuals only as miscellaneous itemized deductions, REMIC Residual
Certificates will generally not be appropriate investments for individuals,
estates or trusts or for pass-through entities (including partnerships and S
corporations) beneficially owned by, or having as partners or shareholders, one
or more individuals, estates or trusts. In addition, REMIC Residual
Certificates are subject to certain restrictions on transfer, including, but
not limited to, a prohibition to investors that are not United States Persons
(as defined herein).
BOOK-ENTRY REGISTRATION
If so provided in the related Prospectus Supplement, one or more
classes of the Offered Certificates of any series will be issued as Book-Entry
Certificates. Each class of Book-Entry Certificates will be initially
represented by one or more Certificates registered in the name of a nominee for
DTC. As a result, unless and until corresponding Definitive Certificates are
issued, the Certificate Owners with respect to any class of Book-Entry
Certificates will be able to exercise the rights of Certificateholders only
indirectly through DTC and its participating organizations ("Participants"). In
addition, the access of Certificate Owners to information regarding the
Book-Entry Certificates in which they hold interests may be limited. Conveyance
of notices and other communications by DTC to its Participants, and directly
and indirectly through such Participants to Certificate Owners, will be
governed by arrangements among them, subject to any statutory or regulatory
requirements as
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may be in effect from time to time. Furthermore, as described herein,
Certificate Owners may suffer delays in the receipt of payments on the
Book-Entry Certificates, and the ability of any Certificate Owner to pledge or
otherwise take actions with respect to its interest in the Book-Entry
Certificates may be limited due to the lack of a physical certificate
evidencing such interest. See "Description of the Certificates--Book-Entry
Registration and Definitive Certificates".
POTENTIAL CONFLICTS OF INTEREST
If so specified in the related Prospectus Supplement, the Master
Servicer may also perform the duties of Special Servicer, and the Master
Servicer, the Special Servicer or the Trustee may also perform the duties of
REMIC Administrator. If so specified in the related Prospectus Supplement, an
affiliate of the Sponsor, or the Mortgage Asset Seller or an affiliate thereof,
may perform the functions of Master Servicer, Special Servicer and/or REMIC
Administrator. In addition, any party to a Pooling Agreement or any affiliate
thereof may own Certificates. Investors in the Offered Certificates should
consider that any resulting conflicts of interest could affect the performance
of duties under the related Pooling Agreement. For example, if the same party
serves as both Master Servicer and Special Servicer for any Trust Fund and, as
Master Servicer, such party is obligated to make advances in respect of
delinquent payments on the Mortgage Loans in such Trust Fund, or if the Master
Servicer or Special Servicer for any Trust Fund owns a significant portion of
any class of Offered Certificates of the related series, then, notwithstanding
the applicable servicing standard imposed by the related Prospectus Supplement,
either such fact could influence servicing decisions in respect of the Mortgage
Loans in such Trust Fund. Also, as specified in the related Prospectus
Supplement, the holders of interests in a specified class or classes of
Subordinate Certificates may have the ability to replace the Special Servicer
or direct the Special Servicer's actions in connection with liquidating or
modifying defaulted Mortgage Loans. Accordingly, investors in those Classes of
Offered Certificates more senior thereto should consider that, although the
Special Servicer will be obligated to act in accordance with the terms of the
Pooling Agreement and will be governed by the servicing standard described
therein, it may have interests when dealing with defaulted Mortgage Loans that
are in conflict with those of holders of the Offered Certificates.
DELINQUENT MORTGAGE LOANS
If so provided in the related Prospectus Supplement, the Trust Fund
for a particular series of Certificates may include Mortgage Loans that are
past due. Unless otherwise described in the related Prospectus Supplement, the
servicing of such Mortgage Loans as to which a specified number of payments are
delinquent will be performed by the Special Servicer; however, the same entity
may act as both Master Servicer and Special Servicer. Credit Support provided
with respect to a particular series of Certificates may not cover all losses
related to such delinquent Mortgage Loans, and investors should consider the
risk that the inclusion of such Mortgage Loans in the Trust Fund may adversely
affect the rate of defaults and involuntary prepayments on the Mortgage Assets
in such Trust Fund and the yield on the Offered Certificates of such series. See
"Description of the Trust Funds--Mortgage Loans--General".
DESCRIPTION OF THE TRUST FUNDS
GENERAL
The primary assets of each Trust Fund will consist of (i) one or more
various types of multifamily or commercial real estate loans or participations
therein (the "Mortgage Loans"), (ii) mortgage pass-through certificates or
other mortgage-backed securities ("MBS") that evidence interests in, or that
are secured by pledges of, one or more of various types of multifamily or
commercial real estate loans or (iii) a combination of Mortgage
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Loans and MBS (collectively, "Mortgage Assets"). Each Trust Fund will be
established by Mortgage Capital Funding, Inc. (the "Sponsor"). Each Mortgage
Asset will be selected by the Sponsor for inclusion in a Trust Fund from among
those purchased, either directly or indirectly, from a prior holder thereof (a
"Mortgage Asset Seller"), which prior holder may or may not be the originator
of such Mortgage Loan or the issuer of such MBS and may be an affiliate of the
Sponsor. The Mortgage Assets will not be guaranteed or insured by the Sponsor
or any of its affiliates or, unless otherwise provided in the related
Prospectus Supplement, by any governmental agency or instrumentality or by any
other person. The discussion below under the heading "--Mortgage Loans", unless
otherwise noted, applies equally to real estate loans underlying any MBS
included in a particular Trust Fund.
MORTGAGE LOANS
General. The Mortgage Loans will be evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages, deeds of trust or similar security
instruments (the "Mortgages") that create liens on fee or leasehold estates in,
or cooperative shares relating to, properties (the "Mortgaged Properties")
consisting of, without limitation, (i) residential buildings with multiple
dwelling units and mobile home parks ("Multifamily Properties") or (ii) office
buildings, retail stores, hotels or motels, nursing homes, hospitals or other
health care-related facilities, recreational vehicle parks, warehouse
facilities, mini-warehouse facilities, self-storage facilities, industrial
facilities, mixed use or various other types of income-producing properties or
unimproved land ("Commercial Properties"). The Mortgaged Properties may include
mixed commercial and residential structures and may include apartment buildings
or commercial structures owned by private cooperative corporations
("Cooperatives"). If so specified in the related Prospectus Supplement, certain
Mortgage Loans (the "Cooperative Loans") will be secured by security interests
in shares ("Cooperative Shares") in a Cooperative that give the owner thereof
the right to occupy particular multiple dwelling units or a particular
commercial unit in the cooperative building or complex. Unless otherwise
specified in the related Prospectus Supplement, each Mortgage will create a
first priority mortgage lien on a borrower's fee estate in a Mortgaged
Property. If a Mortgage creates a lien on a borrower's leasehold estate in a
property, then, unless otherwise specified in the related Prospectus
Supplement, the term of any such leasehold will exceed the term of the Mortgage
Note by at least ten years. Unless otherwise specified in the related
Prospectus Supplement, each Mortgage Loan will have been originated by a person
(the "Originator") other than the Sponsor; however, the Originator may be or
may have been an affiliate of the Sponsor.
The Mortgaged Properties securing the Mortgage Loans in any Mortgage
Asset Pool may be located in the United States, its territories and
possessions, the Commonwealth of Puerto Rico and, in a limited number of cases,
outside the foregoing jurisdictions.
If so specified in the related Prospectus Supplement, Mortgage Assets
for a series of Certificates may include Mortgage Loans made on the security of
real estate projects under construction. In that case, the related Prospectus
Supplement will describe the procedures and timing for making disbursements
from construction reserve funds as portions of the related real estate project
are completed. In addition, the Mortgage Assets for a particular series of
Certificates may include Mortgage Loans that are delinquent
as of the date such Certificates are issued. In that case, the related
Prospectus Supplement will set forth, as to each such Mortgage Loan, available
information as to the period of such delinquency, any forbearance arrangement
then in effect, the condition of the related Mortgaged Property and the ability
of the Mortgaged Property to generate income to service the mortgage debt.
Default and Loss Considerations with Respect to the Mortgage Loans.
Mortgage loans secured by liens on income-producing properties are
substantially different from loans made on the security of owner-occupied
single-family homes. The repayment of a loan secured by a lien on an
income-producing property is typically dependent upon the successful operation
of such property (that is, its ability to generate income.)
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Moreover, some or all of the Mortgage Loans included in a particular Trust Fund
may be non-recourse loans, which means that, absent special facts, recourse in
the case of default will be limited to the Mortgaged Property and such other
assets, if any, that were pledged to secure repayment of the Mortgage Loan.
Lenders typically look to the Debt Service Coverage Ratio of a loan
secured by income-producing property as an important measure of the risk of
default on such a loan. Unless otherwise defined in the related Prospectus
Supplement, the "Debt Service Coverage Ratio" of a Mortgage Loan at any given
time is the ratio of (i) the Net Operating Income derived from the related
Mortgaged Property for a twelve-month period to (ii) the annualized scheduled
payments on the Mortgage Loan and any other loans senior thereto that are
secured by the related Mortgaged Property. Unless otherwise defined in the
related Prospectus Supplement, "Net Operating Income" means, for any given
period, the total operating revenues derived from a Mortgaged Property during
such period, minus the total operating expenses incurred in respect of such
Mortgaged Property during such period other than (i) non-cash items such as
depreciation and amortization, (ii) capital expenditures and (iii) debt service
on the related Mortgage Loan or on any other loans that are secured by such
Mortgaged Property. The Net Operating Income of a Mortgaged Property will
fluctuate over time and may or may not be sufficient to cover debt service on
the related Mortgage Loan at any given time. As the primary source of the
operating revenues of a non-owner occupied, income-producing property, rental
income (and maintenance payments from tenant-stockholders of a Cooperative) may
be affected by the condition of the applicable real estate market and/or area
economy. In addition, properties typically leased, occupied or used on a
short-term basis (i.e., six months or less) such as certain health care-related
facilities, hotels and motels, and mini-warehouse and self-storage facilities,
tend to be affected more rapidly by changes in market or business conditions
than do properties typically leased for longer periods, such as warehouses,
retail stores, office buildings and industrial facilities. Commercial
Properties may be owner-occupied or leased to a single tenant. Thus, the Net
Operating Income of such a Mortgaged Property may depend substantially on the
financial condition of the borrower or the single tenant, and Mortgage Loans
secured by liens on such properties may pose greater risks than loans secured
by liens on Multifamily Properties or on multi-tenant Commercial Properties.
Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses, and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the risk of default on a Mortgage Loan. As may
be further described in the related Prospectus Supplement, in some cases leases
of Mortgaged Properties may provide that the lessee, rather than the
borrower/landlord, is responsible for payment of operating expenses ("Net
Leases"). However, the existence of such "net of expense" provisions will
result in stable Net Operating Income to the borrower/landlord only to the
extent that the lessee is able to absorb operating expense increases while
continuing to make rent payments.
Lenders also look to the Loan-to-Value Ratio of a mortgage loan as a
measure of risk of loss if a property must be liquidated following a default.
Unless otherwise defined in the related Prospectus Supplement, the
"Loan-to-Value Ratio" of a Mortgage Loan at any given time is the ratio
(expressed as a percentage) of (i) the then outstanding principal balance of
the Mortgage Loan and any other loans pari passu therewith or senior thereto
that are secured by the related Mortgaged Property to (ii) the Value of the
related Mortgaged Property. The "Value" of a Mortgaged Property is generally
its fair market value determined in an appraisal obtained by the Originator at
the origination of such loan. The lower the Loan-to-Value Ratio, the greater
the percentage of the borrower's equity in a Mortgaged Property, and thus the
greater the cushion provided to the lender against loss on liquidation
following a default.
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Loan-to-Value Ratios will not necessarily constitute an accurate
measure of the risk of liquidation loss in a pool of Mortgage Loans. For
example, the value of a Mortgaged Property as of the date of initial issuance
of the related series of Certificates may be less than the Value determined at
loan origination, and will likely continue to fluctuate from time to time based
upon changes in economic conditions and the real estate market. Moreover, even
when current, an appraisal is not necessarily a reliable estimate of value.
Appraised values of income-producing properties are generally based on the
market comparison method (recent resale value of comparable properties at the
date of the appraisal), the cost replacement method (the cost of replacing the
property at such date), the income capitalization method (a projection of value
based upon the property's projected net cash flow), or upon a selection from or
interpolation of the values derived from such methods. Each of these appraisal
methods can present analytical difficulties. It is often difficult to find
truly comparable properties that have recently been sold; the replacement cost
of a property may have little to do with its current market value; and income
capitalization is inherently based on inexact projections of income and expense
and the selection of an appropriate capitalization rate. Where more than one of
these appraisal methods are used and provide significantly different results,
an accurate determination of value and, correspondingly, a reliable analysis of
default and loss risks, is even more difficult.
While the Sponsor believes that the foregoing considerations are
important factors that generally distinguish loans secured by liens on
income-producing real estate from single-family mortgage loans there is no
assurance that all of such factors will in fact have been prudently considered
by the Originators of the Mortgage Loans, or that, for a particular Mortgage
Loan, they are complete or relevant. See "Risk Factors--Certain Risks
Associated with Mortgage Loans Secured by Commercial and Multifamily
Properties" and "--Balloon Payments; Borrower Default".
Payment Provisions of the Mortgage Loans. Unless otherwise specified
in the related Prospectus Supplement, all of the Mortgage Loans will have had
original terms to maturity of not more than approximately 40 years, and will
provide for scheduled payments of principal, interest or both, to be made on
specified dates ("Due Dates") that occur monthly, quarterly, semi-annually or
annually. A Mortgage Loan (i) may provide for accrual of interest thereon at an
interest rate (a "Mortgage Rate") that is fixed over its term or that adjusts
from time to time, or that may be converted at the borrower's election from an
adjustable to a fixed Mortgage Rate, or from a fixed to an adjustable Mortgage
Rate, and in some cases back again, (ii) may provide for level payments to
maturity or for payments that adjust from time to time to accommodate changes
in the Mortgage Rate or to reflect the occurrence of certain events, and may
permit negative amortization, (iii) may be fully amortizing over its term to
maturity or may require a balloon payment on its stated maturity date, (iv) may
provide for no amortization prior to its stated maturity date, and (v) may
contain a prohibition on prepayment (the period of such prohibition, a
"Lock-out Period" and its date of expiration, a "Lock-out Date") and/or require
payment of a premium or a yield maintenance amount (a "Prepayment Premium") in
connection with a prepayment, in each case as described in the related
Prospectus Supplement. A Mortgage Loan may also contain a provision that
entitles the lender to a share of profits realized from the operation or
disposition of the Mortgaged Property (an "Equity Participation"), as described
in the related Prospectus Supplement. If holders of any class or classes of
Offered Certificates of a series will be entitled to all or a portion of an
Equity Participation in addition to normal payments of interest on and/or
principal of such Offered Certificates, the related Prospectus Supplement will
describe the Equity Participation and the method or methods by which
distributions in respect thereof will be made to such holders.
Mortgage Loan Information in Prospectus Supplements. Each Prospectus
Supplement will contain certain information pertaining to the Mortgage Loans
which will generally be current as of a date specified in the related
Prospectus Supplement and which, to the extent then applicable and specifically
known to the Sponsor, will include the following: (i) the aggregate outstanding
principal balance and the largest, smallest and average
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outstanding principal balance of the Mortgage Loans, (ii) the type or types of
property that provide security for repayment of the Mortgage Loans, (iii) the
origination date and maturity date of the Mortgage Loans, (iv) the original and
remaining terms to maturity of the Mortgage Loans, or the respective ranges
thereof, and the weighted average original and remaining terms to maturity of
the Mortgage Loans, (v) the current Loan-to-Value Ratios of the Mortgage Loans,
or the range thereof, and the weighted average current Loan-to-Value Ratio of
the Mortgage Loans, in each case based on an appraisal done at origination or,
in some instances, a more recent appraisal, (vi) the Mortgage Rates borne by
the Mortgage Loans, or the range thereof, and the weighted average Mortgage
Rate borne by the Mortgage Loans, (vii) with respect to Mortgage Loans with
adjustable Mortgage Rates ("ARM Loans"), the index or indices upon which such
adjustments are based, the adjustment dates, the range of gross margins and the
weighted average gross margin, and any limits on Mortgage Rate adjustments at
the time of any adjustment and over the life of the ARM Loan, (viii)
information regarding the payment characteristics of the Mortgage Loans,
including without limitation balloon payment and other amortization provisions,
Lock-out Periods and Prepayment Premiums, (ix) the Debt Service Coverage Ratios
of the Mortgage Loans (either at origination or as of a more recent date), or
the range thereof, and the weighted average of such Debt Service Coverage
Ratios, and (x) the geographic distribution of the Mortgaged Properties on a
state-by-state basis. In appropriate cases, the related Prospectus Supplement
will, as to certain Mortgage Loans, provide the information described above on
a loan-by-loan basis and will also contain certain information available to the
Sponsor that pertains to the provisions of leases and the nature of tenants of
the Mortgaged Properties. If the Sponsor is unable to tabulate the specific
information described above at the time Offered Certificates of a series are
initially offered, more general information of the nature described above will
be provided in the related Prospectus Supplement, and specific information will
be set forth in a report which will be available to purchasers of those
Certificates at or before the initial issuance thereof and will be filed as
part of a Current Report on Form 8-K with the Commission within fifteen days
following such issuance.
MBS
MBS may include (i) private (that is, not guaranteed or insured by the
United States or any agency or instrumentality thereof) mortgage pass-through
certificates or other mortgage-backed securities or (ii) certificates insured
or guaranteed by FHLMC, FNMA, GNMA or FAMC, provided that each MBS will
evidence an interest in, or will be secured by a pledge of, real estate loans
that conform to the descriptions of the Mortgage Loans contained herein.
Any MBS will have been issued pursuant to a pooling and servicing
agreement, an indenture or similar agreement (an "MBS Agreement"). The issuer
of the MBS (the "MBS Issuer") and/or the servicer of the underlying real estate
loans (the "MBS Servicer") will have entered into the MBS Agreement, generally
with a trustee (the "MBS Trustee") or, in the alternative, with the original
purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with
characteristics similar to the classes of Certificates described herein.
Distributions in respect of the MBS will be made by the MBS Servicer or the MBS
Trustee on the dates specified in the related Prospectus Supplement. The MBS
Issuer or the MBS Servicer or another person specified in the related
Prospectus Supplement may have the right or obligation to repurchase or
substitute assets underlying the MBS after a certain date or under other
circumstances specified in the related Prospectus Supplement.
Reserve funds, subordination or other credit support similar to that
described for the Certificates under "Description of Credit Support" may have
been provided with respect to the MBS. The type, characteristics and amount of
such credit support, if any, will reflect the characteristics of the MBS and
the underlying mortgage loans and generally will have been established on the
basis of the requirements of any Rating Agency that may have assigned a rating
to the MBS, or by the initial purchasers of the MBS.
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The Prospectus Supplement for a series of Certificates that evidence
interests in MBS will specify, to the extent available, (i) the aggregate
approximate initial and outstanding principal amount and type of the MBS to be
included in the Trust Fund, (ii) the original and remaining term to stated
maturity of the MBS, if applicable, (iii) the pass-through or bond rate of the
MBS or the formula for determining such rates, (iv) the payment characteristics
of the MBS, (v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable,
(vi) a description of the credit support, if any, (vii) the circumstances under
which the related underlying mortgage loans, or the MBS themselves, may be
purchased prior to their maturity, (viii) the terms on which real estate loans
may be substituted for those originally underlying the MBS, (ix) the type of
mortgage loans underlying the MBS and, to the extent available to the Sponsor
and appropriate under the circumstances, such other information in respect of
the underlying real estate loans described under "--Mortgage Loans--Mortgage
Loan Information in Prospectus Supplements" and (x) the characteristics of any
cash flow agreements that relate to the MBS.
CERTIFICATE ACCOUNTS
Each Trust Fund will include one or more accounts (collectively, the
"Certificate Account") established and maintained on behalf of the
Certificateholders into which the person or persons designated in the related
Prospectus Supplement will, to the extent provided in the related Pooling
Agreement and described herein and in the related Prospectus Supplement,
deposit all payments and collections received or advanced with respect to the
Mortgage Assets and other assets in the Trust Fund. A Certificate Account may
be maintained as an interest bearing or a non-interest bearing account, and
funds held therein may be held as cash or invested in certain obligations
acceptable to each Rating Agency rating one or more classes of the related
series of Offered Certificates.
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Mortgage Assets in the
related Trust Fund may be provided to one or more classes of Certificates in
the related series in the form of subordination of one or more other classes of
Certificates in such series or by one or more other types of credit support,
such as a letter of credit, insurance policy, guarantee or reserve fund, among
others, or a combination thereof (any such coverage with respect to the
Certificates of any series, "Credit Support"). If so specified in the related
Prospectus Supplement, any form of Credit Support may offer protection only
against specific types of losses and shortfalls. The amount and types of Credit
Support, the coverage afforded by it, the identification of the entity
providing it (if applicable) and related information with respect to each type
of Credit Support, if any, will be set forth in the Prospectus Supplement for a
series of Offered Certificates. See "Risk Factors--Credit Support Limitations"
and "Description of Credit Support".
CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund
may include guaranteed investment contracts pursuant to which moneys held in
the funds and accounts established for the related series will be invested at a
specified rate. The Trust Fund may also include certain other agreements, such
as interest rate exchange agreements, interest rate cap or floor agreements,
currency exchange agreements or similar agreements designed to reduce the
effects of interest rate or currency exchange rate fluctuations on the Mortgage
Assets on one or more classes of Certificates. The principal terms of any such
guaranteed investment contract or other agreement (any such agreement, a "Cash
Flow Agreement"), and the identity of the Cash Flow Agreement obligor, will be
described in the Prospectus Supplement for a series of Offered Certificates.
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YIELD AND MATURITY CONSIDERATIONS
GENERAL
The yield on any Offered Certificate will depend on the price paid by
the Certificateholder, the Pass-Through Rate of the Certificate and the amount
and timing of distributions on the Certificate. See "Risk Factors--Prepayments;
Average Life of Certificates; Yields". The following discussion contemplates a
Trust Fund that consists solely of Mortgage Loans. While the characteristics
and behavior of real estate loans underlying MBS can generally be expected to
have the same effect on the yield to maturity and/or weighted average life of a
Class of Certificates as will the characteristics and behavior of comparable
Mortgage Loans, the effect may differ due to the payment characteristics of the
MBS. If a Trust Fund includes MBS, the related Prospectus Supplement will
discuss the effect that the MBS payment characteristics may have on the yield
to maturity and weighted average lives of the Offered Certificates offered
thereby.
PASS-THROUGH RATE
The Certificates of any class within a series may have a fixed,
variable or adjustable Pass-Through Rate, which may or may not be based upon
the interest rates borne by the Mortgage Loans in the related Trust Fund. The
Prospectus Supplement with respect to any series of Offered Certificates will
specify the Pass-Through Rate for each class of such Certificates or, in the
case of a class of Offered Certificates with a variable or adjustable
Pass-Through Rate, the method of determining the Pass-Through Rate; the effect,
if any, of the prepayment of any Mortgage Loan on the Pass-Through Rate of one
or more classes of Offered Certificates; and whether the distributions of
interest on the Offered Certificates of any class will be dependent, in whole
or in part, on the performance of any obligor under a Cash Flow Agreement.
PAYMENT DELAYS
With respect to any series of Certificates, a period of time will
elapse between the date upon which payments on the Mortgage Loans in the
related Trust Fund are due and the Distribution Date on which such payments are
passed through to Certificateholders. That delay will effectively reduce the
yield that would otherwise be produced if payments on such Mortgage Loans were
distributed to Certificateholders on or near the date they were due.
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full or in part is made on a Mortgage
Loan, the borrower is generally charged interest only for the period from the
Due Date of the preceding scheduled payment up to the date of such prepayment,
instead of up to the Due Date for the next succeeding scheduled payment.
However, interest accrued on any series of Certificates and distributable
thereon on any Distribution Date will generally correspond to interest accrued
on the Mortgage Loans to their respective Due Dates during the related Due
Period. Unless otherwise specified in the related Prospectus Supplement, a "Due
Period" is a specified time period generally corresponding in length to the
time period between Distribution Dates, and all scheduled payments on the
Mortgage Loans in any Trust Fund that are due during a given Due Period will,
to the extent received by a specified date (the "Determination Date") or
otherwise advanced by the related Master Servicer, Special Servicer or other
specified person, be distributed to the related series of Certificateholders on
the next succeeding Distribution Date. Consequently, if a prepayment on any
Mortgage Loan is distributable to Certificateholders on a particular
Distribution Date, but such prepayment is not accompanied by interest thereon
to the Due Date for such Mortgage Loan in the related Due Period, then the
interest charged to the borrower (net of servicing and administrative fees) may
be less (such shortfall, a "Prepayment Interest Shortfall") than the
corresponding amount
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of interest accrued and otherwise payable on the Certificates of the related
series. If and to the extent that any such shortfall is allocated to a class of
Offered Certificates, the yield thereon will be adversely affected. The
Prospectus Supplement for a series of Certificates will describe the manner in
which any such shortfalls will be allocated among the classes of such
Certificates. If so specified in the related Prospectus Supplement, the Master
Servicer will be required to apply some or all of its servicing compensation
for the corresponding period to offset the amount of any such shortfalls. The
related Prospectus Supplement will also describe any other amounts available to
offset such shortfalls. See "Description of the Pooling Agreements--Servicing
Compensation and Payment of Expenses".
YIELD AND PREPAYMENT CONSIDERATIONS
A Certificate's yield to maturity will be affected by the rate of
principal payments on the Mortgage Loans in the related Trust Fund and the
allocation thereof to reduce the principal balance (or notional amount, if
applicable) of such Certificate. The rate of principal payments on the Mortgage
Loans in any Trust Fund will in turn be affected by the amortization schedules
thereof (which, in the case of ARM Loans, will change periodically to
accommodate adjustments to the Mortgage Rates thereon), the dates on which any
balloon payments are due, and the rate of principal prepayments thereon
(including for this purpose, prepayments resulting from liquidations of
Mortgage Loans due to defaults, casualties or condemnations affecting the
Mortgaged Properties, or purchases of Mortgage Loans out of the related Trust
Fund). Because the rate of principal prepayments on the Mortgage Loans in any
Trust Fund will depend on future events and a variety of factors (as described
more fully below), no assurance can be given as to such rate.
The extent to which the yield to maturity of a class of Offered
Certificates of any series may vary from the anticipated yield will depend upon
the degree to which they are purchased at a discount or premium and when, and
to what degree, payments of principal on the Mortgage Loans in the related
Trust Fund are in turn distributed on such Certificates (or, in the case of a
class of Stripped Interest Certificates, result in the reduction of the
Notional Amount thereof). An investor should consider, in the case of any
Offered Certificate purchased at a discount, the risk that a slower than
anticipated rate of principal payments on the Mortgage Loans in the related
Trust Fund could result in an actual yield to such investor that is lower than
the anticipated yield and, in the case of any Offered Certificate purchased at
a premium, the risk that a faster than anticipated rate of principal payments
on such Mortgage Loans could result in an actual yield to such investor that is
lower than the anticipated yield. In addition, if an investor purchases an
Offered Certificate at a discount (or premium), and principal payments are made
or otherwise result in reduction of the principal balance or notional amount of
such investor's Offered Certificates at a rate slower (or faster) than the rate
anticipated by the investor during any particular period, the consequent
adverse effects on such investor's yield would not be fully offset by a
subsequent like increase (or decrease) in the rate of such principal payments
at a later date.
A class of Certificates, including a class of Offered Certificates,
may provide that on any Distribution Date the holders of such Certificates are
entitled to a pro rata share of the prepayments on the Mortgage Loans in the
related Trust Fund that are distributable on such date, to a disproportionately
large share (which, in some cases, may be all) of such prepayments, or to a
disproportionately small share (which, in some cases, may be none) of such
prepayments. As and to the extent described in the related Prospectus
Supplement, the respective entitlements of the various classes of
Certificateholders of any series to receive payments (and, in particular,
prepayments) of principal of the Mortgage Loans in the related Trust Fund may
vary based on the occurrence of certain events (e.g., the retirement of one or
more classes of Certificates of such series) or subject to certain
contingencies (e.g., prepayment and default rates with respect to such Mortgage
Loans).
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In general, the Notional Amount of a class of Stripped Interest
Certificates will either (i) be based on the principal balances of some or all
of the Mortgage Assets in the related Trust Fund or (ii) equal the Certificate
Balances of one or more of the other classes of Certificates of the same
series. Accordingly, the yield on such Stripped Interest Certificates will be
inversely related to the rate at which payments and other collections of
principal are received on such Mortgage Assets or distributions are made in
reduction of the Certificate Balances of such classes of Certificates, as the
case may be.
Consistent with the foregoing, if a class of Certificates of any
series consists of Stripped Interest Certificates or Stripped Principal
Certificates, a lower than anticipated rate of principal prepayments on the
Mortgage Loans in the related Trust Fund will negatively affect the yield to
investors in Stripped Principal Certificates, and a higher than anticipated
rate of principal prepayments on such Mortgage Loans will negatively affect the
yield to investors in Stripped Interest Certificates. If the Offered
Certificates of a series include any such Certificates, the related Prospectus
Supplement will include a table showing the effect of various assumed levels of
prepayment on yields on such Certificates. Such tables will be intended to
illustrate the sensitivity of yields to various assumed prepayment rates and
will not be intended to predict, or provide information that will enable
investors to predict, yields or prepayment rates.
The Sponsor is not aware of any relevant publicly available or
authoritative statistics with respect to the historical prepayment experience
of a large group of multifamily or commercial mortgage loans. However, the
extent of prepayments of principal of the Mortgage Loans in any Trust Fund may
be affected by a number of factors, including, without limitation, the
availability of mortgage credit, the relative economic vitality of the area in
which the Mortgaged Properties are located, the quality of management of the
Mortgaged Properties, the servicing of the Mortgage Loans, possible changes in
tax laws and other opportunities for investment. In addition, the rate of
principal payments on the Mortgage Loans in any Trust Fund may be affected by
the existence of Lock-out Periods and requirements that principal prepayments
be accompanied by Prepayment Premiums, and by the extent to which such
provisions may be practicably enforced.
The rate of prepayment on a pool of mortgage loans is also affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. Even in the case of ARM Loans, as prevailing market interest rates
decline, and without regard to whether the Mortgage Rates on such ARM Loans
decline in a manner consistent therewith, the related borrowers may have an
increased incentive to refinance for purposes of either (i) converting to a
fixed rate loan and thereby "locking in" such rate or (ii) taking advantage of
the initial "teaser rate" (a mortgage interest rate below what it would
otherwise be if the applicable index and gross margin were applied) on another
adjustable rate mortgage loan.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash
flow needs or to make other investments. In addition, some borrowers may be
motivated by federal and state tax laws (which are subject to change) to sell
Mortgaged Properties prior to the exhaustion of tax depreciation benefits. The
Sponsor will make no representation as to the particular factors that will
affect the prepayment of the Mortgage Loans in any Trust Fund, as to the
relative importance of such factors, as to the percentage of the principal
balance of such Mortgage Loans that will be paid as of any date or as to the
overall rate of prepayment on such Mortgage Loans.
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WEIGHTED AVERAGE LIFE AND MATURITY
The rate at which principal payments are received on the Mortgage
Loans in any Trust Fund will affect the ultimate maturity and the weighted
average life of one or more classes of the Certificates of such series.
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of an instrument until each dollar allocable as
principal of such instrument is repaid to the investor.
The weighted average life and maturity of a class of Certificates of
any series will be influenced by the rate at which principal on the related
Mortgage Loans, whether in the form of scheduled amortization or prepayments
(for this purpose, the term "prepayment" includes voluntary prepayments,
liquidations due to default and purchases of Mortgage Loans out of the related
Trust Fund), is paid to such class. Prepayment rates on loans are commonly
measured relative to a prepayment standard or model, such as the Constant
Prepayment Rate ("CPR") prepayment model or the Standard Prepayment Assumption
("SPA") prepayment model. CPR represents an assumed constant rate of prepayment
each month (expressed as an annual percentage) relative to the then outstanding
principal balance of a pool of loans for the life of such loans. SPA represents
an assumed variable rate of prepayment each month (expressed as an annual
percentage) relative to the then outstanding principal balance of a pool of
loans, with different prepayment assumptions often expressed as percentages of
SPA. For example, a prepayment assumption of 100% of SPA assumes prepayment
rates of 0.2% per annum of the then outstanding principal balance of such loans
in the first month of the life of the loans and an additional 0.2% per annum in
each month thereafter until the thirtieth month. Beginning in the thirtieth
month, and in each month thereafter during the life of the loans, 100% of SPA
assumes a constant prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption
purports to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any particular pool of
loans. Moreover, the CPR and SPA models were developed based upon historical
prepayment experience for single-family loans. Thus, it is unlikely that the
prepayment experience of the Mortgage Loans included in any Trust Fund will
conform to any particular level of CPR or SPA.
The Prospectus Supplement with respect to each series of Certificates
will contain tables, if applicable, setting forth the projected weighted
average life of each class of Offered Certificates of such series and the
percentage of the initial Certificate Balance of each such class that would be
outstanding on specified Distribution Dates based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the
related Mortgage Loans are made at rates corresponding to various percentages
of CPR or SPA, or at such other rates specified in such Prospectus Supplement.
Such tables and assumptions will illustrate the sensitivity of the weighted
average lives of the Certificates to various assumed prepayment rates and will
not be intended to predict, or to provide information that will enable
investors to predict, the actual weighted average lives of the Certificates.
CONTROLLED AMORTIZATION CLASSES AND COMPANION CLASSES
A series of Certificates may include one or more Controlled
Amortization Classes that will entitle the holders thereof to receive principal
distributions according to a specified principal payment schedule, which
schedule is protected by prioritizing, as and to the extent described in the
related Prospectus Supplement, the principal payments from the Mortgage Loans
in the related Trust Fund. Unless otherwise specified in the related Prospectus
Supplement, each Controlled Amortization Class will either be a Planned
Amortization Class (a "PAC") or a Targeted Amortization Class (a "TAC"). In
general, a PAC has a "prepayment collar" (that is, a range of prepayment rates
that can be sustained without disruption) that determines the principal cash
flow of such Certificates. Such a prepayment collar is not static, and may
expand or contract after the issuance of the
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PAC depending upon the actual prepayment experience for the underlying Mortgage
Loans. Distributions of principal on a PAC would be made in accordance with the
specified schedule so long as prepayments on the underlying Mortgage Loans
remain at a relatively constant rate within the prepayment collar and, as
described below, Companion Classes exist to absorb "excesses" or "shortfalls"
in principal payments on the underlying Mortgage Loans. If the rate of
prepayment on the underlying Mortgage Loans from time to time falls outside the
prepayment collar, or fluctuates significantly within the prepayment collar,
especially for any extended period of time, such an event may have material
consequences in respect of the anticipated weighted average life and maturity
for a PAC. A TAC is structured so that principal distributions generally will
be payable thereon in accordance with its specified principal payment schedule
so long as the rate of prepayments on the related Mortgage Assets remains
relatively constant at the particular rate used in establishing such schedule.
A TAC will generally afford the holders thereof some protection against early
retirement or some protection against an extended average life, but not both.
Although prepayment risk cannot be eliminated entirely for any class
of Certificates, a Controlled Amortization Class will generally provide a
relatively stable cash flow so long as the actual rate of prepayment on the
Mortgage Loans in the related Trust Fund remains relatively constant at the
rate, or within the range of rates, of prepayment used to establish the
specific principal payment schedule for such Certificates. Prepayment risk with
respect to a given Mortgage Asset Pool does not disappear, however, and the
stability afforded to a Controlled Amortization Class comes at the expense of
one or more Companion Classes of the same series, any of which Companion
Classes may also be a class of Offered Certificates. In general, and as more
particularly described in the related Prospectus Supplement, a Companion Class
will entitle the holders thereof to a disproportionately large share of
prepayments on the Mortgage Loans in the related Trust Fund when the rate of
prepayment is relatively fast, and will entitle the holders thereof to a
disproportionately small share of prepayments on the Mortgage Loans in the
related Trust Fund when the rate of prepayment is relatively slow. A class of
Certificates that entitles the holders thereof to a disproportionately large
share of the prepayments on the Mortgage Loans in the related Trust Fund
enhances the risk of early retirement of such class ("call risk") if the rate
of prepayment is relatively fast; while a class of Certificates that entitles
the holders thereof to a disproportionately small share of the prepayments on
the Mortgage Loans in the related Trust Fund enhances the risk of an extended
average life of such class ("extension risk") if the rate of prepayment is
relatively slow. Thus, as and to the extent described in the related Prospectus
Supplement, a Companion Class absorbs some (but not all) of the "call risk"
and/or "extension risk" that would otherwise belong to the related Controlled
Amortization Class if all payments of principal of the Mortgage Loans in the
related Trust Fund were allocated on a pro rata basis.
OTHER FACTORS AFFECTING YIELD, WEIGHTED AVERAGE LIFE AND MATURITY
Balloon Payments; Extensions of Maturity. Some or all of the Mortgage
Loans included in a particular Trust Fund may require that balloon payments be
made at maturity. Because the ability of a borrower to make a balloon payment
typically will depend upon its ability either to refinance the loan or to sell
the related Mortgaged Property, there is a risk that Mortgage Loans that
require balloon payments may default at maturity, or that the maturity of such
a Mortgage Loan may be extended in connection with a workout. In the case of
defaults, recovery of proceeds may be delayed by, among other things,
bankruptcy of the borrower or adverse conditions in the market where the
property is located. In order to minimize losses on defaulted Mortgage Loans,
the Master Servicer and/or Special Servicer for a Trust Fund, to the extent and
under the circumstances set forth herein and in the related Prospectus
Supplement, may be authorized to modify Mortgage Loans in such Trust Fund that
are in default or as to which a payment default is imminent. Any defaulted
balloon payment or modification that extends the maturity of a Mortgage Loan
may delay distributions of principal on a class of
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Offered Certificates and thereby extend the weighted average life of such
Certificates and, if such Certificates were purchased at a discount, reduce the
yield thereon.
Negative Amortization. The weighted average life of a class of
Certificates can be affected by Mortgage Loans that permit negative
amortization to occur. A Mortgage Loan that permits negative amortization would
be expected during a period of increasing interest rates to amortize at a
slower rate (and perhaps not at all) than if interest rates were declining or
were remaining constant. Such slower rate of Mortgage Loan amortization would
correspondingly be reflected in a slower rate of amortization for one or more
classes of Certificates of the related series. In addition, negative
amortization on one or more Mortgage Loans in any Trust Fund may result in
negative amortization on the Certificates of the related series. The related
Prospectus Supplement will describe, if applicable, the manner in which
negative amortization in respect of the Mortgage Loans in any Trust Fund is
allocated among the respective classes of Certificates of the related series.
The portion of any Mortgage Loan negative amortization allocated to a class of
Certificates (other than certain classes of REMIC Residual Certificates) will
result in a deferral of some or all of the interest payable thereon, which
deferred interest may be added to the Certificate Balance thereof. Accordingly,
the weighted average lives of Mortgage Loans that permit negative amortization
(and that of the classes of Certificates to which any such negative
amortization would be allocated or which would bear the effects of a slower
rate of amortization on such Mortgage Loans) may increase as a result of such
feature.
Notwithstanding the foregoing, negative amortization generally occurs
in respect of those ARM Loans that allow for such because the related Mortgage
Note limits the amount by which the scheduled payment thereon may adjust in
response to a change in the Mortgage Rate thereon and/or the related Mortgage
Note provides that the scheduled payment thereon will adjust less frequently
than the Mortgage Rate thereon. Accordingly, during a period of declining
interest rates, the scheduled payment on a Mortgage Loan that permits negative
amortization may exceed the amount necessary to amortize the loan fully over
its remaining amortization schedule and pay interest at the then applicable
Mortgage Rate, thereby resulting in the accelerated amortization of such
Mortgage Loan. Any such acceleration in amortization of its principal balance
will shorten the weighted average life of such Mortgage Loan and,
correspondingly, the weighted average lives of those classes of Certificates
entitled to a portion of the principal payments on such Mortgage Loan.
The extent to which the yield on any Offered Certificate will be
affected by the inclusion in the related Trust Fund of Mortgage Loans that
permit negative amortization, will depend upon (i) whether such Offered
Certificate was purchased at a premium or a discount and (ii) the extent to
which the payment characteristics of such Mortgage Loans delay or accelerate
the distributions of principal on such Certificate (or, in the case of a
Stripped Interest Certificate, delay or accelerate the amortization of the
notional amount thereof). See "--Yield and Prepayment Considerations" above.
Foreclosures and Payment Plans. The number of foreclosures and the
principal amount of the Mortgage Loans that are foreclosed in relation to the
number and principal amount of Mortgage Loans that are repaid in accordance
with their terms will affect the weighted average lives of those Mortgage Loans
and, accordingly, the weighted average lives of and yields on the Certificates
of the related series. Servicing decisions made with respect to the Mortgage
Loans, including the use of payment plans prior to a demand for acceleration
and the restructuring of Mortgage Loans in bankruptcy proceedings, may also
have an effect upon the payment patterns of particular Mortgage Loans and thus
the weighted average lives of and yields on the Certificates of the related
series.
Losses and Shortfalls on the Mortgage Assets. The yield to holders of
the Offered Certificates of any series will directly depend on the extent to
which such holders are required to bear the effects of any losses or shortfalls
in collections arising out of defaults on the Mortgage Loans in the related
Trust Fund and the timing
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of such losses and shortfalls. In general, the earlier that any such loss or
shortfall occurs, the greater will be the negative effect on yield for any
class of Certificates that is required to bear the effects thereof.
The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated among
the respective classes of Certificates of the related series in the priority
and manner, and subject to the limitations, specified in the related Prospectus
Supplement. As described in the related Prospectus Supplement, such allocations
may result in reductions in the entitlements to interest and/or Certificate
Balances of one or more such classes of Certificates, or may be effected simply
by a prioritization of payments among such classes of Certificates.
The yield to maturity on a class of Subordinate Certificates may be
extremely sensitive to losses and shortfalls in collections on the Mortgage
Loans in the related Trust Fund.
Additional Certificate Amortization. In addition to entitling the
holders thereof to a specified portion (which may range from none to all) of
the principal payments received on the Mortgage Assets in the related Trust
Fund, one or more classes of Certificates of any series, including one or more
classes of Offered Certificates of such series, may provide for distributions
of principal thereof from (i) amounts attributable to interest accrued but not
currently distributable on one or more classes of Accrual Certificates, (ii)
Excess Funds or (iii) any other amounts described in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
"Excess Funds" will, in general, represent that portion of the amounts
distributable in respect of the Certificates of any series on any Distribution
Date that represent (i) interest received or advanced on the Mortgage Assets in
the related Trust Fund that is in excess of the interest currently
distributable on the Certificates of such series, as well as any interest
accrued but not currently distributable on any Accrual Certificates of such
series, or (ii) Prepayment Premiums, payments from Equity Participations or any
other amounts received on the Mortgage Assets in the related Trust Fund that do
not constitute interest thereon or principal thereof.
The amortization of any class of Certificates out of the sources
described in the preceding paragraph would shorten the weighted average life of
such Certificates and, if such Certificates were purchased at a premium, reduce
the yield thereon. The related Prospectus Supplement will discuss the relevant
factors to be considered in determining whether distributions of principal of
any class of Certificates out of such sources would have any material effect on
the rate at which such Certificates are amortized.
Optional Early Termination. If so specified in the related Prospectus
Supplement, a series of Certificates may be subject to optional early
termination through the repurchase of the Mortgage Assets in the related Trust
Fund by the party or parties specified therein, under the circumstances and in
the manner set forth therein. If so provided in the related Prospectus
Supplement, upon the reduction of the Certificate Balance of a specified class
or classes of Certificates by a specified percentage or amount, a party
specified therein may be authorized or required to solicit bids for the
purchase of all of the Mortgage Assets of the related Trust Fund, or of a
sufficient portion of such Mortgage Assets to retire such class or classes,
under the circumstances and in the manner set forth therein. In the absence of
other factors, any such early retirement of a class of Offered Certificates
would shorten the weighted average life thereof and, if such Certificates were
purchased at premium, reduce the yield thereon.
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MORTGAGE CAPITAL FUNDING, INC
The Sponsor was incorporated in the State of Delaware on October 7,
1986 under its former name of CitiCMO, Inc., and is a direct wholly-owned
subsidiary of Citicorp Banking Corporation, which in turn is a direct
wholly-owned subsidiary of Citicorp. The principal executive offices of the
Sponsor are located at 399 Park Avenue, 3rd floor, New York, New York 10043,
and its telephone number is (212) 559-6899. All inquiries, requests and other
communications to the Sponsor regarding the matters described herein should be
made or sent to the attention of "Real Estate Capital Markets". The Sponsor
does not have, nor is it expected in the future to have, any significant
assets.
On April 5, 1998, Citicorp, of which the Sponsor and Citibank, N.A.
are wholly-owned subsidiaries, and Travelers Group Inc. ("Travelers") agreed to
merge (the "Merger"). The combined company will be known as Citigroup. The
Merger is subject to customary closing conditions, including regulatory
approvals.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates of
any series will be applied by the Sponsor to the purchase of Trust Assets or
will be used by the Sponsor for general corporate purposes. The Sponsor expects
to sell the Certificates 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 Sponsor, prevailing interest rates,
availability of funds and general market conditions.
DESCRIPTION OF THE CERTIFICATES
GENERAL
Each series of Certificates will represent the entire beneficial
ownership interest in the Trust Fund created pursuant to the related Pooling
Agreement. As described in the related Prospectus Supplement, the Certificates
of each series, including the Offered Certificates of such series, may consist
of one or more classes of Certificates that: (i) provide for the accrual of
interest thereon at a fixed, variable or adjustable rate; (ii) are senior
(collectively, "Senior Certificates") or subordinate (collectively,
"Subordinate Certificates") to one or more other classes of Certificates in
entitlement to certain distributions on the Certificates; (iii) are entitled to
distributions of principal, with disproportionately small, nominal or no
distributions of interest (collectively, "Stripped Principal Certificates");
(iv) are entitled to distributions of interest, with disproportionately small,
nominal or no distributions of principal (collectively, "Stripped Interest
Certificates"); (v) provide for distributions of interest thereon or principal
thereof that commence only after the occurrence of certain events, such as the
retirement of one or more other classes of Certificates of such series; (vi)
provide for distributions of principal thereof to be made, from time to time or
for designated periods, at a rate that is faster (and, in some cases,
substantially faster) or slower (and, in some cases, substantially slower) than
the rate at which payments or other collections of principal are received on
the Mortgage Assets in the related Trust Fund; or (vii) provide for
distributions of principal thereof to be made, subject to available funds,
based on a specified principal payment schedule or other methodology.
Each class of Offered Certificates of a series will be issued in
minimum denominations corresponding to the principal balances or, in case of
Stripped Interest Certificates or certain REMIC Residual Certificates, notional
amounts or percentage interests, specified in the related Prospectus
Supplement. As provided in the related Prospectus Supplement, one or more
classes of Offered Certificates of any series may be issued in fully
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registered, definitive form (such Certificates, "Definitive Certificates") or
may be offered in book-entry format (such Certificates, "Book-Entry
Certificates") through the facilities of The Depository Trust Company ("DTC").
The Offered Certificates of each series (if issued as Definitive Certificates)
may be transferred or exchanged, subject to any restrictions on transfer
described in the related Prospectus Supplement, at the location specified in
the related Prospectus Supplement, without the payment of any service charges,
other than any tax or other governmental charge payable in connection
therewith. Interests in a class of Book-Entry Certificates will be transferred
on the book-entry records of DTC and its participating organizations
("Participants"). See "Risk Factors--Limited Assets for Payment of
Certificates" and "--Book-Entry Registration".
DISTRIBUTIONS
Distributions on the Certificates of each series will be made by or on
behalf of the related Trustee or Master Servicer on each Distribution Date as
specified in the related Prospectus Supplement from the Available Distribution
Amount for such series and such Distribution Date. Unless otherwise provided in
the related Prospectus Supplement, the "Available Distribution Amount" for any
series of Certificates and any Distribution Date will refer to the total of all
payments or other collections (or advances in lieu thereof) on, under or in
respect of the Mortgage Assets and any other assets included in the related
Trust Fund that are available for distribution to the Certificateholders of
such series on such date. The particular components of the Available
Distribution Amount for any series on each Distribution Date will be more
specifically described in the related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement,
distributions on the Certificates of each series (other than the final
distribution in retirement of any such Certificate) will be made 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 in which the applicable
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date (the
"Determination Date") specified in the related Prospectus Supplement. All
distributions with respect to each class of Certificates on each Distribution
Date will be allocated pro rata among the outstanding Certificates in such
class. Payments will be made either by wire transfer in immediately available
funds to the account of a Certificateholder at a bank or other entity having
appropriate facilities therefor, if such Certificateholder has provided the
person required to make such payments with wiring instructions (which may be
provided in the form of a standing order applicable to all subsequent
distributions) no later than the date specified in the related Prospectus
Supplement (and, if so provided in the related Prospectus Supplement, such
Certificateholder holds Certificates in the requisite amount or denomination
specified therein), or by check mailed to the address of such Certificateholder
as it appears on the Certificate Register; provided, however, that the final
distribution in retirement of any class of Certificates (whether Definitive
Certificates or Book-Entry Certificates) will be made only upon presentation
and surrender of such Certificates at the location specified in the notice to
Certificateholders of such final distribution.
DISTRIBUTIONS OF INTEREST ON THE CERTIFICATES
Each class of Certificates of each series (other than certain classes
of Stripped Principal Certificates and certain classes of REMIC Residual
Certificates that have no Pass-Through Rate) may have a different Pass-Through
Rate, which in each case may be fixed, variable or adjustable. The related
Prospectus Supplement will specify the Pass-Through Rate or, in the case of a
variable or adjustable Pass-Through Rate, the method for determining the
Pass-Through Rate, for each class. Unless otherwise specified in the related
Prospectus Supplement, interest on the Certificates of each series will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
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Distributions of interest in respect of any class of Certificates
(other than certain classes of Certificates that will be entitled to
distributions of accrued interest commencing only on the Distribution Date, or
under the circumstances, specified in the related Prospectus Supplement
("Accrual Certificates"), and other than any class of Stripped Principal
Certificates or REMIC Residual Certificates that is not entitled to any
distributions of interest) will be made on each Distribution Date based on the
Accrued Certificate Interest for such class and such Distribution Date, subject
to the sufficiency of the portion of the Available Distribution Amount
allocable to such class on such Distribution Date. Prior to the time interest
is distributable on any class of Accrual Certificates, the amount of Accrued
Certificate Interest otherwise distributable on such class will be added to the
Certificate Balance thereof on each Distribution Date. With respect to each
class of Certificates (other than certain classes of Stripped Interest
Certificates and certain classes of REMIC Residual Certificates), the "Accrued
Certificate Interest" for each Distribution Date will be equal to interest at
the applicable Pass-Through Rate accrued for a specified period (generally
equal to the time period between Distribution Dates) on the outstanding
Certificate Balance of such class of Certificates immediately prior to such
Distribution Date. Unless otherwise provided in the related Prospectus
Supplement, the Accrued Certificate Interest for each Distribution Date on a
class of Stripped Interest Certificates will be similarly calculated except
that it will accrue on a hypothetical or notional amount (a "Notional Amount")
that is either (i) based on the principal balances of some or all of the
Mortgage Assets in the related Trust Fund or (ii) equal to the Certificate
Balances of one or more other classes of Certificates of the same series.
Reference to a Notional Amount with respect to a class of Stripped Interest
Certificates is solely for convenience in making certain calculations and does
not represent the right to receive any distributions of principal. If so
specified in the related Prospectus Supplement, the amount of Accrued
Certificate Interest that is otherwise distributable on (or, in the case of
Accrual Certificates, that may otherwise be added to the Certificate Balance
of) one or more classes of the Certificates of a series will be reduced to the
extent that any Prepayment Interest Shortfalls, as described under "Yield and
Maturity Considerations--Certain Shortfalls in Collections of Interest", exceed
the amount of any sums (including, if and to the extent specified in the
related Prospectus Supplement, the Master Servicer's servicing compensation)
that are applied to offset such shortfalls. The particular manner in which such
shortfalls will be allocated among some or all of the classes of Certificates
of that series will be specified in the related Prospectus Supplement. The
related Prospectus Supplement will also describe the extent to which the amount
of Accrued Certificate Interest that is otherwise distributable on (or, in the
case of Accrual Certificates, that may otherwise be added to the Certificate
Balance of) a class of Offered Certificates may be reduced as a result of any
other contingencies, including delinquencies, losses and deferred interest on
or in respect of the Mortgage Assets in the related Trust Fund. Unless
otherwise provided in the related Prospectus Supplement, any reduction in the
amount of Accrued Certificate Interest otherwise distributable on a class of
Certificates by reason of the allocation to such class of a portion of any
deferred interest on or in respect of the Mortgage Assets in the related Trust
Fund will result in a corresponding increase in the Certificate Balance of such
class. See "Risk Factors--Prepayments; Average Life of Certificates; Yields"
and "Yield and Maturity Considerations".
DISTRIBUTIONS OF PRINCIPAL OF THE CERTIFICATES
Each class of Certificates of each series (other than certain classes
of Stripped Interest Certificates and certain classes of REMIC Residual
Certificates) will have a "Certificate Balance" which, at any time, will equal
the then maximum amount that the holders of Certificates of such class will be
entitled to receive in respect of principal out of the future cash flow on the
Mortgage Assets and other assets included in the related Trust Fund. The
outstanding Certificate Balance of a class of Certificates will be reduced by
distributions of principal made thereon from time to time and, if so provided
in the related Prospectus Supplement, further by any losses incurred in respect
of the related Mortgage Assets allocated thereto from time to time. In turn,
the outstanding Certificate Balance of a class of Certificates may be increased
as a result of any deferred interest on or in respect of the related Mortgage
Assets being allocated thereto from time to time, and will be increased, in the
case of a class
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of Accrual Certificates prior to the Distribution Date on which distributions
of interest thereon are required to commence, by the amount of any Accrued
Certificate Interest in respect thereof (reduced as described above). Unless
otherwise provided in the related Prospectus Supplement, the initial aggregate
Certificate Balance of all classes of a series of Certificates will not be
greater than the aggregate outstanding principal balance of the related
Mortgage Assets as of the applicable Cut-off Date, after application of
scheduled payments due on or before such date, whether or not received. The
initial Certificate Balance of each class of a series of Certificates will be
specified in the related Prospectus Supplement. As and to the extent described
in the related Prospectus Supplement, distributions of principal with respect
to a series of Certificates will be made on each Distribution Date to the
holders of the class or classes of Certificates of such series entitled thereto
until the Certificate Balances of such Certificates have been reduced to zero.
Distributions of principal with respect to one or more classes of Certificates
may be made at a rate that is faster (and, in some cases, substantially faster)
than the rate at which payments or other collections of principal are received
on the Mortgage Assets in the related Trust Fund. Distributions of principal
with respect to one or more classes of Certificates may not commence until the
occurrence of certain events, such as the retirement of one or more other
classes of Certificates of the same series, or may be made at a rate that is
slower (and, in some cases, substantially slower) than the rate at which
payments or other collections of principal are received on the Mortgage Assets
in the related Trust Fund. Distributions of principal with respect to one or
more classes of Certificates (each such class, a "Controlled Amortization
Class") may be made, subject to available funds, based on a specified principal
payment schedule. Distributions of principal with respect to one or more
classes of Certificates (each such class, a "Companion Class") may be
contingent on the specified principal payment schedule for a Controlled
Amortization Class of the same series and the rate at which payments and other
collections of principal on the Mortgage Assets in the related Trust Fund are
received. Unless otherwise specified in the related Prospectus Supplement,
distributions of principal of any class of Certificates will be made on a pro
rata basis among all of the Certificates of such class.
DISTRIBUTIONS ON THE CERTIFICATES IN RESPECT OF PREPAYMENT PREMIUMS OR IN
RESPECT OF EQUITY PARTICIPATIONS
If so provided in the related Prospectus Supplement, Prepayment
Premiums or payments in respect of Equity Participations received on or in
connection with the Mortgage Assets in any Trust Fund will be distributed on
each Distribution Date to the holders of the class of Certificates of the
related series entitled thereto in accordance with the provisions described in
such Prospectus Supplement. Alternatively, payments in respect of Equity
Participations received on or in respect of any Mortgage Asset in any Trust
Fund may be retained by the Sponsor or another prior owner of such Mortgage
Asset.
ALLOCATION OF LOSSES AND SHORTFALLS
The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated among
the respective classes of Certificates of the related series in the priority
and manner, and subject to the limitations, specified in the related Prospectus
Supplement. As described in the related Prospectus Supplement, such allocations
may result in reductions in the entitlements to interest and/or Certificate
Balances of one or more such classes of Certificates, or may be effected simply
by a prioritization of payments among such classes of Certificates.
ADVANCES IN RESPECT OF DELINQUENCIES
If and to the extent provided in the related Prospectus Supplement, if
a Trust Fund includes Mortgage Loans, the Master Servicer, the Special
Servicer, the Trustee, any provider of Credit Support and/or any other
specified person may be obligated to advance, or have the option of advancing,
on or before each Distribution
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Date, from its or their own funds or from excess funds held in the related
Certificate Account that are not part of the Available Distribution Amount for
the related series of Certificates for such Distribution Date, an amount up to
the aggregate of any payments of principal (other than any balloon payments)
and interest that were due on or in respect of such Mortgage Loans during the
related Due Period and were delinquent on the related Determination Date.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Certificates
entitled thereto, rather than to guarantee or insure against losses.
Accordingly, all advances made out of a specific entity's own funds will be
reimbursable out of related recoveries on the Mortgage Loans (including amounts
received under any instrument of Credit Support) respecting which such advances
were made (as to any Mortgage Loan, "Related Proceeds") and such other specific
sources as may be identified in the related Prospectus Supplement, including in
the case of a series that includes one or more classes of Subordinate
Certificates, collections on other Mortgage Loans in the related Trust Fund
that would otherwise be distributable to the holders of one or more classes of
such Subordinate Certificates. No advance will be required to be made by a
Master Servicer, Special Servicer or Trustee if, in the judgment of the Master
Servicer, Special Servicer or Trustee, as the case may be, such advance would
not be recoverable from Related Proceeds or another specifically identified
source (any such advance, a "Nonrecoverable Advance"); and, if previously made
by a Master Servicer, Special Servicer or Trustee, a Nonrecoverable Advance
will be reimbursable thereto from any amounts in the related Certificate
Account prior to any distributions being made to the related series of
Certificateholders.
If advances have been made by a Master Servicer, Special Servicer,
Trustee or other entity from excess funds in a Certificate Account, such Master
Servicer, Special Servicer, Trustee or other entity, as the case may be, will
be required to replace such funds in such Certificate Account on any future
Distribution Date to the extent that funds in such Certificate Account on such
Distribution Date are less than payments required to be made to the related
series of Certificateholders on such date. If so specified in the related
Prospectus Supplement, the obligation of a Master Servicer, Special Servicer,
Trustee or other entity to make advances may be secured by a cash advance
reserve fund or a surety bond. If applicable, information regarding the
characteristics of, and the identity of any obligor on, any such surety bond,
will be set forth in the related Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement,
any entity making advances may be entitled to receive interest thereon for the
period that such advances are outstanding at the rate specified in such
Prospectus Supplement, and such entity will be entitled to payment of such
interest periodically from general collections on the Mortgage Loans in the
related Trust Fund prior to any payment to the related series of
Certificateholders or as otherwise provided in the related Pooling Agreement
and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Certificates evidencing an
interest in a Trust Fund that includes MBS will describe any comparable
advancing obligation of a party to the related Pooling Agreement or of a party
to the related MBS Agreement.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, together with the distribution to the
holders of each class of the Offered Certificates of a series, a Master
Servicer or Trustee, as provided in the related Prospectus Supplement, will
forward to each such holder, a statement (a "Distribution Date Statement")
that, unless otherwise provided in the related Prospectus Supplement, will set
forth, among other things, in each case to the extent applicable:
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(i) the amount of such distribution to holders of such class
of Offered Certificates that was applied to reduce the Certificate
Balance thereof;
(ii) the amount of such distribution to holders of such class
of Offered Certificates that is allocable to Accrued Certificate
Interest;
(iii) the amount, if any, of such distribution to holders of
such class of Offered Certificates that is allocable to (A) Prepayment
Premiums and (B) payments on account of Equity Participations;
(iv) the amount, if any, by which such distribution is less
than the amounts to which holders of such class of Offered
Certificates are entitled;
(v) the Certificate Balance or Notional Amount, as the case
may be, of each class of Certificates (including any class of
Certificates not offered hereby) at the close of business on such
Distribution Date, separately identifying any reduction in such
Certificate Balance or Notional Amount due to the allocation of any
losses in respect of the related Mortgage Assets, any increase in such
Certificate Balance or Notional Amount due to the allocation of any
negative amortization in respect of the related Mortgage Assets and
any increase in the Certificate Balance of a class of Accrual
Certificates, if any, in the event that Accrued Certificate Interest
has been added to such balance;
(vi) information regarding the aggregate principal balance of
the related Mortgage Assets on or shortly before such Distribution
Date;
(vii) if such class of Offered Certificates has a variable
Pass-Through Rate or an adjustable Pass-Through Rate, the Pass-Through
Rate applicable thereto for such Distribution Date;
(viii) the amount deposited in or withdrawn from any reserve
fund on such Distribution Date, and the amount remaining on deposit in
such reserve fund as of the close of business on such Distribution
Date;
(ix) if the related Trust Fund includes one or more
instruments of Credit Support, such as a letter of credit, an
insurance policy and/or a surety bond, the amount of coverage under
each such instrument as of the close of business on such Distribution
Date; and
(x) to the extent not otherwise reflected through the
information furnished pursuant to subclauses (v) and (vi) above, the
amount of Credit Support being afforded by any classes of Subordinate
Certificates.
In the case of information furnished pursuant to subclauses (i)-(iii)
above, the amounts will be expressed as a dollar amount per minimum
denomination of the relevant class of Offered Certificates or per a specified
portion of such minimum denomination. The Prospectus Supplement for each series
of Offered Certificates will describe any additional information to be included
in reports to the holders of such Certificates. Upon request, a
Certificateholder may receive with respect to the Mortgage Loans, if any, in
the related Trust Fund, a monthly report regarding the delinquencies thereon,
indicating the number and aggregate principal amount of such Mortgage Loans
delinquent one month and two or more months, as well as the book value of any
related Mortgaged Property acquired through foreclosure, deed in lieu of
foreclosure or other exercise of rights respecting the Trustee's interest in
such Mortgage Loans.
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Within a reasonable period of time after the end of each calendar
year, the related Master Servicer or Trustee, as the case may be, will be
required to furnish to each person who at any time during the calendar year was
a holder of an Offered Certificate a statement containing the information set
forth in subclauses (i)-(iii) above, aggregated for such calendar year or the
applicable portion thereof during which such person was a Certificateholder,
together with such other customary information as the Sponsor or the reporting
party determines to be necessary to enable Certificateholders to prepare their
tax returns for such calendar year. See, however, "Description of the
Certificates--Book-Entry Registration and Definitive Certificates". If the
Trust Fund for a series of Certificates includes MBS, the ability of the
related Master Servicer or Trustee, as the case may be, to include in any
Distribution Date Statement information regarding the mortgage loans underlying
such MBS will depend on the reports received with respect to such MBS. In such
cases, the related Prospectus Supplement will describe the loan-specific
information to be included in the Distribution Date Statements that will be
forwarded to the holders of the Offered Certificates of that series in
connection with distributions made to them.
VOTING RIGHTS
The voting rights evidenced by each series of Certificates (as to such
series, the "Voting Rights") will be allocated among the respective classes of
such series in the manner described in the related Prospectus Supplement.
Certificateholders will generally not have a right to vote, except
with respect to required consents to certain amendments to the related Pooling
Agreement and as otherwise specified in the related Prospectus Supplement. See
"Description of the Pooling Agreements--Amendment". The holders of specified
amounts of Certificates of a particular series will have the right to act as a
group to remove the related Trustee and also upon the occurrence of certain
events which if continuing would constitute an Event of Default on the part of
the related Master Servicer, Special Servicer or REMIC Administrator. See
"Description of the Pooling Agreements--Events of Default", "--Rights Upon
Event of Default" and "--Resignation and Removal of the Trustee".
TERMINATION
The obligations created by the Pooling Agreement for each series of
Certificates will terminate following (i) the final payment or other
liquidation of the last Mortgage Asset subject thereto or the disposition of
all property acquired upon foreclosure of any Mortgage Loan subject thereto and
(ii) the payment to Certificateholders of that series of all amounts required
to be paid to them pursuant to such Pooling Agreement. Written notice of
termination of a Pooling Agreement will be given to each Certificateholder of
the related series, and the final distribution will be made only upon
presentation and surrender of the Certificates of such series at the location
to be specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Certificates may be subject to optional early termination through the
repurchase of the Mortgage Assets in the related Trust Fund by the party or
parties specified therein, under the circumstances and in the manner set forth
therein. If so provided in the related Prospectus Supplement, upon the
reduction of the Certificate Balance of a specified class or classes of
Certificates by a specified percentage or amount, a party specified therein may
be authorized or required to solicit bids for the purchase of all the Mortgage
Assets of the related Trust Fund, or of a sufficient portion of such Mortgage
Assets to retire such class or classes, under the circumstances and in the
manner set forth therein.
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BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES
If so provided in the related Prospectus Supplement, one or more
classes of the Offered Certificates of any series will be offered in book-entry
format through the facilities of The Depository Trust Company ("DTC"), and each
such class will be represented by one or more global Certificates registered in
the name of DTC or its nominee.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking corporation" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities for its participating organizations
("Participants") and facilitate the clearance and settlement of securities
transactions between Participants through electronic computerized book-entry
changes in their accounts, thereby eliminating the need for physical movement
of securities certificates. "Direct Participants", which maintain accounts with
DTC, include securities brokers and dealers, banks, trust companies and
clearing corporations and may include certain other organizations. DTC is owned
by a number of its Direct Participants and by the New York Stock Exchange,
Inc., the American Stock Exchange, Inc., and the National Association of
Securities Dealers, Inc. Access to the DTC system also is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Direct Participant, either directly or
indirectly ("Indirect Participants"). The Rules applicable to DTC and its
Participants are on file with the Commission.
Purchases of Book-Entry Certificates under the DTC system must be made
by or through Direct Participants, which will receive a credit for the
Book-Entry Certificates on DTC's records. The ownership interest of each actual
purchaser of a Book-Entry Certificate (a "Certificate Owner") is in turn to be
recorded on the Direct and Indirect Participants' records. Certificate Owners
will not receive written confirmation from DTC of their purchases, but
Certificate Owners are expected to receive written confirmations providing
details of such transactions, as well as periodic statements of their holdings,
from the Direct or Indirect Participant through which each Certificate Owner
entered into the transaction. Transfers of ownership interest in the Book-Entry
Certificates are to be accomplished by entries made on the books of
Participants acting on behalf of Certificate Owners. Certificate Owners will
not receive certificates representing their ownership interests in the
Book-Entry Certificates, except in the event that use of the book-entry system
for the Book-Entry Certificates of any series is discontinued as described
below.
DTC has no knowledge of the actual Certificate Owners of the
Book-Entry Certificates; DTC's records reflect only the identity of the Direct
Participants to whose accounts such Certificates are credited, which may or may
not be the Certificate Owners. The Participants will remain responsible for
keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Certificate Owners will be governed
by arrangements among them, subject to any statutory or regulatory requirements
as may be in effect from time to time.
Distributions on the Book-Entry Certificates will be made to DTC.
DTC's practice is to credit Direct Participants' accounts on the related
Distribution Date in accordance with their respective holdings shown on DTC's
records unless DTC has reason to believe that it will not receive payment on
such date. Disbursement of such distributions by Participants to Certificate
Owners will be governed by standing instructions and customary practices, as is
the case with securities held for the accounts of customers in bearer form or
registered in "street
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name", and will be the responsibility of each such Participant (and not of DTC,
the Sponsor or any Trustee, Master Servicer or Special Servicer), subject to
any statutory or regulatory requirements as may be in effect from time to time.
Under a book-entry system, Certificate Owners may receive payments after the
related Distribution Date.
Unless otherwise provided in the related Prospectus Supplement, the
only "Certificateholder" (as such term is used in the related Pooling
Agreement) will be the nominee of DTC, and the Certificate Owners will not be
recognized as Certificateholders under the Pooling Agreement. Certificate
Owners will be permitted to exercise the rights of Certificateholders under the
related Pooling Agreement only indirectly through the Participants who in turn
will exercise their rights through DTC. The Sponsor is informed that DTC will
take action permitted to be taken by a Certificateholder under a Pooling
Agreement only at the direction of one or more Participants to whose account
with DTC interests in the Book-Entry Certificates are credited.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain Certificate Owners, the ability of
a Certificate Owner to pledge its interest in Book-Entry Certificates to
persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of its interest in Book-Entry Certificates, may be
limited due to the lack of a physical certificate evidencing such interest.
Unless otherwise specified in the related Prospectus Supplement,
Certificates initially issued in book-entry form will be issued in fully
registered, certificated form (as so issued, "Definitive Certificates") to
Certificate Owners or their nominees, rather than to DTC or its nominee, only
if (i) the Sponsor advises the Trustee in writing that DTC is no longer willing
or able to properly discharge its responsibilities as depository with respect
to such Certificates and the Sponsor is unable to locate a qualified successor
or (ii) the Sponsor, at its option, elects to terminate the book-entry system
through DTC with respect to such Certificates. Upon the occurrence of either of
the events described in the preceding sentence, DTC will be required to notify
all Participants of the availability through DTC of Definitive Certificates.
Upon surrender by DTC of the certificate or certificates representing a class
of Book-Entry Certificates, together with instructions for registration, the
Trustee or other designated party will be required to issue to the Certificate
Owners identified in such instructions the Definitive Certificates to which
they are entitled, and thereafter the holders of such Definitive Certificates
will be recognized as Certificateholders under the related Pooling Agreement.
DESCRIPTION OF THE POOLING AGREEMENTS
GENERAL
The Certificates of each series will be issued pursuant to a pooling
and servicing agreement or other agreement specified in the related Prospectus
Supplement (in either case, a "Pooling Agreement"). In general, the parties to
a Pooling Agreement will include the Sponsor, the Trustee, the Master Servicer,
the Special Servicer and, if one or more REMIC elections have been made with
respect to the related Trust Fund, the REMIC Administrator. However, a Pooling
Agreement may also include a Mortgage Asset Seller as a party, and a Pooling
Agreement that relates to a Trust Fund that consists solely of MBS may not
include a Master Servicer, Special Servicer or other servicer as a party. All
parties to each Pooling Agreement under which Certificates of a series are
issued will be identified in the related Prospectus Supplement. If so specified
in the related Prospectus Supplement, the Mortgage Asset Seller or an affiliate
thereof or of the Sponsor may perform the duties of Master Servicer, Special
Servicer or REMIC Administrator. If so specified in the related Prospectus
Supplement, the Master Servicer may also perform the duties of Special
Servicer, and the Master Servicer, the Special Servicer or the Trustee may also
perform the duties of REMIC Administrator. Any party to a Pooling Agreement may
own Certificates issued thereunder; however, except with respect to required
consents to certain amendments to a
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Pooling Agreement, Certificates issued thereunder that are held by the related
Master Servicer or Special Servicer will not be allocated Voting Rights. See
"Risk Factors--Conflicts of Interest Involving Parties to a Pooling Agreement".
A form of a pooling and servicing agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
However, the provisions of each Pooling Agreement will vary depending upon the
nature of the Certificates to be issued thereunder and the nature of the
related Trust Fund. The following summaries describe certain provisions that
may appear in a Pooling Agreement under which Certificates that evidence
interests in Mortgage Loans will be issued. The Prospectus Supplement for a
series of Certificates will describe any provision of the related Pooling
Agreement that materially differs from the description thereof contained in
this Prospectus and, if the related Trust Fund includes MBS, will summarize all
of the material provisions of the related Pooling Agreement. The summaries
herein 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 Agreement
for each series of Certificates and the description of such provisions in the
related Prospectus Supplement. As used herein with respect to any series, the
term "Certificate" refers to all of the Certificates of that series, whether or
not offered hereby and by the related Prospectus Supplement, unless the context
otherwise requires. The Sponsor will provide a copy of the Pooling Agreement
(without exhibits) that relates to any series of Certificates without charge
upon written request of a holder of a Certificate of such series addressed to
it at its principal executive offices specified herein under "Mortgage Capital
Funding, Inc."
ASSIGNMENT OF MORTGAGE LOANS; REPURCHASES
At the time of issuance of any series of Certificates, the Sponsor
will assign (or cause to be assigned) to the designated Trustee the Mortgage
Loans to be included in the related Trust Fund, together with, unless otherwise
specified in the related Prospectus Supplement, all principal and interest to
be received on or with respect to such Mortgage Loans after the Cut-off Date,
other than principal and interest due on or before the Cut-off Date. The
Trustee will, concurrently with such assignment, deliver the Certificates to or
at the direction of the Sponsor in exchange for the Mortgage Loans and the
other assets to be included in the Trust Fund for such series. Each Mortgage
Loan will be identified in a schedule appearing as an exhibit to the related
Pooling Agreement. Such schedule generally will include detailed information
that pertains to each Mortgage Loan included in the related Trust Fund, which
information will typically include: the address of the related Mortgaged
Property and type of such property; the Mortgage Rate and, if applicable, the
applicable index, gross margin, adjustment date and any rate cap information;
the original and remaining term to maturity; the original amortization term;
and the original and outstanding principal balance.
With respect to each Mortgage Loan to be included in a Trust Fund, the
Sponsor will deliver (or cause to be delivered) to the related Trustee (or to a
custodian appointed by the Trustee) certain loan documents which, unless
otherwise specified in the related Prospectus Supplement, will include the
original Mortgage Note endorsed, without recourse, to the order of the Trustee,
the original Mortgage or a certified copy thereof, with evidence of recording
or filing indicated thereon, and an assignment of the Mortgage to the Trustee
in recordable form. In certain cases where documents respecting a Mortgage Loan
may not be available prior to execution of the related Pooling Agreement, the
Sponsor may be permitted to deliver (or cause to be delivered) copies thereof
(if applicable, without evidence of recording or filing thereon) to the related
Trustee (or to a custodian appointed by the Trustee), provided that such
documents or certified copies thereof are delivered (if applicable, with
evidence of recording or filing thereon) promptly upon receipt.
Assignments of Mortgage to a Trustee will be recorded or filed in the
appropriate jurisdictions except in states where, in the written opinion of
local counsel acceptable to the Sponsor, such filing or recording is not
required to protect the Trustee's interests in the related Mortgage Loans
against sale, further assignment,
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satisfaction or discharge by the related Mortgage Asset Seller, the related
Master Servicer, the related Special Servicer, any Sub-Servicers or the
Sponsor.
The related Trustee (or a custodian appointed by the Trustee) will be
required to review the Mortgage Loan documents delivered to it within a
specified period of days after receipt thereof, and the Trustee (or such
custodian) will hold such documents in trust for the benefit of the
Certificateholders of the related series. Unless otherwise specified in the
related Prospectus Supplement, if any such document is found to be missing or
defective, and such omission or defect, as the case may be, materially and
adversely affects the interests of the related series of Certificateholders,
the Trustee (or such custodian) will be required to notify the Master Servicer,
the Special Servicer and the Sponsor, and one of such persons will be required
to notify the relevant Mortgage Asset Seller. In that case, and if the Mortgage
Asset Seller cannot deliver the document or cure the defect within a specified
number of days after receipt of such notice, then, except as otherwise
specified below or in the related Prospectus Supplement, the Mortgage Asset
Seller will be obligated to repurchase the related Mortgage Loan from the
Trustee at a price that will be specified in the related Prospectus Supplement.
If so provided in the Prospectus Supplement for a series of Certificates, a
Mortgage Asset Seller, in lieu of repurchasing a Mortgage Loan as to which
there is missing or defective loan documentation, will have the option,
exercisable upon certain conditions and/or within a specified period after
initial issuance of such series of Certificates, to replace such Mortgage Loan
with one or more other mortgage loans, in accordance with standards that will
be described in the Prospectus Supplement. Unless otherwise specified in the
related Prospectus Supplement, this repurchase or substitution obligation will
constitute the sole remedy to holders of the Certificates of any series or to
the related Trustee on their behalf for missing or defective loan
documentation, and none of the Sponsor, the Master Servicer or the Special
Servicer, in the last two cases unless it is the Mortgage Asset Seller, will be
obligated to purchase or replace a Mortgage Loan if a Mortgage Asset Seller
defaults on its obligation to do so. Notwithstanding the foregoing, if a
document has not been delivered to the related Trustee (or to a custodian
appointed by the Trustee) because such document has been submitted for
recording, and neither such document nor a certified copy thereof, in either
case with evidence of recording thereon, can be obtained because of delays on
the part of the applicable recording office, then the Mortgage Asset Seller
will not be required to repurchase or replace the affected Mortgage Loan on the
basis of such missing document so long as it continues in good faith to attempt
to obtain such document or such certified copy.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the related Prospectus Supplement, the
Sponsor will, with respect to each Mortgage Loan in the related Trust Fund,
make or assign, or cause to be made or assigned, certain representations and
warranties (each person making such representations and warranties, the
"Warranting Party") covering, by way of example: (i) the accuracy of the
information set forth for such Mortgage Loan on the schedule of Mortgage Loans
appearing as an exhibit to the related Pooling Agreement; (ii) the
enforceability of the related Mortgage Note and Mortgage and the existence of
title insurance insuring the lien priority of the related Mortgage; (iii) the
Warranting Party's title to the Mortgage Loan and the authority of the
Warranting Party to sell the Mortgage Loan; and (iv) the payment status of the
Mortgage Loan. It is expected that in most cases the Warranting Party will be
the Mortgage Asset Seller; however, the Warranting Party may also be an
affiliate of the Mortgage Asset Seller, the Sponsor or an affiliate of the
Sponsor, the Master Servicer, the Special Servicer or another person acceptable
to the Sponsor. The Warranting Party, if other than the Mortgage Asset Seller,
will be identified in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, each
Pooling Agreement will provide that the Master Servicer, Special Servicer
and/or Trustee will be required to notify promptly any Warranting Party of any
breach of any representation or warranty made by it in respect of a Mortgage
Loan that materially and
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adversely affects the interests of the related series of Certificateholders. If
such Warranting Party cannot cure such breach within a specified period
following the date on which it was notified of such breach, then, unless
otherwise provided in the related Prospectus Supplement, it will be obligated
to repurchase such Mortgage Loan from the Trustee at a price that will be
specified in the related Prospectus Supplement. If so provided in the
Prospectus Supplement for a series of Certificates, a Warranting Party, in lieu
of repurchasing a Mortgage Loan as to which a breach has occurred, will have
the option, exercisable upon certain conditions and/or within a specified
period after initial issuance of such series of Certificates, to replace such
Mortgage Loan with one or more other mortgage loans, in accordance with
standards that will be described in the Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, this repurchase or substitution
obligation will constitute the sole remedy available to holders of the
Certificates of any series or to the related Trustee on their behalf for a
breach of representation and warranty by a Warranting Party, and none of the
Sponsor, the Master Servicer or the Special Servicer, in each case unless it is
the Warranting Party, will be obligated to purchase or replace a Mortgage Loan
if a Warranting Party defaults on its obligation to do so.
In some cases, representations and warranties will have been made in
respect of a Mortgage Loan as of a date prior to the date upon which the
related series of Certificates is issued, and thus may not address events that
may occur following the date as of which they were made. However, the Sponsor
will not include any Mortgage Loan in the Trust Fund for any series of
Certificates if anything has come to the Sponsor's attention that would cause
it to believe that the representations and warranties made in respect of such
Mortgage Loan will not be accurate in all material respects as of the date of
issuance. The date as of which the representations and warranties regarding the
Mortgage Loans in any Trust Fund were made, will be specified in the related
Prospectus Supplement.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer and Special Servicer for any Trust Fund, directly
or through Sub-Servicers, will each be required to make reasonable efforts to
collect all scheduled payments under the Mortgage Loans in such Trust Fund
serviced thereby, and will each be required to follow such collection
procedures as it would follow with respect to mortgage loans that are
comparable to the Mortgage Loans in such Trust Fund serviced thereby and held
for its own account, provided such procedures are consistent with (i) the terms
of the related Pooling Agreement and any related instrument of Credit Support
included in such Trust Fund, (ii) applicable law and (iii) the servicing
standard specified in the related Pooling Agreement and Prospectus Supplement
(the "Servicing Standard").
The Master Servicer and Special Servicer for any Trust Fund, either
jointly or separately, directly or through Sub-Servicers, also will be required
to perform as to the Mortgage Loans in such Trust Fund various other customary
functions of a servicer of comparable loans, including maintaining escrow or
impound accounts for payment of taxes, insurance premiums, ground rents and
similar items, or otherwise monitoring the timely payment of those items;
attempting to collect delinquent payments; supervising foreclosures; conducting
property inspections on a periodic or other basis; managing Mortgaged
Properties acquired on behalf of such Trust Fund through foreclosure,
deed-in-lieu of foreclosure or otherwise (each, an "REO Property"); and
maintaining servicing records relating to such Mortgage Loans. The related
Prospectus Supplement will specify when and the extent to which servicing of a
Mortgage Loan is to be transferred from the Master Servicer to the Special
Servicer. In general, and subject to the discussion in the related Prospectus
Supplement, a Special Servicer will be responsible for the servicing and
administration of: (i) Mortgage Loans that are delinquent in respect of a
specified number of scheduled payments; (ii) Mortgage Loans as to which the
related borrower has entered into or consented to bankruptcy, appointment of a
receiver or conservator or similar insolvency proceeding, or the related
borrower has become the subject of a decree or order for such a proceeding
which shall have remained
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in force undischarged or unstayed for a specified number of days; and (iii) REO
Properties. If so specified in the related Prospectus Supplement, a Pooling
Agreement also may provide that if a default on a Mortgage Loan has occurred
or, in the judgment of the related Master Servicer, a payment default is
imminent, the related Master Servicer may elect to transfer the servicing
thereof, in whole or in part, to the related Special Servicer. Unless otherwise
provided in the related Prospectus Supplement, when the circumstances no longer
warrant a Special Servicer's continuing to service a particular Mortgage Loan
(e.g., the related borrower is paying in accordance with the forbearance
arrangement entered into between the Special Servicer and such borrower), the
Master Servicer will resume the servicing duties with respect thereto. If and
to the extent provided in the related Pooling Agreement and described in the
related Prospectus Supplement, a Special Servicer may perform certain limited
duties in respect of Mortgage Loans for which the Master Servicer is primarily
responsible (including, if so specified, performing property inspections and
evaluating financial statements); and a Master Servicer may perform certain
limited duties in respect of any Mortgage Loan for which the Special Servicer
is primarily responsible (including, if so specified, continuing to receive
payments on such Mortgage Loan (including amounts collected by the Special
Servicer), making certain calculations with respect to such Mortgage Loan and
making remittances and preparing certain reports to the Trustee and/or
Certificateholders with respect to such Mortgage Loan). Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer will be
responsible for filing and settling claims in respect of particular Mortgage
Loans under any applicable instrument of Credit Support. See "Description of
Credit Support".
SUB-SERVICERS
A Master Servicer or Special Servicer may delegate its servicing
obligations in respect of the Mortgage Loans serviced thereby to one or more
third-party servicers (each, a "Sub-Servicer"); provided that, unless otherwise
specified in the related Prospectus Supplement, such Master Servicer or Special
Servicer will remain obligated under the related Pooling Agreement. Unless
otherwise provided in the related Prospectus Supplement, each sub-servicing
agreement between a Master Servicer or Special Servicer, as the case may be,
and a Sub-Servicer (a "Sub-Servicing Agreement") must provide that, if for any
reason such Master Servicer or Special Servicer is no longer acting in such
capacity, the Trustee or any successor to such Master Servicer or Special
Servicer may assume such party's rights and obligations under such
Sub-Servicing Agreement. The Master Servicer and Special Servicer for any Trust
Fund will each be required to monitor the performance of Sub-Servicers retained
by it, and will each have the right to remove a Sub-Servicer retained by it at
any time it considers such removal to be in the best interests of
Certificateholders.
Unless otherwise provided in the related Prospectus Supplement, a
Master Servicer or Special Servicer will be solely liable for all fees owed by
it to any Sub-Servicer, irrespective of whether its compensation pursuant to
the related Pooling Agreement is sufficient to pay such fees. Each Sub-Servicer
will be reimbursed by the Master Servicer or Special Servicer, as the case may
be, that retained it for certain expenditures which it makes, generally to the
same extent such Master Servicer or Special Servicer would be reimbursed under
a Pooling Agreement. See "--Certificate Account" and "--Servicing Compensation
and Payment of Expenses".
CERTIFICATE ACCOUNT
General. The Master Servicer, the Special Servicer and/or the Trustee
will, as to each Trust Fund that includes Mortgage Loans, establish and
maintain or cause to be established and maintained one or more separate
accounts for the collection of payments on or in respect of such Mortgage Loans
(collectively, the "Certificate Account"), which will be established so as to
comply with the standards of each Rating Agency that has rated any one or more
classes of Certificates of the related series. A Certificate Account may be
maintained as an interest-bearing or a non-interest-bearing account and the
funds held therein may be invested pending each succeeding Distribution Date in
United States government securities and other obligations (including guaranteed
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investment contracts) that are acceptable to each Rating Agency that has rated
any one or more classes of Certificates of the related series ("Permitted
Investments"). Unless otherwise provided in the related Prospectus Supplement,
any interest or other income earned on funds in a Certificate Account will be
paid to the related Master Servicer, Special Servicer or Trustee as additional
compensation. A Certificate Account may be maintained with the related Master
Servicer, Special Servicer or Mortgage Asset Seller or with a depository
institution that is an affiliate of any of the foregoing or of the Sponsor,
provided that it complies with applicable Rating Agency standards. If permitted
by the applicable Rating Agency or Agencies and so specified in the related
Prospectus Supplement, a Certificate Account may contain funds relating to more
than one series of mortgage pass-through certificates and may contain other
funds representing payments on mortgage loans owned by the related Master
Servicer or Special Servicer or any related Sub-Servicer or serviced by any of
them on behalf of others.
Deposits. Unless otherwise provided in the related Pooling Agreement
and described in the related Prospectus Supplement, a Master Servicer, Special
Servicer or Trustee will be required to deposit or cause to be deposited in the
Certificate Account for each Trust Fund that includes Mortgage Loans, within a
certain period following receipt (in the case of collections on or in respect
of the Mortgage Loans) or otherwise as provided in the related Pooling
Agreement, the following payments and collections received or made by the
Master Servicer, the Special Servicer or the Trustee subsequent to the Cut-off
Date (other than payments due on or before the Cut-off Date):
(i) all payments on account of principal, including
principal prepayments, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage
Loans, including any default interest collected, in each case net of
any portion thereof retained by the Master Servicer, the Special
Servicer or any Sub-Servicer as its servicing compensation or as
compensation to the Trustee;
(iii) all proceeds received under any hazard, title or other
insurance policy that provides coverage with respect to a Mortgaged
Property or the related Mortgage Loan (other than proceeds applied to
the restoration of the property or released to the related borrower in
accordance with the customary servicing practices of the Master
Servicer (or the Special Servicer, with respect to Mortgage Loans
serviced by it) and/or the terms and conditions of the related
Mortgage) (collectively, "Insurance Proceeds"), all proceeds received
in connection with the condemnation or other governmental taking of
all or any Mortgaged Property (other than proceeds applied to the
restoration of the property or released to the related borrower in
accordance with the customary servicing practices of the Master
Servicer (or the Special Servicer, with respect to Mortgage Loans
serviced by it) and/or the terms and conditions of the related
Mortgage) (collectively, "Condemnation Proceeds") and all other
amounts received and retained in connection with the liquidation of
defaulted Mortgage Loans or property acquired in respect thereof, by
foreclosure or otherwise ("Liquidation Proceeds"), together with the
net operating income (less reasonable reserves for future expenses)
derived from the operation of any Mortgaged Properties acquired by the
Trust Fund through foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any
fund that constitutes Credit Support for the related series of
Certificates as described under "Description of Credit Support";
(v) any advances made as described under "Description of
the Certificates--Advances in Respect of Delinquencies";
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(vi) any amounts paid under any Cash Flow Agreement, as
described under "Description of the Trust Funds--Cash Flow
Agreements";
(vii) all proceeds of the purchase of any Mortgage Loan, or
property acquired in respect thereof, by the Sponsor, any Mortgage
Asset Seller or any other specified person as described under
"--Assignment of Mortgage Loans; Repurchases" and "--Representations
and Warranties; Repurchases", all proceeds of the purchase of any
defaulted Mortgage Loan as described under "--Realization Upon
Defaulted Mortgage Loans", and all proceeds of any Mortgage Asset
purchased as described under "Description of the
Certificates--Termination" (all of the foregoing, also "Liquidation
Proceeds");
(viii) any amounts paid by the Master Servicer to cover
Prepayment Interest Shortfalls arising out of the prepayment of
Mortgage Loans as described under "--Servicing Compensation and
Payment of Expenses";
(ix) to the extent that any such item does not constitute
additional servicing compensation to the Master Servicer or Special
Servicer, any payments on account of modification or assumption fees,
late payment charges, Prepayment Premiums or Equity Participations on
the Mortgage Loans;
(x) 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 Policies";
(xi) any amount required to be deposited by the Master
Servicer, the Special Servicer or the Trustee in connection with
losses realized on investments for the benefit of the Master Servicer,
the Special Servicer or the Trustee, as the case may be, of funds held
in the Certificate Account; and
(xii) any other amounts required to be deposited in the
Certificate Account as provided in the related Pooling Agreement and
described in the related Prospectus Supplement.
Withdrawals. Unless otherwise provided in the related Pooling
Agreement and described in the related Prospectus Supplement, a Master
Servicer, Special Servicer or Trustee may make withdrawals from the Certificate
Account for each Trust Fund that includes Mortgage Loans for any of the
following purposes:
(i) to make distributions to the Certificateholders on each
Distribution Date;
(ii) to pay the Master Servicer, the Special Servicer or any
Sub-Servicer any servicing fees not previously retained thereby, such
payment to be made, unless otherwise provided in the related
Prospectus Supplement, out of payments on the particular Mortgage
Loans as to which such fees were earned;
(iii) to reimburse the Master Servicer, the Special Servicer,
the Trustee or any other specified person for any unreimbursed amounts
advanced by it as described under "Description of the
Certificates--Advances in Respect of Delinquencies", such
reimbursement to be made out of amounts received which were identified
and applied by the Master Servicer or Special Servicer, as applicable,
as late collections of interest on and principal of the particular
Mortgage Loans with respect to which the advances were made or out of
amounts drawn under any form of Credit Support with respect to such
Mortgage Loans;
(iv) to reimburse the Master Servicer or the Special Servicer
for unpaid servicing fees earned by it and certain unreimbursed
servicing expenses incurred by it with respect to Mortgage Loans in
the
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Trust Fund and properties acquired in respect thereof, such
reimbursement to be made out of amounts that represent Liquidation
Proceeds, Condemnation Proceeds and Insurance Proceeds collected on
the particular Mortgage Loans and properties, and net income collected
on the particular properties, with respect to which such fees were
earned or such expenses were incurred or out of amounts drawn under
any form of Credit Support with respect to such Mortgage Loans and
properties;
(v) to reimburse the Master Servicer, the Special Servicer or
the Trustee for any advances described in clause (iii) above made by
it and/or any servicing expenses referred to in clause (iv) above
incurred by it which, in the good faith judgment of the Master
Servicer, the Special Servicer or the Trustee, as applicable, will not
be recoverable from the amounts described in clauses (iii) and (iv),
respectively, such reimbursement to be made from amounts collected on
other Mortgage Loans in the same Trust Fund or, if and to the extent
so provided by the related Pooling Agreement and described in the
related Prospectus Supplement, only from that portion of amounts
collected on such other Mortgage Loans that is otherwise distributable
on one or more classes of Subordinate Certificates of the related
series;
(vi) if and to the extent described in the related Prospectus
Supplement, to pay the Master Servicer, the Special Servicer, the
Trustee or any other specified person interest accrued on the advances
described in clause (iii) above made by it and/or the servicing
expenses described in clause (iv) above incurred by it while such
remain outstanding and unreimbursed;
(vii) to pay for costs and expenses incurred by the Trust
Fund for environmental site assessments performed with respect to
Mortgaged Properties that constitute security for defaulted Mortgage
Loans, and for any containment, clean-up or remediation of hazardous
wastes and materials present on such Mortgaged Properties, as
described under "--Realization Upon Defaulted Mortgage Loans";
(viii) to reimburse the Master Servicer, the Special
Servicer, the REMIC Administrator (if any), the Sponsor, or any of
their respective directors, officers, employees and agents, as the
case may be, for certain expenses, costs and liabilities incurred
thereby, as and to the extent described under "--Certain Matters
Regarding the Master Servicer, the Special Servicer, the REMIC
Administrator and the Sponsor";
(ix) if and to the extent described in the related Prospectus
Supplement, to pay the fees of the Trustee and/or the REMIC
Administrator (if any);
(x) if and to the extent described in the related Prospectus
Supplement, to pay the fees of any provider of Credit Support;
(xi) if and to the extent described in the related Prospectus
Supplement, to reimburse prior draws on any form of Credit Support;
(xii) to reimburse the Trustee or any of its directors,
officers, employees and agents, as the case may be, for certain
expenses, costs and liabilities incurred thereby, as and to the extent
described under "--Certain Matters Regarding the Trustee";
(xiii) to pay the Master Servicer, the Special Servicer or
the Trustee, as appropriate, interest and investment income earned in
respect of amounts held in the Certificate Account as additional
compensation;
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(xiv) to pay (generally from related income) for costs
incurred in connection with the operation, management and maintenance
of any Mortgaged Property acquired by the Trust Fund by foreclosure or
otherwise;
(xv) if one or more elections have been made to treat the
Trust Fund or designated portions thereof as a REMIC, to pay any
federal, state or local taxes imposed on the Trust Fund or its assets
or transactions, as and to the extent described under "Material
Federal Income Tax Consequences--REMICS--Prohibited Transactions Tax
and Other Taxes";
(xvi) to pay for the cost of an independent appraiser or
other expert in real estate matters retained to determine a fair sale
price for a defaulted Mortgage Loan or a property acquired in respect
thereof in connection with the liquidation of such Mortgage Loan or
property;
(xvii) to pay for the cost of various opinions of counsel
obtained pursuant to the related Pooling Agreement for the benefit of
Certificateholders;
(xviii) to make any other withdrawals permitted by the
related Pooling Agreement and described in the related Prospectus
Supplement ; and
(xix) to clear and terminate the Certificate Account upon the
termination of the Trust Fund.
ESCROW ACCOUNTS
A Pooling Agreement may require the Master Servicer or Special
Servicer thereunder to establish and maintain, as and to the extent permitted
by the terms of the related Mortgage Loans, one or more escrow accounts into
which mortgagors deposit amounts sufficient to pay taxes, assessments, hazard
insurance premiums or comparable items. Withdrawals from the escrow accounts
maintained in respect of the Mortgage Loans in any Trust Fund may be made to
effect timely payment of taxes, assessments and hazard insurance premiums or
comparable items, to reimburse the related Master Servicer or Special Servicer
out of related collections for prior advances in respect of taxes, assessments
and hazard insurance premiums or comparable items, to refund to mortgagors
amounts determined to be overages, to remit to mortgagors, if required,
interest earned, if any, on balances in any of the escrow accounts, to repair
or otherwise protect the related Mortgaged Property and to clear and terminate
any of the escrow accounts. The Master Servicer and Special Servicer each will
be solely responsible for administration of the escrow accounts maintained by
it.
MODIFICATIONS, WAIVERS AND AMENDMENTS OF MORTGAGE LOANS
Unless otherwise provided in the related Prospectus Supplement, a
Master Servicer or Special Servicer may agree to modify, waive or amend any
term of any Mortgage Loan serviced by it in a manner consistent with the
applicable Servicing Standard; provided that the modification, waiver or
amendment (i) will not affect the amount or timing of any scheduled payments of
principal or interest on the Mortgage Loan, (ii) will not, in the judgment of
the Master Servicer or Special Servicer, as the case may be, materially impair
the security for the Mortgage Loan or reduce the likelihood of timely payment
of amounts due thereon, (iii) will not adversely affect the coverage under any
applicable instrument of Credit Support or (iv) will not adversely affect the
Trust Fund's status as a REMIC or grantor trust, as the case may be. Unless
otherwise provided in the related Prospectus Supplement, a Special Servicer
also may agree to any other modification, waiver or amendment that would have
the effect described in clauses (i) and (ii) of the proviso to the preceding
sentence if, in its judgment, (i) a material default on the Mortgage Loan has
occurred or a payment default is imminent, (ii) such modification, waiver or
amendment is reasonably likely to produce a greater recovery with respect to
the Mortgage Loan on a present
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value basis than would liquidation, (iii) such modification, waiver or
amendment will not adversely affect the coverage under any applicable
instrument of Credit Support and (iv) such modification, waiver or amendment
would not adversely affect the Trust Fund's status as a REMIC or grantor trust,
as the case may be.
If described in the related Prospectus Supplement, the holders of
interests in a specified class or classes of Subordinate Certificates may have
the ability to direct the Special Servicer's actions in connection with
liquidating or modifying defaulted Mortgage Loans or to replace the Special
Servicer and substitute any such holder or an affiliate thereof as the
successor. See "Risk Factors--Potential Conflicts of Interest." The Prospectus
Supplement will describe, however, whether and to what extent holders of
Offered Certificates may object to the Special Servicer extending the maturity
of a defaulted Mortgage Loan beyond a certain date.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
A borrower's failure to make required Mortgage Loan payments may mean
that operating income is insufficient to service the mortgage debt, or may
reflect the diversion of that income from the servicing of the mortgage debt.
In addition, a borrower that is unable to make Mortgage Loan payments may also
be unable to make timely payment of taxes and insurance premiums and to
otherwise maintain the related Mortgaged Property. In general, and subject to
the discussion in the related Prospectus Supplement, the related Special
Servicer will be required to monitor any Mortgage Loan that is in default more
than a specified number of scheduled payments, evaluate whether the causes of
the default can be corrected over a reasonable period without significant
impairment of the value of the related Mortgaged Property, initiate corrective
action in cooperation with the borrower if cure is likely, inspect the related
Mortgaged Property and take such other actions as are consistent with the
Servicing Standard. A significant period of time may elapse before the Special
Servicer is able to assess the success of any such corrective action or the
need for additional initiatives.
The time within which the Special Servicer can make the initial
determination of appropriate action, evaluate the success of corrective action,
develop additional initiatives, institute foreclosure proceedings and actually
foreclose (or accept a deed to a Mortgaged Property in lieu of foreclosure) on
behalf of the Certificateholders may vary considerably depending on the
particular Mortgage Loan, the Mortgaged Property, the borrower, the presence of
an acceptable party to assume the Mortgage Loan and the laws of the
jurisdiction in which the Mortgaged Property is located. If a borrower files a
bankruptcy petition, the Special Servicer may not be permitted to accelerate
the maturity of the related Mortgage Loan or to foreclose on the related
Mortgaged Property for a considerable period of time, and such Mortgage Loan
may be restructured in the resulting bankruptcy proceedings. See "Certain Legal
Aspects of Mortgage Loans".
A Pooling Agreement may grant to the Master Servicer, the Special
Servicer, a provider of Credit Support and/or the holder or holders of certain
classes of the related series of Certificates a right of first refusal to
purchase from the Trust Fund, at a predetermined purchase price (which, if
insufficient to fully fund the entitlements of Certificateholders to principal
and interest thereon, will be specified in the related Prospectus Supplement),
any Mortgage Loan as to which a specified number of scheduled payments are
delinquent. In addition, unless otherwise specified in the related Prospectus
Supplement, the Special Servicer may offer to sell any defaulted Mortgage Loan
if and when the Special Servicer determines, consistent with the applicable
Servicing Standard, that such a sale would produce a greater recovery on a
present value basis than would liquidation of the related Mortgaged Property.
Unless otherwise provided in the related Prospectus Supplement, the related
Pooling Agreement will require that the Special Servicer accept the highest
cash bid received from any person (including itself, the Master Servicer, the
Sponsor or any affiliate of any of them or any Certificateholder) that
constitutes a fair price for such defaulted Mortgage Loan. In the absence of
any bid determined in accordance
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with the related Pooling Agreement to be fair, the Special Servicer will
generally be required to proceed against the related Mortgaged Property,
subject to the discussion below.
If a default on a Mortgage Loan has occurred or, in the Special
Servicer's judgment, a payment default is imminent, the Special Servicer, on
behalf of the Trustee, may at any time institute foreclosure proceedings,
exercise any power of sale contained in the related Mortgage, obtain a deed in
lieu of foreclosure, or otherwise acquire title to the related Mortgaged
Property and/or other collateral, by operation of law or otherwise, if such
action is consistent with the Servicing Standard. Unless otherwise specified in
the related Prospectus Supplement, however, neither the Special Servicer nor
the Master Servicer may acquire title to any Mortgaged Property, have a
receiver of rents appointed with respect to any Mortgaged Property or take any
other action with respect to any Mortgage Property that would cause the
Trustee, for the benefit of the related series of Certificateholders, or any
other specified person to be considered to hold title to, to be a
"mortgagee-in-possession" of, or to be an "owner" or an "operator" of such
Mortgaged Property within the meaning of certain federal environmental laws,
unless the Special Servicer has previously determined, based on a report
prepared by a person who regularly conducts environmental audits (which report
will be an expense of the Trust Fund), that either:
(i) the Mortgaged Property is in compliance with applicable
environmental laws and regulations or, if not, that taking such
actions as are necessary to bring the Mortgaged Property into
compliance therewith is reasonably likely to produce a greater
recovery to Certificateholders on a present value basis than not
taking such actions; and
(ii) there are no circumstances or conditions present at the
Mortgaged Property that have resulted in any contamination for which
investigation, testing, monitoring, containment, clean-up or
remediation could be required under any applicable environmental laws
and regulations or, if such circumstances or conditions are present
for which any such action could be required, taking such actions with
respect to the Mortgaged Property is reasonably likely to produce a
greater recovery to Certificateholders on a present value basis than
not taking such actions. See "Certain Legal Aspects of Mortgage
Loans--Environmental Risks".
Unless otherwise provided in the related Prospectus Supplement, if
title to any Mortgaged Property is acquired by a Trust Fund as to which a REMIC
election has been made, the Special Servicer, on behalf of the Trust Fund, will
be required to sell the Mortgaged Property by the end of the third taxable year
following the taxable year in which such acquisition occurred, unless (i) the
Internal Revenue Service grants an extension of time to sell such property or
(ii) the Trustee and REMIC Administrator each receives an opinion of
independent counsel to the effect that the holding of the property by the Trust
Fund beyond the end of the third taxable year following the taxable year in
which the property was acquired will not result in the imposition of a tax on
the Trust Fund or cause the Trust Fund (or any designated portion thereof) to
fail to qualify as a REMIC under the Code at any time that any Certificate is
outstanding. Subject to the foregoing, the Special Servicer will generally be
required to solicit bids for any Mortgaged Property so acquired in such a
manner as will be reasonably likely to realize a fair cash price for such
property. If the Trust Fund acquires title to any Mortgaged Property, the
Special Servicer, on behalf of the Trust Fund, may retain an independent
contractor to manage and operate such property. The retention of an independent
contractor, however, will not relieve the Special Servicer of its obligation to
manage such Mortgaged Property in a manner consistent with the Servicing
Standard. The Special Servicer may be authorized to conduct activities with
respect to a Mortgaged Property acquired by a Trust Fund that cause the Trust
Fund to incur a federal income or other tax, provided that doing so would, in
reasonable discretion of the Special Servicer, maximize net after-tax proceeds
to Certificateholders.
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If Liquidation Proceeds collected with respect to a defaulted Mortgage
Loan are less than the outstanding principal balance of the defaulted Mortgage
Loan plus interest accrued thereon plus the aggregate amount of reimbursable
expenses incurred by the Special Servicer and/or Master Servicer in connection
with such Mortgage Loan, the Trust Fund will realize a loss in the amount of
such difference. The Special Servicer and/or Master Servicer will be entitled
to reimbursement out of the Liquidation Proceeds recovered on any defaulted
Mortgage Loan, prior to the distribution of such Liquidation Proceeds to
Certificateholders, amounts that represent unpaid servicing compensation in
respect of the Mortgage Loan, unreimbursed servicing expenses incurred with
respect to the Mortgage Loan and any unreimbursed advances of delinquent
payments made with respect to the Mortgage Loan.
With respect to collateral securing a Cooperative Loan, any
prospective purchaser will generally have to obtain the approval of the board
of directors of the relevant Cooperative before purchasing the shares and
acquiring rights under the proprietary lease or occupancy agreement securing
the Cooperative Loan. See "--Certain Legal Aspects of Mortgage
Loans--Foreclosure on Cooperatives". This approval is usually based on the
purchaser's income and net worth and numerous other factors. The necessity of
acquiring such approval could limit the number of potential purchasers for
those shares and otherwise limit the Master Servicer's ability to sell, and
realize the value of, those shares.
If any Mortgaged Property suffers damage such that the proceeds, if
any, of the related hazard insurance policy are insufficient to fully restore
the damaged property, neither the Special Servicer nor the Master Servicer will
be required to expend its own funds to effect such restoration unless (to the
extent not otherwise provided in the related Prospectus Supplement) it
determines (i) that such restoration will increase the proceeds to
Certificateholders on liquidation of the Mortgage Loan after reimbursement of
the Special Servicer or Master Servicer, as the case may be, for its expenses
and (ii) that such expenses will be recoverable by it from related Insurance
Proceeds or Liquidation Proceeds.
Notwithstanding the foregoing discussion, if and to the extent
described in the related Prospectus Supplement, the related Pooling Agreement
may provide that any or all of the rights, duties and obligations of a Special
Servicer with respect to any defaulted Mortgage Loan or REO Property as
described under this section "--Realization Upon Defaulted Mortgage Loans" and
elsewhere in this Prospectus, may be exercised or performed by a Master
Servicer with the consent of, at the direction of or following consultation
with the Special Servicer. Moreover, a single entity may act as both Master
Servicer and Special Servicer for any Trust Fund.
HAZARD INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will require the Master Servicer (or the Special Servicer
with respect to Mortgage Loans serviced thereby) to cause each Mortgage Loan
borrower to maintain a hazard insurance policy that provides for such coverage
as is required under the related Mortgage or, if the Mortgage permits the
holder thereof to dictate to the borrower the insurance coverage to be
maintained on the related Mortgaged Property, such coverage as is consistent
with the requirements of the Servicing Standard. Unless otherwise specified in
the related Prospectus Supplement, such coverage generally will be in an amount
equal to the lesser of the principal balance owing on such Mortgage Loan and
the replacement cost of the related Mortgaged Property. The ability of a Master
Servicer (or Special Servicer) to assure that hazard insurance proceeds are
appropriately applied may be dependent upon its being named as an additional
insured under any hazard insurance policy and under any other insurance policy
referred to below, or upon the extent to which information concerning covered
losses is furnished by borrowers. All amounts collected by a Master Servicer
(or Special Servicer) under any such policy (except for amounts to be applied
to the restoration or repair of the Mortgaged Property or released to the
borrower in accordance with the Master Servicer's (or Special Servicer's)
normal servicing procedures and/or to the terms and conditions of the related
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Mortgage and Mortgage Note) will be deposited in the related Certificate
Account. The Pooling Agreement may provide that the Master Servicer (or Special
Servicer) may satisfy its obligation to cause borrowers to maintain such hazard
insurance policies by maintaining a blanket policy insuring against hazard
losses on all of the related Mortgage Loans. If such blanket policy contains a
deductible clause, the Master Servicer (or Special Servicer) will be required,
in the event of a casualty covered by such blanket policy, to deposit or cause
to be deposited in the related Certificate Account all sums that would have
been deposited therein but for such deductible clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies covering the Mortgaged Properties will be
underwritten by different insurers under different state laws in accordance
with different applicable state forms, and therefore will not contain identical
terms and conditions, most such 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
mudflows), wet or dry rot, vermin, domestic animals and other kinds of risks
not specified in the preceding sentence. Accordingly, a Mortgaged Property may
not be insured for losses arising from any such cause unless the related
Mortgage specifically requires, or permits the holder thereof to require, such
coverage.
The hazard insurance policies covering the Mortgaged Properties will
typically contain co-insurance clauses that in effect require an insured at all
times to carry insurance of a specified percentage (generally 80% to 90%) of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clauses generally provide that the
insurer's liability in the event of partial loss does not exceed the lesser of
(i) the replacement cost of the improvements less physical depreciation and
(ii) such proportion of the loss as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such improvements.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the Mortgage Loans may contain a due-on-sale clause that
entitles the lender to accelerate payment of the Mortgage Loan upon any sale or
other transfer of the related Mortgaged Property made without the lender's
consent. Certain of the Mortgage Loans may also contain a due-on-encumbrance
clause that entitles the lender to accelerate the maturity of the Mortgage Loan
upon the creation of any other lien or encumbrance upon the Mortgaged Property.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer or the Special Servicer will determine whether to exercise any right
the Trustee may have under any such provision in a manner consistent with the
Servicing Standard. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer or Special Servicer, as applicable, will be
entitled to retain as additional servicing compensation any fee collected in
connection with the permitted transfer of a Mortgaged Property. See "Certain
Legal Aspects of Mortgage Loans--Due-on-Sale and Due-on-Encumbrance".
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, a
Master Servicer's primary servicing compensation with respect to a series of
Certificates will come from the periodic payment to it of a specified portion
of the interest payments on each Mortgage Loan in the related Trust Fund,
including Mortgage Loans serviced by the related Special Servicer. If and to
the extent described in the related Prospectus Supplement, a Special Servicer's
primary compensation with respect to a series of Certificates may consist of
any or all of the following components: (i) a specified portion of the interest
payments on each Mortgage Loan in the related Trust Fund, whether or not
serviced by it; (ii) an additional specified portion of the interest payments
on each Mortgage Loan then currently serviced by it; and (iii) subject to any
specified limitations, a fixed percentage of some or all
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of the collections and proceeds received with respect to each Mortgage Loan
which was at any time serviced by it, including Mortgage Loans for which
servicing was returned to the Master Servicer. As additional compensation, a
Master Servicer or Special Servicer may be entitled to retain all or a portion
of late payment charges, Prepayment Premiums, modification fees and other fees
collected from borrowers and any interest or other income that may be earned on
funds held in the related Certificate Account. A more detailed description of
each Master Servicer's and Special Servicer's compensation will be provided in
the related Prospectus Supplement. Any Sub-Servicer will receive as its
sub-servicing compensation a portion of the servicing compensation to be paid
to the Master Servicer or Special Servicer that retained such Sub-Servicer.
In addition to amounts payable to any Sub-Servicer retained by it, a
Master Servicer or Special Servicer may be required, to the extent provided in
the related Prospectus Supplement, to pay from amounts that represent its
servicing compensation certain expenses incurred in connection with the
administration of the related Trust Fund, including, without limitation,
payment of the fees and disbursements of independent accountants and payment of
expenses incurred in connection with distributions and reports to
Certificateholders. Certain other expenses, including certain expenses related
to Mortgage Loan defaults and liquidations and, to the extent so provided in
the related Prospectus Supplement, interest on such expenses at the rate
specified therein, may be required to be borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement, a
Master Servicer may be required to apply a portion of the servicing
compensation otherwise payable to it in respect of any period to Prepayment
Interest Shortfalls. See "Yield and Maturity Considerations--Certain Shortfalls
in Collections of Interest".
EVIDENCE AS TO COMPLIANCE
Unless otherwise provided in the related Prospectus Supplement, each
Pooling Agreement will require that, on or before a specified date in each
year, the Master Servicer and, if and to the extent appropriate, the Special
Servicer each cause a firm of independent public accountants to furnish to the
Trustee a statement to the effect that (i) such firm has obtained a letter of
representations regarding certain matters relating to the management of the
Master Servicer or the Special Servicer, as the case may be, which includes an
assertion that the Master Servicer or the Special Servicer, as the case may be,
has complied with certain minimum mortgage loan servicing standards (to the
extent applicable to commercial and multifamily mortgage loans), identified in
the Uniform Single Attestation Program for Mortgage Bankers established by the
Mortgage Bankers Association of America, with respect to the servicing of
commercial and multifamily mortgage loans during the most recently completed
calendar year and (ii) on the basis of an examination conducted by such firm in
accordance with standards established by the American Institute of Certified
Public Accountants, such representation is fairly stated in all material
respects, subject to such exceptions and other qualifications that may be
appropriate. In rendering its report, such firm may rely, as to matters
relating to the direct servicing of commercial and multifamily mortgage loans
by sub-servicers, upon comparable reports of firms of independent public
accountants rendered on the basis of examinations conducted in accordance with
the same standards (rendered within one year of such report) with respect to
those sub-servicers. A Prospectus Supplement may provide that additional or
alternative reports of independent certified public accountants relating to the
servicing of mortgage loans may be required to be delivered to the Trustee.
Each Pooling Agreement will also require that, on or before a
specified date in each year, the Master Servicer and Special Servicer each
deliver to the Trustee a statement signed by one or more officers thereof to
the effect that the Master Servicer or the Special Servicer, as the case may
be, has fulfilled its material obligations under the Pooling Agreement
throughout the preceding calendar year or other specified twelve month period.
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CERTAIN MATTERS REGARDING THE MASTER SERVICER, THE SPECIAL SERVICER, THE REMIC
ADMINISTRATOR AND THE SPONSOR
Any entity serving as Master Servicer, Special Servicer or REMIC
Administrator under a Pooling Agreement may be an affiliate of the Sponsor and
may have other normal business relationships with the Sponsor or the Sponsor's
affiliates. Unless otherwise specified in the Prospectus Supplement for a
series of Certificates, the related Pooling Agreement will permit the Master
Servicer, the Special Servicer and any REMIC Administrator to resign from its
obligations thereunder only upon (a) the appointment of, and the acceptance of
such appointment by, a successor thereto and receipt by the Trustee of written
confirmation from each applicable Rating Agency that such resignation and
appointment will not have an adverse effect on the rating assigned by such
Rating Agency to any class of Certificates of such series or (b) a
determination that such obligations are no longer permissible under applicable
law or are in material conflict by reason of applicable law with any other
activities carried on by it. No such resignation will become effective until
the Trustee or other successor has assumed the obligations and duties of the
resigning Master Servicer, Special Servicer or REMIC Administrator, as the case
may be, under the Pooling Agreement. The Master Servicer and Special Servicer
for each Trust Fund will be required to maintain a fidelity bond and errors and
omissions policy or their equivalent that provides coverage against losses that
may be sustained as a result of an officer's or employee's misappropriation of
funds or errors and omissions, subject to certain limitations as to amount of
coverage, deductible amounts, conditions, exclusions and exceptions permitted
by the related Pooling Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will further provide that none of the Master Servicer, the
Special Servicer, the REMIC Administrator (if any), the Sponsor or any
director, officer, employee or agent of any of them will be under any liability
to the related Trust Fund or Certificateholders for any action taken, or not
taken, in good faith pursuant to the Pooling Agreement or for errors in
judgment; provided, however, that none of the Master Servicer, the Special
Servicer, the REMIC Administrator (if any), the Sponsor or any such person will
be protected against any liability that would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the performance of
obligations or duties thereunder or by reason of reckless disregard of such
obligations and duties. Unless otherwise specified in the related Prospectus
Supplement, each Pooling Agreement will further provide that the Master
Servicer, the Special Servicer, the REMIC Administrator (if any), the Sponsor
and any director, officer, employee or agent of any of them will be entitled to
indemnification by the related Trust Fund against any loss, liability or
expense incurred in connection with any legal action that relates to such
Pooling Agreement or the related series of Certificates; provided, however,
that such indemnification will not extend to any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or gross negligence in the
performance of obligations or duties under such Pooling Agreement, or by reason
of reckless disregard of such obligations or duties. In addition, each Pooling
Agreement will provide that none of the Master Servicer, the Special Servicer,
the REMIC Administrator (if any) or the Sponsor 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 Agreement and that in its opinion
may involve it in any expense or liability. However, each of the Master
Servicer, the Special Servicer, the REMIC Administrator (if any) and the
Sponsor will be permitted, in the exercise of its discretion, to undertake any
such action that it may deem necessary or desirable with respect to the
enforcement and/or protection of the rights and duties of the parties to the
Pooling Agreement and the interests of the related series of Certificateholders
thereunder. In such event, the legal expenses and costs of such action, and any
liability resulting therefrom, will be expenses, costs and liabilities of the
related series of Certificateholders, and the Master Servicer, the Special
Servicer, the REMIC Administrator or the Sponsor, as the case may be, will be
entitled to charge the related Certificate Account therefor.
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Any person into which the Master Servicer, the Special Servicer, the
REMIC Administrator (if any) or the Sponsor may be merged or consolidated, or
any person resulting from any merger or consolidation to which the Master
Servicer, the Special Servicer, the REMIC Administrator (if any) or the Sponsor
is a party, or any person succeeding to the business of the Master Servicer,
the Special Servicer, the REMIC Administrator (if any) or the Sponsor, will be
the successor of the Master Servicer, the Special Servicer, the REMIC
Administrator or the Sponsor, as the case may be, under the related Pooling
Agreement.
Unless otherwise specified in the related Prospectus Supplement, a
REMIC Administrator will be entitled to perform any of its duties under the
related Pooling Agreement either directly or by or through agents or attorneys,
and the REMIC Administrator will not be responsible for any willful misconduct
or gross negligence on the part of any such agent or attorney appointed by it
with due care.
EVENTS OF DEFAULT
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, "Events of Default" under the related Pooling Agreement will
include (i) any failure by the Master Servicer to distribute or cause to be
distributed to the Certificateholders of such series, or to remit to the
Trustee for distribution to such Certificateholders, any amount required to be
so distributed or remitted, which failure continues unremedied for five days
after written notice thereof has been given to the Master Servicer by any other
party to the related Pooling Agreement, or to the Master Servicer, with a copy
to each other party to the related Pooling Agreement, by Certificateholders
entitled to not less than 25% (or such other percentage specified in the
related Prospectus Supplement) of the Voting Rights for such series; (ii) any
failure by the Special Servicer to remit to the Master Servicer or the Trustee
any amount required to be so remitted, which failure continues unremedied for
five days after written notice thereof has been given to the Special Servicer
by any other party to the related Pooling Agreement, or to the Special
Servicer, with a copy to each other party to the related Pooling Agreement, by
the Certificateholders entitled to not less than 25% (or such other percentage
specified in the related Prospectus Supplement) of the Voting Rights of such
series; (iii) any failure by the Master Servicer or the Special Servicer duly
to observe or perform in any material respect any of its other covenants or
obligations under the related Pooling Agreement, which failure continues
unremedied for sixty days after written notice thereof has been given to the
Master Servicer or the Special Servicer, as the case may be, by any other party
to the related Pooling Agreement, or to the Master Servicer or the Special
Servicer, as the case may be, with a copy to each other party to the related
Pooling Agreement, by Certificateholders entitled to not less than 25% (or such
other percentage specified in the related Prospectus Supplement) of the Voting
Rights for such series; (iv) any failure by a REMIC Administrator (if any) duly
to observe or perform in any material respect any of its covenants or
obligations under the related Pooling Agreement, which failure continues
unremedied for sixty days after written notice thereof has been given to the
REMIC Administrator by any other party to the related Pooling Agreement, or to
the REMIC Administrator, with a copy to each other party to the related Pooling
Agreement, by Certificateholders entitled to not less than 25% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights
for such series; and (v) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities, or similar proceedings in respect of or
relating to the Master Servicer, the Special Servicer, or a REMIC Administrator
(if any), and certain actions by or on behalf of the Master Servicer, the
Special Servicer or a REMIC Administrator (if any) indicating its insolvency or
inability to pay its obligations. Material variations to the foregoing Events
of Default (other than to add thereto or shorten cure periods or eliminate
notice requirements) will be specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, when a single
entity acts as Master Servicer, Special Servicer and REMIC Administrator, or in
any two of the foregoing capacities, for any Trust Fund, an Event of Default
described above in one capacity will constitute an Event of Default in each
capacity.
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RIGHTS UPON EVENT OF DEFAULT
If an Event of Default occurs with respect to the Master Servicer, the
Special Servicer or a REMIC Administrator (if any) under a Pooling Agreement,
then, in each and every such case, so long as the Event of Default remains
unremedied, the Sponsor or the Trustee will be authorized, and at the direction
of Certificateholders of the related series entitled to not less than 51% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights for such series, the Trustee will be required, to terminate all
of the rights and obligations of the defaulting party as Master Servicer,
Special Servicer or REMIC Administrator, as applicable, under the Pooling
Agreement, whereupon the Trustee will succeed to all of the responsibilities,
duties and liabilities of the defaulting party as Master Servicer, Special
Servicer or REMIC Administrator, as applicable, under the Pooling Agreement
(except that if the defaulting party is required to make advances thereunder
regarding delinquent Mortgage Loans, but the Trustee is prohibited by law from
obligating itself to make such advances, or if the related Prospectus
Supplement so specifies, the Trustee will not be obligated to make such
advances) and will be entitled to similar compensation arrangements. Unless
otherwise specified in the related Prospectus Supplement, if the Trustee is
unwilling or unable so to act, it may (or, at the written request of
Certificateholders of the related series entitled to not less than 51% (or such
other percentage specified in the related Prospectus Supplement) of the Voting
Rights for such series, it will be required to) appoint, or petition a court of
competent jurisdiction to appoint, a qualified and established institution that
(unless otherwise provided in the related Prospectus Supplement) is acceptable
to each applicable Rating Agency to act as successor to the Master Servicer,
Special Servicer or REMIC Administrator, as the case may be, under the Pooling
Agreement. Pending such appointment, the Trustee will be obligated to act in
such capacity.
No Certificateholder will have the right under any Pooling Agreement
to institute any proceeding with respect thereto unless such holder previously
has given to the Trustee written notice of default and unless
Certificateholders of the same series entitled to not less than 25% (or such
other percentage specified in the related Prospectus Supplement) of the Voting
Rights for such series shall have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and shall have
offered to the Trustee reasonable indemnity, and the Trustee for sixty days (or
such other period specified in the related Prospectus Supplement) shall have
neglected or refused to institute any such proceeding. The Trustee, however,
will be under no obligation to exercise any of the trusts or powers vested in
it by any Pooling Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the holders of
Certificates of the related series, unless such Certificateholders have offered
to the Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby.
AMENDMENT
Each Pooling Agreement may be amended by the respective parties
thereto, without the consent of any of the holders of the related series of
Certificates, (i) to cure any ambiguity, (ii) to correct a defective provision
therein or to correct, modify or supplement any provision therein that may be
inconsistent with any other provision therein, (iii) to add any other
provisions with respect to matters or questions arising under the Pooling
Agreement that are not inconsistent with the provisions thereof, (iv) to comply
with any requirements imposed by the Code, or (v) for any other purpose;
provided that such amendment (other than an amendment for the specific purpose
referred to in clause (iv) above) may not (as evidenced by an opinion of
counsel to such effect satisfactory to the Trustee) adversely affect in any
material respect the interests of any such holder without such holder's consent
or adversely affect the status of the Trust Fund as either a REMIC or grantor
trust, as the case may be, for federal income tax purposes; and provided
further that such amendment (other than an amendment for one of the specific
purposes referred to in clauses (i) through (iv) above) must be acceptable to
each
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applicable Rating Agency. Unless otherwise specified in the related Prospectus
Supplement, each Pooling Agreement may also be amended by the respective
parties thereto, with the consent of the holders of the related series of
Certificates entitled to not less than 51% (or such other percentage specified
in the related Prospectus Supplement) of the Voting Rights for such series
allocated to the affected classes, for any purpose; provided that, unless
otherwise specified in the related Prospectus Supplement, no such amendment may
(i) reduce in any manner the amount of, or delay the timing of, payments
received or advanced on Mortgage Loans that are required to be distributed in
respect of any Certificate without the consent of the holder of such
Certificate, (ii) adversely affect in any material respect the interests of the
holders of any class of Certificates, in a manner other than as described in
clause (i), without the consent of the holders of all Certificates of such
class or (iii) modify the amendment provisions of the Pooling Agreement
described in this paragraph without the consent of the holders of all
Certificates of the related series. However, unless otherwise specified in the
related Prospectus Supplement, the Trustee will be prohibited from consenting
to any amendment of a Pooling Agreement pursuant to which a REMIC election is
to be or has been made unless the Trustee shall first have received an opinion
of counsel to the effect that such amendment will not result in the imposition
of a tax on the related Trust Fund or cause the related Trust Fund (or
designated portion thereof) to fail to qualify as a REMIC at any time that the
related Certificates are outstanding.
LIST OF CERTIFICATEHOLDERS
Unless otherwise specified in the related Prospectus Supplement, upon
written request of three or more Certificateholders of record made for purposes
of communicating with other holders of Certificates of the same series with
respect to their rights under the related Pooling Agreement, the Trustee or
other specified person will afford such Certificateholders access during normal
business hours to the most recent list of Certificateholders of that series
held by such person. If such list is as of a date more than 90 days prior to
the date of receipt of such Certificateholders' request, then such person, if
not the registrar for such series of Certificates, will be required to request
from such registrar a current list and to afford such requesting
Certificateholders access thereto promptly upon receipt.
THE TRUSTEE
The Trustee under each Pooling Agreement will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company that serves as Trustee may have typical
banking relationships with the Sponsor and its affiliates and with any Master
Servicer, Special Servicer or REMIC Administrator and its affiliates.
DUTIES OF THE TRUSTEE
The Trustee for each series of Certificates will make no
representation as to the validity or sufficiency of the related Pooling
Agreement, the Certificates or any underlying Mortgage Loan or related document
and will not be accountable for the use or application by or on behalf of any
Master Servicer or Special Servicer of any funds paid to the Master Servicer or
Special Servicer in respect of the Certificates or the underlying Mortgage
Loans, or any funds deposited into or withdrawn from the Certificate Account
for such series or any other account by or on behalf of the Master Servicer or
Special Servicer. If no Event of Default has occurred and is continuing, the
Trustee for each series of Certificates will be required to perform only those
duties specifically required under the related Pooling Agreement. However, upon
receipt of any of the various certificates, reports or other instruments
required to be furnished to it pursuant to the related Pooling Agreement, a
Trustee will be required to examine such documents and to determine whether
they conform to the requirements of such agreement.
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CERTAIN MATTERS REGARDING THE TRUSTEE
As and to the extent described in the related Prospectus Supplement,
the fees and normal disbursements of any Trustee may be the expense of the
related Master Servicer or other specified person or may be required to be
borne by the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to indemnification,
from amounts held in the Certificate Account for such series, for any loss,
liability or expense incurred by the Trustee in connection with the Trustee's
acceptance or administration of its trusts under the related Pooling Agreement;
provided, however, that such indemnification will not extend to any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence on the part of the Trustee in the performance of its
obligations and duties thereunder, or by reason of its reckless disregard of
such obligations or duties.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to execute any of its
trusts or powers under the related Pooling Agreement or perform any of its
duties thereunder either directly or by or through agents or attorneys, and the
Trustee will not be responsible for any willful misconduct or gross negligence
on the part of any such agent or attorney appointed by it with due care.
RESIGNATION AND REMOVAL OF THE TRUSTEE
A Trustee will be permitted at any time to resign from its obligations
and duties under the related Pooling Agreement by giving written notice thereof
to the Sponsor. Upon receiving such notice of resignation, the Sponsor (or such
other person as may be specified in the related Prospectus Supplement) will be
required to use its best efforts to promptly appoint a successor trustee. If no
successor trustee shall have accepted an appointment within a specified period
after the giving of such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction to appoint a successor trustee.
If at any time a Trustee ceases to be eligible to continue as such
under the related Pooling Agreement, or if at any time the Trustee becomes
incapable of acting, or if certain events of (or proceedings in respect of)
bankruptcy or insolvency occur with respect to the Trustee, the Sponsor will be
authorized to remove the Trustee and appoint a successor trustee. In addition,
holders of the Certificates of any series entitled to at least 33 1/3% (or such
other percentage specified in the related Prospectus Supplement) of the Voting
Rights for such series may at any time (with or without cause) remove the
Trustee under the related Pooling Agreement and appoint a successor trustee,
provided that other holders of Certificates of the same series entitled to a
greater percentage of the Voting Rights for such series do not object.
Any resignation or removal of a Trustee and appointment of a successor
trustee will not become effective until acceptance of appointment by the
successor trustee.
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DESCRIPTION OF CREDIT SUPPORT
GENERAL
Credit Support may be provided with respect to one or more classes of
the Certificates of any series, or with respect to the related Mortgage Assets.
Credit Support may be in the form of a letter of credit, the subordination of
one or more classes of Certificates, the use of a pool insurance policy or
guarantee insurance, the establishment of one or more reserve funds or another
method of Credit Support described in the related Prospectus Supplement, or any
combination of the foregoing. If so provided in the related Prospectus
Supplement, any form of Credit Support may provide credit enhancement for more
than one series of Certificates to the extent described therein.
Unless otherwise provided in the related Prospectus Supplement for a
series of Certificates, the Credit Support will not provide protection against
all risks of loss and will not guarantee payment to Certificateholders of all
amounts to which they are entitled under the related Pooling Agreement. If
losses or shortfalls occur that exceed the amount covered by the related Credit
Support or that are not covered by such Credit Support, Certificateholders will
bear their allocable share of deficiencies. Moreover, if a form of Credit
Support covers more than one series of Certificates, holders of Certificates of
one series will be subject to the risk that such Credit Support will be
exhausted by the claims of the holders of Certificates of one or more other
series before the former receive their intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Certificates of a series, or with respect to the related Mortgage Assets, the
related Prospectus Supplement will include a description of (i) the nature and
amount of coverage under such Credit Support, (ii) any conditions to payment
thereunder not otherwise described herein, (iii) the conditions (if any) under
which the amount of coverage under such Credit Support may be reduced and under
which such Credit Support may be terminated or replaced and (iv) the material
provisions relating to such Credit Support. Additionally, the related
Prospectus Supplement will set forth certain information with respect to the
obligor under any instrument of Credit Support, including (i) a brief
description of its principal business activities, (ii) its principal place of
business, place of incorporation and the jurisdiction under which it is
chartered or licensed to do business, (iii) if applicable, the identity of
regulatory agencies that exercise primary jurisdiction over the conduct of its
business and (iv) its total assets, and its stockholders' equity or
policyholders' surplus, if applicable, as of a date that will be specified in
the Prospectus Supplement. See "Risk Factors--Credit Support Limitations".
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more
classes of Certificates of a series may be Subordinate Certificates. To the
extent specified in the related Prospectus Supplement, the rights of the
holders of Subordinate Certificates to receive distributions from the
Certificate Account on any Distribution Date will be subordinated to the
corresponding rights of the holders of Senior Certificates. If so provided in
the related Prospectus Supplement, the subordination of a class may apply only
in the event of (or may be limited to) certain types of losses or shortfalls.
The related Prospectus Supplement will set forth information concerning the
manner and amount of subordination provided by a class or classes of
Subordinate Certificates in a series and the circumstances under which such
subordination will be available.
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CROSS-SUPPORT PROVISIONS
If the Mortgage Assets in any Trust Fund are divided into separate
groups, each supporting a separate class or classes of Certificates of the
related series, Credit Support may be provided by cross-support provisions
requiring that distributions be made on Senior Certificates evidencing
interests in one group of Mortgage Assets prior to distributions on Subordinate
Certificates evidencing interests in a different group of Mortgage Assets
within the Trust Fund. The Prospectus Supplement for a series that includes a
cross-support provision will describe the manner and conditions for applying
such provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO MORTGAGE LOANS
If so provided in the Prospectus Supplement for a series of
Certificates, Mortgage Loans included in the related Trust Fund will be covered
for certain default risks by insurance policies or guarantees. To the extent
material, a copy of each such instrument will accompany the Current Report on
Form 8-K to be filed with the Commission within 15 days of issuance of the
Certificates of the related series.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of
Certificates, deficiencies in amounts otherwise payable on such Certificates or
certain classes thereof will be covered by one or more letters of credit,
issued by a bank or financial institution specified in such Prospectus
Supplement (the "L/C Bank"). Under a letter of credit, the L/C Bank will be
obligated to honor draws thereunder in an aggregate fixed dollar amount, net of
unreimbursed payments thereunder, generally equal to a percentage specified in
the related Prospectus Supplement of the aggregate principal balance of the
Mortgage Assets on the related Cut-off Date or of the initial aggregate
Certificate Balance of one or more classes of Certificates. If so specified in
the related Prospectus Supplement, the letter of credit may permit draws only
in the event of certain types of losses and shortfalls. The amount available
under the letter of credit will, in all cases, be reduced to the extent of the
unreimbursed payments thereunder and may otherwise be reduced as described in
the related Prospectus Supplement. The obligations of the L/C Bank under the
letter of credit for each series of Certificates will expire at the earlier of
the date specified in the related Prospectus Supplement or the termination of
the Trust Fund. A copy of any such letter of credit will accompany the Current
Report on Form 8-K to be filed with the Commission within 15 days of issuance
of the Certificates of the related series.
CERTIFICATE INSURANCE AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of
Certificates, deficiencies in amounts otherwise payable on such Certificates or
certain classes thereof will be covered by insurance policies and/or surety
bonds provided by one or more insurance companies or sureties. Such instruments
may cover, with respect to one or more classes of Certificates of the related
series, timely distributions of interest and/or full distributions of principal
on the basis of a schedule of principal distributions set forth in or
determined in the manner specified in the related Prospectus Supplement. The
related Prospectus Supplement will describe any limitations on the draws that
may be made under any such instrument. A copy of any such instrument will
accompany the Current Report on Form 8-K to be filed with the Commission within
15 days of issuance of the Certificates of the related series.
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RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of
Certificates, deficiencies in amounts otherwise payable on such Certificates or
certain classes thereof will be covered (to the extent of available funds) by
one or more reserve funds in which cash, a letter of credit, Permitted
Investments, a demand note or a combination thereof will be deposited, in the
amounts specified in such Prospectus Supplement. If so specified in the related
Prospectus Supplement, the reserve fund for a series may also be funded over
time by a specified amount of the collections received on the related Mortgage
Assets.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement, reserve funds may be
established to provide protection only against certain types of losses and
shortfalls. Following each Distribution Date, amounts in a reserve fund in
excess of any amount required to be maintained therein may be released from the
reserve fund under the conditions and to the extent specified in the related
Prospectus Supplement.
If so specified in the related Prospectus Supplement, amounts
deposited in any reserve fund will be invested in Permitted Investments. Unless
otherwise specified in the related Prospectus Supplement, any reinvestment
income or other gain from such investments will be credited to the related
reserve fund for such series, and any loss resulting from such investments will
be charged to such reserve fund. However, such income may be payable to any
related Master Servicer or another service provider as additional compensation
for its services. The reserve fund, if any, for a series will not be a part of
the Trust Fund unless otherwise specified in the related Prospectus Supplement.
CREDIT SUPPORT WITH RESPECT TO MBS
If so provided in the Prospectus Supplement for a series of
Certificates, any MBS included in the related Trust Fund and/or the related
underlying mortgage loans may be covered by one or more of the types of Credit
Support described herein. The related Prospectus Supplement will specify, as to
each such form of Credit Support, the information indicated above with respect
thereto, to the extent such information is material and available.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal
aspects of loans secured by liens on commercial and multifamily residential
properties located in the United States and security interests in Cooperatives
Shares with respect to such types of properties. Because such legal aspects are
governed by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete, to reflect the laws of any particular
state, or to encompass the laws of all states in which the security for the
Mortgage Loans (or mortgage loans underlying any MBS) is situated. Accordingly,
the summaries are qualified in their entirety by reference to the applicable
laws of those states. If the Mortgage Assets in any Trust Fund that are
ultimately secured by the properties in a particular state represent a
significant concentration (by balance) of all the Mortgage Assets in such Trust
Fund, the Sponsor will include in the related Prospectus Supplement such
additional information regarding the real estate laws of such state as may be
material to an investment decision with respect to the related series of
Offered Certificates. See "Description of the Trust Funds--Mortgage Loans". For
purposes of the following discussion, "Mortgage Loan" includes a real estate
loan underlying an MBS.
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GENERAL
Except as described below with respect to Cooperative Loans (see
"--Cooperative Loans" below), each Mortgage Loan will be evidenced by a note or
bond and secured by an instrument granting a lien on or security interest in
real property, which may be a mortgage, deed of trust or a deed to secure debt,
depending upon the prevailing practice and law in the state in which the
related Mortgaged Property is located. Mortgages, deeds of trust and deeds to
secure debt are herein collectively referred to as "mortgages". A mortgage
creates a lien upon, or grants a title interest in, the real property covered
thereby, and represents the security for the repayment of the indebtedness
customarily evidenced by a promissory note. The priority of the lien created or
interest granted will depend on the terms of the mortgage and, in some cases,
on the terms of separate subordination agreements or intercreditor agreements
with others that hold interests in the subject property, the knowledge of the
parties to the mortgage and, generally, the order of recordation of the
mortgage in the appropriate public recording office. However, the lien of a
recorded mortgage will generally be subordinate to later-arising liens for real
estate taxes and assessments and other charges imposed under governmental
police powers.
TYPES OF MORTGAGE INSTRUMENTS
There are two parties to a mortgage: a mortgagor (the borrower and
usually the owner of the subject property) and a mortgagee (the lender). In
contrast, a deed of trust is a three-party instrument, among a trustor (the
equivalent of a borrower), a trustee to whom the real property is conveyed, and
a beneficiary (the lender) for whose benefit the conveyance is made. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust and generally with a power of sale, to the trustee to secure
repayment of the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. The borrower, or grantor, conveys title to the
real property to the grantee, or lender, generally with a power of sale, until
such time as the debt is repaid. In a case where the borrower is a land trust,
there would be an additional party because legal title to the property is held
by a land trustee under a land trust agreement for the benefit of the borrower.
At origination of a mortgage loan involving a land trust, the borrower executes
a separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's and beneficiary's authority under a
deed of trust and the grantee's authority under a deed to secure debt are
governed by the express provisions of the related instrument, the law of the
state in which the real property is located, certain federal laws (including,
without limitation, the Soldiers' and Sailors' Civil Relief Act of 1940). In
addition, in some deed of trust transactions, the trustee's authority may be
governed by the directions of the beneficiary.
LEASES AND RENTS
Mortgages that encumber income-producing property often contain an
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease
and the income derived therefrom, while (unless rents are to be paid directly
to the lender) retaining a revocable license to collect the rents for so long
as there is no default. If the borrower defaults, the license terminates and
the lender is entitled to collect the rents. Local law may require that the
lender take possession of the property and/or obtain a court-appointed receiver
before becoming entitled to collect the rents.
In most states, hotel and motel room rates are considered accounts
receivable under the Uniform Commercial Code ("UCC"); in cases where hotels or
motels constitute loan security, the rates are generally pledged by the
borrower as additional security for the loan. In general, the lender must file
financing statements in order to perfect its security interest in the room
rates and must file continuation statements, generally every five years, to
maintain perfection of such security interest. In certain cases, Mortgage Loans
secured by hotels or motels may be included in a Trust Fund even if the
security interest in the room rates was not perfected or the requisite UCC
filings were allowed to lapse; and, if such fact is deemed by the Sponsor to be
material to the
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investment decision with respect to a series of Offered Certificates, it will
be set forth in the related Prospectus Supplement. Even if the lender's
security interest in room rates is perfected under the UCC, it will generally
be required to commence a foreclosure action or otherwise take possession of
the property in order to collect the room rates following a default. In the
bankruptcy setting, the lender will be stayed from enforcing its rights to
collect room rates, but those room rates (in light of certain revisions to the
Bankruptcy Code which are effective for all bankruptcy cases commenced on or
after October 22, 1994) constitute "cash collateral" and therefore cannot be
used by the bankruptcy debtor without a hearing or lender's consent and unless
the lender's interest in the room rates is given adequate protection (e.g.,
cash payment for otherwise encumbered funds or a replacement lien on
unencumbered property, in either case equal in value to the amount of room
rates that the debtor proposes to use, or other similar relief). See
"--Bankruptcy Laws".
COOPERATIVE LOANS
In the case of a Cooperative Loan, the Cooperative owns or has a
leasehold interest in all the real property and owns in fee or leases the
building and all separate units therein. The Cooperative is directly
responsible for project management and, in most cases, payment of real estate
taxes, other governmental impositions and hazard and liability insurance. If
there is a blanket mortgage on the cooperative building and/or underlying land,
as is generally the case, or an underlying lease of the land, as is the case in
some instances, the Cooperative, as project mortgagor, or lessee, as the case
may be, is also responsible for meeting these blanket mortgage or rental
obligations. A blanket mortgage is ordinarily incurred by the Cooperative in
connection with either the construction or purchase of the Cooperative's
building or the obtaining of capital by the Cooperative. The interests of the
occupants under proprietary leases or occupancy agreements as to which the
Cooperative is the landlord are generally subordinate to the interests of the
holder of the blanket mortgage and to the interest of the holder of a land
lease. If the Cooperative is unable to meet the payment obligations (i) 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 or (ii) arising under its land lease, the holder of the
landlord's interest under the land lease could terminate it and all subordinate
proprietary leases and occupancy agreements. Also, the blanket mortgage on a
Cooperative may provide financing in the form of a mortgage loan that does not
fully amortize, with a significant portion of principal being due in one final
payment at maturity. The inability of the Cooperative to refinance this
mortgage and its consequent inability to make such final payment could lead to
foreclosure by the mortgagee. Similarly, a land lease has an expiration date
and the inability of the Cooperative to extend its term or, in the alternative,
to purchase the land could lead to termination of the Cooperative's interest in
the property and termination of all proprietary leases and occupancy
agreements. In either event, foreclosure by the holder of the blanket mortgage
or the termination of the underlying lease could eliminate or significantly
diminish the value of any collateral held by the lender that financed the
purchase by an individual tenant-stockholder of Cooperative Shares or, in the
case of the Trust Fund, the collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership
of stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a Cooperative must
make a monthly payment to the Cooperative representing such
tenant-stockholder's pro rata share of the Cooperative's payments for its
blanket mortgage, real property taxes, maintenance expenses and other capital
or ordinary expenses. An ownership interest in a Cooperative and accompanying
occupancy rights is financed through a Cooperative Loan evidenced by a
promissory note and secured by an assignment of and a security interest in the
occupancy agreement or proprietary lease and a security interest in the related
Cooperative Shares. The lender generally 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
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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. See "--Foreclosure on
Commercial Cooperative Shares" below.
PERSONALTY
In the case of certain types of mortgaged properties, such as hotels,
motels and nursing homes, personal property (to the extent owned by the
borrower and not previously pledged) may constitute a significant portion of
the property's value as security. The creation and enforcement of liens on
personal property are governed by the UCC. Accordingly, if a borrower pledges
personal property as security for a mortgage loan, the lender generally must
file UCC financing statements in order to perfect its security interest
therein, and must file continuation statements, generally every five years, to
maintain that perfection. In certain cases, Mortgage Loans secured in part by
personal property may be included in a Trust Fund even if the security interest
in such personal property was not perfected or the requisite UCC filings were
allowed to lapse; and, if such fact is deemed by the Sponsor to be material to
the investment decision with respect to a series of Offered Certificates, it
will be set forth in the related Prospectus Supplement.
FORECLOSURE ON MORTGAGES
General. Foreclosure is a legal procedure that allows the lender to
recover its mortgage debt by enforcing its rights and available legal remedies
under the mortgage. If the borrower defaults in payment or performance of its
obligations under the note or mortgage, the lender has the right to institute
foreclosure proceedings to sell the real property at public auction to satisfy
the indebtedness.
Foreclosure procedures vary from state to state. Two primary methods
of foreclosing a mortgage are judicial foreclosure, involving court
proceedings, and non-judicial foreclosure pursuant to a power of sale granted
in the mortgage instrument. Other foreclosure procedures are available in some
states, but they are either infrequently used or available only in limited
circumstances. A foreclosure action is subject to most of the delays and
expenses of other lawsuits if defenses are raised or counterclaims are
interposed, and sometimes requires several years to complete.
Judicial Foreclosure. A judicial foreclosure proceeding is conducted
in a court having jurisdiction over the mortgaged property. Generally, the
action is initiated by the service of legal pleadings upon the borrower and all
parties having a subordinate interest of record in the real property and all
parties in possession of the property, under leases or otherwise, whose
interests are subordinate to the mortgage. Delays in completion of the
foreclosure may occasionally result from difficulties in locating defendants.
When the lender's right to foreclose is contested, the legal proceedings can be
time-consuming. Upon successful completion of a judicial foreclosure
proceeding, the court generally issues a judgment of foreclosure and appoints a
referee or other officer to conduct a public sale of the mortgaged property,
the proceeds of which are used to satisfy the judgment. Such sales are made in
accordance with procedures that vary from state to state.
Equitable Limitations on Enforceability of Certain Provision. United
States courts have traditionally imposed general equitable principles to limit
the remedies available to lenders in foreclosure actions. These principles are
generally designed to relieve borrowers from the effects of mortgage defaults
perceived as harsh or unfair. Relying on such principles, a court may alter the
specific terms of a loan to the extent it considers necessary to prevent or
remedy an injustice, undue oppression or overreaching, or may require the
lender to
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undertake affirmative actions to determine the cause of the borrower's default
and the likelihood that the borrower will be able to reinstate the loan. In
some cases, courts have substituted their judgment for the lender's and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from a temporary financial disability.
In other cases, courts have limited the right of the lender to foreclose in the
case of a non-monetary default, such as a failure to adequately maintain the
mortgaged property or an impermissible further encumbrance of the mortgaged
property. Finally, some courts have addressed the issue of whether federal or
state constitutional provisions reflecting due process concerns for adequate
notice require that a borrower receive notice in addition to
statutorily-prescribed minimum notice. For the most part, these cases have
upheld the reasonableness of the notice provisions or have found that a public
sale under a mortgage providing for a power of sale does not involve sufficient
state action to trigger constitutional protections. In addition, some states
may provide statutory protections such as the right of the borrower to cure
outstanding defaults and reinstate a mortgage loan after commencement of
foreclosure proceedings but prior to a foreclosure sale.
Non-Judicial Foreclosure/Power of Sale. Foreclosure of a deed of trust
is generally accomplished by a non-judicial trustee's sale pursuant to a power
of sale typically granted in the deed of trust. A power of sale may also be
contained in any other type of mortgage instrument if applicable law so
permits. A power of sale under a deed of trust allows a non-judicial public
sale to be conducted generally following a request from the beneficiary/lender
to the trustee to sell the property upon default by the borrower and after
notice of sale is given in accordance with the terms of the mortgage and
applicable state law. In some states, prior to such sale, the trustee under the
deed of trust must record a notice of default and notice of sale and send a
copy to the borrower and to any other party who has recorded a request for a
copy of a notice of default and notice of sale. In addition, in some states the
trustee must provide notice to any other party having an interest of record in
the real property, including junior lienholders. A notice of sale must be
posted in a public place and, in most states, published for a specified period
of time in one or more newspapers. The borrower or junior lienholder may then
have the right, during a reinstatement period required in some states, to cure
the default by paying the entire actual amount in arrears (without regard to
the acceleration of the indebtedness), plus the lender's expenses incurred in
enforcing the obligation. In other states, the borrower or the junior
lienholder is not provided a period to reinstate the loan, but has only the
right to pay off the entire debt to prevent the foreclosure sale. Generally,
state law governs the procedure for public sale, the parties entitled to
notice, the method of giving notice and the applicable time periods.
Public Sale. A third party may be unwilling to purchase a mortgaged
property at a public sale because of the difficulty in determining the exact
status of title to the property (due to, among other things, redemption rights
that may exist) (see "--Foreclosure on Mortgages--Rights of Redemption" below)
and because of the possibility that physical deterioration of the property may
have occurred during the foreclosure proceedings. Potential buyers may also be
reluctant to purchase property at a foreclosure sale in light of State law
fraudulent conveyance concerns. For these reasons, it is common for the lender
to purchase the mortgaged property for an amount equal to the secured
indebtedness and accrued and unpaid interest plus the expenses of foreclosure,
in which event the borrower's debt will be extinguished, or for a lesser amount
in order to preserve its right to seek a deficiency judgment if such is
available under state law. (The Mortgage Loans, however, are generally expected
to be non-recourse. See "Risk Factors--Certain Risks Associated with Mortgage
Loans Secured by Commercial and Multifamily Properties".) Thereafter, subject
to the borrower's right in some states to remain in possession during a
redemption period, the lender will become the owner of the property and have
both the benefits and burdens of ownership, including the obligation to pay
debt service on any senior mortgages, to pay taxes, to obtain casualty
insurance and to make such repairs as are necessary to render the property
suitable for sale. The costs of operating and maintaining a commercial or
multifamily residential property may be significant and may be greater than the
income derived from that property. The lender also will commonly obtain the
services of a real
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estate broker and pay the broker's commission in connection with the sale or
lease 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. Moreover, because of the expenses associated with acquiring, owning
and selling a mortgaged property, a lender could realize an overall loss on a
mortgage loan even if the mortgaged property is sold at foreclosure, or resold
after it is acquired through foreclosure, for an amount equal to the full
outstanding principal amount of the loan plus accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged
property does so subject to senior mortgages and any other prior liens, and may
be obliged to keep senior mortgage loans current in order to avoid foreclosure
of its interest in the property. In addition, if the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause contained in a
senior mortgage, the junior mortgagee could be required to pay the full amount
of the senior mortgage indebtedness or face foreclosure.
Rights of Redemption. The purposes of a foreclosure action are to
enable the lender to realize upon its security and to bar the borrower, and all
persons who have interests in the property that are subordinate to that of the
foreclosing lender, from exercise of their "equity of redemption". The doctrine
of equity of redemption provides that, until the property encumbered by a
mortgage has been sold in accordance with a properly conducted foreclosure and
foreclosure sale, those having interests that are subordinate to that of the
foreclosing lender have an equity of redemption and may redeem the property by
paying the entire debt with interest. Those having an equity of redemption must
generally be made parties and joined in the foreclosure proceeding in order for
their equity of redemption to be terminated.
The equity of redemption is a common-law (non-statutory) right which
should be distinguished from post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage,
the borrower and foreclosed junior lienors are given a statutory period in
which to redeem the property. In some states, statutory redemption may occur
only upon payment of the foreclosure sale price. In other states, redemption
may be permitted if the former borrower pays only a portion of the sums due.
The effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property because the exercise of a right of
redemption would defeat the title of any purchaser through a foreclosure.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired. In some states, a post-sale statutory right of
redemption may exist following a judicial foreclosure, but not following a
trustee's sale under a deed of trust.
Anti-Deficiency Legislation. Some or all of the Mortgage Loans may be
nonrecourse loans, as to which recourse in the case of default will be limited
to the Mortgaged Property and such other assets, if any, that were pledged to
secure the Mortgage Loan. However, even if a mortgage loan by its terms
provides for recourse to the borrower's other assets, a lender's ability to
realize upon those assets may be limited by state law. For example, in some
states a lender cannot obtain a deficiency judgment against the borrower
following foreclosure or sale under a deed of trust. A deficiency judgment is a
personal judgment against the former borrower equal to the difference between
the net amount realized upon the public sale of the real property and the
amount due to the lender. Other statutes may require the lender to exhaust the
security afforded under a mortgage before bringing a personal action against
the borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of those states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and thus may be
precluded from foreclosing upon the security. Consequently, lenders in those
states where such an election of remedy provision exists will usually proceed
first against the security. Finally, other statutory provisions, designed to
protect borrowers from exposure to large deficiency judgments that might result
from bidding at
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below-market values at the foreclosure sale, limit any deficiency judgment to
the excess of the outstanding debt over the fair market value of the property
at the time of the sale.
Leasehold Risks. Mortgage Loans may be secured by a lien on the
borrower's leasehold interest in a ground lease. Leasehold mortgage loans are
subject to certain risks not associated with mortgage loans secured by a lien
on the fee estate of the borrower. The most significant of these risks is that
if the borrower's leasehold were to be terminated (for example, as a result of
a lease default or the bankruptcy of the ground lessor or the borrower/ground
lessee), the leasehold mortgagee would be left without its security. This risk
may be substantially lessened if the ground lease contains provisions
protective of the leasehold mortgagee, such as a provision that requires the
ground lessor to give the leasehold mortgagee notices of lessee defaults and an
opportunity to cure them, a provision that permits the leasehold estate to be
assigned to and by the leasehold mortgagee or the purchaser at a foreclosure
sale, a provision that gives the leasehold mortgagee the right to enter into a
new ground lease with the ground lessor on the same terms and conditions as the
old ground lease or a provision that prohibits the ground lessee/borrower from
treating the ground lease as terminated in the event of the ground lessor's
bankruptcy and rejection of the ground lease by the trustee for the
debtor/ground lessor. Certain Mortgage Loans, however, may be secured by liens
on ground leases that do not contain these provisions. In addition, the
enforceability of certain of these provisions is not assured.
FORECLOSURE ON COOPERATIVE SHARES
The Cooperative Shares and proprietary lease or occupancy agreement
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 by-laws, as well as in the proprietary lease
or occupancy agreement, and may be canceled by the Cooperative for failure by
the tenant-stockholder to pay rent or other obligations or charges owed by such
tenant-stockholder, including mechanics' liens against the Cooperative building
incurred by such tenant-stockholder. Typically, rent and other obligations and
charges arising under a proprietary lease or occupancy agreement that are owed
to the Cooperative are made liens upon the shares to which the proprietary
lease or occupancy agreement relates. In addition, the proprietary lease or
occupancy agreement generally permits the Cooperative to terminate such lease
or agreement in the event the tenant-stockholder fails to make payments or
defaults in the performance of covenants required thereunder.
Typically, the lender protection provisions contained in the
proprietary lease or a recognition agreement signed by the Cooperative
establish the rights and obligations of the lender in the event of the default
by the tenant-stockholder on its obligations under the proprietary lease or
occupancy agreement. A default by the tenant- stockholder under the proprietary
lease or occupancy agreement will usually constitute a default under the
security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from a sale of the Cooperative
unit, subject, however, to the Cooperative's right to sums due under such
proprietary lease or occupancy agreement or that have become liens on the
shares relating to 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 thereon.
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Recognition agreements also provide that in the event of a foreclosure
on a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative Shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
Under the laws applicable in most 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 Commercial Cooperative corporation to receive
sums due under the proprietary lease or occupancy agreement. If there are
proceeds remaining, the lender must account to the tenant-stockholder for the
surplus. Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. However, 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 pledged Cooperative Shares and the
related proprietary lease or occupancy agreement) was conducted in a
commercially reasonable manner.
BANKRUPTCY LAWS
Operation of the Bankruptcy Code and related state laws may interfere
with or affect the ability of a lender to realize upon collateral and/or to
enforce a deficiency judgment. For example, under the Bankruptcy Code,
virtually all actions (including foreclosure actions and deficiency judgment
proceedings) to collect a debt are automatically stayed upon the filing of the
bankruptcy petition and, often, no interest or principal payments are made
during the course of the bankruptcy case. The delay and its consequences caused
by the automatic stay can be significant. Also, under the Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a junior lienor may stay
the senior lender from taking action to foreclose out such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a mortgage
loan secured by a lien on property of the debtor may be modified under certain
circumstances. For example, the outstanding amount of the loan may be reduced
to the then-current value of the property (with a corresponding partial
reduction of the amount of lender's security interest) pursuant to a confirmed
plan or lien avoidance proceeding, thus leaving the lender a general unsecured
creditor for the difference between such value and the outstanding balance of
the loan. Other modifications may include the reduction in the amount of each
scheduled payment, by means of a reduction in the rate of interest and/or an
alteration of the repayment schedule (with or without affecting the unpaid
principal balance of the loan), and/or by an extension (or shortening) of the
term to maturity. Some bankruptcy courts have approved plans, based on the
particular facts of the reorganization case, that effected the cure of a
mortgage loan default by paying arrearages over a number of years. Also, a
bankruptcy court may permit a debtor, through its rehabilitative plan, to
reinstate a loan mortgage payment schedule even if the lender has obtained a
final judgment of foreclosure prior to the filing of the debtor's petition.
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Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of the secured lender to enforce the borrower's
assignment of rents and leases related to the mortgaged property even where the
secured lender has received an absolute assignment of rents rather than an
assignment of rents as additional security. Under Section 362 of the Bankruptcy
Code, the lender will usually be stayed from enforcing the assignment, and the
legal proceedings necessary to resolve the issue could be time-consuming, with
resulting delays in the lender's receipt of the rents. However, the Bankruptcy
Code has recently been amended to provide that a lender's perfected
pre-petition security interest in leases, rents and hotel revenues continues in
the post-petition leases, rents and hotel revenues, unless a bankruptcy court
orders to the contrary "based on the equities of the case". Thus, unless a
court orders otherwise, revenues from a mortgaged property generated after the
date the bankruptcy petition is filed will constitute "cash collateral" under
the Bankruptcy Code. Debtors may only use cash collateral upon obtaining the
lender's consent or a prior court order finding that the lender's interest in
the mortgaged properties and the cash collateral is "adequately protected" as
such term is defined and interpreted under the Bankruptcy Code.
If a borrower's ability to make payment on a mortgage loan is
dependent on its receipt of rent payments under a lease of the related
property, that ability may be impaired by the commencement of a bankruptcy
proceeding relating to a lessee under such lease. Under the Bankruptcy Code,
the filing of a petition in bankruptcy by or on behalf of a lessee results in a
stay in bankruptcy against the commencement or continuation of any state court
proceeding for past due rent, for accelerated rent, for damages or for a
summary eviction order with respect to a default under the lease that occurred
prior to the filing of the lessee's petition. In addition, the Bankruptcy Code
generally provides that a trustee or debtor-in-possession may, subject to
approval of the court, (i) assume the lease and retain it or assign it to a
third party even when the lease prohibits such assignment or (ii) reject the
lease. If the lease is assumed, the trustee or debtor-in-possession (or
assignee, if applicable) must cure any pre-and post-petition defaults under the
lease, compensate the lessor for its losses and provide the lessor with
"adequate assurance" of future performance. Such remedies may be insufficient,
and any assurances provided to the lessor may, after the fact, eventually be
inadequate. If the lease is rejected, the lessor will be treated as an
unsecured creditor (except potentially to the extent of any security deposit)
with respect to its claim for damages for termination of the lease. The
Bankruptcy Code also limits a lessor's damages for lease rejection to (a) the
rent reserved by the lease (without regard to acceleration) for the greater of
one year, or 15%, not to exceed three years, of the remaining term of the
lease, plus (b) unpaid rent to the earlier of the surrender of the property or
the lessee's bankruptcy filing. In addition, some courts have limited a
lessor's post-petition pre-rejection priority claim for lease payments to fair
market value or less based on the benefit of the lease to the debtor's
bankruptcy estate.
ENVIRONMENTAL RISKS
General. A lender may be subject to environmental risks when taking a
security interest in real property. Of particular concern may be properties
that are or have been used for industrial, manufacturing, military or disposal
activity. Such environmental risks include the risk of the diminution of the
value of a contaminated property or, as discussed below, liability for clean-up
costs or other remedial actions that could exceed the value of the property or
the amount of the lender's loan. In certain circumstances, a lender could
determine to abandon a contaminated mortgaged property as collateral for its
loan rather than foreclose and risk liability for clean-up costs.
Superlien Laws. Under the laws of many states, contamination on a
property may give rise to a lien on the property for clean-up costs. In several
states, such a lien has priority over all existing liens, including those of
existing mortgages. In these states, the lien of a mortgage may lose its
priority to such a "superlien".
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CERCLA. The federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for the
costs of clean-up. A secured lender may be liable as an "owner" or "operator"
of a contaminated mortgaged property if agents or employees of the lender have
become sufficiently involved in the management of such mortgaged property or
the operations of the borrower. Such liability may exist even if the lender did
not cause or contribute to the contamination and regardless of whether or not
the lender has actually taken possession of a mortgaged property through
foreclosure, deed in lieu of foreclosure or otherwise. Moreover, such liability
is not limited to the original or unamortized principal balance of a loan or to
the value of the property securing a loan. Excluded from CERCLA's definition of
"owner" or "operator", however, is a person who without participating in the
management of the facility, holds indicia of ownership primarily to protect his
security interest. This is the so called "secured creditor exemption".
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996 (the "Lender Liability Act") amended, among other things, the provisions
of CERCLA with respect to lender liability and the secured creditor exemption.
The Lender Liability Act offers substantial protection to lenders by defining
the activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for a lender to be deemed to have
participated in the management of a mortgaged property, the lender must
actually participate in the operational affairs of the property of the
borrower. The Lender Liability Act provides that "merely having the capacity to
influence, or unexercised right to control" operations does not constitute
participation in management. A lender will lose the protection of the secured
creditor exemption only if it exercises decision-making control over the
borrower's environmental compliance and hazardous substance handling and
disposal practices, or assumes day-to-day management of operational functions
of the mortgaged property. The Lender Liability Act also provides that a lender
will continue to have the benefit of the secured creditor exemption even if it
forecloses on a mortgaged property, purchases it at a foreclosure sale or
accepts a deed-in-lieu of foreclosure provided that the lender seeks to sell
the mortgaged property at the earliest practicable commercially reasonable time
on commercially reasonable terms.
Certain Other Federal and State Laws. Many states have statutes
similar to CERCLA, and not all those statutes provide for a secured creditor
exemption. In addition, under federal law, there is potential liability
relating to underground storage tanks pursuant to Subtitle I of the federal
Resource Conservation and Recovery Act ("RCRA").
In a few states, transfer of some types of properties is conditioned
upon clean-up of contamination prior to transfer. In these cases, a lender that
becomes the owner of a property through foreclosure, deed in lieu of
foreclosure or otherwise, may be required to clean-up the contamination before
selling or otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law
causes of action (for example, actions based on nuisance or on toxic tort
resulting in death, personal injury or damage to property) related to hazardous
environmental conditions on a property. While it may be more difficult to hold
a lender liable in such cases, unanticipated or uninsurable liabilities of the
borrower may jeopardize the borrower's ability to meet its loan obligations.
Additional Considerations. The cost of remediating hazardous substance
contamination at a property can be substantial. If a lender becomes liable, it
can bring an action for contribution against the owner or operator who created
the environmental hazard, but that individual or entity may be without
substantial assets. Accordingly, it is possible that such costs could become a
liability of a Trust Fund and occasion a loss to Certificateholders of the
related series.
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To reduce the likelihood of such a loss, and unless otherwise provided
in the related Prospectus Supplement, the related Pooling Agreement will
provide that neither the Master Servicer nor the Special Servicer, acting on
behalf of the Trustee, may acquire title to a Mortgaged Property or take over
its operation unless the Special Servicer, based on a report prepared by a
person who regularly conducts environmental audits, has made the determination
that certain conditions relating to environmental matters, as described under
"Description of the Pooling Agreements--Realization Upon Defaulted Mortgage
Loans", have been satisfied.
If a lender forecloses on a mortgage secured by a property, the
operations on which are subject to environmental laws and regulations, the
lender will be required to operate the property in accordance with those laws
and regulations. Such compliance may entail substantial expense, especially in
the case of industrial or manufacturing properties.
In addition, a lender may be obligated to disclose environmental
conditions on a property to government entities and/or to prospective buyers
(including prospective buyers at a foreclosure sale or following foreclosure).
Such disclosure may decrease the amount that prospective buyers are willing to
pay for the affected property, sometimes substantially, and thereby decrease
the ability of the lender to recoup its investment in a loan upon foreclosure.
Environmental Site Assessments. In most cases, an environmental site
assessment of each Mortgaged Property will have been performed in connection
with the origination of the related Mortgage Loan or at some time prior to the
issuance of the related series of Certificates. Environmental site assessments,
however, vary considerably in their content, quality and cost. Even when
adhering to good, commercial and customary professional practices,
environmental consultants will sometimes not detect significant environmental
problems because carrying out an exhaustive environmental assessment would be
far too costly and time-consuming to be practical.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE
Certain of the Mortgage Loans may contain "due-on-sale" and
"due-on-encumbrance" clauses that purport to permit the lender to accelerate
the maturity of the loan if the borrower transfers or encumbers the related
Mortgaged Property without the lender's consent. In recent years, court
decisions and legislative actions placed substantial restrictions on the right
of lenders to enforce such clauses in many states. By virtue, however, of the
Garn-St Germain Depository Institutions Act of 1982 (the "Garn Act"), effective
October 15, 1982 (which purports to preempt state laws that prohibit the
enforcement of due-on-sale clauses by providing among other matters, that
"due-on-sale" clauses in certain loans made after the effective date of the
Garn Act are enforceable, within certain limitations as set forth in the Garn
Act and the regulations promulgated thereunder), a Master Servicer or Special
Servicer may nevertheless have the right to accelerate the maturity of a
Mortgage Loan that contains a "due-on-sale" provision upon transfer of an
interest in the property, regardless of the Master Servicer's or Special
Servicer's, as the case may be, ability to demonstrate that a sale threatens
its legitimate security interest.
SUBORDINATE FINANCING
Certain of the Mortgage Loans may not restrict the ability of the
borrower to use the Mortgaged Property as security for one or more additional
loans. Where a borrower encumbers a mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the borrower
may have difficulty servicing and repaying multiple loans, and if the
subordinate financing permits recourse to the borrower (as is frequently the
case) and the senior loan does not, a borrower may have more incentive to repay
sums due on the subordinate loan. Second, acts of the senior lender that
prejudice the junior lender or impair the junior lender's security may
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create a superior equity in favor of the junior lender. For example, if the
borrower and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the borrower is
additionally burdened. Third, if the borrower defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions
taken by junior lenders can impair the security available to the senior lender
and can interfere with or delay the taking of action by the senior lender.
Moreover, the bankruptcy of a junior lender may operate to stay foreclosure or
similar proceedings by the senior lender.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower
to pay a late charge or additional interest if payments are not timely made,
and in some circumstances, may prohibit prepayments for a specified period
and/or condition prepayments upon the borrower's payment of prepayment fees or
yield maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a borrower
for delinquent payments. Certain states also limit the amounts that a lender
may collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 ("Title V") provides that state usury limitations shall not
apply to certain types of residential (including multifamily) first mortgage
loans originated by certain lenders after March 31, 1980. Title V authorized
any state to reimpose interest rate limits by adopting, before April 1, 1983, a
law or constitutional provision that expressly rejects application of the
federal law. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Certain states have taken action
to reimpose interest rate limits and/or to limit discount points or other
charges.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's mortgage loan (including a borrower
who was in reserve status and is called to active duty after origination of the
Mortgage Loan), may not be charged interest (including fees and charges) above
an annual rate of 6% during the period of such borrower's active duty status,
unless a court orders otherwise upon application of the lender. The Relief Act
applies to individuals who are members of the Army, Navy, Air Force, Marines,
National Guard, Reserves, Coast Guard and officers of the U.S. Public Health
Service assigned to duty with the military. Because the Relief Act applies to
individuals who enter military service (including reservists who are called to
active duty) after origination of the related mortgage loan, no information can
be provided as to the number of loans with individuals as borrowers that may be
affected by the Relief Act. Application of the Relief Act would adversely
affect, for an indeterminate period of time, the ability of a Master Servicer
or Special Servicer to collect full amounts of interest on certain of the
Mortgage Loans. Any shortfalls in interest collections resulting from the
application of the Relief Act would result in a reduction of the amounts
distributable to the holders of the related series of Certificates, and would
not be covered by advances or, unless otherwise specified in the related
Prospectus Supplement, any form of Credit Support provided in connection with
such Certificates. In addition, the Relief Act imposes limitations that would
impair the ability of a Master Servicer or Special Servicer to foreclose on an
affected Mortgage Loan during the borrower's period of active duty status, and,
under certain circumstances, during an additional three month period
thereafter.
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AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and
rules promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove architectural and communication barriers that are
structural in nature from existing places of public accommodation to the extent
"readily achievable". In addition, under the ADA, alterations to a place of
public accommodation or a commercial facility are to be made so that, to the
maximum extent feasible, such altered portions are readily accessible to and
usable by disabled individuals. The "readily achievable" standard takes into
account, among other factors, the financial resources of the affected site,
owner, landlord or other applicable person. The requirements of the ADA may
also be imposed on a foreclosing lender who succeeds to the interest of the
borrower as owner or landlord. Since the "readily achievable" standard may vary
depending on the financial condition of the owner or landlord, a foreclosing
lender who is financially more capable than the borrower of complying with the
requirements of the ADA may be subject to more stringent requirements than
those to which the borrower is subject.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984, the
government may seize the property even before conviction. The government must
publish notice of the forfeiture proceeding and may give notice to all parties
"known to have an alleged interest in the property", including the holders of
mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds or, illegal drug or
RICO activities.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the anticipated material
federal income tax consequences of the purchase, ownership and disposition of
Offered Certificates by Certificateholders that will hold the Certificates as
capital assets within the meaning of Section 1221 of the Internal Revenue Code
of 1986 (the "Code"), and is based on the advice of the special tax counsel to
the Sponsor specified in the related Prospectus Supplement. However, the
following discussion does not purport to discuss all federal income tax
consequences that may be applicable to particular categories of investors, some
of which (such as banks, insurance companies and foreign investors) may be
subject to special rules. Further, the authorities on which this discussion,
and the opinion referred to below are based are subject to change or differing
interpretations, which could apply retroactively. Prospective investors should
note that no rulings have been or will be sought from the IRS with respect to
any of the federal income tax consequences discussed below, and no assurances
can be given that the IRS will not take contrary positions. Taxpayers and
preparers of tax returns (including those filed by any REMIC or other issuer)
should be aware that under applicable Treasury regulations a provider of advice
on specific issues of law is not considered an income tax return preparer
unless the advice (i) is given with respect to events that have occurred at the
time the advice is rendered and is not given with respect to the consequences
of contemplated actions, and (ii) is directly relevant to the determination of
an entry on a tax return. Accordingly, taxpayers should consult their own tax
advisors and tax return preparers regarding the treatment of any item on their
tax return, even where the anticipated tax
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consequences have been discussed herein. In addition to the federal income tax
consequences described herein, potential investors should consider the state
and local tax consequences, if any, of the purchase, ownership and disposition
of the Certificates. See "State and Other Tax Consequences". Certificateholders
are advised to consult their own tax advisors concerning the federal, state,
local or other tax consequences to them of the purchase, ownership and
disposition of Offered Certificates.
The following discussion addresses securities of two general types:
(i) certificates ("REMIC Certificates") representing interests in a Trust Fund,
or a portion thereof, that a REMIC Administrator will elect to have treated as
a real estate mortgage investment conduit ("REMIC") under Sections 860A through
860G (the "REMIC Provisions") of the Code, and (ii) certificates ("Grantor
Trust Certificates") representing interests in a Trust Fund ("Grantor Trust
Fund") as to which no such election will be made. The Prospectus Supplement for
each series of Certificates will indicate whether a REMIC election (or
elections) will be made for the related Trust Fund and, if such an election is
to be made, will identify all "regular interests" and "residual interests" in
the REMIC. For purposes of this tax discussion, references to a
"Certificateholder" or a "holder" are to the beneficial owner of a Certificate.
The following discussion is limited in applicability to Offered
Certificates. Moreover, this discussion applies only to the extent that
Mortgage Assets held by a Trust Fund consist solely of Mortgage Loans. To the
extent that other Mortgage Assets, including REMIC certificates and mortgage
pass-through certificates, are to be held by a Trust Fund, the tax consequences
associated with the inclusion of such assets will be disclosed in the related
Prospectus Supplement. In addition, if Cash Flow Agreements, other than
guaranteed investment contracts, are included in a Trust Fund, the tax
consequences associated with such Cash Flow Agreements also will be disclosed
in the related Prospectus Supplement. See "Description of the Trust Funds--Cash
Flow Agreements".
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271-1273 and 1275 of
the Code and in the Treasury regulations issued thereunder (the "OID
Regulations"), and in part upon the REMIC Provisions and the Treasury
regulations issued thereunder (the "REMIC Regulations"). The OID Regulations do
not adequately address certain issues relevant to, and in some instances
provide that they are not applicable to, securities such as the Certificates.
REMICS
Classification of REMICs. Upon the issuance of each series of REMIC
Certificates, counsel to the Sponsor will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Pooling
Agreement and certain other documents (and subject to certain assumptions set
forth therein), the related Trust Fund (or each applicable portion thereof)
will qualify as a REMIC and the REMIC Certificates offered with respect thereto
will be considered to evidence ownership of "regular interests" ("REMIC Regular
Certificates") or "residual interests" ("REMIC Residual Certificates") in that
REMIC within the meaning of the REMIC Provisions. Accordingly, each investor is
advised to consult its own tax advisors with regard to the tax consequences to
it of investing in REMIC Certificates.
If an entity electing to be treated as a REMIC fails to comply with
one or more of the ongoing requirements of the Code for such status during any
taxable year, the entity may lose its status as a REMIC for such year and
thereafter. In that event, such entity may be taxable as a corporation and the
related REMIC Certificates may not be accorded the status or given the tax
treatment described below. Although the Code authorizes the Treasury Department
to issue regulations providing relief in the event of an inadvertent
termination of REMIC status, no such regulations have been issued. Any such
relief, moreover, may be accompanied by sanctions, such as the imposition of a
corporate tax on all or a portion of the Trust Fund's income for the period in
which the requirements for such status are not satisfied. The Pooling Agreement
with respect to each REMIC
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will include provisions designed to maintain the Trust Fund's status as a REMIC
under the REMIC Provisions. It is not anticipated that the status of any Trust
Fund as a REMIC will be terminated.
Characterization of Investments in REMIC Certificates. In general,
unless otherwise provided in the related Prospectus Supplement, the REMIC
Certificates will be "real estate assets" within the meaning of Section
856(c)(5)(B) of the Code and assets described in Section 7701(a)(19)(C) of the
Code in the same proportion that the assets of the REMIC underlying such
Certificates would be so treated. However, to the extent that the REMIC assets
constitute mortgages on property not used for residential or certain other
prescribed purposes, the REMIC Certificates will not be treated as assets
qualifying under Section 7701(a)(19)(C)(v). Moreover, if 95% or more of the
assets of the REMIC qualify for any of the foregoing treatments at all times
during a calendar year, the REMIC Certificates will qualify for the
corresponding status in their entirety for that calendar year. Interest
(including original issue discount) on the REMIC Regular Certificates and
income allocated to the class of REMIC Residual Certificates will be interest
described in Section 856(c)(3)(B) of the Code to the extent that such
Certificates are treated as "real estate assets" within the meaning of Section
856(c)(5)(B) of the Code. In addition, the REMIC Regular Certificates will be
"qualified mortgages" within the meaning of Section 860G(a)(3) of the Code in
the hands of another REMIC and will be "permitted assets" under Section
860L(c)(1)(G) for a "financial asset securitization investment trust", or
"FASIT". The determination as to the percentage of the REMIC's assets that
constitute assets described in the foregoing sections of the Code will be made
with respect to each calendar quarter based on the average adjusted basis of
each category of the assets held by the REMIC during such calendar quarter. The
REMIC Administrator will report those determinations to Certificateholders in
the manner and at the times required by the applicable Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and property acquired by foreclosure held pending sale, and may include amounts
in reserve accounts. It is unclear whether property acquired by foreclosure
held pending sale and amounts in reserve accounts would be considered to be
part of the Mortgage Loans, or whether such assets (to the extent not invested
in assets described in the foregoing sections) otherwise would receive the same
treatment as the Mortgage Loans for purposes of all of the foregoing sections.
In addition, in some instances Mortgage Loans may not be treated entirely as
assets described in the foregoing sections. If so, the related Prospectus
Supplement will describe those Mortgage Loans that may be so treated. Treasury
Regulations do provide, however, that payments on Mortgage Loans held pending
distribution are considered part of the Mortgage Loans for purposes of Section
856(c)(4)(A) of the Code.
Tiered REMIC Structures. For certain series of REMIC Certificates, two
or more separate elections may be made to treat designated portions of the
related Trust Fund as separate REMICs ("Tiered REMICs") for federal income tax
purposes. Upon the issuance of any such series of REMIC Certificates, counsel
to the Sponsor will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the related Pooling Agreement, each of the
Tiered REMICs will qualify as a REMIC, and the REMIC Certificates issued by
each of the Tiered REMICs will be considered to evidence ownership of REMIC
Regular Certificates or REMIC Residual Certificates, as the case may be, in
such REMIC, within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will
be "real estate assets" within the meaning of Section 856(c)(5)(B) of the Code,
and "loans secured by an interest in real property" under Section
7701(a)(19)(C) of the Code, and whether the income on such Certificates is
interest described in Section 856(c)(3)(B) of the Code, the Tiered REMICs will
be treated as one REMIC.
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Taxation of Owners of REMIC Regular Certificates.
General. Except as otherwise stated in this discussion, REMIC 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 REMIC Regular Certificates that otherwise
report income under the cash method of accounting will be required to report
income with respect to REMIC Regular Certificates under the accrual method.
Original Issue Discount. Certain classes of REMIC Regular Certificates
may be issued with "original issue discount" within the meaning of Section
1273(a) of the Code. Any holders of REMIC Regular Certificates issued with
original issue discount generally will be required to include original issue
discount in income as it accrues, in accordance with the method described
below, in advance of the receipt of the cash attributable to such income. In
addition, Section 1272(a)(6) of the Code provides special rules applicable to
REMIC Regular Certificates and certain other debt instruments issued with
original issue discount; regulations, however, have not been issued under that
section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner
prescribed in Treasury regulations; as noted above, those regulations have not
been issued. The Conference Committee Report accompanying the Tax Reform Act of
1986 (the "Committee Report") indicates that the regulations will provide that
the prepayment assumption used with respect to a REMIC Regular Certificate must
be the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption (the "Prepayment Assumption") used in
reporting original issue discount for each series will be consistent with this
standard and will be disclosed in the related Prospectus Supplement. However,
neither the Sponsor nor any other person will make any representation that the
Mortgage Loans will in fact prepay at a rate conforming to the Prepayment
Assumption or at any other rate or that such Prepayment Assumption will not be
challenged by the Internal Revenue Service (the "IRS") on audit.
The original issue discount, if any, on a REMIC Regular Certificate will
be the excess of its stated redemption price at maturity over its issue price.
The issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold (excluding sales to bond houses, brokers and underwriters).
If less than a substantial amount of a particular class of REMIC Regular
Certificates is sold for cash on or prior to the date of their initial issuance
(the "Closing Date") the issue price for such class will be the fair market
value of such class on the Closing Date. Under the OID Regulations, the stated
redemption price of a REMIC Regular Certificate is equal to the total of all
payments to be made on such Certificate other than "qualified stated interest".
"Qualified stated interest" includes interest that is unconditionally payable
at least annually during the entire term of the instrument at a single fixed
rate, at a "qualified floating rate" or at an "objective rate", at a
combination of a single fixed rate and one or more "qualified floating rates"
or one "qualified inverse floating rate", or at a combination of "qualified
floating rates" that does not operate in a manner that accelerates or defers
interest payments on such REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner
in which such rules will be applied with respect to those Certificates in
preparing information returns to the Certificateholders and the IRS.
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Certain classes of the REMIC Regular Certificates may provide for the
first interest payment with respect to such Certificates to be made more than
one month after the date of issuance, a period which is longer than the
subsequent monthly intervals between interest payments. Assuming the "accrual
period" (as defined below) for original issue discount is each monthly period
that ends on a Distribution Date, in some cases, as a consequence of this "long
first accrual period", some or all interest payments may be required to be
included in the stated redemption price of the REMIC Regular Certificate and
accounted for as original issue discount. Because interest on REMIC Regular
Certificates must in any event be accounted for under an accrual method,
applying this analysis would result in only a slight difference in the timing
of the inclusion in income of the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first
Distribution Date is computed with respect to a period that begins prior to the
Closing Date, a portion of the purchase price paid for a REMIC Regular
Certificate will reflect such accrued interest. In such cases, information
returns provided to the Certificateholders and the IRS will be based on the
position that the portion of the purchase price paid for the interest accrued
with respect to periods prior to the Closing Date is treated as part of the
overall cost of such REMIC Regular Certificate (and not as a separate asset the
cost of which is recovered entirely out of interest received on the next
Distribution Date) and that portion of the interest paid on the first
Distribution Date in excess of interest accrued for a number of days
corresponding to the number of days from the Closing Date to the first
Distribution Date should be included in the stated redemption price of such
REMIC Regular Certificate. However, the OID Regulations state that all or some
portion of such accrued interest may be treated as a separate asset the cost of
which is recovered entirely out of interest paid on the first Distribution
Date. It is unclear how an election to do so would be made under the OID
Regulations and whether such an election could be made unilaterally by a
Certificateholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a REMIC Regular Certificate will be considered to be
de minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
sum of the amounts determined, as to each payment included in the stated
redemption price of such REMIC Regular Certificate, by multiplying (i) the
number of complete years (rounding down for partial years) from the issue date
until such payment is expected to be made (presumably taking into account the
Prepayment Assumption) by (ii) a fraction, the numerator of which is the amount
of the payment and the denominator of which is the stated redemption price at
maturity of such REMIC Regular Certificate. Under the OID Regulations, original
issue discount of only a de minimis amount (other than de minimis original
issue discount attributable to a so-called "teaser" interest rate or an initial
interest holiday) will be included in income as each payment of stated
principal is made, based on the product of the total amount of such de minimis
original issue discount and a fraction, the numerator of which is the amount of
such principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See
"--Taxation of Owners of REMIC Regular Certificates--Market Discount" for a
description of such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess
of a de minimis amount, the holder of such Certificate must include in ordinary
gross income the sum of the "daily portions" of original issue discount for
each day during its taxable year on which it held such REMIC Regular
Certificate, including the purchase date but excluding the disposition date. In
the case of an original holder of a REMIC Regular Certificate, the daily
portions of original issue discount will be determined as follows.
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As to each "accrual period", that is, unless otherwise stated in the
related Prospectus Supplement, each period that ends on a date that corresponds
to a Distribution Date and begins on the first day following the immediately
preceding accrual period (or in the case of the first such period, begins on
the Closing Date), a calculation will be made of the portion of the original
issue discount that accrued during such accrual period. The portion of original
issue discount that accrues in any accrual period will equal the excess, if
any, of (i) the sum of (a) the present value, as of the end of the accrual
period, of all of the distributions remaining to be made on the REMIC Regular
Certificate, if any, in future periods and (b) the distributions made on such
REMIC Regular Certificate during the accrual period of amounts included in the
stated redemption price, over (ii) the adjusted issue price of such REMIC
Regular Certificate at the beginning of the accrual period. The present value
of the remaining distributions referred to in the preceding sentence will be
calculated (i) assuming that distributions on the REMIC Regular Certificate
will be received in future periods based on the Mortgage Loans being prepaid at
a rate equal to the Prepayment Assumption (ii) using a discount rate equal to
the original yield to maturity of the Certificate and (iii) taking into account
events (including actual prepayments) that have occurred before the close of
the accrual period. For these purposes, the original yield to maturity of the
Certificate will be calculated based on its issue price and assuming that
distributions on the Certificate will be made in all accrual periods based on
the Mortgage Loans being prepaid at a rate equal to the Prepayment Assumption.
The adjusted issue price of a REMIC Regular Certificate at the beginning of any
accrual period will equal the issue price of such Certificate, increased by the
aggregate amount of original issue discount that accrued with respect to such
Certificate in prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods
of amounts included in the stated redemption price. The original issue discount
accruing during any accrual period, computed as described above, will be
allocated ratably to each day during the accrual period to determine the daily
portion of original issue discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases
such Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of
any original issue discount with respect to such Certificate. However, each
such daily portion will be reduced, if such cost is in excess of its "adjusted
issue price", in proportion to the ratio such excess bears to the aggregate
original issue discount remaining to be accrued on such REMIC Regular
Certificate. The adjusted issue price of a REMIC Regular Certificate on any
given day equals the sum of (i) the adjusted issue price (or, in the case of
the first accrual period, the issue price) of such Certificate at the beginning
of the accrual period which includes such day and (ii) the daily portions of
original issue discount for all days during such accrual period prior to such
day.
If the foregoing method for computing original issue discount results
in a negative amount of original issue discount as to any accrual period with
respect to a REMIC Regular Certificate, the amount of original issue discount
allocable to such accrual period will be zero. That is, no current deduction of
such negative amount will be allowed to the holder of such Certificate. The
holder will instead only be permitted to offset such negative amount against
future positive original issue discount (if any) attributable to such a
Certificate. Although not free from doubt, it is possible that a
Certificateholder may be permitted to deduct a loss to the extent his or her
basis in the Certificate exceeds the maximum amount of payments such
Certificateholder could ever receive with respect to such Certificate. However,
any such loss may be a capital loss, which is limited in its deductibility. The
foregoing considerations are particularly relevant to Stripped Interest
Certificates which can have negative yields under certain circumstances that
are not default related. See "Risk Factors--Prepayments; Average Life of
Certificates; Yields" herein.
Market Discount. A Certificateholder that purchases a REMIC Regular
Certificate at a market discount (other than a de minimis amount), that is, in
the case of a REMIC Regular Certificate issued without original issue discount,
at a purchase price less than its remaining stated principal amount, or in the
case of a REMIC Regular Certificate issued with original issue discount, at a
purchase price less than its adjusted issue price, will recognize
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gain upon receipt of each distribution representing some or all of the stated
redemption price. In particular, under Section 1276 of the Code such a
Certificateholder generally will be required to allocate the portion of each
such distribution representing stated redemption price first to accrued market
discount not previously included in income, and to recognize ordinary income to
that extent. A Certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder on or after the first day of
the first taxable year to which such election applies.
The OID Regulations also 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. If such an
election were made with respect to a REMIC Regular Certificate with market
discount, the Certificateholder would be deemed to have made an election to
include currently market discount in income with respect to all other debt
instruments having market discount that such Certificateholder acquires during
the taxable year of the election or thereafter, and possibly previously
acquired instruments. Similarly, a Certificateholder that made this election
for a Certificate that is acquired at a premium would be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. See
"--Taxation of Owners of REMIC Regular Certificates--Premium" below. Each of
the elections in this and the preceding paragraph to accrue interest, discount
and premium with respect to a Certificate on a constant yield method or as
interest would be irrevocable.
However, market discount with respect to a REMIC Regular Certificate
will be considered to be de minimis for purposes of Section 1276 of the Code if
such market discount is less than 0.25% of the remaining stated redemption
price of such REMIC Regular Certificate multiplied by the number of complete
years to maturity remaining after the date of its purchase. In interpreting a
similar rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect
to market discount, presumably taking into account the Prepayment Assumption.
If market discount is treated as de minimis under this rule, it appears that
the actual discount would be treated in a manner similar to original issue
discount of a de minimis amount. See "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount". Such treatment would result in discount
being included in income at a slower rate than discount would be required to be
included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than
one installment. Until regulations are issued by the Treasury Department,
certain rules described in the Committee Report apply. The Committee Report
indicates that in each accrual period market discount on REMIC Regular
Certificates should accrue, at the Certificateholder's option: (i) on the basis
of a constant yield method, (ii) in the case of a REMIC Regular Certificate
issued without original issue discount, in an amount that bears the same ratio
to the total remaining market discount as the stated interest paid in the
accrual period bears to the total amount of stated interest remaining to be
paid on the REMIC Regular Certificate as of the beginning of the accrual
period, or (iii) in the case of a REMIC Regular Certificate issued with
original issue discount, in an amount that bears the same ratio to the total
remaining market discount as the original issue discount accrued in the accrual
period bears to the total original issue discount remaining on the REMIC
Regular Certificate at the beginning of the accrual period. Moreover, the
Prepayment Assumption used in calculating the accrual of original issue
discount is also used in calculating the accrual of market discount. Because
the regulations referred to in this paragraph have not been issued, it is not
possible to predict what effect such regulations might have on the tax
treatment of a REMIC Regular Certificate purchased at a discount in the
secondary market.
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To the extent that REMIC Regular Certificates provide for monthly or
other periodic distributions throughout their term, the effect of these rules
may be to require market discount to be includible in income at a rate that is
not significantly slower than the rate at which such discount would accrue if
it were original issue discount. Moreover, in any event a holder of a REMIC
Regular Certificate generally will be required to treat a portion of any gain
on the sale or exchange of such Certificate as ordinary income to the extent of
the market discount accrued to the date of disposition under one of the
foregoing methods, less any accrued market discount previously reported as
ordinary income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder, however, has elected to include market discount in income currently as
it accrues, the interest deferral rule described above would not apply.
Premium. A REMIC Regular Certificate purchased at a cost (excluding any
portion of such cost attributable to accrued qualified stated interest) greater
than its remaining stated redemption price will be considered to be purchased
at a premium. The holder of such a REMIC Regular Certificate may elect under
Section 171 of the Code to amortize such premium under the constant yield
method over the life of the Certificate. If a holder elects to amortize bond
premium, bond premium would be amortized on a constant yield method and would
be applied as an offset against qualified stated interest. If made, such an
election will apply to all debt instruments having amortizable bond premium
that the holder owns or subsequently acquires. The IRS recently finalized new
regulations on the amortization of bond premium. However, the regulations
expressly do not apply to holders of REMIC Regular Certificates. The OID
Regulations also permit Certificateholders to elect to include all interest,
discount and premium in income based on a constant yield method, further
treating the Certificateholder as having made the election to amortize premium
generally. See "--Taxation of Owners of REMIC Regular Certificates--Market
Discount" above. The Committee Report states that the same rules that apply to
accrual of market discount (which rules will require use of a Prepayment
Assumption in accruing market discount with respect to REMIC Regular
Certificates without regard to whether such Certificates have original issue
discount) will also apply in amortizing bond premium under Section 171 of the
Code.
Realized Losses. Under Section 166 of the Code, both corporate holders
of the REMIC Regular Certificates and noncorporate holders of the REMIC Regular
Certificates that acquire such Certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their Certificates become wholly or partially
worthless as the result of one or more realized losses on the Mortgage Loans.
However, it appears that a noncorporate holder that does not acquire a REMIC
Regular Certificate in connection with a trade or business will not be entitled
to deduct a loss under Section 166 of the Code until such holder's Certificate
becomes wholly worthless (i.e., until its outstanding principal balance has
been reduced to zero) and that the loss will be characterized as a short-term
capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Assets until it can be established that any such
reduction ultimately will not be recoverable. As a result, the amount of
taxable income reported in any period by the holder of a REMIC Regular
Certificate could exceed the amount of economic income actually realized by the
holder in such period. Although the holder of a REMIC Regular Certificate
eventually will recognize a loss or reduction in
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income attributable to previously accrued and included income that as a
result of a realized loss ultimately will not be realized, the law is unclear
with respect to the timing and character of such loss or reduction in income.
Accordingly, holders of REMIC Regular Certificates are urged to consult with
their own tax advisors regarding the appropriate timing, amount and character
of any loss sustained with respect to such Certificate.
Taxation of Owners of REMIC Residual Certificates.
General. As residual interests, the REMIC Residual Certificates will
be subject to tax rules that differ significantly from those that would apply
if the REMIC Residual Certificates were treated for federal income tax purposes
as direct ownership interests in the Mortgage Loans or as debt instruments
issued by the REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts so allocated will then be allocated
among the Residual Certificateholders in proportion to their respective
ownership interests on such day. Any amount included in the gross income or
allowed as a loss of any Residual Certificateholder by virtue of this paragraph
will be treated as ordinary income or loss. The taxable income of the REMIC
will be determined under the rules described below in "--Taxable Income of the
REMIC" and will be taxable to the Residual Certificateholders without regard to
the timing or amount of cash distributions by the REMIC. Ordinary income
derived from REMIC Residual Certificates will be "portfolio income" for
purposes of the taxation of taxpayers subject to limitations under Section 469
of the Code on the deductibility of "passive losses".
A holder of a Residual Certificate that purchased such Certificate
from a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC
Residual Certificate. Those daily amounts generally will equal the amounts of
taxable income or net loss determined as described above. The Committee Report
indicates that certain modifications of the general rules may be made, by
regulations, legislation or otherwise to reduce (or increase) the income of a
Residual Certificateholder that purchased such REMIC Residual Certificate from
a prior holder of such Certificate at a price greater than (or less than) the
adjusted basis (as defined below) such REMIC Residual Certificate would have
had in the hands of an original holder of such Certificate. The REMIC
Regulations, however, do not provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be
taken into account in determining the income of such holder for federal income
tax purposes. Although it appears likely that any such payment would be
includible in income immediately upon its receipt, the IRS might assert that
such payment should be included in income over time according to an
amortization schedule or according to some other method. Because of the
uncertainty concerning the treatment of such payments, holders of REMIC
Residual Certificates should consult their tax advisors concerning the
treatment of such payments for income tax purposes.
The amount of income Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, Residual Certificateholders should have other sources of funds
sufficient to pay any federal income taxes due as a result of their ownership
of REMIC Residual Certificates or unrelated deductions against which income may
be offset, subject to the rules relating to "excess inclusions", residual
interests without "significant value" and "noneconomic" residual interests
discussed below. The fact that the tax liability associated with the income
allocated to Residual Certificateholders may exceed the cash distributions
received by such Residual Certificateholders for the corresponding period may
significantly adversely affect such
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Residual Certificateholders' after-tax rate of return. REMIC Residual
Certificates may in some instances have negative "value". See "Risk
Factors--Certain Federal Tax Considerations Regarding REMIC Residual
Certificates".
Taxable Income of the REMIC. The taxable income of the REMIC will
equal the income from the Mortgage Loans and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest (including original issue discount and reduced by any premium on
issuance) on the REMIC Regular Certificates (and any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby),
for amortization of any premium on the Mortgage Loans, for bad debt losses with
respect to the Mortgage Loans and, except as described below, for servicing,
administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Mortgage Loans and the other assets of the REMIC in proportion to
their respective fair market values. The issue price of any REMIC Certificates
offered hereby will be determined in the manner described above under
"--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount".
The issue price of a REMIC Certificate received in exchange for an interest in
the Mortgage Loans or other property will equal the fair market value of such
interests in the Mortgage Loans or other property. Accordingly, if one or more
classes of REMIC Certificates are retained initially rather than sold, the
REMIC Administrator may be required to estimate the fair market value of such
interests in order to determine the basis of the REMIC in the Mortgage Loans
and other property held by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such market discount in income currently, as it accrues,
on a constant yield basis. See "--Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing such discount income
that is analogous to that required to be used by a REMIC as to Mortgage Loans
with market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated
redemption price. Any such discount will be includible in the income of the
REMIC as it accrues, in advance of receipt of the cash attributable to such
income, under a method similar to the method described above for accruing
original issue discount on the REMIC Regular Certificates. It is anticipated
that each REMIC will elect under Section 171 of the Code to amortize any
premium on the Mortgage Loans. Premium on any Mortgage Loan to which such
election applies may be amortized under a constant yield method, presumably
taking into account a Prepayment Assumption.
A REMIC will be allowed deductions for interest (including original
issue discount) on the REMIC Regular Certificates (including any other class of
REMIC Certificates constituting "regular interests" in the REMIC not offered
hereby) equal to the deductions that would be allowed if the REMIC Regular
Certificates (including any other class of REMIC Certificates constituting
"regular interests" in the REMIC not offered hereby) were indebtedness of the
REMIC. Original issue discount will be considered to accrue for this purpose as
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount", except that the de minimis rule and the
adjustments for subsequent holders of REMIC Regular Certificates
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(including any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in
excess of the stated redemption price of such class (such excess "Issue
Premium"), the net amount of interest deductions that are allowed the REMIC in
each taxable year with respect to the REMIC Regular Certificates of such class
will be reduced by an amount equal to the portion of the Issue Premium that is
considered to be amortized or repaid in that year. Although the matter is not
entirely certain, it is likely that Issue Premium would be amortized under a
constant yield method in a manner analogous to the method of accruing original
issue discount described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount".
As a general rule, the taxable income of a REMIC will be determined in
the same manner as if the REMIC were an individual having the calendar year as
its taxable year and using the accrual method of accounting. However, no item
of income, gain, loss or deduction allocable to a prohibited transaction will
be taken into account. See "--Prohibited Transactions Tax and Other Taxes"
below. Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code (which allows such deductions only to the
extent they exceed in the aggregate two percent of the taxpayer's adjusted
gross income) will not be applied at the REMIC level so that the REMIC will be
allowed deductions for servicing, administrative and other non-interest
expenses in determining its taxable income. All such expenses will be allocated
as a separate item to the holders of REMIC Certificates, subject to the
limitation of Section 67 of the Code. See "--Possible Pass-Through of
Miscellaneous Itemized Deductions" below. If the deductions allowed to the
REMIC exceed its gross income for a calendar quarter, such excess will be the
net loss for the REMIC for that calendar quarter.
Basis Rules, Net Losses and Distributions. The adjusted basis of a
REMIC Residual Certificate will be equal to the amount paid for such REMIC
Residual Certificate, increased by amounts included in the income of the
Residual Certificateholder and decreased (but not below zero) by distributions
made, and by net losses allocated, to such Residual Certificateholder.
A Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such
Residual Certificateholder's adjusted basis in its REMIC Residual Certificate
as of the close of such calendar quarter (determined without regard to such net
loss). Any loss that is not currently deductible by reason of this limitation
may be carried forward indefinitely to future calendar quarters and, subject to
the same limitation, may be used only to offset income from the REMIC Residual
Certificate. The ability of Residual Certificateholders to deduct net losses
may be subject to additional limitations under the Code, as to which Residual
Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of
taxable income of the Trust Fund. However, such bases increases may not occur
until the end of the calendar quarter, or perhaps the end of the calendar year,
with respect to which such REMIC taxable income is allocated to the REMIC
Residual Certificateholders. To the extent such REMIC Residual
Certificateholders' initial bases are less than the distributions to such
Residual Certificateholders, and increases in such initial bases either occur
after such
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distributions or (together with their initial bases) are less than the amount
of such distributions, gain will be recognized to such Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Certificates.
The effect of these rules is that a Residual Certificateholder may not
amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of REMIC
Certificates". For a discussion of possible modifications of these rules that
may require adjustments to income of a holder of a REMIC Residual Certificate
other than an original holder in order to reflect any difference between the
cost of such REMIC Residual Certificate to such Residual Certificateholder and
the adjusted basis such REMIC Residual Certificate would have in the hands of
an original holder. See "--Taxation of Owners of REMIC Residual
Certificates--General".
Excess Inclusions. Any "excess inclusions" with respect to a REMIC
Residual Certificate will be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the sum
of the daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such Residual Certificateholder. The daily accruals of a Residual
Certificateholder will be determined by allocating to each day during a
calendar quarter its ratable portion of the product of the "adjusted issue
price" of the REMIC Residual Certificate at the beginning of the calendar
quarter and 120% of the "long-term Federal rate" in effect on the Closing Date.
For this purpose, the adjusted issue price of a REMIC Residual Certificate as
of the beginning of any calendar quarter will be equal to the issue price of
the REMIC Residual Certificate, increased by the sum of the daily accruals for
all prior quarters and decreased (but not below zero) by any distributions made
with respect to such REMIC Residual Certificate before the beginning of such
quarter. The issue price of a REMIC Residual Certificate is the initial
offering price to the public (excluding bond houses and brokers) at which a
substantial amount of the REMIC Residual Certificates were sold. The "long-term
Federal 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. Although it has not done so, the Treasury has the authority to issue
regulations that would treat the entire amount of income accruing on a REMIC
Residual Certificate as an excess inclusion if the REMIC Residual Certificates
are considered not to have "significant value." Unless otherwise stated in the
related Prospectus Supplement, no REMIC Residual Certificate will have
"significant value" for these purposes.
For Residual Certificateholders, an excess inclusion (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to Residual
Certificateholders that are foreign investors. See, however, "--Foreign
Investors in REMIC Certificates," below. Furthermore, for purposes of the
alternative minimum tax, (i) excess inclusions will not be permitted to be
offset by the alternative tax net operating loss deduction and (ii) alternative
minimum taxable income may not be less than the taxpayer's excess inclusions.
This last rule has the effect of preventing nonrefundable tax credits from
reducing the taxpayer's income tax to an amount lower than the alternative
minimum tax on excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by
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such shareholders from such trust, and any amount so allocated will be treated
as an excess inclusion with respect to a REMIC Residual Certificate as if held
directly by such shareholder. Treasury regulations yet to be issued could apply
a similar rule to regulated investment companies, common trust funds and
certain cooperatives; the REMIC Regulations currently do not address this
subject.
Noneconomic REMIC Residual Certificates. Under the REMIC Regulations,
transfers of "noneconomic" REMIC Residual Certificates will be disregarded for
all federal income tax purposes if "a significant purpose of the transfer was
to enable the transferor to impede the assessment or collection of tax". If
such transfer is disregarded, the purported transferor will continue to remain
liable for any taxes due with respect to the income on such "noneconomic" REMIC
Residual Certificate. The REMIC Regulations provide that a REMIC Residual
Certificate is noneconomic unless, based on the Prepayment Assumption and on
any required or permitted clean up calls, or required liquidation provided for
in the REMIC's organizational documents, (1) the present value of the expected
future distributions (discounted using the "applicable Federal rate" for
obligations whose term ends on the close of the last quarter in which excess
inclusions are expected to accrue with respect to the REMIC Residual
Certificate, which rate is computed and published monthly by the IRS) on the
REMIC Residual Certificate equals at least the present value of the expected
tax on the anticipated excess inclusions, and (2) the transferor reasonably
expects that the transferee will receive distributions with respect to the
REMIC Residual Certificate at or after the time the taxes accrue on the
anticipated excess inclusions in an amount sufficient to satisfy the accrued
taxes. Accordingly, all transfers of REMIC Residual Certificates that may
constitute noneconomic residual interests will be subject to certain
restrictions under the terms of the related Pooling Agreement that are intended
to reduce the possibility of any such transfer being disregarded. Such
restrictions will require each party to a transfer to provide an affidavit that
no purpose of such transfer is to impede the assessment or collection of tax,
including certain representations as to the financial condition of the
prospective transferee, as to which the transferor is also required to make a
reasonable investigation to determine such transferee's historic payment of its
debts and ability to continue to pay its debts as they come due in the future.
Prior to purchasing a REMIC Residual Certificate, prospective purchasers should
consider the possibility that a purported transfer of such REMIC Residual
Certificate by such a purchaser to another purchaser at some future date may be
disregarded in accordance with the above-described rules which would result in
the retention of tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Sponsor will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules.
Unless otherwise stated in the related Prospectus Supplement,
transfers of REMIC Residual Certificates to investors that are not United
States Persons (as defined below in "--Foreign Investors in REMIC
Certificates") will be prohibited under the related Pooling Agreement. If
transfers of REMIC Residual Certificates to investors that are not United
States Persons are permitted pursuant to the related Pooling Agreement, the
related Prospectus Supplement will describe additional restrictions applicable
to transfers of certain REMIC Residual Certificates to such persons.
Mark-to-Market Rules. On December 24, 1996, the IRS released
regulations under Section 475 of the Code (the "Mark-to-Market Regulations")
relating to the requirement that a securities dealer mark-to-market securities
held for sale to customers. This mark-to-market requirement applies to all
securities owned by a dealer, except to the extent that the dealer has
specifically identified a security as held for investment. The Mark-to-Market
Regulations provide that a REMIC residual interest issued after January 4,
1995, is not a
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"security" for the purposes of Section 475 of the Code, and thus is not subject
to the mark-to-market rules. Prospective purchasers of a REMIC Residual
Certificate should consult their tax advisors regarding the Mark-to-Market
Regulations.
Possible Pass-Through of Miscellaneous Itemized Deductions. Fees and
other non-interest expenses of a REMIC generally will be allocated to the
holders of the related REMIC Residual Certificates. The applicable Treasury
regulations indicate, however, that in the case of a REMIC that is similar to a
single class grantor trust, all or a portion of such fees and expenses should
be allocated to the holders of the related REMIC Regular Certificates. Unless
otherwise stated in the related Prospectus Supplement, such fees and expenses
will be allocated to holders of the related REMIC Residual Certificates in
their entirety and not to the holders of the related REMIC Regular
Certificates.
With respect to REMIC Residual Certificates or REMIC Regular
Certificates the holders of which receive an allocation of fees and expenses in
accordance with the preceding discussion, if any holder thereof is an
individual, estate or trust, or a "pass-through entity" beneficially owned by
one or more individuals, estates or trusts, (i) an amount equal to such
individual's, estate's or trust's share of such fees and expenses will be added
to the gross income of such holder and (ii) such individual's, estate's or
trust's share of such fees and expenses will be treated as a miscellaneous
itemized deduction allowable subject to the limitation of Section 67 of the
Code, which permits such deductions only to the extent they exceed in the
aggregate two percent of a taxpayer's adjusted gross income. In addition,
Section 68 of the Code provides that the amount of itemized deductions
otherwise allowable for an individual whose adjusted gross income exceeds a
specified amount will be reduced by the lesser of (i) 3% of the excess of the
individual's adjusted gross income over such amount or (ii) 80% of the amount
of itemized deductions otherwise allowable for the taxable year. The amount of
additional taxable income reportable by REMIC Certificateholders that are
subject to the limitations of either Section 67 or Section 68 of the Code may
be substantial. Furthermore, in determining the alternative minimum taxable
income of such a holder of a REMIC Certificate that is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more
individuals, estates or trusts, no deduction will be allowed for such holder's
allocable portion of servicing fees and other miscellaneous itemized deductions
of the REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, REMIC
Residual Certificates will generally not be appropriate investments for
individuals, estates, or trusts, or pass-through entities beneficially owned by
one or more individuals, estates or trusts. Such prospective investors should
carefully consult with their own tax advisors prior to making an investment in
such Certificates.
Sales of REMIC Certificates. If a REMIC Certificate is sold, the
selling Certificateholder will recognize gain or loss equal to the difference
between the amount realized on the sale and its adjusted basis in the REMIC
Certificate. The adjusted basis of a REMIC Regular Certificate generally will
equal the cost of such REMIC Regular Certificate to such Certificateholder,
increased by income reported by such Certificateholder with respect to such
REMIC Regular Certificate (including original issue discount and market
discount income) and reduced (but not below zero) by distributions on such
REMIC Regular Certificate received by such Certificateholder and by any
amortized premium. The adjusted basis of a REMIC Residual Certificate will be
determined as described under "--Taxation of Owners of REMIC Residual
Certificates--Basis Rules, Net Losses and Distributions". Except as described
below, any such gain or loss will be capital gain or loss, provided such REMIC
Certificate is held as a capital asset (generally, property held for
investment) within the meaning of Section 1221 of the Code. The Code as of the
date of this Prospectus provides for lower rates as to mid-term capital gains,
and still lower rates as to long-term capital gains, than those applicable to
the short-term capital gains and ordinary income realized or received by
individuals. No such rate differential exists for corporations. In addition,
the distinction between a capital gain or loss and ordinary income or loss
remains relevant for other purposes.
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Gain from the sale of a REMIC Regular Certificate that might otherwise
be capital gain will be treated as ordinary income to the extent such gain does
not exceed the excess, if any, of (i) the amount that would have been
includible in the seller's income with respect to such REMIC Regular
Certificate assuming that income had accrued thereon at a rate equal to 110% of
the "applicable Federal rate" (generally, a rate based on an average of current
yields on Treasury securities having a maturity comparable to that of the
Certificate based on the application of the Prepayment Assumption to such
Certificate, which rate is computed and published monthly by the IRS),
determined as of the date of purchase of such REMIC Regular Certificate, over
(ii) the amount of ordinary income actually includible in the seller's income
prior to such sale. In addition, gain recognized on the sale of a REMIC Regular
Certificate by a seller who purchased such REMIC Regular Certificate at a
market discount will be taxable as ordinary income in an amount not exceeding
the portion of such discount that accrued during the period such REMIC
Certificate was held by such holder, reduced by any market discount included in
income under the rules described above under "--Taxation of Owners of REMIC
Regular Certificates--Market Discount" and "--Premium".
REMIC Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Code, so that gain or loss recognized from
the sale of a REMIC Certificate by a bank or thrift institution to which such
Section applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate
that might otherwise be capital gain may be treated as ordinary income to the
extent that such Certificate is held as part of a "conversion transaction"
within the meaning of Section 1258 of the Code. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in the
same or similar property that reduce or eliminate market risk, if substantially
all of the taxpayer's return is attributable to the time value of the
taxpayer's net investment in such transaction. The amount of gain so realized
in a conversion transaction that is recharacterized as ordinary income
generally will not exceed the amount of interest that would have accrued on the
taxpayer's net investment at 120% of the appropriate "applicable Federal rate"
(which rate is computed and published monthly by the IRS) at the time the
taxpayer enters into the conversion transaction, subject to appropriate
reduction for prior inclusion of interest and other ordinary income items from
the transaction.
Finally, a taxpayer may elect to have net capital gains taxed at
ordinary income rates rather than capital gain rates in order to include such
net capital gain in total net investment income for the taxable year, for
purposes of the rule that limits the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
Except as may be provided in Treasury regulations yet to be issued, if
the seller of a REMIC Residual Certificate reacquires a REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a "taxable mortgage pool" (as defined in Section 7701(i) of the
Code) during the period beginning six months before, and ending six months
after, the date of such sale, such sale will be subject to the "wash sale"
rules of Section 1091 of the Code. In that event, any loss realized by the
REMIC Residual Certificateholder on the sale will not be deductible, but
instead will be added to such REMIC Residual Certificateholder's adjusted basis
in the newly-acquired asset.
Prohibited Transactions Tax and Other Taxes. The Code imposes a tax on
REMICs equal to 100% of the net income derived from "prohibited transactions"
(a "Prohibited Transactions Tax"). In general, subject to certain specified
exceptions a prohibited transaction means the disposition of a Mortgage Loan,
the receipt of income from a source other than a Mortgage Loan or certain other
permitted investments, the receipt of compensation for services, or gain from
the disposition of an asset purchased with the payments on the Mortgage Loans
for temporary investment pending distribution on the REMIC Certificates. Unless
otherwise disclosed in
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the related Prospectus Supplement, it is not anticipated that any REMIC will
engage in any prohibited transactions as to which it would be subject to a
material Prohibited Transaction Tax.
In addition, certain contributions to a REMIC made after the day on
which the REMIC issues all of its interests could result in the imposition of a
tax on the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling Agreement will include provisions designed
to prevent the acceptance of any contributions that would be subject to such
tax.
REMICs also are 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 rents and other qualifying income for a real estate investment
trust. Under certain circumstances, the Special Servicer may be authorized to
conduct activities with respect to a Mortgaged Property acquired by a Trust
Fund that causes the Trust Fund to incur a tax, provided that doing so would,
in reasonable discretion of the Special Servicer, maximize net after-tax
proceeds to Certificateholders.
Unless otherwise disclosed in the related Prospectus Supplement, it is
not anticipated that any material state or local income or franchise tax will
be imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to
the extent permitted by then applicable laws, 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 the REMIC will be borne by
the related REMIC Administrator, Master Servicer, Special Servicer or Trustee
in any case out of its own funds, provided that such person has sufficient
assets to do so and provided further that such tax arises out of a breach of
such person's obligations under the related Pooling Agreement. Any such tax not
borne by a REMIC Administrator, Master Servicer, Special Servicer or Trustee
would be charged against the related Trust Fund resulting in a reduction in
amounts payable to holders of the related REMIC Certificates.
Tax and Restrictions on Transfers of REMIC Residual Certificates to
Certain Organizations. If a REMIC Residual Certificate is transferred to a
"disqualified organization" (as defined below), a tax would be imposed in an
amount (determined under the REMIC Regulations) equal to the product of (i) the
present value (discounted using the "applicable Federal rate" for obligations
whose term ends on the close of the last quarter in which excess inclusions are
expected to accrue with respect to the REMIC Residual Certificate, which rate
is computed and published monthly by the IRS) of the total anticipated excess
inclusions with respect to such REMIC Residual Certificate for periods after
the transfer and (ii) the highest marginal federal income tax rate applicable
to corporations. The anticipated excess inclusions must be determined as of the
date that the REMIC Residual Certificate is transferred and must be based on
events that have occurred up to the time of such transfer, the Prepayment
Assumption and any required or permitted clean up calls or required liquidation
provided for in the REMIC's organizational documents. Such a tax generally
would be imposed on the transferor of the REMIC Residual Certificate, except
that where such transfer is through an agent for a disqualified organization,
the tax would instead be imposed on such agent. However, a transferor of a
REMIC Residual Certificate would in no event be liable for such tax with
respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a disqualified organization and, as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. Moreover, an entity will not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that (i) residual
interests in such entity are not held by disqualified organizations and (ii)
information necessary for the application of the tax described herein will be
made available. Restrictions on the transfer of REMIC Residual Certificates and
certain other provisions that are intended to meet this requirement will be
included in the Pooling Agreement, and will be discussed more fully in any
Prospectus Supplement relating to the offering of any REMIC Residual
Certificate. For these purposes a "disqualified organization" means (i) the
United States, any State or political subdivision thereof, any foreign
government, any international organization, or any agency or instrumentality of
the foregoing (but would not include instrumentalities described in Section
168(h)(2)(D) of the Code or the Federal Home Loan Mortgage Corporation), (ii)
any organization (other than a cooperative described in Section 521 of the
Code) that is exempt from federal income tax, unless it is subject to the tax
imposed by Section 511 of the Code or (iii) any organization described in
Section 1381(a)(2)(C) of the Code.
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In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the
amount of excess inclusions on the REMIC Residual Certificate that are
allocable to the interest in the pass-through entity held by such disqualified
organization and (ii) the highest marginal federal income tax rate imposed on
corporations. A pass-through entity will not be subject to this tax for any
period, however, if each record holder of an interest in such pass-through
entity furnishes to such pass-through entity (i) such holder's social security
number and a statement under penalty of perjury that such social security
number is that of the record holder or (ii) a statement under penalty of
perjury that such record holder is not a disqualified organization. For these
purposes, a "pass-through entity" means any regulated investment company,
real estate investment trust, trust, partnership or certain other entities
described in Section 860E(e)(6) of the Code. In addition, a person holding
an interest in a pass-through entity as a nominee for another person will,
with respect to such interest, be treated as a pass-through entity.
For taxable years beginning on or after January 1, 1998, if an
"electing large partnership" holds a REMIC Residual Certificate, all
interests in the electing large partnership are treated as held by disqualified
organizations for purposes of the tax imposed upon a pass-through entity by
Section 860E(c) of the Code. An exception to this tax, otherwise available to a
pass-through entity that is furnished certain affidavits by record holders of
interests in the entity and that does not know such affidavits are false, is
not available to an electing large partnership. For these purposes, an
"electing large partnership" means any partnership having more than 100
members during the preceding tax years (other than certain service partnerships
and commodity pools), which elect to apply simplified reporting provisions
under the Code.
Termination. A REMIC will terminate immediately after the Distribution
Date following receipt by the REMIC of the final payment in respect of the
Mortgage Loans or upon a sale of the REMIC's assets following the adoption by
the REMIC of a plan of complete liquidation. The last distribution on a REMIC
Regular Certificate will be treated as a payment in retirement of a debt
instrument. In the case of a REMIC Residual Certificate, if the last
distribution on such REMIC Residual Certificate is less than the Residual
Certificateholder's adjusted basis in such REMIC Residual Certificate, such
Residual Certificateholder should (but may not) be treated as realizing a
capital loss equal to the amount of such difference.
Reporting and Other Administrative Matters. Solely for purposes of the
administrative provisions of the Code, the REMIC will be treated as a
partnership and Residual Certificateholders will be treated as partners. Unless
otherwise stated in the related Prospectus Supplement, the REMIC Administrator
will file REMIC federal income tax returns on behalf of the REMIC, will be
designated as and will act as the "tax matters person" with respect to the
REMIC in all respects, and will generally hold at least a nominal amount of
REMIC Residual Certificates.
As the tax matters person, the REMIC Administrator, subject to certain
notice requirements and various restrictions and limitations, generally will
have the authority to act on behalf of the REMIC and the REMIC Residual
Certificateholders in connection with the administrative and judicial review of
items of income, deduction, gain or loss of the REMIC, as well as the REMIC's
classification. REMIC Residual Certificateholders generally will be required to
report such REMIC items consistently with their treatment on the related
REMIC's tax return and may in some circumstances be bound by a settlement
agreement between the REMIC Administrator, as tax matters person, and the IRS
concerning any such REMIC item. Adjustments made to the REMIC's tax return may
require a REMIC Residual Certificateholder to make corresponding adjustments on
its return, and an audit of the REMIC's tax return, or the adjustments
resulting from such an audit, could result in an audit of a REMIC Residual
Certificateholder's return. No REMIC will be registered as a tax shelter
pursuant to Section 6111 of the Code because it is not anticipated that any
REMIC will have a net loss for any of the first five taxable years of its
existence. Any person that holds a REMIC Residual Certificate as a nominee for
another person may be required to furnish the related
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REMIC, in a manner to be provided in Treasury regulations, with the name and
address of such person and other information.
Reporting of interest income, including any original issue discount,
with respect to REMIC Regular Certificates is required annually, and may be
required more frequently under Treasury regulations. These information reports
generally are required to be sent to individual holders of REMIC Regular
Interests and the IRS; holders of REMIC Regular Certificates that are
corporations, trusts, securities dealers and certain other non-individuals will
be provided interest and original issue discount income information and the
information set forth in the following paragraph upon request in accordance
with the requirements of the applicable regulations. The information must be
provided by the later of 30 days after the end of the quarter for which the
information was requested, or two weeks after the receipt of the request. The
REMIC must also comply with rules requiring a REMIC Regular Certificate issued
with original issue discount to disclose on its face the amount of original
issue discount and the issue date, and requiring such information to be
reported to the IRS. Reporting with respect to the REMIC Residual Certificates,
including income, excess inclusions, investment expenses and relevant
information regarding qualification of the REMIC's assets will be made as
required under the Treasury regulations, generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular
Certificate at the beginning of each accrual period. In addition, the reports
will include information required by regulations with respect to computing the
accrual of any market discount. Because exact computation of the accrual of
market discount on a constant yield method would require information relating
to the holder's purchase price that the REMIC may not have, such regulations
only require that information pertaining to the appropriate proportionate
method of accruing market discount be provided. See "--Taxation of Owners of
REMIC Regular Certificates--Market Discount".
Unless otherwise specified in the related Prospectus Supplement, the
responsibility for complying with the foregoing reporting rules will be borne
by the person designated as REMIC Administrator.
Backup Withholding with Respect to REMIC Certificates. Payments of
interest and principal, as well as payments of proceeds from the sale of REMIC
Certificates, may be subject to the "backup withholding tax" under Section 3406
of the Code at a rate of 31% if recipients of such payments fail to furnish to
the payor certain information, including their taxpayer identification numbers,
or otherwise fail to establish an exemption from such tax. Any amounts deducted
and withheld from a distribution to a recipient would be allowed as a credit
against such recipient's federal income tax. Furthermore, certain penalties may
be imposed by the IRS on a recipient of payments that is required to supply
information but that does not do so in the proper manner.
Foreign Investors in REMIC Certificates. A REMIC Regular
Certificateholder that is not a "United States person" (as defined below) and
is not subject to federal income tax as a result of any direct or indirect
connection to the United States in addition to its ownership of a REMIC Regular
Certificate will not, unless otherwise disclosed in the related Prospectus
Supplement, be subject to United States federal income or withholding tax in
respect of a distribution on a REMIC Regular Certificate, provided that the
holder complies to the extent necessary with certain identification
requirements (including delivery of a statement, signed by the
Certificateholder under penalties of perjury, certifying that such
Certificateholder is not a United States person and providing the name and
address of such Certificateholder). For these purposes, "United States person"
means a citizen or resident of the United States, a corporation, partnership or
other entity created or organized in, or under the laws of, the United States
or any political subdivision thereof, or an estate whose income is subject to
United States federal income tax regardless of its source, 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 the
authority to control all substantial decisions of the trust. It is possible
that the IRS may assert that the foregoing
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tax exemption should not apply with respect to a REMIC Regular Certificate held
by a Residual Certificateholder that owns directly or indirectly a 10% or
greater interest in the REMIC Residual Certificates. If the holder does not
qualify for exemption, distributions of interest, including distributions in
respect of accrued original issue discount, to such holder may be subject to a
tax rate of 30%, subject to reduction under any applicable tax treaty.
It is possible, under regulations promulgated under Section 881 of the
Code concerning conduit financing transactions, that the exemption from
withholding taxes described above may not be available to a holder who is not a
United States person and owns 10% of more of one or more underlying Mortgagors
or, if the holder is a controlled foreign corporation, who is related to one or
more Mortgagors.
Further, it appears that a REMIC Regular Certificate would not be
included in the estate of a non-resident alien individual and would not be
subject to United States estate taxes. However, Certificateholders who are
non-resident alien individuals should consult their tax advisors concerning
this question.
Unless otherwise stated in the related Prospectus Supplement,
transfers of REMIC Residual Certificates to investors that are not United
States Persons will be prohibited under the related Pooling Agreement.
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations
(the "New Regulations") which make certain modifications to the withholding,
backup withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 1999, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
GRANTOR TRUST FUNDS
Classification of Grantor Trust Funds. With respect to each series of
Grantor Trust Certificates, counsel to the Sponsor will deliver its opinion to
the effect that, assuming compliance with all provisions of the related Pooling
Agreement, the related Grantor Trust Fund will be classified as a grantor trust
under subpart E, part I of subchapter J of the Code and not as a partnership or
an association taxable as a corporation. Accordingly, each holder of a Grantor
Trust Certificate generally will be treated as the owner of an interest in the
underlying Mortgage Loans included in the Grantor Trust Fund.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a specified rate, will be referred to as a "Grantor Trust
Fractional Interest Certificate". A Grantor Trust Certificate representing
ownership of all or a portion of the difference between interest paid on the
Mortgage Loans constituting the related Grantor Trust Fund (net of normal
administration fees and any spread) and interest paid to the holders of Grantor
Trust Fractional Interest Certificates issued with respect to such Grantor
Trust Fund will be referred to as a "Stripped Interest Certificate". A Stripped
Interest Certificate may also evidence a nominal ownership interest in the
principal of the Mortgage Loans constituting the related Grantor Trust Fund.
Characterization of Investments in Grantor Trust Certificates.
Grantor Trust Fractional Interest Certificates. In the case of Grantor
Trust Fractional Interest Certificates, unless otherwise disclosed in the
related Prospectus Supplement, counsel to the Sponsor will deliver an opinion
that, in general, Grantor Trust Fractional Interest Certificates will represent
interests in (i) "loans . . . secured by an interest in real property" within
the meaning of Section 7701(a)(19)(C)(v) of the Code (but generally only to the
extent that the underlying Mortgage Loans have been made with respect to
property that is
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used for residential or certain other prescribed purposes); (ii)
"obligations (including any participation or certificate of beneficial
ownership therein) which . . . [are] principally secured by an interest in real
property" within the meaning of Section 860G(a)(3)(A) of the Code;(iii)
"permitted assets" within the meaning of Section 860L(a)(1)(C) of the Code and
(iv) "real estate assets" within the meaning of Section 856(c)(5)(B) of the
Code. In addition, counsel to the Sponsor will deliver an opinion that interest
on Grantor Trust Fractional Interest Certificates will to the same extent be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Section 856(c)(3)(B) of the
Code.
Stripped Interest Certificates. It is unclear whether Stripped
Interest Certificates evidence an interest in a Grantor Trust Fund consisting
of Mortgage Loans that are "loans . . . secured by an interest in real
property" within the meaning of Section 7701(a)(19)(C)(v) of the Code, and
"real estate assets" within the meaning of Section 856(c)(5)(B) of the Code,
and the interest on which is "interest on obligations secured by mortgages on
real property" within the meaning of Section 856(c)(3)(B) of the Code. Counsel
to the Sponsor will not deliver any opinion on this question. Prospective
purchasers to which such characterization of an investment in Stripped Interest
Certificates is material should consult their tax advisors regarding whether
the Stripped Interest Certificates, and the income therefrom, will be so
characterized.
The Stripped Interest Certificates will be "obligations (including any
participation or certificate of beneficial ownership therein) which . . . [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code and, in general, "permitted assets" within
the meaning of Section 860L(a)(1)C) of the Code.
Taxation of Owners of Grantor Trust Fractional Interest Certificates.
General. Holders of a particular series of Grantor Trust Fractional
Interest Certificates generally will be required to report on their federal
income tax returns their shares of the entire income from the Mortgage Loans
(including amounts used to pay reasonable servicing fees and other expenses)
and will be entitled to deduct their shares of any such reasonable servicing
fees and other expenses. Because of stripped interests, market or original
issue discount, or premium, the amount includible in income on account of a
Grantor Trust Fractional Interest Certificate may differ significantly from the
amount distributable thereon representing interest on the Mortgage Loans.
Under Section 67 of the Code, an individual, estate or trust holding a
Grantor Trust Fractional Interest Certificate directly or through certain
pass-through entities will be allowed a deduction for such reasonable servicing
fees and expenses only to the extent that the aggregate of such holder's
miscellaneous itemized deductions exceeds two percent of such holder's adjusted
gross income. In addition, Section 68 of the Code provides that the amount of
itemized deductions otherwise allowable for an individual whose adjusted gross
income exceeds a specified amount will be reduced by the lesser of (i) 3% of
the excess of the individual's adjusted gross income over such amount or (ii)
80% of the amount of itemized deductions otherwise allowable for the taxable
year. The amount of additional taxable income reportable by holders of Grantor
Trust Fractional Interest Certificates who are subject to the limitations of
either Section 67 or Section 68 of the Code may be substantial. Further,
Certificateholders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holder's alternative minimum taxable income. Although it is not entirely clear,
it appears that in transactions in which multiple classes of Grantor Trust
Certificates (including Stripped Interest Certificates) are issued, such fees
and expenses should be allocated among the classes of Grantor Trust
Certificates using a method that recognizes that each such class benefits from
the related services. In the absence of statutory or administrative
clarification as to the method to be used, it currently is intended to base
information returns or reports to the IRS and Certificateholders on a method
that allocates such expenses among classes of Grantor Trust Certificates with
respect to each period based on the distributions made to each such class
during that period.
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The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a class of Stripped
Interest Certificates is issued as part of the same series of Certificates or
(ii) the Sponsor or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on a Mortgage Asset. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon.
The servicing fees paid with respect to the Mortgage Loans for certain series
of Grantor Trust Fractional Interest Certificates may not constitute reasonable
servicing compensation. The related Prospectus Supplement will include
information regarding servicing fees paid to a Master Servicer, a Special
Servicer, any Sub-Servicer or their respective affiliates.
If Stripped Bond Rules Apply. If the stripped bond rules apply, each
Grantor Trust Fractional Interest Certificate will be treated as having been
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code, subject, however, to the discussion below regarding the treatment of
certain stripped bonds as market discount bonds and the discussion regarding de
minimis market discount. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--Market Discount". Under the stripped bond rules, the
holder of a Grantor Trust Fractional Interest Certificate (whether a cash or
accrual method taxpayer) will be required to report interest income from its
Grantor Trust Fractional Interest Certificate for each month in an amount equal
to the income that accrues on such Certificate in that month calculated under a
constant yield method, in accordance with the rules of the Code relating to
original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser for the Grantor Trust Fractional Interest Certificate. The stated
redemption price of a Grantor Trust Fractional Interest Certificate will be the
sum of all payments to be made on such Certificate, other than "qualified
stated interest", if any, as well as such Certificate's share of reasonable
servicing fees and other expenses. See "--Taxation of Owners of Grantor Trust
Fractional Interest Certificates--If Stripped Bond Rules Do Not Apply" for a
definition of "qualified stated interest". In general, the amount of such
income that accrues in any month would equal the product of such holder's
adjusted basis in such Grantor Trust Fractional Interest Certificate at the
beginning of such month (see "--Sales of Grantor Trust Certificates") and the
yield of such Grantor Trust Fractional Interest Certificate to such holder.
Such yield would be computed at the rate (compounded based on the regular
interval between payment dates) that, if used to discount the holder's share of
future payments on the Mortgage Loans, would cause the present value of those
future payments to equal the price at which the holder purchased such
Certificate. In computing yield under the stripped bond rules, a
Certificateholder's share of future payments on the Mortgage Loans will not
include any payments made in respect of any spread or any other ownership
interest in the Mortgage Loans retained by the Sponsor, a Master Servicer, a
Special Servicer, any Sub-Servicer or their respective affiliates, but will
include such Certificateholder's share of any reasonable servicing fees and
other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to
the prepayment assumption, with respect to certain categories of debt
instruments. Recent legislation extends the scope of the section to any pool of
debt instruments, the yield on which may be affected by reason of prepayments.
The precise application of the new legislation is unclear in certain respects.
For example, it is uncertain whether a prepayment assumption will be applied
collectively to all a taxpayer's investments in pools of debt instruments or
will be applied on an investment-by-investment basis. Similarly, as to
investments in Grantor Trust Fractional Interest Certificates, it is not clear
whether the assumed prepayment rate is to be determined based on conditions at
the time of the first sale of the Grantor Trust Fractional Interest Certificate
or, with respect to any holder, at the time of purchase of the Grantor Trust
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Fractional Interest Certificate by that holder. Certificateholders are advised
to consult their own tax advisors concerning reporting original issue discount
in general and, in particular, whether a prepayment assumption should be used
in reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates.
In the case of a Grantor Trust Fractional Interest Certificate
acquired at a price equal to the principal amount of the Mortgage Loans
allocable to such Certificate, the use of a prepayment assumption generally
would not have any significant effect on the yield used in calculating accruals
of interest income. In the case, however, of a Grantor Trust Fractional
Interest Certificate acquired at a discount or premium (that is, at a price
less than or greater than such principal amount, respectively), the use of a
reasonable prepayment assumption would increase or decrease such yield, and
thus accelerate or decelerate, respectively, the reporting of income.
In the absence of statutory or administrative clarification, it is
currently intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Sponsor nor any other person will make any representation that the
Mortgage Loans will in fact prepay at a rate conforming to such Prepayment
Assumption or any other rate or that the Prepayment Assumption will not be
challenged by the IRS on audit. Certificateholders also should bear in mind
that the use of a representative initial offering price will mean that such
information returns or reports, even if otherwise accepted as accurate by the
IRS, will in any event be accurate only as to the initial Certificateholders of
each series who bought at that price. See "--Grantor Trust Reporting", below.
Under Treasury Regulation Section 1.1286-1, certain stripped bonds are
to be treated as market discount bonds and, accordingly, any purchaser of such
a bond is to account for any discount on the bond as market discount rather
than original issue discount. This treatment only applies, however, if
immediately after the most recent disposition of the bond by a person stripping
one or more coupons from the bond and disposing of the bond or coupon (i) there
is no original issue discount (or only a de minimis amount of original issue
discount) or (ii) the annual stated rate of interest payable on the original
bond is no more than one percentage point lower than the gross interest rate
payable on the original mortgage loan (before subtracting any servicing fee or
any stripped coupon). If interest payable on a Grantor Trust Fractional
Interest Certificate is more than one percentage point lower than the gross
interest rate payable on the Mortgage Loans, the related Prospectus Supplement
will disclose that fact. If the original issue discount or market discount on a
Grantor Trust Fractional Interest Certificate determined under the stripped
bond rules is less than 0.25% of the stated redemption price multiplied by the
weighted average maturity of the Mortgage Loans, then such original issue
discount or market discount will be considered to be de minimis. Original issue
discount or market discount of only a de minimis amount will be included in
income in the same manner as de minimis original issue and market discount
described in
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"--Taxation of Owners of Grantor Trust Fractional Interest Certificates--If
Stripped Bond Rules Do Not Apply" and "--Market Discount".
If Stripped Bond Rules Do Not Apply. Subject to the discussion below
on original issue discount, if the stripped bond rules do not apply to a
Grantor Trust Fractional Interest Certificate, the Certificateholder will be
required to report its share of the interest income on the Mortgage Loans in
accordance with such Certificateholder's normal method of accounting. In that
case, the original issue discount rules will apply to a Grantor Trust
Fractional Interest Certificate only to the extent it evidences an interest in
Mortgage Loans issued with original issue discount.
The original issue discount, if any, on the Mortgage Loans will equal
the difference between the stated redemption price of such Mortgage Loans and
their issue price. Under the OID Regulations the stated redemption price is
equal to the total of all payments to be made on such Mortgage Loan other than
"qualified stated interest". "Qualified stated interest" includes interest that
is unconditionally payable at least annually at a single fixed rate, at a
"qualified floating rate", or at an "objective rate", a combination of a single
fixed rate and one or more "qualified floating rates" or one "qualified inverse
floating rate", or a combination of "qualified floating rates" that does not
operate in a manner that accelerates or defers interest payments on such
Mortgage Loan. In general, the issue price of a Mortgage Loan will be the
amount received by the borrower from the lender under the terms of the Mortgage
Loan, less any "points" paid by the borrower, and the stated redemption price
of a Mortgage Loan will equal its principal amount, unless the Mortgage Loan
provides for an initial below-market rate of interest or the acceleration or
the deferral of interest payments. See "--Taxation of Owners of REMIC Regular
Interests--Original Issue Discount", above.
In the case of Mortgage Loans bearing adjustable or variable interest
rates, the related Prospectus Supplement will describe the manner in which such
rules will be applied with respect to those Mortgage Loans by the Trustee or
Master Servicer, as applicable, in preparing information returns to the
Certificateholders and the IRS.
Notwithstanding the general definition of original issue discount,
original issue discount will be considered to be de minimis if such original
issue discount is less than 0.25% of the stated redemption price multiplied by
the weighted average maturity of the Mortgage Loan. For this purpose, the
weighted average maturity of the Mortgage Loan will be computed as the sum of
the amounts determined, as to each payment included in the stated redemption
price of such Mortgage Loan, by multiplying (i) the number of complete years
(rounding down for partial years) from the issue date until such payment is
expected to be made, by (ii) a fraction, the numerator of which is the amount
of the payment and the denominator of which is the stated redemption price of
the Mortgage Loan. Under the OID Regulations, original issue discount of only a
de minimis amount (other than de minimis original issue discount attributable
to a so-called "teaser" rate or initial interest holiday) will be included in
income as each payment of stated principal is made, based on the product of the
total amount of such de minimis original issue discount and a fraction, the
numerator of which is the amount of each such payment and the denominator of
which is the outstanding stated principal amount of the Mortgage Loan. The OID
Regulations also permit a Certificateholder to elect to accrue de minimis
original issue discount into income currently based on a constant yield method.
See "--Taxation of Owners of Grantor Trust Fractional Interest
Certificates--Market Discount" below.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a Mortgage Loan will be required to be
accrued and reported in income each month, based on a constant yield. Under
recent legislation, Section 1272(a)(6) of the Code requires that a prepayment
assumption be used in computing original issue discount with respect to any
pool of debt instruments, the yield on which may be affected by prepayments.
The precise application of the new legislation is unclear in certain respects.
For example, it is uncertain whether a prepayment assumption will be applied
collectively to all a taxpayer's investments in pools of debt instruments or
will be applied on an investment-by-investment basis. Similarly, as to
investments in Grantor Trust Fractional Interest Certificates, it is not clear
whether the assumed prepayment rate is to be determined at the time of the
first sale of the Grantor Trust Fractional Interest Certificate or, with
respect to any holder, at the time of that holder's purchase of the Grantor
Trust Fractional Interest Certificate. Certificateholders should consult their
own tax advisors concerning reporting of original issue discount with respect
to Grantor Trust Fractional Interest Certificates and should refer to the
related Prospectus Supplement with respect to each Series to determine whether
and in what manner the original issue discount rules will apply to Mortgage
Loans in such Series.
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A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less
than such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Mortgage Loans held in the related Trust Fund will also
be required to include in gross income such Certificate's daily portions of any
original issue discount with respect to such Mortgage Loans. However, each such
daily portion will be reduced, if the cost of such Grantor Trust Fractional
Interest Certificate to such purchaser is in excess of such Certificate's
allocable portion of the aggregate "adjusted issue prices" of the Mortgage
Loans held in the related Trust Fund, approximately in proportion to the ratio
such excess bears to such Certificate's allocable portion of the aggregate
original issue discount remaining to be accrued on such Mortgage Loans. The
adjusted issue price of a Mortgage Loan on any given day equals the sum of (i)
the adjusted issue price (or, in the case of the first accrual period, the
issue price) of such Mortgage Loan at the beginning of the accrual period that
includes such day and (ii) the daily portions of original issue discount for
all days during such accrual period prior to such day. The adjusted issued
price of a Mortgage Loan at the beginning of any accrual period will equal the
issue price of such Mortgage Loan, increased by the aggregate amount of
original issue discount with respect to such Mortgage Loan that accrued in
prior accrual periods, and reduced by the amount of any payments made on such
Mortgage Loan in prior accrual periods of amounts included in its stated
redemption price.
Unless otherwise provided in the related Prospectus Supplement, the
Trustee or Master Servicer, as applicable, will provide to any holder of a
Grantor Trust Fractional Interest Certificate such information as such holder
may reasonably request from time to time with respect to original issue
discount accruing on Grantor Trust Fractional Interest Certificates. See
"--Grantor Trust Reporting", below.
In the absence of statutory or administrative clarification, it is
currently intended that information reports or returns to the IRS and
Certificateholders will be based on a prepayment assumption (the "Prepayment
Assumption") that is determined when Certificates are offered and sold
hereunder and that is disclosed in the related Prospectus Supplement. However,
neither the Depositor nor any other person will make any representation that
the Mortgage Loans will in fact prepay at a rate conforming to such Prepayment
Assumption or any other rate or that the Prepayment Assumption will not be
challenged by the IRS on audit. See "--Grantor Trust Reporting", below.
Market Discount. If the stripped bond rules do not apply to the
Grantor Trust Fractional Interest Certificate, a Certificateholder may be
subject to the market discount rules of Sections 1276 through 1278 of the Code
to the extent an interest in a Mortgage Loan is considered to have been
purchased at a "market discount", that is, in the case of a Mortgage Loan
issued without original issue discount, at a purchase price less than its
remaining stated redemption price (as defined above), or in the case of a
Mortgage Loan issued with original issue discount, at a purchase price less
than its adjusted issue price (as defined above). If market discount is in
excess of a de minimis amount (as described below), the holder generally will
be required to include in income in each month the amount of such discount that
has accrued (under the rules described in the next paragraph) through such
month that has not previously been included in income, but limited, in the case
of the portion of such discount that is allocable to any Mortgage Loan, to the
payment of stated redemption price on such Mortgage Loan that is received by
(or, in the case of accrual basis Certificateholders, due to) the Trust Fund in
that month. A Certificateholder may elect to include market discount in income
currently as it accrues (under a constant yield method based on the yield of
the Certificate to such holder) rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder during or after the first
taxable year to which such election applies. In addition, the OID Regulations
would 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. If such an election were made
with respect to a Mortgage Loan with market discount, the Certificateholder
would be deemed to have made an election to include currently market discount
in income with respect to all other debt instruments
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having market discount that such Certificateholder acquires during the taxable
year of the election and thereafter, and possibly previously acquired
instruments. Similarly, a Certificateholder that made this election for a
Certificate acquired at a premium would be deemed to have made an election to
amortize bond premium with respect to all debt instruments having amortizable
bond premium that such Certificateholder owns or acquires. See
"--REMICs--Taxation of Owners of REMIC Regular Certificates--Premium". Each of
these elections to accrue interest, discount and premium with respect to a
Certificate on a constant yield method or as interest is irrevocable.
Section 1276(b)(3) of the Code authorized the Treasury Department to
issue regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. Under those rules, in each
accrual period market discount on the Mortgage Loans should accrue, at the
holder's option: (i) on the basis of a constant yield method, (ii)
in the case of a Mortgage Loan issued without original issue discount, in an
amount that bears the same ratio to the total remaining market discount as the
stated interest paid in the accrual period bears to the total stated interest
remaining to be paid on the Mortgage Loan as of the beginning of the accrual
period, or (iii) in the case of a Mortgage Loan issued with original issue
discount, in an amount that bears the same ratio to the total remaining market
discount as the original issue discount accrued in the accrual period bears to
the total original issue discount remaining at the beginning of the accrual
period.
Under recent legislation, Section 1272(a)(6) of the Code requires that a
prepayment assumption be used in computing the accrual of original issue
discount with respect to any pool of debt instruments, the yield on which may
be affected by prepayments. Because the Mortgage Loans will be such a pool,
under the Committee Report, it appears that the prepayment assumption used (or
that would be used) in calculating the accrual of original issue discount, if
any, is also to be used in calculating the accrual of market discount. However,
the precise application of the new legislation is unclear in certain respects.
For example, it is uncertain whether a prepayment assumption will be applied
collectively to all of a taxpayer's investments in pools of debt instruments or
will be applied on an investment-by-investment basis. Similarly, it is not
clear whether the assumed prepayment rate is to be determined at the time of
the first sale of the Grantor Trust Fractional Interest Certificate or, with
respect to any holder, at the time of that holder's purchase of the Grantor
Trust Fractional Interest Certificate. Moreover, because the regulations under
1276(b)(3) referred to in the preceding paragraph have not been issued, it is
not possible to predict what effect such regulations might have on the tax
treatment of a Mortgage Loan purchased at a discount in the secondary market.
Certificateholders should consult their own tax advisors concerning accrual of
market discount with respect to Grantor Trust Fractional Interest Certificates
and should refer to the related Prospectus Supplement with respect to each
Series to determine whether and in what manner the market discount will apply
to Mortgage Loans purchased at a market discount in such Series.
To the extent that the Mortgage Loans provide for periodic payments of
stated redemption price, market discount may be required to be included in
income at a rate that is not significantly slower than the rate at which such
discount would be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans generally will be
considered to be de minimis if it is less than 0.25% of the stated redemption
price of the Mortgage Loans multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations. If market discount is treated as de minimis under the foregoing
rule, it appears that actual discount would be treated in a manner similar to
original issue discount of a de minimis amount. See "--Taxation of Owners of
Grantor Trust Fractional Interest Certificates--If Stripped Bond Rules Do Not
Apply", below.
Further, under the rules described in "--REMICs--Taxation of Owners of
REMIC Regular Certificates--Market Discount", any discount that is not original
issue discount and exceeds a de minimis amount may require the deferral of
interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market
discount currently as it accrues. This rule applies without regard to the
origination dates of the Mortgage Loans.
In the absence of statutory or administrative clarification, it is
currently intended that information reports or returns to the IRS and
Certificateholders will be based on a prepayment assumption (the "Prepayment
Assumption") that is determined when Certificates are offered and sold
hereunder and that is disclosed in the related Prospectus Supplement. However,
neither the Depositor nor any other person will make any representation that
the Mortgage Loans will in fact prepay at a rate conforming to such Prepayment
Assumption or any other rate or that the Prepayment Assumption will not be
challenged by the IRS on audit. See "--Grantor Trust Reporting", below.
Premium. If a Certificateholder is treated as acquiring the underlying
Mortgage Loans at a premium, that is, at a price in excess of their remaining
stated redemption price, such Certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of such premium
allocable to Mortgage Loans originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on
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the related debt instrument, rather than as a separate interest deduction.
However, premium allocable to Mortgage Loans originated before September 28,
1985 or to Mortgage Loans for which an amortization election is not made,
should be allocated among the payments of stated redemption price on the
Mortgage Loan and be allowed as a deduction as such payments are made (or, for
a Certificateholder using the accrual method of accounting, when such payments
of stated redemption price are due).
It appears that a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code, based on the
recent amendments to Section 1272(a)(6) of the Code that require the use of a
prepayment assumption with respect to original issue discount for debt
instruments, the yield on which may be affected by prepayments, and on the
Committee Report's extension of those rules to the accrual of market discount
and amortization of premium.
In the absence of statutory or administrative clarification, it is
currently intended that information reports or returns to the IRS and
Certificateholders will be based on a prepayment assumption (the "Prepayment
Assumption") that is determined when Certificates are offered and sold
hereunder and that is disclosed in the related Prospectus Supplement. However,
neither the Depositor nor any other person wil make any representation that the
Mortgage Loans will in fact prepay at a rate conforming to such Prepayment
Assumption or any other rate or that the Prepayment Assumption will not be
challenged by the IRS on audit. See "--Grantor Trust Reporting", below.
Taxation of Owners of Stripped Interest Certificates. The "stripped
coupon" rules of Section 1286 of the Code will apply to the Stripped Interest
Certificates. Except as described above in "--Taxation of Owners of Grantor
Trust Fractional Interest Certificates--If Stripped Bond Rules Apply", no
regulations or published rulings under Section 1286 of the Code have been
issued and some uncertainty exists as to how such Section will be applied to
securities such as the Stripped Interest Certificates. Accordingly, holders of
Stripped Interest Certificates should consult their own tax advisors concerning
the method to be used in reporting income or loss with respect to such
Certificates.
The OID Regulations do not apply to "stripped coupons", although they
provide general guidance as to how the original issue discount sections of the
Code will be applied.
It appears that original issue discount will be required to be accrued
in each month on the Stripped Interest Certificates based on a constant yield
method. In effect, each holder of Stripped Interest Certificates would include
as interest income in each month an amount equal to the product of such
holder's adjusted basis in such Stripped Interest Certificate at the beginning
of such month and the yield of such Stripped Interest Certificate to such
holder. Such yield would be calculated based on the price paid for that
Stripped Interest Certificate by its holder and the payments remaining to be
made thereon at the time of the purchase, plus an allocable portion of the
servicing fees and expenses to be paid with respect to the Mortgage Loans. See
"--Taxation of Owners of Grantor Trust Fractional Interest Certificates--If
Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a
prepayment assumption be used in computing the accrual of original issue
discount with respect to certain categories of debt instruments, and that
adjustments be made in the amount and rate of accrual of such discount when
prepayments do not conform to such prepayment assumption. Under recent
legislation extending Section 1272(a)(6) to pools of debt instruments the
yield on which may be affected by prepayments, that method of prepayment
would apply to Stripped Interest Certificates. The precise application of the
new legislation is unclear in certain respects. For example, it is uncertain
whether a prepayment assumption will be applied collectively to all a
taxpayer's investments in pools of debt instruments or will be applied on an
investment-by-investment basis. Similarly, as to investments in Stripped
Interest Certificates, it is not clear whether the assumed prepayment rate is
to be determined based on conditions at the time of the first sale of the
Stripped Interest Certificates or, with respect to any holder, at the time of
purchase of the Stripped Interest Certificates by that holder.
Certificateholders are advised to consult their own tax advisors concerning
reporting original issue discount in general and, in particular, whether a
prepayment assumption should be used in reporting original issue discount with
respect to Stripped Interest Certificates.
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The accrual of income on the Stripped Interest Certificates will be
significantly slower using a prepayment assumption than if yield is computed
assuming no prepayments. In the absence of statutory or administrative
clarification, it currently is intended to base information returns or reports
to the IRS and Certificateholders on the Prepayment Assumption disclosed in the
related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Sponsor nor any other person will make any representation that the
Mortgage Loans will in fact prepay at a rate conforming to the Prepayment
Assumption or at any other rate or that the Prepayment Assumption will not be
challenged by the IRS on audit. Certificateholders also should bear in mind
that the use of a representative initial offering price will mean that such
information returns or reports, even if otherwise accepted as accurate by the
IRS, will in any event be accurate only as to the initial Certificateholders of
each series who bought at that price. See "--Taxation of Owners of Grantor
Fractional Interest Certificates--If Stripped Bond Rules Apply", above.
Prospective purchasers of the Stripped Interest Certificates should consult
their own tax advisors regarding the use of the Prepayment Assumption.
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Sales of Grantor Trust Certificates. Any gain or loss, equal to the
difference between the amount realized on the sale or exchange of a Grantor
Trust Certificate and its adjusted basis, recognized on such sale or exchange
of a Grantor Trust Certificate by an investor who holds such Grantor Trust
Certificate as a capital asset, will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and (in the case of banks and other financial institutions)
except as provided under Section 582(c) of the Code. The adjusted basis of a
Grantor Trust Certificate generally will equal its cost, increased by any
income reported by the seller (including original issue discount and market
discount income) and reduced (but not below zero) by any previously reported
losses, any amortized premium and by any distributions with respect to such
Grantor Trust Certificate. The Code as of the date of this Prospectus provides
for lower rates as to long-term capital gains, than those applicable to the
short-term capital gains and ordinary income realized or received by
individuals. No such rate differential exists for corporations. In addition,
the distinction between a capital gain or loss and ordinary income or loss
remains relevant for other purposes.
Gain or loss from the sale of a Grantor Trust Certificate may be
partially or wholly ordinary and not capital in certain circumstances. Gain
attributable to accrued and unrecognized market discount will be treated as
ordinary income, as will gain or loss recognized by the banks and other
financial institutions subject to Section 582(c) of the Code. Furthermore, a
portion of any gain that might otherwise be capital gain may be treated as
ordinary income to the extent that the Grantor Trust Certificate is held as
part of a "conversion transaction" within the meaning of Section 1258 of the
Code. A conversion transaction generally is one in which the taxpayer has taken
two or more positions in the same or similar property that reduce or eliminate
market risk, if substantially all of the taxpayer's return is attributable to
the time value of the taxpayer's net investment in such transaction. The amount
of gain realized in a conversion transaction that is recharacterized as
ordinary income generally will not exceed the amount of interest that would
have accrued on the taxpayer's net investment at 120% of the appropriate
"applicable Federal rate" (which rate is computed and published monthly by the
IRS) at the time the taxpayer enters into the conversion transaction, subject
to appropriate reduction for prior inclusion of interest and other ordinary
income items from the transaction. Finally, a taxpayer may elect to have net
capital gain taxed at ordinary income rates rather than capital gains rates in
order to include such net capital gain in total net investment income for that
taxable year, for purposes of the rule that limits the deduction of interest on
indebtedness incurred to purchase or carry property held for investment to a
taxpayer's net investment income.
Grantor Trust Reporting. Unless otherwise provided in the related
Prospectus Supplement, the Trustee or Master Servicer, as applicable, will
furnish to each holder of a Grantor Trust Certificate with each distribution a
statement setting forth the amount of such distribution allocable to principal
on the underlying Mortgage Loans and to interest thereon at the related
Pass-Through Rate. In addition, within a reasonable time after the end of each
calendar year, the Trustee or Master Servicer, as applicable, will furnish to
each Certificateholder during such year such customary factual information as
the Sponsor or the reporting party deems necessary or desirable
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to enable holders of Grantor Trust Certificates to prepare their tax returns
and will furnish comparable information to the IRS as and when required by law
to do so. Because the rules for accruing discount and amortizing premium with
respect to the Grantor Trust Certificates are uncertain in various respects,
there is no assurance the IRS will agree with the Trustee's or Master
Servicer's, as the case may be, information reports of such items of income and
expense. Moreover, such information reports, even if otherwise accepted as
accurate by the IRS, will in any event be accurate only as to the initial
Certificateholders that bought their Certificates at the representative initial
offering price used in preparing such reports.
On August 13, 1998, the Service published proposed regulations that
would, when effective, establish a reporting method for "widely held fixed
investment trusts" holding pools of debt instruments subject to Section
1272(a)(6), that would be similar to the reporting method currently used for
regular interests in REMICs. A fixed investment trust, defined to include any
entity classified as a "trust" under Treasury Regulation 301.7701-4(c), is a
"widely held" fixed investment trust if any ownership interest in the trust is
held by a middleman (which includes, but is not limited to, a custodian holding
a person's account, a nominee, and a broker holding an interest for a customer
in street name). These regulations are proposed to be effective beginning on or
after the date that final regulations are published in the Federal Register.
Backup Withholding. In general, the rules described in "--Taxation of
Owners of REMIC Residual Certificates--Backup Withholding with Respect to REMIC
Certificates" will also apply to Grantor Trust Certificates.
Foreign Investors. In general, the discussion with respect to REMIC
Regular Certificates in "--REMICs--Foreign Investors in REMIC Certificates"
applies to Grantor Trust Certificates except that Grantor Trust Certificates
will, unless otherwise disclosed in the related Prospectus Supplement, be
eligible for exemption from United States withholding tax, subject to the
conditions described in such discussion, only to the extent the related
Mortgage Loans were originated after July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be
exempt under Sections 871(h)(1) and 881(c) of the Code from United States
withholding tax, and the Grantor Trust Certificate is not held in connection
with a Certificateholder's trade or business in the United States, such Grantor
Trust Certificate will not be subject to U.S. estate taxes in the estate of
non-resident alien individual.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Material Federal Income Tax Consequences", potential investors should consider
the state and local tax consequences of the acquisition, ownership, and
disposition of the Offered Certificates. State tax law may differ substantially
from the corresponding federal law, and the discussion above does not purport
to describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Offered
Certificates.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain requirements on employee benefit plans,
and on certain other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts in which such plans, accounts or arrangements are
invested that are subject to the fiduciary responsibility provisions of ERISA
and Section 4975 of the Code (all of which are hereinafter referred to as
"Plans"), and on persons who are fiduciaries with respect to Plans, in
connection with the investment of Plan assets. 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 Section 3(33) of ERISA) are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Offered Certificates
without regard to the ERISA considerations described below, subject to the
provisions of other applicable federal and state law.
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Any such plan which is qualified and exempt from taxation under Sections 401(a)
and 501(a) of the Code, however, is subject to the prohibited transaction rules
set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and
the requirement that a Plan's investments be made in accordance with the
documents governing the Plan. In addition, ERISA and the Code prohibit a broad
range of transactions involving assets of a Plan and persons ("Parties in
Interest") who have certain specified relationships to the Plan, unless a
statutory or administrative exemption is available. The types of transactions
between Plans and Parties in Interest that are prohibited include: (a) sales,
exchanges or leases of property, (b) loans or other extensions of credit and
(c) the furnishing of goods and services. Certain Parties in Interest that
participate in a prohibited transaction may be subject to an excise tax imposed
pursuant to Section 4975 of the Code, unless a statutory or administrative
exemption is available. In addition, the persons involved in the prohibited
transaction may have to rescind the transaction and pay an amount to the Plan
for any losses realized by the Plan or profits realized by such persons,
individual retirement accounts involved in the transaction may be disqualified
resulting in adverse tax consequences to the owner of such account and certain
other liabilities could result that have a significant adverse effect on such
person.
PLAN ASSET REGULATIONS
A Plan's investment in Certificates may cause the Trust Assets to be
deemed Plan assets. Section 2510.3-101 of the regulations of the United States
Department of Labor ("DOL") provides that when a Plan acquires an equity
interest in an entity, the Plan's assets include both such equity interest and
an undivided interest in each of the underlying assets of the entity, unless
certain exceptions apply, including that the equity participation in the entity
by "benefit plan investors" (that is, Plans and certain employee benefit plans
not subject to ERISA) is not "significant". For this purpose, in general,
equity participation in a Trust Fund will be "significant" on any date if,
immediately after the most recent acquisition of any Certificate, 25% or more
of any class of Certificates is held by benefit plan investors (determined by
not including the investments of persons with discretionary authority or
control over the assets of such entity, of any person who provides investment
advice for a fee (direct or indirect) with respect to such assets, and of
"affiliates" (as defined in the Plan Asset Regulations) of such persons).
Equity participation in a Trust Fund will be significant on any date if
immediately after the most recent acquisition of any Certificate, 25% or more
of any class of Certificates is held by benefit plan investors (determined by
not including the investments of the Sponsor, the Trustee, the Master Servicer,
the Special Servicer, any other parties with discretionary authority over the
assets of a Trust Fund and their respective affiliates).
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides
investment advice with respect to such assets for a fee, is a fiduciary of the
investing Plan. If the Trust Assets constitute Plan assets, then any party
exercising management or discretionary control regarding those assets, such as
a Master Servicer, a Special Servicer, any Sub-Servicer, a Trustee, the obligor
under any credit enhancement mechanism, or certain affiliates thereof, may be
deemed to be a Plan "fiduciary" with respect to the investing Plan, and thus
subject to the fiduciary responsibility provisions of ERISA. In addition, if
the underlying assets of a Trust Fund constitute Plan assets, the Sponsor, the
REMIC Administrator, any borrower, as well as each of the parties described in
the preceding sentence, may become Parties in Interest with respect to an
investing Plan (or of a Plan holding an interest in an investing entity). Thus,
if the Trust Assets constitute Plan assets, the operation of the Trust Fund may
involve a prohibited transaction under ERISA and the Code. For example, if a
person who is a Party in Interest with respect to an investing Plan is
borrower, the purchase of Certificates by the Plan could constitute a
prohibited loan between a Plan and a Party in Interest.
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Any Plan fiduciary that proposes to cause such Plan to purchase
Offered Certificates should consult with its counsel with respect to the
potential applicability of ERISA and the Code, in particular the fiduciary
responsibility and prohibited transaction provisions, to such investment and
the availability of (and scope of relief provided by) any prohibited
transaction exemption in connection therewith. The Prospectus Supplement with
respect to a series of Certificates may contain additional information
regarding the application of any exemption with respect to the Certificates
offered thereby. In addition, any Plan fiduciary that proposes to cause a Plan
to purchase Stripped Interest Certificates should consider the federal income
tax consequences of such investment.
LEGAL INVESTMENT
The Offered Certificates will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA")
only if so specified in the related Prospectus Supplement. Accordingly,
investors whose investment authority is subject to legal restrictions should
consult their own legal advisors to determine whether and to what extent the
Offered Certificates constitute legal investments for them.
Prior to December 31, 1996, only classes of Offered Certificates that
(i) were rated in one of the two highest rating categories by one or more
Rating Agencies and (ii) were part of a series evidencing interests in a Trust
Fund consisting of loans secured by a single parcel of real estate, including
stock allocated to a dwelling unit in a residential cooperative housing
corporation, upon which is located a dwelling or mixed residential and
commercial structure, such as certain Multifamily Loans, and originated by
types of Originators specified in SMMEA, will be "mortgage related securities"
for purposes of SMMEA. "Mortgage related securities" are legal investments to
the same extent that, under applicable law, obligations issued by or guaranteed
as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including depository institutions, insurance companies and pension funds
created pursuant to or existing under the laws of the United States or of any
state, the authorized investments of which are subject to state regulation).
However, under SMMEA as originally enacted, if a state enacted legislation
prior to October 3, 1991 that specifically limited the legal investment
authority of any such entities with respect to "mortgage related securities"
under such definition, Offered Certificates would constitute legal investments
for entities subject to such legislation only to the extent provided in such
legislation.
Effective December 31, 1996, the definition of "mortgage related
securities" was modified to include among the types of loans to which such
securities may relate, loans secured by "one or more parcels of real estate
upon which is located one or more commercial structures". In addition, the
related legislative history states that this expanded definition includes
multifamily loans secured by more than one parcel of real estate upon which is
located more than one structure. Until September 23, 2001, any state may enact
legislation limiting the extent to which "mortgage related securities" under
this expanded definition would constitute legal investments under that state's
laws.
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
with "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe. In
this connection, effective December 31, 1996, the Office of the Comptroller of
the Currency (the "OCC") amended 12 C.F.R. Part 1 to authorize national banks
to purchase and sell for their own account, without limitation as to
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a percentage of the bank's capital and surplus (but subject to compliance with
certain general standards concerning "safety and soundness" and retention of
credit information in 12 C.F.R. Section 1.5), certain "Type IV securities",
defined in 12 C.F.R. Section 1.2(1) to include certain "commercial
mortgage-related securities" and "residential mortgage-related securities". As
so defined, "commercial mortgage-related security" and "residential
mortgage-related security" mean, in relevant part, "mortgage related security"
within the meaning of SMMEA, provided that, in the case of a "commercial
mortgage-related security," it "represents ownership of a promissory note or
certificate of interest or participation that is directly secured by a first
lien on one or more parcels of real estate upon which one or more commercial
structures are located and that is fully secured by interests in a pool of
loans to numerous obligors." In the absence of any rule or administrative
interpretation by the OCC defining the term "numerous obligors," no
representation is made as to whether any class of Offered Certificates will
qualify as "commercial mortgage-related securities", and thus as "Type IV
securities", for investment by national banks. Federal credit unions should
review NCUA Letter to Credit Unions No. 96, as modified by Letter to Credit
Unions No. 108, which includes guidelines to assist federal credit unions in
making investment decisions for mortgage related securities. The NCUA has
adopted rules, codified as 12 C.F.R. Section 703.5(f)-(k), which prohibit
federal credit unions from investing in certain mortgage related securities
(including securities such as certain classes of Offered Certificates), except
under limited circumstances.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement (the "Policy Statement") applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities". The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the OTS. The Policy Statement
generally indicates that a mortgage derivative product will be deemed to be
high risk if it exhibits greater price volatility than a standard fixed rate
thirty-year mortgage security. According to the Policy Statement, prior to
purchase, a depository institution will be required to determine whether a
mortgage derivative product that it is considering acquiring is high-risk, and
if so that the proposed acquisition would reduce the institution's overall
interest rate risk. Reliance on analysis and documentation obtained from a
securities dealer or other outside party without internal analysis by the
institution would be unacceptable. There can be no assurance as to which
classes of Certificates, including Offered Certificates, will be treated as
high-risk under the Policy Statement.
The predecessor to the Office of Thrift Supervision (the "OTS") issued
a bulletin, entitled "Mortgage Derivative Products and Mortgage Swaps", which
is applicable to thrift institutions regulated by the OTS. The bulletin
established guidelines for the investment by savings institutions in certain
"high-risk" mortgage derivative securities and limitations on the use of such
securities by insolvent, undercapitalized or otherwise "troubled" institutions.
According to the bulletin, such "high-risk" mortgage derivative securities
include securities having certain specified characteristics, which may include
certain classes of Offered Certificates. In addition, the National Credit Union
Administration has issued regulations governing federal credit union
investments which prohibit investment in certain specified types of securities,
which may include certain classes of Offered Certificates. Similar policy
statements have been issued by regulators having jurisdiction over other types
of depository institutions.
There may be other restrictions on the ability of certain investors
either to purchase certain classes of Offered Certificates or to purchase any
class of Offered Certificates representing more than a specified percentage of
the investor's assets. Except as to the status of certain classes of Offered
Certificates as "mortgage related securities", the Sponsor will make no
representations as to the proper characterization of any class of Offered
Certificates for legal investment or other purposes, or as to the ability of
particular investors to purchase any class of Offered Certificates under
applicable legal investment restrictions. These uncertainties (and any
unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Offered
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Certificates) may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all investors whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent the Offered
Certificates of any class constitute legal investments or are subject to
investment, capital or other restrictions.
METHOD OF DISTRIBUTION
The Offered Certificates offered hereby and by Prospectus Supplements
hereto will be offered in series through one or more of the methods described
below. The Prospectus Supplement prepared for each series will describe the
method of offering being utilized for that series and will state the net
proceeds to the Sponsor from such sale.
The Sponsor intends that Offered Certificates will be offered through
the following methods from time to time and that offerings may be made
concurrently through more than one of these methods or that an offering of a
particular series of Certificates may be made through a combination of two or
more of these methods. Such methods are as follows:
(i) By negotiated firm commitment underwriting and public
offering by one or more underwriters specified in the related
Prospectus Supplement;
(ii) by placements through one or more placement agents
specified in the related Prospectus Supplement primarily with
institutional investors and dealers; and
(iii) through offerings by the Sponsor.
The Prospectus Supplement for each series of Offered Certificates
will, as to each class of such Certificates, describe the method of offering
being used for that class and either the price at which such class is being
offered, the nature and amount of any underwriting discounts or additional
compensation to underwriters and the proceeds of the offering to the Sponsor,
or the method for determining the price at which such class will be sold to the
public. A firm commitment underwriting and public offering by underwriters may
be done through underwriting syndicates led by one or more managing
underwriters or through one or more underwriters acting alone. The managing
underwriter or underwriters with respect to the offer and sale of a particular
series of Offered Certificates will be set forth on the cover of the Prospectus
Supplement relating to such series and the members of the underwriting
syndicate, if any, will be named in such Prospectus Supplement. The firms
acting as underwriters with respect to the Offered Certificates of any series
may include Citicorp Securities, Inc. and Citibank, N.A., each of which is an
affiliate of the Sponsor. Any of the above-named firms not named in the related
Prospectus Supplement will not be parties to the Underwriting Agreement in
respect of a series of Offered Certificates, will not be purchasing any such
Certificates from the Sponsor and will have no direct or indirect participation
in the underwriting of such Certificates, although any of such firms may
participate in the distribution of such Certificates under circumstances
entitling it to a dealer's commission. Each Prospectus Supplement for an
underwritten offering will also contain information regarding the nature of the
underwriters' obligations, any material relationships between the Sponsor 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 a firm
commitment underwritten offering, the underwriters will be obligated to
purchase all of the Offered Certificates of a series if any such Certificates
are purchased. Offered 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
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or at varying prices determined at the time of sale. In connection with the
sale of the Offered Certificates of any series, underwriters may receive
compensation from the Sponsor or from purchasers of such Certificates in the
form of discounts, concessions or commissions. The related Prospectus
Supplement will describe any such compensation paid by the Sponsor.
In underwritten offerings, the underwriters and their agents may be
entitled, under agreements entered into with the Sponsor, to indemnification
from the Sponsor against certain civil liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act"), or to
contribution with respect to payments which such underwriters or agents may be
required to make in respect thereof. Such rights to indemnification or
contribution may also extend to each person, if any, who controls any such
underwriter within the meaning of the Securities Act.
If a series or class of Offered Certificates is offered otherwise
than through underwriters, the Prospectus Supplement relating thereto will
contain information regarding the nature of such offering and any agreements to
be entered into between the Sponsor and purchasers of such Certificates. It is
contemplated that Citicorp Securities, Inc. or Citibank, N.A. will act as
placement agent on behalf of the Sponsor in such offerings of a series or class
of Offered Certificates. If Citicorp Securities, Inc. does act as placement
agent in the sale of Offered Certificates, it will receive a selling commission
which will be disclosed in the related Prospectus Supplement. Citicorp
Securities, Inc. or Citibank, N.A. may also purchase Offered Certificates
acting as principal.
On April 5, 1998, Citicorp, of which the Sponsor and Citibank, N.A.
are wholly-owned subsidiaries, and Travelers Group Inc. ("Travelers"), of which
Salomon Brothers Inc ("Salomon") is a wholly-owned subsidiary, agreed to merge
(the "Merger"). The combined company will be known as Citigroup. The Merger is
subject to customary closing conditions, including regulatory approvals. Firms
acting as underwriters or placement agents with respect to the Offered
Certificates of any series may include Salomon.
It is expected that the Sponsor will from time to time form Mortgage
Asset Pools and cause series of Offered Certificates evidencing an ownership
interest in such Mortgage Asset Pools to be issued to the related Mortgage
Asset Sellers. Thereafter, and pending final sale of such a series of Offered
Certificates, the related Mortgage Asset Seller may enter into repurchase
arrangements or secured lending arrangements with institutions that may include
Citicorp Securities, Inc. or any of its affiliates for purposes of financing
the holding of such series. Prior to any sales of such Certificates to
investors, the related Mortgage Asset Seller will prepare and deliver a
Prospectus Supplement containing updated information regarding the Mortgage
Asset Pool as of the first day of the month in which such sale occurs.
Affiliates of the Sponsor may act as principals or agents in
connection with market-making transactions relating to the Offered
Certificates. This Prospectus and the related Prospectus Supplement may be used
by such affiliates in connection with offers and sales related to market-making
transactions in the Offered Certificates. Such sales will be made at prices
related to prevailing market prices at the time of sale.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Certificates, and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
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RATING
It is a condition to the issuance of any class of Offered Certificates
that they shall have been rated not lower than investment grade, that is, in
one of the four highest rating categories, by at least one Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood
of receipt by the holders thereof of all collections on the underlying mortgage
assets to which such holders are entitled. These ratings address the
structural, legal and issuer-related aspects associated with such certificates,
the nature of the underlying mortgage assets and the credit quality of the
guarantor, if any. Ratings on mortgage pass-through certificates do not
represent any assessment of the likelihood of principal prepayments by
borrowers or of the degree by which such prepayments might differ from those
originally anticipated. As a result, Certificateholders might suffer a lower
than anticipated yield, and, in addition, holders of stripped interest
certificates in extreme cases might fail to recoup their initial 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 OF PRINCIPAL TERMS
Accrual Certificates..........................................S-14, S-43
ADA.................................................................S-81
ARM Loans...........................................................S-32
Book-Entry Certificates.......................................S-16, S-42
Cash Flow Agreement...........................................S-12, S-33
Cash Flow Agreements.................................................S-1
CERCLA........................................................S-26, S-78
Certificate Account.....................................S-11, S-33, S-53
Certificate Balance.................................................S-13
Certificate Owner.............................................S-16, S-48
Certificateholders...................................................S-2
Certificates.........................................................S-9
Closing Date........................................................S-85
Code..........................................................S-16, S-82
Commercial Cooperative Loans........................................S-10
Commercial Properties.........................................S-10, S-29
Commission...........................................................S-3
Committee Report....................................................S-85
Companion Class...............................................S-15, S-44
Condemnation Proceeds...............................................S-54
Contingent Payment Regulations.....................................S-108
Contributions Tax...................................................S-96
Controlled Amortization Class.................................S-15, S-44
Cooperatives........................................................S-29
CPR.................................................................S-37
Credit Support...........................................S-1, S-12, S-33
Cut-off Date........................................................S-14
Definitive Certificate..............................................S-16
Definitive Certificates.......................................S-42, S-49
Determination Date............................................S-34, S-42
Direct Participants.................................................S-48
Distribution Date...................................................S-14
Distribution Date Statement.........................................S-45
DOL................................................................S-111
DTC................................................S-4, S-16, S-42, S-48
Due Dates...........................................................S-31
Equity Participation................................................S-31
ERISA........................................................S-19, S-110
Exchange Act.........................................................S-4
FAMC................................................................S-11
FHLMC...............................................................S-11
FNMA................................................................S-11
Garn Act............................................................S-80
GNMA................................................................S-11
Grantor Trust Certificates....................................S-16, S-82
Grantor Trust Fractional
Interest Certificates............................................S-18
Grantor Trust Fund..................................................S-82
Indirect Participants...............................................S-48
Insurance Proceeds..................................................S-54
IRS.................................................................S-85
Issue Premium.......................................................S-91
L/C Bank............................................................S-69
Lender Liability Act................................................S-78
Liquidation Proceeds..........................................S-54, S-55
Lock-out Date.......................................................S-31
Lock-out Period.....................................................S-31
Mark-to-Market Regulations..........................................S-94
Master Servicer.................................................S-3, S-9
MBS......................................................S-1, S-11, S-28
MBS Agreement.......................................................S-32
MBS Issuer..........................................................S-32
MBS Servicer........................................................S-32
MBS Trustee.........................................................S-32
Mortgage Asset Pool..................................................S-1
Mortgage Asset Seller.........................................S-11, S-29
Mortgage Assets................................................S-1, S-29
Mortgage Loans...........................................S-1, S-10, S-28
Mortgage Notes......................................................S-29
Mortgage Rate.................................................S-10, S-31
Mortgaged Properties................................................S-29
Mortgages...........................................................S-29
Multifamily Properties..............................................S-29
Net Leases..........................................................S-30
New Regulations.....................................................S-99
Nonrecoverable Advance..............................................S-45
Notional Amount...............................................S-13, S-43
OCC................................................................S-112
Offered Certificates.................................................S-1
OID Regulations.....................................................S-83
Originator..........................................................S-29
OTS................................................................S-113
PAC.................................................................S-37
Participants............................................S-27, S-42, S-48
Parties in Interest................................................S-110
Pass-Through Rate..............................................S-3, S-13
Permitted Investments...............................................S-54
Plans..............................................................S-110
Policy Statement...................................................S-113
Pooling Agreement.............................................S-13, S-49
Prepayment Assumption........................................S-85, S-103
Prepayment Interest Shortfall.......................................S-34
Prepayment Premium..................................................S-31
Prohibited Transactions Tax.........................................S-96
Prospectus Supplement................................................S-1
Rating Agency.......................................................S-19
RCRA................................................................S-79
Record Date.........................................................S-42
Related Proceeds....................................................S-45
Relief Act..........................................................S-81
REMIC.........................................................S-16, S-82
REMIC Administrator.............................................S-3, S-9
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REMIC Certificates.................................................S-82
REMIC Provisions...................................................S-82
REMIC Regular Certificates...................................S-16, S-83
REMIC Regulations..................................................S-83
REMIC Residual Certificates..................................S-16, S-83
REO Property.......................................................S-52
RICO...............................................................S-82
Securities Act....................................................S-114
Senior Certificates..........................................S-13, S-41
Servicing Standard.................................................S-52
SMMEA.............................................................S-111
SPA................................................................S-37
Special Servicer...............................................S-3, S-9
Sponsor............................................................S-29
Stripped Interest Certificates...............................S-13, S-41
Stripped Principal Certificates..............................S-13, S-41
Sub-Servicer.......................................................S-53
Sub-Servicing Agreement............................................S-53
Subordinate Certificates.....................................S-13, S-41
TAC................................................................S-37
Tiered REMICs......................................................S-84
Title V............................................................S-81
Trust Assets........................................................S-3
Trust Fund..........................................................S-1
Trustee.............................................................S-9
UCC................................................................S-71
Voting Rights......................................................S-47
Warranting Party...................................................S-51
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The estimated expenses in connection with the issuance and
distribution of the Certificates being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
Filing Fee for Registration Statement.......................... $1,180,000.00
Legal Fees and Expenses........................................ 1,500,000.00*
Accounting Fees and Expenses................................... 750,000.00*
Blue Sky Fees and Expenses..................................... 62,500.00*
Printing and Engraving Fees.................................... 500,000.00*
Rating Agency Fees............................................. 1,250,000.00*
Miscellaneous.................................................. 312,500.00*
-------------
Total...................... $5,555,000.00
- ----------
*Based on five separate offerings of Certificates.
Item 15. Indemnification of Directors and Officers.
Under Section 7(b) of the proposed form of underwriting
agreement, the underwriter is obligated under certain circumstances to
indemnify each director of the Registrant, each officer of the Registrant that
signed this Registration Statement or any amendment hereof, and certain
controlling persons of the Registrant, against certain liabilities, including
liabilities under the Securities Act of 1933.
Subsection (a) of Section 145 of the General Corporation Law of
the State of Delaware empowers a corporation to indemnify any person who was or
is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation and except that no indemnification may be
made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the court
shall deem proper.
Section 145 further provides that to the extent a director,
officer, employee or agent of a corporation has been successful on the merits
or otherwise in the defense of any action, suit or proceeding referred to in
subsections (a) and (b) or in the defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
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actually and reasonably incurred by him in connection therewith; that expenses
incurred by a director or officer in defending any action, suit or proceeding
may be paid by the corporation in advance of the final disposition thereof upon
receipt of an undertaking by or on behalf of such director or officer to repay
such amount if it is ultimately determined that such director or officer is not
entitled to indemnification under Section 145; and that indemnification and
advancement of expenses provided for by Section 145 shall not be deemed
exclusive of any other rights to which the person seeking indemnification or
advancement of expenses may be entitled; and empowers the corporation to
purchase and maintain insurance on behalf of a person who is or was a director,
officer, employee or agent of the corporation against any liability asserted
against him or incurred by him in any such capacity or arising out of his
status as such, whether or not the corporation would have the power to
indemnify him against such liabilities under Section 145.
The Certificate of Incorporation of the Registrant provides, in
effect, that, to the extent and under the circumstances permitted by
subsections (a) and (b) of Section 145 of the General Corporation Loan of
Delaware, the Registrant (i) shall indemnify any person who was or is a party
or is threatened to be made a party to any action, suit or proceeding described
in subsections (a) and (b) by reason of the fact that he is or was a director
or officer of the Registrant against expenses, judgments, fines and amounts
paid in settlement, and (ii) may indemnify any person who was or is a party or
is threatened to be made a party to any such action, suit or proceeding if such
person is or was an employee or agent of the Registrant, or was serving at the
request of the Registrant as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise.
Pursuant to Section 145 of the General Corporation Law of
Delaware, liability insurance is maintained covering directors and principal
officers of the Registrant.
Each Pooling Agreement (as defined in the prospectus included in
this Registration Statement) pursuant to which the Certificates being
registered will be issued, will provide that no director, officer, employee or
agent of the Registrant is liable to the Trust Fund or the Certificateholders,
except for such person's own willful misfeasance, bad faith, gross negligence
or reckless disregard of duty. Each Pooling Agreement will further provide
that, with the exceptions stated above, a director, officer, employee or agent
of the Registrant is entitled to be indemnified against all liability in
connection with any legal action that relates to such Pooling Agreement or the
Certificates issued thereunder.
Any purchase agreement pursuant to which the Registrant acquires
Mortgage Assets (as defined in the prospectus included in the Registration
Statement) for inclusion in a Trust Fund may provide under certain
circumstances that each director of the Registrant, each officer of the
Registrant that signed this Registration Statement or any amendment hereof, and
certain controlling persons of the Registrant, are entitled to be indemnified
by the seller of such Mortgage Assets or an affiliate against certain
liabilities, including liabilities under the Securities Act of 1933, relating
to such Mortgage Assets.
Any underwriters who execute an Underwriting Agreement in the
form filed as Exhibit 1.1 to this Registration Statement will agree to
indemnify the Registrant's directors and its officers who signed this
Registration Statement against certain liabilities which might arise under the
Securities Act of 1933 from certain information furnished to the Registrant by
or on behalf of such indemnifying party.
Item 16. Exhibits.
1.1 Form of Underwriting Agreement.*
4.1 Form of Pooling and Servicing Agreement.*
5.1 Opinion of Stephen E. Dietz, Associate General Counsel of
Citibank, N.A., with respect to legality.
8.1 Opinion of Sidley & Austin with respect to certain tax
matters.
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23.1 Consent of Stephen E. Dietz, Associate General Counsel of
Citibank, N.A. (included as part of Exhibit 5.1).
23.2 Consent of Sidley & Austin (included as part of Exhibit 8.1).
24.1 Power of Attorney.
-------------
* Incorporated by reference from the Registration Statement on
Form S-3 (File No. 33-63924).
Item 17. Undertakings.
A. Undertakings Relating to Rule 415 Offering.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(a) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(b) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement; and
(c) to include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
provided, however, that (1)(a) and (1)(b) do not apply if the information
required to be included in a post-effective amendment by those items is
contained in periodic reports filed by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference to this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
B. Undertaking in connection with incorporation by reference of certain filings
under the Securities Exchange Act of 1934.
The Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
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C. Undertaking in respect of indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
D. Undertaking in respect of delivery of certificates.
The Registrant hereby undertakes to provide to the respective
underwriters at the closing specified in the underwriting agreements,
certificates in such denominations and in such names as required by each such
underwriter to permit prompt delivery to each purchaser.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3, reasonably believes that the
security rating requirement contained in Transaction Requirement B.5. of Form
S-3 will be met by the time of the sale of the Securities registered hereunder
and has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in The City of New York, State of
New York, on January 20, 1999.
MORTGAGE CAPITAL FUNDING, INC.
By /s/ Richard L. Jarocki, Jr.
-------------------------------
Richard L. Jarocki, Jr.
President and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on January 20, 1999, by the
following persons in the capacities indicated below.
Signature Capacity
- --------- --------
* Chief Executive Officer
- -------------------------------- (Principal Executive Officer and Director)
John Dowd
* Vice President and Director
- --------------------------------
Thomas Lavin
* Treasurer (Chief Financial Officer and
- -------------------------------- Principal Accounting Officer)
Joseph Cutolo
/s/ Richard L. Jarocki, Jr. President and Director
- --------------------------------
Richard L. Jarocki, Jr.
* Richard L. Jarocki, Jr., by signing his name hereto, does sign this document
on behalf of each of the persons indicated above for whom he is
attorney-in-fact pursuant to a power of attorney duly executed by such person
and filed with the Securities and Exchange Commission.
/s/ Richard L. Jarocki, Jr.
---------------------------------
Richard L. Jarocki, Jr.
Attorney-in-Fact
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<PAGE>
EXHIBIT INDEX
Page
Number
------
1.1 Form of Underwriting Agreement.*
4.1 Form of Pooling and Servicing Agreement.*
5.1 Opinion of Stephen E. Dietz, Associate General Counsel of
Citibank, N.A., with respect to legality.*
8.1 Opinion of Sidley & Austin with respect to certain tax
matters.*
23.1 Consent of Stephen E. Dietz, Associate General Counsel of
Citibank, N.A. (included as part of Exhibit 5.1).*
23.2 Consent of Sidley & Austin (included as part of Exhibit 8.1).*
24.1 Power of Attorney.*
- -------------
* Previously filed.
