<PAGE>
PROSPECTUS SUPPLEMENT
(To Prospectus dated July 25, 1995)
$261,318,000 (Approximate)
American Southwest Financial Securities Corporation
(Depositor)
Commercial Mortgage Pass-Through Certificates, Series 1996-FHA1
Assumed Final
Certificate Initial Class Principal Distribution(s)
Class Interest Rate Balance(a) Date(b)(c) Ratings(c)(d)
----- ------------- ----------------------- ---------------- -------------
Class S 1.258%(1) N/A(3) Nov. 25, 2036 AAAr
Class A-1 6.675% $40,317,000 Dec. 25, 2001 AAA
Class A-2 7.000% $38,978,000 June 25, 2005 AAA
Class A-3 7.125% $55,487,000 April 25, 2009 AAA
Class A-4 7.290% $58,824,000 May 25, 2012 AAA
Class A-Z 7.248%(2) $67,712,000 March 25, 2034 AAA
- -------------------------------
(Footnotes to table on next page)
The Series 1996-FHA1 Commercial Mortgage Pass-Through Certificates (the
"Certificates") will consist of ten classes (each, a "Class"), including the
Classes listed above (collectively, the "Offered Certificates") and the Class B
and Class R-I, Class R-II and Class R-III Certificates (collectively, the
"Non-Offered Certificates"). Only the Offered Certificates are offered hereby.
The Certificates will evidence beneficial ownership interests in a trust fund
(the "Trust Fund") to be created by American Southwest Financial Securities
Corporation (the "Depositor"). Upon creation, the Trust Fund will primarily
consist of: (i) approximately $188,800,560 of fixed-rate, fully-amortizing
mortgage loans (the "FHA Loans") insured, to the extent and subject to the
conditions described herein, by the Federal Housing Administration (the "FHA")
of the United States Department of Housing and Urban Development ("HUD") under
certain sections of the National Housing Act of 1934, as amended (the "Housing
Act"), and secured by liens on multifamily rental housing developments
(collectively, "Multifamily Properties") or nursing homes, intermediate care
facilities, assisted living facilities, board and care homes or other nursing
facilities (collectively, "Nursing Facilities"); and (ii) approximately
$77,709,904 of securities (the "GNMA Certificates") guaranteed by the Government
National Mortgage Association ("GNMA") and backed by fixed-rate, level payment,
fully-amortizing mortgage loans (the "Underlying Mortgage Loans" and,
collectively with the FHA Loans, the "Mortgage Loans") that are likewise so
insured by the FHA and are secured by liens on Multifamily Properties or Nursing
Facilities. All such FHA Loans and GNMA
(Cover continued on next page)
FOR A DISCUSSION OF CERTAIN SIGNIFICANT MATTERS AFFECTING INVESTMENTS
IN THE OFFERED CERTIFICATES, SEE "RISK FACTORS" BEGINNING AT PAGE 29 HEREIN AND
"SPECIAL CONSIDERATIONS" BEGINNING AT PAGE 21 IN THE PROSPECTUS.
THE MORTGAGE LOANS ARE, TO THE EXTENT AND SUBJECT TO THE CONDITIONS
DESCRIBED HEREIN, INSURED BY THE FHA, AND THE TIMELY PAYMENT OF PRINCIPAL AND
INTEREST ON THE GNMA CERTIFICATES IS GUARANTEED BY GNMA. BOTH THE INSURANCE BY
THE FHA AND THE GNMA GUARANTY ARE BACKED BY THE FULL FAITH AND CREDIT OF THE
UNITED STATES OF AMERICA. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR
OBLIGATION OF THE DEPOSITOR, THE MASTER SERVICER, THE SELLERS, THE TRUSTEE, THE
UNDERWRITERS OR ANY OF THEIR AFFILIATES AND, NOTWITHSTANDING THE TWO PRECEDING
SENTENCES, ARE NOT INSURED OR GUARANTEED BY GNMA, THE FHA OR ANY OTHER
GOVERNMENTAL AGENCY OR INSTRUMENTALITY, OR BY THE UNDERWRITERS, THE TRUSTEE OR
ANY OF THEIR AFFILIATES, OR BY ANY OTHER PERSON OR ENTITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO
WHICH IT RELATES. 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 A
CRIMINAL OFFENSE.
The Offered Certificates are being offered by Donaldson, Lufkin &
Jenrette Securities Corporation and Daiwa Securities America Inc. (together, the
"Underwriters") from time to time in negotiated transactions or otherwise at
prices to be determined at the time of sale. Proceeds to the Depositor from the
sale of the Offered Certificates will be approximately $275,214,019 plus accrued
interest thereon from December 1, 1996, before deducting issuance expenses
payable by the Depositor. For further information with respect to the plan of
distribution and any discounts, commissions and profits on resale that may be
deemed underwriting discounts or commissions, see "PLAN OF DISTRIBUTION" herein.
The Offered Certificates are offered by the Underwriters when, as and
if delivered to and accepted by the Underwriters and subject to their right to
reject any orders in whole or in part. It is expected that the delivery of the
Offered Certificates will be made in book-entry form through the facilities of
The Depository Trust Company ("DTC"), on or about December 27, 1996. See "Plan
of Distribution" herein.
Donaldson, Lufkin & Jenrette Daiwa Securities
Securities Corporation America Inc.
The date of this Prospectus Supplement is December 19, 1996.
<PAGE>
(Footnotes to table from page one)
(a) Subject to a variance of plus or minus 5%.
(b) The Assumed Final Distribution Date with respect to any Class
of Offered Certificates is the Distribution Date (as defined herein) on which
the final distribution would occur for such Class of Certificates based on the
Modeling Assumptions (as defined herein) and the assumption that no Mortgage
Loan is prepaid prior to its stated maturity. The actual performance and
experience of the Mortgage Assets will likely differ from such assumptions. See
"Maturity and Prepayment Considerations" herein.
(c) The "Rated Final Distribution Date" is November 25, 2038.
(d) The indicated rating of each Class of Offered Certificates
will be assigned by Standard & Poor's Ratings Services, A Division of The
McGraw-Hill Companies, Inc. ("S&P" or the "Rating Agency").
- ------------------------
(1) The Certificate Interest Rate (as defined herein) applicable
to the Class S Certificates for the initial Distribution Date is approximately
1.2583% per annum. For each subsequent Distribution Date, the Certificate
Interest Rate for such Class of Certificates will, in general, equal the excess,
if any, of the weighted average of the Net Asset Rates (as defined herein) of
the Mortgage Assets (as defined herein) from time to time, over the weighted
average of the Certificate Interest Rates for the respective Classes of
Sequential Pay Certificates (as defined herein) from time to time.
(2) As described herein, until the Accrual Termination Date (as
defined herein), interest payable in respect of the Class A-Z Certificates on
each Distribution Date will be deferred and added to the Class Principal Balance
thereof. See "Description of Certificates--Distributions" herein.
(3) The Class S Certificates will not have a Class Principal
Balance (as defined herein) and the holders thereof will not be entitled to
receive distributions of principal. Interest will accrue on the Class S
Certificates at the Certificate Interest Rate applicable to such Certificates
from time to time on their Class Notional Amount (as defined herein) outstanding
from time to time. The Class Notional Amount of the Class S Certificates will
equal the aggregate of the Class Principal Balances of the Sequential Pay
Certificates outstanding from time to time.
- ------------------------
(Cover continued from page one)
Certificates (together with any FHA Debentures (as defined herein) that may be
received in connection with the assignment of a defaulted FHA Loan to the FHA)
are collectively referred to herein as the initial "Mortgage Assets". The
Mortgage Assets are currently held, directly or indirectly, by Greystone Funding
Corporation ("Greystone Funding" and the Mortgage Assets held thereby, the
"Greystone Mortgage Assets"), by Daiwa Finance Corp. ("Daiwa Finance" and,
together with Greystone Funding, the "Sellers") or by Daiwa Securities America
Inc. ("Daiwa Securities"), an affiliate of Daiwa Finance (the Mortgage Assets
held by Daiwa Finance or Daiwa Securities, the "Daiwa Mortgage Assets"). See
"THE MORTGAGE POOL--Sale and Assignment of the Mortgage Assets; Repurchases"
herein. On or prior to the date of initial issuance of the Certificates, at the
direction of the Depositor, each of the Sellers will transfer or cause the
transfer of their respective Mortgage Assets to LaSalle National Bank as trustee
(the "Trustee") for the benefit of the holders of the Certificates (the
"Certificateholders"). As of December 1, 1996 (the "Cut-off Date"), the Mortgage
Assets will have an aggregate outstanding principal balance of approximately
$266,510,464, after application of all payments of principal due on the Mortgage
Loans on or before such date, whether or not received, and subject to a
permitted variance of plus or minus 5%.
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement, to be dated as of the Cut-off Date, among the Depositor, the Trustee,
each Seller and Greystone Servicing Corporation, Inc. as master servicer (the
"Master Servicer"). Interest and principal on the Certificates will be payable
on the 25th day of each month or, if such day is not a Business Day (as defined
herein), on the next succeeding Business Day (each, a "Distribution Date"),
commencing in January 1997.
The yield to investors on the Offered Certificates will depend on,
among other things, the rate and timing of principal payments (including
prepayments, whether voluntary or by reason of defaults and liquidations) on the
Mortgage Loans, which may fluctuate significantly from time to time, and by
other factors set forth herein. The yield to maturity on the Class S
Certificates will be extremely sensitive to the rate and timing of principal
payments (including prepayments) on the Mortgage Loans. Investors should fully
consider the associated risks, including the risk that an extremely rapid rate
of principal payments on the Mortgage Loans could result in the failure by
investors in the Class S Certificates to fully recoup their initial investments.
See "MATURITY AND PREPAYMENT CONSIDERATIONS" and "YIELD CONSIDERATIONS" herein.
There is currently no secondary market for the Offered Certificates.
The Underwriters expect to make a secondary market in the Offered Certificates,
but have no obligation to do so. There can be no
S-2
<PAGE>
assurance that any secondary market for the Offered Certificates will develop
or, if it does develop, that it will continue.
As described herein, three separate "real estate mortgage investment
conduit" ("REMIC") elections will be made with respect to the Trust Fund for
federal income tax purposes (the REMICs formed thereby, "REMIC I," "REMIC II"
and REMIC III", respectively). As described herein and in the Prospectus, the
Offered Certificates will be treated as REMIC "regular interests". See "FEDERAL
INCOME TAX CONSIDERATIONS" herein and in the Prospectus.
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART
OF A SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE DEPOSITOR FROM TIME TO
TIME PURSUANT TO ITS PROSPECTUS DATED JULY 25, 1995, WHICH ACCOMPANIES THIS
PROSPECTUS SUPPLEMENT AND OF WHICH THIS PROSPECTUS SUPPLEMENT FORMS A PART. THE
PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT
CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND
THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND A PROSPECTUS. THIS 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.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Offered Certificates. This Prospectus Supplement
and the related Prospectus, which form a part of the Registration Statement,
omit certain information contained in such Registration Statement pursuant to
the Rules and Regulations of the Commission. The Registration Statement can be
inspected and copied at the Public Reference Room of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 and the Commission's regional offices at
Seven World Trade Center, Suite 1300, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such materials can be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a Web site at http://www.sec.gov containing reports, proxy
and information statements and other information regarding registrants,
including the Depositor, that file electronically with the Commission.
S-3
<PAGE>
No person has been authorized to give information or to make any representations
other than those contained in this Prospectus Supplement and the accompanying
Prospectus in connection with the offer made hereby, and, if given or made, such
information or representations must not be relied upon. This Prospectus
Supplement and the accompanying Prospectus do not constitute an offer to sell or
a solicitation of an offer to buy any securities other than the Certificates
offered hereby, nor an offer of the Offered Certificates in any state or
jurisdiction in which, or to any person to whom, such offer would be unlawful.
The delivery of this Prospectus Supplement and the accompanying Prospectus at
any time does not imply that information herein or therein is correct as of any
time subsequent to its date; however, if any material change occurs while this
Prospectus Supplement or the accompanying Prospectus is required by law to be
delivered, this Prospectus Supplement or the accompanying Prospectus will be
amended or supplemented accordingly.
TABLE OF CONTENTS
SUMMARY OF TERMS...........................................................S-6
RISK FACTORS..............................................................S-29
The Certificates.....................................................S-29
The Mortgage Assets..................................................S-31
DESCRIPTION OF THE CERTIFICATES...........................................S-35
General ............................................................S-35
Class Principal Balances and Class Notional Amounts..................S-36
Registration; Denominations..........................................S-37
Certificate Interest Rates...........................................S-37
Distributions........................................................S-39
Subordination; Allocation of Losses and Certain
Other Expenses and Shortfalls......................................S-44
Prepayment Interest Shortfalls and Compensating
Interest Payments..................................................S-44
Reports to Certificateholders; Available Information.................S-46
Example of Distributions.............................................S-48
Optional Termination.................................................S-49
Voting Rights; Lists of Certificateholders...........................S-49
The Trustee..........................................................S-49
The Custodial and Collection Accounts................................S-50
DESCRIPTION OF THE MORTGAGE POOL..........................................S-51
General .............................................................S-51
The FHA Loans.........................................................S-51
The GNMA Certificates.................................................S-52
Certain Terms and Conditions of the Mortgage Loans....................S-52
Additional Mortgage Loan Information..................................S-54
Sale and Assignment of the Mortgage Assets; Repurchases...............S-68
Representations and Warranties; Repurchases...........................S-69
Changes in Mortgage Pool Characteristics..............................S-71
Retained Yield........................................................S-71
GREYSTONE FUNDING CORPORATION.............................................S-72
DAIWA FINANCE CORP........................................................S-72
S-4
<PAGE>
FHA MORTGAGE INSURANCE PROGRAMS...........................................S-73
General .............................................................S-73
Insurance Claims and Benefits.........................................S-73
GNMA Mortgage-Backed Securities Program...............................S-85
SERVICING OF THE FHA LOANS................................................S-86
General .............................................................S-86
The Master Servicer...................................................S-87
Master Servicer Compensation and Payment of Expenses..................S-87
FHA Loan Modifications................................................S-87
Advances .............................................................S-88
Sale of Defaulted FHA Loans...........................................S-90
Sale of FHA Debentures................................................S-90
Sub-Servicers.........................................................S-90
Due-on-Sale and Due-on-Encumbrance Provisions.........................S-90
Maintenance of Hazard and Other Insurance.............................S-91
Maintenance of FHA Insurance; Collection Thereunder...................S-91
Resignation...........................................................S-93
Limitation on Liability...............................................S-93
Events of Default.....................................................S-94
Appointment of a Successor Master Servicer............................S-95
MATURITY AND PREPAYMENT CONSIDERATIONS....................................S-95
YIELD CONSIDERATIONS.....................................................S-102
General ............................................................S-102
Sensitivity of the Class S Certificates..............................S-103
LEGAL INVESTMENT.........................................................S-105
USE OF PROCEEDS..........................................................S-105
ERISA CONSIDERATIONS.....................................................S-105
FEDERAL INCOME TAX CONSIDERATIONS........................................S-107
PLAN OF DISTRIBUTION.....................................................S-109
LEGAL MATTERS............................................................S-110
CERTIFICATE RATING.......................................................S-110
INDEX OF PRINCIPAL TERMS.................................................S-111
S-5
<PAGE>
SUMMARY OF TERMS
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. Capitalized terms used and not otherwise defined
herein have the respective meanings assigned to them in the "Glossary" of the
Prospectus. An "Index of Principal Terms" is included at the end of this
Prospectus Supplement.
The Certificates.......... The Series 1996-FHA1 Commercial Mortgage Pass-Through
Certificates (the "Certificates") will consist of
ten classes (each, a "Class"): (i) the Class A-1,
Class A-2, Class A-3, Class A-4 and Class A-Z
Certificates (collectively, the "Class A
Certificates"); (ii) the Class S Certificates
(collectively, with the Class A Certificates, the
"Offered Certificates"); (iii) the Class B
Certificates (collectively, with the Offered
Certificates, the "Regular Interest Certificates");
and the Class R-I, Class R-II and Class R-III
Certificates (collectively, the "Residual Interest
Certificates" and, collectively with the Class B
Certificates, the "Non-Offered Certificates"). The
Certificates will evidence beneficial ownership
interests in a trust fund (the "Trust Fund") to be
created by the Depositor. The Certificates will be
issued, and the Trust Fund will be created, on or
about the Closing Date, pursuant to a pooling and
servicing agreement (the "Pooling and Servicing
Agreement"), to be dated as of the Cut-off Date,
among the Depositor, the Trustee, the Master
Servicer and each Seller. Upon creation, the Trust
Fund will consist primarily of a segregated pool
(the "Mortgage Pool") of (i) approximately
$188,800,560 of fixed-rate, fully-amortizing
mortgage loans (the "FHA Loans") insured, to the
extent and subject to the conditions described
herein, by the Federal Housing Administration (the
"FHA") of the United States Department of Housing
and Urban Development ("HUD") under certain
sections of the National Housing Act of 1934, as
amended (the "Housing Act"), and secured by liens
on multifamily rental housing developments
(collectively, "Multifamily Properties") or nursing
homes, intermediate care facilities, assisted
living facilities, board and care homes or other
nursing facilities (collectively, "Nursing
Facilities"), and (ii) approximately $77,709,904 of
securities (the "GNMA Certificates") guaranteed by
the Government National Mortgage Association
("GNMA") and backed by fixed-rate, level payment,
fully-amortizing mortgage loans (the "Underlying
Mortgage Loans"; and, collectively with the FHA
Loans, the "Mortgage Loans") that are likewise so
insured by the FHA and are secured by liens on
Multifamily Properties or Nursing Facilities. The
S-6
<PAGE>
FHA Loans and the GNMA Certificates, together with
any FHA Debentures (as defined herein) paid by the
FHA in satisfaction of an insurance claim in
respect of a defaulted FHA Loan, are
collectively referred to herein as the "Mortgage
Assets". As of the Cut-off Date, the Mortgage
Assets will have an aggregate outstanding principal
balance of approximately $266,510,464 (the "Initial
Pool Balance"), after deducting all payments of
principal due on the Mortgage Loans on or before
such date, whether or not received, and subject to
a permitted variance of plus or minus 5%.
Only the Offered Certificates are offered hereby.
Each Class of Offered Certificates will be issued
with the initial Class Principal Balance or Class
Notional Amount (each, as defined below), and will
accrue interest from time to time at the per annum
rate (the "Certificate Interest Rate"), set forth
or otherwise described on the cover page of this
Prospectus Supplement. The initial Class Principal
Balance or Class Notional Amount of any Class of
Offered Certificates is subject to a permitted
variance of plus or minus 5%, depending on the
actual Mortgage Assets delivered by the Sellers.
The Non-Offered Certificates have not been
registered under the Securities Act of 1933, as
amended, and are not offered hereby. The initial
Class Principal Balance of the Class B Certificates
will equal the excess of the Initial Pool Balance
over the aggregate of the initial Class Principal
Balances of the respective Classes of Class A
Certificates. The Certificate Interest Rate
applicable to the Class B Certificates will equal
6.500% per annum. The Residual Interest
Certificates will not have Class Principal Balances
or Class Notional Amounts and will not accrue
interest.
The Class A and Class B Certificates (collectively,
the "Sequential Pay Certificates") are the only
Certificates that have Class Principal Balances.
"Class Principal Balance" means, with respect to
any Class of Sequential Pay Certificates, as of any
date of determination, an amount equal to the
initial aggregate principal amount thereof, less
the amount of all distributions previously made
with respect to such Class of Certificates in
reduction of the Class Principal Balance thereof,
less all Realized Losses and Additional Trust Fund
Expenses (each, as defined herein), if any,
previously allocated to such Class of Certificates
in the manner described below, and plus, in the
case of the Class A-Z Certificates, the aggregate
of the Monthly Class
S-7
<PAGE>
A-Z Accrual Amounts (as defined herein) previously
added thereto. The Class S Certificates are the
only Certificates that have a Class Notional
Amount. "Class Notional Amount" means, with respect
to the Class S Certificates, as of any date of
determination, an amount equal to the then
aggregate of the Class Principal Balances of the
Sequential Pay Certificates.
See "DESCRIPTION OF THE CERTIFICATES" herein.
Registration;
Denominations .......... Except in certain limited circumstances, the
Offered Certificates will be issued only in
book-entry form through the facilities of The
Depository Trust Company ("DTC") in denominations
of: in the case of the Class A Certificates,
$10,000 initial principal balance and integral
multiples of $1,000 in excess thereof; and (ii) in
the case of the Class S Certificates, $100,000
initial notional amount and integral multiples of
$1,000 in excess thereof, except for one Class S
Certificate evidencing the sum of an authorized
denomination thereof and the remainder of the
initial notional amount of such Class of
Certificates. See "DESCRIPTION OF THE
CERTIFICATES--Registration; Denominations" herein
and "SPECIAL CONSIDERATIONS--Book-Entry
Registration" and "DESCRIPTION OF THE
SECURITIES--Book-Entry Registration" in the
Prospectus.
Depositor................. American Southwest Financial Securities Corporation,
an Arizona corporation. The principal executive
offices of the Depositor are located at 2390 East
Camelback Road, Suite 225, Phoenix, Arizona 85016
(Telephone No. (602) 381- 8960). None of the
Depositor, its parent, or any of their respective
affiliates has guaranteed or insured the payments
on the Mortgage Loans or the distributions on the
Certificates. The Depositor is referred to as the
Issuer in the Prospectus. See "THE ISSUER" in the
Prospectus.
Sellers................... With respect to the Greystone Mortgage Assets (as
defined herein), Greystone Funding Corporation, a
Virginia corporation ("Greystone Funding"). See
"GREYSTONE FUNDING CORPORATION" herein. With
respect to the Daiwa Mortgage Assets (as defined
herein), Daiwa Finance Corp., a New York
corporation ("Daiwa Finance"). See "DAIWA FINANCE
CORP." herein.
Master Servicer........... Greystone Servicing Corporation, Inc., a Georgia
corporation and an affiliate of Greystone Funding.
See "SERVICING OF THE FHA LOANS--The Master
Servicer" herein.
S-8
<PAGE>
Trustee................... LaSalle National Bank, a nationally chartered bank.
See "DESCRIPTION OF THE CERTIFICATES--The Trustee"
herein.
Cut-off Date.............. December 1, 1996.
Closing Date.............. On or about December 27, 1996.
Record Date............... The record date (the "Record Date") for each
distribution on the Offered Certificates will be
the last Business Day (as defined herein) of the
month immediately preceding the month in which such
distribution is to be made.
Distribution Date......... The 25th day of each month (unless such day is not
a Business Day, in which case distributions will be
made on the next succeeding Business Day),
commencing in January 1997.
Collection Period......... As to any Distribution Date, the period ending at
the close of business on the Determination Date for
such Distribution Date and commencing immediately
following the end of the prior such period (or, in
the case of the initial Collection Period,
commencing immediately following the Cut-off Date).
Determination Date........ As to each Distribution Date, the 20th day of the
month in which such Distribution Date occurs or, if
such 20th day is not a Business Day, then the next
succeeding Business Day.
Distributions of Interest
on the Offered
Certificates............ On each Distribution Date, to the extent of the
Available Distribution Amount (as defined herein)
for such date, the holders of the Class S
Certificates, the Class A-1 Certificates, the Class
A-2 Certificates, the Class A-3 Certificates, the
Class A-4 Certificates and, commencing on the
Accrual Termination Date, the Class A-Z
Certificates will be entitled to receive
distributions of interest, on a pro rata basis, in
an amount equal to all Accrued Certificate Interest
in respect of each such Class of Certificates for
such Distribution Date and, to the extent not
previously received, for all prior Distribution
Dates. See "DESCRIPTION OF THE
CERTIFICATES--Distributions --The Available
Distribution Amount" and "--Distributions
--Application of the Available Distribution Amount"
herein.
The"Accrued Certificate Interest" in respect of any
Class of Offered Certificates for any Distribution
Date will equal one month's interest (calculated on
the basis of a 360-day year consisting of twelve
30-day months) at the Certificate
S-9
<PAGE>
Interest Rate applicable to such Class of
Certificates for such Distribution Date, accrued on
the Class Principal Balance or Class Notional
Amount, as the case may be, of such Class of
Certificates outstanding immediately prior to such
Distribution Date. Until the Accrual Termination
Date, the Accrued Certificate Interest in respect
of the Class A-Z Certificates for each Distribution
Date will not be payable to the holders thereof
currently but rather will be added to the Class
Principal Balance of such Certificates. The amount
so added to the Class Principal Balance of the
Class A-Z Certificates on each Distribution Date on
or prior to the Accrual Termination Date is herein
referred to as the "Monthly Class A-Z Accrual
Amount". See "DESCRIPTION OF THE CERTIFICATES--
Distributions--Accrued Certificate Interest"
herein.
The"Accrual Termination Date" for the Class A-Z
Certificates (which, for purposes of the
Prospectus, are "Compound Interest Securities")
will be the earliest of: (i) the first Distribution
Date as of which the aggregate of the Class
Principal Balances of the Class A-1, Class A-2,
Class A-3 and Class A-4 Certificates has been
reduced to zero on or prior thereto; (ii) the Class
A Principal Distribution CrossOver Date; and (iii)
the final Distribution Date in connection with a
termination of the Trust Fund.
Distributions in Reduction
of the Class Principal
Balances of the Class A
Certificates............ On each Distribution Date, following all required
distributions of interest on the Offered
Certificates, the Trustee will apply the remaining
portion of the Available Distribution Amount for
such Distribution Date to make payments in
reduction of the respective Class Principal
Balances of the Class A-1 Certificates, the Class
A-2 Certificates, the Class A-3 Certificates, the
Class A-4 Certificates and the Class A-Z
Certificates, in that order, in each case up to an
amount equal to the lesser of (i) the remaining
Class Principal Balance of such Class of
Certificates and (ii) the remaining Principal
Distribution Amount for such Distribution Date;
provided that, notwithstanding the foregoing, on
and after the Class A Principal Distribution
Cross-Over Date, and in any event on the final
Distribution Date in connection with a termination
of the Trust Fund, such distributions shall be made
on a pro rata basis in accordance with the
respective remaining Class Principal Balances of
the Class A Certificates. See "DESCRIPTION OF THE
CERTIFICATES--Distributions--Application of the
Available Distribution Amount" herein.
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As more particularly described herein, the
"Principal Distribution Amount" for each
Distribution Date will generally equal the
aggregate of: (i) all payments and other
collections of principal received or advanced on
the Mortgage Assets that are available for
distribution on the Certificates on such
Distribution Date; and (ii) if such Distribution
Date occurs on or prior to the Accrual Termination
Date, the Monthly Class A-Z Accrual Amount for such
Distribution Date. See "DESCRIPTION OF THE
CERTIFICATES--Distributions--Principal Distribution
Amount" herein.
The"Class A Principal Distribution Cross-Over Date"
will be the first Distribution Date as of which the
Class Principal Balance of the Class B Certificates
has been reduced to zero prior thereto as a result
of the allocation of Realized Losses and/or
Additional Trust Fund Expenses as described herein.
Distributions of
Prepayment Premiums..... On each Distribution Date, the Trustee will
distribute, separate from distributions made out of
the Available Distribution Amount, all Prepayment
Premiums (as defined herein) actually collected on
the Mortgage Assets during the related Collection
Period as follows: (i) 75% of such Prepayment
Premiums will be distributable in respect of the
Class S Certificates; and (ii) 25% of such
Prepayment Premiums will be distributable in
respect of the Class(es) of Sequential Pay
Certificates entitled to distributions in reduction
of its (their) Class Principal Balance(s) on such
Distribution Date. See "DESCRIPTION OF THE
CERTIFICATES--Distributions--Distributions of
Prepayment Premiums" herein.
Allocation of
Realized Losses and
Certain Other Expenses
and Shortfalls............ If, following the distributions to be made in
respect of the Certificates on any Distribution
Date, the aggregate of the Stated Principal
Balances (as defined herein) of the Mortgage Assets
that will be outstanding immediately following such
Distribution Date is less than the then aggregate
of the Class Principal Balances of the respective
Classes of Sequential Pay Certificates, the Class
Principal Balance of the Class B Certificates will
be reduced until such deficit (or such Class
Principal Balance) is reduced to zero (whichever
occurs first). If any portion of such deficit
remains at such time as the Class Principal Balance
of the Class B Certificates is reduced to zero,
then the respective
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Class Principal Balances of the remaining Classes
of Sequential Pay Certificates shall be reduced,
pro rata in accordance with the relative sizes of
the remaining Class Principal Balances of such
Classes of Certificates, until such deficit (or
each such Class Principal Balance) is reduced to
zero. Any such deficit may be the result of a loss
(a "Realized Loss"), the Master Servicer's failure
to collect all amounts due and owing in respect of
a defaulted FHA Loan, including, in connection with
the assignment of any defaulted FHA Loan to the
FHA, by reason of the payment of the required
Assignment Fee (as defined herein) or by reason of
the FHA Insurance Benefits (as defined herein) not
covering certain items as hereinafter described,
including certain interest shortfalls arising out
of the assignment of a defaulted FHA Loan to the
FHA. Any such deficit may also be the result of the
Trust Fund incurring certain expenses ("Additional
Trust Fund Expenses"), including interest payable
to the Master Servicer or the Trustee, subject to
the limitations described herein, in respect of any
Monthly Advances (as defined herein) required to be
made thereby. The foregoing reductions in the Class
Principal Balances of the Sequential Pay
Certificates will be deemed to constitute an
allocation of any such Realized Losses and
Additional Trust Fund Expenses. See "DESCRIPTION OF
THE CERTIFICATES-- Subordination; Allocation of
Losses and Certain Other Expenses and Shortfalls"
herein.
Prepayment Interest
Shortfalls and
Compensating Interest
Payments.................. A "Prepayment Interest Shortfall" is a shortfall in
the collection of a full month's interest (net of
related servicing fees) on any FHA Loan by reason
of a full or partial voluntary principal prepayment
made by the related borrower during any Collection
Period prior to the scheduled due date for such FHA
Loan in such Collection Period. With respect to
each Distribution Date, the Master Servicer will be
obligated to make a nonreimbursable payment (a
"Compensating Interest Payment"), up to the amount
of any Prepayment Interest Shortfalls incurred
during the related Collection Period.
Purchases of defaulted FHA Loans by the Majority
Class B Certificateholder and purchases of FHA
Debentures by the Majority Class B
Certificateholder, the Master Servicer or the
Trustee as provided herein will not result in
"Prepayment Interest Shortfalls" because the
Purchase Price (as defined herein) of any such
defaulted FHA Loan or
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FHA Debenture will include unpaid interest thereon
to the later of (i) the date of purchase and (ii)
the Due Date of such defaulted FHA Loan or, in the
case of an FHA Debenture, the Due Date of the
related Assigned FHA Loan in the Collection Period
of purchase. See "SERVICING OF THE FHA LOANS--Sale
of Defaulted FHA Loans" and "--Sale of FHA
Debentures" herein.
Optional Termination...... The Master Servicer will have the option to
purchase, in whole but not in part, the Mortgage
Assets remaining in the Trust Fund, and thereby
effect a termination of the Trust Fund and early
retirement of the then outstanding Certificates, on
any date on which the aggregate Stated Principal
Balance of the Mortgage Assets at the time of the
repurchase is less than 5% of the Initial Pool
Balance. See "DESCRIPTION OF THE
CERTIFICATES--Optional Termination" herein.
The Mortgage Pool......... The Mortgage Pool will initially consist of 61 FHA
Loans with an aggregate Cut-off Date Balance of
approximately $188,800,560 and 20 GNMA Certificates
with an aggregate Cut-off Date Balance of
approximately $77,709,904. Mortgage Assets
representing 51.65% of the Initial Pool Balance are
currently held, directly or indirectly, by
Greystone Funding (such Mortgage Assets, the
"Greystone Mortgage Assets"), and Mortgage Assets
representing 48.35% of the Initial Pool Balance are
currently held, directly or indirectly, by Daiwa
Finance or Daiwa Securities (such Mortgage Assets,
the "Daiwa Mortgage Assets"). See "THE MORTGAGE
POOL--Sale and Assignment of the Mortgage Assets;
Repurchases" herein. On or prior to the Closing
Date, at the direction of the Depositor, Greystone
Funding and Daiwa Finance will transfer or cause
the transfer of the Greystone Mortgage Assets and
Daiwa Mortgage Assets, respectively, to the Trustee
for the benefit of the holders of the Certificates
(the "Certificateholders"). The aggregate Cutoff
Date Balance of all such Mortgage Assets will equal
approximately $266,510,464 (the "Initial Pool
Balance"), subject to a permitted variance of plus
or minus 5%.
The"Cut-off Date Balance" of any FHA Loan is the
unpaid principal balance thereof as of the Cut-off
Date, after application of the payment of principal
due thereon on such date, whether or not received
from the borrower. The "Cutoff Date Balance" of any
GNMA Certificate is the unpaid principal balance
thereof as of the Cut-off Date, after application
of the payment of principal due on the related
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Underlying Mortgage Loan on such date, whether or
not received from the borrower. All numerical
information provided herein with respect to the
Mortgage Loans and the GNMA Certificates is
provided on an approximate basis. All weighted
average information provided herein with respect to
the Mortgage Loans and the GNMA Certificates
reflects weighing based on the Cut-off Date
Balances thereof or, in the case of an Underlying
Mortgage Loan, of the related GNMA Certificate. See
"DESCRIPTION OF THE MORTGAGE POOL" herein.
A. The FHA Loans.......... Each FHA Loan is evidenced by a promissory note or
other evidence of indebtedness (a "Mortgage Note")
and is secured by a mortgage, deed of trust or
other similar security instrument (a "Mortgage")
creating a lien on a Multifamily Property or a
Nursing Facility (as to such FHA Loan, the
"Mortgaged Property"). Thirty-three FHA Loans,
representing 57.9% of the FHA Loans by aggregate
Cut-off Date Balance, are secured by liens on
Multifamily Properties; the remaining 28 FHA Loans,
representing 42.1% of the FHA Loans by aggregate
Cut-off Date Balance, are secured by liens on
Nursing Facilities. The Mortgages create either
first mortgage liens (96.6% of the FHA Loans by
aggregate Cut-off Date Balance) or second mortgage
liens (3.4% of the FHA Loans by aggregate Cut-off
Date Balance) on the related Mortgaged Properties.
Two FHA Loans are secured by a first mortgage lien
and a second mortgage lien, respectively, on the
same Mortgaged Property. Debt service coverage
ratios are presented herein with respect to such
pair of FHA Loans as if it was a single Mortgage
Loan.
As of the Cut-off Date, the FHA Loans had the
following additional characteristics:
(i) Cut-off Date Balances ranging from $174,827
to $11,238,871, and an average Cut-off Date
Balance of $3,095,091;
(ii) fixed interest rates (each, a "Mortgage
Rate") ranging from 7.500% per annum to 10.500%
per annum, and a weighted average Mortgage Rate
of 8.763% per annum;
(iii) Net Asset Rates (as defined below) ranging
from 7.380% per annum to 10.330% per annum, and
a weighted average Net Asset Rate of 8.537% per
annum;
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(iv) Debenture Rates (as defined herein) ranging
from 6.500% per annum to 11.625% per annum, and
a weighted average Debenture Rate of 7.979% per
annum;
(v) remaining terms to stated maturity ranging
from 130 months to 475 months, and a weighted
average remaining term to stated maturity of 383
months; and
(vi) as to the 51 FHA Loans as to which the
related Mortgaged Property operating information
is available, Cut-off Date Debt Service Coverage
Ratios (as defined in "DESCRIPTION OF THE
MORTGAGE POOL --Additional Mortgage Loan
Information" herein) ranging from 0.44x to
3.12x, and a weighted average Cut-off Date Debt
Service Coverage Ratio of 1.55x.
With respect to each FHA Loan, "Net Asset Rate"
means a rate per annum equal to the related
Mortgage Rate minus the sum of the applicable
Servicing Fee Rate (as defined herein) and the
Trustee Fee Rate (as defined herein).
As of the Cut-off Date, no FHA Loan is 30 days or
more delinquent in respect of a scheduled monthly
payment of principal and interest (a "Monthly
Payment").
See "DESCRIPTION OF THE MORTGAGE POOL--The FHA
Loans" herein.
B. The GNMA Certificates.. Each GNMA Certificate will be backed by a single
Underlying Mortgage Loan secured by a lien on a
Multifamily Property. Seventeen Underlying Mortgage
Loans, representing 75.0% of the Underlying
Mortgage Loans by aggregate Cut-off Date Balance,
are secured by liens on Multifamily Properties; the
remaining three Underlying Mortgage Loans,
representing 25.0% of the Underlying Mortgage Loans
by Aggregate Cut- off Date Balance, are secured by
liens on Nursing Facilities. In all but two cases,
each GNMA Certificate evidences a 100% interest in
the related Underlying Mortgage Loan. However, two
GNMA Certificates, representing 7.51% of the
Initial Pool Balance, evidence only a partial pro
rata interest in the related Underlying Mortgage
Loan.
As of the Cut-off Date, the GNMA Certificates had
the following additional characteristics:
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<PAGE>
(i) Cut-off Date Balances ranging from $623,332
to $12,441,203, and an average Cut-off Date
Balance of $3,885,495;
(ii) fixed pass-through rates (each, a "GNMA
Certificate Rate") ranging from 7.375% per annum
to 8.700% per annum, and a weighted average GNMA
Certificate Rate of 7.925% per annum; and
(iii) Net Asset Rates (as defined below) ranging
from 7.355% per annum to 8.680% per annum, and a
weighted average Net Asset Rate of 7.905% per
annum.
With respect to each GNMA Certificate, "Net Asset
Rate" means a rate per annum equal to the related
GNMA Certificate Rate minus the Trustee Fee Rate.
As of the Cut-off Date, the Underlying Mortgage
Loans had the following characteristics:
(i)Mortgage Rates ranging from 7.750% per annum
to 9.000% per annum, and a weighted average
Mortgage Rate of 8.204% per annum;
(ii) remaining terms to stated maturity ranging
from 300 months to 479 months, and a weighted
average remaining term to stated maturity of 398
months; and
(iii) as to the 14 Underlying Mortgage Loans as
to which the related Mortgaged Property
operating information is available, Cut-off Date
Debt Service Coverage Ratios (as defined in
"DESCRIPTION OF THE MORTGAGE POOL--Additional
Mortgage Loan Information" herein) ranging from
1.17x to 2.00x, and a weighted average Cut-off
Date Debt Service Coverage Ratio of 1.38x.
As of the Cut-off Date, no Underlying Mortgage Loan
is 30 days or more delinquent in respect of a
Monthly Payment.
See "DESCRIPTION OF THE MORTGAGE POOL--The GNMA
Certificates" herein.
C. The Mortgage Assets.... As of the Cut-off Date, the Mortgage Assets (or, in
the case of item (iv) below, the Mortgage Loans) in
the aggregate had the following characteristics:
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(i) Cut-off Date Balances ranging from $174,827
to $12,441,203, and an average Cut-off Date
Balance of $3,290,253;
(ii) fixed Mortgage Rates ranging from 7.500%
per annum to 10.500% per annum, and a weighted
average Mortgage Rate of 8.600% per annum;
(iii) Net Asset Rates ranging from 7.355% per
annum to 10.330% per annum, and a weighted
average Net Asset Rate of 8.352% per annum; and
(iv) remaining terms to stated maturity ranging
from 130 months to 479 months, and a weighted
average remaining term to stated maturity of 387
months.
Prepayment Provisions
of the Mortgage Loans... As of the Cut-off Date, all of the Mortgage Loans
either prohibited voluntary principal prepayments
(the period of any such prohibition, a "Lockout
Period") or required that any voluntary principal
prepayment be accompanied by a prepayment premium,
penalty or fee (a "Prepayment Premium") calculated
as described herein. Notwithstanding the foregoing,
certain of the Mortgage Loans permit the borrower
to prepay up to 15% of the original principal
amount of the loan in any one calendar year without
any Prepayment Premium.
As of the Cut-off Date, the Mortgage Loans provided
for the prepayment restrictions described below:
Percentage of
Type of Number of Initial Pool
Prepayment Provision(1) Mortgage Loans Balance
----------------------- -------------- ------------
L, PP 47 48.6%
L 24 30.9%
PP 10 20.5%
---------------------
(1) L, PP = Voluntary prepayments in full are
prohibited or locked-out for a period of time and
are followed by a period in which voluntary
prepayments in full must be accompanied by a
Prepayment Premium.
L = Voluntary prepayments in full are prohibited or
locked-out for a period of time.
PP = Voluntary prepayments in full must be
accompanied by a Prepayment Premium for a period of
time.
For more detailed presentation of the prepayment
restrictions imposed by each Mortgage Loan, see the
table captioned "Maturity and Prepayment Terms of
the Mortgage Loans"
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<PAGE>
under the heading "DESCRIPTION OF THE MORTGAGE
POOL--Additional Mortgage Loan Information" herein.
For a discussion regarding limitations on the
enforceability of lockout provisions and the
enforceability or collectability of Prepayment
Premiums on the Mortgage Loans, see "RISK
FACTORS--The Mortgage Assets-- Prepayment Premiums"
herein.
FHA Insurance and GNMA
Guaranty................ The Mortgage Loans are covered by insurance provided
by the FHA ("FHA Insurance") under Sections 207,
220, 221(d)(4), 223(a)(7), 223(d), 223(e), 223(f),
232, 241 and 241(f) of the Housing Act. FHA
Insurance is backed by the full faith and credit of
the United States of America. The insurance
benefits payable by the FHA thereunder in respect
of any defaulted Mortgage Loan are herein referred
to as "FHA Insurance Benefits". See "FHA MORTGAGE
INSURANCE PROGRAMS" herein. Certain of the Mortgage
Loans were originated under coinsurance programs of
the FHA.
Each GNMA Certificate is guaranteed as to full and
timely payment of principal and interest thereon by
GNMA, which guarantee is in turn also backed by the
full faith and credit of the United States of
America. Although each Underlying Mortgage Loan is
insured by the FHA, GNMA's guarantee of principal
and interest on the GNMA Certificates is not
conditioned on the amount or nature of the FHA
Insurance Benefits that may be received by GNMA in
respect of the Underlying Mortgage Loans. However,
as described under "GNMA MORTGAGE-BACKED SECURITIES
PROGRAM" herein, the timing of payment of
unscheduled principal on the GNMA Certificates will
depend on the timing of receipt of FHA Insurance
Benefits on the Underlying Mortgage Loans.
As described herein, the Trustee will (at the
direction of the Master Servicer) file claims in
respect of defaulted FHA Loans with the FHA, and
the Master Servicer will administer such claims and
monitor the FHA Insurance in respect of the FHA
Loans, all in accordance with the Pooling and
Servicing Agreement. Neither the Trustee nor the
Master Servicer (in their respective capacities as
such) will have any such responsibilities with
respect to the Underlying Mortgage Loans.
If a borrower fails to make any payment due on an
FHA Loan or to perform any other covenant of an FHA
Loan, and such failure continues for a period of 30
days (the date of
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<PAGE>
such failure being herein referred to as the "Date
of Default"), then the Trustee will be required to
promptly notify the FHA and the Majority Class B
Certificateholder of the default and (unless the
defaulted FHA Loan is purchased by the Majority
Class B Certificateholder as described below)
within 45 days after the expiration of the 30-day
grace period (or such other period as may be
permitted or required by the FHA), to notify the
FHA in accordance with the instructions of the
Master Servicer, of its intention to file an
insurance claim in respect of the defaulted FHA
Loan and of its intention to assign such loan to
the Secretary of HUD (the "Secretary"). In
connection with any such assignment, an amount (the
"Assignment Fee") equal to 1% of the unpaid
principal balance of the defaulted FHA Loan as of
the Date of Default will be deducted from the FHA
Insurance Benefits payable under the claim. The FHA
will waive the Assignment Fee with respect to a
partial payment of a claim. See "FHA MORTGAGE
INSURANCE PROGRAMS--Insurance Claims and Benefits",
"--Partial Payment of a Claim", and "SERVICING OF
THE FHA LOANS" herein.
The amount of FHA Insurance Benefits payable to the
Trustee in connection with the assignment of any
defaulted FHA Loan to the Secretary (whereupon such
loan will become an "Assigned FHA Loan") will
generally equal (a) the sum of (i) the unpaid
principal amount of the FHA Loan, computed as of
the Date of Default, (ii) certain eligible payments
(such as taxes, insurance, special assessments and
water rates) made by the Master Servicer and (iii)
an allowance for reasonable payments made by the
Master Servicer, with the approval of the FHA, for
the completion and preservation of the related
Mortgaged Property, less (b) the sum of (i) amounts
realized by the Trust Fund as income from the
related Mortgaged Property after the Date of
Default, (ii) any other amounts received by the
Trust Fund on account of the FHA Loan after the
Date of Default, (iii) amounts held in escrow by
the Master Servicer for the account of the borrower
and (iv) the Assignment Fee. However, see "FHA
MORTGAGE INSURANCE PROGRAMS--Insurance Claims and
Benefits--Partial Payment of a Claim" herein for a
discussion of the partial payment of FHA insurance
claims under certain limited circumstances. FHA
Insurance Benefits are payable by the FHA either in
cash, in debentures issued by the FHA ("FHA
Debentures") or in a combination of both, depending
on the section of the Housing Act under which the
FHA Loan is insured.
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<PAGE>
As part of the FHA Insurance Benefits described
above, the Trustee will be entitled to interest on
the FHA Insurance Benefits at the applicable
Debenture Rate (as defined below) from the Date of
Default to the date of payment of such FHA
Insurance Benefits (unless certain filing and
notice requirements are not met in a timely
fashion), exclusive of any portion of such interest
constituting Retained Yield (as defined below)
payable to the Seller of the Assigned FHA Loan. As
described herein, if FHA Insurance Benefits are
paid in FHA Debentures, the Trust Fund will
continue to receive semiannual payments of interest
on such FHA Debentures at the applicable Debenture
Rate, exclusive of any portion of such interest
constituting Retained Yield payable to the Seller
of the Assigned FHA Loan, until such FHA Debentures
mature, are redeemed by the FHA or, as described
below, are purchased out of the Trust Fund.
The FHA Insurance Benefits will not cover: (i) one
month's interest on the unpaid principal balance of
the Assigned FHA Loan (because the interest
component of such benefits is calculated from the
Date of Default, and interest on the FHA Loans is
paid in arrears), (ii) interest on any amounts due
under the Assigned FHA Loan to the Trust Fund but
not included in the FHA Insurance Benefits and
(iii) certain expenses incurred in connection with
the assignment process. In addition, FHA Insurance
Benefits may be reduced if the FHA determines that
an FHA Loan has not been serviced in accordance
with the applicable FHA Regulations. See
"DESCRIPTION OF THE CERTIFICATES--Subordination;
Allocation of Losses and Certain Other Expenses and
Shortfalls" herein.
FHA Debentures are 20-year, fixed-rate obligations
of the FHA, pay interest on each January 1 and July
1 and principal at maturity, and are redeemable at
the option of the FHA, as described herein. FHA
Debentures are issued in respect of an FHA Loan as
of the Date of Default. The principal amount of any
FHA Debenture is equal to the amount of the FHA
Insurance Benefits payable in respect of the
Assigned FHA Loan, and FHA Debentures bear interest
from the Date of Default at the applicable
Debenture Rate. Delivery of an FHA Debenture will
occur after the defaulted FHA Loan is assigned as
described herein. The amount of interest which
accrues at the Debenture Rate on an FHA Debenture
from the Date of Default to the date the FHA
Debenture is delivered will be paid in cash. See
"FHA MORTGAGE INSURANCE PROGRAMS--Insurance Claims
and Benefits--FHA Debentures" herein.
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<PAGE>
The"Debenture Rate" applicable to any FHA Debenture
is the rate set by the FHA and in effect as of the
date that (i) the commitment to insure the FHA Loan
was issued or (ii) the FHA Loan was initially
endorsed for insurance by the FHA, whichever rate
is higher. The Debenture Rate corresponding to an
FHA Loan may be higher or lower than the related
Mortgage Rate.
Upon receipt, FHA Debentures delivered by the FHA
as part of the FHA Insurance Benefits in respect of
any Assigned FHA Loan will constitute "Mortgage
Assets" for purposes hereof, and the "Net Debenture
Rate" for any FHA Debenture will equal the related
Debenture Rate minus the sum of the Trustee Fee
Rate and any applicable Retained Yield Rate (as
defined below) (Servicing Fees (as defined herein)
are not payable in respect of FHA Debentures). For
purposes of calculating the Certificate Interest
Rate applicable to the Class S Certificates from
time to time, the "Net Asset Rate" for any FHA
Debenture will equal the Net Asset Rate for the
related Assigned FHA Loan. Accordingly, the Net
Asset Rate for any FHA Debenture may be higher or
lower than the related Net Debenture Rate. If the
Net Asset Rate for any FHA Loan is higher than the
related Net Debenture Rate, the aggregate interest
accruing in respect of the FHA Loans and GNMA
Certificates at their respective Net Asset Rates
and the FHA Debentures at their respective Net
Debenture Rates will be less than the aggregate
interest accruing in respect of the Regular
Interest Certificates (other than the Class S
Certificates) thereby resulting in a Realized Loss.
See "DESCRIPTION OF THE CERTIFICATES--
Subordination; Allocation of Losses and Certain
Other Expenses and Shortfalls" herein.
Sale of Defaulted FHA
Loans................... If a borrower fails to make any payment due on an
FHA Loan or to perform any other covenant of an FHA
Loan, and such failure continues for a period of 30
days, then any holder or combination of holders of
Certificates representing a majority percentage
interest in the Class B Certificates (such holder
or a combination of holders collectively, the
"Majority Class B Certificateholder") will be
entitled to purchase such defaulted FHA Loan at a
price generally equal to the sum of (a) 100% of the
unpaid principal balance of such FHA Loan on the
date of purchase, plus (b) all accrued and unpaid
interest on such FHA Loan at the related Mortgage
Rate to the later of (i) the date of purchase and
(ii) the scheduled due date for such FHA Loan in
the Collection Period of purchase, plus (c)
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<PAGE>
certain reimbursable servicing expenses. See
"SERVICING OF THE FHA LOANS--Sale of Defaulted FHA
Loans" herein.
Sale of FHA Debentures.... If the Trustee receives an FHA Debenture as part of
the FHA Insurance Benefits in respect of any
Assigned FHA Loan, the Majority Class B
Certificateholder, if any, will be entitled to
purchase such FHA Debenture (including any related
Retained Yield) at a price equal to the sum of (a)
100% of the unpaid principal balance of such FHA
Debenture on the date of such purchase, plus (b)
all accrued and unpaid interest on such FHA
Debenture at the related Debenture Rate to the
later of (i) the date of purchase and (ii) the
scheduled due date for the related Assigned FHA
Loan in the Collection Period of purchase. If no
holder of Class B Certificates purchases the FHA
Debentures, the Master Servicer will be required to
purchase the FHA Debentures at such price. If the
Master Servicer fails to so purchase the FHA
Debentures, the Trustee will then be required to
purchase such FHA Debentures at such price. See
"SERVICING OF THE FHA LOANS--Sale of FHA
Debentures" herein.
Retained Yield............ If and to the extent that the Debenture Rate
applicable to any Assigned FHA Loan is higher than
the related Mortgage Rate (such difference, the
"Retained Yield Rate"), the related Seller of such
Assigned FHA Loan will be entitled to receive that
portion of any and all payments and other
collections received after the Date of Default on
or in respect of such FHA Loan (or on or in respect
of any FHA Debentures paid as part of the FHA
Insurance Benefits in respect thereof) that
represents interest at the related Retained Yield
Rate (such amount, the "Retained Yield") until
purchase of the related FHA Debenture. The related
Debenture Rate for 6 FHA Loans, representing
approximately 13.16% of the aggregate Cut-off Date
Balance of the FHA Loans, is higher than the
related Mortgage Rate and, accordingly, such loans
are being transferred to the Trust Fund subject to
the related Seller's right to receive any related
Retained Yield collected with respect thereto in
the event of any default thereunder and any
subsequent assignment to the Secretary. The
Retained Yield Rates for such FHA Loans range from
0.075% per annum to 4.125% per annum. As of the
Cut-off Date, such FHA Loans had a weighted average
Retained Yield Rate (based on the respective
Cut-off Date Balances thereof) of approximately
2.244% per annum. See "DESCRIPTION OF THE MORTGAGE
POOL--Retained Yield" herein.
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<PAGE>
Servicing Fees............ No Servicing Fee will be payable in respect of the
GNMA Certificates or any FHA Debentures. The Master
Servicer will be entitled to receive each month a
fee (the "Servicing Fee") equal to one month's
interest (calculated on the basis of a 360-day year
consisting of twelve 30-day months) at the related
Servicing Fee Rate accrued on the Stated Principal
Balance of each FHA Loan as of the commencement of
such month, as compensation for servicing such FHA
Loan. The "Servicing Fee Rate" for each FHA Loan
will be at least 0.100% per annum and not more than
0.800% per annum (with a weighted average, based on
their respective Cut-off Date Balances, of
approximately 0.206% per annum). See "SERVICING OF
THE FHA LOANS--Master Servicer Compensation and
Payment of Expenses" herein.
Trustee Fee............... The Trustee will be entitled to receive each month
a fee (the "Trustee Fee") equal to one month's
interest (calculated on the basis of a 360-day year
consisting of twelve 30-day months) at 0.02% per
annum (the "Trustee Fee Rate") on the aggregate
Stated Principal Balance of all the Mortgage Assets
as of the commencement of such month, as
compensation for its duties in respect of the Trust
Fund. See "DESCRIPTION OF THE CERTIFICATES--The
Trustee" herein.
Net Asset Rate............ With respect to each FHA Loan, "Net Asset Rate"
means a rate per annum equal to the related
Mortgage Rate minus the sum of the applicable
Servicing Fee Rate and the Trustee Fee Rate. With
respect to each GNMA Certificate, "Net Asset Rate"
means a rate per annum equal to the related GNMA
Certificate Rate (which equals the Mortgage Rate on
the Underlying Mortgage Loan minus the sum of the
per annum rates applicable to the related
underlying servicing and GNMA guaranty fees, which
rates in the aggregate will be at least 0.25% per
annum and not more than 0.50% per annum, with a
weighted average, based on their respective Cut-off
Date Balances, of approximately 0.28% per annum)
minus the Trustee Fee Rate.
Advances.................. The Master Servicer will be obligated to make
advances (each, an "Advance") of delinquent
interest and/or principal on the FHA Loans and
certain other interest amounts described herein in
respect of any FHA Debentures (a "Monthly Advance")
and to cover certain servicing expenses (a
"Servicing Advance") to the extent, under the
circumstances and subject to the limitations
described
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herein. In general, the Trustee will be obligated
to make any Monthly Advance that the Master
Servicer is required but fails to make.
Subject to the limitations described herein, each
Advance will bear interest on the amount thereof
for the period during which it is outstanding, such
interest to accrue and be payable as described
herein. See "SERVICING OF THE FHA LOANS--Advances"
herein.
No person will be obligated to make any Advances
with respect to the GNMA Certificates. However,
GNMA guarantees the full and timely payment of
principal and interest due on each GNMA
Certificate. See "GNMA MORTGAGE-BACKED SECURITIES
PROGRAM" herein.
Certain Investment
Considerations............ The yield to maturity of a Class A Certificate
purchased at a discount or premium will be affected
by the rate of payments and other collections of
principal on or in respect of the Mortgage Assets
and the allocation thereof (along with, in the case
of a Class A-1, Class A-2, Class A-3 or Class A-4
Certificate, the Monthly Class A-Z Accrual Amount)
to reduce the principal balance of such
Certificate. An investor should consider, in the
case of any such Certificate purchased at a
discount, the risk that a slower than anticipated
rate of payments and other collections of principal
on or in respect of the Mortgage Assets could
result in a lower than anticipated yield and, in
the case of any such Certificate purchased at a
premium, the risk that a faster than anticipated
rate of payments and other collections of principal
on or in respect of the Mortgage Assets could
result in a lower than anticipated yield.
Prepayment Premiums, even if collected and
distributable on a Class of Certificates, may not
be sufficient to offset any loss in yield on such
Class of Certificates attributable to prepayments
on the Mortgage Assets. In addition, the yield on
Classes of Sequential Pay Certificates that do not
receive a distribution of any particular principal
prepayment (and, accordingly, would not be entitled
to receive any portion of the related Prepayment
Premium) may be affected by such principal
prepayment in that the weighted average lives of
one or more such Classes of Sequential Pay
Certificates may be shortened by the distribution
of such principal prepayment in respect of another
Class of Sequential Pay Certificates.
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<PAGE>
The Class A Certificates are subject to various
priorities for payment of principal as described
herein. The timing of distributions in reduction of
the Class Principal Balance with respect to any
particular Class A Certificate subject to
sequential allocations of principal is highly
uncertain and may be significantly earlier or later
than the date that may be desired by such
Certificateholder. In addition, because all Accrued
Certificate Interest in respect of the Class A-Z
Certificates for each Distribution Date prior to
the Accrual Termination Date will be added to the
Class Principal Balance thereof instead of being
paid thereon on a current basis (with the
corresponding Monthly Class A-Z Accrual Amount
being added to the Principal Distribution Amount
payable on the other Classes of Class A
Certificates on each such Distribution Date), the
weighted average life of the Class A-Z Certificates
will be longer, and the weighted average lives of
the other Classes of Class A Certificates will be
shorter, than if such Accrued Certificate Interest
were being paid currently to the holders of the
Class A-Z Certificates and there was no Monthly
Class A-Z Accrual Amount being included in the
Principal Distribution Amount.
Furthermore, the yield to maturity on a Class S
Certificate will be extremely sensitive to the rate
and timing of payments and other collections of
principal on or in respect of the Mortgage Assets
(in particular as affected by prepayments, defaults
and liquidations on the Mortgage Loans), and an
investor in the Class S Certificates should fully
consider the associated risks, including the risk
that an extremely rapid rate of payments and other
collections of principal on or in respect of the
Mortgage Assets could result in the failure of such
investor to fully recoup its initial investment.
The yield on the Class S Certificates will also be
materially and adversely affected if the Mortgage
Assets with higher Net Asset Rates prepay faster
than the Mortgage Assets with lower Net Asset
Rates, because the weighted average Net Asset Rate
(and, accordingly, the Certificate Interest Rate
for the Class S Certificates) will be reduced.
See"RISK FACTORS--Certain Yield and Maturity
Considerations", "MATURITY AND PREPAYMENT
CONSIDERATIONS" and "YIELD CONSIDERATIONS" herein.
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<PAGE>
In addition, insofar as an investor's initial
investment in any Offered Certificate is returned
in the form of payments of principal thereon, there
can be no assurance that such amounts can be
reinvested in comparable alternative investments
with comparable yields. Investors in the Offered
Certificates should consider that the rate of
prepayments on the Mortgage Loans is likely to be
inversely related to the level of prevailing market
interest rates (and, presumably, to the yields on
comparable alternative investments).
Use of Proceeds........... The Depositor will use substantially all of the net
proceeds from the sale of the Certificates to
effect the purchase of the Mortgage Assets by the
Trust Fund from the Sellers and to pay certain
expenses in connection with the issuance of the
Certificates. See "USE OF PROCEEDS" herein.
Federal Income
Tax Considerations...... Three separate "real estate mortgage investment
conduit" ("REMIC") elections will be made with
respect to the Trust for federal income tax
purposes. The assets of "REMIC I" will consist of
the Mortgage Assets, the FHA Insurance in respect
of the FHA Loans, any funds or assets (other than
Retained Yield) deposited in the Collection Account
or the Custodial Account (each, as defined herein),
any hazard or other insurance policies with respect
to the FHA Loans and any proceeds of the foregoing.
The assets of "REMIC II" will consist of the
separate non-certificated regular interests in
REMIC I, and the assets of "REMIC III" will consist
of the separate non-certificated "regular
interests" in REMIC II. The Regular Interest
Certificates will evidence "regular interests" in,
and generally will be treated as debt obligations
of, REMIC III.
The Class S Certificates and the Class A-Z
Certificates will, and the other Classes of Offered
Certificates 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 for purposes of
computing the accrual of original issue discount,
market discount and premium, if any, for federal
income tax purposes will be that the Mortgage Loans
prepay in accordance with the Modeling Assumptions
at a CPR of 40%, beginning in the first month in
which each Mortgage Loan's applicable prepayment
lockout period and Prepayment Premium penalty
period have expired. However, no representation is
made that the Mortgage Loans will so prepay at that
rate or at any other rate.
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<PAGE>
If the method for computing original issue discount
described in the Prospectus results in a negative
amount for any period, a Certificateholder will be
permitted to offset such amount only against the
future original issue discount (if any) from such
Certificate. See "FEDERAL INCOME TAX
CONSIDERATIONS--Taxation of Regular Interest
Securities--Original Issue Discount" in the
Prospectus.
For further information regarding the federal
income tax consequences of investing in the Offered
Certificates, see "FEDERAL INCOME TAX
CONSIDERATIONS" herein and in the Prospectus.
Legal Investment.......... The Offered Certificates will not constitute
"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984.
As a result, the appropriate characterization of
the Offered Certificates under various legal
investment restrictions, and thus the ability of
investors subject to these restrictions to purchase
the Offered Certificates of any Class, may be
subject to significant interpretative
uncertainties. In addition, institutions whose
investment activities are subject to review by
federal or state regulatory authorities may be or
may become subject to restrictions on the
investment by such institutions in certain forms of
mortgage backed securities. Investors should
consult their own legal advisors to determine the
extent to which the Offered Certificates may be
purchased by such investors. See "LEGAL INVESTMENT"
herein and 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
Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") an individual exemption, Prohibited
Transaction Exemption ("PTE") 90-83, 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 Sections 4975(a)
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<PAGE>
and (b) of the Code transactions relating to the
purchase, sale and holding of pass-through
certificates underwritten by DLJ and the servicing
and operation of related asset pools, provided that
conditions set forth in PTE 90-83 are satisfied.
See "ERISA CONSIDERATIONS" herein and in the
Prospectus.
Certificate Rating........ It is a condition of their issuance that the Class
A Certificates be rated "AAA", and that the Class S
Certificates be rated "AAAr", by Standard & Poor's
Ratings Services ("S&P" or the "Rating Agency").
The ratings on the Offered Certificates address the
likelihood of the timely receipt by the holders
thereof of all payments of interest to which they
are entitled and, in the case of the respective
Classes of Class A Certificates, the ultimate
receipt by the holders thereof of all payments of
principal to which they are entitled on or before
the Rated Final Distribution Date. The ratings take
into consideration the characteristics of the
Mortgage Assets and the structural and legal
aspects associated with the Offered Certificates.
The ratings do not address the likelihood of
receipt of Prepayment Premiums, nor the possibility
that Certificateholders might suffer a lower than
anticipated yield or that, if there is a rapid rate
of principal payments (including both voluntary and
involuntary prepayments) on and/or other
liquidations of the Mortgage Assets, investors in
the Class S Certificates could fail to recover
their initial investments. Each security rating
assigned to the Offered Certificates should be
evaluated independently of any other security
rating.
A credit 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. In addition, a credit rating does
not address the likelihood or frequency of
prepayments of Mortgage Loans, or the corresponding
effect on yield to investors. See "CERTIFICATE
RATING" herein and "SPECIAL CONSIDERATIONS
--Limited Nature of Rating" in the Prospectus.
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<PAGE>
RISK FACTORS
Prospective purchasers should consider, among other things, the
following factors in connection with an investment in the Offered Certificates.
The Certificates
Certain Factors Adversely Affecting Resale of the Offered Certificates
There is currently no secondary market for the Offered Certificates.
The Underwriters expect to make a secondary market in the Offered Certificates,
but neither is under any obligation to do so. Accordingly, there can be no
assurance that such a market will develop or, if it does develop, that it will
provide holders of the Offered Certificates with liquidity of investment or
continue for the life of such Certificates. Consequently, investors may not be
able to sell their Offered Certificates readily or at prices that will enable
them to realize their desired yield. The Offered Certificates will not be listed
on any securities exchange. See "SPECIAL CONSIDERATIONS--Limited Liquidity" in
the Prospectus.
Insofar as a secondary market does develop for any Class of Offered
Certificates, 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 Mortgage Loans) and
prevailing interest rates. The price payable at any given time in respect of any
Class of Offered Certificates (in particular, the Class S Certificates or the
Class A-Z 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 Depositor is not aware of any source through which price information about
the Offered Certificates will be generally available on an ongoing basis.
Certain Yield and Maturity Considerations
The yield on any Offered Certificate will depend on the price paid for
such Certificate and the rate, timing and amount of distributions on such
Certificate. The rate, timing and amount of distributions on any Offered
Certificate will in turn depend on, among other things, (i) the rate, timing and
amount of payments (including full or partial prepayments) and other collections
of principal on the Mortgage Assets and (ii) in the case of the Class A
Certificates, by the order of priority of distributions allocated to reduce the
respective Class Principal Balances of those Certificates. An investor should
consider, in the case of any Certificate purchased at a discount, the risk that
a slower than anticipated rate of payments and other collections of principal on
or in respect of the Mortgage Assets could result in a lower than anticipated
yield and, in the case of any Certificate purchased at a premium, the risk that
a faster than anticipated rate of payments and other collections of principal on
or in respect of the Mortgage Assets could result in a lower than anticipated
yield.
The Class S Certificates will be especially sensitive to the rate and
timing of principal prepayments on or in respect of the Mortgage Loans. In
addition, in the event of a sale of a defaulted FHA Loan or an assignment of a
defaulted FHA Loan to the FHA and subsequent sale of any FHA Debenture issued in
connection therewith, the proceeds from such sale will be passed through to the
holders of the Offered Certificates with the same effect as if such FHA Loan had
been prepaid in full
S-29
<PAGE>
(except that no Prepayment Premium would be payable in respect thereof). The
yield to the holders of the Offered Certificates, especially the Class S
Certificates, will be sensitive to the rate, timing and severity of Realized
Losses on the Mortgage Loans and Additional Trust Fund Expenses that result in a
reduction of the related Class Principal Balance or Class Notional Amount.
Except to the extent mitigated by the distribution of Prepayment Premiums in
certain circumstances, any loss in anticipated yield and reinvestment risk
resulting from the distribution of principal prepayments to Certificateholders
will be borne entirely by Certificateholders. No representation is made as to
the rate or timing of prepayments (voluntary or involuntary) on the Mortgage
Assets, the rate, timing or severity of any Realized Losses or Additional Trust
Fund Expenses or as to the anticipated yield to maturity of any Offered
Certificate. See "YIELD CONSIDERATIONS" herein and "YIELD AND PREPAYMENT
CONSIDERATIONS" in the Prospectus.
The Certificate Interest Rate for each Class of Class A Certificates
for each Distribution Date will remain fixed at the rate set forth on the cover
hereof. However, the Certificate Interest Rate applicable to the Class S
Certificates is variable and will, in general, equal the excess, if any, of the
weighted average of the Net Asset Rates of the Mortgage Assets from time to
time, over the weighted average of the Certificate Interest Rates for the
respective Classes of Sequential Pay Certificates from time to time.
Accordingly, the yield on the Class S Certificates will be sensitive to changes
in the relative composition of the Mortgage Pool as a result of scheduled
amortization, voluntary prepayments, liquidations of Mortgage Loans following
default and the receipt and subsequent sale of FHA Debentures. The yield on the
Class S Certificates will be materially and adversely affected if the Mortgage
Assets with higher Net Asset Rates prepay faster than the Mortgage Assets with
lower Net Asset Rates, because the weighted average Net Asset Rate (and,
accordingly, the Certificate Interest Rate for the Class S Certificates) will be
reduced. See "DESCRIPTION OF THE CERTIFICATES--Distributions--Certificate
Interest Rates" and "DESCRIPTION OF THE MORTGAGE POOL" herein.
Prepayments on or in respect of the Mortgage Loans will be influenced
by the prepayment provisions of the related Mortgage Loans and may also be
affected by a variety of economic, geographic and other factors, including the
difference between the Mortgage Rates on the Mortgage Loans and prevailing
mortgage rates (giving consideration to limitations imposed by any lock-out
provisions and the cost of refinancing, including the payment of a Prepayment
Premium), federal and state governmental housing policy (including any reduction
or non-renewal of any existing rent subsidies) and the availability of
refinancing. In general, if prevailing interest rates fall significantly below
the Mortgage Rates on the Mortgage Loans, borrowers will have an increased
incentive to prepay their Mortgage Loans. Prepayments on or in respect of the
Mortgage Assets will also be influenced by defaults on the Mortgage Loans. The
Class S Certificates will be extremely sensitive to the rate and timing of
principal payments on or in respect of the Mortgage Assets, including by reason
of voluntary prepayments by borrowers or arising out of defaults on the Mortgage
Loans.
The Class A Certificates are subject to various priorities for payment
of principal as described herein. Distributions of principal on Classes of
Sequential Pay Certificates having an earlier priority of payment will be
affected by the rates of prepayment of the Mortgage Assets early in the life of
the Trust Fund. The timing of commencement of principal distributions and the
weighted average lives of Classes of Sequential Pay Certificates with a later
priority of payment will be affected by the rates of prepayment of the Mortgage
Assets experienced both before and after the commencement of principal
distributions on such Classes. The timing of distributions in reduction of the
Class Principal Balance of any particular Class of Class A Certificates subject
to sequential allocations of principal is highly uncertain and may be
significantly earlier or later than the date that may be desired by such
Certificateholder. If prepayments on the Mortgage Assets occur at a higher rate
than anticipated, the weighted average lives of the Class
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<PAGE>
A Certificates may be shortened significantly. Conversely, if prepayments on the
Mortgage Assets occur at a lower rate than anticipated, the weighted average
lives of the Class A Certificates may be extended significantly. Because all
Accrued Certificate Interest in respect of the Class A-Z Certificates for each
Distribution Date prior to the Accrual Termination Date will be added to the
Class Principal Balance thereof instead of being paid thereon on a current basis
(with the corresponding Monthly Class A-Z Accrual Amount being added to the
Principal Distribution Amount payable on the other Classes of Class A
Certificates on each such Distribution Date), the weighted average life of the
Class A-Z Certificates will be longer, and the weighted average lives of the
other Classes of Class A Certificates will be shorter, than if such Accrued
Certificate Interest were being paid currently to the holders of the Class A-Z
Certificates and there was no Monthly Class A-Z Accrual Amount being included in
the Principal Distribution Amount. See "MATURITY AND PREPAYMENT CONSIDERATIONS"
and "YIELD CONSIDERATIONS" herein.
Limited Obligations
The Certificates will represent beneficial ownership interests solely
in the assets of the Trust Fund and will not represent an interest in or
obligation of the Master Servicer, the Trustee, the Sellers, the Depositor, the
Underwriters, any of their respective affiliates or any other person.
Distributions on any Class of Certificates will depend solely on the amount and
timing of payments and other collections (including FHA Insurance Benefits) in
respect of the Mortgage Loans. See "SPECIAL CONSIDERATIONS--Limited Assets" in
the Prospectus.
The Mortgage Assets
Mortgaged Property Types
The possibility and timing of defaults on the Mortgage Loans, and
therefore the timing of receipt of FHA Insurance Benefits or GNMA guaranteed
principal payments, as the case may be, may depend, in part, on whether the
related Mortgaged Property is a Multifamily Property or a Nursing Facility.
Multifamily Properties. Fifty of the Mortgage Loans (representing
approximately 62.9% of the Initial Pool Balance) are secured by liens on
Multifamily Properties. The ability of the related borrowers to repay their
Mortgage Loans and meet their obligations in a timely manner will depend on a
number of factors that typically affect such types of properties, including the
successful operation of, and the value of, such property. Various factors, many
of which are beyond the control of the borrowers or managers of Multifamily
Properties, may affect the economic viability of Multifamily Properties,
including but not limited to national, regional and local economic conditions;
local real estate conditions; local competing housing; the location and quality
of each Multifamily Property and its neighborhood; federal and state
governmental housing policy (including the renewal of any rent subsidies); and
perceptions of prospective tenants. In addition, other factors may adversely
affect a Multifamily Property's value without affecting its then current net
operating income, including changes in government regulations, zoning or tax
laws; potential environmental liabilities or other legal liabilities; the
availability of refinancing; and changes in prevailing market rates of interest.
Nursing Facilities. Thirty-one of the Mortgage Loans (representing
approximately 37.1% of the Initial Pool Balance) are secured by liens on Nursing
Facilities. Once established, a Nursing Facility is subject to federal, state
and/or local operating requirements, including, but not limited to, those
mandated by Medicare and Medicaid and set forth in Titles XVIII (Medicare) and
XIX (Medicaid) of the Social Security Act and accompanying regulations, and
those mandated by applicable state and local laws and
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<PAGE>
regulations. The failure of any Nursing Facility to comply with such
requirements could lead to civil or criminal sanctions, the appointment of a
receiver to operate the Nursing Facility or the suspension or termination of the
Nursing Facility operator from the Medicare and Medicaid programs or other
insurance programs and thus may severely impair the borrower's ability to make
required payments on the related Mortgage Loan.
Nursing Facility operators typically rely on government reimbursements
for a significant portion of their operating revenues, which are often subject
to delays by fiscal intermediaries or due to government funding restrictions.
Changes in federal or state reimbursement policies may also adversely affect an
operator's revenues. In addition, the successful operation of a Nursing Facility
will generally depend on a number of factors, including, among other things,
local competing facilities, the quality of care and the cost of that care,
reputation, management and affiliations with other health care providers. The
operators of the subject Nursing Facilities are likely to compete on a local and
regional basis with other providers who operate similar facilities. Some of
these competitors may be better equipped financially, and may provide more
services, than the subject Nursing Facilities.
Limited Information with Respect to the Mortgage Assets
Greystone Funding, with respect to the Greystone Mortgage Assets, and
Daiwa Finance, with respect to the Daiwa Mortgage Assets, have only limited
information with respect to the Mortgaged Properties, their operating income and
expenses and the related borrowers. In the case of 16 of the Mortgaged Assets,
constituting security for approximately 12.50% of the Initial Pool Balance,
Greystone Funding, with respect to the Greystone Mortgage Assets, and Daiwa
Finance, with respect to the Daiwa Mortgage Assets, have been unable to obtain
financial statements for the most recent (and/or any recent prior) fiscal year.
In the case of 18 of the Mortgage Assets, constituting security for
approximately 30.90% of the Initial Pool Balance, audited financial statements
(in each such case, for the fiscal year, ending either December 31, 1994 or
December 31, 1995) were obtained. In the case of 44 of the Mortgage Assets,
constituting security for approximately 48.3% of the Initial Pool Balance, such
Mortgage Assets were recently originated and pro-forma financial statements were
obtained. In the case of two Mortgaged Assets, constituting security for
approximately 7.1% of the Initial Pool Balance, unaudited partial-year,
financial statements were obtained and annualized. In the case of one of the
Mortgage Assets, constituting security for approximately 1.2% of the Initial
Pool Balance, unaudited financial statements for the 12 month period ended
November 30, 1996 were obtained. On the basis of such financial statements, it
was determined that three of the Mortgage Loans, representing approximately
4.91% of the Initial Pool Balance, had Cut-off Date Debt Service Coverage Ratios
of below 1.0x, and two of the Mortgage Loans, representing approximately 3.6% of
the Initial Pool Balance, had Cut-off Date Debt Service Coverage Ratios of
between 1.0x and 1.1x, inclusive. In those circumstances where the Cut-off Date
Debt Service Coverage Ratio of a Mortgage Loan is below 1.0x, the revenue
derived from the use and operation of the related Mortgaged Property is
insufficient to cover the operating expenses of such Mortgaged Property and to
pay debt service due on such Mortgage Loan. Accordingly, in such cases, the
related borrower or its principals have been required to pay a portion of such
items from sources other than the cash flow of the related Mortgaged Property.
If the related borrower or its principals cease to use such alternative cash
sources at a time when operating revenue from the related Mortgaged Property is
still insufficient to cover such payments, deferred maintenance at the related
Mortgaged Property and/or a default under the subject Mortgage Loan is likely to
result. Greystone Funding, with respect to the Greystone Mortgage Assets, and
Daiwa Finance, with respect to the Daiwa Mortgage Assets, make no representation
as to whether any such borrower will continue to make such payments out of
alternative cash sources or what the incentives of any such borrower might be
for doing so. Certain FHA Loans have been the subject of modifications. Three
FHA Loans, among others, were
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the subject of one or more previous modifications that reduced the related debt
service on such FHA Loans. Notwithstanding such modifications, all three such
FHA Loans, for which financial statements were obtained, representing
approximately 4.91% of the Initial Pool Balance, had a Cut-off Debt Service
Coverage Ratio below 1.0x. In addition, as discussed below under "--Loans
Assisted Under Section 8," Greystone Funding, with respect to the Greystone
Mortgage Assets, and Daiwa Finance, with respect to the Daiwa Mortgage Assets,
do not have complete information regarding the degree to which property revenues
are attributable to Section 8 rent subsidies.
In addition, Greystone Funding, with respect to the Greystone Mortgage
Assets, and Daiwa Finance, with respect to the Daiwa Mortgage Assets, do not
have information with respect to the current loan-to-value ratios of the
Mortgage Loans, and are therefore unable to make any predictions regarding
default experience of the Mortgage Pool based on such information. Generally,
mortgage loans with high loan-to-value ratios will be more likely to experience
default than mortgage loans with lower loan-to-value ratios. As shown in the
tables under "FHA MORTGAGE INSURANCE PROGRAMS--FHA Default and Prepayment
Experience," historically, mortgage loans insured under certain FHA programs,
including the FHA programs for the Mortgage Loans, have had relatively high
default rates.
Limitations of FHA Insurance
The recovery of FHA Insurance Benefits following a default on an FHA
Loan is subject to a number of conditions, including strict compliance by the
Master Servicer and any Sub-Servicer with FHA Regulations in servicing the FHA
Loan. Although the Master Servicer and any Sub-Servicer will have been approved
as such by the FHA and are obligated to comply with applicable regulations
promulgated by the FHA ("FHA Regulations"), such regulations are susceptible to
interpretative uncertainties and administrative revision. Failure to comply with
all FHA Regulations may result in a reduction or denial of FHA Insurance
Benefits, and there can be no assurance that FHA's enforcement of its
regulations will not become more strict in the future. In addition, any claim
paid by the FHA in connection with an assignment of a defaulted FHA Loan to the
FHA will cover, at most, only 99% of the unpaid principal on that FHA Loan and a
portion of the unpaid interest. See "FHA MORTGAGE INSURANCE PROGRAMS" herein.
The Master Servicer, Sub-Servicers, mortgagors and the Trustee are
subject at all times to the FHA Regulations. There can be no assurance that the
FHA Regulations will not be changed in the future, nor that any such change
would not adversely affect the timing of payments made to Certificateholders.
HUD, the Clinton Administration and various members of Congress have
recently suggested the need for legislation which could significantly alter the
nature and scope of FHA insurance programs. The Depositor is not able to predict
the effect that any of these suggestions, if enacted as legislation, would have
on the Offered Certificates or the Mortgage Loans.
Loans Assisted Under Section 8
Section 8 of the United States Housing Act of 1937, as amended,
authorizes the payment by the federal government of rental subsidies to owners
of qualified housing. Through Section 8 project-based assistance, HUD subsidizes
the difference between the tenants' contribution (based on a percentage of their
income) and the contract rents for the units. HUD pays the subsidies either
directly to the owner or through public housing agencies. Based solely on
information obtained from various sources, including Greystone Funding, with
respect to the Greystone Mortgage Assets, and Daiwa Finance, with respect to the
Daiwa Mortgage Assets, the Sellers believe that 13 of the Mortgage Loans
(representing
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approximately 15.9% of the Initial Pool Balance) receive some form of Section 8
assistance. However, the Sellers have not been able to verify the accuracy of
such information, the existence of any Project-Based Assistance (as defined
herein) with respect to any of the Mortgage Loans, the particular form of such
Section 8 assistance, the length of any related Section 8 contract or the number
of units covered by or maximum dollar amount of such contract for any of such
Mortgage Loans.
Historically, there have been differing default and prepayment rate
experiences between loans receiving Section 8 rent subsidies and insured under
certain sections of the Housing Act and those insured under the same sections
but not receiving Section 8 rent subsidies. These default and prepayment rates
may or may not be affected by subsequent Congressional legislation which may or
may not affect projects whose Project-Based Assistance expires during the term
of the FHA-insured mortgage. In addition, Congress has recently enacted
legislation to curtail the Section 8 program, which may result in a higher
default rate for such Mortgage Loans that are secured by Mortgaged Properties
subject to Section 8. See "FHA MORTGAGE INSURANCE PROGRAMS--The Section 8
Program".
Prepayment Premiums
Fifty-seven of the Mortgage Loans, representing 69.1% of the Initial
Pool Balance, require for a specified period following the related Cut-off Date
(or, if applicable, the end of the related lock-out period) that any voluntary
principal prepayment (other than as described below) be accompanied by a
Prepayment Premium. See "DESCRIPTION OF THE MORTGAGE POOL--Certain Terms and
Conditions of the FHA Loans--Prepayment Provisions" herein. If and to the extent
received, Prepayment Premiums will be distributed to Certificateholders as
described under "DESCRIPTION OF THE CERTIFICATES--Distributions--Distributions
of Prepayment Premiums" herein. However, none of the Depositor, the Sellers or
the Underwriters make any representation as to the enforceability of the
provision of any Mortgage Note requiring the payment of a Prepayment Premium, or
of the collectability of any Prepayment Premium. Prepayment Premiums, even if
and to the extent collected and distributable on any Class of Certificates, may
not be sufficient to offset any loss in yield on such Class of Certificates
attributable to prepayments on the Mortgage Loans. Provisions requiring
Prepayment Premiums may not be enforceable in some states and under federal
bankruptcy law, and may constitute interest for usury purposes. Accordingly, no
assurance can be given that the obligation to pay a Prepayment Premium will be
enforceable under applicable state or federal law. See "CERTAIN LEGAL ASPECTS OF
MORTGAGE LOANS -- Default Interest, Prepayment Charges and Prepayments" in the
Prospectus.
Notwithstanding any Mortgage Loan provision requiring the payment of a
Prepayment Premium, (i) the FHA may generally override the relevant provisions
of the related Mortgage Note when a Mortgage Loan is in default if the FHA
determines that it is in the best interest of the federal government to allow
the mortgagor to refinance, partially prepay or modify the loan without
restrictions or penalties and thereby avoid or mitigate a claim for FHA
Insurance; and (ii) certain of the Mortgage Loans permit the borrower to prepay
up to 15% of the original principal amount of the loan in any one calendar year
without any Prepayment Premium.
No Prepayment Premium will be payable in connection with any assignment
of a defaulted FHA Loan to the FHA, any purchase of a defaulted FHA Loan by the
Majority Class B Certificateholder, any purchase of an FHA Debenture by the
Majority Class B Certificateholder, the Master Servicer or the Trustee or any
repurchase of a Mortgage Asset by the related Seller, for a material breach of
representation or warranty on the part of the related Seller or its failure to
deliver the requisite documentation relating thereto, nor will any Prepayment
Premium be payable in connection with the purchase of all the Mortgage Assets by
the Master Servicer in connection with the termination of the
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Trust Fund. See "DESCRIPTION OF THE MORTGAGE POOL--Sale and Assignment of the
Mortgage Assets; Repurchases" and "--Representations and Warranties;
Repurchases", "SERVICING OF THE FHA LOANS--Sale of Defaulted FHA Loans",
"DESCRIPTION OF THE CERTIFICATES--Optional Termination" and "FHA MORTGAGE
INSURANCE PROGRAMS--Insurance Claims and Benefits" herein.
DESCRIPTION OF THE CERTIFICATES
General
The Series 1996-FHA1 Commercial Mortgage Pass-Through Certificates (the
"Certificates") will be issued on or about December 27, 1996 (the "Closing
Date") pursuant to a pooling and servicing agreement (the "Pooling and Servicing
Agreement"), to be dated as of the Cut-off Date, among the Depositor, the
Trustee, the Master Servicer and each Seller. The following summaries describe
certain provisions relating to the Certificates. The summaries do not purport to
be complete and are subject to, and qualified in their entirety by reference to,
the provisions of the Pooling and Servicing Agreement. When particular
provisions or terms used in the Pooling and Servicing Agreement are referred to
herein, the actual provisions (including definitions of terms) are deemed to be
incorporated herein by reference. Reference is made to the Prospectus for
additional information regarding the terms of the Pooling and Servicing
Agreement. However, information set forth in the Prospectus should be read
taking account of all supplemental information contained herein. For purposes of
the Prospectus, the Pooling and Servicing Agreement constitutes both a Trust
Agreement and a Master Servicing Agreement. See "DESCRIPTION OF THE SECURITIES",
"THE TRUST AGREEMENT" and "SERVICING OF MORTGAGE LOANS" in the Prospectus.
The Certificates will represent in the aggregate the entire beneficial
ownership interest in a trust fund (the "Trust Fund") consisting primarily of:
(i) the Mortgage Assets and all payments under and proceeds of the Mortgage
Assets received or due after the Cut-off Date (exclusive of payments of
principal and interest due on the Mortgage Loans on or before the Cut-off Date
and exclusive of any Retained Yield); (ii) the FHA Insurance in respect of the
FHA Loans, together with all FHA Insurance Benefits derived therefrom (exclusive
of any Retained Yield); (iii) such funds or assets (other than Retained Yield)
as from time to time are deposited in the Collection Account and the Custodial
Account (each, as defined herein); (iv) any hazard or other insurance policies
with respect to the FHA Loans; and (v) all proceeds of the conversion, voluntary
or involuntary, of any of the foregoing into cash or other liquid property.
The Certificates will consist of ten classes (each, a "Class"): (i) the
Class A-1, Class A-2, Class A-3, Class A-4 and Class A-Z Certificates
(collectively, the "Class A Certificates"); (ii) the Class S Certificates
(collectively, with the Class A Certificates, the "Offered Certificates"); (iii)
the Class B Certificates (collectively, with the Offered Certificates, the
"Regular Interest Certificates"); and (iv) the Class R-I, Class R-II and Class
R-III Certificates (collectively, the "Residual Interest Certificates" and,
collectively with the Class B Certificates, the "Non-Offered Certificates").
Only the Offered Certificates are offered hereby. The Non-Offered Certificates
have not been registered under the Securities Act of 1933, as amended (the
"Securities Act"), and are not offered hereby. Information herein regarding the
terms of the Non-Offered Certificates is provided because of its relevance to a
prospective purchaser of an Offered Certificate.
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Class Principal Balances and Class Notional Amounts
Upon initial issuance, the Class A-1, Class A-2, Class A-3, Class A-4,
Class A-Z and Class B Certificates (collectively, the "Sequential Pay
Certificates") will have the respective Class Principal Balances set forth in
the following table, in each case subject to a permitted variance of plus or
minus 5%.
Initial Class Approximate % of
Class of Certificates Principal Balance Initial Pool Balance
- --------------------- ----------------- --------------------
Class A-1 Certificates.............. $ 40,317,000 15.13%
Class A-2 Certificates.............. 38,978,000 14.63
Class A-3 Certificates.............. 55,487,000 20.82
Class A-4 Certificates.............. 58,824,000 22.07
Class A-Z Certificates.............. 67,712,000 25.41
Class B Certificates................ 5,192,464 1.95
-------------- -------
TOTAL........................... $ 266,510,464 100.00%
============== =======
"Class Principal Balance" means, with respect to any Class of
Sequential Pay Certificates, as of any date of determination, an amount equal t
the initial aggregate principal amount of such Class of Certificates, less the
amount of all distributions previously made with respect to such Class of
Certificates in reduction of the Class Principal Balance thereof, less all
Realized Losses and Additional Trust Fund Expenses (each, as defined below)
previously allocated to such Class of Certificates in the manner described
herein, plus, in the case of the Class A-Z Certificates, the aggregate of the
Monthly Class A-Z Accrual Amounts (as defined below) previously added thereto in
the manner described herein. The "Certificate Principal Balance" of any
Sequential Pay Certificate, as of any date of determination, will equal the
product of the Percentage Interest evidenced by such Certificate in the related
Class of Certificates, multiplied by the Class Principal Balance of such Class
of Certificates then outstanding.
The Class S Certificates will not have a Class Principal Balance, but
will represent the right to receive distributions of interest accrued as
described herein on an aggregate notional amount (a "Class Notional Amount")
equal to the aggregate of the Class Principal Balances of the Sequential Pay
Certificates outstanding from time to time. The "Certificate Notional Amount" of
any Class S Certificate, as of any date of determination, will equal the product
of the Percentage Interest evidenced by such Certificate in the related Class,
multiplied by the Class Notional Amount of such Class then outstanding.
The Residual Interest Certificates will not have Class Principal
Balances or Class Notional Amounts, but will represent the right to receive the
portion, if any, of the Available Distribution Amount for the final Distribution
Date remaining after all the Classes of Regular Interest Certificates have been
retired.
The "Percentage Interest" in the related Class evidenced by any Regular
Interest Certificate will be a fraction, expressed as a percentage, the
numerator of which is the initial Certificate Principal Balance or Certificate
Notional Amount, as the case may be, of such Certificate on the Closing Date as
set forth on the face thereof, and the denominator of which is the initial Class
Principal Balance or Class Notional Amount, as the case may be, of the related
Class on the Closing Date. The "Percentage Interest" in the related Class
evidenced by any Residual Interest Certificate will be set forth on the face
thereof.
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Registration; Denominations
The Offered Certificates will be issued in book-entry form through the
facilities of The Depository Trust Company ("DTC") in denominations of: (i) in
the case of the Class A Certificates, $10,000 initial principal balance and
integral multiples of $1,000 in excess thereof; and (ii) in the case of the
Class S Certificates, $100,000 initial notional amount and integral multiples of
$1,000 in excess thereof, except for one Class S Certificate evidencing the sum
of an authorized denomination thereof and the remainder of the initial notional
amount of such Class of Certificates.
Each Class of Offered Certificates will initially be represented by one
or more global Certificates registered in the name of the nominee of DTC. The
Depositor has been informed by DTC that DTC's nominee will be Cede & Co.
("Cede"). No beneficial owner of an Offered Certificate of any Class thereof
(each, a "Beneficial Owner") will be entitled to receive a fully registered,
physical certificate (a "Definitive Certificate") representing its interest in
such Class except under certain limited circumstances. Unless and until
Definitive Certificates are issued in respect of a Class of Offered
Certificates, beneficial ownership interests in such Class of Certificates will
be maintained and transferred on the book-entry records of DTC and its
participating organizations (the "Participants"), and all references to actions
by holders of such Class of Offered Certificates will refer to actions taken by
DTC upon instructions received from the related Beneficial Owners through the
Participants in accordance with DTC procedures, and all references herein to
payments, notices, reports and statements to holders of such Class of
Certificates will refer to payments, notices, reports and statements to DTC or
Cede, as the registered holder thereof, for distribution to the related
Beneficial Owners through the Participants in accordance with DTC procedures.
The form of such payments and transfers may result in certain delays in receipt
of payments by an investor and may restrict an investor's ability to pledge its
securities. See "SPECIAL CONSIDERATIONS--Book-Entry Registration" and
"DESCRIPTION OF THE SECURITIES--Book-Entry Registration" in the Prospectus.
Certificate Interest Rates
The rate per annum at which any Regular Interest Certificate accrues
interest from time to time is herein referred to as its "Certificate Interest
Rate". The Certificate Interest Rate applicable to each Class of Sequential Pay
Certificates for each Distribution Date is fixed at the rate set forth on the
cover hereof. The Certificate Interest Rate for the Class S Certificates is
variable and will equal: (i) in the case of the initial Distribution Date,
1.2583% per annum; and (ii) in the case of each Distribution Date subsequent to
the initial Distribution Date, the excess, if any, of the Weighted Average Net
Asset Rate for such Distribution Date, over the weighted average of the
Certificate Interest Rates for the respective Classes of Sequential Pay
Certificates (weighted on the basis of the respective Class Principal Balances
of such Classes of Certificates outstanding immediately prior to such
Distribution Date). For purposes of calculating the Certificate Interest Rate
applicable to the Class S Certificates, Net Asset Rate shall mean with respect
to any FHA Debenture received by the Trust Fund, the Net Asset Rate for the
related Assigned FHA Loan (as defined herein). The Residual Interest
Certificates will not bear interest.
The "Weighted Average Net Asset Rate" for any Distribution Date will be
a per annum rate equal to the weighted average of the Net Asset Rates in respect
of the Mortgage Assets as of the commencement of the Collection Period for such
Distribution Date, weighted on the basis of the respective Stated Principal
Balances of such Mortgage Assets outstanding immediately prior to such
Distribution Date.
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"Net Asset Rate" means: (i) with respect to each FHA Loan, as of any
date of determination, a rate per annum equal to the related Mortgage Rate,
minus the sum of the applicable Servicing Fee Rate and the Trustee Fee Rate;
(ii) with respect to each FHA Debenture, as of any date of determination, a rate
per annum equal to the Net Asset Rate for the related Assigned FHA Loan; and
(iii) with respect to each GNMA Certificate, as of any date of determination, a
rate per annum equal to the related GNMA Certificate Rate, minus the Trustee Fee
Rate. The GNMA Certificate Rate, as further described herein under "FHA MORTGAGE
INSURANCE PROGRAMS--GNMA Mortgage-Backed Securities Program", is equal to the
Mortgage Rate on the Underlying Mortgage Loan minus the sum of the per annum
rates applicable to the related underlying servicing and GNMA guaranty fees.
Such rates in the aggregate will be at least 0.25% per annum and not more that
0.50% per annum (with a weighted average, based on their respective Cut-off Date
Balances, of approximately 0.28% per annum). The Net Asset Rate for any FHA
Debenture may be higher or lower than the related Net Debenture Rate. The "Net
Debenture Rate" for any FHA Debenture will equal the related Debenture Rate
minus the sum of the Trustee Fee Rate and any applicable Retained Yield Rate
(Servicing Fees are not payable in respect of an FHA Debenture). If the Net
Asset Rate for any FHA Loan is higher than the related Net Debenture Rate, the
aggregate interest accruing in respect of the FHA Loans and GNMA Certificates at
their respective Net Asset Rates and the FHA Debentures at their respective Net
Debenture Rates will be less than the aggregate interest accruing in respect of
the Regular Interest Certificates (other than the Class S Certificates) thereby
resulting in a Realized Loss.
The "Stated Principal Balance" of any FHA Loan, as of any date of
determination coinciding with or following the Cut-off Date, will generally be
equal to the Cut-off Date Balance of such FHA Loan, reduced on each Distribution
Date (to not less than zero) by: (i) the aggregate of all payments (including,
without limitation, any principal prepayments), insurance proceeds, condemnation
proceeds, FHA Insurance Benefits (received in the form of cash) and other
amounts that were received on or in respect of such FHA Loan during the related
Collection Period and that were identified and applied by the Master Servicer as
recoveries of principal thereof, in each case net of any portion of such amounts
that represents a late collection of principal due on or before the Cut-off Date
or for which a Monthly Advance was previously made for a prior Distribution Date
or that represents the principal portion of a Monthly Payment due on a Due Date
subsequent to the related Collection Period; (ii) if and to the extent received
prior to the related Collection Period, the principal portion of the Monthly
Payment due in respect of such FHA Loan during the related Collection Period;
(iii) the principal portion of any Monthly Advance made by the Master Servicer
or the Trustee with respect to such FHA Loan for such Distribution Date; (iv)
the principal amount of any FHA Debentures received during the related
Collection Period as FHA Insurance Benefits in respect of such FHA Loan; and (v)
the principal portion of any Realized Loss incurred in respect of such FHA Loan
during the related Collection Period. The "Stated Principal Balance" of any GNMA
Certificate, as of any date of determination coinciding with or following the
Cut-off Date, will generally equal the Cut-off Date Balance of such GNMA
Certificate, reduced on each Distribution Date by all payments of principal
received on such GNMA Certificate during the related Collection Period (other
than any such payment of principal that relates to principal due on the related
Underlying Mortgage Loan on or before the Cut-off Date). The "Stated Principal
Balance" of any FHA Debenture, as of any date of determination coinciding with
or following the date such FHA Debenture was delivered into the Trust Fund (the
"FHA Debenture Delivery Date"), will generally equal the unpaid principal
balance of such FHA Debenture as of the related FHA Debenture Delivery Date,
reduced on each subsequent Distribution Date by all payments of principal
received on such FHA Debenture during the related Collection Period.
Notwithstanding the foregoing, if any FHA Loan, GNMA Certificate or FHA
Debenture is paid in full, or if any FHA Loan, GNMA Certificate or FHA Debenture
is liquidated, purchased out of the Trust Fund or otherwise disposed of by the
Trust Fund, the "Stated Principal Balance" of such Mortgage Asset will be zero
commencing as of the Distribution Date on which all
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amounts received in connection with such payment in full, liquidation, purchase
or other disposition would be distributed on the Certificates.
The "Collection Period" for any Distribution Date will end at the close
of business on the Determination Date for such Distribution Date and commence
immediately following the end of the prior such period (or, in the case of the
initial Collection Period, commence immediately following the Cut-off Date). The
"Determination Date" for each Distribution Date will be the 20th day of the
month in which such Distribution Date occurs or, if such 20th day is not a
Business Day, then the next succeeding Business Day.
"Due Date" with respect to any FHA Loan, GNMA Certificate or FHA
Debenture means each date on which a payment, whether of principal, interest or
both, is due on such FHA Loan, GNMA Certificate or FHA Debenture, as the case
may be, in accordance with the terms thereof.
A "Business Day" is any day other than (i) a Saturday or a Sunday or
(ii) a day on which banking institutions in New York or Illinois are authorized
or obligated by law or executive order to be closed.
Distributions
General
Distributions of principal and interest on the Certificates will be
made by the Trustee out of the Available Distribution Amount on the 25th day of
each month (or, if such day is not a Business Day, then on the next succeeding
Business Day) (each such date, a "Distribution Date "), commencing in January
1997. Except as otherwise described below, all such distributions will be made
to the persons in whose names the Certificates are registered at the close of
business on the related Record Date and, as to each such person, 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 Trustee with wiring
instructions no less than five business days prior to the related Record Date
and is the registered owner of Certificates with an aggregate initial
Certificate Principal Balance of at least $2,500,000 or an aggregate initial
Certificate Notional Amount of at least $10,000,000, 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 in such Class. As
described herein, no distributions will be made in respect of the Class A-Z
Certificates prior to the Accrual Termination Date.
The "Record Date" for each Class of Offered Certificates for each
Distribution Date will be the last Business Day of the month preceding the month
in which such Distribution Date occurs.
The Available Distribution Amount
The aggregate amount available for distributions of principal and
interest to Certificateholders on each Distribution Date (the "Available
Distribution Amount") will, in general, equal the sum of the following amounts:
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(a) the aggregate of all cash amounts received on or in respect of
the Mortgage Assets (including all scheduled monthly payments of
principal and/or interest received on the Mortgage Assets; any
principal prepayments, insurance proceeds, condemnation proceeds and
FHA Insurance Benefits (received in the form of cash) received on the
Mortgage Assets; any proceeds from the purchase of any Mortgage Assets
required to be repurchased by a Seller; any proceeds from the purchase
of any defaulted FHA Loan by a Majority Class B Certificateholder; any
proceeds from the purchase of any FHA Debentures by a Majority Class B
Certificateholder, the Master Servicer or the Trustee; and any other
amounts required to be deposited in the Collection Account and/or the
Custodial Account under the Pooling and Servicing Agreement), in each
case to the extent so received by the related Determination Date and
not previously withdrawn from the Collection Account or Custodial
Account for distribution to Certificateholders or otherwise prior to
such date, exclusive of any portion thereof that represents one or more
of the following:
(i) Monthly Payments collected on the FHA Loans but
due on a Due Date subsequent to the related
Collection Period;
(ii) Prepayment Premiums;
(iii) Retained Yield;
(iv) amounts that are currently payable or reimbursable
to the Master Servicer, the Depositor, a Seller or
the Trustee (including as compensation or to
reimburse the Master Servicer or the Trustee, as
the case may be, for outstanding Advances,
together with interest thereon, or to indemnify or
reimburse the Trustee and certain related persons
as contemplated under "--The Trustee" below, or to
indemnify or reimburse the Master Servicer, the
Depositor and certain related persons as
contemplated under "SERVICING OF THE FHA
LOANS--Limitation on Liability" herein) or used to
pay any other expenses of the Trust Fund not
previously reimbursed;
(v) amounts received on Mortgage Assets previously
purchased by a Seller, the Master Servicer, the
Trustee or a Majority Class B Certificateholder or
otherwise removed from the Trust Fund; and
(vi) amounts deposited in the Custodial Account or
Collection Account in error; and
(b) all Monthly Advances made by the Master Servicer or the
Trustee and Compensating Interest Payments made by the Master Servicer
with respect to such Distribution Date (see "--Advances" and
"--Prepayment Interest Shortfalls and Compensating Interest Payments"
below).
With respect to the final Distribution Date, any Termination Price paid
as contemplated under "--Optional Termination" (exclusive of any portion thereof
allocable to the items described in clauses (a)(iii) and (a)(iv) of the
definition of "Available Distribution Amount" above) will constitute part of the
related Available Distribution Amount.
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Application of the Available Distribution Amount
On each Distribution Date, the Trustee will apply amounts on deposit in
the Collection Account, to the extent of the Available Distribution Amount for
such Distribution Date, in the following order of priority, in each case subject
to remaining funds:
(i) to distributions of interest to the holders of the Class S,
Class A-1, Class A-2, Class A-3 and Class A-4 Certificates and,
commencing on the Accrual Termination Date, the Class A-Z Certificates,
pro rata in accordance with, and to the extent of, all Accrued
Certificate Interest in respect of each such Class of Certificates for
such Distribution Date and, to the extent not previously paid, for all
prior Distribution Dates;
(ii) to distributions of principal to the holders of the
respective Classes of Class A Certificates (allocable among such
Classes of Certificateholders as described below), in an amount (not to
exceed the then aggregate of the Class Principal Balances of the
respective Classes of Class A Certificates) equal to the Principal
Distribution Amount for such Distribution Date (such distributions to
be made on each Distribution Date until the Class Principal Balances of
the respective Classes of Class A Certificates are reduced to zero, as
described below);
(iii) to distributions of interest to the holders of the Class B
Certificates, in an amount equal to all Accrued Certificate Interest in
respect of such Class of Certificates for such Distribution Date and,
to the extent not previously paid, for all prior Distribution Dates;
(iv) if the aggregate of the Class Principal Balances of the
Class A Certificates has been reduced to zero, to distributions of
principal to the holders of the Class B Certificates, in an amount (not
to exceed the then Class Principal Balance of the Class B Certificates)
equal to the Principal Distribution Amount for such Distribution Date
(net of any portion thereof applied to retire the Class A Certificates)
(such distributions to be made on each Distribution Date until the
Class Principal Balance of the Class B Certificates is reduced to
zero); and
(v) if any portion of the Available Distribution Amount for
such Distribution Date remains, to distributions of such portion to the
holders of the Class R-I Certificates.
Distributions of principal (including, in the case of the Class A-1,
Class A-2, Class A-3 and Class A-4 Certificates, distributions of the Monthly
Class A-Z Accrual Amount) made on any Distribution Date in respect of the Class
A Certificates as described in clause (ii) above, will be paid: first, to the
holders of the Class A-1 Certificates, until the Class Principal Balance of such
Class of Certificates is reduced to zero; second, to the holders of the Class
A-2 Certificates, until the Class Principal Balance of such Class of
Certificates is reduced to zero; third, to the holders of the Class A-3
Certificates, until the Class Principal Balance of such Class of Certificates is
reduced to zero; fourth, to the holders of the Class A-4 Certificates, until the
Class Principal Balance of such Class of Certificates is reduced to zero; and
last, to the holders of the Class A-Z Certificates, until the Class Principal
Balance of such Class of Certificates (as the same will have been increased by
additions thereto of Monthly Class A-Z Accrual Amounts) is reduced to zero;
provided that, notwithstanding the foregoing, on and after any Class A Principal
Distribution Cross-Over Date, and in any event on the final Distribution Date in
connection with a termination of the Trust Fund, such sequential distributions
of principal will be disregarded, and the Trustee will make such distributions
of principal on the respective Classes of Class A Certificates on a pro rata
basis in accordance with the respective Class Principal Balances of such Classes
of Certificates outstanding immediately prior to such Distribution Date.
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The "Accrual Termination Date" for the Class A-Z Certificates will be
the earliest of (i) the first Distribution Date as of which the aggregate of the
Class Principal Balances of the Class A-1, Class A-2, Class A-3 and Class A-4
Certificates has been reduced to zero on or prior thereto; (ii) the Class A
Principal Distribution Cross-Over Date; and (iii) the final Distribution Date in
connection with a termination of the Trust Fund.
The "Class A Principal Distribution Cross-Over Date" will be the first
Distribution Date as of which the Class Principal Balance of the Class B
Certificates has been reduced to zero prior thereto as a result of the
allocation of Realized Losses and/or Additional Trust Fund Expenses as described
herein.
Accrued Certificate Interest
The "Accrued Certificate Interest" in respect of any Class of Regular
Interest Certificates for any Distribution Date will equal one month's interest
(calculated on the basis of a 360-day year consisting of twelve 30-day months)
at the Certificate Interest Rate applicable to such Class of Certificates for
such Distribution Date, accrued on the Class Principal Balance or Class Notional
Amount, as the case may be, of such Class of Certificates outstanding
immediately prior to such Distribution Date. Until the Accrual Termination Date,
the Accrued Certificate Interest in respect of the Class A-Z Certificates for
each Distribution Date shall not be payable to the holders thereof currently but
rather shall be added to the Class Principal Balance of such Certificates. The
amount so added to the Class Principal Balance of the Class A-Z Certificates on
each Distribution Date on or prior to the Accrual Termination Date is herein
referred to as the "Monthly Class A-Z Accrual Amount".
Principal Distribution Amount
The "Principal Distribution Amount" for each Distribution Date will
generally equal the aggregate of the following:
(a) the aggregate of all payments of principal (other than
principal prepayments) received on the FHA Loans during the related
Collection Period, in each case net of any portion of the particular
payment that represents a late collection of principal due on or before
the Cut-off Date or for which a Monthly Advance was previously made for
a prior Distribution Date or that represents the principal portion of a
Monthly Payment due on a Due Date subsequent to the related Collection
Period;
(b) the aggregate of the principal portions of all Monthly
Payments due in respect of the FHA Loans for their respective Due Dates
occurring during the related Collection Period that were received prior
to the related Collection Period;
(c) the aggregate of all principal prepayments made by the
respective borrowers on the FHA Loans during the related Collection
Period;
(d) the aggregate of all insurance proceeds, condemnation
proceeds and liquidation proceeds (including FHA Insurance Benefits
received in the form of cash) and any other cash amounts (exclusive of
payments by Mortgagors and exclusive of proceeds received in connection
with any purchase or repurchase of a Mortgage Asset contemplated by any
of clauses (f), (g) and (j) below) that were received on the FHA Loans
during the related Collection Period and that were allocable as
recoveries of previously unadvanced principal of the FHA Loans;
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(e) the aggregate of all payments of principal that were
received on the GNMA Certificates and any FHA Debentures during the
related Collection Period (other than, in the case of a GNMA
Certificate, any such payment of principal that relates to principal
due on the related Underlying Mortgage Loan on or before the Cut-off
Date);
(f) the Stated Principal Balance of each Mortgage Asset, if any,
that was repurchased by a Seller during the related Collection Period
as a result of a breach of a representation or warranty or for
defective or missing documentation as described under "DESCRIPTION OF
THE MORTGAGE POOL--Sale and Assignment of Mortgage Assets; Repurchases"
and "--Representations and Warranties; Repurchases" herein;
(g) the Stated Principal Balance of each defaulted FHA Loan and
FHA Debenture, if any, that was purchased by the Majority Class B
Certificateholder, the Master Servicer and/or the Trustee during the
related Collection Period as described under "SERVICING OF THE FHA
LOANS--Sale of Defaulted FHA Loans" and "--Sale of FHA Debentures"
herein;
(h) the aggregate of the principal portions of all Monthly
Advances made in respect of the FHA Loans for such Distribution Date;
(i) if such Distribution Date occurs prior to the Accrual
Termination Date, the Monthly Class A-Z Accrual Amount for such
Distribution Date; and
(j) if such Distribution Date is to be the final Distribution
Date in connection with the purchase by the Master Servicer of all the
Mortgage Assets remaining in the Trust Fund as described under
"--Optional Termination" below, the Stated Principal Balance of each
such Mortgage Assets so purchased.
Distributions of Prepayment Premiums
On each Distribution Date, the Trustee will withdraw any amounts then
on deposit in the Collection Account that represent Prepayment Premiums
collected during or prior to the related Collection Period and will distribute
such amounts, separate from the Available Distribution Amount, as follows: (i)
75% of such Prepayment Premiums will be distributable in respect of the Class S
Certificates; and (ii) 25% of such Prepayment Premiums will be distributable in
respect of the Class(es) of the Sequential Pay Certificates entitled to
distributions in reduction of its (their) Class Principal Balance(s) on such
Distribution Date (pro rata based on the relative amounts of such distributions
if there is more than one such Class of Sequential Pay Certificates then
entitled thereto).
The Depositor makes no representation as to the enforceability of the
provision of any Mortgage Note requiring the payment of a Prepayment Premium, or
of the collectability of any Prepayment Premium. See "RISK FACTORS--The Mortgage
Assets" and "DESCRIPTION OF THE MORTGAGE POOL--Certain Terms and Conditions of
the Mortgage Assets" and "--Additional Mortgage Loan Information" herein.
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Subordination; Allocation of Losses and Certain Other Expenses and Shortfalls
The rights of holders of the Non-Offered Certificates to receive
distributions of amounts collected or advanced on or in respect of the Mortgage
Assets will be subordinated, to the extent described herein, to the rights of
holders of the Offered Certificates. This subordination is intended to enhance
the likelihood of timely receipt by holders of the Offered Certificates of the
full amount of all interest payable in respect of the Offered Certificates on
each Distribution Date, and the ultimate receipt by holders of the respective
Classes of Class A Certificates of principal in an amount equal to the entire
Class Principal Balance of each such Class of Certificates. The protection
afforded to the holders of the Offered Certificates by means of the
subordination of the Non-Offered Certificates will be accomplished by the
application of the Available Distribution Amount on each Distribution Date in
accordance with the order of priority described under
"--Distributions--Application of the Available Distribution Amount" above. No
other form of credit enhancement will be available for the benefit of the
holders of the Offered Certificates.
If, following the distributions to be made in respect of the
Certificates on any Distribution Date, the aggregate of the Stated Principal
Balances of the Mortgage Assets that will be outstanding immediately following
such Distribution Date is less than the then aggregate of the Class Principal
Balances of the respective Classes of Sequential Pay Certificates, the Class
Principal Balance of the Class B Certificates will be reduced until such deficit
(or such Class Principal Balance) is reduced to zero (whichever occurs first).
If any portion of such deficit remains at such time as the Class Principal
Balance of the Class B Certificates is reduced to zero, then the Class Principal
Balances of the respective Classes of Class A Certificates will be reduced, pro
rata in accordance with the relative sizes of the remaining Class Principal
Balances of such Classes of Certificates, until such deficit (or each such Class
Principal Balance) is reduced to zero. Any such deficit may be the result of
losses (each, a "Realized Loss") arising from the Master Servicer's failure to
collect all amounts due and owing in respect of a defaulted FHA Loan, including,
in connection with the assignment of any defaulted FHA Loan to the FHA, by
reason of the payment of the required Assignment Fee or by reason of the FHA
Insurance Benefits not covering certain items as hereinafter described,
including certain interest shortfalls arising out of the assignment of a
defaulted FHA Loan to the FHA. See "FHA MORTGAGE INSURANCE PROGRAMS--Insurance
Claims and Benefits" herein. Any such deficit may also be the result of
Additional Trust Fund Expenses. "Additional Trust Fund Expenses" will include,
among other things: (i) any interest paid to the Master Servicer or the Trustee,
subject to the limitations described herein, in respect of unreimbursed
Advances; and (ii) any of certain unanticipated, non-Mortgage Asset specific
expenses of the Trust Fund, including, but not limited to, certain
reimbursements and indemnification to the Trustee and certain related persons
described under "--The Trustee" below, certain reimbursements and
indemnification to the Master Servicer, the Depositor and certain related
persons described under "SERVICING OF THE FHA LOANS--Limitation on Liability"
herein, certain taxes payable from the assets of the Trust Fund and described
under "FEDERAL INCOME TAX CONSIDERATIONS" herein and under "FEDERAL INCOME TAX
CONSIDERATIONS" in the Prospectus, certain tax-related expenses and the cost of
various opinions of counsel required to be obtained in connection with the
servicing and administration of the Mortgage Assets. The foregoing reductions in
the Class Principal Balances of the Sequential Pay Certificates will be deemed
to constitute an allocation of any such Realized Losses and Additional Trust
Fund Expenses.
Prepayment Interest Shortfalls and Compensating Interest Payments
For any Distribution Date, a "Prepayment Interest Shortfall" will arise
with respect to any FHA Loan if a borrower makes a full or partial principal
prepayment during the related Collection Period, and
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the date such payment was made occurred prior to the Due Date for such FHA Loan
in such Collection Period. Such a shortfall arises because the amount of
interest which accrues on the amount of such principal prepayment will be less
than the corresponding amount of interest accruing on the Certificates and fees
payable to the Master Servicer and the Trustee. In such case, the Prepayment
Interest Shortfall will generally equal the amount of interest that would have
accrued at the related Net Asset Rate plus the Trustee Fee Rate on the amount of
such principal prepayment during the period commencing on the date as of which
such principal prepayment was applied to such FHA Loan and ending on the day
immediately preceding such Due Date, inclusive, to the extent such interest was
not (without regard to any Prepayment Premium) collected from the related
borrower. With respect to each Distribution Date, the Master Servicer will be
required to make a nonreimbursable payment (a "Compensating Interest Payment"),
in an amount equal to the aggregate of any Prepayment Interest Shortfalls
incurred during the related Collection Period.
In any case in which a full or partial principal prepayment is made by
the borrower during any Collection Period after the Due Date for the related FHA
Loan, "Excess Prepayment Interest" will arise because the amount of interest
which accrues on the amount of such principal prepayment will exceed the
corresponding amount of interest accruing on the Certificates and fees payable
to the Master Servicer and the Trustee. The amount of Excess Prepayment Interest
in any such case will equal the interest that accrues on the FHA Loan from such
Due Date to the date such payment was made, net of any Servicing Fees payable
therefrom. Excess Prepayment Interest will be payable to the Master Servicer as
additional compensation.
"Prepayment Interest Shortfalls" will not result from a principal
prepayment of any Underlying Mortgage Loan because such principal prepayment
does not reduce the principal balance of the related GNMA Certificate on which
interest accrues until such principal prepayment is paid to the holder of the
GNMA Certificate. The Due Date for the payment of scheduled principal and
interest on the GNMA Certificates is the 15th day of each month (or, if such
15th day is not a business day, the next succeeding business day). Interest
payable on a GNMA Certificate on each related Due Date accrues on the principal
balance thereof as of the end of the prior calendar month. Accordingly, if a
principal prepayment on any Underlying Mortgage Loan were passed through on a
GNMA Certificate after the Determination Date in any calendar month, interest
payable on such GNMA Certificate on the next related Due Date would accrue on
the principal balance of the GNMA Certificate reduced by such principal
prepayment. Because such principal prepayment would not be distributable on the
Certificates until the Distribution Date in the following calendar month, the
Certificates would continue to accrue interest on Certificate Principal Balances
and Certificate Notional Amounts that did not reflect the payment of such
principal prepayment, thus resulting in an interest shortfall. However, the
holder of a GNMA Certificate is not required to accept more than one payment per
month on such GNMA Certificate, and because a payment must be made on each GNMA
Certificate on each Due Date in respect thereof, the Trustee (as the holder
thereof) will not be required to accept any payment in any given month after the
Due Date for such GNMA Certificate. In order to avoid an interest shortfall of
the type described above, the Pooling and Servicing Agreement will prohibit the
Master Servicer and the Trustee from accepting a second payment on a GNMA
Certificate after the related Due Date in any month.
Purchases of defaulted FHA Loans by the Majority Class B
Certificateholder and purchases of FHA Debentures by the Majority Class B
Certificateholder, the Master Servicer or the Trustee as provided herein will
not result in "Prepayment Interest Shortfalls" because the Purchase Price (as
defined herein) of any such defaulted FHA Loan or FHA Debenture will include
unpaid interest thereon to the later of (i) the date of purchase and (ii) the
Due Date of such defaulted FHA Loan or, in the case of an FHA Debenture, the Due
Date of the related Assigned FHA Loan in the Collection Period of purchase.
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See "SERVICING OF THE FHA LOANS--Sale of Defaulted FHA Loans" and "--Sale of FHA
Debentures" herein.
Interest shortfalls comparable to Prepayment Interest Shortfalls but
arising out of the assignment of a defaulted FHA Loan to the FHA will be treated
as part of the related "Realized Loss".
Reports to Certificateholders; Available Information
Trustee Reports
Based on information provided in monthly reports prepared by the Master
Servicer and delivered to the Trustee, the Trustee will prepare and forward on
each Distribution Date to the holders of each Class of Offered Certificates a
statement (a "Distribution Date Statement") setting forth, among other things:
(i) the amount of the distribution on such Distribution Date to the holders of
such Class of Offered Certificates in reduction of the Class Principal Balance
thereof; (ii) the amount of the distribution on such Distribution Date to the
holders of such Class of Offered Certificates allocable to Accrued Certificate
Interest; (iii) the amount of the distribution on such Distribution Date to the
holders of such Class of Offered Certificates allocable to Prepayment Premiums;
(iv) the Available Distribution Amount for such Distribution Date; (v) the
aggregate amount of Monthly Advances made in respect of such Distribution Date,
the aggregate amount of unreimbursed Monthly Advances that had been outstanding
at the close of business on the related Determination Date and the aggregate
amount of unpaid Advance Interest (as defined herein) in respect of such
unreimbursed Monthly Advances at the close of business on the related
Determination Date; (vi) the aggregate Stated Principal Balance of the Mortgage
Pool outstanding immediately before and immediately after such Distribution Date
and the Stated Principal Balance of each Mortgage Loan outstanding immediately
before and immediately after such Distribution Date; (vii) the number, aggregate
principal balance, weighted average remaining term to maturity and weighted
average Mortgage Rate of the FHA Loans, collectively, and the principal balance,
remaining term to maturity and Mortgage Rate of each FHA Loan, in each case, as
of the close of business on the related Determination Date; (viii) the number,
aggregate principal balance, weighted average remaining term to maturity and
weighted average GNMA Certificate Rate of the GNMA Certificates, collectively,
and the principal balance, remaining term to maturity and GNMA Certificate Rate
of each GNMA Certificate, in each case as of the close of business on the
related Determination Date; (ix) the number, aggregate principal balance,
weighted average remaining term to maturity and weighted average Debenture Rate
of the FHA Debentures, collectively, and the principal balance, remaining term
to maturity and Debenture Rate of each FHA Debenture, if any, in each case as of
the close of business on the related Determination Date; (x) (A) the number of
FHA Loans and the aggregate amount of Monthly Payments which were due but
delinquent as of the Due Date in (1) the month of the distribution, (2) the
first month preceding distribution and (3) the second month preceding
distribution and (B) the identity and outstanding principal balance of any FHA
Loan assigned to the FHA for which final settlement with the FHA has not been
made, if any; (xi) the status of any claims under the FHA Insurance in respect
of any defaulted FHA Loan; (xii) if applicable, the amount of such distribution
allocable to the proceeds of the purchase of a defaulted FHA Loan or FHA
Debentures by the Majority Class B Certificateholder, the Master Servicer or the
Trustee; (xiii) with respect to any FHA Loan that was liquidated during the
related Collection Period (other than by reason of a payment in full), (A) the
related FHA project number, (B) the aggregate of all liquidation proceeds and/or
FHA Insurance Benefits and other amounts received in connection with such
liquidation (separately identifying the portion thereof allocable to
distributions on the Certificates), and (C) the amount of any loss in connection
with such liquidation; (xiv) the Accrued Certificate Interest in respect of such
Class of Offered Certificates for such Distribution Date; (xv) any unpaid
Accrued Certificate Interest in respect of such Class of Offered Certificates
(other than the Monthly Class A-Z
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Accrual Amount) after giving effect to the distributions made on such
Distribution Date; (xvi) the Certificate Interest Rate for such Class of Offered
Certificates for such Distribution Date; (xvii) any principal prepayment or
other unscheduled collection of principal received during the related Collection
Period, the FHA project number for the related FHA Loan and the amount of such
prepayment or other collection of principal; (xviii) the aggregate of all
Realized Losses, if any, incurred during the related Collection Period; (xix)
the Class Principal Balance or Class Notional Amount, as applicable, of each
Class of Regular Interest Certificates outstanding immediately before and
immediately after such Distribution Date; (xx) the aggregate amount of Advance
Interest paid to the Master Servicer or the Trustee during the related
Collection Period, the aggregate amount of Advance Interest paid to the Master
Servicer or the Trustee since the Closing Date and the amount remaining under
the Advance Interest Cap on the related Determination Date; (xxi) the aggregate
amount of servicing compensation paid to the Master Servicer during the most
recently ended calendar month; and (xxii) such other information as the Trustee
is required by the Code or other applicable law to furnish to enable
Certificateholders to prepare their tax returns. In the case of information to
be furnished pursuant to clauses (i) through (iii) above, the amounts shall be
expressed as a dollar amount in the aggregate for all Certificates of each
applicable Class and per specified denomination.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee is required to send to each person who at any time
during the calendar year was a holder of record of an Offered Certificate, a
report containing the information set forth in clauses (i) through (iii) above
as to the applicable Class, aggregated for the portion of such calendar year
that such Person was a Certificateholder of record. Investors and any other
interested party may obtain Trustee Reports via the Trustee's electronic
bulletin board by dialing (312) 904-2200 and selecting the applicable statement
(document #217).
Book-Entry Registration
Until such time as Definitive Certificates are issued in respect of the
Offered Certificates, the foregoing information will be available to the related
Beneficial Owners only to the extent it is forwarded by or otherwise available
through DTC and its Participants. Any Beneficial Owner who does not receive
information through DTC or its Participants may request that Trustee reports be
mailed directly to it by written request to the Trustee (accompanied by
verification of such Beneficial Owner's ownership interest) at the Trustee's
corporate trust office. Certain information set forth in such Trustee reports is
to be available via facsimile transmission through LaSalle National Bank's ASAP
(Automated Statements Accessed by Phone) System by calling (312) 904-2200 and
requesting statement number 217. The manner in which notices and other
communications are conveyed by DTC to Participants, and by Participants to the
Beneficial 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 Trustee and the Depositor are required to recognize as
Certificateholders only those persons in whose names the Certificates are
registered on the books and records of the Trustee. See "SPECIAL
CONSIDERATIONS--Book-Entry Registration" and "DESCRIPTION OF THE
SECURITIES--Book-Entry Registration" in the Prospectus.
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Example of Distributions
The following chart sets forth an example of distributions on the
Certificates for the first month of the Trust Fund's existence, assuming the
Certificates are issued on December 27, 1996:
December 1 (A) Cut-off Date.
December 31 (B) Record Date.
December 2--January 20 (C) Collection Period.
January 20 (D) Determination Date.
January 23 (E) Monthly Advance Date.
January 24 (F) Master Servicer Remittance Date.
January 27 (G) Distribution Date.
Succeeding monthly periods follow the pattern of (B) through (G)
(except as described below).
(A) The Initial Pool Balance will be the aggregate unpaid principal
balance of the Mortgage Assets at the close of business on December 1, 1996
(after deducting principal payments due on the Mortgage Loans on or before such
date). Those principal payments due on or before such date, and the accompanying
interest payments, are not part of the Trust Fund.
(B) With respect to any Distribution Date, the related "Record Date"
will be the last Business Day of the month preceding the month in which the
applicable Distribution Date occurs.
(C) Scheduled payments of principal and interest due on the Mortgage
Loans after the Cut-off Date and on or prior to January 20, 1997, to the extent
collected (directly or through the GNMA Certificates) on or prior to January 20,
1997, will be deposited in the Custodial Account or the Collection Account, as
appropriate, as described under "--The Custodial and Collection Accounts"
herein. Any principal prepayments made by the borrowers under the Mortgage Loans
after the Cut-off Date and on or prior to January 20, 1997 (or, in the case of
an Underlying Mortgage Loan, made by the related borrower after the Cut-off Date
and passed through on the related GNMA Certificate on or prior to January 20,
1997) will be deposited in the Custodial Account or the Collection Account, as
appropriate, as described under "--The Custodial and Collection Accounts"
herein. The Master Servicer will offset any resulting Prepayment Interest
Shortfalls in respect of prepaid Mortgage Loans. Each subsequent Collection
Period will begin immediately following the preceding Collection Period and will
end at the close of business on the Determination Date for the related
Distribution Date.
(D) With respect to each Distribution Date, the related "Determination
Date" will be the 20th day of the month in which such Distribution Date occurs,
or, if such 20th day is not a Business Day, the next succeeding Business Day.
(E) On the second Business Day preceding each Distribution Date, the
Master Servicer is to make any required Monthly Advances for such Distribution
Date. See "SERVICING OF THE FHA LOANS--Advances" herein.
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(F) On the Business Day preceding each Distribution Date, the Master
Servicer is to remit to the Collection Account that portion of the Available
Distribution Amount then on deposit in the Custodial Account. See "--The
Custodial and Collection Accounts" herein.
(G) The Trustee will make distributions to Certificateholders on the
25th day of each month or, if such day is not a Business Day, the next
succeeding Business Day.
Optional Termination
The Master Servicer will have the option to purchase, in whole but not
in part, the Mortgage Assets remaining in the Trust Fund on any date on which
the aggregate Stated Principal Balance of the Mortgage Pool is less than or
equal to 5% of the Initial Pool Balance. Such purchase will be at a price (the
"Termination Price") generally equal to the aggregate of the Purchase Prices for
the Mortgage Assets to be so purchased (calculated as if the purchase was to
occur on the last Business Day of the Collection Period for the final
Distribution Date). The optional termination of the Trust Fund must be conducted
so as to constitute a "qualified liquidation" of each of REMIC I, REMIC II and
REMIC III under Section 860F of the Code. The Termination Price (exclusive of
any portion thereof payable to persons other than the Certificateholders as
described under "--Distributions--The Available Distribution Amount" above) will
constitute part of the Available Distribution Amount for the final Distribution
Date.
The "Purchase Price" for any Mortgage Asset will equal the sum of (a)
100% of the unpaid principal balance thereof as of the date of purchase, plus
(b) accrued and unpaid interest on such Mortgage Asset at the related Mortgage
Rate, GNMA Certificate Rate or Debenture Rate, as applicable, to the later of
(i) the date of purchase and (ii) the Due Date for such Mortgage Asset (or, in
the case of an FHA Debenture, the Due Date for the related Assigned FHA Loan) in
the Collection Period of purchase, plus (c) all related unreimbursed Servicing
Advances, if any.
Any such optional termination would result in the prepayment in full of
the Offered Certificates and would have an adverse effect on the yield of the
Class S Certificates and any other outstanding Offered Certificates purchased at
a premium, because a termination would have the same effect as a prepayment in
full of the Mortgage Assets. See "MATURITY AND PREPAYMENT CONSIDERATIONS" and
"YIELD CONSIDERATIONS" herein.
Voting Rights; Lists of Certificateholders
At all times during the term of the Pooling and Servicing Agreement,
99% of the voting rights for the Series offered hereby (the "Voting Rights")
will be allocated to the various Classes of Sequential Pay Certificates in
proportion to their respective Class Principal Balances and 1% of all Voting
Rights will be allocated to the Class S Certificates. All Voting Rights
allocated to a Class of Certificates shall be allocated among the Certificates
of such Class in proportion to the Percentage Interests evidenced thereby.
The Trustee
LaSalle National Bank will act as Trustee of the Trust Fund. The
Trustee is at all times to be, and will be required to resign if it fails to be,
a corporation or association having its principal office in a state and city
acceptable to the Depositor and organized and doing business under the laws of
such state or the United States of America, authorized under such laws to
exercise corporate trust powers, having a rating on its long-term unsecured debt
obligations at least equal to "AA-" from S&P (or such lower
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rating as will not cause S&P to reduce, withdraw or qualify its then-current
ratings of the Certificates), having a combined capital and surplus of at least
$50,000,000 and subject to supervision or examination by federal or state
authority, and that is an FHA-Approved Mortgagee. The corporate trust office of
the Trustee responsible for administration of the Trust (the "Corporate Trust
Office") is located at 135 South LaSalle Street, Suite 1740, Chicago, Illinois
60674-4107 Attention: Asset-Backed Securities Trust Services, ASW-FHA1. The
Trustee may be removed by the holders of Certificates entitled to not less than
50% of the Voting Rights. The Trustee will be responsible for various
tax-related administrative duties in respect of the Trust.
The Trustee, prior to the occurrence of an Event of Default and after
the curing of all Events of Default that may have occurred, will perform such
duties and only such duties with respect to the Trust Fund as are specifically
set forth in the Pooling and Servicing Agreement. The Trustee will not be
required to perform or be responsible for the manner of performance of any of
the obligations of the Master Servicer under the Pooling and Servicing
Agreement, except the obligations to make Monthly Advances and purchase FHA
Debentures, as described herein, and during any such time, if any, as the
Trustee shall be the acting or successor master servicer, vested with the
rights, duties, powers and privileges of the Master Servicer.
As compensation for the performance of its duties, the Trustee will be
paid a monthly fee (the "Trustee Fee"), out of general collections on the
Mortgage Assets, equal to one-month's interest (calculated on the basis of a
360-day year consisting of twelve 30-day months) at 0.02% per annum (the
"Trustee Fee Rate") accrued on the aggregate Stated Principal Balance of the
Mortgage Assets immediately prior to the related Distribution Date. The Trustee
shall also be entitled to recover from the Trust Fund all reasonable
unanticipated expenses and disbursements incurred or made by the Trustee in
accordance with any of the provisions of the Pooling and Servicing Agreement
(including the reasonable compensation and the reasonable expenses and
disbursements of its counsel and of all persons not regularly in its employ),
but not including expenses incurred in the ordinary course of performing its
duties as Trustee under the Pooling and Servicing Agreement, and further not
including any such expense, disbursement or advance as may arise from the
Trustee's negligence, bad faith or willful misconduct or which is the specific
responsibility of the Trustee under the Pooling and Servicing Agreement. The
Trustee's right to payment for any fees and certain expenses under the Pooling
and Servicing Agreement will be prior to that of the Certificateholders to
payment on any Distribution Date.
The Trustee and each of its directors, officers, employees or agents
shall be entitled to indemnification from the Trust Fund for any loss, liability
or expense incurred without negligence, bad faith or willful misconduct on their
part, arising out of, or in connection with, the acceptance or administration of
the trusts created under the Pooling and Servicing Agreement, including the
costs and expenses of defending themselves against any claim in connection with
the exercise or performance of any of their powers or duties under the Pooling
and Servicing Agreement.
The Custodial and Collection Accounts
The "Custodial Account" for the Trust Fund is to be established by the
Master Servicer in its name on behalf of the Trustee for the benefit of the
Certificateholders in an account or accounts as described in the Pooling and
Servicing Agreement and meeting Rating Agency criteria (each, an "Eligible
Account"). The Master Servicer is required to deposit in the Custodial Account
on a daily basis all payments and other collections received with respect to the
FHA Loans after the Cut-off Date (other than payments of principal and interest
due on the FHA Loans on or before the Cut-off Date and other than Retained
Yield), and will be permitted to make withdrawals therefrom as set forth in the
Pooling and
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Servicing Agreement. Funds in the Custodial Account may be invested and, if
invested, will be invested in the name of the Trustee (in its capacity as such)
in Permitted Investments specified in the Prospectus that mature not later than
the Business Day preceding each Distribution Date and may not be sold or
disposed of prior to its maturity. All income and gain realized from any such
investments will accrue to the benefit of the Master Servicer, as additional
servicing compensation, and will be subject to withdrawal by the Master Servicer
from time to time. Likewise, all losses realized from any such investments will
be borne by the Master Servicer.
The "Collection Account" for the Trust Fund will be established by the
Trustee in an Eligible Account or Accounts. Payments on the GNMA Certificates
(other than any such payments relating to payments of principal and interest due
on the Underlying Mortgage Loans on or before the Cut-off Date) are to be
deposited directly into the Collection Account upon receipt. No later than the
Business Day prior to each Distribution Date (the "Master Servicer Remittance
Date"), the net collections on or in respect of the FHA Loans then on deposit in
the Custodial Account that constitute part of the Available Distribution Amount
for such Distribution Date, together with the Compensating Interest Payment and
Monthly Advances in respect of such Distribution Date, certain other limited
amounts then payable to the Trustee and any Prepayment Premiums collected during
the related Collection Period, are to be remitted by the Master Servicer to the
Trustee for deposit into the Collection Account. On each Distribution Date, the
Trustee will withdraw all amounts on deposit in the Collection Account and,
after paying fees and expenses as provided in the Pooling and Servicing
Agreement, will pay interest and principal on the Certificates, and will
distribute the Prepayment Premiums, all as described herein. Funds in the
Collection Account may be invested and, if invested, shall be invested in
Permitted Investments specified in the Prospectus that mature not later than the
Business Day prior to each Distribution Date and may not be sold or disposed of
prior to maturity. All income and gain realized from any such investments will
accrue to the benefit of the Master Servicer, as additional compensation, and
will be subject to withdrawal at the direction of the Master Servicer from time
to time. Losses realized from any such investments will be borne by the Master
Servicer.
DESCRIPTION OF THE MORTGAGE POOL
General
Upon creation, the Trust Fund will primarily consist of the segregated
pool (the "Mortgage Pool") of assets described under "--The FHA Loans" and
"--The GNMA Certificates" and having an aggregate Cut-off Date Balance of
approximately $266,510,464 (the "Initial Pool Balance") subject to a permitted
variance of plus or minus 5%. All numerical information provided herein with
respect to the Mortgage Loans and the GNMA Certificates is provided on an
approximate basis. All weighted average information provided herein with respect
to the Mortgage Loans and the GNMA Certificates reflects weighting based on the
Cut-off Date Balances thereof or, in the case of an Underlying Mortgage Loan,
the Cut-off Date Balance of the related GNMA Certificate.
The FHA Loans
The Mortgage Pool will include 61 fixed-rate, fully-amortizing mortgage
loans (the "FHA Loans") having an aggregate Cut-off Date Balance of
approximately $188,800,560, subject to a permitted variance of plus or minus 5%.
Each FHA Loan is evidenced by a promissory note or other evidence of
indebtedness (a "Mortgage Note") and secured by a mortgage, deed of trust or
other similar security instrument (a "Mortgage") creating a first or second lien
on a multifamily rental housing development
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(a "Multifamily Property") or a nursing home, an intermediate care facility, a
board and care home or a facility providing assisted living for the frail
elderly (a "Nursing Facility"; the Multifamily Property or Nursing Facility
constituting security for any FHA Loan, a "Mortgaged Property"). Furthermore,
the FHA Loans are insured, to the extent and subject to the limitations
described herein, by the FHA under certain provisions of the Housing Act. The
"Cut-off Date Balance" of any FHA Loan is equal to the unpaid principal balance
thereof as of the Cut-off Date, after application of the payment of principal
due thereon on such date, whether or not received. See "FHA MORTGAGE INSURANCE
PROGRAMS" herein.
The GNMA Certificates
The Mortgage Pool will include 20 separate securities (the "GNMA
Certificates") guaranteed by GNMA and backed by fixed-rate, fully-amortizing
mortgage loans (the "Underlying Mortgage Loans" and, collectively with the FHA
Loans, the "Mortgage Loans"), such GNMA Certificates having an aggregate Cut-off
Date Balance of $77,709,904, subject to a permitted variance of plus or minus
5%. Each GNMA Certificate is backed by a single Underlying Mortgage Loan, and
each Underlying Mortgage Loan is evidenced by a Mortgage Note, secured by a
Mortgage creating a first or second lien on a Multifamily Property or a Nursing
Facility (in either case, as to such Underlying Mortgage Loan, the "Mortgaged
Property"), and insured by the FHA under a particular provision of the Housing
Act. In all but two cases, each GNMA Certificate evidences a 100% interest in
the related Underlying Mortgage Loan. However, two GNMA Certificates,
representing 7.51% of the Initial Pool Balance, evidence only a partial pro rata
interest in the related Underlying Mortgage Loan. The "Cut-off Date Balance" of
any GNMA Certificate is equal to the unpaid principal balance thereof as of the
Cut-off Date, exclusive of the payment of principal due on the related
Underlying Mortgage Loan on such date, whether or not received. See "FHA
MORTGAGE INSURANCE PROGRAMS" and "GNMA MORTGAGE-BACKED SECURITIES PROGRAM"
herein.
Certain Terms and Conditions of the Mortgage Loans
Mortgage Rates; Calculations of Interest. All of the Mortgage Loans
bear interest at mortgage interest rates (each, a "Mortgage Rate") that will
remain fixed for their remaining terms. All of the Mortgage Loans accrue
interest on the basis of a 360-day year consisting of twelve 30-day months.
Due Dates. All of the Mortgage Loans have Due Dates (that is, the dates
upon which the related Monthly Payments first become due) that occur on the
first day of each month.
Amortization. All of the Mortgage Loans are fully-amortizing over their
remaining terms to stated maturity. Certain of the Mortgage Loans provide that,
if the related borrower makes a partial principal prepayment, such borrower will
not be in default if it fails to make any subsequent scheduled payment of
principal provided that such borrower continues to pay interest in a timely
manner and the unpaid principal balance of such Mortgage Loan at the time of
such failure is at or below what it would otherwise be in accordance with its
amortization schedule if such partial principal prepayment had not been made.
Level Payments. All of the Mortgage Loans provide for level monthly
payments, except with respect to two FHA Loans, representing 2.4% of the Initial
Pool Balance.
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<PAGE>
Prepayment Provisions (as of the Cut-off Date):
Percentage of
Type of Number of Cut-off Date
Prepayment Provision(1) Mortgage Loans Principal Balances
----------------------- -------------- ------------------
L, PP 47 48.6%
L 24 30.9%
PP 10 20.5%
---------------------
(1) L, PP = Voluntary prepayments in full are prohibited or locked-out
for a period of time and are followed by a period in which voluntary
prepayments in full must be accompanied by a Prepayment Premium.
L = Voluntary prepayments in full are prohibited or locked-out for a
period of time.
PP = Voluntary prepayments in full must be accompanied by a
Prepayment Premium for a period of time.
If and when payable, Prepayment Premiums are calculated as a percentage
of the amount prepaid, which percentage generally declines (in some cases to
zero) over the related loan term. In general, each Mortgage Loan permits a
principal prepayment to be made without payment of any Prepayment Premium or
other restriction during a specified period preceding its stated maturity date.
See "DESCRIPTION OF THE MORTGAGE POOL--Additional Mortgage Loan Information"
herein. In the case of a Mortgage Loan which is the subject of Section 8 rental
assistance, continuing use restrictions incident to the acceptance of such
assistance may provide a meaningful disincentive to voluntary prepayment. See
"FHA MORTGAGE INSURANCE PROGRAMS-- Section 241(f)". However, as discussed below
under "--Loans Assisted Under Section 8," the Sellers do not have complete
information regarding the degree to which property revenues are attributable to
Section 8 rent subsidies.
If and to the extent collected, Prepayment Premiums will be distributed
to Certificateholders as described herein under "DESCRIPTION OF THE
CERTIFICATES--Distributions--Distributions of Prepayment Premiums". None of the
Depositor, the Sellers or the Underwriters makes any representation as to the
enforceability of the terms of any Mortgage Note requiring the payment of a
Prepayment Premium, or as to the collectability of any Prepayment Premium. See
"RISK FACTORS--The Mortgage Assets--Prepayment Premiums" herein.
As described under "FHA MORTGAGE INSURANCE PROGRAMS--Insurance Claims
and Benefits--Prepayments and Lock-outs" herein, Mortgage Loans that restrict
prepayments are subject to a right of the FHA to override such restrictions and
permit prepayment without penalty and without the consent of the mortgagee if
the FHA determines that such override would be in the best interest of the
federal government. In addition, under HUD's Mortgagee Letter 87-9, the
mortgagee may be required to request from HUD an extension of the deadline for
filing a claim for FHA Insurance Benefits on a Mortgage Loan that has prepayment
restrictions and, if such request is granted by HUD, to provide certain
assistance and cooperation ("87-9 Cooperation") to the mortgagor and HUD during
a three-month period to avoid such an insurance claim, consistent with prudent
business practices. In addition, certain of the Mortgage Loans permit the
borrower to prepay up to 15% of the original principal amount of the loan in any
one calendar year without any Prepayment Premium, notwithstanding the prepayment
restrictions in the related Mortgage Note.
"Due-on-Sale" and "Due-on-Encumbrance" Provisions. In general, the
Mortgages for the Mortgage Loans contain "due-on-encumbrance" clauses that
permit the holder of the Mortgage, subject
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<PAGE>
to any required 87-9 Cooperation, to accelerate the maturity of the related
Mortgage Loan if the borrower further encumbers the related Mortgaged Property
or prohibit the borrower from doing so without the consent of the holder of the
Mortgage. However, in general, the Mortgages do not contain "due-on-sale"
clauses restricting sale or other transfer of the related Mortgaged Property.
See "SERVICING OF THE FHA LOANS--Due-on-Sale and Due-on-Encumbrance Provisions"
herein.
Additional Mortgage Loan Information
The tables appearing on the following pages set forth certain
information with respect to the GNMA Certificates, the Mortgage Loans and the
Mortgaged Properties. The statistics in certain of such tables were derived
primarily from information furnished by the related borrowers and/or property
managers, and such information has not been independently verified by the
Depositor, the Sellers, the Trustee or the Underwriters. For purposes of this
Prospectus Supplement:
1. "NOI" as used herein with respect to any Mortgaged Property
for any twelve-month period means the Annual Total Revenues minus the
Annual Total Operating Expenses, in each case for such twelve-month
period. "Annual Total Revenues" include primarily apartment unit
rentals or nursing bed rentals (and related Nursing Facility-provided
services), as applicable, together with all other income generated by
the related Mortgaged Property. "Annual Total Operating Expenses"
include administrative expenses (including a management fee), utility
expenses, operating and maintenance expenses, property insurance
expenses and real estate taxes, but do not include mortgage interest,
mortgage insurance premiums, capital expenditures, amortization or
depreciation.
2. "Cut-off Date Debt Service Coverage Ratio" or "Cut-off Date
DSCR" means, with respect to any Mortgage Asset for which it can be
calculated, (a) the NOI (if available) as derived from (i) in the case
of 18 of the Mortgaged Assets, constituting security for approximately
30.90% of the Initial Pool Balance, audited financial statements (in
each such case, for the fiscal year, ending either December 31, 1994 or
December 31, 1995), (ii) in the case of 44 of the Mortgaged Assets (all
recently originated), constituting security for approximately 48.3% of
the Initial Pool Balance, pro-forma financial statements, (iii) in the
case of two Mortgaged Assets, constituting security for approximately
7.1% of the Initial Pool Balance, unaudited partial-year, financial
statements (annualized) in the case of one Mortgage Asset, constituting
security for approximately 1.2% of the Initial Pool Balance, unaudited
financial statements for the 12-month period ended November 30, 1996,
divided by (b) the Annual Debt Service for such Mortgage Loan (based on
the Monthly Payment due in respect thereof on the first Due Date
following the Cut-off Date) plus, in the case of a Mortgage Loan
secured by a second lien on the related Mortgaged Property, the annual
debt service for the related first mortgage loan; provided, however,
that in the one case where the first mortgage lien and second mortgage
lien are both assets of the Trust Fund, the related Debt Service
Coverage Ratios are presented herein with respect to such pair of FHA
Loans as if it was a single Mortgage Loan.
3. "FY '94" and "FY '95" as used herein with respect to the
NOI for any Mortgaged Property for which it can be calculated, shall
designate that such NOI was derived from financial statements covering
the entire fiscal year ending December 31, 1994 and December 31, 1995,
respectively. "FY '96" as used herein with respect to the NOI for any
Mortgaged Property shall designate that such NOI was derived from
financial statements covering a portion of 1996 and annualized or from
financial statements covering the 12-month period ending November 30,
1996.
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<PAGE>
4. "U/W" as used herein with respect to the NOI for any
Mortgaged Property shall designate that such NOI was derived from a
pro-forma financial statement.
5. References to "weighted average" or "wtd. avg." are
references to an average weighted on the basis of the Cut-off Date
Balances of the related Mortgage Assets.
6. "N/A" as used herein shall mean not available.
7. "Remaining Prepayment Premium Term" as used herein, shall
mean with respect to any Mortgage Loan, the period, if any, during
which, under the terms of the Mortgage Loan, a voluntary prepayment in
full must be accompanied by a Prepayment Premium.
8. "Remaining Lockout Term" as used herein shall mean with
respect to any Mortgage Loan, the period, if any, during which, under
the terms of the Mortgage Loan, a voluntary prepayment in full is
prohibited.
9. References to "Cut-off Date Balances" and "Net Asset Rates"
of the Underlying Mortgage Loans are references to the "Cut-off Date
Balances" and "Net Asset Rates," respectively, of the related GNMA
Certificates.
The following tables set forth the indicated information with respect
to the Mortgage Assets, the Mortgage Assets and/or the Mortgaged Properties as
of the Cut-off Date. The sum in any column of any of the following tables may
not equal the indicated total due to rounding.
Location and Type of the Mortgaged Properties
Mortgage Section of Zip
Number Asset Type Housing Act Property Type City State Code
- ------ ---------- ----------- ------------- -------------- ----- -----
1 GNMA 223 (f) Multifamily Virginia Beach VA 23451
2 FHA 207 Multifamily Aurora CO 80231
3 GNMA 223 (a)7 Nursing Facility Vorhees NJ 20186
4 FHA 221 (d)4 Multifamily New York NY 10029
5 FHA 223 (e) Multifamily New York NY 10017
6 FHA 220 Multifamily Hartford CT 10106
7 FHA 223 (a)7 Nursing Facility Brighton MA 02135
8 FHA 220 Multifamily New York NY 10016
9 FHA 223 (f) Multifamily Erwin NY 14870
10 GNMA 223 (f) Multifamily Atlanta GA 30316
11 FHA 223 (f) Nursing Facility Mount Vernon IL 60610
12 GNMA 232 Nursing Facility Altoona PA 16601
13 FHA 223 (f) Nursing Facility Dover NH 03821
14 GNMA 223 (f) Multifamily Austintown OH 44515
15 GNMA 223 (f) Multifamily Lafayette IN 47905
16 GNMA 223 (f) Multifamily Blacksburg VA 24060
17 FHA 223 (f) Multifamily Lubbock TX 79424
18 FHA 221 (d)4 Multifamily Killeen TX 76540
19 FHA 223 (f) Nursing Facility Exeter NH 03821
20 FHA 232 Nursing Facility Westfield NY 14787
21 FHA 223 (f) Multifamily Sierra Vista AZ 85635
22 FHA 223 (f) Nursing Facility Greenville MI 48838
23 FHA 223 (f) Nursing Facility Tallmadge OH 44278
24 FHA 223 (f) Multifamily Merritt Island FL 32953
25 FHA 221 (d)4 Multifamily La Porte TX 77571
26 GNMA 223 (f) Multifamily Texas City TX 77590
27 FHA 221 (d)4 Multifamily Port Arthur TX 77642
S-55
<PAGE>
Location and Type of the Mortgaged Properties
Mortgage Section of Zip
Number Asset Type Housing Act Property Type City State Code
- ------ ---------- ----------- ------------- -------------- ----- -----
28 FHA 221 (d)4 Multifamily New York NY 10031
29 FHA 223 (f) Nursing Facility Big Rapids MI 49307
30 FHA 232 Nursing Facility Navarre OH 44662
31 FHA 223 (f) Multifamily Suitland MD 20746
32 FHA 223 (a)7 Multifamily Brooklyn NY 11210
33 GNMA 223 (f) Multifamily East Haven CT 06512
34 FHA 223 (f) Multifamily San Bernardino CA 92400
35 GNMA 223 (a)7 Multifamily Laurel MD 20697
36 FHA 223 (f) Nursing Facility Rapid City SD 55701
37 FHA 223 (f) Nursing Facility Pierre SD 57501
38 FHA 223 (f) Nursing Facility Rapid City SD 55701
39 FHA 223 (f) Nursing Facility East Lansing MI 48823
40 FHA 223 (f) Multifamily Lubbock TX 79424
41 FHA 232 Nursing Facility Manistee MI 49660
42 GNMA 241 (f) Multifamily Naugatuck CT 06770
43 FHA 232 Nursing Facility Montrose MI 48457
44 FHA 221 (d)4 Multifamily Chicago IL 60640
45 FHA 232 Nursing Facility Keysville GA 30816
46 FHA 232 Nursing Facility Muskegon MI 49441
47 FHA 223 (f) Nursing Facility Litchfield MI 49252
48 GNMA 223 (f) Nursing Facility Lonaconing MD 22186
49 FHA 232 Nursing Facility Wadsworth OH 44281
50 GNMA 223 (f) Multifamily Spring Valley CA 91977
51 FHA 221 (d)4 Multifamily Duluth MN 55701
52 FHA 223 (f) Multifamily Detroit MI 48207
53 FHA 232 Nursing Facility Lancaster OH 43130
54 FHA 232 Nursing Facility Plain Township OH 43064
55 GNMA 241 (f) Multifamily Cumberland MD 21502
56 FHA 223 (d) Nursing Facility Brighton MA 02135
57 GNMA 223 (a)7 Multifamily Miami Township OH 45056
58 FHA 223 (f) Multifamily Waterbury CT 06702
59 GNMA 223 (a)7 Multifamily Amherst MA 01002
60 FHA 223 (f) Nursing Facility Zeeland MI 49464
61 GNMA 223 (f) Multifamily Burnsville MN 55337
62 FHA 221 (d)4 Multifamily Clayton NC 27520
63 FHA 241 Multifamily Lexington KY 40504
64 FHA 223 (f) Multifamily Reynoldsburg OH 43068
65 GNMA 221 (d)4 Multifamily New Hope AL 35760
66 FHA 223 (f) Multifamily Biddeford ME 04005
67 FHA 223 (f) Multifamily Cuyahoga Falls OH 43221
68 FHA 232 Nursing Facility Washington OH 43160
Courthouse
69 FHA 223 (f) Multifamily Lubbock TX 79410
70 FHA 232 Nursing Facility Marysville OH 43040
71 GNMA 223 (f) Multifamily Philadelphia PA 19118
72 FHA 223 (f) Nursing Facility Marysville OH 43040
73 FHA 241 Nursing Facility Stamford NY 12167
74 FHA 241 Multifamily Roanoke VA 24017
75 GNMA 241 (f) Multifamily Excelsior MO 64024
76 FHA 223 (d) Nursing Facility Topsham ME 04086
77 FHA 241 (f) Multifamily Grand Island NE 68801
78 FHA 241 (f) Multifamily Los Angeles CA 90007
79 FHA 223 (f) Multifamily Irving TX 75061
80 FHA 241 (f) Multifamily Ashland OR 97520
81 FHA 241 (f) Multifamily Ashland OR 97520
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<PAGE>
Description of Mortgaged Properties
Mortgage Type/Date Cut-off Date
Number Lien Position NOI of NOI(1) DSCR (2)(3)
- ------ ------------- --- --------- -----------
1 First $2,854,403 FY '95 1.17x
2 First 1,865,539 FY '96 1.79
3 First 1,330,613 FY '95 1.34
4 First 1,029,957 FY '94 1.07
5 First 1,076,996 FY '95 1.33
6 First 657,598 FY '95 0.99
7 First 1,011,163 U/W 1.19
8 First 1,290,361 FY '95 1.60
9 First 1,045,944 U/W 1.53
10 First 1,076,744 FY '95 1.60
11 First 2,080,584 U/W 3.12
12 First 760,000 U/W 1.41
13 First 835,232 U/W 1.67
14 First N/A N/A N/A
15 First 625,472 U/W 1.30
16 First N/A N/A N/A
17 First N/A N/A N/A
18 First 542,367 U/W 1.17
19 First 670,912 U/W 1.67
20 First 826,616 U/W 1.90
21 First 556,900 U/W 1.33
22 First 588,956 U/W 1.60
23 First 559,357 FY '95 1.59
24 First 473,165 U/W 1.32
25 First 433,060 U/W 1.17
26 First 459,304 U/W 1.40
27 First N/A N/A N/A
28 First 788,156 FY '95 1.75
29 First 764,249 U/W 2.45
30 First 590,711 FY '95 1.61
31 First 137,247 FY '96 0.44
32 First 468,370 FY '95 1.50
33 First 397,369 U/W 1.62
34 First 330,891 U/W 1.32
35 First N/A N/A N/A
36 First 663,956 U/W 2.68
37 First 590,151 U/W 2.43
38 First 526,511 U/W 2.19
39 First 444,866 U/W 1.78
40 First N/A N/A N/A
41 First 381,959 FY '94 1.39
42 Second N/A N/A N/A
43 First 517,243 U/W 2.49
44 First 244,714 U/W 1.17
45 First 307,704 U/W 1.35
46 First 312,225 U/W 1.40
47 First 294,122 U/W 1.50
48 First 320,223 U/W 2.00
49 First 264,706 FY '95 1.37
50 First 195,120 U/W 1.25
51 First 197,486 U/W 1.17
52 First 164,239 FY '94 0.97
53 First 213,635 U/W 1.29
54 First 212,135 FY '95 1.16
55 Second N/A N/A N/A
56 Second 1,011,163 U/W 1.19
57 First 196,129 U/W 1.44
58 First 191,401 U/W 1.24
59 First 194,328 FY '95 1.42
60 First 202,919 U/W 1.55
61 First 151,891 U/W 1.32
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<PAGE>
Description of Mortgaged Properties
Mortgage Type/Date Cut-off Date
Number Lien Position NOI of NOI(1) DSCR (2)(3)
- ------ ------------- --- --------- -----------
62 First $142,222 FY '95 1.25x
63 Second N/A N/A N/A
64 First 135,876 U/W 1.24
65 First 130,878 U/W 1.33
66 First 134,338 U/W 1.37
67 First 108,204 U/W 1.24
68 First 117,929 U/W 1.41
69 First 101,609 U/W 1.37
70 First 102,843 U/W 1.33
71 First 92,115 FY '95 1.27
72 First 99,677 U/W 1.45
73 Second N/A N/A N/A
74 Second 442,210 FY '95 1.84
75 Second N/A N/A N/A
76 Second N/A N/A N/A
77 Second N/A N/A N/A
78 Second N/A N/A N/A
79 First 72,541 U/W 1.08
80 Second N/A N/A N/A
81 Second N/A N/A N/A
---
Total/Wtd. Avg.: 1.51x
=====
Maximum: 3.12x
=====
Minimum: 0.44x
=====
(1) NOI's for Mortgaged Properties securing Mortgage Assets identified by
Numbers 2 and 10 are based on annualization of partial year actual financial
information.
(2) Cut-off Date DSCR's for Mortgage Assets identified by Numbers 1 and 10 are
GNMA Certificates evidencing less than 100% interest in the related
Underlying Mortgage Loan. For the purposes of calculating DSCR's of such
Mortgage Assets, the annual debt service for 100% of the related Underlying
Mortgage Loan was used.
(3) Cut-off Date DSCR's for Mortgage Assets identified by Numbers 7, 56 and 74
are calculated based on the combined annual debt service for both the
related first and second mortgage lien positions.
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<PAGE>
Characteristics of the Mortgage Loans
<TABLE>
<CAPTION>
Original Percentage of
Principal Cut-off Date Initial Pool Mortgage Net Debenture Monthly
Number Balance Balance Balance Rate Asset Rate Rate Payment(1)
- ------ ------- ------- ------- ---- ---------- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $12,583,228(2) $12,441,203 4.67 8.375% 8.105% N/A% $92,821(2)
2 11,503,900 11,238,871 4.22 8.600 8.405 8.500 86,768
3 11,040,700 11,030,670 4.14 8.450 8.180 N/A 82,742
4 9,879,400 9,021,896 3.39 9.500 9.305 7.750 80,029
5 9,236,700 8,187,274 3.07 8.500 8.360 7.125 67,714
6 8,116,378 8,075,289 3.03 7.500 7.380 11.625 55,180
7 7,942,900 7,938,262 2.98 8.500 8.305 7.250 58,573
8 8,734,900 7,879,951 2.96 9.000 8.805 7.250 67,378
9 7,800,100 7,790,442 2.92 8.250 8.045 7.250 56,823
10 7,609,700(3) 7,577,130 2.84 7.750 7.355 N/A 52,673(3)
11 7,402,500 7,396,847 2.78 8.550 8.355 7.250 55,560
12 6,559,300 6,557,352 2.46 7.875 7.605 N/A 44,993
13 5,943,500 5,924,427 2.22 7.875 7.680 6.500 41,676
14 5,649,100 5,511,712 2.07 8.375 7.980 N/A 43,273
15 5,450,000 5,442,662 2.04 8.000 7.730 N/A 39,990
16 5,047,300 5,047,300 1.89 7.875 7.605 N/A 35,392
17 5,015,000 5,002,529 1.88 8.275 8.055 6.500 36,626
18 4,943,000 4,937,835 1.85 9.125 8.910 8.375 38,605
19 4,774,200 4,758,879 1.79 7.875 7.680 6.500 33,477
20 4,549,445 4,483,183 1.68 9.000 8.820 11.500 36,256
21 4,505,000 4,458,246 1.67 8.900 8.680 7.750 34,983
22 3,995,000 3,990,143 1.50 8.500 8.305 7.250 30,718
23 4,004,700 3,980,954 1.49 8.300 7.930 8.375 29,321
24 3,867,500 3,838,016 1.44 8.825 8.630 8.375 29,816
25 3,813,200 3,808,907 1.43 9.500 9.305 7.750 30,889
26 3,758,600 3,755,508 1.41 8.250 7.980 N/A 27,381
27 3,850,000 3,687,868 1.38 9.750 9.610 10.125 31,938
28 4,459,300 3,485,858 1.31 9.500 9.305 7.750 37,477
29 3,478,200 3,475,510 1.30 8.500 8.305 7.250 25,977
30 3,434,200 3,398,410 1.28 10.500 10.330 9.000 30,515
31 3,337,681 3,313,791 1.24 8.250 8.130 10.250 26,290
32 2,990,100 2,930,413 1.10 8.500 8.180 7.250 25,963
33 2,919,000 2,916,367 1.09 7.875 7.605 N/A 20,468
34 2,899,500 2,899,500 1.09 8.125 7.785 7.250 20,858
35 2,892,800 2,856,635 1.07 8.450 8.180 N/A 21,499
36 2,837,900 2,836,737 1.06 8.250 7.930 7.250 20,674
37 2,779,800 2,778,661 1.04 8.250 7.930 7.250 20,251
38 2,750,400 2,749,273 1.03 8.250 7.930 7.250 20,036
39 2,701,300 2,698,016 1.01 8.500 8.305 7.250 20,771
40 2,465,000 2,458,870 0.92 8.275 8.055 6.500 18,002
41 2,562,400 2,441,713 0.92 9.750 9.055 8.000 22,835
42 2,392,800 2,377,105 0.89 8.750 8.355 N/A 17,998
43 2,212,800 2,208,574 0.83 9.125 8.930 8.375 17,282
44 2,205,000 2,195,585 0.82 9.250 9.055 8.375 17,434
45 2,187,200 2,181,058 0.82 10.000 9.180 7.750 18,972
46 2,160,000 2,149,274 0.81 9.750 9.555 8.375 18,584
47 2,125,000 2,122,416 0.80 8.500 8.305 7.250 16,339
48 1,829,800 1,826,769 0.69 8.250 7.980 N/A 13,330
49 1,806,200 1,792,587 0.67 10.50 10.305 9.000 16,082
50 1,755,200 1,754,052 0.66 8.125 7.855 N/A 13,032
51 1,738,900 1,724,783 0.65 9.500 8.910 8.000 14,086
52 1,725,000 1,709,276 0.64 8.875 8.555 8.000 14,135
53 1,709,100 1,706,846 0.64 9.500 9.230 8.375 13,845
54 1,715,600 1,702,543 0.64 10.500 10.305 9.000 15,277
55 1,707,700 1,685,622 0.63 9.000 8.605 N/A 13,835
56 1,655,000 1,654,034 0.62 8.500 8.305 7.250 12,204
57 1,624,500 1,621,889 0.61 7.750 7.480 N/A 11,356
58 1,568,500 1,548,123 0.58 9.250 9.055 7.750 12,904
59 1,506,400 1,500,220 0.56 8.250 7.980 N/A 11,369
60 1,421,600 1,419,871 0.53 8.500 8.305 7.250 10,931
</TABLE>
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<PAGE>
Characteristics of the Mortgage Loans
<TABLE>
<CAPTION>
Original Percentage of
Principal Cut-off Date Initial Pool Mortgage Net Debenture Monthly
Number Balance Balance Balance Rate Asset Rate Rate Payment(1)
- ------ ------- ------- ------- ---- ---------- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
61 $1,348,600 $1,347,420 0.51% 8.000% 7.730% N/A% $9,579
62 1,354,300 1,304,408 0.49 8.000 7.805 10.250 9,517
63 1,302,400 1,296,917 0.49 10.000 9.805 8.375 11,290
64 1,139,700 1,129,715 0.42 9.250 8.930 7.750 9,149
65 1,053,900 1,044,233 0.39 8.950 8.680 N/A 8,199
66 1,020,000 1,012,991 0.38 9.250 9.055 8.375 8,188
67 907,600 901,698 0.34 9.250 8.930 8.375 7,286
68 859,700 857,717 0.32 9.500 9.180 7.750 6,964
69 844,000 841,901 0.32 8.275 8.055 6.500 6,164
70 798,300 796,135 0.30 9.500 9.180 7.750 6,467
71 819,796 792,722 0.30 7.900 7.630 N/A 6,066
72 765,000 760,678 0.29 8.500 8.180 7.250 5,713
73 700,000 699,826 0.26 8.750 8.545 7.250 5,278
74 660,100 643,051 0.24 10.250 9.930 10.250 5,735
75 627,000 623,332 0.23 9.000 8.480 N/A 4,836
76 584,400 581,345 0.22 8.500 7.920 7.250 4,365
77 557,500 550,974 0.21 9.250 9.055 7.750 4,535
78 484,000 482,683 0.18 8.625 8.430 7.250 3,594
79 480,800 476,358 0.18 8.500 8.160 7.250 5,619
80 310,000 307,794 0.12 8.750 8.555 7.750 2,332
81 175,600 174,827 0.07 9.500 9.305 8.375% 1,422
---------- ------------ ------ ------- ------ --------- ------
Total/Wtd. $271,921,828 $266,510,464 100.0% 8.600% 8.352% 7.979%
============ ============ ====== ===== ===== =====
Maximum: $12,583,228 $12,441,203 4.67% 10.500% 10.330% 11.625%
Minimum: $ 175,600 $ 174,827 0.07% 7.500% 7.355% 6.500%
</TABLE>
- ----------------------
(1) The Mortgage Assets identified by Numbers 28 and 32 provide for a one-time
reset of the Monthly Payment during the remaining term of the related Mortgage
Loan. The Monthly Payment for the Mortgage Asset identified by Number 28 changes
to $27,140.20 in period 49 (from the Cut-off Date). The Monthly Payment for the
Mortgage Asset identified by Number 32 changes to $21,562.98 in period 56 (from
the Cut-off Date).
(2) Represents Cut-off Date Balance of approximately 45% of the total original
GNMA pool balance of $27,538,200.
(3) Represents Cut-off Date Balance of approximately 94% of the total original
GNMA pool balance $8,109,700.
S-60
<PAGE>
Maturity and Prepayment Terms of the Mortgage Loans
<TABLE>
<CAPTION>
Remaining
First Stated Original Term Remaining Remaining Prepayment
Due Maturity to Stated Term to Stated Lockout Premium Prepayment Provision
Number Date Date Maturity (Mos.) Maturity (Mos.) Term (Mos.) Term (Mos.) at Cut-off Date (years)(1)
- ------ ---- ---- --------------- --------------- --------- ----------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 11/1/94 10/1/29 420 394 33 60 L(2.75), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
2 10/1/92 9/1/27 420 369 8 0 L(0.67)
3 11/1/96 2/1/30 400 398 0 118 7%(4.83), 5%(1), 4%(1), 3%(1), 2%(1),
1%(1)
4 4/1/81 3/1/21 480 291 0 69 0.750% (.75)...0.125% (1)
5 3/1/81 2/1/21 480 290 0 66 0.750% (0.5)...0.125% (1)
6 4/1/96 11/1/29 404 395 111 0 L(9.25)
7 11/1/96 12/1/34 458 456 58 0 L(4.83)
8 7/1/80 6/1/20 480 282 0 62 0.75% (0.17)...0.125% (1)
9 10/1/96 9/1/31 420 417 116 0 L(9.67)
10 4/1/96 3/1/31 420 411 51 60 L(4.25), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
11 11/1/96 10/1/31 420 418 117 0 L(9.75)
12 12/1/96 11/1/36 480 479 119 0 L(9.92)
13 6/1/96 5/1/31 420 413 52 60 L(4.33), 5%(1), 4%(1), 3%(1), 2%(1),
1%(1)
14 5/1/94 4/1/23 348 316 28 60 L(2.33), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
15 11/1/96 10/1/26 360 358 0 57 5%(0.75), 4%(1), 3%(1), 2%(1), 1%(1)
16 1/1/97 12/1/31 420 420 60 60 L(5), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
17 7/1/96 6/1/31 420 414 53 60 L(4.42), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
18 8/1/96 7/1/36 480 475 58 60 L(4.83), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
19 6/1/96 5/1/31 420 413 52 60 L(4.33), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
20 9/1/94 3/1/26 379 351 0 210 9% (0.50)...0.50% (1)
21 10/1/94 9/1/29 420 393 32 0 L(2.67)
22 11/1/96 10/1/26 360 358 57 60 L(4.75), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
23 9/1/95 8/1/30 420 404 44 60 L(3.67), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
24 5/1/95 4/1/30 420 400 39 60 L(3.25), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
25 7/1/96 6/1/36 480 474 50 60 L(4.17), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
26 11/1/96 10/1/31 420 418 118 0 L(9.83)
27 7/1/85 6/1/25 480 342 0 132 1.375% (1)...0.125% (1)
28 1/1/81 12/1/20 480 288 0 72 0.750% (1)...0.125% (1)
29 11/1/96 10/1/31 420 418 57 60 L(4.75), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
30 1/1/92 12/1/31 480 420 60 0 L(5)
31 6/1/96 6/1/21 301 294 113 0 L(9.42)
32 1/1/96 10/1/23 334 322 48 0 L(4.00)
33 11/1/96 10/1/31 420 418 58 60 L(4.83), 5%(1), 4%(1), 3%(1), 2%(1),
1%(1)
34 1/1/97 12/1/31 420 420 60 60 L(5), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
35 8/1/94 7/15/29 420 391 31 60 L(2.58), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
36 12/1/96 11/1/31 420 419 58 60 L(4.83), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
37 12/1/96 11/1/31 420 419 58 60 L(4.83), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
38 12/1/96 11/1/31 420 419 58 60 L(4.83), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
39 11/1/96 10/1/26 360 358 57 60 L(4.75), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
40 7/1/96 6/1/31 420 414 53 60 L(4.42), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
41 12/1/92 11/1/17 300 251 7 60 L(0.58), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
42 11/1/94 10/1/34 480 454 93 0 L(7.75)
43 4/1/96 3/1/36 480 471 48 60 L(4), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
44 5/1/95 4/1/35 480 460 39 60 L(3.25), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
45 5/1/96 10/1/28 390 382 43 60 L(3.58), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
46 3/1/96 11/1/25 357 347 47 60 L(3.92), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
47 11/1/96 10/1/26 360 358 57 60 L(4.75), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
48 9/1/96 8/15/31 420 416 55 60 L(4.58), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
49 9/1/93 6/1/32 466 426 66 0 L(5.5)
50 12/1/96 11/1/26 360 359 58 60 L(4.83), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
51 11/1/93 10/1/33 480 442 82 0 L(6.83)
52 2/1/96 5/1/22 316 305 1 36 L(0.08), 3%(1), 2%(1), 1%(1)
53 6/1/96 5/1/36 480 473 53 60 L(4.42), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
54 9/1/93 5/1/32 465 425 65 0 L(5.42)
55 5/1/95 4/1/24 348 328 40 60 L(3.33), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
</TABLE>
S-61
<PAGE>
<TABLE>
<CAPTION>
Remaining
First Stated Original Term Remaining Remaining Prepayment
Due Maturity to Stated Term to Stated Lockout Premium Prepayment Provision
Number Date Date Maturity (Mos.) Maturity (Mos.) Term (Mos.) Term (Mos.) at Cut-off Date (years)(1)
- ------ ---- ---- --------------- --------------- --------- ----------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
56 11/1/96 12/1/34 458 456 58 0 L(4.83)
57 10/1/96 1/1/30 400 397 57 60 L(4.75), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
58 2/1/95 1/1/25 360 337 36 60 L(3), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
59 7/1/96 11/1/25 353 347 53 60 L(4.42), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
60 11/1/96 10/1/26 360 358 57 60 L(4.75), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
61 11/1/96 10/1/31 420 418 117 0 L(9.75)
62 10/1/87 9/1/27 480 369 84 0 L(7)
63 1/1/96 8/1/28 392 380 46 60 L(3.83), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
64 12/1/94 11/1/29 420 395 34 60 L(2.83), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
65 11/1/94 7/1/30 429 403 94 0 L(7.83)
66 5/1/95 4/1/30 420 400 39 60 L(3.25), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
67 6/1/95 5/1/30 420 401 40 60 L(3.33), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
68 1/1/96 12/1/35 480 468 48 60 L(4), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
69 7/1/96 6/1/31 420 414 53 60 L(4.42), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
70 11/1/95 10/1/35 480 466 46 60 L(3.83), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
71 1/1/94 12/1/21 336 300 0 24 2%(1), 1%(1)
72 11/1/95 10/1/30 420 406 46 60 L(3.83), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
73 12/1/96 1/1/36 470 469 118 0 L(9.83)
74 1/1/88 12/1/27 480 372 0 10 1.0% (0.83)
75 12/1/94 11/1/34 480 455 94 0 L(7.83)
76 12/1/95 11/1/30 420 407 106 0 L(8.83)
77 12/1/94 11/1/26 384 359 35 60 L(2.92), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
78 2/1/96 1/1/36 480 469 48 60 L(4), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
79 11/1/96 10/1/07 132 130 46 0 L(3.83)
80 9/1/94 8/1/34 480 452 31 60 L(2.58), 5%(1), 4%(1), 3%(1), 2%(1), 1%(1)
81 3/1/95 2/1/35 480 458 97 0 L(8.08)
------ ------ --- --- --
Total/Wtd.
Avg.: 2/1/94 3/16/29 422 387 48 48
====== ======= === === == ==
Maximum: 1/1/97 11/1/36 480 479 119 210
Minimum: 7/1/80 10/1/07 132 130 0 0
</TABLE>
- ----------------------
(1) Prepayment Provision Code from Cut-off Date:
o L(X) = Lockout for X years.
o Y%(X) = Prepayment Premium equal to Y% of amount prepaid for X years.
The FHA may override certain lockout and prepayment penalties in certain
circumstances. See "FHA MORTGAGE INSURANCE PROGRAMS" herein.
S-62
<PAGE>
Mortgage Loans by Property Type
<TABLE>
<CAPTION>
Weighted Weighted
Aggregate Percentage of Average Average
Number Cut-off Date Initial Pool Mortgage Term to
Property Type of Loans Balance Balance Rate Maturity
(Mos.)
<S> <C> <C> <C> <C> <C>
Multifamily 50 $167,611,754 62.9% 8.566% 374
Nursing Facility 31 98,898,710 37.1 8.658 410
-- ------------ ----- ----- ---
Total/Wtd. Avg.: 81 $266,510,464 100.0% 8.600% 387
============= ===== ===== ===
</TABLE>
Type of Mortgage Asset
<TABLE>
<CAPTION>
Weighted Weighted
Aggregate Percentage of Average Average
Number Cut-off Date Initial Pool Mortgage Term to
Type of Mortgage Asset of Assets Balance Balance Rate Maturity
(Mos.)
<S> <C> <C> <C> <C> <C>
FHA Loan 61 $188,800,560 70.8% 8.763% 383
GNMA Certificate 20 77,709,904 29.2 8.204 398
-- ------------- ----- ----- ---
Total/Wtd. Avg.: 81 $266,510,464 100.0% 8.600% 387
== ============ ===== ===== ===
</TABLE>
Mortgage Loans by Mortgage Lien Position
<TABLE>
<CAPTION>
Weighted Weighted
Aggregate Percentage of Average Average
Number Cut-off Date Initial Pool Mortgage Term to
Mortgage Lien Position of Loans Balance Balance Rate Maturity
(Mos.)
<S> <C> <C> <C> <C> <C>
First 69 $255,432,955 95.8% 8.582% 386
Second 12 11,077,510 4.2 9.016 416
-- ------------ ----- ----- ---
Total/Wtd. Avg.: 81 $266,510,464 100.0% 8.600% 387
== ============ ===== ===== ===
</TABLE>
S-63
<PAGE>
Mortgage Loans by State
<TABLE>
<CAPTION>
Weighted Weighted
Aggregate Percentage of Average Average
Number Cut-off Date Initial Pool Mortgage Term to
# State of Loans Balance Balance Rate Maturity (Mos.)
- ----- -------- ------- ------- ---- ---------------
<S> <C> <C> <C> <C> <C> <C>
1 New York 8 $ 44,478,844 16.7% 8.880% 322
2 Texas 8 24,969,776 9.4 8.848 420
3 Ohio 12 24,160,886 9.1 9.161 398
4 Michigan 9 22,214,794 8.3 8.849 362
5 Virginia 3 18,131,554 6.8 8.302 400
6 Connecticut 4 14,916,884 5.6 7.954 403
7 Colorado 1 11,238,871 4.2 8.600 369
8 Massachusetts 3 11,092,516 4.2 8.466 441
9 New Jersey 1 11,030,670 4.1 8.450 398
10 New Hampshire 2 10,683,306 4.0 7.875 413
11 Georgia 2 9,758,188 3.7 8.253 405
12 Maryland 4 9,682,818 3.6 8.440 352
13 Illinois 2 9,592,432 3.6 8.710 428
14 South Dakota 3 8,364,670 3.1 8.250 419
15 Pennsylvania 2 7,350,074 2.8 7.878 460
16 Indiana 1 5,442,662 2.0 8.000 358
17 California 3 5,136,234 1.9 8.172 404
18 Arizona 1 4,458,246 1.7 8.900 393
19 Florida 1 3,838,016 1.4 8.825 400
20 Minnesota 2 3,072,204 1.2 8.842 431
21 Maine 2 1,594,336 0.6 8.977 403
22 North Carolina 1 1,304,408 0.5 8.000 369
23 Kentucky 1 1,296,917 0.5 10.000 380
24 Alabama 1 1,044,233 0.4 8.95 403
25 Missouri 1 623,332 0.2 9.000 455
26 Nebraska 1 550,974 0.2 9.250 359
27 Oregon 2 482,621 0.2 9.022 454
-- ------------- ---- ----- ---
Total/Wtd. Avg.: 81 $ 266,510,464 100.0% 8.600% 387
== ============= ===== ===== ===
</TABLE>
Mortgage Loans by FHA Insurance Program
<TABLE>
<CAPTION>
Weighted Weighted
Aggregate Percentage of Average Average
Section of Number Cut-off Date Initial Pool Mortgage Term to
# Housing Act of Loans Balance Balance Rate Maturity (Mos.)
- ----------- -------- ------- ------- ---- ---------------
<S> <C> <C> <C> <C> <C>
1 223 (f) 38 $ 130,686,712 49.0% 8.296% 393
2 221 (d)4 9 31,211,375 11.7 9.372 375
3 232 12 30,275,394 11.4 9.348 411
4 223 (a)7 6 27,878,089 10.5 8.418 403
5 220 2 15,955,240 6.0 8.241 339
6 207 1 11,238,871 4.2 8.600 369
7 223 (e) 1 8,187,274 3.1 8.500 290
8 241 (f) 7 6,202,337 2.3 8.899 413
9 241 3 2,639,794 1.0 9.730 402
10 223 (d) 2 2,235,379 0.8 8.500 443
-- ------------- ---- ----- ---
Total/Wtd. Avg.: 81 $266,510,464 100.0% 8.600% 387
== ============ ===== ===== ===
</TABLE>
Certain of the Mortgage Loans were originated under coinsurance programs of the
FHA.
S-64
<PAGE>
Cut-off Date Balances
<TABLE>
<CAPTION>
Weighted Weighted
Aggregate Percentage of Average Average
Cut-off Number Cut-off Date Initial Pool Mortgage Term to
Principal Balance of Loans Balance Balance Rate Maturity (Mos.)
- ------------------------ ---------- -------------- ------------- -------- -------------------
<S> <C> <C> <C> <C> <C>
100,000 - 999,999 15 $ 9,491,042 3.6% 8.922% 403
1,000,000 - 1,999,999 19 28,782,300 10.8 8.954 392
2,000,000 - 2,999,999 16 40,800,196 15.3 8.670 394
3,000,000 - 3,999,999 10 36,734,967 13.8 8.973 383
4,000,000 - 4,999,999 4 18,638,144 7.0 8.722 410
5,000,000 - 5,999 999 5 26,928,629 10.1 8.077 384
6,000,000 - 6,999,999 1 6,557,352 2.5 7.875 479
7,000,000 - 7,999,999 5 38,582,632 14.5 8.414 396
8,000,00 - 8,999,999 2 16,262,563 6.1 8.003 342
9,000,000 - 9,999,999 1 9,021,896 3.4 9.500 291
10,000,000 - 11,999,999 2 22,269,540 8.4 8.526 383
12,000,000 - 15,000,000 1 12,441,203 4.7 8.375 394
- ---------- --- ----- ---
Total/Wtd. Avg.: 81 $266,510,464 100.0% 8.600% 387
== ============ ===== ===== ===
</TABLE>
Average Cut-off Date Balance: $3,250,128
Mortgage Rates
<TABLE>
<CAPTION>
Weighted Weighted
Aggregate Percentage of Average Average
Number Cut-off Date Initial Pool Mortgage Term to
Mortgage Rate of Loans Balance (1) Balance Rate Maturity (Mos.)
------------- -------- ----------- ------- ---- ---------------
<S> <C> <C> <C> <C> <C>
7.250% - 7.999% 9 $ 43,271,355 16.2% 7.779% 418
8.000% - 8.249% 5 12,748,042 4.8 8.046 380
8.250% - 8.499% 16 70,675,874 26.5 8.327 393
8.500% - 8.749% 15 55,352,720 20.8 8.528 377
8.750% - 8.999% 7 14,434,496 5.4 8.846 400
9.000% - 9.249% 6 21,818,498 8.2 9.041 367
9.250% - 9.499% 6 7,339,086 2.8 9.250 401
9.500% - 9.749% 8 21,576,971 8.1 9.500 364
9.750% - 9.999% 3 8,278,856 3.1 9.750 316
10.000% - 10.499% 3 4,121,025 1.5 10.039 380
10.500% - 10.999% 3 6,893,541 2.6 10.500 423
- --------- --- ------ ---
Total/Wtd. Avg.: 81 $266,510,464 100.0% 8.600% 387
== ============ ===== ===== ===
</TABLE>
Weighted Average Mortgage Rate: 8.600%
S-65
<PAGE>
Net Asset Rates
<TABLE>
<CAPTION>
Weighted Weighted
Aggregate Percentage of Average Average
Number Cut-off Date Initial Pool Mortgage Term to
Net Asset Rates of Assets Balance Balance Rate Maturity (Mos.)
------------- -------- -------------- ------------- -------- ---------------
<S> <C> <C> <C> <C> <C>
7.000% - 7.490% 3 $ 17,274,308 6.5% 7.633% 402
7.500% - 7.740% 8 32,787,129 12.3 7.901 416
7.750% - 7.990% 12 31,479,138 11.8 8.254 390
8.000% - 8.240% 11 49,903,490 18.7 8.362 388
8.250% - 8.490% 13 53,604,362 20.1 8.546 386
8.500% - 8.740% 7 13,743,014 5.2 8.881 382
8.750% - 8.990% 7 23,265,740 8.7 9.097 76
9.000% - 9.490% 13 29,782,632 11.2 9.513 358
9.500% - 9.990% 4 7,777,110 2.9 9.833 352
10.000% - 10.490% 3 6,893,541 2.6 10.500 423
- --------- --- ------ ---
Total/Wtd. Avg.: 81 $266,510,464 100.0% 8.600% 387
== ============ ===== ===== ===
</TABLE>
Weighted Average Net Asset Rate: 8.352%
Debenture Rates
<TABLE>
<CAPTION>
Weighted Weighted
Aggregate Percentage of Average Average
Number Cut-off Date Initial Pool Mortgage Term to
Debenture Rates of Loans Balance Balance Rate Maturity (Mos.)
<S> <C> <C> <C> <C> <C>
6.500% - 6.990% 5 18,986,605 7.1 8.050 413
7.000% - .240% 1 8,187,274 3.1 8.500 290
7.250% - 7.490% 20 63,560,965 23.8 8.491 391
7.750% - 7.990% 11 28,146,424 10.6 9.407 359
8.000% - 8.240% 3 5,875,773 2.2 9.422 323
8.250% - 8.490% 11 24,403,518 9.2 9.095 427
8.500% - 8.740% 1 11,238,871 4.2 8.600 369
9.000% - 9.240% 3 6,893,541 2.6 10.500 423
10.000% - 10.490% 4 8,949,118 3.4 8.975 330
11.500% - 11.990% 2 12,558,472 4.7 8.035 379
N/A 20 77,709,904 29.2 8.204 398
-- ---------- ---- ----- ---
Total/Wtd. Avg.: 81 $266,510,464 100.0% 8.600% 387
== ============ ===== ===== ===
</TABLE>
Weighted Average Debenture Rate: 7.979%
S-66
<PAGE>
Cut-off Date Debt Service Coverage Ratios
<TABLE>
<CAPTION>
Weighted Weighted
Aggregate Percentage of Average Average
Number Cut-off Date Initial Pool Mortgage Term to
DSCR of Loans Balance Balance Rate Maturity (Mos.)
- -------------- -------- ------------- ------------- -------- ---------------
<S> <C> <C> <C> <C> <C>
0.40 - 0.999 3 $ 13,098,357 4.9% 7.869% 358
1.000 - 1.099 2 9,498,254 3.6 9.450 283
1.100 - 1.199 8 36,403,154 13.7 8.833 437
1.200 - 1.299 7 9,137,564 3.4 8.785 381
1.300 - 1.399 15 51,069,914 19.2 8.672 374
1.400 - 1.499 6 13,447,131 5.0 8.340 428
1.500 - 1.599 8 37,691,320 14.1 8.381 367
1.600 - 1.999 9 39,547,061 14.8 8.659 379
2.000 - 2.499 5 13,038,787 4.9 8.465 427
2.500 - 3.299 2 10,233,583 3.8 8.467 418
N/A 16 33,345,339 12.5 8.606 388
-- ---------- ---- ----- ---
Total/Wtd. Avg.: 81 $266,510,464 100.0% 8.600% 387
== ============ ===== ===== ===
</TABLE>
Weighted Average Cut-off Date Debt Service Coverage Ratio: 1.51x
Remaining Maturity Term
<TABLE>
<CAPTION>
Remaining Weighted Weighted
Maturity Aggregate Percentage of Average Average
Term Number Cut-off Date Initial Pool Mortgage Term to
(Months) of Loans Balance Balance Rate Maturity (Mos.)
-------- -------- ------------ ------------ --------- ---------------
<S> <C> <C> <C> <C> <C>
120 - 132 1 $ 476,358 0.2% 8.500% 130
240 - 252 1 2,441,713 0.9 9.750 251
276 - 299 5 31,888,771 12.0 8.990 289
300 - 335 5 12,629,746 4.7 8.525 317
336 - 359 12 31,346,802 11.8 8.735 353
360 - 395 10 45,625,393 17.1 8.493 386
396 - 431 30 103,050,083 38.7 8.387 413
432 - 480 17 39,051,599 14.7 8.815 466
-- ---------- ---- ----- ---
Total/Wtd. Avg.: 81 $266,510,464 100.0% 8.600% 387
== ============ ===== ===== ===
</TABLE>
Weighted Average Remaining Term to Maturity: 387
S-67
<PAGE>
Additional Prepayment Information
<TABLE>
<CAPTION>
Weighted
Weighted Average Average Weighted
Aggregate Percentage of Remaining Remaining Average
Remaining Number Cut-off Date Initial Pool Lockout Prepayment Term to
Maturity Term (years) of Loans Balance Balance Term (years) Term (years) Maturity (years)
--------------------- -------- ------------ ------------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
10.0 - 10.9 1 $ 476,358 0.2% 3.8 3.8 10.8
20.0 - 20.9 1 2,441,713 0.9 0.6 5.6 20.9
23.0 - 23.9 1 7,879,951 3.0 0.0 5.2 23.5
24.0 - 24.9 4 24,008,820 9.0 1.3 6.2 24.2
25.0 - 25.9 2 2,501,998 0.9 0.1 2.7 25.3
26.0 - 26.9 2 8,442,125 3.2 2.9 6.2 26.5
27.0 - 27.9 1 1,685,622 0.6 3.3 8.3 27.3
28.0 - 28.9 4 8,885,486 3.3 2.2 9.7 28.6
29.0 - 29.9 8 22,461,317 8.4 2.6 10.0 29.7
30.0 - 30.9 2 12,543,279 4.7 1.3 1.3 30.8
31.0 - 31.9 3 4,121,025 1.5 3.1 7.5 31.7
32.0 - 32.9 5 28,961,089 10.9 4.5 7.4 32.8
33.0 - 33.9 9 24,772,474 9.3 2.3 9.1 33.3
34.0 - 34.9 16 63,437,268 23.8 6.2 9.6 34.6
35.0 - 35.9 5 14,840,341 5.6 5.1 7.8 35.1
36.0 - 36.9 1 1,724,783 0.6 6.8 6.8 36.8
37.0 - 37.9 3 3,308,231 1.2 7.3 7.8 37.8
38.0 - 38.9 5 12,758,843 4.8 4.5 5.7 38.1
39.0 - 39.9 8 21,259,742 8.0 6.3 9.6 39.6
-- ------------- ---- --- --- ----
Total/Wtd. Avg.: 81 $266,510,464 100.0% 4.0 7.9 32.3
== ============= ===== === === ====
</TABLE>
Sale and Assignment of the Mortgage Assets; Repurchases
The FHA Loans and GNMA Certificates to be transferred or caused to be
transferred by Greystone Funding Corporation ("Greystone Funding") are herein
referred to as the "Greystone FHA Loans" and the "Greystone GNMA Certificates",
respectively, and as the "Greystone Mortgage Assets", collectively. The FHA
Loans and the GNMA Certificates to be transferred or caused to be transferred by
Daiwa Finance Corp. ("Daiwa Finance" and, together with Greystone Funding, the
"Sellers"), are referred to herein as the "Daiwa FHA Loans" and the "Daiwa GNMA
Certificates", respectively, and as the "Daiwa Mortgage Assets", collectively.
Greystone Funding is the beneficial owner of each of the Greystone Mortgage
Assets (and immediately prior to the transfer of such Mortgage Assets to the
Trust Fund, certain servicers (including the Master Servicer), as the FHA
approved mortgagees, will hold legal title thereto). Daiwa Finance is the
beneficial owner of each of the Daiwa FHA Loans (and immediately prior to the
transfer of such Mortgage Assets to the Trust Fund, certain servicers, as the
FHA approved mortgagees, will hold legal title thereto). Daiwa Securities
America Inc. ("Daiwa Securities") is the legal and beneficial owner of each of
the Daiwa GNMA Certificates. Daiwa Finance is assuming all of the obligations as
Seller with respect to both the Daiwa FHA Loans and Daiwa GNMA Certificates,
including, without limitation, any repurchase obligations in connection with a
breach of a representation and warranty with regard to a Daiwa Mortgage Asset
and, consequently, Daiwa Securities will not have any obligations with respect
to the Daiwa GNMA Certificates. On or prior to the Closing Date, Greystone
Funding and Daiwa Finance will, at the direction of the Depositor, transfer and
assign, or cause the transfer and assignment of, the Greystone Mortgage Assets
and the Daiwa Mortgage Assets, respectively, to the Trustee, together with all
principal and interest due on or with respect to such Mortgage Assets, other
than principal, interest and other amounts due on the Mortgage Loans on or
before the Cut-off Date, principal prepayments received on the Mortgage Loans on
or before the Cut-off Date and Retained Yield. The Trustee, concurrently with
such assignment, will execute and deliver Certificates evidencing the beneficial
ownership interests in the Trust Fund to or at the direction of the Depositor in
exchange for the Mortgage Assets. Each Greystone Mortgage Asset and each Daiwa
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Mortgage Asset will be identified in separate schedules relating to the
Greystone Mortgage Assets and Daiwa Mortgage Assets, respectively, appearing as
exhibits to the Pooling and Servicing Agreement (collectively, he "Mortgage
Asset Schedule"). The Mortgage Asset Schedule will include, among other things,
as to each Mortgage Asset, information as to its Cut-off Date Balance and Net
Asset Rate, as well as information respecting various other characteristics of
each Mortgage Asset or the related Underlying Mortgage Loan.
With respect to each Greystone GNMA Certificate, Greystone Funding
will, and with respect to each Daiwa GNMA Certificate, Daiwa Finance will, be
required to cause such GNMA Certificate to be registered in the name of the
Trustee (in its capacity as such) on the books and records of the appropriate
"financial intermediary" designated by the Trustee on or before the Closing
Date. With respect to each Greystone FHA Loan, Greystone Funding will, and with
respect to each Daiwa FHA Loan, Daiwa Finance will, be required to deliver, or
cause to be delivered, to the Trustee, among other things, the following
documents (collectively, as to each FHA Loan, the "Mortgage File"): (i) the
original Mortgage Note, endorsed without recourse to the order of Trustee; (ii)
the original or a copy of each Mortgage, together with originals or certified
copies of any intervening assignments of such Mortgage, in each case with
evidence of recording indicated thereon or, in the case of a recent unrecorded
intervening assignment, in recordable form; (iii) an assignment of each Mortgage
in favor of the Trustee and in recordable form; (iv) originals or copies of all
assumption, modification and substitution agreements in those instances where
the terms or provisions of a Mortgage or Mortgage Note have been modified or the
FHA Loan has been assumed; and (v) the original or a copy of the lender's title
insurance policy issued with respect to such FHA Loan.
The Trustee will be required to review each Mortgage File within a
specified period following its receipt thereof. 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 interests of the Certificateholders,
Greystone Funding, in the case of a Greystone FHA Loan, and Daiwa Finance, in
the case of a Daiwa FHA Loan, will be obligated to deliver or cause delivery of
the document or cure or cause the cure of the defect within a period of 60 days
following its receipt of notice thereof or, within such 60-day period, to
repurchase the affected FHA Loan at the applicable Purchase Price.
The foregoing repurchase obligation will constitute the sole recourse
available to the Certificateholders and the Trustee for any defect or omission
in the Mortgage File for an FHA Loan. None of Greystone Funding's affiliates or
Daiwa Finance's affiliates or any other person will be obligated to repurchase
any affected FHA Loan as to which there is a material defect or omission in the
related Mortgage File if Greystone Funding, in the case of a Greystone FHA Loan,
or Daiwa Finance, in the case of a Daiwa FHA Loan, defaults on its obligation to
do so.
Representations and Warranties; Repurchases
In the Pooling and Servicing Agreement, Greystone Funding will
represent and warrant solely with respect to the Greystone FHA Loans and
Greystone GNMA Certificates, and Daiwa Finance will represent and warrant solely
with respect to the Daiwa FHA Loans and Daiwa GNMA Certificates, as of the
Closing Date, or as of such other date specifically provided in the
representation and warranty, among other things, as follows:
(1) The information set forth in the Mortgage Asset Schedule relating
to each such Mortgage Asset (and, in the case of a GNMA Certificate, with
respect to the related Underlying Mortgage Loan) is true and correct in all
material respects at the date or dates respecting which such information is
provided.
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(2) As of the Closing Date, none of such FHA Loans is:
(a) delinquent under the original or modified terms thereof to the
extent of more than one monthly installment of interest, principal or
escrow deposits or is otherwise in default; or
(b) subject to any outstanding advance or advances made by the
mortgagee to the Mortgagor.
(3) The chain of title of each such FHA Loan from the originator
thereof to the Trustee is unbroken and free from defect and, except in the case
of any FHA Loan as to which a lost note affidavit was delivered to the Trustee,
is duly endorsed on the related Mortgage Note.
(4) The terms of each such FHA Loan and the related Mortgage have not
been impaired, waived, altered or modified in any respect, except by written
instruments, approved by the FHA. No mortgagor under any such FHA Loan has been
released in whole or in part except in connection with an agreement approved by
the FHA which agreement is part of the related Mortgage File delivered to the
Trustee.
(5) Each such FHA Loan is fully insured by the FHA, and all necessary
steps have been taken to make and keep such insurance valid, binding and
enforceable. No defect exists that would prevent recovery in full or in part in
respect of any such FHA Loan under any contract of FHA Insurance. Such insurance
is the binding, valid and enforceable obligation of the FHA to the full extent
thereof, without any set off, defense or material surcharge. Each document which
is required in order to assign any such FHA Loan to the FHA and to collect the
FHA Insurance Benefits in full, without the imposition of any material
surcharge, is included in the related Mortgage File, except for such items as
may be required by the FHA which are executed or assembled and delivered to the
FHA to evidence the assignment of such Mortgage Loan from the Trustee to the
FHA.
(6) It has reviewed the Mortgage File with respect to each such FHA
Loan, and the related Mortgaged Property is covered by a lender's title policy
insuring that the related Mortgage is a valid first (or, if identified on the
Mortgage Asset Schedule as such, a second) mortgage lien on such Mortgaged
Property, subject only to the exceptions stated therein. Such title insurance
policy is in full force and effect, no claims have been made thereunder, is
freely assignable and will inure to the benefit of the Trustee as mortgagee of
record.
(7) The transfer of each such FHA Loan to the Trustee, and the
transfers of Certificates evidencing interests therein, as contemplated by the
Pooling and Servicing Agreement is and will be in compliance with 24 CFR Section
207.261 and such transfers of Certificates, and any prior transfers of each such
FHA Loan have been in compliance with 24 CFR Section 207.261.
In addition, Greystone Funding and Daiwa Finance (or, in each case, the
related FHA-approved mortgagee on behalf of Greystone Funding or Daiwa Finance),
will represent and warrant that, immediately prior to the transfer of the
Greystone Mortgage Assets and the Daiwa FHA Loans, respectively, Greystone
Funding and Daiwa Finance had good and marketable title to such Greystone
Mortgage Assets and Daiwa FHA Loans, respectively, free and clear from all
liens, charges, encumbrances or rights of others (except the right of the
Depositor to direct the assignment of such Mortgage Assets to the Trustee).
Daiwa Finance will represent and warrant that, immediately prior to the transfer
of the Daiwa GNMA Certificates, Daiwa Securities had good and marketable title
to such Daiwa GNMA Certificates free and clear from all liens, charges,
encumbrances or rights of others (except the right of the Depositor to direct
the assignment of such Mortgage Assets to the Trustee).
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In the case of a breach of any of the foregoing representations and
warranties that materially and adversely affects the interests of the
Certificateholders, Greystone Funding, in the case of a Greystone Mortgage
Asset, and Daiwa Finance, in the case of a Daiwa Mortgage Asset, will be
obligated either to cure such breach within a period of 60 days following its
discovery or its receipt of notice thereof or, within such 60-day period, to
repurchase the affected Mortgage Asset at its applicable Purchase Price.
The foregoing repurchase obligation will constitute the sole recourse
available to the Certificateholders and the Trustee for any uncured breach of
Greystone Funding's or Daiwa Finance's representations and warranties regarding
the Greystone Mortgage Assets and the Daiwa Mortgage Assets, respectively.
Greystone Funding will be the sole warranting party in respect of the Greystone
Mortgage Assets and Daiwa Finance will be the sole warranting party with respect
to the Daiwa Mortgage Assets, and in neither such case will any such party's
affiliates or any other person be obligated to repurchase any affected Mortgage
Asset in connection with a material breach of such party's representations and
warranties if such party defaults on its obligation to do so.
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 the Mortgage Loans on or before the Cut-off
Date. Prior to the issuance of the Offered Certificates, a Mortgage Asset may be
removed from the Mortgage Pool if the Depositor deems such removal necessary or
appropriate or if it is prepaid. A limited number of other mortgage assets may
be included in the Mortgage Pool prior to the issuance of the Offered
Certificates, unless including such mortgage assets would materially alter the
characteristics of the Mortgage Pool as described herein. The information set
forth herein is expected to 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 interest rates and maturities, as well as the
other characteristics of the Mortgage Assets 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 Closing 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 Assets 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.
Retained Yield
If and to the extent that the Debenture Rate applicable to any Assigned
FHA Loan is higher than the Mortgage Rate for such FHA Loan (such difference,
the "Retained Yield Rate"), Greystone Funding, in the case of a Greystone FHA
Loan, and Daiwa Finance, in the case of a Daiwa FHA Loan, have retained the
right to receive that portion of any and all payments and other collections
received after the Date of Default on or in respect of such FHA Loan (or on or
in respect of any FHA Debentures paid as part of the FHA Insurance Benefits in
respect thereof) that represents interest at the related Retained Yield Rate
(such amount, the "Retained Yield") until purchase of the related FHA Debenture.
The related Debenture Rate for six FHA Loans, representing approximately 13.16%
of the Initial Pool Balance, is higher than the related Mortgage Rate and,
accordingly, such loans are being transferred to the Trust Fund subject to the
related Seller's right to receive any related Retained Yield collected in
respect thereof in the event of any default thereunder and any subsequent
assignment to the Secretary. The Retained Yield Rates for such FHA Loans range
from 0.075% per annum to 4.125% per annum. As of the Cut-off
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Date, such FHA Loans had a weighted average Retained Yield Rate (based on the
respective Cut-off Date Balances thereof) of approximately 2.244% per annum.
GREYSTONE FUNDING CORPORATION
Greystone Funding, a Virginia corporation, is engaged in the business
of purchasing, selling, financing and restructuring mortgage loans and
mortgage-backed securities, including FHA-insured loans and GNMA pass-through
certificates, and is an affiliate of the Master Servicer.
As of December 31, 1995, Greystone Funding's portfolio of FHA-insured
mortgage loans and GNMA pass-through certificates totaled approximately $536
million and its net worth, calculated in accordance with generally accepted
accounting principles, was approximately $34.4 million. Greystone Funding's
principal offices are located at the Alexandria Pike Building, 98 Alexandria
Pike, Warrenton, Virginia 20186 and its telephone number is (540) 341-2100.
The foregoing information concerning Greystone Funding has been
provided by it. Accordingly, the Depositor, the Master Servicer, Daiwa Finance
and the Underwriters make no representation or warranty as to the accuracy or
completeness of such information.
DAIWA FINANCE CORP.
Daiwa Finance is a New York corporation, which is involved in, among
other things, originating mortgage loans, acquiring mortgage assets and selling
interests therein. Daiwa Finance is a wholly-owned subsidiary of Daiwa America
Corporation, a Delaware corporation, which is wholly-owned by Daiwa Securities
Co., Ltd. a Japanese corporation. Daiwa Securities Co. Ltd. is engaged in the
domestic and international securities business.
As of November 30, 1996, Daiwa Finance's portfolio of FHA-insured
mortgage loans totalled approximately $178,360,801 on an unaudited basis. As of
March 31, 1996, Daiwa Finance's net worth, calculated in accordance with
generally accepted accounting principles, was approximately $1,435,343. Daiwa
Finance's principal offices are located at 32 Old Slip, New York, New York 10005
and its telephone number is (212) 612-7000.
The foregoing information concerning Daiwa Finance has been provided by
it. Accordingly, the Depositor, the Master Servicer, Greystone Funding and the
Underwriters make no representation or warranty as to the accuracy or
completeness of such information.
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FHA MORTGAGE INSURANCE PROGRAMS
General
The United States Department of Housing and Urban Development ("HUD")
is authorized under the National Housing Act of 1934, as amended (the "Housing
Act"), to provide government support for the housing market by insuring loans by
third-party lenders, collecting premiums, and paying claims when loans go into
default. The Federal Housing Administration (the "FHA") coordinates a variety of
single- and multi-family and nursing facility mortgage loan insurance programs
which are named after particular sections of the Housing Act.
FHA operates four separate mortgage insurance funds for its various
mortgage programs. The Mutual Mortgage Insurance Fund insures loans under the
basic Section 203(b) home mortgage program. The Cooperative Management Housing
Insurance Fund insures Section 213 loans for cooperative housing projects. The
Special Risk Insurance Fund insures mortgages with special risk factors and the
General Insurance Fund insures all other mortgages including most multifamily
loans.
The Housing Act authorizes various mortgage insurance programs, each
setting forth specific requirements primarily governing the eligibility of (i)
the terms, interest rate and mortgage amount of the proposed mortgage, (ii) the
type of property covered by the mortgage and (iii) the mortgagor. These programs
insure that, if the mortgagor defaults on the mortgage, the FHA will pay
insurance benefits as and to the extent described below under "--Insurance
Claims and Benefits".
Insurance Claims and Benefits
General procedures and processing requirements relating to insurance
claims and benefits paid thereunder apply irrespective of which particular
mortgage insurance program is involved. Certain of these procedures and
requirements, as well as certain rights and obligations of the mortgagee upon an
event of default on an FHA-insured mortgage loan, are summarized below. Section
references herein are to Sections of the Housing Act, unless otherwise noted.
Default
A mortgagor's failure to make any payment due under an FHA-insured
mortgage loan or failure to perform any covenant of an FHA-insured mortgage loan
is considered a default under such loan as of the date of such failure (as used
herein, the "Date of Default"). If such a default continues for 30 days (the "30
day grace period"), the mortgagee is entitled to receive benefits ("FHA
Insurance Benefits") under the related FHA mortgage insurance ("FHA Insurance"),
including allowable interest. It should be noted that certain of the Mortgage
Loans provide that, if the related borrower makes a partial principal
prepayment, such borrower will not be in default if it fails to make any
subsequent scheduled payment of principal provided that such borrower continues
to pay interest in a timely manner and the unpaid principal balance of such
Mortgage Loan at the time of such failure is at or below what it would otherwise
be in accordance with its amortization schedule if such partial principal
prepayment had not been made.
Notice of Default
If a default is not cured within the 30 day grace period, the mortgagee
must notify the FHA of such default within 30 days thereafter. The mortgagee
must also notify the FHA of a mortgagor's failure to perform a covenant of an
FHA-insured mortgage loan if such failure continues unremedied for 30 days (even
if the mortgagee does not accelerate the loan for such failure), within 30 days
thereafter. Upon
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notice of the mortgagor's failure to perform a covenant under an FHA-insured
mortgage loan, the FHA may require the mortgagee to accelerate the payment of
the outstanding principal balance due.
Insurance Claims
Within 45 days after the expiration of the 30 day grace period, the
mortgagee must notify the FHA in writing of its intention to file an insurance
claim and its election either (a) to assign the mortgage to the Secretary of HUD
(the "Secretary") or (b) to acquire title to the mortgaged property by
foreclosure (or by deed-in-lieu of foreclosure) and convey such title to the
Secretary. If the mortgagee elects to assign the mortgage, it must comply with
applicable FHA Regulations, which require it, among other things, to file its
application for FHA Insurance Benefits and assign the credit instrument(s) and
the realty and chattel security instruments to the FHA within 30 days (which may
be extended by the FHA for a period not to exceed 60 days) after its election.
If the mortgagee fails to meet any of the filing or notice requirements within
the specified time or such further time as the FHA may approve, and if the FHA
Insurance Benefits are to be paid in cash rather than FHA Debentures, the
interest payable with respect to the FHA Insurance Benefits may be computed only
to the date on which the particular required action should have been taken, and
not to the date such FHA Insurance Benefits are paid. (Currently, there is no
similar penalty for failing to meet filing or notice requirements if the FHA
Insurance Benefits are to be paid in FHA Debentures.) Under certain
circumstances, a mortgagee may be required to request a three month extension
for filing its notice of intention to file an insurance claim, and if an
extension is granted, the mortgagee will be required to assist the mortgagor in
arranging a refinancing to cure the default and avert an insurance claim and
comply with various FHA reporting and approval requirements.
Under the Pooling and Servicing Agreement, unless it is unable to do
so, the Master Servicer will be required to assign a defaulted FHA Loan to the
Secretary (whereupon it will become an "Assigned FHA Loan") rather than elect to
acquire the related Mortgaged Property and convey it to the Secretary.
Assignment Fee
In connection with the assignment of an FHA-insured mortgage loan to
the FHA, 1% of the unpaid principal balance of the loan as of the Date of
Default (the "Assignment Fee") is deducted from the FHA Insurance Benefits
payable under the claim.
Form and Amount of FHA Insurance Benefits
Generally, FHA Insurance Benefits may be paid in the form of cash, FHA
Debentures or a combination thereof. However, the various programs under the
Housing Act have different limitations with respect to the form of payment of
the FHA Insurance Benefits. Specifically, unless the mortgagee requests to be
paid in FHA Debentures, mortgages insured under Section 220, Section 221(d)(4),
and, in certain cases, Section 223(e), Section 223(f) and Section 241 are
payable in cash. With respect to the remaining mortgages insured under Section
223(f) and Section 241, and all mortgages insured under Section 232, the FHA
Insurance Benefits are paid in cash, FHA Debentures or a combination thereof, as
determined by the FHA at the time of actual payment.
The amount of FHA Insurance Benefits payable with respect to a
defaulted FHA-insured mortgage loan will generally equal (a) the sum of (i) the
unpaid principal amount of the loan, computed as of the Date of Default, (ii)
certain eligible payments (such as taxes, insurance, special assessments and
water rates) made by the mortgagee and (iii) an allowance for reasonable
payments made by the mortgagee, with the approval of the FHA, for the completion
and preservation of the related mortgaged property, less (b) the sum of (i)
amounts realized by the mortgagee as income from the related mortgaged property
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after the Date of Default, (ii) any other amounts received by the mortgagee on
account of the loan after the Date of Default, (iii) amounts held in escrow by
the mortgagee for the account of the related mortgagor and (iv) the Assignment
Fee, if the mortgagee elects to assign the loan to the FHA.
As part of the FHA Insurance Benefits described above, the mortgagee
receives interest on the FHA Insurance Benefits at the applicable Debenture Rate
from the Date of Default to the date of payment of such FHA Insurance Benefits
(unless certain filing and notice requirements are not met in a timely fashion).
As described below, if FHA Insurance Benefits are paid in the form of FHA
Debentures, the mortgagee will continue to receive semiannual payments of
interest on such FHA Debentures at the applicable Debenture Rate until such FHA
Debentures are called for redemption by the FHA or mature.
If the Trustee receives FHA Debentures as part of the FHA Insurance
Benefits in respect of any Assigned FHA Loan, the Majority Class B
Certificateholder may purchase such FHA Debenture at the applicable Purchase
Price. If no holder or holders of Class B Certificates purchases the FHA
Debentures, the Master Servicer will be required to purchase the FHA Debentures
at the applicable Purchase Price. If the Master Servicer fails to purchase the
FHA Debentures, the Trustee (in its individual capacity) will be required to
purchase such FHA Debentures at the applicable Purchase Price. See "SERVICING OF
THE FHA LOANS--Sale of FHA Debentures" herein.
The FHA Insurance Benefits received in respect of a defaulted
FHA-insured mortgage loan do not cover: (i) one month's interest on the unpaid
principal balance of the loan (because the interest component of the benefits is
calculated from the Date of Default, and interest on FHA-insured mortgage loans
is paid in arrears), (ii) interest on any amounts due under the related mortgage
to the mortgagee but not included in the FHA Insurance Benefits and (iii)
certain expenses incurred in connection with the assignment or foreclosure
process. In addition, FHA Insurance Benefits may be reduced if the FHA
determines that an FHA-insured mortgage loan has not been serviced in accordance
with applicable FHA Regulations.
Along with the FHA Insurance Benefits (including any allowable
interest), the mortgagee also receives a certificate of claim for certain losses
and expenses not covered by the FHA Insurance Benefits; however, such
certificates are subordinated to the FHA's recovery of all of its investment in
an FHA-insured mortgage loan (and typically do not result in any additional
recovery for the mortgagee).
FHA Debentures
"FHA Debentures" are 20-year, fixed-rate obligations bearing interest
from the applicable Date of Default and paying interest on the first day of
January and the first day of July of each year at the applicable Debenture Rate.
With respect to any particular FHA-insured mortgage loan, the applicable
Debenture Rate is equal to the rate in effect as of the date the commitment to
insure such loan is issued or as of the date such loan is initially endorsed for
insurance by the FHA, whichever rate is higher. FHA Debentures are redeemable at
the option of the FHA at par plus accrued interest on any semi-annual interest
payment date therefor upon at least three months' notice.
FHA Debentures are issued in either book-entry or certificated
registered form or such other form as the FHA may prescribe, are obligations of
the United States as to principal and interest and are issued in such
denominations as the FHA may prescribe. The market value of FHA Debentures may
be less than their principal amount, depending on the applicable interest rate
and on prevailing market conditions.
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When an FHA Debenture is issued in payment of FHA Insurance Benefits,
the amount of interest which accrued at the Debenture Rate on that debenture
from the Date of Default to the date on which such debenture is delivered will
be paid in cash.
FHA Debentures are issued as of the Date of Default. The principal
amount of such FHA Debentures is equal to the FHA Insurance Benefits which are
payable on a defaulted FHA-insured mortgage loan, and such FHA Debentures bear
interest from the Date of Default at the applicable Debenture Rate. Delivery
of an FHA Debenture will occur after the defaulted FHA-insured mortgage loan
is assigned or the mortgaged property is conveyed, as described herein.
Actual Payment
The timing of the actual payment of FHA Insurance Benefits is not
governed by any specific regulation or statutory provision and current FHA
practices and procedures could change in the future. Current FHA practice is
that, when FHA Insurance Benefits are payable in cash (as opposed to FHA
Debentures), 90% of the claim is generally paid within a week of the recording
of the conveyance of title of the related mortgaged property or assignment of
the defaulted FHA-insured mortgage loan, and the balance of the claim is paid
after completion of an audit and all other FHA procedures, which generally
occurs within 12 months, during which time interest will accrue from the Date of
Default. With respect to FHA Insurance Benefits paid in FHA Debentures,
currently the average period of time before the mortgagee receives the FHA
Debentures is approximately 12 months after recording of the conveyance of title
or assignment of the defaulted FHA-insured mortgage loan, during which time
interest will accrue at the applicable Debenture Rate from the Date of Default.
Regardless of the form in which the FHA Insurance Benefits are paid, there can
be no assurance as to the timing of receipt of such benefits. The period for
receiving FHA Insurance Benefits may be longer than described. The information
set forth herein is based on general information currently available as of the
date of this Prospectus Supplement and may not be indicative of the timing of
benefits received in the future.
Partial Payment of a Claim
FHA Regulations permit, with the consent of the mortgagee, a partial
payment in cash of a mortgagee's insurance claim for mortgage loans insured by
the FHA under certain Sections. The FHA may request that a mortgagee with an
insurance claim accept a partial payment of its claim and agree to recast the
mortgage under such terms and conditions as the FHA and the mortgagee agree. The
FHA may offer partial payment to a mortgagee only if the project secured by the
mortgage is, or potentially could serve as, a low- and moderate-income project.
The FHA must also make certain findings, generally aimed at insuring that the
project can be operated profitably after the partial payment is made, prior to
offering partial payment to the mortgagee. The recast mortgage will secure the
mortgagor's obligation to repay to the mortgagee the remaining mortgage amount
and the recast mortgage will be an FHA-insured mortgage loan. The FHA will also
place a second mortgage on the project to secure the mortgagor's obligation to
repay to the FHA that portion of the claim which the FHA paid to the mortgagee
under the insurance claim in respect of the related FHA-insured mortgage loan.
See "Servicing of FHA Loans-FHA Loan Modifications" herein with respect to
circumstances under which the Master Servicer may direct the Trustee, as
mortgagee of record, to consent to any of the foregoing. The FHA will waive the
Assignment Fee with respect to a partial payment of a claim.
Prepayments and Lock-outs
Generally, unless the related mortgage note contains a provision to the
contrary, a mortgagor may prepay an FHA-insured mortgage loan in whole or in
part after giving the mortgagee 30 days' notice in
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writing in advance of its intention to so prepay. However, full or partial
prepayments by nonprofit mortgagors of mortgages insured under Section 232
cannot be effected without prior written consent from the FHA. The FHA
Regulations provide that where the mortgagor prepays an FHA-insured mortgage
loan in full prior to maturity, full prepayment of any related supplemental
(subordinate) loans insured under Section 241 is required unless the mortgagor
submits to certain requirements imposed by FHA Regulations.
With respect to lock-out periods, partial or full prepayment of a
mortgage insured under Section 223(f), where the commitment to insure the
mortgage was given after October 8, 1980, is prohibited for a period of five
years from the date of endorsement of the mortgage, except as required by the
FHA or where certain conditions are met. In cases in which a Mortgage Loan backs
a GNMA Certificate or where a lender has obtained the funds for the loan by the
issuance and sale of bonds or bond anticipation notes, or both, the mortgage may
contain a prepayment restriction and prepayment penalty charge acceptable to the
FHA commissioner as to term, amount and conditions. Such prepayment restriction
may have a longer term acceptable to the FHA.
Notwithstanding any lock-out or prepayment penalties applicable to
prepayments of FHA-insured mortgage loans, such loans generally must also
include a provision which allows the FHA to override any lock-out and/or
prepayment penalty provisions when an FHA-insured mortgage loan is in default if
the FHA determines that it is in the best interest of the federal government to
allow the mortgagor to refinance or partially prepay the mortgage without
restrictions or penalties and thereby avoid or mitigate an FHA insurance claim.
Certain of the Mortgage Loans permit the borrower to prepay up to 15%
of the original principal amount of the loan in any one calendar year without
any Prepayment Premium.
Description of FHA Mortgage Insurance Programs
The following is a summary of the various FHA Insurance programs under
which the Mortgage Loans are insured.
Section 207. Section 207 provides financing for both manufactured home
parks and rental housing. Loans under the Section 207 Program were made mostly
to private, profit-motivated mortgagors. Eligible properties included new
accommodations or buildings requiring substantial rehabilitation. Rehabilitation
projects have been situated in such a way as to effect a substantial improvement
of housing conditions in the neighborhood.
A Section 207 mortgage generally could not have involved a principal
obligation in excess of the lesser of the following: (i) 90% of the FHA
estimated value of the project or (ii) for the part of the project attributable
to dwelling use (excluding exterior land improvements), a dollar amount per
family unit depending on the number of bedrooms. As is the case with each of the
insurance programs described herein, the related dollar limitations were subject
to change from time to time, and accordingly, the regulations in effect at the
time of the origination of the Mortgage Loan in question must be referred to for
the applicable amounts.
Rents on projects with mortgages insured before November 30, 1983 are
subject to HUD regulation. Recent regulatory streamlining removed the Section
207 rules on rent regulation without providing for any specific replacement
guidelines. Generally, the related regulatory agreement must be consulted for
any continuing rent restrictions. Projects which were exempted from state or
local rent
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controls because of any applicable HUD regulation of project rents thereon may
in any case remain subject to rent regulation by HUD.
Section 220. Section 220 authorizes multifamily loans in designated
urban renewal and community development areas (areas in which concentrated
housing, physical development, and public service activities are being carried
out according to a locally developed strategy for neighborhood improvement,
conservation or preservation). The dollar limits for applicable to this program
are generally the same as those for the Section 207 program, with certain
additional increases allowed in the case of projects involving a rehabilitation
or which have elevators. The Section 220 program has rarely been used in recent
years.
Section 221(d)(4). Section 221(d)(4) is targeted to low- and
moderate-income rental housing. For new construction, the maximum mortgage
amount was generally limited to 90% of estimated replacement cost. For project
repairs or rehabilitation (including projects to be refinanced), the maximum
mortgage amount was generally limited to 90% of the sum of the estimated cost of
repairs and the estimated property value prior to such repair or rehabilitation.
Per-unit dollar limitations are also applicable to the portion of the project
attributed to dwelling use, excluding exterior land improvements. These are
subject to increase for elevator type structures. These limitations may
generally be increased up to 110% in certain high cost areas, and up to 140% on
a project-by-project basis, with the approval of HUD.
Although rents under this program may generally be determined by the
mortgagor, in certain instances the presence of any Section 8 subsidies or other
factors may yield a different result. For certain Section 221(d)(4) project
loans, the mortgagee, under Section 221(g)(4) of the Housing Act, has the option
to assign the original credit instrument and the mortgage securing the same to
the FHA, provided that such project loan is not in default at the expiration of
20 years from the date it was endorsed for insurance and provided that such
assignment is made within one year following such 20th anniversary. Certain of
the FHA Loans may be eligible for assignment under Section 221(g)(4); however,
the Pooling and Servicing Agreement prohibits the Trustee and the Master
Servicer from exercising this option.
Section 223(a)(7). Section 223(a)(7) provides FHA-insured refinancing
of FHA-insured mortgage loans at an interest rate lower than that of the
original mortgage loan. Unlike the Section 223(f) program, this program is not
available to refinance conventional mortgages. The principal balance of the
Section 223(a)(7) project loan is generally based upon the unpaid principal
balance of the existing insured mortgage. The term of the new mortgage cannot
generally exceed the unexpired term of the existing mortgage, except that it may
extend up to twelve years beyond the unexpired term if HUD determines that the
extended term will benefit the FHA insurance fund.
Section 223(d). Section 223(d) permits FHA-insured financing to cover
the costs of certain operating losses which a project with FHA-insured financing
may experience during certain eligible periods. An operating loss is defined as
the amount by which the sum of taxes, mortgage interest, insurance premiums and
maintenance and operating expenses exceed project income. The principal amount
for an operating loss loan cannot generally exceed the lesser of 80 percent of
the non-reimbursed cash contributions made by the project owner to cover
operating losses, or an amount which when added to the existing indebtedness on
the property equals the allowable mortgage limit for the project. Section 223(d)
financing is generally not available for projects with subsidized first
mortgages, other forms of rent supplements or Section 8 assistance.
Section 223(e). Section 223(e) provides FHA-insured financing for the
purchase, rehabilitation or construction of housing in older, declining, but
still viable urban areas where conditions are such that
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the normal requirements for mortgage insurance cannot be met. HUD determines if
a project should be insured under Section 223(e) and become an obligation of the
Special Risk Insurance Fund.
Section 223(f). Section 223(f) provides FHA-insured financing or
refinancing for existing multifamily projects. Unlike Section 223(a)(7), Section
223(f) is not limited to the refinancing of FHA- insured mortgages. Through this
program, HUD is able to provide owners of affordable housing with a means of
restructuring the original financing to provide for a lower debt service. A
mortgage loan can generally be insured under any FHA multifamily program
pursuant to Section 223(f), and the specific program mortgage limits would
apply. Section 223(f) mortgages have typically been insured under Section 207.
The per-unit mortgage limits are generally the same as those in the Section 207
program with certain additional restrictions: (i) the loan amount cannot
generally exceed 85% of the project's value and (ii) if the mortgage loan is an
acquisition loan, the loan amount cannot generally exceed 85 percent of the cost
of acquisition, including certain costs and related reserve account
requirements.
Section 232. Section 232 provides for federal insurance of private
construction mortgage loans to finance new or rehabilitated nursing homes,
intermediate care facilities, assisted living facilities, board and care homes,
assisted living for the frail elderly or allowable combinations thereof,
including equipment to be used in their operation. Section 232 also provides for
supplemental loans to finance the purchase and installation of fire safety
equipment in these facilities. However, these loans are governed by different
restrictions and limitations than those set forth below for the actual
facilities.
A nursing home is a facility, which is licensed or regulated by the
State or municipality, for the accommodation of convalescents or other persons
who require skilled nursing and related medical services. An intermediate care
facility provides housing for persons who need minimum yet continuous care, but
do not require continuous medical or nursing services. A qualified board and
care home must provide continuous protective oversight for persons, including
intervention in the event of a crisis or supervision of medication or
nutritional needs, and the facility must be in compliance with Section 1616(e)
of the Social Security Act. Finally, assisted living for the frail elderly is
characterized as a facility that provides supportive services and separate
dwelling units for persons who are at least 62 years old and who are unable to
perform at least 3 activities of daily living. Activities of daily living
include such activities as bathing, shopping, obtaining and taking medications,
managing money, dressing and eating. All the facilities must be operated under
the necessary licenses required by federal, state and local regulations.
The maximum mortgage amount which is insurable under Section 232 is 90%
of the value of the project for profit motivated mortgagors (95% of such value
for private non-profit mortgagors), including the equipment to be used in its
operation. However, in the event that the mortgage loan is used to finance an
existing project to be repaired or rehabilitated, the maximum mortgage amount
which is insurable under Section 232 is 85% of the value of the project for
profit motivated mortgagors (90% of such value for non-profit mortgagors),
including the equipment. Section 232 mortgages may have terms not exceeding 40
years.
Section 241. Section 241 provides for federal insurance of private
supplemental loans (subordinate liens) to finance improvements or additions,
including energy conserving improvements and advances during construction or
improvement to a multifamily project, a nursing home, an intermediate care
facility, a group practice facility, any mortgage insured under any section of
the Housing Act or any mortgage held by the FHA. The purpose of the Section 241
loan program is to provide a project with a means to remain competitive, extend
its economic life and finance the replacement of obsolete equipment, without the
refinancing of the existing mortgage.
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Supplemental loans which are insured under Section 241 may be in an
amount of up to 90% of the value of improvements, additions and/or equipment
financed by the loan; provided, that such amount, when added to the outstanding
balance of the mortgage covering the project, shall not exceed the maximum
mortgage amount insurable under the section or title pursuant to which the
mortgage covering such project is insured. For a property not previously insured
by the FHA, the maximum insurable amount is the least of (a) the value of the
improvements, (b) an amount which can be supported by net income and (c) an
amount which when added to the existing indebtedness does not exceed the FHA's
estimate of the value of the project after improvements. There is no statutory
or regulatory limit on the mortgage term under Section 241. Instead, the loan
shall have a term which is satisfactory to the FHA.
Section 241(f). The Low Income Housing Preservation and Resident Home
ownership Act of 1990 established the Section 241(f) program for supplemental
financing and equity takeout loans. These mortgage loans are typically secured
by subordinate liens and made to an eligible owner pursuant to a plan of action
("Plan") as a means of acquiring, rehabilitating or extracting accumulated
equity from a project. In any case HUD is authorized to provide preservation
incentive payments in the form of Section 8 Rental Assistance to the owner of
the project, if, in exchange for such assistance, the owner enters into
commitments with HUD which ensure that the low-income use of such project will
be maintained for the remaining useful life of the project. The continuing use
restrictions incident to the acceptance of incentive payments may provide a
meaningful disincentive to voluntary prepayment.
The termination provisions applicable to a preservation project already
receiving incentives under a Plan state that if HUD is unable to extend the term
of Section 8 assistance, or is otherwise unable to develop a revised package of
incentives providing benefits to the eligible owner comparable to those received
under the original Plan (such as switching the project over to tenant-based
assistance), it will at the eligible owner's request (i) modify the commitments
which are dependent on such rental assistance, and (ii) permit the eligible
owner to prepay the mortgage and terminate the Plan along with any related use
agreements or restrictions. It should be noted that in many cases, HUD set the
level of Section 8 assistance by backing into the level of subsidy necessary to
cover the additional debt service and funding of reserve accounts. This formula
admittedly may yield a level of "rent" which has no relation to fair market
rents. See "FHA MORTGAGE INSURANCE PROGRAMS--The Section 8 Program".
The ability to prepay may not be of much use in instances where the
surrounding locale does not provide the owner with a higher and better use for
his property. In these cases, the owner might attempt to service the
supplemental loan despite the discontinued subsidy, or negotiate a partial
assignment and modification of the supplemental loan to reduce his total debt
service to reflect the discontinued subsidy. Owners often have no incentive to
sell a project because of their depreciated tax basis in the project, and such a
sale could result in a substantial tax liability (not only on any cash received
but also on gains attributable to their negative capital accounts). In the event
of a default and partial assignment and modification, a similar result would
occur unless HUD takes back a subordinate mortgage, often referred to as a "soft
second", which HUD has typically done in the past and which is being considered
in the context of its "mark to market" proposals. See "FHA MORTGAGE INSURANCE
PROGRAMS--The Section 8 Program".
The Section 8 Program
Project-based Section 8 rent subsidies are paid by HUD to owners of
certain types of low income multifamily housing properties on behalf of eligible
tenants. Tenant eligibility is determined based upon family income and size, as
well as the median income for the area. The subsidy paid by HUD is based on the
difference between the rent charged to the tenant (which rent is established by
HUD, as set forth below) and the tenant's ability to pay. The payment of
subsidies to a particular project owner is made
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pursuant to a Housing Assistance Payment contract (a "HAP Contract") between the
owner of the project and HUD or between the owner and a local public housing
authority ("PHA"), depending on which entity is administering the HAP Contract.
Section 8 assistance may be either tenant-based or project-based.
Tenant-based assistance involves subsidy payments made to a PHA on behalf of
eligible tenants which the PHA pays to the project owner. "Project-Based
Assistance" differs from tenant-based assistance in that subsidies not linked to
particular tenants are paid to the owner directly from HUD. Generally, housing
projects qualified for Project-Based Assistance provide that the tenants therein
spend, in general, at least approximately 30% of their gross monthly income on
rent and have household income below approximately 80% of the median income
level for their geographic area. HUD can set the basic income limits higher or
lower than 80 percent, based on the prevailing level of construction costs or
unusually high or low incomes. There are, however, overall restrictions on the
number of assisted tenants whose households are not classified as "very low
income" households. "Very-low income" for a family of four is defined as 50% of
area median income, and the percentage is adjusted for family size.
Historically, rent subsidies for newly constructed and rehabilitated
housing projects were made for terms of 20 to 40 years. Presently, HAP Contracts
relating to projects subject to HUD's default management and property
disposition functions have a maximum term of five years. Historically, HUD has
extended Section 8 subsidies on eligible projects when the subsidy contracts
have expired. A recently released HUD-commissioned analysis of multifamily
properties that both receive Section 8 subsidies and have mortgage loans insured
by the FHA indicates, however, that Section 8 rental assistance contracts on
approximately 800,000 apartment units will expire during the next seven years,
with approximately 263,000 expiring in fiscal year 1997. This analysis reflects
HUD's belief that budget constraints make it unlikely that the contracts will be
renewed at their current assistance levels in future years. In addition, the
analysis indicates that rents on approximately two-thirds of the HUD-subsidized
units are higher than market rents for comparable units in the same community.
If Congress reduces these HUD-subsidized rents to market levels, however, it is
possible that many project owners may not have sufficient revenues to cover
their mortgage payments and may ultimately default on their FHA-insured
mortgages.
In response to this potential problem, HUD has proposed to reform
Section 8 Project Based assistance with an initiative commonly referred to as
"mark-to-market", but more correctly entitled "The Portfolio Re-Engineering
Initiative". As a general matter, under this initiative, expiring Section 8
contracts would be renewed at market-rate-rent levels, and HUD would write down
the balances of existing mortgages on properties faced with a default without
above-market-rent subsidies through the claims process such that the smaller
balances of the restructured mortgage loans could be supported by market rents.
See "FHA Mortgage Insurance Programs--Partial Payment of a Claim" herein.
Currently, HUD only has authority to renew certain expiring HAP Contracts for a
period of not more than one year at rent levels that are equal to those under
the expiring HAP Contract as of the date the contract expires. The rent levels
of most such renewals are limited to 120 percent of the fair market rent for the
market area in which the project is located. Reliable information is not
currently available as to whether any of the Mortgage Loans that benefit from
Project Based Assistance are secured by liens on projects with rents in excess
of the 120 percent threshold.
HUD's authority to renew expiring project-based HAP Contracts comes
from HUD's Appropriation Act for fiscal year 1997 (the "Act"). Under the Act,
Congress will implement a voluntary demonstration program for owners of
FHA-insured multifamily properties whose Section 8 contracts are expiring and
whose HAP Contract rents exceed 120% of the applicable fair market rent
limitations. In general, this Portfolio Re-engineering Demonstration Program
(the "Demonstration Program") involves reducing rents to market levels and
adjusting the insured mortgages to accommodate reduced cash flow
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and rehabilitation needs. This Demonstration Program is structured so that
several distinct "work-out" processes can be set up and their results evaluated.
It allows HUD the administrative ability to focus on those FHA-insured
multifamily housing projects with significantly oversubsidized rents. HUD has
been given flexible tools, including: reinsurance authority; the use of
project-based and tenant-based assistance; authority to forgive debt;
budget-based rents; the use of bifurcated mortgages; partial and full payment of
claim authority; credit enhancements; the ability to enter into risk-sharing
arrangements; and the sale of benefits and burdens of FHA multifamily mortgage
insurance.
The Demonstration Program is designed as an interim strategy and as a
stepping stone for more comprehensive legislation. The information gathered
through the Demonstration Program will be valuable as future legislation is
crafted to (1) decrease the escalating costs of Section 8 rental assistance; (2)
prevent mortgage defaults; (3) protect against resident displacement; and (4)
resolve the associated tax issues which are raised when project owners write
down the value of their mortgages in connection with restructurings. See "FHA
Mortgage Insurance Programs--General--Section 241(f)".
In some cases, the ability of a project owner to meet its payment
obligations under an FHA Mortgage may be dependent upon its ability to obtain
further subsidies to replace the expiring Project Based Assistance. Because the
remaining term to maturity of an affected Mortgage Loan may be longer than the
remaining term of any related HAP Contract, and because there is no assurance
that HUD will extend the term of any particular HAP Contract upon its
expiration, it is possible that the expiration of a HAP Contract with respect to
a particular Mortgaged Property could result in an unscheduled recovery of
principal due to a full or partial FHA-insurance claim or prepayment with
respect to a related Mortgage Loan, notwithstanding any prepayment lockout
otherwise applicable thereto. See "Yield Considerations" herein.
Moreover, if an FHA-insured project's underlying HAP Contract expires
and is not renewed by HUD, or is renewed at lower rent levels, FHA and the owner
may agree, subject to such third party consents (which should include the
Mortgagee) as may be necessary, to a restructuring of the underlying debt which
may include a partial or full payment of claim prior to a default under the
related regulatory agreement or HAP Contract. Therefore, before a technical
default occurs, HUD may seek to reduce the financial risk to the FHA Insurance
Fund by restructuring the project's debt so that the affordable nature of the
housing is preserved and the involuntary displacement of tenants is minimized.
Based solely on information obtained from various sources, including
Greystone Funding, with respect to the Greystone Mortgage Assets, and Daiwa
Finance, with respect to the Daiwa Mortgage Assets, the Sellers believe that 13
of the Mortgage Loans (representing approximately 15.9% of the Initial Pool
Balance) receive some form of Section 8 assistance. However, the Sellers have
not been able to verify the accuracy of such information, the existence of any
Project-Based Assistance with respect to any of the Mortgage Loans, the
particular form of such Section 8 assistance, the length of any related HAP
Contract or the number of units covered by or maximum dollar amount of such
contract for any of such Mortgage Loans.
Historically, there have been differing default and prepayment rate
experiences between loans receiving Section 8 rent subsidies and insured under
certain sections of the Housing Act and those insured under the same sections
but not receiving Section 8 rent subsidies. These default and prepayment rates
may or may not be affected by subsequent Congressional legislation which may or
may not affect projects whose Project-Based Assistance expires during the term
of the FHA-insured mortgage.
See "Risk Factors--The Mortgage Assets--Loans Assisted Under Section 8"
herein.
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FHA Default and Prepayment Experience
The following tables set forth aggregate default and prepayment
characteristics of mortgage loans insured under the specified FHA programs for
the periods shown. These tables were reprinted from publicly- available
information furnished by the Office of the Housing--FHA Comptroller, Statistical
and Actuarial Analysis Staff (Phone: (202) 755-7510), and dated as of
approximately March, 1996. None of the Depositor, the Underwriters or the
Sellers has independently verified such information, and none of the Depositor,
the Underwriters or the Sellers makes any representation as to its completeness
or accuracy. Statistical information with respect to loans insured under
Sections 241, 223(a)(7) and 241(f) has not been included herein because of the
small size and/or relative newness of such programs.
Notwithstanding that the following tables reflect information
concerning aggregate claim and non- claim terminations for certain FHA-Insurance
Programs, both with and without Section 8 subsidies, it should be noted that
such information may or may not reflect a meaningful pattern concerning the
default and prepayment experience attributable to loans insured under any such
programs since, among other reasons, such information does not separately
identify partial claim terminations or the number of such loans which were
previously coinsured, modified, or subject to other special circumstances
relating to the operation of the related Mortgaged Property or the loan
origination practices then in effect. See "Risk Factors--The Mortgage Assets"
herein.
A "Claim Termination" with respect to an FHA-insured mortgage loan is a
prepayment in full of that mortgage as a result of a default and receipt of FHA
Insurance Benefits. A "Non-Claim Termination" with respect to an FHA-insured
mortgage loan is a prepayment in full of that mortgage other than as a result of
a default and a receipt of FHA Insurance Benefits.
For all programs other than Section 232, the following table does not
include loans receiving Section 8 rent subsidies.
CLAIM TERMINATIONS
<TABLE>
<CAPTION>
NUMBER OF $ AMOUNT NUMBER OF PERCENT OF $ AMOUNT OF PERCENT OF
LOANS OF LOANS CLAIM NUMBER CLAIM $ AMOUNT
PROGRAM PERIOD INSURED INSURED TERMINATIONS INSURED TERMINATIONS INSURED
- ------- ------ -------- --------- ------------ --------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Section 221(d)(4) 1962-1996 3,432 $12,352,366,460 924 26.92% $3,432,544,335 27.79%
Section 207/223(f) 1975-1996 1,320 $ 5,528,593,614 70 5.30% $ 181,351,136 3.28%
Section 232 1960-1996 2,064 $ 5,700,449,324 182 8.82% $ 450,453,041 7.90%
Section 220 1951-1995 413 $ 2,062,048,760 114 27.60% $ 827,084,057 40.11%
</TABLE>
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NON-CLAIM TERMINATIONS
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF $ AMOUNT OF PERCENT OF
NON-CLAIM NUMBER NON-CLAIM $ AMOUNT
PROGRAM TERMINATIONS INSURED TERMINATIONS INSURED
- ------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Section 221(d)(4) 830 24.18% $1,837,873,924 14.88%
Section 207/223(f) 245 18.56% $ 775,806,300 14.03%
Section 232 1,064 51.55% $1,449,636,840 25.43%
Section 220 209 50.61% $ 749,366,668 36.00%
</TABLE>
The following table includes only loans receiving Section 8 rent
subsidies. Due to the small number of Section 8 subsidized loans endorsed under
Sections 207/223f and 232, the information shown with respect to Section
207/223f may not be indicative of the performance of such loans and no
information with respect to Section 232 has been shown.
CLAIM TERMINATIONS
<TABLE>
<CAPTION>
NUMBER OF $ AMOUNT NUMBER OF PERCENT OF $ AMOUNT PERCENT OF
LOANS OF LOANS CLAIM NUMBER OF CLAIM $ AMOUNT
PROGRAM PERIOD INSURED INSURED TERMINATIONS INSURED TERMINATIONS INSURED
- ------- ------ -------- --------- ------------ --------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Section 221(d)(4) 1962-1996 3,972 $11,129,006,043 328 8.26% $1,363,321,390 12.25%
Section 207/223(f) 1975-1996 47 $ 106,416,070 15 31.91% $ 38,617,300 36.29%
Section 220 1951-1995 90 $ 922,178,879 16 17.78% $ 200,730,298 21.77%
</TABLE>
NON-CLAIM TERMINATIONS
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF $ AMOUNT OF PERCENT OF
NON-CLAIM NUMBER NON-CLAIM $ AMOUNT
PROGRAM TERMINATIONS INSURED TERMINATIONS INSURED
- ------- ------------ ------- ------------ ----------
<S> <C> <C> <C> <C>
Section 221(d)(4) 109 27.44% $352,430,904 3.17%
Section 207/223(f)1 1 2.13% $2,869,600 2.70%
Section 220 2 2.20% $46,414,800 5.03%
</TABLE>
It is unlikely that the default and prepayment characteristics of the
Mortgage Loans comprising the Mortgage Pool will correspond to the default and
prepayment experience of the mortgage loans set forth in
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the foregoing tables. The mortgage loans set forth above include mortgage loans
with a variety of payment and other characteristics (including geographic
location and year of origination) which are not necessarily representative of
the payment and other characteristics of the Mortgage Loans comprising the
Mortgage Pool. Furthermore, the mortgage loans set forth above may have been
originated using a variety of different underwriting procedures and standards
which may have been more or less selective based on the year originated and may
have defaulted or refinanced as result of a variety of circumstances, including
general economic conditions and regulatory climate which has and is likely to
continue to change over time.
GNMA Mortgage-Backed Securities Program
The Government National Mortgage Association ("GNMA") is a wholly-owned
corporate instrumentality of the United States within HUD. Section 306(g) of
Title III of the Housing Act authorizes GNMA to guarantee the timely payment of
the principal of, and interest on, certificates that are based on and backed by
a pool of mortgage loans insured or guaranteed by (i) the FHA under the Housing
Act, (ii) the Farmers Home Administration under Title V of the Housing Act of
1949 or (iii) the Department of Veterans Affairs under the Serviceman's
Readjustment Act of 1944, as amended, or Chapter 37 of Title 38, United States
Code.
Each GNMA Certificate will be a "fully-modified pass-through" mortgage
backed certificate issued and serviced by a mortgage banking company or other
financial concern approved by GNMA (a "GNMA Issuer"). Each GNMA Certificate is
backed by a single Underlying Mortgage Loan. Each GNMA Certificate is guaranteed
as to the timely payment of principal and interest thereon by GNMA. Section
306(g) of Title III provides that "the full faith and credit of the United
States is pledged to the payment of all amounts which may be required to be paid
under any guaranty under this subsection." To meet its obligations under its
guaranties, GNMA is authorized, under Section 306(d) of Title III, to borrow
from the United States Treasury with no limit as to amount.
GNMA has approved the issuance of each GNMA Certificate in accordance
with a guaranty agreement between GNMA and the GNMA Issuer. Pursuant to such
agreement, the GNMA Issuer is required to advance its own funds in order to make
timely payment of all amounts due on the GNMA Certificate, even if the payments
received by the GNMA Issuer on the related Underlying Mortgage Loan are less
than the amounts due thereon. However, the GNMA Certificates do not constitute a
liability of, or evidence any recourse against, the related GNMA Issuer.
A registered holder of a GNMA Certificate has the right to proceed directly
against GNMA under the terms of the GNMA Certificate for any amounts that are
not paid when due.
Each GNMA Certificate will bear interest at an annual interest rate
(the "GNMA Certificate Rate") equal to the Mortgage Rate on its Underlying
Mortgage Loan less the per annum rates applicable to the calculation of related
servicing and GNMA guaranty fees. The GNMA Issuer must remit unscheduled
recoveries of principal no later than on the 15th day of the month following the
month in which such amounts were actually received. Each GNMA Certificate will
provide for the payment by, or on behalf of, the GNMA Issuer to the registered
holder of the GNMA Certificate of scheduled and unscheduled recoveries of
principal on the related Underlying Mortgage Loan, and accrued interest at the
related GNMA Certificate Rate on the principal balance of the GNMA Certificate
as of the end of the previous calendar month. In addition, each payment will
include any prepayments of principal on the Underlying Mortgage Loan and
liquidation proceeds in the event of a foreclosure or other disposition of such
Underlying Mortgage Loan. Typically, each payment on a GNMA Certificate will be
paid to the registered holder thereof, on the 15th day of each month (or, if
such day is not a business day, the next succeeding business day), however, in
the case of an unscheduled recovery of principal, in whole or in part, the GNMA
Issuer may remit amounts due on an earlier day of a particular month, provided
that the holder of the GNMA Certificates is not obligated to accept more than
one payment per month. The Pooling and Servicing Agreement prohibits the Trustee
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and Master Servicer from accepting a second payment on any GNMA Certificate in
any calendar month after the Due Date for such GNMA Certificate in such month.
Each GNMA Issuer is obligated to service the Underlying Mortgage Loan
in accordance with FHA Regulations and in accordance with generally accepted
practices in the mortgage lending industry. Such responsibilities will include
collection of all principal and interest payments and payments made by borrowers
toward escrows established for taxes and insurance premiums; maintenance of
necessary hazard insurance policies; institution of all actions necessary to
foreclose on, or take other appropriate action with respect to, loans in
default; and collection of FHA Insurance Benefits.
However, in the event of a default on an Underlying Mortgage Loan, the
holder of the related GNMA Certificate will not receive FHA Debentures under any
circumstance. Rather, GNMA will advance payments of principal and interest due
on such GNMA Certificate until GNMA receives all FHA Insurance Benefits due on
that Underlying Mortgage Loan from the FHA. At that time, GNMA will pay cash to
the holder of the GNMA Certificate in an amount sufficient to pay all
outstanding principal and interest on that GNMA Certificate.
All of the Underlying Mortgage Loans are insured under Sections
221(d)(4), 223 (a)(7), 223(f), 232 and 241(f) of the Housing Act. For
information concerning FHA default and prepayment experience on mortgage loans
insured by the FHA under these programs (other than Section 223(a)(7) and
Section 241(f)), see "FHA MORTGAGE INSURANCE PROGRAMS--FHA Default and
Prepayment Experience" herein.
SERVICING OF THE FHA LOANS
General
The servicing of the FHA Loans will be governed by the Pooling and
Servicing Agreement. The following summaries describe certain provisions of the
Pooling and Servicing Agreement relating to the servicing and administration of
the FHA Loans. The summaries do not purport to be complete and are subject, and
qualified in their entirety by reference, to the provisions of the Pooling and
Servicing Agreement. When particular provisions or terms used in the Pooling and
Servicing Agreement are referred to herein, the actual provisions (including
definitions of terms) are deemed to be incorporated herein by reference.
Reference is made to the Prospectus for additional information regarding the
terms of the Pooling and Servicing Agreement relating to the servicing and
administration of the FHA Loans. However, information set forth in the
Prospectus should be read taking account of all supplemental information
contained herein. For purposes of the Prospectus, the Pooling and Servicing
Agreement constitutes both a Trust Agreement and a Master Servicing Agreement.
See "SERVICING OF MORTGAGE LOANS" in the Prospectus.
The Master Servicer will be required to service and administer the FHA
Loans, for and on behalf of the Trust Fund and solely in the best interests of
and for the benefit of the Trustee (as trustee for the Certificateholders) and
the Certificateholders, in accordance with the applicable provisions of the
Housing Act and the FHA Regulations, the terms of the Pooling and Servicing
Agreement and the respective FHA Loans and, to the extent consistent with the
foregoing, in accordance with the normal and usual standards of practice of
prudent servicers of FHA-insured project mortgage loans in the respective states
where the related Mortgaged Properties are located (the foregoing general
standard, the "Servicing Standard").
Subject to the Servicing Standard, the Master Servicer will have full
power and authority, acting alone and/or through any sub-servicer (a
"Sub-Servicer"), to do or cause to be done any and all things that it may deem
necessary or desirable in connection with the servicing and administration of
the FHA Loans.
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In the Pooling and Servicing Agreement, each Seller, the Master
Servicer and the Depositor covenants that it will not, prior to six months
before the stated maturity date of any FHA Loan, solicit the related mortgagor,
directly or indirectly, for purposes of providing such mortgagor with financing
to prepay such FHA Loan. No such covenant has been made by any Sub-Servicer,
however.
The Master Servicer
Greystone Servicing Corporation, Inc., a Georgia corporation, will act
as Master Servicer with respect to the FHA Loans. As of December 31, 1995, the
Master Servicer had a net worth, calculated in accordance with generally
accepted accounting principles, of approximately $15.6 million, and a total
commercial and multifamily mortgage loan servicing portfolio (including mortgage
loans serviced for its own account and for others) of approximately $1.7
billion. The Master Servicer's principal servicing offices are located at
Alexandria Pike Building, 98 Alexandria Pike, Warrenton, Virginia 20186 and its
telephone number is (540) 341-2100. The foregoing information concerning the
Master Servicer has been provided by it. Accordingly, the Depositor makes no
representation or warranty as to the accuracy or completeness of such
information.
Master Servicer Compensation and Payment of Expenses
The Master Servicer will be entitled, for each calendar month, to the
Servicing Fee. The "Servicing Fee" with respect to each FHA Loan is an amount
equal to one month's interest accrued on the basis of a 360-day year consisting
of twelve 30-day months (or, in the event of any payment of interest which
accompanies a principal prepayment in full made by the mortgagor, interest for
the number of days covered by such payment of interest) at the applicable
Servicing Fee Rate on the Stated Principal Balance of such FHA Loan as of the
commencement of such month. The "Servicing Fee Rate" for each FHA Loan will be
at least 0.100% and not more than 0.800% per annum (with a weighted average,
based on their respective Cut-off Date Balances, of approximately 0.206% per
annum). No Servicing Fee will accrue or be payable with respect to a GNMA
Certificate or an FHA Debenture.
The Master Servicer will also be entitled to receive, as additional
servicing compensation, (i) any Prepayment Interest Excesses, late payment
charges, assumption fees, modification fees and other usual and customary fees
collected from the respective mortgagors under the FHA Loans (other than
Prepayment Premiums) and (ii) any net income earned on Permitted Investments of
funds held in the Collection Account and/or the Custodial Account. The Master
Servicer will be required to pay all expenses incurred by it in connection with
its servicing activities under the Pooling and Servicing Agreement and will not
be entitled to reimbursement therefor except as specifically provided in the
Pooling and Servicing Agreement.
FHA Loan Modifications
The Master Servicer may not, without the consent of the FHA (if
required under FHA Regulations) (i) modify or extend any FHA Loan, (ii) make or
consent to any material amendment, change, modification or alteration of any FHA
Loan, (iii) consent to any release, substitution or exchange of the collateral
given for any FHA Loan, (iv) waive any claim or right against the mortgagor
under or any guarantor, standby creditor or obligor of an FHA Loan, or (v)
consent to any transfer of or subordinate financing on any Mortgaged Property
unless such transfer or subordinate financing is permitted under the loan
documents relating thereto. In addition, the Master Servicer may not (unless (i)
a mortgagor is in default with respect to any FHA Loan or such default is, in
the good faith and reasonable judgment of the Master Servicer, reasonably
foreseeable, (ii) the Master Servicer has obtained the written consent of the
FHA if required under FHA Regulations and (iii) the Master Servicer has obtained
written confirmation from the Rating Agency that there would be no resulting
downgrade, withdrawal or qualification of the then-current rating of any Class
of Offered Certificates) permit any modification with respect to any FHA Loan
that would affect the amount or timing of any related payment of principal,
interest or other
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amount payable thereunder or, in the Master Servicer's good faith and reasonable
judgment, would materially impair the security for such FHA Loan or reduce the
likelihood of timely payment of amounts due thereon. Moreover, the Master
Servicer may not make or permit any modification, waiver or amendment of any
term of, or take any other action with respect to, any FHA Loan that would (i)
result in certain specified adverse tax consequences with respect to either
REMIC I, REMIC II or REMIC III or (ii) cause any FHA Loan to cease to be a
"qualified mortgage" within the meaning of Section 860G(a)(3) of the Code. Any
modification, waiver or amendment of any term of any FHA Loan must be consistent
with the Servicing Standard.
Advances
Monthly Advances
Subject to the conditions described herein, the Master Servicer will,
with respect to each Distribution Date, make "Monthly Advances" to the
Collection Account maintained by the Trustee, in an amount (calculated as of the
related Determination Date) equal to the aggregate of the following: (i) all
Monthly Payments (after adjustment of the interest portion of each such Monthly
Payment to the related Mortgage Rate less the applicable Servicing Fee Rate)
that were due on the FHA Loans (other than Assigned FHA Loans) on their
respective Due Dates during the related Collection Period but that were not
received on or before the related Determination Date; (ii) with respect to each
Assigned FHA Loan as to which all reasonably expected FHA Insurance Benefits had
not been received as of the related Determination Date, an amount equal to the
excess, if any, of (A) one month's interest on the Stated Principal Balance of
such FHA Loan outstanding as of the related Determination Date (accrued at the
lesser of (1) the related Mortgage Rate less the applicable Servicing Fee Rate
and (2) the applicable Debenture Rate less the applicable Servicing Fee Rate,
and calculated on the basis of a 360-day year consisting of twelve 30-day
months), over (B) any and all payments and other amounts received in respect of
such FHA Loan during the related Collection Period that represent previously
unadvanced interest (net of any portion thereof constituting Servicing Fees);
and (iii) with respect to each FHA Debenture as to which no Due Date occurred
during the related Collection Period, one month's interest on the Stated
Principal Balance of such debenture outstanding as of the related Determination
Date (accrued at the lesser of (1) the related Net Asset Rate plus the Trustee
Fee Rate and (2) the related Debenture Rate less any applicable Retained Yield
Rate, and calculated on the basis of a 360-day year consisting of twelve 30-day
months).
In lieu of making all or a portion of the Monthly Advances for any
Distribution Date, the Master Servicer may utilize any such funds in the
Custodial Account that will constitute part of the Available Distribution Amount
for a future Distribution Date in discharge of its obligation to make any such
Monthly Advance and will cause to be made in its records relating to the
Custodial Account an appropriate entry reflecting such use of funds. Any funds
so applied will be replaced by the Master Servicer by deposit in the Custodial
Account no later than the Master Servicer Remittance Date for the applicable
future Distribution Date.
If the Trustee does not receive, or there is not deposited in the
Collection Account, the full amount of all Monthly Advances, if any, required to
be made in respect of any Distribution Date, then the Trustee shall make the
portion of such Monthly Advances that was required to be, but not, made by the
Master Servicer. The Master Servicer will have certain reimbursement obligations
to the Trustee in respect of Monthly Advances so made by the Trustee, and if
such reimbursement obligations are not so satisfied, then the Master Servicer
will be terminated as such and such Monthly Advances so made by the Trustee will
be deemed to have been made thereby in its capacity as successor master
servicer.
Servicing Advances
The Master Servicer is also required to make advances to cover certain
servicing expenses ("Servicing Advances"). The Master Servicer is not required
to make any Servicing Advance to the extent that (i) the Master
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Servicer determines that such Servicing Advance would, if made, not be
specifically covered by the FHA Insurance Benefits with respect to the related
FHA Loan and (ii) the failure to make such Servicing Advance would not adversely
affect the ability to recover the full amount of FHA Insurance Benefits in
respect of the related FHA Loan.
Recoverability of Advances
The Master Servicer is entitled to reimburse itself, and the Trustee is
entitled to reimbursement, for any Monthly Advances and Servicing Advances
(collectively, "Advances") in respect of any Mortgage Asset out of any
subsequent payments or other collections received on or in respect of such
Mortgage Asset ("Related Proceeds"), including, in the case of an Assigned FHA
Loan, any proceeds derived from the sale of any FHA Debentures received as
related FHA Insurance Benefits as described under "--Sale of FHA Debentures"
below; provided, however, that unless an FHA Insurance Nonexistence Event (as
described below) has occurred, reimbursement of Servicing Advances will be
limited to amounts remaining after payment of Expected Recoveries due
Certificateholders and reimbursement of Monthly Advances, in either case, in
respect of the related Mortgage Asset. To the extent that Related Proceeds are
for whatever reason insufficient to reimburse the Advances made in respect of
any Mortgage Asset (and, in the case of Servicing Advances, an FHA Insurance
Nonexistence Event has occurred), the Master Servicer will be entitled to
reimburse itself for any such unreimbursed Advance (a "Non-Recoverable Advance")
out of collections on the other Mortgage Assets prior to any payments due
Certificateholders. However, in no event will the Master Servicer be entitled to
reimbursement for any costs or expenses incurred by it in connection with an
assignment of an FHA Loan to the FHA. Neither the Master Servicer nor the
Trustee will be required to make any Advance which it believes, in its
reasonable and good faith judgment, would, if made, constitute a Non-Recoverable
Advance. An "FHA Insurance Nonexistence Event" is deemed to have occurred when
FHA Insurance is no longer available on any FHA Loan solely as a result of the
nonexistence of the FHA or any successor federal agency or official thereto with
respect to the functions and obligations thereof, including the obligation of
the FHA with respect to FHA Insurance. "Expected Recoveries due
Certificateholders" payable out of Related Proceeds prior to the occurrence of
an FHA Insurance Nonexistence Event will generally equal: (i) in the case of any
FHA Loan (other than an Assigned FHA Loan), the aggregate of all unpaid interest
(at the related Net Asset Rate) and principal then due and owing, net of related
unreimbursed Monthly Advances; (ii) in the case of any Assigned FHA Loan, the
aggregate of all unpaid interest (at the lesser of the related Net Asset Rate
and the related Net Debenture Rate) from the Date of Default and 99% of the
unpaid principal balance of such FHA Loan, net of related unreimbursed Monthly
Advances; and (iii) in the case of any FHA Debenture, the aggregate of all
unpaid interest (at the lesser of the related Net Asset Rate and the related Net
Debenture Rate) from the Date of Default and 100% of the unpaid principal
balance of such FHA Debenture, net of related unreimbursed Monthly Advances.
Interest on Advances
The Master Servicer, any successor thereto, and the Trustee will be
entitled to interest on each Advance made thereby, subject to a cap (the
"Advance Interest Cap") as described below, such interest ("Advance Interest")
to accrue on a daily basis for so long as such Advance is outstanding (or until
Advance Interest in an aggregate amount equal to the Advance Interest Cap has
accrued, whether or not previously paid), at a per annum rate equal to the
"prime rate" published in the "Money Rates" section of The Wall Street Journal,
as such "prime rate" may change from time to time. Advance Interest accrued in
respect of any Advance will be payable, subject to the Advance Interest Cap, out
of general collections on the Mortgage Pool at any time on or after the date
such Advance is reimbursed to the Master Servicer. The Advance Interest Cap is
approximately $472,001, or, at the request of the Master Servicer or the
Trustee, such greater amount as to which the Master Servicer or the Trustee has
obtained written confirmation from the Rating Agency that there would be no
resulting downgrade, withdrawal or qualification of the then-current rating of
any Class of Offered Certificates.
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Sale of Defaulted FHA Loans
If a borrower fails to make any payment due on an FHA Loan or to
perform any other covenant of an FHA Loan, and such failure continues for a
period of 30 days, then the Trustee shall promptly so notify in writing the
FHA and the holders of the Class B Certificates. Any holder or a combination of
holders of Certificates representing a majority Percentage Interest in the Class
B Certificates (such holder, or such combination of holders collectively, the
"Majority Class B Certificateholder") will be entitled to purchase such
defaulted FHA Loan at the applicable Purchase Price at any time before the FHA
insurance claim process is complete.
Sale of FHA Debentures
If the Trustee receives FHA Debentures as part of the FHA Insurance
Benefits in respect of any Assigned FHA Loan, then the Trustee shall promptly so
notify in writing the other parties to the Pooling and Servicing Agreement and
the Majority Class B Certificateholder, if any. Any such Majority Class B
Certificateholder may, at its option, purchase such FHA Debentures (including
any related Retained Yield) at the applicable Purchase Price by so notifying the
Trustee in writing of its intention to do so within ten days of its receipt of
the notice contemplated by the preceding sentence and by delivering cash in an
amount equal to the applicable Purchase Price to the Master Servicer for deposit
in the Custodial Account within fifteen days of its receipt of the notice
contemplated by the preceding sentence. If (i) the Majority Class B
Certificateholder fails to notify the Trustee within the applicable ten-day
period of its intention to purchase such FHA Debentures or (ii) the Majority
Class B Certificateholder has notified the Trustee of its intention to purchase
such FHA Debentures within the applicable ten-day period but fails to purchase
such FHA Debentures within the fifteen-day period applicable to its purchase
thereof, the Trustee shall so notify the Master Servicer. Upon receiving such
notice from the Trustee, the Master Servicer shall, no later than the tenth day
following such notice, purchase such FHA Debentures by depositing a cash amount
equal to the applicable Purchase Price in the Custodial Account. If the Master
Servicer is required but fails to purchase such FHA Debentures within the
applicable ten-day period, then the Trustee shall, no later than the third
Business Day following the ten-day period during which the Master Servicer is
required to purchase such FHA Debentures as provided above, purchase such FHA
Debentures at the applicable Purchase Price.
Sub-Servicers
The Master Servicer may perform its servicing obligations under the
Pooling and Servicing Agreement through sub-servicers (each, a "Sub-Servicer");
provided that each such Sub-Servicer, at all times it is servicing any FHA Loan,
is an established and approved servicer of multifamily, FHA-insured project
mortgage loans; and provided further that the Master Servicer will remain
primarily obligated for such servicing under the Pooling and Servicing
Agreement.
The Master Servicer will be solely liable for all fees owed by it to
any Sub-Servicer, irrespective of whether its compensation pursuant to the
Pooling and Servicing Agreement is sufficient to pay such fees. Each
Sub-Servicer will be reimbursed by the Master Servicer for certain expenditures
which it makes, generally to the same extent the Master Servicer would be so
reimbursed under the Pooling and Servicing Agreement.
Due-on-Sale and Due-on-Encumbrance Provisions
When any Mortgaged Property has been conveyed by the related mortgagor
(except as otherwise provided herein), the Master Servicer will, to the extent
that it has knowledge of such conveyance, enforce any due-on-sale clause
contained in the related Mortgage Note or Mortgage, to the extent permitted
under applicable law and governmental regulations, but only to the extent that
such enforcement will not adversely affect or jeopardize coverage under the
related contract of FHA Insurance or any hazard or other insurance policy (each,
a "Required Insurance Policy") that is required to be maintained from time to
time under the Pooling and Servicing Agreement
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in respect of such FHA Loan. In the event that the Master Servicer or the
related Sub-Servicer is prohibited by law from enforcing any such due-on-sale
clause, or if coverage under the related contract of FHA Insurance or any
Required Insurance Policy would be adversely affected, the Master Servicer is
authorized, subject to the provisions of the Pooling and Servicing Agreement, to
take or enter into an assumption and modification agreement from or with the
person to whom such property has been or is about to be conveyed, pursuant to
which such person becomes liable under the related Mortgage Note and, unless
prohibited by applicable state law, the mortgagor remains liable thereon,
provided that the FHA Loan will continue to be covered (if so covered before the
Master Servicer enters such agreement) by the related contract of FHA Insurance
and the applicable Required Insurance Policies. The Master Servicer, subject to
the provisions of the Pooling and Servicing Agreement, is also authorized with
the prior approval of the FHA and, if necessary and appropriate, the insurers
under any Required Insurance Policies to enter into a substitution of liability
agreement with such person, pursuant to which the original mortgagor is released
from liability and such person is substituted as mortgagor and becomes liable
under the related Mortgage Note.
When any Mortgaged Property has been further encumbered by the related
mortgagor, the Master Servicer shall, to the extent it has knowledge of such
encumbrance, enforce any due-on-encumbrance clause contained in the related
Mortgage Note or Mortgage, to the extent permitted under applicable law and
governmental regulations, but only to the extent that such enforcement will not
adversely affect or jeopardize coverage under the related contract of FHA
Insurance or any Required Insurance Policy.
Maintenance of Hazard and Other Insurance
Pursuant to the Housing Act or as may be stipulated by the Commissioner
of the FHA, and specifically in compliance with 24 CFR Section 207.260 and any
superseding or supplemental regulation, the Master Servicer will arrange that at
all times during the existence of the Pooling and Servicing Agreement all
buildings and improvements on the Mortgaged Properties are, in each case,
insured against insurable loss by fire and other hazards, casualties, floods and
contingencies to the extent that such insurance is required by the
aforementioned regulation and is available at a reasonably competitive price,
and where such insurance is for any reason not so available, the Master Servicer
will so notify the FHA as required to ensure that no payment of FHA Insurance
Benefits is diminished by the absence of such insurance. Such policies, with
copies of all notices thereunder to be given to the Master Servicer, will be
endorsed with standard mortgagee clauses with loss payable to the Trustee. All
proceeds paid under any such policies will, after receipt by the Trustee of a
direction from an officer of the Master Servicer (a "Servicing Officer")
involved in, or responsible for, the administration and servicing of the FHA
Loans whose name and specimen signature appear on a list of servicing officers
furnished to the Trustee on the Closing Date by the Master Servicer (as such
list may from time to time be amended), be delivered by the Trustee to the
Master Servicer for application to the restoration or repair of the Mortgaged
Property or for release by the Master Servicer to the related mortgagor, in
accordance with the Master Servicer's normal servicing procedures and the terms
of the applicable contract of FHA Insurance, and any such proceeds remaining
after such application or release will be deposited in the Custodial Account
pursuant to the Pooling and Servicing Agreement.
Maintenance of FHA Insurance; Collection Thereunder
The Master Servicer may not act, or fail to act, in any such manner as
to impair the full force and effect of the FHA Insurance in respect of any FHA
Loan throughout the term of the Pooling and Servicing Agreement and is to
exercise its best reasonable efforts to discharge its obligations arising out of
the contract of FHA Insurance in respect of each FHA Loan. The Master Servicer
will be liable to the Trustee and the Certificateholders for any loss, liability
or expense incurred by the Trustee and/or any Certificateholder by reason of any
FHA Insurance being voided, reduced, released or adversely affected by reason of
the failure by the Master Servicer to perform its obligations under the Pooling
and Servicing Agreement in strict compliance with the terms and conditions
thereof. The Master Servicer will service and administer the FHA Loans in
accordance with the Servicing Standard,
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will discharge all obligations of the mortgagee under each FHA Loan and, subject
to the right to assign the FHA Loan to the FHA, will take all action reasonably
necessary to preserve the lien of the related Mortgage, including, without
limitation, the defense of actions to challenge or foreclose such lien. In
particular, the Master Servicer will: (i) ensure the payment, on a timely basis,
of the premiums on the FHA Insurance in respect of each FHA Loan; (ii) make or
cause to be made an annual physical inspection of the property subject to each
FHA Loan, and furnish an inspection report to the FHA and the Trustee; and (iii)
maintain insurance as specified above and pay ground rents, if any, taxes and
other assessments on, any Mortgaged Property if the related mortgagor fails to
do so.
If a mortgagor fails to make any payment due on any FHA Loan or fails
to perform any other covenant under the provisions of any FHA Loan, and such
failure continues for a period of thirty (30) days, the Master Servicer will by
written instructions signed by a Servicing Officer, promptly direct the Trustee
to, and the Trustee will, promptly notify the FHA and the Majority Class B
Certificateholder of the default and will, in accordance with such instructions
within forty-five (45) days (or such other period as permitted or required by
the FHA) after the expiration of the 30-day grace period (unless the defaulted
FHA Loan is purchased by the Majority Class B Certificateholder as described
herein), notify the FHA of its intention to file an insurance claim and of its
election to assign the FHA Loan to the FHA. The Master Servicer will thereafter
in accordance with such instructions take such reasonable action as is necessary
to perfect the claim under the FHA Insurance. The Master Servicer will, as a
condition to the taking by the Trustee of any action described in this
paragraph, complete and provide to the Trustee all forms and other documentation
needed to notify the FHA of, file and perfect such an insurance claim on a
timely basis. In any such connection, the Master Servicer will be obligated to
advance from its own funds all amounts necessary to preserve rights under the
related contract of FHA Insurance and, subject to any applicable limitations in
the Pooling and Servicing Agreement, to preserve and protect the related
Mortgaged Property and title thereto, including, but not limited to, FHA
Insurance premiums, hazard and other insurance premiums, taxes, special
assessments and other costs associated with providing security for such
premises. The Master Servicer will be entitled to reimbursement, with interest,
for any such cost or advance as permitted in the Pooling and Servicing
Agreement. However, the Master Servicer will not be entitled to reimbursement
for any costs or expenses incurred by it in connection with an assignment of an
FHA Loan to the FHA. See "--Advances--Recoverability of Advances" and
"--Interest on Advances" above. Any amounts collected from or on behalf of the
FHA under or in connection with the FHA Insurance will be deposited in the
Custodial Account. If the Master Servicer and/or the Trustee are permitted to
elect whether to receive FHA Insurance Benefits in the form of cash or FHA
Debentures, the Pooling and Servicing Agreement will require each to select
cash.
Notwithstanding the foregoing, if for any reason a defaulted FHA Loan
cannot be assigned to the FHA (including, without limitation, by reason of any
change in the FHA Regulations), then the Master Servicer may foreclose upon such
FHA Loan or acquire a deed in lieu thereof (and may direct the Trustee to
provide the appropriate notices to the FHA), but only if the Master Servicer
receives (and delivers to the Trustee) written confirmation from the Rating
Agency that such foreclosure or such other acquisition of title will not, in and
of itself, result in a withdrawal, qualification or downgrade of the rating
assigned by the Rating Agency to any Class of Offered Certificates. The Trustee
is to cooperate with all reasonable requests of the Master Servicer in
connection with the foregoing.
If the Master Servicer forecloses upon an FHA Loan or accepts a deed in
lieu thereof in accordance with the preceding paragraph, then the Trustee shall
convey such Mortgaged Property to the FHA or, alternatively, the Master Servicer
shall, subject to the terms and conditions of the Pooling and Servicing
Agreement, take such other action in respect of such Mortgaged Property as is in
the best interests of the Certificateholders and as will not, as confirmed in
writing by the Rating Agency, result in a withdrawal, qualification or downgrade
of the rating assigned by the Rating Agency to any Class of Offered
Certificates.
No Certificateholder will have any rights with respect to the FHA
Insurance in respect of any FHA Loan except as expressly provided for in the
Pooling and Servicing Agreement. The Trustee will be the "principal
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mortgagee" (as such term is used in the FHA Regulations) with respect to each
FHA Loan for purposes of the FHA Regulations and the FHA Insurance, and the
Trustee will retain legal title to the FHA Loan and remain the mortgagee of
record under the FHA Insurance. Without diminishing the obligations of the
Master Servicer under the Pooling and Servicing Agreement with respect to any
contract of FHA Insurance or FHA Loan, and without increasing the duties or
liabilities of the Trustee under the Pooling and Servicing Agreement, the FHA
will have no obligation to recognize or deal with anyone other than the
principal mortgagee with respect to the rights, benefits and obligations of the
mortgagee under the contract of FHA Insurance in respect of any FHA Loan. The
mortgagor under each FHA Loan will have no obligation to recognize or do
business with anyone other than the Trustee or the Master Servicer with respect
to the rights, benefits and obligations of the mortgagor or the mortgagee under
the related Mortgage.
Resignation
The Master Servicer may not resign from the obligations and duties
imposed upon it under the Pooling and Servicing Agreement except upon
determination that such obligations and duties are no longer permissible under
applicable law. However, the Master Servicer may assign its rights and delegate
its duties and obligations under the Pooling and Servicing Agreement to a
corporation or institution approved as a mortgagee by the FHA under the Housing
Act and applicable FHA Regulation, and eligible to own and service project
mortgage loans such as the Mortgage Loans (an "FHA-Approved Mortgagee"), and
having a net worth of at least $5,000,000, provided that, among other things,
the Rating Agency acknowledges that its ratings of the Offered Certificates then
in effect will not be qualified, withdrawn or reduced as a result of such
assignment and delegation.
Limitation on Liability
None of the Depositor, the Master Servicer or any of their respective
directors, officers, employees or agents will be under any liability to the
Certificateholders for any action taken or for refraining from the taking of any
action in good faith pursuant to the Pooling and Servicing Agreement, or for
errors in judgment. The Depositor, the Sellers and the Master Servicer will not,
in the case of any such party, be protected, however, against any breach of
representations or warranties made by it in the Pooling and Servicing Agreement
or from any liability which would otherwise be imposed by reasons of willful
misfeasance, bad faith or negligence in the performance of its duties under the
Pooling and Servicing Agreement or by reason of reckless disregard of
obligations and duties under the Pooling and Servicing Agreement. The Depositor
and the Master Servicer and any director, officer, employee or agent of the
Depositor or the Master Servicer will be indemnified by the Trust Fund and held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Pooling and Servicing Agreement or the
Certificates, other than any loss, liability or expense incurred by reason of a
breach of any representations, warranties or covenants of either such party to
the Pooling and Servicing Agreement or by reason of willful misfeasance, bad
faith or negligence in the performance of duties under the Pooling and Servicing
Agreement or by reason of reckless disregard of obligations and duties under the
Pooling and Servicing Agreement. Neither the Depositor nor the Master Servicer
will be under any obligation to appear in, prosecute or defend any legal action
that is not incidental to its duties under the Pooling and Servicing Agreement
and which in its opinion may involve it in any expense or liability. However,
each of the Depositor and the Master Servicer may in its discretion undertake
any such action that it may deem necessary or desirable in respect of the
Pooling and Servicing Agreement and the rights and duties of the parties thereto
and interests of the Trustee and the Certificateholders thereunder. In such
event, the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Fund, and the
Depositor or the Master Servicer, as the case may be, will be entitled to be
reimbursed therefor out of the Custodial Account.
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Events of Default
"Events of Default" in respect of the Master Servicer will include:
(i) any failure by the Master Servicer to deposit in the Collection
Account or the Custodial Account, or to remit to the Trustee for
deposit in the Collection Account, any deposit or payment required to
be so made by the Master Servicer under the terms of the Pooling and
Servicing Agreement, which failure will continue unremedied for a
period of one business day (or, in the case of any Monthly Advance,
until 5:00 p.m., New York City time on the related Distribution Date);
or
(ii) any failure by the Master Servicer to observe or perform in
any material respect any other of the covenants or agreements on the
part of the Master Servicer contained in the Pooling and Servicing
Agreement which failure (a) materially affects the rights of the
Certificateholders and (b) will continue unremedied for a period of 60
days (except that such number of days will be 15 in the case of a
failure to pay the premium for any FHA Insurance or Required Insurance
Policy in respect of any FHA Loan) after the date on which written
notice of such failure will have been given to the Master Servicer by
the Trustee or the Depositor, or to the Master Servicer, the Depositor
and the Trustee by the holders of Certificates entitled to not less
than 25% of the Voting Rights evidenced by the Certificates; or
(iii) a decree or order of a court or agency or supervisory
authority having jurisdiction in the premises for the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment
of debt, marshalling of assets and liabilities or similar proceedings,
or for the winding-up or liquidation of its affairs, is entered against
the Master Servicer and such decree or order remains in force
undischarged or unstayed for a period of 60 days; or
(iv) the Master Servicer consents to the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment
of debt, marshalling of assets and liabilities or similar proceedings
of or relating to the Master Servicer or all or substantially all of
the property of the Master Servicer; or
(v) the Master Servicer admits in writing its inability to pay its
debts generally as they become due, files a petition to take advantage
of, or commence a voluntary case under, any applicable insolvency or
reorganization statute, makes an assignment for the benefit of its
creditors, or voluntarily suspends payment of its obligations; or
(vi) the Master Servicer fails to purchase any FHA Debenture as
required by the Pooling and Servicing Agreement; or
(vii) the Rating Agency provides written notice of its intention to
reduce, withdraw or qualify any of the then-current ratings of the
Offered Certificates because the existing or prospective financial
condition or mortgage loan servicing capability of the Master Servicer
is insufficient to maintain such outstanding rating; or
(viii) the Master Servicer ceases to be duly qualified as an
FHA-Approved Mortgagee with power and authority to service the FHA
Loans and make claims on the FHA under any FHA Insurance as
contemplated in the Pooling and Servicing Agreement.
If an Event of Default due to the actions or inaction of the Master
Servicer occurs, then, and in each and every such case, so long as such Event of
Default has not been remedied, the Trustee may, and (i) in the case of an Event
of Default described in clause (i) above, if so directed by the Holders of
Certificates entitled to not less than 25% of the Voting Rights allocated to any
Class of Regular Interest Certificates, (ii) in the case of an Event
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of Default described in clause (ii) above, if so directed by the Holders of
Certificates entitled to not less than 51% of all the Voting Rights, and (iii)
in the case of any other Event of Default, under all circumstances, the Trustee
will, by notice in writing to the Master Servicer (with a copy to the Depositor
and the Rating Agency), terminate all of the rights and obligations of the
Master Servicer under the Pooling and Servicing Agreement (other than rights to
reimbursement for Advances previously made, as provided in the Pooling and
Servicing Agreement).
Appointment of a Successor Master Servicer
On and after the time the Master Servicer receives a notice of
termination or resigns, the Trustee will be the successor in all respects to the
Master Servicer in its capacity as servicer under the Pooling and Servicing
Agreement and with respect to the transactions set forth or provided for therein
and will be subject to all the responsibilities, duties and liabilities relating
thereto placed on the Master Servicer by the terms and provisions thereof,
except with respect to those duties, liabilities and obligations incurred by the
Master Servicer as a result of any act or omission on its part prior to its
termination. If the Trustee has become the successor to the Master Servicer, the
Trustee may, if it will be unwilling to so act, or will, if it is unable to so
act, appoint, or petition a court of competent jurisdiction to appoint, an
FHA-Approved Mortgagee with a net worth of at least $15,000,000, the appointment
of which does not adversely affect any of the then-current ratings of the
Offered Certificates, as the successor to the Master Servicer under the Pooling
and Servicing Agreement in the assumption of all or any part of the related
responsibilities, duties or liabilities of the Master Servicer. Pending
appointment of a successor to the Master Servicer under the Pooling and
Servicing Agreement, the Trustee, unless the Trustee is prohibited by law from
so acting, will act in such capacity as provided in the Pooling and Servicing
Agreement. In connection with such appointment and assumption, the Trustee may
make such arrangements for the compensation of such successor out of payments on
FHA Loans as it and such successor will agree; provided, however, that no such
compensation will be in excess of that permitted the Master Servicer under the
Pooling and Servicing Agreement.
MATURITY AND PREPAYMENT CONSIDERATIONS
The rate at which the Certificate Principal Balances and/or Certificate
Notional Amounts of the Offered Certificates are paid down or otherwise reduced
will depend primarily on the rate of principal payments on or in respect of the
Mortgage Assets. The rate of principal payments on or in respect of the GNMA
Certificates, in turn, will depend primarily on the rate of principal payments
on or in respect of the Underlying Mortgage Loans. Principal payments on or in
respect of the Mortgage Loans may be scheduled payments or partial or full
prepayments, which may include prepayments by the borrower, payments resulting
from FHA Insurance Benefits and payments made pursuant to any guaranty of
principal payment by GNMA (other than scheduled amortization payments).
The rate of prepayments on mortgage loans is affected by prevailing
market rates for mortgage loans of comparable term and risk characteristics. In
general, if prevailing mortgage interest rates fall relative to the interest
rates on the Mortgage Loans, the rate of prepayments on the Mortgage Loans may
increase. Conversely, if prevailing mortgage interest rates rise relative to the
interest rates on the Mortgage Loans, the rate of prepayments thereon may
decrease. A number of other factors also may influence the prepayment rate,
including general economic conditions, geographic distribution and refinancing
opportunities, as well as factors affecting prepayment and default rates on the
various types of Mortgaged Properties securing the Mortgage Loans. See "RISK
FACTORS--The Mortgage Assets--Nature of Mortgaged Properties" herein.
Certain of the Mortgage Loans provide for Lock-out Periods during which
time prepayments are prohibited and/or provide for the payment of Prepayment
Premiums. However, the FHA requires that certain mortgages it insures include a
provision allowing the FHA to override certain lock-out and Prepayment Premium
provisions in certain circumstances (e.g., if the mortgage is in default and the
FHA determines that it is in the best interests of
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the government to override such provisions). Also, certain of the Mortgage Loans
permit the borrower to prepay up to 15% of the original principal amount of the
loan in any one calendar year without any Prepayment Premium. Generally, if
prevailing interest rates fall, a mortgagor may be more likely to prepay a
Mortgage Loan than would otherwise be the case. However, to the extent that
prepayments on any Mortgage Loan may be subject to the payment of a Prepayment
Premium, the mortgagor may be less likely to prepay such loan than would
otherwise be the case. See "FHA MORTGAGE INSURANCE PROGRAMS--FHA Default and
Prepayment Experience" herein.
The weighted average life of a security refers to the average amount of
time that will elapse from the date of delivery of a security until each dollar
of principal is repaid to the investor. The weighted average life of any Class
of Class A Certificates will depend primarily on the rate at which principal is
paid on the Mortgage Assets. The Class A Certificates are subject to various
priorities for payment of principal as described herein. Distributions of
principal on Classes of Class A Certificates having an earlier priority of
payment will be affected by the rates of prepayment of the Mortgage Assets early
in the life of the Trust Fund. The timing of commencement of principal
distributions and the weighted average lives of Classes of Class A Certificates
with a later priority of payment will be affected by the rates of prepayment of
the Mortgage Assets experienced both before and after the commencement of
principal distributions on such Classes. The timing of distributions in
reduction of the Class Principal Balance with respect to any particular Class of
Class A Certificates subject to sequential allocations of principal is highly
uncertain and may be significantly earlier or later than the date that may be
desired by a Certificateholder. If prepayments on the Mortgage Assets occur at a
higher rate than anticipated, the weighted average lives of the Class A
Certificates may be shortened significantly. Conversely, if prepayments on the
Mortgage Assets occur at a lower rate than anticipated, the weighted average
lives of the Class A Certificates may be extended significantly. Because all
Accrued Certificate Interest in respect of the Class A-Z Certificates for each
Distribution Date prior to the Accrual Termination Date will be added to the
Class Principal Balance thereof instead of being paid thereon on a current basis
(with the corresponding Monthly Class A-Z Accrual Amount being added to the
Principal Distribution Amount payable on the other Classes of Class A
Certificates on each such Distribution Date), the weighted average life of the
Class A-Z Certificates will be longer, and the weighted average lives of the
other Classes of Class A Certificates will be shorter, than if such Accrued
Certificate Interest were being paid currently to the holders of the Class A-Z
Certificates and there was no Monthly Class A-Z Accrual Amount being included in
the Principal Distribution Amount. This Prospectus Supplement shows the weighted
average lives of each Class of Class A Certificates under various mortgage
prepayment assumptions. In each such case, weighted average life is calculated
by (i) multiplying the assumed reductions in the principal amount (as the same
is assumed to increase, in the case of the Class A-Z Certificates) of any Class
of Offered Certificates with a Certificate Principal Balance on each
Distribution Date by the number of years from the Closing Date to such
Distribution Date, (ii) summing the results and (iii) dividing the sum by the
aggregate amount of the assumed reductions in such principal amount.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The standard used in this Prospectus Supplement is
based on a Constant Prepayment Rate ("CPR"). A CPR represents an assumed
constant rate of prepayment each month, expressed as a per annum percentage of
the then outstanding principal balance of a pool of mortgage loans for the life
of such mortgage loans. CPR does not purport to be either an historical
description of the prepayment experience of any pool of mortgage loans or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Mortgage Loans.
The following tables show the percentages of initial principal balance
outstanding and weighted average lives of each Class of Offered Certificates
with a Certificate Principal Balance under various percentages of CPR, on the
basis of the following assumptions (the "Modeling Assumptions"): (i) the Class
sizes are as shown on the cover of this Prospectus Supplement; (ii) the
settlement date is December 30, 1996; (iii) distributions on the Certificates
are made on the 25th day of each month, commencing in January 1997; (iv) except
as otherwise specifically described in these assumptions, the Mortgage Loans and
GNMA Certificates have the characteristics
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set forth under "DESCRIPTION OF THE MORTGAGE POOL" herein; (v) there are no
delinquencies or defaults with respect to the Mortgage Loans, and all Monthly
Payments on the Mortgage Loans are timely received on their respective Due Dates
commencing during the initial Collection Period; (vi) each of the Mortgage Loans
prepays monthly at the specified percentages of CPR as set forth in the
following tables, beginning in the first month in which each Mortgage Loan's
applicable prepayment lock-out period or Prepayment Premium penalty period have
expired; (vii) each principal prepayment of a Mortgage Loan is received on the
last day of each month (commencing during the initial Collection Period) and is
accompanied by one month's interest thereon at the related Mortgage Rate; (viii)
there are no breaches of Greystone Funding's and Daiwa Finance's representations
and warranties with respect to the Greystone Mortgage Assets and the Daiwa
Mortgage Assets, respectively; (ix) no Mortgage Loan is modified; (x) no
Additional Trust Fund Expense occurs; and (xi) the Mortgage Assets were
amortized using the payments of principal and interest as specified in the
related Mortgage Note.
When reading the tables and the related text, investors should bear in
mind that the Modeling Assumptions are unlikely to be entirely consistent with
actual experience. It is not likely that all of the Mortgage Loans and GNMA
Certificates will have the characteristics assumed, even if the Mortgage Loans
and GNMA Certificates have the weighted average characteristics set forth
herein. Furthermore, it is unlikely that the Mortgage Loans will all prepay as
assumed at any of the levels of CPR indicated in the tables or at any constant
level. No representation is made that prepayments will not occur during any
applicable Lock-out Period or during a Prepayment Premium Term as a result of a
default of an FHA Loan and subsequent assignment of such FHA Loan to the FHA (or
purchase by the Majority Class B Certificateholder) as described herein.
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Percent of Initial Certificate Principal Balance Outstanding
for the Class A-1 Certificates at the Respective Percentages of CPR
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 10% 30% 40% 50% 75% 100%
- ----------------- --- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial 100% 100% 100% 100% 100% 100% 100%
December 25, 1997 83 82 79 78 77 72 53
December 25, 1998 64 60 53 50 46 39 35
December 25, 1999 44 37 26 21 17 11 2
December 25, 2000 22 11 0 0 0 0 0
December 25, 2001 0 0 0 0 0 0 0
December 25, 2002 0 0 0 0 0 0 0
Weighted average
life (years) 2.65 2.40 2.10 2.00 1.91 1.74 1.50
</TABLE>
Percent of Initial Certificate Principal Balance Outstanding for the
Class A-2 Certificates at the Respective Percentages of CPR
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 10% 30% 40% 50% 75% 100%
- ----------------- --- --- --- --- ---- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Initial 100% 100% 100% 100% 100% 100% 100%
December 25, 1997 100 100 100 100 100 100 100
December 25, 1998 100 100 100 100 100 100 100
December 25, 1999 100 100 100 100 100 100 100
December 25, 2000 100 100 96 90 86 79 75
December 25, 2001 99 83 61 54 49 39 8
December 25, 2002 73 45 6 0 0 0 0
December 25, 2003 45 3 0 0 0 0 0
December 25, 2004 15 0 0 0 0 0 0
December 25, 2005 0 0 0 0 0 0 0
December 25, 2006 0 0 0 0 0 0 0
Weighted average
life (years) 6.81 5.87 5.17 5.00 4.87 4.66 4.42
</TABLE>
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Percent of Initial Certificate Principal Balance Outstanding
for the Class A-3 Certificates at the Respective Percentages of CPR
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 10% 30% 40% 50% 75% 100%
- ----------------- --- --- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial 100% 100% 100% 100% 100% 100% 100%
December 25, 1997 100 100 100 100 100 100 100
December 25, 1998 100 100 100 100 100 100 100
December 25, 1999 100 100 100 100 100 100 100
December 25, 2000 100 100 100 100 100 100 100
December 25, 2001 100 100 100 100 100 100 100
December 25, 2002 100 100 100 94 85 64 31
December 25, 2003 100 100 62 48 37 18 6
December 25, 2004 100 70 20 4 0 0 0
December 25, 2005 88 33 0 0 0 0 0
December 25, 2006 63 0 0 0 0 0 0
December 25, 2007 37 0 0 0 0 0 0
December 25, 2008 8 0 0 0 0 0 0
December 25, 2009 0 0 0 0 0 0 0
December 25, 2010 0 0 0 0 0 0 0
Weighted average
life (years) 10.49 8.55 7.31 7.00 6.77 6.36 5.88
</TABLE>
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Percent of Initial Certificate Principal Balance Outstanding
for the Class A-4 Certificates at the Respective Percentages of CPR
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 10% 30% 40% 50% 75% 100%
- ----------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial 100% 100% 100% 100% 100% 100% 100%
December 25, 1997 100 100 100 100 100 100 100
December 25, 1998 100 100 100 100 100 100 100
December 25, 1999 100 100 100 100 100 100 100
December 25, 2000 100 100 100 100 100 100 100
December 25, 2001 100 100 100 100 100 100 100
December 25, 2002 100 100 100 100 100 100 100
December 25, 2003 100 100 100 100 100 100 100
December 25, 2004 100 100 100 100 93 74 43
December 25, 2005 100 100 71 53 39 16 0
December 25, 2006 100 88 1 0 0 0 0
December 25, 2007 100 33 0 0 0 0 0
December 25, 2008 100 0 0 0 0 0 0
December 25, 2009 79 0 0 0 0 0 0
December 25, 2010 48 0 0 0 0 0 0
December 25, 2011 14 0 0 0 0 0 0
December 25, 2012 0 0 0 0 0 0 0
December 25, 2013 0 0 0 0 0 0 0
Weighted average
life (years) 13.92 10.71 9.35 9.03 8.80 8.44 8.03
</TABLE>
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Percent of Initial Certificate Principal Balance Outstanding
for the Class A-Z Certificates at the Respective Percentages of CPR
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 10% 30% 40% 50% 75% 100%
- ----------------- --- --- --- --- --- --- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial 100% 100% 100% 100% 100% 100% 100%
December 25, 1997 107 107 107 107 107 107 107
December 25, 1998 116 116 116 116 116 116 116
December 25, 1999 124 124 124 124 124 124 124
December 25, 2000 134 134 134 134 134 134 134
December 25, 2001 144 144 144 144 144 144 144
December 25, 2002 154 154 154 154 154 154 154
December 25, 2003 166 166 166 166 166 166 166
December 25, 2004 178 178 178 178 178 178 178
December 25, 2005 192 192 192 192 192 192 182
December 25, 2006 206 206 206 182 162 120 14
December 25, 2007 221 221 143 109 81 32 3
December 25, 2008 238 220 98 63 39 6 0
December 25, 2009 256 194 66 36 18 0 0
December 25, 2010 275 170 45 20 8 0 0
December 25, 2011 296 149 30 11 2 0 0
December 25, 2012 298 130 19 5 0 0 0
December 25, 2013 288 112 12 2 0 0 0
December 25, 2014 276 97 6 0 0 0 0
December 25, 2015 264 82 2 0 0 0 0
December 25, 2016 251 70 0 0 0 0 0
December 25, 2017 236 58 0 0 0 0 0
December 25, 2018 220 48 0 0 0 0 0
December 25, 2019 204 39 0 0 0 0 0
December 25, 2020 188 31 0 0 0 0 0
December 25, 2021 173 25 0 0 0 0 0
December 25, 2022 157 19 0 0 0 0 0
December 25, 2023 140 14 0 0 0 0 0
December 25, 2024 122 9 0 0 0 0 0
December 25, 2025 104 5 0 0 0 0 0
December 25, 2026 86 2 0 0 0 0 0
December 25, 2027 68 0 0 0 0 0 0
December 25, 2028 51 0 0 0 0 0 0
December 25, 2029 34 0 0 0 0 0 0
December 25, 2030 20 0 0 0 0 0 0
December 25, 2031 9 0 0 0 0 0 0
December 25, 2032 5 0 0 0 0 0 0
December 25, 2033 1 0 0 0 0 0 0
December 25, 2034 0 0 0 0 0 0 0
December 25, 2035 0 0 0 0 0 0 0
Weighted average life (years) 26.02 17.88 12.53 11.64 11.09 10.34 9.67
</TABLE>
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The Modeling Assumptions that have been made in preparing the foregoing
tables are expected to vary from the actual performance of the Mortgage Loans
and GNMA Certificates. In particular, actual prepayments are not likely to occur
as assumed at constant rates, and variations in prepayment speeds, even if
averaging to the same constant prepayment rate over time, may have different
effects on the payment rates of the Class A Certificates. No representation is
made that prepayments will not occur during any applicable Lock-out Period or
during a Prepayment Premium Term as a result of a default of an FHA Loan and
subsequent assignment of such FHA Loan to the FHA (or purchase by the Majority
Class B Certificateholder) as described herein. Furthermore, defaults on the FHA
Loans will likely result in Realized Losses and Additional Trust Fund Expenses
to some degree. There can be no assurance as to the actual rate of prepayment of
the Mortgage Loans or as to variations in applicable interest rates.
YIELD CONSIDERATIONS
General
The yield on the Offered Certificates of any Class thereof will be less
than the yield that would otherwise be produced by the applicable Certificate
Interest Rate and the applicable purchase price because, while accrued monthly
interest on a Mortgage Loan is payable on the first day of each month,
distributions of interest on the Certificates will be made on the 25th day of
such month or, if such day is not a Business Day, on the Business Day
immediately following such day.
The effective yield to holders of Offered Certificates will depend
upon, among other factors, the price at which their Certificates are purchased
and the amount and rate at which distributions in respect thereof are made. The
amount and rate of distributions in respect of the Offered Certificates will be
related to the rate of payments (including prepayments) of principal on or in
respect of the Mortgage Assets. For this purpose, the term "prepayment" includes
voluntary prepayments and prepayments resulting from liquidations due to
defaults or other dispositions (including assignments to the FHA) of the
Mortgage Loans and/or casualties and condemnations of the related Mortgaged
Properties, and the purchase of Mortgage Assets out of the Trust Fund.
In the case of the Class S Certificates and any other Offered
Certificates purchased at a premium, faster than anticipated rates of principal
payments on or in respect of the Mortgage Assets could result in actual yields
to maturity that are lower than the anticipated yields. In the case of any
Offered Certificates purchased at a discount, slower than anticipated rates of
principal payments on or in respect of the Mortgage Assets could result in
actual yields to maturity that are lower than the anticipated yields.
The rate of principal prepayments on mortgage loans is influenced by a
variety of economic, geographic, social and other factors, including the level
of mortgage interest rates and the rate at which mortgagors default on their
mortgages. In general, if prevailing interest rates fall significantly below the
Mortgage Rates on the Mortgage Loans, the Mortgage Loans (and, accordingly, the
Offered Certificates) are likely to be subject to a higher incidence of
prepayment than if prevailing rates remained at or above the Mortgage Rates on
the Mortgage Loans. In the latter case, the amount of payments on the Offered
Certificates available to an investor for reinvestment at the higher rates may
be relatively low. The Depositor makes no representation as to the expected rate
of prepayments on the Mortgage Loans. See "DESCRIPTION OF THE MORTGAGE POOL" and
"MATURITY AND PREPAYMENT CONSIDERATIONS" herein for additional information about
the effect of the rate of prepayment on the yield on and maturity of the Offered
Certificates. The Class S Certificates will be extremely sensitive to the rate
and timing of principal payments on or in respect of the Mortgage Assets,
including by reason of voluntary prepayments by borrowers or arising out of
defaults on the Mortgage Loans.
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The Depositor is not aware of any publicly available statistics that
set forth principal prepayment experience or prepayment forecasts of loans
comparable to the Mortgage Loans over an extended period of time.
The Mortgage Loans are not likely to prepay at any constant rate until
maturity, nor will they all prepay at the same rate at any one time. The timing
of changes in the rate of prepayments may affect the actual yield to an
investor, even if the average rate of principal prepayments is consistent with
the investor's expectation. In general, the earlier payments of principal on the
Mortgage Assets are received, the greater the effect on an investor's yield.
Therefore, the effect on an investor's yield of principal prepayments occurring
at a rate higher (or lower) than the rate anticipated by the investor during the
earlier periods is not likely to be offset by a later equivalent decrease (or
increase). See "MATURITY AND PREPAYMENT CONSIDERATIONS" herein.
Prepayment Premiums, even if collected and distributable on a Class of
Certificates, may not be sufficient to offset any loss in yield on such Class of
Certificates attributable to prepayments on the Mortgage Assets. In addition,
the yield on Classes of Sequential Pay Certificates that do not receive a
distribution of any particular principal prepayment (and, accordingly, would not
be entitled to receive any portion of the related Prepayment Premium) may be
affected by such principal prepayment in that the weighted average lives of one
or more such Classes of Sequential Pay Certificates may be shortened by the
distribution of such principal prepayment in respect of another Class of
Sequential Pay Certificates.
The Certificate Interest Rate (and, accordingly, yield to maturity) on
the Class S Certificates will be sensitive to the Weighted Average of the Net
Asset Rates in effect from time to time, which will change, among other things,
as principal is amortized and prepayments are received on or in respect of the
Mortgage Loans.
The Class A Certificates are subject to various priorities for payment
of principal as described herein. Distributions of principal on Classes of Class
A having an earlier priority of payment will be affected by the rates of
prepayment of the Mortgage Assets early in the life of the Trust Fund. The
timing of commencement of principal distributions on Classes of Class A
Certificates with a later priority of payment will be affected by the rates of
prepayment of the Mortgage Assets experienced both before and after the
commencement of principal distributions on such Classes. The timing of
distributions in reduction of the Class Principal Balance with respect to any
particular Class of Class A Certificates subject to sequential allocations of
principal is highly uncertain and may be significantly earlier or later than the
date that may be desired by a Certificateholder. If prepayments on the Mortgage
Assets occur at a higher rate than anticipated, the weighted average lives of
the Class A Certificates may be shortened significantly. Conversely, if
prepayments on the Mortgage Assets occur at a lower rate than anticipated, the
weighted average lives of the Class A Certificates may be extended
significantly. In addition, because interest accrued on the Class A-Z
Certificates will be deferred and added to the Class Principal Balance of the
Class A-Z Certificates until the Accrual Termination Date as described herein,
holders of the Class A-Z Certificates are, in effect, making an additional
investment in the Mortgage Assets on each Distribution Date in the amount of the
Monthly Class A-Z Accrual Amount for such Distribution Date. Depending on the
level of prevailing interest rates at the time of each such "additional
investment," the negative amortization feature of the Class A-Z Certificates may
be more or less attractive than other investments that pay interest on a current
basis.
Sensitivity of the Class S Certificates
The yield to investors on the Class S Certificates will be highly
sensitive to the rate and timing of principal payments (including prepayments),
and the rate, timing and severity of Realized Losses, on
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the Mortgage Loans. Investors in the Class S Certificates should fully
consider the associated risks, including the risk that an extremely rapid rate
of prepayment or default on the Mortgage Loans could result in the failure of
such investors to recoup their initial investments. See "RISK FACTORS--Certain
Yield and Maturity Considerations" herein. The yield on the Class S Certificates
will also be materially and adversely affected if the Mortgage Assets with
higher Net Asset Rates prepay faster than the Mortgage Assets with lower Net
Asset Rates, because the Weighted Average Net Asset Rate (and, accordingly the
Certificate Interest Rate for holders of the Class S Certificates) will be
reduced.
The table below indicates the sensitivity of the pre-tax corporate bond
equivalent yields to maturity of the Class S Certificates at various levels of
CPR. The yields set forth in the following table were calculated by determining
the monthly discount rates that, when applied to the assumed stream of cash
flows to be paid on the Class S Certificates, would cause the discounted present
value of such assumed stream of cash flows to equal the assumed aggregate
purchase price of the Class S Certificates and converting such monthly rates to
corporate bond equivalent rates. Such calculations do not take into account
variations that may occur in the interest rates at which investors may be able
to reinvest funds received by them as distributions on the Class S Certificates
and consequently do not purport to reflect the return on any investment in the
Class S Certificates when such reinvestment rates are considered.
The table below has been prepared on the basis of the Modeling
Assumptions and on the assumed purchase of the Class S Certificates set forth in
the table, which do not include accrued interest thereon. However, accrued
interest from the Cut-off Date was added to the prices for the calculations
below.
Sensitivity of Pre-Tax Yields to Maturity on
the Class S Certificates to Principal Prepayments
<TABLE>
<CAPTION>
Assumed Purchase Price
(Excluding Accrued Interest) 0% CPR 10% CPR 30% CPR 40% CPR 50% CPR 75% CPR 100% CPR
- ---------------------------- ------ ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
7.3278% 14.96% 12.32% 8.98% 7.92% 7.10% 5.67% 3.92%
</TABLE>
There can be no assurance that the Mortgage Loans will prepay in
accordance with the Modeling Assumptions at any of the rates shown in the table
or at any other particular rate, that the cash flows on the Class S Certificates
will correspond to the cash flows shown herein or that the aggregate purchase
price of the Class S Certificates will be as assumed. In addition, it is
unlikely that the Mortgage Loans will prepay in accordance with the Modeling
Assumptions at any of the specified percentages of CPR until maturity or that
all the Mortgage Loans will so prepay at the same rate. No representation is
made that prepayments will not occur during any applicable Lock-out Period or
during a Prepayment Premium Term as a result of a default of an FHA Loan and
subsequent assignment of such FHA Loan to the FHA (or purchase by the Majority
Class B Certificateholder) as described herein. Timing of changes in the rate of
prepayments may significantly affect the actual yield to maturity to investors,
even if the average rate of principal prepayments is consistent with the
expectations of investors. Investors must make their own decisions as to the
appropriate prepayment assumption to be used in deciding whether to purchase any
Class S Certificate.
S-104
<PAGE>
LEGAL INVESTMENT
The Offered Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984. As a result, the appropriate characterization of the Offered Certificates
under various legal investment restrictions, and thus the ability of investors
subject to these restrictions to purchase the Offered Certificates of any Class,
may be subject to significant interpretative uncertainties. In addition,
institutions whose investment activities are subject to review by federal or
state regulatory authorities may be or may become subject to restrictions on the
investment by such institutions in certain forms of mortgage related securities.
Investors should consult their own legal advisors to determine whether and to
what extent the Offered Certificates constitute legal investments for them.
The Depositor 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 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.
USE OF PROCEEDS
Substantially all of the net proceeds from the sale of the Offered
Certificates will be used by the Depositor to effect the purchase of the
Mortgage Loans by the Trust Fund from the Sellers and to pay certain expenses in
connection with the issuance of the Offered Certificates.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plan or
arrangement, including individual retirement accounts and annuities, Keogh plans
and bank collective investment funds and insurance company general 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") or any person
contemplating purchasing Offered Certificates with plan assets ("Plan Assets")
of a Plan (within the meaning of the U.S. Department of Labor ("DOL")
regulations promulgated at 29 C.F.R. ss.2510.3-101) 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 DOL issued to Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ"), one of the underwriters, an individual prohibited transaction
exemption, Prohibited Transaction Exemption 90-83 (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 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 Offered Certificates, underwritten by an
"Underwriter," provided that certain conditions set forth in the Exemption are
satisfied. For purposes of this discussion, the term "Underwriter" shall include
(a) DLJ (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with the
Underwriter 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 Offered Certificates.
S-105
<PAGE>
The Exemption set forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of Offered
Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of the Offered 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
Offered Certificates must not be subordinated to the rights and interests
evidenced by the other Certificates. Third, the Offered Certificates at the time
of acquisition by the Plan must be rated in one of the three highest generic
rating categories by S&P, Duff & Phelps, Inc. ("Duff & Phelps"), Moody's
Investors Service, Inc. ("Moody's"), 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 Depositor, the Master
Servicer, each Seller, the Trustee, any Sub-Servicer, any issuer of GNMA
Certificates and any borrower with respect to FHA Loans constituting more than
5% of the aggregate unamortized principal balance of the Mortgage Assets as of
the date of initial issuance of the Offered Certificates. Fifth, the sum of all
payments made to and retained by the Underwriter must represent not more than
reasonable compensation for underwriting the Offered Certificates; the sum of
all payments made to and retained by the Depositor, the Sellers and any of their
respective affiliates in connection with the assignment of the Mortgage Assets
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 and any Sub-Servicer must represent not more than reasonable
compensation for such person's services under the relevant 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.
Because the Offered 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
Offered Certificates that they be rated not lower than "AAA" (or, in the case of
the Class S Certificates, "AAAr") by S&P; thus, the third general condition set
forth above is satisfied with respect to the Offered Certificates as of the
Closing Date. In addition, the fourth general condition set forth above is also
satisfied as of the Closing Date. A fiduciary of a Plan or any other Plan Asset
investor contemplating purchasing an Offered Certificate in the secondary market
must make its own determination that, at the time of such purchase, an Offered
Certificate continues to satisfy the third and fourth general conditions set
forth above. A fiduciary of a Plan or any other Plan Asset investor
contemplating purchasing an Offered Certificate must make its own determination
that the first, fifth and sixth general conditions set forth above will be
satisfied with respect to such Offered Certificate as of the date of such
purchase.
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
S&P, Duff & Phelps, Moody's or Fitch for at least one year prior to the Plan's
acquisition of Offered 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 Offered Certificates. The
Depositor 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 Offered
Certificates in the initial issuance of such Certificates between the Depositor
or an Underwriter and a Plan when the Depositor, an Underwriter, the Trustee, a
Seller, the Master Servicer, any Sub-Servicer, any issuer of GNMA Certificates
or any mortgagor under an FHA Loan is a "party in interest" (within the meaning
of Section 3(14) of ERISA) with respect to the investing Plan, (ii) the direct
or indirect acquisition or disposition in the secondary market of Offered
Certificates by a Plan and (iii) the holding of Offered Certificates by a Plan.
However, no exemption is provided from the restrictions of Sections
S-106
<PAGE>
406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or holding of an
Offered 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 Offered Certificates in the initial issuance of Offered Certificates
between the Depositor 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 Offered Certificates is (a) a mortgagor under
an FHA Loan with respect to 5% or less of the fair market value of the Mortgage
Assets or (b) an affiliate of such a person, (2) the direct or indirect
acquisition or disposition in the secondary market of Offered Certificates by a
Plan and (3) the holding of Offered 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 Depositor expects that the specific conditions of the Exemption required for
this purpose will be satisfied with respect to the Offered 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" (within the meaning of
Section 3(14) of ERISA) 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. A purchaser of an Offered 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 that may be
considered prohibited transactions.
Any Plan Fiduciary considering whether to purchase an Offered
Certificate on behalf of a Plan should consult with its counsel regarding the
applicability of fiduciary responsibility and prohibited transaction provisions
of ERISA and the Code to such investment. Before purchasing an Offered
Certificate based upon the availability of the Exemption, a fiduciary of a Plan
or any other Plan Asset investor should itself confirm that the specific and
general conditions of the Exemption 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 or other Plan Asset Investor should consider the availability of any
other prohibited transaction exemptions, including in the case of an insurance
company, Prohibited Transaction Class Exemption 95-60. See "ERISA
CONSIDERATIONS" in the Prospectus.
FEDERAL INCOME TAX CONSIDERATIONS
Upon the issuance of the Offered Certificates, Thacher Proffitt & Wood,
special tax counsel to the Depositor, 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 portions of the Trust
Fund designated in the Pooling and Servicing Agreement as "REMIC I," "REMIC II"
and "REMIC III", respectively, will each qualify as a REMIC under the Internal
Revenue Code of 1986 (the "Code"). For federal income tax purposes, (a) the
separate non-certificated regular interests in REMIC I will be the "regular
interests" in REMIC I and will constitute the assets of "REMIC II," (b) the
Class R-I Certificates will be the sole class of "residual interests" in REMIC
I,
S-107
<PAGE>
(c) the separate non-certificated "regular interests" in REMIC II will be the
"regular interests" in REMIC II and will constitute the assets of "REMIC III,"
(d) the Class R-II Certificates will be the sole class of "residual interests"
in REMIC II, (e) the Regular Interest Certificates will evidence the "regular
interests" in, and generally will be treated as debt obligations of, REMIC III,
and (f) the Class R-III Certificates will be the sole class of "residual
interests" in REMIC III. See "FEDERAL INCOME TAX CONSIDERATIONS" in the
Prospectus.
The Class S Certificates and the Class A-Z Certificates will, and the
other Classes of Offered Certificates 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 in accordance with the Modeling
Assumptions at a CPR of 40%, beginning in the first month in which each Mortgage
Loan's applicable prepayment lock-out period or Prepayment Premium penalty
period have expired. No representation is made that the Mortgage Loans will so
prepay at that rate or at any other rate.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
Certificateholder (in particular, the holder of a Class S Certificate), the
amount of original issue discount allocable to such period would be zero and
such Certificateholder will be permitted to offset such negative amount only
against future original issue discount (if any) attributable to such
Certificates. Although the matter is not free from doubt, a holder of a Class S
Certificate may be permitted to deduct a loss to the extent that his or her
respective remaining basis in such Certificate exceeds the maximum amount of
future payments to which such Certificateholder is entitled, assuming no further
prepayments of the Mortgage Loans. Any such loss might be treated as a capital
loss.
The OID Regulations in some circumstances permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that used by the Trustee. Accordingly, it is possible that the holder of an
Offered Certificate may be able to select a method for recognizing original
issue discount that differs from that used by the Trustee in preparing reports
to the Certificateholders and the Internal Revenue Service. Prospective
purchasers of Offered Certificates are advised to consult their tax advisors
concerning the tax treatment of such Certificates.
In general, the Offered Certificates will be "real estate assets"
within the meaning of Section 856(c)(5)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code in the same proportion that assets of the
REMIC underlying each Certificate would be so treated. Moreover, if 95% or more
of the assets of such REMIC qualify for any of the foregoing treatments at all
times during a calendar year, the Certificates will qualify for the
corresponding status in their entirety for that calendar year. Interest
(including original issue discount) on the Offered Certificates and income
allocated to the Class R 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)(A) of the Code. In
addition, the Offered Certificates will be "qualified mortgages" within the
meaning of Section 860(G)(a)(3) of the Code.
Prepayment Premiums actually collected will be distributed to the
Certificateholders as and to the extent described herein under "DESCRIPTION OF
THE CERTIFICATES--Distributions--Distributions of Prepayment Premiums". It is
not entirely clear under the Code when the amount of a Prepayment Premium should
be taxed to a Certificateholder entitled to a portion thereof, but it is not
expected, for federal income tax reporting purposes, that Prepayment Premiums
will be treated as giving rise to any income to the Certificateholders entitled
to a portion thereof prior to the Master Servicer's actual receipt of a
Prepayment Premium. It appears that Prepayment Premiums, if any, will be treated
as ordinary income rather than capital gain. However, that is not entirely clear
and Certificateholders should consult their own tax advisors concerning the
treatment of Prepayment Premiums.
S-108
<PAGE>
Any taxes imposed on the Trust Fund, its assets or transactions will be
borne by the Trustee, the Master Servicer or the Depositor, in any case out of
its own funds, provided that such person has the assets to do so, and provided
further that such tax arises out of a breach of such person's obligations under
the Pooling and Servicing Agreement and in respect of compliance with applicable
laws and regulations. Any such tax not borne by the Trustee, the Master Servicer
or the Depositor will, together with any related penalties and expenses, be
charged against the Trust Fund resulting in a reduction in amounts payable to
Certificateholders (and, accordingly, will constitute an "Additional Trust Fund
Expense" allocable first to the Class B Certificates and then to the Class A
Certificates as and to the extent described under "DESCRIPTION OF THE
CERTIFICATES--Subordination; Allocation of Losses and Certain Other Expenses and
Shortfalls" herein).
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "FEDERAL INCOME TAX
CONSIDERATIONS" in the Prospectus.
PLAN OF DISTRIBUTION
The Depositor has entered into an underwriting agreement (the
"Underwriting Agreement") with DLJ and Daiwa Securities, as underwriters (DLJ
and Daiwa Securities, in such capacity, the "Underwriters"). The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain conditions precedent, and that DLJ will be obligated to purchase all of
the Offered Certificates if any are purchased. Subject to the terms and
conditions set forth in the Underwriting Agreement, DLJ has agreed to purchase
100% of the Offered Certificates, and Daiwa Securities has agreed to purchase
any of the Offered Certificates allotted to them by DLJ.
The Underwriters have advised the Depositor that the Underwriters
propose to offer the Offered Certificates from time to time for sale in one or
more negotiated transactions or otherwise at prices to be determined at the time
of sale. The Underwriters 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
Underwriters and any purchasers of the Offered Certificates for whom they may
act as agent.
The Offered Certificates are offered by the Underwriters when, as and
if issued by the Depositor, delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected that
delivery of the Offered Certificates will be made in book-entry form through the
facilities of DTC, against payment therefor on or about December 27, 1996.
The Underwriters and any dealers that participate with the Underwriters
in the distribution of the Offered Certificates may be deemed to be
underwriters, and any discounts or commissions received by them and any profit
on the resale of Offered Certificates by them may be deemed to be underwriting
discounts or commissions, under the Securities Act.
The Depositor has agreed to indemnify the Underwriters against certain
civil liabilities, including liabilities under the Securities Act or contribute
to payments the Underwriters may be required to make in respect thereof.
S-109
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed
upon for the Depositor by O'Connor, Cavanagh, Anderson, Killingsworth &
Beshears, a professional association, Phoenix, Arizona, for the Underwriters by
Thacher Proffitt & Wood, New York, New York and for the Sellers by Ballard Spahr
Andrews & Ingersoll, Philadelphia, Pennsylvania.
CERTIFICATE RATING
It is a condition of their issuance that the Class A Certificates be
rated "AAA", and that the Class S Certificates be rated "AAAr", by Standard &
Poor's Rating Services ("S&P" or the "Rating Agency").
The ratings of the Offered Certificates address the likelihood of the
timely receipt by holders thereof of all payments of interest to which they are
entitled and, in the case of the Class A Certificates, the ultimate receipt by
holders thereof of all payments of principal to which they are entitled, if any,
by the Distribution Date in November 25, 2038 (the "Rated Final Distribution
Date"). The ratings take into consideration the credit quality of the Mortgage
Pool, structural and legal aspects associated with the Offered Certificates, and
the extent to which the payment stream from the Mortgage Pool is adequate to
make payments required under the Offered Certificates. The ratings on the
Offered Certificates do not, however, represent any assessment of (i) the
likelihood or frequency of prepayments on or in respect of the Mortgage Assets,
(ii) the degree to which the frequency of prepayments might differ from that
originally anticipated, (iii) whether or to what extent Prepayment Premiums may
be received, (iv) the ability of the Master Servicer and the Trustee to purchase
FHA Debentures or (v) in the case of the Class S Certificates, that a holder
thereof might not fully recover its investment in the event of a rapid rate of
prepayments (including both voluntary and involuntary prepayments) on or in
respect of the Mortgage Assets.
There can be no assurance that any rating agency not requested to rate
the Offered Certificates will not nonetheless issue a rating to any or all
Classes thereof and, if so, what such rating or ratings would be. A rating
assigned to any Class of Offered Certificates by a rating agency that has not
been requested by the Depositor to do so may be lower than the rating assigned
by S&P.
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.
S-110
<PAGE>
INDEX OF PRINCIPAL TERMS
30 day grace period...............................................S-73
87-9 Cooperation..................................................S-53
Accrual Termination Date..........................................S-10
Accrued Certificate Interest.......................................S-9
Additional Trust Fund Expenses....................................S-12
Advance .....................................................S-23
Advance Interest..................................................S-89
Advance Interest Cap..............................................S-89
Annual Total Operating Expenses...................................S-54
Annual Total Revenues.............................................S-54
Assigned FHA Loan.................................................S-19
Assignment Fee....................................................S-19
Available Distribution Amount.....................................S-39
Beneficial Owner..................................................S-37
Business Day ......................................................S-2
Cede .....................................................S-37
Certificate Interest Rate..........................................S-7
Certificate Notional Amount.......................................S-36
Certificate Principal Balance.....................................S-36
Certificateholders.................................................S-2
Certificates ......................................................S-1
Claim Termination.................................................S-83
Class ......................................................S-6
Class A Certificates...............................................S-6
Class A Principal Distribution Cross-Over Date....................S-11
Class Notional Amount..............................................S-8
Class Principal Balance............................................S-7
Closing Date .....................................................S-35
Code ....................................................S-107
Collection Period.................................................S-39
Commission ......................................................S-3
Compensating Interest Payment.....................................S-12
Compound Interest Securities......................................S-10
Corporate Trust Office............................................S-50
CPR .....................................................S-96
Custodial Account.................................................S-50
Cut-off Date ......................................................S-2
Cut-off Date Balance..............................................S-13
Cut-off Date Debt Service Coverage Ratio..........................S-54
Cut-off Date DSCR.................................................S-54
Daiwa Finance......................................................S-2
Daiwa Mortgage Assets..............................................S-2
Daiwa Securities...................................................S-2
Date of Default...................................................S-19
Debenture Rate....................................................S-21
Definitive Certificate............................................S-37
Demonstration Program.............................................S-81
S-111
<PAGE>
Depositor ......................................................S-1
Description of Certificates -- Distributions.......................S-2
Determination Date................................................S-39
Distribution Account..............................................S-51
Distribution Date..................................................S-2
Distribution Date Statement.......................................S-46
DLJ .....................................................S-27
DOL ....................................................S-105
DTC ......................................................S-1
Due Date .....................................................S-39
Duff & Phelps....................................................S-106
Eligible Account..................................................S-50
ERISA .....................................................S-27
Events of Default.................................................S-94
Excess Prepayment Interest........................................S-45
Excluded Plan....................................................S-107
Exemption ....................................................S-105
Expected Recoveries due Certificateholders........................S-89
FHA ......................................................S-1
FHA Debenture Delivery Date.......................................S-38
FHA Debentures....................................................S-19
FHA Insurance.....................................................S-18
FHA Insurance Benefits............................................S-18
FHA Insurance Nonexistence Event..................................S-89
FHA Loans ......................................................S-1
FHA Regulations...................................................S-33
FHA-Approved Mortgagee............................................S-93
Fitch ....................................................S-106
Form 8-K .....................................................S-71
FY '94 .....................................................S-54
FY '95 .....................................................S-54
FY '96 .....................................................S-54
GNMA ......................................................S-1
GNMA Certificate Rate.............................................S-16
GNMA Certificates..................................................S-1
Greystone Funding..................................................S-2
Greystone Mortgage Assets..........................................S-2
HAP Contract .....................................................S-81
Housing Act ......................................................S-1
HUD ......................................................S-1
Initial Pool Balance...............................................S-7
Lockout Period....................................................S-17
Majority Class B Certificateholder................................S-21
Master Servicer....................................................S-2
Master Servicer Remittance Date...................................S-51
Modeling Assumptions..............................................S-96
Monthly Advance...................................................S-23
Monthly Class A-Z Accrual Amount..................................S-10
Monthly Payment...................................................S-15
Moody's ....................................................S-106
S-112
<PAGE>
Mortgage .....................................................S-14
Mortgage Asset Schedule...........................................S-69
Mortgage Assets....................................................S-2
Mortgage File.....................................................S-69
Mortgage Loans.....................................................S-1
Mortgage Note.....................................................S-14
Mortgage Pool......................................................S-6
Mortgage Rate...............................................S-14, S-17
Mortgaged Property................................................S-14
Multifamily Properties.............................................S-1
N/A .....................................................S-55
Net Asset Rate....................................................S-45
Net Debenture Rate................................................S-21
NOI .....................................................S-54
Non-Claim Termination.............................................S-83
Non-Offered Certificates...........................................S-1
Non-Recoverable Advance...........................................S-89
Nursing Facilities.................................................S-1
Offered Certificates...............................................S-1
Original Interest Discount........................................S-27
Participants .....................................................S-37
Percentage Interest...............................................S-36
PHA .....................................................S-81
Plan .....................................................S-27
Plan Assets ....................................................S-105
Pooling and Servicing Agreement....................................S-6
Prepayment Interest Shortfall.....................................S-12
Prepayment Premium................................................S-17
Principal Distribution Amount.....................................S-42
Project-Based Assistance..........................................S-34
PTE .....................................................S-27
Purchase Price....................................................S-49
Rated Final Distribution Date......................................S-2
Rating Agency......................................................S-2
Realized Loss.....................................................S-12
Record Date ......................................................S-9
Regular Interest Certificates......................................S-6
Related Proceeds..................................................S-89
Remaining Lockout Term............................................S-55
Remaining Prepayment Premium Term.................................S-55
REMIC ......................................................S-3
REMIC I .....................................................S-88
REMIC II .....................................................S-88
REMIC III ......................................................S-3
Required Insurance Policy.........................................S-90
Residual Interest Certificates.....................................S-6
Restricted Group.................................................S-106
Retained Yield....................................................S-22
Retained Yield Rate...............................................S-22
S&P ......................................................S-2
S-113
<PAGE>
Secretary .....................................................S-19
Securities Act....................................................S-35
Sellers ......................................................S-2
Sequential Pay Certificates........................................S-7
Servicing Advance.................................................S-23
Servicing Fee.....................................................S-23
Servicing Fee Rate................................................S-23
Servicing Officer.................................................S-91
Servicing Standard................................................S-86
Stated Principal Balance..........................................S-38
Sub-Servicer .....................................................S-86
Termination Price.................................................S-49
Trust Fund ......................................................S-1
Trustee ......................................................S-2
Trustee Fee .....................................................S-23
Trustee Fee Rate..................................................S-23
U/W .....................................................S-55
Underlying Mortgage Loans..........................................S-1
Underwriters ......................................................S-1
Underwriting Agreement...........................................S-109
Voting Rights.....................................................S-49
Weighted Average Net Asset Rate...................................S-37
S-114
<PAGE>
PROSPECTUS
AMERICAN SOUTHWEST
FINANCIAL SECURITIES CORPORATION
Mortgage Securities, Issuable in Series
This Prospectus relates to Mortgage-Collateralized Bonds (the "Bonds") and
Mortgage Pass-Through Certificates (the "Certificates" and, together with the
Bonds, the "Securities") which may be issued from time to time in one or more
series (a "Series") under this Prospectus and the related Prospectus Supplement
(a "Prospectus Supplement"). As specified in the related Prospectus Supplement,
the Securities of each Series will be either Bonds issued pursuant to an
Indenture and representing indebtedness of either American Southwest Financial
Securities Corporation (the "Company") or an owner trust (the "Owner Trust")
established by it, or Certificates which will evidence a beneficial ownership
interest in assets deposited into a trust (a "Trust Fund") by the Company as
depositor pursuant to a Trust Agreement, as described herein. The issuer (the
"Issuer") with respect to a Series of Bonds will be the Company or the Owner
Trust established to issue such Bonds and, with respect to a Series of
Certificates, will be the Trust Fund established in respect of such
Certificates.
The Securities will be sold from time to time under this Prospectus on terms
determined for each Series at the time of the sale and as described in the
related Prospectus Supplement. Each Series will consist of one or more Classes,
one or more of which may be Compound Interest Securities, Variable Interest
Securities, Residual Interest Securities, Retail Securities, Planned
Amortization Class Securities, Principal Only Securities, Interest Only
Securities, or Participating Securities. Principal Only Securities will not
accrue, and will not be entitled to receive, any interest. Payments or
distributions of interest on each Class of Securities other than Principal Only
Securities and Compound Interest Securities will be made on each Payment Date or
Distribution Date as specified in the related Prospectus Supplement. Interest
will not be paid or distributed on Compound Interest Securities on a current
basis until the date or period specified in the related Prospectus Supplement.
Prior to such time, interest on such Class of Compound Interest Securities will
accrue and the amount of interest so accrued will be added to the principal
thereof on each Payment Date or Distribution Date. The amount of principal and
interest available and payable on each Series on each Payment Date or
Distribution Date will be applied to the Classes of such Series in the order and
as otherwise specified in the related Prospectus Supplement. Principal payments
or distributions on each Class of Securities of a Series will be made on a pro
rata, random lot or other selection basis among Securities of such Class, as
specified in the related Prospectus Supplement. Any Series may include one or
more Classes of "Subordinate Securities," which are subordinated in right and
priority to the extent described in the related Prospectus Supplement to the
payment of principal and interest to other Classes of Securities of such Series
(the "Senior Securities") and may be allocated losses and shortfalls prior to
the allocation thereof to any Class of Senior Securities. Securities of a Series
will be subject to redemption or repurchase only under the circumstances and
according to the priorities described herein and in the related Prospectus
Supplement. It will be a condition to the issuance of any Securities offered by
this Prospectus and the related Prospectus Supplement that at the time of sale
to the public the Securities be rated "investment grade" by at least one
nationally recognized statistical rating organization.
The Securities of each Series of Securities will be secured by or will
represent a beneficial interest in one or more types of mortgage assets
("Mortgage Assets") and other assets (together with the Mortgage Assets, the
"Assets") which may include reserve funds, insurance policies, letters of
credit, guarantees or other credit support described in the related Prospectus
Supplement, or any combination thereof (collectively, "Credit Support"), and
currency or interest rate exchange agreements and other financial assets, or any
combination thereof (collectively, "Cash Flow Agreements"). The Mortgage Assets
will consist of one or more of the following: (i) mortgage loans secured by
first or junior liens on commercial real estate properties, multifamily
residential properties, cooperatively owned multifamily properties and/or mixed
residential/commercial properties, including participation interests therein,
installment contracts for the sale of such types of properties and mortgage
loans insured by the Federal Housing Administration ("FHA Loans") (collectively,
"Mortgage Loans") and (ii) certain other types of mortgage assets, including
mortgage participation or pass-through certificates or collateralized mortgage
obligations ("Mortgage Certificates"). The Mortgage Certificates and Mortgage
Loans securing or underlying a Series of Securities will not be guaranteed or
insured by any agency or instrumentality of the United States Government unless
otherwise stated in the related Prospectus Supplement. See "Assets Securing or
Underlying the Securities."
Bonds of a Series constitute non-recourse obligations of the Issuer and
Certificates of a Series evidence an interest in the related Trust Fund only.
Neither the Bonds nor the Certificates of a Series are insured or guaranteed by
any governmental agency or instrumentality, by any person or entity affiliated
with the Company or the Issuer or, unless otherwise specified in the related
Prospectus Supplement, by any other person or entity. Each Issuer has or will
have no significant assets other than the Mortgage Assets and certain other
assets pledged to secure the Bonds or in which the Certificates represent a
beneficial interest. See "Special Considerations."
An election may be made, with respect to any Series of Securities, to treat
all or a specified portion of the assets securing such Series or comprising the
Trust Fund as a "real estate mortgage investment conduit" (a "REMIC") or to
treat the arrangement by which a Series of Securities is issued as a REMIC. If
such an election is made, each Class of Securities of a Series will consist of
either Regular Interests or Residual Interests, as specified in the related
Prospectus Supplement. See "Federal Income Tax Considerations."
An investment in the Securities should be made only after reviewing the
risk factors appearing under the caption "Special Considerations" in this
Prospectus.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATIONS TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is July 25, 1995
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series to be offered thereby and
hereby will, among other things, set forth with respect to such Series: (a)
whether such Securities are Bonds or Certificates; (b) the initial aggregate
principal amount, the Bond Interest Rate or Certificate Interest Rate (or the
method for determining it) and the authorized denominations of each Class of
such Series; (c) certain information concerning the Assets securing such Series
or comprising the Trust Fund, including the principal amount, type and
characteristics of such Assets securing such Bonds or comprising the Trust Fund
on the date of issue, and, if applicable, the amount of any Reserve Funds for
such Series; (d) in the case of Mortgage Assets consisting in whole or in part
of Mortgage Certificates, information concerning the Certificate Issuer and
Certificate Trustee thereof, the master servicer, if any, and the Underlying
Mortgage Loans; (e) the circumstances, if any, under which the Securities of
such Series are subject to redemption prior to maturity or repurchase prior to
the Final Scheduled Distribution Date; (f) the Stated Maturity of each Class of
Bonds or Final Scheduled Distribution Date of each Class of Certificates; (g)
the method used to calculate the aggregate amount of principal available and
required to be applied to the Securities of such Series on each Payment Date or
Distribution Date, as applicable, the timing of the application of principal and
the order of priority of the application of such principal to the respective
Classes and the allocation of the principal to be so applied; (h) the extent of
subordination of any Subordinate Securities; (i) the identity of each Class of
Compound Interest Securities, Variable Interest Securities, Planned Amortization
Class Securities, Subordinate Securities, Retail Securities, Principal Only
Securities, Interest Only Securities and Participating Securities included in
such Series, if any, or such other Class of Securities described therein; (j)
the principal amount of each Class of such Series that would be outstanding on
specified Payment Dates or Distribution Dates, as applicable, if the Mortgage
Loans underlying or comprising the Mortgage Assets pledged as security for such
Series or comprising the Trust Fund were prepaid at various assumed rates; (k)
the Payment Dates or Distribution Dates, as applicable, for the respective
Classes; (l) the Assumed Reinvestment Rate, if any, and (if applicable) the
percentage of Excess Cash Flow to be applied to payments of principal of the
Series; (m) relevant financial information with respect to the Mortgagor(s) and
the Mortgaged Property underlying the Mortgage Loans, if applicable; (n)
information with respect to any required Insurance Policies relating to any
Mortgage Loans underlying or comprising the Mortgage Assets; (o) additional
information with respect to any Credit Support, Cash Flow Agreements or any
other agreements relating to such Series; (p) the plan of distribution of such
Series; (q) whether the Securities are to be issuable in registered form or
bearer form or both, and if bearer securities are issued, whether bearer
securities may be exchanged for registered securities and the circumstances and
places for such exchange, if permitted and (r) the rating of each Class of
Securities of such Series.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Securities. This Prospectus, which forms a part of
the Registration Statement, omits certain information contained in such
Registration Statement pursuant to the Rules and Regulations of the Commission.
The Registration Statement and the exhibits thereto can be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington D.C. 20549, and at certain of its Regional Offices
located as follows: Chicago Regional Office, Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and New York
Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material also can be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Issuer and the Company do not intend to send any financial reports to
Holders of Securities.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Securities
2
<PAGE>
offered hereby shall be deemed to be incorporated by reference into this
Prospectus and to be a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of any and all of the documents incorporated herein by reference (not
including the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents). Requests for such copies should be
directed to the office of the Secretary, American Southwest Financial Securities
Corporation, 2390 East Camelback, Suite 225, Phoenix, Arizona 85016, telephone
number (602) 381-8960.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUPPLEMENT................................................................. 2
ADDITIONAL INFORMATION................................................................ 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 2
SUMMARY OF TERMS...................................................................... 7
SPECIAL CONSIDERATIONS................................................................ 21
Limited Liquidity................................................................... 21
Limited Assets...................................................................... 21
Yield and Prepayment Considerations................................................. 22
Limited Nature of Rating............................................................ 23
Risks Associated With Certain Mortgage Loans and Mortgaged Properties............... 23
Balloon Payments.................................................................... 27
Delinquent and Non-Performing Mortgage Loans........................................ 27
Limited Number of Mortgage Loans.................................................... 27
Credit Support Limitations.......................................................... 27
Remedies Following Default.......................................................... 28
ERISA Considerations................................................................ 29
Certain Federal Tax Considerations Regarding Residual Interest Bonds and Residual
Interest Certificates............................................................ 29
Book-Entry Registration............................................................. 29
DESCRIPTION OF THE SECURITIES......................................................... 30
General............................................................................. 30
The Bonds -- General................................................................ 30
The Certificates -- General......................................................... 30
Bearer Securities and Registered Securities......................................... 31
Book-Entry Registration............................................................. 32
Valuation of Mortgage Assets........................................................ 34
Payments or Distributions of Interest............................................... 34
Payments or Distributions of Principal.............................................. 35
Redemption of Bonds................................................................. 36
Termination or Repurchase Respecting Certificates................................... 37
YIELD AND PREPAYMENT CONSIDERATIONS................................................... 38
General............................................................................. 38
Timing of Payment or Distribution of Interest....................................... 38
Principal Prepayments............................................................... 38
Prepayments -- Maturity and Weighted Average Life................................... 39
Other Factors Affecting Weighted Average Life....................................... 41
ASSETS SECURING OR UNDERLYING THE SECURITIES.......................................... 42
General............................................................................. 42
Mortgage Loans...................................................................... 43
Mortgage Certificates............................................................... 48
Substitution of Mortgage Assets..................................................... 48
Collection Account.................................................................. 49
Other Funds or Accounts............................................................. 49
Investment of Funds................................................................. 49
Credit Support...................................................................... 50
Cash Flow Agreements................................................................ 50
4
<PAGE>
----
SERVICING OF MORTGAGE LOANS........................................................... 50
General............................................................................. 50
Collection Procedures............................................................... 51
Payments on Mortgage Loans; Deposits to Custodial Accounts.......................... 51
Advances............................................................................ 52
Maintenance of Insurance Policies................................................... 52
Realization Upon Defaulted Mortgage Loans........................................... 53
Modification; Waivers............................................................... 55
Due-on-Sale and Due-on-Encumbrance Provisions....................................... 55
Retained Interest; Servicing Compensation and Payment of Expenses................... 55
Evidence as to Compliance........................................................... 56
Certain Matters Regarding the Master Servicer and Special Servicer.................. 56
CREDIT SUPPORT........................................................................ 56
General............................................................................. 56
Subordinated Securities............................................................. 57
Cross-Support Features.............................................................. 58
Insurance on the Mortgage Loans..................................................... 58
Letter of Credit.................................................................... 58
Guarantee Insurance................................................................. 58
Reserve Funds....................................................................... 59
DESCRIPTION OF INSURANCE ON THE MORTGAGE LOANS........................................ 59
Credit Support With Respect to Mortgage Certificates................................ 59
Mortgage Insurance on the Mortgage Loan............................................. 59
Hazard Insurance on the Mortgage Loan............................................... 60
FUNDING AGREEMENTS.................................................................... 61
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS............................................... 61
General............................................................................. 61
Types of Mortgage Instruments....................................................... 62
Leases and Rents.................................................................... 62
Personal Property................................................................... 62
Foreclosure......................................................................... 63
Environmental Legislation........................................................... 68
Due-on-Sale and Due-on-Encumbrance.................................................. 69
Subordinate Financing............................................................... 70
Default Interest, Prepayment Charges and Prepayments................................ 70
Applicability of Usury Laws......................................................... 70
Soldiers' and Sailors' Civil Relief Act of 1940..................................... 71
Forfeitures in Drug and RICO Proceedings............................................ 71
Alternative Mortgage Instruments.................................................... 71
THE INDENTURE......................................................................... 72
Certain Covenants................................................................... 72
Modification of Indenture........................................................... 72
Events of Default................................................................... 73
Authentication and Delivery of Bonds................................................ 75
Satisfaction and Discharge of the Indenture......................................... 75
Issuer's Annual Compliance Statement................................................ 75
List of Bondholders................................................................. 75
Meetings of Bondholders............................................................. 76
Fiscal Year......................................................................... 76
Trustee's Annual Report............................................................. 76
5
<PAGE>
Page
----
THE TRUST AGREEMENT................................................................... 76
Assignment of Mortgage Assets....................................................... 76
Repurchase or Substitution of Non-Conforming Loans.................................. 77
Representations and Warranties; Repurchase.......................................... 77
Reports to Certificateholders....................................................... 78
Events of Default................................................................... 79
Rights Upon Event of Default........................................................ 80
Duties of the Trustee............................................................... 80
Amendment of Trust Agreement........................................................ 81
Voting Rights....................................................................... 81
Lists of Certificateholders......................................................... 81
Termination......................................................................... 81
THE TRUSTEE........................................................................... 82
THE ISSUER............................................................................ 82
The Company......................................................................... 82
Owner Trust......................................................................... 83
Administrator....................................................................... 83
USE OF PROCEEDS....................................................................... 83
LIMITATIONS ON ISSUANCE OF BEARER SECURITIES.......................................... 84
FEDERAL INCOME TAX CONSIDERATIONS..................................................... 84
General............................................................................. 84
Characterization of Securities...................................................... 85
Taxation of Regular Interest Securities............................................. 85
Taxation of the REMIC............................................................... 89
Taxation of Holders of Residual Interest Securities................................. 90
Administrative Matters.............................................................. 93
Tax Status as a Grantor Trust....................................................... 93
Tax Treatment of Foreign Investors.................................................. 97
STATE AND LOCAL TAX CONSIDERATIONS.................................................... 98
ERISA CONSIDERATIONS.................................................................. 98
LEGAL INVESTMENT...................................................................... 100
PLAN OF DISTRIBUTION.................................................................. 101
LEGAL MATTERS......................................................................... 102
FINANCIAL INFORMATION................................................................. 102
GLOSSARY.............................................................................. 103
6
<PAGE>
SUMMARY OF TERMS
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the Prospectus
Supplement with respect to the Series offered thereby and to the related
Indenture (the "Indenture") or Trust Agreement (the "Trust Agreement"), as
applicable, and the supplemental or terms indenture or agreement with respect to
such Series (the "Series Supplement") between the Company or an owner trustee,
as the case may be, and a bank, trust company or other fiduciary acting as a
trustee and named in the Prospectus Supplement (the "Trustee") for the related
Series of Mortgaged-Collateralized Bonds or a trust fund and the Trustee for the
related Series of Mortgage Pass-Through Certificates (the Indenture and any
Series Supplement relating to Bonds of a Series together are referred to as the
"Indenture," and the Trust Agreement and any Series Supplement relating to
Certificates together are referred to as the "Trust Agreement").
Securities Offered............ Bonds and Certificates issuable from time to
time in one or more series (a "Series"). The
Bonds of a Series will represent indebtedness of
the issuer (the "Issuer") of such Bonds, secured
by the Trust Estate for such Series and the
Certificates of a Series will evidence a
beneficial ownership interest in the Trust Fund
for such Series. Each Series of Securities will
consist of one or more Classes, one or more of
which may be Classes of Compound Interest
Securities, Planned Amortization Class ("PAC")
Securities, Variable Interest Securities, Retail
Securities, Principal Only Securities, Interest
Only Securities or Participating Securities.
Each Class of a Series of Bonds may differ in,
among other things, the amounts allocated to and
the priority of principal and interest payments,
maturity date, Payment Dates and Bond Interest
Rate, and each Class of a Series of Certificates
may differ in, among other things, the amount,
percentage and timing of distribution of
principal, interest or both. Additionally, one
or more Classes may consist of Subordinate
Securities which are subordinated to other
Classes of Securities with respect to the right
to receive payments or distributions of
principal, interest or both, and may be
allocated losses and shortfalls prior to the
allocation thereof to other Classes of
Securities, under the circumstances and in such
amounts as described herein and in the related
Prospectus Supplement. The Securities of each
Class will be issued in the minimum
denominations specified in the related
Prospectus Supplement. If so specified in the
related Prospectus Supplement, the Securities or
certain Classes of such Securities offered
thereby may be available in book-entry form
only. The Bonds may be issued in registered form
or bearer form with coupons attached. Bonds in
bearer form will be offered only outside the
United States to non-United States persons and
to offices located outside the United States of
certain United States financial institutions.
See "Description of the Securities -- The Bonds
-- General," "-- The Certificates -- General"
and "Credit Support -- Subordinated Securities."
Issuer........................ The Issuer with respect to a Series of Bonds
will be American Southwest Financial Securities
Corporation (the "Company") or an owner trust
established by it (the "Owner Trust") for the
purpose of issuing one or more Series of Bonds.
Each such Owner Trust will be created by an
agreement (the "Deposit Trust Agreement")
between the Company, acting as depositor, and a
bank, trust company or other fiduciary, acting
as owner trustee (the "Owner Trustee"). The
Bonds will be non-recourse obligations of the
Issuer. The Series Supplement for a particular
Series of Bonds may permit the assets pledged to
secure the related Bonds to be transferred by
the Issuer to a trust or other limited purpose
affiliate of the Company, subject to the
obligations of the Bonds of such
7
<PAGE>
Series, thereby relieving the Issuer of its
obligations with respect to such Bonds.
The Issuer with respect to a Series of
Certificates will be a trust fund (the "Trust
Fund") established by the Company for the
purpose of issuing one or more Series of
Certificates. Such Trust Fund will be created by
an agreement (the "Trust Agreement") between the
Company, acting as depositor, and a Trustee.
The Issuer will not have, nor be expected in the
future to have, any significant assets available
for payments on a Series of Bonds or
distributions on a Series of Certificates, other
than the assets pledged as security for a
specific Series of Bonds issued by it, or assets
deposited into a Trust Fund for a specific
Series of Certificates. No Series of Bonds will
have any claim against or security interest in
the Mortgage Assets pledged to secure any other
Series and no Series of Certificates will have a
beneficial ownership interest in any other
Series.
The Company, an Arizona corporation, is a
limited-purpose finance subsidiary organized for
the purpose of issuing one or more Series of
Securities and other similar obligations
directly or through one or more Owner Trusts or
Trust Funds established by it as depositor (in
such capacity, the "Depositor"). Although all of
the outstanding capital stock of the Company is
owned by American Southwest Affiliated
Companies, neither American Southwest Affiliated
Companies nor any of its affiliates has
guaranteed or is otherwise obligated with
respect to any Series, except with respect to
any representations and warranties given by any
such affiliate as originator, seller or servicer
of Mortgage Assets relating to a Series.
The Company's principal office is located at
2390 East Camelback Road, Suite 225, Phoenix,
Arizona 85016 and its telephone number is (602)
381-8960. See "Special Considerations" and "The
Issuer."
Interest Payments or
Distributions............... Each Class of a Series of Securities (other
than a Class of Principal Only Securities) will
accrue interest at the rate set forth in (or, in
the case of Variable Interest Securities, as
determined by the method described in) the
related Prospectus Supplement (the "Bond
Interest Rate" with respect to a Series of Bonds
and the "Certificate Interest Rate" with respect
to a Series of Certificates). Interest on all
Securities which bear or receive interest, other
than Compound Interest Securities, will be due
and payable on the Payment Dates, or distributed
on the Distribution Dates, as applicable,
specified in the related Prospectus Supplement.
However, failure to pay or distribute interest
on a current basis may not necessarily be an
Event of Default with respect to a particular
Series of Securities. Payments or distributions
of interest on a Class of Variable Interest
Securities will be made on the dates set forth
in the related Prospectus Supplement (the
"Variable Interest Payment Dates"). Interest on
any Class of Compound Interest Securities will
not be paid or distributed currently, but will
accrue and the amount of the interest so accrued
will be added to the principal thereof on each
Payment Date or Distribution Date, as
applicable, through the Accrual Termination Date
specified in the related Prospectus Supplement.
Following the applicable Accrual Termination
Date, interest payments or distributions on such
Compound Interest Securities will be made on the
Accreted Value thereof. Interest Only Securities
may be assigned a "Notional Amount" which is
used solely for convenience in expressing the
calculation of interest and for certain other
purposes. As specified in the related Prospectus
Supplement, the Notional Amount for Interest
Only
8
<PAGE>
Securities of a Series will be determined at the
time of issuance of such Securities based on the
principal balance of another Class or Classes of
Securities of such Series that are entitled to
receive principal or the Asset Value of the
Mortgage Assets or a portion thereof. Such
Notional Amount will be adjusted monthly over
the life of the Securities based upon
adjustments to the principal balance of such
other Class or Classes or the Asset Value of
such Mortgage Assets. Reference to the Notional
Amount is solely for convenience in certain
calculations and does not represent the right to
receive any distributions allocable to
principal. Principal Only Securities will not
accrue, and will not be entitled to receive, any
interest.
Each payment of interest on each Class of
Securities (or addition to principal of a Class
of Compound Interest Securities) on a Payment
Date or Distribution Date, as applicable, will
include all interest accrued during the Interest
Accrual Period specified in the related
Prospectus Supplement preceding such Payment
Date or Distribution Date. If the Interest
Accrual Period for a Series ends on a date other
than a Payment Date or Distribution Date, as
applicable, for such Series, the yield realized
by the Holders of such Securities may be lower
than the yield that would result if the Interest
Accrual Period ended on such Payment Date or
Distribution Date. Additionally, if so specified
in the related Prospectus Supplement, interest
accrued for an Interest Accrual Period for one
or more Classes may be calculated on the
assumption that principal payments or
distributions (and additions to principal of the
Securities), and allocations of losses on the
Mortgage Assets (if so specified in the related
Prospectus Supplement), are made on the first
day of the preceding Interest Accrual Period and
not on the Payment Date or Distribution Date, as
applicable, for such preceding Interest Accrual
Period when actually made or added. Such method
would produce a lower effective yield than if
interest were calculated on the basis of the
actual principal amount outstanding. See "Yield
and Prepayment Considerations."
With respect to any Class of Variable Interest
Securities, the related Prospectus Supplement
will set forth: (a) the initial Bond Interest
Rate or Certificate Interest Rate, as
applicable, (or the manner of determining the
initial Bond Interest Rate or Certificate
Interest Rate); (b) the formula, index or other
method by which the Bond Interest Rate or
Certificate Interest Rate, as applicable, will
be determined from time to time; (c) the
periodic intervals at which such determination
will be made; (d) the interest rate cap (the
"Maximum Variable Interest Rate") or the
interest rate floor (the "Minimum Variable
Interest Rate"), if any, on the Bond Interest
Rate or Certificate Interest Rate for such
Variable Interest Securities; and (e) the
Variable Interest Period and any other terms
relevant to such Class of Securities. See
"Description of the Securities -- Payments or
Distributions of Interest."
Principal Payments or
Distributions............... Principal payments or distributions on the
Securities of a Series will be made from amounts
available therefor on each Payment Date or
Distribution Date, as applicable, in an
aggregate amount determined as set forth in the
related Prospectus Supplement and will be
allocated among the respective Classes of a
Series of Securities at the times, in the manner
and in the priority set forth in the related
Prospectus Supplement.
Except with respect to Compound Interest
Securities and Interest Only Securities, on each
Payment Date or Distribution Date, as
applicable,
9
<PAGE>
principal payments or distributions will be made
on the Securities of a Series in the Principal
Payment Amount as determined by a formula
specified in the related Prospectus Supplement.
If the Series of Securities has a Class of
Compound Interest Securities, additional
principal payments on the Securities will be
made on each Payment Date or Distribution Date,
as applicable, in an amount equal to the
interest accrued, but not then payable or
distributable, on such Class of Compound
Interest Securities for the related Interest
Accrual Period. If the Series of Securities has
a Class of PAC Securities, such PAC Securities
will have certain priorities of payment or
distribution with respect to principal to the
extent of certain targeted amounts with respect
to each Payment Date or Distribution Date, as
set forth in the related Prospectus Supplement.
See "Description of the Securities -- Payments
or Distributions of Principal."
Allocation of Losses.......... If so specified in the related Prospectus
Supplement, on any Payment Date or Distribution
Date, as applicable, on which the principal
balance of the Mortgage Assets is reduced due to
losses on the Mortgage Assets, (i) the amount of
such losses will be allocated first, to reduce
the aggregate outstanding principal balance of
the Subordinate Securities or other
subordination, if any, and, thereafter, to
reduce the aggregate outstanding principal
balance of the remaining Securities in the
priority and manner specified in such Prospectus
Supplement until the aggregate outstanding
principal balance of each Class of Securities so
specified has been reduced to zero or paid in
full, thus reducing the amount of principal
payable or distributable on each such Class of
Securities or (ii) such losses may be allocated
in any other manner set forth in the related
Prospectus Supplement. Such reductions of
principal of a Class or Classes of Securities
will be allocated to the Holders of the
Securities of such Class or Classes pro rata in
the proportion which the outstanding principal
of each Security of such Class or Classes bears
to the aggregate outstanding principal balance
of all Securities of such Class. See
"Description of the Securities -- Payments or
Distributions of Principal."
Stated Maturity and
Final Scheduled Distribution
Date........................ The "Stated Maturity" for each Class of Bonds
of a Series is the date specified in the related
Prospectus Supplement no later than which all
the Bonds of such Class will be fully paid,
calculated on the basis of the assumptions set
forth in the related Prospectus Supplement. The
"Final Scheduled Distribution Date" for each
Class of Certificates of a Series is the date
after which no Certificates of such Class will
remain outstanding, assuming timely
distributions are made on the Mortgage Assets in
the related Trust Fund in accordance with their
terms. The Final Scheduled Distribution Date of
a Class of Certificates may equal the maturity
date of the Mortgage Asset in the related Trust
Fund which has the latest stated maturity or
will be determined as described herein and in
the related Prospectus Supplement.
The actual maturity date of the Securities of a
Series will depend primarily upon the level of
prepayments with respect to the Mortgage Assets
(including the Underlying Mortgage Loans if such
Mortgage Assets consist of Mortgage
Certificates) securing or underlying such Series
of Securities. The actual maturity of any
Securities is likely to occur earlier and may
occur substantially earlier than its Stated
Maturity or Final Scheduled Distribution Date,
as applicable, as a result of the application of
prepayments to the reduction of the principal
balances of the Securities. The rate of
prepayments on the Mortgage Assets securing or
underlying a Series will depend on a variety of
factors, including
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certain characteristics of such Mortgage Loans
and the prevailing level of interest rates from
time to time, as well as on a variety of
economic, demographic, tax, legal, social and
other factors. No assurance can be given as to
the actual prepayment experience with respect to
a Series. See "Special Considerations" and
"Yield and Prepayment Considerations."
Redemption of Bonds........... The Bonds will be redeemable only as follows:
a. Special Redemption....... If specified in the related Prospectus
Supplement, Bonds of a Series will be subject to
special redemption, in whole or in part, if, as
a result of principal payments on the Mortgage
Assets securing such Series or low reinvestment
yields, or both, the Trustee determines (based
on assumptions, if any, specified in the
Indenture and after giving effect to the
amounts, if any, available to be withdrawn from
any Reserve Fund for such Series) that the
amount anticipated to be available in the
Collection Account for such Series on the date
specified in the related Prospectus Supplement
will be insufficient to meet debt service
requirements on any portion of the Bonds. Any
such redemption would be limited to the
aggregate amount of all scheduled principal
payments and prepayments on the Mortgage Assets
received since the last Payment Date or Special
Redemption Date, whichever is later, and may
shorten the maturity of any Bond so redeemed by
no more than the period between the date of such
special redemption and the next Payment Date.
Unless otherwise specified in the related
Prospectus Supplement, Special Redemptions of
Bonds of a Series will be made in the same
priority and manner as principal payments are
made on a Payment Date. Bonds subject to Special
Redemption will be redeemed on the applicable
Special Redemption Date at 100% of their unpaid
principal amount plus accrued interest on such
principal to the date specified in the related
Prospectus Supplement. To the extent described
in the related Prospectus Supplement, Bonds of a
Series may be subject to Special Redemptions in
whole or in part at the Redemption Price
following certain defaults under a Credit
Support Agreement or other agreement, and in
certain other events. See "Description of the
Securities -- Redemption of Bonds -- Special
Redemption."
b. Optional Redemption...... To the extent specified in the related
Prospectus Supplement, one or more Classes of
any Series of Bonds may be redeemed in whole or
in part, at the Redemption Price, at the option
of the Issuer or of such other person specified
in the related Prospectus Supplement. See
"Description of the Securities -- Redemption of
Bonds -- Optional Redemption."
c. Redemptions of
Retail Bonds............. If specified in the related Prospectus
Supplement for a Series, one or more Classes of
Bonds of a Series ("Retail Bonds") may be
subject to mandatory redemption by lot or by
such other method set forth in the Prospectus
Supplement. The related Prospectus Supplement
relating to a Series of Bonds with Retail
Securities will set forth Class priorities, if
any, and conditions with respect to mandatory
redemptions. See "Description of the Securities
-- Redemption of Bonds -- Redemption of Retail
Bonds."
Optional Termination of
Trust Fund or Repurchase of
Certificates................ If so specified in the related Prospectus
Supplement, the Depositor, the Servicer or such
other entity that is specified in the related
Prospectus Supplement, may, at its option, cause
an early termination of the related
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Trust Fund by repurchasing all of the assets
remaining in the Trust Fund on or after a
specified date, or on or after such time as the
aggregate principal balance of the Certificates
of any Class of the Series is less than the
amount or percentage specified in the related
Prospectus Supplement. See "Description of the
Securities -- Termination or Repurchase
Respecting Certificates -- Optional
Termination."
If so specified in the related Prospectus
Supplement, one or more classes of the
Certificates of such Series may be repurchased,
in whole or in part, at the option of the
Depositor or of such other person specified in
the related Prospectus Supplement, at such times
and under the circumstances specified in such
Prospectus Supplement and at the repurchase
price set forth therein. See "Description of the
Securities -- Termination or Repurchase
Respecting Certificates -- Optional Repurchase."
If so specified in the related Prospectus
Supplement, any Class of Certificates may be
subject to repurchase at the request of the
holders of such Class or to mandatory repurchase
by the Depositor (including by random lot). See
"Description of the Securities -- Termination or
Repurchase Respecting Certificates -- Other
Repurchases."
Assets Securing or Underlying
the Securities.............. Each Series of Bonds will be separately secured
by a Trust Estate, and each Series of
Certificates will represent beneficial ownership
interests in a Trust Fund, in each case
consisting of one or more of the assets (the
"Assets") described below, as specified in the
related Prospectus Supplement.
a. Mortgage Assets.......... The Mortgage Assets for a Series may consist of
any combination of the following, to the extent
and as specified in the related Prospectus
Supplement:
(1) Mortgage Loans....... Mortgage Assets for a Series may consist, in
whole or in part, of Mortgage Loans which may
include mortgage loans secured by first or
junior mortgages, deeds of trust or similar
security instruments ("Mortgages") on, or
installment contracts ("Installment Contracts")
for the sale of, fee simple or leasehold
interests in commercial real estate properties,
multifamily residential properties or
cooperatively owned multifamily properties
consisting of five or more dwelling units and/or
mixed residential/commercial properties
(collectively, the "Mortgaged Properties")
including participations therein. If so
specified in the related Prospectus Supplement,
Mortgage Loans relating to real estate projects
under construction may be included in the
Mortgage Assets for a Series. Some Mortgage
Loans may be multifamily mortgage loans insured
by the Federal Housing Administration. Some
Mortgage Loans or Mortgage Loans underlying such
participation interests may be delinquent or
nonperforming as specified in the related
Prospectus Supplement. The Mortgage Assets may
consist of a single Mortgage Loan or obligations
of a single obligor or related obligors as
specified in the related Prospectus Supplement.
Mortgage Loans (including Underlying Mortgage
Loans) may be originated by or acquired from an
affiliate of the Issuer and an affiliate of the
Issuer may be an obligor with respect to any
such Mortgage Loan. Payments on Mortgage Loans
securing or underlying a Series of Certificates
will be collected by the Trustee or by the
Servicer or Master Servicer with respect to such
Series, will be remitted to the Trustee as
described in the related Prospectus Supplement
and will be available in the priority described
in the related Prospectus Supplement to make
payments on the Securities of such Series.
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<PAGE>
Mortgage Loans may, as specified in the related
Prospectus Supplement, have various payment
characteristics and may consist of fixed rate
loans or ARMs or Mortgage Loans having balloon
or other irregular payment features. The related
Prospectus Supplement will describe certain
characteristics of the Mortgage Loans comprising
the Mortgage Assets for a Series, including,
without limitation, (a) the aggregate unpaid
principal balance of the Mortgage Loans
comprising the Mortgage Assets; (b) the weighted
average Mortgage Rate on the Mortgage Loans,
and, in the case of adjustable Mortgage Rates,
the weighted average of the current adjustable
Mortgage Rates, the minimum and maximum
permitted adjustable Mortgage Rates, if any, and
the weighted average thereof; (c) the average
outstanding principal balance of the Mortgage
Loans; (d) the weighted average remaining
scheduled term to maturity of the Mortgage Loans
and the range of remaining scheduled terms to
maturity; (e) the range of Loan-to-Value Ratios
of the Mortgage Loans; (f) the relative
percentage (by principal balance as of the
Cut-Off Date) of Mortgage Loans that are ARMs,
fixed interest rate, FHA Loans or other types of
Mortgage Loans; (g) any credit support relating
to the Mortgage Assets; (h) the relative
percentage (by principal balance as of the
Cut-Off Date) of Mortgage Loans that are secured
by Multifamily Property or Commercial Property;
(i) the geographic dispersion of Mortgaged
Properties securing the Mortgage Loans; (j) the
use or type of each Mortgage Property securing a
Mortgage Loan and (k) any servicing fees
relating to the Mortgage Assets.
If permitted by applicable law, the Mortgage
Assets also may include Mortgaged Properties
acquired by foreclosure or by deed-in-lieu of
foreclosure ("REO Property"). To the extent
specified in the related Prospectus Supplement,
the Servicer or the Master Servicer or the
Special Servicer, if any, may establish and
maintain a trust account or accounts to be used
in connection with REO Properties and other
Mortgaged Properties being operated by it or on
its behalf on behalf of the Trust Estate or
Trust Fund, as applicable, by the mortgagor as
debtor-in-possession or otherwise. See "Assets
Securing or Underlying the Securities --
Mortgage Loans", "Servicing of Mortgage Loans --
Maintenance of Insurance Policies" and "--
Realization Upon Defaulted Mortgage Loans."
(2) Mortgage
Certificates......... Mortgage Certificates may include (a) private
mortgage participation or pass-through
certificates representing beneficial interests
in certain Mortgage Loans, (b) mortgage
certificates issued or guaranteed by FHLMC, FNMA
or GNMA, or (c) debt obligations, interest
payments on which may be tax-exempt in whole or
in part, secured by mortgages. Although
individual Mortgage Loans underlying a Mortgage
Certificate ("Underlying Mortgage Loans") may be
insured or guaranteed by the United States or an
agency or instrumentality thereof, they need not
be, and the Mortgage Certificates themselves
will be so insured or guaranteed only to the
extent specified in the related Prospectus
Supplement. Payments on the Mortgage
Certificates are expected to be distributed to
the Trustee or, if applicable, the Paying Agent
(on behalf of the Trust Estate or Trust Fund, as
applicable) as registered owner of such Mortgage
Certificates. If payments with respect to
interest on the underlying obligations are
tax-exempt, the Prospectus Supplement relating
to a Series will disclose the relevant federal
income tax characteristics relating to the
tax-exempt status of such obligations.
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<PAGE>
The Prospectus Supplement for a Series of
Securities secured by or evidencing an interest
in Mortgage Certificates will specify, to the
extent applicable, (i) the aggregate approximate
principal amount and type of any Mortgage
Certificates to be included in the Trust Estate
or Trust Fund, as applicable, for such Series;
(ii) the payment features of such Mortgage
Certificates; (iii) certain characteristics of
the Underlying Mortgage Loans including (A) the
payment features of such Underlying Mortgage
Loans (i.e., whether they are fixed interest
rate or adjustable rate and whether they provide
for fixed level payments, negative amortization
or other payment features), (B) the approximate
aggregate principal amount, if known, of the
Underlying Mortgage Loans which are insured or
guaranteed by a governmental entity, (C) the
servicing fee or range of servicing fees with
respect to the Underlying Mortgage Loans, and
(D) the stated maturities of the Underlying
Mortgage Loans at origination; (iv) the maximum
original term to maturity of the Mortgage
Certificates; (v) the weighted average term to
maturity of the Mortgage Certificates; (vi) the
pass-through or bond rate or ranges thereof for
the Mortgage Certificates or formula therefor;
(vii) the weighted average passthrough or
certificate rate of the Mortgage Certificates or
formula therefor; (viii) the issuer of the
Mortgage Certificates (the "Certificate
Issuer"), the servicer or master servicer of the
Mortgage Certificates and the trustee of the
Mortgage Certificates (the "Certificate
Trustee"); (ix) certain characteristics of
credit support, if any, such as reserve funds,
insurance policies, letters of credit,
guarantees or overcollateralization, relating to
the Underlying Mortgage Loans or to such
Mortgage Certificates themselves; (x) the terms
on which Underlying Mortgage Loans or the
Mortgage Certificates may, or are required to,
be repurchased prior to maturity; and (xi) the
terms on which substitute Underlying Mortgage
Loans may be delivered to replace those
initially deposited with the Certificate Trust.
(3) Determination of
Asset Value.......... If provided in the applicable Prospectus
Supplement, each Mortgage Asset for a Series
will be assigned an Asset Value. Generally, the
aggregate of the Asset Values of the Mortgage
Assets securing a Series of Bonds or deposited
in a Trust Fund for a Series of Certificates,
when taken together with Credit Support and any
cash initially deposited by the Issuer, will
equal not less than the original Aggregate
Outstanding Principal of such Series. The Asset
Value of a Mortgage Asset securing any Series of
Bonds or deposited in a Trust Fund for a Series
of Certificates is intended to represent the
principal amount of Securities of such Series
that, based on certain assumptions stated in the
related Series Supplement, can be supported by
payments on such Mortgage Asset, irrespective of
prepayments thereon, together with, depending on
the type of Mortgage Asset and method used to
determine its Asset Value, reinvestment earnings
at the related Assumed Reinvestment Rate, if
any, and amounts in any Reserve Fund established
for that Series. The Prospectus Supplement for a
Series of Securities will set forth the method
or methods and related assumptions used to
determine Asset Value, if such method is used,
for the Mortgage Assets securing or underlying
such Series. See "Description of the Securities
-- Valuation of Mortgage Assets."
b. Collection Account....... Payments on the Mortgage Assets pledged as
security for a Series of Bonds or deposited in a
Trust Fund for a Series of Certificates, net of
certain fees, reimbursements and other amounts
specified in the related Prospectus Supplement,
will be remitted to a Collection Account to be
established with the Trustee, or if the Trustee
is not also the Paying
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<PAGE>
Agent, with the Paying Agent, for such Series.
Such payments, together with the Reinvestment
Income thereon, if any, the amount of cash, if
any, initially deposited in the Collection
Account by the Issuer together with Reinvestment
Income thereon, if any, and any amounts
withdrawn from any Reserve Fund established for
such Series, will be available to make payments
or distributions of principal of and interest on
the Securities of such Series on the next
Payment Date or Distribution Date, as
applicable. Any funds remaining in the
Collection Account for a Series immediately
following a Payment Date or Distribution Date,
as applicable, (unless required to be deposited
into one or more Reserve Funds, as described
below, or applied to pay certain expenses or
other payments provided for in the Indenture or
Trust Agreement, as applicable) will be promptly
paid as provided in the Indenture or Trust
Agreement to the Issuer or, in certain
circumstances, to owners of residual interests
and, upon such payment, will be released from
the lien of the Indenture or Trust Agreement, as
applicable. See "Assets Securing or Underlying
the Securities -- Collection Account."
c. Guaranteed Investment
Contracts and Other Cash
Flow Agreements.......... The Issuer may obtain and deliver to the Trustee
Guaranteed Investment Contracts pursuant to
which moneys held in the funds and accounts
established for such Series will be invested at
a specified rate for the Series. The Issuer also
may obtain and deliver to the Trustee certain
other agreements such as interest rate swap
agreements, interest rate cap or floor
agreements or similar agreements (together with
Guaranteed Investment Contracts, "Cash Flow
Agreements") issued by a bank, insurance
company, savings bank, savings and loan
association or other entity which reduce the
effects of interest rate fluctuations on the
Mortgage Assets or the Securities. The principal
terms of any such Guaranteed Investment Contract
or other 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. Additionally, the
related Prospectus Supplement will provide
certain information with respect to the issuer
of such Guaranteed Investment Contract or other
Cash Flow Agreement.
Credit Support................ Credit Support in the form of reserve funds,
subordination, overcollateralization, insurance
policies, letters of credit or other types of
credit support may be provided with respect to
the Mortgage Assets or with respect to one or
more Classes of Securities of a Series. If the
Mortgage Assets are divided into separate
Mortgage Groups, each securing or underlying a
separate Class or Classes of a Series, Credit
Support may be provided by a cross-support
feature which requires that payments or
distributions be made to Securities secured by
or representing an interest in one Mortgage
Group prior to distributions to Subordinate
Securities secured by or representing an
interest in another Mortgage Group within the
Trust Estate or Trust Fund, as applicable.
The type, characteristic and amount of Credit
Support will be determined based on the
characteristics of the Mortgage Assets and other
factors and will be established on the basis of
requirements of each Rating Agency rating the
Securities of such Series. If so specified in
the related Prospectus Supplement, any such
Credit Support may apply only in the event of
certain types of losses or delinquencies and the
protection against losses or delinquencies
provided by such Credit Support will be limited.
See "Credit Support" and "Special
Considerations" herein.
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<PAGE>
a. Subordinate Securities... A Series of Securities may include one or more
Classes of Subordinate Securities. The rights of
holders of such Subordinate Securities to
receive distributions on any Payment Date or
Distribution Date, as applicable, will be
subordinate in right and priority to the rights
of Holders of Senior Securities of the Series,
but only to the extent described in the related
Prospectus Supplement. If so specified in the
related Prospectus Supplement, subordination may
apply only in the event of certain types of
losses not covered by other Credit Support.
Such subordination will be in lieu of or in
addition to providing insurance policies or
other Credit Support with respect to losses
arising from such events. The related Prospectus
Supplement may specify a trustee that is not the
Trustee to be appointed to act on behalf of
Holders of Subordinate Securities.
The Prospectus Supplement for a Series of
Securities that includes one or more Classes of
Subordinate Securities will set forth
information concerning the amount of
subordination of such Class or Classes of
Subordinate Securities in a Series, the
circumstances in which such subordination will
be applicable, the manner, if any, in which the
amount of subordination will decrease over time,
the manner of funding any related Reserve Fund
and the conditions under which amounts in any
related Reserve Fund will be used to make
distributions to Holders of Senior Securities
and/or to Holders of Subordinate Securities or
be released from the related Trust Estate or
Trust Fund, as applicable. If cash flows
otherwise distributable to Holders of
Subordinate Securities secured by or evidencing
an interest in a Mortgage Group will be used as
Credit Support for Senior Securities secured by
another Mortgage Group within the Trust Estate
or Trust Fund, the related Prospectus Supplement
will specify the manner and conditions for
applying such a cross-support feature. See
"Credit Support -- Subordinated Securities."
b. Insurance................ If so specified in the Prospectus Supplement for
a Series of Securities, certain insurance
policies will be required to be maintained with
respect to the Mortgage Loans included in the
Trust Estate or Trust Fund, as applicable, for
such Series. Such insurance policies may
include, but are not limited to, a standard
hazard insurance policy or, with respect to FHA
Loans, FHA Insurance. See "Credit Support" and
"Description of Insurance on the Mortgage
Loans." The Prospectus Supplement for a Series
will provide information concerning any such
insurance policies, including (a) the types of
coverage provided by each, (b) the amount of
such coverage and (c) conditions to payment
under each. To the extent described in the
related Prospectus Supplement, certain insurance
policies to be maintained with respect to the
Mortgage Loans may be terminated, reduced and
replaced following the occurrence of certain
events affecting the authority or
creditworthiness of the issuer. Additionally,
such insurance policies may be terminated,
reduced or replaced by the Servicer or Master
Servicer, if any, provided that no rating
assigned to Securities of the related Series
offered hereby and by the related Prospectus
Supplement is adversely affected, all as set
forth in the related Prospectus Supplement.
c. Letter of Credit......... If so specified in the Prospectus Supplement for
a Series of Securities, Credit Support for such
Series may be provided by one or more letters of
credit. A letter of credit may provide limited
protection against certain losses in addition to
or in lieu of other credit support. The issuer
of the letter of credit (the "L/C Bank") will be
obligated to honor demands with respect to such
letter of credit, to the extent of the amount
available thereunder, to provide funds under the
circumstances and subject to such conditions as
are specified in the related Prospectus
Supplement. The
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<PAGE>
liability of the L/C Bank under its letter of
credit may be reduced by the amount of
unreimbursed payments thereunder.
The maximum liability of an L/C Bank under its
letter of credit will be an amount equal to a
percentage specified in the related Prospectus
Supplement of the initial aggregate outstanding
principal balance of the Mortgage Loans in the
Trust Estate or Trust Fund, as applicable, or
one or more Classes of Securities of the related
Series (the "L/C Percentage"). The maximum
amount available at any time to be paid under a
letter of credit will be determined in the
manner specified therein, as set forth in the
related Prospectus Supplement. See "Credit
Support -- Letter of Credit."
d. Payment Guarantee
Insurance................ If so specified in the Prospectus Supplement for
a Series of Securities, Credit Support for such
Series may be provided by an insurance policy or
surety bond ("Payment Guarantee Insurance")
issued by one or more insurance companies or
sureties. Such Payment Guarantee Insurance may
guarantee timely distributions of interest and
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. See "Credit
Support -- Guarantee Insurance."
e. Reserve Funds............ If so specified in the Prospectus Supplement for
a Series of Securities, the Issuer may deposit
in one or more reserve funds (collectively, the
"Reserve Funds") for such Series cash, Eligible
Investments, demand notes or a combination
thereof in the aggregate amount, if any,
specified in such Prospectus Supplement. Any
Reserve Funds for a Series also may be funded
over time through application of a specified
amount of cash flow, to the extent described in
the related Prospectus Supplement. Such Reserve
Fund may be established to increase the
likelihood of the timely distributions on the
Securities of such Series or to reduce the
likelihood of a Special Redemption with respect
to any Series of Bonds. Reserve Funds may be
established to provide protection against
certain losses or delinquencies in addition to
or in lieu of other Credit Support. Amounts on
deposit in any Reserve Fund for a Series,
together with (if so specified in the related
Prospectus Supplement) the Reinvestment Income
thereon, if any, will be applied for the
purposes, if the manner and to the extent
provided by the related Prospectus Supplement.
On each Payment Date or Distribution Date, as
applicable, for a Series, all amounts on deposit
in any Reserve Funds for such Series in excess
of the amounts required to be maintained therein
by the related Indenture or Trust Agreement, as
applicable, may be released from the Reserve
Funds and will not be available for future
payments or distributions on the Securities of
such Series. Additional information concerning
any Reserve Funds, including whether any such
Reserve Fund is a part of the Trust Estate or
Trust Fund, as applicable, the circumstances
under which moneys therein will be applied to
make distributions to Bondholders or
Certificateholders, as applicable, the balance
required to be maintained in such Reserve Funds,
the manner in which such required balances will
decrease over time and the manner of funding any
such Reserve Fund, will be set forth in the
related Prospectus Supplement. See "Credit
Support -- Reserve Funds."
f. Overcollateralization.... If so specified in the Prospectus Supplement for
a Series of Securities, such Series may be
structured such that the outstanding principal
balances or aggregate Asset Value of the
Mortgage Assets securing or underlying a Series
may exceed the aggregate outstanding principal
amount of the Securities of such Series, thereby
resulting in
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<PAGE>
overcollateralization. See "Description of the
Securities -- Valuation of Mortgage Assets."
Servicing Agreements.......... Various Servicers will perform certain servicing
functions with respect to the Mortgage Loans
comprising Mortgage Assets or Underlying
Mortgage Loans for a Series. In addition, if so
specified in the related Prospectus Supplement,
a Master Servicer identified in the related
Prospectus Supplement may service Mortgage Loans
directly or indirectly or administer and
supervise the performance by the Servicers of
their duties and responsibilities under separate
Servicing Agreements. Each Servicer must meet
the requirements of the Master Servicer, if any,
and be approved by the Issuer, and, if specified
in the related Prospectus Supplement, the Master
Servicer and each Servicer must be approved by
either FNMA or FHLMC as a seller-servicer of
mortgage loans and, in the case of FHA Loans, by
HUD as an FHA mortgagee. Each Servicer will be
obligated under a Servicing Agreement to perform
customary servicing functions and may be
obligated to advance funds to cover certain
payments not made by the Mortgagors to the
extent described herein and in the related
Prospectus Supplement. The Master Servicer, if
any, may, if so specified in the related
Prospectus Supplement, be obligated to advance
funds to cover any required Advances not made by
the Servicers to the extent that, in the
judgment of the Master Servicer, such Advances
are recoverable under the Insurance Policies,
any Credit Support or from the proceeds of
liquidation of the Mortgage Loans or as provided
in the related Prospectus Supplement. The
related Prospectus Supplement will specify the
conditions to and any limitations on such
Advances and the conditions under which such
Advances will be recoverable. With respect to
any such Series, the Issuer may (i) enter into a
standby agreement with an independent standby
Servicer acceptable to each Rating Agency rating
such Securities providing that such standby
Servicer will assume the Servicer's or Master
Servicer's obligations in the event of a default
by the Master Servicer or Servicer or (ii)
obtain a servicer performance bond acceptable to
each Rating Agency rating such Securities that
will guarantee certain of the Servicer's or
Master Servicer's obligations. The Issuer will
assign to the Trustee its rights under any
Master Servicing Agreement and any Servicing
Agreements so provided with respect to a Series
as security for the Securities. See "Assets
Securing or Underlying the Securities --
Mortgage Loans" and "Servicing of Mortgage
Loans."
Special Servicer.............. If so specified in the Prospectus Supplement for
a Series of Securities, to the extent a Mortgage
Loan on or after the Closing Date meets certain
criteria set forth in the related Prospectus
Supplement, (i) all or a portion of the
servicing responsibilities with respect to such
Mortgage Loan may be transferred to a Special
Servicer or (ii) the Special Servicer will
provide advisory services with respect to the
servicing of such Mortgage Loan. See "Servicing
of Mortgage Loans."
Federal Income Tax
Considerations.............. The applicable Prospectus Supplement will state
whether a real estate mortgage investment
conduit (a "REMIC") election will be made with
respect to each Series of Securities. Securities
of a Series for which a REMIC election has been
made will be designated as "regular interests"
in a REMIC ("Regular Interest Securities") or as
"residual interests" in a REMIC ("Residual
Interest Securities").
The Prospectus Supplement for a Series of
Securities may specify that the Securities of
such Series will not be treated as regular or
residual interests in a REMIC for federal income
tax purposes but instead will be
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treated as (i) indebtedness of the Issuer, (ii)
an undivided beneficial ownership interest in
the Mortgage Loans (and the arrangement pursuant
to which the Mortgage Loans will be held and the
Securities will be issued will be treated as a
grantor trust under Subpart E, part I of
subchapter J of the Code and not as an
association taxable as a corporation for federal
income tax purposes); (iii) equity interests in
an association that will satisfy the
requirements for qualification as a real estate
investment trust; or (iv) interests in an entity
that will satisfy the requirements for
qualifications as a partnership for federal
income tax purposes. The federal income tax
consequences to Bondholders or
Certificateholders, as applicable, of any such
Series will be described in the related
Prospectus Supplement.
Compound Interest Securities and Principal Only
Securities will, and certain other Classes of
Securities may, be issued with original issue
discount that is not de minimis. In such cases,
the Bondholder or Certificateholder, as
applicable, will be required to include the
original issue discount in gross income as it
accrues, which may be prior to the receipt of
cash attributable to such income. If a Security
is issued at a premium, the Holder will be
entitled to make an election to amortize such
premium on a constant yield method. Securities
constituting regular or residual interests in a
REMIC will generally represent "qualifying real
property loans" for mutual savings banks and
domestic building and loan associations, "loans
secured by an interest in real property" for
domestic building and loan associations and
"real estate assets" for real estate investment
trusts to the extent that the underlying
mortgage loans and interest thereon qualify for
such treatment. Non-REMIC Securities will not
qualify for such treatment.
A Holder of a Residual Interest Security will be
required to include in its income its pro rata
share of the taxable income of the REMIC. In
certain circumstances, the Holder of a Residual
Interest Security may have REMIC taxable income
or tax liability attributable to REMIC taxable
income for a particular period in excess of cash
distributions for such period or have an
after-tax return that is less than the after-tax
return on comparable debt instruments. In
addition, a portion (or, in some cases, all) of
the income from a Residual Interest Security (i)
except in certain circumstances with respect to
a Holder classified as a thrift institution
under the Code, may not be subject to offset by
losses from other activities, (ii) for a Holder
that is subject to tax under the Code on
unrelated business taxable income, may be
treated as unrelated business taxable income and
(iii) for a foreign Holder, may not qualify for
exemption from or reduction of withholding.
Further, individual Holders are subject to
limitations on the deductibility of expenses of
the REMIC. See "Federal Income Tax
Considerations."
Legal Investment.............. The Prospectus Supplement for a Series of
Securities will state whether the Securities of
such Series will constitute "mortgage related
securities" under the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Investors
whose investment authority is subject to legal
restrictions should consult their own legal
advisors to determine whether and to what extent
the Securities constitute legal investments for
them. See "Legal Investment."
Use of Proceeds............... The Issuer will use the net proceeds from the
sale of a Series of Securities to (i) purchase
Mortgage Assets securing or underlying such
Securities, (ii) repay indebtedness incurred by
the Issuer or Depositor to acquire the Mortgage
Assets securing or underlying such Securities,
(iii) establish any Reserve Funds described in
the related Prospectus
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Supplement, (iv) pay costs of structuring,
guaranteeing and issuing such Securities or (v)
fund loans to each Finance Company participating
in such Series of Securities pursuant to Funding
Agreements with such Finance Companies. See
"Funding Agreements." If so specified in the
Prospectus Supplement for a Series of
Securities, the purchase of the Mortgage Assets
securing or underlying such Series may be
effected by an exchange of Securities of such
Series with the seller of such Mortgage Assets.
See "Use of Proceeds."
Ratings....................... It will be a condition to the issuance of any
Securities offered by this Prospectus and the
related Prospectus Supplement that they be rated
in one of the four highest applicable rating
categories by at least one Rating Agency. The
rating or ratings applicable to Securities of
each Series will be as set forth in the related
Prospectus Supplement.
A security rating should be valuated
independently of similar ratings of different
types of securities. A security rating does not
address the effect of the rate of prepayment on
Mortgage Loans comprising or underlying the
Mortgage Assets or the effect that reinvestment
rates may have on the yield to investors in the
Securities. A rating is not a recommendation to
buy, sell or hold securities and may be subject
to revision or withdrawal at any time by the
assigning rating organization. Each rating
should be evaluated independently of any other
rating. See "Special Considerations."
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SPECIAL CONSIDERATIONS
Investors should consider, among other things, the following risk factors
in connection with the purchase of the Securities.
Limited Liquidity
There can be no assurance that a secondary market for the Securities of any
Series will develop or, if it does develop, that it will provide holders with
liquidity of investment or will continue while Securities of such Series remain
outstanding. Any such secondary market may provide less liquidity to investors
than any comparable market for securities evidencing interests in single-family
mortgage loans. The market value of the Securities will fluctuate with changes
in prevailing rates of interest. Consequently, sale of the Securities by a
Holder in any secondary market which may develop may be at a discount from par
value or from their purchase price. Furthermore, secondary purchasers may look
only to the Prospectus Supplement attached hereto and to the reports to Holders
of Securities delivered pursuant to the Indenture or Trust Agreement, as
applicable, and as described herein under the heading "Description of the
Securities -- General," "-- The Bonds -- General" and "-- The Certificates --
General" for information concerning the Securities. If specified in the related
Prospectus Supplement, the Holder of a Security will have optional redemption or
early termination rights, as applicable. The Bonds are subject to redemption,
and the Certificates are subject to early termination or repurchase, by the
Issuer or Depositor (or other person specified in the related Prospectus
Supplement) only under certain specified circumstances described herein and in
the related Prospectus Supplement. See "Description of the Securities --
Redemptions of Bonds" and "-- Termination or Repurchase Respecting
Certificates."
Limited Assets
The Issuer will not have, nor is expected in the future to have, any
significant assets available for payments on a Series of Securities other than
the assets in the Trust Estate or Trust Fund, as applicable, for a specific
Series. The Bonds will be non-recourse obligations of the Issuer, payable solely
from the Mortgage Assets and other assets pledged to secure such Series. No
Series will have any claim against or security interest in the Mortgage Assets
pledged to secure any other Series. If the Mortgage Assets and other assets
securing a Series of Bonds are insufficient to make payments on such Bonds, no
other assets of the Issuer will be available for payment of the deficiency.
The Trust Fund for a Series of Certificates will be the only available
source of funds to make distributions on the Certificates of such Series. The
only obligations, if any, of the Depositor with respect to the Certificates of
any Series will be pursuant to certain representations and warranties. The
Depositor does not have, and is not expected in the future to have, any
significant assets with which to meet any obligation to repurchase Mortgage
Assets with respect to which there has been a breach of any representation or
warranty. If the Depositor were required to repurchase a Mortgage Loan deposited
in the Trust Fund for a Series of Certificates, its only sources of funds to
make such repurchase would be from funds obtained from the enforcement of a
corresponding obligation, if any, on the part of the originator of the Mortgage
Loan or the Servicer, as the case may be, or from a reserve fund established to
provide funds for such repurchases.
Additionally, certain amounts remaining in certain funds or accounts,
including the Collection Account and any Reserve Funds, may be withdrawn under
certain conditions and circumstances described in the related Prospectus
Supplement. In the event of such withdrawal, such amounts will not be pledged
to, or available for, future payments or distributions of principal of or
interest on the Securities. If so specified in the Prospectus Supplement for a
Series of Securities, on any Payment Date or Distribution Date, as applicable,
for such Series on which the principal balance of the Mortgage Assets securing
or underlying such Series is reduced due to losses on such Mortgage Assets, (i)
the amount of such losses will be allocated first to reduce the aggregate
outstanding principal balance of the Subordinate Securities or other
subordination, if any, and thereafter to reduce the aggregate outstanding
principal balance of the remaining Securities in the priority and manner
specified in such Prospectus Supplement until the aggregate outstanding
principal balance of each Class of Securities so specified has been reduced to
zero or paid in full, thereby reducing the amount of
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principal payable on each such Class of Securities or (ii) such losses may be
allocated in any other manner set forth in the related Prospectus Supplement.
Such reductions of principal of a Class or Classes of Securities will be
allocated to the Holders of the Securities of such Class or Classes pro rata in
the proportion which the outstanding principal balance of each Security of such
Class or Classes bears to the aggregate outstanding principal balance of all
Securities of such Class or will be allocated in accordance with such other
selection basis specified in the related Prospectus Supplement.
Yield and Prepayment Considerations
Prepayments on the Mortgage Loans and Underlying Mortgage Loans (the
prepayments on which will affect the payments on the Mortgage Certificate
secured thereby or representing an interest therein) for a Series of Securities
(including prepayments resulting from modifications, defaults or liquidations or
repurchases due to certain breaches of representations and warranties) and other
principal payments (including Balloon Payments) generally will result in a
faster rate of principal payments on such Securities than if payments on such
Mortgage Assets were made as scheduled. Thus, the prepayment experience on the
Mortgage Loans and Underlying Mortgage Loans will affect the average life of
each Class secured thereby or representing an interest therein, as applicable,
and the extent to which each such Class is paid prior to its Stated Maturity or
Final Scheduled Distribution Date. The actual maturity of or final distribution
on any Class could occur significantly earlier than its Stated Maturity or Final
Scheduled Distribution Date. There can be no assurance as to the rate of
prepayment on the Mortgage Assets securing or underlying any Series of
Securities, or that the rate of payments will conform to any model described
herein or in any Prospectus Supplement. The actual maturity of the Bonds or
final distribution on the Certificates of a Series also will be affected by the
extent to which Excess Cash Flow is applied to payments or distributions of
principal on Bonds or Certificates, as applicable. A Series of Securities may
include Classes of PAC Securities or other Securities with priorities of payment
and, as a result, yields on the other Classes of Securities of such Series may
be more sensitive to prepayments on the Mortgage Loans or Underlying Mortgage
Loans, as applicable. A Series may include a Class offered at a significant
premium or discount. Yields on such Classes of Securities will be sensitive, and
in some cases extremely sensitive, to prepayments on Mortgage Loans and
Underlying Mortgage Loans and, in the case of a premium Class, where the amount
of interest payable with respect to such Class is extremely disproportionate to
principal, a Holder might, in some prepayment scenarios, fail to recoup its
original investment. See "Yield and Prepayment Considerations."
Any changes in the average life of a Security may adversely affect the
yield to Holder of a Security. Prepayments resulting in a shortening of the
average life of any Security may be made at a time of low interest rates when a
Holder may be unable to reinvest the resulting payments of principal on its
Security at a rate comparable to the rate payable on such Securities, while
delays and extension resulting in a lengthening of the weighted average life of
any Security may occur at a time of high interest rates when a Holder may have
been able to reinvest principal payments that would otherwise have been received
by it at higher rates.
Prepayments on the Mortgage Loans and Underlying Mortgage Loans will be
influenced by the prepayment provisions of the related notes and also may be
affected by a variety of economic, demographic, geographic, social, tax, legal
and other factors, including the difference between the interest rates on the
Mortgage Loans and Underlying Mortgage Loans (giving consideration to the cost
of refinancing) and prevailing mortgage rates and the availability of
refinancing. In general, if prevailing interest rates fall significantly below
the interest rates on the Mortgage Loans and Underlying Mortgage Loans, the rate
of prepayment on the Mortgage Loans and Underlying Mortgage Loans (and
particularly on Mortgage Loans and Underlying Mortgage Loans with fixed mortgage
interest rates or with minimum adjustable mortgage interest rates that are
higher than prevailing interest rates) would be expected to increase.
Conversely, if prevailing interest rates rise significantly above the mortgage
interest rates on the Mortgage Loans and Underlying Mortgage Loans, the rate of
prepayment would be expected to decrease. Some of the Mortgage Loans and
Underlying Mortgage Loans have lockout periods or prepayment premiums or
penalties which could be a deterrent to prepayments.
Delays in liquidations of defaulted Mortgage Loans and modifications
extending the maturity of Mortgage Loans will tend to extend the payment of
principal of the Mortgage Loans. If a Mortgage Loan has
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a Balloon Payment due at maturity, the ability of the borrower to make the
Balloon Payment typically will depend upon its ability either to refinance the
loan or to sell the related Mortgaged Property. Thus, there is a risk that a
Mortgage Loan having a Balloon Payment may default at maturity, or that the
Servicer or Special Servicer of such a Mortgage Loan may extend its maturity 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.
Limited Nature of Rating
Any rating assigned to the Securities of a Series by a Rating Agency will
reflect such Rating Agency's assessment solely of the likelihood that Holders of
such Securities will receive payments or distributions, as applicable, required
to be made under the Indenture or Trust Agreement, as the case may be. Such
rating will not constitute an assessment of the likelihood that principal
prepayments on the Mortgage Loans underlying or comprising the Mortgage Assets
will be made by Mortgagors or of the degree to which the rate of such
prepayments might differ from that originally anticipated. Such rating will not
address the possibility that prepayments at higher or lower rates than
anticipated by an investor may cause such investor to experience a lower than
anticipated yield or that investors purchasing a Security at a significant
premium might fail to recoup their initial investment under certain prepayment
scenarios.
The amount of Assets required to be included in the Trust Estate or Trust
Fund for a Series of Securities, including any applicable Credit Support, will
be determined on the basis of criteria established by each Rating Agency rating
such Series. Such criteria are sometimes based upon actuarial analysis of the
behavior of mortgage loans in a larger group. Such analysis is often the basis
upon which each Rating Agency determines the amount of Credit Support required
with respect to each Series of Securities. There can be no assurance that the
historical data supporting such actuarial analysis will accurately reflect
future experience generally nor any assurance that the data derived from a large
pool of mortgages will accurately predict the delinquency, foreclosure or loss
experience of any particular pool of Mortgage Loans. In other cases, such
analysis may be based upon the value of the property underlying the Mortgage
Assets. There can be no assurance that such value will accurately reflect the
future value of the property and, therefore, whether or not the Securities will
be paid in full.
Certain legal aspects of the Mortgage Loans comprising or underlying
Mortgage Assets for a Series will be described in the related Prospectus
Supplement.
Risks Associated With Certain Mortgage Loans and Mortgaged Properties
General
Mortgage Loans made with respect to Multifamily or Commercial Property may
entail risks of loss in the event of delinquency and foreclosure that are
greater than similar risks associated with traditional single-family property.
Multifamily and commercial lending typically involves larger loans to a single
obligor or groups of related obligors than residential one- to four-family
mortgage loans. Many of the Mortgage Loans may be nonrecourse loans or loans for
which recourse may be restricted or unenforceable, as to which, in the event of
an obligor default, recourse may be had only against the specific Multifamily or
Commercial Property and such limited other assets as have been pledged to secure
such Mortgage Loan, and not against the obligor's other assets. See "Certain
Legal Aspects of Mortgage Loans -- Foreclosure -- Anti-Deficiency Legislation."
With respect to those Mortgage Loans that provide for recourse against the
Borrower and its assets generally, there can be no assurance that such recourse
will ensure a recovery in respect of a defaulted Mortgage Loan greater than the
liquidation value of the related Mortgaged Property. The liquidation value of
any Mortgaged Property may be adversely affected by risks generally incident to
interests in real property, including 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
and personal property tax rates and other operating expenses including energy
costs; changes in governmental rules, regulations and fiscal policies, including
environmental legislation; acts of God; and other factors which are beyond the
Master Servicer's or the Special Servicer's, if any, control. Although the
Servicer or the Master Servicer is obligated
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to cause standard hazard insurance to be maintained with respect to each
Mortgage Loan, insurance with respect to extraordinary hazards such as
earthquakes and floods generally is not required to be maintained, and insurance
is not available with respect to many of the other risks listed above. No
assurance can be given that values of any Mortgaged Properties have remained or
will remain at their levels on the respective dates of origination of the
related Mortgage Loans. Moreover, there is no assurance that appreciation of
real estate values generally will limit loss experiences on Commercial
Properties or Multifamily Properties. 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
underlying or comprising the Mortgage Assets for a particular Series 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
the Mortgage Assets for a Series. To the extent that such losses are not covered
by Credit Support, such losses will be borne, at least in part, by the Holders
of one or more Classes of the Securities of the related Series. See "Credit
Support."
Dependence on Operations of Mortgaged Properties
The repayment of loans secured by income producing properties is typically
dependent upon the successful operation of the related real estate project
rather than upon the liquidation value of the underlying real estate. If the net
operating income from the project is reduced (for example, if rental or
occupancy rates decline or real estate and personal property tax rates or other
operating expenses increase), the obligor's ability to repay the loan may be
impaired. Even where the net operating income generated by a Mortgaged Property
is currently sufficient to cover debt service payments on the related Mortgage
Loan, there can be no assurance that this will continue to be the case in the
future. In the case of an adjustable rate Mortgage Loan, an increase in the
Mortgage Interest Rate will increase the debt service and could impair the
Borrower's ability to repay the Mortgage Loan. Net operating income from a real
estate project may be reduced, and the Borrower's ability to repay the loan
impaired, as a result of an increase in vacancy rates for the project, a decline
in rental rates as leases are renewed or entered into with new tenants, an
increase in operating expenses of the project and/or an increase in capital
expenditures needed to maintain the project and make improvements required by
tenants. A number of the Mortgage Loans may be secured by owner-occupied
Mortgaged Properties or Mortgaged Properties leased to a single tenant.
Accordingly, a decline in the financial condition of the obligor 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 with multiple tenants. The performance of a
Mortgage Loan secured by an income-producing property lease by the Mortgagor to
tenants as well as the liquidation value of such Mortgaged Property may be
dependent upon the business operated by such tenants in connection with such
Mortgaged Property, the creditworthiness of such tenants or both; the risks
associated with such Mortgage Loans may be offset by the number of tenants or,
if applicable, a diversity of types of business operated by such tenants.
To the extent specified in the Prospectus Supplement for a Series of
Securities, the Mortgage Loans will be secured by an assignment of leases and
rents pursuant to which the obligor typically assigns its right, title and
interest as landlord under the leases on the related Mortgaged Property and the
income derived therefrom to the lender as further security for the related
Mortgage Loan, while retaining a license to collect rents for so long as there
is no default. In the event the obligor defaults, the license terminates and the
lender is entitled to collect rents. Such assignments are typically not
perfected as security interests prior to actual possession of the cashflows.
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 rents. In addition, if bankruptcy or similar proceedings are
commenced by or in respect of the obligor, the lender's ability to collect rents
may be adversely affected. See "Certain Legal Aspects of Mortgage Loans --
Leases and Rents" and " -- Bankruptcy Laws."
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Obligor Default
If so specified in the related Prospectus Supplement, in order to maximize
recoveries on defaulted Mortgage Loans, the Master Servicer or Special Servicer,
if any, will have considerable flexibility to extend and modify Mortgage Loans
which are in default or as to which a payment default is reasonably foreseeable,
including in particular with respect to Balloon Payments. See "Certain Legal
Aspects of the Mortgage Loans -- Foreclosure -- Anti-Deficiency Legislation."
With respect to those Mortgage Loans that provide for recourse against the
Borrower and its assets generally, there can be no assurance that such recourse
will ensure a recovery in respect of a defaulted Mortgage Loan greater than the
liquidation value of the related Mortgaged Property. In addition, the Master
Servicer or Special Servicer, if any, may receive a workout fee based on
receipts from or proceeds of such Mortgage Loans. While the Master Servicer or
Special Servicer generally will be required to determine that any such extension
or modification is likely to produce a greater recovery on a present value basis
than liquidation, there can be no assurance that such flexibility with respect
to extensions or modifications or payments of a workout fee to the Master
Servicer or Special Servicer will increase the present value of receipts from or
proceeds of Mortgage Loans which are in default or as to which a default is
reasonably foreseeable. To the extent losses on such Mortgage Loans exceed
levels of available Credit Support, the Holders of the Securities of a Series
may experience a loss. See "Servicing of Mortgage Loans -- Maintenance of
Insurance Policies" and "Credit Support."
Mortgage Loans made to partnerships, corporations or other entities may
entail risks of loss from delinquency and foreclosure that are greater than
those of Mortgage Loans made to individuals. The Mortgagor's sophistication and
form of organization may increase the likelihood of protracted litigation or
bankruptcy in default situations.
Foreclosure Considerations
In the event of the foreclosure of a Mortgage Loan, the court may impose
equitable principles to limit the remedies available to the mortgagee. In
particular, a court may alter the specific terms of a Mortgage Loan, may require
that the Mortgage Loan be reinstated or that the payments thereunder be recast,
or may limit the right to foreclose if the default under the Mortgage is not
monetary. In addition, a foreclosure action is subject to the delays and
expenses of litigation if defenses or counter-claims are raised. See "Certain
Legal Aspects of Mortgage Loans -- Foreclosure -- Equitable Limitations on
Enforceability of Certain Provisions."
Because potential buyers may be unwilling to purchase a mortgaged property
at a foreclosure sale due to, among other reasons, redemption rights and a
bankruptcy court's ability to rescind the sale as a fraudulent conveyance, the
lender often will purchase the mortgaged property and thereafter be subject to
the obligations, including those represented by any mortgages senior or prior to
the lien foreclosed, and risks of ownership of the property. See "Certain Legal
Aspects of Mortgage Loans -- Foreclosure -- Public Sale" and " -- Rights of
Redemption."
Leaseholds
Mortgage Loans may be secured by leasehold mortgages that are subject to
the risk that the ground leases creating the leasehold estate could terminate in
the event, among other reasons, of a breach or default of the ground lease by
the ground lessee or of a bankruptcy of the ground lessee or ground lessor. If
the ground lease is terminated, the leasehold mortgagee is subject to the risk
of losing its security. See "Certain Legal Aspects of Mortgage Loans --
Leaseholds."
Subordinate Financing
If a Borrower encumbers a Mortgaged Property with additional liens junior
to the Mortgage Loan, the Mortgage Loan will become subject to the risk that the
existence of junior liens and actions taken by junior lenders could impair the
security available to the senior lender and interfere with or delay the taking
of action by the senior lender. See "Certain Legal Aspects of Mortgage Loans --
Subordinate Financing".
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Bankruptcy Considerations
In the event that the Mortgagor of a Mortgage Loan securing or underlying a
Series of Securities were to become a debtor in a case (a "Bankruptcy Case")
seeking reorganization or other relief under the United States Bankruptcy Code
(the "Bankruptcy Code"), a delay or substantial reduction in payments due under
such Mortgage Loan may occur and the Mortgagor would probably have insufficient
funds to make all required payments on such Mortgage Loan. Such events also
would delay foreclosure on the related Mortgaged Property and delay payment on
the Securities of such Series until the conclusion of such Bankruptcy Case. See
"Certain Legal Aspects of Mortgage Loans -- Foreclosure -- Anti-Deficiency
Legislation" and "-- Bankruptcy Laws."
Enforceability of Due on Sale and Due on Encumbrance Provisions
As specified in the Prospectus Supplement for a Series of Securities, the
Mortgage Loans may contain due-on-sale clauses, which permit the lender to
accelerate the maturity of the related Mortgage Loan if the borrower sells,
transfers or conveys the related Mortgaged Property or its interests in the
Mortgaged Property. Such clauses are generally enforceable subject to certain
exceptions. See "Certain Legal Aspects of Mortgage Loans -- Due on Sale and Due
on Encumbrance."
If specified in the Prospectus Supplement for a Series of Securities, the
Mortgage Loans may include a debt-acceleration clause, which permits the lender
to accelerate the debt upon a monetary or non-monetary default of the borrower.
The courts of all states will enforce clauses providing for acceleration in the
event of a material payment default. The equity courts of any state, however,
may refuse to foreclose 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. See "Certain Legal Aspects of Mortgage Loans --
Due on Sale and Due on Encumbrance."
Environmental Risks
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the costs of
clean-up. In several states, such a lien has priority over the lien of an
existing mortgage against such property. In addition, under the 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 that require remedy at 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 a
prior owner. A lender also risks such liability on foreclosure of the mortgaged
property. The Servicer, the Master Servicer or the Special Servicer, as
applicable, acting on behalf of the Trust Estate or Trust Fund, as applicable,
may not acquire title to a Mortgaged Property underlying a Mortgage Loan or take
over its operation unless (a) the Servicer, the Master Servicer or the Special
Servicer, as applicable, has previously determined, based upon a report prepared
by a person who regularly conducts environmental audits, that (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 in compliance therewith is reasonably likely to produce a greater
recovery on a present value basis than not taking such actions and (ii) there
are no circumstances or conditions present that have resulted in any
contamination or if such circumstances or conditions are present for which such
action could be required, taking such actions with respect to the affected
Mortgaged Property is reasonably likely to produce a greater recovery on a
present value basis than not taking such actions or (b) such other conditions
specified in the Prospectus Supplement have been satisfied. There can be no
assurance, however, as to the ultimate level of protection, if any, afforded by
any such environmental report. See "Certain Legal Aspects of Mortgage Loans --
Environmental Legislation."
Condemnation
The aggregate initial Asset Values of the Mortgage Loans for such Series,
when taken together with any cash deposits, Credit Support or Reinvestment
Income as specified in the related Prospectus Supplement, generally will exceed
the aggregate initial principal amount of the Securities of such Series.
However, in the
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event the United States Government, or a state government, "takes" a Mortgaged
Property relating to any such Mortgage Loans by the exercise of its power of
eminent domain, there can be no assurance that the just compensation therefor,
as determined by a court, will equal or exceed the Asset Value attributable to
such Mortgage Loan or the unpaid principal and accrued interest due on the
Securities of such Series supported thereby, together with any other expenses or
liabilities payable with respect thereto.
Balloon Payments
Certain of the Mortgage Loans as of the Cut-Off Date may not be fully
amortizing over their terms to maturity, and, thus, will have substantial
principal balances ("Balloon Payments") due at their stated maturity. Mortgage
Loans with Balloon Payments involve a greater degree of risk because the ability
of an obligor 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 an obligor to accomplish either of these goals will be affected by a
number of factors, including the level of available mortgage rates at the time
of sale or refinancing, the obligor's equity in the related Mortgaged Property,
the financial condition of the obligor and the operating history of the related
Mortgaged Property, tax laws, prevailing general economic conditions and the
availability of credit for commercial or multifamily, as the case may be, real
estate projects generally.
Delinquent and Non-Performing Mortgage Loans
If so specified in the related Prospectus Supplement, management of REO
Properties or servicing with respect to Mortgage Loans that have become past due
or nonperforming will be transferred to the Special Servicer as of the Closing
Date. Credit Support provided with respect to a particular Series may not cover
all losses related to such delinquent or non-performing Mortgage Loans or to
such REO Properties. Investors should consider the risk that the inclusion of
such Mortgage Loans or such REO Properties in the Mortgage Assets may affect the
rate of defaults and prepayments on such Mortgage Loans and the yield on the
Securities of such Series. See "Assets Securing or Underlying the Securities --
Mortgage Loans."
Limited Number of Mortgage Loans
It is likely that the Assets will consist of only a limited number of
Mortgage Loans that may be to the same Mortgagor. As a result of this lack of
diversity, losses or prepayments on, or modifications of, the Mortgage Loans or
the leases may have a greater effect on yield to the Holders of the Securities
of the related Series than might otherwise be the case had there been a greater
number or degree of diversity in the Mortgage Loans and the Mortgagors
thereunder. See "Yield and Prepayment Considerations."
Credit Support Limitations
The amount, type and nature of insurance policies, subordination, Payment
Guarantee Insurance, letters of credit, overcollateralization, Reserve Funds and
other Credit Support, if any, required with respect to a Series will be
determined on the basis of criteria established by each Rating Agency rating
such Series. Such criteria are sometimes based upon an actuarial analysis of the
behavior of mortgage loans in a larger group. Such analysis is often the basis
upon which each Rating Agency determines the amount of Credit Support required
with respect to each Series of Securities. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately reflect
future experience nor any assurance that the data derived from a large pool of
mortgage loans accurately predicts the delinquency, foreseeable or loss
experience of any particular pool of Mortgage Loans.
In addition, if principal payments on the Securities of a Series are made
in a specified order of priority, any limits with respect to the aggregate
amounts of claims under any related insurance policy, letters of credit or other
Credit Support may be exhausted before the principal of the lower priority
Classes has been repaid. As a result, the impact of significant losses on the
Mortgage Assets may bear primarily upon the Securities of the later maturing
Classes.
The Prospectus Supplement for a Series will describe any Reserve Funds,
insurance policies, letters of credit, subordination, Payment Guarantee
Insurance, overcollateralization or other Credit Support relating to
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the Mortgage Assets or to the Securities of such Series. Use of such Reserve
Funds and payments under such insurance policies, Payment Guarantee Insurance,
letters of credit or other third-party Credit Support will be subject to the
conditions and limitations described herein and in the related Prospectus
Supplement. Moreover, such Reserve Funds, insurance policies, letters of credit
or other Credit Support may not cover all potential losses or risks; for
example, Credit Support may or may not cover fraud or negligence by the Issuer,
the Master Servicer or other parties. Moreover, if a form of Credit Support
covers more than one Series of Securities (each, a "Covered Series"), holders of
Securities issued with respect to any of such Covered Series will be subject to
the risk that such Credit Support will be exhausted by the claims of other
Covered Series prior to such Covered Series receiving any of its intended share
of such coverage. The obligations of the issuers of any Credit Support will not
be guaranteed or insured by the United States, or by any agency or
instrumentality thereof only if so specified in the Prospectus Supplement for a
Series of Securities. A Series of Securities may be secured by or represent an
interest in Mortgage Assets having an Asset Value in excess of the principal
amount of the Securities or Excess Cash Flow may be applied to create
overcollateralization. Alternatively, a Series of Securities may include one or
more Classes of Subordinate Securities to the extent described in the related
Prospectus Supplement. Such overcollateralization will be at amounts established
by the Rating Agency rating the Series based on an assumed level of defaults,
delinquencies, other losses, application of Excess Cash Flow or other factors.
There can, however, be no assurance that the loss experience on the Mortgage
Assets securing or underlying the Securities will not exceed such assumed
levels, adversely affecting the ability of the Issuer to meet debt service or
distribution requirements on the Securities. Although overcollateralization and
subordination are intended to reduce the risk of delinquent payments or losses
to Holders of Senior Securities, the amount of overcollateralization or
subordination, as the case may be, will be limited and will decline under
certain circumstances and any related Reserve Fund could be depleted in certain
circumstances. See "Description of the Securities," "Assets Securing or
Underlying the Securities" and "Credit Support."
Remedies Following Default
The market value of the Mortgage Assets securing or underlying a Series
will fluctuate as general interest rates fluctuate. Following an Event of
Default with respect to a Series of Bonds, there is no assurance that the market
value of the Mortgage Assets securing such Series of Bonds will be equal to or
greater than the unpaid principal and accrued interest due on the Bonds of such
Series, together with any other expenses or liabilities payable thereon. If the
Mortgage Assets securing a Series of Bonds are sold by the Trustee following an
Event of Default, the proceeds of such sale may be insufficient to pay in full
the principal of and interest on such Bonds. However, in certain events the
Trustee may be restricted from selling the Mortgage Assets securing a Series of
Bonds. See "The Indenture -- Events of Default."
In addition, upon an Event of Default with respect to a Series of Bonds and
a resulting sale of the Mortgage Assets securing such Bonds, the proceeds of
such sale typically will be applied first to the payment of certain amounts due
to the Trustee and certain other expenses or reimbursements prior to the
application of such proceeds as specified in the related Prospectus Supplement
the payment of accrued interest on, and the outstanding principal of, such Bonds
(including interest on and the aggregate outstanding principal balance of any
Residual Interest Bond) as specified in the related Prospectus Supplement.
Consequently, in the event of any such Event of Default and sale of Mortgage
Assets, any Classes on which principal payments have previously been made may
have, in the aggregate, a greater proportion of their principal repaid than will
Classes on which principal payments have not previously been made.
In the event the principal of the Securities of a Series is declared due
and payable, the Holders of any such Securities issued at a discount from par
("original issue discount") may be entitled, under applicable provisions of the
federal Bankruptcy Code, to receive no more than an amount equal to the unpaid
principal amount thereof less unamortized original issue discount ("accrued
value"). There is no assurance as to how such accrued value would be determined
if such event occurred.
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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 which 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 Securities of any Series. See
"ERISA Considerations."
Certain Federal Tax Considerations Regarding Residual Interest Bonds and
Residual Interest Certificates
Holders of Residual Interest Bonds and Residual Interest 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 in "Federal Income Tax
Considerations -- Residual Interests in a REMIC." Accordingly, under certain
circumstances, Holders of Securities which constitute Residual Interest Bonds
and Residual Interest Certificates may have taxable income and tax liabilities
arising from such investment during a taxable year in excess of the cash
received during such period. The requirement that Holders of Residual Interest
Bonds and Residual Interest Certificates report their pro rata share of the
taxable income and net loss of the REMIC will continue until the principal
balances of all Classes of Bonds or Certificates of the related Series have been
reduced to zero, even though Holders of Residual Interest Bonds and Residual
Interest Certificates have received full payment of their stated interest and
principal. A portion (or, in certain circumstances, all) of a Holder of a
Residual Interest Bond's or Residual Interest Certificate'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. Individual Holders of Securities constituting Residual Interest
Bonds and Residual Interest Certificates may be limited in their ability to
deduct servicing fees and other expenses of the REMIC. In addition, Residual
Interest Bonds and Residual Interest Certificate are subject to certain
restrictions on transfer. Because of the special tax treatment of residual
interest, the taxable income arising in a given year on a Residual Interest Bond
and Residual Interest Certificate will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pre-tax yield. Therefore, the after-tax
yield on the Residual Interest Bond and Residual Interest Certificate may be
significantly less than that of a corporate bond or stripped instrument having
similar cash flow characteristics.
Book-Entry Registration
If so provided in the Prospectus Supplement of a Series of Securities, one
or more Classes of the Securities will be initially represented by one or more
certificates registered in the name of Cede & Co. ("CEDE"), the nominee for The
Depository Trust Company ("DTC"), and will not be registered in the names of the
Holders of Securities or their nominees. While the Securities are in book-entry
form, a Holder of a Security will be able to exercise the rights of a "Holder"
under the Indenture or Trust Agreement, as applicable, only indirectly through
DTC and its participating organizations. Because transfers and pledges of
Securities in book-entry form can be effected only through book-entries at a
depository through depository participants, the liquidity of the secondary
market for book-entry Securities may be reduced to the extent that some
investors are unwilling to hold Securities in book-entry form in the name of
depository participants and the ability to pledge book-entry Securities may be
limited due to lack of a physical certificate. Beneficial owners of book-entry
Securities may, in certain cases, experience delay in the receipt of payments of
principal and interest since such payments will be forwarded by the Trustee to
the depository who will then forward payment to the depository participants who
will thereafter forward payment to beneficial owners. In the event of the
insolvency of the depository or of a depository participant in whose name
Securities are recorded, the ability of beneficial owners to obtain timely
payment and (if the limits of applicable insurance coverage by the Securities
Investor Protection Corporation are exceeded, or if such coverage is otherwise
unavailable) ultimate payment of principal and interest on book-entry Securities
may be impaired. See "Description of the Securities -- Book-Entry Registration."
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DESCRIPTION OF THE SECURITIES
General
The following summaries describe certain provisions common to each Series.
The summaries do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, the provisions of the Indenture or
Trust Agreement, as applicable, and the Prospectus Supplement relating to each
Series. When particular provisions or terms used in the Indenture or Trust
Agreement are referred to, such provisions or terms shall be as specified in the
Indenture or Trust Agreement.
The Bonds -- General
The Bonds will be issued in Series pursuant to an Indenture between the
Company and a bank or trust company qualified under the TIA and named in the
related Prospectus Supplement for a Series as Trustee, or as Owner Trustee, each
such Indenture as supplemented by or as incorporated by reference by a Series
Supplement with respect to each Series. A copy of the form of Indenture has been
filed with the Commission as an exhibit to the Registration Statement of which
this Prospectus forms a part. A copy of the Series Supplement for a Series, if
any, will be filed with the Commission as an exhibit to a Current Report on Form
8-K to be filed with the Commission within 15 days of issuance of the Bonds of
the related Series.
The Indenture does not limit the amount of Bonds that can be issued
thereunder and provides that any Series may be issued thereunder up to the
aggregate principal amount specified in the related Series Supplement that may
be authorized from time to time by the Issuer. Each Series will consist of one
or more Classes, one or more of which may be Compound Interest Bonds, Variable
Interest Bonds, Retail Bonds, Planned Amortization Class Bonds, Principal Only
Bonds, Interest Only Bonds or Participating Bonds. A Series also may include one
or more Classes of Subordinate Bonds. If so specified in the related Prospectus
Supplement, such Subordinate Bonds may be offered hereby and by the related
Prospectus Supplement.
Each Class of a Series will be issued in registered or bearer form, as
designated in the related Prospectus Supplement for a Series, in the minimum
denominations specified in the related Prospectus Supplement. See "Description
of the Securities -- Bearer Securities and Registered Securities." The Bonds of
each Series will be issued in fully registered certificated or book-entry form
in the minimum denominations for each Class specified in the related Prospectus
Supplement. The Bonds of each Series in certificated form may be transferred or
exchanged at the corporate trust office of the Trustee without the payment of
any service charge, other than any tax or other governmental charge payable in
connection therewith.
One or more Classes of Bonds of a Series ("Book-Entry Bonds") may be issued
in fully registered book-entry form. Such Book-Entry Bonds will be represented
by a single certificate for each Class of such Bonds registered in the name of
the nominee of the depository for such Book-Entry Bonds. The depository for a
Class of Book-Entry Bonds and its nominee will be specified in the related
Prospectus Supplement. Payment and transfer procedures for Book-Entry Bonds will
be specified in the related Prospectus Supplement.
The Paying Agent specified in the Prospectus Supplement for a Series of
Bonds will make payments of principal and interest on the Bonds of such Series
by checks mailed to registered Holders of such Bonds as of the record date set
forth in the related Prospectus Supplement at their addresses appearing on the
books and records of the Issuer, except that (a) distributions may be made by
wire transfer in certain circumstances described in the related Prospectus
Supplement and (b) the final payments in retirement of each Class of Bonds of a
Series in certificated form will be made only upon presentation and surrender of
such Bonds at the office or agency of the Issuer maintained for that purpose.
The Certificates -- General
The Certificates will be issued in Series pursuant to separate Trust
Agreements between the Depositor, the Master Servicer and a bank or trust
company qualified under the TIA (if required) and named in the Prospectus
Supplement for a Series. A form of Trust Agreement has been filed as an exhibit
to the Registration Statement of which this Prospectus forms a part. The Trust
Agreement relating to a Series of
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Certificates will be filed as an exhibit to a report on Form 8-K to be filed
with the Commission within 15 days following the issuance of such Series of
Certificates.
Each Series of Certificates will consist of one or more Classes, one or
more of which may consist of Compound Interest Certificates, Variable Interest
Certificates, Interest Only Certificates, Principal Only Certificates, Residual
Interest Certificates or Planned Amortization Class Certificates. A Series of
Certificates also may include one or more Classes of Subordinate Certificates.
Each Series will be issued in fully registered or bearer form, in the
minimum original amount or notional amount for Certificates of each Class
specified in the related Prospectus Supplement. The transfer of the Certificates
may be registered, and the Certificates may be exchanged, without the payment of
any service charge payable in connection with such registration of transfer or
exchange. If specified in the related Prospectus Supplement, one or more Classes
of a Series may be available in book-entry form only. See "Description of the
Securities -- Bearer Securities and Registered Securities."
Commencing on the date specified in the related Prospectus Supplement,
distributions of principal and interest on the Certificates will be made on each
Distribution Date as set forth in the related Prospectus Supplement.
Distributions of principal and interest on Certificates of a Series in
registered form will be made by check mailed to Certificateholders of such
Series registered as such on the close of business on the record date specified
in the related Prospectus Supplement at their addresses appearing on the
Certificate Register, except that (a) distributions may be made by wire transfer
(at the expense of the Certificateholder requesting payment by wire transfer) in
certain circumstances described in the related Prospectus Supplement and (b) the
final distribution in retirement of a Certificate will be made only upon
presentation and surrender of such Certificate at the corporate trust office of
the Trustee for such Series or such other office of the Trustee as specified in
the Prospectus Supplement. Notice of the final distribution on a Certificate
will be mailed to the Holder of such Certificate before the Distribution Date on
which such final distribution in retirement of the Certificate is expected to be
made.
The Trustee will include with each distribution on a Certificate a
statement showing, among other things, the allocation of such payment to
interest, if any, and principal, if any, and the remaining unpaid principal
amount of a Certificate of each Class having the minimum denomination for
Certificates of such Class of that Series, the amount of Advances made by the
Servicer or Master Servicer, the amount of servicing compensation paid with
respect to the Mortgage Assets, the aggregate principal balance of delinquent
and foreclosed Mortgage Loans and REO Property, the realized losses for the
Mortgage Assets, if applicable, the number and aggregate principal balance of
Deleted and Substitute Mortgage Loans, and on each Distribution Date prior to
the commencement of principal payments on a Class of Compound Interest
Securities, the aggregate unpaid principal amount of each Class of Certificates,
the interest accrued since the prior Distribution Date and added to the
principal of a Compound Interest Certificate having the minimum denomination for
Certificates of such Class and the new principal balance of such Certificate.
See "The Trust Agreement -- Reports to Certificateholders."
Bearer Securities and Registered Securities
Generally, the Securities will be issuable as registered securities without
coupons. If so provided with respect to a Series of Securities, Securities of
such Series will be issuable solely as bearer securities with coupons attached
or as both registered securities and bearer securities. Any such bearer
securities will be issued in accordance with U.S. tax and securities laws then
applicable to the sale of such securities.
Unless applicable law at the time of issuance of any bearer securities
provides otherwise, in connection with the sale during the "restricted period"
as defined in Section 1.163-5(c)(2)(i)(D)(7) of the United States Treasury
Regulations (generally, the first 40 days after the Closing Date and, with
respect to unsold allotments, until sold) no bearer security shall be mailed or
otherwise delivered to any location in the United States (as defined under
"Limitations on Issuance of Bearer Securities"). A bearer security in definitive
form may be delivered only if the person entitled to receive such bearer
security furnishes written certification, in
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the form required by the Indenture or Trust Agreement, as applicable, to the
effect that such bearer security is not owned by or on behalf of a United States
person (as defined under "Limitations on Issuance of Bearer Securities"), or, if
a beneficial person (i) acquired and holds the bearer security through a foreign
branch of a United States financial institution, (ii) is a foreign branch of a
United States financial institution purchasing for its own account or resale
(and in either case (i) or (ii), such financial institution agreed to comply
with the requirements of Section 165(j)(3)(A), (B), or (C) of the Internal
Revenue Code of 1986, as amended, and the regulations thereunder) or (iii) is a
financial institution purchasing for resale during the restricted period only to
non-United States persons outside the United States. See "Limitations on
Issuance of Bearer Securities."
Registered securities of any Series (other than in book-entry form) will be
exchangeable for other registered securities of the same Series and of a like
aggregate principal amount and tenor but of different authorized denominations.
In addition, if specified in the related Prospectus Supplement, if Securities of
any Series are issuable as both registered securities and as bearer securities,
at the option of the Holder, upon request confirmed in writing, and subject to
the terms of the Indenture or Trust Agreement, as the case may be, bearer
securities (with all unmatured coupons, except as provided below, and all
matured coupons in default) of such Series will be exchangeable into registered
securities of the same Series of any authorized denominations and of a like
aggregate principal amount and tenor. Any bearer security surrendered in
exchange for a registered security between the relevant record date and the
relevant date for payment of interest shall be surrendered without the coupon
relating to such date for payment of interest and interest will not be payable
in respect of the registered security issued in exchange for such bearer
security, but will be payable only to the holder of such coupon when due in
accordance with the terms of the Indenture or Trust Agreement, as the case may
be. Bearer securities will not be issued in exchange for registered securities.
If Securities of a Series are issuable as bearer securities, the Issuer will be
required to maintain a transfer agent for such Series outside the United States.
As specified in an applicable Prospectus Supplement, payment or
distribution of principal of and interest on bearer securities will be payable
or distributable, subject to any applicable laws and regulations, at the offices
of such Paying Agents outside the United States as the Issuer may designate from
time to time by check or by wire transfer, at the option of the Holder, to an
account maintained by the payee with a bank located outside the United States.
Payment or distribution of interest on bearer securities on any Payment Date or
Distribution Date, as applicable, will be made only against surrender of the
coupon relating to such Payment Date or Distribution Date. No payment or
distribution of interest on a bearer security will be made unless on the earlier
of the date of the first such payment or distribution by the Paying Agent or the
delivery by the Issuer of the bearer security in definitive form (the
"Certificate Date"), a written certificate in the form and to the effect
described above is provided to the Issuer. No payment or distribution with
respect to any bearer security will be made at any office or agency in the
United States or by check mailed to any address in the United States or by
transfer to an account maintained with a bank located in the United States.
Notwithstanding the foregoing, payment or distribution of principal of and
interest on bearer securities denominated and payable in U.S. dollars will be
made at the office of the Issuer's paying agent in the United States if, and
only if, payment of the full amount thereof in U.S. dollars at all offices or
agencies outside the United States is illegal or effectively precluded by
exchange controls or other similar restrictions.
Book-Entry Registration
If so specified in the Prospectus Supplement for a Series of Securities,
the Securities of such Series will be issued in book-entry form in the minimum
denominations specified in such Prospectus Supplement and integral multiples
thereof, and each Class will be represented by one or more single certificates
registered in the name of the nominee of the depository, DTC. Unless and until
Definitive Securities are issued under the limited circumstances set forth
below, it is anticipated that the only Holder of book-entry Securities will be
Cede & Co., as nominee of DTC. No person acquiring an interest in book-entry
Securities (a "Securities Owner") will be entitled to receive Securities
representing such person's interest in the Securities except in the event that
Definitive Securities are issued.
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DTC is a limited purpose trust company organized under the laws of the
State of New York, 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
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("DTC Participants") and to facilitate the
clearance and settlement of securities transactions through electronic
book-entry changes in accounts of DTC Participants, thereby eliminating the need
for the physical movement of certificates. DTC Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Indirect 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 DTC Participant,
either directly or indirectly ("Indirect DTC Participants").
Securities Owners that are not DTC Participants or Indirect DTC
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, any Class of Securities held through the facilities of DTC
may do so only through DTC Participants and Indirect DTC Participants. In
addition, Securities Owners will receive all payments or distributions of
principal and interest to DTC in same day funds and DTC will forward such
payments to DTC Participants. Each DTC Participant will be responsible for
disbursing such payments or distributions to Indirect DTC Participants or to
Securities Owners. Unless and until Definitive Securities are issued for the
Securities held through the facilities of DTC, it is anticipated that the only
Securities Owner of such Securities will be Cede, as nominee of DTC. Securities
Owners will not be "Holders," "Bondholders" or "Certificateholders" under the
Indenture or Trust Agreement, as applicable, and Securities Owners will be
permitted to exercise the rights of "Holders," "Bondholders" or
"Certificateholders" only indirectly through DTC and DTC Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operation (the "Rules"), DTC is required to make book-entry transfers among
DTC Participants on whose behalf it acts with respect to the Securities held
through the facilities of DTC and is required to receive and transmit payments
or distributions of principal and interest on such Securities. DTC Participants
and Indirect DTC Participants with which Securities Owners have accounts with
respect to such Securities similarly are required to make book-entry transfers
and receive and transmit such payments on behalf of such Securities Owners.
Accordingly, although Securities Owners of the Securities held through the
facilities of DTC will not possess Definitive Bonds, the Rules provide a
mechanism by which such Securities Owners through their DTC Participants or
Indirect DTC Participants will receive payments or distributions and will be
able to transfer their interests.
Because DTC can act only on behalf of DTC Participants and Indirect DTC
Participants, the ability of a Securities Owner to pledge the Securities to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect to such Classes of Securities, may be limited due to the lack
of a certificate for such Securities.
The Issuer understands that DTC will take any action permitted to be taken
with respect to the Securities held through the facilities of DTC by a
Bondholder under the Indenture or Certificateholder under the Trust Agreement,
as applicable, only at the direction of one or more DTC Participants to whose
DTC account such Securities are credited. Additionally, the Issuer understands
that DTC will take such actions with respect to a specified principal amount of
the Securities held through the facilities of DTC only at the direction of and
on behalf of DTC Participants whose holdings include that specified principal
amount of such Securities. DTC may take conflicting actions with respect to
other principal amounts of such Classes of Securities, provided that such
actions are taken on behalf of DTC Participants whose holdings include those
principal amounts of such Classes of Securities.
Following the Closing Date for a Series issued in book-entry form, the
Securities of such Series will be issued in fully registered, certificated form
("Definitive Bonds") to Securities Owners of such Series or their nominees,
rather than to DTC, only if (i) the Issuer advises the Trustee in writing that
DTC is no longer willing or able to properly discharge its responsibilities as
depository with respect to such Classes of Securities, and the Trustee or the
Issuer is unable to locate a qualified successor, (ii) the Issuer, at its sole
option, elects
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to terminate the book-entry system through DTC, or (iii) after the occurrence of
an Event of Default under the Indenture or Trust Agreement, as applicable,
Securities Owners representing a majority in aggregate principal amount of each
of the Classes of Securities then outstanding advise DTC through DTC
Participants in writing that the continuation of a book-entry system through DTC
(or a successor thereto) is no longer in the best interest of the Securities
Owners of such Series.
Upon the occurrence of any of the events described in clauses (i) through
(iii) of the immediately preceding paragraph, DTC is required to notify DTC
Participants of the availability through DTC of Definitive Securities. Upon
surrender by DTC of a certificate representing the respective Classes of
Securities and instructions for re-registration, the Trustee will issue, in
Definitive Securities, the entire outstanding principal amount of such Classes
of Securities. Such Definitive Securities will be issued in the respective
principal amounts owned by individual Securities Owners and thereafter the
Trustee will recognize the Holders of such Definitive Securities as Bondholders
under the Indenture or Certificateholders under the Trust Agreement, as
applicable.
Valuation of Mortgage Assets
If stated in the Prospectus Supplement for a Series of Securities, each
Mortgage Asset securing or underlying a Series of Securities will be assigned an
initial Asset Value determined in the manner and subject to the assumptions
specified in such Prospectus Supplement.
The outstanding Asset Value at any time corresponding to each Mortgage
Asset securing or underlying a Series of Securities will represent the amount of
the Securities of such Series that, based on certain assumptions and
irrespective of the prepayments on such Mortgage Asset, can be supported by the
distributions on such Mortgage Asset, together with (depending on the type of
such Mortgage Asset and the method used to determine its Asset Value) the
Reinvestment Income thereon at the Assumed Reinvestment Rate, to the extent
specified in the Prospectus Supplement, and, if applicable, the cash available
to be withdrawn from any Reserve Fund. The aggregate of the initial Asset Values
of the Mortgage Assets securing or underlying a Series of Securities, together
with any such Reinvestment Income and any such cash, generally will not be less
than the initial aggregate outstanding principal balances of the Securities of
such Series at the date of issuance thereof.
There are a number of alternative means of determining Asset Value of the
Mortgage Assets, including determinations based on the discounted present value
of the remaining scheduled payments on such Mortgage Assets, determinations
based on the relationship between the interest rate borne by such Mortgage
Assets and the Bond Interest Rates or Certificate Interest Rates for the related
Classes of Securities, or based upon the aggregate outstanding principal
balances of the Mortgage Assets. If applicable, the Prospectus Supplement for a
Series will specify the method or methods and summarize the related assumptions
used to determine the Asset Values of the Mortgage Assets for such Series of
Securities.
The Assumed Reinvestment Rate, if any, for a Series will be the rate
acceptable to each Rating Agency rating the Securities of such Series on which
amounts deposited in the Collection Account will be assumed to accrue interest
or a rate insured or guaranteed by means of a surety bond, Guaranteed Investment
Contract or similar arrangement. If the Assumed Reinvestment Rate is insured or
guaranteed, the related Prospectus Supplement will set forth the terms of such
arrangement.
Payments or Distributions of Interest
Each Class of a Series (other than a Class of Principal Only Securities)
will accrue interest at the rate per annum specified, or in the manner
determined and set forth, in the related Prospectus Supplement. Interest on all
Securities which accrue interest, other than Compound Interest Securities, will
be due and payable on the Payment Dates or Distribution Dates, as applicable,
specified in the related Prospectus Supplement. However, failure to pay or
distribute interest on a current basis may not necessarily be an Event of
Default with respect to a particular Series of Securities. Payment or
distribution of interest on a Class of Compound Interest Securities will
commence only following the Accrual Termination Date except under any limited
circumstances specified in the related Prospectus Supplement. Prior to such
time, interest on such
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Class of Compound Interest Securities will accrue and the amount of interest so
accrued will be added to the principal thereof on each Payment Date or
Distribution Date, as applicable. Following the applicable Accrual Termination
Date, interest payments will be made on such Class on the Accreted Value of such
Class. The Accreted Value of a Class of Compound Interest Securities equals the
original principal amount of such Class, plus accrued and unpaid interest added
to such Class through the immediately preceding Payment Date or Distribution
Date, as applicable, less any principal payments or distributions previously
made on that Class and, if specified in the related Prospectus Supplement,
losses allocable thereto. Each payment or distribution of interest on each Class
of Securities (or addition to principal of a Class of Compound Interest
Securities) on a Payment Date or Distribution Date, as applicable, will include
all interest accrued during the related Interest Accrual Period preceding such
Payment Date or Distribution Date, which Interest Accrual Period will end on the
day preceding each such Payment Date or Distribution Date or such earlier date
as may be specified in the related Prospectus Supplement. If the Interest
Accrual Period for a Series ends on a date other than a Payment Date or
Distribution Date, as applicable, for such Series, the yield realized by the
Holders of such Securities may be lower than the yield that would result if the
Interest Accrual Period ended on such Payment Date or Distribution Date.
Additionally, if so specified in the Prospectus Supplement for a Series of
Securities, interest accrued for an Interest Accrual Period for one or more
Classes may be calculated on the assumption that principal payments or
distributions (and additions to principal of the Securities), and allocations of
losses on the Mortgage Assets (if so specified in the related Prospectus
Supplement), are made on the first day of the preceding Interest Accrual Period
and not on the Payment Date or Distribution Date, as applicable, for such
preceding Interest Accrual Period when actually made or added. Such method would
produce a lower effective yield than if interest were calculated on the basis of
the actual principal amount outstanding.
To the extent provided in the Prospectus Supplement for a Series of
Securities, such Series may include one or more Classes of Variable Interest
Securities. The Variable Interest Rate of Variable Interest Securities will be a
variable or adjustable rate based on an index or formula described in the
Prospectus Supplement for such Series, subject to a Maximum Variable Interest
Rate and a Minimum Variable Interest Rate. For each Class of Variable Interest
Securities, the related Prospectus Supplement will set forth the initial Bond
Interest Rate or Certificate Interest Rate, as applicable, (or the method of
determining such rate), the Variable Interest Period and the formula, index or
other method by which the Bond Interest Rate or Certificate Interest Rate, as
applicable, for each Variable Interest Period will be determined.
Interest Only Securities or Interest Weighted Securities may be assigned a
"Notional Amount" which is used solely for convenience in expressing the
calculation of interest and for certain other purposes. The Notional Amount will
be determined at the time of issuance of such Securities and in the manner
specified in the related Prospectus Supplement. Typically, the Notional Amount
is based on the principal balances of other Classes of Securities of such Series
entitled to receive principal or Asset Values of the Mortgage Assets
attributable to the Securities of such Series entitled to receive principal, and
will be adjusted monthly over the life of the Securities based upon adjustments
to the Asset Values or principal balances of such Mortgage Assets or Classes of
Securities, as applicable. Reference to the Notional Amount is solely for
convenience in certain calculations and does not represent the right to receive
any distributions allocable to principal.
If so specified in the Prospectus Supplement for a Series of Securities, if
funds in the Collection Account are insufficient to make required payments or
distributions of interest to Holder of a Security on any Payment Date or
Distribution Date, as applicable, amounts available for payment to the Holder of
a Security of each Class will be allocated pro rata in the proportion in which
the outstanding principal balance of each Security bears to the aggregate
outstanding principal balance of all Securities of such Class, except that
Holders of Subordinate Securities, if any, generally will not receive any
payments or distributions of interest on the Subordinate Securities until
Holders of Senior Securities receive payments of interest due them (in each case
as described in the related Prospectus Supplement).
Payments or Distributions of Principal
On each Payment Date or Distribution Date, as applicable, for a Series of
Securities, the Issuer will make principal payments or distributions to the
Holders of the Securities of such Series on which principal is then due and
payable. Payments or distributions of principal on a Series will be allocated
among Classes of such Series in the order of priority and amounts specified in
the Prospectus Supplement for such Series. All
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payments or distributions of principal with respect to Securities of a Class
will be applied on a pro rata, random lot or other selection basis, as specified
in the related Prospectus Supplement.
The total amount of principal payments or distributions required to be made
on the Securities of any Series on a Payment Date or Distribution Date will be
determined as specified in the related Prospectus Supplement. If the Series of
Securities has a Class of PAC Securities, such PAC Securities will have certain
priorities of payment with respect to principal to the extent of certain
targeted amounts with respect to each Payment Date or Distribution Date, as set
forth in the related Prospectus Supplement. There can be no assurance that the
amount available to make payments or distributions of principal on any Payment
Date or Distribution Date will be sufficient to pay in full the PAC Amount
payable on such Payment Date or Distribution Date. The failure to pay in full
the PAC Amount payable on a Payment Date or Distribution Date will not
constitute an Event of Default under the Indenture or Trust Agreement, as
applicable.
One or more Classes of a Series may consist of Subordinate Bonds or
Subordinate Certificates. Subordinate Bonds or Subordinate Certificates may be
included in a Series to provide credit support as described herein under "Credit
Support" in lieu of or in addition to other forms of Credit Support. The extent
of subordination of a Class of Subordinate Bonds or Subordinate Certificates may
be limited as described in the related Prospectus Supplement. If so specified in
the related Prospectus Supplement for a Series of Securities that includes
Subordinate Securities, on any Payment Date or Distribution Date on which the
principal balance of the Mortgage Assets is reduced due to losses on the
Mortgage Assets, (i) the amount of such losses will be allocated first, to
reduce the principal balance of the Subordinate Securities or other
subordination, if any, and, thereafter, to reduce the principal balance of the
remaining Securities in the priority and manner specified in such Prospectus
Supplement until the aggregate outstanding principal balance of each Class of
Securities so specified has been reduced to zero or paid in full, thus, reducing
the amount of principal payable on each such Class of Securities or (ii) such
losses may be allocated in any other manner set forth in the related Prospectus
Supplement. Such reductions of principal of a Class or Classes of Securities
will be allocated to the Holders of the Securities of such Class or Classes pro
rata in the proportion which the outstanding principal balance of each Security
of such Class or Classes bears to the aggregate outstanding principal balance of
all Securities of such Class or other basis specified in the related Prospectus
Supplement. If the Mortgage Assets are divided into separate Mortgage Groups
securing or underlying separate Classes of a Series, credit support may be
provided by a cross-support feature which requires that payments or
distributions be made to Senior Securities secured by or representing an
interest in one Mortgage Group prior to making payments or distributions on
Subordinate Securities secured by or representing an interest in another
Mortgage Group within the Trust Estate or Trust Fund, as applicable. Subordinate
Securities will be offered hereby and by the related Prospectus Supplement so
long as such Securities are rated in one of the four highest rating categories
by at least one Rating Agency.
Redemption of Bonds
Special Redemption
To the extent specified in the Prospectus Supplement for a Series of Bonds,
Bonds of a Series having other than monthly Payment Dates may be subject to
special redemption ("Special Redemption"), in whole or in part, on a pro rata,
random lot or other selection basis as specified in the related Prospectus
Supplement, on the day of any month specified in such Prospectus Supplement upon
the Issuer's or the Trustee's determination in accordance with certain
assumptions specified in the Indenture relating to such Series that, because of
principal prepayments on the Mortgage Loans included in or underlying the
Mortgage Assets securing such Series of Bonds and the yields then available for
reinvestment, the funds in the Collection Account for such Series of Bonds on
the next succeeding Payment Date would be insufficient to meet the debt service
requirements on the Bonds of such Series on such Payment Date. The amount of any
Special Redemption with respect to a Series of Bonds will be limited to the
amount of principal payments on the Mortgage Assets securing such Series of
Bonds received since the immediately preceding Payment Date or intervening
Special Redemption Date or redemption date that would otherwise be required to
be applied to the payment of principal on the Bonds of such Series on the next
succeeding Payment Date. As a result, no Special Redemption of Bonds of a Series
can shorten the maturity of the Bonds so redeemed by more than the
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period of time between the date on which the Special Redemption occurs and the
next succeeding Payment Date for such Series.
All payments of principal pursuant to any Special Redemption will be made
in the order of priority and in the manner specified in the related Prospectus
Supplement. Notice of any Special Redemption will be mailed by the Issuer or the
Trustee prior to the Special Redemption Date. The Redemption Price for any Bonds
so redeemed will be the percentage of the unpaid principal amount of such Bonds
specified in the related Prospectus Supplement, together with interest accrued
thereon to the date specified in such Prospectus Supplement.
Optional Redemption
The Issuer also may redeem, at its option, or at the option of such other
persons or entities described in the Prospectus Supplement for a Series of
Bonds, in whole or in part, on a pro rata, random lot or other selection basis,
the Bonds of any Class of such Series as specified in the related Prospectus
Supplement prior to their Stated Maturity under the circumstances specified in
the related Prospectus Supplement. Notice of such redemption must be mailed by
the Issuer or the Trustee as specified in the related Prospectus Supplement. The
Redemption Price for any Bond (or portion thereof) so redeemed will be the
percentage of the unpaid principal amount of such Bonds specified in the related
Prospectus Supplement, together with accrued interest thereon as specified in
such Prospectus Supplement. In the case of a REMIC, the Issuer may effect an
optional redemption only if it obtains an opinion of counsel that such
redemption, or any contribution made to the REMIC in connection with such
redemption, will not cause the REMIC to fail to qualify as such or cause the
REMIC to be subject to tax.
Redemption of Retail Bonds
To the extent specified in the Prospectus Supplement for a Series of Bonds,
one or more Classes of Retail Bonds of such Series may be subject to optional
redemption by the Holders of such Retail Bonds or to mandatory redemption by the
Issuer to the extent of funds available in the Collection Account for such
redemptions as described in such Prospectus Supplement. Any such optional or
mandatory redemption with respect to a Class of Retail Bonds will be described
in the related Prospectus Supplement and will be on such terms and conditions as
described therein and specified in the Indenture for such Series of Bonds.
Other Redemptions
In the event that the initial aggregate Asset Value of the Mortgage Assets
delivered to the Trustee on the Closing Date is less than the original aggregate
outstanding principal amount of the related Series, the Issuer will deposit cash
or Eligible Investments on an interim basis with the Trustee on such Closing
Date in lieu of the undelivered Mortgage Assets. If Mortgage Assets are not
subsequently delivered within 90 days of issuance of the Bonds, the amount of
such deposit corresponding to principal may be used to pay a corresponding
amount of principal of the Bonds to the extent set forth, and on the Payment
Dates specified, in the related Prospectus Supplement.
To the extent described in the Prospectus Supplement for a Series of Bonds,
Bonds of a Series may be subject to a required redemption in whole or in part
following certain defaults under a Credit Support Agreement and, in certain
other events, at the Redemption Price.
Termination or Repurchase Respecting Certificates
Optional Termination
If so specified in the Prospectus Supplement for a Series of Certificates,
the Depositor, the Servicer or another entity designated in the related
Prospectus Supplement may, at its option, cause an early termination of the
Trust Fund for such Series by repurchasing all of the Mortgage Assets from such
Trust Fund on or after a date specified in the related Prospectus Supplement, or
on or after such time as the aggregate outstanding principal amount of the
Certificates of such Series is less than a specified percentage of their initial
aggregate
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principal amount. In the case of a Trust Fund for which a REMIC election has
been made, such an optional termination may be effected only if the Trustee
receives a satisfactory opinion of counsel that the repurchase price will not
jeopardize the status of the REMIC and that the optional termination will be
conducted so as to constitute a "qualified liquidation" under section 860F of
the Code. See "The Trust Agreement -- Termination."
Optional Repurchase
If so specified in the Prospectus Supplement for a Series of Certificates,
one or more Classes of the Certificates of such Series may be repurchased, in
whole or in part, at the option of the Depositor, at such times and under the
circumstances specified in such Prospectus Supplement. Notice of any such
repurchase must be given by the Trustee prior to the optional repurchase date,
as specified in the related Prospectus Supplement. The repurchase price for any
Certificate so repurchased will be set forth in the related Prospectus
Supplement.
Other Repurchases
If so specified in the Prospectus Supplement for a Series of Certificates,
any Class of the Certificates of such Series may be subject to repurchase at the
request of the Holders of such Class or to mandatory repurchase by the
Depositor. Any such repurchase at the request of Holders or mandatory repurchase
with respect to a Class of a Series of the Certificates will be described in the
related Prospectus Supplement and will be on such terms and conditions as
described therein.
YIELD AND PREPAYMENT CONSIDERATIONS
General
The yield on any Security will depend on the price paid by the investor,
the Pass-Through or Bond Interest Rate of the Security, the receipt and timing
of receipt of distributions on the Security and the weighted average life of the
Mortgage Assets in the related Trust Estate or Trust Fund, as applicable. See
"Special Considerations -- Yield and Prepayment Consideration".
Timing of Payment or Distribution of Interest
Each payment or distribution of interest on the Securities (or addition to
principal of a Class of Compound Interest Securities) on a Payment Date or
Distribution Date, as applicable, will include all interest accrued during the
period specified in the related Prospectus Supplement preceding such Payment
Date or Distribution Date. If the Interest Accrual Period for a Series ends on a
date other than a Payment Date or Distribution Date for such Series, the yield
realized by the Holders of such Securities may be lower than the yield that
would result if the Interest Accrual Period ended on such Payment Date or
Distribution Date. Additionally, if so specified in the related Prospectus
Supplement, interest accrued for an Interest Accrual Period for one or more
Classes may be calculated on the assumption that principal payments or
distributions (and additions to principal of the Securities) and allocations of
losses on the Mortgage Assets are made on the first day of the preceding
Interest Accrual Period and not on the Payment Date or Distribution Date with
respect to such preceding Interest Accrual Period. Such method would produce a
lower effective yield than if interest were calculated on the basis of the
actual principal amount outstanding during such Interest Accrual Period.
Principal Prepayments
The yield to maturity, Stated Maturity or final distribution, as
applicable, on the Securities will be affected by the rate of principal payments
on the Mortgage Assets (including principal prepayments resulting from both
voluntary prepayments by the Mortgagors and involuntary liquidations). The rate
at which principal prepayments occur on the Mortgage Loans underlying or
comprising the Mortgage Assets will be affected by a variety of factors,
including, without limitation, the terms of the Mortgage Loans, the level of
prevailing
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interest rates, the availability of mortgage credit and economic, tax, legal and
other factors. The rate of principal payments or distributions on the Securities
will correspond to the rate of principal payments on the Mortgage Assets.
Principal prepayments on the Mortgage Assets are likely to be affected by the
existence of provisions prohibiting prepayment of a Mortgage Loan underlying or
comprising the Mortgage Assets for a defined period of time (a "Lock-Out
Period") or provisions requiring the payment of a prepayment premium in the
event of a prepayment (a "Yield Maintenance Payment"), and by the extent to
which the Servicer is able to enforce such provisions. Mortgage Loans with a
Lock-Out Period or a Yield Maintenance Payment, to the extent enforceable,
generally would be expected to experience a lower rate of principal prepayments
than otherwise identical Mortgage Loans without such provisions, with shorter
LockOut Periods or with lower Yield Maintenance Payments.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity, Stated Maturity or final distribution based on an
assumed rate of payments or distributions of principal that is faster than that
actually experienced on the Mortgage Loans underlying or comprising the Mortgage
Assets securing or underlying the related Series of Securities, the actual yield
to maturity or final distribution will be lower than that so calculated.
Conversely, if the purchaser of a Security offered at a premium calculates its
anticipated yield to maturity or final distribution based on an assumed rate of
distributions of principal that is slower than that actually experienced on the
Mortgage Loans underlying or comprising the Mortgage Assets securing or
underlying the related Series of Securities, the actual yield to maturity or
final distribution will be lower than that so calculated. In either case, if so
provided in the Prospectus Supplement for a Series, the effect on yield on one
or more Classes of Securities of such Series of prepayments of the Mortgage
Assets in the related Trust Estate or Trust Fund, as applicable, may be
mitigated or exacerbated by any provisions for sequential or selective payment
or distribution of principal to such Classes.
The timing of changes in the rate of principal prepayments on the Mortgage
Loans may significantly affect an investor's actual yield to maturity, even if
the average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal prepayment is received on the
Mortgage Loans and paid on an investor's Security, the greater the effect on
such investor's yield to maturity, Stated Maturity, or final distribution. The
effect on an investor's yield of principal payments or distributions occurring
at a rate higher (or lower) than the rate anticipated by the investor during a
given period may not be offset by a subsequent like decrease (or increase) in
the rate of principal payments or distributions.
Prepayments -- Maturity and Weighted Average Life
The Stated Maturity or Final Scheduled Distribution Date for a Class of
Securities is the date specified in the related Prospectus Supplement,
calculated on the basis of the assumptions applicable to such Series set forth
therein, no later than which the entire aggregate outstanding principal thereof
will be fully paid or reduced to zero.
The rate of return on reinvestment of distributions of principal and
interest on the Mortgage Assets securing or underlying a Series, the rates at
which principal payments are received on such Mortgage Assets and the rate at
which payments are made from any Reserve Fund or other Credit Support for such
Series may affect the ultimate maturity of each Class of such Series.
Prepayments on the Mortgage Assets will accelerate the rate at which principal
is paid or distributed on the Securities. High reinvestment rates tend to
increase the amount of Reinvestment Income, which, to the extent applied to
principal payments or distributions on the Securities, will accelerate principal
payments or distributions on such Securities.
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a Security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of the
Securities of a Series will be influenced by the rate at which principal on the
Mortgage Loans comprising or underlying the Mortgage Assets securing or
underlying such Series of Securities is paid, which may be in the form of
scheduled amortization or prepayments (for this purpose, the term "prepayment"
includes prepayments, in whole or in part, and liquidations due to default).
The rate of principal prepayments on pools of mortgages is influenced by a
variety of economic, demographic, geographic, tax, legal and other factors. The
rate of prepayments of housing loans has fluctuated
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significantly in recent years. In general, however, if prevailing interest rates
fall significantly below the interest rates on the Mortgage Loans comprising or
underlying the Mortgage Assets securing or underlying a Series of Securities,
such Mortgage Loans are likely to be the subject of higher principal prepayments
than if prevailing rates remain at or above the rates borne by such Mortgage
Loans. Certain Mortgage Assets may be backed by Mortgage Loans with different
interest rates and the stated pass-through or pay-through interest rate of
certain Mortgage Assets may be a number of percentage points less than the
Underlying Mortgage Loans. In addition, the weighted average life of the
Securities may be affected by the varying maturities of the Mortgage Loans
comprising or underlying the Mortgage Assets. If any Mortgage Loans comprising
or underlying the Mortgage Assets for a Series have actual terms to maturity of
less than those assumed in calculating Stated Maturity or the Final Scheduled
Distribution Date, one or more Classes of the Series may be fully paid prior to
their respective Stated Maturities or the Final Scheduled Distribution Dates,
even in the absence of prepayment and a reinvestment return higher than the
Assumed Reinvestment Rate, if any. Accordingly, the prepayment experience of the
Mortgage Assets will, to some extent, be a function of the mix of interest rates
and maturities of the Mortgage Loans comprising or underlying such Mortgage
Assets. See "Assets Securing or Underlying the Securities."
Prepayments on mortgage 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,
each as described below. CPR represents a constant assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of loans
for the life of such loans. SPA represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of loans. 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 pool of loans, including the Mortgage
Loans underlying or comprising the Mortgage Assets. Thus, it is likely the
prepayment of any Mortgage Loans comprising or underlying the Mortgage Assets
for any Series will not conform to any particular level of CPR or SPA.
The Issuer is not aware of any publicly available statistics that set forth
prepayment experience or prepayment forecasts of commercial or multifamily
mortgage loans over an extended period of time.
Except with respect to Interest Only Securities, the Prospectus Supplement
may contain tables setting forth the projected weighted average life of each
Class of such Series and the percentage of the original principal amount of each
Class of such Series that would be outstanding on specified Payment Dates or
Distribution Dates, as applicable, for such Series based on the assumptions
stated in such Prospectus Supplement, including assumptions that prepayments on
the Mortgage Loans comprising or underlying the related Mortgage Assets are made
at rates corresponding to various percentages of CPR, SPA or at such other rates
specified in such Prospectus Supplement. Such tables and assumptions are
intended to illustrate the sensitivity of weighted average life of the
Securities to various prepayment rates and will not be intended to predict or to
provide information which will enable investors to predict the actual weighted
average life of the Securities or prepayment rates of the Mortgage Loans
comprising or underlying the related Mortgage Assets. It is unlikely that
prepayment of any Mortgage Loans comprising or underlying the Mortgage Assets
for any Series will conform to any particular level of CPR, SPA or any other
rate specified in the related Prospectus Supplement.
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Other Factors Affecting Weighted Average Life
Type of Mortgage Loan
Mortgage Loans comprising or underlying the Mortgage Assets may consist of
ARMs. The rate of principal prepayments with respect to ARMs has fluctuated in
recent years. ARMs may be subject to a greater rate of principal prepayments in
a declining interest rate environment. For example, if prevailing interest rates
fall significantly below the then current mortgage interest rates on the
Mortgage Loans, the rate of prepayment on the Mortgage Loans would be expected
to increase. Conversely, if prevailing interest rates rise significantly above
the then current mortgage interest rates on the Mortgage Loans, the rate of
prepayment on the Mortgage Loans would be expected to decrease. No assurances
can be given as to the rate of prepayments on the Mortgage Loans in stable or
changing interest rate environments.
A number of Mortgage Loans may have Balloon Payments due at maturity, and
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 Mortgaged
Property, there is a risk that a number of Mortgage Loans having Balloon
Payments may default at maturity, or that the Servicer, the Master Servicer or
the Special Servicer, if any, may extend the maturity of such a Mortgage Loan 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 Servicer, the Master Servicer or the Special
Servicer, if any, may, to the extent and under the circumstances set forth in
the related Prospectus Supplement, be given considerable flexibility to modify
Mortgage Loans which are in default or as to which a default is reasonably
foreseeable. Any defaulted Balloon Payment or modification which extends the
maturity of a Mortgage Loan will tend to extend the weighted average life of the
Securities thereby lengthening the period of time elapsed from the date of
issuance of a Security until each dollar of principal will be repaid to the
investor.
Foreclosure and Payment Plans
The number of foreclosures and the principal amount of the Mortgage Loans
comprising or underlying the Mortgage Assets which are foreclosed in relation to
the number of Mortgage Loans which are repaid in accordance with their terms
will affect the weighted average life of the Mortgage Loans comprising or
underlying the Mortgage Assets and that of the related Series of Securities.
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, also may have an impact upon the
payment patterns of particular Mortgage Loans. The return to Holders of
Securities may be adversely affected by servicing policies and decisions
relating to foreclosures.
Due on Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the related
Prospectus Supplement. A number of the Mortgage Loans comprising or underlying
the Mortgage Assets may include "due-on-sale" clauses which allow the holder of
the Mortgage Loans to demand payment in full of the remaining principal balance
of the Mortgage Loans upon sale or certain other transfers of the underlying
Mortgaged Property. The Prospectus Supplement for a Series will specify whether
the Servicer of Mortgage Loans comprising or underlying Mortgage Assets securing
such Series will exercise its right to enforce any "due-on-sale" clause
applicable to the related Mortgage Loan in the event the new mortgagor satisfies
the applicable underwriting criteria for similar loans serviced by the Servicer.
The Servicer will not enforce such clause to the extent enforcement would be
unlawful or would prejudice recovery under any applicable Insurance Policy. If
the Servicer determines not to enforce such "due-on-sale" clause, it will enter
into an assumption and modification agreement with the person to whom the
Mortgaged Property is to be conveyed. FHA Loans are not permitted to contain
"due-on-sale" clauses and are freely assumable by qualified persons.
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Single Mortgage Loan or Single Obligor
The Mortgage Assets securing or underlying a Series may consist of a single
Mortgage Loan or obligations of a single obligor or related obligors as
specified in the related Prospectus Supplement. Assumptions used with respect to
the prepayment standards or models based upon analysis of the behavior of
mortgage loans in a larger group will not necessarily be relevant in determining
prepayment experience on a single Mortgage Loan or with respect to a single
obligor.
ASSETS SECURING OR UNDERLYING THE SECURITIES
General
Each Series of Bonds will be secured by a pledge by the Issuer to the
Trustee of all right, title and interest of the Issuer in the Assets for such
Series, and each Series of Certificates will represent a beneficial interest in
a Trust Fund comprised of Assets and other assets transferred to the Trustee by
the Depositor. The Assets may include (i) Mortgage Assets and payments thereon,
(ii) Reserve Funds, insurance policies, letters of credit, guarantees or other
credit support described herein and in the related Prospectus Supplement
("Credit Support"), (iii) currency or interest rate exchange agreements and
other financial assets, or any combination thereof (collectively "Cash Flow
Agreements"), (iv) an assignment of leases and rents, if any, (v) Reinvestment
Income, if any, on moneys deposited in any Series Account, (vi) Servicing
Agreements, if any, related to the Mortgage Loans of such Series, and (i) other
funds, instruments or securities specified as Assets in the related Prospectus
Supplement.
To the extent specified in the related Prospectus Supplement, certain
amounts ("Retained Interests") received by the Trustee or the Servicer with
respect to a Mortgage Asset securing or underlying a Series may not be pledged
as security or deposited into the Trust Fund for such Series, as the case may
be, but will be payable to the seller of such Mortgage Asset or to a Servicer
free and clear of the lien of the Indenture or interest granted under the
Indenture or Trust Agreement, as applicable.
Mortgage Assets for a Series will consist of any combination of the
following as specified in the related Prospectus Supplement: (i) mortgage loans
secured by first or junior liens on commercial real estate properties,
multifamily residential properties, cooperatively owned multifamily properties
and/or mixed residential/commercial properties, including participation
interests therein, installment contracts for the sale of such types of
properties ("Installment Contracts") and mortgage loans insured by the Federal
Housing Administration ("FHA Loans") (collectively, "Mortgage Loans") and (ii)
certain other types of mortgage assets, including mortgage participation or
pass-through certificates or collateralized mortgage obligations ("Mortgage
Certificates"). As used herein, "Mortgage Loans" refers to both whole Mortgage
Loans and Mortgage Loans underlying Mortgage Certificates. Mortgage Loans for a
Series may be purchased by the Issuer directly or through an affiliate in the
open market or in private negotiated transactions.
In addition, the Mortgage Assets securing a Series of Bonds may include
Mortgage Assets either owned by the Issuer or owned by limited purpose finance
companies (the "Finance Companies") affiliated with builders, thrifts,
commercial banks, mortgage bankers or other entities involved in mortgage
finance and pledged to secure such Series of Bonds by such Finance Companies
pursuant to funding agreements with respect to such Series of Bonds (the
"Funding Agreements") between the Issuer and each Finance Company participating
in such Series of Bonds. The Issuer will assign to the Trustee all of its right,
title and interest in the Mortgage Assets and other Assets and all proceeds
thereof owned by it or pledged under the Funding Agreements (except for its
right to receive certain fees and reimbursement for certain expenses and its
right to indemnification) as security for such Series of Bonds as described
herein and in the related Prospectus Supplement.
Scheduled distributions of principal of and interest on the Mortgage Assets
pledged to secure a Series or deposited into the Trust Fund for a Series, as the
case may be, the amounts available to be withdrawn from any related Reserve
Fund, the amount of cash, if any, initially deposited in the related Collection
Account and any other Mortgage Assets pledged to secure such Series or deposited
into the Trust Fund for such Series, as
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the case may be, together with the Reinvestment Income thereon at the Assumed
Reinvestment Rate, if any, are expected to be sufficient irrespective of the
rate of prepayments on the Mortgage Assets to make required payments or
distributions of interest on the Securities of such Series and to retire each
Class of such Series not later than its Stated Maturity or Final Scheduled
Distribution Date, as applicable. See "Yield and Prepayment Considerations." The
Mortgage Assets for a Series will equally and ratably secure each Class of such
Series, or will represent beneficial interest in the Trust Fund, as the case may
be, without priority of one Class over the other (subject to any subordination
or Subordinate Securities of a Series as set forth in the related Prospectus
Supplement), and the Mortgage Assets securing a Series, or comprising the Trust
Fund for a Series, will serve as Mortgage Assets only for that Series.
Mortgage Loans
The characteristics of the Mortgage Loans comprising or underlying the
Mortgage Assets may affect the rate of prepayment of Securities and the risk
of delinquencies, foreclosure and losses. See "Special Considerations" and
"Yield and Prepayment Considerations."
The Mortgage Loans will be secured by liens on, or security interests in,
Mortgaged Properties consisting of (i) residential properties consisting of five
or more rental or cooperatively-owned dwelling units in high-rise, mid-rise or
garden apartment buildings ("Multifamily Properties" and the related loans,
"Multifamily Loans") or (ii) office buildings, retail stores, hotels or motels,
nursing homes, hospitals or other health care-related facilities, mobile home
parks, warehouse facilities, mini-warehouse facilities or self-storage
facilities, industrial plants, mixed use or other types of commercial properties
("Commercial Properties" and the related loans, "Commercial Loans"). Multifamily
Property may include mixed commercial and residential structures and may include
apartment buildings owned by private cooperative housing corporations
("Cooperatives"). The Mortgaged Properties may include leasehold interests on
properties, the title to which is held by third party lessors. The term of any
such leasehold will exceed the term of the mortgage note by at least two years.
Each Mortgage Loan will have been originated by a person (the "Originator")
other than the Issuer or Depositor. The Mortgage Loans will be evidenced by
promissory notes (the "Mortgage Notes") secured by mortgages or deeds of trust
(the "Mortgages") creating a lien on the Mortgaged Properties or by installment
contracts for the sale of Mortgage Properties ("Installment Contracts"). The
Prospectus Supplement for a Series of Securities will specify the priority of
such Mortgages. Mortgage Loans will generally also be secured by an assignment
of leases and rents and/or operating of other cash flow guarantees relating to
the Mortgage Loans.
Default and Loss Considerations with Respect to the Mortgage Loans
Mortgage Loans secured by Commercial and Multifamily Properties are
markedly different from owner-occupied single-family home mortgage loans. The
repayment of loans secured by Commercial or Multifamily Properties is typically
dependent upon the successful operation of such property rather than upon the
liquidation value of the real estate. The Prospectus Supplement for a Series of
Securities will specify whether the Mortgage Loans will be non-recourse loans,
which means that, absent special facts, the mortgagee may look only to the Net
Operating Income from the property for repayment of the mortgage debt, and not
to any other of the mortgagor's assets, in the event of the mortgagor's default.
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. The "Debt Service Coverage Ratio" of a Mortgage Loan at any given time
is the ratio of the Net Operating Income for a twelve-month period to the
annualized scheduled payments on the Mortgage Loan. "Net Operating Income" will
be defined in the Prospectus Supplement for a Series of Securities. Net
Operating Income typically represents the total operating revenues derived from
a Mortgaged Property during a given period, minus the total operating expenses
incurred in respect of such Mortgaged Property during such period other than
certain items such as depreciation and amortization, capital expenditures and
debt service on loans secured by the Mortgaged Property. The Net Operating
Income of a Mortgaged Property will fluctuate over time and may be sufficient or
insufficient to cover debt service on the related Mortgage Loan at any given
time.
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As the primary component of Net Operating Income, rental income (and
maintenance payments from tenant-stockholders of a Cooperative) is subject to
the vagaries of the applicable real estate market and/or business climate.
Properties typically leased, occupied or used on a short-term basis, such as
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 leased, occupied or used for longer
periods, such as (typically) warehouses, retail stores, office buildings and
industrial plants. Commercial Loans may be secured by owner-occupied Mortgaged
Properties or Mortgaged Properties leased to a single tenant. Accordingly, a
decline in the financial condition of the mortgagor 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 with multiple tenants.
Changes in the expense components of Net Operating Income due to the
general economic climate or economic condition in a locality or industry
segment, such as increases in interest rates, real estate and personal property
tax rates and other operating expenses including energy costs; changes in
governmental rules, regulations and fiscal policies, including environmental
legislation; and acts of God also may affect the risk of default on the related
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 mortgagor, is responsible for payment of certain of these expenses
("Net Leases"); however, because leases are subject to default risks as well
when a tenant's income is insufficient to cover its rent and operating expenses,
the existence of such "net of expense" provisions will only temper, not
eliminate, the impact of expense increases on the performance of the related
Mortgage Loans.
While the duration of leases and the existence of any "net of expense"
provisions are often viewed as the primary considerations in evaluating the
credit risk of mortgage loans secured by certain income-producing properties,
such risk may be affected equally or to a greater extent by changes in
governmental regulation of the operator of the property. Examples of the latter
include mortgage loans secured by health care-related facilities and hospitals,
the income from which and the operating expenses of which are subject to state
and/or federal regulations, such as Medicare and Medicaid, and multifamily
properties and mobile home parks, which may be subject to state or local rent
control regulation and, in certain cases, restrictions on changes in use of the
property. Low- and moderate-income housing may be particularly subject to legal
limitations and regulations but, because of such regulations, also may be less
sensitive to fluctuations in market rents generally.
The liquidation value of any Mortgaged Property may be adversely affected
by risks generally incident to interests in real property, including declines in
rental or occupancy rates. Lenders generally use the Loan-to-Value Ratio of a
mortgage loan as a measure of risk of loss if a property must be liquidated upon
a default by the mortgagor. The "Loan-to-Value Ratio" of a Mortgage Loan at any
given time is the ratio (expressed as a percentage) of the then outstanding
principal balance of the Mortgage Loan to the Value of the related Mortgaged
Property. The "Value" of a Mortgaged Property, other than with respect to
Refinance Loans, is generally the lesser of (a) the appraised value determined
in an appraisal obtained by the originator at origination of such loan and (b)
the sales price for such property. Refinance Loans are loans made to refinance
existing loans. The Value of the Mortgaged Property securing a Refinance Loan is
the appraised value thereof determined in an appraisal obtained at the time of
origination of the Refinance Loan. The Value of a Mortgaged Property as of the
date of initial issuance of the related Series of Securities may be less than
the value at origination and will fluctuate from time to time based upon changes
in economic conditions.
Appraised values of income-producing properties may be 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 presents analytical challenges. 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 create significantly different results, or
where a high Loan-to-Value Ratio
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accompanies a high Debt Service Coverage Ratio (or vice versa), the analysis of
default and loss risks is even more difficult.
The related Prospectus Supplement for each Series will provide information
with respect to the Mortgage Assets as of the Cut-Off Date, including, among
other things, (a) the aggregate unpaid principal balance of the Mortgage Loans
comprising the Mortgage Assets; (b) the weighted average Mortgage Rate on the
Mortgage Loans, and, in the case of adjustable Mortgage Rates, the weighted
average of the current adjustable Mortgage Rates, the minimum and maximum
permitted adjustable Mortgage Rates, if any, and the weighted average thereof;
(c) the average outstanding principal balance of the Mortgage Loans; (d) the
weighted average remaining scheduled term to maturity of the Mortgage Loans and
the range of remaining scheduled terms to maturity; (e) the range of
Loan-to-Value Ratios of the Mortgage Loans; (f) the relative percentage (by
principal balance as of the Cut-Off Date) of Mortgage Loans that are ARMs, fixed
interest rate, FHA Loans or other types of Mortgage Loans; (g) any Credit
Support relating to the Mortgage Assets; (h) the relative percentage (by
principal balance as of the Cut-Off Date) of Mortgage Loans that are secured by
Multifamily Properties and Commercial Property; (i) the geographic dispersion of
Mortgaged Properties securing the Mortgage Loans; and (j) the use or type of
each Mortgaged Property securing the Mortgage Loans. The Prospectus Supplement
for a Series of Securities also will specify other characteristics of Mortgage
Loans which may be included in the Mortgage Assets for a Series. If Mortgage
Certificates representing ownership interests in multiple mortgage pools
constitute Mortgage Assets for a Series, the Prospectus Supplement will set
forth, to the extent available, the above-specified information on an aggregate
basis for the respective mortgage pools. If specific information respecting the
Mortgage Loans is not known to the Issuer at the time the related Series is
initially offered, more general information of the nature described above will
be provided in the Prospectus Supplement, and final specific information will be
set forth in a Current Report on Form 8-K to be available to investors on the
date of issuance of the Series and to be filed with the Commission within 15
days after the initial issuance of such Series.
Payment Provisions of the Mortgage Loans
The Mortgage Loans are expected to (i) have individual principal balances
at origination of not less than $25,000, (ii) have original terms to maturity of
not more than 40 years and (iii) provide for payments of principal, interest or
both, on due dates that occur monthly, quarterly or semi-annually or at such
other interval as is specified in the related Prospectus Supplement. Each
Mortgage Loan may provide for an accrual of interest or for accrual of interest
thereon at an interest rate (a "Mortgage Rate") that is fixed over its terms or
that adjusts from time to time, or that may be converted from an adjustable to a
fixed Mortgage Rate, or from a fixed to an adjustable Mortgage Rate, from time
to time at the mortgagor's election, in each case as described in the related
Prospectus Supplement. Each Mortgage Loan may provide for scheduled payments to
maturity or payments that adjust from time to time to accommodate changes in the
Mortgage Rate or to reflect the occurrence of certain events, and may provide
for negative amortization or accelerated amortization, in each case as described
in the related Prospectus Supplement. Each Mortgage Loan may be fully amortizing
or require a Balloon Payment due on its stated maturity date, in each case as
described in the related Prospectus Supplement. Each Mortgage Loan may contain
prohibitions on prepayment (a "Lock-Out Period" and the date of expiration
thereof, a "Lock-Out Date") or require payment of a premium or a yield
maintenance penalty (a "Prepayment Premium") in connection with a prepayment, in
each case as described in the related Prospectus Supplement. In the event that
Holders of any Class or Class of Securities will be entitled to all or a portion
of any Prepayment Premiums collected in respect of Mortgage Loans, the related
Prospectus Supplement will specify the method or methods by which any such
amounts will be allocated. A Mortgage Loan also may contain provisions entitling
the mortgagee to a share of profits realized from the operation or disposition
of the Mortgaged Property ("Equity Participations"), as described in the related
Prospectus Supplement. In the event that Holders of any Class or Classes of
Securities will be entitled to all or a portion of an Equity Participation, the
related Prospectus Supplement will specify the terms and provisions of the
Equity Participation and the method or methods by which distributions in respect
thereof will be allocated among such Securities.
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If so specified in the related Prospectus Supplement, the terms of a
Mortgage Loan may provide that upon the sale of the Mortgaged Property, the
obligor may, in lieu of the payment in full of the amount of principal and
interest then outstanding or accrued on the related Mortgage Loan, irrevocably
deposit cash or other specified obligations into an account with the Trustee in
an amount which, together with interest thereon, will be sufficient to make
timely payments or distributions of principal and interest on the Mortgage Loan
and, therefore, on the Securities according to their terms.
Mortgage Underwriting Standards and Procedures
The underwriting procedures and standards for Mortgage Loans comprising or
underlying the Mortgage Assets will be specified in the related Prospectus
Supplement to the extent such procedures and standards are known or available.
Such Mortgage Loans may be originated in contemplation of the transactions
contemplated by this Prospectus and the related Prospectus Supplement. If stated
in the related Prospectus Supplement, the originator of the Mortgage Loans (or
another entity specified in the related Prospectus Supplement) will make
representations and warranties concerning compliance with such underwriting
procedures and standards.
Underwriting procedures typically evaluate, among other things, the income
derived from the Mortgaged Property, the capabilities of the management of the
project, including a review of management's past performance record, its
management reporting and control procedures (to determine its ability to
recognize and respond to problems) and its accounting procedures to determine
cash management ability, the obligor's credit standing and repayment ability and
the value and adequacy of the Mortgaged Property as collateral. FHA Loans will
have been originated by mortgage lenders which are approved by HUD as an FHA
mortgagee in the ordinary course of their real estate lending activities and
will comply with the underwriting policies of FHA.
The adequacy of a Mortgaged Property as security for repayment will
generally have been determined by appraisal by appraisers selected in accordance
with preestablished guidelines established by or acceptable to the loan
originator. The appraiser typically personally inspects the property and
verifies that it was in good condition and that construction, if new, has been
completed. The applicable Prospectus Supplement will specify whether the
appraisal is based upon a cash flow analysis or a market data analysis of recent
sales of comparable properties or a replacement cost analysis based on the
current cost of constructing or purchasing a similar property.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. Further, there is no assurance that appreciation of real
estate values generally will limit loss experiences on Commercial Property or on
non-traditional housing, such as Multifamily Property. If the relevant real
estate market should experience an overall decline in property values such that
the outstanding balances of the Mortgage Loans and any additional financing on
the related Mortgaged Properties become equal to or greater than the value of
the Mortgaged Properties, the actual rates of delinquencies, foreclosures and
losses could be higher than those now generally experienced in the mortgage
lending industry. To the extent that such losses are not covered by the methods
of Credit Support described herein, the ability of the Issuer to pay or
distribute principal of and interest on the Securities may be adversely
affected. Even where Credit Support covers all losses resulting from defaults
and foreclosure, the effect of defaults and foreclosures may be to increase
prepayment experience on the Mortgage Assets, thus shortening weighted average
life and affecting yield to maturity. See "Yield and Prepayment Considerations."
Determination of Compliance With Pool Requirements and Underwriting Procedures
If so specified in the Prospectus Supplement for a Series of Securities,
upon the discovery of the breach of certain representations and warranties made
by the Warranting Party in respect of a Mortgage Loan servicing or underlying
such Series that materially and adversely affects the interests of the Holder of
a Security of the related Series, the Issuer will be obligated to cause the
warranting party of such Mortgage Loan to repurchase such Mortgage Loan or
deliver a substitute conforming Mortgage Loan as described below under
"Repurchase and Substitution of Non-Conforming Mortgage Loans." The Trustee will
be required to
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enforce this obligation for the benefit of the Holder of a Security, following
the practices it would employ in its good faith business judgment were it the
owner of such Mortgage Loan. If so specified in the related Prospectus
Supplement, the Master Servicer, if any, may be obligated to enforce such
obligations rather than the Trustee.
Repurchase and Substitution of Non-Conforming Mortgage Loans
The Trustee, or if so specified in the Prospectus Supplement for a Series
of Securities, a custodian, will review Mortgage Loan documents after receipt
thereof. Unless otherwise provided in the related Prospectus Supplement, if any
such document is found to be defective in any material respect, or if it is
determined that the Warranting Party has breached any representation or
warranty, the Trustee or the custodian will immediately notify the Warranting
Party and the Master Servicer, if any, and the Trustee, if the custodian. If
such defect cannot be cured thereafter, the related Prospectus Supplement will
specify the terms and conditions of any repurchase obligations, including the
party required to repurchase the Mortage Loan, the time period within which such
repurchase must be made and the purchase price for such repurchase.
If provided in the Prospectus Supplement for a Series of Securities, the
Issuer may, rather than cause the repurchase of the Mortgage Loan as described
above, remove such Mortgage Loan ("Deleted Mortgage Loan") from the Trust Estate
or Trust Fund, as applicable, and substitute in its place one or more other
Mortgage Loans (each, a "Substitute Mortgage Loan"); provided, however (i) with
respect to a Series for which no REMIC election is made, such substitution must
be effected within the period specified in the related Prospectus Supplement and
(ii) with respect to a Series for which a REMIC election is made, the Trustee
must have received a satisfactory opinion of counsel that such substitution will
not cause the REMIC to lose its status as a REMIC or constitute a "prohibited
transaction" or "prohibited contribution" that would result in the imposition of
a tax on the REMIC. Any Substitute Mortgage Loan will, on the date of
substitution, have the characteristics specified in the related Prospectus
Supplement. This repurchase or substitution obligation generally constitute the
sole remedy available to the Holders of the Securities or the Trustee for a
material defect in a Mortgage Loan document or for breach of representations and
warranties with respect to any Mortgage Loan. With respect to Mortgage Loans
underlying Mortgage Certificates, the Mortgage Certificate Agreement may have
terms relating to the repurchase or substitution obligations which differ from
those set forth above.
The Master Servicer, if any, also may make certain warranties with respect
to the Mortgage Loans comprising the Mortgage Assets for a Series. See
"Servicing Mortgage Loans -- Certain Matters Regarding the Master Servicer."
Upon a breach of any such warranty that materially and adversely affects the
interests of the Holders of the Securities of the related Series, the related
Mortgage Loan will be required to be repurchased, subject to the conditions
described in the preceding paragraph and in the related Prospectus Supplement.
If the Master Servicer fails to repurchase such a Mortgage Loan, payments to the
Holders of the Securities could be reduced to the extent payments are not made
on the Mortgage Loan.
Various Servicers will provide certain customary servicing functions with
respect to any Mortgage Loans pursuant to Servicing Agreements. Such Servicers
may include affiliates of the Issuer. If so specified in the related Prospectus
Supplement, a Master Servicing Agreement may be entered into between the Issuer
and a Master Servicer. The Master Servicer will supervise the performance by the
Servicers of their duties and responsibilities under the Servicing Agreements
with respect to Mortgage Loans for the related Series. Alternatively, if so
specified in the related Prospectus Supplement, the Master Servicer may be
obligated to service Mortgage Loans directly or through one or more Servicers.
In such a case, the Master Servicer will be primarily responsible for servicing
the Mortgage Loans. The specific duties to be performed by any Servicers and
Master Servicer, if any, with respect to the Mortgage Loans of a particular
Series will be set forth in the Prospectus Supplement to the extent they differ
from the servicing obligations described herein under "Servicing of Mortgage
Loans." Servicers and the Master Servicer, if any, may be required to advance
funds to cover delinquent payments on Mortgage Loans, to the extent specified in
the related Prospectus Supplement. The Prospectus Supplement also will specify
criteria to be met by each Servicer and the Master Servicer. Such criteria will
be determined by the Issuer consistent with the requirements of each Rating
Agency rating such Series. See "Servicing of Mortgage Loans."
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Mortgage Certificates
General
Mortgage Certificates will consist of the types of mortgage assets
described in the Prospectus Supplement for the Series of Securities secured
therefor representing an interest therein and may include mortgage pass-through
certificates or mortgage collateralized obligations. In the event such Mortgage
Certificates have been issued pursuant to a pooling and servicing agreement, an
indenture, a participation agreement or similar agreement (a "Mortgage
Certificate Agreement"), the seller or servicer of the Underlying Mortgage Loans
will have entered into the Mortgage Certificate Agreement with the trustee under
such Mortgage Certificate Agreement (the "Mortgage Certificate Trustee").
Distributions of principal, interest and/or other amounts will be made on
Mortgage Certificates on the dates, and in the amounts and manner, specified in
the related Prospectus Supplement. Credit Support in the form of reserve funds,
subordination of other credit support similar to that described for the
Securities under "Description of Credit Support" may be provided with respect to
the Mortgage Certificates. The type, characteristics and amount of such credit
support, if any, will be a function of certain characteristics of the Underlying
Mortgage Loans and other factors and generally will have been established for
the Mortgage Certificates on the basis of requirements of either any Rating
Agency that may have assigned a rating to the Mortgage Certificates or the
initial purchasers of the Mortgage Certificates.
The Prospectus Supplement for a Series of Securities secured by or
evidencing interests in Mortgage Assets that include Mortgage Certificates will
specify, to the extent available, (i) the aggregate approximate initial and
outstanding principal amount and type of the Mortgage Certificates to be
included in the Trust Fund or Trust Estate, as applicable, (ii) the original and
remaining term to stated maturity of the Mortgage Certificates, if applicable,
(iii) the pass-through or bond interest rate of the Mortgage Certificates or
formula for determining such rates, (iv) the applicable payment provisions for
the Mortgage Certificates, (v) the Mortgage Certificate Issuer and Mortgage
Certificate Trustee, as applicable, (vi) certain characteristics of the Credit
Support, if any, such as subordination, reserve funds, insurance policies,
letters of credit or guarantees relating to the related Underlying Mortgage
Loans or directly to such Mortgage Certificates, (vii) the terms on which the
related Underlying Mortgage Loans for such Mortgage Certificates or the Mortgage
Certificates may, or are required to, be purchased prior to their maturity,
(viii) the terms on which Underlying Mortgage Loans may be substituted for those
originally underlying the Mortgage Certificates, (ix) the servicing fees, (x) to
the extent available, information in respect of the Underlying Mortgage Loans
and (xi) the characteristics of any cash flow agreements that are included as
part of the trust evidenced or secured by the Mortgage Certificates.
Substitution of Mortgage Assets
If provided in the related Prospectus Supplement, and subject to the
limitations set forth in the Indenture or Trust Agreement, as applicable, for a
Series of Securities, the Issuer or Depositor may deliver to the Trustee other
Mortgage Assets in substitution for any Mortgage Assets originally pledged as
security for a Series, or deposited in the Trust Fund for a Series, as the case
may be. Such limitations typically will provide that (1) any such Substitute
Mortgage Asset will have an outstanding principal balance or Asset Value
(determined in a manner consistent with the Mortgage Assets for which it is
substituted) that is greater than or equal to the outstanding principal balance
or aggregate Asset Value of the Mortgage Assets for which it is substituted, and
will otherwise have such characteristics as shall be necessary to cause the
Mortgage Assets, upon such substitution, to conform to the description thereof
set forth in the related Prospectus Supplement, (2) no substitution will be
permitted which would delay the Stated Maturity or Final Scheduled Distribution
Date, as applicable, of any Class of Securities of the related Series, (3) no
more than 40% of the Mortgage Assets (including any cash deposited on the
Closing Date) securing or underlying a Series may be substituted for, (4) only
like kind Mortgage Assets may be substituted for Mortgage Assets (or, with
respect to a substitution for cash deposited in any Reserve Fund on the Closing
Date, the Substitute Mortgage Assets must be of like kind as the Mortgage Assets
securing or underlying the related Series) and (5) there can be no substitutions
for Substitute Mortgage Assets. No substitution may be made (1) if such
substitution would
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result in the Issuer becoming required to register as an "investment company"
for purposes of the Investment Company Act of 1940, (2) if the Rating Agencies
will, as a result of such substitution, downgrade the rating on the related
Series of Securities or any Class thereof or (3) in the event that the Issuer
has elected to be treated as a REMIC and such substitution would cause the REMIC
to lose its status as a REMIC or result in a tax on "prohibited contributions"
to or "prohibited transactions" of the REMIC.
If the Issuer elects to treat the Mortgage Assets securing or underlying a
Series of Securities as a REMIC or an election is made to treat the arrangement
by which a Series of Securities is issued as a REMIC, no Substitute Mortgage
Assets may be pledged by the Issuer (a) in the case of the substitution for a
"defective obligation" (within the meaning of section 860G(a)(4)(B) of the
Code), more than two years after the "Start Up Day" (as defined in section
860(G)(a)(9) of the Code) of the REMIC, or (b) in the case of any other Mortgage
Assets, more than three months after the Start Up Day.
Collection Account
A separate Collection Account for each Series will be established by the
Trustee, or if the Trustee is not also the Paying Agent, by the Paying Agent,
for receipt of all monthly principal and interest payments on the Assets
securing or underlying such Series and the amount of cash, if any, to be
initially deposited therein by the Issuer, Reinvestment Income, if any, thereon
and any amounts withdrawn from any Reserve Funds for such Series. If specified
in the related Prospectus Supplement, Reinvestment Income, if any, or other gain
from investments of moneys in the Collection Account will be credited to the
Collection Account for such Series and any loss resulting from such investments
will be charged to such Collection Account. Funds on deposit in the Collection
Account will be available for application to the payment or distribution of
principal of and interest on the Securities of the related Series and for
certain other payments provided for in the Indenture or Trust Agreement, as
applicable, and described in the related Prospectus Supplement. To the extent
that amounts remaining on deposit in the Collection Account on each Payment Date
or Distribution Date represent Excess Cash Flow not required to be applied to
such payments or distributions, the related Prospectus Supplement will specify
the application of such Excess Cash Flow, including whether such amounts may be
paid to the Issuer or to the Holder of the residual interest therein.
Other Funds or Accounts
A Series also may be secured by certain other funds and accounts for the
purpose of, among other things, (i) paying certain administrative fees and
operating expenses and (ii) accumulating funds that are credited to the
Issuer's account pending their distribution to the Issuer. See "Credit
Support."
Investment of Funds
The Collection Account and certain other funds and accounts for a Series
will be invested in certain Eligible Investments acceptable to each Rating
Agency rating such Series, which may include, without limitation, (a) direct
obligations of, and obligations fully guaranteed by, the United States of
America, FHLMC, FNMA or any agency or instrumentality of the United States of
America, (b) demand and time deposits, certificates of deposit or bankers'
acceptances, (c) repurchase obligations pursuant to a written agreement with
respect to (1) any security described in clause (a) above or (2) any other
security issued or guaranteed by an agency or instrumentality of the United
States of America, (d) securities bearing interest or sold at a discount issued
by any corporation incorporated under the laws of the United States of America
or any state, (e) commercial paper (including both non-interest-bearing discount
obligations and interest-bearing obligations paying on demand or on a specified
date not more than one year after the date of issuance thereof), (f) a
Guaranteed Investment Contract, (g) certificates or receipts representing
ownership interests in future interest or principal payments on obligations
described in clause (a) above, and (h) any other demand, money market or time
deposit obligation, security or investment acceptable to the Rating Agencies.
Eligible Investments with respect to a Series will include only obligations
or securities that mature on or before the date on which the Collection Account
or any other Reserve Fund for such Series are required or may be anticipated to
be required to be applied for the benefit of the Holders of such Series. Any
gain or loss
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from such investments for a Series will be credited or charged to the
appropriate fund or account for such Series if so specified in the related
Prospectus Supplement.
Credit Support
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Mortgage Assets securing
or underlying a Series of Securities may be provided to one or more Classes of
Securities of such Series in the form of subordination of one or more other
Classes of Securities in such Series or by one or more other types of credit
support, such as a letter of credit, insurance policy, payment guarantee,
reserve fund or another type of credit support, or a combination thereof (any
such coverage with respect to the Securities of any Series, "Credit Support").
The amount and types of coverage, the identification of the entity providing the
coverage (if applicable) and related information with respect to each type of
Credit Support, if any, will be described in the Prospectus Supplement for a
Series of Securities. See "Special Considerations -- Credit Support Limitations"
and "Credit Support."
Cash Flow Agreements
If so provided in the Prospectus Supplement for a Series of Securities, the
Assets 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 Assets also may include certain other agreements, such as
interest rate exchange agreements, interest rate cap or floor agreements,
currency exchange agreements or similar agreements (any such agreement, a "Cash
Flow Agreement") provided to reduce the effects of interest rate or currency
exchange rate fluctuations on the Mortgage Assets in one or more Classes of
Securities. The principal terms of any such 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 provide certain information with respect to
the obligor under any such Cash Flow Agreement.
SERVICING OF MORTGAGE LOANS
General
The servicing obligations with respect to a particular Series may be
performed by various Servicers or by the Trustee. If so specified in the related
Prospectus Supplement, a Master Servicer or a Special Servicer may be appointed.
The related Prospectus Supplement for each Series will describe the extent, if
any, such rights, duties and obligations vary or differ with respect to such
Series from those described herein.
If so specified in the related Prospectus Supplement, pursuant to a Master
Servicing Agreement or Trust Agreement, customary servicing functions with
respect to Mortgage Loans which comprise Mortgage Assets for a Series will be
provided by the Master Servicer directly or by one or more Servicers subject to
supervision by the Master Servicer. To the extent specified in the related
Prospectus Supplement, a special servicer (the "Special Servicer") may be
appointed. The related Prospectus Supplement will describe the duties and
obligations of such Special Servicer. To the extent specified in the related
Prospectus Supplement, the Master Servicer or Special Servicer, if any, may have
the authority to sell or otherwise dispose of Mortgage Loans or the related REO
Property in order to maximize the value of such Mortgage Loans or property. The
entity which has primary liability for servicing Mortgage Loans directly is
sometimes referred to herein as the "Primary Servicer." If the Master Servicer
is not required under the Master Servicing Agreement or Trust Agreement, as
applicable, to act as Primary Servicer, then the Master Servicer, if any, will
(i) administer and supervise the performance by the Servicers (who will act as
Primary Servicers) of their servicing responsibilities under the Servicing
Agreements, (ii) to the extent not maintained by a Primary Servicer, maintain
any insurance policy required for the related Mortgage Assets and (iii) advance
funds as described below under "Advances" and in the related Prospectus
Supplement. If a Master Servicer undertakes to service Mortgage Loans directly,
it may do so through Servicers as its agents. In such case, the Master Servicer
will be
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responsible for all aspects of the servicing of the related Mortgage Loans
notwithstanding such use of Servicers. The Master Servicer or a Servicer may be
an affiliate of the Issuer. In the case of FHA Loans, the Master Servicer and
each Servicer may be required to be approved by HUD as an FHA mortgagee. The
Master Servicer will only be responsible for the duties and obligations of the
Special Servicer to the extent set forth in the related Prospectus Supplement.
To the extent applicable, Master Servicing Agreements (direct or
supervisory), Servicing Agreements and Special Servicing Agreements, if any,
with respect to a Series will be filed as exhibits to a Current Report on Form
8-K within 15 days following the issuance of the Securities of a Series.
The Master Servicer, the Special Servicer, if any, and each Servicer, if
any, will be paid a servicing fee for the performance of its services and duties
as specified in the related Prospectus Supplement. In addition, the Master
Servicer, Special Servicer or Servicer may be entitled to retain late charges,
assumption fees and similar charges to the extent collected from Mortgagors. If
a Servicer or the Special Servicer is terminated by the Master Servicer, the
servicing function of the Servicer or the Special Servicer will be either
transferred to a substitute Servicer or Special Servicer, as the case may be, or
performed by the Master Servicer. The Master Servicer will be entitled to retain
the portion of the servicing fee paid to a Servicer, under a terminated
Servicing Agreement, or the Special Servicer, under the Special Servicing
Agreement, if the Master Servicer elects to perform such servicing functions
itself. See "Retained Interest; Servicing Compensation and Payment of Expenses."
Collection Procedures
The Primary Servicer or, if so specified in the related Prospectus
Supplement, the Trustee, will make reasonable efforts to collect all payments
called for under the Mortgage Loans and will follow such collection procedures
as it follows with respect to mortgage loans serviced by it that are comparable
to the Mortgage Loans.
The Primary Servicer, to the extent permitted by law and the terms of the
related Mortgage Loans, may establish and maintain an escrow account (the
"Escrow Account") in which payments by Mortgagors to pay taxes, assessments,
mortgage and hazard insurance premiums, and other comparable items will be
deposited. Withdrawals from the Escrow Account are to be made to effect timely
payment of taxes, assessments and hazard insurance premiums, to refund to
Mortgagors amounts determined to be overages, to pay interest to Mortgagors on
balances in the Escrow Account to the extent required by law, to repair or
otherwise protect the Mortgaged Property and to clear and terminate such
account. Alternatively, the terms of the related Mortgage Loan may require, upon
the occurrence of a delinquency or default by the obligor, an impound account
("Impound Account") to be established and maintained and into which payments by
Mortgagors to pay taxes, assessments, mortgage and hazard insurance premiums and
other comparable items will be deposited pending distribution of such items. The
Primary Servicer will be responsible for the administration of the Escrow
Account or the Impound Account and may be obligated to make escrow or impound
advances to the relevant account when a deficiency exists therein if so
specified in the related Prospectus Supplement.
Payments on Mortgage Loans; Deposits to Custodial Accounts
If specified in the Prospectus Supplement for a Series of Securities, the
Master Servicer, if any, will establish an account (the "Custodial Account") in
compliance with the standards of each Rating Agency rating the Securities of a
Series. The Master Servicer will deposit in the Custodial Account on a daily
basis all mortgage related receipts (including amounts remitted by the Servicer)
received by it subsequent to the Cut-Off Date (other than payments of principal
and interest due on or before the Cut-Off Date).
In those cases where a Servicer is servicing Mortgage Loans pursuant to a
Servicing Agreement, the Servicer will establish and maintain an account (the
"Servicing Account") that will comply with the standards for the Custodial
Account and that is otherwise acceptable to the Master Servicer, if any. The
Servicer will be required to deposit into the Servicing Account on a daily basis
(or upon identification) all mortgage related receipts received by it with
respect to Mortgage Loans serviced by such Servicer subsequent to the Cut-Off
Date less its servicing fee and certain other amounts specified in the
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Servicing Agreement. On each Servicer Remittance Date, the Servicer will remit
all funds held in the Servicing Account (other than payments due on or before
the Cut-Off Date and other amounts permitted to be withdrawn from or held in
the Servicing Account pursuant to the Servicing Agreement) with respect to
each Mortgage Loan together with any Advances made by such Servicer for
deposit to the Custodial Account, or if a Custodial Account has not been
established, directly to the Collection Account. See "Servicing of Mortgage
Loans -- Advances."
If so specified in the Prospectus Supplement for a Series of Securities,
the Custodial Account and each Servicing Account may be maintained as an
interest-bearing account, or the funds held therein may be invested, pending
remittance to the Trustee, in Eligible Investments. If specified in the related
Prospectus Supplement, the Master Servicer or the Servicer will be entitled to
receive any such interest or other income earned on funds in the Custodial
Account or Servicing Account, respectively, as additional compensation.
With respect to any other type of Mortgage Loan which provides for payments
other than on the basis of level payments, an account may be established as
described in the related Prospectus Supplement.
Advances
General
To the extent provided in the related Prospectus Supplement, the Primary
Servicer may make periodic advances of cash ("Advances") from its own funds or,
if so specified in the related Prospectus Supplement, from excess funds in the
Custodial Account or Servicing Account, but only to the extent such Advances
are, in the good faith business judgment of the Servicer or the Master Servicer,
as the case may be, ultimately recoverable from future payments and collections
on the Mortgage Loans or otherwise. Neither the Master Servicer nor the
Servicers will be required to make such Advances except to the extent specified
in the related Prospectus Supplement. The Master Servicer's obligations to make
Advances, if any, may, as specified in the related Prospectus Supplement, be
limited in amount or may be limited to Advances received from Servicers. If so
specified in the related Prospectus Supplement, the Master Servicer will not be
obligated to make Advances until all or a specified portion of a Reserve Fund is
depleted. Advances are intended to enable the Issuer to make timely payment of
the scheduled principal and interest payments or distributions on the Securities
of such Series, not to guarantee or insure against losses. Accordingly, any
funds so advanced are recoverable by the Servicer or the Master Servicer, as the
case may be, out of amounts received on particular Mortgage Loans which
represent late recoveries of principal or interest respecting which any such
Advance was made. If an Advance is made and subsequently determined to be
nonrecoverable from late collections, Insurance Proceeds or Liquidation Proceeds
from the related Mortgage Loans, or any other source described in the related
Prospectus Supplement, the Servicer or Master Servicer will be entitled to
reimbursements from other funds in the Custodial Account or Servicing Account,
as applicable.
Adjustments to Servicing Fees or Advances in Connection with Prepaid Mortgage
Loans
With respect to the Mortgage Loans securing or underlying a Series of
Securities, if an obligor makes a principal prepayment between scheduled payment
dates, the obligor may be required to pay interest on the principal balance only
to the date of prepayment in full. If and to the extent provided in the related
Prospectus Supplement, the amount of the servicing fee may be reduced, or the
Primary Servicer may be otherwise obligated to advance moneys from its own funds
or any reserve maintained for such purpose, to the extent necessary to include
an amount equal to a full month's interest payment at the applicable Mortgage
Rate. Partial principal prepayments may be treated as having been received on
the next Due Date, and, if so, no reduction in interest remitted for deposit to
the Collection Account will occur. See "Yield and Prepayment Considerations."
Maintenance of Insurance Policies
To the extent specified in the related Prospectus Supplement and the
Servicing Agreement, the Primary Servicer will be required to cause to be
maintained a standard hazard insurance policy with respect to each Mortgaged
Property. In addition, all or a portion of the Mortgage Loans comprising the
Mortgage Assets for a
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Series may be insured by the FHA. The Primary Servicer will be required to
take such steps as are reasonably necessary to keep such insurance in full
force and effect. See "Description of Insurance on the Mortgage Loans."
The Primary Servicer, on behalf of itself, the Trustee, the Bondholders or
Certificateholders, as applicable and the Issuer, will be required to present,
or cause to be presented, claims with respect to any insurance policy. The
Primary Servicer will be required to present claims and take such reasonable
steps as are necessary to permit recovery under any FHA insurance respecting
defaulted Mortgage Loans.
Realization Upon Defaulted Mortgage Loans
A mortgagor's failure to make required payments may reflect inadequate
operating income or the diversion of that income from the service of payments
due under the Mortgage Loan, and may call into question such mortgagor's ability
to make timely payment of taxes and to pay for necessary maintenance of the
related Mortgaged Property. The Master Servicer typically will be required to
monitor any Mortgage Loan which is in default, contact the mortgagor concerning
the default, evaluate whether the causes of the default can be cured over a
reasonable period without significant impairment of the value of the Mortgaged
Property, initiate corrective action in cooperation with the mortgagor if cure
is likely, inspect the Mortgaged Property and take such other actions as are
consistent with its usual general mortgage servicing activities. A significant
period of time may elapse before the Master Servicer is able to assess the
success of such corrective action or the need for additional initiatives.
The time within which the Master Servicer makes the initial determination
of appropriate action, evaluates the success of corrective action, develops
additional initiatives, institutes foreclosure proceedings and actually
forecloses (or takes a deed to a Mortgaged Property in lieu of foreclosure) on
behalf of the Holders of the Securities, may vary considerably depending on the
particular Mortgage Loan, the Mortgaged Property, the mortgagor, the presence of
an acceptable party to assume the Mortgage Loan and the laws of the jurisdiction
in which the Mortgaged Property is located. Under federal bankruptcy law, the
Master Servicer in certain cases may not be permitted to accelerate a Mortgage
Loan or to foreclose on a Mortgaged Property for a considerable period of time.
See "Certain Legal Aspects of Mortgage Loans."
The related Prospectus Supplement will state whether the Master Servicer
may offer to sell any defaulted Mortgage Loan if and when the Master Servicer
determines that such a sale would produce a greater recovery on a present value
basis than would liquidation through foreclosure or similar proceeding. Any such
offering will be made in a commercially reasonable manner and the Master
Servicer will accept the highest cash bid received from any person (including
itself, an affiliate of the Master Servicer or any Holder of a Security) that
constitutes a fair price for such defaulted Mortgage Loan. In the absence of any
bid determined to be fair, the Master Servicer will proceed with respect to such
defaulted Mortgage Loan as described below.
The Master Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a Mortgage Loan by operation of law or otherwise, if a default
on the related Mortgage Loan has occurred or, in the Master Servicer's judgment,
is imminent. The Master Servicer may not, however, acquire title to any
Mortgaged Property or take any other action that would cause the Trustee, for
the benefit of a Holder of a Security, or any other specified person to be
considered to hold title to the Mortgaged Property, 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 (a) the Master Servicer has previously determined, based on a report
prepared by a person who regularly conducts environmental audits, that (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 in compliance therewith is reasonably likely to produce a
greater recovery on a present value basis than not taking such actions and (ii)
there are no circumstances or conditions present that have resulted in any
contamination or if such circumstances or conditions are present for which such
action could be required, taking such actions with respect to the affected
Mortgaged Property is reasonably likely to produce a greater recovery on a
present
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value basis than not taking such actions or (b) such other conditions specified
in the related Prospectus Supplement have been satisfied.
If title to any Mortgaged Property is acquired by a Trust Estate or Trust
Fund as to which a REMIC election has been made, the Master Servicer, on behalf
of such Trust Estate or Trust Fund, may be required to sell the Mortgaged
Property within two years of acquisition, unless (i) the Internal Revenue
Service grants an extension of time to sell such property or (ii) the Trustee
receives an opinion of independent counsel to the effect that the holding of the
property by such Trust Estate or Trust Fund subsequent to two years after its
acquisition will not result in the imposition of a tax on the Trust Fund or
cause such Trust Estate or Trust Fund to fail to qualify as a REMIC under the
Code at any time that any Security is outstanding. Subject to the foregoing, the
Master Servicer will be required to (i) solicit bids for any Mortgaged Property
so acquired in such a manner as will be reasonably likely to realize a fair
price for such property and (ii) accept the first (and, if multiple bids are
contemporaneously received, the highest) cash bid received from any person that
constitutes a fair price.
If the Trust Estate or Trust Fund, as applicable, for a Series of
Securities acquires title to any Mortgaged Property, the Master Servicer, on
behalf of such Trust Estate or Trust Fund may retain an independent contractor
to manage and operate such property. The retention of an independent contractor,
however, will not relieve the Master Servicer of any of its obligations with
respect to the management and operation of such Mortgaged Property. Any such
property acquired by the Trust Estate or Trust Fund, as applicable, for such
Series will be managed in a manner consistent with the management and operation
of similar property by a prudent lending institution.
The limitations imposed by the REMIC provisions of the Code (if a REMIC
election has been made with respect to the related Series of Securities) on the
operations and ownership of any Mortgaged Property acquired on behalf of the
Trust Fund or Trust Estate, as applicable, may result in the recovery of an
amount less than the amount that would otherwise be recovered. See "Certain
Legal Aspects of Mortgage Loans -- Foreclosure."
If recovery on a defaulted Mortgage Loan under any related instrument of
Credit Support is not available, the Master Servicer nevertheless will be
obligated to follow or cause to be followed such normal practices and procedures
as it deems necessary or advisable to realize upon the defaulted Mortgage Loan.
If the proceeds of any liquidation of the property securing the defaulted
Mortgage Loan are less than the outstanding principal balance of the defaulted
Mortgage Loan plus interest accrued thereon plus the aggregate amount of
expenses incurred by the Master Servicer in connection with such proceedings and
which are reimbursable, the Trust Estate or Trust Fund, as applicable, for the
related Series of Securities will realize a loss in the amount of such
difference. The Master Servicer will be entitled to withdraw out of the
Liquidation Proceeds recovered with respect to any defaulted Mortgage Loan,
prior to the distribution of such Liquidation Proceeds to Holders of the
Securities, amounts representing its normal servicing compensation on 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.
If any Mortgaged Property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy are not sufficient to
restore the damaged property to a condition sufficient to permit recovery under
the related instrument of Credit Support, if any, the Master Servicer is not
required to expend its own funds to restore the damaged property unless it
determines (i) that such restoration will increase the proceeds to Holders of
the Securities on liquidation of the Mortgage Loan after reimbursement of the
Master Servicer for its expenses and (ii) that such expenses will be recoverable
by it from related Insurance Proceeds or Liquidation Proceeds.
As servicer of the Mortgage Loans, a Master Servicer, on behalf of itself,
the Trustee and the Holders of the Securities, will present claims to the
obligor under each instrument of Credit Support, and will take such reasonable
steps as are necessary to receive payment or to permit recovery thereunder with
respect to defaulted Mortgage Loans.
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If a Master Servicer or its designee recovers payments under any instrument
of Credit Support with respect to any defaulted Mortgage Loan, the Master
Servicer will be entitled to withdraw out of such proceeds, prior to
distribution thereof to Holders of the Securities, amounts representing its
normal servicing compensation on such Mortgage Loans, unreimbursed servicing
expenses incurred with respect to the Mortgage Loan and any unreimbursed
advances of delinquent payments made with respect to the Mortgage Loan. See
"Description of Insurance on the Mortgage Loans -- Hazard Insurance on the
Mortgage Loan" and "Credit Support."
Modification; Waivers
As set forth in the Prospectus Supplement for a Series of Securities, the
Master Servicer or Special Servicer, if any, may have the discretion, subject to
certain conditions set forth therein, to modify, waive or amend the terms of any
Mortgage Loan without the consent of the Trustee or any Holder of a Security.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer or the Special Servicer, if any, will not agree to any modification,
waiver or amendment of the payment terms of a Mortgage Loan unless the Master
Servicer or the Special Servicer, if any, has determined that such modification,
waiver or amendment is reasonably likely to produce a greater recovery on a
present value basis than liquidation of the Mortgage Loan.
Due-on-Sale and Due-on-Encumbrance Provisions
Certain of the Mortgage Loans may contain clauses requiring the consent of
the mortgagee to any sale or other transfer of the related Mortgaged Property,
or due-on-sale clauses entitling the mortgagee to accelerate payment of the
Mortgage Loan upon any sale or other transfer of the related Mortgaged Property.
Certain of the Mortgage Loans may contain clauses requiring the consent of the
mortgagee to the creation of any other lien or encumbrance on the Mortgaged
Property or due-on-encumbrance clauses entitling the mortgagee to accelerate
payment of the Mortgage Loan upon the creation of any other lien or encumbrance
upon the Mortgaged Property. If provided in the related Prospectus Supplement,
the Master Servicer will determine whether to exercise any right the Trustee may
have as mortgagee to accelerate payment of any such Mortgage Loan or to withhold
its consent to any transfer or further encumbrance in a manner consistent with
its general mortgage servicing activities. If specified in the related
Prospectus Supplement, any fee collected by or on behalf of the Master Servicer
for entering into an assumption agreement will be retained by or on behalf of
the Master Servicer as additional servicing compensation. See "Certain Legal
Aspects of Mortgage Loans -- Due-on-Sale and Due-on-Encumbrance."
Retained Interest; Servicing Compensation and Payment of Expenses
The Prospectus Supplement for a Series of Securities will specify the
Retained Interest, if any, whether there will be any Retained Interest in the
Mortgage Assets, and, if so, the owner thereof. If so, the Retained Interest
will be established on a loan-by-loan basis. A "Retained Interest" in a Mortgage
Asset represents a specified portion of the interest payable thereon. The
Retained Interest will be deducted from mortgagor payments as received and will
not be part of the related Trust Estate or Trust Fund, as applicable.
A Master Servicer's primary servicing compensation with respect to a Series
of Securities generally will come from the payment to it of a portion of the
interest payment on each Mortgage Loan. Because a Master Servicer's primary
compensation is a percentage of the principal balance of each Mortgage Asset,
such amount will decrease in accordance with the amortization of the Mortgage
Loans. The Prospectus Supplement with respect to a Series of Securities secured
by or evidencing interests in Mortgage Loans may provide that, as additional
compensation, the Master Servicer or the Servicers may retain all or a portion
of assumption fees, modification fees, late payment charges or Prepayment
Premiums collected from mortgagors and any interest or other income which may be
earned on funds held in the Collection Account or any Servicing Account. Any
Servicer will receive a portion of the Master Servicer's compensation as its
servicing compensation.
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In addition to amounts payable to any Servicer, a Master Servicer may pay,
to the extent provided in the related Prospectus Supplement, from its servicing
compensation certain expenses incurred in connection with its servicing of the
Mortgage Loans, including, without limitation, payment of the fees and
disbursements of the Trustee and independent accountants, payment of expenses
incurred in connection with distributions and reports to Holders of Securities,
and payment of any other expenses described in the related Prospectus
Supplement. Certain other expenses, including certain expenses relating to
defaults and liquidations on the Mortgage Loans and, to the extent so provided
in the related Prospectus Supplement, interest thereon at the rate specified
therein, and the fees of any Special Servicer, may be borne by the Trust Fund or
Trust Estate, as applicable.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any period, to certain interest
shortfalls, resulting from the voluntary prepayment of any Mortgage Loans
securing or underlying the related Series of Securities during such period prior
to their respective due dates therein.
Evidence as to Compliance
The Master Servicer and the Special Servicer, if any, will deliver to the
Trustee, on or before 120 days after the end of each fiscal year of the Master
Servicer and the Special Servicer, if applicable, an officer's certificate
stating that (i) a review of the activities of the Master Servicer, the Special
Servicer and the Servicers during the preceding calendar year and of performance
under the Master Servicing Agreement, Special Servicing Agreement, if
applicable, and the Servicing Agreements has been made under the supervision of
such officer and (ii) the Master Servicer and the Special Servicer, if
applicable, has fulfilled all its obligations under the Master Servicing
Agreement and Special Servicing Agreement, if applicable, throughout such year,
and, to the best of such officer's knowledge, based on such review, each
Servicer has fulfilled its obligations under the related Servicing Agreement
throughout such year, or, if there has been a default in the fulfillment of any
such obligation, specifying each such default known to such officer and the
nature and status thereof. Such officer's certificate will be accompanied by a
statement of a firm of independent public accountants to the effect that, on the
basis of an examination of certain documents and records relating to servicing
of the Mortgage Loans, conducted in accordance with generally accepted
accounting principles in the mortgage banking industry, the Master Servicer's
and the Special Servicer's, if applicable, duties and duties of the Servicers
have been conducted in compliance with the provisions of the applicable
agreement, except for (i) such exceptions as such firm believes to be immaterial
and (ii) such other exceptions as are set forth in such statement. Copies of the
annual officer's certificate and accountants' statement may be obtained without
charge upon written request to the Trustee.
Certain Matters Regarding the Master Servicer and Special Servicer
The Master Servicer and any Special Servicer for each Series will be
specified in the related Prospectus Supplement. The Master Servicer and any
Special Servicer may be an affiliate of the Issuer and may have other business
relationships with the Issuer and its affiliates.
The Prospectus Supplement for a Series of Securities will specify the
limitations on the Master Servicer's ability to resign from its obligations and
duties. In addition, the Prospectus Supplement for a Series of Securities will
specify the limitations on the liability of the Master Servicer to the Holders
of the Securities of such Series for any action taken or for refraining from the
taking of any action pursuant to the Master Servicing Agreement, or for errors
in judgment.
CREDIT SUPPORT
General
For any Series, Credit Support may be provided with respect to one or more
Classes thereof or the related Mortgage Assets. Credit Support may be in the
form of the subordination of one or more Classes of the Securities of such
Series, the establishment of one or more reserve funds, overcollateralization,
letters of
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credit, insurance policies, guarantee insurance, the use of cross-support
features or another method of Credit Support described in the related Prospectus
Supplement, or any combination of the foregoing. If so specified in the related
Prospectus Supplement, any form of Credit Support (including but not limited to
insurance, letters of credit or guarantee insurance) may be structured so as to
be drawn upon by more than one Series to the extent described therein.
The Credit Support typically will not provide protection against all risks
of loss and will not guarantee repayment of the entire principal balance of the
Securities and interest thereon. If losses occur which exceed the amount covered
by Credit Support or which are not covered by the Credit Support, Bondholders or
Certificateholders, as applicable, will bear their allocable shares of
deficiencies. Moreover, if a form of Credit Support covers more than one Series
of Securities (each, a "Covered Series"), Holders of Securities of any such
Covered Series will be subject to the risk that such Credit Support will be
exhausted by the claims of other Covered Series prior to such Covered Series
receiving any of its intended share of such coverage.
If Credit Support is provided with respect to one or more Classes of a
Series, or the related Mortgage Assets, the related Prospectus Supplement will
include a description of (a) the amount payable under such Credit Support, (b)
any conditions to payment thereunder not otherwise described herein, (c) the
conditions (if any) under which the amount payable under such Credit Support may
be reduced and under which such Credit Support may be terminated or replaced and
(d) the material provisions of any agreement relating to such Credit Support.
Additionally, the related Prospectus Supplement will set forth certain
information with respect to the issuer of any third-party 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 which exercise primary jurisdiction over the
conduct of its business and (iv) its total assets, and its stockholders' or
policyholders' surplus, if applicable, as of the date specified in the
Prospectus Supplement. See "Special Considerations -- Credit Support
Limitations."
Subordinated Securities
If so specified in the related Prospectus Supplement, one or more Classes
of a Series may be Subordinate Securities. If so specified in the related
Prospectus Supplement, the rights of the Holders of Subordinate Securities to
receive distributions of principal and interest from the Collection Account on
any Payment Date or Distribution Date will be subordinated to such rights of the
Holders of Senior Securities to the extent specified in the related Prospectus
Supplement. The amount of subordination will decrease whenever amounts otherwise
payable to the Holder of Subordinate Securities are paid to the Holders of
Senior Securities (including amounts withdrawn from any related Reserve Fund and
paid to the Holders of Senior Securities), and will (unless otherwise specified
in the related Prospectus Supplement) increase whenever there is distributed to
the Holders of Subordinate Securities amounts in respect of which subordination
payments have previously been paid to the Holders of Senior Securities. If so
specified in the related Prospectus Supplement, the related Series Supplement
may require a trustee that is not the Trustee to be appointed to act on behalf
of Holders of Subordinate Securities.
A Series may include one or more Classes of Subordinate Securities entitled
to receive cash flows remaining after distributions are made to all other
Classes designated as being senior thereto. Such right will effectively be
subordinate to the rights of other Holders of Senior Securities, but will not be
limited to a specified dollar amount of subordination. If so specified 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 not covered by
Insurance Policies or other Credit Support, such as losses arising from damage
to property securing a Mortgage Loan not covered by standard hazard insurance
policies.
The related Prospectus Supplement will set forth information concerning the
amount of subordination of a Class or Classes of Subordinate Securities in a
Series, the circumstances in which such subordination will be applicable, the
manner, if any, in which the amount of subordination will decrease over time,
the manner of funding any related Reserve Fund and the conditions under which
amounts in any related Reserve Fund will be used to make distributions to
Holders of Senior Securities and/or to Holders of Subordinate Securities or
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be released from the related Trust Estate or Trust fund. If cash flows otherwise
distributable to Holders of Subordinate Securities secured by a Mortgage Group
will be used as credit support for Senior Securities secured by another Mortgage
Group within the Trust Estate or Trust Fund, the related Prospectus Supplement
will specify the manner and conditions for applying such a cross-support
feature.
Cross-Support Features
If the Mortgage Assets for a Series are divided into separate Mortgage
Groups, each securing a separate Class or Classes of a Series, Credit Support
may be provided by a cross-support feature which requires that distributions be
made on Senior Securities secured by one Mortgage Group prior to distributions
on Subordinate Securities secured by another Mortgage Group within the Trust
Estate or Trust Fund. The related Prospectus Supplement for a Series which
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
Insurance on the Mortgage Loans
Credit Support with respect to a Series may be provided by insurance
policies that cover various default risks, including standard hazard insurance
and FHA Insurance, in each case as specified and described in the related
Prospectus Supplement. See "Description of Insurance on the Mortgage Loans."
Letter of Credit
If so provided in the Prospectus Supplement for a Series of Securities,
deficiencies in amounts otherwise payable on the Securities of such Series or
certain Classes thereof will be covered by one or more letters of credit issued
by the bank or financial institution specified in the related Prospectus
Supplement (the "L/C Bank"). Under the letter of credit, the L/C Bank will be
obligated to honor drawings thereunder in an aggregate fixed dollar amount, net
of unreimbursed payments thereunder, generally equal to the percentage specified
in the related Prospectus Supplement of the aggregate principal balance of the
Mortgage Loans on the related Cut-Off Date or of one or more Classes of
Securities (the "L/C Percentage"). If so specified in the related Prospectus
Supplement, the letter of credit may permit drawings in the event of only
certain types of losses or shortfalls such as losses arising from damage not
covered by standard hazard insurance policies. 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 Securities will expire at the earlier of the
date specified in the related Prospectus Supplement or the termination of the
Trust Estate or Trust Fund, as applicable. A copy of the letter of credit for a
Series, if any, will be filed with the Commission as an exhibit to a Current
Report on Form 8-K to be filed within 15 days of issuance of the Securities of
the related Series.
Guarantee Insurance
If so provided in the Prospectus Supplement for a Series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain Classes
thereof will be covered by insurance policies and/or surety bonds ("Payment
Guarantee Insurance") provided by one or more insurance companies or sureties.
Such Payment Guarantee Insurance will guarantee, with respect to one or more
Classes of Securities of the related Series, timely distributions of interest
and 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. If so specified in the related Prospectus Supplement, the
Payment Guarantee Insurance also will guarantee against any payment made to a
Bondholder or Certificateholder which is subsequently recovered as a "voidable
preference" payment under the Bankruptcy Code. A copy of the Payment Guarantee
Insurance for a Series, if any, will be filed with the Commission as an exhibit
to a Current Report on Form 8-K to be filed with the Commission within 15 days
of issuance of the Securities of the related Series.
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Reserve Funds
If so provided in the Prospectus Supplement for a Series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain Classes
thereof will be covered by one or more reserve funds ("Reserve Funds") in which
case a letter of credit, Eligible Investments, a demand note or a combination
thereof, in the amounts, if any, so specified in the related Prospectus
Supplement will be deposited. The Reserve Funds for a Series also may be funded
over time by depositing therein a specified amount of the distributions received
on the related Mortgage Assets as specified in the related Prospectus
Supplement.
Amounts on deposit in any Reserve Fund for a Series, together with the
reinvestment income thereon, if any, will be applied by the Trustee for the
purposes, in the manner, and to the extent specified in the related Prospectus
Supplement. A Reserve Fund may be provided to increase the likelihood of timely
payments or distributions of principal of and interest on the Securities, if
required as a condition to the rating of such Series by each Rating Agency, or
to reduce the likelihood of Special Redemptions with respect to any Series. If
so specified in the related Prospectus Supplement, Reserve Funds may be
established to provide limited protection, in an amount satisfactory to each
Rating Agency, against certain types of losses not covered by Insurance Policies
or other Credit Support, such as losses arising from damage not covered by
standard hazard insurance policies. Following each Payment Date or Distribution
Date for a Series, amounts in such 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 and
will not be available for further application by the Trustee.
The Prospectus Supplement for a Series of Securities will specify the types
of investments in which moneys deposited in any Reserve Funds will be invested
and whether gains and losses resulting from such investments will be charged to
such Reserve Fund or otherwise. If specified in the related Prospectus
Supplement, such income may be payable to the Master Servicer or a Servicer as
additional servicing compensation. See "Servicing of Mortgage Loans." The
related Prospectus Supplement will specify whether the Reserve Fund, if any, for
such Series will be a part of the Trust Estate or Trust Fund, as applicable.
Additional information concerning any Reserve Fund will be set forth in the
related Prospectus Supplement, including the initial balance of such Reserve
Fund, the balance required to be maintained in the Reserve Fund, the manner in
which such required balance will decrease over time, the manner of funding such
Reserve Fund, the purposes for which funds in the Reserve Fund may be applied to
make payments or distributions to Bondholders or Certificateholders and use of
investment earnings from the Reserve Fund, if any.
DESCRIPTION OF INSURANCE ON THE MORTGAGE LOANS
The following description of standard hazard insurance policies and FHA
Insurance and the respective coverages thereunder are general descriptions only
and do not purport to be complete.
Credit Support With Respect to Mortgage Certificates
If so provided in the Prospectus Supplement for a Series of Securities, the
Mortgage Certificates constituting Mortgage Assets for such Series, or the
Mortgage Loans underlying such Mortgage Certificates, 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.
Mortgage Insurance on the Mortgage Loan
General
Each Mortgaged Property will be covered by a standard hazard insurance
policy, as described in the related Prospectus Supplement. The coverage under
standard hazard insurance policies will be subject to conditions and limitations
described in the Prospectus Supplement and under "Hazard Insurance on the
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Mortgage Loan" below. Certain hazard risks will, therefore, not be insured and
the occurrence of such hazards could adversely affect payments or distributions
to Holders. Additionally, to the extent that losses on a defaulted or foreclosed
Mortgage Loan are not covered by other Credit Support for such Series, such
losses, if any, would affect payments or distributions to Holders.
Hazard Insurance on the Mortgage Loan
Standard Hazard Insurance Policies
The standard hazard insurance policies will provide for coverages at least
equal to the applicable state standard form of fire insurance policy with
extended coverage. In general, the standard form of fire and extended coverage
policy will cover physical damage to or destruction of the improvements on the
Mortgaged Property caused by fire, lightning, explosion, smoke, windstorm, hail,
riot, strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Because the standard hazard insurance policies
relating to the Mortgage Loans will be underwritten by different insurers and
will cover Mortgaged Properties located in various states, such policies will
not contain identical terms and conditions. The basic terms, however, generally
will be determined by state law and generally will be similar. Most such
policies typically will not cover any physical damage resulting from war,
revolution, governmental actions, floods and other water-related causes, earth
movement (including earthquake, landslides, and mudflows), nuclear reaction, wet
or dry rot, vermin, rodents, insects or domestic animals, theft and, in certain
cases, vandalism. The foregoing list is merely indicative of certain kinds of
uninsured risks and is not intended to be all-inclusive. Uninsured risks not
covered by a special hazard policy or other form of Credit Support may adversely
affect the ability of the Issuer to make payments of principal or interest on
the Securities of the related Series. When a Mortgaged Property is located in a
flood area identified by FEMA pursuant to the Flood Disaster Protection Act of
1973, the Master Servicer or the Servicer will be required to cause flood
insurance to be maintained with respect to such Mortgaged Property.
The standard hazard insurance policies covering Mortgaged Properties
securing Mortgage Loans typically will contain a "coinsurance" clause which will
require the insured at all times to carry hazard insurance of a specified
percentage (generally 80% to 90%) of the actual cash value of the improvements
on the Mortgaged Property in order to recover the full amount of any partial
loss. If the insured's coverage falls below this specified percentage, such
clause will provide that the hazard insurer's liability in the event of partial
loss will not exceed the greater of (i) the actual cash value (the replacement
cost less physical depreciation) of the improvements damaged or destroyed or
(ii) such proportion of the loss as the amount of insurance carried bears to the
specified percentage of the actual cash value of such improvements.
In the event of partial loss, hazard insurance proceeds may be insufficient
to restore fully the damaged property. Under the terms of the Mortgage Loans,
Mortgagors are required to present claims to insurers under hazard insurance
policies maintained on the Mortgaged Properties. The Primary Servicer, on behalf
of the Trustee and the Bondholders or Certificateholders, as applicable, is
obligated to present or cause to be presented claims under any blanket insurance
policy insuring against hazard losses on Mortgaged Properties; however, the
ability of the Primary Servicer to present or cause to be presented such claims
is dependent upon the extent to which information in this regard is furnished to
the Primary Servicer by Mortgagors.
FHA Insurance
The FHA is responsible for administering various federal programs,
including mortgage insurance, authorized under the Housing Act, as amended, and
the United States Housing Act of 1937, as amended. To the extent specified in
the related Prospectus Supplement, all or a portion of the Mortgage Loans may be
insured by the FHA. The Primary Servicer will be required to take such steps as
are reasonably necessary to keep such insurance in full force and effect.
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FUNDING AGREEMENTS
If specified in the Prospectus Supplement for a Series of Bonds, the Issuer
and each Finance Company participating in a Series of Bonds will enter into a
separate Funding Agreement. Pursuant to each Funding Agreement with respect to a
Series of Bonds, the Finance Company will (i) borrow a portion of the proceeds
of the sale of such Series of Bonds in an amount not to exceed the aggregate
initial Asset Value of the Mortgage Assets pledged under such Funding Agreement;
(ii) repay such loan by causing payments to be made to the Trustee in such
amounts as are necessary (after taking into account any required payments from
any Reserve Fund for such Series of Bonds) to pay accrued interest on such loan
and to amortize the entire principal amount of such loan; and (iii) pledge to
the Issuer as security for the loan Mortgage Assets having an aggregate initial
Asset Value equal to at least the amount of the loan under the Funding
Agreement. Each Finance Company also will provide its required portion of the
cash, certificates of deposit, irrevocable letters of credit or other financial
guarantees to fund any Reserve Fund under the Indenture. The related Prospectus
Supplement will specify whether the security pledged by each Finance Company
under its Funding Agreement will secure only its loan or will be
cross-collateralized with the loans made to the other participating Finance
Companies.
The Issuer will assign to the Trustee all of its rights, title and interest
in the Assets and all proceeds thereof pledged under the Funding Agreements with
respect to such Series of Bonds except for its rights to receive certain fees
and reimbursement for certain expenses and its right to indemnification.
The Funding Agreements for such Series of Bonds will not provide for any
prepayments of amounts due by the Finance Companies otherwise than by virtue of
amounts received under the Mortgage Assets securing such Series of Bonds or, in
certain cases, in connection with or following a redemption pursuant to the
Indenture. However, in the event of certain prepayments in connection with an
event of default under a Funding Agreement, a prepayment penalty will be payable
equal to the amount by which the market value of the collateral securing such
obligation exceeds the outstanding principal amount of such obligation, plus
accrued interest to the date of such prepayment. The proceeds of any such
prepayment relating to principal and interest may be applied by the Trustee to
interest and as a principal prepayment on the Bonds of such Series, and any such
proceeds constituting a premium will be distributed on a pro rata, random lot or
other selection basis as specified in the Prospectus Supplement for such Series
of Bonds to holders of Bonds of such Series.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans secured by commercial and multifamily properties that are general
in nature. Because such legal aspects are governed by applicable state law
(which laws may differ substantially), the summaries do not purport to be
complete nor to reflect the laws of any particular state, nor to encompass the
laws of all states in which the Mortgaged Properties securing the Mortgage Loans
or subject to the leases are situated. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
Mortgage Loans.
General
All of the Mortgage Loans are loans evidenced by a note or bond and secured
by instruments granting a security interest in real property which may be
mortgages, deeds of trust, or deeds to secure debt, depending upon the
prevailing practice and law in the state in which the Mortgaged Property is
located. Mortgages, deeds of trust and deeds to secure debt are herein
collectively referred to as "mortgages." Any of the foregoing types of mortgages
will create a lien upon, or grant a title interest in, the subject property, the
priority of which will depend on the terms of the particular security
instrument, as well as separate, recorded, contractual arrangements with others
holding interests in the mortgaged property, the knowledge of the parties to
such instrument as well as the order of recordation of the instrument in the
appropriate public recording office. However, recording does not generally
establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
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Types of Mortgage Instruments
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties, 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
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this Prospectus, unless the context otherwise requires, "mortgagor" includes the
trustor under a deed of trust and a grantor under a deed to secure debt. Under a
deed of trust, the mortgagor grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale as security for the indebtedness
evidenced by the related note. A deed to secure debt typically has two parties.
By executing a deed to secure debt, the grantor conveys title to, as opposed to
merely creating a lien upon, the subject property to the grantee until such time
as the underlying debt is repaid, generally with a power of sale as security for
the indebtedness evidenced by the related mortgage note. In case the mortgagor
under a mortgage 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 mortgagor. At origination of a mortgage loan
involving a land trust, the mortgagor executes a separate undertaking to make
payments on the mortgage note. The mortgagee's authority under a mortgage, the
trustee'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 mortgage, 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) and, in some cases in deed of trust transactions, 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 mortgagor assigns its
right, title and interest as landlord under each lease and the income derived
therefrom to the lender, while the mortgagor retains a revocable license to
collect the rents for so long as there is no default. If the mortgagor 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"); generally, these rates are either assigned by
the mortgagor, which remains entitled to collect such rates absent a default, or
pledged by the mortgagor, as security for the loan. In general, the lender must
file financing statements in order to perfect its security interest in the rates
and must file continuation statements, generally every five years, to maintain
perfection of such security interest. Even if the lender's security interest in
room rates is perfected under the UCC, the lender will generally be required to
commence a foreclosure or otherwise take possession of the property in order to
collect the room rates after a default.
Even after a foreclosure, the potential rent payments from the property may
be less than the periodic payments that had been due under the mortgage. For
instance, the net income that would otherwise be generated from the property may
be less than the amount that would have been needed to service the mortgage debt
if the leases on the property are at below-market rents, or as the result of
excessive maintenance, repair or other obligations which a lender succeeds to as
landlord.
Personal Property
Certain types of Mortgaged Properties, such as hotels, motels and
industrial plants, are likely to derive a significant part of their value from
personal property which does not constitute "fixtures" under applicable state
real property law and, hence, would not be subject to the lien of a mortgage.
Such property is generally pledged or assigned as security to the lender under
the UCC. In order to perfect its security interest therein, the lender generally
must file UCC financing statements and, to maintain perfection of such security
interest, file continuation statements generally every five years.
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Foreclosure
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage vary
from state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only in
certain limited circumstances, such as strict foreclosure.
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 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 Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is 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 undertake affirmative and expensive actions to determine the cause
of the mortgagor's default and the likelihood that the mortgagor 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 mortgagors who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose if the default under the mortgage is not monetary, e.g., the
mortgagor failed to maintain the mortgaged property adequately or the mortgagor
executed a junior mortgage on the mortgaged property. The exercise by the court
of its equity powers will depend on the individual circumstances of each case
presented to it. Finally, some courts have been faced with the issue of whether
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that a mortgagor 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 afford constitutional protections to the mortgagor.
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
require several years to complete. Moreover, as discussed below, a noncollusive,
regularly conducted foreclosure sale may be challenged as a fraudulent
conveyance, regardless of the parties' intent, if a court determines that the
sale was for less than fair consideration and such sale occurred while the
mortgagor was insolvent and within one year (or within the state statute of
limitations if the trustee in bankruptcy elects to proceed under state
fraudulent conveyance law) of the filing of bankruptcy.
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Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be contained
in any other type of mortgage instrument. A power of sale 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 any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such sale,
the trustee under a deed of trust must record a notice of default and notice of
sale and send a copy to the mortgagor 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 mortgagor 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 acceleration) plus the expenses incurred in enforcing the obligation.
In other states, the mortgagor 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, the procedure for public sale, the
parties entitled to notice, the method of giving notice and the applicable time
periods are governed by state law and vary among the states. Foreclosure of a
deed to secure debt is also generally accomplished by a non-judicial sale
similar to that required by a deed of trust, except that the lender or its
agent, rather than a trustee, is typically empowered to perform the sale in
accordance with the terms of the deed to secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a public
sale because of the difficulty in determining the value of such property at the
time of sale, due to, among other things, redemption rights which may exist and
the possibility of physical deterioration of the property during the foreclosure
prodeedings. Potential buyers also may be reluctant to purchase property at a
foreclosure sale as a result of the 1980 decision of the United States Court of
Appeals for the Fifth Circuit in Durrett v. Washington National Insurance
Company. The court in Durrett held that even a non-collusive, regularly
conducted foreclosure sale was a fraudulent transfer under Section 67d of the
former Bankruptcy Act (Section 548 of the current Bankruptcy Code) and,
therefore, could be rescinded in favor of the bankrupt's estate, if (i) the
foreclosure sale was held while the debtor was insolvent and not more than one
year prior to the filing of the bankruptcy petition and (ii) the price paid for
the foreclosed property did not represent "fair consideration" ("reasonably
equivalent value" under the Bankruptcy Code). For these reasons, it is common
for the lender to purchase the mortgaged property for an amount equal to or less
than the underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses which may be recovered by a lender. Thereafter, subject to the
mortgagor's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and have
both the benefits and burdens of ownership of the mortgaged property. For
example, the lender will have the obligation to pay debt service on any senior
mortgages, to pay taxes, obtain casualty insurance and to make such repairs at
its own expense as are necessary to render the property suitable for sale.
Frequently, the lender employs a third party management company to manage and
operate the property. 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 costs of management and operation of
those mortgaged properties which are hotels, motels or restaurants or nursing or
convalescent homes or hospitals may be particularly significant because of the
expertise, knowledge and, with respect to nursing or convalescent homes or
hospitals, regulatory compliance, required to run such operations and the effect
which foreclosure and a change in ownership may have on the public's and the
industry's (including franchisors') perception of the quality of such
operations. The lender will commonly obtain the services of a real estate broker
and pay the broker's commission in connection with the sale of the property.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property. Moreover, a
lender commonly incurs substantial legal fees and court costs in acquiring a
mortgaged property through
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contested foreclosure and/or bankruptcy proceedings. Furthermore, a few states
require that any environmental contamination at certain types of properties be
cleaned up before a property may be resold. In addition, a lender may be
responsible under federal or state law for the cost of cleaning up a mortgaged
property that is environmentally contaminated. See "Certain Legal Aspects of
Mortgage Loans -- Environmental Legislation." Generally, state law controls the
amount of foreclosure expenses and costs, including attorneys' fees, that may be
recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior mortgages
to avoid their foreclosure. In addition, in the event that the foreclosure of a
junior mortgage triggers the enforcement of a "due-on-sale" clause contained in
a senior mortgage, the junior mortgagee may be required to pay the full amount
of the senior mortgage to avoid its foreclosure. Accordingly, with respect to
those Mortgage Loans which are junior mortgage loans, if the lender purchases
the property, the lender's title will be subject to all senior mortgages, prior
liens and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
In connection with a Series of Securities for which a REMIC election is
made, the REMIC provisions of the Code and the Indenture or Trust Agreement, as
applicable, may require the Master Servicer to hire an independent contractor to
operate any foreclosed property relating to Mortgage Loans.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an interest
in the property which is subordinate to the mortgage being foreclosed, from
exercise of their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. 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 cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right which exists
prior to completion of the foreclosure, is not waivable by the mortgagor, must
be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former mortgagor pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. 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.
Under the REMIC provisions of the Code currently in effect, property
acquired by foreclosure generally must not be held for more than two years. The
Prospectus Supplement with respect to a Series of Securities for which a REMIC
election is made will specify whether the Indenture or Trust Agreement, as
applicable, for such Series will permit foreclosed property to be held for more
than two years if the Internal Revenue
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Service grants an extension of time within which to sell such property or
independent counsel renders an opinion to the effect that holding such property
for such additional period is permissible under the REMIC provisions of the
Code.
Anti-Deficiency Legislation
Some or all of the Mortgage Loans may be nonrecourse loans, as to which
recourse may be had only against the specific property securing the related
Mortgage Loan and a personal money judgment may not be obtained against the
mortgagor. Even if a mortgage loan by its terms provides for recourse to the
mortgagor, some states impose prohibitions or limitations on such recourse. For
example, statutes in some states limit the right of the lender to obtain a
deficiency judgment against the mortgagor following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former mortgagor equal to the difference between the net amount realized upon
the public sale of the real property and the amount due to the lender. Some
states require the lender to exhaust the security afforded under a mortgage by
foreclosure in an attempt to satisfy the full debt before bringing a personal
action against the mortgagor. In certain other states, the lender has the option
of bringing a personal action against the mortgagor on the debt without first
exhausting such security; however, in some of these states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. In some cases, a lender will be precluded from exercising any
additional rights under the note or mortgage if it has taken any prior
enforcement action. Consequently, the practical effect of the election
requirement, in those states permitting such election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the mortgagor. Finally, other statutory provisions limit any
deficiency judgment against the former mortgagor following a judicial sale to
the excess of the outstanding debt over the fair market value of the property at
the time of the public sale. The purpose of these statutes is generally to
prevent a lender from obtaining a large deficiency judgment against the former
mortgagor as a result of low or no bids at the judicial sale.
Leaseholds
Mortgage Loans may be secured by a mortgage on a ground lease. Leasehold
mortgages are subject to certain risks not associated with mortgage loans
secured by the fee estate of the mortgagor. The most significant of these risks
is that the ground lease creating the leasehold estate could terminate, leaving
the leasehold mortgagee without its security. The ground lease may terminate if,
among other reasons, the ground lessee breaches or defaults in its obligations
under the ground lease or there is a bankruptcy of the ground lessee or the
ground lessor. This risk may be minimized if the ground lease contains certain
provisions protective of the mortgagee, but the ground leases that secure
Mortgage Loans may not contain some of these protective provisions, and
mortgages may not contain the other protections discussed in the next paragraph.
Protective ground lease provisions include the right of the leasehold mortgagee
to receive notices from the ground lessor of any defaults by the mortgagor; the
right to cure such defaults, with adequate cure periods; if a default is not
susceptible of cure by the leasehold mortgagee, the right to acquire the
leasehold estate through foreclosure or otherwise; the ability of the ground
lease to be assigned to and by the leasehold mortgagee or purchaser at a
foreclosure sale and for the concomitant release of the ground lessee's
liabilities thereunder; and the right of the leasehold mortgagee to enter into a
new ground lease with the ground lessor on the same terms and conditions as the
old ground lease in the event of a termination thereof.
In addition to the foregoing protections, a leasehold mortgagee may require
that the ground lease or leasehold mortgage prohibit the ground lessee 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. As further protection, a leasehold mortgage may provide
for the assignment of the debtor-ground lessee's right to reject a lease
pursuant to Section 365 of the Bankruptcy Reform Act of 1978, as amended (11
U.S.C.) (the "Bankruptcy Code"), although the enforceability of such clause has
not been established. Without the protections described in the foregoing
paragraph, a leasehold mortgagee may lose the collateral securing its leasehold
mortgage. In addition, terms and conditions of a leasehold mortgage are subject
to the terms and conditions of the ground lease. Although certain rights given
to a ground lessee can be limited by the terms of
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a leasehold mortgage, the rights of a ground lessee or a leasehold mortgagee
with respect to, among other things, insurance, casualty and condemnation will
be governed by the provisions of the ground lease.
Bankruptcy Laws
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) are
automatically stayed upon the filing of the bankruptcy petition, and, usually,
no interest or principal payments are made during the course of the bankruptcy
case. The delay and the consequences thereof caused by such 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 for the lender are met, the amount and terms of a mortgage secured by
property of the debtor may be modified under certain circumstances. The
outstanding amount of the loan secured by the real property may be reduced to
the then current value of the property (with a corresponding partial reduction
of the amount of the 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, which reduction may result from a reduction in the rate of interest
and/or the alteration of the repayment schedule (with or without affecting the
unpaid principal balance of the loan), and/or an extension (or reduction) of the
final maturity date. Some courts with federal bankruptcy jurisdiction have
approved plans, based on the particular facts of the reorganization case, that
effected the curing of a mortgage loan default by paying arrearages over a
number of years. Also, under federal bankruptcy law, a bankruptcy court may
permit a debtor through its rehabilitative plan to deaccelerate a secured loan
and to reinstate the loan even though the lender accelerated the mortgage loan
and final judgment of foreclosure had been entered in state court (provided no
sale of the property had yet occurred) prior to the filing of the debtor's
petition. This may be done even though the full amount due under the original
loan is never repaid.
Federal bankruptcy law may also interfere with or affect the ability of the
secured mortgage lender to enforce an assignment by a mortgagor of rents and
leases related to the Mortgaged Property if the related mortgagor is in a
bankruptcy proceeding. Under Section 362 of the Bankruptcy Code, the mortgagee
will be stayed from enforcing the assignment, and the legal proceedings
necessary to resolve the issue can be time consuming and may result in
significant delays in the receipt of the rents. Rents and other proceeds of a
Mortgage Loan also may escape an assignment thereof if the assignment is not
fully perfected under state law prior to commencement of the bankruptcy
proceeding. Under the law of most states, hotel and motel room rates are not
considered rents and, under the Bankruptcy Code, would not be deemed to be cash
collateral in the event of the mortgagor's bankruptcy, even if the lender's
security interest were properly perfected under the UCC.
To the extent that a mortgagor's ability to make payment on a mortgage loan
is dependent on its receipt of payments of rent under a lease of the related
property, such 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, (a) assume the lease
and retain it or assign it to a third party or (b) reject the lease. If the
lease is assumed, the trustee or debtor in possession (or assignee, if
applicable) must cure any 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, however, as the lessor may be
forced to continue under the lease with a lessee that is a poor credit risk or
an unfamiliar tenant if the lease was assigned, and any
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assurances provided to the lessor may, in fact, be inadequate. If the lease is
rejected, the lessor will be treated as an unsecured creditor with respect
to its claim for damages for termination of the lease. In addition, pursuant to
Section 502(b)(6) of the Bankruptcy Code, a lessor's damages for lease rejection
in respect of future rent installments are limited to the rent reserved by the
lease, without acceleration, for the greater of one year, or 15%, not to exceed
three years, of the remaining term of the lease.
In a bankruptcy or similar proceeding, action may be taken seeking the
recovery as a preferential transfer of any payments made by the mortgagor under
the related mortgage loan to the lender. Payments on long-term debt may be
protected from recovery as preferences if they are payments in the ordinary
course of business made on debts incurred in the ordinary course of business.
Whether any particular payment would be protected depends upon the facts
specific to a particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its
costs and expenses in preserving or selling the mortgaged property ahead of
payment to the lender. In certain circumstances, a debtor in bankruptcy may have
the power to grant liens senior to the lien of a mortgage, and analogous state
statutes and general principles of equity also may provide a mortgagor with
means to halt a foreclosure proceeding or sale and to force a restructuring of a
mortgage loan on terms a lender would not otherwise accept. Moreover, the laws
of certain states also give priority to certain tax liens over the lien of a
mortgage or deed of trust. Under the Bankruptcy Code, if the court finds that
actions of the mortgagee have been unreasonable, the lien of the related
mortgage may be subordinated to the claims of unsecured creditors.
Environmental Legislation
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property.
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 (a "superlien") including those of existing
mortgages; in these states, the lien of a mortgage contemplated by this
transaction may lose its priority to such a superlien.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), a lender may be liable either to
the government or to private parties for clean-up costs on a property securing a
loan, even if the lender does not cause or contribute to the contamination.
CERCLA imposes strict, as well as joint and several, liability on several
classes of potentially responsible parties, including current owners and
operators of the property, regardless of whether they caused or contributed to
the contamination. Many states have laws similar to CERCLA.
Lenders may be held liable under CERCLA as owners or operators unless they
qualify for the secured creditor exemption to CERCLA. Secured lenders may
qualify for the exemption unless they participate in management of the property
sufficiently to void the exemption. Also, if the lender takes title to or
possession of the property, the secured creditor exemption may be deemed to be
unavailable and the lender may be liable for clean-up or other remedial costs
pursuant to CERCLA.
The rule of the Environmental Protection Agency ("EPA") on lender liability
under CERCLA, finalized by the EPA on April 29, 1992, would offer substantial
protection to lenders by defining the activities in which a lender can engage
and still have the benefit of the secured creditor exemption. The EPA rule
permits a lender to foreclose, purchase at foreclosure sale or take a deed in
lieu of foreclosure, without incurring CERCLA liability as an owner or operator
of the facility, provided that certain guidelines are followed. Preforeclosure
activities, such as servicing existing loans and working out problem loans, are
governed by a test for participation in management that can be met by a lender
by carefully staying within the bounds of the EPA rule. The EPA intended for the
rule to be binding in suits by private parties, as well as actions by the EPA.
In the recent decision of Kelley v. EPA, 15 F.3d 1100 (D.C. Cir. 1994), the U.S.
Court of Appeals for the District of Columbia vacated EPA's lender liability
rule, holding that EPA had no authority under CERCLA to promulgate a rule
construing CERCLA's liability scheme, and that the rule was not to be given
judicial deference in any context, that is, in either government or private
party actions. Accordingly, unless and until
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that decision is reversed or legislation is passed to address the issue, the
scope of the secured lender exemption will be subject to the interpretative
uncertainties that existed prior to the promulgation of EPA's rule.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly construed
the provision in CERCLA excluding secured lenders from those who may be liable
for remedial costs. The court suggested that a lender with enough control over a
mortgagor's financial affairs to have the capacity to influence the mortgagor's
decision-making concerning treatment of hazardous material could be liable under
CERCLA. A subsequent decision by the United States Court of Appeals for the
Ninth Circuit in In re Bergsoe Metal Corp. ruled that a secured lender had no
liability absent "some actual management of the facility" on the part of the
lender.
The EPA rule does not protect a lender from liability under CERCLA in cases
where the lender arranges for disposal of hazardous substances or for
transportation of hazardous substances. The EPA rule also does not govern
liability for clean-up costs under federal laws other than CERCLA, in particular
Subtitle I of the federal Resource Conservation and Recovery Act, which
regulates underground storage tanks.
Although the EPA rule does not govern suits under the laws of many states
that are similar to CERCLA, some states with laws similar to CERCLA have enacted
lender protection amendments.
If a lender is or becomes liable, it may bring an action for contribution
against the owner or operator who created the environmental hazard, but that
person or entity may be bankrupt or otherwise judgment proof. It is possible
that clean-up costs could become a liability of the Trust Estate or Trust Fund,
as applicable, for a Series and occasion a loss to the Holder of a Security in
certain circumstances described above if such remedial costs were incurred.
The Prospectus Supplement for a Series of Securities will state whether an
environmental assessment of the Mortgaged Properties was conducted and the
extent of such assessment.
The Servicer, the Master Servicer or the Special Servicer, as applicable,
acting on behalf of the Trust Estate or Trust Fund, as applicable, will acquire
title to a Mortgaged Property underlying a Mortgage Loan or take over its
operation only after complying with certain requirements relating to
environmental matters as set forth herein under "SERVICING OF MORTGAGE LOANS --
Realization Upon Defaulted Mortgage Loans."
Due-on-Sale and Due-on-Encumbrance
Certain of the Mortgage Loans may contain due-on-sale and
due-on-encumbrance clauses. These clauses generally provide that the lender may
accelerate the maturity of the loan if the mortgagor sells or otherwise
transfers or encumbers the mortgaged property. Certain of these clauses may
provide that, upon an attempted breach thereof by the mortgagor of an otherwise
non-recourse loan, the mortgagor becomes personally liable for the mortgage
debt. The enforceability of due-on-sale clauses has been the subject of
legislation or litigation in many states and, in some cases, the enforceability
of these clauses was limited or denied. However, with respect to certain loans
the Garn-St Germain Depository Institutions Act of 1982 preempts state
constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms subject to certain limited exceptions. Unless otherwise
provided in the related Prospectus Supplement, a Master Servicer, on behalf of
the Trust Estate or Trust Fund, as applicable, for a Series, will determine
whether to exercise any right the Trustee may have as mortgagee to accelerate
payment of any such Mortgage Loan or to withhold its consent to any transfer or
further encumbrance in a manner consistent with its usual general mortgage
servicing standard.
Exempted from the general rule of enforceability of due-on-sale clauses are
mortgage loans (originated other than by federal savings and loan associations
and federal savings banks) that were made or assumed during the period beginning
on the date a state, by statute or final appellate court decision having
statewide effect, prohibited the exercise of due-on-sale clauses and ending on
October 15, 1982 ("Window Period Loans"). However, this exception applies only
to transfers of property underlying Window Period Loans occurring between
October 15, 1982 and October 15, 1985 and does not restrict enforcement of a
due-on sale clause in connection with the current transfers of property
underlying multifamily or commercial Window Period Loans unless the property
underlying such Window Period Loan is located in Michigan, which has
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enacted a statute which extended the prohibition on enforcement of due-on-sale
clauses. Due-on-sale clauses contained in mortgage loans originated by federal
savings and loan associations or federal savings banks are fully enforceable
pursuant to regulations of the Federal Home Loan Bank Board which preempts state
law restrictions on the enforcement of due-on-sale clauses.
Subordinate Financing
Where the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor 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 mortgagor is
additionally burdened. Third, if the mortgagor 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, Prepayment Charges and Prepayments
Forms of notes and mortgages used by lenders may contain provisions
obligating the mortgagor to pay a late charge or additional interest if payments
are not timely made, and in some circumstances may provide for prepayment fees
or yield maintenance penalties if the obligation is paid prior to maturity or
prohibit such prepayment for a specified period. 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 may collect from a mortgagor as an additional charge if the loan
is prepaid. The enforceability under the laws of a number of states of
provisions providing for prepayment fees or penalties upon, or prohibition of,
an involuntary prepayment is unclear, and no assurance can be given that, at the
time a Prepayment Premium is required to be made on a Mortgage Loan in
connection with an involuntary prepayment, the obligation to make such payment,
or the provisions of any such prohibition, will be enforceable under applicable
state law. The absence of a restraint on prepayment, particularly with respect
to Mortgage Loans having higher Mortgage Rates, may increase the likelihood of
refinancing or other early retirements of the Mortgage Loans.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential (including
multifamily but not other commercial) first mortgage loans originated by certain
lenders after March 31, 1980. A similar federal statute was in effect with
respect to mortgage loans made during the first three months of 1980. The
statute 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.
The Company has been advised by counsel that a court interpreting Title V
would hold that first mortgage loans secured by primarily residential properties
that are originated on or after January 1, 1980 are subject to federal
preemption. Therefore, in a state that has not taken the requisite action to
reject application of Title V or to adopt a provision limiting discount points
or other charges prior to origination of such mortgage loans, any such
limitation under such state's usury law would not apply to such mortgage loans.
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In any state in which application of Title V has been expressly rejected or
a provision limiting discount points or other charges is adopted, no Mortgage
Loan originated after the date of such state action will be eligible for
inclusion in a Trust Estate or Trust Fund, as applicable, for a Series unless
(i) such Mortgage Loan provides for such interest rate, discount points and
charges as are permitted in such state or (ii) such Mortgage Loan provides that
the terms thereof shall be construed in accordance with the laws of another
state under which such interest rate, discount points and charges would not be
usurious and the mortgagor's counsel has rendered an opinion that such choice of
law provision would be given effect.
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 mortgagor who enters military service after the
origination of such mortgagor's mortgage loan (including a mortgagor 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 mortgagor's active duty status, unless a
court orders otherwise upon application by the lender. The Relief Act applies to
mortgagors 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 mortgagors
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 Mortgage Loans 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 any 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 Securities,
unless the related Prospectus Supplement specifies that such shortfalls will be
covered by advances or by Credit Support provided in connection with such Series
of Securities. In addition, the Relief Act imposes limitations that would impair
the ability of the Servicer to foreclose on an affected Mortgage Loan during the
mortgagor's period of active duty status, and, under certain circumstances,
during an additional three month period thereafter. Thus, in the event that such
a Mortgage Loan goes into default, there may be delays and losses occasioned
thereby.
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 "Crime
Control Act"), 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 of, illegal drug or
RICO activities.
Alternative Mortgage Instruments
Alternative mortgage instruments, including ARMs originated by
non-federally chartered lenders, have historically been subject to a variety of
restrictions. Such restrictions differed from state to state, resulting in
difficulties in determining whether a particular alternative mortgage instrument
originated by a state-chartered lender complied with applicable law. These
difficulties were alleviated substantially as a result of the enactment of Title
VIII of the Garn-St. Germain Act ("Title VIII"). Title VIII provides that,
notwithstanding any state law to the contrary, state-chartered banks may
originate "alternative mortgage instruments" (including ARMs) in accordance with
regulations promulgated by the Comptroller of the Currency with respect to
origination of alternative mortgage instruments by national banks; state
chartered credit unions may
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originate alternative mortgage instruments in accordance with regulations
promulgated by the National Credit Union Administration with respect to
origination of alternative mortgage instruments by federal credit unions and all
other non-federally chartered housing creditors, including state-chartered
savings and loan associations; and state-chartered savings banks and mortgage
banking companies may originate alternative mortgage instruments in accordance
with the regulations promulgated by the Federal Loan Bank Board, as succeeded by
the OTS, with respect to origination of alternative mortgage instruments by
federal savings and loan associations. Title VIII provides that any state may
reject applicability of the provisions of Title VIII by adopting, prior to
October 15, 1985, a law or constitutional provision expressly rejecting the
applicability of such provisions. Certain states have taken such action.
THE INDENTURE
The following summaries describe certain provisions of the Indenture. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Indenture.
Certain Covenants
The Issuer may not liquidate or dissolve, without the consent of the
Holders of not less than 66 2/3% of the aggregate outstanding principal balance
of the Bonds of each Series. The Issuer also may not consolidate or merge with
or into any other Person or convey or transfer its properties and assets
substantially as an entirety without the consent of Holders of not less than 66
2/3% of the aggregate outstanding principal balance of the Bonds of each Series,
and unless (a) the Person (if other than the Issuer) formed or surviving such
merger or consolidation or acquiring such assets is a Person organized under the
laws of the United States of America or any State and shall have expressly
assumed, by supplemental indenture in form satisfactory to the Trustee, the due
and punctual payment of principal of and interest on all Bonds and the
performance of every applicable covenant of the Indenture to be performed by the
Issuer, (b) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing, (c) the Trustee shall
have received a letter from each Rating Agency rating any outstanding Bonds to
the effect that the rating issued with respect to such Bonds is confirmed
notwithstanding the consummation of such transaction and (d) the Trustee shall
have received from the Issuer an Officers' Certificate and an Opinion of
Counsel, each to the effect that, among other things, such transaction complies
with the foregoing requirements.
The Issuer may incur, assume, have outstanding or guarantee any
indebtedness other than pursuant to the Indenture subject to certain conditions
and limitations.
Modification of Indenture
Except as set forth below, with the consent of the Holders of not less than
a majority in the principal amount of the outstanding Bonds of each Series or
Class of such Series to be affected, the Trustee and the Issuer may amend the
Indenture or execute a supplemental indenture, to add provisions to or change or
eliminate any provisions of the Indenture relating to such Series or modify in
any manner the rights of the Holders of the Bonds of such Series.
Without the consent of the Holder of each outstanding Bond affected,
however, except as provided below, no such amendment or supplemental indenture
may (i) change the Stated Maturity of the principal of or interest on any Bond
or reduce the principal amount thereof, the Bond Interest Rate for any Bond,
(ii) reduce the percentage of aggregate outstanding principal of the Bonds of
the affected Series or Class of such Series, the consent of the Holders of which
is required for the authorization of any such amendment or supplemental
indenture or for any waiver of compliance with certain provisions of the
Indenture or certain defaults thereunder and their consequences, (iii) impair or
adversely affect the Collateral securing a Series of Bonds, (iv) permit the
creation of any lien ranking prior to or on a parity with the lien of the
Indenture with respect to any part of the property subject to the lien of the
Indenture or terminate the lien of the Indenture on any property at any time
subject thereto or deprive the Holder of any Bonds of the security afforded by
the lien of the Indenture, (v) reduce the percentage of the aggregate
outstanding principal amount of any Series (or Class of such Series), the
consent of the Holders of which is required to direct the Trustee to liquidate
the
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Mortgage Assets for such Series, or (vi) modify the provisions of the Indenture
regarding any modifications of such Indenture requiring consent of the Holders
of Bonds, except to increase the percentage or number of Holders required to
consent to such modification of such Indenture or to provide that additional
provisions of the Indenture cannot be modified or waived without the consent of
the Holder of each Bond affected thereby.
The Issuer and the Trustee also may amend the Indenture or enter into the
supplemental indentures, without obtaining the consent of Holders of any Series,
to cure any ambiguity or to correct or supplement any provision of the Indenture
or any supplemental indenture which may be defective or inconsistent with any
other provision, or to make or to amend any other provisions with respect to
matters or questions arising under the Indenture or any supplemental indenture,
provided that such actions shall not materially adversely affect the interests
of the Holders of the Bonds. Such amendments also may be made and such
supplemental indentures also may be entered into without the consent of
Bondholders to set forth the terms of and security for additional Series, to
evidence the succession of another person to the Issuer, to add to the
conditions, limitations and restrictions on certain terms of any Series and to
the covenants of the Issuer, to surrender any right or power conferred upon the
Issuer, to convey, transfer, assign, mortgage or pledge any property to the
Trustee, to correct or amplify the description of any property subject to the
lien of the Indenture, to modify the Indenture to the extent necessary to effect
the Trustee's qualification under the TIA or comply with the requirements of the
TIA to make any amendment necessary or desirable to maintain the status of a
REMIC as a REMIC, to amend the provisions of the Indenture relating to
authentication and delivery of a Series with respect to which a supplemental
indenture has not theretofore been authorized, or to evidence and provide for
the acceptance of appointment by a successor trustee.
Events of Default
The Prospectus Supplement for a Series of Bonds will set forth the events
constituting "Events of Default" with respect to such Series. Such Events of
Default generally will include: (i) a continuing default for the number of days
specified in the related Prospectus Supplement in the payment of interest on any
Bond of such Series; (ii) a continuing default for the number of days specified
in the related Prospectus Supplement in the payment of principal, when due, of
any Bonds of such Series; (iii) a default in the observance of, or breach of,
any covenant or negative covenant of the Issuer made in the Indenture, and the
continuation of any such default or breach for a period exceeding the number of
days specified in the related Prospectus Supplement after notice to the Issuer
by the Trustee or to the Issuer and the Trustee by the Holders of at least 25%
of the then aggregate outstanding principal amount of the Bonds of such Series
(unless the default or breach is with respect to certain covenants specified in
the Indenture not requiring such continuation or notice); and (iv) certain
events of bankruptcy, insolvency, receivership or reorganization of the Issuer.
Notwithstanding the foregoing, if a Series of Bonds includes a Class of
Subordinate Bonds, the Series Supplement for such a Series may provide that
certain defaults which relate only to such Subordinate Bonds shall not
constitute an Event of Default with respect to the Bonds, under certain
circumstances, and may limit the rights of Holders of Subordinate Bonds to
direct the Trustee to pursue remedies with respect to such defaults, or other
Events of Default. Such limitations, if any, will be specified in the related
Prospectus Supplement.
The Prospectus Supplement for a Series of Bonds will specify the remedies
in case an Event of Default with respect to a Series should occur and be
continuing. Such remedies may include the declaration of all Bonds of such
Series to be due and payable, together with accrued and unpaid interest thereon.
Such declaration may under certain circumstances be rescinded by the Holders of
a specified amount of the then aggregate outstanding principal amount of the
Bonds of such Series. However, in the event that an Event of Default has
occurred as the result of an order or judgment which prevents the application by
the Trustee of the proceeds of any Mortgage Assets securing a Series of Bonds,
the Indenture may allow the Trustee to declare to be due and payable by lot a
portion of the Bonds of such Series then outstanding in a principal amount equal
to the outstanding Asset Values of such Mortgage Assets. If so specified in the
related Prospectus Supplement, such declaration by the Trustee will be the sole
remedy for the Holders of the Bonds of such Series upon the happening of such
occurrences.
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The Indenture will provide that the Trustee shall, within 90 days (or such
other time period specified in the related Prospectus Supplement) after the
occurrence of an Event of Default with respect to a Series, mail to the Holders
of such Series notice of all uncured or unwaived defaults known to it; provided
that, except in the case of an Event of Default in the payment of the principal
of or interest on any Bonds, the Trustee shall be protected in withholding such
notice if it determines in good faith that the withholding of such notice is in
the interest of the Bondholders of such Series.
An Event of Default with respect to one Series will not necessarily be an
Event of Default with respect to any other Series.
The Prospectus Supplement for a Series of Securities may specify that, if
following an Event of Default with respect to such Series, the Bonds of such
Series have been declared to be due and payable, the Trustee may, but shall not
be obligated to, in its sole discretion, refrain from liquidating the related
Mortgage Assets if (i) the Trustee determines that the amounts receivable with
respect to such Mortgage Assets and any Credit Support will be sufficient to pay
(a) all principal of and interest on the Bonds in accordance with their terms
without regard to the declaration of acceleration and (b) all sums due the
Trustee and any other administrative amounts required to be paid under the
Indenture and (ii) Holders of the requisite percentage of the Securities of such
Series have not directed the Trustee to sell the related Mortgage Assets as so
specified in the Indenture. In addition, the related Prospectus Supplement will
state the conditions under which the Trustee is permitted to sell the Trust
Estate following certain Events of Default. Such conditions typically will
include that (a) the Trustee determines that the amounts receivable with respect
to the Mortgage Assets and any Credit Support will not be sufficient on an
ongoing basis to pay in full the principal of and accrued interest on the Bonds
of such Series and to pay sums due the Trustee and other administrative expenses
specified in the Indenture and the Trustee obtains the consent of Holders of 66
2/3% of the aggregate outstanding principal amount of the Bonds of such Series
or (b) the Trustee obtains the consent of 100% of the aggregate outstanding
principal amount of the Bonds of such Series, and subject to the provisions of
the related Indenture, the obligor under the Credit Support. The proceeds of a
sale of Mortgage Assets will be applied as provided in the related Prospectus
Supplement to the payment of amounts due the Trustee and other administrative
expenses specified in the Indenture and then distributed pro rata among the
Bondholders of such Series (without regard to Class, provided that Subordinate
Bonds will be subordinate to Senior Bonds of the Series to the extent provided
in the related Prospectus Supplement) according to the amounts due and payable
on the Bonds for principal and interest at the time such proceeds are
distributed by the Trustee.
In the event the principal of the Bonds of a Series is declared due and
payable as described above, and the Assets securing such Series of Bonds is
sold, the Holders of any such Bonds issued at a discount from par ("original
issue discount") may be entitled to receive no more than an amount equal to the
unpaid principal amount thereof unless unamortized original issue discount.
Pursuant to the Indenture, as security for the payment by the Issuer of the
compensation and expenses of the Trustee and any sums to which the Trustee may
be entitled to indemnification by the Issuer, the Issuer may grant to the
Trustee a senior lien on the Assets, which would be senior to the lien of the
Bonds on such Assets. The senior lien will be exercised by the Trustee only if
the Bonds of a Series have been declared due and payable following an Event of
Default, the acceleration of the maturity of such Bonds as a result of such
Event of Default has not been annulled or rescinded, and the moneys collected by
the Trustee in respect to such Bonds are being applied as provided in the
Indenture.
The Trustee shall not be deemed to have knowledge of any Event of Default
or Default described in clauses (iv) and (v) of the first paragraph of this
"Event of Default" subsection unless an officer in the Trustee's corporate trust
department has actual knowledge thereof. Subject to the provisions of the
Indenture relating to the duties of the Trustee, in case an Event of Default
shall occur and be continuing, the Trustee will be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the Bondholders of a Series, unless such Bondholders shall
have offered to the Trustee reasonable security or indemnity. Subject to such
provisions for indemnification and certain limitations contained in the
Indenture, the Holders of a majority of the then aggregate outstanding principal
amount of the Bonds of a Series (or of such Classes specified in the related
Prospectus Supplement) will have the right to direct the
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time, method and place of conducting any proceeding for any remedy available to
the Trustee or exercising any trust or power conferred on the Trustee with
respect to such Series. In addition, the Holders of a majority of the then
aggregate outstanding principal amount of the Bonds of a Series (or of such
Classes specified in the related Prospectus Supplement) may, in certain cases,
waive any default with respect to such Series, except a default in payment of
principal or interest or in respect of a covenant or provision which cannot be
modified without the consent of all Bondholders affected.
The Indenture for a Series of Bonds may provide that no Holder of Bonds of
such Series will have the right to institute any Proceeding with respect to the
Indenture, unless (i) such Holder previously has given to the Trustee written
notice of a continuing Event of Default with respect to such Series and has
offered the Trustee satisfactory indemnity, (ii) the Holders of not less than
25% of the then aggregate outstanding principal amount of the Bonds of such
Series have made written request upon the Trustee to institute such Proceeding
as Trustee and have offered satisfactory indemnity, (iii) the Trustee has, for
60 days after receipt of such notice, request and offer of indemnity, failed to
institute any such Proceeding and (iv) no direction inconsistent with such
written request has been given to the Trustee during such 60-day period by the
Holders of a majority of the then aggregate outstanding principal amount of the
Bonds of such Series, provided, however, that in the event that the Trustee
receives conflicting requests and indemnities from two or more groups of
Bondholders, each representing less than a majority of the aggregate outstanding
principal amount of the Bonds of such Series, the Trustee may in its sole
discretion determine what action with respect to the Proceedings, if any, shall
be taken.
Authentication and Delivery of Bonds
The Issuer may from time to time deliver Bonds executed by it to the
Trustee and order that the Trustee authenticate such Bonds. Upon the receipt of
such Bonds and such order and subject to the Issuer's compliance with certain
conditions specified in the Indenture, the Trustee will authenticate and
deliver such Bonds as the Issuer may direct. The Trustee may be authorized to
appoint an agent for purposes of authenticating and delivering any Series of
Bonds (the "Authenticating Agent").
Satisfaction and Discharge of the Indenture
The Indenture will be discharged as to a Series (except with respect to certain
continuing rights specified in the Indenture), (a)(1) upon the delivery to
the Trustee for cancellation of all of the Bonds of such Series other than
Bonds which have been mutilated, lost or stolen and have been replaced or paid
and Bonds for which money has been deposited in trust for the full payment
thereof (and thereafter repaid to the Issuer and discharged from such trust)
as provided in the Indenture, or (2) at such time as all Bonds of such Series
not previously cancelled by the Trustee have become, or, within one year, will
become, due and payable or called for redemption and the Issuer shall have
deposited with the Trustee an amount sufficient to repay all of the Bonds and
(b) the Issuer shall have paid all other amounts payable under the Indenture
with respect to such Series.
Issuer's Annual Compliance Statement
The Issuer will be required to file annually with the Trustee a written
statement as to fulfillment of its obligations under the Indenture.
List of Bondholders
Three or more Holders of a Series of Bonds which have each owned the Bonds
for at least six months may, by written application to the Trustee, request
access to the list maintained by the Trustee of all Holders of the same Series
or of all Bonds, as specified in the request, for the purpose of communicating
with other Bondholders with respect to their rights under the Indenture. The
Trustee may elect not to afford the requesting Bondholders access to the list of
Bondholders if it agrees to mail the desired communication or proxy, on behalf
of the requesting Bondholders, to all such Bondholders.
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Meetings of Bondholders
Meetings of Bondholders may be called at any time and from time to time to
(i) give any notice to the Issuer or to the Trustee, give directions to the
Trustee, consent to the waiver of any Default or Event of Default under the
Indenture, or to take any other action authorized to be taken by Bondholders in
connection therewith, (ii) remove the Trustee and to appoint a successor
Trustee, (iii) consent to the execution of supplemental indentures or (iv) take
any other action authorized to be taken by or on behalf of the Bondholders of
any specified percentage of the aggregate outstanding principal amount of the
Bonds. Such meetings may be called by the Trustee, the Issuer or by the Holders
of 10% in aggregate outstanding principal amount of the Bonds of any such
Series.
Fiscal Year
The fiscal year of each Issuer ends on December 31.
Trustee's Annual Report
The Trustee will be required to mail each year to all Bondholders a brief
report relating to its eligibility and qualification to continue as the Trustee
under the Indenture, any amounts advanced by it under the Indenture which remain
unpaid on the date of the report, the amount, interest rate and maturity date of
certain indebtedness owing by the Issuer (or any other obligor on such Series)
to the Trustee in its individual capacity, the property and funds physically
held by the Trustee as such, any release or release and substitution of property
subject to the lien of the Indenture which has not been previously reported, any
additional issuance of Bonds of such Series not previously reported and any
action taken by it which materially affects the Bonds and which has not been
previously reported.
THE TRUST AGREEMENT
The Certificates of each Series will be issued pursuant to a Trust
Agreement among the Depositor, the Trustee and, in the event the Trust Fund
includes Mortgage Loans, the Master Servicer and any Special Servicer. The
following summaries describe certain provisions of the Trust Agreement. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Trust Agreement.
Assignment of Mortgage Assets
General
At the time of issuance of a Series of Certificates, the Depositor will
transfer, convey and assign to the Trustee all right, title and interest of the
Depositor in the Mortgage Assets and other property to be included in the Trust
Fund for a Series of Certificates. Such assignment will include all principal
and interest due on or with respect to the Mortgage Assets after the Cut-off
Date specified in the related Prospectus Supplement other than any Retained
Interest. The Trustee will, concurrently with such assignment, execute and
deliver the Certificates for such Series in exchange for the Mortgage Assets and
other Assets comprising the Trust Fund for such Series.
Each Mortgage Asset will be identified in a schedule appearing as an
exhibit to the related Trust Agreement. Such schedule may include, among other
things, detailed information (i) in respect to each Mortgage Loan included in
the related Trust Fund, including without limitation, the address of the related
Mortgaged Property and type of such property, the Mortgage Rate and, if
applicable, the applicable index, margin, adjustment rate and any rate cap
information, the original and remaining term to maturity, the original and
outstanding principal balance and balloon payment, if any, the Value,
Loan-to-Value Ratio and Debt Service Coverage Ratio as of the date indicated and
payment and prepayment provisions, if applicable, and (ii) in respect of each
Mortgage Certificate included in the related Trust Fund, including without
limitation, the Mortgage Certificate, Mortgage Certificate Servicer and Mortgage
Certificate Trustee, the pass-through rate or bond rate or formula for
determining such rate, the issue date and original and remaining
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term to maturity, if applicable, the original and outstanding principal amount
and payment provisions, if applicable.
Assignment of Mortgage Loans
The Depositor will, as to each Mortgage Loan, deliver or cause to be
delivered to the Trustee, or, as specified in the related Prospectus Supplement,
the Custodian, the Mortgage Note endorsed without recourse to the order of the
Trustee or in blank, the original Mortgage with evidence of recording indicated
thereon (except for any Mortgage not returned from the public recording office,
in which case a copy of such Mortgage will be delivered, together with a
certificate that the original of such Mortgage was delivered to such recording
office) and an assignment of the Mortgage in recordable form. The Trustee, or,
if so specified in the related Prospectus Supplement, the Custodian, will hold
such documents in trust for the benefit of the Certificateholders.
If so specified in the related Prospectus Supplement, the Depositor will,
at the time of delivery of the Certificates, cause assignments to the Trustee of
the Mortgage Loans to be recorded in the appropriate public office for real
property records, except in states where, in the opinion of counsel acceptable
to the Trustee, such recording is not required to protect the Trustee's interest
in the Mortgage Loan. If specified in the related Prospectus Supplement, the
Depositor will cause such assignments to be so recorded within the time after
delivery of the Certificates as is specified in the related Prospectus
Supplement. With respect to any Mortgage Loan required to be recorded but not
recorded within such time, the Trust Agreement may, as specified in the related
Prospectus Supplement, require the repurchase from the Trustee of such Mortgage
Loan at the price provided in the related Prospectus Supplement or may permit
such other remedy as is specified in the related Prospectus Supplement.
Repurchase or Substitution of Non-Conforming Loans
The Prospectus Supplement for a Series of Securities will specify the
remedy in the event any document in the Mortgage Loan file delivered to the
Trustee is found by the Trustee within a specified period of days after the
execution of the related Trust Agreement (or promptly after the Trustee's
receipt of any document permitted to be delivered after the Closing Date) to be
defective in any material respect and such defect is not cured within 90 days,
or within such other period specified in the related Prospectus Supplement. Such
remedies may include the substitution for or repurchase of the related Mortgage
Loan or any property acquired in respect thereof from the Trustee at a price
(the "Repurchase Price") equal to the amount specified in the related Prospectus
Supplement.
There can be no assurance that a Mortgage Asset seller will fulfill this
repurchase or substitution obligation, and neither the Master Servicer nor the
Depositor will be obligated to repurchase or substitute for such Mortgage Loan
if the Mortgage Asset seller defaults on its obligation.
With respect to each Mortgage Certificate, the Depositor will deliver or
cause to be delivered to the Trustee (or the custodian) the original certificate
or other definitive evidence of the MBS, together with bond power or other
instruments, certifications or documents required to transfer fully the MBS to
the Trustee for the benefit of the Certificateholders in accordance with the
related MBS Agreement. The related Trust Agreement may require that either the
Depositor or the Trustee promptly cause the MBS to be reregistered, with the
applicable persons, in the name of the Trustee.
Representations and Warranties; Repurchase
The Prospectus Supplement for a Series of Securities will specify the
Mortgage Asset seller or an affiliate thereof or such other person acceptable to
the Depositor making certain representations and warranties with respect to each
Whole Loan constituting a Mortgage Asset in the related Trust Fund, as of a
specified date (the person making such representations and warranties, the
"Warranting Party"). The related Prospectus Supplement will specify the remedies
in the event of a breach of any such representation or warranty, including
whether the Warranting Party will be obligated to cure such breach or repurchase
or replace the affected Mortgage Loan as described below.
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The Trust Agreement for a Series of Securities will provide that the Master
Servicer and/or Trustee will be required to notify promptly the relevant
Warranting Party of any breach of any representation or warranty made by it in
respect of a Mortgage Loan that materially and adversely affects the value of
such Mortgage Loan or the interests therein in the Certificateholder. If so
specified in the related Prospectus Supplement, if such Warranting Party cannot
cure such breach within a specified period following the date on which such
party was notified of such breach, then such Warranting Party will be obligated
to repurchase such Mortgage Loan from the Trustee within a specified period from
the date on which the Warranting Party was notified of such breach, at the
Repurchase Price therefor. If so provided in the Prospectus Supplement for a
Series of Certificates, a Warranting Party, rather than repurchase a Mortgage
Loan as to which a breach has occurred, will have the option, within a specified
period after initial issuance of such Series of Certificates, to cause the
removal of such Mortgage Loan from the Trust Fund and substitute in its place
one or more other Mortgage Loans, in accordance with the standards described in
the related Prospectus Supplement.
With respect to a Trust Fund that includes Mortgage Certificates, the
related Prospectus Supplement will describe any representations or warranties
made with respect to such Mortgage Certificates, the person making them and the
remedies for breach thereof.
Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Master Servicer will be obligated to purchase or substitute for a
Mortgage Asset if a Warranting Party defaults on its obligations to do so, and
no assurance can be given that Warranting Parties will carry out such
obligations with respect to Mortgage Assets.
Reports to Certificateholders
The Trustee or Master Servicer, as specified in the Trust Agreement for a
Series of Certificates, will prepare and forward to each Certificateholder of a
Series on each Distribution Date for such Series, or as soon thereafter as is
practicable, a statement setting forth, to the extent applicable to such Series,
among other things:
(i) the amount of such distribution allocable to principal on the
Mortgage Assets included in the Trust Fund for such Series, separately
identifying the aggregate amount of any principal prepayments included
therein and the amount, if any, advanced by the Master Servicer or by a
Servicer;
(ii) the amount of such distribution allocable to interest on the
Mortgage Assets and the amount, if any, advanced by the Master Servicer or
by a Servicer;
(iii) the amount of servicing compensation due with respect to the
Mortgage Assets and paid during the Due Period commencing on the Due Date
to which such distribution relates and the amount of servicing compensation
during such period attributable to penalties and fees;
(iv) the aggregate outstanding principal balance of the Mortgage
Assets as of the opening of business on the Due Date, after giving effect
to distributions allocated to principal and reported under (i) above;
(v) the aggregate outstanding principal amount of the Certificates of
such Series as of the Due Date, after giving effect to distributions
allocated to principal reported under (i) above;
(vi) with respect to Compound Interest Securities, prior to the
Accrual Termination Date in addition to the information specified in (i)(B)
above, the amount of interest accrued on such Securities during the related
interest accrual period and added to the Accreted Value thereof;
(vii) in the case of Variable Rate Securities, the Variable Interest
Rate applicable to the distribution being made;
(viii) if applicable, the amount of any shortfall (i.e., the
difference between the aggregate amounts of principal and interest which
Certificateholders of such Series would have received if there were
sufficient eligible funds to distribute and the amounts actually
distributed);
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(ix) if applicable, the number and aggregate principal balances of
Mortgage Loans delinquent for (A) two consecutive payments and (B) three or
more consecutive payments, as of the close of the business on the
Determination Date to which such distribution relates;
(x) if applicable, the book value of any REO Property acquired on
behalf of Certificateholders of such Series through foreclosure, grant of a
deed in lieu foreclosure or repossession as of the close of the business on
the business day preceding the Distribution Date to which such distribution
relates;
(xi) if applicable, the amount of coverage under any pool insurance
policy as of the close of business on the applicable Distribution Date;
(xii) if applicable, the amount of coverage under any special hazard
insurance policy as of the close of business on the applicable Distribution
Date;
(xiii) if applicable, the amount of coverage under any bankruptcy
bond as of the close of business on the applicable Distribution Date;
(xiv) in the case of any other Credit Support described in the related
Prospectus Supplement, the amount of coverage of such credit support as of
the close of business on the applicable Distribution Date;
(xv) in the case of any Series of Certificates which includes a
Subordinate Certificate, the subordinated amount, if any, determined as of
the related Determination Date and if the distribution to the Holders of
Senior Certificates is less than their required distribution, the amount of
the shortfall;
(xvi) the amount of any withdrawal from any applicable Reserve Fund
included in amounts actually distributed to Certificateholders of such
Series and the remaining balance of each reserve fund, if any, on such
Distribution Date, after giving effect to distributions made on such date;
and
(xvii) such other information as specified in the related Trust
Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Trustee, unless otherwise specified in the related Prospectus
Supplement, will furnish to each Certificateholder of record at any time during
such calendar year: (a) the aggregate of amounts reported pursuant to (i)
through (iv), (vi), (viii) and (xvi) above for such calendar year and (b) such
information specified in the Trust Agreement to enable Certificateholders to
prepare their tax returns including, without limitation, the amount of original
issue discount accrued on the Certificates of such Series, if applicable.
Information in the Distribution Date and annual reports provided to the
Certificateholders will not have been examined and reported upon by an
independent public accountant. However, the Master Servicer for a Series of
Certificates evidencing an interest in Mortgage Loans will provide to the
Trustee a report by independent public accountants with respect to the Master
Servicer's servicing of the Mortgage Loans. See "Servicing of Mortgage Loans --
Evidence as to Compliance" herein.
Events of Default
Events of Default under the Trust Agreement for each Series include (i) any
failure to distribute to Certificateholders of such Series any required payment
which continues unremedied for five days after the giving of written notice of
such failure to the Master Servicer by the Trustee or the Depositor for a
Series, for a Series of Certificates evidencing an interest in Mortgage Loans,
or to the Trustee by the Depositor for a Series of Certificates evidencing an
interest in Mortgage Certificates, or in either case, to the Master Servicer or
the Depositor and the Trustee by the Holders of Certificates of such Series
evidencing not less than 25% of the aggregate outstanding principal amount of
the Certificates for such Series, (ii) with respect to a Series of Certificates
evidencing an interest in Mortgage Loans, any failure by the Master Servicer
duly to observe or perform in any material respect any other of its covenants or
agreements in the Trust Agreement which continues unremedied for 30 days (or 15
days in the case of a failure to maintain any insurance policy required to be
maintained pursuant to the Trust Agreement) after the giving of written notice
of such failure to the Master Servicer by the Trustee, or to the Master Servicer
and the Trustee by the Holders of Certificates of such Series evidencing not
less than 25% of the aggregate outstanding principal amount of the Certificates
and (iii) certain events in insolvency, readjustment of debt, marshalling of
assets and liabilities or similar
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proceedings and certain actions by the Master Servicer indicating its
insolvency, reorganization or inability to pay its obligations.
Rights Upon Event of Default
So long as an Event of Default remains unremedied under the Trust Agreement
for a Series, the Depositor or the Trustee for such Series or Holders of
Certificates of such Series evidencing not less than 25% of the aggregate
outstanding principal amount of the Certificates for such Series may terminate
all of the rights and obligations of the Master Servicer as servicer under the
Trust Agreement and in and to the Mortgage Loans (other than its right to
recovery of other expenses and amounts advanced pursuant to the terms of the
Trust Agreement which rights the Master Servicer will retain under all
circumstances), whereupon the Trustee will succeed to all the responsibilities,
duties and liabilities of the Master Servicer under the Trust Agreement and will
be entitled to reasonable servicing compensation not to exceed the applicable
servicing fee, together with other servicing compensation in the form of
assumption fees, late payment charges or otherwise as provided in the Trust
Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a housing and
home finance institution, bank or mortgage servicing institution with a net
worth of at least $15,000,000 to act as successor Master Servicer under the
provisions of such Trust Agreement relating to the servicing of the Mortgage
Loans. The successor Servicer would be entitled to reasonable servicing
compensation in an amount not to exceed the servicing fee as set forth in the
related Prospectus Supplement, together with the other servicing compensation in
the form of assumption fees, late payment charges or otherwise, as provided in
the Trust Agreement.
During the continuance of any Event of Default under the Trust Agreement
for a Series, the Trustee for such Series will have the right to take action to
enforce its rights and remedies and to protect and enforce the rights and
remedies of the Certificateholders of such Series, and Holders of Certificates
evidencing not less than 25% of the aggregate outstanding principal amount of
the Certificates for such Series may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred upon that Trustee. However, the Trustee will not be
under any obligation to pursue any such remedy or to exercise any of such trusts
or powers unless such Certificateholders have offered the Trustee reasonable
security or indemnity against the cost, expenses and liabilities which may be
incurred by the Trustee therein or thereby. Also, the Trustee may decline to
follow any such direction if the Trustee determines that the action or
proceeding so directed may not lawfully be taken or would involve it in personal
liability or be unjustly prejudicial to the nonassenting Certificateholders.
No Certificateholder of a Series, solely by virtue of such Holder's status
as a Certificateholder, will have any right under the Trust Agreement for such
Series to institute any proceeding with respect to the Trust Agreement, unless
such Holder previously has given to the Trustee for such Series written notice
of default and unless the Holders of Certificates evidencing not less than 25%
of the aggregate outstanding principal amount of the Certificates for such
Series have made written request upon the Trustee to institute such proceeding
in its own name as Trustee thereunder and have offered to the Trustee reasonable
indemnity, and the Trustee for 60 days has neglected or refused to institute any
such proceeding.
Duties of the Trustee
If no Event of Default (as defined in the related Trust Agreement) has
occurred, the Trustee is required to perform only those duties specifically
required of it under the Trust Agreement. Upon receipt of the various
certificates, statements, reports or other instruments required to be furnished
to it, the Trustee is required to examine them to determine whether they are in
the form required by the related Trust Agreement, however, the Trustee will not
be responsible for the accuracy or content of any such documents furnished by it
or the Certificateholders to the Master Servicer under the Trust Agreement.
The Trustee may be held liable for its own negligent action or failure to
act, or for its own willful misconduct, provided, however, that the Trustee will
not be personally liable with respect to any action taken, suffered or omitted
to be taken by it in good faith in accordance with the direction of the
Certificateholders in
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an Event of Default. See "Rights Upon Event of Default" above. The Trustee is
not required to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties under a Trust Agreement, or in
the exercise of any of its rights or powers, if it has reasonable grounds for
believing that repayment of such funds or adequate indemnity against such risk
or liability is not reasonably assured to it.
Amendment of Trust Agreement
The Trust Agreement for each Series of Certificates may be amended by the
Depositor, the Master Servicer (if such Series evidences an interest in Mortgage
Loans), and the Trustee with respect to such Series, without notice to or
consent of the Certificateholders (i) to cure any ambiguity, (ii) to correct or
supplement any provision therein which may be inconsistent with any other
provision therein or in the Prospectus Supplement, (iii) to make any other
provisions with respect to matters or questions arising under such Trust
Agreement or (iv) to comply with any requirements imposed by the Code; provided
that any such amendment pursuant to clause (iii) above will not adversely affect
in any material respect the interests of any Certificateholders of such Series
not consenting thereto. Any such amendment pursuant to clause (iii) of the
preceding sentence shall be deemed not to adversely affect in any material
respect the interests of any Certificateholder if the Trustee receives written
confirmation from each Rating Agency rating such Certificates that such
amendment will not cause such Rating Agency to reduce the then current rating
thereof. The Trust Agreement for each Series also may be amended by the Trustee,
the Master Servicer (if such Series evidences an interest in Mortgage Loans) and
the Depositor with respect to such Series with the consent of the Holders
possessing not less than 66 2/3% of the aggregate outstanding principal amount
of the Certificates of each Class of such Series affected thereby, for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of such Trust Agreement or modifying in any manner the rights
of Certificateholders of such Series, provided, however, that no such amendment
may (a) reduce the amount or delay the timing of payments on any Certificate
without the consent of the Holder of such Certificate, or (b) reduce the
aforesaid percentage of aggregate outstanding principal amount of Certificates
of each Class, the Holders of which are required to consent to any such
amendment without the consent of the Holders of 100% of the aggregate
outstanding principal amount of each Class of Certificates affected thereby.
Voting Rights
The related Prospectus Supplement will set forth the method of determining
allocation of voting rights with respect to a Series, if other than set forth
herein.
Lists of Certificateholders
Upon written request of three or more Certificateholders of record of a
Series, for purposes of communicating with other Certificateholders with respect
to their rights under the Trust Agreement or under the Certificates for such
Series, which request is accompanied by a copy of the communication which such
Certificateholders propose to transmit, the Trustee will afford such
Certificateholders access during business hours to the most recent list of
Certificateholders of that Series held by the Trustee.
No Trust Agreement will provide for the holding of any annual or other
meeting of Certificateholders.
Termination
The obligations created by the Trust Agreement for a Series will terminate
upon the distribution to Certificateholders of such Series of all amounts
distributable to them pursuant to such Trust Agreement following the earlier of
(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 purchase of all of the assets of the
Trust Fund by the party entitled to effect such termination, under the
circumstances and in the manner set forth in the related Prospectus Supplement.
In no event, however, will the trust created by the Agreement continue beyond
the date specified in the related Prospectus Supplement. Written notice of
termination of the Trust Agreement will be given to each Certificateholder, and
the final distribution will be made only upon presentation and surrender of the
Certificates at the location to be specified in the notice of termination.
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If so specified in the related Prospectus Supplement, a Series of
Certificates may be subject to optional early termination through the repurchase
of the Assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth herein. 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, the party specified therein will solicit bids for the purchase of all
Assets of the Trust Fund, or of a sufficient portion of such Assets to retire
such Class or Classes under the circumstances and in the manner set forth
therein. See "Description of the Securities -- Termination or Repurchase
Respecting Certificates" "-- Optional Termination," "-- Optional Repurchase,"
and "-- Other Repurchases."
THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series will be set forth in the related
Prospectus Supplement. The entity serving as Trustee may have normal banking
relationships with the Issuer, the Depositor or the Master Servicer. In
addition, for the purpose of meeting the legal requirements of certain local
jurisdictions, the Trustee will have the power to appoint co-trustees or
separate trustees of all or any part of the Trust Estate or Trust Fund, as
applicable, relating to a Series of Securities. In the event of such
appointment, all rights, powers, duties and obligations conferred or imposed
upon the Trustee by the Indenture or Trust Agreement, as applicable, relating to
such Series will be conferred or imposed upon the Trustee and each such separate
trustee or co-trustee jointly, or, in any jurisdiction in which the Trustee
shall be incompetent or unqualified to perform certain acts, singly upon such
separate trustee or co-trustee who shall exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee. The
Trustee also may appoint agents to perform any of the responsibilities of the
Trustee, which agents shall have any or all of the rights, powers, duties and
obligations of the Trustee conferred on them by such appointment; provided that
the Trustee shall continue to be responsible for its duties and obligations
under the Indenture or Trust Agreement, as applicable.
The Trustee may, upon written notice to the Issuer, resign at any time, in
which event the Issuer or Depositor, as applicable, will be obligated to use its
best efforts to appoint a successor Trustee. If no successor Trustee has been
appointed and has accepted the appointment within 30 days after giving such
notice of resignation, the resigning Trustee may petition any court of competent
jurisdiction for appointment of a successor Trustee. The Trustee also may be
removed at any time (i) by the Issuer or Depositor, as applicable, if the
Trustee ceases to be eligible to continue as such under the Trust Agreement,
(ii) if the Trustee becomes insolvent, (iii) if a tax is imposed or threatened
with respect or the Trust Estate or Trust Fund, as applicable, by any state in
which the Trustee or the Trust Estate or Trust Fund held by the Trustee for such
Series is located, or (iv) by the Holders of Securities evidencing over 50% of
the aggregate outstanding principal amount of the Securities upon 30 days'
advance written notice to the Trustee and to the Issuer or Depositor, as
applicable. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee.
THE ISSUER
The Company
The Company was incorporated in the State of Arizona on September 30, 1993
as a limited purpose financing corporation. The principal office of the Company
is located at 2390 East Camelback Road, Suite 225, Phoenix, Arizona 85016. Its
telephone number is (602) 381-8960.
The Articles of Incorporation of the Company provides that the Company may
not conduct any activities other than those related to the issue and sale of one
or more series of bonds or certificates secured by or representing interests in
mortgage assets and to serve as depositor of one or more trusts that may issue
and sell such bonds or certificates and, in connection therewith, acquiring,
owning, holding and conveying mortgage assets and interests therein. The
Articles of Incorporation of the Company provides that any securities, except
for subordinated securities, issued by the Company must be rated in one of the
four highest categories
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available by any Rating Agency rating the Series. Pursuant to the terms of the
Indenture or Trust Agreement, as applicable, the Company may not issue any
securities which would result in the lowering of the then current ratings of the
outstanding Securities of any Series.
The Series Supplement for a particular Series may permit the Assets pledged
to secure the related Series of Bonds to be transferred by the Issuer to a
trust, subject to the obligations of the Bonds of such Series, thereby relieving
the Issuer of its obligations with respect to such Bonds.
Owner Trust
Each owner trust established to act as Issuer of a Series of Bonds (each,
an "Owner Trust") will be created pursuant to a deposit trust agreement (the
"Deposit Trust Agreement") between the Company which will act as Depositor and
the bank, trust company or other fiduciary named in the related Prospectus
Supplement which will act solely in its fiduciary capacity as Owner Trustee.
Under the terms of each Deposit Trust Agreement, the Company will convey to the
Owner Trustee Mortgage Assets and other Assets to secure one or more Series in
return for certificates or other instruments evidencing beneficial ownership of
the Owner Trust and the net proceeds of the sale of the Bonds. The Company may
in turn sell or assign the certificates of beneficial interest to another entity
or entities, including affiliates of the Company.
The Owner Trust will pledge the Mortgage Assets and other Assets to the
Trustee under the related documents as security for a Series. The Trustee will
hold such Mortgage Assets as security only for that Series, and Holders of the
Bonds of such Series will be entitled to the equal and proportionate benefits of
such security, subject to the express subordination of certain Classes thereof,
as if the same had been granted by a corporate issuer.
Each Deposit Trust Agreement will provide that the related Trust may not
conduct any activities other than those related to the issuance and sale of the
particular Series. No Deposit Trust Agreement will be subject to amendment
without the prior written consent of the Owner Trustee, the Holders representing
a majority of the beneficial interest of the Owner Trust and the Trustee, except
that the Holders of not less than 66 2/3% of the aggregate outstanding principal
amount of Bonds of each Series affected must consent to any amendment of, among
other provisions, the limitation on activities of the Owner Trust and the
provisions regarding amendments to the Deposit Trust Agreement. The Holders of
the beneficial interests in an Owner Trust which issues a Series will not be
liable for payment of principal of or interest on the Bonds and each Holder of
Bonds of such Series will be deemed to have released such beneficial owners from
any such liability.
Administrator
If specified in the related Prospectus Supplement, American Southwest
Financial Services, Inc., an affiliate of the Company, (the "Administrator") may
provide certain advisory, administrative, accounting and clerical services with
respect to the Securities. In addition, under the Indenture or Trust Agreement,
as applicable, the Issuer is responsible for certain administrative and
accounting matters relating to the Securities.
USE OF PROCEEDS
The Issuer will apply all or substantially all of the net proceeds from the
sale of each Series offered hereby and by the related Prospectus Supplement to
(i) purchase or repay indebtedness with respect to the Mortgage Assets securing
or underlying each Series simultaneously with the issuance and sale of such
Securities or (ii) fund loans to each Finance Company participating in such
Series of Securities pursuant to Funding Agreements with such Finance Companies.
The proceeds also may be used to establish the Reserve Funds, if any, for the
Series and to pay costs of structuring, guaranteeing and issuing the Securities.
If so specified in the related Prospectus Supplement, the purchase of the
Mortgage Assets for a Series may be effected by an exchange of Securities with
the seller of such Mortgage Assets.
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LIMITATIONS ON ISSUANCE OF BEARER SECURITIES
Any bearer securities will be issued in compliance with United States
federal tax laws and regulations applicable at the time of issuance. Under
current law, bearer securities may not be offered or sold during the restricted
period, or delivered in definitive form in connection with a sale during the
restricted period (as defined under "Description of the Securities -- Bearer
Securities and Registered Securities"), in the United States or to United States
persons other than to (a) the United States office of (i) an international
organization (as defined in Section 7701(a)(18) of the Code), (ii) a foreign
central bank (as defined in Section 895 of the Code), or (iii) any underwriter,
agent, or dealer offering or selling bearer securities during the restricted
period (a "Distributor") pursuant to a written contract with the Issuer or with
another Distributor, that purchases bearer securities for resale or for its own
account and agrees to comply with the requirements of Section 165(j)(3)(A), (B)
or (C) of the Code, or (b) the foreign branch of a United States financial
institution purchasing for its own account or for resale, which institution
agrees to comply with the requirements of Section 154(j)(3)(A), (B) or (C) of
the Code. In addition, a sale of a bearer security may be made during the
restricted period to a United States person who acquired and holds the bearer
security on the certification date through a foreign branch of a United States
financial institution that agrees to comply with the requirements of Section
165(j)(3)(A), (B) or (C) of the Code. Any Distributor (including an affiliate of
a Distributor) offering or selling bearer securities during the restricted
period must agree not to offer to sell bearer securities in the United States or
to United States persons (except as discussed above) and must employ procedures
reasonably designed to ensure that its employees or agents directly engaged in
selling bearer securities are aware of these restrictions.
Bearer securities and their interest coupons will bear a legend
substantially to the following effect: "Any United States person who holds this
obligation will be subject to limitations under the United States income tax
laws, including the limitations provided in Section 165(j) and 1287(a) of the
Internal Revenue Code."
Purchase of bearer securities may be affected by certain limitations
under United States tax laws. See "Federal Income Tax Considerations."
As used herein, "United States person" means a citizen or resident of the
United States, a corporation or partnership or other entity created or organized
in or under the laws of the United States and an estate or trust the income of
which is subject to United States federal income taxation regardless of its
source, and "United States" means the United States of America (including the
States and the District of Columbia) and its possession including Puerto Rico,
the U.S. Virgin Island, Guam, American Samoa, Wake Island and the Northern
Mariana Islands.
FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a summary of certain federal income tax consequences of
the purchase, ownership, and disposition of the Securities. The summary is based
upon the provisions of the Code, the regulations promulgated thereunder,
including, where applicable, proposed regulations, and the judicial and
administrative rulings and decisions now in effect, all of which are subject to
change or possible differing interpretations. The statutory provisions,
regulations, and interpretations on which this interpretation is based are
subject to change, and such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with certain types of investors subject to special treatment
under the federal income tax laws. This summary focuses primarily upon investors
who will hold Securities as "capital assets" (generally, property held for
investment) within the meaning of Section 1221 of the Code, but much of the
discussion is applicable to other investors as well. Potential purchasers of
Securities are advised to consult their own tax advisers concerning the federal,
state or local tax consequences to them of the purchase, holding and disposition
of the Securities.
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Characterization of Securities
If stated in the Prospectus Supplement for a Series of Securities, a REMIC
election will be made with respect to such Series of Securities. In each such
case, O'Connor, Cavanagh, Anderson, Westover, Killingsworth & Beshears, P.A.,
legal counsel to the Company, will deliver its opinion to the effect that the
arrangement by which the Securities of that Series are issued will be treated as
a REMIC as long as all of the provisions of the Indenture or Trust Agreement, as
applicable, are complied with and the statutory and regulatory requirements are
satisfied. Securities of such Series will be designated as "regular interests"
or "residual interests" in a REMIC, as specified in the related Prospectus
Supplement.
If the applicable Prospectus Supplement so specifies with respect to a
Series of Securities, the Securities of such Series will not be treated as
regular or residual interests in a REMIC for federal income tax purposes but
instead will be treated as (i) indebtedness of the Issuer, (ii) an undivided
beneficial ownership interest in the Mortgage Assets (and the arrangement
pursuant to which the Mortgage Assets will be held and the Securities will be
issued will be treated as a grantor trust under Subpart E, part I of subchapter
J of the Code and not as an association taxable as a corporation for federal
income tax purposes); (iii) equity interests in an association that will satisfy
the requirements for qualification as a real estate investment trust; or (iv)
interests in an entity that will satisfy the requirements for qualification as a
partnership for federal income tax purposes. The federal income tax consequences
to Bondholders or Certificateholders of any such Series will be described in the
applicable Prospectus Supplement.
If a REMIC election is made with respect to a Series of Securities, (i)
Securities held by a mutual savings bank or domestic building and loan
association will represent interests in "qualifying real property loans" within
the meaning of Code Section 593(d) (assuming that at least 95% of the REMIC's
assets are "qualifying real property loans"); (ii) Securities held by a domestic
building and loan association will constitute "a regular or a residual interest
in a REMIC" within the meaning of Code Section 7701(a)(19)(C)(xi) (assuming that
at least 95% of the REMIC's assets consist of cash, government securities,
"loans... secured by an interest in real property," and other types of assets
described in Code Section 7701(a)(19)(C); and (iii) Securities held by a real
estate investment trust will constitute "real estate assets" within the meaning
of Code Section 856(c)(6)(B), and income with respect to the Securities will be
considered "interest on obligations secured by mortgages on real property or on
interest in real property" within the meaning of Code Section 856(c)(3)(B)
(assuming, for both purposes, that at least 95% of the REMIC's assets are
qualifying assets). If less than 95% of the REMIC's assets consist of assets
described in (i), (ii) or (iii) above, then Securities will qualify for the tax
treatment described in (i), (ii), or (iii) in the proportion that such REMIC
assets are qualifying assets. In general, Mortgage Loans secured by a
non-residential real property will not constitute "loans... secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C).
It is possible that various reserves or funds will reduce the proportion of
REMIC assets which qualify under the standards described above.
Taxation of Regular Interest Securities
General
Securities that qualify as regular interests in a REMIC ("Regular Interest
Securities") are generally treated as indebtedness for federal income tax
purposes. Stated interest on a Regular Interest Security will be taxable as
ordinary income using the accrual method of accounting, regardless of the
Bondholder's or Certificateholder's normal accounting method. Reports will be
made annually to the IRS and to Holders of Regular Interest Securities that are
not excepted from the reporting requirements regarding amounts treated as
interest (including accrual of original issue discount) on Regular Interest
Securities.
Original Issue Discount
Compound Interest Securities and Principal Only Securities will, and
certain of the other Securities constituting Regular Interest Securities may, be
issued with "original issue discount" ("OID") within the
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meaning of Code Section 1273. Rules governing original issue discount are set
forth in sections 1271-1275 of the Code and the Treasury regulations proposed
thereunder (the "OID Regulations"). Although the Code contains specific
provisions governing the calculation of OID on securities, such as the
Securities, on which principal is prepaid based on prepayments of the underlying
assets, Regulations interpreting those provisions have not yet been issued.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Regular Interest Security and its issue price.
A Holder of a Regular Interest Security must include such OID in gross income as
ordinary interest income as it accrues under a method taking into account an
economic accrual of the discount. In general, OID must be included in income in
advance of the receipt of the cash representing that income. The amount of OID
on a Regular Interest Security will be considered to be zero if it is less than
a de minimis amount determined under the Code.
The issue price of a Regular Interest Security of a Class will generally be
the initial offering price at which a substantial amount of the Securities in
the Class are sold to the public, and will be treated by the Issuer as
including, in addition, the amount paid by the Bondholder or Certificateholder
for accrued interest that relates to a period prior to the Closing Date of such
Regular Interest Security. Under the OID Regulations, the stated redemption
price at maturity is the sum of all payments on the Security other than any
"qualified stated interest" payments. Qualified stated interest is generally
defined as stated interest that is unconditionally payable in cash or in
property at least annually at a single fixed rate. In the case of Compound
Interest Securities, and certain of the other Regular Interest Securities, none
of the payments under the instrument will be considered qualified stated
interest, and thus the aggregate amount of all payments will be included in the
stated redemption price. In addition it is possible that, because Holders of a
Security are entitled to receive interest only to the extent that payments are
made on the Mortgage Assets, interest might not be considered to be
"unconditionally payable."
The Holder of a Regular Interest Security issued with OID must include in
gross income, for all days during its taxable year on which it holds such
Regular Interest Security, the sum of the "daily portions" of such OID. Such
daily portions are computed by allocating to each day during a taxable year a
pro rata portion of the OID that accrued during the relevant accrual period. In
the case of a debt instrument, such as a Regular Interest Security, that is
subject to acceleration due to prepayments on other debt obligations securing
such instrument, OID is computed by taking into account the anticipated rate of
prepayments assumed in pricing the debt instrument (the "Prepayment
Assumption"). The amount of OID that will accrue during an accrual period
(generally the period between interest payments or compounding dates) is the
excess (if any) of (i) the sum of (a) the present value of all payments
remaining to be made on the Regular Bond as of the close of the accrual period
and (b) the payments during the accrual period of amounts included in the stated
redemption price of the Regular Interest Security, over (ii) an "adjusted issue
price" of the Regular Interest Security at the beginning of the accrual period.
The adjusted issue price of a Regular Interest Security is the sum of its issue
price plus prior accruals of OID, reduced by the total payments made with
respect to such Regular Interest Security in all prior periods, other than
qualified stated interest payments. The present value of the remaining payments
is determined on the basis of three factors: (i) the original yield to maturity
of the Regular Interest Security (determined on the basis of compounding at the
end of each accrual period and properly adjusted for the length of the accrual
period), (ii) events which have occurred before the end of the accrual period
and (iii) the assumption that the remaining payments will be made in accordance
with the original Prepayment Assumption.
The effect of this method is to increase the portions of OID required to be
included in income by a Bondholder or Certificateholder to take into account
prepayments with respect to the Mortgage Assets at a rate that exceeds the
Prepayment Assumption, and to decrease (but not below zero for any period) the
portions of OID required to be included in income by a Bondholder or
Certificateholder to take into account prepayments with respect to the Mortgage
Assets at a rate that is slower than the Prepayment Assumption. Although
original issue discount will be reported to Bondholders or Certificateholders
based on the Prepayment Assumption, no representation is made to Bondholders or
Certificateholders that Mortgage Assets will be prepaid at that rate or any
other rate.
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The Issuer may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC), in a manner that it believes
to be appropriate, to take account of realized losses on the Mortgage Assets,
although the OID Regulations do not provide for such adjustments. If the
Internal Revenue Service were to require that OID be accrued without such
adjustments, the rate of accrual of OID for a Class of Regular Interest
Securities could increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. The Prospectus Supplement will specify
whether, based on the OID Regulations, OID will be calculated on such Regular
Interest Securities as if, solely for the purposes of computing OID, the
separate regular interest were a single debt instrument.
Certain Series of Securities may be structured to include two or more
REMICs, one or more of which (each, an "Upper Tier REMIC") hold regular
interests ("Lower Tier Interests") in other REMICs (each, a "Lower Tier REMIC").
Under the OID Regulations, OID on all of the Lower Tier Interests issued by a
single Lower Tier REMIC that are held by a second REMIC will be calculated by
treating all of such Lower Tier Interests as a single debt instrument. Unless
contrary rules are issued by the Internal Revenue Service, the Issuer intends to
calculate the income of the Lower Tier REMIC and the Upper Tier REMIC in
accordance with the OID Regulations.
A subsequent Holder of a Regular Interest Security will also be required to
include original issue discount in gross income, but such a Holder who purchases
such Regular Interest Security for an amount that exceeds its adjusted issue
price will be entitled (as will an initial Holder who pays more than a Regular
Interest Security's issue price) to offset such original issue discount by
comparable economic accruals of portions of such excess.
Interest Weighted Securities
It is not clear how income should be accrued with respect to a Regular
Interest Securities the payments on which consist solely or primarily of a
specified portion of the interest payments on qualified mortgages held by a
REMIC ("Interest Weighted Securities"). The Issuer intends to take the position
that all of the income derived from Interest Weighted Securities should be
treated as OID and that the amount and rate of accrual of such OID should be
calculated in the same manner as for a Compound Interest Security. However, the
Internal Revenue Service could assert that income derived from an Interest
Weighted Security should be calculated as if the Interest Weighted Security were
a bond purchased at a premium equal to the excess of the price paid by such
Holder for the Interest Weighted Security over its stated principal amount, if
any. Under this approach, a Holder would be entitled to amortize such premium
only if it has in effect an election under Section 171 of the Code with respect
to all taxable debt instruments held by such Holder, as described below.
Alternatively, the Internal Revenue Service could assert that the Interest
Weighted Security should be taxable under the rules governing bonds issued with
contingent principal payments, in which case a Holder might recognize income at
a slower rate than if the Interest Weighted Security were treated as a Compound
Interest Security.
Variable Rate Regular Securities
The REMIC regulations (the "REMIC Regulations") permit REMICS to issue
regular interest bearing a variety of variable rates including rates based on
(i) a fixed formula of an objective interest index or (ii) a weighted average of
the interest rates on some or all of the qualified mortgages held by the REMIC.
In the case of Securities bearing interest at a rate that varies directly,
according to a fixed formula, with an objective index, it appears that (i) the
yield to maturity of such Regular Interest Securities and (ii) the present value
of all payments remaining to be made on such Regular Interest Securities should
be calculated as if the interest index remained at its value as of the issue
date of such Securities. In addition, Holders of variable rate Regular Interest
Securities should consult their own tax advisers regarding the appropriate
method of calculating OID on such Securities.
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Effects of Defaults and Delinquencies
Holders of Securities will be required to report income with respect to
such Securities under an accrual method without giving effect to delays and
reductions in distributions attributable to a default or delinquency on the
Mortgage Assets, except to the extent that it can be established that such
amounts are uncollectible. As a result, the amount of income reported by a
Holder of such a Security in any period could significantly exceed the amount of
cash distributed to such Holder in that period. The Holder will eventually be
allowed a loss (or will be allowed to report a lesser amount of income) to the
extent that the aggregate amount of distributions on the Securities is reduced
as a result of a Mortgage Asset default. However, the timing and character of
such losses or reductions in income are uncertain and, accordingly, Holders of
Securities should consult their own tax advisors on this point.
Market Discount and Premium
A purchaser of a Regular Interest Security may also be subject to the
market discount rules of the Code. Such purchaser generally will be required to
recognize accrued market discount as ordinary income as payments of principal
are received on such Regular Interest Security, or upon sale or exchange of the
Regular Interest Security. In general terms, until regulations are promulgated,
market discount may be treated as accruing, at the election of the Holder,
either (i) under a constant yield method, taking into account the Prepayment
Assumption, or (ii) in proportion to accruals of original issue discount (or, if
there is no original issue discount, in proportion to accruals of stated
interest). A Holder of a Regular Interest Security having market discount may
also be required to defer a portion of the interest deductions attributable to
any indebtedness incurred or continued to purchase or carry the Regular Interest
Security. As an alternative to the inclusion of market discount in income on the
foregoing basis, the Holder may elect to include such market discount in income
currently as it accrues on all market discount instruments acquired by such
Holder in that taxable year or thereafter, in which case the interest deferral
rule will not apply.
A Holder who purchases a Regular Interest Security (other than an Interest
Weighted Security, to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the Security at a premium, which it may elect to amortize as an offset
to interest income on such Security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the computation of
premium accrual on collateralized mortgage obligations or REMIC regular
interests have been issued, applicable legislative history indicates that
premium is to be accrued in the same manner as market discount. Accordingly, it
appears that the accrual of premium on a Regular Interest Security will be
calculated using the prepayment assumption used in pricing such Regular Interest
Security. If a Holder makes an election to amortize premium on a Security, such
election will apply to all taxable debt instruments (including all REMIC regular
interests) held by the Holder at the beginning of the taxable year in which the
election is made, and to all taxable debt instruments acquired thereafter by
such Holder, and will be irrevocable without the consent of the Internal Revenue
Service. Purchasers who pay a premium for the Regular Interest Security should
consult their tax advisers regarding the election to amortize premium and the
method to be employed.
Sale or Exchange of Regular Interest Securities
A Regular Bondholder's or Regular Certificateholder's tax basis in its
Regular Interest Securities is the price such Holder pays for a Security, plus
amounts of original issue discount included in income and reduced by any
payments received (other than qualified stated interest payments) and any
amortized premium. Gain or loss recognized on a sale, exchange, or redemption of
a Regular Interest Securities, measured by the difference between the amount
realized and the Regular Interest Security's basis as so adjusted, will
generally be capital gain or loss, assuming that the Regular Interest Security
is held as a capital asset. If, however, a Regular Bondholder or Regular
Certificateholder is a bank, thrift, or similar institution described in section
582 of the Code, gain or loss realized on the sale or exchange of a Regular
Interest Security will be taxable as ordinary income or loss. In addition, gain
from the disposition of a Regular Interest Security that might otherwise be
capital gain will be treated as ordinary income to the extent of the excess, if
any, of (i) the amount that would have been includible in the Holder's income if
the yield on such Regular Interest Security
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had equaled 110% of the applicable federal rates as of the beginning of such
Holder's holding period, over (ii) the amount of ordinary income actually
recognized by the Holder with respect to such Regular Interest Security.
Taxation of the REMIC
General
Although a REMIC is a separate entity for federal income tax purposes, a
REMIC is not generally subject to entity-level tax. Rather, the taxable income
or net loss of a REMIC is taken into account by the Holders of residual
interests. The regular interests are generally taxable as debt of the REMIC.
Calculation of REMIC Income
The taxable income or net loss of a REMIC is determined under an accrual
method of accounting and in the same manner as in the case of an individual,
with certain adjustments. In general, the taxable income or net loss will be the
difference between (i) the gross income produced by the REMIC's assets,
including stated interest and any original issue discount or market discount on
loans and other assets, and (ii) deductions, including stated interest and
original issue discount accrued on a Regular Interest Security, amortization of
any premium with respect to loans, and servicing fees and other expenses of the
REMIC. A Holder of a Residual Interest Security that is an individual or a
"pass-through interest Holder" (including certain pass-through entities, but not
including real estate investment trusts) may be unable to deduct servicing fees
payable on the loans or other administrative expenses of the REMIC for a given
taxable year. See "REMIC Expenses" below.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Start Up
Day (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The original issue discount provisions of the Code apply to loans of
individuals originated on or after March 2, 1984, and the market discount
provisions apply to loans originated after July 18, 1984. Subject to possible
application of the de minimis rules, the method of accrual by the REMIC of
original issue discount on such loans will be equivalent to the method under
which Holders of Regular Interest Securities accrue original issue discount
(i.e., under the constant yield method taking into account the Prepayment
Assumption). The REMIC will deduct original issue discount on the Regular
Interest Securities in the same manner that the Holders of the Securities
include such discount in income, but without regard to the de minimis rules. See
"Taxation of Regular Interest Securities" above. However, a REMIC that acquires
loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
REMIC Expenses
As a general rule, all of the expenses of a REMIC will be taken into
account by Holders of the Residual Interest Securities or the REMIC residual
interest. In the case of a "single class REMIC," however, the expenses will be
allocated, under temporary Treasury regulations, among the Holders of the
Regular Interest Securities and the Holders of the Residual Interest Securities
on a daily basis in proportion to the relative amounts of income accruing to
each Bondholder or Certificateholder on that day. In the case of a Holder of a
Regular Interest Security who is an individual or a "pass-through interest
Holder" (including certain pass-through entities but not including real estate
investment trusts), such expenses will be deductible only to the extent that
such expenses, plus other "miscellaneous itemized deductions" of the Bondholder
or Certificate-
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holder exceed 2% of such Bondholder's or Certificateholder's adjusted gross
income and will not be deductible in computing alternative minimum taxable
income. In addition, Code Section 68 provides that the itemized deductions
otherwise allowable for the taxable year are phased out for higher-income
individuals The disallowance of this deduction may have a significant impact on
the yield of the Regular Interest Security to such a Holder. In general terms, a
single class REMIC is one that either (i) would qualify, under existing Treasury
regulations, as a grantor trust if it were not a REMIC (treating all interests
as ownership interests, even if they would be classified as debt for federal
income tax purposes) or (ii) is similar to such a trust and which is structured
with the principal purpose of avoiding the single class REMIC rules.
Prohibited Transactions and Contributions Tax
The REMIC will be subject to a 100% tax on any net income derived from a
"prohibited transaction." For this purpose, net income will be calculated
without taking into account any losses from other prohibited transactions or any
deductions attributable to any prohibited transactions that resulted in a loss.
In general, prohibited transactions include (i) subject to limited exceptions,
the sale or other disposition of any qualified mortgage transferred to the
REMIC; (ii) subject to a limited exception, the sale or other disposition of a
cash flow investment; (iii) the receipt of any income from assets not permitted
to be held by the REMIC pursuant to the Code; or (iv) the receipt of any fees or
other compensation for services rendered by the REMIC. It is anticipated that a
REMIC will not engage in any prohibited transactions in which it would recognize
a material amount of net income. In addition, subject to a number of exceptions,
a tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
close of the three-month period beginning on the Start Up Day. The Holders of
Residual Interest Securities will generally be responsible for the payment of
any such taxes imposed on the REMIC. To the extent not paid by such Holders or
otherwise, however, such taxes will be paid out of the assets of the REMIC and,
to the extent specified in the related Prospectus Supplement, will be allocated
pro rata to all outstanding Classes of Securities of such REMIC.
Taxation of Holders of Residual Interest Securities
General
The Holder of a Security representing a REMIC residual interest (a
"Residual Interest Security") will take into account the "daily portion" of the
taxable income or net loss of the REMIC for each day during the taxable year on
which such Holder held the Residual Interest Security. The daily portion is
determined by allocating to each day in any calendar quarter its ratable portion
of the taxable income or net loss of the REMIC for such quarter, and by
allocating that amount among the Holders (on such day) of the Residual Interest
Securities in proportion to their respective holdings on such day.
The Holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the loans held by the REMIC were issued or
acquired at a discount, since mortgage prepayments cause recognition of discount
income, while the corresponding portion of the prepayment could be used in whole
or in part to make principal payments on Regular Interest Securities issued
without any discount or at an insubstantial discount. (If this occurs, it is
likely that cash distributions will exceed taxable income in later years.)
Taxable income may also be greater in earlier years of certain REMIC issues as a
result of the fact that interest expense deductions, as a percentage of
outstanding principal on Regular Interest Securities, will typically increase
over time as lower yielding Securities are paid, whereas interest income with
respect to loans will generally remain constant over time as a percentage of
loan principal.
In any event, because the Holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
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Limitation on Losses
The amount of the REMIC's net loss that a Holder may take into account
currently is limited to the Holder's adjusted basis at the end of the calendar
quarter in which such loss arises. A Holder's basis in a Residual Interest
Security will initially equal such Holder's purchase price, and will
subsequently be increased by the amount of the REMIC's taxable income allocated
to the Holder, and decreased (but not below zero) by the amount of distributions
made and the amount of the REMIC's net loss allocated to the Holder. Any
disallowed loss may be carried forward indefinitely, but may be used only to
offset income generated by the same REMIC. The ability of Residual Bondholders
or Residual Certificateholders to deduct net losses may be subject to additional
limitations under the Code, as to which such Holders should consult their tax
advisers.
Distributions
Distributions on a Residual Interest Security (whether at their scheduled
times or as a result of prepayments) will generally not result in any additional
taxable income or loss to a Holder of a Residual Interest Security. If the
amount of such payment exceeds a Holder's adjusted basis in the Residual
Interest Security, however, the Holder will recognize gain (treated as gain from
the sale of the Residual Interest Security) to the extent of such excess.
Sale or Exchange
A Holder of a Residual Interest Security will recognize gain or loss on the
sale or exchange of a Residual Bond equal to the difference, if any, between the
amount realized and such Bondholder's or Certificateholder's adjusted basis in
the Residual Interest Security at the time of such sale or exchange. Except to
the extent provided in regulations, which have not yet been issued, any loss
upon disposition of a Residual Interest Security will be disallowed if the
selling Bondholder or Certificateholder acquires any residual interest in a
REMIC or similar mortgage pool within six months before or after such
disposition. Under the REMIC Regulations, in certain circumstances, transfers of
Residual Interest Securities may be disregarded. See "Restrictions on Ownership
and Transfer of Residual Interest Securities" and "Tax Treatment of Foreign
Investors" below.
Unlike provisions in the Code dealing with partnerships, there is not
specifically provided a method of adjusting the basis of the assets of the REMIC
if a Holder of a Residual Interest Security sells its Residual Interest Security
for a gain or loss. In other words, a subsequent Holder of a Residual Interest
Security may have an outside basis in its Residual Interest Security that is
greater or less than the inside basis of the REMIC's assets. The lack of such an
adjustment could adversely affect the marketability of a Residual Interest
Security because a subsequent Holder of a Residual Interest Security could not
amortize any excess outside basis (if the Security was sold for profit) or
reduced outside basis (if the Security was sold for a loss) against the future
income earned by that REMIC and passed through to that Holder of a Residual
Interest Security. Although the legislative history to the REMIC provisions
recognizes the problem and states that the rules governing taxation of Holders
of Residual Interest Securities may be modified, no further guidance is
provided.
Excess Inclusion Income
The portion of a Residual Bondholder's or Residual Certificateholder's
REMIC taxable income consisting of "excess exclusion" income may not be offset
by other deductions or losses, including net operating losses, on such
Bondholder's or Certificateholder's federal income tax return. An exception
applies to organizations to which Code section 593 applies (generally, certain
thrift institutions); however, such exception will not apply if the aggregate
value of the Residual Interest Securities is not considered to be significant.
The REMIC Regulations provide that a Residual Interest Security has significant
value only if (i) the aggregate issue price of the Residual Interest Security is
at least 2% of the aggregate of the issue prices of all Regular Interest
Securities and Residual Interest Securities in the REMIC and (ii) the
anticipated weighted average life (determined as specified in the REMIC
Regulations) of the Residual Interest Securities is at least 20% of the
anticipated weighted average life of the REMIC.
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Further, if the Holder of a Residual Interest Security is an organization
subject to the tax on unrelated business income imposed by Code section 511,
such Residual Bondholder's or Residual Certificateholder's excess inclusion
income will be treated as unrelated business taxable income of such Bondholder
or Certificateholder's. In addition, under Treasury regulations yet to be
issued, if a real estate investment trust, a regulated investment company, a
common trust estate, or certain cooperatives were to own a Residual Interest
Security, a portion of dividends (or other distributions) paid by the real
estate investment trust (or other entity) would be treated as excess inclusion
income. If a Residual Interest Security is owned by a foreign person excess
inclusion income is subject to tax at a rate of 30% which may not be reduced by
treaty and is not eligible for treatment as "portfolio interest."
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long term applicable federal rate on the Start Up Day multiplied
by (ii) the adjusted issue price of such Residual Interest Security at the
beginning of such quarterly period. The adjusted issue price of a Residual
Interest Security at the beginning of each calendar quarter will equal its issue
price (calculated in a manner analogous to the determination of the issue price
of a Regular Interest Security), increased by the aggregate of the daily
accruals for prior calendar quarters, and decreased (but not below zero) by the
amount of loss allocated to a Holder and the amount of distributions made on the
Residual Interest Security before the beginning of the quarter. The long-term
federal rate, which is announced monthly by the Treasury Department, is an
interest rate that is based on the average market yield of outstanding
marketable obligations of the United States government having remaining
maturities in excess of nine years.
If the aggregate value of the Residual Interest Securities is not
considered to be significant, then the Code provisions that to the extent
provided in regulations a Holder of a Residual Interest Security's entire share
of REMIC taxable income will be treated as an excess inclusion subject to the
foregoing limitations. The Internal Revenue Service has the authority to issue
regulations providing guidance in this area. Although the Internal Revenue
Service did not exercise that authority in the REMIC Regulations, future
regulations could contain such a rule. The legislative history states that any
Treasury regulations issued should take into account the value of the Residual
Interest Securities in a REMIC relative to the combined value of the Residual
Interest Securities and the Regular Interest Securities in the REMIC and that
the value of the Residual Interest Securities should be considered significant
in cases where that value is at least two percent of the combined value of the
Regular Interest Securities and the Residual Interest Securities. Further, the
legislative history states that the regulations may apply to Securities issued
before those regulations are issued. The Prospectus Supplement will set forth
the value of the Residual Interest Securities relative to the total value of all
Securities.
Restrictions on Ownership and Transfer of Residual Interest Securities
As a condition to qualification as a REMIC, reasonable arrangements must be
made to prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by sections 1-1399 of the Code,
if such entity is not subject to tax on its unrelated business income.
Accordingly, the Indenture or Trust Agreement, as applicable, will prohibit
Disqualified Organizations from owning a Residual Interest Security. In
addition, no transfer of a Residual Interest Security will be permitted unless
the proposed transferee shall have furnished to the Issuer an affidavit
representing and warranting that it is neither a Disqualified Organization nor
an agent nor nominee acting on behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization (in violation of the restrictions set forth above), a substantial
tax will be imposed on the transferor of such Residual Interest Security at the
time of the transfer. In addition, if a Disqualified Organization holds an
interest in a pass-through entity (including, among others, a partnership,
thrust, real estate investment trust, regulated investment company, or any
person holding as a nominee) that owns a Residual Interest Security, the
pass-through entity will be required to pay an annual tax on its allocable share
of the excess inclusion income of the REMIC.
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Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a "noneconomic
residual interest" unless, at the time of the transfer (i) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the anticipated excess inclusions and
the highest rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which the taxes accrue on the anticipated
excess inclusion in an amount sufficient to satisfy the accrued taxes. The
present value is calculated based on the Prepayment Assumption, using a discount
rate equal to the "applicable federal rate" at the time of transfer. If a
transfer of a residual interest is disregarded, the transferor would be liable
for any federal income tax imposed upon taxable income derived by the transferee
from the REMIC. A significant purpose to impede the assessment or collection of
tax exists if the transferor, at the time of transfer, knew or should have known
that the transferee would be unwilling or unable to pay taxes on its share of
the taxable income of the REMIC. A similar limitation exists with respect to
certain transfers of residual interests by foreign persons to United States
persons. See "Tax Treatment of Foreign Investors" below.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the Internal Revenue Service
in a unified administrative proceeding.
Tax Status as a Grantor Trust
General
If the applicable Prospectus Supplement so specifies with respect to a
Series of Securities, the Securities of such Series will not be treated as
regular or residual interests in a REMIC for federal income tax purposes but
instead will be treated as an undivided beneficial ownership interest in the
Mortgage Assets and the arrangement pursuant to which the Mortgage Assets will
be held and the Securities will be issued, will be classified for federal income
tax purposes as a grantor trust under Subpart E, Part 1 of Subchapter J of the
Code and not as an association taxable as a corporation. In such a case, special
counsel to the Issuer will deliver its opinion to the effect that the
arrangement by which the Securities of that Series are issued will be treated as
a grantor trust as long as all of the provisions of the applicable Trust
Agreement are complied with and the statutory and regulatory requirements are
satisfied. In some Series ("Pass-Through Certificates"), there will be no
separation of the principal and interest payments on the Mortgage Assets. In
such circumstances, a Certificateholder will be considered to have purchased an
undivided interest in each of the Mortgage Assets. In other cases ("Stripped
Certificates"), sale of the Certificates will produce a separation in the
ownership of the principal payments and interest payments on the Mortgage
Assets.
Each Certificateholder must report on its federal income tax return its pro
rata share of the gross income derived from the Mortgage Assets (not reduced by
the amount payable as fees to the Trustee and the Master Servicer and similar
fees (collectively, the "Servicing Fee")), at the same time and in the same
manner as such items would have been reported under the Certificateholder's tax
accounting method had it held its interest in the Mortgage Assets directly,
received directly its share of the amounts received with respect to the Mortgage
Assets, and paid directly its share of the Servicing Fees. To the extent that
income of a grantor trust consists of tax-exempt income in respect of certain
debt obligations held by such grantor trust, such income will retain its
tax-exempt character in the hands of the Certificateholders and will not be
includible in gross income pursuant to section 103 of the Code. In the case of
Pass-Through Certificates, such gross income will consist of a pro rata share of
all of the income derived from all of the Mortgage Assets and, in the case of
stripped bond or stripped coupon in which the Certificateholder owns an
interest. The Holder of a Certificate will generally be entitled to deduct such
Servicing Fees under section 162 or section 212 of the Code to the extent that
such Servicing Fees represent "reasonable" compensation for the services
rendered by the Trustee
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and the Master Servicer (and Servicer, if other than the Master Servicer). In
the case of a noncorporate Holder, however, Servicing Fees (to the extent not
otherwise disallowed, e.g., because they exceed reasonable compensation) will be
deductible in computing such Holder's regular tax liability only to the extent
that such fees, when added to other miscellaneous itemized deductions, exceed 2%
of adjusted gross income and may not be deductible to any extent in computing
such Holder's alternative minimum tax liability. In addition, Code section 68
provides that the itemized deductions otherwise allowable the taxable year are
phased out for higher-income individuals. Furthermore, a noncorporate
Certificateholder whose holding does not constitute a trade or business will not
be entitled to such deductions under section 162 of 212 of the Code to the
extent such amounts are allocable to interest wholly exempt from federal income
taxation.
Discount or Premiums on Pass-Through Certificates
The Holder's purchase price of a Pass-Through Certificate is to be
allocated among the Mortgage Assets in proportion to their fair market values,
determined as of the time of purchase of the Certificates. In the typical case,
the Depositor believes it is reasonable for this purpose to treat each Mortgage
Asset as having a fair market value proportional to the share of the aggregate
principal balances of all of the Mortgage Assets that it represents, if the
Certificates have a relatively uniform interest rate and other common
characteristics. To the extent that the portion of the purchase price of a
Certificate allocated to a Mortgage Assets (other than to a right to receive any
accrued interest thereon and any undistributed principal payments) is less than
or greater than the portion of the principal balance of the Mortgage Assets
allocable to the Certificate, the interest in the Mortgage Assets allocable to
the Certificate will be deemed to have been acquired at a discount or premium,
respectively.
The treatment of any discount will depend on whether the discount
represents original issue discount or market discount. In the case of a Mortgage
Assets with original issue discount in excess of a prescribed de minimis amount,
a Holder of a Certificate will be required to report as interest income in each
taxable year its share of the amount of original issue discount that accrues
during that year, determined under a constant yield method by reference to the
initial yield to maturity of the Mortgage Assets, in advance of receipt of the
cash attributable to such income and regardless of the method of federal income
tax accounting employed by that Holder. Original issue discount with respect to
a Mortgage Assets could arise for example by virtue of the financing of points
by the originator of the Mortgage Assets, or by virtue of the charging of points
by the originator of the Mortgage Assets in an amount greater than a statutory
de minimis exception, in circumstances under which the points are not currently
deductible pursuant to applicable Code provisions. However, the Code provides
for a reduction in the amount of original issue discount includible in the
income of a Holder who acquires an obligation after its initial issuance at a
price greater than the sum of the original issue price of the Mortgage Assets
and the previously accrued original issue discount, less prior payments of
principal. Accordingly, if the Mortgage Assets acquired by a Certificateholder
are purchased at a price equal to the then unpaid principal amount of such
Mortgage Assets, any original issue discount should be reduced or eliminated.
Certificateholders also may be subject to the market discount rules of
sections 1276-1278 of the Code. A Certificateholder that acquires an interest in
Mortgage Assets originated after July 18, 1984 with more than a prescribed de
minimis amount of "market discount" (generally, the excess of the principal
amount of the Mortgage Assets over the purchaser's purchase price) will be
required under section 1276 of the Code to include accrued market discount in
income as ordinary income in each month, but limited to an amount not exceeding
the principal payments on the Mortgage Assets received in that month and, if the
Certificates are sold, the gain realized. Such market discount would accrue in a
manner to be provided in Treasury regulations. The legislative history indicates
that, until such regulations are issued, such market discount would in general
accrue either (i) on the basis of a constant interest rate or (ii) in the ratio
of (a) in the case of Mortgage Assets not originally issued with original issue
discount, stated interest payable in the relevant period to total stated
interest remaining to be paid in the beginning of the period or (b) in the case
of Mortgage Assets originally issued at a discount, original issue discount in
the relevant period to total original issue discount remaining to be paid.
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In the case of market discount attributable to Mortgage Assets originated
on or before July 18, 1984, the Holder generally will be required to allocate
the portion of such discount that is allocable to a loan among the principal
payments on the Mortgage Assets and to include the discount allocable to each
principal payment in ordinary income at the time such principal payment is made.
Such treatment would generally 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 in the preceding paragraph.
Section 1277 of the Code provides that, regardless of the origination date,
the excess of interest paid or accrued to purchase or carry a loan with market
discount over interest received on such loan is allowed as a current deduction
only to the extent such excess is greater than the market discount that accrued
during the taxable year in which such interest expense was incurred. In general,
the deferred portion of any interest expense will be deductible when such market
discount is included in income, including upon the sale, disposition, or
repayment of the loan. A Holder may elect to include market discount in income
currently as it accrues, on all market discount obligations acquired by such
Holder during the taxable years such election is made and thereafter, in which
case the interest deferral rule discussed above will not apply.
A Certificateholder who purchases a Certificate a premium generally will be
deemed to have purchased its interest in the underlying Mortgage Assets at a
premium. A Certificateholder who holds a Certificate as a capital asset may
generally elect under section 171 of the Code to amortize such premium as an
offset to interest income on the Mortgage Assets (and not as a separate
deduction item) on a constant yield method. The legislative history suggests
that the same rules that will apply to the accrual of market discount (described
above) will generally also apply in amortizing premium with respect to Mortgage
Assets originated after September 27, 1985. If a Holder makes an election to
amortize premium, such election will apply to all taxable debt instruments held
by such Holder at the beginning of the taxable year in which the election is
made, and to all taxable debt instruments acquired thereafter by such Holder,
and will be irrevocable without the consent of the Internal Revenue Service.
Purchasers who pay a premium for the Certificates should consult their tax
advisers regarding the election to amortize premium and the method to be
employed. Although the law is somewhat unclear regarding recovery of premium
allocable to Mortgage Assets originated before September 28, 1985, it is
possible that such premium may be recovered in proportion to payments of
Mortgage Assets principal.
Discount or Premium on Stripped Certificates
A Stripped Certificate may represent a right to receive only a portion of
the interest payments on the Mortgage Assets, a right to receive only principal
payments on the Mortgage Assets, or a right to receive certain payments of both
interest and principal. Certain Stripped Certificates ("Ratio Strip
Certificates") may represent a right to receive differing percentages of both
the interest and principal on each Mortgage Asset. Pursuant to section 1286 of
the Code, the separation of ownership of the right to receive some or all of the
interest payments on an obligation from ownership of the right to receive some
or all of the principal payments results in the creation of "stripped bonds"
with respect to principal payments and "stripped coupons") with respect to
interest payments. Section 1286 of the Code applies the original issue discount
rules to stripped bonds and stripped coupons. For purposes of computing original
issue discount, a stripped bond or a stripped coupon is treated as a debt
instrument issued on the date that such stripped interest is purchased with an
issue price equal to its purchase price allocable to such stripped interest. The
Code, Regulations, and judicial decisions provide no direct guidance as to how
the interest and original issue discount rules are to apply to Stripped
Certificates. Under the method described above for REMIC Regular Interest
Certificates (the "Cash Flow Bond Method"), a prepayment assumption is used and
periodic recalculations are made which take into account with respect to each
accrual period the effect of prepayments during such period. The Code prescribed
the same method for debt instruments "secured by" other debt instruments, the
maturity of which may be affected by prepayments on the underlying debt
instruments. However, the Code does not, absent Treasury regulations, appear
specifically to cover instruments such as the Stripped Certificates which
technically represent ownership interests in the underlying Mortgage Assets,
rather than being debt instruments "secured by" those loans. Nevertheless, it is
believed that the Cash Flow Bond Method is a reasonable method of reporting
income for such Certificates, and it is expected that original issue discount
will
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be reported on that basis. In applying the calculation to such Certificates, all
payments to be received with respect to the Certificates will be treated,
whether attributable to principal or interest on the loans, as payments on a
single installment obligation and as includible in the stated redemption price
at maturity. The Internal Revenue Service could, however, assert that original
issue discount must be calculated separately for each Mortgage Asset underlying
a Certificate. In addition, in the case of Ratio Strip Certificates, the
Internal Revenue Service could assert that original issue discount must be
calculated separately for each stripped coupon or stripped bond underlying a
Certificate.
Under certain circumstances, if the Mortgage Loans prepay at a rate faster
than the Prepayment Assumption, the use of the Cash Flow Bond Method may
accelerate a Certificateholder's recognition of income. If, however, the
Mortgage Assets prepay at a rate slower than the prepayment assumption, in some
circumstances the use of this method may decelerate a Certificateholder's
recognition of income.
In the case of a Stripped Certificate which either embodies only interest
payments on the underlying loans or (if it embodies some principal payments on
the Mortgage Assets) is issued at a price that exceeds the principal payments
(an "Interest Weighted Certificate"), additional uncertainty exists because of
the enhanced potential for applicability of the contingent principal provisions
of the Proposed Regulations.
Under the contingent principal provisions, "contingent principal"
represents the portion of the purchase price in excess of the amount of
principal payments. Under this method, the Certificateholder is in effect put on
the cash method with respect to interest income at the applicable federal rate.
First, each payment denominate "interest" is treated as interest to the extent
of accrued and unpaid interest on the debt instrument at the time that the
payment is received. Second, the portion of a payment denominated interest that
his not treated as interest, as described in the preceding sentence, is treated
as a repayment of contingent principal. The interest for any accrual period,
other than an initial short period, is the product of the applicable federal
rate (published monthly by the Treasury Department) at the time of the debt
instrument's issuance and the adjusted issue price at the beginning of the
accrual period (the sum of the purchase price of the instrument plus the accrued
interest for all prior accrual periods, reduced by the total of payments
received in all prior periods). The total of the payments denominated interest
with respect to the Interest Weighted Certificate that may be treated as
principal may not exceed the amount of contingent principal. If the contingent
principal has been completely recovered, all subsequent payments will be treated
as interest.
The Proposed Regulations provide that if all contingent principal is not
recovered as of the final payment, then the final payment will be treated as
principal to the extent of such unrecovered principal and interest to the extent
of the remainder, if any. To the extent the final payment is not sufficient to
cover the principal amount, the Certificateholders will recognize a loss. Any
such loss may be an ordinary loss since loss recognized on retirement of a debt
instrument issued by a natural person (e.g., a mortgage loan) is not a loss from
a sale or exchange. However, the Internal Revenue Service might content that
such loss should be a capital loss if the Certificateholder held its Certificate
as a capital asset within the meaning of section 1221 of the Code.
Possible Alternative Characterizations
The characterizations of the Stripped Certificates described above are not
the only possible interpretations of the applicable Code provisions. Among other
possibilities, the Internal Revenue Service could contend that (i) in certain
Series, each non-Interest Weighted Certificate is composed of an unstripped
undivided ownership interest in Loans and an installment obligation consisting
of stripped principal payments; (ii) the non-Interest Weighted Certificates are
subject to the contingent payment provisions of the Proposed Regulations; (iii)
each Interest Weighted Certificate is composed of an unstripped undivided
ownership interest in Loans and an installment obligations consisting of
stripped interest payments; or (iv) there are as many stripped bonds or stripped
coupons as there are scheduled payments of principal and/or interest on each
Mortgage Asset.
Given the variety of alternatives for treatment of the Certificates and the
different federal income tax consequences that result from each alternative,
potential purchasers are urged to consult their own tax advisers regarding the
proper treatment of the Certificates for federal income tax purposes.
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Character as Qualifying Mortgage Loans
In the case of Stripped Certificates there is no specific legal authority
existing regarding whether the character of the Certificates, for federal income
tax purposes, will be the same as the Mortgage Assets. The Internal Revenue
Service could take the position that the Mortgage Assets' character is not
carried over to the Certificates in such circumstances. Pass-Through
Certificates will be, and, although the matter is not free from doubt, Stripped
Certificates should be considered to represent, "qualifying real property loans"
within the meaning of section 593(d) of the Code, "real estate assets" within
the meaning of section 856(c)(6)(B) of the Code, and "loans required by an
interest in real property" within the meaning of section 7701(a)(19)(C)(v) of
the Code; and interest income attributable to the Certificates should be
considered to represent "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. Reserves or funds underlying the Certificates may
cause a proportionate reduction in the above-described qualifying status
categories of Certificates.
Sale of Certificates
As a general rule, if a Certificate is sole, gain or loss will be
recognized by the Holder thereof in an amount equal to the difference between
the amount realized on the sale and the Certificateholder's adjusted tax basis
in the Certificate. Such gain or loss will generally be capital gain or loss if
the Certificate is held as a capital asset. In the case of Pass-Through
Certificates, such tax basis will generally equal the Holder's cost of the
Certificate increased by any discount income with respect to the loans
represented by such Certificate previously included in income, and decreased by
the amount of any distributions of principal previously received with respect to
the Certificate. Such gain, to the extent not otherwise treated as ordinary
income, will be treated as ordinary income to the extent of any accrued market
discount not previously reported as income. In the case of Stripped
Certificates, the tax basis will generally equal the Certificateholder's cost
for the Certificate, increased by any discount income with respect to the
Certificate previously included in income, and decreased by the amount of all
payments previously received with respect to such Certificate.
Backup Withholding
A Bondholder or Certificateholder, other than a Residual Bondholder or
Residual Certificateholder, may, under certain circumstances, be subject to
"backup withholding" at the rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or original issue discount on the Securities. This withholding generally applies
if the Holder of a Security (i) fails to furnish the Issuer with its taxpayer
identification number "TIN"); (ii) furnishes the issuer an incorrect TIN; (iii)
fails to report properly interest, dividends or other "reportable payments" as
defined in the Code; or (iv) under certain circumstances, fails to provide the
issuer or such Holder's securities broker with a certified statement, signed
under penalty of perjury, that the TIN provided is its correct number and that
the Holder is not subject to backup withholding. Backup withholding will not
apply, however, with respect to certain payments made to Bondholders or
Certificateholders, including payments to certain exempt recipients (such as
exempt organizations) and to certain Nonresidents (as defined below). Holders of
the Securities should consult their tax advisers as to their qualification for
exemption from backup withholding and the procedure for obtaining the exemption.
The Issuer will report to the Holder of a Security and to the Internal
Revenue Service for each calendar year the amount of any "reportable payments"
during such year and the amount of tax withheld, if any, with respect to
payments on the Securities.
Tax Treatment of Foreign Investors
Regular Interests
Under the Code, unless interest (including OID) paid on a Security (other
than a Residual Interest Security) is considered to be "effectively connected"
with a trade or business conducted in the United States by a nonresident alien
individual, foreign partnership or foreign corporation ("Nonresidents"), such
interest will normally qualify as portfolio interest (except where (i) the
recipient is a Holder, directly or by attribution,
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of 10% or more of the capital or profits interest in the Issuer or (ii) the
recipient is a controlled foreign corporation to which the Issuer is a related
person) and will be exempt from federal income tax. Upon receipt of appropriate
ownership statements, the Issuer normally will be relieved of the obligation to
withhold federal income tax from such interest payments. These provisions
supersede the generally applicable provisions of United States law that would
otherwise require the Issuer to withhold at a 30% rate (unless such rate were
reduced or eliminated by an applicable tax treaty) on, among other things,
interest and other fixed or determinable, annual or periodic income paid to
Nonresidents.
Interest and original issue discount of Bondholders or Certificateholders
who are foreign persons are not subject to withholding if they are effectively
connected with a United States business conducted by the Bondholder or
Certificateholders. They will, however, generally be subject to the regular
United States income tax.
Residual Interests
Payments to Holders of Residual Interest Securities who are foreign persons
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Holders should assume that such income does
not qualify for exemption from United States withholding tax as "portfolio
interest." To the extent that a payment represents a portion of REMIC taxable
income that constitutes excess inclusions income, a Holder of a Residual
Interest Security will not be entitled to an exemption from or reduction of the
30% (or lower treaty rate) withholding tax rule. If the payments are subject to
United States withholding tax, they generally will be taken into account for
withholding tax purposes only when paid or distributed (or when the Residual
Interest Security is disposed of). The Treasury has statutory authority,
however, to promulgate regulations which would require such amounts to be taken
into account at an earlier time in order to prevent the avoidance of tax. Such
regulations could, for example, require withholding prior to the distribution of
cash in the case of Residual Interest Securities that do not have significant
value. Under the REMIC Regulations, if a Residual Interest Security has tax
avoidance potential, a transfer of a Residual Interest Security to a Nonresident
will be disregarded for all Federal tax purposes. A Residual Interest Security
has tax avoidance potential unless, at the time of the transfer the transferor
reasonably expects that the REMIC will distribute to the transferee residual
Holder amounts that will equal at least 30% of each excess inclusion, and that
such amounts will be distributed at or after the time at which the excess
inclusion accrues and not later than the close of the calendar year following
the calendar year of accrual. If a Nonresident transfers a Residual Interest
Security to a United States person, and if the transfer has the effect of
allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. See "Excess Inclusion Income."
STATE AND LOCAL TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Federal
Income Tax Considerations," potential investors should consider the state income
tax consequences of the acquisition, ownership, and disposition of the
Securities. State and local income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state or locality. Therefore, potential
investors should consult their own tax advisors with respect to the various
state and local tax consequences of an investment in the Securities of any
Series.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain requirements on employee benefit plans to which it applies
("Plans") and on those persons who are fiduciaries with respect to such Plans.
In accordance with ERISA's general fiduciary standards, before investing in
Securities of a Series, a Plan fiduciary should determine whether to do so is
permitted under the governing Plan instruments and is appropriate for the Plan
in view of its overall investment policy and the composition and diversification
of its portfolio. Other provisions of ERISA impose certain restrictions on Plans
and persons who have certain specified relationships to such Plans ("Parties in
Interest"). ERISA also imposes certain
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duties on persons who are fiduciaries of Plans subject to ERISA and prohibits
certain transactions between a Plan and Parties in Interest with respect to such
Plans ("Prohibited Transactions"). Under ERISA, any person who exercises any
authority or control respecting the management or disposition of the assets of a
Plan is considered to be a fiduciary of such Plan (subject to certain exceptions
not here relevant). Similar restrictions also apply to Plans that are subject to
the Code.
The Issuer, the Master Servicer, the Servicer (if any), the Trustee or the
provider of Credit Support (if any) may be considered to be Parties in Interest
with respect to certain Plans because of their activities or the activities of
their respective affiliates. If the Securities are acquired by a Plan with
respect to which the Issuer, the Master Servicer, the Servicer (if any), the
Trustee or the provider of Credit Support (if any) is a Party in Interest, such
transaction would violate the Prohibited Transaction rules of ERISA and the Code
unless such transaction were subject to one or more statutory or administrative
exemptions such as Prohibited Transaction Class Exemption ("PTCE") 75-1, which
exempts certain transactions involving employee benefit plans and certain
broker-dealers, reporting dealers and banks; PTCE 90-1, which exempts certain
transactions between insurance company pooled separate accounts and Parties in
Interest; PTCE 91-38, which exempts certain transactions between bank collective
investment funds and Parties in Interest; PTCE 84-14, which exempts certain
transactions effected on behalf of a Plan by a "qualified plan asset manager,"
or any other available exemption. Accordingly, prior to making an investment in
the Securities, investing Plans should determine whether the Issuer is a Party
in Interest with respect to such Plan and, if so, whether such transaction
qualifies for one or more statutory or administrative exemptions.
The Certificates of a Series will, and the Bonds of a Series could, be
treated as "equity" for purposes of ERISA. Under regulations issued by the
United States Department of Labor ("DOL") (the "Plan Asset Regulations"), if a
Plan makes an "equity" investment in a corporation, partnership, trust or
certain other entities, the underlying assets and properties of such entity will
be deemed for purposes of ERISA to be assets of the investing Plan unless
certain exemptions set forth in the regulation apply. If a particular Series is
treated as "equity" for purposes of the Plan Asset Regulations such that the
underlying assets of the Issuer could be treated as assets of a Plan purchasing
Securities of such Series and the Mortgage Assets securing or underlying such
Series consist of a single Mortgage Asset or obligations of a single obligor or
related obligors as specified in the applicable Prospectus Supplement (e.g.,
affiliates of the Issuer), and Securities of such Series are acquired by a Plan
with respect to which the obligor or related obligors are Parties in Interest,
such transaction would violate the Prohibited Transaction rules of ERISA and the
Code unless such transaction were subject to one or more statutory or
administrative exemptions such as those described above or any other available
exemption. Accordingly, prior to making an investment in Securities of such
Series, a Plan investor should determine whether such obligor or related
obligors are Parties in Interest with respect to such Plan and, if so, whether
such transaction is subject to one or more of the statutory or administrative
exemptions.
If a particular Series is treated as "equity" for purposes of the Plan
Asset Regulations such that the underlying assets of the Issuer could be treated
as assets of a Plan purchasing Securities of such Series and the Mortgage Assets
securing or underlying such Series consist of multiple Mortgage Assets or
obligations of multiple unrelated obligors as specified in the related
Prospectus Supplement, an investing Plan may not be able to determine whether
any of the obligors are Parties in Interest with respect to such Plan. In that
event, prior to making an investment in Securities of such Series, such Plan
investor should determine whether (i) one or more statutory or administrative
exemptions is applicable or (ii) one or more exceptions to the Plan Asset
Regulations is applicable such that the underlying assets of the Issuer will not
be treated as assets of such investing Plan.
One such exception applies if the class of "equity" interests in question
is (i) held by 100 or more investors who are independent of the Issuer and each
other, (ii) freely transferable, and (iii) sold as part of an offering pursuant
to (a) an effective registration statement under the Securities Act of 1933, and
then subsequently registered under the Securities Exchange Act of 1934 or (b) an
effective registration statement under Section 12(b) or 12(g) of the Securities
Exchange Act of 1934 ("Publicly Offered Securities"). It is expected that each
Series of Securities will satisfy requirement (ii) and (iii)(a). It cannot be
predetermined whether the ownership of any Class of any Series will be
sufficiently diffused to satisfy requirement (i). The Plan Asset Regulations
also provide that if at all times more than 75% of the value of all classes of
equity interests in the Issuer are held by investors other than benefit plan
investors (which is defined as including
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plans subject to ERISA, government plans and individual retirement accounts),
the investing Plan's assets will not include any of the underlying assets of the
Issuer. Again, it cannot be predetermined whether non-benefit plan investors
will own sufficient amounts of all classes of equity interests in the Issuer so
as to make the exception applicable.
Furthermore, if the Issuer were deemed to hold plan assets by reason of a
Plan's investment in a Security, the persons providing services with respect to
the assets of the Issuer, including the Mortgage Assets, may be subject to the
fiduciary responsibility provisions of Title I of ERISA and be subject to the
prohibited transactions provisions of ERISA and section 4975 of the Code with
respect to transactions involving such assets unless such transactions are
subject to a statutory or administrative exemption, such as those described
above.
There can be no assurance that the Securities will not be treated as equity
interests in the Issuer for purposes of the Plan Asset Regulations. Moreover, if
the Securities are treated as equity interests for purposes of ERISA, there can
be no assurance that any of the exceptions set forth in the Plan Asset
Regulations will apply to the purchase of Securities offered hereby. If the
Mortgage Assets securing Securities are treated as plan assets of Plans
investing therein, the degree of such inclusion may be limited depending on the
nature of the underlying collateral. The Plan Asset Regulations provide that
where a Plan acquires a "guaranteed governmental mortgage pool collateral
certificate," the Plan's assets include such certificate but do not, solely by
reason of the Plan's holding of such certificate, include any of the mortgages
underlying such certificate. The Plan Asset Regulations include in the
definition of a "guaranteed governmental mortgage pool certificate" certain
types of GNMA Certificates, FHLMC Certificates and FNMA Certificates, which may
be included in the Mortgage Assets securing Securities. Accordingly, even if
such Mortgage Assets were deemed to be assets of Plan investors, the mortgage
loans underlying the guaranteed governmental mortgage pool portion of such
Mortgage Assets would not be treated as assets of such Plans.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code and the potential consequences to
their specific circumstances, prior to making an investment in the Securities.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment procedure and diversification an investment in
the Securities is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
LEGAL INVESTMENT
The Prospectus Supplement for each Series will identify those Classes of
Securities, if any, which constitute "mortgage related securities" for purposes
of SMMEA.
Such Classes will constitute "mortgage related securities" for so long as
they are rated in one of the two highest rating categories by at least one
nationally recognized statistical rating organization (the "SMMEA Securities").
As "mortgage related securities," the SMMEA Securities will constitute legal
investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including, but not limited to, state
chartered savings banks, commercial banks, savings and loan associations and
insurance companies, as well as trustees and state government employee
retirement systems) created pursuant to or existing under the laws of the United
States or of any state (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulation to the same extent
that, under applicable law, obligations issued by or guaranteed as to principal
and interest by the United States or any agency or instrumentality thereof
constitute legal investments or such entities. Pursuant to SMMEA, a number of
states enacted legislation, on or before the October 3, 1991 cutoff for such
enactments, limiting to varying extents the ability of certain entities (in
particular, insurance companies) to invest in mortgage related securities, in
most cases by requiring the affected investors to rely solely upon existing
state law, and not SMMEA. Accordingly, the investors affected by such
legislation will be authorized to invest in SMMEA Securities only to the extent
provided in such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with, mortgage
related securities without limitation as to the percentage of their assets
represented thereby,
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federal credit unions may invest in mortgage related securities, and national
banks may purchase mortgage related 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,
federal credit unions should review the NCUA Letter of Credit Unions No. 96, as
modified by Letter No. 108, which includes guidelines to assist federal credit
unions in making investment decisions for mortgage related securities. The NCUA
has adopted rules which prohibit federal credit unions from investing in certain
mortgage related securities, except under limited circumstances.
All depository institutions considering an investment in the Securities
should review the Supervisory Policy Statement on Securities Activities dated
January 28, 1992 (the "Policy Statement") of the Federal Financial Institution
Examination Council. The Policy Statement, which has been adopted by the Board
of Governors of the Federal Reserve System, the FDIC, the Comptroller of the
Currency and the Office of Thrift Supervision and by the NCUA (with certain
modifications) prohibits depository institutions from investing in certain
"high-risk" mortgage securities, except under limited circumstances, and sets
forth certain investment practices deemed to be unsuitable for regulated
institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any SMMEA
Securities, as SMMEA Securities may be deemed unsuitable investments, or may
otherwise be restricted, under such rules, policies or guidelines (in certain
instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investment securities which are not "interest bearing"
or "income-paying," and provisions which may restrict or prohibit investments in
securities which are issued in book-entry form.
Investors should consult with their own legal advisors in determining
whether, and to what extent, SMMEA Securities constitute legal investments for
such investors.
Other Classes of Securities will not constitute "mortgage related
securities" under SMMEA (the "Non-SMMEA Securities"). The appropriate
characterization of the Non-SMMEA Securities under various legal investment
restrictions, and thus the ability of investors subject to these restrictions to
purchase Non-SMMEA Securities, may be subject to significant interpretive
uncertainties. All investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether, and
to what extent, the Non-SMMEA Securities will constitute legal investments for
them.
Except as to the status of SMMEA Securities identified in the Prospectus
Supplement for a Series as "mortgage-related securities" under SMMEA, the
Company will make no representations as to the proper characterization of the
Securities for legal investment or financial institution regulatory purposes, or
as to the ability of particular investors to purchase Securities under
applicable legal investment restrictions. The uncertainties described above (and
any unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Securities) may adversely affect
the liquidity of the Securities.
PLAN OF DISTRIBUTION
The Issuer may sell the Securities offered hereby either directly or to one
or more underwriters to be specified in the related Prospectus Supplement. The
Prospectus Supplement relating to a Series will set forth the terms of the
offering of such Series and each Class within such Series, including the name or
names of the underwriters, the proceeds to and their intended use by the Issuer,
and either the initial public offering price, the discounts and commissions to
the underwriters and any discounts or concessions allowed or reallowed to
certain dealers, or the method by which the price at which the underwriters and
any discounts or concessions allowed or reallowed to certain dealers, or the
method by which the price at which the underwriters will sell the Securities
will be determined.
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The underwriters will be obligated, subject to certain conditions, to
purchase all of the Securities described in the Prospectus Supplement relating
to a Series if any such Securities are purchased. The Securities of a Series may
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices determined at the time of
sale. In such event, the Prospectus Supplement will specify the amount of
compensation to be paid to the underwriters and expenses, if any, in connection
with such distribution. If so indicated in the Prospectus Supplement, the Issuer
will authorize the underwriters or other persons acting as the Issuer's agents
to solicit offers by certain institutions to purchase the Securities on such
terms and subject to such conditions as so specified.
The Issuer also may sell the Securities offered hereby and by means of the
related Prospectus Supplements from time to time in negotiated transactions or
otherwise, at prices determined at the time of sale. The Issuer may effect such
transactions by selling Securities to or through dealers and such dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Issuer and any purchasers of Securities for whom they may
act as agents.
The place and time of delivery for the Securities of a Series in respect of
which this Prospectus is delivered will be set forth in the related Prospectus
Supplement.
LEGAL MATTERS
Certain legal matters in connection with the Securities offered hereby will
be passed upon for the Issuer by O'Connor, Cavanagh, Anderson, Westover,
Killingsworth & Beshears, a professional association, Phoenix, Arizona.
FINANCIAL INFORMATION
The Issuer has determined that its financial statements are not material to
the offering made hereby. However, a copy of its latest audited consolidated
financial statements will be forwarded to any prospective investor who desires
to review financial information concerning the Issuer upon request. Prospective
investors should direct requests for such reports to: American Southwest
Financial Securities Corporation, 2390 East Camelback Road, Suite 225, Phoenix,
Arizona 85016.
In addition, a new Trust Fund will be formed with respect to each Series of
Certificates and, a new Owner Trust will be formed with respect to each Series
of Bonds issued by an Owner Trust. No Trust Fund or Owner Trust will engage in
any business activities or have any assets or obligations prior to the issuance
of the related Series of Securities. Accordingly, no financial statements with
respect to any Trust Fund or Owner Trust will be included in this Prospectus or
in the related Prospectus Supplement.
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GLOSSARY
The following are abbreviated definitions of certain capitalized terms used
in this Prospectus. Unless otherwise provided in the Prospectus Supplement for a
Series, such definitions shall apply to capitalized terms used in such
Prospectus Supplement. The definitions may vary from those in the Indenture or
Trust Agreement, as applicable, and the Indenture or Trust Agreement, as
applicable, generally provides a more complete definition of certain of the
terms. Reference should be made to the Indenture or Trust Agreement, as
applicable, for a more complete definition of such terms.
"Accreted Value" means, with respect to a Class of Compound Interest
Securities, as of any determination date, the original principal amount of such
Class, plus all accrued and unpaid interest, if any, previously added to the
principal thereof and reduced by any payments of principal previously made on
such Class of Compound Interest Securities and by any losses allocated to such
Class.
"Accrual Date" means, with respect to any Series, the date upon which
interest begins accruing on the Securities of the Series, as specified in the
related Prospectus Supplement.
"Accrual Payment Amount" means, with respect to any Payment Date or
Distribution Date for a Series that occurs prior to or on the Accrual
Termination Date, the aggregate amount of interest which has accrued on the
Compound Interest Securities of such Series during the Interest Accrual Period
relating to such Payment Date or Distribution Date and which is not then
required to be paid.
"Accrual Termination Date" means, with respect to a Class of Compound
Interest Securities, the date specified in the related Prospectus Supplement.
"Administration Agreement" means, with respect to a Series, an agreement
pursuant to which the Administrator agrees to perform certain ministerial,
administrative, accounting and clerical duties on behalf of the Issuer with
respect to such Series.
"Administration Fee" means the fee specified as such in the
Administration Agreement.
"Administrator" means American Southwest Financial Services, Inc. and its
successors or such other entity as is acceptable to the Rating Agency rating
such Series of Securities.
"Advances" means cash advances with respect to delinquent payments of
principal and interest on any Mortgage Loan made by a Servicer or the Master
Servicer, as the case may be, from its own funds or, if so specified in the
related Prospectus Supplement, from excess funds in the Custodial Account, but
only to the extent that such advances are, in the good faith business judgment
of such Servicer or Master Servicer, as the case may be, ultimately recoverable
from future payments and collections on the Mortgage Loans or otherwise.
"Aggregate Outstanding Principal" means, with respect to any Series or
Class thereof, the principal amount of all Securities of such Series or Class
outstanding on the date of determination, including, in respect of any Class of
Compound Interest Securities of such Series (or other Class of Securities on
which interest accrues and is added to the outstanding principal amount
thereof), the Accreted Value of such Securities through the Payment Date or
Distribution Date immediately preceding the date of determination.
"Appraised Value" means the appraised value determined in an appraisal
obtained at origination.
"ARM" or "Adjustable Rate Mortgage" means a Mortgage which provides for
adjustment from time to time to the Mortgage Rate in accordance with an approved
index.
"Asset Value" shall have the meaning specified in the related Prospectus
Supplement, with respect to each Mortgage Certificate or Mortgage Loan or other
Mortgage Assets included in the Trust Estate or Trust Fund for a Series.
"Assets" means the Mortgage Assets and any other assets comprising the
Trust Estate pledged to secure a Series of Bonds, or comprising the Trust Fund
relating to a Series of Certificates.
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"Assumed Reinvestment Rate" means, with respect to a Series, the per annum
rate or rates specified in the related Prospectus Supplement for a particular
period or periods.
"Authenticating Agent" means an agent appointed by the Trustee for purposes
of authenticating and delivering any Series of Certificates.
"Balloon Payment" means, with respect to a Mortgage Loan as to which only
interest is payable until maturity and all payments of principal are amortized,
the payment of principal at maturity for such Mortgage Loan.
"Bankruptcy Case" means a case in which the Mortgagor of a Mortgage Loan
securing or underlying a Series of Securities is a debtor seeking reorganization
or other relief under the Bankruptcy Code.
"Bankruptcy Code" means the Bankruptcy Reform Act, Title 11 of the United
States Code, as amended, and any successor statute thereto.
"Bond Interest Rate" means the interest rate on the outstanding principal
amount of a Bond payable on the applicable Payment Date for such Bond, as
specified in the related Prospectus Supplement.
"Bondholder" means the Person in whose name a Bond is registered in the
Bond Register.
"Bonds" means the Mortgage Collateralized Bonds sold by the Issuer pursuant
to this Prospectus and a related Prospectus Supplement.
"Book-entry Bonds" means Bonds of a Series for which ownership and
transfers of beneficial interests shall be made through book entries by DTC.
"Cash Flow Agreements" means interest rate swap agreements, interest rate
cap or floor agreements or similar agreements which reduce the effects of
interest rate fluctuations issued by a bank, insurance company, savings bank,
savings and loan association or other such entity.
"CERCLA" means the federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980.
"Certificate Date" means the date of delivery by the Issuer of a bearer
Security in definitive form.
"Certificate Interest Rate" means the interest rate on the outstanding
principal amount of a Certificate payable on the applicable Distribution Date
for such Certificate, as specified in the related Prospectus Supplement.
"Certificate Issuer" means the issuer of the Mortgage Certificates.
"Certificate Trustee" means the trustee of the Mortgage Certificates.
"Certificateholder" means the Person in whose name a Certificate is
registered in the Certificate Register.
"Certificates" means the Mortgage Pass-Through Certificates sold by the
Issuer pursuant to this Prospectus and a related Prospectus Supplement.
"Class" means a class of Securities of a Series.
"Closing Date" means, with respect to a Series, the date specified in the
related Series Supplement as the date on which Securities of such Series are
first issued.
"Code" means the Internal Revenue Code of 1986, as amended, and regulations
promulgated thereunder.
"Collection Account" means, with respect to a Series, the account created
pursuant to the Indenture or Trust Agreement, as applicable.
"Commercial Loans" means Mortgage Loans secured by liens on, or security
interests in, office buildings, retail stores, hotels or motels, nursing homes,
hospitals or other health care-related facilities, mobile home
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parks, warehouse facilities or self-storage facilities, industrial plants and
mixed use or other types of commercial properties.
"Commercial Property" means any property securing a Mortgage Loan used for
commercial purposes.
"Commission" means the Securities and Exchange Commission.
"Company" means American Southwest Financial Securities Corporation.
"Compound Interest Security" means any Security of a Series on which
interest accrues and is added to the principal of such Security periodically,
but with respect to which no interest or principal shall be payable except
during the period or periods specified in the related Prospectus Supplement.
"Cooperatives" means apartment buildings owned by private cooperative
housing corporations.
"Corporate Trust Office" means the corporate trust office of the Trustee as
specified in the related Prospectus Supplement.
"Covered Series" means a Trust Estate or Trust Fund covered by a form of
Credit Support.
"CPR" means the Constant Prepayment Rate prepayment model.
"Credit Support" means the Credit Support for a Series, if any, specified
in the related Prospectus Supplement.
"Credit Support Agreement" means the agreement or instrument pursuant to
which any Credit Support is issued or the terms of any Credit Support are set
forth.
"Crime Control Act" means the Comprehensive Crime Control Act of 1984, as
amended.
"Custodial Account" means an account established by the Master Servicer in
the name of the Trustee for the deposit on a daily basis of all Mortgage Loan
related receipts received by it subsequent to the Cut-Off Date.
"Cut-Off Date" means, with respect to a Series, the date specified in the
related Series Supplement.
"Definitive Bonds" means Bonds of a Series when and if issued in fully
registered, certificated form.
"Definitive Securities" means the Bonds or the Certificates for a Series
when and if issued in definitive form to the Securities Owners of such Series or
their nominees.
"Deleted Mortgage Loan" means a Mortgage Loan removed from the Trust Estate
or Trust Fund in order to substitute a Substitute Mortgage Loan.
"Deposit Trust Agreement" means a deposit trust agreement between the
Company and an Owner Trustee pursuant to which an Owner Trust is created and
Assets are deposited therein.
"Depositor" means the Company (i) when acting in such capacity under a
Deposit Trust Agreement to deposit Assets into an Owner Trust relating to a
Series of Bonds, or (ii) when acting in such capacity under a Trust Agreement to
deposit Assets into a Trust Fund relating to a Series of Certificates.
"Determination Date" means the date specified in the related Prospectus
Supplement.
"Disqualified Organization" means the United States, any State or political
subdivision thereof, any possession of the United States, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
section 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income.
"Distribution Date" means the date on which distributions of principal of
and interest on Certificates will be made.
"DOL" means the Department of Labor.
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"DTC" means that certain limited purpose trust company organized under the
laws of the State of New York, 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 Securities Exchange Act of 1934, as amended.
"DTC Participants" means organizations, including securities brokers and
dealers, banks, trust companies, clearing corporations and may include certain
other organizations, that maintain a custodial relationship with DTC.
"Due Date" means each date on which a payment is due and payable on any
Mortgage Assets.
"Due Period" means the period specified in the related Prospectus
Supplement that corresponds to each Payment Date or Distribution Date, as
applicable.
"Eligible Investments" means any one or more of the obligations or
securities described herein under "Assets Securing or Underlying the Securities
- -- Investment of Funds."
"EPA" means the Environmental Protection Agency, or any successor agency
thereof.
"Equity Participations" means shares of profits realized from the operation
or disposition of Mortgaged Property.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means an escrow account established and maintained by the
primary Servicer in which payments by Mortgagors to pay taxes, assessments,
mortgage and hazard insurance premiums and other comparable items will be
deposited.
"Event of Default" shall have the meaning specified in the related
Prospectus Supplement.
"Excess Cash Flow" shall have the meaning set forth in the related
Prospectus Supplement.
"Exchange Act" means the Securities Exchange Act of 1934.
"FDIC" means the Federal Deposit Insurance Corporation.
"FHA Loan" means a fixed-rate mortgage loan insured by the FHA.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FNMA" means the Federal National Mortgage Association.
"Final Scheduled Distribution Date" means the Distribution Date on which
principal of and interest on a Series of Certificates is scheduled to be paid in
full.
"Finance Companies" means limited purpose finance companies affiliated with
builders, thrifts, commercial banks, mortgage bankers or other entities involved
in mortgage finance which own Mortgage Assets.
"Funding Agreements" means, with respect to a Series of Bonds, agreements
between the Issuer and a Finance Company pursuant to which the Finance Company
will (i) borrow a portion of the proceeds of the sale of such Series of Bonds in
an amount not to exceed the aggregate initial Asset Value of the Mortgage Assets
pledged under such Funding Agreement; (ii) repay such loan by causing payments
to be made to the Trustee in such amounts as are necessary (after taking into
account any required payments from any Reserve Fund for such Series of Bonds) to
pay accrued interest on such loan and to amortize the entire principal amount of
such loan; and (iii) pledge to the Issuer as security for the loan Mortgage
Assets having an aggregate initial Asset Value equal to at least the amount of
the loan under the Funding Agreement.
"Garn-St. Germain Act" means the Garn-St. Germain Depository Institutions
Act of 1982.
"Guaranteed Investment Contract" means a guaranteed investment contract
providing for the investment of all distributions on the Mortgage Assets
guaranteeing a minimum or a fixed rate of return on the investment of moneys
deposited therein.
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"Holder" means a Bondholder or Certificateholder, as applicable.
"Housing Act" means the National Housing Act of 1934, as amended.
"HUD" means the United States Department of Housing and Urban
Development.
"Indenture" means, with respect to any Series of Bonds, the Indenture and
any related Series Supplement pursuant to which such Bonds are issued.
"Impound Account" means an account to be established and maintained upon
the occurrence of a delinquency or default by the obligor on a Mortgage Loan
into which payments by Mortgagors to pay taxes, assessments, mortgage and hazard
insurance premiums and other comparable items will be deposited pending
distribution of such items.
"Indirect DTC Participants" means banks, brokers, dealers and trust
companies that clear security transactions through or maintain a custodial
relationship with a DTC Participant.
"Installment Contracts" means installment contracts for the sale of fee
simple or leasehold interests in Mortgaged Property.
"Insurance Policies" means hazard insurance and other insurance policies
required to be maintained with respect to Mortgage Loans.
"Insurance Proceeds" means amounts received by the Trustee from the Master
Servicer or a Servicer in connection with sums paid or payable under any
insurance policies, to the extent not applied to the restoration or repair of
the Mortgaged Property.
"Interest Accrual Period" means the period specified in the related
Prospectus Supplement for a Series, during which interest accrues on Securities
of the related Series with respect to any Payment Date, Distribution Date,
Redemption Date or Special Redemption Date.
"Interest Only Securities" means a Security entitled to receive payments of
interest only based upon the Notional Amount of the Security.
"Interest Weighted Certificates" means, with respect to Certificates issued
by a grantor Trust, Certificates that embody only interest payments on the
underlying Mortgage Loans or (if they embody some principal payments on the
underlying Mortgage Loans) is issued at a price that exceeds the principal
payments.
"Interest Weighted Securities" means REMIC Securities the payments on which
consist solely or primarily of a specified portion of the interest payments on
qualified mortgages held by a REMIC.
"IRS" means the Internal Revenue Service.
"Issuer" means the Company or an Owner Trust or Trust Fund established by
the Company as issuer of a Series of Securities.
"L/C Bank" means the issuer of a letter of credit.
"L/C Percentage" means the maximum liability of an L/C Bank under its
letter of credit equal to a percentage specified in the related Prospectus
Supplement of the initial aggregate outstanding principal balance of the
Mortgage Loan, in the Trust Estate or Trust Fund, as applicable, or one or more
Classes of Securities of the related Series.
"Liquidation Proceeds" means amounts (other than Insurance Proceeds)
received and retained in connection with liquidation of defaulted Mortgage Loans
whether through foreclosure or otherwise, net of related liquidation expenses.
"Loan-to-Value Ratio" means, as of any date of determination, the ratio of
the then outstanding principal amount to the lesser of the appraised value and
the purchase price of the Mortgaged Property at the time of origination.
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"Lock-Out Date" means the date upon which a Lock-Out Period expires.
"Lock-Out Period" means, if provided for in the related Mortgage Loan, the
period within which prepayments thereon are prohibited.
"Master Servicer" means, with respect to a Series secured by Mortgage Loans
or Mortgage Certificates, the Person, if any, designated in the related
Prospectus Supplement to manage and supervise the administration and servicing
by the Servicers of the Mortgage Loans comprising Mortgage Assets or Underlying
Mortgage Loans for that Series, or the successors or assigns of such Person.
"Master Servicing Agreement" means the Master Servicing Agreement between
the Issuer and the Master Servicer, if any, specified in the related Prospectus
Supplement.
"Maximum Variable Interest Rate" means the interest rate cap on the Bond
Interest Rate or Certificate Interest Rate for Variable Interest Securities.
"Minimum Variable Interest Rate" means the interest rate floor on the
Bond Interest Rate or Certificate Interest Rate for Variable Interest
Securities.
"Mortgage" means a mortgage, deed of trust or other security instrument
evidencing the lien on the Mortgaged Property.
"Mortgage Assets" means the Mortgage Loans, including participation
interests therein, REO Property and Mortgage Certificates which are Granted to
the Trustee as security for a Series of Bonds or deposited into the Trust Fund
in respect of a Series of Certificates; an item of Mortgage Assets refers to a
specific Mortgage Loan, REO Property or Mortgage Certificates.
"Mortgage Certificate Agreement" means a pooling and servicing agreement,
an indenture, a participation agreement or similar agreement pursuant to which a
Mortgage Certificate is issued.
"Mortgage Certificate Trustee" means the trustee under a Mortgage
Certificate Agreement.
"Mortgage Certificate" means a mortgage participation or other interest,
pass-through certificate or collateralized mortgage obligation.
"Mortgaged Properties" means the real properties on which liens are created
pursuant to Mortgages for purposes of securing the Mortgage Loans.
"Mortgage Group" means groups of Mortgage Assets.
"Mortgage Loan" means a mortgage loan or participation interest therein
that is owned by the issuer and constitutes a part of the Mortgage Assets for a
Series, or that is Underlying Mortgage Loans for a Mortgage Certificate that
constitutes a part of the Mortgage Assets for a Series.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor with respect to a Mortgage Loan.
"Mortgage Rate" means, with respect to each Mortgage Loan, the annual
interest rate required to be paid by the Mortgagor under the terms of the
related Mortgage Note.
"Mortgagor" means the Person indebted under the Mortgage Note relating to a
Mortgage Loan.
"Multifamily Loans" means Mortgage Loans which are secured by liens on, or
security interests in, Multifamily Properties.
"Multifamily Property" means any property securing a Mortgage Loan
consisting of multifamily residential rental property or cooperatively owned
multifamily property consisting of five or more dwelling units.
"Nonresidents" means a nonresident alien individual, foreign partnership
or foreign corporation.
"Notional Amount" means an amount assigned to Interest Only Securities
and Interest Weighted Securities by the related Prospectus Supplement.
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"OID" means "original issue discount" within the meaning of section 1273 of
the Code.
"Originator" means the originator, other than the Issuer or the
Depositor, of a Mortgage Loan.
"OTS" means the Office of the Thrift Supervision.
"Owner Trust" means the trust fund established by the Company pursuant to a
Deposit Trust Agreement to hold Assets and issue a Series of Bonds.
"Owner Trustee" means the bank or trust company named in the Prospectus
Supplement related to a Series of Bonds, not in its individual capacity but
solely as trustee pursuant to a Deposit Trust Agreement, and its successors and
assigns.
"PAC" means Planned Amortization Class Securities.
"PAC Amount" means the scheduled amounts of principal payments to be
applied on each Payment Date or Distribution Date to the PAC Securities, as set
forth in the related Prospectus Supplement.
"PAC Security" or "Planned Amortization Class Security" means a Security on
which principal is payable in accordance with a planned amortization schedule to
the extent principal is available to be paid on such security on each Payment
Date or Distribution Dates.
"Participating Securities" means a Security entitled to receive payments of
principal and interest and an additional return on investment as described in
the related Prospectus Supplement.
"Parties in Interest" means persons who, under ERISA, have certain
specified relationships to a Plan.
"Pass-Through Certificates" means, in respect of Certificates issued by a
grantor trust, Certificates in which there is no separation of the principal and
interest payments on the underlying Mortgage Loans.
"Paying Agent" means the Trustee or any other Person that meets the
eligibility standards for the Paying Agent specified in the Indenture or Trust
Agreement, as applicable and is authorized and appointed pursuant to the
Indenture or Trust Agreement, as applicable by the Issuer to pay the principal
of or interest on any Securities on behalf of the Issuer.
"Payment Date" means the date on which payments of principal of and
interest on the Bonds will be made.
"Payment Guarantee Insurance" means the insurance policy or surety bond
issued with respect to a Series of Securities that guarantees, with respect to
one or more Classes of Securities of such Series, timely distributions of
interest and full distributions of principal on the basis of a schedule of
principal distributions set forth in or determined in a manner specified in the
related Prospectus Supplement.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
"Plan Asset Regulations" means regulations issued by the DOL.
"Plans" means employee benefit plans subject to ERISA.
"Policy Statement" means the supervisory policy statement adopted by the
Federal Financial Institution Examination Council.
"Prepayment Assumption" means the anticipated rate of prepayments assumed
in pricing the Securities.
"Prepayment Premium" means, if applicable, a premium or a yield maintenance
penalty required to be paid under the terms of a Mortgage Loan in connection
with a prepayment thereon.
"Primary Servicer" means the entity which has primary liability for
servicing Mortgage Loans directly.
"Principal Balance" means, with respect to any Mortgage Loan or related REO
Property, for any Due Date and the Due Period with respect thereto, the
principal balance of such Mortgage Loan (or, in the case of
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REO Property, of the related Mortgage Loan on the last date on which a payment
was made thereon) outstanding as of the Cut-Off Date, after application of
principal payments due on or before the Cut-Off Date, whether or not received,
plus all amounts of Deferred Interest accrued on such Mortgage Loan to the Due
Date in the Due Period immediately preceding the date of determination minus the
sum of (a) the principal portion of the Scheduled Payment due on or prior to
such Due Date, but only if received from or on behalf of the Mortgagor, (b) all
Principal Prepayments, and all Insurance Proceeds, Liquidation Proceeds and net
income from an REO Property to the extent identified and applied by the Master
Servicer or Servicer, as applicable, as recoveries of principal through the
close of the related Prepayment Period for the Master Servicer or Servicer, as
applicable, and (c) any Realized Loss on such Mortgage Loan to the extent
treated as a principal loss and which is realized during such Prepayment Period.
"Principal Prepayment" means, with respect to any Mortgage Certificates or
Mortgage Loan, any payment of principal on such Mortgage Certificates or
Mortgage Loan in excess of the Scheduled Payment, resulting from prepayment,
partial prepayment, Liquidation Proceeds or Insurance Proceeds with respect to
the Mortgage Loans underlying such Mortgage Certificates or Mortgage Loan but
not including any scheduled payment received prior to the Due Period in which it
was scheduled to be paid.
"Principal Payment Amount" means, with respect to any Payment Date or
Distribution Date related to a particular Series, the amount that is specified
in the related Prospectus Supplement.
"Principal Only Securities" means a Security entitled to receive payments
of principal only.
"Proceeding" means any suit in equity, action at law or other judicial or
administrative proceeding.
"Prohibited Transactions" means certain transactions between a Plan and
Parties in Interest with respect to such Plan which are prohibited under ERISA.
"Proposed OID Regulations" means proposed Treasury regulations issued under
sections 1271-1275 of the Code governing original issue discount.
"Prospectus Supplement" means the supplemental prospectus to this
Prospectus, as applicable, relating to a Series of Securities registered with
the Commission.
"PTCE" means Prohibited Transactions Class Exemption.
"Rating Agency" means a nationally recognized statistical rating agency.
"Realized Losses" with respect to each Mortgage Loan or REO Property, as
the case may be, as to which a Cash Liquidation or REO Disposition has occurred,
an amount equal to (i) the Principal Balance of the Mortgage Loan as of the date
of Cash Liquidation or REO Disposition, plus (ii) interest at the applicable
Mortgage Rate, from the date as to which interest was last paid up to the Due
Date in the period in which such Cash Liquidation or REO Disposition has
occurred on the Principal Balance of such Mortgage Loan outstanding during each
Due Period that accrued interest was not paid, minus (iii) Liquidation Proceeds
received during the month in which such Cash Liquidation or REO Disposition
occurred, net of amounts that are payable to the Master Servicer or Servicer, as
applicable, with respect to such Mortgage Loan.
"Redemption Price" means, with respect to any Bond of a Series or Class to
be redeemed, an amount equal to the percentage specified in the related
Prospectus Supplement of the principal amount (or of the Accreted Value of any
Compound Interest Security) of such Security so redeemed, together with accrued
and unpaid interest thereon at the applicable Bond Interest Rate to the
Designated Interest Accrual Date for such Series.
"Regular Bondholder" means a Holder of a Regular Interest Bond.
"Regular Certificateholder" means a Holder of a Regular Interest
Certificate.
"Regular Interest Certificates" means Classes of Certificates constituting
regular interests in a REMIC.
"Regular Interest Securities" means Regular Interest Bonds or Regular
Interest Certificates, as applicable.
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"Reinvestment Income" means any interest or other earnings on Series Funds
or Accounts that are part of the Assets for a Series.
"REMIC" means a real estate mortgage investment conduit under Section 860D
of the Code.
"REMIC Regulations" means proposed Treasury regulations issued on September
27, 1991 relating to REMICs.
"REO Property" means a Mortgaged Property acquired through foreclosure or
deed-in-lieu of foreclosure in connection with a defaulted Mortgage Loan or
otherwise.
"Repurchase Price" means the price at which the Depositor is required to
either substitute for or repurchase a Mortgage Loan if any document in the
Mortgage Loan file relating to such Mortgage Loan and delivered by the Depositor
to the Trustee is found by the Trustee within a period specified in the related
Prospectus Supplement to be defective in any material respect and the Depositor
does not cure such defect within a period specified in the related Prospectus
Supplement.
"Reserve Fund" means, with respect to a Series, any reserve fund described
in the applicable Prospectus Supplement, including a subordination Reserve Fund.
"Reserve Funds" means, collectively, more than one reserve fund.
"Residual Bondholder" means the Holder of a Residual Interest Bond.
"Residual Certificateholder" means the Holder of a Residual Interest
Certificate.
"Residual Interest Bonds" means Classes of Bonds constituting the residual
interest in a REMIC.
"Residual Interest Certificates" means Classes of Certificates constituting
residual interests in a REMIC.
"Residual Interest Securities" means Residual Interest Bonds or Residual
Interest Certificates, as applicable.
"Retail Bonds" means each of the Bonds of a Class identified as such in the
related Prospectus Supplement.
"Retail Certificates" means each of the Certificates of a Class identified
as such in the related Prospectus Supplement.
"Retained Interests" means, to the extent specified in the related
Prospectus Supplement, certain amounts received by the Trustee or the Servicer
with respect to a Mortgage Asset securing or underlying a Series which may not
be pledged as security or deposited into the Trust Fund for such Series, as the
case may be, but will be payable to the Seller of such Mortgage Asset or to a
Servicer free and clear of the lien of an Indenture or interest granted under
such an Indenture or Trust Agreement, as applicable.
"RICO" means the Racketeer Influenced and Corrupt Organization Act, as
amended.
"Scheduled Payments" means the scheduled payments of principal and interest
to be made by the Mortgagor on a Mortgage Loan in accordance with the terms of
the related Mortgage Note, as modified by any permitted modification of a
Mortgage Note.
"Securities" means Bonds or Certificates.
"Securities Owners" means the owners of the beneficial interests in a
Series of Bonds or Certificates.
"Senior Securities" means a Class of Securities which are senior in right
and priority to the extent described in the related Prospectus Supplement to
payment of principal and interest to certain other Classes of Securities of such
Series.
"Series" means a separate series of Bonds or Certificates, as the case may
be, sold pursuant to this Prospectus and the related Prospectus Supplement.
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"Series Supplement" means the supplemental indenture to or terms indenture
incorporating by reference the Indenture or Trust Agreement, as applicable,
between the Issuer of a Series of Securities and the Trustee relating to such
Series of Securities.
"Servicer" means, for any Mortgage Loan, the Person approved by the Issuer
and by the Master Servicer, if any, as servicer of such Mortgage Loan, which
Person will be a FNMA or FHLMC approved seller and servicer.
"Servicer Remittance Date" means with respect to each Mortgage Loan, the
date on which the Servicer will remit all funds held in the Servicing Account
together with any Advances made by such Servicer for deposit to the Collection
Account.
"Servicing Agreements" means the Master Servicing Agreement and the
Servicing Agreement, if any.
"Servicing Fee" means for any Series, the aggregate fees paid to the
Trustee or the Master Servicer or other similar fees.
"SMMEA" means the Secondary Mortgage Market Enhancement Act of 1984.
"SMMEA Securities" means Classes of Securities which constitute "mortgage
related securities" for purposes of SMMEA for so long as such Classes are rated
in one of the two highest rating categories by at least one nationally
recognized statistical rating organization.
"SPA" means the Standard Prepayment Assumption prepayment model.
"Special Redemption" means with respect to Bonds of a Series, a special
redemption, in whole or in part, if, as a result of principal payments on the
Mortgage Assets securing such Series or low reinvestment yields or both, the
Trustee determines (based on assumptions, if any, specified in the Indenture and
after giving effect to the amounts, if any, available to be withdrawn from any
Reserve Fund for such Series) that the amount anticipated to be available in the
Collection Account for such Series on the date specified in the related
Prospectus Supplement will be insufficient to meet debt service requirements on
any portion of the Bonds.
"Special Redemption Date" means, with respect to a Series, the date each
month (other than any month in which a Payment Date occurs) on which Bonds of
that Series may be redeemed pursuant to the Indenture or the related Series
Supplement; such date will be the same day of the month as the day on which the
Payment Date for the Bonds of that Series occurs.
"Special Servicer" means a special servicer identified in the related
Prospectus Supplement appointed to perform the activities set forth in the
related Prospectus Supplement.
"Start Up Day" means the "startup day" of the REMIC as defined in section
860G(a)(9) of the Code.
"Stated Maturity" means the date specified in the related Prospectus
Supplement no later than which all the Bonds of such Class will be fully paid,
calculated on the basis of the assumptions set forth in the related Prospectus
Supplement.
"Stripped Certificates" means, in respect of Certificates issued by a
grantor trust, Certificates in which there is considered to be a separate
ownership of the payments of principal and interest on the underlying Mortgage
Loans.
"Subordinate Securities" means a Class of Securities which are subordinate
in right and priority to the extent described in the related Prospectus
Supplement to payment of principal and interest to all Senior Classes of
Securities of such Series.
"Substitute Mortgage Assets" means any Mortgage Assets that are Granted to
the Trustee as security for a Series of Bonds or deposited into the Trust Fund
in respect of a Series of Certificates in lieu of any Mortgage Assets then
comprising part of the Trust Estate or Trust Fund, as applicable, for such
Series of Bonds or Certificates.
"Substitute Mortgage Loan" means a Mortgage Loan substituted for one or
more Deleted Mortgage Loans in the Trust Estate or Trust Fund as the case may
be.
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"TIN" means Taxpayer Identification Number.
"Title V" means Title V of the Depository Institutions Deregulation and
Monetary Control Act of 1980, as amended.
"Title VIII" means Title VIII of the Garn-St. Germain Act.
"Trust Agreement" means the pooling and servicing agreement, indenture or
similar agreement pursuant to which the Certificates are issued.
"Trust Estate" means, with respect to any Series of Certificates, all
money, instruments, securities and other property, including all proceeds
thereof, which are subject or intended to be subject to the lien of the
Indenture for the benefit of the Series as of any particular time (including,
without limitation, all property and interests Granted to the Trustee pursuant
to the Series Supplement for such Series).
"Trust Fund" means the trust fund established pursuant to a Trust Agreement
into which Assets are deposited for the purpose of issuing a Series of
Certificates.
"Trustee" means bank or trust company qualified under the TIA and named in
the Prospectus Supplement for a Series as trustee.
"UCC" means the Uniform Commercial Code.
"Underlying Mortgage Loans" means, with respect to a Mortgage Certificate,
the underlying Mortgage Loans.
"Variable Interest Payment Date" means, with respect to any Class of
Variable Interest Securities issued as part of a Series of Bonds, the date
specified in the related Prospectus Supplement.
"Variable Interest Period" means, with respect to any Class of Variable
Interest Securities, the period commencing immediately subsequent to the
preceding Variable Interest Period (or, in the case of the Variable Interest
Period applicable to the first Variable Interest Payment Date with respect to
such [Class of Variable Interest Securities, commencing on the Accrual Date for
such Class) and ending on the] date specified in the related Prospectus
Supplement.
"Variable Interest Rate" means the interest rate in respect of Variable
Interest Security.
"Warranting Party" means the party specified in the related Prospectus
Supplement.
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