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PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED AUGUST 29, 1996)
$318,494,140 (APPROXIMATE)
MLCC MORTGAGE INVESTORS, INC., SELLER
MORTGAGE LOAN ASSET BACKED PASS-THROUGH CERTIFICATES, SERIES 1996-C,
CLASS A
PRINCIPAL AND INTEREST PAYABLE ON THE 15TH DAY OF EACH MONTH, BEGINNING IN
SEPTEMBER 1996
MERRILL LYNCH CREDIT CORPORATION, MASTER SERVICER
------------------------
The Series 1996-C Certificates will consist of Class A, Class B and Class R
Certificates (collectively, the 'Certificates'). Only the Class A Certificates
are offered hereby. The Class A Certificates will be senior to the Class B and
Class R Certificates (collectively, the 'Subordinated Certificates'), to the
extent described herein. See 'Description of the Certificates -- Subordinated
Certificates.'
The Certificates will represent beneficial interests in a pool (the
'Mortgage Pool') of high balance, adjustable rate, one- to four-family mortgage
loans (the 'Mortgage Loans'), including adjustable rate loans that may be
converted to fixed rate loans or to adjustable rate loans based on a different
Index, which were originated by Merrill Lynch Credit Corporation ('MLCC') under
its PrimeFirst'r' mortgage program or acquired by it in the course of its
correspondent lending activities, and certain related property (collectively,
the 'Trust Fund') conveyed by MLCC Mortgage Investors, Inc. (the 'Company').
MLCC will serve as Master Servicer (the 'Master Servicer') of the Mortgage Pool.
Terms used and not otherwise defined herein shall have the respective meanings
ascribed to such terms in the Prospectus dated August 29, 1996 attached hereto
(the 'Prospectus').
The Class A Certificates will be issued in the initial aggregate principal
amount of approximately $318,494,140, subject to a permitted variance of plus or
minus 5%. The remaining beneficial interests in the Trust Fund will be evidenced
by the Class B and Class R Certificates.
[Logo]
On or before the issuance of the Certificates, the Company will obtain from
AMBAC Indemnity Corporation (the 'Certificate Insurer') a certificate guaranty
insurance policy, relating to the Class A Certificates (the 'Certificate
Insurance Policy'), in favor of the Trustee. The Certificate Insurance Policy
will protect holders of the Class A Certificates against shortfalls in amounts
due to be distributed at the times and to the extent described herein. See 'The
Certificate Insurance Policy and the Certificate Insurer.'
(Cover continued on following page)
THE CLASS A CERTIFICATES WILL NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE COMPANY, THE TRUSTEE, MLCC, MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED, MERRILL LYNCH & CO., INC. OR ANY OF THEIR AFFILIATES, NOR WILL THE
CLASS A CERTIFICATES BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY
ANY OTHER PERSON OR ENTITY (OTHER THAN, SOLELY IN RESPECT OF THE CLASS A
CERTIFICATES, THE CERTIFICATE INSURER), INCLUDING THE COMPANY, THE TRUSTEE,
MLCC, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, MERRILL LYNCH & CO.,
INC. OR ANY OF THEIR AFFILIATES. DISTRIBUTIONS ON THE CLASS A CERTIFICATES WILL
BE PAYABLE SOLELY FROM THE ASSETS TRANSFERRED TO THE TRUST FUND FOR THE BENEFIT
OF THE HOLDERS OF THE CLASS A CERTIFICATES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Class A Certificates are being offered by the Underwriter from time to
time in negotiated transactions or otherwise at varying prices to be determined,
in each case, at the time of sale.
The aggregate proceeds to the Company from the sale of the Class A
Certificates will be approximately $316,901,669, before deducting expenses
payable by the Company, estimated to be $550,000 in the aggregate. The
Underwriter will reimburse the Company for approximately $100,000 of such
expenses.
The Class A Certificates are offered subject to prior sale, when, as and if
issued by the Trust Fund and accepted by the Underwriter and subject to its
right to reject orders in whole or in part. It is expected that delivery of the
Class A Certificates will be made in book-entry form only through the facilities
of The Depository Trust Company, Cedel Bank, societe anonyme, and the Euroclear
System on or about September 10, 1996.
------------------------
MERRILL LYNCH & CO.
------------------------
The date of this Prospectus Supplement is September 4, 1996.
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The Class A Certificates will be adjustable rate Certificates. Each
Mortgage Loan will be an adjustable rate loan with an interest rate that is
adjusted (subject to a lifetime maximum cap) either every month or every six
months as described herein and, in the case of certain of those Mortgage Loans,
subject to the option of the Mortgagor to convert the Mortgage Loan to a fixed
rate loan or to a different Index, as described below and herein, or, in some
cases, only to convert to a new Index. Payments of interest and, to the extent
described herein, principal will be due on the first day (the 'Due Date') of
each month and will be distributed, as and to the extent described herein, to
the holders of the Class A Certificates on the 15th day of that month (or if
such day is not a business day, then on the next succeeding business day) (each,
a 'Distribution Date'). The adjustments to the interest rates of the Mortgage
Loans and their scheduled amortization are described herein. Approximately 1.06%
of the Mortgage Loans (by aggregate principal balance as of the Cut-off Date)
(the 'Convertible Mortgage Loans') provide that, at the option of the related
Mortgagors, the adjustable interest rate on such Mortgage Loans may be converted
to a fixed interest rate and that, at the option of the related Mortgagors, the
Index may be converted to a different Index, provided that certain conditions
have been satisfied. Upon notification from a Mortgagor of such Mortgagor's
intent to convert a Mortgage Loan from an adjustable interest rate to a fixed
interest rate, and prior to such conversion of any such Mortgage Loan (a
'Converting Mortgage Loan'), the initial Master Servicer, so long as it is the
Master Servicer, will be obligated to purchase the Converting Mortgage Loan at a
price equal to the outstanding principal balance thereof plus accrued interest
thereon net of any servicing fees (the 'Conversion Price'). If the Master
Servicer does not purchase a Converting Mortgage Loan, the Mortgage Loans will
thereafter include such fixed rate converted Mortgage Loan. Approximately 97.68%
of the Mortgage Loans (by aggregate principal balance as of the Cut-off Date)
(the 'Index Convertible Mortgage Loans') provide that, at the option of the
related Mortgagors, the Index for such Mortgage Loans may be converted to a
different Index, provided that certain conditions have been satisfied. The
Master Servicer will not purchase a Mortgage Loan (whether it is a Convertible
Mortgage Loan or an Index Convertible Mortgage Loan) upon its conversion to a
new Index. See 'Prepayment and Yield Considerations' herein.
The Class A Pass-Through Rate is equal to the lesser of (i) the applicable
one-month LIBOR (as defined herein) plus the applicable margin described herein
and (ii) the applicable Weighted Average Net Mortgage Rate (defined herein) for
the Mortgage Loans, as described under 'Description of the
Certificates -- Distributions on the Certificates.'
On each Distribution Date, commencing on September 16, 1996, holders of the
Class A Certificates will be entitled to receive, from and to the extent of the
funds described herein, distributions with respect to principal of the Mortgage
Loans, to the extent described herein, together with interest on the outstanding
principal balance of the Class A Certificates at the Class A Pass-Through Rate,
calculated as described herein and subject to the limitations described herein.
Interest will begin to accrue on the Class A Certificates from the date of their
initial issuance as described herein.
THE YIELD ON THE CLASS A CERTIFICATES WILL BE SENSITIVE TO, AMONG OTHER
THINGS, THE LEVELS OF THE MORTGAGE RATES, THE TIMING OF THE CHANGES IN THOSE
MORTGAGE RATES, THE LEVEL OF ONE-MONTH LIBOR AND THE RATE AND TIMING OF
PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS). SEE 'PREPAYMENT AND YIELD
CONSIDERATIONS.'
The only obligation of the Company with respect to the Certificates will be
to obtain from MLCC, as seller of the Mortgage Loans to the Company, certain
representations and warranties relating to the Mortgage Loans. MLCC will have
the obligation to repurchase any Mortgage Loan as to which an uncured breach of
certain representations or warranties has occurred that materially adversely
affects the Certificateholders or the Certificate Insurer and will have
contractual servicing obligations as Master Servicer. The Master Servicer is
obligated under certain circumstances to make Advances (defined herein) to the
Certificateholders. See 'Description of the Certificates -- Advances' herein and
'Description of the Certificates -- Distributions on the Certificates' in the
Prospectus.
An election will be made to treat the Trust Fund (exclusive of the rights
in respect of any Additional Collateral, as described herein) as a real estate
mortgage investment conduit (a 'REMIC') for federal income tax purposes. See
'Certain Federal Income Tax Consequences' in the Prospectus.
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The Class A Certificates and Class B Certificates will represent 'regular
interests' in the REMIC. The Class R Certificate will represent the sole class
of 'residual interest' in the REMIC.
The interests of the owners of the Class A Certificates (the 'Certificate
Owners') will be represented by book-entries on the records of The Depository
Trust Company and participating members thereof. See 'Description of the
Certificates -- Registration of Class A Certificates' herein.
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the 'Underwriter')
intends to make a secondary market in the Class A Certificates, but has no
obligation to do so. There can be no assurance that a secondary market for the
Class A Certificates will develop, or if it does develop, that it will provide
holders of the Class A Certificates with liquidity of investment at any
particular time or for the life of the Class A Certificates.
THE CLASS A CERTIFICATES ARE BEING OFFERED BY THE COMPANY FROM TIME TO TIME
PURSUANT TO THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS ACCOMPANYING THIS
PROSPECTUS SUPPLEMENT. THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE
INFORMATION ABOUT THE OFFERING OF THE CLASS A CERTIFICATES. ADDITIONAL
INFORMATION IS CONTAINED IN THE PROSPECTUS AND PURCHASERS ARE URGED TO READ BOTH
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE CLASS A
CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
TO THE EXTENT THAT ANY STATEMENTS IN THIS PROSPECTUS SUPPLEMENT MODIFY
STATEMENTS CONTAINED IN THE PROSPECTUS, THE STATEMENTS IN THIS PROSPECTUS
SUPPLEMENT SHALL CONTROL.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriter or a request by such
investor's representative within the period during which there is an obligation
to deliver a Prospectus Supplement and Prospectus, the Company or the
Underwriter will promptly deliver, or cause to be delivered, without charge, a
paper copy of the Prospectus Supplement and Prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date
of the Prospectus and prior to the termination of the offering of the Class A
Certificates made by this Prospectus Supplement are incorporated herein by
reference. The Company hereby undertakes to provide without charge to each
person to whom this Prospectus Supplement and the Prospectus are delivered, on
request of such person, a copy of any or all of the documents incorporated
herein by reference other than the exhibits to such documents (unless such
exhibits are specifically incorporated by reference in such documents). Requests
should be directed to the Corporate Secretary of MLCC Mortgage Investors, Inc.,
in writing at 4802 Deer Lake Drive East, Jacksonville, Florida 32246, or by
telephone at (904) 928-6000.
------------------------
UNTIL 90 DAYS FROM THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND
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.
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SUMMARY OF TERMS OF THE CERTIFICATES
This 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 herein and not otherwise defined
shall have the respective meanings assigned them in the Prospectus or elsewhere
in this Prospectus Supplement.
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Securities Offered........................ Mortgage Loan Asset Backed Pass-Through Certificates, Series 1996-C,
Class A (the 'Class A Certificates'). The Class B and Class R
Certificates (the 'Subordinated Certificates') will be subordinated
to the Class A Certificates as described herein. The Subordinated
Certificates are not offered hereby and may be retained or sold by
the Company or certain affiliates thereof. The Certificate Insurance
Policy will be available to protect the holders of the Class A
Certificates against shortfalls in amounts due to be distributed at
the times and to the extent described herein. See ' -- Certificate
Insurance Policy' below and 'The Certificate Insurance Policy and the
Certificate Insurer' herein.
Seller.................................... MLCC Mortgage Investors, Inc. (the 'Company'), a wholly-owned,
limited purpose subsidiary of Merrill Lynch Credit Corporation, which
is a wholly-owned indirect subsidiary of Merrill Lynch & Co., Inc.
and an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated (the 'Underwriter'). Neither Merrill Lynch & Co., Inc.
nor any of its affiliates, including the Company, has insured or
guaranteed the Certificates.
Master Servicer........................... Merrill Lynch Credit Corporation ('MLCC'), a wholly-owned indirect
subsidiary of Merrill Lynch & Co., Inc. and an affiliate of both the
Company and the Underwriter.
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Each of the following original principal balance amounts is approximate, subject
to a permitted variance of plus or minus 5%:
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Original Pool Scheduled Principal Balance.................................................... $323,344,305
Original Class A Principal Balance........................................................... $318,494,140
Original Class B Principal Balance........................................................... $ 4,850,165
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Class A Pass-Through Rate................. On each Distribution Date, the Class A Pass-Through Rate will equal
the lesser of (i) the London interbank offered rate for one-month
United States dollar deposits ('LIBOR') (calculated as described
under 'Description of the Certificates -- Distributions on the
Certificates') as of the second LIBOR business day prior to the
immediately preceding Distribution Date (but as of September 6, 1996
in the case of the Distribution Date on September 16, 1996) plus
0.38% (which margin is subject to increase as described below) and
(ii) the Weighted Average Net Mortgage Rate for the Mortgage Loans as
of the Due Date in the preceding month (determined on the basis of
the Principal Balances of the Mortgage Loans after giving effect to
the Monthly Payments due on or prior to such Due Date and unscheduled
principal payments received prior to such Due Date). The 'Net
Mortgage Rate' of a Mortgage Loan is its Mortgage Rate less the sum
of (i) the Servicing Fee Rate of 0.25% and (ii) the Certificate
Insurance Policy annual premium rate (which, together with the
Servicing Fee Rate, will not exceed 0.38%). The 'Weighted Average Net
Mortgage Rate' is the weighted average of the Net Mortgage Rates for
the Mortgage Loans. See also 'Prepayment and Yield Considerations'.
Notwithstanding the foregoing, the 0.38% margin added to the
applicable LIBOR formula for the calculation of the Class A
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Pass-Through Rate will instead be 0.78% for each Distribution Date
occurring at least 120 days after the first Distribution Date in
respect of which the option to purchase the Mortgage Loans, described
under 'Description of the Certificates -- Optional Termination', may
first be exercised by the Master Servicer, thereby effecting the
early retirement of the Certificates. The Class A Pass-Through Rate
thus calculated will still be subject to the limitation of the
Weighted Average Net Mortgage Rate as described above in the
preceding paragraph.
Class B Pass-Through Rate................. On each Distribution Date, the Class B Pass-Through Rate will equal
the applicable LIBOR plus 1.25%, subject to a maximum rate as
described under 'Description of the Certificates -- Distributions on
the Certificates'.
Denominations............................. The Class A Certificates will be issuable in denominations of $25,000
and integral multiples of $1,000 in excess thereof.
Cut-off Date.............................. August 1, 1996 (or the date of origination, if later).
Agreement................................. The Pooling and Servicing Agreement dated as of August 1, 1996 (the
'Agreement'), among the Company, MLCC, as Master Servicer, and
Bankers Trust Company of California, N.A., as trustee (the
'Trustee'), relating to the Certificates.
The Mortgage Loans........................ High balance, adjustable rate mortgage loans secured by one-to
four-family residential properties (including shares issued by
cooperative housing units), having an aggregate unpaid principal
balance as of the Cut-off Date of approximately $323,344,305 (the
'Mortgage Loans'). Generally, high balance mortgage loans are loans
whose initial principal balances exceed, and in certain cases
substantially exceed, the maximum initial principal amount of
mortgage loans eligible to be purchased by FNMA or FHLMC. Certain of
the Mortgage Loans may have initial principal balances below such
thresholds. The Mortgage Loans were originated by MLCC in the
ordinary course of its real estate lending activities or acquired by
it in the course of its correspondent lending activities. Monthly
payments of interest and, to the extent described herein, principal
on the Mortgage Loans ('Monthly Payments') will be due on the first
day of each month (each, a 'Due Date'). Each Mortgage Loan has an
original term to maturity of 25 years and is scheduled to pay only
interest for the first 10 years of its term. Commencing in its
eleventh year, each Mortgage Loan is scheduled to amortize on a
15-year fully amortizing basis.
The per annum interest rate (the 'Mortgage Rate') for certain of the
Mortgage Loans is adjusted monthly and the Mortgage Rate for the
remainder of the Mortgage Loans is adjusted every six months. The
adjustment date is referred to as the 'Interest Adjustment Date'.
Subject to its Maximum Mortgage Rate, the Mortgage Rate borne by a
Mortgage Loan may be calculated as follows:
Prime Index. The Mortgage Rate borne by 0.57% of the Mortgage
Loans (by Cut-off Date Principal Balance) is adjusted every six
months to equal the highest Prime Rate listed under 'Money
Rates' in The Wall Street Journal most recently available as of
45 days, in the case of six-month adjustable Mortgage Loans, and
25 days, in the case of monthly adjustable Mortgage Loans, prior
to such Interest Adjustment Date (the 'Prime Index') (i) plus a
margin (the 'Margin') ranging from 0.25% to 0.750% or (ii) minus
a Margin of 0.25%.
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Six-Month LIBOR Index. The Mortgage Rate borne by 65.11% of the
Mortgage Loans (by Cut-off Date Principal Balance) is adjusted
every six months to equal the London interbank offered rate for
six-month U.S. dollar deposits (the 'Six-Month LIBOR Index') as
listed under 'Money Rates' in The Wall Street Journal most
recently available as of 45 days prior to the related Interest
Adjustment Date plus a Margin ranging from 0.875% to 3.00%.
One-Month LIBOR Index. The Mortgage Rate borne by 30.16% of the
Mortgage Loans (by Cut-off Date Principal Balance) is adjusted
every month to equal the London interbank offered rate for
one-month U.S. dollar deposits (the 'One-Month LIBOR Index') as
listed under 'Money Rates' in The Wall Street Journal most
recently available as of 25 days prior to the related Interest
Adjustment Date plus a Margin ranging from 0.75% to 2.625%.
Treasury Index. The Mortgage Rate borne by 3.10% of the Mortgage
Loans (by Cut-off Date Principal Balance) is adjusted every six
months, and the Mortgage Rate borne by 1.06% of the Mortgage
Loans (by Cut-off Date Principal Balance) is adjusted monthly,
to equal the weekly average yield on the United States Treasury
Securities adjusted to a constant maturity of one year, as made
available by the Federal Reserve board in Statistical Release
H.15 (the 'Treasury Index') most recently available as of 45
days, in the case of six-month adjustable Mortgage Loans, and 25
days, in the case of monthly adjustable Mortgage Loans, prior to
the related Interest Adjustment Date plus a Margin ranging from
1.750% to 3.00%.
Notwithstanding the foregoing, all of the Mortgage Loans will have a
maximum Mortgage Rate (the 'Maximum Mortgage Rate') of between 12.00%
and 14.00%. None of the Mortgage Loans are subject to periodic
interest rate caps.
Approximately 1.06% of the Mortgage Loans (by Cut-off Date Principal
Balance) are Convertible Mortgage Loans, which provide that, at the
option of the related Mortgagor, the adjustable interest rate on such
Mortgage Loan may be converted to a fixed interest rate, and that, at
the option of the related Mortgagor, the adjustable rate on such
Mortgage Loan may be converted to a different Index (and may
thereafter be converted to a fixed rate), provided in each case that
certain conditions have been satisfied. The available Indices to
which a six-month adjustable Convertible Mortgage Loan may be
converted are the Prime Index, the Six-Month LIBOR Index and the
Treasury Index. The available Indices to which a monthly adjustable
Convertible Mortgage Loan may be converted are the Prime Index, the
One-Month LIBOR Index and the Treasury Index. The margins generally
applicable to such Indices are specified under 'MLCC and Its Mortgage
Programs'. In connection with the conversion to a new Index, the
frequency of the Interest Adjustment Date is not changed. Upon
notification from a Mortgagor of such Mortgagor's intent to convert
any Mortgage Loan from an adjustable interest rate to a fixed
interest rate, and prior to such conversion, the initial Master
Servicer will be obligated to purchase such Mortgage Loan (a
'Converting Mortgage Loan'), if such Mortgage Loan is eligible for
such conversion in accordance with the terms thereof, at a price (the
'Conversion Price') equal to the outstanding principal balance
thereof plus accrued interest thereon net of any servicing fee. The
Master Servicer will not
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purchase any Mortgage Loan upon its conversion to a new index.
If the Master Servicer does not purchase a Converting Mortgage Loan
that converts to a fixed rate, the Mortgage Loans will thereafter
include such fixed rate converted Mortgage Loan as well as adjustable
rate Mortgage Loans, and the yield on the Class A Certificates might
be lower than it would have been if such purchase had been made. See
'MLCC and Its Mortgage Programs' and 'Prepayment and Yield
Considerations' herein. If the initial Master Servicer is terminated
as Master Servicer, it will not thereafter be obligated to purchase
any Converting Mortgage Loan. A successor Master Servicer (including
the Trustee if it becomes the successor Master Servicer) will become
obligated to purchase Convertible Mortgage Loans that become
Converting Mortgage Loans only if such successor Master Servicer
elects in its discretion to obligate itself to make such purchases.
Approximately 97.68% of the Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) (the 'Index Convertible Mortgage
Loans') provide that, at the option of the related Mortgagors, the
Index for such Mortgage Loans may be converted to a different Index,
provided that certain conditions have been satisfied. The frequency
of the Interest Adjustment Date is not changed in connection with
such a conversion. The Indices to which an Index Convertible Mortgage
Loan may be converted are the same as those to which a Convertible
Mortgage Loan may be converted as described above. The Master
Servicer will not purchase a Convertible Mortgage Loan or an Index
Convertible Mortgage Loan upon its conversion to another Index.
On each Interest Adjustment Date for a Mortgage Loan during the first
10 years of its term, its Monthly Payment is adjusted to equal one
month's interest at the Mortgage Rate determined for such Interest
Adjustment Date. During the last 15 years of its term the Monthly
Payment is adjusted on each Interest Adjustment Date to equal an
amount that will fully amortize the outstanding principal of the
Mortgage Loan over its remaining term at the related Mortgage Rate.
With the exception of 2.68% of the Mortgage Loans (by Cut-off Date
Principal Balance), the Mortgage Loans, including Mortgage Loans
having a Loan-to-Value Ratio greater than 80%, are not insured under
any Primary Mortgage Insurance Policy (as defined in the Prospectus)
or other credit insurance policy. Mortgage Loans having a
Loan-to-Value Ratio at origination greater than 80% are generally
Mortgage 100SM or Parent Power'r' loans, which, in addition to being
secured by real property, are secured by a security interest in a
limited amount of additional collateral owned by the borrower or are
supported by a third-party guarantee (the 'Additional Collateral
Loans'). Such additional collateral and guarantee are no longer
required when the Loan-to-Value Ratio for such Additional Collateral
Loan is reduced to MLCC's applicable Loan-to-Value Ratio limit for
such Mortgage Loan by virtue of a reduction in the related Mortgage
Loan principal balance or an increase in the appraised value of the
Mortgaged Property as determined by MLCC. The pledge agreement or
guaranty agreement, as applicable, and the security interest in such
additional collateral (the 'Additional Collateral') will be assigned
to the Trustee, but will not be part of the REMIC created by the
Agreement. AMBAC Indemnity Corporation (the 'Surety Bond Provider')
has previously issued a limited
</TABLE>
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purpose surety bond (the 'Limited Purpose Surety Bond'), which is
limited in amount and separate from the Certificate Insurance Policy,
and will guarantee receipt by the Trust Fund of certain shortfalls in
the net proceeds realized from the liquidation of any required
Additional Collateral (such amount not to exceed 30% of the original
principal amount of the related Additional Collateral Loan) to the
extent any such shortfall results in a loss of principal on the
related Additional Collateral Loan that becomes a Liquidated Mortgage
Loan. The Limited Purpose Surety Bond will not cover any payments on
the Class A Certificates that are recoverable or sought to be
recovered as a voidable preference under applicable law. For
information concerning the Surety Bond Provider and the Certificate
Insurance Policy, see 'The Certificate Insurance Policy and the
Certificate Insurer'.
See 'MLCC and Its Mortgage Programs' and 'The Mortgage Pool' herein.
</TABLE>
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SUMMARY OF MORTGAGE LOANS
CHARACTERISTICS AS OF THE CUT-OFF DATE
(APPROXIMATE)
<TABLE>
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Aggregate Outstanding Principal.................................................. $323,344,305
Number of Mortgage Loans......................................................... 901
Weighted Average Mortgage Rate................................................... 7.521%
Range of Mortgage Rates.......................................................... 5.875% to 9.00%
Percent of Mortgage Loans Using the following Index in determining the Mortgage
Rate:
Prime Index................................................................. 0.57%
One-Month LIBOR Index....................................................... 30.16%
Six-Month LIBOR Index....................................................... 65.11%
Treasury Index.............................................................. 4.16%
Weighted Average Margins:
Prime Index Mortgage Loans.................................................. 0.026%
One-Month LIBOR Index....................................................... 1.749%
Six-Month LIBOR Index Mortgage Loans........................................ 1.942%
Treasury Index Mortgage Loans............................................... 2.486%
Frequency of Interest Adjustment Dates:
Monthly..................................................................... 31.22%
Six-Month................................................................... 68.78%
Range of Maximum Mortgage Rates.................................................. 12.000% to 14.000%
Weighted Average of Maximum Mortgage Rates....................................... 12.583%
Weighted Average Remaining Term to Stated Maturity............................... 299 months
Range of Remaining Terms to Stated Maturity...................................... 295 months to 300 months
Range of Outstanding Principal Balances of Mortgage Loans........................ $23,800 to $4,000,000
Average Outstanding Principal Balance of Mortgage Loans.......................... $358,873
Latest Maturity Date............................................................. September 2021
Weighted Average Loan-to-Value Ratio at Origination.............................. 76.58%
Percent of Mortgage Loans with Loan-to-Value Ratios:
Less Than or Equal to 70%................................................... 37.91%
Greater Than 70% and Less Than or Equal to 80%.............................. 25.47%
Greater Than 80%............................................................ 36.62%
Percent of Mortgage Loans which are Additional Collateral Loans.................. 32.70%
Weighted Average Constructive Loan-to-Value Ratio at Origination(1).............. 66.77%
Percent of Mortgage Loans which are convertible to both a fixed rate and a new
Index.......................................................................... 1.06%
Percent of Mortgage Loans which are convertible to a new Index................... 97.68%
</TABLE>
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(1) The 'Constructive Loan-to-Value Ratio' is calculated as (i) the original
loan amount less the required amount of any required Additional Collateral,
divided by (ii) the lesser of the appraised value of the Mortgaged Property
at origination and, if the Mortgage Loan is a purchase money loan, the sales
price of the Mortgaged Property. See 'MLCC and Its Mortgage Programs' herein
for a description of the program requirements for Additional Collateral
Mortgage Loans and the releasing of Additional Collateral during the term of
a Mortgage Loan.
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Description of the Certificates........... The Class A Certificates will evidence beneficial interests in the
pool of Mortgage Loans (the 'Mortgage Pool') and certain other
property held in trust for the benefit of the Certificateholders (the
'Trust Fund'). Exclusive of the interest of the Class R Certificate,
the Class A Certificates will evidence in the aggregate a beneficial
interest of approximately 98.50% in the Mortgage Loans and the Class
B Certificates will evidence the remaining approximately 1.50%. The
Class B and Class R Certificates are subordinated in certain respects
to the Class A Certificates. See 'Description of the Certificates'
herein.
Record Date............................... As to any Distribution Date, the last business day preceding the
immediately preceding Distribution Date (or the date of initial
issuance of the Certificates in the case of the first Distribution
Date).
Distributions on the Certificates......... Distributions of interest and principal to each holder of a Class A
Certificate will be made on the 15th day of each month (or if such
15th day is not a business day, then on the next succeeding business
day) (each, a 'Distribution Date'), commencing in September 1996, in
an amount equal to each such holder's respective Percentage Interest
multiplied by the amount distributed in respect of the Class A
Certificates. The undivided percentage interest (the 'Percentage
Interest') evidenced by any Class A Certificate will be equal to the
percentage obtained by dividing the initial principal balance of such
Certificate by the aggregate initial principal balance of all Class A
Certificates. Distributions on the Class A Certificates will be
applied first to interest and then to principal. All calculations of
interest on the Certificates will be made on the basis of the actual
number of days in the Accrual Period divided by 360. Interest will
accrue with respect to each Distribution Date in respect of the Class
A and Class B Certificates during the one-month period beginning on
the 15th day of the month preceding the month of such Distribution
Date and ending on the 14th day of the month of such Distribution
Date (or, in the case of the first Distribution Date, the period
beginning on the date on which the Certificates are initially issued
(the 'Closing Date') and ending on September 14, 1996) (each, an
'Accrual Period').
Certain collections on deposit in the Certificate Account (the
'Available Distribution Amount'), as described in detail under
'Description of the Certificates' herein, on the Determination Date
for the related Distribution Date will be distributed in the
following amounts and order of priority:
(i) to the Class A Certificateholders, interest for the
related Accrual Period at the Class A Pass-Through Rate
on the Class A Principal Balance, together with any
previously undistributed shortfalls in distributions of
interest due on the Class A Certificates (the 'Class A
Unpaid Interest Shortfall'). Interest distributions are
subject to reduction on account of Net Interest
Shortfalls as described below;
(ii) to the Class A Certificateholders, on account of
principal, the Class A Formula Principal Distribution
Amount until the Class A Principal Balance is reduced to
zero;
(iii) to the Certificate Insurer, the monthly premium due on
the Certificate Insurance Policy;
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(iv) to the Certificate Insurer, an amount equal to any
previously unreimbursed payments made under the
Certificate Insurance Policy and any fees and expenses
owed to it under the related insurance agreement,
together with interest thereon (collectively, the
'Unreimbursed Insurer Amounts');
(v) to the Reserve Fund, the amount (but not in excess of the
Formula Excess Interest Amount) required to be deposited
in the Reserve Fund as described under 'Description of
the Certificates -- Distributions on the Certificates'
and ' -- Reserve Fund' herein;
(vi) to the Class B Certificateholders, interest for the
related Accrual Period at the Class B Pass-Through Rate
on the Class B Principal Balance, together with any
previously undistributed shortfalls in required
distributions of interest on the Class B Certificates.
Interest distributions are subject to reduction on
account of Net Interest Shortfalls as described below;
(vii) to the Class A Certificateholders on account of
principal, the Unrecovered Principal Amounts, if any, for
the Mortgage Loans for such Distribution Date and all
prior Distribution Dates that have not previously been
distributed pursuant to this clause until the Class A
Principal Balance is reduced to zero;
(viii) to the Class B Certificateholders, on account of
principal, the Class B Formula Principal Distribution
Amount until the Class B Principal Balance is reduced to
zero;
(ix) to the Class B Certificateholders, the Class B Loss
Amounts not previously distributed to them pursuant to
this clause; and
(x) to the Class R Certificateholders, any remaining balance.
Notwithstanding the foregoing, until the Class A Principal Balance is
reduced to zero, distributions on account of principal otherwise
allocable to the Class B Certificateholders in accordance with the
above priorities will instead be made to the Class A
Certificateholders to the extent, if any, that such distribution
would, if made to the Class B Certificateholders, reduce the Class B
Principal Balance to less than 1.00% of the Original Pool Scheduled
Principal Balance or if the Class B Principal Balance is less than
that amount.
The Class A Principal Balance as of any Distribution Date is the
Original Class A Principal Balance less all prior distributions to
Class A Certificateholders on account of principal.
The interest entitlement above for the Class A and Class B
Certificates with respect to each Distribution Date will be reduced
by the amount of the Net Interest Shortfall allocable to each such
Class. The Net Interest Shortfall on any Distribution Date will be
allocated pro rata among the Class A and Class B Certificates based
on the amount of interest each such class of Certificates would
otherwise be entitled to receive on such Distribution Date.
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The Class A Formula Principal Distribution Amount will comprise a
percentage of the scheduled payments of principal on the Mortgage
Loans and a percentage of certain unscheduled payments of principal
of the Mortgage Loans. Such percentages will be a function of the
ratio of the Class A Principal Balance to the Pool Scheduled
Principal Balance and the level of subordination, if any, provided to
the Class A Certificates by the Class B Certificates and are fully
described under 'Description of the Certificates -- Distributions on
the Certificates'. The Class B Formula Principal Distribution Amount
will comprise a percentage of the scheduled principal payments and a
percentage of certain unscheduled principal payments of the Mortgage
Loans equal, in each case, to 100% less the respective percentage
allocable to the Class A Certificates. See 'Description of the
Certificates -- Distributions on the Certificates'. The 'Pool
Scheduled Principal Balance' as of any Distribution Date is equal to
the aggregate Principal Balance of the Mortgage Loans as of the
Cut-off Date less the sum of (i) the aggregate of the Formula
Principal Distribution Amounts for all prior Distribution Dates and
(ii) the aggregate of the Unrecovered Principal Amounts for all prior
Distribution Dates. See 'Description of the Certificates --
Distributions on the Certificates'.
In no event will the aggregate distributions of principal to the
holders of the Class A Certificates (whether out of Available
Distribution Amounts, Reserve Fund draws, payments under the
Certificate Insurance Policy or payments under the Limited Purpose
Surety Bond) exceed the Original Class A Principal Balance. See
'Description of the Certificates -- Distributions on the
Certificates'.
Priority Sequence of Distributions of
Principal on Certificates............... The Formula Principal Distribution Amount for a Distribution Date,
which includes prepayments on the Mortgage Loans, will be distributed
on the Class A and Class B Certificates on the shifting-interest
basis as described under 'Description of the Certificates --
Distributions on the Certificates'. Unless offset by cash flow
insufficiencies, this prioritization of distributions should have the
effect of accelerating, at least in the early years of the life of
the Class A Certificates, the amortization of the Class A
Certificates from what it would otherwise be if such distributions
were made on a pro rata basis. The rate of principal payments on the
Class A Certificates is directly related to the rate of payments of
principal on the Mortgage Loans and the level of subordination, if
any, provided by the Class B Certificates and will affect the yield
on the Class A Certificates. See 'Prepayment and Yield
Considerations' herein and 'Yield and Prepayment Considerations' in
the Prospectus.
Reserve Fund.............................. At the time of the initial issuance of the Certificates, a Reserve
Fund will be established as part of the Trust Fund and will be funded
up to $250,000 (the 'Initial Amount') from the application of the
Available Distribution Amount pursuant to clause (v) under
' -- Distributions on the Certificates' above.
On each Distribution Date, funds, if any, in the Reserve Fund will be
applied to make any required Advance not made by the Master Servicer.
Subordinated Certificates................. The rights of the Class B Certificateholders and the Class R
Certificateholders to receive distributions with respect to the
Mortgage Loans will be subordinated to the rights of the holders of
Class A Certificates to the extent described herein.
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This subordination is intended to enhance the likelihood of regular
receipt by the respective holders of Class A Certificates of the full
amount of monthly distributions due them and to protect the holders
of Class A Certificates and the Certificate Insurer against losses,
but no assurance can be given that the holders of Class A
Certificates will not experience losses.
The protection afforded to the holders of the Class A Certificates by
means of the subordination, to the extent provided herein, of the
Class B and Class R Certificates as described above will be
accomplished (i) by the application of the Available Distribution
Amount in the order specified under 'Distributions on the
Certificates' above and (ii) if the Available Distribution Amount for
a Distribution Date is not sufficient to permit the distribution of
the entire Class A Formula Principal Distribution Amount and all
previously undistributed Unrecovered Principal Amounts, by the right
of the holders of the Class A Certificates to receive any such
shortfall out of future distributions of Available Distribution
Amounts that would otherwise have been payable to the holders of the
Class B Certificates and the Class R Certificate. This subordination
feature is effected for the Class A Certificates by allocating
principal among the Certificates on a shifting-interest payment basis
as described herein.
If the Available Distribution Amount for any Distribution Date is not
sufficient to cover, in addition to interest distributable to the
Class A and Class B Certificateholders, the entire Class A Formula
Principal Distribution Amount and all previously undistributed
Unrecovered Principal Amounts distributable to the Class A
Certificateholders on such Distribution Date, then the amount of the
Pool Scheduled Principal Balance available to the Class B
Certificates (i.e., such Pool Scheduled Principal Balance less the
Class A Principal Balance) on future Distribution Dates will be
reduced. See 'Description of the Certificates -- Distributions on the
Certificates' herein. If, because of liquidation losses, the Pool
Scheduled Principal Balance were to decrease disproportionately
faster than distributions to the Class A Certificateholders reducing
the Class A Principal Balance, the level of protection afforded to
the Class A Certificateholders by the subordination of the Class B
Certificates (i.e., the percentage of the Pool Scheduled Principal
Balance available to the Class B Certificates) would be reduced. If
the Certificate Insurer were to fail to perform its obligations under
the Certificate Insurance Policy and the Pool Scheduled Principal
Balance were to become equal to or less than the Class A Principal
Balance, the Class A Certificateholders would bear all losses and
delinquencies on the Mortgage Loans and could incur a loss on their
investment.
See 'Description of the Certificates -- Subordinated Certificates'
herein.
Certificate Insurance Policy.............. The Company will obtain the Certificate Insurance Policy, which is
noncancelable, in favor of the Trustee, which will provide for
payment of Insured Amounts solely to the holders of the Class A
Certificates in accordance with the terms of the Certificate
Insurance Policy. Payment of an Insured Amount, if applicable, is
intended to provide the Trustee with sufficient funds to make
distributions to the holders of the Class A Certificates of the full
amount of interest, together with the related Class A Formula
Principal Distribution Amount, due on the Class A Certificates on
each Distribution Date and, on the third Distribution Date following
the month in which the
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latest original scheduled maturity date of any then outstanding
Mortgage Loan occurs, the outstanding Principal Balance, if any, of
the Class A Certificates. The Certificate Insurance Policy does not
guarantee to holders of the Class A Certificates, and does not
protect against any adverse consequences caused by, any specified
rate of prepayments of the Mortgage Loans and does not protect such
Certificateholders against any adverse consequences caused by any Net
Interest Shortfalls. See 'The Certificate Insurance Policy and the
Certificate Insurer' herein.
Certificate Insurer....................... AMBAC Indemnity Corporation.
Advances.................................. The Master Servicer is obligated to make advances of cash, which will
be part of the Available Distribution Amount, in an amount equal to
the delinquent Monthly Payments due on the immediately preceding Due
Date (the 'Advances'). The Master Servicer is under no obligation to
make Advances to the extent it determines such Advances are not
recoverable from future payments or collections on the related
Mortgage Loans. Advances, however, will be reimbursed to the Master
Servicer and are not intended to guarantee or insure against losses.
See 'Description of the Certificates -- Advances' herein.
Optional Termination...................... The Master Servicer may, at its option, and, in the absence of the
exercise thereof by the Master Servicer, the Certificate Insurer may,
at its option, repurchase from the Trust Fund all Mortgage Loans
remaining outstanding on any Distribution Date when the Pool
Scheduled Principal Balance is less than 10% of the aggregate unpaid
principal balance of the Mortgage Loans on the Cut-off Date. The
repurchase price will equal the greatest of (i) the aggregate
Principal Balances of the Mortgage Loans plus accrued interest
thereon at the related Net Mortgage Rate, plus the appraised value of
any property acquired in respect of a Mortgage Loan, less, if the
Master Servicer is the purchaser, any unreimbursed advances made by
the Master Servicer with respect to an acquired property, (ii) the
fair market value of the Mortgage Loans and any property acquired in
respect of a Mortgage Loan, as determined by the Master Servicer,
less, if the Master Servicer is the purchaser, any unreimbursed
advances made by the Master Servicer with respect to an acquired
property and (iii) the sum of (a) the aggregate of the Class A
Principal Balance together with one month's interest at the Class A
Pass-Through Rate and any Class A Unpaid Interest Shortfall and (b)
the sum of the Class B Principal Balance together with one month's
interest at the Class B Pass-Through Rate and any previously
undistributed shortfall in interest due on the Class B Certificates
on prior Distribution Dates. See 'Description of the
Certificates -- Optional Termination' herein.
Certain Federal Income Tax
Considerations.......................... An election will be made to treat the assets of the Trust Fund
(exclusive of the rights in the Additional Collateral) as a REMIC for
federal income tax purposes. The Class A Certificates and Class B
Certificates will constitute regular interests in the Trust Fund and
generally will be treated, for federal income tax purposes, as debt
instruments issued by the Trust Fund. The Class R Certificate will be
the residual interest in the Trust Fund. The Class A Certificates
will be treated as (i) qualifying real property loans within the
meaning of section 593(d) of the Internal Revenue Code of 1986, as
amended (the 'Code'), (ii) assets described in section 7701(a)(19)(C)
of the Code and (iii) 'real estate assets' within
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the meaning of section 856(c)(5)(A) of the Code, in each case to the
extent described in the Prospectus.
See 'Certain Federal Income Tax Consequences' herein and in the
Prospectus.
ERISA Considerations...................... A fiduciary of any employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended ('ERISA'), or
section 4975 of the Code, should carefully review with its legal
advisors whether the purchase or holding of Class A Certificates
could give rise to a transaction prohibited or not otherwise
permissible under ERISA or the Code. See 'ERISA Considerations'
herein and in the Prospectus.
Legal Investment Considerations........... So long as the Class A Certificates are rated in one of the two
highest rating categories by at least one nationally recognized
statistical rating agency, the Class A Certificates will constitute
'mortgage related securities' under the Secondary Mortgage Market
Enhancement Act of 1984 and, as such, will be 'legal investments' for
certain types of institutional investors to the extent provided in
such Act. See 'Legal Investment Considerations' in the Prospectus.
Use of Proceeds........................... Substantially all of the net proceeds from the sale of the Class A
Certificates will be applied by the Company to the purchase price of
the Mortgage Loans and to pay expenses connected with pooling the
Mortgage Loans and issuing the Certificates. See 'Use of Proceeds'
herein.
Certificate Ratings....................... It is a condition to the issuance of the Class A Certificates that
the Class A Certificates be rated AAAr by Standard & Poor's Ratings
Services ('Standard & Poor's') and Aaa by Moody's Investors Service,
Inc. ('Moody's'). Standard & Poor's assigns the additional symbol of
'r' to highlight classes of securities that Standard & Poor's
believes may experience high volatility or high variability in
expected returns due to non-credit risks; however, the absence of an
'r' symbol should not be taken as an indication that a class will
exhibit no volatility or variability in total return. The ratings of
Standard & Poor's and Moody's for the Class A Certificates will not
represent any assessment of the Master Servicer's ability to purchase
Converting Mortgage Loans. If the Master Servicer does not purchase a
Converting Mortgage Loan that it is obligated to purchase as
described herein, the holders of the applicable Class A Certificates
might experience a lower than anticipated yield on their
Certificates. 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. A security rating does not
address the frequency of prepayments on the Mortgage Loans or the
corresponding effect on yield to investors. See 'Certificate Rating'
herein.
Registration of Class A Certificates...... The Class A Certificates initially will be represented by
certificates registered in the name of Cede & Co. ('Cede') as the
nominee of The Depository Trust Company ('DTC'), and will only be
available in the form of book-entries on the records of DTC and
participating members thereof. Certificates representing the Class A
Certificates will be issued in definitive form only under the limited
circumstances described herein. All references herein to 'holders' or
'Certificateholders' shall reflect the rights of owners of Class A
Certificates ('Certificate Owners') as they may indirectly exercise
such rights through DTC and participating members thereof, except as
otherwise specified herein. See 'Description of the Certificates --
Registration of Class A Certificates' herein.
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SPECIAL CONSIDERATIONS
Prospective investors should consider, among other things discussed in this
Prospectus Supplement and the Prospectus, the following factors, which are
discussed as noted in greater detail elsewhere in this Prospectus Supplement or
the Prospectus.
Limited Liquidity. There is currently no market for the Class A
Certificates. While the Underwriter currently intends to make a market in the
Class A Certificates, it is under no obligation to do so. There can be no
assurance that a secondary market will develop or, if a secondary market does
develop, that it will provide holders of the Class A Certificates with liquidity
of investment or that it will continue for the lives of the Class A
Certificates.
Local Real Estate Markets. An overall decline in the residential real
estate markets in the states in which the Mortgaged Properties are located could
adversely affect the values of the Mortgaged Properties such that the
outstanding Mortgage Loan balances equal or exceed the value of the affected
Mortgaged Properties. Such declines would adversely affect the position of the
Trust Fund as the holder of the Mortgage Loans. Residential real estate markets
in some states have declined in recent years. See 'The Mortgage Pool' and 'MLCC
and Its Mortgage Programs -- Delinquency and Loan Loss Experience' herein.
Maturity, Prepayment and Yield Considerations. The Mortgage Loans may be
prepaid in whole or in part at any time without penalty. The Trust Fund's
prepayment experience may be affected by a wide variety of factors, including
general economic conditions, the level of prevailing interest rates, the
availability of alternative financing and homeowner mobility. The weighted
average lives of the Class A Certificates will be sensitive to the rate and
timing of principal payments (including prepayments) on the Mortgage Loans,
which may fluctuate significantly from time to time. No assurance can be given
as to the level of prepayments that the Trust Fund will experience.
No prediction can be made as to future levels of LIBOR, the One-Month LIBOR
Index, the Six-Month LIBOR Index, the Prime Index or the Treasury Index or as to
the timing of any changes therein or as to the conversion of Mortgage Loans to
fixed rates or other Indexes, each of which will directly affect the yields of
the Class A Certificates. The holders of the Class A Certificates will absorb
the yield risk associated with a possible narrowing or inversion of the spread
between the Class A Pass-Through Rate calculated on the basis of the LIBOR
formula and the Weighted Average Net Mortgage Rate. The Mortgage Rates reset at
different times and are subject to lifetime interest rate caps.
See 'Prepayment and Yield Considerations' herein.
Certificate Insurance Policy. Credit enhancement with respect to the Class
A Certificates will be provided by the Certificate Insurance Policy. See 'The
Certificate Insurance Policy and the Certificate Insurer' herein. If the
Certificate Insurer fails to perform its obligations under the Certificate
Insurance Policy, the Class A Certificateholders will be directly affected by
losses on the Mortgage Loans. See 'Description of the
Certificates -- Subordinated Certificates'.
Certain Legal Considerations. Applicable state laws generally regulate
interest rates and other charges and require certain disclosures. In addition,
state and federal consumer protection laws, unfair and deceptive practices acts
and debt collection practices acts may apply to the origination or collection of
the Mortgage Loans. Depending on the provisions of the applicable law,
violations of these laws may limit the ability of the Master Servicer to collect
all or part of the principal of or interest on the Mortgage Loans, may entitle
the borrower to a refund of amounts previously paid and, in addition, could
subject the Master Servicer to damages and administrative enforcement. See
'Certain Legal Aspects of the Mortgage Loans' in the Prospectus.
CERTAIN LEGAL CONSIDERATIONS
MLCC and the Company will treat as sales the transfers of the Mortgage
Loans from MLCC to the Company and from the Company to the Trust Fund. As a sale
of the Mortgage Loans to the Trust Fund, the Mortgage Loans would not be part of
MLCC's or the Company's bankruptcy estate and would not be available to MLCC's
or the Company's creditors. However, in the event of the insolvency of MLCC or
the Company, it is possible that the bankruptcy trustee or a creditor of MLCC or
the Company or
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MLCC or the Company as debtor in possession may attempt to argue that the
transactions between MLCC, the Company and the Trust Fund were a pledge of the
Mortgage Loans rather than a true sale or that, in an insolvency of MLCC, the
transactions between the Company and the Trust Fund were a pledge of the
Mortgage Loans and other assets of the Trust Fund rather than a sale and that
the assets of the Company should be substantively consolidated with those of
MLCC. Either such position, if argued before or accepted by a court, could
prevent timely payments of amounts due on each Class of Certificates and/or
result in payment of reduced amounts distributed on each Class of Certificates.
THE MORTGAGE POOL
The mortgage pool with respect to the Certificates (the 'Mortgage Pool')
will consist of approximately 901 conventional mortgage loans evidenced by high
balance, adjustable interest rate promissory notes (each, a 'Mortgage Note')
having an aggregate principal balance as of the Cut-off Date of approximately
$323,344,305. The Mortgage Notes are secured by mortgages or deeds of trust or
other similar security instruments creating first liens on one- to four-family
residential properties and shares ('Co-op Shares') issued by private non-profit
housing corporations ('Cooperatives') and related proprietary leases or
occupancy agreements granting exclusive rights to occupy specified units in such
Cooperatives' buildings (the 'Mortgaged Properties'). The Mortgage Loans were
originated by MLCC in the ordinary course of its real estate lending activities,
except for 3.40% (by Cut-off Date Principal Balance) of the Mortgage Loans,
which were acquired by MLCC in the course of its correspondent lending
activities. With respect to approximately 10.64% of the Mortgage Loans (by
Cut-off Date Principal Balance), the borrowers were initially solicited by, and
the documentation for the Mortgage Loans was provided by, mortgage brokers that
are not affiliated with MLCC under MLCC's Third Party Originator program.
Personnel of MLCC reviewed the documentation for each such Mortgage Loan and
underwrote such loans in accordance with MLCC's underwriting standards. See
'MLCC and its Mortgage Programs' herein for a description of MLCC's Third Party
Originator and Correspondent Lending activities.
The Mortgaged Properties will consist of detached individual dwelling
units, individual condominiums, townhouses, duplexes, cooperative apartments,
individual units in planned unit developments and other attached dwelling units.
Based upon representations obtained from the mortgagors at the time of
origination of the Mortgage Loans, approximately 86.85% (by Cut-off Date
Principal Balance) of the related Mortgaged Properties are owner-occupied. As of
the Cut-off Date, none of the Mortgage Loans will be delinquent one month or
more. The Trust Fund will include, in addition to the Mortgage Pool, (i) the
amounts held from time to time in one or more accounts (collectively, the
'Certificate Account') maintained in the name of the Master Servicer, as the
Master Servicer for the Trustee, pursuant to the Pooling and Servicing Agreement
dated as of August 1, 1996 (the 'Agreement'), by and among the Company, MLCC, as
master servicer (the 'Master Servicer'), and Bankers Trust Company of
California, N.A., as trustee (the 'Trustee'), (ii) the amounts held from time to
time in the Distribution Account (the 'Distribution Account') maintained in the
name of the Trustee pursuant to the Agreement, (iii) any property which
initially secured a Mortgage Loan and which is acquired by foreclosure or deed
in lieu of foreclosure, (iv) all insurance policies and the proceeds thereof
described below, (v) any right to require MLCC to repurchase or substitute for
the Mortgage Loans on account of certain breaches of representations and
warranties as set forth in the Agreement, (vi) the pledge agreements or guaranty
agreements, as applicable, in respect of the Additional Collateral Loans, (vii)
the Reserve Fund, (viii) the Certificate Insurance Policy and the proceeds
thereof and (ix) the Limited Purpose Surety Bond and the proceeds thereof. The
agreements and rights in respect of the Additional Collateral will not be part
of the REMIC.
The Company will purchase the Mortgage Loans from MLCC and will cause such
Mortgage Loans to be assigned to the Trustee. The Master Servicer will service
the Mortgage Loans, either by itself or through other mortgage servicing
institutions (the 'Sub-servicers'), pursuant to the Agreement. With respect to
any Mortgage Loans serviced by the Master Servicer through a Sub-servicer, the
Master Servicer will remain liable for its servicing obligations under the
Agreement as if the Master Servicer alone were servicing such Mortgage Loans.
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MLCC will make certain representations and warranties for the benefit of
the Company, the Certificate Insurer and the Trustee with respect to the
Mortgage Loans as described in the Prospectus under 'Mortgage Loan
Program -- Representations by Sellers; Repurchases' and will have a
responsibility to repurchase a Mortgage Loan as to which there is a breach of
such representations and warranties that materially and adversely affects the
value of that Mortgage Loan and is not timely cured. The only remedy available
to Certificateholders for a breach of these representations and warranties will
be the repurchase obligation of MLCC provided in the Agreement as described in
the sections of the Prospectus referred to above. The Trustee will enforce
MLCC's repurchase obligation and the Company will not be obligated to repurchase
any Mortgage Loan for such a breach of any representation or warranty. In lieu
of such repurchase obligation, MLCC may, within two years after the date of
initial delivery of the Certificates, substitute for the affected Mortgage Loan
a substitute Mortgage Loan, as described under 'Mortgage Loan
Program -- Representations by Sellers; Repurchases' in the Prospectus and as
provided by the Agreement.
Certain data with respect to the Mortgage Loans is set forth below.
References herein to percentages of Mortgage Loans refer in each case to the
percentage of the aggregate principal balance of the Mortgage Loans as of the
Cut-off Date, based on the outstanding balances of the Mortgage Loans as of the
Cut-off Date, giving effect to scheduled Monthly Payments due on or prior to the
Cut-off Date.
Approximately 30.16% of the Mortgage Loans are One-Month LIBOR Index based
Mortgage Loans, approximately 65.11% are Six-Month LIBOR Index based Mortgage
Loans, approximately 0.57% are Prime Index based Mortgage Loans that adjust
every six months, approximately 1.06% are Treasury Index based Mortgage Loans
that adjust monthly and approximately 3.10% are Treasury Index based Mortgage
Loans that adjust every six months. Approximately 1.06% of the Mortgage Loans
are Convertible Mortgage Loans and approximately 97.68% of the Mortgage Loans
are Index Convertible Mortgage Loans.
The Mortgage Loans were originated from February 1996 through August 1996.
No more than 2.39% of the Mortgaged Properties securing the Mortgage Loans are
located in any one zip code area. At origination, all of the Mortgage Loans had
terms to stated maturity of 25 years. The latest month and year in which any
Mortgage Loan matures is September 2021. The Mortgage Loans had remaining terms
to stated maturity, calculated as of the Cut-off Date, of between approximately
295 and 300 months and a weighted average remaining term to stated maturity as
of the Cut-off Date of approximately 299 months. The interest rates (the
'Mortgage Rates') borne by the Mortgage Loans as of the Cut-off Date ranged from
5.875% per annum to 9.000% per annum and the weighted average Mortgage Rate as
of the Cut-off Date was approximately 7.521% per annum. Employees of Merrill
Lynch & Co., Inc. and its affiliates are the borrowers under 9.14% of the
Mortgage Loans.
Except for 2.68% of the Mortgage Loans, no Mortgage Loan is insured under a
Primary Mortgage Insurance Policy or any other credit insurance policy. Mortgage
Loans having a Loan-to-Value Ratio at origination greater than 80% are generally
Additional Collateral Loans. MLCC will attempt to realize on the security
interest in the Additional Collateral of a defaulted Mortgage Loan in
liquidation for the benefit of the Trust Fund. See 'MLCC and Its Mortgage
Programs' herein.
Each Mortgage Loan had an original principal balance of not less than
$23,800 nor more than $4,000,000. The average outstanding principal balance of
the Mortgage Loans as of the Cut-off Date was approximately $358,873.
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The sum of the percentages in each table below may not equal the total
because of rounding.
Set forth below is a description of certain additional characteristics of
the Mortgage Loans.
<TABLE>
<CAPTION>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
- ---------------------------------------------------------------
PERCENT
NUMBER CUT-OFF BY CUT-OFF
OF DATE DATE
MORTGAGE PRINCIPAL PRINCIPAL
STATE OR TERRITORY LOANS BALANCE BALANCE
- ---------------------------------------------------------------
<S> <C> <C> <C>
California.......... 101 $ 67,282,107 20.81%
Colorado............ 33 12,551,910 3.88
Connecticut......... 28 10,616,064 3.28
Florida............. 114 36,086,203 11.16
Georgia............. 39 14,382,808 4.45
New Jersey.......... 45 20,667,050 6.39
New York............ 85 34,379,827 10.63
Texas............... 66 20,262,179 6.27
Other(1)............ 390 107,116,157 33.13
--- ------------ -----
Total............ 901 $323,344,305 100.00%
--- ------------ -----
--- ------------ -----
</TABLE>
- ------------------------
(1) 'Other' includes 39 other States and the Virgin Islands with under
3% concentrations individually.
<TABLE>
<CAPTION>
RANGE OF CUT-OFF DATE PRINCIPAL BALANCES(1)
- --------------------------------------------------------------------------------
PERCENT
NUMBER CUT-OFF BY CUT-OFF
RANGE OF OF DATE DATE
CUT-OFF DATE MORTGAGE PRINCIPAL PRINCIPAL
PRINCIPAL BALANCES LOANS BALANCE BALANCE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 0.01 -- $ 25,000.00 4 $ 98,800 0.03%
$ 25,000.01 -- $ 50,000.00 25 1,098,900 0.34
$ 50,000.01 -- $ 75,000.00 50 3,189,773 0.99
$ 75,000.01 -- $ 100,000.00 69 6,209,900 1.92
$ 100,000.01 -- $ 200,000.00 248 37,164,744 11.49
$ 200,000.01 -- $ 300,000.00 179 44,768,721 13.85
$ 300,000.01 -- $ 400,000.00 108 37,931,098 11.73
$ 400,000.01 -- $ 500,000.00 59 26,889,370 8.32
$ 500,000.01 -- $ 600,000.00 39 22,123,325 6.84
$ 600,000.01 -- $ 700,000.00 20 12,930,239 4.00
$ 700,000.01 -- $ 800,000.00 15 11,248,600 3.48
$ 800,000.01 -- $ 900,000.00 10 8,511,982 2.63
$ 900,000.01 -- $1,000,000.00 19 18,648,500 5.77
$1,000,000.01 -- $1,500,000.00 32 39,048,853 12.08
$1,500,000.01 -- $2,000,000.00 11 18,650,000 5.77
$2,000,000.01 -- $2,500,000.00 7 15,757,000 4.87
$2,500,000.01 -- $3,000,000.00 3 8,187,500 2.53
$3,000,000.01 -- $3,500,000.00 1 3,250,000 1.01
$3,500,000.01 -- $4,000,000.00 2 7,637,000 2.36
--- ------------ -----
Total........................ 901 $323,344,305 100.00%
--- ------------ -----
--- ------------ -----
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the average outstanding principal balance
of the Mortgage Loans was approximately $358,873.
<TABLE>
<CAPTION>
RANGE OF ORIGINAL CONSTRUCTIVE LOAN-TO-VALUE RATIOS(1)(2)
- ------------------------------------------------------------------------
PERCENT
RANGE OF NUMBER CUT-OFF BY CUT-OFF
ORIGINAL OF DATE DATE
LOAN-TO-VALUE MORTGAGE PRINCIPAL PRINCIPAL
RATIOS LOANS BALANCE BALANCE
- ------------------------------------------------------------------------
<S> <C> <C> <C>
0.01% -- 10.00% 1 $ 25,000 0.01%
10.01% -- 20.00% 6 2,355,000 0.73
20.01% -- 30.00% 8 2,735,000 0.85
30.01% -- 40.00% 21 7,456,500 2.31
40.01% -- 50.00% 95 27,745,306 8.58
50.01% -- 60.00% 77 36,435,884 11.27
60.01% -- 70.00% 371 140,607,012 43.49
70.01% -- 75.00% 86 37,594,400 11.63
75.01% -- 80.00% 173 51,679,743 15.98
80.01% -- 85.00% 15 4,625,400 1.43
85.01% -- 90.00% 42 10,402,760 3.22
90.01% -- 95.00% 5 1,283,300 0.40
95.01% -- 100.00% 1 399,000 0.12
--- ------------ -----
Total 901 $323,344,305 100.00%
--- ------------ -----
--- ------------ -----
</TABLE>
- ------------------------
(1) The 'Constructive Loan-to-Value Ratio' is calculated as (i) the original
loan amount less the required amount of any required Additional Collateral,
divided by (ii) the lesser of the appraised value of the Mortgaged Property
at origination and, if the Mortgage Loan is a purchase money loan, the sales
price of the Mortgaged Property. See 'MLCC and Its Mortgage Programs' herein
for a description of the program requirements for Additional Collateral
Mortgage Loans and the releasing of Additional Collateral during the term of
a Mortgage Loan.
(2) As of the Cut-off Date, the weighted average Constructive Loan-to-Value
Ratio at origination was approximately 66.77%.
<TABLE>
<CAPTION>
RANGE OF ORIGINAL LOAN-TO-VALUE RATIOS(1)
- ----------------------------------------------------------------
PERCENT
RANGE OF NUMBER CUT-OFF BY CUT-OFF
ORIGINAL OF DATE DATE
LOAN-TO-VALUE MORTGAGE PRINCIPAL PRINCIPAL
RATIOS LOANS BALANCE BALANCE
- ----------------------------------------------------------------
<S> <C> <C> <C>
0.01% -- 10.00% 1 $ 25,000 0.01%
10.01% -- 20.00% 6 2,355,000 0.73
20.01% -- 30.00% 8 2,735,000 0.85
30.01% -- 40.00% 21 7,456,500 2.31
40.01% -- 50.00% 43 17,068,132 5.28
50.01% -- 60.00% 56 32,464,471 10.04
60.01% -- 70.00% 111 60,417,760 18.69
70.01% -- 75.00% 72 31,646,600 9.79
75.01% -- 80.00% 173 50,690,343 15.68
80.01% -- 85.00% 24 6,681,175 2.07
85.01% -- 90.00% 51 13,280,423 4.11
90.01% -- 95.00% 37 12,756,270 3.95
95.01% -- 100.00% 291 82,665,631 25.57
100.01% -- 125.00% 7 3,102,000 0.97
--- ------------ -----
Total 901 $323,344,305 100.00%
--- ------------ -----
--- ------------ -----
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination was approximately 76.58%.
S-19
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
OCCUPANCY STATUS
- ----------------------------------------------------------------
PERCENT
NUMBER CUT-OFF BY CUT-OFF
OF DATE DATE
MORTGAGE PRINCIPAL PRINCIPAL
STATUS LOANS BALANCE BALANCE
- ----------------------------------------------------------------
<S> <C> <C> <C>
Owner-Occupied........ 740 $280,822,063 86.85%
Second Home........... 114 36,569,597 11.31
Investment Property... 47 5,952,645 1.84
--- ------------ -----
Total.............. 901 $323,344,305 100.00%
--- ------------ -----
--- ------------ -----
</TABLE>
<TABLE>
<CAPTION>
LOAN PURPOSE
- ----------------------------------------------------------------
PERCENT
NUMBER CUT-OFF BY CUT-OFF
OF DATE DATE
MORTGAGE PRINCIPAL PRINCIPAL
LOAN PURPOSE LOANS BALANCE BALANCE
- ----------------------------------------------------------------
<S> <C> <C> <C>
Purchase.............. 608 $181,943,030 56.27%
Cash-out
Refinance(1)......... 198 99,073,149 30.64
Rate and term
refinance............ 95 42,328,126 13.09
--- ------------ -----
Total.............. 901 $323,344,305 100.00%
--- ------------ -----
--- ------------ -----
</TABLE>
- ------------------------
(1) MLCC categorizes as cash-out refinance mortgage loans those loans in respect
of which the cash taken out by the mortgagor exceeded the sum of (i) closing
costs and points, (ii) funds applied to pay off a subordinate loan that was
outstanding at least one year and (iii) an amount equal to 1% of the
principal amount of such new loan.
<TABLE>
<CAPTION>
MORTGAGED PROPERTIES
- ----------------------------------------------------------------
PERCENT
NUMBER CUT-OFF BY CUT-OFF
OF DATE DATE
MORTGAGE PRINCIPAL PRINCIPAL
PROPERTY TYPE LOANS BALANCE BALANCE
- ----------------------------------------------------------------
<S> <C> <C> <C>
Single family......... 587 $227,720,333 70.43%
De minimis Planned
Unit Development..... 141 55,610,238 17.20
Condominium........... 108 21,574,235 6.67
Cooperative........... 26 5,015,795 1.55
2-4 Family
Residence............ 18 7,568,660 2.34
Planned Unit
Development
Project.............. 21 5,855,044 1.81
--- ------------ -----
Total.............. 901 $323,344,305 100.00%
--- ------------ -----
--- ------------ -----
</TABLE>
<TABLE>
<CAPTION>
MAXIMUM MORTGAGE RATES(1)
- ----------------------------------------------------------------
PERCENT
NUMBER CUT-OFF BY CUT-OFF
OF DATE DATE
MORTGAGE PRINCIPAL PRINCIPAL
MAXIMUM MORTGAGE RATES LOANS BALANCE BALANCE
- ----------------------------------------------------------------
<S> <C> <C> <C>
12.000% -- 12.249%.... 91 $ 64,630,019 19.99%
12.250% -- 12.499%.... 92 60,743,045 18.79
12.500% -- 12.749%.... 175 73,626,252 22.77
12.750% -- 12.999%.... 168 57,398,667 17.75
13.000% -- 13.249%.... 211 41,391,907 12.80
13.250% -- 13.499%.... 75 15,328,365 4.74
13.500% -- 13.749%.... 82 9,397,950 2.91
13.750% -- 13.999%.... 5 654,000 0.20
14.000% -- 14.249%.... 2 174,100 0.05
--- ------------ -----
Total.............. 901 $323,344,305 100.00%
--- ------------ -----
--- ------------ -----
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average Maximum Mortgage Rate was
12.583%.
<TABLE>
<CAPTION>
RANGE OF CURRENT MORTGAGE RATES(1)
- ----------------------------------------------------------------
PERCENT
NUMBER CUT-OFF BY CUT-OFF
OF DATE DATE
RANGE OF CURRENT MORTGAGE PRINCIPAL PRINCIPAL
MORTGAGE RATES LOANS BALANCE BALANCE
- ----------------------------------------------------------------
<S> <C> <C> <C>
5.750% -- 5.999%...... 1 $ 440,000 0.14%
6.000% -- 6.249%...... 2 2,375,000 0.73
6.250% -- 6.499%...... 3 1,288,250 0.40
6.500% -- 6.749%...... 7 6,103,000 1.89
6.750% -- 6.999%...... 32 21,542,839 6.66
7.000% -- 7.249%...... 56 37,425,414 11.57
7.250% -- 7.499%...... 98 68,289,795 21.12
7.500% -- 7.749%...... 174 73,056,252 22.59
7.750% -- 7.999%...... 167 56,798,667 17.57
8.000% -- 8.249%...... 200 34,514,923 10.67
8.250% -- 8.499%...... 72 11,284,115 3.49
8.500% -- 8.749%...... 82 9,397,950 2.91
8.750% -- 8.999%...... 5 654,000 0.20
9.000% -- 9.249%...... 2 174,100 0.05
--- ------------ -----
Total.............. 901 $323,344,305 100.00%
--- ------------ -----
--- ------------ -----
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average current Mortgage Rate was
7.521%.
<TABLE>
<CAPTION>
REMAINING TERMS TO STATED MATURITY(1)
- -------------------------------------------------------------
PERCENT
NUMBER CUT-OFF BY CUT-OFF
REMAINING OF DATE DATE
TERMS TO STATED MORTGAGE PRINCIPAL PRINCIPAL
MATURITY IN MONTHS LOANS BALANCE BALANCE
- -------------------------------------------------------------
<S> <C> <C> <C>
295................... 1 $ 600,000 0.19%
296................... 6 5,761,732 1.78
297................... 3 974,400 0.30
298................... 63 24,974,331 7.72
299................... 415 147,915,408 45.75
300................... 413 143,118,434 44.26
--- ------------ -----
Total.............. 901 $323,344,305 100.00%
--- ------------ -----
--- ------------ -----
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average remaining term to stated
maturity was 299 months.
S-20
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NEXT INTEREST RATE ADJUSTMENT DATE(1)
FOR ALL MORTGAGE LOANS
- ---------------------------------------------------------------
PERCENT
NUMBER CUT-OFF BY CUT-OFF
OF DATE DATE
MONTH OF NEXT MORTGAGE PRINCIPAL PRINCIPAL
ADJUSTMENT DATE LOANS BALANCE BALANCE
- ---------------------------------------------------------------
<S> <C> <C> <C>
September 1,
1996.............. 117 $ 52,934,171 16.37%
October 1, 1996.... 117 49,780,979 15.40
November 1, 1996... 8 5,579,400 1.73
December 1, 1996... 48 18,599,231 5.75
January 1, 1997.... 314 101,956,337 31.53
February 1, 1997... 283 91,492,687 28.30
March 1, 1997...... 14 3,001,500 0.93
--- ------------ -----
Total........... 901 $323,344,305 100.00%
--- ------------ -----
--- ------------ -----
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average number of months to the next
Interest Adjustment Date was 4.09 months.
<TABLE>
<CAPTION>
NEXT INTEREST RATE ADJUSTMENT DATE(1)
FOR PRIME INDEX MORTGAGE LOANS
THAT ADJUST EVERY SIX MONTHS
- ---------------------------------------------------------------
PERCENT OF
SUCH
MORTGAGE LOANS
NUMBER CUT-OFF BY CUT-OFF
OF DATE DATE
MONTH OF NEXT MORTGAGE PRINCIPAL PRINCIPAL
ADJUSTMENT DATE LOANS BALANCE BALANCE
- ---------------------------------------------------------------
<S> <C> <C> <C>
January 1, 1997...... 5 $ 581,400 31.59%
February 1, 1997..... 4 1,259,100 68.41
-
---------- -----
Total............. 9 $1,840,500 100.00%
- ---------- -----
- ---------- -----
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average number of months to the next
Interest Adjustment Date was 5.68 months.
<TABLE>
<CAPTION>
NEXT INTEREST RATE ADJUSTMENT DATE(1)
FOR ONE-YEAR TREASURY INDEX MORTGAGE LOANS
THAT ADJUST EVERY SIX MONTHS
- ---------------------------------------------------------------
PERCENT OF
SUCH
MORTGAGE LOANS
NUMBER CUT-OFF BY CUT-OFF
OF DATE DATE
MONTH OF NEXT MORTGAGE PRINCIPAL PRINCIPAL
ADJUSTMENT DATE LOANS BALANCE BALANCE
- ---------------------------------------------------------------
<S> <C> <C> <C>
October 1, 1996..... 2 $ 2,574,995 25.69%
November 1, 1996.... 1 238,400 2.38
December 1, 1996.... 4 4,467,500 44.57
January 1, 1997..... 10 2,208,350 22.03
February 1, 1997.... 4 534,000 5.33
-- ----------- -----
Total............ 21 $10,023,245 100.00%
-- ----------- -----
-- ----------- -----
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average number of months to the next
Interest Adjustment Date was 3.79 months.
<TABLE>
<CAPTION>
NEXT INTEREST RATE ADJUSTMENT DATE(1)
FOR SIX-MONTH LIBOR INDEX MORTGAGE LOANS
- ---------------------------------------------------------------
PERCENT OF
SUCH
MORTGAGE LOANS
NUMBER CUT-OFF BY CUT-OFF
OF DATE DATE
MONTH OF NEXT MORTGAGE PRINCIPAL PRINCIPAL
ADJUSTMENT DATE LOANS BALANCE BALANCE
- ---------------------------------------------------------------
<S> <C> <C> <C>
September 1, 1996.. 1 $ 600,000 0.29%
October 1, 1996.... 4 3,186,737 1.51
November 1, 1996... 2 736,000 0.35
December 1, 1996... 44 14,131,731 6.71
January 1, 1997.... 299 99,166,588 47.11
February 1, 1997... 275 89,699,587 42.61
March 1, 1997...... 14 3,001,500 1.43
--- ------------ -----
Total........... 639 $210,522,143 100.00%
--- ------------ -----
--- ------------ -----
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average number of months to the next
Interest Adjustment Date was 5.32 months.
S-21
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PRIME INDEX MORTGAGE LOAN MARGINS(1)
- ---------------------------------------------------------------
PERCENT OF
SUCH
MORTGAGE LOANS
NUMBER CUT-OFF BY CUT-OFF
OF DATE DATE
MORTGAGE PRINCIPAL PRINCIPAL
MARGIN(1) LOANS BALANCE BALANCE
- ---------------------------------------------------------------
<S> <C> <C> <C>
- - 0.250%............. 1 $1,000,000 54.33%
0.250%............... 6 666,400 36.21
0.750%............... 2 174,100 9.46
- ---------- -----
Total............. 9 $1,840,500 100.00%
- ---------- -----
- ---------- -----
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average current Margin was 0.026%.
<TABLE>
<CAPTION>
ONE-MONTH LIBOR INDEX MORTGAGE LOAN MARGINS(1)
- ----------------------------------------------------------------
PERCENT OF
SUCH
MORTGAGE LOANS
NUMBER CUT-OFF BY CUT-OFF
OF DATE DATE
MORTGAGE PRINCIPAL PRINCIPAL
MARGIN LOANS BALANCE BALANCE
- ----------------------------------------------------------------
<S> <C> <C> <C>
0.750%........... 1 $ 675,000 0.69%
1.125%........... 3 2,842,000 2.91
1.250%........... 3 1,870,500 1.92
1.375%........... 14 13,599,900 13.95
1.500%........... 17 10,793,766 11.07
1.625%........... 28 17,395,900 17.84
1.750%........... 15 7,410,800 7.60
1.875%........... 36 17,759,032 18.21
2.000%........... 13 6,718,900 6.89
2.125%........... 47 11,372,235 11.66
2.250%........... 1 252,000 0.26
2.375%........... 19 3,577,651 3.67
2.500%........... 4 690,334 0.71
2.625%........... 22 2,559,850 2.63
--- ----------- -----
Total......... 223 $97,517,868 100.00%
--- ----------- -----
--- ----------- -----
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average current Margin was 1.749%.
<TABLE>
<CAPTION>
SIX-MONTH LIBOR INDEX MORTGAGE LOAN MARGINS(1)
- ----------------------------------------------------------------
PERCENT OF
SUCH
MORTGAGE LOANS
NUMBER CUT-OFF BY CUT-OFF
OF DATE DATE
MORTGAGE PRINCIPAL PRINCIPAL
MARGIN LOANS BALANCE BALANCE
- ----------------------------------------------------------------
<S> <C> <C> <C>
0.875%.......... 2 $ 1,250,000 0.59%
1.000%.......... 4 1,520,000 0.72
1.125%.......... 1 465,000 0.22
1.250%.......... 4 1,286,500 0.61
1.375%.......... 1 425,000 0.20
1.500%.......... 21 25,166,980 11.95
1.625%.......... 24 16,824,087 7.99
1.750%.......... 87 44,721,427 21.24
1.875%.......... 17 15,678,740 7.45
2.000%.......... 96 38,513,460 18.29
2.125%.......... 16 6,828,000 3.24
2.250%.......... 205 33,828,133 16.07
2.375%.......... 9 2,355,339 1.12
2.500%.......... 53 9,129,116 4.34
2.625%.......... 12 1,358,400 0.65
2.750%.......... 81 9,201,961 4.37
3.000%.......... 6 1,970,000 0.94
--- ------------ -----
Total........ 639 $210,522,143 100.00%
--- ------------ -----
--- ------------ -----
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average current Margin was 1.942%.
<TABLE>
<CAPTION>
ONE-YEAR TREASURY INDEX MORTGAGE LOAN MARGINS(1)
- ----------------------------------------------------------------
PERCENT OF
SUCH
MORTGAGE LOANS
NUMBER CUT-OFF BY CUT-OFF
OF DATE DATE
MORTGAGE PRINCIPAL PRINCIPAL
MARGIN LOANS BALANCE BALANCE
- ----------------------------------------------------------------
<S> <C> <C> <C>
1.750%........... 1 $ 35,450 0.26%
1.875%........... 1 1,760,000 13.07
2.375%........... 5 3,639,500 27.03
2.500%........... 11 2,075,350 15.41
2.625%........... 4 1,766,595 13.12
2.750%........... 4 3,661,500 27.20
3.000%........... 4 525,400 3.90
-- ----------- -----
Total......... 30 $13,463,795 100.00%
-- ----------- -----
-- ----------- -----
</TABLE>
- ------------------------
(1) As of the Cut-off Date, the weighted average current Margin was 2.486%.
S-22
<PAGE>
<PAGE>
MLCC AND ITS MORTGAGE PROGRAMS
MLCC, a wholly-owned indirect subsidiary of Merrill Lynch & Co., Inc. ('ML
& Co.') and the parent of the Company and an affiliate of the Underwriter, is a
Delaware corporation qualified to do business in each state where its mortgage
program is offered and such qualification is required. It maintains licenses in
various states as a real estate or mortgage broker, and/or as a mortgage banker,
and/or as a first or second mortgage lender. It also has the following
approvals: HUD nonsupervised one- to four-family mortgagee; FHA approved
mortgagee; FNMA first and second mortgage one- to four-family seller/servicer;
FHLMC first and second mortgage one- to four-family seller/servicer; GNMA
mortgage backed securities issuer under the GNMA I and GNMA II single family
programs; and supervised VA lender.
MLCC's offices are located in Jacksonville, Florida. MLCC generally does
not establish local offices in the states where its loans are offered, but has,
in the past, and where required, appointed employees of other Merrill Lynch
companies which do have local offices as officers or agents of MLCC, and has
used the other Merrill Lynch companies' local offices as MLCC's local offices
for licensing purposes. MLCC also maintains an office in San Juan, Puerto Rico.
On July 16, 1991, MLCC changed its name from Merrill Lynch Equity Management,
Inc. to Merrill Lynch Credit Corporation.
MLCC is in the business of originating, purchasing and servicing real
estate secured by conforming and non-conforming fixed and adjustable rate
mortgage loans (including its PrimeFirst'r' mortgages). MLCC also originates
revolving lines of credit to individuals. These lines of credit are called
'Equity Access'r' credit accounts' or 'Equity Access'r' loans'. MLCC currently
originates and services loans in fifty states, the District of Columbia, Puerto
Rico and the U.S. Virgin Islands. PrimeFirst'r' loans are secured by first liens
on one- to four-family residences, condominiums and cooperative apartments (New
York State only), most of which are owner-occupied. Substantially all of the
Mortgage Loans were originated under MLCC's PrimeFirst'r' mortgage program.
MLCC's mortgage programs are marketed primarily through financial
consultants employed by Merrill Lynch, Pierce, Fenner & Smith Incorporated and
mortgage and credit specialists employed by MLCC, as well as through newspaper
and other print advertising and direct mail campaigns.
From time to time, MLCC may offer new loans to its borrowers, which may
result in the refinancing of loans originated by it (including the Mortgage
Loans). Any such refinancing of a Mortgage Loan would have the effect of a
prepayment in full of the Mortgage Loan.
MLCC underwriting guidelines are applied to evaluate an applicant's credit
standing and repayment ability, and the value and adequacy of the mortgaged
property as collateral. Initially, an applicant is typically required to
complete an application providing pertinent credit information and to pay an
application fee (unless prohibited by applicable state law) to MLCC. As part of
the description of the applicant's financial condition, the applicant is
required to provide information concerning his or her assets, liabilities,
income and expenses, as well as an authorization permitting MLCC to apply for a
credit report summarizing the applicant's credit history.
Upon receipt of the application package, which typically requires
submission of the last two years' personal income tax returns and business tax
returns for self-employed applicants, MLCC conducts its own review of the
application package and obtains additional information concerning the
prospective borrower prior to approving the loan. Along with obtaining a credit
report, MLCC may solicit a written verification of the applicant's existing
first mortgage balance, if any, and payment history from the first mortgage
lender, if appropriate. If such lender does not respond in writing and the
mortgage payment history is not reported on the borrower's credit report, verbal
verification is attempted and the applicant generally is required to submit the
prior year's mortgage statements which generally reflect a monthly payment
history. In addition, a written employment verification may be requested from
the applicant's employer or, in lieu thereof, verbal verification is obtained if
the applicant has supplied a copy of a current pay stub along with signed
personal tax returns. In certain limited circumstances, MLCC may utilize other
methods to verify an applicant's income.
In determining the adequacy of the property as collateral for the loan, a
FNMA/FHLMC conforming appraisal of the property is performed by an independent
appraiser selected by MLCC. The appraiser is required to inspect the property
and verify that it is in good condition and that construction
S-23
<PAGE>
<PAGE>
or renovation, if new, has been completed. The appraisal report indicates a
value for the property and provides information concerning marketability, the
neighborhood, the property site, interior and exterior improvements, and the
condition of the property.
The applicant has the option of directly obtaining a title report or may
choose to have MLCC obtain the report. Generally, all liens must be satisfied
and removed prior to or upon the closing of any of the Mortgage Loans. Title
insurance is required to be obtained for all Mortgage Loans. Where applicable,
in addition to providing proof of standard hazard insurance on the property, the
applicant is required to obtain, to the extent available, flood insurance when
the subject property is identified as being in a federally designated flood
hazard area.
Once sufficient employment, credit and property information is obtained,
the decision as to whether to approve the loan is based upon the applicant's
income and credit history, the status of title to the mortgaged property, and
the appraised value of the mortgaged property. MLCC may also consider the level
of an applicant's liquid assets as an indication of creditworthiness. The
approval process generally requires that the applicant have a good credit
history and a total debt service-to-income ratio (DTI) that generally does not
exceed 50% (this ratio may be limited to 38% if certain disposable income
thresholds are not met), and that the proposed loan have a Loan-to-Value (LTV)
ratio that generally does not exceed 80%, but under certain circumstances may be
up to or slightly in excess of 100%. The DTI ratio is calculated as the ratio of
the borrower's total monthly debt obligations (including the interest-only
payment on the proposed loan at an interest rate that is 2% to 2.50% higher than
the original rate), divided by the borrower's total verified monthly income.
MLCC's practice is to continuously review LTV limits and to adjust such limits
where economic conditions dictate that such adjustments are appropriate. Any
negative comments concerning the quality, condition and current market
conditions as noted in the appraisal report may result in a reduction of the
maximum LTV permitted for the loan. In the case of a loan which is a purchase
money mortgage, MLCC computes the loan's LTV as the original loan balance
divided by the appraised value of the property or the contract sales price,
whichever is lower. In certain limited cases, MLCC may accept verification of
borrower assets and/or status of credit history in addition to or in lieu of
income verification, provided that the borrower meets certain standards with
regard to the ratio of liquid assets to the loan amount and other compensating
factors are present.
Loans that have a LTV in excess of 80% are, in general, also either (i)
secured by a security interest in additional collateral (normally securities)
owned by the borrower (such loans being referred to as 'Mortgage 100'SM' Loans')
or (ii) supported by a third party guarantee (usually a parent of the borrower),
which in turn is secured by a security interest in collateral (usually
securities) or by a lien on residential real estate of the guarantor and/or
supported by the right to draw on a home equity line of credit extended by MLCC
to the guarantor (such loans being referred to as 'Parent Power'r' Loans'). Such
loans are also collectively referred to herein as 'Additional Collateral Loans',
and the collateral referred to in clauses (i) and (ii) is herein referred to as
'Additional Collateral'. The amount of such Additional Collateral generally does
not exceed 30% of the loan amount, although the amount of the Additional
Collateral may exceed 30% of the loan amount if the original principal amount of
the loan exceeds $1,000,000. In limited cases, MLCC may require Additional
Collateral in excess of 30% of the loan amount as part of the underwriting
decision. The requirement to maintain Additional Collateral generally terminates
when the LTV for such Additional Collateral Loan is reduced to MLCC's applicable
loan-to-value ratio limit for such loan by virtue of a reduction in the
principal balance of such loan or an increase in the appraised value of the
mortgaged property securing such loan as determined by MLCC. The pledge
agreement and the guaranty agreement, as applicable, and the security interest
in such Additional Collateral, if any, provided in the case of an Additional
Collateral Loan will be assigned to the Trustee but will not be part of the
REMIC. To the extent the Mortgage Loans include any Additional Collateral Loans
that are supported by a guarantee that is secured by a lien on residential real
estate, such lien will not be transferred to the Trustee. MLCC will, in
accordance with its normal servicing procedures, attempt to realize on any such
security interest if the related Mortgage Loan is liquidated upon default. No
assurance can be given as to the amount of proceeds, if any, that might be
realized from such Additional Collateral. The Limited Purpose Surety Bond is
intended to guarantee the receipt by the Trust Fund of certain shortfalls in the
net proceeds realized from the liquidation of any required Additional Collateral
(such amount not to exceed 30% of the original principal amount of
S-24
<PAGE>
<PAGE>
the related Additional Collateral Loan) to the extent any such shortfall results
in a loss of principal on such Additional Collateral Loan that becomes a
Liquidated Mortgage Loan. The Limited Purpose Surety Bond will not cover any
payments on the Class A Certificates that are recoverable or sought to be
recovered as a voidable preference under applicable law.
The Mortgage Loans may include loans made to corporations, partnerships,
and trustees of certain trusts in connection with applications which have been
received from individuals. Such loans are generally structured as follows: (i)
the loan is to the individual and the entity which owns the real property, and
is secured by a mortgage or deed of trust executed solely by the entity; or (ii)
the loan is to the entity, secured by a mortgage from the entity and guaranteed
by the individual applicant. In such cases, MLCC applies its standard
underwriting criteria to the property and the individual applicant. Such loans
are categorized as owner-occupied in this Prospectus Supplement if the
individual applicant states in the application that, as of the closing of the
related loan, he or she will occupy the property as his or her primary
residence.
Approximately 2.79% (by Cut-off Date Principal Balance) of the Mortgage
Loans have been originated under the MLCC Non-Resident Alien Program (the
'Non-Resident Alien Loans'). All of the Non-Resident Alien Loans represent loans
to borrowers who are non-resident aliens in the United States and/or to foreign
personal holding companies. In general, MLCC applies the same underwriting
guidelines under its Non-Resident Alien Program as under its standard mortgage
programs. MLCC may limit the LTV on Non-Resident Alien Loans if adequate income
and credit information is not available. With respect to Non-Resident Alien
Loans representing approximately 0.86% of the Mortgage Loans (by Cut-off Date
Principal Balance), MLCC did not obtain verification of borrower income.
The above described underwriting guidelines may be varied in certain cases,
on the basis of compensating factors, as deemed appropriate by MLCC's
underwriting personnel.
In 1992, MLCC began originating loans through mortgage brokers that are not
affiliated with MLCC, under its Third Party Originator program. The mortgage
brokers solicit the prospective borrower and process the documentation described
above for such borrower's loan. Personnel of MLCC review such documentation and
underwrite the loan in accordance with the above described underwriting
standards. In that regard, the related appraisals are either conducted or
reviewed by appraisers who are approved by MLCC. Such loans are closed in the
name of, and funded by, MLCC.
In 1995, MLCC began purchasing loans from mortgage banking related entities
under its Correspondent Lending program. Under this program, MLCC-approved
mortgage bankers process, close, and fund the mortgage loans. Personnel of MLCC
underwrite the loans in accordance with MLCC's standard underwriting guidelines.
Additionally, MLCC conducts a post-closing review on each loan prior to
purchasing it from a correspondent lender.
In 1995, MLCC began originating mortgage loans under its construction to
permanent financing program. Such loans have the same terms as other loans under
the PrimeFirst'r' mortgage program but include certain requirements for the
completion of construction, at which time such loans become permanent loans. The
Mortgage Loans may include such loans, all of which are permanent loans as to
which construction is complete, as evidenced by a certificate of occupancy
and/or appraiser's certification of completion.
Upon the approval of a loan, the borrower obtains the loan by paying an
origination fee (employees of ML & Co. and its affiliates generally pay a lower
origination fee) and reimbursing MLCC for all out-of-pocket closing costs
incurred by MLCC, all or part of which fees or costs may be waived by MLCC from
time to time as part of MLCC's marketing efforts.
DESCRIPTION OF MLCC'S PRIMEFIRST'r' MORTGAGE PROGRAM
During the first ten years of a PrimeFirst'r' loan, only interest on the
outstanding loan balance is payable monthly along with any other fees that are
due, including late charges. During the 11th through the 25th year, a
PrimeFirst'r' loan is fully amortizing and, as a result, the borrower must pay a
larger monthly payment than the interest only monthly payment. The borrower
receives a monthly statement that reflects any change in the monthly payment.
The borrower may prepay the principal balance of the PrimeFirst'r' loan at any
time without penalty during the term of the loan.
S-25
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<PAGE>
Approximately 97.68% of the Mortgage Loans were originated under MLCC's
PrimeFirst'r' Self-Directed'SM' mortgage program. Upon origination, borrowers
under this program may choose from one of several different indices upon which
to base their interest rate and have the option to purchase a 1% periodic rate
cap through a higher margin on the loan. Borrowers under the PrimeFirst'r'
Self-Directed'SM' mortgage program also choose whether the interest rate on the
loan will adjust monthly or every six months. A loan with a one-month adjustment
frequency generally carries a lower interest rate and margin than a comparable
loan with a six-month adjustment frequency. Loans originated under the
PrimeFirst'r' Self-Directed'SM' mortgage program are convertible to a different
Index and the related Margin for a specified period during the life of the loan.
Additionally, borrowers may choose to purchase a fixed rate conversion option by
adding 0.25% to the applicable margin on the loan.
Pricing For Six-Month Adjustment Frequency. The interest rate on a
six-month adjustable PrimeFirst'r' loan is equal to either the Prime Index, the
London interbank offered rate for six-month U.S. dollar deposits (the 'Six-Month
LIBOR Index') or the weekly average yield on the United States Treasury
Securities adjusted to a constant maturity of one year as made available by the
Federal Reserve Board in Statistical Release H.15 (the 'Treasury Index') (each,
an 'Index'), plus or minus the appropriate margin. The interest rate is adjusted
every six months based upon the applicable index rate as of 45 days prior to the
Interest Adjustment Date. The following margins are generally used in
calculating the interest rate on a PrimeFirst'r' loan with a semi-annual
adjustment period. The margins set forth below may be higher for borrowers who
elect not to pay origination fees and/or closing costs. Conversely, the margins
may be lower for borrowers who opt to pay additional points to buy down their
margin.
<TABLE>
<CAPTION>
INDEX
-----------------------------------
LOAN AMOUNT PRIME 6-MONTH LIBOR TREASURY
- ------------------------------------------------------------------ ------ ------------- --------
<S> <C> <C> <C>
Less than $199,999................................................ +0.250 +2.250 +2.500
$200,000 to $299,999.............................................. 0.000 +2.000 +2.375
$300,000 to $599,999.............................................. -0.250 +1.750 +2.125
$600,000 to $999,999.............................................. -0.375 +1.625 +2.000
$1,000,000 or more................................................ -0.500 +1.500 +1.875
</TABLE>
Pricing For One-Month Adjustment Frequency. The interest rate on a
one-month adjustable PrimeFirst'r' loan is equal to either the Prime Index, the
London interbank offered rate for one-month U.S. dollar deposits (the 'One-Month
LIBOR Index') or the Treasury Index, plus or minus the appropriate margin. The
interest rate is adjusted every month based upon the applicable index rate as of
25 days prior to the Interest Adjustment Date. The following margins are
generally used in calculating the interest rate on a PrimeFirst'r' loan with a
monthly adjustment period. These margins may be higher or lower as described in
the last two sentences of the preceding paragraph.
<TABLE>
<CAPTION>
INDEX
-----------------------------------
LOAN AMOUNT PRIME 1-MONTH LIBOR TREASURY
- ------------------------------------------------------------------ ------ ------------- --------
<S> <C> <C> <C>
Less than $199,999................................................ 0.000 +2.125 +2.250
$200,000 to $299,999.............................................. -0.250 +1.875 +2.125
$300,000 to $599,999.............................................. -0.500 +1.625 +1.875
$600,000 to $999,999.............................................. -0.625 +1.500 +1.750
$1,000,000 or more................................................ -0.750 +1.375 +1.625
</TABLE>
Loans purchased by MLCC in the Correspondent Lending program may have
slightly higher margins than those shown above.
Periodic and Lifetime Rate Caps. PrimeFirst'r' loans may be originated with
a periodic rate cap of 1% (i.e., the interest rate cannot be increased by more
than 1% from one interest period to the next). The Margin for such a loan is
generally 0.50% greater than it would be without this feature. The periodic cap
is only available with six-month adjustable loans. Each loan originated under
the PrimeFirst'r' Self-Directed'SM' program has a lifetime rate cap equal to the
greater of (i) its initial interest rate plus 5% or (ii) 12%. None of the
Mortgage Loans carry a periodic rate cap.
Fixed Rate Conversion Option and Index Conversion Option. Borrowers under
the PrimeFirst'r' Self-Directed'SM' mortgage program may purchase a fixed rate
conversion option by adding 0.25% to the
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margin on the loan. The fixed rate conversion option gives the borrower the
option to convert the interest rate on the loan from an adjustable rate to a
fixed rate. The exercise period for such option begins in the month in which the
12th scheduled monthly payment is due and ends on the fifth day of the month in
which the 60th scheduled monthly payment is due. The fixed rate becomes
effective on the first day of the month after the conversion notice is given.
The new fixed rate is equal to the Federal National Mortgage Association net
required yield for 30-year fixed rate mortgages subject to a 60-day mandatory
delivery requirement (as published in The Wall Street Journal) plus 0.875%,
rounded to the nearest 0.125%. Upon a fixed rate conversion, the new scheduled
monthly payment is adjusted to the amount that is sufficient to fully amortize
the loan in substantially equal installments on the original maturity date.
Generally, all loans originated under the PrimeFirst'r' Self-Directed'SM'
mortgage program allow the borrower to convert the loan to a new Index and
Margin, provided that such Index has the same frequency of adjustment. The
option is exercisable in respect of a six-month adjustable PrimeFirst'r' loan
from its second change date to its tenth change date, and in respect of a
one-month adjustable PrimeFirst'r' loan, from its twelfth change date to its
sixtieth change date, within a certain 21-day period commencing on the 45th day
prior to each such change date. If the loan also carries the fixed rate
conversion option, such option may be exercised whether or not an Index
conversion has occurred. A borrower may not convert the frequency with which the
interest rate adjusts on a PrimeFirst'r' loan and may not add a periodic rate
cap to a loan that did not carry such periodic rate cap upon origination. The
Indices and Margins to which a borrower may convert a PrimeFirst'r' loan are the
same as those described above for PrimeFirst'r' loans for the applicable
adjustment frequency.
The exercise of either option is subject to the satisfaction of the
following conditions: (i) the borrower must be the owner and occupant of the
mortgaged property, (ii) the borrower has not been late on any of the 12
scheduled monthly payments immediately preceding the date on which the
conversion notice is given, (iii) the borrower has not been more than 30 days
late on any scheduled monthly payment, (iv) the borrower is not in default under
the mortgage note and (v) the borrower must pay a $500 conversion fee.
DELINQUENCY AND LOAN LOSS EXPERIENCE
The next two tables set forth information relating to the delinquency and
loan loss experience on the loans originated in MLCC's PrimeFirst'r' mortgage
program as of and for each of the five years in the period ended December 31,
1995, respectively, and the six-month period ending June 30, 1996. The
delinquency and loan loss experience represents the historical experience of
MLCC, and there can be no assurance that the future experience on the Mortgage
Loans in the Trust Fund will be the same as, or more favorable than, that of the
PrimeFirst'r' loans originated by MLCC, which loans, because they were first
originated in the first quarter of 1990, have not yet exhibited a loss and
delinquency experience that is representative of the losses and delinquencies
that may be experienced over a longer period of time.
S-27
<PAGE>
<PAGE>
PRIMEFIRST'r' LOAN DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
1991 1992 1993 1994
---------------------- ----------------------- ----------------------- ----------------------
NUMBER OF NUMBER OF NUMBER OF
PRIMEFIRST'r' PRINCIPAL PRIMEFIRST'r' NUMBER OF PRINCIPAL PRIMEFIRST'r' PRINCIPAL
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
----------- --------- ----------- ---------- ----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PrimeFirst'r' loans
outstanding............. 921 $ 522,425 3,265 $1,504,940 4,959 $2,264,421 7,615 $3,351,328
Delinquency period:
30-59 days............ 6 4,261 23 15,446 69 48,509 121 86,279
60-89 days............ 0 0 2 6,300 6 3,361 20 18,152
90 days or more*...... 2 1,350 2 1,635 13 8,565 17 19,257
--- --------- ----- ---------- ----- ---------- ----- ----------
Total
delinquency..... 8 $ 5,611 27 $ 23,381 88 $ 60,435 158 $ 123,688
Delinquencies as a
percent of number of
PrimeFirst'r' loans and
principal amount
outstanding............. 0.87% 1.07% 0.83% 1.55% 1.77% 2.67% 2.07% 3.69%
Foreclosures*............ 4 $ 12,902 7 $ 13,592 9 $ 7,899 18 $ 15,637
Foreclosures as a percent
of number of
PrimeFirst'r' loans and
principal amount
outstanding............. 0.43% 2.47% 0.21% 0.90% 0.18% 0.35% 0.24% 0.47%
<CAPTION>
1995 AS OF JUNE 30, 1996
----------------------- -----------------------
NUMBER OF NUMBER OF
PRIMEFIRST'r' PRINCIPAL PRIMEFIRST'r' PRINCIPAL
LOANS AMOUNT LOANS AMOUNT
----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
PrimeFirst'r' loans
outstanding............. 8,272 $3,536,761 9,273 $3,852,739
Delinquency period:
30-59 days............ 127 56,370 159 $ 76,487
60-89 days............ 13 7,917 22 19,095
90 days or more*...... 44 45,749 31 27,530
----- ---------- ----- ----------
Total
delinquency..... 184 $ 110,036 212 $ 123,112
Delinquencies as a
percent of number of
PrimeFirst'r' loans and
principal amount
outstanding............. 2.22% 3.11% 2.29% 3.20%
Foreclosures*............ 28 $ 38,209 30 $ 33,527
Foreclosures as a percent
of number of
PrimeFirst'r' loans and
principal amount
outstanding............. 0.34% 1.11% 0.32% 0.87%
</TABLE>
- ------------
* Does not include loans subject to bankruptcy proceedings and real estate
owned.
PRIMEFIRST'r' LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
-------- ---------- ---------- ---------- ---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Average principal balance of
PrimeFirst'r' loan
portfolio.................. $351,651 $1,008,493 $1,851,696 $2,807,875 $3,444,045 $3,694,750
Average number of
PrimeFirst'r' loans
outstanding during the
period..................... 569 2,036 4,091 6,287 7,944 8,773
Gross charge-offs............ $ 0 $ 0 $ 2,285 $ 457 $ 1,840 $ 2,775
Recoveries................... $ 0 $ 0 $ 171 $ 0 $ 0 $ 0
Net charge-offs.............. $ 0 $ 0 $ 2,114 $ 457 $ 1,840 $ 2,775
Net charge-offs as a percent
of average principal
balance outstanding........ 0.00% 0.00% 0.11% 0.02% 0.05% 0.08%(1)
</TABLE>
- ------------
(1) Not annualized.
Because of the short time during which the PrimeFirst'r' loans have been
outstanding and the resulting lack of experience as to delinquencies and losses
on PrimeFirst'r' loans, the following two tables, which relate to the
delinquency and loan loss experience on home equity revolving credit line loans
originated and serviced by MLCC, are presented instead. MLCC believes that the
underwriting standards used by it in originating the revolving credit line loans
are similar, but by no means identical, to its PrimeFirst'r' underwriting
standards. The delinquency and loan loss experience represents the historical
experience of MLCC on the revolving credit line loans, and there can be no
assurance that the future experience on the Mortgage Loans in the Trust Fund
will be the same as, or more favorable than, that of the revolving credit line
mortgage loans in MLCC's servicing portfolio, which mortgage loans are not fully
seasoned and the terms of which do not require the payment of principal until
final maturity.
S-28
<PAGE>
<PAGE>
REVOLVING CREDIT LINE LOAN DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------------------------------------------------ JUNE 30,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Number of revolving credit
line loans serviced........ 15,913 15,084 13,839 15,598 25,056 27,801
Aggregate loan balance of
revolving credit line loans
serviced................... $1,073,492 $1,062,930 $1,037,427 $1,079,693 $1,293,483 $1,318,904
Loan balance of revolving
credit line loans 2 months
delinquent................. $ 2,250 $ 3,717 $ 5,161 $ 5,358 $ 8,447 $ 5,364
Loan balance of revolving
credit line loans 3 months
or more delinquent......... $ 22,361 $ 18,751 $ 17,508 $ 22,989 $ 33,763 $ 43,610
Total of 2 months or more
delinquent as a percentage
of aggregate loan balance
of revolving credit line
line loans................. 2.29% 2.11% 2.19% 2.63% 3.26% 3.71%
</TABLE>
REVOLVING CREDIT LINE LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
SIX MONTHS
AS OF DECEMBER 31, ENDED
-------------------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Number of revolving credit
line loans serviced....... 15,913 15,084 13,839 15,598 25,056 27,801
Aggregate loan balance of
revolving credit line
loans serviced............ $1,073,492 $1,062,930 $1,037,427 $1,079,693 $1,293,483 $1,318,904
For the period:
Gross charge-off
dollars.............. $ 936 $ 1,447 $ 3,153 $ 1,118 $ 3,700 $ 1,040
Percentages(1)......... 0.09% 0.14% 0.30% 0.10% 0.29% 0.08%(2)
</TABLE>
- ------------
(1) As a percentage of aggregate balance of revolving credit line loans
serviced.
(2) Not annualized.
No assurance can be given that values of the Mortgaged Properties as of the
dates of origination of the related Mortgage Loans have remained or will remain
constant. In certain regions of the country, including regions in which
Mortgaged Properties are located, real estate values have recently declined. See
'The Mortgage Pool' for a listing of the geographic distribution of the
Mortgaged Properties as of the Cut-off Date. If the residential real estate
market should experience an overall decline in property values such that the
outstanding balances of the Mortgage Loans equal or exceed the value of the
Mortgaged Properties, the actual rates of delinquencies, foreclosures and losses
could be higher than those currently experienced in the mortgage lending
industry in general. In addition, adverse economic conditions (which may or may
not affect real property values) may affect the timely payment by borrowers of
scheduled payments of principal and interest on the Mortgage Loans and,
accordingly, the actual rates of delinquencies, foreclosures and losses with
respect to the Mortgage Pool. To the extent that such losses are not covered by
the subordination feature described under 'Description of the
Certificates -- Subordinated Certificates', subject to the effect of the
Certificate Insurance Policy as
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<PAGE>
<PAGE>
described under 'Description of the Certificates -- Distributions on the
Certificates', they will be borne by holders of the related Class A
Certificates.
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on the Class A Certificates, the aggregate
amount of each interest payment on such Certificates and the yields to maturity
of such Certificates are related to and affected by the rate and timing of
payments of principal on the underlying Mortgage Loans. The principal payments
on the Mortgage Loans may be in the form of scheduled principal payments or
prepayments or liquidation proceeds due to default, casualty, condemnation and
the like. Any such payments will result in distributions to the
Certificateholders of amounts attributable to principal which would otherwise be
distributed over the remaining term of the Mortgage Loans. In addition, because
the Class A Certificates will be entitled to receive, at least during the early
years of their life, all or a disproportionate percentage of unscheduled
principal payments on the Mortgage Loans (including liquidations due to default)
on each Distribution Date until the Class A Principal Balance is reduced to
zero, rather than the portion thereof proportionate to their interest in the
Mortgage Loans, the rate of principal payments on the Mortgage Loans will,
unless offset by cash flow insufficiencies due to delinquencies and liquidation
losses, have a greater effect on the rate of principal payments and the amount
of interest payments on, and the yields to maturity of, the Class A Certificates
than if the Class A Certificates were entitled only to their proportionate
interest in the Formula Principal Distribution Amounts for the Mortgage Loans.
See 'Description of the Certificates -- Distributions on the Certificates'. In
general, the prepayment rate may be influenced by a number of factors, including
general economic conditions, homeowner mobility and the level of mortgage market
interest rates. Mortgagors are permitted to prepay the Mortgage Loans, in whole
or in part, at any time without penalty. If a Mortgagor makes a partial
prepayment of a Mortgage Loan, MLCC will adjust the monthly payment of such
Mortgage Loan in the following month to reflect the reduced loan amount. The
rate of payment of principal may also be affected by any repurchase of the
Mortgage Loans by the Master Servicer or the Certificate Insurer as described
herein. See 'The Mortgage Pool' and 'Description of the Certificates -- Optional
Termination'. In such event, the repurchase price will be passed through to the
Class A Certificateholders as a prepayment of principal in the month following
the month of such repurchase.
All of the Mortgage Loans are adjustable rate loans for which only interest
is due during the first ten years of their terms. Approximately 1.06% of the
Mortgage Loans (by Cut-off Date Principal Balance) are Convertible Mortgage
Loans, in respect of which the Mortgagor, during the related conversion period,
may convert the adjustable rate to a fixed rate and may convert to a different
Index (and may thereafter convert to a fixed rate). Approximately 97.68% of the
Mortgage Loans (by Cut-off Date Principal Balance) are Index Convertible
Mortgage Loans, in respect of which the Mortgagor, during the related conversion
period, may convert to a different Index. The Company is not aware of any
publicly available statistics that set forth principal prepayment or conversion
experience or prepayment or conversion forecasts of adjustable rate mortgage
loans over an extended period of time, and the experience of MLCC is
insufficient to draw any conclusions with respect to the expected prepayment or
conversion rates on the Mortgage Loans. The rate of principal prepayments and
conversions with respect to adjustable rate mortgage loans has fluctuated in
recent years. As is the case with conventional fixed rate mortgage loans,
adjustable rate mortgage loans may be subject to a greater rate of principal
prepayments and conversions in a declining interest rate environment. For
example, if prevailing interest rates fall significantly, adjustable rate
mortgage loans could be subject to higher prepayment rates than if prevailing
interest rates remain constant because the availability of fixed rate or other
adjustable rate mortgage loans at competitive interest rates may encourage
mortgagors to refinance their adjustable rate loans, or convert them to a fixed
rate or other adjustable rate, to 'lock in' a lower adjustable or fixed interest
rate. The fixed rate conversion option may also be exercised in a rising
interest rate environment as Mortgagors avoid the risk of higher rates. No
prediction can be made as to the rate of prepayments or conversions on the
Mortgage Loans in stable or changing interest rate environments. If a
substantial number of Mortgagors exercise their conversion option with respect
to the Convertible Mortgage Loans to convert to a fixed rate, and the Master
Servicer purchases such Converting Mortgage Loans, the Mortgage Loans will, in
effect, experience substantial prepayments of
S-30
<PAGE>
<PAGE>
principal. If the Master Servicer fails to purchase Converting Mortgage Loans
that are converting to a fixed rate, then the Mortgage Loans will include fixed
rate Mortgage Loans, which will have the effect of limiting the extent to which
the related Net Mortgage Rates can increase (or decrease) in accordance with
changes in the Indices and accordingly may limit the Class A Pass-Through Rate
on the Class A Certificates to the related Weighted Average Net Mortgage Rate
rather than the applicable Class A Pass-Through Rate calculated on the basis of
the LIBOR formula. The Master Servicer will not purchase Convertible Mortgage
Loans or Index Convertible Mortgage Loans upon their conversion to a different
Index. Consequently, the Mortgage Loans will include any such Mortgage Loans
with the different Index, which may have an adverse effect on the level of the
Class A Pass-Through Rate. See 'Yield and Prepayment Considerations' in the
Prospectus.
To the extent that amounts paid to the holders of the Class A Certificates
on any Distribution Date are less than the amount due to the holders of the
Class A Certificates on such date, the weighted average life of the Class A
Certificates will be longer than if shortfalls had not occurred.
In the case of any Class A Certificates purchased at a discount to their
original principal amounts, a slower than anticipated rate of principal payments
is likely to result in a lower than anticipated yield. In the case of Class A
Certificates purchased at a premium to their original principal amounts, a
faster than anticipated rate of principal payments is likely to result in a
lower than anticipated yield.
In the event of the acceleration of Mortgage Loans as a result of
enforcement of 'due-on-sale' provisions in connection with transfers of the
related Mortgaged Properties or the occurrence of certain other events resulting
in acceleration as described under 'Description of the Certificates -- Servicing
and Insurance', the level of prepayments on the Mortgage Loans will be affected,
thereby shortening the weighted average life of the Class A Certificates. The
Master Servicer is not obligated to exercise a due-on-sale clause. See 'Yield
and Prepayment Considerations' in the Prospectus.
If a Mortgage Loan is prepaid in full, interest thereon will cease to
accrue on the date of the prepayment. Consequently, the timing of prepayments in
full on Mortgage Loans will affect the amount of the Available Distribution
Amount available to make distributions of interest on the Certificates and will
therefore affect the ability of the Trust Fund to make a full distribution of
interest on the Class A Certificates and the Class A Formula Principal
Distribution Amount. The Master Servicer's Servicing Fee in respect of the month
of prepayment will be applied to make up for any reduced amount of interest
collections on account of the timing of the receipt of principal prepayments,
but no assurance can be given that the amount of the Servicing Fee will be
sufficient for such purpose. Net Interest Shortfalls will be borne by the Class
A Certificateholders as described under 'Description of the Certificates --
Distributions on the Certificates' and will result in a lower than anticipated
yield.
No prediction can be made as to future levels of LIBOR, the One-Month LIBOR
Index, the Six-Month LIBOR Index, the Prime Index or the Treasury Index or as to
the timing of any changes therein, each of which will directly affect the yields
of the Class A Certificates. In addition, the holders of the Class A
Certificates will absorb the yield risk associated with a possible narrowing of
the spread between the Class A Pass-Through Rate (which rate, except as
otherwise provided, is based on LIBOR) and the Weighted Average Net Mortgage
Rate. The Mortgage Rates reset at different times and are subject to lifetime
interest rate caps. The conversions of Convertible Mortgage Loans to a fixed
rate may, if the Master Servicer fails to purchase such Converting Mortgage
Loans, have the effect of narrowing the spread between the Class A Pass-Through
Rate calculated on the basis of LIBOR and the Weighted Average Net Mortgage
Rate. If such spread disappears (i.e., if LIBOR plus 0.38% exceeds the related
Weighted Average Net Mortgage Rate), then the Class A Pass-Through Rate for such
Distribution Date will be limited to such lower Weighted Average Net Mortgage
Rate. In addition, interest accrues on the Class A and Class B Certificates on
the basis of the actual number of days in the related Accrual Period (which
could be more than 30) divided by 360. Consequently, if the Pass-Through Rates
equaled the related Weighted Average Net Mortgage Rate, the amount of such
accrued interest might, in certain circumstances, be greater than the amount of
interest that would be due on the Mortgage Loans, on which interest accrues on
the basis of a year consisting of twelve 30-day months. See 'Description of the
Certificates -- Servicing Compensation and Payment of Expenses'. Any such
differential in accrued interest would be covered, as to the Class A
Certificates, by the Certificate Insurance Policy to the extent such
differential results in a Distribution Account Shortfall.
S-31
<PAGE>
<PAGE>
The Maximum Mortgage Rates range from 12.00% to 14.00% per annum and the
weighted average Maximum Mortgage Rate for the Mortgage Loans (by Cut-off Date
Principal Balance) is equal to 12.583%. None of the Mortgage Loans are subject
to periodic interest rate caps.
WEIGHTED AVERAGE LIFE OF THE CLASS A CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments of the Mortgage Loans on the weighted average life of the Class A
Certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the Mortgage Loans.
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average lives of the Class A Certificates
will be affected by the rate at which principal on the Mortgage Loans is paid.
Principal payments on Mortgage Loans may be in the form of scheduled
amortization or prepayments (for this purpose, the term 'prepayment' includes
prepayments and liquidations due to default or other dispositions of Mortgage
Loans). Prepayments on mortgage loans may be measured by a prepayment standard
or model. The model used in this Prospectus Supplement is a Constant Prepayment
Rate ('CPR'). The CPR represents an assumed constant rate of prepayment each
month, expressed as a per annum percentage of the scheduled principal balance of
the pool of mortgage loans for that month. As used in the following table, the
column headed '0%' assumes that none of the Mortgage Loans is prepaid before
maturity. The columns headed '10%', '15%', '20%' and '30%' assume that
prepayments on the Mortgage Loans are made at CPRs of '10%', '15%', '20%' and
'30%', respectively. THE CPR DOES NOT PURPORT TO BE A HISTORICAL DESCRIPTION OF
PREPAYMENT EXPERIENCE OR A PREDICTION OF THE ANTICIPATED RATE OF PREPAYMENT OF
ANY POOL OF MORTGAGE LOANS, INCLUDING THE MORTGAGE LOANS.
There is no assurance, however, that prepayments of the Mortgage Loans will
conform to any level of CPR, and no representation is made that the Mortgage
Loans will prepay at the CPRs shown or any other prepayment rate. The rate of
principal payments on pools of mortgage loans is influenced by a variety of
economic, geographic, social and other factors, including the level of interest
rates and the rate at which homeowners sell their homes or default on their
mortgage loans. Other factors affecting prepayment of mortgage loans include
changes in borrowers' housing needs, job transfers, unemployment and obligors'
net equity in their homes.
The percentages and weighted average lives in the following table were
determined assuming that (i) scheduled interest and principal payments on the
Mortgage Loans are received in a timely manner and prepayments are made at the
indicated CPRs; (ii) principal prepayments on the Mortgage Loans will be
received on the last day of each month commencing in August 1996 at the
respective constant percentages of CPR set forth in such table and there are no
Prepayment Interest Shortfalls; (iii) except as indicated with respect to the
weighted average lives, neither the Master Servicer nor the Certificate Insurer
exercises its right of optional termination described above; (iv) each Mortgage
Loan will pay interest only for the first ten years from origination and will
fully amortize during the following fifteen years; (v) each Mortgage Loan will,
as of the Cut-off Date, have the applicable original term to maturity and the
applicable remaining term to maturity specified below; (vi) each Mortgage Loan
bears interest at the applicable current Mortgage Rate specified in the table
below until the next applicable Interest Adjustment Date and thereafter bears
interest at the sum of the applicable Index and Margin specified in the table
below; (vii) there are no losses or delinquencies on the Mortgage Loans and no
Index Convertible Mortgage Loan is converted into a new Index; (viii) the Class
A Certificates are issued on September 10, 1996; (ix) the Distribution Date is
the 15th day of each month commencing in September 1996; and (x) no Convertible
Mortgage Loans are converted to fixed rate Mortgage Loans or to different
Indices. No representation is made that the actual losses and delinquencies on
the Mortgage Loans will be experienced at the assumed rate or at any other rate.
In addition, the Mortgage Loans are assumed to have the following
characteristics:
S-32
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
MONTHS TO LEVEL OF
CUT-OFF DATE CURRENT NEXT INTEREST INDEX AFTER
INDEX AND FREQUENCY OF PRINCIPAL MORTGAGE ADJUSTMENT CURRENT REMAINING ORIG.
ADJUSTMENT BALANCE RATE DATE MORTGAGE RATE MARGIN TERM (MONTHS) TERM
- ------------------------- ------------ -------- ------------- ------------- ---------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Six-Month LIBOR -- Six
Months................. $210,522,143 7.656% 5 5.875% 1.942% 299 300
Prime -- Six Months...... $ 1,840,500 8.276% 6 8.250% 0.026% 300 300
Treasury -- Six Months... $ 10,023,245 7.291% 4 5.940% 2.587% 298 300
One-Month
LIBOR -- Monthly....... $ 97,517,868 7.220% 2 5.473% 1.749% 299 300
Treasury -- Monthly...... $ 3,440,550 8.025% 2 5.940% 2.193% 300 300
</TABLE>
Since the table was prepared on the basis of the assumptions in the
preceding paragraph, there are discrepancies between the characteristics of the
actual Mortgage Loans and the characteristics of the Mortgage Loans assumed in
preparing the table. Any such discrepancy may have an effect upon the
percentages of the Original Class A Principal Balance outstanding and the
weighted average lives of the Class A Certificates set forth in the tables. In
particular, the Mortgage Rates are adjustable and will most likely vary from the
assumed interest rates, which may have a significant effect on the percentages
of the Original Class A Principal Balance outstanding and the weighted average
life. In addition, since the actual Mortgage Loans in the Trust Fund have
characteristics which differ from those assumed in preparing the table set forth
below, the distributions of principal on the Class A Certificates may be made
earlier or later than as indicated in the table.
It is not likely that the Mortgage Loans will prepay at any constant CPR to
maturity or that all Mortgage Loans will prepay at the same rate. In addition,
the diverse remaining terms to maturity of the Mortgage Loans could produce
slower distributions of principal than as indicated in the related tables at the
various CPRs specified even if the weighted average remaining term to maturity
of the Mortgage Loans is as assumed above.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed herein.
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class A Certificates and sets forth the
percentage of the Original Class A Principal Balance that would be outstanding
after each of the dates shown at the indicated CPR.
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<PAGE>
<PAGE>
PERCENT OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A CERTIFICATES
OUTSTANDING FOR:
<TABLE>
<CAPTION>
CLASS A CERTIFICATE AT THE
FOLLOWING PERCENTAGES OF CPR
---------------------------------------------
DISTRIBUTION DATE 0% 10% 15% 20% 30%
- ---------------------------------------------------------------- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage.............................................. 100% 100% 100% 100% 100%
August 15, 1997................................................. 100 90 85 80 70
August 15, 1998................................................. 100 81 72 63 48
August 15, 1999................................................. 100 72 61 50 34
August 15, 2000................................................. 100 65 51 40 23
August 15, 2001................................................. 100 58 44 32 16
August 15, 2002................................................. 100 52 37 26 11
August 15, 2003................................................. 100 47 32 20 7
August 15, 2004................................................. 100 42 27 16 5
August 15, 2005................................................. 100 38 22 13 3
August 15, 2006................................................. 100 34 19 10 2
August 15, 2007................................................. 96 30 15 7 1
August 15, 2008................................................. 92 25 12 5 0
August 15, 2009................................................. 88 22 10 4 0
August 15, 2010................................................. 83 18 8 3 0
August 15, 2011................................................. 78 15 6 2 0
August 15, 2012................................................. 72 13 4 1 0
August 15, 2013................................................. 67 10 3 1 0
August 15, 2014................................................. 60 8 2 0 0
August 15, 2015................................................. 53 6 1 0 0
August 15, 2016................................................. 46 5 1 0 0
August 15, 2017................................................. 37 3 0 0 0
August 15, 2018................................................. 29 2 0 0 0
August 15, 2019................................................. 19 1 0 0 0
August 15, 2020................................................. 9 0 0 0 0
August 15, 2021................................................. 0 0 0 0 0
Weighted Average Life without exercise of optional termination
(years)(1).................................................... 18.75 7.85 5.58 4.19 2.64
Weighted Average Life with exercise of optional termination
(years)(1)(2)................................................. 18.71 7.60 5.30 3.94 2.45
</TABLE>
- ------------
(1) The weighted average life of a Class A Certificate is determined by (i)
multiplying the amount of each principal distribution by the number of years
from the date of the issuance of such Certificate to the related
Distribution Date, (ii) adding the results and (iii) dividing the sum by the
original principal balance of such Certificate.
(2) The right of the Master Servicer and the Certificate Insurer to purchase the
Mortgage Loans when the Pool Scheduled Principal Balance is less than 10% of
the original Pool Scheduled Principal Balance is described under
'Description of the Certificates -- Optional Termination'. The weighted
average lives that assume the exercise of such option assume that the option
is exercised when it first becomes exercisable.
S-34
<PAGE>
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement among the
Company, the Master Servicer and the Trustee. A copy of the Agreement (exclusive
of the list of Mortgage Loans) will be attached as an exhibit to the Current
Report on Form 8-K to be filed with the Securities and Exchange Commission after
the date of delivery of the Certificates. Reference is made to the Prospectus
for additional information regarding the terms and conditions of the Agreement
to the extent not revised by the following description. To the extent that the
statements in this Prospectus Supplement modify statements in the Prospectus,
the statements in this Prospectus Supplement control.
The following summaries do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, the provisions of the
Agreement. When particular provisions or terms used in the Agreement are
referred to, the actual provisions (including definitions of terms) are
incorporated by reference.
GENERAL
Exclusive of the interest of the Class R Certificate, the Class A
Certificates will initially evidence in the aggregate a beneficial interest of
approximately 98.50% in the pool of Mortgage Loans, and the Class B Certificates
will initially evidence the remaining approximate 1.50%. The Class R Certificate
does not have a principal balance.
The Class A Certificates will be issued in fully registered form only, in
denominations of $25,000 and integral multiples of $1,000 in excess thereof. The
Percentage Interest of a Class A Certificate is the percentage obtained from
dividing its denomination by the Original Class A Principal Balance. Definitive
Class A Certificates, if issued, will be transferable and exchangeable at the
corporate trust office of the Trustee at its Corporate Trust Department in
California or, if it so elects, at the office of an agent in New York City. No
service charge will be made for any registration of exchange or transfer, but
the Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
Distributions of principal and interest on the Class A Certificates will be
made on the 15th day of each month, or, if such day is not a business day, the
next succeeding business day (each, a 'Distribution Date') beginning in
September 1996, to the persons in whose names the Class A Certificates are
registered at the close of business on the last business day preceding the
immediately preceding Distribution Date or on the date of the initial issuance
of the Certificates in the case of the first Distribution Date (the 'Record
Date'). The Class A Certificates will initially be represented by certificates
registered in the name of Cede & Co. ('Cede') as the nominee of The Depository
Trust Company ('DTC'). See 'Registration of Class A Certificates' below. If
definitive Class A Certificates are issued, distributions will be made by check
mailed to the address of the person entitled thereto as it appears on the
Certificate Register, except that a Certificateholder who holds Class A
Certificates with original denominations aggregating at least $5 million may
request payment by wire transfer of funds pursuant to written instructions
delivered to the Trustee at least ten business days prior to the Record Date.
The final distribution in retirement of Class A Certificates will be made only
upon presentation and surrender of the Class A Certificates at the office or
agency of the Trustee specified in the final distribution notice to Class A
Certificateholders.
The Certificate Account will be established in the name of the Master
Servicer as Master Servicer for the Trustee.
DISTRIBUTIONS ON THE CERTIFICATES
Distributions of interest and principal to each holder of a Class A
Certificate will be made on each Distribution Date, commencing in September
1996, in an amount equal to each such holder's respective Percentage Interest
multiplied by the amount distributed in respect of Class A Certificates. Certain
calculations with respect to the Certificates will be made by the Master
Servicer as of the fifth day of the month (or if such fifth day is not a
business day, then on the next preceding business day) (the 'Determination
Date'). Distributions on the Class A Certificates will be applied first to
interest and then to principal. All calculations of interest on the Certificates
will be made on the basis of the actual number of days in the Accrual Period
divided by 360. Interest will accrue with respect to each
S-35
<PAGE>
<PAGE>
Distribution Date during the one-month period beginning on the 15th day of the
month preceding the month of such Distribution Date and ending on the 14th day
of the month of such Distribution Date (or, in the case of the first
Distribution Date, the period beginning on the Closing Date and ending on
September 14, 1996) (each, an 'Accrual Period').
With respect to each Distribution Date, the Available Distribution Amount
will be the amount received in respect of the Mortgage Loans that is on deposit
in the Certificate Account as of the close of business on the related
Determination Date plus the Advances deposited in the Distribution Account
(described below) for such Distribution Date, less the following amounts:
(a) amounts received on the Mortgage Loans as late payments or other
recoveries of interest or principal (including Liquidation Proceeds,
Insurance Proceeds and condemnation awards) and respecting which the Master
Servicer previously made an unreimbursed Advance of such amounts;
(b) amounts representing the reimbursement for Nonrecoverable Advances
and other amounts (including the Servicing Fee) permitted to be withdrawn
by the Master Servicer from, or not required to be deposited in, the
Certificate Account;
(c) amounts representing all or part of a Monthly Payment due after
the immediately preceding Due Date;
(d) all Repurchase Proceeds, Principal Prepayments, Liquidation
Proceeds, Insurance Proceeds and condemnation awards with respect to
Mortgage Loans received after the related Principal Prepayment Period, and
all related payments of interest representing interest for any period of
time after the related Due Date; and
(e) all income from Eligible Investments held in the Certificate
Account for the account of the Master Servicer.
On the business day prior to each Distribution Date the Available
Distribution Amount will be deposited into the Distribution Account. In
addition, on or before each Distribution Date, the Trustee will deposit into the
Distribution Account (i) the payments, if any, it has received under the
Certificate Insurance Policy and the Limited Purpose Surety Bond and (ii) any
Reserve Fund draw amounts, in each case for distribution on such Distribution
Date.
On each Distribution Date the Available Distribution Amount will be
distributed in the following amounts and order of priority:
(i) to the Class A Certificateholders, interest for the related
Accrual Period at the Class A Pass-Through Rate on the Class A Principal
Balance, together with any previously undistributed shortfalls in required
distributions of interest on the Class A Certificates (the 'Class A Unpaid
Interest Shortfall'). Interest distributions are subject to reduction on
account of Net Interest Shortfalls as described below;
(ii) to the Class A Certificateholders, on account of principal, the
Class A Formula Principal Distribution Amount until the Class A Principal
Balance is reduced to zero;
(iii) to the Certificate Insurer, the monthly premium due on the
Certificate Insurance Policy;
(iv) to the Certificate Insurer, an amount equal to any previously
unreimbursed payments made under the Certificate Insurance Policy and any
fees and expenses owed to it under the related insurance agreement,
together with interest thereon (collectively, the 'Unreimbursed Insurer
Amounts');
(v) to the Reserve Fund, the amount (but not in excess of the Formula
Excess Interest Amount) required to be deposited in the Reserve Fund;
(vi) to the Class B Certificateholders, interest for the related
Accrual Period at the Class B Pass-Through Rate on the Class B Principal
Balance, together with any previously undistributed shortfalls in required
distributions of interest on the Class B Certificates. Interest
distributions are subject to reduction on account of Net Interest
Shortfalls as described below;
(vii) to the Class A Certificateholders, on account of principal, the
Unrecovered Principal Amounts, if any, for the Mortgage Loans for such
Distribution Date and all prior Distribution
S-36
<PAGE>
<PAGE>
Dates that have not previously been distributed pursuant to this clause
until the Class A Principal Balance is reduced to zero;
(viii) to the Class B Certificateholders, on account of principal, the
Class B Formula Principal Distribution Amount until the Class B Principal
Balance is reduced to zero;
(ix) to the Class B Certificateholders, the Class B Loss Amounts not
previously distributed to them pursuant to this clause; and
(x) to the Class R Certificateholders, any remaining balance.
Notwithstanding the foregoing, until the Class A Principal Balance is
reduced to zero, distributions on account of principal otherwise allocable to
the Class B Certificateholders in accordance with the above priorities will
instead be made to the Class A Certificateholders to the extent, if any, that
such distribution would, if made to the Class B Certificateholders, reduce the
Class B Principal Balance to less than 1.00% of the Original Pool Scheduled
Principal Balance or if the Class B Principal Balance is less than that amount.
As to any Distribution Date, the 'Formula Principal Distribution Amount' is
the sum of:
(a) the principal portion of all Monthly Payments, whether or not
received, which were due on the related Due Date on Outstanding Mortgage
Loans as of the related Due Date;
(b) with respect to each Mortgage Loan, all Principal Prepayments made
by the Mortgagor during the month (the 'Principal Prepayment Period')
preceding the month of such Distribution Date;
(c) with respect to each Mortgage Loan not described in (e) below, all
Insurance Proceeds, condemnation awards and any other cash proceeds from a
source other than the Mortgagor, to the extent required to be deposited in
the Certificate Account pursuant to the Agreement, which are allocable to
principal and were received during the related Principal Prepayment Period,
net of related unreimbursed Servicing Advances and net of any portion
thereof that, as to such Mortgage Loan, constitutes late collections with
respect thereto;
(d) with respect to each Mortgage Loan that has been repurchased
pursuant to Section 11.01 of the Agreement during the related Principal
Prepayment Period, an amount equal to the Principal Balance of the Mortgage
Loan as of the date of repurchase;
(e) with respect to each Mortgage Loan that became a Liquidated
Mortgage Loan during the related Principal Prepayment Period, the amount
allocable to the principal of such Liquidated Mortgage Loan that was
recovered out of the net liquidation proceeds in respect of such Liquidated
Mortgage Loan in such Principal Prepayment Period; and
(f) with respect to each Mortgage Loan repurchased during the related
Principal Prepayment Period by the Master Servicer on account of a breach
of a representation or warranty that materially adversely affects the
interests of the Certificateholders or the Certificate Insurer or the
Surety Bond Provider, or on account of its conversion to a fixed rate
Mortgage Loan or otherwise, an amount equal to the principal portion of the
Purchase Price, as defined in the Agreement (exclusive of any portion
thereof included in clause (a) above).
The 'Scheduled Formula Principal Distribution Amount' for a Distribution
Date is the amount specified in clause (a) of this paragraph for such
Distribution Date. The 'Unscheduled Formula Principal Distribution Amount' for a
Distribution Date is the sum of the amounts in clauses (b), (c), (d), (e) and
(f) of this paragraph for such Distribution Date.
The 'Unrecovered Principal Amount' in respect of a Liquidated Mortgage Loan
is the portion, if any, of the principal of such Liquidated Mortgage Loan that
was not recovered upon its liquidation. An Unrecovered Principal Amount in
respect of a Distribution Date is one that was incurred in the immediately
preceding Principal Prepayment Period.
An 'Outstanding Mortgage Loan' in respect of a Due Date is a Mortgage Loan
which was not the subject of a Principal Prepayment in full prior to such Due
Date, which did not become a Liquidated Mortgage Loan prior to such Due Date and
which was not repurchased pursuant to the Agreement on
S-37
<PAGE>
<PAGE>
account of certain breaches of a representation or warranty or conversion or
otherwise prior to such Due Date.
A 'Liquidated Mortgage Loan' is, generally, a defaulted Mortgage Loan as to
which all amounts that the Master Servicer believes can be recovered with
respect to such Mortgage Loan or the property acquired in respect thereof have
been recovered.
The 'Principal Balance' of a Mortgage Loan is its principal balance
remaining to be paid at the close of business on the Cut-off Date (after
deduction of all principal payments due on or before the Cut-off Date whether or
not paid, but without deducting Monthly Payments due after the Cut-off Date and
received on or before the Cut-off Date) reduced by all amounts (including
Advances, if any) distributed to Certificateholders relating to principal of
such Mortgage Loan.
The interest entitlement above for the Class A and Class B Certificates
with respect to each Distribution Date will be reduced by the amount of Net
Interest Shortfall allocable to each such Class. The Net Interest Shortfall on
any Distribution Date will be allocated pro rata among the Class A and Class B
Certificates based on the amount of interest each such Class of Certificates
would otherwise be entitled to receive on such Distribution Date.
The 'Net Interest Shortfall' in respect of a Distribution Date is equal to
the sum of (i) the amount of interest which would otherwise have been received
with respect to any Mortgage Loan that was the subject of a Relief Act Reduction
and (ii) any Net Prepayment Interest Shortfall. The 'Net Prepayment Interest
Shortfall' in respect of a Distribution Date is the aggregate of the Prepayment
Interest Shortfalls incurred on the Mortgage Loans in the preceding Principal
Prepayment Period that were not made up by the application of the Servicing Fees
collected by the Master Servicer in respect of such Principal Prepayment Period.
A 'Relief Act Reduction' is a reduction in the amount of monthly interest on a
Mortgage Loan pursuant to the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended.
In no event will the aggregate distributions of principal to the holders of
the Class A or Class B Certificates (whether out of Available Distribution
Amounts, Reserve Fund draw amounts, payments under the Certificate Insurance
Policy or payments under the Limited Purpose Surety Bond) exceed the Original
Principal Balance of such Class.
The 'Formula Excess Interest Amount' in respect of a Distribution Date is
the amount, if any, by which (i) one month's interest at the Weighted Average
Net Mortgage Rate on the aggregate Principal Balance of the Mortgage Loans as of
the Due Date in the preceding month (after giving effect to the scheduled
principal payments due on such Due Date and unscheduled principal payments
received prior to such Due Date) exceeds (ii) interest for the related Accrual
Period at the weighted average of the Class A and Class B Pass-Through Rates for
such Distribution Date on the aggregate Principal Balance of such Certificates.
The Class A Principal Balance is the Original Class A Principal Balance
less all prior distributions to Class A Certificateholders on account of
principal.
The Class B Principal Balance, which shall not be less than zero, is the
Original Class B Principal Balance less the sum of (i) all prior distributions
to the Class B Certificateholders on account of principal and (ii) the sum of
all Class B Loss Amounts for prior Distribution Dates. A 'Class B Loss Amount'
for a Distribution Date is the amount, if any, by which (a) the sum of (x) the
Formula Principal Distribution Amount and (y) the aggregate of the Unrecovered
Principal Amounts, if any, for such Distribution Date exceeds (b) the amount
distributed on account of principal to the holders of the Certificates on such
Distribution Date. Class B Loss Amounts will not bear interest.
The term 'Principal Balance', when used in respect of a Class or Classes of
Certificates, refers to the principal balance thereof as calculated in the
preceding two paragraphs.
The 'Class A Formula Principal Distribution Amount' for a Distribution Date
is equal to the sum of (i) the Class A Percentage of the Scheduled Formula
Principal Distribution Amount and (ii) the Class A Prepayment Percentage of the
Unscheduled Formula Principal Distribution Amount.
The 'Class A Percentage' for a Distribution Date is equal to the percentage
(which shall in no event be greater than 100%) derived from dividing the Class A
Principal Balance by the Pool Scheduled Principal Balance (before giving effect
to the Formula Principal Distribution Amount for
S-38
<PAGE>
<PAGE>
such Distribution Date). The 'Class A Prepayment Percentage' for a Distribution
Date on or before the Distribution Date in August 2006 will be 100%. The 'Class
A Prepayment Percentage' for a Distribution Date after the Distribution Date in
August 2006 will be as follows: for any Distribution Date subsequent to August
2006 to and including the Distribution Date in August 2007, the Class A
Percentage for such Distribution Date plus 70% of the Subordinated Percentage
for such Distribution Date; for any Distribution Date subsequent to August 2007
to and including the Distribution Date in August 2008, the Class A Percentage
for such Distribution Date plus 60% of the Subordinated Percentage for such
Distribution Date; for any Distribution Date subsequent to August 2008 to and
including the Distribution Date in August 2009, the Class A Percentage for such
Distribution Date plus 40% of the Subordinated Percentage for such Distribution
Date; for any Distribution Date subsequent to August 2009 to and including the
Distribution Date in August 2010, the Class A Percentage for such Distribution
Date plus 20% of the Subordinated Percentage for such Distribution Date; and for
any Distribution Date thereafter, the Class A Percentage for such Distribution
Date (unless on any of the foregoing Distribution Dates the Class A Percentage
exceeds the initial Class A Percentage, in which case the Class A Prepayment
Percentage for such Distribution Date will once again be 100%). Reduction of the
Class A Prepayment Percentage in accordance with the preceding sentence is
subject to the satisfaction of certain criteria (including the criteria set
forth in clause (ii) of the next paragraph (applied, for purposes of this
paragraph, by starting the application of clause (a) thereof with any
Distribution Date after August 2006 to and including the Distribution Date in
August 2007 and similarly moving back the application of clauses (b), (c) and
(d) thereof) and the criteria set forth in clause (iii) of the next paragraph)
regarding delinquency and loss experience of the Mortgage Loans.
Notwithstanding the foregoing, if on any Distribution Date (i) the Current
Subordination Level equals at least twice the Original Subordination Level, (ii)
cumulative Unrecovered Principal Amounts with respect to the Mortgage Loans have
not exceeded (a) if such Distribution Date is on or before the fifth anniversary
of the first Distribution Date, 35% of the initial Class B Principal Balance,
(b) if such Distribution Date is after the fifth but on or before the sixth
anniversary of the first Distribution Date, 40% of the initial Class B Principal
Balance, (c) if such Distribution Date is after the sixth but on or before the
seventh anniversary date of the first Distribution Date, 45% of the initial
Class B Principal Balance and (d) if such Distribution Date is after the seventh
anniversary date of the first Distribution Date, 50% of the initial Class B
Principal Balance, and (iii) over the prior three months, the average aggregate
outstanding principal balance of the Mortgage Loans delinquent 60 days or more
(including for this purpose any Mortgage Loans in foreclosure and Mortgage Loans
with respect to which the related Mortgage Property has been acquired by the
Trust Fund) has not exceeded 3.00% of the average aggregate outstanding
principal balance of all Mortgage Loans for such period, then the Class A
Prepayment Percentage for such Distribution Date will be as follows: (A) as to
any Distribution Date prior to the third anniversary of the first Distribution
Date, the Class A Percentage for such Distribution Date plus 50% of the
Subordinated Percentage for such Distribution Date; and (B) as to any
Distribution Date thereafter, the Class A Percentage for such Distribution Date.
The 'Current Subordination Level' in respect of a Distribution Date is the
percentage derived from dividing (i) the Class B Principal Balance (before
giving effect to the distributions and the allocation of the Unrecovered
Principal Amounts for such Distribution Date) by (ii) the Pool Scheduled
Principal Balance (before giving effect to the Formula Principal Distribution
Amount for such Distribution Date). The 'Original Subordination Level' is the
percentage derived from dividing (i) the Original Class B Principal Balance by
(ii) the Original Pool Scheduled Principal Balance, which percentage is 1.50%.
The 'Class B Formula Principal Distribution Amount' for a Distribution Date
is the sum of (i) the Subordinated Percentage of the Scheduled Formula Principal
Distribution Amount and (ii) the Subordinated Prepayment Percentage of the
Unscheduled Formula Principal Distribution Amount. The Subordinated Percentage
is equal to 100% less the Class A Percentage. The Subordinated Prepayment
Percentage is equal to 100% less the Class A Prepayment Percentage.
With respect to any Distribution Date, a 'Distribution Account Shortfall'
is the sum of (a) the amount, if any, by which (x) the aggregate of the full
amounts due to be distributed to the Class A Certificateholders pursuant to
clauses (i) and (ii) in the fourth paragraph under 'Distributions on the
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Certificates' above exceeds (y) the amount of funds (exclusive of funds
representing the Insured Payment in respect of such Distribution Date) that will
be on deposit in the Distribution Account in respect of such Distribution Date
and available to be distributed on the Class A Certificates, after taking into
account all deposits to be made to the Distribution Account on or prior to such
Distribution Date, including without limitation all Advances, all funds to be
transferred from the Reserve Fund and payments under the Limited Purpose Surety
Bond and (b) on the third Distribution Date that follows the month in which
there occurs the latest original scheduled maturity date of any Mortgage Loan
that was an Outstanding Mortgage Loan at any time during such month, the amount
necessary to reduce the Class A Principal Balance to zero (after giving effect
to all other distributions of principal to be made on such Distribution Date in
respect of the Class A Certificates).
Subject to the terms and conditions of the Certificate Insurance Policy,
the Insured Amount for a Distribution Date will include the Distribution Account
Shortfall, if any, for such Distribution Date. Insured Payments, if any, will be
distributed to the Class A Certificateholders on the related Distribution Date.
See 'The Certificate Insurance Policy and the Certificate Insurer' herein.
The Class A Pass-Through Rate for a Distribution Date will be equal to the
lesser of (i) LIBOR (as described below) plus 0.38% and (ii) the Weighted
Average Net Mortgage Rate for the Mortgage Loans as of the Due Date in the
preceding month (determined on the basis of the Principal Balances of the
Mortgage Loans after giving effect to the Monthly Payments due on or prior to
such Due Date and unscheduled principal payments received prior to such Due
Date). The Class B Pass-Through Rate will be similarly calculated, except that
the rate corresponding to clause (i) of the preceding sentence will equal LIBOR
plus 1.25%. The 'Net Mortgage Rate' of a Mortgage Loan is its Mortgage Rate less
the sum of (i) the Servicing Fee Rate of 0.25% and (ii) the Certificate
Insurance Policy annual premium rate (which, together with the Servicing Fee
Rate, will not exceed 0.38%). The 'Weighted Average Net Mortgage Rate' is the
weighted average of the Net Mortgage Rates for the Mortgage Loans.
Notwithstanding the foregoing, the 0.38% margin added to the applicable LIBOR
formula for the calculation of the Class A Pass-Through Rate will instead be
0.78% for each Distribution Date occurring at least 120 days after the first
Distribution Date in respect of which the option to purchase the Mortgage Loans,
described under 'Description of the Certificates -- Optional Termination', may
first be exercised by the Master Servicer. The Class A Pass-Through Rate thus
calculated will still be subject to the limitation of the Weighted Average Net
Mortgage Rate as described above in this paragraph. See also 'Servicing
Compensation and Payment of Expenses'.
Calculation of LIBOR. LIBOR with respect to any Distribution Date shall be
established by the Trustee and shall equal the arithmetic mean (rounded, if
necessary, to the nearest one-sixteenth of a percent, with a one thirty-second
being rounded upwards) of the offered rates for United States dollar deposits
for one month which appear on the Reuters Screen LIBO Page (as defined below) as
of 11:00 a.m., London time, on the second LIBOR Business Day prior to the
immediately preceding Distribution Date (but as of September 6, 1996 in the case
of the Distribution Date on September 16, 1996), provided that at least two such
offered rates appear on the Reuters Screen LIBO Page on such date. If fewer than
two offered rates appear, LIBOR will be determined on such date as described in
the paragraph below. 'Reuters Screen LIBO Page' means the display designated as
page 'LIBO' on the Reuters Monitor Money Rates Service (or such other page as
may replace the LIBO page on that service for the purpose of displaying London
interbank offered rates of major banks). 'LIBOR Business Day', for purposes of
the Agreement, is a day which is both a Business Day (as defined in the
Agreement) and a day on which banking institutions in the City of London,
England are not required or authorized by law to be closed.
If on such date fewer than two offered rates appear on the Reuters Screen
LIBO Page, the Trustee will request the principal London office of each of the
Reference Banks (which shall be major banks specified in, or determined by the
Master Servicer under, the Agreement that are engaged in transactions in the
London interbank market) to provide the Trustee with its offered quotation for
United States dollar deposits for one month to prime banks in the London
interbank market as of 11:00 a.m., London time, on such date. If at least two
Reference Banks provide the Trustee with such offered quotations, LIBOR on such
date will be the arithmetic mean (rounded, if necessary, to the nearest
one-sixteenth of a percent, with a one thirty-second being rounded upwards) of
all such
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quotations. If on such date fewer than two of the Reference Banks provide the
Trustee with such an offered quotation, LIBOR on such date will be the
arithmetic mean (rounded, if necessary, to the nearest one-sixteenth of a
percent, with a one thirty-second being rounded upwards) of the offered per
annum rates which one or more leading banks in The City of New York specified in
or determined by the Agreement are quoting as of 11:00 a.m., New York City time,
on such date to leading European banks for United States dollar deposits for one
month; provided, however, that if such banks are not quoting as described above,
LIBOR will be the LIBOR applicable to the immediately preceding Distribution
Date.
RESERVE FUND
The Reserve Fund will be an account established with the Trustee and will
initially be funded up to $250,000 (the 'Initial Amount') from the application
in the aggregate of the Available Distribution Amount pursuant to clause (v) in
the fourth paragraph under ' -- Distributions on the Certificates' above. On
each Distribution Date, funds, if any, in the Reserve Fund will be applied to
make any required Advance that the Master Servicer fails to make. Collections of
late Monthly Payments covered by any Advance from the Reserve Fund will be
applied to reinstate the amount in the Reserve Fund up to the Initial Amount.
Similarly, the application of the Available Distribution Amount pursuant to
clause (v) in the fourth paragraph under ' -- Distributions on the Certificates'
above may reinstate the amount in the Reserve Fund up to the Initial Amount.
SUBORDINATED CERTIFICATES
The rights of the Class B Certificateholders and the Class R
Certificateholders to receive distributions with respect to the Mortgage Loans
will be subordinated to the rights of the holders of Class A Certificates to the
extent described herein. This subordination is intended to enhance the
likelihood of regular receipt by the holders of Class A Certificates of the full
amount of monthly distributions due them and to protect the holders of Class A
Certificates against losses.
The protection afforded to the holders of the Class A Certificates by means
of the subordination, to the extent provided herein, of the Class B and Class R
Certificates as described above will be accomplished (i) by the application of
the Available Distribution Amount in the order specified under 'Distributions on
the Certificates' above and (ii) if the Available Distribution Amount on such
Distribution Date is not sufficient to permit the distribution of the entire
Class A Formula Principal Distribution Amount and all previously undistributed
Unrecovered Principal Amounts to the holders of Class A Certificates, by the
right of the holders of such Class A Certificates to receive any such shortfall
out of future distributions of Available Distribution Amounts that would
otherwise have been payable to the holders of the related Class B Certificates
and the Class R Certificate, as applicable. This subordination feature is
effected for the Class A Certificates by allocating principal among the
Certificates on a shifting-interest payment basis as described herein.
As described above, the distribution of principal to the holders of Class A
Certificates is intended to include the Principal Balance of each Mortgage Loan
that became a Liquidated Mortgage Loan during the related Principal Prepayment
Period. A 'Liquidated Mortgage Loan' is, generally, a defaulted Mortgage Loan as
to which all amounts that the Master Servicer believes can be recovered with
respect to such Mortgage Loan or the property acquired in respect thereof have
been recovered. If the Liquidation Proceeds, net of related Liquidation Expenses
and any Advances in respect thereof, allocable to principal from such Liquidated
Mortgage Loan are less than the principal balance of such Liquidated Mortgage
Loan, the deficiency may, in effect, be absorbed by the holders of the Class B
Certificates since a portion of future Available Distribution Amounts funded by
future principal collections on the Mortgage Loans, up to the aggregate amount
of such deficiencies, that would otherwise have been distributable to them may
be paid to the holders of the Class A Certificates or to the Certificate Insurer
or the Surety Bond Provider. No assurance can be given that the Class A
Certificates will not experience any losses.
If, due to losses and delinquencies, the Available Distribution Amount for
any Distribution Date is not sufficient to cover, in addition to interest
distributable to the holders of the Class A and Class B
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Certificates, the entire Formula Principal Distribution Amount and any
Unrecovered Principal Amounts distributable to the holders of such Class A
Certificates on such Distribution Date, then the aggregate of the Pool Scheduled
Principal Balance will have become less than the outstanding Principal Balance
of the Certificates. Such disproportionate reduction of the Pool Scheduled
Principal Balance reduces the protection afforded by the subordination of the
Class B Certificates. But for the effect of the Certificate Insurance Policy,
the holders of Class A Certificates will bear all losses and delinquencies on
the Mortgage Loans, and could incur losses on their investment, if the Pool
Scheduled Principal Balance becomes equal to or less than the aggregate
outstanding Principal Balance of such Class A Certificates.
CERTIFICATE INSURANCE POLICY
The Company will obtain the Certificate Insurance Policy, which will be
issued by the Certificate Insurer in favor of the Trustee and will provide for
payment of Insured Amounts (as defined herein) in accordance with the terms of
the Certificate Insurance Policy solely for the benefit of the holders of the
Class A Certificates. The Certificate Insurance Policy is non-cancelable. See
'The Certificate Insurance Policy and the Certificate Insurer' herein.
The Certificate Insurer is required to pay Insured Amounts to the Trustee
as paying agent on the later of the applicable Distribution Date or the Business
Day next following the Business Day on which the Certificate Insurer receives a
notice of Nonpayment (as defined herein) in accordance with and subject to the
terms of the Certificate Insurance Policy. The Certificate Insurer is not
responsible for the application of any Insured Amount subsequent to the receipt
thereof by the Trustee.
The Certificate Insurance Policy does not cover shortfalls, if any,
attributable to the liability of the Trust Fund, the REMIC or the Trustee for
withholding taxes, if any (including interest and penalties in respect of any
such liability). In addition, the Certificate Insurance Policy does not protect
against the adverse consequences of, and does not guarantee, any specified rate
of prepayments and does not protect against any risk other than Nonpayment,
including failure of the Trustee to make any Insured Payment (as defined herein)
due to holders of the Class A Certificates. In addition, the Certificate
Insurance Policy does not cover any Net Interest Shortfalls in respect of the
Class A Certificates. The Certificate Insurer has the right to terminate the
Trust Fund, causing the transfer of amounts in certain accounts and the
acceleration of the Class A Certificates, under certain circumstances if the
Pool Scheduled Principal Balance becomes less than 10% of the Pool Scheduled
Principal Balance as of the Cut-off Date.
ASSIGNMENT OF MORTGAGE LOANS
The Company will cause the Mortgage Loans to be assigned to the Trustee,
together with all principal and interest collected on or with respect to the
Mortgage Loans due after the Cut-off Date. The Trustee will, concurrently with
such assignment, authenticate and deliver the Certificates. Each Mortgage Loan
will be identified in a schedule appearing as an exhibit to the Agreement (the
'Mortgage Loan Schedule'). The Mortgage Loan Schedule specifies, among other
things, with respect to each Mortgage Loan, the original principal amount and
the unpaid principal balance as of the Cut-off Date; the Monthly Payment as of
the Cut-off Date; the months remaining to maturity of the Mortgage Loan; the
Margin; and the Mortgage Rate as of the Cut-off Date.
The Mortgage Notes and Mortgages and certain other documents (the 'Mortgage
Files') will be delivered by the Master Servicer to the Trustee or a custodian
of the Trustee within 21 days after the date of the initial issuance of the
Certificates, and at least 50% of the Mortgage Notes will have been delivered by
such issuance date. The Trustee, or its custodian, will review each Mortgage
File (or copies thereof) and if any document required to be included in any
Mortgage File is found to be defective in any material respect and such defect
is not cured within 60 days (or such longer period as may be agreed to by the
Trustee or its custodian) following notification thereof to the Master Servicer
by the Trustee, the Master Servicer will repurchase or substitute for such
Mortgage Loan in the manner set forth under 'The Pooling and Servicing
Agreement -- Assignment of Mortgage Assets -- Assignment of the Mortgage Loans'
in the Prospectus and as set forth in the Agreement.
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The assignments of the Mortgages to the Trustee will not be recorded.
However, if ML & Co.'s long-term unsecured debt is rated below A - by Standard &
Poor's or A3 by Moody's Investors Service, Inc., the Master Servicer will be
obligated to cause the assignments of the Mortgages to be recorded in the
appropriate public records unless there shall have been delivered an opinion of
counsel satisfactory to the Company, the Certificate Insurer and the Trustee
that such recording is not required to protect the Trustee's interest in the
Mortgage Loans. Any Mortgage Loans for which assignments are required to be
recorded but are not recorded within the time required under the Agreement shall
be repurchased as described under 'The Pooling and Servicing
Agreement -- Assignment of Mortgage Assets -- Assignment of the Mortgage Loans'
in the Prospectus and as set forth in the Agreement.
AMENDMENTS TO MORTGAGE LOAN DOCUMENTS
In connection with the servicing of the Mortgage Loans, the Master Servicer
may at the request of a borrower or at its own initiative agree to modify the
Mortgage Note or Mortgage relating to a Mortgage Loan or waive compliance by the
borrower with any provision of the Mortgage Note or Mortgage, provided that any
such modification or waiver (i) does not extend the scheduled maturity date of,
modify the interest rate payable under (except as required by law or as
contemplated by the Mortgage Note), or constitute a cancellation or discharge of
the outstanding principal balance under such Mortgage Loan, (ii) is not
inconsistent with the Master Servicer's then current practice respecting
comparable mortgage loans held in its own portfolio, or (iii) does not
materially and adversely affect the security afforded by the Mortgaged Property;
provided, however, that the Master Servicer may agree to changes to the terms of
a Mortgage Note or Mortgage which would otherwise be violative of clauses (i)
and (iii) above if (a) the Master Servicer has determined that such changes are
necessary to avoid prepayment of the related Mortgage Loan or to accommodate the
request of a borrower to extend the scheduled maturity date of the related
Mortgage Loan and such changes are consistent with prudent business practice,
(b) the Master Servicer repurchases the related Mortgage Loan for the Purchase
Price on the business day preceding the Distribution Date immediately following
the Principal Prepayment Period during which such changes were made and (c) such
changes and subsequent repurchase will not affect the status of the Trust Fund
as a REMIC as evidenced by an opinion of counsel. Any such repurchase will be
accomplished in the manner described under 'Description of the Certificates --
Assignment of Mortgage Loans' herein.
SERVICING AND INSURANCE
The Mortgage Loans will be serviced in accordance with procedures as
described generally in the Prospectus under 'The Pooling and Servicing
Agreement' and as set forth in the Agreement.
Except as described below, when any Mortgaged Property is conveyed by the
Mortgagor, the Master Servicer may, but is not obligated to, enforce any
due-on-sale clause contained in the Mortgage Loan, to the extent permitted under
applicable law and governmental regulations. Acceleration of Mortgage Loans as a
result of enforcement of such 'due-on-sale' provisions in connection with
transfers of the related Mortgaged Properties will affect the level of
prepayments on the Mortgage Loans, thereby affecting the weighted average life
of the Class A Certificates. See 'Yield and Prepayment Considerations' in the
Prospectus and 'Prepayment and Yield Considerations' herein. If the Master
Servicer elects not to enforce any due-on-sale clause or is prevented from
enforcing such due-on-sale clause under applicable law, the Master Servicer is
authorized to enter into an assumption and modification agreement with the
person to whom such Mortgaged Property has been or is about to be conveyed,
pursuant to which such person becomes liable under the Mortgage Loan.
The Master Servicer will be obligated to maintain a Standard Hazard
Insurance Policy with respect to each Mortgage Loan in an amount equal to the
replacement cost of the improvements securing such Mortgage Loan or the
outstanding principal balance of such Mortgage Loan, whichever is less. See 'The
Pooling and Servicing Agreement -- Hazard Insurance' in the Prospectus. No
Mortgage Pool Insurance Policy, Special Hazard Insurance Policy or Mortgagor
Bankruptcy Insurance will be maintained with respect to the Mortgage Pool, nor
will any Mortgage Loan included in the Mortgage Pool be subject to FHA Insurance
or VA Guaranty or, except for 2.68% of the Mortgage Loans (by Cut-off Date
Principal Balance), be covered by a Primary Mortgage Insurance Policy.
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SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer will be paid a monthly Servicing Fee (including any
sub-servicing compensation) with respect to each Mortgage Loan in an amount
equal to approximately one-twelfth of 0.25% of the principal balance of each
Mortgage Loan (the 'Servicing Fee Rate'). The Master Servicer will not receive
excess interest or excess proceeds as additional servicing compensation. See
'Certain Federal Income Tax Consequences' herein and in the Prospectus. The
Master Servicer will receive any net investment earnings on the Certificate
Account.
The Master Servicer is obligated to pay certain ongoing expenses associated
with the Mortgage Pool and incurred by the Master Servicer in connection with
its responsibilities under the Agreement. See 'The Pooling and Servicing
Agreement -- Servicing and Other Compensation and Payment of Expenses' in the
Prospectus for information regarding other possible compensation to the Master
Servicer and for information regarding expenses payable by the Master Servicer.
The Servicing Fee in respect of a month will be applied to make up any
Prepayment Interest Shortfall experienced on any prepayment of a Mortgage Loan
in such month in respect of which less than one month's interest is collected in
respect of such month. A 'Prepayment Interest Shortfall' in respect of a
Mortgage Loan is the amount by which interest paid by the Mortgagor in
connection with a principal prepayment of such Mortgage Loan is less than one
month's interest at the related Mortgage Rate on the amount prepaid. See
'Prepayment and Yield Considerations'. No assurance can be given that the amount
of the Servicing Fee will be sufficient for such purpose.
In addition, after giving effect to the preceding paragraph, the balance of
the Servicing Fee in respect of a month will be applied to make up the amount,
if any, by which (i) the interest accrued on the Certificates (calculated on the
assumption that the sum of the Class A Principal Balance and the Class B
Principal Balance is equal to the Pool Scheduled Principal Balance) at the
weighted-average of the applicable Class A Pass-Through Rate and the Class B
Pass-Through Rate for the related Accrual Period exceeds (ii) the interest due
on the Mortgage Loans on the Due Date in such Accrual Period (calculated on the
assumption that there were no prepayments of the Mortgage Loans during the month
preceding such Due Date). If the Class A and Class B Pass-Through Rates for an
Accrual Period are equal to the related Weighted Average Net Mortgage Rate, the
amount in clause (i) could in certain circumstances be greater than the amount
in clause (ii) because interest will accrue on the Mortgage Loans on the basis
of a year consisting of twelve 30-day months and interest on the Class A and
Class B Certificates will accrue on the basis of the actual number of days in
the Accrual Period (which could be more than 30) divided by 360. No assurance
can be given that the Servicing Fee will be sufficient to cover any such
differential. However, the Certificate Insurance Policy would, in effect, cover
such differential to the extent, if any, that it causes a Distribution Account
Shortfall after giving effect to the application of the Servicing Fee as
described in this paragraph. See 'The Certificate Insurance Policy and the
Certificate Insurer'.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
The Master Servicer may, in its sole discretion, purchase from the Trust
Fund any Mortgage Loan as to which a Monthly Payment is 90 or more days
delinquent. Any such purchase will be at a price equal to 100% of the Principal
Balance of such Mortgage Loan, plus any unreimbursed Advances in respect
thereof, together with accrued interest thereon at the Mortgage Rate from the
date through which interest was last paid by the related borrower or advanced by
the Master Servicer to the end of the Principal Prepayment Period preceding the
Distribution Date on which the proceeds of such purchase are required to be
distributed.
ADVANCES
The Master Servicer is obligated to make Advances of cash each month, which
will be part of the Available Distribution Amount and therefore also available
to the Class B Certificateholders, equal to the amount of the delinquent Monthly
Payments due on the immediately preceding Due Date and not paid. The Master
Servicer is under no obligation to make an Advance with respect to any Mortgage
Loan if the Master Servicer determines, in its sole discretion, that such
Advance will not be recoverable
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from future payments and collections on such Mortgage Loans based upon its
general experience in servicing mortgage loans, its assessment of the likelihood
of ultimate payment by the related Mortgagors and its estimate of Liquidation
Proceeds. The Master Servicer will be reimbursed for Advances out of the related
late collections and Liquidation Proceeds. The Master Servicer will be
reimbursed for Advances that it determines will not be recoverable out of
related late collections and Liquidation Proceeds ('Nonrecoverable Advances')
from funds in the Certificate Account. Advances are intended to maintain a
regular flow of scheduled interest payments to the Class A Certificateholders,
not to guarantee or insure against losses. Accordingly, any funds so advanced
are recoverable by the Master Servicer out of amounts received on Mortgage
Loans. Advances are required to be deposited in the Certificate Account by the
second Business Day prior to the related Distribution Date. The Master Servicer
may make an Advance (i) out of its own funds, (ii) out of funds in the
Certificate Account that are not part of the Available Distribution Amount for
the related Distribution Date or (iii) by any combination of clauses (i) and
(ii). Advances made pursuant to clause (ii) must be restored from the Master
Servicer's funds when such amounts are required to be distributed as part of an
Available Distribution Amount.
OPTIONAL TERMINATION
The Master Servicer may, at its option, and, in the absence of the exercise
thereof by the Master Servicer, the Certificate Insurer may, at its option,
repurchase from the Mortgage Pool all Mortgage Loans remaining outstanding on
any Distribution Date when the Pool Scheduled Principal Balance is less than 10%
of the Pool Scheduled Principal Balance as of the Cut-off Date. The repurchase
price to be distributed to Certificateholders will equal the greatest of (i) the
aggregate Principal Balances of the Mortgage Loans plus accrued interest thereon
at the related Net Mortgage Rate, plus the appraised value of any property
acquired in respect of a Mortgage Loan, less, if the Master Servicer is the
purchaser, any unreimbursed advances previously made by the Master Servicer with
respect to an acquired property, (ii) the fair market value of the Mortgage
Loans and any property acquired in respect of a Mortgage Loan (as determined by
the Master Servicer) less, if the Master Servicer is the purchaser, any
unreimbursed advances previously made by the Master Servicer with respect to an
acquired property and (iii) the sum of (a) the aggregate of the Class A
Principal Balance together with one month's interest at the Class A Pass-Through
Rate and any Class A Unpaid Interest Shortfall and (b) the sum of the Class B
Principal Balance together with one month's interest at the Class B Pass-Through
Rate and any previously undistributed shortfall in interest due on the Class B
Certificates on prior Distribution Dates. The repurchase price will be
distributed to Certificateholders in the month following the month of
repurchase, first to the Class A Certificateholders to the extent of the amount
in clause (iii)(a) and then in accordance with the Agreement.
MISCELLANEOUS
In determining the percentage of the Trust Fund evidenced by a Certificate
for purposes of determining the consent of Certificateholders or other action by
Certificateholders as discussed under 'The Pooling and Servicing
Agreement -- Amendment' in the Prospectus, such percentage shall be based upon
the relative outstanding Principal Balances of the Certificates. Amendments to
the Agreement requiring the consent of Certificateholders shall require only the
consent of the holders of Certificates of each Class affected thereby,
evidencing, as to such Class, Percentage Interests aggregating at least 66%.
Amendments to the Agreement may be made only with the prior written consent of
the Certificate Insurer and the Surety Bond Provider. Certain other actions
under the Agreement also require the prior written consent of the Certificate
Insurer and the Surety Bond Provider. The Certificate Insurer and the Surety
Bond Provider may direct the Trustee to waive any default by the Master Servicer
under the Agreement, except that a default in making any required distribution
on any Certificate may only be waived by the affected Certificateholder. Upon an
Event of Default, the Trustee may terminate the rights of the Master Servicer
only with the consent of the Certificate Insurer and the Surety Bond Provider,
and shall terminate the Master Servicer at the direction of the Certificate
Insurer and the Surety Bond Provider.
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A successor Master Servicer, if any, will become obligated to purchase
Convertible Mortgage Loans that convert to a fixed rate after such successor
becomes the Master Servicer only if such successor Master Servicer, at its
discretion, elects to obligate itself to make such purchases. A terminated
Master Servicer (including the initial Master Servicer) will not be obligated to
make such purchases after its termination as Master Servicer.
REGISTRATION OF CLASS A CERTIFICATES
The Class A Certificates will initially be registered in the name of Cede,
the nominee of DTC. Certificateholders may hold their Certificates through DTC
(in the United States) or CEDEL or Euroclear (each as defined below) (in Europe)
if they are participants of such systems, or indirectly through organizations
that are participants in such systems.
Cede, as nominee for DTC, will hold the global Class A Certificates. CEDEL
and Euroclear will hold omnibus positions on behalf of the CEDEL Participants
and the Euroclear Participants (each as defined below), respectively, through
customers' securities accounts in CEDEL's and Euroclear's names on the books of
their respective depositaries (collectively, the 'Depositaries') which in turn
will hold such positions in customers' securities accounts in the Depositaries'
names on the books of DTC.
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
1934 Act. DTC accepts securities for deposit from its participating
organizations ('Participants') and facilitates the clearance and settlement of
securities transactions between Participants in such securities through
electronic book-entry changes in accounts of Participants, thereby eliminating
the need for physical movement of certificates. Participants include securities
brokers and dealers, banks and trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system is also
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
the ordinary way in accordance with their applicable rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant CEDEL
Participant or Euroclear Participant on such business day. Cash received in
CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL or
Euroclear cash account only as of the business day following settlement in DTC.
Certificate Owners who are not Participants but desire to purchase, sell or
otherwise transfer ownership of Class A Certificates may do so only through
Participants (unless and until Definitive Class A Certificates, as defined
below, are issued). In addition, Certificate Owners will receive all
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distributions of principal of and interest on the Class A Certificates from the
Trustee through DTC and Participants. Certificate Owners will not receive or be
entitled to receive certificates representing their respective interests in the
Class A Certificates, except under the limited circumstances described below.
Unless and until Definitive Class A Certificates (as defined below) are
issued, it is anticipated that the only 'Certificateholder' of the Class A
Certificates will be Cede, as nominee of DTC. Certificate Owners will not be
Certificateholders as that term is used in the Agreement. Certificate Owners are
only permitted to exercise the rights of Certificateholders indirectly through
Participants and DTC.
While the Class A Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations, DTC is required to make
book-entry transfers among Participants on whose behalf it acts with respect to
the Class A Certificates and is required to receive and transmit distributions
of principal of, and interest on, the Class A Certificates. Unless and until
Definitive Class A Certificates are issued, Certificate Owners who are not
Participants may transfer ownership of Class A Certificates only through
Participants by instructing such Participants to transfer Class A Certificates,
by book-entry transfer, through DTC for the account of the purchasers of such
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Class A Certificates will be executed through DTC and the accounts
of the respective Participants at DTC will be debited and credited.
Class A Certificates will be issued in registered form to Certificate
Owners, or their nominees, rather than to DTC (such Certificates being referred
to herein as 'Definitive Class A Certificates'), only if (i) DTC or the Company
advises the Trustee in writing that DTC is no longer willing or able to
discharge properly its responsibilities as nominee and depository with respect
to the Class A Certificates and the Company or the Trustee is unable to locate a
qualified successor, (ii) the Company, at its sole option and with the consent
of the Trustee, elects to terminate the book-entry system through DTC or (iii)
after the occurrence of an Event of Default, DTC, at the direction of
Certificate Owners having a majority in Percentage Interests of the Class A
Certificates together, advises the Trustee in writing that the continuation of a
book-entry system through DTC (or a successor thereto) to the exclusion of any
physical certificates being issued to Certificate Owners is no longer in the
best interest of Certificate Owners. Upon issuance of Definitive Class A
Certificates to Certificate Owners, such Certificates will be transferable
directly (and not exclusively on a book-entry basis) and registered holders will
deal directly with the Trustee with respect to transfers, notices and
distributions.
DTC has advised the Company and the Trustee that, unless and until
Definitive Class A Certificates are issued, DTC will take any action permitted
to be taken by a holder of Class A Certificates under the Agreement only at the
direction of one or more Participants to whose DTC account the Class A
Certificates are credited. DTC has advised the Company that DTC will take such
action with respect to any Percentage Interests of the Class A Certificates only
at the direction of and on behalf of such Participants with respect to such
Percentage Interests of the Class A Certificates. DTC may take actions, at the
direction of the related Participants, with respect to some Class A Certificates
which conflict with actions taken with respect to other Class A Certificates.
Cedel Bank, societe anonyme ('CEDEL') is incorporated under the laws of
Luxembourg as a professional depository. CEDEL holds securities for its
participating organizations ('CEDEL Participants') and facilitates the clearance
and settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in CEDEL in any of 28 currencies, including United States dollars. CEDEL
provides to its CEDEL Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. CEDEL interfaces with domestic
markets in several countries. As a professional depository, CEDEL is subject to
regulation by the Luxembourg Monetary Institute. CEDEL Participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations and may include the underwriters of any class of
Certificates. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
S-47
<PAGE>
<PAGE>
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ('Euroclear Participants') and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in any of 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. The Euroclear
System is operated by Morgan Guaranty Trust Company of New York, Brussels,
Belgium office (the 'Euroclear Operator' or 'Euroclear'), under contract with
Euroclear Clearance System, S.C., a Belgian cooperative corporation (the
'Euroclear Cooperative'). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Euroclear
Cooperative. The Euroclear Cooperative establishes policy for the Euroclear
System on behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to the Euroclear System is also
available to other firms that clear through or maintain a custodial relationship
with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the 'Terms and Conditions'). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants and has no record
of or relationship with persons holding through Euroclear Participants.
Distributions with respect to Certificates held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See 'Certain Federal Income Tax Consequences'. CEDEL or the Euroclear Operator,
as the case may be, will take any other action permitted to be taken by a
Certificate Owner under the Agreement on behalf of a CEDEL Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to its Depositary's ability to effect such actions on its behalf
through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Class A Certificates among participants of
DTC, CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
In the event that any of DTC, Cedel or Euroclear should discontinue its
services, the Company would seek an alternative depositary (if available) or
cause the issuance of Definitive Class A Certificates to Certificate Owners or
their nominees in the manner described above.
Issuance of the Class A Certificates in book-entry form rather than as
physical certificates may adversely affect the liquidity of the Class A
Certificates in the secondary market and the ability of Certificate Owners to
pledge them. In addition, since distributions on the Class A Certificates will
be made by the Trustee to DTC and DTC will credit such distributions to the
accounts of its Participants, which will further credit them to the accounts of
indirect participants of Certificate Owners, Certificate Owners may experience
delays in the receipt of such distributions.
S-48
<PAGE>
<PAGE>
THE TRUSTEE
Bankers Trust Company of California, N.A., a national banking association,
will act as Trustee of the Trust Fund. The mailing address of the Trustee's
corporate trust office is 3 Park Plaza, 16th Floor, Irvine, California 92714 and
its telephone number is (714) 253-7575.
The Trustee may resign at any time, in which event the Master Servicer will
be obligated to appoint a successor Trustee. The Master Servicer may also remove
the Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement or if the Trustee becomes insolvent. Upon becoming aware of such
circumstances, the Master Servicer will be obligated to appoint a successor
Trustee. If a downgrading in the credit rating of the Trustee would materially
adversely affect the rating of the Class A Certificates, the Master Servicer,
under certain circumstances, may remove the Trustee and appoint a successor
Trustee. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
of the successor Trustee.
S-49
<PAGE>
<PAGE>
THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer for
inclusion in this Prospectus Supplement.
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of the Certificate Insurance Policy, unconditionally and
irrevocably guarantees that an amount equal to each full and complete Insured
Amount will be received by the Trustee for distribution to holders of the Class
A Certificates in accordance with the terms of the Agreement (as defined below).
The Certificate Insurer's obligations under the Certificate Insurance Policy
with respect to a particular Insured Amount shall be finally and completely
discharged to the extent funds equal to the applicable Insured Amount are
received from the Certificate Insurer by the Trustee. The Certificate Insurer is
not responsible for the application of any Insured Amount subsequent to the
receipt thereof by the Trustee. Insured Amounts shall be paid only at the time
set forth in the Certificate Insurance Policy.
Notwithstanding the foregoing paragraph, the Certificate Insurance Policy
does not cover shortfalls, if any, attributable to the liability of the Trust
Fund or the Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability). The Certificate Insurance Policy
does not protect against the adverse consequences of, and does not guarantee,
any specified rate of prepayments nor protect against any risk other than
Nonpayment, including failure of the Trustee to make any Insured Payment due to
holders of the Class A Certificates. In addition, the Certificate Insurance
Policy does not cover any Net Interest Shortfalls in respect of the Class A
Certificates.
In the event the Trustee has notice that any payment of principal or
interest which has been made to a holder of the Class A Certificates by or on
behalf of the Trustee has been deemed a preferential transfer and theretofore
recovered from its registered owner pursuant to the United States Bankruptcy
Code in accordance with a final, nonappealable order of a court of competent
jurisdiction, the Certificate Insurer will make payment to the Trustee in
respect thereof.
The Certificate Insurer will pay any amount payable under the Certificate
Insurance Policy from its own funds on the later of (a) the Business Day next
following the Business Day on which the Certificate Insurer receives a notice of
Nonpayment or (b) the applicable Distribution Date. Such payments shall be made
only upon presentation of an instrument in form and substance satisfactory to
the Certificate Insurer who shall be subrogated to all rights of the holders of
the Class A Certificates to payment on the Class A Certificates to the extent of
the Insured Payments so made. Once payments of the Insured Amounts have been
made to the Trustee, the Certificate Insurer shall have no further obligation in
respect of such Insured Amounts.
As used in the Certificate Insurance Policy, the following terms have the
following meanings:
'Agreement' means the Pooling and Servicing Agreement dated as of
August 1, 1996, by and among the Company, the Master Servicer and the
Trustee without regard to any amendment or supplement thereto without the
prior consent of the Certificate Insurer.
'Business Day' means any day other than a Saturday, Sunday or any day
on which national banks in the States of New York, California or Florida
are authorized or obligated by law or executive order to close.
'Insured Amount' and 'Nonpayment' mean with respect to any
Distribution Date the sum of (i) the Distribution Account Shortfall for
such Distribution Date and (ii) any Preference Amount.
'Insured Payment' means with respect to any Distribution Date the
Insured Amount for such Distribution Date paid to the Trustee by the
Certificate Insurer.
'Preference Amount' means any payment of principal or interest which
has been made to a holder of the Class A Certificates by or on behalf of
the Trustee which has been deemed a preferential transfer and theretofore
recovered from its registered owner pursuant to the United States
Bankruptcy Code in accordance with a final, nonappealable order of a court
of competent jurisdiction.
The Certificate Insurance Policy is being issued under and pursuant to, and
shall be construed under, the laws of the State of California, without giving
effect to the conflict of laws principles thereof.
S-50
<PAGE>
<PAGE>
In the event that AMBAC Indemnity Corporation were to become insolvent, any
claims arising under the policy would be excluded from coverage by the
California Insurance Guaranty Association established pursuant to the laws of
the State of California.
The insurance provided by the Certificate Insurance Policy is not covered
by the Property/Casualty Insurance Security Fund specified in Article 76 of the
New York Insurance Law.
The Certificate Insurance Policy is not cancelable for any reason. The
premiums on the Certificate Insurance Policy are not refundable for any reason
including payment, or provision being made for payment, prior to the maturity of
the Class A Certificates.
AMBAC Indemnity Corporation ('AMBAC') is a Wisconsin-domiciled stock
insurance corporation regulated by the Office of the Commissioner of Insurance
of the State of Wisconsin and licensed to do business in 50 states, the District
of Columbia, the Commonwealth of Puerto Rico, and Guam. AMBAC primarily insures
newly issued municipal bonds. AMBAC is a wholly owned subsidiary of AMBAC Inc.,
a 100% publicly held company. Moody's, Standard & Poor's and Fitch Investors
Service, L.P. have each assigned a triple-A claims-paying ability rating to
AMBAC.
AMBAC has entered into pro rata reinsurance agreements under which a
percentage of the insurance underwritten pursuant to certain of AMBAC's
municipal bond insurance programs has been and will be assumed by a number of
foreign and domestic unaffiliated reinsurers.
The following table sets forth AMBAC's capitalization as of December 31,
1993, December 31, 1994, December 31, 1995 and June 30, 1996, respectively, on
the basis of generally accepted accounting principles.
AMBAC INDEMNITY CORPORATION
CAPITALIZATION TABLE
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1993 1994 1995 1996
------------ ------------ ------------ -----------
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Unearned premiums..................................... $ 785 $ 840 $ 906 $ 937
Other liabilities..................................... 192 136 295 286
Stockholder's equity:
Common stock..................................... 82 82 82 82
Additional paid-in capital....................... 444 444 481 514
Unrealized gain (loss) on bonds; net of tax...... 68 (46) 87 34
Retained earnings................................ 668 782 907 912
------------ ------------ ------------ -----------
Total stockholder's equity............................ $1,262 $1,262 $1,557 $ 1,542
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
Total liabilities and stockholder's equity............ $2,239 $2,238 $2,758 $ 2,765
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
</TABLE>
- ------------
* The financial information presented has been adjusted to reflect the effects
of Statement of Financial Accounting Standards No. 113 'Accounting and
Reporting for Reinsurance of Short Duration and Long Duration Contracts'
which AMBAC adopted during 1993.
------------------------
For additional financial information concerning AMBAC, see the audited
financial statements of AMBAC included as Appendix A of this Prospectus
Supplement and the unaudited financial statements of AMBAC included as Appendix
B of this Prospectus Supplement.
Effective December 31, 1993, AMBAC adopted Statement of Financial
Accounting Standards No. 115, 'Accounting for Certain Debt and Equity
Securities' ('Statement 115') with all investments designated as
available-for-sale. As required under Statement 115, prior years' financial
statements have not been restated. The cumulative effect of adopting Statement
115 as of December 31, 1993 was to
S-51
<PAGE>
<PAGE>
increase AMBAC's stockholder's equity $63.6 million, net of tax. The adoption of
Statement 115 had no effect on earnings.
AMBAC makes no representation regarding the Certificates or the
advisability of investing in the Certificates and makes no representation
regarding, nor has it participated in the preparation of, the Prospectus or the
Prospectus Supplement other than the information supplied by AMBAC and presented
under the heading 'The Certificate Insurance Policy and the Certificate Insurer'
and in Appendix A and Appendix B.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the assets of the Trust Fund (exclusive
of the rights in respect of the Additional Collateral) as a REMIC for federal
income tax purposes. The Class A Certificates and the Class B Certificates will
be regular interests in the Trust Fund (exclusive of the rights in respect of
the Additional Collateral) and the Class R Certificate will be the residual
interest in the Trust Fund (exclusive of the rights in respect of the Additional
Collateral).
The Class A Certificates may be treated as having been issued with original
issue discount. The prepayment assumption that will be used for purposes of
computing original issue discount, if any, for federal income tax purposes is a
CPR of 15%. No representation is made that the Mortgage Loans will, in fact,
prepay at this or any other rate.
See 'Certain Federal Income Tax Consequences' in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ('ERISA'),
imposes certain restrictions on employee benefit plans that are subject to ERISA
('Plans') and on persons who are fiduciaries with respect to such Plans. See
'ERISA Considerations' in the Prospectus.
The U.S. Department of Labor has granted to Merrill Lynch, Pierce, Fenner &
Smith Incorporated (the 'Underwriter') an administrative exemption (Prohibited
Transaction Exemption 90-29, Exemption Application No. D-8012, Fed. Reg. 21459
(1990)) (the 'Exemption') from certain of the prohibited transaction rules of
ERISA with respect to the initial purchase, the holding and the subsequent
resale by Plans of certificates representing interests in asset-backed
pass-through trusts that consist of certain receivables, loans and other
obligations that meet the conditions and requirements of the Exemption. The
receivables covered by the Exemption apply to mortgage loans such as the
Mortgage Loans in the Trust Fund. The Exemption will apply to the acquisition,
holding and resale of the Class A Certificates by a Plan, provided that certain
conditions (certain of which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply to
the Class A Certificates are the following:
(1) The acquisition of the Class A Certificates by a Plan is on terms
(including the price for the Class A Certificates) that are at least as
favorable to the Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Class A Certificates
acquired by the Plan are not subordinate to the rights and interests
evidenced by other certificates of the Trust Fund;
(3) The Class A Certificates acquired by the Plan have received a
rating at the time of such acquisition that is in one of the three highest
generic rating categories from either Standard & Poor's Ratings Services,
Moody's Investors Service, Inc., Duff & Phelps Inc. or Fitch Investors
Service, Inc.;
(4) The Trustee is not an affiliate of any member of the Restricted
Group (as defined below);
(5) The sum of all payments made to the Underwriter in connection with
the distribution of the Class A Certificates represents not more than
reasonable compensation for underwriting the Class A Certificates. The sum
of all payments made to and retained by the Company pursuant to the sale of
the Class A Certificates to the Trust Fund represents not more than the
fair market value of such Mortgage Loans. The sum of all payments made to
and retained by the Master
S-52
<PAGE>
<PAGE>
Servicer represents not more than reasonable compensation for the Master
Servicer's services under the Agreement and reimbursement of the Master
Servicer's reasonable expenses in connection therewith; and
(6) The Plan investing in the Class A Certificates is an 'accredited
investor' as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933, as amended.
Moreover, the Exemption would provide relief from certain
self-dealing/conflict of interest prohibited transactions only if, among other
requirements, (i) in the case of the acquisition of Class A Certificates in
connection with the initial issuance, at least fifty (50) percent of the Class A
Certificates are acquired by persons independent of the Restricted Group (as
defined below), (ii) the Plan's investment in Class A Certificates does not
exceed twenty-five (25) percent of all of the Class A Certificates outstanding
at the time of the acquisition and (iii) immediately after the acquisition, no
more than twenty-five (25) percent of the assets of the Plan are invested in
certificates representing an interest in one or more trusts containing assets
sold or serviced by the same entity. The Exemption does not apply to Plans
sponsored by the Company, the Underwriter, the Trustee, the Master Servicer, any
obligor with respect to Mortgage Loans included in the Trust Fund constituting
more than five percent of the aggregate unamortized principal balance of the
assets in the Trust Fund, or any affiliate of such parties (the 'Restricted
Group').
The Company believes that the Exemption will apply to the acquisition and
holding by Plans of the Class A Certificates sold by the Underwriter and that
all conditions of the Exemption other than those within the control of the
investors have been met. In addition, as of the date hereof, no obligor with
respect to Mortgage Loans included in the Trust Fund constitutes more than five
percent of the aggregate unamortized principal balance of the assets of the
Trust Fund.
Employee benefit plans that are governmental plans (as defined in section
3(32) of ERISA) and certain church plans (as defined in section 3(33) of ERISA)
are not subject to ERISA requirements. Accordingly, assets of such plans may be
invested in the Class A Certificates without regard to the ERISA restrictions
described above, subject to applicable provisions of other federal and state
laws.
Any Plan fiduciary who proposes to cause a Plan to purchase Class A
Certificates should consult with its own counsel with respect to the potential
consequences under ERISA and the Code, of the Plan's acquisition and ownership
of Class A Certificates. Assets of a Plan or individual retirement account
should not be invested in the Class A Certificates unless it is clear that the
assets of the Trust Fund will not be plan assets or unless it is clear that the
Exemption or a prohibited transaction class exemption will apply and exempt all
potential prohibited transactions.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of the
Class A Certificates will be applied by the Company to the purchase price of the
Mortgage Loans and expenses connected with pooling the Mortgage Loans and
issuing the Certificates.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated, the sole underwriter,
has agreed, on the terms and conditions of the Underwriting Agreement and a
Terms Agreement (together, the 'Underwriting Agreement') relating to the Class A
Certificates, to purchase the entire principal amount of the Class A
Certificates offered hereby.
In the Underwriting Agreement, the Underwriter has agreed, subject to the
terms and conditions set forth therein, to purchase all the Class A Certificates
offered hereby if any Class A Certificates are purchased.
The distribution of the Class A Certificates by the Underwriter may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined, in each case, at the time of sale. The
Underwriter may effect such transactions by selling the Class A Certificates to
or through dealers, and such dealers may receive compensation in the form of
underwriting discounts,
S-53
<PAGE>
<PAGE>
concessions or commissions from the Underwriter. In connection with the sale of
the Class A Certificates, the Underwriter may be deemed to have received
compensation from the Company in the form of underwriting compensation. The
Underwriter and any dealers that participate with the Underwriter in the
distribution of the Class A Certificates may be deemed to be underwriters and
any commissions received by them and any profit on the resale of the Class A
Certificates positioned by them may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, or contribute to payments the Underwriter may be
required to make in respect thereof.
All of the Mortgage Loans evidenced by the Certificates will have been
acquired by the Company in a privately negotiated transaction with MLCC.
The Underwriter has represented and agreed that (i) it has not offered or
sold and, prior to the expiration of the period of six months from the Closing
Date, will not offer or sell any Class A Certificates to persons in the United
Kingdom, except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulation 1995; (ii) it
has complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the Class A
Certificates in, from or otherwise involving the United Kingdom; and (iii) it
has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issue of the Class A
Certificates to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995,
or is a person to whom such document may otherwise lawfully be issued or passed
on.
EXPERTS
The consolidated balance sheets of AMBAC Indemnity Corporation at December
31, 1994 and 1995, and the consolidated statements of operations, stockholder's
equity and cash flows of AMBAC Indemnity Corporation for each of the years in
the three-year period ended December 31, 1995, appearing in Appendix A to this
Prospectus Supplement, have been included herein in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, included in
Appendix A to this Prospectus Supplement, and upon the authority of said firm as
experts in accounting and auditing.
As discussed in note 2 to the consolidated financial statements, AMBAC
Indemnity Corporation adopted Financial Accounting Standards Board's Statements
of Financial Accounting Standards No. 109, 'Accounting for Income Taxes,' No.
115, 'Accounting for Certain Investments in Debt and Equity Securities', No.
106, 'Employers' Accounting for Postretirement Benefits Other Than Pensions',
and No. 112, 'Employers' Accounting for Postemployment Benefits' in 1993.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company and the
Underwriter by Brown & Wood LLP, New York, New York. The material federal income
tax consequences of the Certificates will be passed upon for the Company by
Brown & Wood LLP.
CERTIFICATE RATING
It is a condition to the issuance of the Certificates that the Class A
Certificates be rated AAAr by Standard & Poor's and Aaa by Moody's. Standard &
Poor's assigns the additional symbol of 'r' to highlight classes of securities
that Standard & Poor's believes may experience high volatility or high
variability in expected returns due to non-credit risks; however, the absence of
an 'r' symbol should not be taken as an indication that a class will exhibit no
volatility or variability in total return.
S-54
<PAGE>
<PAGE>
The ratings of Standard & Poor's and Moody's do not represent any
assessment of the ability of the Master Servicer to purchase any Converting
Mortgage Loan. If the Master Servicer fails to purchase a Converting Mortgage
Loan that it is obligated to purchase, investors in the Class A Certificates
might experience a lower than anticipated yield. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the rating agency. The ratings assigned to the Class A
Certificates address the likelihood of the receipt of distributions due on the
Class A Certificates according to their terms. The ratings take into
consideration, among other things, the credit quality of the Mortgage Loans, the
structural and legal aspects associated with the Class A Certificates, and the
claims-paying ability of the Certificate Insurer. An adverse change in any of
such factors or in other factors may be a basis for the downward revision or
withdrawal of the rating of the Class A Certificates. The ratings assigned to
the Class A Certificates do not represent any assessment of the likelihood that
principal prepayments might differ from those originally anticipated. The rating
does not address the possibility that the holders of the Class A Certificates
might suffer a lower than anticipated yield. There can be no assurance as to
whether any other rating agency will rate the Class A Certificates, or if it
does, what rating it will assign to the Class A Certificates.
S-55
<PAGE>
<PAGE>
INDEX OF PRINCIPAL TERMS
<TABLE>
<CAPTION>
PAGE
-----------------
<S> <C>
Accrual Period.................... S-10, S-36
Additional Collateral............. S-7
Additional Collateral Loans....... S-7, S-24
Advances.......................... S-14
Agreement......................... S-5, S-17
AMBAC............................. S-51
Available Distribution Amount..... S-10
Business Day...................... S-50
Cede.............................. S-15, S-35
CEDEL............................. S-48
CEDEL Participants................ S-48
Certificate Account............... S-17
Certificate Insurance Policy...... Cover
Certificate Insurer............... Cover
Certificate Owners................ S-3, S-15
Certificates...................... Cover
Class A Certificates.............. S-4
Class A Formula Principal
Distribution Amount............. S-38
Class A Percentage................ S-38
Class A Prepayment Percentage..... S-39
Class A Unpaid Interest
Shortfall....................... S-10, S-36
Class B Formula Principal
Distribution Amount............. S-38
Class B Loss Amount............... S-38
Closing Date...................... S-10
Code.............................. S-14
Company........................... Cover, S-4
Constructive Loan-to-Value
Ratio........................... S-9, S-19
Conversion Price.................. S-2, S-6
Convertible Mortgage Loans........ S-2
Converting Mortgage Loan.......... S-2, S-6
Cooperatives...................... S-17
Co-op Shares...................... S-17
CPR............................... S-32
Current Subordination Level....... S-39
Definitive Class A Certificates... S-47
Depositaries...................... S-46
Determination Date................ S-35
Distribution Account.............. S-17
Distribution Account Shortfall.... S-39
Distribution Date................. S-2, S-10, S-35
DTC............................... S-15, S-35
Due Date.......................... S-2, S-5
Equity Access'r' credit
accounts........................ S-23
Equity Access'r' loans............ S-23
<CAPTION>
PAGE
-----------------
<S> <C>
ERISA............................. S-15, S-52
Euroclear......................... S-48
Euroclear Cooperative............. S-48
Euroclear Operator................ S-48
Euroclear Participants............ S-48
Exemption......................... S-52
Formula Excess Interest Amount.... S-38
Formula Principal Distribution
Amount.......................... S-37
Index............................. S-26
Index Convertible Mortgage
Loans........................... S-2
Insured Amount.................... S-50
Insured Payment................... S-50
Initial Amount.................... S-12, S-41
Interest Adjustment Date.......... S-5
LIBOR............................. S-4
LIBOR Business Day................ S-40
Limited Purpose Surety Bond....... S-8
Liquidated Mortgage Loan.......... S-38, S-41
LTV............................... S-24
Margin............................ S-5
Master Servicer................... Cover, S-17
Maximum Mortgage Rate............. S-6
ML & Co........................... S-23
MLCC.............................. Cover, S-4
Monthly Payments.................. S-5
Moody's........................... S-15
Mortgage Files.................... S-42
Mortgage Loans.................... Cover, S-5
Mortgage Loan Schedule............ S-42
Mortgage 100 Loans................ S-24
Mortgage Note..................... S-17
Mortgage Pool..................... Cover, S-10, S-17
Mortgage Rate(s).................. S-5, S-18
Mortgaged Properties.............. S-17
Net Interest Shortfall............ S-38
Net Mortgage Rate................. S-4, S-40
Net Prepayment Interest
Shortfall....................... S-38
Nonpayment........................ S-50
Nonrecoverable Advances........... S-45
Non-Resident Alien Loans.......... S-25
One-Month LIBOR Index............. S-6, S-26
Original Subordination Level...... S-39
Outstanding Mortgage Loan......... S-37
Parent Power Loans................ S-24
Participants...................... S-46
Percentage Interest............... S-10
Plans............................. S-52
</TABLE>
S-56
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----------------
<S> <C>
Pool Scheduled Principal
Balance......................... S-12
Preference Amount................. S-50
Prepayment Interest Shortfall..... S-44
Prime Index....................... S-5
Principal Balance................. S-38
Principal Prepayment Period....... S-37
Prospectus........................ Cover
Record Date....................... S-35
Relief Act Reduction.............. S-38
REMIC............................. S-2
Restricted Group.................. S-53
Reuters Screen LIBO Page.......... S-40
Scheduled Formula Principal
Distribution Amount............. S-37
Servicing Fee Rate................ S-44
Six-Month LIBOR Index............. S-6
Standard & Poor's................. S-15
Statement 115..................... S-51
Subordinated Certificates......... Cover, S-4
<CAPTION>
PAGE
-----------------
<S> <C>
Subordinated Percentage........... S-39
Subordinated Prepayment
Percentage...................... S-39
Sub-servicers..................... S-17
Surety Bond Provider.............. S-7
Terms and Conditions.............. S-48
Treasury Index.................... S-6, S-26
Trust Fund........................ S-10
Trustee........................... S-5, S-17
Underwriter....................... S-3, S-4, S-52
Underwriting Agreement............ S-53
Unrecovered Principal Amount...... S-37
Unreimbursed Insurer Amounts...... S-11, S-36
Unscheduled Formula Principal
Distribution Amount............. S-37
Weighted Average Net Mortgage
Rate............................ S-4, S-40
</TABLE>
S-57
<PAGE>
<PAGE>
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<PAGE>
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered MLCC Mortgage
Investors, Inc. Mortgage Loan Asset Backed Pass-Through Certificates, Series
1996-C, Class A (the 'Global Securities') will be available only in book-entry
form. Investors in the Global Securities may hold such Global Securities through
any of DTC, CEDEL or Euroclear. The Global Securities will be tradeable as home
market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds. Capitalized
terms used but not defined in this Annex I have the meanings assigned to them in
the Prospectus Supplement and the Prospectus.
Secondary market trading between investors holding Global Securities
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Global Securities will be effected on a
delivery-against-payment basis through the respective Depositaries of CEDEL and
Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to similar issues of pass-through
certificates. Investors' securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no 'lock-up' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payments in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to similar issues
of pass-through certificates in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. CEDEL or Euroclear
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against
I-1
<PAGE>
<PAGE>
payment. Payment will include interest accrued on the Global Securities from and
including the last coupon payment date to and excluding the settlement date.
Payment will then be made by the respective Depositary to the DTC Participant's
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the CEDEL Participant's or Euroclear Participant's account. The Global
Securities credit will appear the next day (European time) and the cash debit
will be back-valued to, and the interest on the Global Securities will accrue
from, the value date (which would be the preceding day when settlement occurred
in New York). If settlement is not completed on the intended value date (i.e.,
the trade fails), the CEDEL or Euroclear cash debit will be valued instead as of
the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to pre-position
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective Depositary for the benefit of CEDEL Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at
least one business day prior to settlement. In these cases, CEDEL or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the bonds to
the DTC Participant's account against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment date
to and excluding the settlement date. The payment will then be reflected in the
account of the CEDEL Participant or Euroclear Participant the following day, and
receipt of the cash proceeds in the CEDEL Participant's or Euroclear
Participant's account would be back-valued to the value date (which would be the
preceding day, when settlement occurred in New York). Should the CEDEL
Participant or Euroclear Participant have a line of credit with its respective
clearing system and elect to be in debit in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
charges incurred over that one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails), receipt of the cash proceeds in the
CEDEL Participant's or Euroclear Participant's account would instead be valued
as of the actual settlement date. Finally, day traders that use CEDEL or
Euroclear and that purchase Global Securities from DTC Participants for delivery
to CEDEL Participants or Euroclear Participants should note that these trades
would automatically fail on the sale side unless affirmative action were taken.
At least three techniques should be readily available to eliminate this
potential problem:
I-2
<PAGE>
<PAGE>
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status). If the information shown on Form W-8 changes, a new Form W-8 must
be filed within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are Certificate Owners
residing in a country that has a tax treaty with the United States can
obtain an exemption or reduced tax rate (depending on the treaty terms) by
filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate). If the
treaty provides only for a reduced rate, withholding tax will be imposed at
that rate unless the filer alternatively files Form W-8. Form 1001 may be
filed by the Certificate Owner or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of
a Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom
it holds (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8 and Form 1001 are effective for
three calendar years and Form 4224 is effective for one calendar year.
The term 'U.S. Person' means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of
the United States or any political subdivision thereof or (iii) an estate
or trust the income of which is includible in gross income for United
States tax purposes, regardless of its source. This summary does not deal
with all aspects of U.S. Federal income tax withholding that may be
relevant to foreign holders of the Global Securities. Investors are advised
to consult their own tax advisors for specific tax advice concerning their
holding and disposing of the Global Securities.
I-3
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<PAGE>
<PAGE>
APPENDIX A
AMBAC INDEMNITY CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of AMBAC Inc.)
Consolidated Financial Statements
December 31, 1995 and 1994
(With Independent Auditors' Report Thereon)
A-1
<PAGE>
<PAGE>
Independent Auditors' Report
The Board of Directors
AMBAC Indemnity Corporation:
We have audited the accompanying consolidated balance sheets of AMBAC
Indemnity Corporation and subsidiaries (a wholly owned subsidiary of AMBAC Inc.)
as of December 31, 1995 and 1994, and the related consolidated statements of
operations, stockholder's equity and cash flows for each of the years in the
three-year period ended December 31, 1995. These consolidated financial
statements are the responsibility of AMBAC Indemnity Corporation's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AMBAC
Indemnity Corporation and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the consolidated financial statements, AMBAC
Indemnity Corporation has adopted the provisions of the Financial Accounting
Standards Board's Statements of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" and No. 112, "Employers' Accounting for
Postemployment Benefits," in 1993.
KMPG PEAT MARWICK LLP
KPMG Peat Marwick LLP
New York, New York
January 31, 1996
A-2
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars In Thousands Except Share Data)
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Assets
Investments:
Bonds held in available-for-sale account, at fair value
(amortized cost of $2,090,101 in 1995 and $1,865,350
in 1994).............................................. $2,224,528 $1,795,958
Short-term investments, at cost (approximates fair
value)................................................ 163,953 85,202
---------- ----------
Total investments..................................... 2,388,481 1,881,160
Cash....................................................... 6,912 2,117
Securities purchased under agreements to resell............ 4,120 8,011
Receivable for securities.................................. 8,136 21,508
Investment income due and accrued.......................... 38,319 34,902
Investment in affiliate.................................... 25,827 24,976
Deferred acquisition costs................................. 82,620 71,774
Deferred income taxes...................................... -- 1,778
Current income taxes....................................... 2,171 10,544
Prepaid reinsurance........................................ 153,372 139,855
Other assets............................................... 48,472 41,677
---------- ----------
Total assets.......................................... $2,758,430 $2,238,302
========== ==========
Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums........................................ $ 906,136 $ 839,775
Losses and loss adjustment expenses...................... 65,996 65,662
Ceded reinsurance balances payable....................... 14,654 908
Deferred income taxes.................................... 85,008 --
Accounts payable and other liabilities................... 43,625 43,519
Payable for securities................................... 86,304 26,696
---------- ----------
Total liabilities..................................... 1,201,723 976,560
---------- ----------
Stockholder's equity:
Preferred stock, par value $1,000.00 per share.
Authorized shares -- 285,000; issued and outstanding
shares -- none........................................ -- --
Common stock, par value $2.50 per share. Authorized
shares -- 40,000,000; issued and outstanding
shares -- 32,800,000 at December 31, 1995 and 1994.... 82,000 82,000
Additional paid-in capital............................... 481,059 444,258
Unrealized gains (losses) on investments, net of tax..... 87,112 (46,087)
Retained earnings........................................ 906,536 781,571
---------- ----------
Total stockholder's equity............................ 1,556,707 1,261,742
---------- ----------
Total liabilities and stockholder's equity............ $2,758,430 $2,238,302
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
A-3
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Statements of Operations
(Dollars In Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Gross premiums written........................... $195,033 $192,598 $321,490
Ceded premiums written........................... (28,606) 2,815 (35,810)
-------- -------- --------
Net premiums written.......................... 166,427 195,413 285,680
Increase in unearned premiums, net............... (52,844) (76,077) (132,862)
-------- -------- --------
Net premiums earned........................... 113,583 119,336 152,818
Net investment income............................ 131,496 119,737 104,609
Net realized gains (losses)...................... 177 (13,386) 30,145
Other income..................................... 6,777 6,887 1,516
-------- -------- --------
Total revenues................................ 252,033 232,574 289,088
-------- -------- --------
Expenses:
Losses and loss adjustment expenses.............. 3,377 2,593 (1,849)
Underwriting and operating expenses.............. 38,722 35,946 34,746
Interest expense................................. 1,590 1,428 163
-------- -------- --------
Total expenses................................ 43,689 39,967 33,060
-------- -------- --------
Income before income taxes.................... 208,344 192,607 256,028
-------- -------- --------
Income tax expense:
Current taxes.................................... 29,085 26,286 66,386
Deferred taxes................................... 14,461 16,277 4,090
-------- -------- --------
Total income taxes............................ 43,546 42,563 70,476
-------- -------- --------
Income before cumulative effect of changes in
accounting principles......................... 164,798 150,044 185,552
Cumulative effect of changes in accounting
principles.................................... -- -- (98)
-------- -------- --------
Net income.................................... $164,798 $150,044 $185,454
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
A-4
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Statements of Stockholder's Equity
(Dollars In Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Preferred Stock:
Balance at January 1 and December 31........... $ -- $ -- $ --
========== ========== =========
Common Stock:
Balance at January 1 and December 31........... $ 82,000 $ 82,000 $ 82,000
========== ========== =========
Additional Paid-in Capital:
Balance at January 1........................... $ 444,258 $ 444,143 $397,570
Capital contributions.......................... 35,000 -- 40,000
Cumulative effect of changes in accounting
principles.................................. -- -- 4,708
Other paid-in capital.......................... 1,801 115 1,865
--------- --------- --------
Balance at December 31......................... $ 481,059 $ 444,258 $444,143
========== ========== =========
Unrealized Gains (Losses) on Investments, Net of
Tax:
Balance at January 1........................... $ (46,087) $ 68,091 $ 5,285
Unrealized gain from change in accounting
principle................................... -- -- 63,568
Change in unrealized gain (loss)............... 133,199 (114,178) (762)
--------- --------- --------
Balance at December 31......................... $ 87,112 ($ 46,087) $ 68,091
========== ========== =========
Retained Earnings:
Balance at January 1........................... $ 781,571 $ 667,527 $515,073
Net income..................................... 164,798 150,044 185,454
Dividends declared-common stock................ (40,000) (36,000) (33,000)
Other.......................................... 167 -- --
--------- --------- --------
Balance at December 31......................... $ 906,536 $ 781,571 $667,527
========== ========== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
A-5
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars In Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $ 164,798 $ 150,044 $ 185,454
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization............ 1,605 1,106 1,080
Amortization of bond premium and
discount.............................. (831) (1,097) (507)
Current income taxes payable............. 8,373 (6,069) (20,844)
Deferred income taxes payable............ 14,462 16,277 (2,463)
Deferred acquisition costs............... (10,846) (20,757) (7,059)
Unearned premiums........................ 52,844 76,077 132,862
Losses and loss adjustment expenses...... 334 1,625 (718)
Ceded reinsurance balances payable....... 13,746 (2,963) (5,147)
(Gain) loss on sales of investments...... (177) 13,386 (30,145)
Proceeds from sales of bonds in trading
account............................... -- -- 2,091,143
Proceeds from maturities of bonds in
trading account....................... -- -- 34,409
Purchases of bonds for trading account... -- -- (2,181,198)
Accounts payable and other liabilities... 106 20,497 9,591
Other, net............................... (11,273) 7,179 (1,622)
----------- ----------- -----------
Net cash provided by operating
activities......................... 233,141 255,305 204,836
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of bonds at amortized
cost.................................. 1,882,485 1,305,011 18,912
Proceeds from maturities of bonds at
amortized cost........................ 163,031 39,126 60,131
Purchases of bonds at amortized cost..... (2,192,824) (1,559,982) (258,832)
Investment in preferred stock of
affiliate............................. -- -- (3,000)
Change in short-term investments......... (78,751) 9,005 (25,252)
Securities purchased under agreements to
resell................................ 3,891 (8,011) --
Other, net............................... (1,178) (3,786) (2,370)
----------- ----------- -----------
Net cash used in investing
activities......................... (223,346) (218,637) (210,411)
----------- ----------- -----------
Cash flows from financing activities:
Dividends paid........................... (40,000) (36,000) (33,000)
Capital contribution..................... 35,000 -- 40,000
----------- ----------- -----------
Net cash (used in) provided by
financing activities............... (5,000) (36,000) 7,000
----------- ----------- -----------
Net cash flow......................... 4,795 668 1,425
Cash at beginning of year.................. 2,117 1,449 24
----------- ----------- -----------
Cash at December 31........................ $ 6,912 $ 2,117 $ 1,449
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes.......................... $ 19,500 $ 32,153 $ 86,781
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
A-6
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands)
1 BACKGROUND
AMBAC Indemnity Corporation ("AMBAC Indemnity") is a leading insurer of
municipal and structured finance obligations. Financial guarantee insurance
underwritten by AMBAC Indemnity guarantees payment when due of the principal of
and interest on the obligation insured. In the case of a default on the insured
bond, payments under the insurance policy may not be accelerated by the
policyholder without AMBAC Indemnity's consent. As of December 31, 1995, AMBAC
Indemnity's net insurance in force (principal and interest) was $199,078,000.
AMBAC Indemnity is a wholly owned subsidiary of AMBAC Inc. (NYSE: ABK), a
holding company that provides financial guarantee insurance and financial
services to both public and private clients through its subsidiaries.
As of December 31, 1995, AMBAC Indemnity owned approximately 26.5% of the
outstanding common stock of an affiliate, HCIA Inc. (NASDAQ: HCIA) ("HCIA"), a
leading health care information content company. AMBAC Inc. owns approximately
19.9% of the outstanding common stock of HCIA. Prior to 1995, AMBAC Inc. and
AMBAC Indemnity combined owned approximately 96% of HCIA. During 1995, HCIA
offered approximately 3.5 million shares of its common stock for sale in two
separate public offerings. In addition, in conjunction with the second public
offering by HCIA, AMBAC Inc. sold approximately 1.1 million shares of HCIA
common stock. As a result of these public offerings, as of December 31, 1995,
AMBAC Indemnity and AMBAC Inc. combined owned 46.4% of the common stock of HCIA.
AMBAC Indemnity, as the sole limited partner, owns a limited partnership
interest representing 90% of the total partnership interests of AMBAC Financial
Services, Limited Partnership ("AFS"), a limited partnership which provides
interest rate swaps primarily to states, municipalities and municipal
authorities. The sole general partner of AFS, AMBAC Financial Services Holdings,
Inc., a wholly owned subsidiary of AMBAC Inc., owns a general partnership
interest representing 10% of the total partnership interest in AFS.
AMBAC Indemnity has one wholly owned subsidiary, American Municipal Bond
Holding Company ("AMBH"), which is a holding company for certain real estate
interests.
2 SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared on
the basis of generally accepted accounting principles ("GAAP"). The preparation
of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
significant accounting policies of AMBAC Indemnity and its subsidiaries are as
described below:
CONSOLIDATION:
The consolidated financial statements include the accounts of AMBAC
Indemnity, AFS and AMBH (sometimes collectively referred to as "AMBAC
Indemnity"). All significant intercompany balances have been eliminated.
A-7
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
INVESTMENTS:
AMBAC Indemnity's investment portfolio is accounted for on a trade-date
basis and consists entirely of investments in debt securities which are
considered available-for-sale and are carried at fair value. Fair value is based
on quotes obtained by AMBAC Indemnity from independent market sources.
Short-term investments are carried at cost, which approximates their fair value.
Unrealized gains and losses, net of deferred income taxes, are included as a
separate component of stockholder's equity and are computed using amortized cost
as the basis. For purposes of computing amortized cost, premiums and discounts
are accounted for using the interest method. For bonds purchased at a price
below par value, discounts are accreted over the remaining term of the
securities. For bonds purchased at a price above par value which have call
features, premiums are amortized to the most likely call dates as determined by
management. For premium bonds which do not have call features, such premiums are
amortized over the remaining term of the securities. Premiums and discounts on
mortgage-backed securities are adjusted for the effects of actual and
anticipated prepayments. Realized gains and losses on the sale of investments
are determined on the basis of specific identification.
Effective December 31, 1993, AMBAC Indemnity adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("Statement 115"). Pursuant to Statement 115, AMBAC Indemnity
has designated all investments as "available-for-sale" and reports them at fair
value. Unrealized gains and losses are excluded from earnings and reported as a
separate component of stockholder's equity, net of tax. The cumulative effect of
adopting Statement 115 as of December 31, 1993 was to increase AMBAC Indemnity's
stockholder's equity by $63,568, net of tax. The adoption of Statement 115 had
no effect on earnings.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL:
Securities purchased under agreements to resell are collateralized
financing transactions, and are recorded at their contracted resale amounts,
plus accrued interest. AMBAC Indemnity takes possession of the collateral
underlying those agreements and monitors its market value on a daily basis and,
when necessary, requires prompt transfer of additional collateral to reflect
current market value.
PREMIUM REVENUE RECOGNITION:
Premiums for municipal new issue and secondary market policies are: (i)
generally computed as a percentage of principal and interest insured; (ii)
typically collected in a single payment at policy inception date; and (iii) are
earned pro rata over the period of risk. Premiums for structured finance
policies can be computed as a percentage of either principal or principal and
interest insured. The timing of the collection of structured finance premiums
varies among individual transactions. For policies where premiums are collected
in a single payment at policy inception date, premiums are earned pro rata over
the period of risk. For policies with premiums that are collected periodically
(i.e., monthly, quarterly or annually), premiums are reflected in income pro
rata over the period covered by the premium payment.
When an AMBAC Indemnity-insured new or secondary market issue has been
refunded or called, the remaining unearned premium is generally earned at that
time, as the risk to AMBAC Indemnity is considered to have been eliminated.
A-8
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
LOSSES AND LOSS ADJUSTMENT EXPENSES:
The liability for losses and loss adjustment expenses consists of the
Active Credit Reserve ("ACR") and case basis loss reserves. The development of
the ACR is based upon estimates of the ultimate aggregate losses inherent in the
obligations insured and reflects the net result of contributions related to the
portion of earnings required to cover those losses, less reductions of ACR no
longer deemed necessary by management. When losses occur (actual monetary
defaults or defaults which are imminent on insured obligations), case basis loss
reserves are established in an amount that is sufficient to cover the present
value of the anticipated defaulted debt service payments over the expected
period of default and estimated expenses associated with settling the claims,
less estimated recoveries under salvage or subrogation rights. All or part of
case basis loss reserves are allocated from any ACR available for such insured
obligation.
AMBAC Indemnity's management believes that the reserves for losses and loss
adjustment expenses are adequate to cover the ultimate net cost of claims, but
the reserves are necessarily based on estimates and there can be no assurance
that the ultimate liability will not exceed such estimates.
DEFERRED ACQUISITION COSTS:
Certain costs incurred which vary with, and are primarily related to, the
production of business have been deferred. These costs include direct and
indirect expenses related to underwriting, marketing and policy issuance, rating
agency fees and premium taxes, net of reinsurance ceding commissions. The
deferred acquisition costs are being amortized over the periods in which the
related premiums are earned, and such amortization amounted to $10,183, $9,348
and $12,120 for 1995, 1994 and 1993, respectively. Deferred acquisition costs,
net of such amortization, amounted to $10,845, $20,757 and $7,059 for 1995, 1994
and 1993, respectively.
DEPRECIATION AND AMORTIZATION:
Depreciation of furniture and fixtures and electronic data processing
equipment is provided over the estimated useful lives of the respective assets
using the straight-line method. Amortization of leasehold improvements and
intangibles, including certain computer software licenses, is provided over the
estimated useful lives of the respective assets using the straight-line method.
INTEREST RATE CONTRACTS:
Interest Rate Contracts Held for Purposes Other Than Trading:
AMBAC Indemnity uses interest rate contracts for hedging purposes as part
of its overall interest rate risk management. Gains and losses on interest rate
futures and options contracts that qualify as accounting hedges of existing
assets or liabilities are included in the carrying amounts and amortized over
the remaining lives of the assets and liabilities as an adjustment to interest
income. When the hedged asset is sold, the unamortized gain or loss on the
related hedge is recognized in income. Gains and losses on interest rate
contracts that do not qualify as accounting hedges are recognized in current
period income.
AMBAC Indemnity accounts for its interest rate futures contracts in
accordance with the provisions of Statement of Financial Accounting Standards
No. 80, "Accounting For Futures Contracts" ("Statement 80"). Statement 80
permits hedge accounting for interest rate futures contracts when the item to be
hedged exposes the Company to price or interest rate risk, and the futures
contract effectively reduces that exposure and is designated as a hedge.
Interest rate futures contracts held for purposes other than trading are used
primarily to hedge interest sensitive assets, and are designated at inception as
a hedge to specific assets.
A-9
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Interest rate swaps that are linked with existing liabilities are accounted
for like a hedge of those liabilities, using the accrual method as an adjustment
to interest expense. Interest rate swaps that are linked with existing assets
classified as available-for-sale are accounted for like hedges of those assets,
using the accrual method as an adjustment to interest income, with unrealized
gains and losses included in stockholder's equity, net of tax.
Interest Rate Contracts Held for Trading Purposes:
AMBAC Indemnity, in connection with its market making activities as a
provider of interest rate swaps, primarily to states, municipalities, municipal
authorities and other entities in connection with their financings, uses
interest rate contracts which are classified as held for trading purposes.
Interest rate contracts are recorded on trade date at fair value. Changes in
fair value are recorded as a component of other income. The fair value of
interest rate swaps is determined through the use of valuation models. The
portion of the interest rate swap's initial fair value that reflects credit
considerations, on-going servicing and transaction hedging costs is recognized
over the life of the interest rate swap, as an adjustment to other income.
Interest rate swaps are recorded on a gross basis; assets and liabilities are
netted by customer only when a legal right of set-off exists.
INCOME TAXES:
AMBAC Inc., as common parent, files a consolidated Federal income tax
return with its subsidiaries. Effective January 1, 1993, AMBAC Indemnity adopted
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("Statement 109"). Under Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date.
The cumulative effect of this change in accounting for income taxes
resulted in an increase to net income for 1993 of $1,162 and an increase to
additional paid-in capital of $4,708. The adjustment to additional paid-in
capital reflects Statement 109 adjustments for prior business combinations.
The Internal Revenue Code permits municipal bond insurance companies to
deduct from taxable income, subject to certain limitations, the amounts added to
the statutory mandatory contingency reserve during the year. The deduction taken
is allowed only to the extent that U.S. Treasury noninterest-bearing tax and
loss bonds are purchased at their par value prior to the original due date of
AMBAC Inc.'s consolidated Federal tax return and held in an amount equal to the
tax benefit attributable to such deductions. The amounts deducted must be
included in taxable income when the contingency reserve is released, at which
time AMBAC Indemnity may redeem the tax and loss bonds to satisfy the additional
tax liability. The purchases of tax and loss bonds are recorded as payments of
Federal income taxes and are not reflected in AMBAC Indemnity's current tax
provision.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS:
AMBAC Inc., through its subsidiaries, provides various postretirement and
postemployment benefits, including pension, and health and life benefits
covering substantially all employees who meet certain age and service
requirements. AMBAC Indemnity accounts for these benefits under the accrual
method of accounting. Amounts related to the defined benefit pension plan and
postretirement health benefits are charged based on actuarial determinations.
A-10
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Effective January 1, 1993, AMBAC Indemnity adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" ("Statement 106"). Statement 106 requires that the expected
cost of postretirement benefits, other than pensions, be charged to expense
during the period that the employee renders service. AMBAC Indemnity elected to
recognize the transition obligation immediately and recorded a charge of $465,
after reduction of $240 for income tax benefits, as a cumulative effect of a
change in accounting principle as of the date of adoption.
Effective January 1, 1993, AMBAC Indemnity adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" ("Statement 112"), which, similar to Statement 106, requires accrual
of a liability representing the cost of certain benefits earned by employees
over their employment period. Statement 112 applies to vested benefits provided
to former or inactive employees, their beneficiaries and covered dependents,
after employment but before retirement. In adopting Statement 112, AMBAC
Indemnity recorded a charge of $801, after reduction for income tax benefits of
$429, as a cumulative effect of a change in accounting principle as of the date
of adoption.
STOCK COMPENSATION PLANS:
In 1991, AMBAC Inc. adopted the AMBAC Inc. 1991 Stock Incentive Plan. Under
this plan awards are granted to eligible employees of AMBAC Indemnity in the
form of incentive stock options or other stock-based awards. In October 1995,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("Statement 123") which must be adopted no later than 1996. Statement 123
applies to all stock-based employee compensation plans (except employee stock
ownership plans) in which an employer grants shares of its stock or other equity
instruments to employees. Statement 123 permits a company to choose either the
fair value based method of accounting as defined in the statement or the
intrinsic value based method of accounting as prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") for its stock-based
compensation plans. Companies electing the accounting requirements under APB 25
must also make pro forma disclosures of net income and earnings per share as if
the fair value based method of accounting had been applied. AMBAC Indemnity
currently accounts for its plans under APB 25 and intends to continue to do so
after adopting Statement 123 in 1996. The adoption of Statement 123 is expected
to have no effect on AMBAC Indemnity's results of operations.
RECLASSIFICATIONS:
Certain reclassifications have been made to prior years' amounts to conform
to the current year's presentation.
A-11
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
3 INVESTMENTS
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1995
Municipal obligations........................ $1,558,754 $ 98,090 $ 2,428 $1,654,416
Corporate securities......................... 261,492 30,785 3,263 289,014
U.S. Government obligations.................. 214,224 8,796 621 222,399
Mortgage-backed securities (including
GNMA)...................................... 55,631 3,362 294 58,699
Other........................................ 163,953 -- -- 163,953
---------- ---------- ---------- ----------
$2,254,054 $ 141,033 $ 6,606 $2,388,481
========= ======== ======== =========
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1994
Municipal obligations........................ $1,505,501 $ 23,009 $ 80,935 $1,447,575
Corporate securities......................... 228,992 2,336 11,501 219,827
U.S. Government obligations.................. 61,906 311 1,797 60,420
Mortgage-backed securities (including
GNMA)...................................... 70,251 1,325 2,140 69,436
Other........................................ 83,902 -- -- 83,902
---------- ---------- ---------- ----------
$1,950,552 $ 26,981 $ 96,373 $1,881,160
========= ======== ======== =========
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1995, by contractual maturity, were as follows:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
---------- ----------
<S> <C> <C>
1995
Due in one year or less..................................... $ 223,069 $ 223,949
Due after one year through five years....................... 168,417 181,772
Due after five years through ten years...................... 302,601 315,385
Due after ten years......................................... 1,504,336 1,608,676
---------- ----------
2,198,423 2,329,782
Mortgage-backed securities.................................. 55,631 58,699
---------- ----------
$2,254,054 $2,388,481
========= =========
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
A-12
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Net investment income comprised the following:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Bonds.............................................. $127,865 $118,685 $102,020
Short-term investments............................. 6,116 3,512 4,278
-------- -------- --------
Total investment income.......................... 133,981 122,197 106,298
Investment expense................................. (2,485) (2,460) (1,689)
-------- -------- --------
Net investment income............................ $131,496 $119,737 $104,609
======== ======== ========
</TABLE>
Gross realized gains were $27,786, $26,514 and $42,217 for 1995, 1994 and
1993, respectively, and gross realized losses were $27,609, $39,900 and $12,072
for 1995, 1994 and 1993, respectively.
As of December 31, 1995, AMBAC Indemnity did not have any investment
concentrated in any single repayment source (excluding obligations of the U.S.
Government and its agencies) with a fair value greater than 2.0% of its
stockholder's equity.
As of December 31, 1995 and 1994, AMBAC Indemnity held securities subject
to agreements to resell for $4,120 and $8,011, respectively. Such securities
were held as collateral by AMBAC Indemnity. The agreements had terms of less
than 30 days.
As of December 31, 1995 and 1994, investment securities with a fair value
of $4,583 and $3,948, respectively, were pledged to futures brokers for required
margin.
4 REINSURANCE
In the ordinary course of business, AMBAC Indemnity cedes exposures under
various reinsurance contracts primarily designed to minimize losses from large
risks and to protect capital and surplus. The effect of reinsurance on premiums
written and earned was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1995 1994 1993
--------------------- --------------------- ---------------------
Written Earned Written Earned Written Earned
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Direct................... $192,277 $127,322 $188,057 $136,632 $321,179 $181,320
Assumed.................. 2,756 1,349 4,541 1,325 311 311
Ceded.................... (28,606) (15,088) 2,815 (18,621) (35,810) (28,813)
-------- -------- -------- -------- -------- --------
Net premiums............. $166,427 $113,583 $195,413 $119,336 $285,680 $152,818
======== ======== ======== ======== ======== ========
</TABLE>
The reinsurance of risk does not relieve the ceding insurer of its original
liability to its policyholders. In the event that all or any of the reinsurers
are unable to meet their obligations to AMBAC Indemnity under the existing
reinsurance agreements, AMBAC Indemnity would be liable for such defaulted
amounts. To minimize its exposure to significant losses from reinsurer
insolvencies, AMBAC Indemnity evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk. There were no reinsurance
receivables as of December 31, 1995 and 1994. As of December 31, 1995, prepaid
reinsurance of approximately $48,120 was associated with a single reinsurer. As
of December 31, 1995, AMBAC Indemnity held letters of credit and collateral
amounting to approximately $90,643 from its reinsurers to cover liabilities
ceded under the aforementioned reinsurance contracts.
AMBAC Indemnity terminated reinsurance contracts, resulting in return
premiums to AMBAC Indemnity of $18,141, $30,482 and $36,461 of which $15,700,
$25,891 and $31,010 were recorded as an
A-13
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
increase to the unearned premium reserve in 1995, 1994 and 1993, respectively,
with the remainder recognized as revenue.
5 LOSSES AND LOSS ADJUSTMENT EXPENSES
AMBAC Indemnity's liability for losses and loss adjustment expenses
includes case basis loss reserves and the ACR. Following is a summary of the
activity in the case basis loss and active credit reserve accounts and the
components of the liability for losses and loss adjustment expenses:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Case basis loss reserves:
Balance at January 1......................... $38,892 $35,155 $ 28,321
------- ------- --------
Incurred related to:
Current year............................... 750 8,073 6,630
Prior years................................ 2,650 (3,368) (926)
------- ------- --------
Total incurred.......................... 3,400 4,705 5,704
------- ------- --------
Paid related to:
Current year............................... 150 275 315
Prior years................................ 2,893 693 (1,445)
------- ------- --------
Total paid.............................. 3,043 968 (1,130)
------- ------- --------
Balance at December 31....................... 39,249 38,892 35,155
------- ------- --------
Active credit reserve:
Balance at January 1......................... 26,770 28,882 36,434
Net provision for losses..................... 4,097 4,422 6,709
ACR transfers to case reserves............... (4,120) (6,534) (14,261)
------- ------- --------
Balance at December 31....................... 26,747 26,770 28,882
------- ------- --------
Total................................... $65,996 $65,662 $ 64,037
======= ======= =========
</TABLE>
The terms "current year" and "prior years" in the foregoing table refer to
the year in which case basis loss reserves were established.
A-14
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
6 COMMITMENTS AND CONTINGENCIES
AMBAC Indemnity is responsible for leases on the rental of office space,
principally in New York City. The lease agreements which expire periodically
through September 2014, contain provisions for scheduled periodic rent increases
and are accounted for as operating leases. An estimate of future net minimum
lease payments in each of the next five years ending December 31, and the
periods thereafter, is as follows:
<TABLE>
<CAPTION>
Year Amount
- --------------- --------
<S> <C>
1996........................................................... $ 3,042
1997........................................................... 3,073
1998........................................................... 3,359
1999........................................................... 3,650
2000........................................................... 3,650
All later years................................................ 53,880
-------
$70,654
=======
</TABLE>
Rent expense for the aforementioned leases amounted to $2,924, $2,719 and
$2,778 for the years ended December 31, 1995, 1994 and 1993, respectively.
7 INSURANCE REGULATORY RESTRICTIONS
AMBAC Indemnity is subject to insurance regulatory requirements of the
States of Wisconsin, New York and the other jurisdictions in which it is
licensed to conduct business.
AMBAC Indemnity's ability to pay dividends is generally restricted by law
and subject to approval by the Office of the Commissioner of Insurance of the
State of Wisconsin (the "Wisconsin Commissioner"). Wisconsin insurance law
restricts the payment of dividends in any 12-month period without regulatory
approval to the lesser of (a) 10% of policyholders' surplus as of the preceding
December 31 and (b) the greater of (i) statutory net income for the calendar
year preceding the date of dividend, minus realized capital gains for that
calendar year and (ii) the aggregate of statutory net income for three calendar
years preceding the date of the dividend, minus realized capital gains for those
calendar years and minus dividends paid or credited within the first two of the
three preceding calendar years. AMBAC Indemnity paid dividends of $40,000,
$36,000 and $33,000 on its common stock in 1995, 1994 and 1993, respectively.
Based upon these restrictions, at December 31, 1995, the maximum amount that
will be available during 1996 for payment of dividends by AMBAC Indemnity
without prior approval is approximately $86,000.
However, as discussed in Note 15, AMBAC Indemnity, upon consummation of the
proposed PRIDES offering will deliver to AMBAC Inc. (in the form of an
extraordinary dividend) its 2,378,672 shares of HCIA common stock, at fair
value. The Wisconsin Commissioner has approved such dividend. The fair value of
such dividend will be determined based on the price per share of HCIA common
stock used to price the PRIDES. As a result, any dividends paid by AMBAC
Indemnity to AMBAC Inc. for the twelve months following the extraordinary
dividend will require pre-approval from the Wisconsin Commissioner. The
Wisconsin Commissioner has stated to AMBAC Indemnity management that it does not
foresee any reason such pre-approval would not be given.
The New York Financial Guarantee Insurance Law establishes single risk
limits applicable to all obligations issued by a single entity and backed by a
single revenue source. Under the limit applicable to
A-15
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
municipal bonds, the insured average annual debt service for a single risk, net
of reinsurance and collateral, may not exceed 10% of the sum of the insurer's
policyholders' surplus and contingency reserves. In addition, insured principal
of municipal bonds attributable to any single risk, net of reinsurance and
collateral, is limited to 75% of the insurer's policyholders' surplus and
contingency reserves. Additional single risk limits, which generally are more
restrictive than the municipal bond single risk limit, are also specified for
several other categories of insured obligations.
Statutory capital and surplus was $862,976 and $781,772 at December 31,
1995 and 1994, respectively. Qualified statutory capital (statutory surplus plus
contingency reserve) was $1,358,769 and $1,218,204 at December 31, 1995 and
1994, respectively. Statutory net income was $142,541, $116,238 and $166,157 for
1995, 1994 and 1993, respectively. Statutory capital and surplus differs from
stockholder's equity determined under GAAP principally due to statutory
accounting rules that treat loss reserves, premiums earned, policy acquisition
costs and deferred income taxes differently.
8 INCOME TAXES
The total effect of income taxes on income and stockholder's equity for the
years ended December 31, 1995 and 1994 was as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Total income taxes charged to income.................. $ 43,546 $ 42,563
-------- --------
Income taxes charged (credited) to stockholder's equity:
Unrealized gain (loss) on bonds..................... 71,722 (61,480)
Unrealized gain on investment in affiliate.......... 602 --
Other............................................... (682) (116)
-------- --------
Total charged (credited) to stockholder's
equity................................... 71,642 (61,596)
-------- --------
Total effect of income taxes.......................... $115,188 $(19,033)
======== ========
</TABLE>
The tax provisions in the accompanying consolidated statements of
operations reflect effective tax rates differing from prevailing Federal
corporate income tax rates. The following is a reconciliation of these
differences:
<TABLE>
<CAPTION>
1995 % 1994 % 1993 %
-------- ----- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax at
statutory rate................ $ 72,920 35.0% $ 67,412 35.0% $ 89,610 35.0%
Increases (reductions) in
expected tax resulting from:
Tax-exempt interest........ (28,274) (13.6) (26,336) (13.7) (21,043) (8.2)
Adjustment to deferred tax
assets and liabilities
for enacted changes in
tax laws and rates...... -- -- -- -- 754 0.3
Other, net................. (1,100) (0.5) 1,487 0.8 1,155 0.4
------- ----- ------- ---- ------- ----
Income tax expense on income from
continuing operations.......... $ 43,546 20.9% $ 42,563 22.1% $ 70,476 27.5%
======= ===== ======= ==== ======= ====
</TABLE>
A-16
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities and deferred tax assets at December 31,
1995 and 1994 are presented below:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Deferred tax liabilities:
Unrealized gains on bonds............................ $ 46,906 $ --
Deferred acquisition costs........................... 28,917 25,121
Unearned premiums.................................... 22,079 14,522
Unrealized gain on investment in affiliate........... 602 --
Investments.......................................... 2,911 796
Other................................................ 1,996 1,613
------- -------
Total deferred tax liabilities.............. 103,411 42,052
------- -------
Deferred tax assets:
Unrealized loss on bonds............................. -- 24,816
Loss reserves........................................ 9,631 9,733
Insurance in force................................... 2,870 3,205
Compensation......................................... 2,418 2,812
Other................................................ 3,484 3,264
------- -------
Sub-total deferred tax assets............... 18,403 43,830
Valuation allowance.................................. -- --
------- -------
Total deferred tax assets................... 18,403 43,830
------- -------
Net deferred tax (liabilities) assets....... $(85,008) $ 1,778
======= =======
</TABLE>
AMBAC Indemnity believes that no valuation allowance is necessary in
connection with the deferred tax assets.
9 EMPLOYEE BENEFITS
Pensions:
AMBAC Inc. has a defined benefit pension plan covering substantially all
employees of AMBAC Indemnity and AFS. The benefits are based on years of service
and the employee's compensation during the last five years of employment. AMBAC
Indemnity's funding policy is to contribute annually the maximum amount that can
be deducted for Federal income tax purposes. Contributions are intended to
provide not only for benefits attributed to service-to-date but also for those
expected to be earned in the future.
The actuarial present value of the benefit obligations shown in the table
below sets forth the plan's funded status and amounts recognized by AMBAC Inc.
as of December 31, 1995 and 1994.
A-17
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Actuarial present value of the benefit obligations:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of
$6,049 and $4,300, respectively................................ $(6,788) $(5,000)
======= =======
Projected benefit obligation for service rendered to date........ (7,800) (5,500)
Plan assets at fair value, primarily listed stocks, commingled
funds and fixed income securities.............................. 7,054 4,898
------- -------
Unfunded projected benefit....................................... (746) (602)
Unrecognized prior service cost.................................. (1,784) (1,950)
Unrecognized net loss............................................ 1,906 1,412
Unrecognized net transition asset................................ (12) (15)
------- -------
Pension liability -- entire plan................................. $ (636) $(1,155)
======= =======
</TABLE>
Net pension costs for 1995, 1994 and 1993 included the following
components:
<TABLE>
<CAPTION>
1995 1994 1993
------- ----- -----
<S> <C> <C> <C>
Service cost............................................. $ 541 $ 558 $ 447
Interest cost on expected benefit obligation............. 456 386 297
Actual return on plan assets............................. (1,333) 30 (390)
Net amortization and deferral............................ 760 (547) (149)
------- ----- -----
Net periodic pension cost................................ $ 424 $ 427 $ 205
======= ===== =====
</TABLE>
The weighted-average discount rate used in the determination of the
actuarial present value for the projected benefit obligation was 7.25% and 8.0%
for 1995 and 1994, respectively. The expected long-term rate of return on assets
was 9.25% for both 1995 and 1994. The rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation was 5.0% in both 1995 and 1994.
Substantially all employees of AMBAC Indemnity and AFS are covered by a
defined contribution plan (the "Savings Incentive Plan") for which contributions
and costs are determined as 6% of each covered employee's base salary, plus a
matching company contribution of 50% on contributions up to 6% of base salary
made by eligible employees to the plan. The total cost of the Savings Incentive
Plan to AMBAC Indemnity was $1,435, $1,292 and $1,243 in 1995, 1994 and 1993,
respectively.
Annual Incentive Plan:
AMBAC Indemnity has an annual incentive plan which provides for awards to
key officers and employees based upon predetermined criteria. The cost of the
plan to AMBAC Indemnity for the years ended December 31, 1995, 1994 and 1993 was
$7,669, $8,531 and $6,165, respectively.
Postretirement Health Care and Other Benefits:
AMBAC Indemnity provides certain medical and life insurance benefits for
retired employees and eligible dependents. All plans are contributory. None of
the plans is currently funded.
A-18
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Postretirement benefits expense was $168, $176 and $500 in 1995, 1994 and
1993, respectively. The unfunded accumulated postretirement benefit obligation
was $1,309 and the accrued postretirement liability was $1,368 as of December
31, 1995.
The assumed weighted average health care cost trend rates range from 13.5%
in 1995, decreasing ratably to 5.5% in 2001, and remaining at that level
thereafter. Increasing the assumed health care cost trend rate by one percentage
point in each future year would increase the accumulated postretirement benefit
obligation at December 31, 1995 by $174 and the 1995 benefit expense by $28. The
weighted average discount rate used to measure the accumulated postretirement
benefit obligation and 1995 expense was 7.25%.
10 INSURANCE IN FORCE
The par amount of bonds insured by AMBAC Indemnity, net of reinsurance, was
$110,997,000 and $93,305,000 at December 31, 1995 and 1994, respectively. As of
December 31, 1995, AMBAC Indemnity's insured portfolio was diversified by type
of insured bond as shown in the following table:
<TABLE>
<CAPTION>
Net Par Amount
Outstanding
--------------------
(Dollars in Millions) As of December 31 1995 1994
-------- -------
<S> <C> <C>
Municipal finance:
General obligation........................... $ 30,546 $26,674
Utility revenue.............................. 21,053 19,597
Tax-backed revenue........................... 18,780 16,279
Health care revenue.......................... 12,553 10,922
Transportation revenue....................... 6,293 5,397
Investor Owned Utilities..................... 4,497 3,500
Higher education............................. 3,973 3,447
Student loan................................. 3,769 2,709
Housing revenue.............................. 3,577 2,567
Other........................................ 483 403
-------- -------
Total Municipal finance................... 105,524 91,495
-------- -------
Structured finance:
Domestic..................................... 3,238 902
International................................ 2,235 908
-------- -------
Total Structured finance.................. 5,473 1,810
-------- -------
$110,997 $93,305
========= =======
</TABLE>
As of December 31, 1995, California was the state with the highest
aggregate net par amount inforce, accounting for 14.3% of the total, and the
highest single insured risk represented 0.6% of aggregate net par amount
insured. AMBAC Indemnity's direct insurance in force (principal and interest)
was $235,118,000 and $205,810,000, at December 31, 1995 and 1994, respectively.
Net insurance in force (after giving effect to reinsurance) was $199,078,000 and
$171,678,000 as of December 31, 1995 and 1994, respectively.
A-19
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
11 FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
Financial instruments with off-balance-sheet risk:
In the normal course of business, AMBAC Indemnity becomes a party to
various financial transactions to reduce its exposure to fluctuations in
interest rates. These financial instruments include an interest rate swap
agreement and exchange traded interest rate futures contracts. The notional
amounts of AMBAC Indemnity's off-balance-sheet financial instruments which are
held for purposes other than trading were as follows:
<TABLE>
<CAPTION>
As of December 31,
--------------------
1995 1994
------- --------
<S> <C> <C>
Interest rate futures contracts................ $44,500 $164,200
Interest rate swap............................. 20,000 20,000
</TABLE>
Notional principal amounts are often used to express the volume of these
transactions and do not reflect the extent to which positions may offset one
another. These amounts do not represent the much smaller amounts potentially
subject to risk.
Interest rate futures contracts are sold to hedge interest rate risk
inherent in fixed rate investment securities. At December 31, 1995, interest
rate futures contracts with an outstanding notional amount of $44,500 were
designated as hedges of fixed rate investment securities.
The interest rate swap held for purposes other than trading is used to
manage interest rate risk by synthetically changing the nature of certain
floating rate investments.
Fair values of financial instruments held for purposes other than trading:
The following fair value amounts were determined by AMBAC Indemnity using
independent market information when available, and appropriate valuation
methodologies when market quotes were not available. In cases where specific
market quotes are unavailable, interpreting market data and estimating market
values necessarily require considerable judgment by management. Accordingly, the
estimates presented are not necessarily indicative of the amount AMBAC Indemnity
could realize in a current market exchange.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Investments: The fair values of bonds are based on quoted market prices or
dealer quotes.
Short-term investments and cash: The fair values of short-term investments
and cash are assumed to equal amortized cost.
Securities purchased under agreements to resell: The fair value of
securities purchased under agreements to resell is assumed to approximate
carrying value.
Investment in affiliate: As of December 31, 1995, the fair value of AMBAC
Indemnity's investment in HCIA is based on the quoted market price of HCIA
common stock. As of December 31, 1994, the fair value of AMBAC Indemnity's
investment in HCIA was assumed to equal carrying value.
Interest rate contracts: Fair values of off-balance-sheet interest rate
contracts (futures and swap) are based on quoted market and dealer prices,
current settlement values, or pricing models.
A-20
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Liability for net financial guarantees written: The fair value of the
liability for those financial guarantees written related to new issue and
secondary market exposures is based on the estimated cost to reinsure those
exposures at current market rates, which amount consists of the current unearned
premium reserve, less an estimated ceding commission thereon.
Certain other financial guarantee insurance policies have been written on
an installment basis, where the future premiums to be received by AMBAC
Indemnity are determined based on the outstanding exposure at the time the
premiums are due. The fair value of AMBAC Indemnity's liability under its
installment premium policies is measured using the present value of estimated
future installment premiums, less an assumed ceding commission. The estimate of
the amounts and timing of the future installment premiums is based on
contractual premium rates, debt service schedules and expected run-off
scenarios. This measure is used as an estimate of the cost to reinsure AMBAC
Indemnity's liability under these policies. The carrying amount and estimated
fair value of these financial instruments are presented below:
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------
1995 1994
----------------------- -----------------------
Carrying Estimated Carrying Estimated
(Dollars in Millions) Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Investments........................ $2,225 $2,225 $1,796 $1,796
Short-term investments............. 164 164 85 85
Securities purchased under
agreements to resell............. 4 4 8 8
Investment in affiliate............ 26 111 25 25
Cash............................... 7 7 2 2
Unrecognized financial instruments:
Interest rate swap................. -- -- -- (1)
Interest rate futures contracts.... -- -- -- --
Liability for net financial
guarantees
Direct........................... -- 655 -- 609
Net of reinsurance............... -- 543 -- 507
Net installment premiums......... -- 80 -- 51
</TABLE>
12 FINANCIAL INSTRUMENTS HELD FOR TRADING PURPOSES
AMBAC Indemnity, through its affiliate AFS, is a provider of interest rate
swaps to states, municipalities, municipal authorities and other entities,
including its affiliate, AMBAC Capital Management, Inc. ("ACMI"), in connection
with their financings. AMBAC Indemnity manages its interest rate swap business
with the goal of being market neutral to changes in overall interest rates,
while retaining "basis risk", the relationship between changes in floating rate
tax-exempt and floating rate taxable interest rates. If actual or projected
floating rate tax-exempt interest rates rise in relation to floating rate
taxable rates, AMBAC Indemnity will experience an unrealized mark-to-market
loss. Conversely, if actual or projected floating rate tax-exempt interest rates
decline in relation to floating rate taxable interest rates, AMBAC Indemnity
will experience an unrealized mark-to-market gain.
A-21
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
In the ordinary course of business, AMBAC Indemnity manages a variety of
risks -- principally credit, market, liquidity, operational and legal. These
risks are identified, measured and monitored through a variety of control
mechanisms, which are in place at different levels throughout the organization.
Credit risk relates to the ability of counterparties to perform according
to the terms of their contractual commitments. Various procedures and controls
are in place to monitor the credit risk of interest rate swaps. These include
the initial credit approval process, the establishment of credit limits,
management approvals and a process that ensures the continuous monitoring of
credit exposure.
Market risk relates to the impact of price changes on future earnings. This
risk is a consequence of AMBAC Indemnity's market-making activities in the
municipal interest rate swap market. The principal market risk is basis risk,
the relationship between changes in floating rate tax-exempt and floating rate
taxable interest rates. Since the third quarter of 1995, all municipal interest
rate swaps transacted contain provisions which are designed to protect AMBAC
Indemnity against certain forms of tax reform, thus mitigating its basis risk.
An independent risk management group monitors trading risk limits and, together
with senior management, is involved in the application of risk measurement
methodologies.
The estimation of potential losses arising from adverse changes in market
relationships, known as "value at risk," is a key element in managing market
risk. AMBAC Indemnity has developed a value at risk methodology to estimate
potential losses over a specified holding period and based on certain
probabilistic assessments. AMBAC Indemnity estimates value at risk utilizing
historical short and long term interest rate volatilities and the relationship
between changes in tax-exempt and taxable interest rates calculated on a
consistent daily basis. For the year ended December 31, 1995, AMBAC Indemnity's
value at risk averaged approximately $1,358, calculated at a ninety-nine percent
confidence level. Since no single measure can capture all dimensions of market
risk, AMBAC Indemnity bolsters its value at risk methodology by performing daily
analyses of parallel and nonparallel shifts in yield curves and stress test
scenarios which measure the potential impact of market conditions, however
improbable, which might cause abnormal volatility swings or disruptions of
market relationships.
Liquidity risk relates to the possible inability to satisfy contractual
obligations when due. This risk is present in interest rate swap agreements and
in futures contracts used to hedge those agreements. AMBAC Indemnity manages
liquidity risk by maintaining cash and cash equivalents, closely matching the
dates swap payments are made and received and limiting the amount of risk hedged
by futures contracts.
Operational risk relates to the potential for loss caused by a breakdown in
information, communication and settlement systems. AMBAC Indemnity mitigates
operational risk by maintaining a comprehensive system of internal controls.
This includes the establishment of systems and procedures to monitor
transactions and positions, documentation and confirmation of transactions,
ensuring compliance with regulations and periodic reviews by auditors.
Legal risk relates to the uncertainty of the enforceability, through legal
or judicial processes, of the obligations of AMBAC Indemnity's counterparties,
including contractual provisions intended to reduce credit exposure by providing
for the offsetting or netting of mutual obligations. AMBAC Indemnity seeks to
remove or minimize such uncertainties through continuous consultation with
internal and external legal advisers to analyze and understand the nature of
legal risk, to improve documentation and to strengthen transaction structure.
A-22
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
The following table summarizes information about AMBAC Indemnity's
financial instruments held for trading purposes as of December 31, 1995 and
1994:
<TABLE>
<CAPTION>
Net Net Average Net Fair Value
Carrying Estimated ----------------------- Notional
Amount Fair Value Assets Liabilities Amount
-------- ---------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C>
1995:
Interest rate
swaps............ $5,207 $5,207 $17,714 $16,667 $2,152,400
Interest rate
futures
contracts........ -- -- -- -- 569,800
1994:
Interest rate
swaps............ $1,681 $1,681 $ 4,441 $ 3,560 $ 771,900
Interest rate
futures
contracts........ -- -- -- -- 443,000
</TABLE>
The aggregate amount of net trading income recognized from interest rate
financial instruments held for trading purposes was $2,602 and $3,051 for 1995
and 1994, respectively. Average net fair values were calculated based on average
daily net fair values. For 1994, average net fair values began from the
commencement of operations in September 1994.
Notional principal amounts are often used to express the volume of these
transactions and do not reflect the extent to which positions may offset one
another. These amounts do not represent the much smaller amounts potentially
subject to risk.
13 LINES OF CREDIT
AMBAC Inc. and AMBAC Indemnity maintain a three-year revolving credit
facility with two major international banks, as co-agents, for $100,000. As of
December 31, 1995, no amounts were outstanding under this credit facility, which
expires in July 1998. This facility amended a one-year revolving credit facility
for $75,000. As of December 31, 1994, no amounts were outstanding under this
credit facility.
AMBAC Indemnity has an agreement with another major international bank, as
agent, for a $300,000 credit facility, expiring in 2002. This facility is a
seven-year stand-by irrevocable limited recourse line of credit, which was
increased from $225,000 to $300,000 and extended for an additional year in
December 1995. The line will provide liquidity to AMBAC Indemnity in the event
claims from municipal obligations exceed specified levels. Repayment of any
amounts drawn under the line will be limited primarily to the amount of any
recoveries of losses related to policy obligations. As of December 31, 1995 and
1994, no amounts were outstanding under this line.
14 RELATED PARTY TRANSACTIONS
During 1995 and 1994, AMBAC Indemnity guaranteed the timely payment of
principal and interest on obligations under municipal investment contracts and
municipal investment repurchase agreements issued by its affiliate, ACMI. As of
December 31, 1995 and 1994, the aggregate amount of municipal investment
contracts and municipal investment repurchase contracts insured was $2,240,959
and $2,042,230, respectively, including accrued interest. These insurance
policies are collateralized by ACMI's investment securities, accrued interest,
securities purchased under agreements to resell and cash and cash equivalents,
which as of December 31, 1995 and 1994 had a fair value of $2,299,687 and
$1,964,830, respectively, in the aggregate.
A-23
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
During 1995 and 1994, AMBAC Indemnity recorded gross premiums written of $1,707
and $2,692, and net premiums earned of $1,764 and $1,872, respectively, related
to these contracts.
During 1995 and 1994, several interest rate swap transactions were executed
between AFS and ACMI. As of December 31, 1995 and 1994, these contracts had an
outstanding notional amount of approximately $359,000 and $478,000,
respectively. As of December 31, 1995 and 1994, AFS recorded a positive fair
value of $6,539 and a negative fair value of $5,492, respectively, related to
these transactions.
15 SUBSEQUENT EVENTS
On January 19, 1996, AMBAC Inc. filed with the Securities and Exchange
Commission a registration statement related to a proposed offering of 3,781,369
PRIDES'SM' (Provisionally Redeemable Income Debt Exchangeable for Stock). The
PRIDES, which constitute senior debt of AMBAC Inc., will mature in 2001 and will
be mandatorily exchanged at maturity into shares of HCIA common stock (or, at
AMBAC Inc.'s option, cash with an equal value) determined in accordance with an
exchange rate formula. AMBAC Inc. may redeem the PRIDES, in whole or in part,
after three years. AMBAC Inc. has also granted the underwriters an option to
purchase up to 378,136 PRIDES to cover any over-allotments.
AMBAC Indemnity, upon consummation of the PRIDES offering, will deliver to
AMBAC Inc. (in the form of an extraordinary dividend) its 2,378,672 shares of
HCIA common stock, at fair value. The fair value of such dividend will be
determined based on the price per share of HCIA common stock used to price the
PRIDES.
A-24
<PAGE>
<PAGE>
APPENDIX B
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Unaudited Financial Statements
as of June 30, 1996 and December 31, 1995
and for the six months ended June 30, 1996 and 1995
B-1
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995
(Dollars in Thousands Except Share Data)
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
(unaudited)
<S> <C> <C>
Assets
Investments:
Bonds held in available for sale account, at fair value
(amortized cost of $2,162,449 in 1996 and $2,090,101 in 1995) $2,214,817 $2,224,528
Short-term investments, at cost (approximates fair value) 133,629 163,953
---------- ----------
Total investments 2,348,446 2,388,481
Cash 3,888 6,912
Securities purchased under agreements to resell 3,992 4,120
Receivable for securities 64,288 8,136
Investment income due and accrued 40,207 38,319
Investment in affiliate - 25,827
Deferred acquisition costs 88,107 82,620
Current income taxes - 2,171
Prepaid reinsurance 162,166 153,372
Other assets 54,378 48,472
---------- ----------
Total assets $2,765,472 $2,758,430
========== ==========
Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums $936,870 $906,136
Losses and loss adjustment expenses 59,429 65,996
Ceded reinsurance balances payable 6,765 14,654
Deferred income taxes 57,190 85,008
Current income taxes 3,116 -
Accounts payable and other liabilities 47,035 43,625
Payable for securities 112,413 86,304
---------- ----------
Total liabilities 1,222,818 1,201,723
---------- ----------
Stockholder's equity:
Preferred stock, par value $1,000.00 per share; authorized
shares - 285,000; issued and outstanding shares - none - -
Common stock, par value $2.50 per share; authorized shares
- 40,000,000; issued and outstanding shares - 32,800,000
at June 30, 1996 and December 31, 1995 82,000 82,000
Additional paid-in capital 514,305 481,059
Unrealized gains (losses) on investments, net of tax 34,039 87,112
Retained earnings 912,310 906,536
---------- ----------
Total stockholder's equity 1,542,654 1,556,707
---------- ----------
Total liabilities and stockholder's equity $2,765,472 $2,758,430
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
B-2
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For The Periods Ended June 30, 1996 and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
1996 1995 1996 1995
------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Gross premiums written $58,768 $36,893 $110,060 $77,465
Ceded premiums written (9,836) 6,514 (19,448) 3,055
------- ------- -------- -------
Net premiums written 48,932 43,407 90,612 80,520
Increase in unearned premiums (8,870) (15,126) (21,940) (27,563)
------- ------- -------- -------
Net premiums earned 40,062 28,281 68,672 52,957
Net investment income 35,584 32,419 70,489 64,293
Net realized gains (losses) 67,580 (2,202) 69,936 (6,876)
Other income 4,753 (393) 10,805 1,985
------- ------- -------- -------
Total revenues 147,979 58,105 219,902 112,359
------- ------- -------- -------
Expenses:
Losses and loss adjustment expenses 1,700 341 2,510 1,369
Underwriting and operating expenses 11,583 9,916 21,666 19,246
Interest expense 514 306 1,028 637
------- ------- -------- -------
Total expenses 13,797 10,563 25,204 21,252
------- ------- -------- -------
Income before income taxes 134,182 47,542 194,698 91,107
------- ------- -------- -------
Income tax expense:
Current taxes 38,665 6,696 52,313 13,543
Deferred taxes 806 2,458 760 3,666
------- ------- -------- -------
Total income taxes 39,471 9,154 53,073 17,209
------- ------- -------- -------
Net income 94,711 38,388 141,625 73,898
======= ======= ======== =======
</TABLE>
See accompanying Notes to Consolidated Unaudited Financial Statements
B-3
<PAGE>
<PAGE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For The Periods Ended June 30, 1996 and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1996 1995
-------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $141,625 $73,898
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 950 678
Amortization of bond premium and discount (811) (440)
Current income taxes payable 5,287 574
Deferred income taxes payable 760 3,666
Deferred acquisition costs (5,487) (9,366)
Unearned premiums 21,940 27,563
Losses and loss adjustment expenses (6,567) 45
Ceded reinsurance balances payable (7,889) (422)
(Gain) loss on sales of investments (69,936) 6,876
Other, net (8,685) (6,538)
-------- -----------
Net cash provided by operating activities 71,187 96,534
-------- -----------
Cash flows from investing activities:
Proceeds from sales of bonds at amortized cost 742,407 837,619
Proceeds from maturities of bonds at amortized cost 43,165 70,281
Purchases of bonds at amortized cost (901,331) (1,001,767)
Change in short-term investments 30,324 19,183
Proceeds from sale of affiliate 115,865 -
Securities purchased under agreements to resell 128 (392)
Other, net (1,404) (223)
-------- -----------
Net cash provided by (used in) investing activities 29,154 (75,299)
-------- -----------
Cash flows from financing activities:
Dividends paid (135,865) (20,000)
Capital contribution 32,500 -
-------- -----------
Net cash used in financing activities (103,365) (20,000)
-------- -----------
Net cash flow (3,024) 1,235
Cash at beginning of year 6,912 2,117
-------- -----------
Cash at June 30 $3,888 $3,352
======== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $13,300 $12,700
======== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
B-4
<PAGE>
<PAGE>
AMBAC INDEMNITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
AMBAC Indemnity Corporation ("AMBAC Indemnity") is a leading insurer of
municipal and structured finance obligations. Financial guarantee insurance
underwritten by AMBAC Indemnity guarantees payment when due of the principal of
and interest on the obligation insured. In the case of a default on the insured
obligation, payments under the insurance policy may not be accelerated by the
policyholder without AMBAC Indemnity's consent. As of June 30, 1996, AMBAC
Indemnity's net insurance in force (principal and interest) was $209.3 billion.
AMBAC Indemnity is a wholly-owned subsidiary of AMBAC Inc., which is a holding
company that provides through its affiliates financial guarantee insurance and
financial services to both public and private clients.
AMBAC Indemnity has one wholly-owned subsidiary, American Municipal Bond
Holding Company ("AMBH"), which is a holding company for certain real estate
interests.
On May 6, 1996, AMBAC Inc. sold its 4,159,505 shares of common stock of its
affiliate, HCIA Inc. (NASDAQ:HCIA) ("HCIA") in a secondary public offering.
Prior to consummation of the secondary public offering, AMBAC Indemnity
delivered to AMBAC Inc. (in the form of an extraordinary dividend) its 2,378,672
shares of HCIA common stock, at fair value. The fair value of the HCIA shares
was $115.9 million, based on the offering price per share of HCIA common stock
in the secondary public offering. The carrying value of AMBAC Indemnity's HCIA
shares was $26.2 million, and the resulting gain to AMBAC Indemnity from the
disposition of the shares was $89.7 million. As a result of the secondary public
offering, neither AMBAC Indemnity, nor AMBAC Inc. owned any shares of HCIA.
AMBAC Indemnity, as the sole limited partner, owns 90% of the total
partnership interests of AMBAC Financial Services, Limited Partnership ("AFS"),
a limited partnership which provides interest rate swaps primarily to states,
municipalities and municipal authorities. The sole general partner of AFS, AMBAC
Financial Services Holdings, Inc., a wholly-owned subsidiary of AMBAC Inc., owns
a general partnership interest representing 10% of the total partnership
interest in AFS.
AMBAC Indemnity's consolidated unaudited interim financial statements have
been prepared on the basis of generally accepted accounting principles and, in
the opinion of management, reflect all adjustments necessary for a fair
presentation of the Company's financial condition, results of operations and
cash flows for the periods presented. The results of operations for the six
months ended June 30, 1996 may not be indicative of the results that may be
expected for the full year ending December 31, 1996. These financial statements
and notes should be read in conjunction with the financial statements and notes
included in the audited consolidated financial statements of AMBAC Indemnity
Corporation and its subsidiaries as of December 31, 1995 and 1994, and for each
of the years in the three-year period ended December 31, 1995.
B-5
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<PAGE>
AMBAC INDEMNITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
(2) INCOME TAXES
The tax provisions in the accompanying financial statements reflect
effective tax rates differing from prevailing federal corporate income tax
rates, primarily as a result of tax-exempt interest income.
B-6
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<PAGE>
PROSPECTUS
MLCC MORTGAGE INVESTORS, INC.
DEPOSITOR
PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
------------------------
This Prospectus relates to Pass-Through Certificates (the 'Certificates'),
which may be sold from time to time in one or more Series (each, a 'Series') by
MLCC Mortgage Investors, Inc. (the 'Depositor') on terms determined at the time
of sale and described in this Prospectus and the related Prospectus Supplement.
The Certificates of a Series will evidence beneficial ownership of a trust fund
(a 'Trust Fund'). As specified in the related Prospectus Supplement, the Trust
Fund for a Series of Certificates will include certain mortgage related assets
(the 'Mortgage Assets') consisting of (i) promissory notes or other evidences of
indebtedness secured by first, second or more junior liens on fee simple or
leasehold interests in single family properties, including participations in any
of the foregoing ('Mortgage Loans'), (ii) mortgage pass-through securities (the
'Agency Securities') issued or guaranteed by the Government National Mortgage
Association ('GNMA'), the Federal National Mortgage Association ('FNMA') or the
Federal Home Loan Mortgage Corporation ('FHLMC') or (iii) mortgage-backed
securities that are not guaranteed by GNMA, FNMA or FHLMC ('Private
Mortgage-Backed Securities'). Private Mortgage-Backed Securities will have been
previously offered and sold pursuant to an effective registration statement
under the Securities Act of 1933 or were exempt from registration thereunder.
The Mortgage Assets will be acquired by the Depositor, either directly or
indirectly, from one or more institutions (each, a 'Seller'), which may be
affiliates of the Depositor, and conveyed by the Depositor to the related Trust
Fund. A Trust Fund also may include insurance policies, cash accounts, reserve
funds, reinvestment income, guaranties, letters of credit or other forms of
credit enhancement described herein and in the related Prospectus Supplement, or
any combination thereof. In addition, if so specified in the related Prospectus
Supplement, the property of the Trust Fund will include monies on deposit in a
trust account (the 'Pre-Funding Account') to be established with the Trustee,
which will be used to purchase at a predetermined price additional Mortgage
Assets (the 'Subsequent Mortgage Assets') from the Depositor from time to time
within three months after the issuance of the Certificates.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust Fund. A Series of
Certificates may include one or more classes that are senior or subordinate in
right of payment to one or more other classes of Certificates of such Series.
One or more classes of Certificates of a Series may be entitled to receive
principal distributions with disproportionate, nominal or no interest
distributions or interest distributions with disproportionate, nominal or no
principal distributions or any combination thereof prior to one or more other
classes of Certificates of such Series or after the occurrence of specified
events, in each case as specified in the related Prospectus Supplement.
Distributions among classes of Certificates in a Series may differ as to timing,
sequential order and priority.
Distributions to Certificateholders will be made monthly, quarterly,
semi-annually or at such other intervals and on the dates specified in the
related Prospectus Supplement. Distributions on the Certificates of a Series
will be made from the assets of the related Trust Fund or Funds or other assets
pledged for the benefit of the Certificateholders as specified in the related
Prospectus Supplement.
The Certificates of any Series will not represent an obligation of or
interest in the Depositor or any affiliate thereof and will not be insured or
guaranteed by any governmental agency or instrumentality or, unless otherwise
specified in the related Prospectus Supplement, by any other person. Unless
otherwise specified in the related Prospectus Supplement, the only obligations
of the Depositor with respect to a Series of Certificates will be to obtain
certain representations and warranties from each Seller and to assign to the
Trustee for the related Series of Certificates the Depositor's rights with
respect to such representations and warranties. The principal obligations of the
Master Servicer named in the related Prospectus Supplement with respect to the
related Series of Certificates will be limited to obligations pursuant to
certain representations and warranties and to its contractual servicing
obligations, including any obligation it may have to advance delinquent payments
on the Mortgage Assets in the related Trust Fund.
(Continued on next page)
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
Prior to issuance there will have been no market for the Certificates of any
Series, and there can be no assurance that a secondary market for any
Certificates will develop or, if it does develop, that it will continue. This
Prospectus may not be used to consummate sales of a Series of Certificates
unless accompanied by a Prospectus Supplement.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described under
'Method of Distribution' herein and in the related Prospectus Supplement. All
certificates will be distributed by, or sold by underwriters managed by:
------------------------
MERRILL LYNCH & CO.
------------------------
The date of this Prospectus is August 29, 1996.
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(cover continued)
The yield on each class of Certificates of a Series will be affected by,
among other things, the rate of payment of principal (including prepayments) on
the Mortgage Assets in the related Trust Fund and the timing of receipt of such
payments as described herein and in the related Prospectus Supplement. A Trust
Fund may be subject to early termination under the circumstances described
herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement, one or more elections may be made
to treat the related Trust Fund or specified portions thereof as a 'real estate
mortgage investment conduit' ('REMIC') for federal income tax purposes. See
'Certain Federal Income Tax Consequences'.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus and Prospectus Supplement when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to the Certificates of each Series to be
offered hereunder will, among other things, set forth with respect to such
Certificates, as appropriate: (i) a description of the class or classes of
Certificates and the related Pass-Through Rate or method of determining the
amount of interest, if any, to be passed through to each such class; (ii) the
initial aggregate Certificate Balance of each class of Certificates included in
such Series, Distribution Dates relating to such Series and, if applicable, the
initial and final scheduled Distribution Dates for each class; (iii) information
as to the assets comprising the Trust Fund, including the general
characteristics of the Mortgage Assets included therein and, if applicable, the
insurance, surety bonds, guaranties, letters of credit or other instruments or
agreements included in the Trust Fund, and the amount and source of any Reserve
Fund; (iv) the circumstances, if any, under which the Trust Fund may be subject
to early termination; (v) the method used to calculate the amount of principal
to be distributed with respect to each class of Certificates; (vi) the order of
application of distributions to each of the classes within such Series, whether
sequential, pro rata, or otherwise; (vii) the Distribution Dates with respect to
such Series; (viii) additional information with respect to the plan of
distribution of such Certificates; (ix) whether one or more REMIC elections will
be made and designation of the regular interests and residual interests; (x) the
aggregate original percentage ownership interest in the Trust Fund to be
evidenced by each class of Certificates; (xi) information as to the nature and
extent of subordination with respect to any class of Certificates that is
subordinate in right of payment to any other class; and (xii) information as to
the Seller, the Master Servicer and the Trustee.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
'Commission') a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates. This Prospectus, which forms a part
of the Registration Statement, and the Prospectus Supplement relating to each
Series of Certificates contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and Regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its Regional Offices located as follows:
Chicago Regional Office, Northwest Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661; and New York Regional Office, Seven World Trade Center,
New York, New York 10048. The Commission maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including MLCC Mortgage Investors,
Inc., that file electronically with the Commission.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Certificates
offered hereby and thereby nor an offer of the Certificates to any person in any
state or other
2
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jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of an offering of Certificates evidencing interests therein. The Depositor will
provide or cause to be provided without charge to each person to whom this
Prospectus is delivered in connection with the offering of one or more Classes
of Certificates, a list identifying all filings with respect to the related
Trust Fund pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act,
since the Depositor's latest fiscal year covered by its annual report on Form
10-K and a copy of any or all documents or reports incorporated herein by
reference, in each case to the extent such documents or reports relate to one or
more of such classes of such Certificates, other than the exhibits to such
documents (unless such exhibits are specifically incorporated by reference in
such documents). Requests to the Depositor should be directed to: MLCC Mortgage
Investors, Inc., 4802 Deer Lake Drive East, Jacksonville, Florida 32246,
telephone number (904) 928-6000.
3
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SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement with respect to the Series offered thereby. The Prospectus Supplement
for each Series will specify the extent (if any) to which the terms of such
Series or the related Trust Fund vary from the general description of the
Certificates and Trust Funds which is contained in this Prospectus. Capitalized
terms used herein shall have the respective meanings assigned them in the 'Index
to Defined Terms'.
<TABLE>
<S> <C>
Title of Securities....................... Pass-Through Certificates (the 'Certificates'), issuable in series
(each, a 'Series'). Each Series will be issued under a separate
pooling and servicing agreement (each, an 'Agreement') to be entered
into with respect to each such Series.
Depositor................................. MLCC Mortgage Investors, Inc., a Delaware corporation. The Depositor
is a wholly owned, limited purpose subsidiary of Merrill Lynch Credit
Corporation (a wholly-owned indirect subsidiary of Merrill Lynch &
Co., Inc.). Neither Merrill Lynch & Co., Inc. nor any of its
affiliates, including the Depositor, has guaranteed, or is or will be
otherwise obligated with respect to, the Certificates of any Series.
Trustee................................... The trustee (the 'Trustee') for each Series of Certificates will be
specified in the related Prospectus Supplement. See 'The Pooling and
Servicing Agreement' herein for a description of the Trustee's rights
and obligations.
Master Servicer........................... The entity or entities named as Master Servicer (the 'Master
Servicer') in the related Prospectus Supplement, which may be an
affiliate of the Depositor. See 'The Pooling and Servicing
Agreement -- Certain Matters Regarding the Master Servicer and the
Depositor'.
Servicer.................................. A 'Servicer' may be specified in the related Prospectus Supplement,
which may be an affiliate of the Depositor.
Closing Date.............................. The date (the 'Closing Date') of initial issuance of a Series of
Certificates, as specified in the related Prospectus Supplement.
Trust Fund Assets......................... The Trust Fund for a Series of Certificates will include certain
mortgage related assets (the 'Mortgage Assets') consisting of (a) a
pool (a 'Mortgage Pool') of Mortgage Loans, (b) Agency Securities or
(c) Private Mortgage-Backed Securities, together with payments in
respect of such Mortgage Assets and certain other accounts,
obligations or agreements, in each case as specified in the related
Prospectus Supplement.
To the extent provided in the related Prospectus Supplement, the
Depositor will be obligated (subject only to the availability
thereof) to sell at a predetermined price, and the Trust Fund for a
Series of Certificates will be obligated to purchase (subject to the
satisfaction of certain conditions described in the applicable
Agreement), additional Mortgage Assets (the 'Subsequent Mortgage
Assets') from time to time (as frequently as daily) within three
months after the issuance of the Certificates having an aggregate
principal balance approximately equal to the amount on deposit in the
Pre-Funding Account (the 'Pre-Funded Amount') on such Closing Date.
A. Single Family Loans............... Unless otherwise specified in the related Prospectus Supplement,
Mortgage Loans will be secured by first, second or more junior liens
on fee simple or leasehold interests in single family properties. If
so specified, the Mortgage Loans may include cooperative apartment
loans ('Cooperative Loans') secured by security interests in shares
issued by private, nonprofit, cooperative housing corporations
('Cooperatives') and in the related proprietary leases or occupancy
agreements granting
</TABLE>
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<TABLE>
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exclusive rights to occupy specific dwelling units in such
Cooperatives' buildings. If so specified in the related Prospectus
Supplement, the Mortgage Assets of the related Trust Fund may include
mortgage participation certificates evidencing interests in Mortgage
Loans. Such Mortgage Loans may be conventional loans (i.e., loans
that are not insured or guaranteed by any governmental agency),
insured by the Federal Housing Authority ('FHA') or partially
guaranteed by the Veterans' Administration ('VA') as specified in the
related Prospectus Supplement.
B. General Attributes of Mortgage
Loans............................. The payment terms of the Mortgage Loans to be included in a Trust
Fund will be described in the related Prospectus Supplement and may
include any of the following features or combinations thereof or
other features described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index (which will be specified in
the related Prospectus Supplement), a rate that is fixed for a
period of time or under certain circumstances and is followed by
an adjustable rate, a rate that otherwise varies from time to
time, or a rate that is convertible from an adjustable rate to a
fixed rate or to a different adjustable rate. Changes to an
adjustable rate may be subject to periodic limitations, maximum
rates, minimum rates or a combination of such limitations.
Accrued interest may be deferred and added to the principal of a
loan for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. Mortgage Loans
may provide for the payment of interest at a rate lower than the
specified Mortgage Rate for a period of time or for the life of
the loan, and the amount of any difference may be contributed
from funds supplied by a third party.
(b) Principal may be payable on a level debt service basis to fully
amortize the loan over its term, may be calculated on the basis
of an assumed amortization schedule that is significantly longer
than the original term to maturity or on an interest rate that is
different from the interest rate on the Mortgage Loan or may not
be amortized during all or a portion of the original term.
Payment of all or a substantial portion of the principal may be
due on maturity ('balloon payments'). Principal may include
interest that has been deferred and added to the principal
balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the loan, may increase over a specified period of time or
may change from period to period. Mortgage Loans may include
limits on periodic increases or decreases in the amount of
monthly payments and may include maximum or minimum amounts of
monthly payments.
(d) The Mortgage Loans generally may be prepaid at any time without
payment of any prepayment fee. If so specified in the related
Prospectus Supplement, prepayments of principal may be subject to
a prepayment fee, which may be fixed for the life of any such
Mortgage Loan or may decline over time, and may be prohibited for
the life of any such Mortgage Loan or for certain periods
('lockout periods'). Certain Mortgage Loans may permit prepay-
ments after expiration of the applicable lockout period
</TABLE>
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<S> <C>
and may require the payment of a prepayment fee in connection
with any such subsequent prepayment. Other Mortgage Loans may
permit prepayments without payment of a fee unless the prepayment
occurs during specified time periods. The Mortgage Loans may
include 'due-on-sale' clauses which permit the mortgagee to
demand payment of the entire Mortgage Loan in connection with the
sale or certain transfers of the related Mortgaged Property.
Other Mortgage Loans may be assumable by persons meeting the then
applicable underwriting standards of the Seller.
(e) Certain Mortgage Loans may be originated or acquired in
connection with employee relocation programs. The real property
constituting security for repayment of a Mortgage Loan may be
located in any one of the fifty states, the District of Columbia,
Guam, Puerto Rico or any other territory of the United States.
Unless otherwise specified in the related Prospectus Supplement,
all of the Mortgage Loans will be covered by standard hazard
insurance policies insuring against losses due to fire and
various other causes. The Mortgage Loans will be covered by
primary mortgage insurance policies to the extent provided in the
related Prospectus Supplement.
All Mortgage Loans will have been purchased by the Depositor, either
directly or through an affiliate, from one or more Sellers.
C. Agency Securities................. The Agency Securities evidenced by a Series of Certificates will
consist of (i) mortgage participation certificates issued and
guaranteed as to timely payment of interest and, unless otherwise
specified in the related Prospectus Supplement, ultimate payment of
principal by the Federal Home Loan Mortgage Corporation ('FHLMC
Certificates'), (ii) Guaranteed Mortgage Pass-Through Certificates
issued and guaranteed as to timely payment of principal and interest
by the Federal National Mortgage Association ('FNMA Certificates'),
(iii) fully modified pass-through mortgage-backed certificates
guaranteed as to timely payment of principal and interest by the
Government National Mortgage Association ('GNMA Certificates'), (iv)
stripped mortgage-backed securities representing an undivided
interest in all or a part of either the principal distributions (but
not the interest distributions) or the interest distributions (but
not the principal distributions) or in some specified portion of the
principal and interest distributions (but not all of such
distributions) on certain FHLMC, FNMA or GNMA Certificates and,
unless otherwise specified in the related Prospectus Supplement,
guaranteed to the same extent as the underlying securities, (v)
another type of pass-through certificate issued or guaranteed by
GNMA, FNMA or FHLMC and described in the related Prospectus
Supplement, or (vi) a combination of such Agency Securities. All GNMA
Certificates will be backed by the full faith and credit of the
United States. No FHLMC or FNMA Certificates will be backed, directly
or indirectly, by the full faith and credit of the United States.
The Agency Securities may consist of pass-through securities issued
under FHLMC's Cash or Guarantor Program, the GNMA I Program, the GNMA
II Program or another program specified in the related Prospectus
Supplement. The payment characteristics of the Mortgage Loans
underlying the Agency Securities will be described in the related
Prospectus Supplement.
</TABLE>
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D. Private Mortgage-Backed Se-
curities.......................... Private Mortgage-Backed Securities may include (a) mortgage
pass-through certificates representing beneficial interests in a
Mortgage Pool or (b) collateralized mortgage obligations secured by
Mortgage Loans. Private Mortgage-Backed Securities may include
stripped mortgage-backed securities representing an undivided
interest in all or a part of either the principal distributions (but
not the interest distributions) or the interest distributions (but
not the principal distributions) or in some specified portion of the
principal and interest distributions (but not all of such
distributions) on certain Mortgage Loans. Although individual
Mortgage Loans underlying a Private Mortgage-Backed Security may be
insured or guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and the Private
Mortgage-Backed Securities themselves will not be so insured or
guaranteed. Private Mortgage-Backed Securities will have been
previously offered and sold pursuant to an effective registration
statement under the Securities Act of 1933, as amended, or were
exempt from registration thereunder. Unless otherwise specified in
the related Prospectus Supplement relating to a Series of Certifi-
cates, payments on the Private Mortgage-Backed Securities will be
distributed directly to the Trustee as registered owner of such
Private Mortgage-Backed Securities. See 'The Trust Fund -- Private
Mortgage-Backed Securities' herein.
Description of the Certificates........... Each Certificate will represent a beneficial ownership interest in a
Trust Fund created by the Depositor pursuant to an Agreement among
the Depositor, the Master Servicer and the Trustee for the related
Series. The Certificates of any Series may be issued in one or more
classes as specified in the related Prospectus Supplement. A Series
of Certificates may include one or more classes of senior
Certificates (collectively, the 'Senior Certificates') and one or
more classes of subordinate Certificates (collectively, the
'Subordinated Certificates'). Certain Series or classes of
Certificates may be covered by insurance policies or other forms of
credit enhancement, in each case as described herein and in the
related Prospectus Supplement.
One or more classes of Certificates of each Series (i) may be
entitled to receive distributions allocable only to principal, only
to interest or to any combination thereof; (ii) may be entitled to
receive distributions only of prepayments of principal throughout the
lives of the Certificates or during specified periods; (iii) may be
subordinated in the right to receive distributions of scheduled
payments of principal, prepayments of principal, interest or any
combination thereof to one or more other classes of Certificates of
such Series throughout the lives of the Certificates or during
specified periods; (iv) may be entitled to receive such distributions
only after the occurrence of events specified in the related Prospec-
tus Supplement; (v) may be entitled to receive distributions in
accordance with a schedule or formula or on the basis of collections
from designated portions of the assets in the related Trust Fund;
(vi) as to Certificates entitled to distributions allocable to
interest, may be entitled to receive interest at a fixed rate or a
rate that is subject to change from time to time; and (vii) as to
Certificates entitled to distributions allocable to interest, may be
entitled to distributions allocable to interest only after the
occurrence of events specified in the related Prospectus Supplement
and may accrue interest until such events occur, in each case as
specified in the related Prospectus Supplement. The timing, amounts,
sequential order and
</TABLE>
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priority of such distributions may vary among classes, over time, or
otherwise as specified in the related Prospectus Supplement.
Distributions on the Certificates......... Distributions on the Certificates entitled thereto will be made
monthly, quarterly, semi-annually or at such other intervals and on
the dates specified in the related Prospectus Supplement (each, a
'Distribution Date') out of the payments received in respect of the
assets of the related Trust Fund or other assets pledged for the
benefit of the Certificates as specified in the related Prospectus
Supplement. The amount allocable to payments of principal and
interest on any Distribution Date will be determined as specified in
the related Prospectus Supplement. Unless otherwise specified in the
related Prospectus Supplement, all distributions will be made pro
rata to Certificateholders of the class entitled thereto.
Unless otherwise specified in the related Prospectus Supplement, the
aggregate original Certificate Balance of the Certificates will equal
the aggregate distributions allocable to principal that such
Certificates will be entitled to receive. If specified in the related
Prospectus Supplement, the Certificates will have an aggregate
original Certificate Balance equal to the aggregate unpaid principal
balance of the Mortgage Assets as of the first day of the month of
creation of the Trust Fund and will bear interest in the aggregate at
a rate equal to the interest rate borne by the underlying Mortgage
Loans (the 'Mortgage Rate'), Agency Securities or Private
Mortgage-Backed Securities, net of the aggregate servicing fees and
any other amounts specified in the related Prospectus Supplement (the
'Pass-Through Rate').
The rate at which interest will be passed through to holders of each
class of Certificates entitled thereto may be a fixed rate or a rate
that is subject to change from time to time from the time and for the
periods, in each case, as specified in the related Prospectus
Supplement. Any such rate may be calculated on a loan-by-loan,
weighted average or other basis, in each case as described in the
related Prospectus Supplement.
Credit Enhancement........................ The assets in a Trust Fund or the Certificates of one or more classes
in the related Series may have the benefit of one or more types of
credit enhancement described herein and in the related Prospectus
Supplement. The protection against losses afforded by any such credit
support may be limited. The type, characteristics and amount of
credit enhancement will be determined based on the characteristics of
the Mortgage Loans underlying or comprising the Mortgage Assets and
other factors and will be established on the basis of requirements of
each Rating Agency rating the Certificates of such Series. One or
more forms of credit enhancement may be provided by an affiliate or
affiliates of the Depositor. See 'Credit Enhancement' herein.
A. Subordination..................... A Series of Certificates may consist of one or more classes of Senior
Certificates and one or more classes of Subordinate Certificates. The
rights of the holders of the Subordinated Certificates of a Series to
receive distributions with respect to the assets in the related Trust
Fund will be subordinated to such rights of the holders of the Senior
Certificates of the same Series to the extent described in the
related Prospectus Supplement. This subordination is intended to
enhance the likelihood of regular receipt by holders of Senior
Certificates of the full amount of their scheduled monthly payments
of principal and interest. The protection afforded to the holders of
Senior Certificates of a Series by means of the subordina-
</TABLE>
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<TABLE>
<S> <C>
tion feature will be accomplished by (i) the preferential right of
such holders to receive, prior to any distribution being made in
respect of the related Subordinated Certificates, the amounts of
principal and interest due them on each Distribution Date out of the
funds available for distribution on such date in the related
Certificate Account and, to the extent described in the related
Prospectus Supplement, by the right of such holders to receive future
distributions on the assets in the related Trust Fund that would
otherwise have been payable to the holders of Subordinated
Certificates; (ii) reducing the ownership interest of the related
Subordinated Certificates; (iii) a combination of clauses (i) and
(ii) above; or (iv) as otherwise described in the related Prospectus
Supplement. If so specified in the related Prospectus Supplement,
subordination may apply only in the event of certain types of losses
not covered by other forms of credit support, such as hazard losses
not covered by standard hazard insurance policies or losses due to
the bankruptcy or fraud of the borrower. The related Prospectus
Supplement will set forth information concerning, among other things,
the amount of subordination of a class or classes of Subordinated
Certificates in a Series, the circumstances in which such
subordination will be applicable, and the manner, if any, in which
the amount of subordination will decrease over time.
B. Reserve Fund...................... One or more reserve funds (each, a 'Reserve Fund') may be established
and maintained for each Series. The related Prospectus Supplement
will specify whether or not any such Reserve Fund will be included in
the corpus of the Trust Fund for such Series and will also specify
the manner of funding the related Reserve Fund and the conditions
under which the amounts in any such Reserve Fund will be used to make
distributions to holders of Certificates of a particular class or
released from the related Trust Fund.
C. Mortgage Pool Insurance Policy.... A mortgage pool insurance policy or policies ('Mortgage Pool
Insurance Policy') may be obtained and maintained for a Series, which
shall be limited in scope, covering defaults on the related Mortgage
Loans in an initial amount equal to a specified percentage of the
aggregate principal balance of all Mortgage Loans included in the
Mortgage Pool as of the first day of the month of issuance of the
related Series of Certificates or such other date as is specified in
the related Prospectus Supplement (the 'Cut-off Date').
D. Special Hazard Insurance Policy... A special hazard insurance policy or policies ('Special Hazard
Insurance Policy'), may be obtained and maintained for a Series,
covering certain physical risks that are not otherwise insured
against by standard hazard insurance policies. Each Special Hazard
Insurance Policy will be limited in scope and will cover losses
pursuant to the provisions of each such Special Hazard Insurance
Policy as described in the related Prospectus Supplement.
E. Bankruptcy Bond................... A bankruptcy bond or bonds ('Bankruptcy Bonds') may be obtained
covering certain losses resulting from action that may be taken by a
bankruptcy court in connection with a Mortgage Loan. The level of
coverage and the limitations in scope of each Bankruptcy Bond will be
specified in the related Prospectus Supplement.
F. FHA Insurance and VA Guarantee.... All or a portion of the Mortgage Loans in a Mortgage Pool
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may be insured by FHA insurance ('FHA Insurance') and may be
partially guaranteed by the VA ('VA Insurance').
G. Cross Support..................... If specified in the related Prospectus Supplement, the beneficial
ownership of separate groups of assets included in a Trust Fund may
be evidenced by separate classes of the related Series of
Certificates. In such case, credit support may be provided by a
cross-support feature which requires that distributions be made with
respect to Certificates evidencing beneficial ownership of one or
more asset groups prior to distributions to Subordinated Certificates
evidencing a beneficial ownership interest in other asset groups
within the same Trust Fund.
H. Limited Guarantee................. If specified in the related Prospectus Supplement, credit enhancement
may be provided in the form of a limited financial guarantee
('Limited Guarantee') issued by a guarantor named therein.
I. Letter of Credit.................. Alternative credit support with respect to a Series of Certificates
may be provided by the issuance of a letter of credit ('Letter of
Credit') by the bank or financial institution specified in the
related Prospectus Supplement. The coverage, amount and frequency of
any reduction in coverage provided by a Letter of Credit issued with
respect to a Series of Certificates will be set forth in the related
Prospectus Supplement.
J. Surety Bonds...................... If specified in the related Prospectus Supplement, credit support
with respect to one or more Classes of Certificates of a Series may
be provided by the issuance of a surety bond ('Surety Bond') issued
by a financial guarantee insurance company specified in the related
Prospectus Supplement. The coverage, amount and frequency of any
reduction in coverage provided by a Surety Bond will be set forth in
the related Prospectus Supplement.
Advances.................................. Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer and, if applicable, each mortgage servicing
institution that services a Mortgage Loan in a Mortgage Pool on
behalf of the Master Servicer (a 'Sub-Servicer') will be obligated to
advance amounts (each, an 'Advance') corresponding to delinquent
principal and interest payments on such Mortgage Loan (including, in
the case of Cooperative Loans, unpaid maintenance fees or other
charges under the related proprietary lease) until the first day of
the month following the date on which the related Mortgaged Property
is sold at a foreclosure sale or the related Mortgage Loan is
otherwise liquidated. Any obligation to make Advances may be subject
to limitations as specified in the related Prospectus Supplement.
Advances will be reimbursable to the extent described herein and in
the related Prospectus Supplement.
Optional Termination...................... The Master Servicer or, if specified in the related Prospectus
Supplement, the holder of the residual interest in a REMIC may have
the option to effect early retirement of a Series of Certificates
through the purchase of the Mortgage Assets and other assets in the
related Trust Fund under the circumstances and in the manner
described in 'The Pooling and Servicing Agreement -- Termination;
Optional Termination' herein and in the related Prospectus
Supplement.
In addition, if the related Prospectus Supplement provides that the
property of a Trust Fund will include a Pre-Funding Account (as such
term is defined in the related Prospectus Supplement, the
'Pre-Funding Account'), a portion of a
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Series of Certificates will be subject to early retirement on or
immediately following the end of the Funding Period (as such term is
defined in the related Prospectus Supplement, the 'Funding Period')
in an amount and manner specified in the related Prospectus
Supplement.
Legal Investment.......................... The Prospectus Supplement for each series of Certificates will
specify which, if any, of the Classes of Certificates offered thereby
will constitute 'mortgage related securities' for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA'). Classes
of Certificates that qualify as 'mortgage related securities' will be
legal investments for certain types of institutional investors to the
extent provided in SMMEA, subject, in any case, to any other
regulations that may govern investments by such institutional
investors. Institutions whose investment activities are subject to
review by federal or state authorities should consult with their
counsel or the applicable authorities to determine whether an
investment in a particular class of Certificates (whether or not such
class constitutes a 'mortgage related security') complies with
applicable guidelines, policy statements or restrictions. See 'Legal
Investment'.
Certain Federal Income Tax Consequences... The federal income tax consequences to Certificateholders will vary
depending on whether one or more elections are made to treat the
Trust Fund or specified portions thereof as a 'real estate mortgage
investment conduit' ('REMIC') under the provisions of the Internal
Revenue Code of 1986, as amended (the 'Code'). The Prospectus
Supplement for each Series of Certificates will specify whether such
an election will be made. See 'Certain Federal Income Tax
Consequences'.
ERISA Considerations...................... A fiduciary of any employee benefit plan or other retirement plan or
arrangement subject to the Employee Retirement Income Security Act of
1974, as amended ('ERISA'), or the Code should carefully review with
its legal advisors whether the purchase or holding of Certificates
could give rise to a transaction prohibited or not otherwise
permissible under ERISA or the Code. See 'ERISA Considerations'.
Certain classes of Certificates may not be transferred unless the
Trustee and the Depositor are furnished with a letter of
representations or an opinion of counsel to the effect that such
transfer will not result in a violation of the prohibited transaction
provisions of ERISA and the Code and will not subject the Trustee,
the Depositor or the Master Servicer to additional obligations. See
'Description of the Certificates -- General' and 'ERISA
Considerations'.
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THE TRUST FUND*
The Trust Fund for each Series will be held by the Trustee for the benefit
of the related Certificateholders. Each Trust Fund will consist of certain
mortgage-related assets (the 'Mortgage Assets') consisting of (A) a mortgage
pool (a 'Mortgage Pool') comprised of Mortgage Loans, (B) Agency Securities or
(C) Private Mortgage-Backed Securities, in each case as specified in the related
Prospectus Supplement, together with payments in respect of such Mortgage Assets
and certain other accounts, obligations or agreements, in each case as specified
in the related Prospectus Supplement.
The Certificates will be entitled to payment from the assets of the related
Trust Fund or Funds or other assets pledged for the benefit of the
Certificateholders as specified in the related Prospectus Supplement and will
not be entitled to payments in respect of the assets of any other trust fund
established by the Depositor. Unless otherwise specified in the related
Prospectus Supplement, the Mortgage Assets of any Trust Fund will consist of
Mortgage Loans, Agency Securities or Private Mortgage-Backed Securities but not
a combination thereof.
The Mortgage Assets may be acquired by the Depositor, either directly or
through affiliates, from originators or sellers that may be affiliates of the
Depositor (the 'Sellers') and conveyed by the Depositor to the related Trust
Fund. The Sellers may have originated the Mortgage Assets or acquired the
Mortgage Assets from the originators or other entities. See 'Mortgage Loan
Program -- Underwriting Standards'.
The following is a brief description of the Mortgage Assets expected to be
included in the Trust Funds. If specific information respecting the Mortgage
Assets is not known at the time the related Series of Certificates initially is
offered, more general information of the nature described below will be provided
in the related Prospectus Supplement, and 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 thereof and to be filed with the Securities and Exchange Commission
within fifteen days after the initial issuance of such Certificates (the
'Detailed Description'). A schedule of the Mortgage Assets relating to such
Series will be attached to the Agreement delivered to the Trustee upon delivery
of the Certificates.
THE MORTGAGE LOANS -- GENERAL
For purposes hereof, the real property that secures repayment of the
Mortgage Loans are collectively referred to as 'Mortgaged Properties'. The
Mortgaged Properties may be located in any one of the fifty states, the District
of Columbia, Guam, Puerto Rico or any other territory of the United States.
Mortgage Loans with certain Loan-to-Value Ratios and/or certain principal
balances may be covered wholly or partially by primary mortgage guaranty
insurance policies (each, a 'Primary Mortgage Insurance Policy'). The existence,
extent and duration of any such coverage will be described in the applicable
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans in a Mortgage Pool will have monthly payments due on the first
day of each month. The payment terms of the Mortgage Loans to be included in a
Trust Fund will be described in the related Prospectus Supplement and may
include any of the following features or combination thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index (which will be specified in the
related Prospectus Supplement), a rate that is fixed for a period of time
or under certain circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is convertible
from an adjustable rate to a fixed rate. Changes to an adjustable rate may
be subject to periodic limitations, maximum rates,
- ------------
* Whenever the terms 'Mortgage Pool' and 'Certificates' are used in this
Prospectus, such terms will be deemed to apply, unless the context indicates
otherwise, to one specific Mortgage Pool and the Certificates representing
certain undivided interests, as described below, in a single trust fund (the
'Trust Fund') consisting primarily of the Mortgage Loans in such Mortgage
Pool. Similarly, the term 'Pass-Through Rate' will refer to the Pass-Through
Rate borne by the Certificates of one specific Series and the term 'Trust
Fund' will refer to one specific Trust Fund.
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minimum rates or a combination of such limitations. Accrued interest may be
deferred and added to the principal of a loan for such periods and under
such circumstances as may be specified in the related Prospectus
Supplement. Mortgage Loans may provide for the payment of interest at a
rate lower than the specified interest rate borne by such Mortgage Loan for
a period of time or for the life of the loan, and the amount of any
difference may be contributed from funds supplied by the seller of the
Mortgaged Property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the loan over its term, may be calculated on the basis of an
assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from the
interest rate on the Mortgage Loan or may not be amortized during all or a
portion of the original term. Payment of all or a substantial portion of
the principal may be due on maturity ('balloon payments'). Principal may
include interest that has been deferred and added to the principal balance
of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the loan, may increase over a specified period of time or may
change from period to period. Loans may include limits on periodic
increases or decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
(d) The Mortgage Loans generally may be prepaid at any time without
the payment of any prepayment fee. If so specified in the related
Prospectus Supplement, some prepayments of principal may be subject to a
prepayment fee, which may be fixed for the life of any such Mortgage Loan
or may decline over time, and may be prohibited for the life of any such
Mortgage Loan or for certain periods ('lockout periods'). Certain Mortgage
Loans may permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in connection with
any such subsequent prepayment. Other Mortgage Loans may permit prepayments
without payment of a fee unless the prepayment occurs during specified time
periods. The loans may include 'due-on-sale' clauses which permit the
mortgagee to demand payment of the entire mortgage loan in connection with
the sale or certain transfers of the related Mortgaged Property. Other
Mortgage Loans may be assumable by persons meeting the then applicable
underwriting standards of the Seller.
A Trust Fund may contain certain Mortgage Loans ('Buydown Loans'), which
include provisions whereby a third party partially subsidizes the borrower's
monthly payments during the early years of the Mortgage Loan, the difference to
be made up from a fund (a 'Buydown Fund') contributed by such third party at the
time of origination of the Mortgage Loan. A Buydown Fund will be in an amount
equal either to the discounted value or full aggregate amount of future payment
subsidies. The underlying assumption of buydown plans is that the income of the
borrower will increase during the buydown period as a result of normal increases
in compensation and of inflation, so that the borrower will be able to meet the
full mortgage payments at the end of the buydown period. To the extent that this
assumption as to increased income is not fulfilled, the possibility of defaults
on Buydown Loans is increased. The related Prospectus Supplement will contain
information with respect to any Buydown Loan concerning limitations on the
interest rate paid by the borrower initially, on annual increases in the
interest rate and on the length of the buydown period.
Each Prospectus Supplement will contain information, as of the date of such
Prospectus Supplement and to the extent then specifically known to the
Depositor, with respect to the Mortgage Loans contained in the related Mortgage
Pool, including (i) the aggregate outstanding principal balance and the average
outstanding principal balance of the Mortgage Loans as of the applicable Cut-off
Date, (ii) the type of property securing the Mortgage Loans (e.g., separate
residential properties, individual units in condominium apartment buildings or
in buildings owned by cooperative housing corporations, vacation and second
homes, or other similar real property), (iii) the original terms to maturity of
the Mortgage Loans, (iv) the largest principal balance and the smallest
principal balance of any of the Mortgage Loans, (v) the earliest origination
date and latest maturity date of any of the Mortgage Loans, (vi) the aggregate
principal balance of Mortgage Loans having Loan-to-Value Ratios at origination
exceeding 80%, (vii) the maximum and minimum per annum rates at which the
related Mortgage Notes accrue interest (the 'Mortgage Rate'), and (viii) the
geographical distribution of the Mortgage Loans.
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If specific information respecting the Mortgage Loans is not known to the
Depositor at the time the related Certificates are initially offered, more
general information of the nature described above will be provided in the
related Prospectus Supplement, and final specific information will be set forth
in the Detailed Description.
The 'Loan-to-Value Ratio' of a Mortgage Loan at any given time is the
fraction, expressed as a percentage, the numerator of which is the original
principal balance of the related Mortgage Loan and the denominator of which is
Collateral Value of the related Mortgaged Property. Unless otherwise specified
in the related Prospectus Supplement, the 'Collateral Value' of a Mortgaged
Property is the lesser of (a) the appraised value determined in an appraisal
obtained by the originator at origination of such Mortgage Loan and (b) the
sales price for such property.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding principal
balances of the Mortgage Loans, and any secondary financing on the Mortgaged
Properties, in a particular Mortgage Pool become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, adverse economic conditions and
other factors (which may or may not affect real property values) may affect the
timely payment by mortgagors of scheduled payments of principal and interest on
the Mortgage Loans and, accordingly, the actual rates of delinquencies,
foreclosures and losses with respect to any Mortgage Pool. To the extent that
such losses are not covered by subordination provisions or alternative
arrangements, such losses will be borne, at least in part, by the holders of the
Certificates of the related Series.
The Depositor will cause the Mortgage Loans comprising each Mortgage Pool
to be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Certificates of the related Series. The Master
Servicer named in the related Prospectus Supplement will service the Mortgage
Loans, either directly or through other mortgage servicing institutions (each, a
'Sub-Servicer'), pursuant to a Pooling and Servicing Agreement (each, an
'Agreement'), and will receive a fee for such services. See 'Mortgage Loan
Program' and 'The Pooling and Servicing Agreement'. With respect to Mortgage
Loans serviced by the Master Servicer through a Sub-Servicer, the Master
Servicer will remain liable for its servicing obligations under the related
Agreement as if the Master Servicer alone were servicing such Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, the only
obligations of the Depositor with respect to a Series of Certificates will be to
obtain certain representations and warranties from the Sellers and to assign to
the Trustee for such Series of Certificates the Depositor's rights with respect
to such representations and warranties. See 'The Pooling and Servicing Agreement
- -- Assignment of Mortgage Assets'. The obligations of the Master Servicer with
respect to the Mortgage Loans will consist principally of its contractual
servicing obligations under the related Agreement (including its obligation to
enforce the obligations of the Sub-Servicers or Sellers, or both, as more fully
described herein under 'Mortgage Loan Program -- Representations by Sellers;
Repurchases' and 'The Pooling and Servicing Agreement -- Assignment of Mortgage
Assets') and its obligation to make certain cash advances in the event of
delinquencies in payments on or with respect to the Mortgage Loans in the
amounts described herein under 'Description of the Certificates -- Advances'.
The obligations of the Master Servicer to make advances may be subject to
limitations, to the extent provided herein and in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, Mortgage
Loans will consist of mortgage loans, deeds of trust or participations or other
beneficial interests therein, secured by first, second or more junior liens on
single family (i.e., one- to four-family) residential properties. If so
specified, the Mortgage Loans may include cooperative apartment loans
('Cooperative Loans') secured by security interests in shares issued by private,
non-profit, cooperative housing corporations ('Cooperatives') and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in such Cooperatives' buildings. If so specified in the
related Prospectus Supplement, the Mortgage Assets of the related Trust Fund may
include mortgage participation certificates evidencing interests in Mortgage
Loans. Such loans may be conventional loans
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(i.e., loans that are not insured or guaranteed by any governmental agency) or
loans insured by the FHA or partially guaranteed by the VA, as specified in the
related Prospectus Supplement.
The Mortgaged Properties relating to single family Mortgage Loans will
consist of detached or semi-detached one-family dwelling units, two- to
four-family dwelling units, townhouses, rowhouses, individual condominium units,
individual units in planned unit developments, and certain other dwelling units.
Such Mortgaged Properties may include vacation and second homes, investment
properties and leasehold interests. In the case of leasehold interests, the term
of the leasehold will exceed the scheduled maturity of the Mortgage Loan by at
least five years, unless otherwise specified in the related Prospectus
Supplement. Certain Mortgage Loans may be originated or acquired in connection
with corporate programs, including employee relocation programs. In limited
instances, a borrower who uses the dwelling unit as a primary residence may also
make some business use of the property.
AGENCY SECURITIES
Government National Mortgage Association. GNMA is a wholly-owned corporate
instrumentality of the United States with the United States Department of
Housing and Urban Development. Section 306(g) of Title II of the National
Housing Act of 1934, as amended (the 'Housing Act'), authorizes GNMA to
guarantee the timely payment of the principal of and interest on certificates
which represent an interest in a pool of mortgage loans insured by the Federal
Housing Authority ('FHA') under the Housing Act, or Title V of the Housing Act
of 1949 ('FHA Loans'), or partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended, or Chapter 37 of Title 38, United States
Code ('VA Loans').
Section 306(g) of the Housing Act provides that 'the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guaranty under this subsection'. In order to meet
its obligations under any such guarantee, GNMA may, under Section 306(d) of the
Housing Act, borrow from the United States Treasury in an unlimited amount which
is at any time sufficient to enable GNMA to perform its obligations under its
guarantee.
GNMA Certificates. Each GNMA Certificate held in a Trust Fund (which may be
issued under either the GNMA I program or the GNMA II program) will be a 'fully
modified pass-through' mortgage-backed certificate issued and serviced by a
mortgage banking company or other financial concern ('GNMA Issuer') approved by
GNMA or approved by FNMA as a seller-servicer of FHA Loans and/or VA Loans. The
mortgage loans underlying the GNMA Certificates will consist of FHA Loans and/or
VA Loans. Each such mortgage loan is secured by a one- to four-family
residential property. GNMA will approve the issuance of each such GNMA
Certificate in accordance with a guaranty agreement (a 'Guaranty Agreement')
between GNMA and the GNMA Issuer. Pursuant to its Guaranty Agreement, a GNMA
Issuer will be required to advance its own funds in order to make timely
payments of all amounts due on each such GNMA Certificate, even if the payments
received by the GNMA Issuer on the FHA Loans or VA Loans underlying each such
GNMA Certificate are less than the amounts due on each such GNMA Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 40 years (but may have original maturities of
substantially less than 40 years). Each such GNMA Certificate will be based on
and backed by a pool of FHA Loans or VA Loans secured by one- to four-family
residential properties and will provide for the payment by or on behalf of the
GNMA Issuer to the registered holder of such GNMA Certificate of scheduled
monthly payments of principal and interest equal to the registered holder's
proportionate interest in the aggregate amount of the monthly principal and
interest payment on each FHA Loan or VA Loan underlying such GNMA Certificate,
less the applicable servicing and guarantee fee which together equal the
difference between the interest on the FHA Loan or VA Loan and the pass-through
rate on the GNMA Certificate. In addition, each payment will include
proportionate pass-through payments of any prepayments of principal on the FHA
Loans or VA Loans underlying such GNMA Certificate and liquidation proceeds in
the event of a foreclosure or other disposition of any such FHA Loans or VA
Loans.
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If a GNMA Issuer is unable to make the payments on a GNMA Certificate as it
becomes due, it must promptly notify GNMA and request GNMA to make such payment.
Upon notification and request, GNMA will make such payments directly to the
registered holder of such GNMA Certificate. In the event no payment is made by a
GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make such
payment, the holder of such GNMA Certificate will have recourse only against
GNMA to obtain such payment. The Trustee or its nominee, as registered holder of
the GNMA Certificates held in a Trust Fund, will have the right to proceed
directly against GNMA under the terms of the Guaranty Agreements relating to
such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA I Certificate must have the
same interest rate (except for pools of mortgage loans secured by manufactured
homes) over the term of the loan. The interest rate on such GNMA I Certificate
will equal the interest rate on the mortgage loans included in the pool of
mortgage loans underlying such GNMA I Certificate, less one-half percentage
point per annum of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate are due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund or
any other early recovery of principal on such loan will be passed through to the
Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or by
'buydown' mortgage loans for which funds will have been provided (and deposited
into escrow accounts) for application to the payment of a portion of the
borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing 'buydown' mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of such mortgage loans, will be less than the amount of stated
interest on such mortgage loans. The interest not so paid will be added to the
principal of such graduated payment mortgage loans and, together with interest
thereon, will be paid in subsequent years. The obligations of GNMA and of a GNMA
Issuer will be the same irrespective of whether the GNMA Certificates are backed
by graduated payment mortgage loans or 'buydown' mortgage loans. No statistics
comparable to the FHA's prepayment experience on level payment, non-'buydown'
mortgage loans are available in respect of graduated payment or 'buydown'
mortgages. GNMA Certificates related to a Series of Certificates may be held in
book-entry form.
As described above, the GNMA Certificates included in a Trust Fund, and the
related underlying mortgage loans, may have characteristics and terms different
from those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
Federal Home Loan Mortgage Corporation. FHLMC is a corporate
instrumentality of the United States created pursuant to Title III of the
Emergency Home Finance Act of 1970, as amended (the 'FHLMC Act'). The common
stock of FHLMC is owned by the Federal Home Loan Banks and its preferred stock
is owned by stockholders of the Federal Home Loan Banks. FHLMC was established
primarily for the purpose of increasing the availability of mortgage credit for
the financing of urgently needed housing. It seeks to provide an enhanced degree
of liquidity for residential mortgage
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investments primarily by assisting in the development of secondary markets for
conventional mortgages. The principal activity of FHLMC currently consists of
the purchase of first lien conventional mortgage loans or participation
interests in such mortgage loans and the sale of the mortgage loans or
participations so purchased in the form of mortgage securities, primarily FHLMC
Certificates. FHLMC is confined to purchasing, so far as practicable, mortgage
loans that it deems to be of such quality, type and class as to meet generally
the purchase standards imposed by private institutional mortgage investors.
FHLMC Certificates. Each FHLMC Certificate represents an undivided interest
in a pool of mortgage loans that may consist of first lien conventional loans,
FHA Loans or VA Loans (a 'FHLMC Certificate group'). FHLMC Certificates are sold
under the terms of a Mortgage Participation Certificate Agreement. A FHLMC
Certificate may be issued under either FHLMC's Cash Program or Guarantor
Program.
Mortgage loans underlying the FHLMC Certificates held by a Trust Fund will
consist of mortgage loans with original terms to maturity of between 10 and 30
years. Each such mortgage loan must meet the applicable standards set forth in
the FHLMC Act. A FHLMC Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another FHLMC Certificate group. Under the Guarantor
Program, any such FHLMC Certificate group may include only whole loans or
participation interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable Certificate rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC Certificate
collection by such holder of all principal on the underlying mortgage loans,
without any offset or deduction, to the extent of such holder's pro rata share
thereof, but does not, except if and to the extent specified in the related
Prospectus Supplement for a Series of Certificates, guarantee the timely payment
of scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees the
timely payment of principal based on the difference between the pool factor,
published in the month preceding the month of distribution and the pool factor
published in such month of distribution. Pursuant to its guarantees, FHLMC
indemnifies holders of FHLMC Certificates against any diminution in principal by
reason of charges for property repairs, maintenance and foreclosure. FHLMC may
remit the amount due on account of its guaranty of collection of principal at
any time after default on an underlying mortgage loan, but not later than (i) 30
days following foreclosure sale, (ii) 30 days following payment of the claim by
any mortgage insurer or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying FHLMC Certificates, including the timing of
demand for acceleration, FHLMC reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans that it
has purchased but not sold. The length of time necessary for FHLMC to determine
that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and FHLMC has not adopted standards which
require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, or entitled to,
the full faith and credit of the United States. If FHLMC were unable to satisfy
such obligations, distributions to holders of FHLMC Certificates would consist
solely of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FHLMC Certificates would be
affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial repayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by
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FHLMC or the seller thereof. FHLMC is required to remit each registered FHLMC
Certificateholder's pro rata share of principal payments on the underlying
mortgage loans, interest at the FHLMC pass-through rate and any other sums such
as prepayment fees, within 60 days of the date on which such payments are deemed
to have been received by FHLMC.
Under FHLMC's Cash Program, there is no limitation on the amount by which
interest rates on the mortgage loans underlying a FHLMC Certificate may exceed
the pass-through rate on the FHLMC Certificate. Under such program, FHLMC
purchases groups of whole mortgage loans from sellers at specified percentages
of their unpaid principal balances, adjusted for accrued or prepaid interest,
which when applied to the interest rate of the mortgage loans and participations
purchased results in the yield (expressed as a percentage) required by FHLMC.
The required yield, which includes a minimum servicing fee retained by the
servicer, is calculated using the outstanding principal balance. The range of
interest rates on the mortgage loans and participations in a FHLMC Certificate
group under the Cash Program will vary since mortgage loans and participations
are purchased and assigned to a FHLMC Certificate group based upon their yield
to FHLMC rather than on the interest rate on the underlying mortgage loans.
Under FHLMC's Guarantor Program, the pass-through rate on a FHLMC Certificate is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of FHLMC's management and
guaranty income as agreed upon between the seller and FHLMC.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of the FHLMC Certificates. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, and makes payments of principal and interest each month to the
registered holders thereof in accordance with such holders' instructions.
Federal National Mortgage Association. FNMA is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act, as amended (the 'Charter Act'). FNMA was
originally established in 1938 as a United States government agency to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder-owned and privately-managed corporation by legislation enacted in
1968.
FNMA provides funds to the mortgage market primarily by purchasing mortgage
loans from lenders, thereby replenishing their funds for additional lending.
FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps to
redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA Certificates. FNMA Certificates are Guaranteed Mortgage Pass-Through
Certificates representing fractional undivided interests in a pool of mortgage
loans formed by FNMA. Each mortgage loan must meet the applicable standards of
the FNMA purchase program. Mortgage loans comprising a pool are either provided
by FNMA from its own portfolio or purchased pursuant to the criteria of the FNMA
purchase program.
Mortgage loans underlying FNMA Certificates held by a Trust Fund will
consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a FNMA Certificate are expected to be between either 8 to 15
years or 20 to 30 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest rates
that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA Certificate is equal to the lowest interest rate of
any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Under a
regular servicing option (pursuant to which the mortgagee or each other servicer
assumes the entire risk of
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foreclosure losses), the annual interest rates on the mortgage loans underlying
a FNMA Certificate will be between 50 basis points and 250 basis points greater
than its annual pass-through rate and under a special servicing option (pursuant
to which FNMA assumes the entire risk for foreclosure losses), the annual
interest rates on the mortgage loans underlying a FNMA Certificate will
generally be between 55 basis points and 255 basis points greater than the
annual FNMA Certificate pass-through rate. If specified in the related
Prospectus Supplement, FNMA Certificates may be backed by adjustable rate
mortgages.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing such holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by such FNMA Certificate on the underlying mortgage loans, whether
or not received, and such holder's proportionate share of the full principal
amount of any foreclosed or other finally liquidated mortgage loan, whether or
not such principal amount is actually recovered. The obligations of FNMA under
its guarantees are obligations solely of FNMA and are not backed by, or entitled
to, the full faith and credit of the United States. Although the Secretary of
the Treasury of the United States has discretionary authority to lend FNMA up to
$2.25 billion outstanding at any time, neither the United States nor any agency
thereof is obligated to finance FNMA's operations or to assist FNMA in any other
manner. If FNMA were unable to satisfy its obligations, distributions to holders
of FNMA Certificates would consist solely of payments and other recoveries on
the underlying mortgage loans and, accordingly, monthly distributions to holders
of FNMA Certificates would be affected by delinquent payments and defaults on
such mortgage loans.
FNMA Certificates evidencing interests in pools of mortgage loans formed on
or after May 1, 1985 (other than FNMA Certificates backed by pools containing
graduated payment mortgage loans or mortgage loans secured by multifamily
projects) are available in book-entry form only. Distributions of principal and
interest on each FNMA Certificate will be made by FNMA on the 25th day of each
month to the persons in whose name the FNMA Certificate is entered in the books
of the Federal Reserve Banks (or registered on the FNMA Certificate register in
the case of fully registered FNMA Certificates) as of the close of business on
the last day of the preceding month. With respect to FNMA Certificates issued in
book-entry form, distributions thereon will be made by wire, and with respect to
fully registered FNMA Certificates, distributions thereon will be made by check.
As described above, the FNMA Certificates included in a Trust Fund, and the
related underlying mortgage loans, may have characteristics and terms different
from those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
Stripped Mortgage-Backed Securities. Agency Securities may consist of one
or more stripped mortgage-backed securities, each as described herein and in the
related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but not
the interest distributions) or the interest distributions (but not the principal
distributions), or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain FHLMC, FNMA or GNMA
Certificates. The underlying securities will be held under a trust agreement by
FHLMC, FNMA or GNMA, each as trustee, or by another trustee named in the related
Prospectus Supplement. FHLMC, FNMA or GNMA will guaranty each stripped Agency
Security to the same extent as such entity guarantees the underlying securities
backing such stripped Agency Security, unless otherwise specified in the related
Prospectus Supplement.
Other Agency Securities. If specified in the related Prospectus Supplement,
a Trust Fund may include other mortgage pass-through certificates issued or
guaranteed by GNMA, FNMA or FHLMC. The characteristics of any such mortgage
pass-through certificates will be described in such Prospectus Supplement. If so
specified, a combination of different types of Agency Securities may be held in
a Trust Fund.
PRIVATE MORTGAGE-BACKED SECURITIES
General. Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates or participation certificates evidencing an undivided
interest in a Mortgage Pool or (b) collateralized mortgage obligations secured
by Mortgage Loans. Private Mortgage-Backed Securities may include
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stripped mortgage-backed securities representing an undivided interest in all or
a part of either the principal distributions (but not the interest
distributions) or the interest distributions (but not the principal
distributions) or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain Mortgage Loans.
Private Mortgage-Backed Securities will have been publicly issued pursuant to a
pooling and servicing agreement, an indenture or similar agreement (a 'PMBS
Agreement'). Unless otherwise specified in the related Prospectus Supplement,
the seller/servicer of the underlying Mortgage Loans will have entered into the
PMBS Agreement with the trustee under such PMBS Agreement (the 'PMBS Trustee').
The PMBS Trustee or its agent, or a custodian, will possess the Mortgage Loans
underlying such Private Mortgage-Backed Securities. Mortgage Loans underlying a
Private Mortgage-Backed Security will be serviced by a servicer (the 'PMBS
Servicer') directly or by one or more subservicers who may be subject to the
supervision of the PMBS Servicer.
The issuer of the Private Mortgage-Backed Securities (the 'PMBS Issuer')
will be a financial institution or other entity engaged generally in the
business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized for the
purpose of, among other things, establishing trusts and acquiring and selling
housing loans to such trusts and selling beneficial interests in such trusts. If
so specified in the related Prospectus Supplement, the PMBS Issuer may be an
affiliate of the Depositor. The obligations of the PMBS Issuer will generally be
limited to certain representations and warranties with respect to the assets
conveyed by it to the related trust. Unless otherwise specified in the related
Prospectus Supplement, the PMBS Issuer will not have guaranteed any of the
assets conveyed to the related trust or any of the Private Mortgage-Backed
Securities issued under the PMBS Agreement. Additionally, although the Mortgage
Loans underlying the Private Mortgage-Backed Securities may be guaranteed by an
agency or instrumentality of the United States, the Private Mortgage-Backed
Securities themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
Underlying Loans. The Mortgage Loans underlying the Private Mortgage-Backed
Securities may consist of fixed rate, level payment, fully amortizing loans or
graduated payment mortgage loans, Buydown Loans, adjustable rate mortgage loans,
or loans having balloon or other special payment features. Such Mortgage Loans
may be secured by single family property or by an assignment of the proprietary
lease or occupancy agreement relating to a specific dwelling within a
Cooperative and the related shares issued by such Cooperative.
Additional Information. The Prospectus Supplement for a Series for which
the Trust Fund includes Private Mortgage-Backed Securities will specify (i) the
aggregate approximate principal amount and type of the Private Mortgage-Backed
Securities to be included in the Trust Fund, (ii) certain characteristics of the
Mortgage Loans which comprise the underlying assets for the Private Mortgage-
Backed Securities including (A) the payment features of such Mortgage Loans, (B)
the approximate aggregate principal balance, if known, of underlying Mortgage
Loans insured or guaranteed by a governmental entity, (C) the servicing fee or
range of servicing fees with respect to the Mortgage Loans and (D) the minimum
and maximum stated maturities of the underlying Mortgage Loans at origination,
(iii) the maximum original term-to-stated maturity of the Private
Mortgage-Backed Securities, (iv) the weighted average term-to-stated maturity of
the Private Mortgage-Backed Securities, (v) the pass-through or certificate rate
of the Private Mortgage-Backed Securities, (vi) the weighted average pass-
through or certificate rate of the Private Mortgage-Backed Securities, (vii) the
PMBS Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the PMBS
Trustee for such Private Mortgage-Backed Securities, (viii) certain
characteristics of credit support, if any, such as reserve funds, insurance
policies, surety bonds, letters of credit or guaranties relating to the Mortgage
Loans underlying the Private Mortgage-Backed Securities or to such Private
Mortgage-Backed Securities themselves, (ix) the term on
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which the underlying Mortgage Loans for such Private Mortgage-Backed Securities
may, or are required to, be purchased prior to their stated maturity or the
stated maturity of the Private Mortgage-Backed Securities and (x) the terms on
which Mortgage Loans may be substituted for those originally underlying the
Private Mortgage-Backed Securities.
SUBSTITUTION OF MORTGAGE ASSETS
Substitution of Mortgage Assets will be permitted in the event of breaches
of representations and warranties with respect to any original Mortgage Asset or
in the event the documentation with respect to any Mortgage Asset is determined
by the Trustee to be incomplete. The period during which such substitution will
be permitted generally will be indicated in the related Prospectus Supplement.
The related Prospectus Supplement will describe any other conditions upon which
Mortgage Assets may be substituted for Mortgage Assets initially included in the
Trust Fund.
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement,
substantially all of the net proceeds from the sale of each Series of
Certificates will be used by the Depositor for the purchase of the Mortgage
Assets represented by the Certificates of such Series or to reimburse amounts
previously used to effect such a purchase, the costs of carrying the related
Mortgage Assets until the sale of the Certificates and other expenses connected
with pooling the related Mortgage Assets and issuing the Certificates. The
Depositor expects to sell Certificates in Series from time to time, but the
timing and amount of offerings of Certificates will depend on a number of
factors, including the volume of Mortgage Assets acquired by the Depositor,
prevailing interest rates, availability of funds and general market conditions.
THE DEPOSITOR
MLCC Mortgage Investors, Inc. (the 'Depositor') was incorporated in the
State of Delaware on April 4, 1994 as a wholly-owned, limited purpose finance
subsidiary of Merrill Lynch Credit Corporation (a wholly-owned indirect
subsidiary of Merrill Lynch & Co., Inc.). The Depositor maintains its principal
office at 4802 Deer Lake Drive East, Jacksonville, Florida 32246. Its telephone
number is (904) 928-6000.
As described herein under 'Mortgage Loan Program -- Representations by
Sellers; Repurchases', the only obligations, if any, of the Depositor with
respect to a Series of Certificates may be pursuant to certain limited
representations and warranties and limited undertakings to repurchase or
substitute Mortgage Loans under certain circumstances. The Depositor will have
no ongoing servicing obligations or responsibilities with respect to any
Mortgage Pool. The Depositor does not have, nor is it expected in the future to
have, any significant assets.
As specified in the related Prospectus Supplement, the Master Servicer with
respect to any Series of Certificates evidencing interests in Mortgage Loans may
be an affiliate of the Depositor. As described under 'The Trust Fund -- The
Mortgage Loans -- General', ' -- Agency Securities' and ' -- Private
Mortgage-Backed Securities', the Depositor anticipates that it will acquire
Mortgage Loans, Agency Securities and Private Mortgage-Backed Securities in the
open market or in privately negotiated transactions, which may be through or
from an affiliate.
Neither the Depositor nor Merrill Lynch Credit Corporation nor any of its
affiliates, including Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Merrill Lynch & Co., Inc., will insure or guarantee the Certificates of any
Series.
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Depositor, either
directly or through affiliates, from one or more Sellers, which may be
affiliates of the Depositor. Unless otherwise specified in the related
Prospectus Supplement, the Mortgage Loans so acquired by the Depositor will have
been
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originated in accordance with the underwriting criteria specified below under
'Underwriting Standards'.
UNDERWRITING STANDARDS
Unless otherwise specified in the related Prospectus Supplement, each
Seller will represent and warrant that all Mortgage Loans originated and/or sold
by it to the Depositor or one of its affiliates will have been underwritten in
accordance with standards consistent with those utilized by mortgage lenders
generally during the period of origination for similar types of loans. As to any
Mortgage Loan insured by the FHA or partially guaranteed by the VA, the Seller
will represent that it has complied with underwriting policies of the FHA or the
VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the Mortgaged Property as collateral. In general, a prospective borrower
applying for a Mortgage Loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information. As
part of the description of the borrower's financial condition, the borrower
generally is required to provide a current list of assets and liabilities and a
statement of income and expenses, as well as an authorization to apply for a
credit report which summarizes the borrower's credit history with local
merchants and lenders and any record of bankruptcy. In most cases, an employment
verification is obtained from an independent source (typically the borrower's
employer) which verification reports the length of employment with that
organization, the borrower's current salary, and whether it is expected that the
borrower will continue such employment in the future. If a prospective borrower
is self-employed, the borrower may be required to submit copies of signed tax
returns. The borrower may also be required to authorize verification of deposits
at financial institutions where the borrower has demand or savings accounts.
In determining the adequacy of the Mortgaged Property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good repair and that
construction, if new, has been completed. The appraisal is based on the market
value of comparable homes, the estimated rental income (if considered applicable
by the appraiser) and the cost of replacing the home.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligations on the proposed mortgage loan (generally determined on the
basis of the monthly payments due in the year of origination) and other expenses
related to the Mortgaged Property (such as property taxes and hazard insurance)
and (ii) to meet monthly housing expenses and other financial obligations and
monthly living expenses. The underwriting standards applied by Sellers,
particularly with respect to the level of loan documentation and the mortgagor's
income and credit history, may be varied in appropriate cases where factors such
as low Loan-to-Value Ratios or other favorable credit exist.
In the case of a Mortgage Loan secured by a leasehold interest in real
property, the title to which is held by a third party lessor, the Seller will
represent and warrant, among other things, that the remaining term of the lease
and any sublease is at least five years longer than the remaining term on the
Mortgage Note.
Certain of the types of Mortgage Loans that may be included in a Trust Fund
are recently developed and may involve additional uncertainties not present in
traditional types of loans. For example, certain of such Mortgage Loans may
provide for escalating or variable payments by the mortgagor or obligor. These
types of Mortgage Loans are underwritten on the basis of a judgment that
mortgagors or obligors will have the ability to make monthly payments required
initially. In some instances, however, a mortgagor's or obligor's income may not
be sufficient to permit continued loan payments as such payments increase. These
types of Mortgage Loans may also be underwritten primarily upon the basis of
Loan-to-Value Ratios or other favorable credit factors.
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QUALIFICATIONS OF SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Seller will be required to satisfy the qualifications set forth herein. Each
Seller must be an institution experienced in originating and servicing Mortgage
Loans of the type contained in the related Mortgage Pool in accordance with
accepted practices and prudent guidelines, and must maintain satisfactory
facilities to originate and service those Mortgage Loans. Each Seller must be a
seller/servicer approved by either FNMA or FHLMC. Each Seller must be a
mortgagee approved by the FHA or an institution the deposit accounts in which
are insured by the Federal Deposit Insurance Corporation (the 'FDIC'). The
Resolution Trust Corporation, acting in its capacity as conservator or receiver
of a depository institution, may be a Seller if so specified in the related
Prospectus Supplement.
REPRESENTATIONS BY SELLERS; REPURCHASES
Each Seller will have made representations and warranties in respect of the
Mortgage Loans sold by such Seller and evidenced by a Series of Certificates.
Such representations and warranties unless otherwise provided in the related
Prospectus Supplement generally include, among other things, that (i)
immediately prior to the transfer and assignment of the Mortgage Loans, the
seller had good title to, and was the sole owner of, each Mortgage Loan and
there had been no other sale or assignment thereof, (ii) as of the date of such
transfer, the Mortgage Loans are subject to no offsets, defenses or
counterclaims, (iii) each Mortgage Loan at the time it was made complied in all
material respects with applicable state and federal laws, including usury, equal
credit opportunity and disclosure laws, (iv) a lender's policy of title
insurance was issued on the date of the origination of each Mortgage Loan and
each such policy is valid and remains in full force and effect, (v) as of the
date of such transfer, each Mortgage subject to the Agreement is a valid first
lien on the related Mortgaged Property (subject only to (a) the lien of current
real property taxes and assessments, (b) covenants, conditions and restrictions,
rights of way, easements and other matters of public record as of the date of
the recording of such Mortgage, such exceptions appearing of record and either
being acceptable to mortgage lending institutions generally or specifically
reflected in the appraisal made in connection with the origination of the
related Mortgage Loan and (c) other matters to which like properties are
commonly subject which do not materially interfere with the benefits of the
security intended to be provided by the Mortgage) and such property is free of
material damage and is in good repair, (vi) as of the date of such transfer, no
Mortgage Loan is more than 30 days delinquent in payment and there are no
delinquent tax or assessment liens against the related Mortgaged Property, and
(vii) with respect to each Mortgage Loan, if the Mortgaged Property is located
in an area identified by the Federal Emergency Management Agency as having
special flood hazards and subject in certain circumstances to the availability
of flood insurance under the National Flood Insurance Act of 1968, as amended,
such Mortgaged Property is covered by flood insurance, if applicable regulations
at the time such Mortgage Loan was originated required that such flood insurance
coverage be obtained.
If so specified in the related Prospectus Supplement, the representations
and warranties of a Seller in respect of a Mortgage Loan will be made not as of
the Cut-off Date but as of the date on which such Seller sold the Mortgage Loan
to the Depositor or one of its affiliates. Under such circumstances, a
substantial period of time may have elapsed between such date and the date of
initial issuance of the Series of Certificates evidencing an interest in such
Mortgage Loan. Since the representations and warranties of a Seller do not
address events that may occur following the sale of a Mortgage Loan by such
Seller, its repurchase obligation described below will not arise if the relevant
event that would otherwise have given rise to such an obligation with respect to
a Mortgage Loan occurs after the date of sale of such Mortgage Loan by such
Seller to the Depositor or its affiliates. However, the Depositor will not
include any Mortgage Loan in the Trust Fund for any Series of Certificates if
anything has come to the Depositor's attention that would cause it to believe
that the representations and warranties of a Seller will not be accurate and
complete in all material respects in respect of such Mortgage Loan as of the
date of initial issuance of the related Series of Certificates. If the Master
Servicer is also a Seller of Mortgage Loans with respect to a particular Series,
such representations will be in addition to the representations and warranties
made by the Master Servicer in its capacity as a Master Servicer.
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The Master Servicer or the Trustee, if the Master Servicer is the Seller,
will promptly notify the relevant Seller of any breach of any representation or
warranty made by it in respect of a Mortgage Loan which materially and adversely
affects the interests of the Certificateholders in such Mortgage Loan. Unless
otherwise specified in the related Prospectus Supplement, if such Seller cannot
cure such breach within 90 days after notice from the Master Servicer or the
Trustee, as the case may be, then such Seller will be obligated to repurchase
such Mortgage Loan from the Trust Fund at a price (the 'Purchase Price') equal
to 100% of the Principal Balance thereof as of the date of the repurchase plus
accrued interest thereon to the first day of the month in which the Purchase
Price is to be distributed at the Mortgage Rate (less any unreimbursed Advances
or amount payable as related servicing compensation if the Seller is the Master
Servicer with respect to such Mortgage Loan). If a REMIC election is to be made
with respect to a Trust Fund, unless otherwise provided in the related
Prospectus Supplement, the Master Servicer or a holder of the related residual
certificate will be obligated to pay any prohibited transaction tax which may
arise in connection with any such repurchase. The Master Servicer, unless
otherwise specified in the related Prospectus Supplement, will be entitled to
reimbursement for any such payment from the assets of the related Trust Fund or
from any holder of the related residual certificate. See 'Description of the
Certificates -- General'. Except in those cases in which the Master Servicer is
the Seller, the Master Servicer will be required under the applicable Agreement
to enforce this obligation for the benefit of the Trustee and the holders of the
Certificates, following the practices it would employ in its good faith business
judgment were it the owner of such Mortgage Loan. This repurchase obligation
will constitute the sole remedy available to holders of Certificates or the
Trustee for a breach of representation by a Seller.
Neither the Depositor nor the Master Servicer (unless the Master Servicer
is the Seller) will be obligated to purchase a Mortgage Loan if a Seller
defaults on its obligation to do so, and no assurance can be given that Sellers
will carry out their respective repurchase obligations with respect to Mortgage
Loans. However, to the extent that a breach of a representation and warranty of
a Seller may also constitute a breach of a representation made by the Master
Servicer, the Master Servicer may have a repurchase obligation as described
below under 'The Pooling and Servicing Agreement -- Assignment of Mortgage
Assets'.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an Agreement, dated
as of the related Cut-off Date, among the Depositor, the Master Servicer and the
Trustee for the benefit of the holders of the Certificates of such Series. The
provisions of each Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust Fund. A
form of an Agreement is an exhibit to the Registration Statement of which this
Prospectus is a part. The following summaries describe certain provisions that
may appear in each Agreement. The Prospectus Supplement for a Series of
Certificates will describe any provision of the Agreement relating to such
Series that materially differs from the description thereof contained in this
Prospectus. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
Agreement for each Series of Certificates and the applicable Prospectus
Supplement. The Depositor will provide a copy of the Agreement (without
exhibits) relating to any Series without charge upon written request of a holder
of record of a Certificate of such Series addressed to MLCC Mortgage Investors,
Inc., 4802 Deer Lake Drive East, Jacksonville, Florida 32246.
GENERAL
Unless otherwise specified in the Prospectus Supplement, the Certificates
of each Series will be issued in either fully registered or book-entry form, in
the authorized denominations specified in the related Prospectus Supplement,
will evidence specified beneficial ownership interests in the related Trust Fund
created pursuant to each Agreement and will not be entitled to payments in
respect of the assets included in any other Trust Fund established by the
Depositor. The Certificates will not represent obligations of the Depositor or
any affiliate of the Depositor. The Mortgage Loans will not be insured or
guaranteed by any governmental entity or other person, unless otherwise
specified in the related Prospectus Supplement. Each Trust Fund will consist of,
to the extent provided in the Agreement, (i)
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the Mortgage Assets, that from time to time are subject to the related Agreement
(exclusive of any amounts specified in the related Prospectus Supplement
('Retained Interest')); (ii) such assets as from time to time are required to be
deposited in the related Certificate Account, as defined below under 'The
Pooling and Servicing Agreement -- Payments on Mortgage Loans; Deposits to
Certificate Account'; (iii) property which secured a Mortgage Loan and which is
acquired on behalf of the Certificateholders by foreclosure or deed in lieu of
foreclosure; and (iv) any Primary Mortgage Insurance Policies, FHA Insurance and
VA Guarantees, and any other insurance policies or other forms of credit
enhancement required to be maintained pursuant to the Agreement. If so specified
in the related Prospectus Supplement, a Trust Fund may also include one or more
of the following: reinvestment income on payments received on the Mortgage
Assets, a reserve fund, a mortgage pool insurance policy, a special hazard
insurance policy, a bankruptcy bond, one or more letters of credit, a surety
bond, guaranties or similar instruments or other agreements.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust Fund. A Series of
Certificates may include one or more classes that are senior or subordinate in
right to payment to one or more other classes of Certificates of such Series.
Certain Series or classes of Certificates may be covered by insurance policies,
surety bonds or other forms of credit enhancement, in each case as described
herein and in the related Prospectus Supplement. One or more classes of
Certificates of a Series may be entitled to receive principal, distributions,
with disproportionate, nominal or no interest distributions or to interest
distributions, with disproportionate, nominal or no principal distributions or
any combination thereof. Distributions on one or more classes of a Series of
Certificates may be made prior to one or more other classes, after the
occurrence of specified events, in accordance with a schedule or formula, on the
basis of collections from designated portions of the Mortgage Assets in the
related Trust Fund, or on a different basis, in each case as specified in the
related Prospectus Supplement. The timing, amounts, sequential order and
priority of payment of such distributions may vary among classes or over time as
specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Certificates will be made by the Trustee on
each Distribution Date (i.e., monthly, quarterly, semi-annually or at such other
intervals and on the dates as are specified in the Prospectus Supplement) in
proportion to the percentages specified in the related Prospectus Supplement.
Distributions will be made to the persons in whose names the Certificates are
registered at the close of business on the dates specified in the related
Prospectus Supplement (each, a 'Record Date'). Distributions will be made by
check or money order mailed to the persons entitled thereto at the address
appearing in the register maintained for holders of Certificates (the
'Certificate Register') or, if specified in the related Prospectus Supplement,
in the case of Certificates that are of a certain minimum denomination, upon
written request by the Certificateholder, by wire transfer or by such other
means as are described therein; provided, however, that the final distribution
in retirement of the Certificates will be made only upon presentation and
surrender of the Certificates at the office or agency of the Trustee or other
person specified in the notice to Certificateholders of such final distribution.
The Certificates will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Certificates of any Series but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding by or on behalf of any employee
benefit plan or other retirement arrangement (including individual retirement
accounts and annuities, Keogh plans and collective investment funds in which
such plans, accounts or arrangements are invested) subject to provisions of
ERISA or the Code of a class of Certificates entitled only to a specified
percentage of payments of either interest or principal or a notional amount of
either interest or principal on the related Mortgage Loans or a class of
Certificates entitled to receive payments of interest and principal on the
Mortgage Loans only after payments to other classes or after the occurrence of
certain specified
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events may result in 'prohibited transactions' within the meaning of ERISA and
the Code. See 'ERlSA Considerations'. Unless otherwise specified in the related
Prospectus Supplement, transfer of Certificates of such a class will not be
registered unless the transferee (i) represents that it is not, and is not
purchasing on behalf of, any such plan, account or arrangement or (ii) provides
an opinion of counsel satisfactory to the Trustee and the Depositor that the
purchase of Certificates of such a class by or on behalf of such plan, account
or arrangement is permissible under applicable law and will not subject the
Trustee, the Master Servicer or the Depositor to any obligation or liability in
addition to those undertaken in the Agreement.
As to each Series, an election may be made to treat the related Trust Fund
or designated portions thereof as a 'real estate mortgage investment conduit' or
'REMIC' as defined in the Code. The related Prospectus Supplement will specify
whether a REMIC election is to be made. Alternatively, the Agreement for a
Series may provide that a REMIC election may be made at the discretion of the
Depositor or the Master Servicer and may be made only if certain conditions are
satisfied. As to any such Series, the terms and provisions applicable to the
making of a REMIC election, as well as any material federal income tax
consequences to Certificateholders not otherwise described herein, will be set
forth in the related Prospectus Supplement. If such an election is made with
respect to a Series, one of the classes will be designated as evidencing the
sole class of 'residual interests' in the related REMIC, as defined in the Code.
All other classes of Certificates in such a Series will constitute 'regular
interests' in the related REMIC, as defined in the Code. As to each Series with
respect to which a REMIC election is to be made, the Master Servicer or a holder
of the related residual certificate will be obligated to take all actions
required in order to comply with applicable laws and regulations and will be
obligated to pay any prohibited transaction taxes. The Master Servicer, unless
otherwise specified in the related Prospectus Supplement, will be entitled to
reimbursement for any such payment from the assets of the Trust Fund or from any
holder of the related residual certificate.
Unless otherwise specified in the related Prospectus Supplement, upon
notification from a Mortgagor of such Mortgagor's intent to convert from an
adjustable interest rate to a fixed interest rate, and prior to the conversion
of such Mortgage Loan, the Master Servicer or its successor will be obligated to
purchase such related Mortgage Loan from the related Trust Fund.
DISTRIBUTIONS ON CERTIFICATES
General. In general, the method of determining the amount of distributions
on a particular Series of Certificates will depend on the type of credit
support, if any, that is used with respect to such Series. See 'Credit
Enhancement'. Set forth below are descriptions of various methods that may be
used to determine the amount of distributions on the Certificates of a
particular Series. The Prospectus Supplement for each Series of Certificates
will describe the method to be used in determining the amount of distributions
on the Certificates of such Series.
Distributions allocable to principal of and interest on the Certificates
will be made by the Trustee out of, and only to the extent of, funds in the
related Certificate Account, including any funds transferred from any Reserve
Fund. As between Certificates of different classes and as between distributions
of principal (and, if applicable, between distributions of Principal
Prepayments, as defined below, and scheduled payments of principal) and
interest, distributions made on any Distribution Date will be applied as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, distributions to any class of Certificates
will be made pro rata to all Certificateholders of that class.
Available Distribution Amount. Unless otherwise specified in the related
Prospectus Supplement, all distributions on the Certificates of each Series on
each Distribution Date will be made from the Available Distribution Amount
described below, in accordance with the terms described in the related
Prospectus Supplement and specified in the Agreement. Unless otherwise provided
in the related Prospectus Supplement, the 'Available Distribution Amount' for
each Distribution Date will equal the sum of the following amounts:
(i) the aggregate of all previously undistributed payments on account
of principal (including Principal Prepayments, if any, and prepayment
penalties, if so provided in the related Prospectus
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Supplement) and interest on the Mortgage Loans in the related Trust Fund
(including Liquidation Proceeds and Insurance Proceeds and amounts drawn
under letters of credit or other credit enhancement instruments as
permitted thereunder and as specified in the related Agreement) received by
the Master Servicer after the Cut-off Date and on or prior to the day of
the month of the related Distribution Date specified in the related
Prospectus Supplement (the 'Determination Date') except:
(a) all payments that were due on or before the Cut-off Date;
(b) all Liquidation Proceeds and all Insurance Proceeds, all
Principal Prepayments and all other proceeds of any Mortgage Loan
purchased by the Depositor, Master Servicer, any Sub-Servicer or any
Seller pursuant to the Agreement that were received after the prepayment
period specified in the related Prospectus Supplement and all related
payments of interest representing interest for any period after such
prepayment period;
(c) all scheduled payments of principal and interest due on a date
or dates subsequent to the first day of the month of distribution;
(d) amounts received on particular Mortgage Loans as late payments
of principal or interest or other amounts required to be paid by
Mortgagors, but only to the extent of any unreimbursed advance in
respect thereof made by the Master Servicer (including the related
Sub-Servicers);
(e) amounts representing reimbursement, to the extent permitted by
the Agreement and as described under 'Advances' below, for advances made
by the Master Servicer or Sub-Servicers that were deposited into the
Certificate Account, and amounts representing reimbursement for certain
other losses and expenses incurred by the Master Servicer or the
Depositor and described below;
(f) that portion of each collection of interest on a particular
Mortgage Loan in such Trust Fund that represents credit enhancement fees
or servicing compensation payable to the Master Servicer or any
Sub-servicer or Retained Interest that is to be retained from such
collection or is permitted to be retained from related Insurance
Proceeds, Liquidation Proceeds or proceeds of Mortgage Loans purchased
pursuant to the Agreement;
(ii) the amount of any advance made by the Master Servicer or
Sub-Servicer as described under 'Advances' below and deposited by it in the
Certificate Account; and
(iii) if applicable, amounts withdrawn from a Reserve Fund.
Distributions of Interest. Unless otherwise specified in the related
Prospectus Supplement, interest will accrue on the aggregate Certificate Balance
(or, in the case of Certificates entitled only to distributions allocable to
interest, the aggregate notional amount) of each class of Certificates entitled
to interest from the date, at the Pass-Through Rate (which may be a fixed rate
or rate adjustable as specified in such Prospectus Supplement) and for the
periods specified in such Prospectus Supplement. To the extent funds are
available therefor, interest accrued during each such specified period on each
class of Certificates entitled to interest (other than a class of Certificates
that provides for interest that accrues, but is not currently payable, referred
to hereafter as 'Accrual Certificates') will be distributable on the
Distribution Dates specified in the related Prospectus Supplement until the
aggregate Certificate Balance of the Certificates of such class has been
distributed in full or, in the case of Certificates entitled only to
distributions allocable to interest, until the aggregate notional amount of such
Certificates is reduced to zero or for the period of time designated in the
related Prospectus Supplement. The original Certificate Balance of each
Certificate will equal the aggregate distributions allocable to principal to
which such Certificate is entitled. Unless otherwise specified in the related
Prospectus Supplement, distributions allocable to interest on each Certificate
that is not entitled to distributions allocable to principal will be calculated
based on the notional amount of such Certificate. The notional amount of a
Certificate will not evidence an interest in or entitlement to distributions
allocable to principal but will be used solely for convenience in expressing the
calculation of interest and for certain other purposes.
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With respect to any class of Accrual Certificates, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid on
a given Distribution Date will be added to the aggregate Certificate Balance of
such class of Certificates on that Distribution Date. Unless otherwise specified
in the related Prospectus Supplement, distributions of interest on each class of
Accrual Certificates will commence only after the occurrence of the events
specified in such Prospectus Supplement. Unless otherwise specified in the
related Prospectus Supplement, prior to such time, the beneficial ownership
interest of such class of Accrual Certificates in the Trust Fund, as reflected
in the aggregate Certificate Balance of such class of Accrual Certificates, will
increase on each Distribution Date by the amount of interest that accrued on
such class of Accrual Certificates during the preceding interest accrual period
but that was not required to be distributed to such class on such Distribution
Date. Any such class of Accrual Certificates will thereafter accrue interest on
its outstanding Certificate Balance as so adjusted.
Distributions of Principal. Unless otherwise specified in the related
Prospectus Supplement, the aggregate 'Certificate Balance' of any class of
Certificates entitled to distributions of principal will be the aggregate
original Certificate Balance of such class of Certificates specified in such
Prospectus Supplement, reduced by all distributions reported to the holders of
such Certificates as allocable to principal and (i) in the case of Accrual
Certificates, if so specified in the related Prospectus Supplement, increased by
all interest accrued but not then distributable on such Accrual Certificates and
(ii) in the case of adjustable rate Certificates, if so specified in the related
Prospectus Supplement, subject to the effect of negative amortization. The
related Prospectus Supplement will specify the method by which the amount of
principal to be distributed on the Certificates on each Distribution Date will
be calculated and the manner in which such amount will be allocated among the
classes of Certificates entitled to distributions of principal.
If so provided in the related Prospectus Supplement, one or more classes of
Senior Certificates will be entitled to receive all or a disproportionate
percentage of the payments of principal that are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments ('Principal
Prepayments') in the percentages and under the circumstances or for the periods
specified in such Prospectus Supplement. Any such allocation of Principal
Prepayments to such class or classes of Certificateholders will have the effect
of accelerating the amortization of such Senior Certificates while increasing
the interests evidenced by the Subordinated Certificates in the Trust Fund.
Increasing the interests of the Subordinated Certificates relative to that of
the Senior Certificates is intended to preserve the availability of the
subordination provided by the Subordinated Certificates. See 'Credit
Enhancement -- Subordination'.
Unscheduled Distributions. To the extent specified in the related
Prospectus Supplement relating to a Series of Certificates which have less
frequent than monthly Distribution Dates, the Certificates will be subject to
receipt of distributions before the next scheduled Distribution Date under the
circumstances and in the manner described below and in such Prospectus
Supplement. If applicable, the Trustee will be required to make such unscheduled
distributions on the day and in the amount specified in the related Prospectus
Supplement if, due to substantial payments of principal (including Principal
Prepayments) on the Mortgage Assets, the Trustee or the Master Servicer
determines that the funds available or anticipated to be available from the
Certificate Account and, if applicable, any Reserve Fund, may be insufficient to
make required distributions on the Certificates on such Distribution Date.
Unless otherwise specified in the related Prospectus Supplement, the amount of
any such unscheduled distribution that is allocable to principal will not exceed
the amount that would otherwise have been required to be distributed as
principal on the Certificates on the next Distribution Date. Unless otherwise
specified in the related Prospectus Supplement, all unscheduled distributions
will include interest at the applicable Pass-Through Rate (if any) on the amount
of the unscheduled distribution allocable to principal for the period and to the
date specified in such Prospectus Supplement. See 'Yield and Prepayment
Considerations'.
Unless otherwise specified in the related Prospectus Supplement, all
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
Certificates would have been made on the next Distribution Date, and with
respect to Certificates of the same class, unscheduled distributions of
principal will be made on a pro rata basis.
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Notice of any unscheduled distribution will be given by the Trustee prior to the
date of such distribution.
ADVANCES
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will be required to advance on or before each Distribution Date (from
its own funds, funds advanced by Sub-Servicers or funds held in the Certificate
Account for future distributions to the holders of such Certificates), an amount
equal to the aggregate of payments of principal and interest that were
delinquent on the related Determination Date, subject to the Master Servicer's
determination that such advances will be recoverable out of late payments by
Mortgagors, Liquidation Proceeds, Insurance Proceeds or otherwise. In the case
of Cooperative Loans, the Master Servicer also will be required to advance any
unpaid maintenance fees and other charges under the related proprietary leases
as specified in the related Prospectus Supplement.
In making Advances, the Master Servicer will endeavor to maintain a regular
flow of scheduled interest and principal payments to holders of the
Certificates, rather than to guarantee or insure against losses. If Advances are
made by the Master Servicer from cash being held for future distribution to
Certificateholders, the Master Servicer will replace such funds on or before any
future Distribution Date to the extent that funds in the applicable Certificate
Account on such Distribution Date would be less than the amount required to be
available for distributions to Certificateholders on such date. Any Master
Servicer funds advanced will be reimbursable to the Master Servicer out of
recoveries on the specific Mortgage Loans with respect to which such Advances
were made (e.g., late payments made by the related Mortgagor, any related
Insurance Proceeds, Liquidation Proceeds or proceeds of any Mortgage Loan
purchased by a Sub-Servicer or a Seller under the circumstances described
hereinabove). In addition, Advances by the Master Servicer (and any advances by
a Sub-Servicer) also will be reimbursable to the Master Servicer (or
Sub-Servicer) from cash otherwise distributable to Certificateholders (including
the holders of Senior Certificates) to the extent that the Master Servicer
determines that any such Advances previously made are not ultimately recoverable
as described in the immediately preceding sentence. The Master Servicer also
will be obligated to make Advances, to the extent recoverable out of Insurance
Proceeds, Liquidation Proceeds or otherwise, in respect of certain taxes and
insurance premiums not paid by Mortgagors on a timely basis. Funds so advanced
are reimbursable to the Master Servicer to the extent permitted by the
Agreement. If specified in the related Prospectus Supplement, the obligations of
the Master Servicer to make advances may be supported by a cash advance reserve
fund, a surety bond or other arrangement, in each case as described in such
Prospectus Supplement.
REPORTS TO CERTIFICATEHOLDERS
Prior to or concurrently with each distribution on a Distribution Date and
except as otherwise set forth in an applicable Prospectus Supplement, the Master
Servicer or the Trustee will furnish to each Certificateholder of record of the
related Series a statement setting forth, to the extent applicable to such
Series of Certificates, among other things:
(i) the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and if so
specified in the related Prospectus Supplement, prepayment penalties
included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the outstanding Certificate Balance or notional amount of each
class of the related Series after giving effect to the distribution of
principal on such Distribution Date;
(v) the related amount of the servicing compensation retained or
withdrawn from the Certificate Account by the Master Servicer, and the
amount of additional servicing compensation received by the Master Servicer
attributable to penalties, fees, excess Liquidation Proceeds and other
similar charges and items;
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(vi) the number and aggregate principal balances of Mortgage Loans (A)
delinquent (exclusive of Mortgage Loans in foreclosure) and (B) in
foreclosure as of the close of business on the last day of the calendar
month preceding such Distribution Date;
(vii) the book value of any real estate acquired through foreclosure
or grant of a deed in lieu of foreclosure;
(viii) if applicable, the amount remaining in any Reserve Fund at the
close of business on the Distribution Date;
(ix) the Pass-Through Rate as of the day prior to the immediately
preceding Distribution Date; and
(x) any amounts remaining under letters of credit, pool policies or
other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Certificate of the relevant class having the Percentage
Interest specified in the related Prospectus Supplement. The report to
Certificateholders for any Series of Certificates may include additional or
other information of a similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Certificateholder of record at any time during such calendar year a report (a)
as to the aggregate of amounts reported pursuant to (i) and (ii) for such
calendar year or, in the event such person was a Certificateholder of record
during a portion of such calendar year, for the applicable portion of such year
and (b) such other customary information as may be deemed necessary or desirable
for Certificateholders to prepare their tax returns.
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, a class of
Certificates initially may be represented by one or more certificates registered
in the name of Cede & Co. ('Cede'), the nominee for The Depository Trust Company
('DTC'). 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 ('UCC')
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 ('Participants') and facilitate
the clearance and settlement of securities transactions between Participants
through electronic book-entry changes in their accounts, thereby eliminating the
need for physical movement of certificates. 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 brokers, dealers, banks and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ('Indirect Participant').
Certificateholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of Certificates
registered in the name of Cede, as nominee of DTC, may do so only through
Participants and Indirect Participants. In addition, such Certificateholders
will receive all distributions of principal of and interest on the Certificates
from the Trustee through DTC and its Participants. Under a book-entry format,
Certificateholders will receive payments after the related Distribution Date
because, while payments are required to be forwarded to Cede, as nominee for
DTC, on each such date, DTC will forward such payments to its Participants which
thereafter will be required to forward them to Indirect Participants or
Certificateholders. Under a book-entry format, it is anticipated that the only
Certificateholder will be Cede, as nominee of DTC, and that the beneficial
holders of Certificates will not be recognized by the Trustee as
Certificateholders under the Agreement. The beneficial holders of such
Certificates will only be permitted to exercise the rights of Certificateholders
under the Agreement indirectly through DTC and its Participants who in turn will
exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the
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Certificates and is required to receive and transmit payments of principal of
and interest on the Certificates. Participants and Indirect Participants with
which Certificateholders have accounts with respect to the Certificates
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Certificateholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Certificateholder to pledge Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Certificates may be limited due to the lack of a physical certificate for such
Certificates.
DTC in general advises that it will take any action permitted to be taken
by a Certificateholder under an Agreement only at the direction of one or more
Participants to whose account with DTC the Certificates are credited.
Additionally, DTC in general advises that it will take such actions with respect
to specified percentages of the Certificateholders only at the direction of and
on behalf of Participants whose holdings include current principal amounts of
outstanding Certificates that satisfy such specified percentages. DTC may take
conflicting actions with respect to other current principal amounts of
outstanding Certificates to the extent that such actions are taken on behalf of
Participants whose holdings include such current principal amounts of
outstanding Certificates.
Any Certificates initially registered in the name of Cede, as nominee of
DTC, will be issued in fully registered, certificated form to Certificateholders
or their nominees ('Definitive Certificates'), rather than to DTC or its nominee
only under the events specified in the related Agreement. Such events may
include the following: (i) the Depositor advises the Trustee in writing that DTC
is no longer willing or able to properly discharge its responsibilities as
Depository with respect to the Certificates, and the Trustee or the Depositor is
unable to locate a qualified successor, (ii) the Depositor, at its option,
elects to terminate the book-entry system through DTC, or (iii) after the
occurrence of an Event of Default (defined herein), Certificateholders
representing not less than 50% of the aggregate Current Principal Amount of the
Certificates advise the Trustee and DTC through 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 Certificateholders. Upon the occurrence of
any of the events specified in the related Agreement, DTC will be required to
notify all Participants of the availability through DTC of Definitive
Certificates. Upon surrender by DTC of the certificates representing the
Certificates and instruction for re-registration, the Trustee will issue the
Certificates in the form of Definitive Certificates, and thereafter the Trustee
will recognize the holders of such Definitive Certificates as
Certificateholders. Thereafter, payments of principal of and interest on the
Certificates will be made by the Trustee directly to Certificateholders in
accordance with the procedures set forth herein and in the Agreement. The final
distribution of any Certificate (whether Definitive Certificates or Certificates
registered in the name of Cede), however, will be made only upon presentation
and surrender of such Certificates on the final Distribution Date at such office
or agency as is specified in the notice of final payment to Certificateholders.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes of a
Series of Certificates or with respect to the Mortgage Assets in the related
Trust Fund. Credit enhancement may be in the form of a limited financial
guaranty policy issued by an entity named in the related Prospectus Supplement,
the subordination of one or more classes of the Certificates of such Series, the
establishment of one or more reserve funds, the use of a cross-support feature,
use of a mortgage pool insurance policy, bankruptcy bond, special hazard
insurance policy, surety bond or letters of credit described herein and in the
related Prospectus Supplement, or any combination of the foregoing. Unless
otherwise specified in the related Prospectus Supplement, any credit enhancement
will not provide protection against all risks of loss and will not guarantee
repayment of the entire principal balance of the Certificates and interest
thereon. If losses occur which exceed the amount covered by credit enhancement
or which are not covered by the credit enhancement, Certificateholders will bear
their allocable share of deficiencies.
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SUBORDINATION
If so specified in the related Prospectus Supplement, protection afforded
to holders of one or more classes of Certificates of a Series (the 'Subordinated
Certificates') by means of the subordination feature will be accomplished by the
preferential right of holders of one or more other classes of such Series (the
'Senior Certificates') to distributions in respect of scheduled principal,
Principal Prepayments, interest or any combination thereof that otherwise would
have been payable to holders of Subordinated Certificates under the
circumstances and to the extent specified in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, delays in receipt of
scheduled payments on the Mortgage Loans and losses on defaulted Mortgage Loans
will be borne first by the various classes of Subordinated Certificates and
thereafter by the various classes of Senior Certificates, in each case under the
circumstances and subject to the limitations specified in such related
Prospectus Supplement. The aggregate distributions in respect of delinquent
payments on the Mortgage Loans over the lives of the Certificates or at any
time, the aggregate losses in respect of defaulted Mortgage Loans which must be
borne by the Subordinated Certificates by virtue of subordination and the amount
of the distributions otherwise distributable to the Subordinated
Certificateholders that will be distributable to Senior Certificateholders on
any Distribution Date may be limited as specified in the related Prospectus
Supplement. If aggregate distributions in respect of delinquent payments on the
Mortgage Loans or aggregate losses in respect of such Mortgage Loans were to
exceed an amount specified in the related Prospectus Supplement, holders of
Senior Certificates would experience losses on the Certificates.
In addition to or in lieu of the foregoing, if so specified in the related
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Certificates on any Distribution Date may instead be
deposited into one or more Reserve Funds established with the Trustee. If so
specified in the related Prospectus Supplement, such deposits may be made on
each Distribution Date, for specified periods or until the balance in the
Reserve Funds has reached a specified amount and, following payments from the
Reserve Fund to holders of Senior Certificates or otherwise, thereafter to the
extent necessary to restore the balance in the Reserve Fund to required levels,
in each case as specified in the related Prospectus Supplement. If so specified
in the related Prospectus Supplement, amounts on deposit in the Reserve Fund may
be released to the holders of the class of Certificates specified in such
Prospectus Supplement at the times and under the circumstances specified in such
Prospectus Supplement.
If specified in the related Prospectus Supplement, various classes of
Senior Certificates and Subordinated Certificates may themselves be subordinate
in their right to receive certain distributions to other classes of Senior and
Subordinated Certificates, respectively, through a cross support mechanism or
otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the related Prospectus Supplement.
As between classes of Subordinated Certificates, payments to holders of Senior
Certificates on account of delinquencies or losses and payments to any Reserve
Fund will be allocated as specified in the related Prospectus Supplement.
MORTGAGE POOL INSURANCE POLICIES
If specified in the related Prospectus Supplement relating to a Mortgage
Pool, a separate mortgage pool insurance policy ('Mortgage Pool Insurance
Policy') will be obtained for the Mortgage Pool and issued by the insurer (the
'Pool Insurer') named in such Prospectus Supplement. Each Mortgage Pool
Insurance Policy will, subject to the limitations described below, cover loss by
reason of default in payment on Mortgage Loans in the Mortgage Pool in an amount
equal to a percentage specified in such Prospectus Supplement of the aggregate
principal balance of such Mortgage Loans on the Cut-off Date which are not
covered as to their entire outstanding principal balances by Primary Mortgage
Insurance Policies. As more fully described below, the Master Servicer will
present claims thereunder to the Pool Insurer on behalf of itself, the Trustee
and the holders of the Certificates. The Mortgage Pool Insurance Policies,
however, are not blanket policies against loss, since claims thereunder may be
made only
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respecting particular defaulted Mortgage Loans and only upon satisfaction of
certain conditions precedent described below. Unless otherwise specified in the
related Prospectus Supplement, the Mortgage Pool Insurance Policies will not
cover losses due to a failure to pay or denial of a claim under a Primary
Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool Insurance Policy will provide that no claims may be validly
presented unless (i) any required Primary Mortgage Insurance Policy is in effect
for the defaulted Mortgage Loan and a claim thereunder has been submitted and
settled; (ii) hazard insurance on the related Mortgaged Property has been kept
in force and real estate taxes and other protection and preservation expenses
have been paid; (iii) if there has been physical loss or damage to the Mortgaged
Property, it has been restored to its physical condition (reasonable wear and
tear excepted) at the time of issuance of the policy; and (iv) the insured has
acquired good and merchantable title to the Mortgaged Property free and clear of
liens except certain permitted encumbrances. Upon satisfaction of these
conditions, the Pool Insurer will have the option either (a) to purchase the
property securing the defaulted Mortgage Loan at a price equal to the principal
balance thereof plus accrued and unpaid interest at the Mortgage Rate to the
date of purchase and certain expenses incurred by the Master Servicer on behalf
of the Trustee and Certificateholders or (b) to pay the amount by which the sum
of the principal balance of the defaulted Mortgage Loan plus accrued and unpaid
interest at the Mortgage Rate to the date of payment of the claim and the
aforementioned expenses exceeds the proceeds received from an approved sale of
the Mortgaged Property, in either case net of certain amounts paid or assumed to
have been paid under the related Primary Mortgage Insurance Policy. If any
property securing a defaulted Mortgage Loan is damaged and proceeds, if any,
from the related hazard insurance policy or the applicable Special Hazard
Insurance Policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under the Mortgage Pool Insurance Policy, the
Master Servicer will not be required to expend its own funds to restore the
damaged property unless it determines that (i) such restoration will increase
the proceeds to Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) such expenses
will be recoverable by it through proceeds of the sale of the property or
proceeds of the related Mortgage Pool Insurance Policy or any related Primary
Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, no
Mortgage Pool Insurance Policy will insure (and many Primary Mortgage Insurance
Policies do not insure) against loss sustained by reason of a default arising
from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Mortgagor, the
originator or persons involved in the origination thereof or (ii) failure to
construct a Mortgaged Property in accordance with plans and specifications. A
failure of coverage attributable to one of the foregoing events might result in
a breach of the related Seller's representations described above and, in such
event, might give rise to an obligation on the part of such Seller to purchase
the defaulted Mortgage Loan if the breach cannot be cured by such Seller. No
Mortgage Pool Insurance Policy will cover (and many Primary Mortgage Insurance
Policies do not cover) a claim in respect of a defaulted Mortgage Loan occurring
when the servicer of such Mortgage Loan, at the time of default or thereafter,
was not approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Mortgage Pool Insurance Policy will be
reduced over the life of the related Certificates by the aggregate dollar amount
of claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims paid
will include certain expenses incurred by the Master Servicer as well as accrued
interest on delinquent Mortgage Loans to the date of payment of the claim,
unless otherwise specified in the related Prospectus Supplement. Accordingly, if
aggregate net claims paid under any Mortgage Pool Insurance Policy reach the
original policy limit, coverage under that Mortgage Pool Insurance Policy will
be exhausted and any further losses will be borne by the Certificateholders.
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SPECIAL HAZARD INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy will be obtained for the Mortgage Pool and will be
issued by the insurer (the 'Special Hazard Insurer') named in such Prospectus
Supplement. Each Special Hazard Insurance Policy will, subject to limitations
described below, protect holders of the related Certificates from (i) loss by
reason of damage to Mortgaged Properties caused by certain hazards (including
earthquakes and, to a limited extent, tidal waves and related water damage or as
otherwise specified in the related Prospectus Supplement) not insured against
under the standard form of hazard insurance policy for the respective states in
which the Mortgaged Properties are located or under a flood insurance policy if
the Mortgaged Property is located in a federally designated flood area, and (ii)
loss caused by reason of the application of the coinsurance clause contained in
hazard insurance policies. See 'The Pooling and Servicing Agreement -- Hazard
Insurance'. Each Special Hazard Insurance Policy will not cover losses
occasioned by fraud or conversion by the Trustee or Master Servicer, war,
insurrection, civil war, certain governmental action, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear or
chemical reaction, flood (if the Mortgaged Property is located in a federally
designated flood area), nuclear or chemical contamination and certain other
risks. The amount of coverage under any Special Hazard Insurance Policy will be
specified in the related Prospectus Supplement. Each Special Hazard Insurance
Policy will provide that no claim may be paid unless hazard and, if applicable,
flood insurance on the property securing the Mortgage Loan have been kept in
force and other protection and preservation expenses have been paid.
Subject to the foregoing limitations, and unless otherwise specified in the
related Prospectus Supplement, each Special Hazard Insurance Policy will provide
that where there has been damage to property securing a foreclosed Mortgage Loan
(title to which has been acquired by the insured) and to the extent such damage
is not covered by the hazard insurance policy or flood insurance policy, if any,
maintained by the Mortgagor or the Master Servicer, the Special Hazard Insurer
will pay the lesser of (i) the cost of repair or replacement of such property or
(ii) upon transfer of the property to the Special Hazard Insurer, the unpaid
principal balance of such Mortgage Loan at the time of acquisition of such
property by foreclosure or deed in lieu of foreclosure, plus accrued interest to
the date of claim settlement and certain expenses incurred by the Master
Servicer with respect to such property. If the unpaid principal balance of a
Mortgage Loan plus accrued interest and certain expenses is paid by the Special
Hazard Insurer, the amount of further coverage under the related Special Hazard
Insurance Policy will be reduced by such amount less any net proceeds from the
sale of the property. Any amount paid as the cost of repair of the property will
further reduce coverage by such amount. So long as a Mortgage Pool Insurance
Policy remains in effect, the payment by the Special Hazard Insurer of the cost
of repair or of the unpaid principal balance of the related Mortgage Loan plus
accrued interest and certain expenses will not affect the total insurance
proceeds paid to Certificateholders, but will affect the relative amounts of
coverage remaining under the related Special Hazard Insurance Policy and
Mortgage Pool Insurance Policy.
To the extent specified in an applicable Prospectus Supplement, the Master
Servicer may deposit cash, an irrevocable letter of credit or any other
instrument acceptable to each nationally recognized rating agency rating the
Certificates of the related Series in a special trust account to provide
protection in lieu of or in addition to that provided by a Special Hazard
Insurance Policy. The amount of any Special Hazard Insurance Policy or of the
deposit to the special trust account relating to such Certificates in lieu
thereof may be reduced so long as any such reduction will not result in a
downgrading of the rating of such Certificates by any such rating agency.
BANKRUPTCY BONDS
If specified in the related Prospectus Supplement, a bankruptcy bond
('Bankruptcy Bond') for proceedings under the federal Bankruptcy Code will be
issued by an insurer named in such Prospectus Supplement. Each Bankruptcy Bond
will cover, to the extent specified in the related Prospectus Supplement,
certain losses resulting from a reduction by a bankruptcy court of scheduled
payments of principal and interest on a Mortgage Loan or a reduction by such
court of the principal amount of a Mortgage Loan and will cover certain unpaid
interest on the amount of such a principal reduction from
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the date of the filing of a bankruptcy petition. The required amount of coverage
under each Bankruptcy Bond will be set forth in the related Prospectus
Supplement. Coverage under a Bankruptcy Bond may be cancelled or reduced by the
Master Servicer if such cancellation or reduction would not adversely affect the
then current rating or ratings of the related Certificates. See 'Certain Legal
Aspects of the Mortgage Loans -- Anti-Deficiency Legislation and Other
Limitations on Lenders'.
To the extent specified in an applicable Prospectus Supplement, the Master
Servicer may deposit cash, an irrevocable letter of credit or any other
instrument acceptable to each nationally recognized rating agency rating the
Certificates of the related Series in a special trust account to provide
protection in lieu of or in addition to that provided by a Bankruptcy Bond. The
amount of any Bankruptcy Bond or of the deposit to the special trust account
relating to such Certificates in lieu thereof may be reduced so long as any such
reduction will not result in a downgrading of the rating of such Certificates by
any such rating agency.
RESERVE FUNDS
If so specified in the related Prospectus Supplement, credit support with
respect to a Series of Certificates may be provided by the establishment and
maintenance with the Trustee for such Series of Certificates, in trust, of one
or more Reserve Funds for such Series. The related Prospectus Supplement will
specify whether or not such Reserve Funds will be included in the Trust Fund for
such Series.
The Reserve Fund for a Series will be funded (i) by the deposit therein of
cash, U.S. Treasury securities, instruments evidencing ownership of principal or
interest payments thereon, letters of credit, demand notes, certificates of
deposit or a combination thereof in the aggregate amount specified in the
related Prospectus Supplement, (ii) by the deposit therein from time to time of
certain amounts, as specified in the related Prospectus Supplement to which the
Subordinated Certificateholders, if any, would otherwise be entitled or (iii) in
such other manner as may be specified in the related Prospectus Supplement.
Any amounts on deposit in the Reserve Fund and the proceeds of any other
instrument upon maturity will be held in cash or will be invested in Permitted
Investments which, unless otherwise specified in the related Prospectus
Supplement, will include obligations of the United States and certain agencies
thereof, certificates of deposit, certain commercial paper, time deposits and
bankers acceptances sold by eligible commercial banks and certain repurchase
agreements of United States government securities with eligible commercial
banks. If a letter of credit is deposited with the Trustee, such letter of
credit will be irrevocable. Unless otherwise specified in the related Prospectus
Supplement, any instrument deposited therein will name the Trustee, in its
capacity as trustee for the holders of the Certificates, as beneficiary and will
be issued by an entity acceptable to each rating agency that rates the
Certificates. Additional information with respect to such instruments deposited
in the Reserve Funds will be set forth in the related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Account for distribution to the
holders of Certificates for the purposes, in the manner and at the times
specified in the related Prospectus Supplement.
CROSS SUPPORT
If specified in the related Prospectus Supplement, the beneficial ownership
of separate groups of assets included in a Trust Fund may be evidenced by
separate classes of the related Series of Certificates. In such case, credit
support may be provided by a cross support feature which requires that
distributions be made with respect to Certificates evidencing a beneficial
ownership interest in other asset groups within the same Trust Fund. The related
Prospectus Supplement for a Series which includes a cross-support feature will
describe the manner and conditions for applying such cross support feature.
If specified in the related Prospectus Supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two or more
related Trust Funds. If applicable, the related Prospectus Supplement will
identify the Trust Funds to which such credit support relates and the
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manner of determining the amount of the coverage provided thereby and of the
application of such coverage to the identified Trust Funds.
LIMITED GUARANTEE
If specified in the Prospectus Supplement with respect to a Series of
Certificates, credit enhancement may be provided in the form of a Limited
Guarantee issued by a guarantor named therein. If specified in the related
Prospectus Supplement, a Limited Guarantee may be provided by an affiliate or
affiliates of the Depositor.
LETTER OF CREDIT
Alternative credit support with respect to a Series of Certificates may be
provided by the issuance of a Letter of Credit by the bank or financial
institution specified in the applicable Prospectus Supplement. The coverage,
amount and frequency of any reduction in coverage provided by a Letter of Credit
issued with respect to a Series of Certificates will be set forth in the related
Prospectus Supplement.
SURETY BONDS
If specified in the Prospectus Supplement relating to a Series of
Certificates, credit support with respect to one or more Classes of Certificates
of a Series may be provided by the issuance of a Surety Bond issued by a
financial guarantee insurance company specified in the applicable Prospectus
Supplement. The coverage, amount and frequency of any reduction in coverage
provided by a Surety Bond will be set forth in the related Prospectus
Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Certificates will
be affected primarily by the amount and timing of principal payments received on
or in respect of the Mortgage Assets included in the related Trust Fund. The
original terms to maturity of the Mortgage Loans in a given Mortgage Pool will
vary depending upon the type of Mortgage Loans included therein. Each Prospectus
Supplement will contain information with respect to the type and maturities of
the Mortgage Loans in the related Mortgage Pool. Unless otherwise specified in
the related Prospectus Supplement, Mortgage Loans may be prepaid without penalty
in full or in part at any time. The prepayment experience on the Mortgage Loans
in a Mortgage Pool will affect the life of the related Series of Certificates.
A number of factors, including homeowner mobility, economic conditions, the
presence and enforceability of due-on-sale clauses, mortgage market interest
rates and the availability of mortgage funds, may affect prepayment experience
of Mortgage Loans.
Unless otherwise provided in the related Prospectus Supplement, all
conventional Mortgage Loans will contain due-on-sale provisions permitting the
mortgagee to accelerate the maturity of the loan upon sale or certain transfers
by the mortgagor of the underlying Mortgaged Property. Mortgage Loans insured by
the FHA, and Mortgage Loans partially guaranteed by the VA, are assumable with
the consent of the FHA and the VA, respectively. Thus, the rate of prepayments
on such Mortgage Loans may be lower than that of conventional Mortgage Loans
bearing comparable interest rates. Unless otherwise provided in the related
Prospectus Supplement, the Master Servicer generally will enforce any
due-on-sale or due-on-encumbrance clause, to the extent it has knowledge of the
conveyance or further encumbrance or the proposed conveyance or proposed further
encumbrance of the Mortgaged Property and reasonably believes that it is
entitled to do so under applicable law; provided, however, that the Master
Servicer will not take any enforcement action that would impair or threaten to
impair any recovery under any related insurance policy. See 'The Pooling and
Servicing Agreement -- Collection Procedures' and 'Certain Legal Aspects of the
Mortgage Loans' for a description of certain provisions of each Agreement and
certain legal developments that may affect the prepayment experience on the
Mortgage Loans.
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The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Mortgage Rates borne by the Mortgage Loans, such
Mortgage Loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above such Mortgage Rates. Conversely, if
prevailing interest rates rise appreciably above the Mortgage Rates borne by the
Mortgage Loans, such Mortgage Loans are likely to experience a lower prepayment
rate than if prevailing rates remain at or below such Mortgage Rates. However,
there can be no assurance that such will be the case.
When a full prepayment is made on a Mortgage Loan, the Mortgagor is charged
interest on the principal amount of the Mortgage Loan so prepaid only for the
number of days in the month actually elapsed up to the date of the prepayment
rather than for a full month. Unless otherwise specified in the related
Prospectus Supplement, the effect of prepayments in full will be to reduce the
amount of interest passed through in the following month to holders of
Certificates because interest on the principal amount of any Mortgage Loan so
prepaid will be paid only to the date of prepayment. Partial prepayments in a
given month may be applied to the outstanding principal balances of the Mortgage
Loans so prepaid on the first day of the month of receipt or the month following
receipt. In the latter case, partial prepayments will not reduce the amount of
interest passed through in such month. Unless otherwise specified in the related
Prospectus Supplement, both full and partial prepayments will not be passed
through until the month following receipt.
The effective yield to Certificateholders will be slightly lower than the
yield otherwise produced by the applicable Pass-Through Rate and purchase price
because while interest will accrue on each Mortgage Loan from the first day of
the month (unless otherwise provided in the related Prospectus Supplement), the
distribution of such interest will not be made earlier than the month following
the month of accrual.
Under certain circumstances, the Master Servicer or the holders of the
residual interests in a REMIC may have the option to purchase the assets of a
Trust Fund thereby effecting earlier retirement of the related Series of
Certificates. See 'The Pooling and Servicing Agreement -- Termination; Optional
Termination'.
If so specified in the related Prospectus Supplement, upon notification
from a Mortgagor of such Mortgagor's intent to convert from an adjustable
interest rate to a fixed interest rate, and prior to the conversion of such
Mortgage Loan, the Master Servicer or its successor will be obligated to
purchase such related Mortgage Loan. Any such purchase of a Mortgage Loan would
have the effect of a prepayment in full of the Mortgage Loan.
From time to time, Merrill Lynch Credit Corporation may solicit the
refinancing of loans (including the Mortgage Loans) by offering a new loan to
the borrower. Any such refinancing of a Mortgage Loan would have the effect of a
prepayment in full of the Mortgage Loan.
Factors other than those identified herein and in the related Prospectus
Supplement could significantly affect principal prepayments at any time and over
the lives of the Certificates. The relative contribution of the various factors
affecting prepayment may also vary from time to time. There can be no assurance
as to the rate of payment of principal of the Mortgage Assets at any time or
over the lives of the Certificates.
The Prospectus Supplement relating to a Series of Certificates will discuss
in greater detail the effect of the rate and timing of principal payments
(including prepayments), delinquencies and losses on the yield, weighted average
lives and maturities of such Certificates.
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THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of certain provisions of each Agreement which
are not described elsewhere in this Prospectus. Where particular provisions or
terms used in the Agreements are referred to, such provisions or terms are as
specified in the Agreements.
ASSIGNMENT OF MORTGAGE ASSETS
Assignment of the Mortgage Loans. At the time of issuance of the
Certificates of a Series, the Depositor will cause the Mortgage Loans comprising
the related Trust Fund to be assigned to the Trustee, together with all
principal and interest received by or on behalf of the Depositor on or with
respect to such Mortgage Loans after the Cut-off Date, other than principal and
interest due on or before the Cut-off Date and other than any Retained Interest
specified in the related Prospectus Supplement. The Trustee will, concurrently
with such assignment, deliver the Certificates to the Depositor in exchange for
the Mortgage Loans. Each Mortgage Loan will be identified in a schedule
appearing as an exhibit to the related Agreement. Such schedule will include
information as to the outstanding principal balance of each Mortgage Loan after
application of payments due on the Cut-off Date, as well as information
regarding the Mortgage Rate, the current scheduled monthly payment of principal
and interest, the maturity of the loan, the Loan-to-Value Ratio at origination
and certain other information. If specified in the related Prospectus
Supplement, the Depositor will deliver or cause to be delivered to the Trustee
loans at a predetermined price for inclusion in the Trust Fund within three
months after the issuance of the Certificates. The related Prospectus Supplement
for the Trust Fund will specify whether, and the terms, conditions and manner
under which Subsequent Mortgage Assets will be sold to the Trust Fund within
such three month period.
In addition, the Depositor will deliver or cause to be delivered to the
Trustee (or to the custodian hereinafter referred to) as to each Mortgage Loan,
among other things, (i) the mortgage note (the 'Mortgage Note') endorsed without
recourse in blank or to the order of the Trustee, (ii) the mortgage, deed of
trust or similar instrument (a 'Mortgage') with evidence of recording indicated
thereon (except for any Mortgage not returned from the public recording office,
in which case the Depositor will unless otherwise specified in the related
Prospectus Supplement, deliver or cause to be delivered a copy of such Mortgage
together with a certificate that the original of such Mortgage was delivered to
such recording office), (iii) an assignment of the Mortgage to the Trustee,
which assignment will be in recordable form, and (iv) such other security
documents as may be specified in the related Prospectus Supplement or the
related Agreement. Unless otherwise specified in the related Prospectus
Supplement, the Depositor will promptly cause the assignments of the related
loans to be recorded in the appropriate public office for real property records,
except in states in which, in the opinion of counsel acceptable to the Trustee,
such recording is not required to protect the Trustee's interest in such loans
against the claim of any subsequent transferee or any successor to or creditor
of the Depositor or the originator of such loans.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee, the related original
cooperative note endorsed without recourse in blank or to the order of the
Trustee, the original security agreement, the proprietary lease or occupancy
agreement, the recognition agreement, an executed financing agreement and the
relevant stock certificate, related blank stock powers and any other document
specified in the related Prospectus Supplement. The Depositor will cause to be
filed in the appropriate office an assignment and a financing statement
evidencing the Trustee's security interest in each Cooperative Loan.
The Trustee (or the custodian hereinafter referred to) will review such
Mortgage Loan documents within the time period specified in the related
Prospectus Supplement after receipt thereof, and the Trustee will hold such
documents in trust for the benefit of the Certificateholders. Unless otherwise
specified in the related Prospectus Supplement, if any such document is found to
be missing or defective in any material respect, the Trustee (or such custodian)
will notify the Master Servicer and the Depositor, and the Master Servicer will
notify the related Seller. If the Seller cannot cure the omission or defect
within the time period specified in the related Prospectus Supplement after
receipt of such notice, the Seller will be obligated to purchase the related
Mortgage Loan from the Trustee at the Purchase Price or, if so specified in the
related Prospectus Supplement, replace such Mortgage Loan
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with another mortgage loan that meets certain requirements set forth therein.
There can be no assurance that a Seller will fulfill this purchase obligation.
Although the Master Servicer may be obligated to enforce such obligation to the
extent described above under 'Mortgage Loan Program -- Representations by
Sellers; Repurchases', neither the Master Servicer nor the Depositor will be
obligated to purchase such Mortgage Loan if the Seller defaults on its purchase
obligation, unless such breach also constitutes a breach of the representations
or warranties of the Master Servicer or the Depositor, as the case may be.
Unless otherwise specified in the related Prospectus Supplement, this purchase
obligation constitutes the sole remedy available to the Certificateholders or
the Trustee for omission of, or a material defect in, a constituent document.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Mortgage Loans as agent of the Trustee.
Notwithstanding the foregoing provisions, with respect to a Trust Fund for
which a REMIC election is to be made, unless the related Prospectus Supplement
otherwise provides, no purchase of a Mortgage Loan will be made if such purchase
would result in a prohibited transaction tax under the Code.
Assignment of Agency Securities. The Depositor will cause the Agency
Securities to be registered in the name of the Trustee or its nominee, and the
Trustee concurrently will execute, countersign and deliver the Certificates.
Each Agency Security will be identified in a schedule appearing as an exhibit to
the Agreement, which will specify as to each Agency Security the original
principal amount and outstanding principal balance as of the Cut-off Date, the
annual pass-through rate (if any) and the maturity date.
Assignment of Private Mortgage-Backed Securities. The Depositor will cause
Private Mortgage-Backed Securities to be registered in the name of the Trustee.
The Trustee (or the custodian) will have possession of any certificated Private
Mortgage-Backed Securities. Unless otherwise specified in the related Prospectus
Supplement, the Trustee will not be in possession of or be assignee of record of
any underlying assets for a Private Mortgage-Backed Security. See 'The Trust
Fund -- Private Mortgage-Backed Securities' herein. Each Private Mortgage-Backed
Security will be identified in a schedule appearing as an exhibit to the related
Agreement which will specify the original principal amount, outstanding
principal balance as of the Cut-off Date, annual pass-through rate or interest
rate and maturity date and certain other pertinent information for each Private
Mortgage-Backed Security conveyed to the Trustee.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO CERTIFICATE ACCOUNT
The Master Servicer will establish and maintain or cause to be established
and maintained with respect to the related Trust Fund a separate account or
accounts for the collection of payments on the related Mortgage Assets in the
Trust Fund (the 'Certificate Account'), which unless otherwise specified in the
related Prospectus Supplement, must be either (i) maintained with a depository
institution the short-term debt obligations of which (or in the case of a
depository institution that is the principal subsidiary of a holding company,
the short-term debt obligations of which) are rated in the highest short-term
rating category by the nationally recognized statistical rating organization(s)
that rated one or more classes of the related Series of Certificates (each, a
'Rating Agency'), (ii) an account or accounts the deposits in which are fully
insured by either the BIF or SAIF, (iii) an account or accounts the deposits in
which are insured by the BIF or SAIF (to the limits established by the FDIC),
and the uninsured deposits in which are otherwise secured such that, as
evidenced by an opinion of counsel, the Certificateholders have a claim with
respect to the funds in the Certificate Account or a perfected first priority
security interest against any collateral securing such funds that is superior to
the claims of any other depositors or general creditors of the depository
institution with which the Certificate Account is maintained, (iv) a trust
account or accounts maintained with the trust department of a federal or a state
chartered depository institution or trust company, acting in a fiduciary
capacity or (v) an account or accounts otherwise acceptable to each Rating
Agency. The collateral eligible to secure amounts in the Certificate Account is
limited to United States government securities and other high-quality
investments ('Eligible Investments'). A Certificate Account may be maintained as
an interest bearing account or
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the funds held therein may be invested pending each succeeding Distribution Date
in Eligible Investments. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer or its designee will be entitled to receive any
such interest or other income earned on funds in the Certificate Account as
additional compensation and will be obligated to deposit in the Certificate
Account the amount of any loss immediately as realized. The Certificate Account
may be maintained with the Master Servicer or with a depository institution that
is an affiliate of the Master Servicer, provided it meets the standards set
forth above.
The Master Servicer will deposit or cause to be deposited in the
Certificate Account for each Trust Fund on a daily basis, to the extent
applicable and unless otherwise specified in the related Prospectus Supplement
and provided in the Agreement, the following payments and collections received
or advances made by or on behalf of it subsequent to the Cut-off Date (other
than payments due on or before the Cut-off Date and exclusive of any amounts
representing Retained Interest):
(i) all payments on account of principal, including Principal
Prepayments and, if specified in the related Prospectus Supplement,
prepayment penalties, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans, net of
applicable servicing compensation;
(iii) all proceeds (net of unreimbursed payments of property taxes,
insurance premiums and similar items ('Insured Expenses') incurred, and
unreimbursed advances made, by the Master Servicer, if any) of the hazard
insurance policies and any Primary Mortgage Insurance Policies, to the
extent such proceeds are not applied to the restoration of the property or
released to the Mortgagor in accordance with the Master Servicer's normal
servicing procedures (collectively, 'Insurance Proceeds') and all other
cash amounts (net of unreimbursed expenses incurred in connection with
liquidation or foreclosure ('Liquidation Expenses') and unreimbursed
advances made, by the Master Servicer, if any) received and retained in
connection with the liquidation of defaulted Mortgage Loans, by foreclosure
or otherwise ('Liquidation Proceeds'), together with any net proceeds
received on a monthly basis with respect to any properties acquired on
behalf of the Certificateholders by foreclosure or deed in lieu of
foreclosure;
(iv) all proceeds of any Mortgage Loan or property in respect thereof
purchased by the Master Servicer, the Depositor or any Seller as described
under 'Mortgage Loan Program -- Representations by Sellers; Repurchases' or
' -- Assignment of Mortgage Assets' above and all proceeds of any Mortgage
Loan repurchased as described under ' -- Termination; Optional Termination'
below;
(v) all payments required to be deposited in the Certificate Account
with respect to any deductible clause in any blanket insurance policy
described under ' -- Hazard Insurance' below;
(vi) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments for the benefit of the
Master Servicer of funds held in the Certificate Account and, to the extent
specified in the related Prospectus Supplement, any payments required to be
made by the Master Servicer in connection with prepayment interest
shortfalls; and
(vii) all other amounts required to be deposited in the Certificate
Account pursuant to the Agreement.
The Master Servicer (or the Depositor, as applicable) may from time to time
direct the institution which maintains the Certificate Account to withdraw funds
from the Certificate Account for the following purposes:
(i) to pay to the Master Servicer the servicing fees described in the
related Prospectus Supplement, the Master Servicing Fee (subject to
reduction) and, as additional servicing compensation, earnings on or
investment income with respect to funds in the amounts in the Certificate
Account credited thereto;
(ii) to reimburse the Master Servicer for Advances, such right of
reimbursement with respect to any Mortgage Loan being limited to amounts
received that represent late recoveries of payments of principal and/or
interest on such Mortgage Loan (or Insurance Proceeds or Liquidation
Proceeds with respect thereto) with respect to which such Advance was made;
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(iii) to reimburse the Master Servicer for any Advances previously
made which the Master Servicer has determined to be nonrecoverable;
(iv) to reimburse the Master Servicer from Insurance Proceeds for
expenses incurred by the Master Servicer and covered by the related
insurance policies;
(v) to reimburse the Master Servicer for unpaid Master Servicing Fees
and unreimbursed out-of-pocket costs and expenses incurred by the Master
Servicer in the performance of its servicing obligations, such right of
reimbursement being limited to amounts received representing late
recoveries of the payments for which such advances were made;
(vi) to pay to the Master Servicer, with respect to each Mortgage Loan
or property acquired in respect thereof that has been purchased by the
Master Servicer pursuant to the Pooling and Servicing Agreement, all
amounts received thereon and not taken into account in determining the
related Principal Balance of such repurchased Mortgage Loan;
(vii) to reimburse the Master Servicer or the Depositor for expenses
incurred and reimbursable pursuant to the Pooling and Servicing Agreement;
(viii) to withdraw any amount deposited in the Certificate Account and
not required to be deposited therein; and
(ix) to clear and terminate the Certificate Account upon termination
of the Pooling and Servicing Agreement.
In addition, unless otherwise specified in the related Prospectus
Supplement, on or prior to the Business Day immediately preceding each
Distribution Date, the Master Servicer shall withdraw from the Certificate
Account the amount of Available Distribution Amount, to the extent on deposit,
for deposit in an account maintained by the Trustee for the related Series of
Certificates.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers, will
make reasonable efforts to collect all payments called for under the Mortgage
Loans and will, consistent with each Agreement and any Mortgage Pool Insurance
Policy, Primary Mortgage Insurance Policy, FHA Insurance, VA Guaranty Policy and
Bankruptcy Bond or alternative arrangements, follow such collection procedures
as are customary with respect to mortgage loans that are comparable to the
Mortgage Loans. Consistent with the above, the Master Servicer may, in its
discretion, (i) waive any assumption fee, late payment or other charge in
connection with a Mortgage Loan and (ii) to the extent not inconsistent with the
coverage of such Mortgage Loan by a Mortgage Pool Insurance Policy, Primary
Mortgage Insurance Policy, FHA Insurance, VA Guaranty or Bankruptcy Bond or
alternative arrangements, if applicable, arrange with a Mortgagor a schedule for
the liquidation of delinquencies running for no more than 180 days after the
applicable due date for each payment. Arrangements may be made with a Mortgagor
to cure delinquencies that exceed 180 days if such arrangements are determined
by the Master Servicer to be reasonable and consistent with its then current
practices with respect to comparable mortgage loans held in its own portfolio.
To the extent the Master Servicer is obligated to make or to cause to be made
Advances, such obligation will remain during the period of any such arrangement.
Unless otherwise specified in the related Prospectus Supplement, in any
case in which property securing a conventional Mortgage Loan has been, or is
about to be, conveyed by the mortgagor or obligor, the Master Servicer will, to
the extent it has knowledge of such conveyance or proposed conveyance, exercise
or cause to be exercised its rights to accelerate the maturity of such Mortgage
Loan under any due-on-sale clause applicable thereto, but only if the exercise
of such rights is permitted by applicable law and will not impair or threaten to
impair any recovery under any related Primary Mortgage Insurance Policy. If
these conditions are not met or if the Master Servicer reasonably believes it is
unable under applicable law to enforce such due-on-sale clause, or if such
Mortgage Loan is insured by the FHA or partially guaranteed by the VA, the
Master Servicer will enter into or cause to be entered into an assumption and
modification agreement with the person to whom such property has been or is
about to be conveyed, pursuant to which such person becomes liable for repayment
of the Mortgage Loan and, to the extent permitted by applicable law, the
mortgagor remains liable thereon.
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Any fee collected by or on behalf of the Master Servicer for entering into an
assumption agreement will be retained by or on behalf of the Master Servicer as
additional servicing compensation. See 'Certain Legal Aspects of the Mortgage
Loans -- Due-on-Sale Clauses'. In connection with any such assumption, the terms
of the related Mortgage Loan may not be changed.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See 'Certain Legal Aspects of the
Mortgage Loans' herein. This approval is usually based on the purchaser's income
and net worth and numerous other factors. Although the Cooperative's approval is
unlikely to be unreasonably withheld or delayed, the necessity of acquiring such
approval could limit the number of potential purchasers for those shares and
otherwise limit the Trust Fund's ability to sell and realize the value of those
shares.
In general, a 'tenant-stockholder' (as defined in Code Section 216(b)(2))
of a corporation that qualifies as a 'cooperative housing corporation' within
the meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders
(as defined in Code Section 216(b)(2)). By virtue of this requirement, the
status of a corporation for purposes of Code Section 216(b)(1) must be
determined on a year-to-year basis. Consequently, there can be no assurance that
Cooperatives relating to the Cooperative Loans will qualify under such Section
for any particular year. In the event that such a Cooperative fails to qualify
for one or more years, the value of the collateral securing any related
Cooperative Loans could be significantly impaired because no deduction would be
allowable to tenant-stockholders under Code Section 216(a) with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Code Section
216(b)(1), the likelihood that such a failure would be permitted to continue
over a period of years appears remote.
HAZARD INSURANCE
The Master Servicer will require the mortgagor or obligor on each Mortgage
Loan to maintain a hazard insurance policy providing for no less than the
coverage of the standard form of fire insurance policy with extended coverage
customary for the type of Mortgaged Property in the state in which such
Mortgaged Property is located. Such coverage will be in an amount not less than
the replacement value of the improvements securing such Mortgage Loan or the
principal balance owing on such Mortgage Loan, whichever is less. All amounts
collected by the Master Servicer under any hazard policy (except for amounts to
be applied to the restoration or repair of the Mortgaged Property or released to
the mortgagor or obligor in accordance with the Master Servicer's normal
servicing procedures) will be deposited in the related Certificate Account. In
the event that the Master Servicer maintains a blanket policy insuring against
hazard losses on all the Mortgage Loans comprising part of a Trust Fund, it will
conclusively be deemed to have satisfied its obligation relating to the
maintenance of hazard insurance. Such blanket policy may contain a deductible
clause, in which case the Master Servicer will be required to deposit from its
own funds into the related Certificate Account the amounts which would have been
deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements securing a Mortgage Loan
by fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans may have been
underwritten by different insurers under different state laws in accordance with
different applicable forms and therefore may not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth
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movement (including earthquakes, landslides and mud flows), nuclear reactions,
wet or dry rot, vermin, rodents, insects or domestic animals, theft and, in
certain cases, vandalism. The foregoing list is merely indicative of certain
kinds of uninsured risks and is not intended to be all inclusive. If the
Mortgaged Property securing a Mortgage Loan is located in a federally designated
special flood area at the time of origination, the Master Servicer will require
the mortgagor or obligor to obtain and maintain flood insurance, to the extent
such insurance is available.
The hazard insurance policies covering properties securing the Mortgage
Loans typically contain a clause which in effect requires the insured at all
times to carry insurance of a specified percentage (generally 80% to 90%) of the
full replacement value of the insured property in order to recover the full
amount of any partial loss. If the insured's coverage falls below this specified
percentage, then the insurer's liability in the event of partial loss will not
exceed the larger of (i) the actual cash value (generally defined as replacement
cost at the time and place of loss, less physical depreciation) of the
improvements damaged or destroyed or (ii) such proportion of the loss as the
amount of insurance carried bears to the specified percentage of the full
replacement cost of such improvements. Since the amount of hazard insurance the
Master Servicer may cause to be maintained on the improvements securing the
Mortgage Loans declines as the principal balances owing thereon decrease, and
since improved real estate generally has appreciated in value over time in the
past, the effect of this requirement in the event of partial loss may be that
hazard insurance proceeds will be insufficient to restore fully the damaged
property. If specified in the related Prospectus Supplement, a special hazard
insurance policy will be obtained to insure against certain of the uninsured
risks described above. See 'Credit Enhancement -- Special Hazard Insurance
Policies'.
The Master Servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to such borrower's cooperative dwelling or such
Cooperative's building could significantly reduce the value of the collateral
securing such Cooperative Loan to the extent not covered by other credit
support.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
Primary Mortgage Insurance Policies. The Master Servicer will maintain or
cause to be maintained, as the case may be, in full force and effect, to the
extent specified in the related Prospectus Supplement, a Primary Mortgage
Insurance Policy with regard to each Mortgage Loan for which such coverage is
required. The Master Servicer will not cancel or refuse to renew any such
Primary Mortgage Insurance Policy in effect at the time of the initial issuance
of a Series of Certificates that is required to be kept in force under the
applicable Agreement unless the replacement Primary Mortgage Insurance Policy
for such cancelled or nonrenewed policy is maintained with an insurer whose
claims-paying ability is sufficient to maintain the current rating of the
classes of Certificates of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary, the
amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Mortgage Loan will consist of the insured percentage of the unpaid
principal amount of the covered Mortgage Loan and accrued and unpaid interest
thereon and reimbursement of certain expenses, less (i) all rents or other
payments collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Mortgaged
Property, (ii) hazard insurance proceeds in excess of the amount required to
restore the Mortgaged Property and which have not been applied to the payment of
the Mortgage Loan, (iii) amounts expended but not approved by the issuer of the
related Primary Mortgage Insurance Policy (the 'Primary Insurer'), (iv) claim
payments previously made by the Primary Insurer and (v) unpaid premiums.
Primary Mortgage Insurance Policies reimburse certain losses sustained by
reason of defaults in payments by borrowers. Primary Mortgage Insurance Policies
will not insure against, and exclude from coverage, a loss sustained by reason
of a default arising from or involving certain matters, including (i)
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fraud or negligence in origination or servicing of the Mortgage Loans, including
misrepresentation by the originator, borrower or other persons involved in the
origination of the Mortgage Loan; (ii) failure to construct the Mortgaged
Property subject to the Mortgage Loan in accordance with specified plans; (iii)
physical damage to the Mortgaged Property; and (iv) the related Servicer not
being approved as a servicer by the Primary Insurer.
Recoveries Under a Primary Mortgage Insurance Policy. As conditions
precedent to the filing of or payment of a claim under a Primary Mortgage
Insurance Policy covering a Mortgage Loan, the insured will be required to (i)
advance or discharge (a) all hazard insurance policy premiums and (b) as
necessary and approved in advance by the Primary Insurer, (1) real estate
property taxes, (2) all expenses required to maintain the related Mortgaged
Property in at least as good a condition as existed at the effective date of
such Primary Mortgage Insurance Policy, ordinary wear and tear excepted, (3)
Mortgaged Property sales expenses, (4) any outstanding liens (as defined in such
Primary Mortgage Insurance Policy) on the Mortgaged Property and (5) foreclosure
costs, including court costs and reasonable attorneys' fees; (ii) in the event
of any physical loss or damage to the Mortgaged Property, have the Mortgaged
Property restored and repaired to at least as good a condition as existed at the
effective date of such Primary Mortgage Insurance Policy, ordinary wear and tear
excepted; and (iii) tender to the Primary Insurer good and merchantable title to
and possession of the Mortgaged Property.
The Master Servicer, on behalf of itself, the Trustee and the
Certificateholders, will present claims to the insurer under each Primary
Mortgage Insurance Policy, and will take such reasonable steps as are necessary
to receive payment or to permit recovery thereunder with respect to defaulted
Mortgage Loans. As set forth above, all collections by or on behalf of the
Master Servicer under any Primary Mortgage Insurance Policy and, when the
Mortgaged Property has not been restored, the hazard insurance policy, are to be
deposited in the Certificate Account, subject to withdrawal as heretofore
described.
If the Mortgaged Property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy are insufficient to
restore the damaged Mortgaged Property to a condition sufficient to permit
recovery under the related Primary Mortgage Insurance Policy, if any, the Master
Servicer is not required to expend its own funds to restore the damaged
Mortgaged Property unless it determines (i) that such restoration will increase
the proceeds to Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Mortgage Loan under any related Primary Mortgage
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Mortgage Loan is not covered by a Primary
Mortgage Insurance Policy, the Master Servicer will be obligated to follow or
cause to be followed such normal practices and procedures as it deems necessary
or advisable to realize upon the defaulted Mortgage Loan. If the proceeds of any
liquidation of the Mortgaged Property securing the defaulted Mortgage Loan are
less than the principal balance of such Mortgage Loan plus interest accrued
thereon that is payable to Certificateholders, the Trust Fund will realize a
loss in the amount of such difference plus the aggregate of expenses incurred by
the Master Servicer in connection with such proceedings and which are
reimbursable under the Agreement. In the unlikely event that any such
proceedings result in a total recovery which is, after reimbursement to the
Master Servicer of its expenses, in excess of the principal balance of such
Mortgage Loan plus interest accrued thereon that is payable to
Certificateholders, the Master Servicer will be entitled to withdraw or retain
from the Certificate Account amounts representing its normal servicing
compensation with respect to such Mortgage Loan and, unless otherwise specified
in the related Prospectus Supplement, amounts representing the balance of such
excess, exclusive of any amount required by law to be forwarded to the related
Mortgagor, as additional servicing compensation.
If the Master Servicer or its designee recovers Insurance Proceeds which,
when added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the Master Servicer, exceed the principal balance of
such Mortgage Loan plus interest accrued thereon that is payable to
Certificateholders, the Master Servicer will be entitled to withdraw or retain
from the Certificate Account amounts representing its normal servicing
compensation with respect to such Mortgage Loan. In the event that the Master
Servicer has expended its own funds to restore the
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damaged Mortgaged Property and such funds have not been reimbursed under the
related hazard insurance policy, it will be entitled to withdraw from the
Certificate Account out of related Liquidation Proceeds or Insurance Proceeds an
amount equal to such expenses incurred by it, in which event the Trust Fund may
realize a loss up to the amount so charged. Since Insurance Proceeds cannot
exceed deficiency claims and certain expenses incurred by the Master Servicer,
no such payment or recovery will result in a recovery to the Trust Fund which
exceeds the principal balance of the defaulted Mortgage Loan together with
accrued interest thereon. See 'Credit Enhancement'.
FHA Insurance; VA Guarantees. Mortgage Loans designated in the related
Prospectus Supplement as insured by the FHA will be insured by the FHA as
authorized under the United States Housing Act of 1937, as amended. Such
Mortgage Loans will be insured under various FHA programs including the standard
FHA 203(b) program to finance the acquisition of one- to four-family housing
units and the FHA 245 graduated payment mortgage program. These programs
generally limit the principal amount and interest rates of the mortgage loans
insured. Mortgage Loans insured by the FHA generally require a minimum down
payment of approximately 5% of the original principal amount of the loan. No
FHA-insured Mortgage Loans relating to a Series may have an interest rate or
original principal amount exceeding the applicable FHA limits at the time of
origination of such loan.
The insurance premiums for Mortgage Loans insured by the FHA are collected
by lenders approved by the Department of Housing and Urban Development ('HUD')
or by the Master Servicer or any Sub-Servicers and are paid to the FHA. The
regulations governing FHA single-family mortgage insurance programs provide that
insurance benefits are payable either upon foreclosure (or other acquisition of
possession) and conveyance of the mortgaged premises to HUD or upon assignment
of the defaulted Mortgage Loan to HUD. With respect to a defaulted FHA-insured
Mortgage Loan, the Master Servicer or any Sub-Servicer is limited in its ability
to initiate foreclosure proceedings. When it is determined, either by the Master
Servicer or any Sub-Servicer or HUD, that default was caused by circumstances
beyond the mortgagor's control, the Master Servicer or any Sub-Servicer is
expected to make an effort to avoid foreclosure by entering, if feasible, into
one of a number of available forms of forbearance plans with the mortgagor. Such
plans may involve the reduction or suspension of regular mortgage payments for a
specified period, with such payments to be made up on or before the maturity
date of the mortgage, or the recasting of payments due under the mortgage up to
or beyond the maturity date. In addition, when a default caused by such
circumstances is accompanied by certain other criteria, HUD may provide relief
by making payments to the Master Servicer or any Sub-Servicer in partial or full
satisfaction of amounts due under the Mortgage Loan (which payments are to be
repaid by the mortgagor to HUD) or by accepting assignment of the loan from the
Master Servicer or any Sub-Servicer. With certain exceptions, at least three
full monthly installments must be due and unpaid under the Mortgage Loan, and
HUD must have rejected any request for relief from the mortgagor before the
Master Servicer or any Sub-Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. The Master Servicer of any Sub-Servicer of each
FHA-insured Mortgage Loan will be obligated to purchase any such debenture
issued in satisfaction of such Mortgage Loan upon default for an amount equal to
the principal amount of any such debenture.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted Mortgage Loan adjusted to
reimburse the Master Servicer or Sub-Servicer for certain costs and expenses and
to deduct certain amounts received or retained by the Master Servicer or
Sub-Servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
Master Servicer or Sub-Servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to such date but in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD. When entitlement to insurance benefits results
from assignment of the Mortgage Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Mortgage Loan,
bears interest from a date 30 days after the mortgagor's first uncorrected
failure to perform any
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obligation to make any payment due under the Mortgage and, upon assignment, from
the date of assignment to the date of payment of the claim, in each case at the
same interest rate as the applicable HUD debenture interest rate as described
above.
Mortgage Loans designated in the related Prospectus Supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended (a 'VA Guaranty Policy'). The
Serviceman's Readjustment Act of 1944, as amended, permits a veteran (or in
certain instances the spouse of a veteran) to obtain a mortgage loan guarantee
by the VA covering mortgage financing of the purchase of a one- to four-family
dwelling unit at interest rates permitted by the VA. The program has no mortgage
loan limits, requires no down payment from the purchaser and permits the
guarantee of mortgage loans of up to 30 years' duration. However, no Mortgage
Loan guaranteed by the VA will have an original principal amount greater than
five times the partial VA guarantee for such Mortgage Loan.
The maximum guarantee that may be issued by the VA under a VA guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. As of
January 1, 1990, the maximum guarantee that may be issued by the VA under a VA
guaranteed mortgage loan of more than $144,000 is the lesser of 25% of the
original principal amount of the mortgage loan and $46,000. The liability on the
guarantee is reduced or increased pro rata with any reduction or increase in the
amount of indebtedness, but in no event will the amount payable on the guarantee
exceed the amount of the original guarantee. The VA may, at its option and
without regard to the guarantee, make full payment to a mortgage holder of
unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA guaranteed Mortgage Loan, the Master
Servicer or Sub-Servicer is, absent exceptional circumstances, authorized to
announce its intention to foreclose only when the default has continued for
three months. Generally, a claim for the guarantee is submitted after
liquidation of the Mortgaged Property.
The amount payable under the guarantee will be the percentage of the
VA-insured Mortgage Loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guarantee will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the Mortgaged Property. The amount payable under the guarantee
may in no event exceed the amount of the original guarantee.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal servicing compensation to be paid to the Master Servicer in
respect of its master servicing activities for each series of Certificates will
be equal to the percentage per annum described in the related Prospectus
Supplement (which may vary under certain circumstances) of the outstanding
principal balance of each Mortgage Loan, and such compensation will be retained
by it from collections of interest on such Mortgage Loan in the related Trust
Fund (the 'Master Servicing Fee'). Unless otherwise specified in the related
Prospectus Supplement, as compensation for its servicing duties, a Sub-Servicer
or, if there is no Sub-Servicer, the Master Servicer will be entitled to a
monthly servicing fee as described in the related Prospectus Supplement. In
addition, the Master Servicer or a Sub-Servicer will retain all prepayment
charges, assumption fees and late payment charges, to the extent collected from
Mortgagors, and any benefit which may accrue as a result of the investment of
funds in the applicable Certificate Account (unless otherwise specified in the
related Prospectus Supplement).
The Master Servicer will pay or cause to be paid certain ongoing expenses
associated with each Trust Fund and incurred by it in connection with its
responsibilities under the related Agreement, including, without limitation,
payment of any fee or other amount payable in respect of any credit enhancement
arrangements, payment of the fees and disbursements of the Trustee, any
custodian appointed by the Trustee, the Certificate Registrar and any Paying
Agent, and payment of expenses incurred in enforcing the obligations of
Sub-servicers and Sellers. The Master Servicer will be entitled to reimbursement
of expenses incurred in enforcing the obligations of Sub-Servicers and Sellers
under
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certain limited circumstances. In addition, as indicated in the preceding
section, the Master Servicer will be entitled to reimbursements for certain
expenses incurred by it in connection with Liquidated Mortgage Loans and in
connection with the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Certificateholders to receive any
related Liquidation Proceeds (including Insurance Proceeds).
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a report to the
Trustee to the effect that all loans serviced by the Master Servicer under such
Agreement were included in the total population which was subject to selection
for testing in such firm's examination of certain documents and records and that
such examination, which has been conducted substantially in compliance with the
Uniform Single Attestation Program for Mortgage Bankers (or such other audit or
review program applicable to the Master Servicer), has disclosed no items of
material noncompliance with the provisions of the Uniform Single Attestation
Program for Mortgage Bankers (or such other program), except for such items of
noncompliance as shall be set forth in such report. In rendering its report such
firm may rely, as to matters relating to the direct servicing of Mortgage Loans,
private mortgage-backed securities or agency securities, by Sub-Servicers, upon
comparable statements for examinations conducted substantially in compliance
with the audit program applicable to such Sub-Servicer (rendered within one year
of such statement) of firms of independent public accountants with respect to
the related Sub-Servicer.
Each Agreement will also provide for delivery to the Trustee, on or before
a specified date in each year, of an annual statement signed by an officer or
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement in all material respects
throughout the preceding year or specifying any known failure to do so.
Copies of the annual accountants' statement and the statement of officers
of the Master Servicer may be obtained by Certificateholders of the related
Series without charge upon written request to the Master Servicer at the address
set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The Master Servicer under each Agreement will be named in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement, the
obligations and duties of the Master Servicer may be performed by the Servicer
named in the related Prospectus Supplement. The entity serving as Master
Servicer or Servicer may have normal business relationships with the Depositor
or the Depositor's affiliates.
Each Agreement will provide that, subject to the Master Servicer's right to
assign its rights and delegate its duties as described below, the Master
Servicer may not resign from its obligations and duties under the Agreement
unless its duties thereunder are no longer permissible under applicable law or
are in material conflict by reason of applicable law with any other activities
of a type and nature presently carried on by it, except in connection with a
permitted transfer of servicing. No such resignation will become effective until
the Trustee or a successor servicer has assumed the Master Servicer's
obligations and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer, the
Depositor nor any director, officer, employee, or agent of the Master Servicer
or the Depositor will be under any liability to the related Trust Fund or
Certificateholders for any action taken or for refraining from the taking of any
action in good faith pursuant to the Agreement, or for errors in judgment;
provided, however, that neither the Master Servicer, the Depositor nor any such
person will be protected against any liability which would otherwise be imposed
by reason of any such breach of the terms and conditions of the Agreement. Each
Agreement will further provide that the Master Servicer, the Depositor and any
director, officer, employee or agent of the Master Servicer or the Depositor
will be entitled to indemnification by the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Certificates, other than any loss,
liability or expense related to any specific Mortgage Loan or Mortgage Loans
(except any such
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loss, liability or expense otherwise reimbursable pursuant to the Agreement) and
any loss, liability or expense incurred by reason of any breach of the terms and
conditions of the Agreement. In addition, each Agreement will provide that
neither the Master Servicer nor the Depositor will be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
respective responsibilities under the Agreement and which in its opinion may
involve it in any expense or liability. The Master Servicer or the Depositor
may, however, in its discretion undertake any such action which it may deem
necessary or desirable with respect to the Agreement and the rights and duties
of the parties thereto and the interests of the Certificateholders thereunder.
In such event, the legal expenses and costs of such action and any liability
resulting therefrom will be expenses, costs and liabilities of the Trust Fund
and the Master Servicer or the Depositor, as the case may be, will be entitled
to be reimbursed therefor out of funds otherwise distributable to
Certificateholders.
Any person into which the Master Servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under each Agreement,
provided that such person is qualified to sell mortgage loans to, and service
mortgage loans on behalf of, FNMA or FHLMC and further provided that such
merger, consolidation or succession does not adversely affect the then current
rating or ratings of the class or classes of Certificates of such Series that
have been rated. In addition, the Master Servicer may assign its rights, and
delegate its duties, under the Agreement to a person qualified to sell mortgage
loans to, and service mortgage loans on behalf of, FNMA or FHLMC so long as the
applicable Rating Agency or Rating Agencies confirm that their ratings of the
related Certificates in effect prior to such assignment and delegation will not
be reduced or qualified as a result of such assignment and delegation.
EVENTS OF DEFAULT
Unless otherwise specified in the related Prospectus Supplement, Events of
Default under each Agreement will generally consist of (i) any failure by the
Master Servicer to distribute or cause to be distributed to Certificateholders
of any class any required payment (other than an Advance) which continues
unremedied for five business days after the giving of written notice of such
failure to the Master Servicer by the Trustee or the Depositor, or to the Master
Servicer, the Depositor and the Trustee by the holders of Certificates of such
class evidencing not less than 25% of the related Trust Fund (based on the
outstanding principal balances of the Certificates); (ii) any failure by the
Master Servicer to make an Advance as required under the Agreement, unless cured
as specified therein; (iii) any failure by the Master Servicer duly to observe
or perform in any material respect any of its other covenants or agreements in
the Agreement which continues unremedied for sixty days after the giving of
written notice of such failure to the Master Servicer by the Trustee or the
Depositor, or to the Master Servicer, the Depositor and the Trustee by the
holders of Certificates evidencing not less than 25% of the related Trust Fund
(based on the outstanding principal balances of the Certificates); and (iv)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceeding and certain actions by or on behalf of the
Master Servicer indicating its insolvency, reorganization or inability to pay
its obligations.
If specified in the related Prospectus Supplement, the Agreement will
permit the Trustee to sell the Mortgage Assets and the other assets of the Trust
Fund in the event that payments in respect thereto are insufficient to make
payments required in the Agreement. The assets of the Trust Fund will be sold
only under the circumstances and in the manner specified in the related
Prospectus Supplement.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under an Agreement remains unremedied, the
Depositor or the Trustee may, and at the direction of holders of Certificates
having not less than 25% of the related Trust Fund (based on the outstanding
principal balances of the Certificates) and under such other circumstances as
may be specified in such Agreement, the Trustee shall, terminate all of the
rights and obligations of the Master Servicer under the Agreement relating to
such Trust Fund and in and to the Mortgage Loans, whereupon the Trustee will
succeed to all of the responsibilities, duties and liabilities of the Master
Servicer under the Agreement, including, if specified in the related Prospectus
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Supplement, the obligation to make advances, and will be entitled to similar
compensation arrangements. In the event that the Trustee is unwilling or unable
so to act, it may appoint, or petition a court of competent jurisdiction for the
appointment of, a Mortgage Loan servicing institution with a net worth of at
least $10,000,000 to act as successor to the Master Servicer under the
Agreement. Pending such appointment, the Trustee is obligated to act in such
capacity. The Trustee and any such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
payable to the Master Servicer under the Agreement.
No Certificateholder, solely by virtue of such holder's status as a
Certificateholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Certificates of any Class of such Series evidencing not less than 25% of the
related Trust Fund (based on the outstanding principal balances of the
Certificates) have made written request upon the Trustee to institute such
proceeding in its own name as Trustee thereunder and have offered to the Trustee
reasonable indemnity, and the Trustee for 60 days has neglected or refused to
institute any such proceeding.
AMENDMENT
Unless otherwise specified in the related Prospectus Supplement, each
Agreement may be amended by the Depositor, the Master Servicer and the Trustee,
without the consent of any of the Certificateholders, (i) to cure any ambiguity
or mistake; (ii) to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein or with the related
Prospectus Supplement or Prospectus or to correct any error or mistake; (iii) to
obtain, maintain or improve the rating of any class of Certificates (it being
understood that after obtaining any rating required at the initial issuance of
the related Series, none of the Depositor, Master Servicer or Trustee is
obligated to obtain, maintain or improve the rating of any class of Certificates
of such Series); or (iv) to make any other revisions with respect to matters or
questions arising under the Agreement which are not materially inconsistent with
the provisions thereof, provided that, in the case of clause (iv), such action
will not adversely affect in any material respect the interests of any
Certificateholder. An amendment will be deemed not to adversely affect in any
material respect the interests of the Certificateholders if the person
requesting such amendment obtains a letter from each rating agency requested to
rate the class or classes of Certificates of such Series stating that such
amendment will not result in the downgrading or withdrawal of the respective
ratings then assigned to such Certificates. In addition, to the extent provided
in the related Agreement, an Agreement may be amended without the consent of any
of the Certificateholders, to change the manner in which the Certificate Account
is maintained, provided that any such change does not adversely affect the then
current rating on the class or classes of Certificates of such Series that have
been rated. In addition, if a REMIC election is made with respect to a Trust
Fund, the related Agreement may be amended to modify, eliminate or add to any of
its provisions to such extent as may be necessary to maintain the qualification
of the related Trust Fund as a REMIC, provided that the Trustee has received an
opinion of counsel to the effect that such action is necessary or helpful to
maintain such qualification. Unless otherwise specified in the related
Prospectus Supplement, each Agreement may also be amended by the Depositor, the
Master Servicer and the Trustee with consent of holders of Certificates of such
Series evidencing not less than 66% of the aggregate Percentage Interests of
each class affected thereby for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Agreement or
of modifying in any manner the rights of the holders of the related
Certificates; provided, however, that no such amendment may (i) reduce in any
manner the amount of or delay the timing of, payments received on Mortgage Loans
which are required to be distributed on any Certificate without the consent of
the holder of such Certificate, or (ii) reduce the aforesaid percentage of
Certificates of any class of holders which are required to consent to any such
amendment without the consent of the holders of all Certificates of such class
covered by such Agreement then outstanding. If a REMIC election is made with
respect to a Trust Fund, the Trustee will not be entitled to consent to an
amendment to the related Agreement without having first received an opinion of
counsel to the effect that such amendment will not cause such Trust Fund to fail
to qualify as a REMIC.
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TERMINATION; OPTIONAL TERMINATION
Unless otherwise specified in the related Agreement, the obligations
created by each Agreement for each Series of Certificates will terminate upon
the payment to the related Certificateholders of all amounts held in the
Certificate Account or by the Master Servicer and required to be paid to them
pursuant to such Agreement following the later of (i) the final payment or other
liquidation of the last of the Mortgage Assets subject thereto or the
disposition of all property acquired upon foreclosure of any such Mortgage
Assets remaining in the Trust Fund and (ii) the purchase by the Master Servicer,
the Depositor or, if REMIC treatment has been elected and if specified in the
related Prospectus Supplement, by the holder of the residual interest in the
REMIC (see 'Certain Federal Income Tax Consequences' below), from the related
Trust Fund of all of the remaining Mortgage Assets and all property acquired in
respect of such Mortgage Assets.
Unless otherwise specified in the related Prospectus Supplement, any such
purchase of Mortgage Assets and property acquired in respect of Mortgage Assets
evidenced by a Series of Certificates will be made at the option of the Master
Servicer, the Depositor or, if applicable, such holder of the REMIC residual
interest, at a price, and in accordance with the procedures, specified in the
related Prospectus Supplement. The exercise of such right will effect early
retirement of the Certificates of that Series, but the right of the Master
Servicer, the Depositor or, if applicable, such holder of the REMIC residual
interest, to so purchase is subject to the principal balance of the related
Mortgage Assets being less than the percentage specified in the related
Prospectus Supplement of the aggregate principal balance of the Mortgage Assets
at the Cut-off Date for the Series. The foregoing is subject to the provision
that if a REMIC election is made with respect to a Trust Fund, any repurchase
pursuant to clause (ii) above will be made only in connection with a 'qualified
liquidation' of the REMIC within the meaning of Section 860F(g)(4) of the Code.
THE TRUSTEE
The Trustee under each Agreement will be named in the applicable Prospectus
Supplement. The commercial bank or trust company serving as Trustee may have
normal banking relationships with the Depositor, the Master Servicer and any of
their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Mortgage Loans. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Mortgage Loans is situated. The summaries are qualified in
their entirety by reference to the appropriate laws of the states in which
Mortgage Loans may be originated.
GENERAL
The Mortgage Loans will be secured by deeds of trust, mortgages, security
deeds or deeds to secure debt, depending upon the prevailing practice in the
state in which the property subject to the loan is located. Deeds of trust are
used almost exclusively in California instead of mortgages. A mortgage creates a
lien upon the real property encumbered by the mortgage, which lien is generally
not prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording with a
state or county office. There are two parties to a mortgage, the mortgagor, who
is the borrower and owner of the mortgaged property, and the mortgagee, who is
the lender. Under the mortgage instrument, the mortgagor delivers to the
mortgagee a note or bond and the mortgage. Although a deed of trust is similar
to a mortgage, a deed of trust formally has three parties, the borrower-property
owner called the trustor (similar to a mortgagor), a lender (similar to a
mortgagee) called the beneficiary, and a third-party grantee called the trustee.
Under a deed of trust, the borrower grants the property, irrevocably until the
debt is paid, in trust, generally with a power of sale, to the trustee to secure
payment of the obligation. A security deed and a deed to secure debt are special
types of deeds which indicate on their face that they are granted to secure an
underlying debt.
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By executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until such time as the underlying debt is repaid. The trustee's
authority under a deed of trust, the mortgagee's authority under a mortgage and
the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of the
beneficiary.
Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans. The
Cooperative owns all the real property that comprises the project, including the
land, separate dwelling units and all common areas. The Cooperative is directly
responsible for project management and, in most cases, payment of real estate
taxes and hazard and liability insurance. If there is a blanket mortgage on the
Cooperative and/or underlying land, as is generally the case, the Cooperative,
as project mortgagor, is also responsible for meeting these mortgage
obligations. A blanket mortgage is ordinarily incurred by the Cooperative in
connection with the construction or purchase of the Cooperative's apartment
building. The interest of the occupant under proprietary leases or occupancy
agreements to which that Cooperative is a party are generally subordinate to the
interest of the holder of the blanket mortgage in that building. If the
Cooperative is unable to meet the payment obligations arising under its blanket
mortgage, the mortgagee holding the blanket mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements. In addition, the blanket mortgage on a Cooperative may provide
financing in the form of a mortgage that does not fully amortize with a
significant portion of principal being due in one lump sum at final maturity.
The inability of the Cooperative to refinance this mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee
providing the financing. A foreclosure in either event by the holder of the
blanket mortgage could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of Cooperative shares or, in the case of a Trust Fund
including Cooperative Loans, the collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant-stockholder's pro rata share
of the Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying rights is financed through a
Cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
Cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
FORECLOSURE/REPOSSESSION
Deed of Trust. Foreclosure of a deed of trust is generally accomplished by
a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In certain states,
such foreclosure also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages. In some states, such as California, the
trustee must record a notice of default and send a copy to the borrower-trustor,
to any person who has recorded a request for a copy of any notice of default and
notice of sale. In addition, the trustee must provide notice in some states to
any other individual having an interest of record in the real property,
including any junior lienholder. If the deed of trust is not reinstated within
any applicable cure period, a notice of sale must be posted in a public place
and, in most states, including California, published for a specified period of
time in one or more newspapers. In addition, these notice provisions require
that a copy of the notice of sale be posted on
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the property and sent to all parties having an interest of record in the
property. In California, the entire process from recording a notice of default
to a non-judicial sale usually takes four to five months.
In some states, including California, the borrower-trustor has the right to
reinstate the loan at any time following default until shortly before the
trustee's sale. In general, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Certain state laws control the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recoverable by a lender.
Mortgages. Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of the
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property. In general, the borrower, or any other person having a
junior encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses and
costs, including attorney's fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the deed
of trust is not reinstated, a notice of sale must be posted in a public place
and, in most states, published for a specific period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest in the
real property.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure. Thereafter,
the lender will assume the burden of ownership, including obtaining hazard
insurance and making such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
Cooperative Loans. The Cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the Cooperative's Certificate of Incorporation and
By-laws, as well as the proprietary lease or occupancy agreement, and may be
cancelled by the Cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder
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on its obligations under the proprietary lease or occupancy agreement. A default
by the tenant-stockholder under the proprietary lease or occupancy agreement
will usually constitute a default under the security agreement between the
lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a 'commercially reasonable' manner. Whether a foreclosure sale has
been conducted in a 'commercially reasonable' manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See 'Anti-Deficiency Legislation and Other
Limitations on Lenders' below.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
Cooperative when the building was so converted.
RIGHTS OF REDEMPTION
In some states after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, including California, this right of redemption applies
only to sales following judicial foreclosure, and not to sales pursuant to a
non-judicial power of sale. In most states where the right of redemption is
available, statutory redemption may occur upon payment of the foreclosure
purchase price, accrued interest and taxes. In some states, the right to redeem
is an equitable right. The effect of a right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The exercise of a right
of redemption would defeat the title of any purchaser at a foreclosure sale, or
of any purchaser from the lender subsequent to judicial foreclosure or sale
under a deed of trust. Consequently, the practical effect of the redemption
right is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run.
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ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, including California, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or sale under a deed of trust. A deficiency judgment is a personal
judgment against the borrower equal in most cases to the difference between the
amount due to the lender and the current fair market value of the property at
the time of the foreclosure sale. As a result of these prohibitions, it is
anticipated that in most instances the Master Servicer will utilize the
non-judicial foreclosure remedy and will not seek deficiency judgments against
defaulting Mortgagors.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower; for example, in the event of waste of the
property.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon its security. For example, in a
proceeding under the federal Bankruptcy Code, a lender may not foreclose on the
Mortgaged Property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the Mortgaged
Property is not the debtor's principal residence and the court determines that
the value of the Mortgaged Property is less than the principal balance of the
mortgage loan, for the reduction of the secured indebtedness to the value of the
Mortgaged Property as of the date of the commencement of the bankruptcy,
rendering the lender a general unsecured creditor for the difference, and also
may reduce the monthly payments due under such mortgage loan, change the rate of
interest and alter the mortgage loan repayment schedule. The effect of any such
proceedings under the federal Bankruptcy Code, including but not limited to any
automatic stay, could result in delays in receiving payments on the Mortgage
Loans underlying a Series of Certificates and possible reductions in the
aggregate amount of such payments.
The federal tax laws provide priority to certain tax liens over the lien of
a mortgage or secured party. Numerous federal and state consumer protection laws
impose substantive requirements upon mortgage lenders in connection with the
origination, servicing and enforcement of Mortgage Loans. These laws include the
federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes and regulations. These federal and state laws impose specific
statutory liabilities upon lenders who fail to comply with the provisions of the
law. In some cases, this liability may affect assignees of the loans or
contracts.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the payment of the
costs of clean-up. In several states such a lien has priority over the lien of
an
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existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
('CERCLA'), the United States Environmental Protection Agency ('EPA') may impose
a lien on property where EPA has incurred clean-up costs. However, a CERCLA lien
is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
lender may be held liable, as an 'owner' or 'operator', for costs of addressing
releases or threatened releases of hazardous substances at a Mortgaged Property,
regardless of whether or not the environmental damage or threat was caused by a
prior owner or operator. CERCLA imposes liability on any and all 'responsible
parties' (which includes, inter alia, the property owner and operator) for the
cost of clean-up of releases of hazardous substances. However, CERCLA excludes
from the definition of 'owner or operator' secured creditors who hold indicia of
ownership for the purpose of protecting their security interest, but 'without
participating in the management of the facility'. That exclusion was
substantially narrowed by a May 1990 decision of the United States Court of
Appeals for the Eleventh Circuit in United States v. Fleet Factors Corp., which
held that a lender need not have involved itself in the day-to-day operations of
the facility or participated in decisions relating to hazardous waste management
in order to be liable; rather, liability could attach to the lender if its
involvement with the management of the facility is broad enough to support the
inference that the lender could affect hazardous waste management practices if
it so chose. The court added that a lender's capacity to influence such
decisions could be inferred from the extent of its involvement in the facility's
financial management. In response to Fleet Factors, EPA promulgated regulations
designed to clarify the range of activities a lender may engage in without
losing the benefit of the statutory exclusion. Under the regulations, which took
effect in April 1992, a lender is permitted to monitor the borrower's
environmental practices in order to determine if the facility is in compliance
with applicable law, and to require the borrower to take measures necessary to
achieve or maintain compliance or conduct necessary clean-ups. The lender may
not, however, exercise control over or assume responsibility for the borrower's
environmental practices. Such actions would be considered 'participation in the
management of the facility'. Also, if the lender takes title to or possession of
the property, it might be deemed to have obviated the security interest
exclusion and to be liable for clean-up costs pursuant to CERCLA. The EPA
regulations allow lenders to take certain actions with respect to foreclosure,
without losing the benefit of the statutory exclusion. Essentially, the
regulations allow the lender to take actions consistent with protecting its
security interest, but not actions which demonstrate an intent to exercise
long-term ownership interest in the property. While the EPA regulations offer
some protection to lenders, it must be noted that such protection may not be
available under applicable state law. Furthermore, the regulations are binding
only on EPA with respect to EPA's enforcement powers and cost recovery rights.
It has not yet been determined whether the federal courts will apply the
regulations in cost recovery actions brought against lenders by other
responsible parties, although the regulations may well be considered persuasive
by the courts. (Two judicial challenges have been brought against the EPA
regulations in the United States Court of Appeals for the District of Columbia
Circuit. The challenges both allege that the regulations are inconsistent with
the statutory requirements of CERCLA and, therefore, should be invalidated. The
challenges were filed on July 28, 1992 and are still pending.) If a lender is or
becomes liable, it can bring an action for contribution against any other
'responsible parties', including a previous owner or operator, who created the
environmental hazard, but those persons or entities may be bankrupt or otherwise
judgment proof. The costs associated with environmental clean-up may be
substantial. It is conceivable that such remedial costs arising from the
circumstances set forth above would become a liability of the Trust Fund and
occasion a loss to Certificateholders.
Except as otherwise specified in the applicable Prospectus Supplement, at
the time the Mortgage Loans were originated, no environmental assessment or a
very limited environmental assessment of the Mortgaged Properties was conducted.
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
conventional Mortgage Loan will contain a due-on-sale clause which will
generally provide that if the mortgagor or obligor sells, transfers or conveys
the Mortgaged Property, the loan may be accelerated by the mortgagee. In
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recent years, court decisions and legislative actions placed substantial
restriction on the right of lenders to enforce such clauses in many states. For
instance, the California Supreme Court in August 1978 held that due-on-sale
clauses were generally unenforceable. However, the Garn-St Germain Depository
Institutions Act of 1982 (the 'Garn-St Germain Act'), subject to certain
exceptions, preempts state constitutional, statutory and case law prohibiting
the enforcement of due-on-sale clauses. As to loans secured by an owner-occupied
residence, the Garn-St Germain Act sets forth nine specific instances in which a
mortgagee covered by the Act may not exercise its rights under a due-on-sale
clause, notwithstanding the fact that a transfer of the property may have
occurred. The inability to enforce a due-on-sale clause may result in transfer
of the related Mortgaged Property to an uncreditworthy person, which could
increase the likelihood of default or may result in a mortgage bearing an
interest rate below the current market rate being assumed by a new home buyer,
which may affect the average life of the Mortgage Loans and the number of
Mortgage Loans which may extend to maturity.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of Mortgage Loans with respect
to prepayments on loans secured by liens encumbering owner-occupied residential
properties. Since many of the Mortgaged Properties will be owner-occupied, it is
anticipated that prepayment charges may not be imposed with respect to many of
the Mortgage Loans. The absence of such a restraint on prepayment, particularly
with respect to fixed rate Mortgage Loans having higher Mortgage Rates or APRs,
may increase the likelihood of refinancing or other early retirement of such
loans or contracts.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ('Title V'), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the 'Relief Act'), a borrower who enters military service
after the origination of such borrower's Mortgage Loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the Mortgage Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such interest rate limitation could have an effect,
for an indeterminate period of time, on the ability of the Master Servicer to
collect full amounts of interest on certain of the Mortgage Loans. Unless
otherwise provided in the applicable Prospectus Supplement, any shortfall in
interest collections resulting from the application of the Relief Act could
result in losses to the holders of the Certificates. In addition, the Relief Act
imposes limitations which would impair the ability of the Master Servicer to
foreclose on an affected Mortgage Loan during the borrower's period of active
duty status. Thus, in the event that such a Mortgage Loan goes into default,
there may be delays and losses occasioned by the inability to realize upon the
mortgaged property in a timely fashion.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary represents the advice of Brown & Wood LLP, counsel to
the Depositor, as to the anticipated material federal income tax consequences of
the purchase, ownership and disposition of Certificates. This summary is based
on laws, regulations, including the REMIC regulations promulgated by the
Treasury Department on December 23, 1992, and generally effective for REMICs
with start-up dates on or after November 12, 1991 (the 'REMIC Regulations'),
rulings and decisions now in effect or (with respect to regulations) proposed,
all of which are subject to change either prospectively or retroactively. This
summary does not address the federal income tax consequences of an investment in
Certificates applicable to all categories of investors, some of which (for
example, banks and insurance companies) may be subject to special rules.
Prospective investors should consult their tax advisors regarding the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of Certificates.
GENERAL
The federal income tax consequences to Certificateholders will vary
depending on whether an election is made to treat the Trust Fund relating to a
particular Series of Certificates as a REMIC under the Code. The Prospectus
Supplement for each Series of Certificates will specify whether a REMIC election
will be made.
NON-REMIC CERTIFICATES
If a REMIC election is not made, Brown & Wood LLP will deliver its opinion
that the Trust Fund will not be classified as an association taxable as a
corporation, and that each such Trust Fund will be classified as a grantor trust
under subpart E, Part I of subchapter J of the Code. In this case, owners of
Certificates will be treated for federal income tax purposes as owners of a
portion of the Trust Fund's assets as described below.
SINGLE CLASS OF SENIOR CERTIFICATES
Characterization. The Trust Fund may be created with one class of Senior
Certificates and one class of Subordinated Certificates. In this case, each
Senior Certificateholder will be treated as the owner of a pro rata undivided
interest in the interest and principal portions of the Trust Fund represented by
that Senior Certificate and will be considered the equitable owner of a pro rata
undivided interest in each of the Mortgage Loans in the Pool. Any amounts
received by a Senior Certificateholder in lieu of amounts due with respect to
any Mortgage Loan because of a default or delinquency in payment will be treated
for federal income tax purposes as having the same character as the payments
they replace.
Each holder of a Senior Certificate will be required to report on its
federal income tax return its pro rata share of the entire income from the
Mortgage Loans in the Trust Fund represented by that Senior Certificate,
including interest, original issue discount, if any, prepayment fees, assumption
fees, any gain recognized upon an assumption and late payment charges received
by the Master Servicer in accordance with such Senior Certificateholder's method
of accounting. Under Code Section 162 or 212 each Senior Certificateholder will
be entitled to deduct its pro rata share of servicing fees, prepayment fees,
assumption fees, any loss recognized upon an assumption and late payment charges
retained by the Master Servicer, provided that such amounts are reasonable
compensation for services rendered to the Trust Fund. Senior Certificateholders
that are individuals, estates or trusts will be entitled to deduct their share
of expenses only to the extent such expenses plus all other Code Section 212
expenses exceed two percent of its adjusted gross income. A Senior
Certificateholder using the cash method of accounting must take into account its
pro rata share of income and deductions as and when collected by or paid to the
Master Servicer. A Senior Certificateholder using an accrual method of
accounting must take into account its pro rata share of income and deductions as
they become due or are paid to the Master Servicer, whichever is earlier. If the
Servicing Fees paid to the Master Servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess could be considered as a
retained ownership interest by the Master Servicer (or any person to whom the
Master Servicer assigned for value all or a portion of the Servicing Fees) in a
portion of the interest payments on the Mortgage
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Loans. The Mortgage Loans may then be subject to the 'coupon stripping' rules of
the Code discussed below.
Unless otherwise specified in the related Prospectus Supplement, as to each
Series of Certificates Brown & Wood LLP will have advised the Depositor that:
(i) a Senior Certificate owned by a 'domestic building and loan
association' within the meaning of Code Section 7701(a)(19) representing
principal and interest payments on Mortgage Loans will be considered to
represent 'loans . . . secured by an interest in real property which is
. . . residential property' within the meaning of Code Section
7701(a)(19)(C)(v); to the extent that the Mortgage Loans represented by
that Senior Certificate are of a type described in such Code section;
(ii) a Senior Certificate owned by a financial institution described
in Code Section 593(a) representing principal and interest payments on
Mortgage Loans will be considered to represent 'qualifying real property
loans' within the meaning of Code Section 593(d) and the Treasury
regulations under Code Section 593; to the extent that the Mortgage Loans
represented by that Senior Certificate are of a type described in such Code
section;
(iii) a Senior Certificate owned by a real estate investment trust
representing an interest in Mortgage Loans will be considered to represent
'real estate assets' within the meaning of Code Section 856(c)(5)(A), and
interest income on the Mortgage Loans will be considered 'interest on
obligations secured by mortgages on real property' within the meaning of
Code Section 856(c)(3)(B); to the extent that the Mortgage Loans
represented by that Senior Certificate are of a type described in such Code
section; and
(iv) a Senior Certificate owned by a REMIC will be an 'obligation
. . . which is principally secured, directly or indirectly, by an interest
in real property' within the meaning of Code Section 860G(a)(3).
Buydown Mortgage Loans. The assets constituting certain Trust Funds may
include Buydown Mortgage Loans. The characterization of any investment in
Buydown Mortgage Loans will depend upon the precise terms of the related Buydown
Agreement, but to the extent that such Buydown Mortgage Loans are secured in
part by a bank account or other personal property, they may not be treated in
their entirety as assets described in the foregoing sections of the Code. There
are no directly applicable precedents with respect to the federal income tax
treatment or the characterization of investments in Buydown Mortgage Loans.
Accordingly, holders of Senior Certificates should consult their own tax
advisors with respect to characterization of investments in Senior Certificates
representing an interest in a Trust Fund that includes Buydown Mortgage Loans.
Premium. The price paid for a Senior Certificate by a holder will be
allocated to such holder's undivided interest in each Mortgage Loan based on
each Mortgage Loan's relative fair market value, so that such holder's undivided
interest in each Mortgage Loan will have its own tax basis. A Senior
Certificateholder that acquires an interest in Mortgage Loans at a premium may
elect to amortize such premium under a constant interest method, provided that
such Mortgage Loan was originated after September 27, 1985. Premium allocable to
a Mortgage Loan originated on or before September 27, 1985 should be allocated
among the principal payments on the Mortgage Loan and allowed as an ordinary
deduction as principal payments are made. Amortizable bond premium will be
treated as an offset to interest income on such Senior Certificate. The basis
for such Senior Certificate will be reduced to the extent that amortizable
premium is applied to offset interest payments.
It is not clear whether a reasonable prepayment assumption should be used
in computing amortization of premium allowable under Code Section 171.
If a premium is not subject to amortization using a reasonable prepayment
assumption, the holder of a Senior Certificate acquired at a premium should
recognize a loss, if a Mortgage Loan prepays in full, equal to the difference
between the portion of the prepaid principal amount of the Mortgage Loan that is
allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Mortgage Loan. If a reasonable prepayment
assumption is used to amortize such premium, it appears that such a loss would
be available, if at all, only if prepayments have occurred at a rate faster
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than the reasonable assumed prepayment rate. It is not clear whether any other
adjustments would be required to reflect differences between an assumed
prepayment rate and the actual rate of prepayments.
Original Issue Discount. The Internal Revenue Service (the 'IRS') has
stated in published rulings that, in circumstances similar to those described
herein, the special rules of the Code relating to 'original issue discount'
(currently Code Sections 1271 through 1273 and 1275) will be applicable to a
Senior Certificateholder's interest in those Mortgage Loans meeting the
conditions necessary for these sections to apply. Rules regarding periodic
inclusion of original issue discount income are applicable to mortgages of
corporations originated after May 27, 1969, mortgages of noncorporate mortgagors
(other than individuals) originated after July 1, 1982, and mortgages of
individuals originated after March 2, 1984. Such original issue discount could
arise by the financing of points or other charges by the originator of the
mortgages in an amount greater than a statutory de minimis exception to the
extent that the points are not currently deductible under applicable Code
provisions or are not for services provided by the lender. Original issue
discount generally must be reported as ordinary gross income as it accrues under
a constant interest method. See 'Accrual of Original Issue Discount' under
'Multiple Classes of Senior Certificates' below.
Market Discount. A Senior Certificateholder that acquires an undivided
interest in Mortgage Loans may be subject to the market discount rules of Code
Sections 1276 through 1278 to the extent an undivided interest in a Mortgage
Loan is considered to have been purchased at a 'market discount'. Generally, it
is equal to the excess of the portion of the principal amount of such Mortgage
Loan allocable to such holder's undivided interest over such holder's tax basis
in such interest. Market discount with respect to a Senior Certificate will be
considered to be zero if the amount allocable to the Senior Certificate is less
than 0.25% of the Senior Certificate's stated redemption price at maturity
multiplied by the weighted average maturity remaining after the date of
purchase. Treasury regulations implementing the market discount rules have not
yet been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986 shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. While the
Treasury Department has not yet issued regulations, rules described in the
relevant legislative history will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis of
a constant interest rate or according to one of the following methods. If a
Senior Certificate is issued with original issue discount, the amount of market
discount that accrues during any accrual period would be equal to the product of
(i) the total remaining market discount, multiplied by (ii) a fraction, the
numerator of which is the original issue discount accruing during the period and
the denominator of which is the total remaining original issue discount at the
beginning of the accrual period. For Offered Certificates issued without
original issue discount, the amount of market discount that accrues during a
period is equal to the product of (i) the total remaining market discount,
multiplied by (ii) a fraction, the numerator of which is the amount of stated
interest paid during the accrual period and the denominator of which is the
total amount of stated interest remaining to be paid at the beginning of the
accrual period. For purposes of calculating market discount under any of the
above methods in the case of instruments (such as the Senior Certificates) which
provide for payments which may be accelerated by reason of prepayments of other
obligations securing such instruments, the same prepayment assumption applicable
to calculating the accrual of original issue discount will apply. Because the
regulations described above have not been issued, it is impossible to predict
what effect those regulations might have on the tax treatment of a Senior
Certificate purchased at a discount or premium in the secondary market.
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A holder who acquired a Senior Certificate at a market discount also may be
required to defer, until the maturity date of such Senior Certificate or its
earlier disposition in a taxable transaction, the deduction of a portion of the
amount of interest that the holder paid or accrued during the taxable year on
indebtedness incurred or maintained to purchase or carry the Senior Certificate
in excess of the aggregate amount of interest (including original issue
discount) includible in such holder's gross income for the taxable year with
respect to such Senior Certificate. The amount of such net interest expense
deferred in a taxable year may not exceed the amount of market discount accrued
on the Senior Certificate for the days during the taxable year on which the
holder held the Senior Certificate and, in general, would be deductible when
such market discount is includible in income. The amount of any remaining
deferred deduction is to be taken into account in the taxable year in which the
Senior Certificate matures or is disposed of in a taxable transaction. In the
case of a disposition in which gain or loss is not recognized in whole or in
part, any remaining deferred deduction will be allowed to the extent of gain
recognized on the disposition. This deferral rule does not apply if the Senior
Certificateholder elects to include such market discount in income currently as
it accrues on all market discount obligations acquired by such Senior
Certificateholder in that taxable year or thereafter.
MULTIPLE CLASSES OF SENIOR CERTIFICATES
A. STRIPPED BONDS AND STRIPPED COUPONS
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the interest payments on an obligation from ownership of
the right to receive some or all of the principal payments results in the
creation of 'stripped bonds' with respect to principal payments and 'stripped
coupons' with respect to interest payments. For purposes of Code Sections 1271
through 1288, Code Section 1286 treats a stripped bond or a stripped coupon as
an obligation issued on the date that such stripped interest is created. If a
Trust Fund is created with two classes of Senior Certificates, one class of
Senior Certificates will represent the right to principal and interest, or
principal only, on all or a portion of the Loans (the 'Stripped Bond
Certificates'), while the second class of Offered Certificates will represent
the right to some or all of the interest on such portion (the 'Stripped Coupon
Certificates').
Recently issued IRS additional guidance suggests that a servicing fee in
excess of reasonable servicing ('excess servicing') will be treated under the
stripped bond rules. It appears to require that reasonable servicing be
calculated on a Mortgage Loan by Mortgage Loan basis which could result in some
Mortgage Loans being treated as having more than 100 basis points of interest
(i.e., 1% interest on the Mortgage Loan principal balance) stripped off.
However, if the Certificates are initially sold with a de minimis discount
(assuming no prepayment assumption is required), any non-de minimis discount
arising from a subsequent transfer of the Certificates should be treated as
market discount. See 'Certain Federal Income Tax Consequences -- Non-REMIC
Certificates', ' -- Multiple Classes of Senior Certificates' and ' -- Stripped
Bonds and Stripped Coupons' herein.
Under the Treasury Regulations issued December 28, 1992, a Stripped Bond
Certificate is generally treated as a single debt instrument issued on the day
it is purchased for purposes of calculating any original issue discount.
Generally, if the discount on a Stripped Bond Certificate is larger than a de
minimis amount (as calculated for purposes of the original issue discount rules)
a purchaser of such a certificate will be required to accrue the discount under
the original issue discount rules of the Code. See 'Non-REMIC Certificates' and
'Single Class of Senior Certificates -- Original Issue Discount' herein.
However, a purchaser of a Stripped Bond Certificate will be required to account
for any discount on the certificate as market discount rather than original
issue discount if either (i) the amount of original issue discount with respect
to the certificate was treated as zero under the original issue discount de
minimis rule when the certificate was stripped or (ii) no more than 100 basis
points (including any amount of servicing in excess of reasonable servicing) is
stripped off of the Trust Fund's Mortgage Loans. Pursuant to Revenue Procedure
91-49, issued on August 8, 1991, purchasers of Stripped Bond Certificates using
an inconsistent method of accounting must change their method of accounting and
request the consent of the IRS to the change in their accounting method on a
statement attached to their first timely tax return filed after August 8, 1991.
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The precise tax treatment of Stripped Coupon Certificates is substantially
uncertain. The Code could be read literally to require that original issue
discount computations be made on a Loan by Loan basis. However, based on the
recent IRS guidance, it appears that a Stripped Coupon Certificate should be
treated as a single installment obligation subject to the original issue
discount rules of the Code. As a result, all payments on a Stripped Coupon
Certificate would be included in the certificate's stated redemption price at
maturity for purposes of calculating income on such certificate under the
original issue discount rules of the Code.
It is unclear under what circumstances, if any, the prepayment of Mortgage
Loans will give rise to a loss to the holder of a Stripped Bond Certificate
purchased at a premium or a Stripped Coupon Certificate. If such Certificate is
treated as a single instrument (rather than an interest in discrete mortgage
loans) and the effect of prepayments is taken into account in computing yield
with respect to such Senior Certificate, it appears that no loss may be
available as a result of any particular prepayment unless prepayments occur at a
rate faster than the assumed prepayment rate. However, if such Certificate is
treated as an interest in discrete Mortgage Loans, or if no prepayment
assumption is used, then when a Mortgage Loan is prepaid, the holder of such
Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of such Certificate that is allocable to such Mortgage
Loan.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates are
urged to consult with their own tax advisors regarding the proper treatment of
these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections provide beneficial
treatment to certain taxpayers that invest in mortgage loans of the type that
make up the Trust Fund. With respect to these Code sections, no specific legal
authority exists regarding whether the character of the Senior Certificates, for
federal income tax purposes, will be the same as that of the underlying Mortgage
Loans. While Code Section 1286 treats a stripped obligation as a separate
obligation for purposes of the Code provisions addressing original issue
discount, it is not clear whether such characterization would apply with regard
to these other Code sections. Although the issue is not free from doubt, based
on policy considerations, each class of Senior Certificates should be considered
to represent 'qualifying real property loans' within the meaning of Code Section
593(d), 'real estate assets' within the meaning of Code Section 856(c)(5)(A) and
'loans . . . secured by, an interest in real property which is . . . residential
real property' within the meaning of Code Section 7701(a)(19)(C)(v), and
interest income attributable to Senior Certificates should be considered to
represent 'interest on obligations secured by mortgages on real property' within
the meaning of Code Section 856(c)(3)(B), provided that in each case the
underlying Mortgage Loans and interest on such Mortgage Loans qualify for such
treatment. Prospective purchasers to which such characterization of an
investment in Senior Certificates is material should consult their own tax
advisors regarding the characterization of the Senior Certificates and the
income therefrom. Senior Certificates will be 'obligation[s] (including any
participation or certificate of beneficial ownership therein) which [are]
principally secured, directly or indirectly, by an interest in real property'
within the meaning of Code Section 860G(a)(3).
B. OFFERED CERTIFICATES REPRESENTING INTERESTS IN LOANS OTHER THAN ARMS
Original issue discount on each Senior Certificate must be included in the
owner's ordinary income for federal income tax purposes as it accrues, in
accordance with a constant interest method that takes into account the
compounding of interest, in advance of receipt of the cash attributable to such
income. The amount of original issue discount required to be included in an
owner's income in any taxable year with respect to a Senior Certificate
representing an interest in Mortgage Loans other than ARMs likely will be
computed as described below under 'Accrual of Original Issue Discount'. The
following discussion is based in part on Treasury regulations under Code
Sections 1271 through 1273 and 1275 (the 'OID Regulations') and in part on the
provisions of the Tax Reform Act of 1986 (the '1986 Act'). The holder of a
Regular Certificate should be aware, however, that the OID Regulations do not
adequately address certain issues relevant to prepayable securities, such as the
Regular Certificates.
Under the Code, each Senior Certificate will be treated as having been
issued on the date it was purchased with an amount of original issue discount
equal to the excess of such Certificate's stated
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redemption price at maturity over its issue price. The issue price of a Senior
Certificate as to any purchaser is equal to the price paid by such purchaser for
the Senior Certificate. The stated redemption price at maturity of a Senior
Certificate is the sum of all payments to be made on such Certificate other than
payments that are treated as qualified stated interest payments. The accrual of
this original issue discount, as described below under 'Accrual of Original
Issue Discount', will, unless otherwise specified in the related Prospectus
Supplement, utilize the original yield to maturity of the Senior Certificate,
calculated based on a reasonable assumed prepayment rate for the Mortgage Loans
underlying the Senior Certificate (the 'Prepayment Assumption'), and will take
into account events that occur during the calculation period. The Prepayment
Assumption will be determined in the manner prescribed by regulations which have
not yet been issued. The legislative history of the 1986 Act (the 'Legislative
History') provides, however, that the regulations will require that the
Prepayment Assumption be the prepayment assumption that is used in determining
the offering price of such Certificate. No representation is made that such
Certificate will prepay at the Prepayment Assumption or at any other rate.
Although the existing authority literally only apply to debt instruments
collateralized by mortgages that are subject to prepayment rather than direct
ownership interests in such mortgages, because no other legal authority provides
guidance with regard to the proper method for accruing original issue discount
on obligations that are subject to prepayment, until Treasury regulations or
other legal authority instructs otherwise, the Master Servicer intends to
calculate, and report original issue discount under the method described below.
Accrual of Original Issue Discount. Generally, the owner of a Senior
Certificate must include in gross income the sum of the 'daily portions', as
defined below, of the original issue discount on such Senior Certificate for
each day on which it owns a Senior Certificate, including the date of purchase
but excluding the date of disposition. In the case of an original owner, the
daily portions of original issue discount with respect to each component
generally will be determined as follows under the existing authority. A
calculation will be made by the Master Servicer or such other entity specified
in the related Prospectus Supplement of the portion of original issue discount
that accrues during each successive monthly accrual period (or shorter period
from the date of original issue) that ends on the day in the calendar year
corresponding to each of the Distribution Dates on the Senior Certificate (or
the day prior to each such date). This will be done, in the case of each full
month accrual period, by adding (i) the present value at the end of the accrual
period (determined by using as a discount factor the original yield to maturity
of the respective component, under the Prepayment Assumption) of all remaining
payments to be received under the Prepayment Assumption on the respective
component, and (ii) any payments received during such accrual period, and
subtracting from that total the 'adjusted issue price' of the respective
component at the beginning of such accrual period. The 'adjusted issue price' of
a Senior Certificate at the beginning of the first accrual period is its issue
price; the 'adjusted issue price' of a Senior Certificate at the beginning of a
subsequent accrual period is the 'adjusted issue price' at the beginning of the
immediately preceding accrual period plus the amount of original issue discount
allocable to that accrual period reduced by the amount of any payment made at
the end of or during that accrual period. The original issue discount accruing
during such accrual period will then be divided by the number of days in the
period to determine the daily portion of original issue discount for each day in
the period. With respect to an initial accrual period shorter than a full
monthly accrual period, the daily portions of original issue discount must be
determined according to an appropriate allocation under any reasonable method.
C. SENIOR CERTIFICATES REPRESENTING INTERESTS IN ARM LOANS
The OID Regulations do not address the treatment of instruments, such as
the Senior Certificates, which represent interests in Mortgage Loans with
Mortgage Rates which adjust periodically ('ARM Loans'). Additionally, the IRS
has not issued guidance under the Code's coupon stripping rules with respect to
such instruments. In the absence of any authority the Master Servicer will
report original issue discount on Senior Certificates attributable to ARM Loans
('Stripped ARM Obligations') to holders in a manner it believes is consistent
with the rules described above under the heading 'Senior Certificates
Representing Interests in Loans Other Than ARM Loans' and with the OID
Regulations. In general, application of these rules may require inclusion of
income on a Stripped ARM Obligation in advance of the receipt of cash
attributable to such income. Further, the addition of interest deferred by
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reason of negative amortization ('Deferred Interest') to the principal balance
of an ARM Loan may require the inclusion of such amount in the income of the
Senior Certificateholder when such amount accrues. Furthermore, the addition of
Deferred Interest to the Senior Certificate's principal balance will result in
additional income (including possibly original issue discount income) to the
Senior Certificateholder over the remaining life of such Senior Certificates.
Because the treatment of Stripped ARM Obligations is uncertain, investors
are urged to consult their tax advisors regarding how income will be includible
with respect to such Certificates.
POSSIBLE APPLICATION OF CONTINGENT PAYMENT RULES TO CERTAIN NON-REMIC
CERTIFICATES
The regulations under Section 1275 of the Code include rules for
obligations that provide for one or more contingent payments. Rights to interest
payments on a mortgage loan might be considered to be contingent within the
meaning of the OID Regulations if such interest would not be paid if the
borrower exercised its right to prepay the mortgage loan. However, in the case
of an investor having a right to shares of the interest and principal payments
on such a mortgage loan when the share of interest is not substantially greater
than the share of principal, the possibility of prepayment should not be
considered to characterize otherwise noncontingent interest payments as
contingent payments; the absence of interest payments following a prepayment
would be the normal consequence of the return of such investor's capital in the
form of a principal payment. On the other hand, a right to interest on such a
mortgage loan is more likely to be regarded as contingent if held by an investor
that does not also hold a right to the related principal; such an investor would
not recover its capital through receipt of a principal payment at the time of
the prepayment of the mortgage loan.
Applying these principles to the Senior Certificates, because the Mortgage
Loans are subject to prepayment at any time, payments on a Class of Senior
Certificates representing a right to interest on the Mortgage Loans could be
considered to be contingent within the meaning of the OID Regulations, at least
if such Senior Certificate was issued at a premium. The likelihood that such
payments will be considered contingent increases the greater the amount of such
premium.
The IRS recently issued proposed regulations (the 'Proposed Contingent
Regulations') governing the calculation of OID on instruments having contingent
interest payments. The Proposed Contingent Regulations, although not effective
until 60 days after finalized, represent the only guidance regarding the views
of the IRS with respect to contingent interest instruments and specifically do
not apply for purposes of calculating OID on debt instruments subject to Code
Section 1272(a)(6), such as the Regular Certificates. Additionally, Treasury
regulations issued on January 27, 1994 which provide rules for calculating OID
(the 'OID Regulations'), do not contain provisions specifically interpreting
Code Section 1272(a)(6). Until the Treasury issues guidance to the contrary, the
authority cited above represents the only guidance regarding the current views
of the IRS with respect to contingent payment instruments.
In the event that payments on a Senior Certificate in respect of interest
on the Mortgage Loans are considered contingent, the holder would generally
report income or loss as described above under 'Stripped Bonds and Stripped
Coupons', except that the yield that would be used in calculating interest
income would not be the actual yield but would instead equal the 'applicable
Federal rate' (the 'AFR', generally, an average of current yields of Treasury
securities computed and published monthly by the IRS), in effect at the time of
purchase of such Senior Certificate by such holder. In addition, once such
Holder's adjusted basis in such Senior Certificate has been reduced (by prior
distributions or losses) to an amount equal to the aggregate amount of the
remaining noncontingent payments of the Mortgage Loans that are allocable to
such Senior Certificate (or to zero if such Senior Certificate does not share in
principal payments), then such holder would recognize income in each subsequent
month equal to the full amount of interest on the Mortgage Loans that accrues in
that month and is allocable to such Senior Certificate. It is uncertain whether,
under the contingent payment rules, any other adjustments would be made to take
account of prepayments of the Mortgage Loans.
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SALE OR EXCHANGE OF A SENIOR CERTIFICATE
Sale or exchange of a Senior Certificate prior to its maturity will result
in gain or loss equal to the difference, if any, between the amount received,
and the owner's adjusted basis in the Senior Certificate. Such adjusted basis
generally will equal the seller's purchase price for the Senior Certificate,
increased by the original issue discount included in the seller's gross income
with respect to the Senior Certificate, and reduced by principal payments on the
Senior Certificate previously received by the seller. Such gain or loss will be
capital gain or loss to an owner for which a Senior Certificate is a 'capital
asset' within the meaning of Code Section 1221, and will be long-term or
short-term depending on whether the Senior Certificate has been owned for the
long-term capital gain holding period (currently more than one year).
Senior Certificates will be 'evidences of indebtedness' within the meaning
of Code Section 582(c)(1), so that gain or loss recognized from the sale of a
Senior Certificate by a bank or a thrift institution to which such section
applies will be ordinary income or loss.
NON-U.S. PERSONS
Generally, to the extent that a Senior Certificate evidences ownership in
Mortgage Loans that are issued on or before July 18, 1984, interest or original
issue discount paid by the person required to withhold tax under Code Section
1441 or 1442 to (i) an owner that is not a U.S. Person (as defined below), or
(ii) a Senior Certificateholder holding on behalf of an owner that is not a U.S.
Person, will be subject to federal income tax, collected by withholding, at a
rate of 30% or such lower rate as may be provided for interest by an applicable
tax treaty. Accrued original issue discount recognized by the owner on the sale
or exchange of such a Senior Certificate also will be subject to federal income
tax at the same rate. Generally, such payments would not be subject to
withholding to the extent that a Senior Certificate evidences ownership in
Mortgage Loans issued after July 18, 1984, if (i) such Senior Certificateholder
does not actually or constructively own 10 percent or more of the combined
voting power of all classes of equity in the issuer (which for purposes of this
discussion may be defined as the Trust Fund (the 'Issuer')); (ii) such Senior
Certificateholder is not a controlled foreign corporation (within the meaning of
Code Section 957) related to the Issuer; and (iii) such Senior Certificateholder
complies with certain identification requirements (including delivery of a
statement, signed by the Senior Certificateholder under penalties of perjury,
certifying that such Senior Certificateholder is not a U.S. Person and providing
the name and address of such Senior Certificateholder).
A 'U.S. Person' means a citizen or resident of the United States, a
corporation or a partnership organized in or under the laws of the United
States, or any political subdivision thereof or an estate or trust, the income
of which, from sources outside the United States, is includible in gross income
for federal income tax purposes regardless of its connection with the conduct of
a trade or business within the United States.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Master Servicer will furnish or make available, within a reasonable
time after the end of each calendar year, to each Certificateholder at any time
during such year, such information as may be deemed necessary or desirable to
assist Certificateholders in preparing their federal income tax returns, or to
enable holders to make such information available to owners or other financial
intermediaries of holders that hold such Certificates as nominees. If a holder,
owner or other recipient of a payment on behalf of an owner fails to supply a
certified taxpayer identification number or if the Secretary of the Treasury
determines that such person has not reported all interest and dividend income
required to be shown on its federal income tax return, 31% backup withholding
may be required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability.
REMIC CERTIFICATES
The Trust Fund relating to a Series of Certificates may elect to be treated
as a REMIC. Qualification as a REMIC requires ongoing compliance with certain
conditions. Although a REMIC is
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not generally subject to federal income tax (see, however, 'Residual
Certificates -- Prohibited Transactions and Other Taxes'), if a Trust Fund with
respect to which a REMIC election is made fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable year,
including the implementation of restrictions on the purchase and transfer of the
residual interest in a REMIC as described below under 'Residual Certificates',
the Code provides that a Trust Fund will not be treated as a REMIC for such year
and thereafter. In that event, such entity may be taxable as a separate
corporation, and the related REMIC Certificates may not be accorded the status
or given the tax treatment described below. While the Code authorizes the
Treasury Department to issue regulations providing relief in the event of an
inadvertent termination of status as a REMIC, no such regulations have been
issued. Any such relief, moreover, may be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the REMIC's income for the
period in which the requirements for such status are not satisfied. With respect
to each such Trust Fund that elects REMIC status, Brown & Wood LLP will deliver
its opinion generally to the effect that, under then existing law and assuming
compliance with all provisions of the related Agreement, such Trust Fund will
qualify as a REMIC and the related Certificates will be considered to be regular
interests ('Regular Certificates') or residual interests ('Residual
Certificates') in the REMIC. The related Prospectus Supplement for each Series
of Certificates will indicate whether the Trust Fund will make a REMIC election
and whether a class of Certificates will be treated as a regular or residual
interest in the REMIC.
In general, with respect to each Series of Certificates for which a REMIC
election is made, (i) Certificates held by a thrift institution taxed as a
'mutual savings bank' or 'domestic building and loan association' will represent
interests in 'qualifying real property loans' within the meaning of Code Section
593(d)(1); (ii) Certificates held by a thrift institution taxed as a 'domestic
building and loan association' will constitute assets described in Code Section
7701(a)(19)(C); (iii) Certificates held by a real estate investment trust will
constitute 'real estate assets' within the meaning of Code Section 856(c)(5)(A);
and (iv) interest on Certificates held by a real estate investment trust will be
considered 'interest on obligations secured by mortgages on real property'
within the meaning of Code Section 856(c)(3)(B). If less than 95% of the REMIC's
assets are assets qualifying under any of the foregoing Code sections, the
Certificates will be qualifying assets only to the extent that the REMIC's
assets are qualifying assets. In addition, payments on Mortgage Loans held
pending distribution on the REMIC Certificates will be considered to be
qualifying real property loans for purposes of Code Section 593(d)(1) and real
estate assets for purposes of Code Section 856(c).
In some instances the Mortgage Loans may not be treated entirely as assets
described in the foregoing sections. See, in this regard, the discussion of
Buydown Mortgage Loans contained in 'Non-REMIC Certificates' and 'Single Class
of Senior Certificates' above. REMIC Certificates held by a real estate
investment trust will not constitute 'Government Securities' within the meaning
of Code Section 856(c)(5)(A), and REMIC Certificates held by a regulated
investment company will not constitute 'Government Securities' within the
meaning of Code Section 851(b)(4)(A)(ii). REMIC Certificates held by certain
financial institutions will constitute 'evidences of indebtedness' within the
meaning of Code Section 582(c)(1).
A 'qualified mortgage' for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally secured
by an interest in real property and that is transferred to the REMIC within a
prescribed time period in exchange for regular or residual interests in the
REMIC. The REMIC Regulations provide that manufactured housing or mobile homes
(not including recreational vehicles, campers or similar vehicles) which are
'single family residences' under Code Section 25(e)(10) will qualify as real
property without regard to state law classifications. Under Code Section
25(e)(10), a single family residence includes any manufactured home which has a
minimum of 400 square feet of living space and a minimum width in excess of 102
inches and which is of a kind customarily used at a fixed location.
Tiered REMIC Structures. For certain Series of Certificates, two separate
elections may be made to treat designated portions of the related Trust Fund as
REMICs (respectively, the 'Subsidiary REMIC' and the 'Master REMIC') for federal
income tax purposes. Upon the issuance of any such Series of Certificates, Brown
& Wood, counsel to the Depositor, will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Agreement,
the Master REMIC as well as
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any Subsidiary REMIC will each qualify as a REMIC and the REMIC Certificates
issued by the Master REMIC and the Subsidiary REMICs, respectively, will be
considered to evidence ownership of Regular Certificates or Residual
Certificates in the related REMIC within the meaning of the REMIC provisions.
Only REMIC Certificates issued by the Master REMIC will be offered
hereunder. The Subsidiary REMIC and the Master REMIC will be treated as one
REMIC solely for purposes of determining whether the REMIC Certificates will be
(i) 'qualifying real property loans' under Section 593(d) of the Code; (ii)
'real estate assets' within the meaning of Section 856(c)(5)(A) of the Code;
(iii) 'loans secured by an interest in real property' under Section
7701(a)(19)(C) of the Code; and (iv) whether the income on such Certificates is
interest described in Section 856(c)(3)(B) of the Code.
REGULAR CERTIFICATES
General. Except as otherwise stated in this discussion, Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of Regular Certificates that otherwise report income under a
cash method of accounting will be required to report income with respect to
Regular Certificates under an accrual method.
Original Issue Discount and Premium. The Regular Certificates may be issued
with 'original issue discount' within the meaning of Code Section 1273(a).
Generally, such original issue discount, if any, will equal the difference
between the 'stated redemption price at maturity' of a Regular Certificate and
its 'issue price'. Holders of any class of Certificates issued with original
issue discount will be required to include such original issue discount in gross
income for federal income tax purposes as it accrues, in accordance with a
constant interest method based on the compounding of interest, in advance of
receipt of the cash attributable to such income. The following discussion is
based in part on the OID Regulations and the 1986 Act. The holder of a Regular
Certificate should be aware, however, that the OID Regulations do not adequately
address certain issues relevant to prepayable securities, such as the Regular
Certificates.
Rules governing original issue discount are set forth in Code Sections 1271
through 1273 and 1275. These rules require that the amount and rate of accrual
of original issue discount be calculated based on a Prepayment Assumption and
prescribe a method for adjusting the amount and rate of accrual of such discount
where the actual prepayment rate differs from the Prepayment Assumption. Under
the Code, the Prepayment Assumption must be determined in the manner prescribed
by regulations which have not yet been issued. The Legislative History provides,
however, that Congress intended the regulations to require that the Prepayment
Assumption be the prepayment assumption that is used in determining the initial
offering price of such Regular Certificates. The Prospectus Supplement for each
Series of Regular Certificates will specify the Prepayment Assumption to be used
for the purpose of determining the amount and rate of accrual of original issue
discount. No representation is made that the Regular Certificates will prepay at
the Prepayment Assumption or at any other rate.
In general, each Regular Certificate will be treated as a single
installment obligation issued with an amount of original issue discount equal to
the excess of its 'stated redemption price at maturity' over its 'issue price'.
The issue price of a Regular Certificate is the first price at which a
substantial amount of Regular Certificates of that class are first sold to the
public (excluding bond houses, brokers, underwriters or wholesalers). The issue
price of a Regular Certificate also includes the amount paid by an initial
Regular Certificateholder for accrued interest that relates to a period prior to
the issue date of the Regular Certificate. The stated redemption price at
maturity of a Regular Certificate includes the original principal amount of the
Regular Certificate, but generally will not include distributions of interest if
such distributions constitute 'qualified stated interest'. Under the OID
Regulations, qualified stated interest generally means interest payable at a
single fixed rate or qualified variable rate (as described below) provided that
such interest payments are unconditionally payable at intervals of one year or
less during the entire term of the Regular Certificate. Interest is payable at a
single fixed rate only if the rate appropriately takes into account the length
of the interval between payments. Distributions of interest on Regular
Certificates, with respect to which deferred interest will accrue, will not
constitute qualified stated interest payments, in which case the stated
redemption price at maturity
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of such Regular Certificates includes all distributions of interest as well as
principal thereon. Where the interval between the issue date and the first
Distribution Date on a Regular Certificate is either longer or shorter than the
interval between subsequent Distribution Dates, all or part of the interest
foregone, in the case of the longer interval, and all of the additional
interest, in the case of the shorter interval, will be included in the stated
redemption price at maturity and tested under the de minimis rule described
below. The OID Regulations suggest that all interest on a long first period
Regular Certificate that is issued with non-de minimis OID may be treated as
OID. Regular Certificateholders should consult their own tax advisors to
determine the issue price and stated redemption price at maturity of a Regular
Certificate.
Under the de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Certificate multiplied
by the weighted average maturity of the Regular Certificate. For this purpose,
the weighted average maturity of the Regular Certificate is computed as the sum
of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included in
the stated redemption price at maturity of the Regular Certificate and the
denominator of which is the stated redemption price at maturity of the Regular
Certificate. Although currently unclear, it appears that the schedule of such
distributions should be determined in accordance with the Prepayment Assumption.
The Prepayment Assumption with respect to a Series of Regular Certificates will
be set forth in the related Prospectus Supplement. Holders generally must report
de minimis OID pro rata as principal payments are received, and such income will
be capital gain if the Regular Certificate is held as a capital asset. However,
accrual method holders may elect to accrue all de minimis OID as well as market
discount under a constant interest method.
Certain Regular Certificates may be issued at prices significantly
exceeding their principal amounts (the 'Super-Premium Certificates') if that is
how they are defined in this deal. Under the REMIC Regulations, however, if the
issue price of a Regular Certificate does not exceed 125% of its specified
principal amount, such Regular Certificate will not be treated as a
Super-Premium Regular Certificate and the rules described below under 'Regular
Certificates -- Premium' will apply. The income tax treatment of such Regular
Certificates is not entirely certain. For information reporting purposes, the
Trust Fund intends to take the position that the stated redemption price at
maturity of such Regular Certificates is the sum of all payments to be made on
such Regular Certificates determined under the Prepayment Assumption, with the
result that such Regular Certificates would be issued with original issue
discount. The Service might contend, however, that the stated redemption price
at maturity of such Regular Certificates should be limited to their principal
amount (subject to the discussion below under 'Accrued Interest and Long First
Period Certificates'), so that such Regular Certificates would be considered for
federal income tax purposes to be issued at a premium. If such a position were
to prevail, the rules described below under 'Regular Certificates -- Premium'
would apply.
Generally, a Regular Certificateholder must include in gross income the
'daily portions', as determined below, of the original issue discount that
accrues on a Regular Certificate for each day the Regular Certificateholder
holds the Regular Certificate, including the purchase date but excluding the
disposition date. In the case of an original holder of a Regular Certificate, a
calculation will be made of the portion of the original issue discount that
accrues during each successive period (an 'accrual period') that ends on the day
in the calendar year corresponding to a Distribution Date (or if Distribution
Dates are on the first day or first business day of the immediately preceding
month, interest may be treated as payable on the last day of the immediately
preceding month) and begins on the day after the end of the immediately
preceding accrual period (or on the issue date in the case of the first accrual
period). This will be done, in the case of each full accrual period, by (i)
adding (a) the present value at the end of the accrual period (determined by
using as a discount factor the original yield to maturity of the Regular
Certificates as calculated under the Prepayment Assumption) of all remaining
payments to be received on the Regular Certificate under the Prepayment
Assumption, and (b) any payments included in the stated redemption price at
maturity received during such accrual period, and (ii) subtracting from that
total the 'adjusted issue price' of the Regular Certificates at the beginning of
such accrual period. The 'adjusted issue price' of a Regular Certificate at the
beginning of the first
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accrual period is its issue price; the 'adjusted issue price' of a Regular
Certificate at the beginning of a subsequent accrual period is the 'adjusted
issue price' at the beginning of the immediately preceding accrual period plus
the amount of original issue discount allocable to that accrual period and
reduced by the amount of any payment other than a payment of stated periodic
interest made at the end of or during that accrual period. The original issue
discount accrued during an accrual period will then be divided by the number of
days in the period to determine the daily portion of original issue discount for
each day in the accrual period. The calculation of original issue discount under
the method described above will cause the accrual of original issue discount to
either increase or decrease (but never below zero) in a given accrual period to
reflect the fact that prepayments are occurring faster or slower than under the
Prepayment Assumption. With respect to an initial accrual period shorter than a
full accrual period, the daily portions of original issue discount may be
determined according to an appropriate allocation under any reasonable method.
A subsequent purchaser of a Regular Certificate issued with original issue
discount who purchases the Regular Certificate at a cost less than the remaining
stated redemption price at maturity will also be required to include in gross
income the sum of the daily portions of original issue discount on that Regular
Certificate. In computing the daily portions of original issue discount for such
a purchaser (as well as an initial purchaser that purchases at a price higher
than the adjusted issue price but less than the stated redemption price at
maturity), however, the daily portion is reduced by the amount that would be the
daily portion for such day (computed in accordance with the rules set forth
above) multiplied by a fraction, the numerator of which is the amount, if any,
by which the price paid by such holder for that Regular Certificate exceeds the
following amount: (a) the sum of the issue price plus the aggregate amount of
original issue discount that would have been includible in the gross income of
an original Regular Certificateholder (who purchased the Regular Certificate at
its issue price), less (b) any prior payments included in the stated redemption
price at maturity, and the denominator of which is the sum of the daily portions
for that Regular Certificate for all days beginning on the date after the
purchase date and ending on the maturity date computed under the Prepayment
Assumption.
Variable Rate Regular Certificate. Regular Certificates may provide for
interest based on a variable rate. Under the OID Regulations, interest is
treated as payable at a variable rate and not as contingent interest if,
generally, (i) the issue price does not exceed the original principal balance,
and (ii) the interest compounds or is payable at least annually at current
values of certain objective rates matured by or based on lending rates for newly
borrowed funds or the price of actively traded property or an index of the
prices of such property where such rate is subject to a multiple of not less
than zero nor more than 1.35. The variable interest generally will be qualified
stated interest to the extent it is unconditionally payable at least annually
and, to the extent successive variable rates are used, interest is not
significantly accelerated or deferred.
The amount of original issue discount with respect to a Regular Certificate
bearing a variable rate of interest will accrue in the manner described above
under 'Original Issue Discount', with the yield to maturity and future payments
on such Regular Certificate generally to be determined by assuming that interest
will be payable on the Certificate based on the initial rate for the relevant
class (or, if different, the value of the applicable variable rate as of the
pricing date). Ordinary income reportable for any period will be adjusted based
on subsequent changes in the applicable interest rate index.
Although unclear at present, the Depositor intends to treat Regular
Certificates bearing an interest rate that is a weighted average of the net
interest rates on Mortgage Loans having adjustable rates ('weighted average
rate') as having qualified stated interest. In such case, the applicable index
used to compute interest on the Mortgage Loans in effect on the issue date (or
possibly the pricing date) will be deemed to be in effect beginning with the
period in which the first weighted average adjustment date occurring after the
issue date occurs. If the Pass-Through Rate for one or more periods is less than
it would be based upon the fully indexed rate, the excess of the interest
payments projected at the assumed index over interest projected at such initial
rate will be tested under the de minimis rules as described above. Adjustments
will be made in each accrual period either increasing or decreasing the amount
of ordinary income reportable to reflect the actual Pass-Through Rate on the
Regular Certificate. It is possible, however, that the IRS may treat some or all
of the interest on Regular Certificates with a weighted average rate as taxable
under the rules relating to obligations providing for
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contingent payments. Such treatment may affect the timing of income accruals on
such Regular Certificates.
Market Discount. A purchaser of a Regular Certificate may also be subject
to the market discount provisions of Code Sections 1276 through 1278. Under
these provisions and the OID Regulations, 'market discount' equals the excess,
if any, of (i) the Regular Certificate's stated principal amount or, in the case
of a Regular Certificate with original issue discount, the adjusted issue price
(determined for this purpose as if the purchaser had purchased such Regular
Certificate from an original holder) over (ii) the price for such Regular
Certificate paid by the purchaser. A Certificateholder that purchases a REMIC
Regular Certificate at a market discount will recognize income upon receipt of
each distribution representing stated redemption price. In particular, under
Section 1276 of the Code such a holder generally will be required to allocate
each such principal distribution first to accrued market discount not previously
included in income, and to recognize ordinary income to that extent. A
Certificateholder may elect to include market discount in income currently as it
accrues rather than including it on a deferred basis in accordance with the
foregoing. If made, such election will apply to all market discount bonds
acquired by such Certificateholder on or after the first day of the first
taxable year to which such election applies. In addition, the OID Regulations
permit a Certificateholder using the accrual method of accounting to elect to
accrue all interest, discount (including de minimis market or original issue
discount) and premium in income as interest, based on a constant yield method.
If such an election were made with respect to a REMIC Regular Certificate with
market discount, the Certificateholder is deemed to have made an election to
include in income currently market discount with respect to all other debt
instruments having market discount that such Certificateholder acquires during
the year of the election or thereafter. Similarly, a Certificateholder that
makes this election for a Certificate that is acquired at a premium is deemed to
have made an election to amortize bond premium with respect to all debt
instruments having amortizable bond premium that such Certificateholder owns or
acquires. See 'Regular Certificates -- Premium'. The election to accrue
interest, discount and premium on a constant yield method with respect to a
Certificate is irrevocable.
Market discount with respect to a Regular Certificate will be considered to
be zero if the amount allocable to the Regular Certificate is less than 0.25% of
the Regular Certificate's stated redemption price at maturity multiplied by the
Regular Certificate's weighted average maturity remaining after the date of
purchase. If market discount on a Regular Certificate is considered to be zero
under this rule, the actual amount of market discount must be allocated to the
remaining principal payments on the Regular Certificate, and gain equal to such
allocated amount will be recognized when the corresponding principal payment is
made. Treasury regulations implementing the market discount rules have not yet
been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond shall be
treated as ordinary income to the extent that it does not exceed the accrued
market discount at the time of such payment. The amount of accrued market
discount for purposes of determining the tax treatment of subsequent principal
payments or dispositions of the market discount bond is to be reduced by the
amount so treated as ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest rate or according to one of the following methods. For Regular
Certificates issued with original issue discount, the amount of market discount
that accrues during a period is equal to the product of (i) the total remaining
market discount, multiplied by (ii) a fraction, the numerator of which is the
original issue discount accruing during the period and the denominator of which
is the total remaining original issue discount at the beginning of the period.
For Regular Certificates issued without original issue discount, the amount of
market discount that accrues during a period is equal to the product of (a) the
total remaining market discount and (b) a fraction, the numerator of which is
the amount of stated interest paid during the accrual
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period and the denominator of which is the total amount of stated interest
remaining to be paid at the beginning of the period. For purposes of calculating
market discount under any of the above methods in the case of instruments (such
as the Regular Certificates) which provide for payments which may be accelerated
by reason of prepayments of other obligations securing such instruments, the
same Prepayment Assumption applicable to calculating the accrual of original
issue discount will apply.
A holder of a Regular Certificate that acquires such Regular Certificate at
a market discount also may be required to defer, until the maturity date of such
Regular Certificate or its earlier disposition in a taxable transaction, the
deduction of a portion of the amount of interest that the holder paid or accrued
during the taxable year on indebtedness incurred or maintained to purchase or
carry the Regular Certificate in excess of the aggregate amount of interest
(including original issue discount) includible in such holder's gross income for
the taxable year with respect to such Regular Certificate. The amount of such
net interest expense deferred in a taxable year may not exceed the amount of
market discount accrued on the Regular Certificate for the days during the
taxable year on which the holder held the Regular Certificate and, in general,
would be deductible when such market discount is includible in income. The
amount of any remaining deferred deduction is to be taken into account in the
taxable year in which the Regular Certificate matures or is disposed of in a
taxable transaction. In the case of a disposition in which gain or loss is not
recognized in whole or in part, any remaining deferred deduction will be allowed
to the extent of gain recognized on the disposition. This deferral rule does not
apply if the Regular Certificateholder elects to include such market discount in
income currently as it accrues on all market discount obligations acquired by
such Regular Certificateholder in that taxable year or thereafter.
Premium. A purchaser of a Regular Certificate that purchases the Regular
Certificate at a cost (not including accrued qualified stated interest) greater
than its remaining stated redemption price at maturity will be considered to
have purchased the Regular Certificate at a premium, and may elect to amortize
such premium under a constant yield method. It is not clear whether the
Prepayment Assumption would be taken into account in determining the life of the
Regular Certificate for this purpose. However, the Legislative History states
that the same rules that apply to accrual of market discount (which rules
require use of a Prepayment Assumption in accruing market discount with respect
to Regular Certificates without regard to whether such Certificates have
original issue discount) will also apply in amortizing bond premium under Code
Section 171. The Code provides that amortizable bond premium will be allocated
among the interest payments on such Regular Certificates and will be applied as
an offset against such interest payment.
Deferred Interest. Certain classes of Regular Certificates will provide for
the accrual of interest when one or more ARM Loans are adding interest to their
principal balance by reason of negative amortization ('Deferred Interest'). Any
Deferred Interest that accrues with respect to a class of Regular Certificates
will constitute income to the holders of such Certificates prior to the time
distributions of cash with respect to such Deferred Interest are made. It is
unclear, under the OID Regulations, whether any of the interest on such
Certificates will constitute qualified stated interest or whether all or a
portion of the interest payable on the Certificates must be included in the
stated redemption price at maturity of the Certificate and accounted for as
original issue discount (which could accelerate such inclusion). Interest on
Regular Certificates must in any event be accounted for under an accrual method
by the holders of such Certificates and, therefore, applying the latter analysis
may result only in a slight difference in the timing of the inclusion in income
of interest on such Regular Certificates.
Effects of Defaults and Delinquencies. Certain Series of Certificates may
contain one or more Classes of Subordinate Certificates, and in the event there
are defaults or delinquencies on the Mortgage Loans, amounts that would
otherwise be distributed on the Subordinate Certificates may instead be
distributed on the Senior Certificates. Holders of Subordinate Certificates
nevertheless will be required to report income with respect to such Certificates
under an accrual method without giving effect to delays and reductions in
distributions on such Subordinate Certificates attributable to defaults and
delinquencies on the Mortgage Loans, except to the extent that it can be
established that such amounts are uncollectible. As a result, the amount of
income reported by a holder of a Subordinate Certificate in any period could
significantly exceed the amount of cash distributed to such holder in that
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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 Subordinate Certificate is reduced as a result of defaults
and delinquencies on the Mortgage Loans. However, the timing and character of
such losses or reductions in income are uncertain, and, accordingly, holders of
Subordinate Certificates should consult their own tax advisors on this point.
Sale, Exchange or Redemption. If a Regular Certificate is sold, exchanged,
redeemed or retired, the seller will recognize gain or loss equal to the
difference between the amount realized on the sale, exchange, redemption, or
retirement and the seller's adjusted basis in the Regular Certificate. Such
adjusted basis generally will equal the cost of the Regular Certificate to the
seller, increased by any original issue discount and market discount included in
the seller's gross income with respect to the Regular Certificate, and reduced
(but not below zero) by payments included in the stated redemption price at
maturity previously received by the seller and by any amortized premium.
Similarly, a holder who receives a payment which is part of the stated
redemption price at maturity of a Regular Certificate will recognize gain equal
to the excess, if any, of the amount of the payment over the holder's adjusted
basis in the Regular Certificate. A holder of a Regular Certificate who receives
a final payment which is less than the holder's adjusted basis in the Regular
Certificate will generally recognize a loss. Except as provided in the following
paragraph and as provided under 'Market Discount' above, any such gain or loss
will be capital gain or loss, provided that the Regular Certificate is held as a
'capital asset' (generally, property held for investment) within the meaning of
Code Section 1221.
Gain from the sale or other disposition of a Regular Certificate that might
otherwise be capital gain will be treated as ordinary income to the extent that
such gain does not exceed the excess, if any, of (i) the amount that would have
been includible in such holder's income with respect to the Regular Certificate
had income accrued thereon at a rate equal to 110% of the AFR as defined in Code
Section 1274(d) determined as of the date of purchase of such Regular
Certificate, over (ii) the amount actually includible in such holder's income.
Regular Certificates will be 'evidences of indebtedness' within the meaning
of Code Section 582(c)(1), so that gain or loss recognized from the sale of a
Regular Certificate by a bank or a thrift institution to which such section
applies will be ordinary income or loss.
The Regular Certificate information reports will include a statement of the
adjusted issue price of the Regular Certificate at the beginning of each accrual
period. In addition, the reports will include information necessary to compute
the accrual of any market discount that may arise upon secondary trading of
Regular Certificates. Because exact computation of the accrual of market
discount on a constant yield method would require information relating to the
holder's purchase price which the REMIC may not have, it appears that the
information reports will only require information pertaining to the appropriate
proportionate method of accruing market discount.
Accrued Interest Certificates. Certain of the Regular Certificates
('Payment Lag Certificates') may provide for payments of interest based on a
period that corresponds to the interval between Distribution Dates but that ends
prior to each such Distribution Date. The period between the Closing Date for
Payment Lag Certificates and their first Distribution Date may or may not exceed
such interval. Purchasers of Payment Lag Certificates for which the period
between the Closing Date and the first Distribution Date does not exceed such
interval could pay upon purchase of the Regular Certificates accrued interest in
excess of the accrued interest that would be paid if the interest paid on the
Distribution Date were interest accrued from Distribution Date to Distribution
Date. If a portion of the initial purchase price of a Regular Certificate is
allocable to interest that has accrued prior to the issue date ('pre-issuance
accrued interest') and the Regular Certificate provides for a payment of stated
interest on the first payment date (and the first payment date is within one
year of the issue date) that equals or exceeds the amount of the pre-issuance
accrued interest, then the Regular Certificate's issue price may be computed by
subtracting from the issue price the amount of pre-issuance accrued interest,
rather than as an amount payable on the Regular Certificate. However, it is
unclear under this method how the OID Regulations treat interest on Payment Lag
Certificates as described above. Therefore, in the case of a Payment Lag
Certificate, the REMIC intends to include accrued interest in the issue price
and report interest payments made on the first Distribution Date as interest to
the extent such payments
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represent interest for the number of days which the Certificateholder has held
such Payment Lag Certificate during the first Accrual Period.
Investors should consult their own tax advisors concerning the treatment
for federal income tax purposes of Payment Lag Certificates.
Non-Interest Expenses of the REMIC. Under the REMIC regulations, if the
REMIC is considered to be a 'single-class REMIC', a portion of the REMIC's
servicing, administrative and other non-interest expenses will be allocated as a
separate item to those Regular Certificateholders that are 'pass-through
interest holders'. Certificateholders that are 'pass-through interest holders'
should consult their own tax advisors about the impact of these rules on an
investment in the Regular Certificates. See 'Pass-Through of Non-Interest
Expenses of the REMIC' under 'Residual Certificates' below.
Non-U.S. Persons. Generally, payments of interest (including any payment
with respect to accrued original issue discount) on the Regular Certificates to
a Regular Certificateholder who is a non-U.S. Person not engaged in a trade or
business within the United States, will not be subject to federal withholding
tax if (i) such Regular Certificateholder does not actually or constructively
own 10 percent or more of the combined voting power of all classes of equity in
the issuer (which for purposes of this discussion may be defined as the Trust
Fund or the beneficial owners of the related Residual Certificates (the
'Issuer')); (ii) such Regular Certificateholder is not a controlled foreign
corporation (within the meaning of Code Section 957), related to the Issuer; and
(iii) such Regular Certificateholder complies with certain identification
requirements (including delivery of a statement, signed by the Regular
Certificateholder under penalties of perjury, certifying that such Regular
Certificateholder is a foreign person and providing the name and address of such
Regular Certificateholder). If a Regular Certificateholder is not exempt from
withholding, distributions of interest, including distributions in respect of
accrued original issue discount, such holder may be subject to a 30% withholding
tax, subject to reduction under any applicable tax treaty.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are non-resident
alien individuals should consult their tax advisors concerning this question.
Regular Certificateholders who are non-U.S. Persons and persons related to
such holders should not acquire any Residual Certificates, and Residual
Certificateholders and persons related to Residual Certificateholders should not
acquire any Regular Certificates without consulting their tax advisors as to the
possible adverse tax consequences of doing so.
Information Reporting and Backup Withholding. The Master Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each Regular Certificateholder at any time during such year,
such information as may be deemed necessary or desirable to assist Regular
Certificateholders in preparing their federal income tax returns, or to enable
holders to make such information available to owners or other financial
intermediaries of holders that hold such Regular Certificates. If a holder,
owner or other recipient of a payment on behalf of an owner fails to supply a
certified taxpayer identification number or if the Secretary of the Treasury
determines that such person has not reported all interest and dividend income
required to be shown on its federal income tax return, 31% backup withholding
may be required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability.
RESIDUAL CERTIFICATES
Allocation of the Income of the REMIC to the Residual Certificates. The
REMIC will not be subject to federal income tax except with respect to income
from prohibited transactions and certain other transactions. See 'Prohibited
Transactions and Other Taxes' herein. Instead, each original holder of a
Residual Certificate will report on its federal income tax return, as ordinary
income, its share of the taxable income of the REMIC for each day during the
taxable year on which such holder owns any Residual Certificates. The taxable
income of the REMIC for each day will be determined by allocating the taxable
income of the REMIC for each calendar quarter ratably to each day in the
quarter. Such a
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holder's share of the taxable income of the REMIC for each day will be based on
the portion of the outstanding Residual Certificates that such holder owns on
that day. The taxable income of the REMIC will be determined under an accrual
method and will be taxable to the Residual Certificateholders without regard to
the timing or amounts of cash distributions by the REMIC. Ordinary income
derived from Residual Certificates will be 'portfolio income' for purposes of
the taxation of taxpayers subject to the limitations on the deductibility of
'passive losses'. As residual interests, the Residual Certificates will be
subject to tax rules, described below, that differ from those that would apply
if the Residual Certificates were treated for federal income tax purposes as
direct ownership interests in the Certificates, or as debt instruments issued by
the REMIC.
A Residual Certificateholder may be required to include taxable income from
the Residual Certificate in excess of the cash distributed. For example, a
structure where principal distributions are made serially on regular interests
(that is, a fast-pay, slow-pay structure) may generate such a mismatching of
income and cash distributions (that is, 'phantom income'). This mismatching may
be caused by the use of certain required tax accounting methods by the REMIC,
variations in the prepayment rate of the underlying Mortgage Loans and certain
other factors. Depending upon the structure of a particular transaction, the
aforementioned factors may significantly reduce the after-tax yield of a
Residual Certificate to a Residual Certificateholder. Investors should consult
their own tax advisors concerning the federal income tax treatment of a Residual
Certificate and the impact of such tax treatment on the after-tax yield of a
Residual Certificate.
A subsequent Residual Certificateholder also will report on its federal
income tax return amounts representing a daily share of the taxable income of
the REMIC for each day that such Residual Certificateholder owns such Residual
Certificate. Those daily amounts generally would equal the amounts that would
have been reported for the same days by an original Residual Certificateholder,
as described above. The Legislative History indicates that certain adjustments
may be appropriate to reduce (or increase) the income of a subsequent holder of
a Residual Certificate that purchased such Residual Certificate at a price
greater than (or less than) the adjusted basis such Residual Certificate would
have in the hands of an original Residual Certificateholder. See 'Sale or
Exchange of Residual Certificates' below. It is not clear, however, whether such
adjustments will in fact be permitted or required and, if so, how they would be
made. The REMIC Regulations do not provide for any such adjustments.
Taxable Income of the REMIC Attributable to Residual Interests. The taxable
income of the REMIC will reflect a netting of (i) the income from the Mortgage
Loans and the REMIC's other assets and (ii) the deductions allowed to the REMIC
for interest and original issue discount on the Regular Certificates and, except
as described below under 'Pass-Through of Non-Interest Expenses of the REMIC',
other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the Regular and Residual Certificates (or, if a class of Certificates is not
sold initially, their fair market values). Such aggregate basis will be
allocated among the Mortgage Loans and other assets of the REMIC in proportion
to their respective fair market values. A Mortgage Loan will be deemed to have
been acquired with discount or premium to the extent that the REMIC's basis
therein is less than or greater than its principal balance, respectively. Any
such discount (whether market discount or original issue discount) will be
includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to such income, under a method similar to the method
described above for accruing original issue discount on the Regular
Certificates. The REMIC expects to elect under Code Section 171 to amortize any
premium on the Mortgage Loans. Premium on any Mortgage Loan to which such
election applies would be amortized under a constant yield method. It is not
clear whether the yield of a Mortgage Loan would be calculated for this purpose
based on scheduled payments or taking account of the Prepayment Assumption.
Additionally, such an election would not apply to any Mortgage Loan originated
on or before September 27, 1985. Instead, premium on such a Mortgage Loan would
be allocated among the principal payments thereon and would be deductible by the
REMIC as those payments become due.
The REMIC will be allowed a deduction for interest and original issue
discount on the Regular Certificates. The amount and method of accrual of
original issue discount will be calculated for this
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purpose in the same manner as described above with respect to Regular
Certificates except that the 0.25% per annum de minimis rule and adjustments for
subsequent holders described therein will not apply.
A Residual Certificateholder will not be permitted to amortize the cost of
the Residual Certificate as an offset to its share of the REMIC's taxable
income. However, that taxable income will not include cash received by the REMIC
that represents a recovery of the REMIC's basis in its assets, and, as described
above, the issue price of the Residual Certificates will be added to the issue
price of the Regular Certificates in determining the REMIC's initial basis in
its assets. See 'Sale or Exchange of Residual Certificates' herein. For a
discussion of possible adjustments to income of a subsequent holder of a
Residual Certificate to reflect any difference between the actual cost of such
Residual Certificate to such holder and the adjusted basis such Residual
Certificate would have in the hands of an original Residual Certificateholder,
see 'Allocation of the Income of the REMIC to the Residual Certificates' above.
Net Losses of the REMIC. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. Such net loss would be
allocated among the Residual Certificateholders in the same manner as the
REMIC's taxable income. The net loss allocable to any Residual Certificate will
not be deductible by the holder to the extent that such net loss exceeds such
holder's adjusted basis in such Residual Certificate. Any net loss that is not
currently deductible by reason of this limitation may only be used by such
Residual Certificateholder to offset its share of the REMIC's taxable income in
future periods (but not otherwise). The ability of Residual Certificateholders
that are individuals or closely held corporations to deduct net losses may be
subject to additional limitations under the Code.
Pass-Through of Non-Interest Expenses of the REMIC. As a general rule, all
of the fees and expenses of a REMIC will be taken into account by holders of the
Residual Interests. In the case of a 'single class REMIC', however, the expenses
and a matching amount of additional income will be allocated, under the Treasury
regulations, among the holders of the Regular Certificates and the holders of
the Residual Interests on a daily basis in proportion to the relative amounts of
income accruing to each Certificateholder on that day. In general terms, a
single class REMIC is one that either (i) would qualify, under existing Treasury
regulations, as a grantor trust if it were not a REMIC (treating all interests
as ownership interests, even if they would be classified as debt for federal
income tax purposes) or (ii) is similar to such a trust and is structured with
the principal purpose of avoiding the single class REMIC rules. Unless otherwise
stated in the applicable Prospectus Supplement, the expenses of the REMIC will
be allocated to holders of the related Residual Interests in their entirety and
not to holders of the related Regular Certificates.
In the case of individuals (or trusts, estates, or other persons who
compute their income in the same manner as individuals) who own an interest in a
Regular or Residual Certificate directly or through a pass-through interest
holder which is required to pass miscellaneous itemized deductions through to
its owners or beneficiaries (e.g., a partnership, an S corporation, or a grantor
trust), such expenses will be deductible under Code Section 67 only to the
extent that such expenses, plus other 'miscellaneous itemized deductions' of the
individual, exceed 2% of such individual's adjusted gross income. In addition,
Code Section 68 provides that the amount of itemized deductions otherwise
allowable for an individual whose adjusted gross income exceeds a certain amount
(the 'Applicable Amount') will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over the Applicable Amount or (ii) 80%
of the amount of itemized deductions otherwise allowable for the taxable year.
The amount of additional taxable income recognized by Residual
Certificateholders who are subject to the limitations of either Code Section 67
or Code Section 68 may be substantial. Further, holders (other than
corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holders' alternative
minimum taxable income. The REMIC is required to report to each pass-through
interest holder and to the IRS such holder's allocable share, if any, of the
REMIC's non-interest expenses. The term 'pass-through interest holder' generally
refers to individuals, entities taxed as individuals and certain pass-through
entities, but does not include real estate investment trusts. Residual
Certificateholders that are 'pass-through interest
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holders' should consult their own tax advisors about the impact of these rules
on an investment in the Residual Certificates.
Excess Inclusions. A portion of the income on a Residual Certificate
(referred to in the Code as an 'excess inclusion') for any calendar quarter
will, with an exception discussed below for certain thrift institutions, be
subject to federal income tax in all events. Thus, for example, an excess
inclusion (i) may not, except as described below, be offset by any unrelated
losses, deductions or loss carryovers of a Residual Certificateholder; (ii) will
be treated as 'unrelated business taxable income' within the meaning of Code
Section 512 if the Residual Certificateholder is a pension fund or any other
organization that is subject to tax only on its unrelated business taxable
income (see 'Tax-Exempt Investors' below); and (iii) is not eligible for any
reduction in the rate of withholding tax in the case of a Residual
Certificateholder that is a foreign investor. See 'Non-U.S. Persons' below. The
exception for thrift institutions is available only to the institution holding
the Residual Certificate, and not to any affiliate of the institution, unless
the affiliate is a subsidiary all the stock of which, and substantially all the
indebtedness of which, is held by the institution, and which is organized and
operated exclusively in connection with the organization and operation of one or
more REMICs.
Except as discussed in the following paragraph, with respect to any
Residual Certificateholder, the excess inclusions for any calendar quarter is
the excess, if any, of (i) the income of such Residual Certificateholder for
that calendar quarter from its Residual Certificate over (ii) the sum of the
'daily accruals' (as defined below) for all days during the calendar quarter on
which the Residual Certificateholder holds such Residual Certificate. For this
purpose, the daily accruals with respect to a Residual Certificate are
determined by allocating to each day in the calendar quarter its ratable portion
of the product of the 'adjusted issue price' (as defined below) of the Residual
Certificate at the beginning of the calendar quarter and 120 percent of the
'Federal long-term rate' in effect at the time the Residual Certificate is
issued. For this purpose, the 'adjusted issue price' of a Residual Certificate
at the beginning of any calendar quarter equals the issue price of the Residual
Certificate, increased by the amount of daily accruals for all prior quarters,
and decreased (but not below zero) by the aggregate amount of payments made on
the Residual Certificate before the beginning of such quarter. The 'Federal
long-term rate' is an average of current yields on Treasury securities with a
remaining term of greater than nine years, computed and published monthly by the
IRS.
As an exception to the general rule described above, the Treasury
Department has authority to issue regulations that would treat the entire amount
of income accruing on a Residual Certificate as excess inclusions if the
Residual Certificates in the aggregate are considered not to have 'significant
value'. Under the REMIC Regulations, Residual Certificateholders that are thrift
institutions described in Code Section 593 can offset excess inclusions with
unrelated deductions, losses and loss carryovers provided the Residual
Certificates have 'significant value'. For purposes of applying this rule,
thrift institutions that are members of an affiliated group filing a
consolidated return, together with their subsidiaries formed to issue REMICs,
are treated as separate corporations. Residual Certificates have 'significant
value' if: (i) the Residual Certificates have an aggregate issue price that is
at least equal to 2% of the aggregate issue price of all Residual Certificates
and Regular Certificates with respect to the REMIC and (ii) the anticipated
weighted average life of the Residual Certificates is at least 20% of the
anticipated weighted average life of the REMIC based on the anticipated
principal payments to be received with respect thereto (using the Prepayment
Assumption and any required or permitted clean up calls or required liquidation
provided for in the REMIC's organizational documents), except that all
anticipated distributions are to be used if the Residual Certificate is not
entitled to any principal payments or is entitled to a disproportionately small
portion relative to interest payments thereon. The principal amount will be
considered disproportionately small if the issue price of the Residual
Certificates exceeds 125% of their initial principal amount. Finally, an
ordering rule under the REMIC Regulations provides that a thrift institution may
only offset its excess inclusion income with deductions after it has first
applied its deductions against income that is not excess inclusion income.
In the case of any Residual Certificates held by a real estate investment
trust, the aggregate excess inclusions with respect to such Residual
Certificates, reduced (but not below zero) by the real estate investment trust
taxable income (within the meaning of Code Section 857(b)(2), excluding any net
capital gain), will be allocated among the shareholders of such trust in
proportion to the dividends
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received by such shareholders from such trust, and any amount so allocated will
be treated as an excess inclusion with respect to a Residual Certificate as if
held directly by such shareholder. Regulated investment companies, common trust
funds, and certain cooperatives are subject to similar rules.
Payments. Any distribution made on a Residual Certificate to a Residual
Certificateholder will be treated as a non-taxable return of capital to the
extent it does not exceed the Residual Certificateholder's adjusted basis in
such Residual Certificate. To the extent a distribution exceeds such adjusted
basis, it will be treated as gain from the sale of the Residual Certificate.
Sale or Exchange of Residual Certificates. If a Residual Certificate is
sold or exchanged, the seller will generally recognize gain or loss equal to the
difference between the amount realized on the sale or exchange and its adjusted
basis in the Residual Certificate (except that the recognition of loss may be
limited under the 'wash sale' rules described below). A holder's adjusted basis
in a Residual Certificate generally equals the cost of such Residual Certificate
to such Residual Certificateholder, increased by the taxable income of the REMIC
that was included in the income of such Residual Certificateholder with respect
to such Residual Certificate, and decreased (but not below zero) by the net
losses that have been allowed as deductions to such Residual Certificateholder
with respect to such Residual Certificate and by the distributions received
thereon by such Residual Certificateholder. In general, any such gain or loss
will be capital gain or loss provided the Residual Certificate is held as a
capital asset. However, Residual Certificates will be 'evidences of
indebtedness' within the meaning of Code Section 582(c)(1), so that gain or loss
recognized from sale of a Residual Certificate by a bank or thrift institution
to which such section applies would be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the seller
of a Residual Certificate reacquires such Residual Certificate, or acquires any
other Residual Certificate, any residual interest in another REMIC or similar
interest in a 'taxable mortgage pool' (as defined in Code Section 7701(i))
during the period beginning six months before, and ending six months after, the
date of such sale, such sale will be subject to the 'wash sale' rules of Code
Section 1091. In that event, any loss realized by the Residual Certificateholder
on the sale will not be deductible, but, instead, will increase such Residual
Certificateholder's adjusted basis in the newly acquired asset.
PROHIBITED TRANSACTIONS AND OTHER TAXES
The REMIC is subject to a tax at a rate equal to 100 percent of the net
income derived from 'prohibited transactions'. In general, a prohibited
transaction means the disposition of a Mortgage Loan other than pursuant to
certain specified exceptions, the receipt of investment income from a source
other than a Mortgage Loan or certain other permitted investments or the
disposition of an asset representing a temporary investment of payments on the
Mortgage Loans pending payment on the Residual Certificates or Regular
Certificates. In addition, the assumption of a Mortgage Loan by a subsequent
purchaser could cause the REMIC to recognize gain, which would also be subject
to the 100 percent tax on prohibited transactions.
In addition, certain contributions to a REMIC made after the Closing Date
could result in the imposition of a tax on the REMIC equal to 100% of the value
of the contributed property.
It is not anticipated that the REMIC will engage in any prohibited
transactions or receive any contributions subject to the contributions tax.
However, in the event that the REMIC is subject to any such tax, unless
otherwise disclosed in the related Prospectus Supplement, such tax would be
borne first by the Residual Certificateholders, to the extent of amounts
distributable to them and then by the Master Servicer.
LIQUIDATION AND TERMINATION
If the REMIC adopts a plan of complete liquidation, within the meaning of
Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMICs final tax return a date on which such adoption is deemed to occur, and
sells all of its assets (other than cash) within a 90-day period beginning on
such date, the REMIC will not be subject to any prohibited transaction tax,
provided that the REMIC credits or distributes in liquidation all of the sale
proceeds plus its cash (other
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than the amounts retained to meet claims) to holders of Regular and Residual
Certificates within the 90-day period.
The REMIC will terminate shortly following the retirement of the Regular
Certificates. If a Residual Certificateholder's adjusted basis in the Residual
Certificate exceeds the amount of cash distributed to such Residual
Certificateholder in final liquidation of its interest, then it would appear
that the Residual Certificateholder would be entitled to a loss equal to the
amount of such excess. It is unclear whether such a loss, if allowed, will be a
capital loss or an ordinary loss.
ADMINISTRATIVE MATTERS
Solely for the purpose of the administrative provisions of the Code, the
REMIC will be treated as a partnership and the Residual Certificateholders will
be treated as the partners thereof; however, under the Treasury regulations if
there is at no time during the taxable year more than one Residual
Certificateholder, a REMIC shall not be subject to the rules of Subchapter C of
Chapter 63 of the Code relating to the treatment of Partnership items for a
taxable year. Accordingly, the REMIC will file an annual tax return on Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. In
addition, certain other information will be furnished quarterly to each Residual
Certificateholder who held such Residual Certificate on any day in the previous
calendar quarter.
Each Residual Certificateholder is required to treat items on its return
consistently with their treatment on the REMIC's return, unless the Residual
Certificateholder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information received
from the REMIC. The IRS may assert a deficiency resulting from a failure to
comply with the consistency requirement without instituting an administrative
proceeding at the REMIC level. The REMIC does not intend to register as a tax
shelter pursuant to Code Section 6111 because it is not anticipated that the
REMIC will have a net loss for any of the first five taxable years of its
existence. Any person that holds a Residual Certificate as a nominee for another
person may be required to furnish the REMIC, in a manner to be provided in
Treasury regulations, with the name and address of such person and other
information.
TAX-EXEMPT INVESTORS
Any Residual Certificateholder that is a pension fund or other entity that
is subject to federal income taxation only on its 'unrelated business taxable
income' within the meaning of Code Section 512 will be subject to such tax on
that portion of the distributions received on a Residual Certificate that is
considered an 'excess inclusion'. See 'Residual Certificates -- Excess
Inclusions' herein.
NON-U.S. PERSONS
Amounts paid to Residual Certificateholders who are not U.S. persons (see
'Regular Certificates -- Non-U.S. Persons') are treated as interest for purposes
of the 30% (or lower treaty rate) United States withholding tax. Under the
Treasury regulations, amounts distributed to Residual Holders should qualify as
'portfolio interest', subject to the conditions described in 'Regular
Certificates' above, but only to the extent that the Mortgage Loans were
originated after July 18, 1984. Furthermore, the rate of withholding on any
income on a Residual Certificate that is excess inclusion income will not be
subject to reduction under any applicable tax treaties. See 'Residual
Certificates -- Excess Inclusions'. If the portfolio interest exemption is
unavailable, such amount will be subject to United States withholding tax when
paid or otherwise distributed (or when the Residual Certificate is disposed of)
under rules similar to those for withholding upon disposition of debt
instruments that have original issue discount. The Code, however, grants the
Treasury Department authority to issue regulations requiring that those amounts
be taken into account earlier than otherwise provided where necessary to prevent
avoidance of tax (for example, where the Residual Certificates do not have
significant value). See 'Residual Certificates -- Excess Inclusions'. If the
amounts paid to Residual Certificateholders that are not U.S. Persons are
effectively connected with their conduct of a trade or business within the
United States, the 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such non-U.S. Person will be subject to U.S.
federal income taxation at regular graduated rates. For special restrictions
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on the transfer of Residual Certificates, see 'Tax-Related Restrictions on
Transfers of Residual Certificates' below.
Regular Certificateholders and persons related to such holders should not
acquire any Residual Certificates, and Residual Certificateholders and persons
related to Residual Certificateholders should not acquire any Regular
Certificates without consulting their tax advisors as to the possible adverse
tax consequences of such acquisition.
TAX-RELATED RESTRICTIONS ON TRANSFERS OF RESIDUAL CERTIFICATES
Disqualified Organizations. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests in
such entity are not held by 'disqualified organizations' (as defined below).
Further, a tax is imposed on the transfer of a residual interest in a REMIC to a
'disqualified organization'. The amount of the tax equals the product of (A) an
amount (as determined under the REMIC regulations) equal to the present value of
the total anticipated 'excess inclusions' with respect to such interest for
periods after the transfer and (ii) the highest marginal federal income tax rate
applicable to corporations. The tax is imposed on the transferor unless the
transfer is through an agent (including a broker or other middlemen) for a
disqualified organization, in which event the tax is imposed on the agent. The
person otherwise liable for the tax shall be relieved of liability for the tax
if the transferee furnished to such person an affidavit that the transferee is
not a disqualified organization and, at the time of the transfer, such person
does not have actual knowledge that the affidavit is false. A 'disqualified
organization' means (A) the United States, any State, possession, or political
subdivision thereof, any foreign government, any international organization, or
any agency or instrumentality of any of the foregoing (provided that such term
does not include an instrumentality if all its activities are subject to tax
and, except for FHLMC, a majority of its board of directors is not selected by
any such governmental agency), (B) any organization (other than certain farmers'
cooperatives) generally exempt from federal income taxes unless such
organization is subject to the tax on 'unrelated business taxable income' and
(C) a rural electric or telephone cooperative.
A tax is imposed on a 'pass-through entity' (as defined below) holding a
residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of (A)
the amount of excess inclusions for the taxable year allocable to the interest
held by the disqualified organization, and (B) the highest marginal federal
income tax rate applicable to corporations. The pass-through entity otherwise
liable for the tax, for any period during which the disqualified organization is
the record holder of an interest in such entity, will be relieved of liability
for the tax if such record holder furnishes to such entity an affidavit that
such record holder is not a disqualified organization and, for such period, the
pass-through entity does not have actual knowledge that the affidavit is false.
For this purpose, a 'pass-through entity' means (i) a regulated investment
company, real estate investment trust or common trust fund, (ii) a partnership,
trust or estate and (iii) certain cooperatives. Except as may be provided in
Treasury regulations not yet issued, any person holding an interest in a
pass-through entity as a nominee for another will, with respect to such
interest, be treated as a pass-through entity.
In order to comply with these rules, the Agreement will provide that no
record or beneficial ownership interest in a Residual Certificate may be,
directly or indirectly, purchased, transferred or sold without the express
written consent of the Master Servicer. The Master Servicer will grant such
consent to a proposed transfer only if it receives the following: (i) an
affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the Residual Certificate as a
nominee or agent for a disqualified organization, and (ii) a covenant by the
proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the Residual
Certificate.
Noneconomic Residual Certificates. The REMIC Regulations disregard, for
federal income tax purposes, any transfer of a Noneconomic Residual Certificate
to a 'U.S. Person', as defined below, unless no significant purpose of the
transfer is to enable the transferor to impede the assessment or collection of
tax. A Noneconomic Residual Certificate is any Residual Certificate (including a
Residual Certificate with a positive value at issuance) unless, at the time of
transfer, taking into account the Prepayment Assumption and any required or
permitted clean up calls or required liquidation provided
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for in the REMIC's organizational documents, (i) the present value of the
expected future distributions on the Residual Certificate at least equals the
product of the present value of the anticipated excess inclusions and the
highest corporate income tax rate in effect for the year in which the transfer
occurs and (ii) the transferor reasonably expects that the transferee will
receive distributions from the REMIC at or after the time at which taxes accrue
on the anticipated excess inclusions in an amount sufficient to satisfy the
accrued taxes. A significant purpose to impede the assessment or collection of
tax exists if the transferor, at the time of the transfer, either knew or should
have known that the transferee would be unwilling or unable to pay taxes due on
its share of the taxable income of the REMIC. A transferor is presumed not to
have such knowledge if (i) the transferor conducted a reasonable investigation
of the transferee and (ii) the transferee acknowledges to the transferor that
the residual interest may generate tax liabilities in excess of the cash flow
and the transferee represents that it intends to pay such taxes associated with
the residual interest as they become due. If a transfer of a Noneconomic
Residual Certificate is disregarded, the transferor would continue to be treated
as the owner of the Residual Certificate and would continue to be subject to tax
on its allocable portion of the net income of the REMIC.
Mark to Market Rules. Prospective purchasers of a Residual Certificate
should be aware that on January 3, 1995, the IRS released proposed regulations
under Section 475 (the 'Proposed Regulations'). The Proposed Regulations provide
that any Residual Certificate acquired after January 3, 1995 cannot be marked to
market, regardless of the value of such Residual Certificate. The Proposed
Regulations change temporary regulations under Section 475 (the 'Temporary
Regulations') which were issued on December 28, 1993 and which allowed
securities dealers to mark to market securities held for sale to customers,
including Residual Certificates which did not have 'negative value.' In general,
a Residual Certificate has negative value if, as of the date a taxpayer acquires
the Residual Certificate, the present value of the tax liabilities associated
with holding the Residual Certificate exceeds the sum of (i) the present value
of the expected future distributions on the Residual Certificate, and (ii) the
present value of the anticipated tax savings associated with holding the
Residual Certificate as the REMIC generates losses. The amounts and present
values of the anticipated tax liabilities, expected future distributions and
anticipated tax savings are all to be determined using (i) the prepayment and
reinvestment assumptions adopted under Section 1272(a)(6), or that would have
been adopted had the REMIC's regular interests been issued with original issue
discount, (ii) any required or permitted clean up calls, or required qualified
liquidation, provided for in the REMIC's organizational documents and (iii) a
discount rate equal to the 'applicable Federal rate' (as specified in Section
1274(d)(1), that would apply to a debt instrument issued on the date of
acquisition of the Residual Certificate. The Proposed Regulations still apply to
any REMIC residual interest acquired on or prior to January 3, 1995. Thus,
holders of positive value REMIC residual interests acquired on or prior to
January 3, 1995 may continue to mark such residual interests to market for the
entire economic life of such interests. Prospective purchasers of a Residual
Certificate should consult their tax advisors regarding the possible application
of the Proposed Regulations.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has a 'tax avoidance potential' to a 'foreign person'
will be disregarded for federal income tax purposes. This rule appears to apply
to a transferee who is not a 'U.S. Person', unless such transferee's income in
respect of the Residual Certificate is effectively connected with the conduct of
a United States trade or business. A Residual Certificate is deemed to have a
tax avoidance potential unless, at the time of transfer, the transferor
reasonably expects that the REMIC will distribute to the transferee amounts that
will equal at least 30 percent of each excess inclusion, and that such amounts
will be distributed at or after the time the excess inclusion accrues and not
later than the end of the calendar year following the year of accrual. If the
non-U.S. Person transfers the Residual Certificate to a U.S. Person, the
transfer will be disregarded, and the foreign transferor will continue to be
treated as the owner, if the transfer has the effect of allowing the transferor
to avoid tax on accrued excess inclusions. The Pooling and Servicing Agreement
will provide that no record or beneficial ownership interest in a Residual
Certificate may be, directly or indirectly, transferred to a non-U.S. Person
unless such person provides the Trustee with a duly completed I.R.S. Form 4224
and the Trustee consents to such transfer in writing.
Any attempted transfer or pledge in violation of the transfer restrictions
shall be absolutely null and void and shall vest no rights in any purported
transferee. Investors in Residual Certificates are
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advised to consult their own tax advisors with respect to transfers of the
Residual Certificates and, in addition, pass-through entities are advised to
consult their own tax advisors with respect to any tax which may be imposed on a
pass-through entity.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in 'Certain
Federal Income Tax Considerations', potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Certificate. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Certificates.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the Code,
which apply only to Certificates of a Series that are not divided into
subclasses. If Certificates are divided into subclasses the related Prospectus
Supplement will contain information concerning considerations relating to ERISA
and the Code that are applicable to such Certificates.
ERISA imposes requirements on employee benefit plans subject to ERISA (and
on certain other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts in which such plans, accounts or arrangements are invested
subject to the requirement of ERISA and/or the Code) (collectively 'Plans') and
on persons who are fiduciaries with respect to such Plans. Generally, ERISA
applies to investments made by Plans. Among other things, ERISA requires that
the assets of Plans be held in trust and that the trustee, or other duly
authorized fiduciary, have exclusive authority and discretion to manage and
control the assets of such Plans. ERISA also imposes certain duties on persons
who are fiduciaries of Plans. Under ERISA, any person who exercises any
authority or control respecting the management or disposition of the assets of a
Plan is considered to be a fiduciary of such Plan (subject to certain exceptions
not here relevant). Certain employee benefit plans, such as governmental plans
(as defined in ERISA Section 3(32)) and, if no election has been made under
Section 410(d) of the Code, church plans (as defined in ERISA Section 3(33)),
are not subject to ERISA requirements. Accordingly, assets of such plans may be
invested in Senior Certificates without regard to the ERISA considerations
described above and below, subject to the provisions of applicable state law.
Any such plan which is qualified and exempt from taxation under Code Sections
401(a) and 501(a), however, is subject to the prohibited transaction rules set
forth in Code Section 503.
On November 13, 1986, the United States Department of Labor ('Labor')
issued final regulations concerning the definition of what constitutes the
assets of a Plan. (Labor Reg. Section 2510.3-101) Under this regulation, the
underlying assets and properties of corporations, partnerships and certain other
entities in which a Plan makes an 'equity' investment could be deemed for
purposes of ERISA to be assets of the investing Plan in certain circumstances.
However, the regulation provides that, generally, the assets of a corporation or
partnership in which a Plan invests will not be deemed for purposes of ERISA to
be assets of such Plan if the equity interest acquired by the investing Plan is
a publicly-offered security. A publicly-offered security, as defined in the
Labor Reg. Section 2510.3-101, is a security that is widely held, freely
transferable and registered under the Securities Exchange Act of 1934, as
amended.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA prohibits a broad range of transactions
involving Plan assets and persons ('Parties in Interest') having certain
specified relationships to a Plan and imposes additional prohibitions where
Parties in Interest are fiduciaries with respect to such Plan. Because the
Mortgage Loans may be deemed Plan assets of each Plan that purchases
Certificates, an investment in the Certificates by a Plan might be a prohibited
transaction under ERISA Sections 406 and 407 and subject to an excise tax under
Code Section 4975 unless a statutory or administrative exemption applies.
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PTE 83-1
In Prohibited Transaction Exemption 83-1 ('PTE 83-1'), which amended
Prohibited Transaction Exemption 81-7, Labor exempted from ERISA's prohibited
transaction rules certain transactions relating to the operation of residential
mortgage pool investment trusts and the purchase, sale and holding of 'mortgage
pool pass-through certificates' in the initial issuance of such certificates.
PTE 83-1 permits, subject to certain conditions, transactions that might
otherwise be prohibited between Plans and Parties in Interest with respect to
those Plans related to the origination, maintenance and termination of mortgage
pools consisting of mortgage loans secured by first or second mortgages or deeds
of trust on single-family residential property, and the acquisition and holding
of certain mortgage pool pass-through certificates representing an interest in
such mortgage pools by Plans. If the general conditions (discussed below) of PTE
83-1 are satisfied, investments by a Plan in Certificates that represent
interests in a Mortgage Pool consisting of Mortgage Loans representing loans for
single family homes ('Single Family Certificates') will be exempt from the
prohibitions of ERISA Sections 406(a) and 407 (relating generally to
transactions with Parties in Interest who are not fiduciaries) if the Plan
purchases the Single Family Certificates at no more than fair market value and
will be exempt from the prohibitions of ERISA Sections 406(b)(1) and (2)
(relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid to
the pool sponsor, the Plan does not purchase more than 25% of all Single Family
Certificates, and at least 50% of all Single Family Certificates are purchased
by persons independent of the pool sponsor or pool trustee. PTE 83-1 does not
provide an exemption for transactions involving Subordinate Certificates.
Accordingly, unless otherwise provided in the related Prospectus Supplement, no
transfer of a Subordinate Certificate may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only to
Single Family Certificates. The Depositor believes that, for purposes of PTE
83-1, the term 'mortgage pass-through certificate' would include: (i)
Certificates issued in a Series consisting of only a single class of
Certificates; and (ii) Offered Certificates issued in a Series in which there is
only one class of Offered Certificates; provided that the Certificates in the
case of clause (i), or the Offered Certificates in the case of clause (ii),
evidence the beneficial ownership of both a specified percentage of future
interest payments (greater than 0%) and a specified percentage (greater than 0%)
of future principal payments on the Mortgage Loans. It is not clear whether a
class of Certificates that evidences the beneficial ownership in a Trust Fund
divided into Mortgage Loan Groups, beneficial ownership of a specified
percentage of interest payments only or principal payments only, or a notional
amount of either principal or interest payments, or a class of Certificates
entitled to receive payments of interest and principal on the Mortgage Loans
only after payments to other classes or after the occurrence of certain
specified events would be a 'mortgage pass-through certificate' for purposes of
PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system of
insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Certificateholders against reductions
in pass-through payments due to property damage or defaults in loan payments in
an amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan; (ii) the existence of a pool trustee who
is not an affiliate of the pool sponsor; and (iii) a limitation on the amount of
the payment retained by the pool sponsor, together with other funds inuring to
its benefit, to not more than adequate consideration for selling the mortgage
loans plus reasonable compensation for services provided by the pool sponsor to
the Mortgage Pool. The Depositor believes that the first general condition
referred to above will be satisfied with respect to the Certificates in a Series
issued without a subordination feature, or the Senior Certificates only in a
Series issued with a subordination feature, provided that the subordination and
Reserve Fund, subordination by shifting of interests, the pool insurance or
other form of credit enhancement described herein (such subordination, pool
insurance or other form of credit enhancement being the system of insurance or
other protection referred to above) with respect to a Series of Certificates is
maintained in an amount not less than the greater of one percent of the
aggregate principal balance of the Mortgage Loans or the principal balance of
the largest Mortgage Loan. See 'Description of the Certificates' herein. In the
absence of a ruling that the system of insurance or other protection with
respect to a Series of Certificates satisfies the first general
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condition referred to above, there can be no assurance that these features will
be so viewed by Labor. The Trustee will not be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Single Family Certificates
must make its own determination as to whether the first and third general
conditions, and the specific conditions described briefly in the preceding
paragraph, of PTE 83-1 have been satisfied, or as to the availability of any
other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Certificates is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
UNDERWRITER EXEMPTIONS
Labor has issued to various underwriters substantially similar individual
exemptions (collectively, the 'Underwriter Exemptions') which apply to certain
sales and servicing of 'certificates' that are obligations of a 'trust' with
respect to which such underwriters are the underwriter, manager or co-manager of
an underwriting syndicate. The Underwriter Exemptions provide relief which is
generally similar to that provided by PTE 83-1, but is broader in several
respects.
The Underwriter Exemptions contain several requirements, some of which
differ from those in PTE 83-1. The Underwriter Exemptions contain an expanded
definition of 'certificate', which includes an interest which entitles the
holder to pass-through payments of principal, interest and/or other payments.
The Underwriter Exemptions contain an expanded definition of 'trust' which
permits the trust corpus to consist of secured consumer receivables, including
obligations secured by shares issued by a cooperative housing association. The
definition of 'trust', however, does not include private mortgage-backed
securities like the Private Mortgage-Backed Securities, and does not include any
other investment pool unless, inter alia: (i) the investment pool consists only
of assets of the type which have been included in other investment pools; (ii)
certificates evidencing interests in such other investment pools have been
purchased by investors other than Plans for at least one year prior to the
Plan's acquisition of certificates pursuant to the Underwriter Exemptions; and
(iii) certificates in such other investment pools have been rated in one of the
three highest generic rating categories of the four credit rating agencies noted
below. Generally, the Underwriter Exemptions hold that the acquisition of
certificates by a Plan must be on terms (including the price for the
certificates) that are at least as favorable to the Plan as they would be in an
arm's-length transaction with an unrelated party. The Underwriter Exemptions
require that the rights and interests evidenced by the certificates held by a
Plan not be 'subordinated' to the rights and interests evidenced by other
certificates of the same trust. Further, the Underwriter Exemptions require that
certificates acquired by a Plan have received a rating at the time of their
acquisition that is in one of the three highest generic rating categories of
Standard and Poor's Ratings Group, Moody's Investors Service, Inc., Duff &
Phelps Inc. or Fitch Investors Service, Inc. The Underwriter Exemptions also
specify that the pool trustee must not be an affiliate of the pool sponsor, nor
an affiliate of the underwriter, the pool servicer, any obligor with respect to
mortgage loans included in the trust constituting more than five percent of the
aggregate unamortized principal balance of the assets in the trust, or any
affiliate of such entities. Finally, the Underwriter Exemptions stipulate that
any Plan investing in the certificates must be an 'accredited investor', as
defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
Any Plan fiduciary which proposes to cause a Plan to purchase Certificates
should consult with their counsel concerning the impact of ERISA and the Code,
the applicability of PTE 83-1, and the potential consequences in their specific
circumstances, prior to making such investment. Moreover, each Plan fiduciary
should determine whether under the general fiduciary standards of investment
procedure and diversification an investment in the Certificates is appropriate
for the Plan, taking into account the overall investment policy of the Plan and
the composition of the Plan's investment portfolio.
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LEGAL INVESTMENT
The Prospectus Supplement for each series of Certificates will specify
which, if any, of the Classes of Certificates offered thereby will constitute
'mortgage related securities' for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ('SMMEA'). Classes of Certificates that qualify as
'mortgage related securities' will be legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including depository institutions, life insurance companies and pension funds)
created pursuant to or existing under the laws of the United States or of any
state (including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state enacts
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any such entities with respect to 'mortgage related securities',
the Certificates that qualify as mortgage related securities will constitute
legal investments for entities subject to such legislation only to the extent
provided therein. Approximately twenty-one states adopted such legislation prior
to the October 4, 1991 deadline. SMMEA provides, however, that in no event will
the enactment of any such legislation affect the validity of any contractual
commitment to purchase, hold or invest in Certificates that qualify as mortgage
related securities, or require the sale or other disposition of such
Certificates, so long as such contractual commitment was made or such
Certificates acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Certificates
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase Certificates for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
SS24 (Seventh), subject in each case to such regulations as the applicable
federal authority may prescribe. In this connection, federal credit unions
should review the National Credit Union Administration ('NCUA') Letter to Credit
Unions No. 96, as modified by Letter to Credit Unions No. 108, which includes
guidelines to assist federal credit unions in making investment decisions for
mortgage related securities, and the NCUA's regulation 'Investment and Deposit
Activities' (12 C.F.R. Part 703), (whether or not the Class of Certificates
under consideration for purchase constitutes a 'mortgage related security').
All depository institutions considering an investment in the Certificates
(whether or not the Class of Certificates under consideration for purchase
constitutes a mortgage related security should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators)
(the 'Policy Statement'), setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's investment
portfolio, and guidelines for (and restrictions on) investing in mortgage
derivative products, including mortgage related securities, which are 'high-risk
mortgage securities' as defined in the Policy Statement. According to the Policy
Statement, such 'high-risk mortgage securities' include securities such as
Certificates not entitled to distributions allocated to principal or interest,
or Subordinated Certificates. Under the Policy Statement, it is the
responsibility of each depository institution to determine, prior to purchase
(and at stated intervals thereafter), whether a particular mortgage derivative
product is a 'high-risk mortgage security', and whether the purchase (or
retention) of such a product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines, or agreements generally
governing investments made by a particular investor, including, but not limited
to, 'prudent investor' provisions, percentage-of-assets limits and provisions
that may restrict or prohibit investment in securities that are not 'interest
bearing' or 'income paying'. There may be other restrictions on the ability of
certain investors, including depository institutions, either to purchase
Certificates or to purchase Certificates representing more than a specified
percentage of the investor's assets. Investors should consult their own legal
advisors in determining whether and to what extent the Certificates constitute
legal investments for such investors.
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METHOD OF DISTRIBUTION
The Certificates offered hereby and by the Prospectus Supplements will be
offered in Series. The distribution of the Certificates may be effected from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices to be determined at the time
of sale or at the time of commitment therefor. If so specified in the related
Prospectus Supplement, the Certificates will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting agreement,
by Merrill Lynch, Pierce, Fenner & Smith Incorporated, an affiliate of the
Depositor, acting as underwriter with other underwriters, if any, named therein.
In such event, the Prospectus Supplement may also specify that the underwriters
will not be obligated to pay for any Certificates agreed to be purchased by
purchasers pursuant to purchase agreements acceptable to the Depositor. In
connection with the sale of the Certificates, underwriters may receive
compensation from the Depositor or from purchasers of the Certificates in the
form of discounts, concessions or commissions. The Prospectus Supplement will
describe any such compensation paid by the Depositor.
Alternatively, the Prospectus Supplement may specify that the Certificates
will be distributed by Merrill Lynch, Pierce, Fenner & Smith Incorporated acting
as agent or in some cases as principal with respect to Certificates that it has
previously purchased or agreed to purchase. If Merrill Lynch, Pierce, Fenner &
Smith Incorporated acts as agent in the sale of Certificates, Merrill Lynch,
Pierce, Fenner & Smith Incorporated will receive a selling commission with
respect to each Series of Certificates, depending on market conditions,
expressed as a percentage of the aggregate principal balance of the Certificates
sold hereunder as of the Cut-off Date. The exact percentage for each Series of
Certificates will be disclosed in the related Prospectus Supplement. To the
extent that Merrill Lynch, Pierce, Fenner & Smith Incorporated elects to
purchase Certificates as principal, Merrill Lynch, Pierce, Fenner & Smith
Incorporated may realize losses or profits based upon the difference between its
purchase price and the sales price. The Prospectus Supplement with respect to
any Series offered other than through underwriters will contain information
regarding the nature of such offering and any agreements to be entered into
between the Depositor and purchasers of Certificates of such Series.
The Depositor will indemnify Merrill Lynch, Pierce, Fenner & Smith
Incorporated and any underwriters against certain civil liabilities, including
liabilities under the Securities Act of 1933, or will contribute to payments
Merrill Lynch, Pierce, Fenner & Smith Incorporated and any underwriters may be
required to make in respect thereof.
In the ordinary course of business, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and the Depositor may engage in various securities and financing
transactions, including repurchase agreements to provide interim financing of
the Depositor's Mortgage Loans pending the sale of such Mortgage Loans or
interests therein, including the Certificates.
The Depositor anticipates that the Certificates will be sold primarily to
institutional investors. Purchasers of Certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
'underwriters' within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Certificates. Holders of Certificates should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
The validity of the Certificates, including certain federal income tax
consequences with respect thereto, will be passed upon for the Depositor by
Brown & Wood LLP, One World Trade Center, New York, New York 10048.
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FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of Certificates
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Certificates.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of the Certificates of each Series
offered hereby and by the Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies specified in the related Prospectus
Supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the credit enhancer or guarantor, if any. Ratings on
mortgage pass-through certificates do not represent any assessment of the
likelihood of principal prepayments by mortgagors or of the degree by which such
prepayments might differ from those originally anticipated. As a result,
certificateholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped pass-through certificates in extreme cases might
fail to recoup their underlying investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
85
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INDEX TO DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Accrual Certificates.................................. 27
Accrual Period........................................ 67
Adjusted Issue Price.................................. 62
Advance............................................... 10
AFR................................................... 63
Agency Securities..................................... cover
Agreement............................................. 4, 14
Applicable Amount..................................... 74
ARM Loans............................................. 62
Available Distribution Amount......................... 26
balloon payments...................................... 5, 13
Bankruptcy Bond....................................... 34
Bankruptcy Bonds...................................... 9
Buydown Fund.......................................... 13
Buydown Loans......................................... 13
Capital Asset......................................... 64
Cede.................................................. 30
CERCLA................................................ 55
Certificate Account................................... 39
Certificate Balance................................... 28
Certificate Register.................................. 25
Certificates.......................................... cover, 4, 12
Charter Act........................................... 18
Closing Date.......................................... 4
Code.................................................. 11
Collateral Value...................................... 14
Cooperative Loans..................................... 4, 14
Cooperatives.......................................... 4, 14
Cut-off Date.......................................... 9
Deferred Interest..................................... 63, 70
Definitive Certificates............................... 31
Depositor............................................. cover, 21
Detailed Description.................................. 12
Determination Date.................................... 27
Disqualified Organization............................. 78
Distribution Date..................................... 8
DTC................................................... 30
Due-On-Sale........................................... 6
Eligible Investments.................................. 39
EPA................................................... 55
ERISA................................................. 11
Excess Inclusion...................................... 75
Excess Servicing...................................... 60
FDIC.................................................. 23
Federal Long-Term Rate................................ 75
FHA................................................... 5, 15
FHA Insurance......................................... 10
FHA Loans............................................. 15
FHLMC................................................. cover
FHLMC Act............................................. 16
FHLMC Certificate Group............................... 17
FHLMC Certificates.................................... 6
FNMA.................................................. cover
FNMA Certificates..................................... 6
Funding Period........................................ 11
Garn-St Germain Act................................... 56
GNMA.................................................. cover
GNMA Certificates..................................... 6
GNMA Issuer........................................... 15
Guaranty Agreement.................................... 15
Housing Act........................................... 15
HUD................................................... 45
<CAPTION>
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<S> <C>
Indirect Participant.................................. 30
Insurance Proceeds.................................... 40
Insured Expenses...................................... 40
IRS................................................... 59
Issuer................................................ 64, 72
Labor................................................. 80
Legislative History................................... 62
Letter of Credit...................................... 10
Limited Guarantee..................................... 10
Liquidation Expenses.................................. 40
Liquidation Proceeds.................................. 40
Loan-to-Value Ratio................................... 14
lockout periods....................................... 5, 13
Master REMIC.......................................... 65
Master Servicer....................................... 4
Master Servicing Fee.................................. 46
Mortgage.............................................. 38
Mortgage Assets....................................... cover, 4, 12
Mortgage Loans........................................ cover
Mortgage Note......................................... 38
Mortgage Pool......................................... 4, 12
Mortgage Pool Insurance Policy........................ 9, 32
Mortgage Rate......................................... 8, 13
Mortgage Related Security............................. 83
Mortgaged Properties.................................. 12
NCUA.................................................. 83
OID Regulations....................................... 61, 63
Participants.......................................... 30
Parties in Interest................................... 80
Pass Through Interest Holder.......................... 74
Pass-Through Rate..................................... 8
Payment Lag Certificates.............................. 71
Phantom Income........................................ 73
Plans................................................. 80
PMBS Agreement........................................ 20
PMBS Issuer........................................... 20
PMBS Servicer......................................... 20
PMBS Trustee.......................................... 20
Policy Statement...................................... 83
Pool Insurer.......................................... 32
Pre-Funded Amount..................................... 4
Pre-Funding Account................................... cover, 10
Pre-Issuance Accrued Interest......................... 71
Prepayment Assumption................................. 62
Primary Insurer....................................... 43
Primary Mortgage Insurance Policy..................... 12
Principal Prepayments................................. 28
Private Mortgage-Backed Securities.................... cover
Proposed Contingent Regulations....................... 63
PTE 83-1.............................................. 81
Purchase Price........................................ 24
Qualified Mortgage.................................... 65
Rating Agency......................................... 39
Record Date........................................... 25
Regular Certificates.................................. 65
Regular Interests..................................... 26
Relief Act............................................ 56
REMIC................................................. 2, 11, 26
REMIC Regulations..................................... 57
Reserve Fund.......................................... 9
Residual Certificates................................. 65
residual interests.................................... 26
Retained Interest..................................... 25
</TABLE>
86
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<TABLE>
<CAPTION>
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<S> <C>
Seller................................................ cover
Sellers............................................... 12
Senior Certificates................................... 7, 32
Series................................................ cover, 4
Servicer.............................................. 4
Single Family Certificates............................ 81
SMMEA................................................. 11, 83
Special Hazard Insurance Policy....................... 9
Special Hazard Insurer................................ 34
Stripped ARM Obligations.............................. 62
Stripped Bond(s)...................................... 60
Stripped Bond Certificates............................ 60
Stripped Coupon(s).................................... 60
Stripped Coupon Certificates.......................... 60
Sub-Servicer.......................................... 10, 14
Subordinated Certificates............................. 7, 32
<CAPTION>
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<S> <C>
Subsequent Mortgage Assets............................ cover, 4
Subsidiary REMIC...................................... 65
Super-Premium Certificates............................ 67
Surety Bond........................................... 10
Temporary Regulations................................. 79
Title V............................................... 56
Trust Fund............................................ cover, 12
Trustee............................................... 4
U.S. Person........................................... 64
UCC................................................... 30
Underwriter Exemptions................................ 82
VA.................................................... 5
VA Guaranty Policy.................................... 46
VA Insurance.......................................... 10
VA Loans.............................................. 15
Weighted Average Rate................................. 68
</TABLE>
87
<PAGE>
<PAGE>
_____________________________________ _____________________________________
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE CLASS A CERTIFICATES, NOR AN OFFER OF THE CLASS A CERTIFICATES IN ANY STATE
OR JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE
UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AT ANY
TIME DOES NOT IMPLY THAT 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 PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED
ACCORDINGLY.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
Summary of Terms of the Certificates........................................................................................ S-4
Special Considerations...................................................................................................... S-16
Certain Legal Considerations................................................................................................ S-16
The Mortgage Pool........................................................................................................... S-17
MLCC and Its Mortgage Programs.............................................................................................. S-23
Prepayment and Yield Considerations......................................................................................... S-30
Description of the Certificates............................................................................................. S-35
The Certificate Insurance Policy and the Certificate Insurer................................................................ S-50
Certain Federal Income Tax Consequences..................................................................................... S-52
ERISA Considerations........................................................................................................ S-52
Use of Proceeds............................................................................................................. S-53
Underwriting................................................................................................................ S-53
Experts..................................................................................................................... S-54
Legal Matters............................................................................................................... S-54
Certificate Rating.......................................................................................................... S-54
Index of Principal Terms.................................................................................................... S-56
Annex I: Global Clearance, Settlement and Tax Documentation Procedures...................................................... I-1
Appendix A -- Audited Financial Statements of the Certificate Insurer....................................................... A-1
Appendix B -- Unaudited Financial
Statements of the Certificate Insurer..................................................................................... B-1
PROSPECTUS
Prospectus Supplement....................................................................................................... 2
Available Information....................................................................................................... 2
Incorporation of Certain Information by Reference........................................................................... 3
Summary of Terms............................................................................................................ 4
The Trust Fund.............................................................................................................. 12
Use of Proceeds............................................................................................................. 21
The Depositor............................................................................................................... 21
Mortgage Loan Program....................................................................................................... 21
Description of the Certificates............................................................................................. 24
Credit Enhancement.......................................................................................................... 31
Yield and Prepayment Considerations......................................................................................... 36
The Pooling and Servicing Agreement......................................................................................... 38
Certain Legal Aspects of the Mortgage Loans................................................................................. 50
Certain Federal Income Tax Consequences..................................................................................... 57
State Tax Considerations.................................................................................................... 80
ERISA Considerations........................................................................................................ 80
Legal Investment............................................................................................................ 83
Method of Distribution...................................................................................................... 84
Legal Matters............................................................................................................... 84
Financial Information....................................................................................................... 85
Rating...................................................................................................................... 85
Index to Defined Terms...................................................................................................... 86
</TABLE>
$318,494,140
(APPROXIMATE)
MLCC
MORTGAGE INVESTORS, INC.,
SELLER
MORTGAGE LOAN ASSET BACKED
PASS-THROUGH CERTIFICATES,
SERIES 1996-C, CLASS A
MERRILL LYNCH
CREDIT CORPORATION,
MASTER SERVICER
---------------------------
PROSPECTUS SUPPLEMENT
---------------------------
MERRILL LYNCH & CO.
SEPTEMBER 4, 1996
_____________________________________ _____________________________________
STATEMENT OF DIFFERENCES
------------------------
The registered trademark shall be expressd as................. 'r'
The service mark shall be expressed as........................ 'SM'
<PAGE>
