As filed with the Securities and Exchange Commission on November 15, 1996
Registration No. 333-14253
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO.1
____________________________
ON FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
MLCC MORTGAGE INVESTORS, INC.
(Exact name of registrant as specified in its governing instruments)
Delaware 13-3433607
(State of incorporation) (I.R.S. Employer Identification No.)
4802 Deer Lake Drive East
Jacksonville, Florida 32246
(Address of principal executive offices)
Robert J. Smith
MLCC Mortgage Investors, Inc.
4802 Deer Lake Drive East
Jacksonville, Florida 32246
(Name and address of agent for service)
With a copy to:
Allan Neil Krinsman
Brown & Wood LLP
One World Trade Center
New York, New York 10048
Approximate date of commencement of proposed sale to the public: From
time to time on or after the effective date of the registration statement, as
determined by market conditions.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. /x/
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION> Proposed Proposed
Amount Maximum Maximum Amount of
Title of Each Class of to be Offering Price Aggregate Registration
Registered(1) Per Unit(2) Offering Price(2) Fee (3)
Securities to Be Registered
<S> <C> <C> <C> <C>
Asset Backed Certificates . . . . . . $2,500,000,000 100% $2,500,000,000 $757,575.76
</TABLE>
(1) This Registration Statement relates to the initial offering from time to
time of $2,500,000,000 aggregate principal amount of Asset Backed
Certificates and to any resales thereof in market making transactions by
Merrill Lynch, Pierce, Fenner & Smith Incorporated, an affiliate of the
Registrant, to the extent required.
(2) Estimated solely for purposes of calculating the registration fee on the
basis of the proposed maximum aggregate offering price.
(3) $757,272.72 paid upon the filing of this Pre-effective Amendment No. 1 and
$303.04 was previously paid upon the filing of this Registration Statement
on October 16, 1996.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
PURSUANT TO RULE 429 OF THE SECURITIES AND EXCHANGE COMMISSION'S RULES
AND REGULATIONS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, THE PROSPECTUS
AND PROSPECTUS SUPPLEMENT CONTAINED IN THIS REGISTRATION STATEMENT ALSO
RELATE TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-3 (REGISTRATION
NO. 33-84894) AND THIS REGISTRATION STATEMENT CONSTITUTES A POST-EFFECTIVE
AMENDMENT THERETO.
EXPLANATORY NOTE
This Registration Statement includes a basic prospectus and two
illustrative forms of prospectus supplements for use in an offering of Asset
Backed Certificates backed by adjustable rate, one- to four-family mortgage
loans and by home equity revolving credit line mortgage loans, respectively.
The descriptions in the forms of prospectus supplements of credit enhancement
mechanisms or other features are intended merely as illustrations of the
principal features of a possible series of Asset Backed Certificates; the
features applicable to any actual series of Asset Backed Certificates may
include some, all or none of the features so illustrated, and may include any
features specified in the prospectus.
<START>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED NOVEMBER 15, 1996
PROSPECTUS SUPPLEMENT
- ---------------------
(TO PROSPECTUS DATED ________ ___, 1996)
$___________ (APPROXIMATE)
MLCC MORTGAGE INVESTORS, INC., SELLER
MORTGAGE LOAN ASSET BACKED PASS-THROUGH CERTIFICATES, SERIES 199_-_, CLASS A
PRINCIPAL AND INTEREST PAYABLE ON THE 15TH DAY OF EACH MONTH,
BEGINNING IN _________ 199_
MERRILL LYNCH CREDIT CORPORATION, MASTER SERVICER
-------------------
The Series 199_-_ 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(Registered Trademark) 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 ______ __, 19__ attached hereto (the "Prospectus").
The Class A Certificates will be issued in the initial aggregate
principal amount of approximately $___________, subject to a permitted
variance of plus or minus __%. 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) (MBIA Insurance 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.
FOR A DISCUSSION OF CERTAIN FACTORS RELATING TO AN INVESTMENT IN
CERTIFICATES, SEE "SPECIAL CONSIDERATIONS" ON PAGE S-19 HEREIN.
-------------------
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 $___________, before deducting expenses
payable by the Company, estimated to be $_______ in the aggregate. The
Underwriter will reimburse the Company for approximately $_______ 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 _________ __, 199_.
-------------------
MERRILL LYNCH & CO.
-------------------
The date of this Prospectus Supplement is _______ __, 199_.
(Cover continued from previous page)
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 ___th 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 ____% 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 _____% 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 _________ __, 199_, 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.
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.
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.
Securities Offered. . . . . . . . Mortgage Loan Asset Backed Pass-Through
Certificates, Series 199_-_, 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.
Each of the following original principal balance amounts is approximate,
subject to a permitted variance of plus or minus 5%:
Original Pool Scheduled
Principal Balance . . . . . . . . $___________
Original Class A Principal
Balance . . . . . . . . . . . . . $___________
Original Class B Principal
Balance . . . . . . . . . . . . . $___________
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 ____________ __, 199_ in the
case of the Distribution Date on
__________ __,199_) plus ____%
(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 ____% and (ii) the Certificate
Insurance Policy annual premium rate
(which, together with the Servicing Fee
Rate, will not exceed ____%). 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 ____%
margin added to the applicable LIBOR
formula for the calculation of the Class
A Pass-Through Rate will instead be ____%
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 ____%, 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 $__,000
and integral multiples of $1,000 in
excess thereof.
Cut-off Date . . . . . . . . . . ______ 1, 199_ (or the date of
origination, if later).
Agreement . . . . . . . . . . . . The Pooling and Servicing Agreement dated
as of ______ 1, 199_ (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 $___________ (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 __ years and is scheduled
to pay only interest for the first __
years of its term. Commencing in its
_______ year, each Mortgage Loan is
scheduled to amortize on a __-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
____% 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 ____% to ____%
or (ii) minus a Margin of ____%.
Six-Month LIBOR Index. The Mortgage Rate
borne by _____% 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 _____% to
____%.
One-Month LIBOR Index. The Mortgage Rate
borne by _____% 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 ____% to _____%.
Treasury Index. The Mortgage Rate borne by
____% of the Mortgage Loans (by Cut-off
Date Principal Balance) is adjusted every
six months, and the Mortgage Rate borne by
____% 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 _____% to ____%.
Notwithstanding the foregoing, all of the
Mortgage Loans will have a maximum
Mortgage Rate (the "Maximum Mortgage
Rate") of between _____% and _____%. None
of the Mortgage Loans are subject to
periodic interest rate caps.
Approximately ____% 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 con-
version, 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 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 _____% 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 __ 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 __ 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 ____% 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(Registered Trademark) 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)
(MBIA Insurance Corporation) (the "Surety
Bond Provider") has previously issued a
limited 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.
SUMMARY OF MORTGAGE LOANS
CHARACTERISTICS AS OF THE CUT-OFF DATE
(APPROXIMATE)
Aggregate Outstanding Principal $___________
Number of Mortgage Loans ___
Weighted Average Mortgage Rate _____%
Range of Mortgage Rates _____% to ____%
Percent of Mortgage Loans Using the following Index in
determining the Mortgage Rate:
Prime Index ____%
One-Month LIBOR Index _____%
Six-Month LIBOR Index _____%
Treasury Index ____%
Weighted Average Margins:
Prime Index Mortgage Loans _____%
One-Month LIBOR Index _____%
Six-Month LIBOR Index Mortgage Loans _____%
Treasury Index Mortgage Loans _____%
Frequency of Interest Adjustment Dates:
Monthly _____%
Six-Month _____%
Range of Maximum Mortgage Rates ______% to ______%
Weighted Average of Maximum Mortgage Rates ______%
Weighted Average Remaining Term to Stated Maturity ___ months
Range of Remaining Terms to Stated Maturity ___ months to ___ months
Range of Outstanding Principal Balances of Mortgage Loans
$______ to $_________
Average Outstanding Principal Balance of Mortgage Loans $_______
Latest Maturity Date _________ ____
Weighted Average Loan-to-Value Ratio at Origination _____%
Percent of Mortgage Loans with Loan-to-Value Ratios:
Less Than or Equal to 70% _____%
Greater Than 70% and Less Than or Equal to 80% _____%
Greater Than 80% _____%
Percent of Mortgage Loans which are Additional Collateral Loans _____%
Weighted Average Constructive Loan-to-Value Ratio at Origination(1) _____%
Percent of Mortgage Loans which are convertible to both a fixed
rate and a new Index ____%
Percent of Mortgage Loans which are convertible to a new Index _____%
- ---------
(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.
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 _____% in the Mortgage Loans
and the Class B Certificates will evidence
the remaining approximately ____%. 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. . . . . . . Distributions of interest and principal
Certificates 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 _________ 199_, 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 __th 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 _________
__, 199_) (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;
(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 ____% 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.
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 ___% 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 Prin-
cipal 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 $_______ (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.
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 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) (MBIA
Insurance 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 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 ___________ by
_________________________ and
_____________ by ____________________.
______________ assigns the additional
symbol of ___to highlight classes of
securities that ________________________
believes may experience high volatility
or high variability in expected returns
due to non-credit risks; however, the
absence of an __ symbol should not be
taken as an indication that a class will
exhibit no volatility or variability in
total return. The ratings of ___________
and ____________ 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 . . . . . The Class A Certificates initially will
Certificates 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.
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 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 ___ 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 $___________. 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 ____% (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 _____% 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
_____% (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
______ 1, 199_ (the "Agreement"), by and among the Company, MLCC, as
master servicer (the "Master Servicer"), and
_________________________________________, 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.
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 _____% of the Mortgage Loans are One-Month LIBOR Index
based Mortgage Loans, approximately _____% are Six-Month LIBOR Index based
Mortgage Loans, approximately ____% are Prime Index based Mortgage Loans
that adjust every six months, approximately ____% are Treasury Index based
Mortgage Loans that adjust monthly and approximately ____% are Treasury
Index based Mortgage Loans that adjust every six months. Approximately
____% of the Mortgage Loans are Convertible Mortgage Loans and
approximately _____% of the Mortgage Loans are Index Convertible Mortgage
Loans.
The Mortgage Loans were originated from ________ 199_ through ______
199_. No more than ____% 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 __ years. The latest month
and year in which any Mortgage Loan matures is ____________ 20__. The
Mortgage Loans had remaining terms to stated maturity, calculated as of
the Cut-off Date, of between approximately ___ and ___ months and a
weighted average remaining term to stated maturity as of the Cut-off Date
of approximately ___ months. The interest rates (the "Mortgage Rates")
borne by the Mortgage Loans as of the Cut-off Date ranged from _____% per
annum to _____% per annum and the weighted average Mortgage Rate as of the
Cut-off Date was approximately _____% per annum. Employees of Merrill
Lynch & Co., Inc. and its affiliates are the borrowers under ____% of the
Mortgage Loans.
Except for ____% 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
$______ nor more than $_________. The average outstanding principal
balance of the Mortgage Loans as of the Cut-off Date was approximately
$_______.
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.
Geographical Distribution of Mortgaged Properties
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Number of
State or Mortgage Cut-off Date Percent by Cut-off Date
Territory Loans Principal Balance Principal Balance
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California . . . . . . . . . . . $ %
Colorado . . . . . . . . . . . .
Connecticut . . . . . . . . . .
Florida . . . . . . . . . . . .
Georgia . . . . . . . . . . . .
New Jersey . . . . . . . . . . .
New York . . . . . . . . . . . .
Texas . . . . . . . . . . . . .
Other(1) . . . . . . . . . . . .
-------- -------- ------
Total . . . . . . . . . . . . 100.00%
======== $======== ======
</TABLE>
- -------------------
(1) "Other" includes __ other States and the Virgin Islands with under 3%
concentrations individually.
RANGE OF CUT-OFF DATE PRINCIPAL BALANCES(1)
<TABLE>
<CAPTION>
======================================================================================================
Range of Number of Cut-off Date Percent by Cut-off
Cut-off Date Mortgage Principal Date Principal
Principal Balances Loans Balance Balances
======================================================================================================
<S> <C> <C> <C>
$ 0.01 -- $ 25,000.00 $ %
$ 25,000.01 -- $ 50,000.00
$ 50,000.01 -- $ 75,000.00
$ 75,000.01 -- $ 100,000.00
$ 100,000.01 -- $ 200,000.00
$ 200,000.01 -- $ 300,000.00
$ 300,000.01 -- $ 400,000.00
$ 400,000.01 -- $ 500,000.00
$ 500,000.01 -- $ 600,000.00
$ 600,000.01 -- $ 700,000.00
$ 700,000.01 -- $ 800,000.00
$ 800,000.01 -- $ 900,000.00
$ 900,000.01 -- $1,000,000.00
$1,000,000.01 -- $1,500,000.00
$1,500,000.01 -- $2,000,000.00
$2,000,000.01 -- $2,500,000.00
$2,500,000.01 -- $3,000,000.00
$3,000,000.01 -- $3,500,000.00
$3,500,000.01 -- $4,000,000.00
-------- -------- --------
Total........... $ 100.00%
======== ======== ========
</TABLE>
_________________
(1) As of the Cut-off Date, the average outstanding principal balance of
the Mortgage Loans was approximately $___________.
Range of Original Constructive Loan-to-Value Ratios(1)(2)
<TABLE>
<CAPTION>
===================================================================================
Range of Original Loan- Number of Cut-off Date Percent by Cut-off Date
to-Value Ratios Mortgage Principal Date Principal
Loans Balance Balance
===================================================================================
<S> <C> <C> <C>
0.01% -- 10.00% $ %
10.01% -- 20.00%
20.01% -- 30.00%
30.01% -- 40.00%
40.01% -- 50.00%
50.01% -- 60.00%
60.01% -- 70.00%
70.01% -- 75.00%
75.01% -- 80.00%
80.01% -- 85.00%
85.01% -- 90.00%
90.01% -- 95.00%
95.01% -- 100.00%
-------- -------- --------
Total $ 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 _____%.
Range of Original Loan-to-Value Ratios(1)
<TABLE>
<CAPTION>
==========================================================================================
Range of Original Loan- Number of Cut-off Date Percent by Cut-
to-Value Ratios Mortgage Principal Balance off Date
Loans Principal Balance
==========================================================================================
<S> <C> <C> <C>
0.01% -- 10.00% $ %
10.01% -- 20.00%
20.01% -- 30.00%
30.01% -- 40.00%
40.01% -- 50.00%
50.01% -- 60.00%
60.01% -- 70.00%
70.01% -- 75.00%
75.01% -- 80.00%
80.01% -- 85.00%
85.01% -- 90.00%
90.01% -- 95.00%
95.01% -- 100.00%
100.01% -- 125.00%
-------- -------- --------
Total $ 100.0%
======== ======== ========
</TABLE>
- -------------------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination was approximately _____%.
Occupancy Status
<TABLE>
<CAPTION>
======================================================================================================
Number of Cut-off Date Percent by Cut-off Date
Status Mortgage Loans Principal Balance Principal Balance
======================================================================================================
<S> <C> <C> <C>
Owner-Occupied . . . . . . . $ %
Second Home . . . . . . . . .
Investment Property . . . . .
-------- -------- -------
Total . . . . . . . . . . $ 100.0%
======== ======== =======
</TABLE>
Loan Purpose
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Number of Cut-off Date Percent by Cut-off Date
Loan Purpose Mortgage Loans Principal Balance Principal Balance
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchase . . . . . . . . . . $ %
Cash-out Refinance(1) . . . .
Rate and term refinance . . .
-------- -------- --------
Total . . . . . . . . . . $ 100.0%
======== ======== ========
</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.
Mortgaged Properties
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Number of Cut-off Date Percent by Cut-off Date
Property Type Mortgage Loans Principal Balance Principal Balance
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Single family . . . . . . . . $ %
De minimis Planned Unit
Development . . . . . .
Condominium . . . . . . . . .
Cooperative . . . . . . . . .
2-4 Family Residence . . . .
Planned Unit Development
Project . . . . . . . .
-------- -------- --------
Total . . . . . . . . . . $ 100.0%
======== ======== ========
</TABLE>
Maximum Mortgage Rates(1)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Cut-off Date Percent by Cut-off Date
Number of Mortgage Principal Principal
Maximum Mortgage Rates Loans Balance Balance
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
12.000% -- 12.249% . . . . . $ %
12.250% -- 12.499% . . . . .
12.500% -- 12.749% . . . . .
12.750% -- 12.999% . . . . .
13.000% -- 13.249% . . . . .
13.250% -- 13.499% . . . . .
13.500% -- 13.749% . . . . .
13.750% -- 13.999% . . . . .
14.000% -- 14.249% . . . . . -------- -------- --------
Total . . . . . . . . . . $ 100.00%
======== ======== ========
</TABLE>
- -------------------
(1) As of the Cut-off Date, the weighted average Maximum Mortgage Rate
was ______%.
Range of Current Mortgage Rates(1)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Percent by Cut-off
Range of Current Mortgage Number of Mortgage Cut-off Date Principal Date
Rates Loans Balance Principal Balance
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
5.750% -- 5.999% $ %
6.000% -- 6.249%
6.250% -- 6.499%
6.500% -- 6.749%
6.750% -- 6.999%
7.000% -- 7.249%
7.250% -- 7.499%
7.500% -- 7.749%
7.750% -- 7.999%
8.000% -- 8.249%
8.250% -- 8.499%
8.500% -- 8.749%
8.750% -- 8.999%
9.000% -- 9.249% -------- -------- --------
Total $ 100.00%
======== ======== ========
</TABLE>
- -------------------
(1) As of the Cut-off Date, the weighted average current Mortgage Rate
was ______%.
Remaining Terms to Stated Maturity(1)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Remaining Terms to Stated Percent by Cut-off Date
Maturity in Number of Mortgage Cut-off Date Principal Principal
Months Loans Balance Balance
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
295 . . . . . . . . . . . . . $ %
296 . . . . . . . . . . . . .
297 . . . . . . . . . . . . .
298 . . . . . . . . . . . . .
299 . . . . . . . . . . . . .
300 . . . . . . . . . . . . . -------- -------- --------
Total . . . . . . . . . . . $ 100.00%
======== ======== ========
</TABLE>
- -------------------
(1) As of the Cut-off Date, the weighted average remaining term to stated
maturity was _____ months.
Next Interest Rate Adjustment Date(1)
for All Mortgage Loans
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Percent by Cut-off Date
Number of Mortgage Cut-off Date Principal Principal
Month of Next Adjustment Date Loans Balance Balance
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
September 1, 199_ . . . . . . $ %
October 1, 199_ . . . . . . .
November 1, 199_ . . . . . .
December 1, 199_ . . . . . .
January 1, 199_ . . . . . . .
February 1, 199_ . . . . . .
March 1, 199_ . . . . . . . . -------- -------- --------
Total . . . . . . . . . . . $ 100.00%
======== ======== ========
</TABLE>
- -------------------
(1) As of the Cut-off Date, the weighted average number of months to the
next Interest Adjustment Date was ____ months.
Next Interest Rate Adjustment Date(1)
for Prime Index Mortgage Loans
That Adjust Every Six Months
<TABLE>
<CAPTION> Percent by Cut-off Date
Number of Mortgage Cut-off Date Principal Principal
Month of Next Adjustment Date Loans Balance Balance
<S> <C> <C> <C>
January 1, 199_ . . . . . . . $ %
February 1, 199_ . . . . . .
Total . . . . . . . . . . . $ 100.00%
</TABLE>
- -------------------
(1) As of the Cut-off Date, the weighted average number of months to the
next Interest Adjustment Date was ____ months.
Next Interest Rate Adjustment Date(1)
for One-Year Treasury Index Mortgage Loans
That Adjust Every Six Months
<TABLE>
<CAPTION> Percent by Cut-off Date
Number of Mortgage Cut-off Date Principal Principal
Month of Next Adjustment Date Loans Balance Balance
<S> <C> <C> <C>
October 1, 199_ . . . . . . . $ %
November 1, 199_ . . . . . .
December 1, 199_ . . . . . .
January 1, 199_ . . . . . . .
February 1, 199_ . . . . . .
Total . . . . . . . . . . . $ 100.0%
</TABLE>
- -------------------
(1) As of the Cut-off Date, the weighted average number of months to the
next Interest Adjustment Date was ____ months.
Next Interest Rate Adjustment Date(1)
for Six-Month LIBOR Index Mortgage Loans
<TABLE>
<CAPTION> Percent by Cut-off Date
Number of Mortgage Cut-off Date Principal Principal
Month of Next Adjustment Date Loans Balance Balance
<S> <C> <C> <C>
September 1, 199_ . . . . . . $ %
October 1, 199_ . . . . . . .
November 1, 199_ . . . . . .
December 1, 199_ . . . . . .
January 1, 199_ . . . . . . .
February 1, 199_ . . . . . .
March 1, 199_ . . . . . . . .
Total . . . . . . . . . . . $ 100.00%
</TABLE>
- -------------------
(1) As of the Cut-off Date, the weighted average number of months to the
next Interest Adjustment Date was _____ months.
Prime Index Mortgage Loan Margins(1)
<TABLE>
<CAPTION> Percent of Such
Mortgage Loans
by Cut-off Date
Number of Mortgage Cut-off Date Principal Principal
Margin(1) Loans Balance Balance
<S> <C> <C> <C>
- -0.250% . . . . . . . . . . . $ %
0.250% . . . . . . . . . . .
0.750% . . . . . . . . . . .
Total . . . . . . . . . . . $ 100.00%
</TABLE>
- -------------------
(1) As of the Cut-off Date, the weighted average current Margin was
_____%.
One-Month LIBOR Index Mortgage Loan Margins(1)
<TABLE>
<CAPTION> Percent of Such
Mortgage Loans
by Cut-off Date
Number of Mortgage Cut-off Date Principal Principal
Margin(1) Loans Balance Balance
<S> <C> <C> <C>
0.750% . . . . . . . . . . . $ %
1.125% . . . . . . . . . . .
1.250% . . . . . . . . . . .
1.375% . . . . . . . . . . .
1.500% . . . . . . . . . . .
1.625% . . . . . . . . . . .
1.750% . . . . . . . . . . .
1.875% . . . . . . . . . . .
2.000% . . . . . . . . . . .
2.125% . . . . . . . . . . .
2.250% . . . . . . . . . . .
2.375% . . . . . . . . . . .
2.500% . . . . . . . . . . .
2.625% . . . . . . . . . . .
Total . . . . . . . . . . . $ 100.00%
</TABLE>
- -------------------
(1) As of the Cut-off Date, the weighted average current Margin was
_____%.
Six-Month LIBOR Index Mortgage Loan Margins(1)
<TABLE>
<CAPTION> Percent of Such
Mortgage Loans
by Cut-off Date
Number of Mortgage Cut-off Date Principal Principal
Margin(1) Loans Balance Balance
<S> <C> <C> <C>
0.875% . . . . . . . . . . . $ %
1.000% . . . . . . . . . . .
1.125% . . . . . . . . . . .
1.250% . . . . . . . . . . .
1.375% . . . . . . . . . . .
1.500% . . . . . . . . . . .
1.625% . . . . . . . . . . .
1.750% . . . . . . . . . . .
1.875% . . . . . . . . . . .
2.000% . . . . . . . . . . .
2.125% . . . . . . . . . . .
2.250% . . . . . . . . . . .
2.375% . . . . . . . . . . .
2.500% . . . . . . . . . . .
2.625% . . . . . . . . . . .
2.750% . . . . . . . . . . .
3.000% . . . . . . . . . . .
Total . . . . . . . . . . . $ 100.00%
</TABLE>
- -------------------
(1) As of the Cut-off Date, the weighted average current Margin was
_____%.
One-Year Treasury Index Mortgage Loan Margins(1)
<TABLE>
<CAPTION> Percent of Such
Mortgage Loans
by Cut-off Date
Number of Mortgage Cut-off Date Principal Principal
Margin Loans Balance Balance
<S> <C> <C> <C>
1.750% . . . . . . . . . . . $ %
1.875% . . . . . . . . . . .
2.375% . . . . . . . . . . .
2.500% . . . . . . . . . . .
2.625% . . . . . . . . . . .
2.750% . . . . . . . . . . .
3.000% . . . . . . . . . . .
Total . . . . . . . . . . . $ 100.00%
</TABLE>
- -------------------
(1) As of the Cut-off Date, the weighted average current Margin was
____%.
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(Registered Trademark) mortgages).
MLCC also originates revolving lines of credit to individuals. These lines
of credit are called "Equity Access(Registered Trademark) credit accounts"
or "Equity Access(Registered Trademark) loans". MLCC currently originates
and services loans in fifty states, the District of Columbia, Puerto Rico
and the U.S. Virgin Islands. PrimeFirst(Registered Trademark) 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(Registered Trademark) 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 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 100SM 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(Registered Trademark) 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 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 ___% (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 ___% 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(Registered Trademark) 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(REGISTERED TRADEMARK) MORTGAGE PROGRAM
During the first ten years of a PrimeFirst(Registered Trademark)
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(Registered Trademark) 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(Registered
Trademark) loan at any time without penalty during the term of the loan.
Approximately _____% of the Mortgage Loans were originated under
MLCC's PrimeFirst(Registered Trademark) Self-DirectedSM 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(Registered Trademark)
Self-DirectedSM 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(Registered Trademark) Self-DirectedSM
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(Registered Trademark) 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(Registered Trademark) 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(Registered Trademark) 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(Registered Trademark) 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 6-Month LIBOR Treasury
<S> <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(Registered Trademark)
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(Registered
Trademark) Self-DirectedSM 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(Registered Trademark) Self-DirectedSM mortgage
program may purchase a fixed rate conversion option by adding 0.25% to the
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(Registered
Trademark) Self-DirectedSM 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(Registered Trademark) loan from its second
change date to its tenth change date, and in respect of a one-month
adjustable PrimeFirst(Registered Trademark) 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(Registered Trademark) 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(Registered Trademark) loan are the same as those described
above for PrimeFirst(Registered Trademark) 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(Registered Trademark) 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(Registered Trademark) 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.
<PAGE>
Prime First Registered Trademark Loan Delinquency Experience
<TABLE>
<CAPTION>
1991 1992 1993
Number of Amount Number of PrimeFirst Number of Principal
PrimeFirst Principal Copyright Loans Amount
Loans Loans Amount
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Prime First
Copyright
Loans
Outstanding 921 $522,425 3,265 $1,504,940 4,959 $2,264,421
Delinquency
Period
30-59 days 6 4,261 23 15,446 69 48,509
60-89 days 0 0 2 6,300 6 3,361
90 days or more* 2 1,350 2 1,635 13 8,565
Total Delinquency 8 5,611 27 23,381 88 460,435
Delinquencies
as a percent of
number of
PrimeFirst
Copyright loans
and principal amount
outstanding 0.87% 1.07% 0.83% 1.55% 1.77% 2.67%
Foreclosures 4 $12,902 7 13,592 9 7,899
Foreclosures as a
percent of number of
PrimeFirst loans
and principal
outstanding 0.43% 2.47% 0.21% 0.90% 0.18% 0.35%
</TABLE>
Prime First Registered Trademark Delinquency Experience
<TABLE>
<CAPTION>
1994 1995 As of June 30, 1996
Number of Principal Number of Principal Number of Principal
PrimeFirst Amount PrimeFirst Amount PrimeFirst Amount
Copyright Copyright Copyright
Loans Loans Loans
<S> <C> <C> <C> <C> <C> <C>
Prime First
Copyright
Loans
Outstanding 7,615 $3,351,328 8,272 $3,536,761 9,273 $3,852,739
Delinquency
Period
30-59 days 121 86,279 127 56,370 159 76,487
60-89 days 20 18,152 13 7,917 22 19,095
90 days or more* 17 19,257 44 45,749 31 27,530
Total Delinquency 158 $123,688 184 $110,036 212 123,112
Delinquencies
as a percent of
number of
PrimeFirst
Copyright loans
and principal amount
outstanding 2.07% 3.69% 2.22% 3.11% 2.29% 3.20%
Foreclosures 18 $15,637 28 $38,209 30 $33,527
Foreclosures as a
percent of number of
PrimeFirst loans
and principal
outstanding 0.24% 0.47% 0.34% 1.11% 0.32% 0.87%
</TABLE>
- ---------
* Does not include loans subject to bankruptcy proceedings and real
estate owned.
PrimeFirst(Registered Trademark) Loan Loss Experience
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
ENDED
1991 1992 1993 1994 1995 JUNE 30, 1996
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average principal balance of $351,651 $1,008,493 $1,851,696 $2,807,875 $3,444,045 $3,694,750
PrimeFirst(Copyright) loan
portfolio . . . . . . . . .
Average number of 569 2,036 4,091 6,287 7,944 8,773
PrimeFirst(Copyright) loans
outstanding during the
period . . . . . . . . . .
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 0.00% 0.00% 0.11% 0.02% 0.05% 0.08%(1)
of average principal balance
outstanding . . . . . . . .
</TABLE>
- ---------
(1) Not annualized.
Because of the short time during which the PrimeFirst(Registered
Trademark) loans have been outstanding and the resulting lack of
experience as to delinquencies and losses on PrimeFirst(Registered
Trademark) 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(Registered Trademark) 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.
Revolving Credit Line Loan Delinquency Experience
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
ENDED
1991 1992 1993 1994 1995 JUNE 30, 1996
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Number of revolving credit $15,913 15,084 13,839 15,598 25,056 27,081
line loans serviced
Aggregate loan balance of $1,073,492 $1,062,930 $1,037,427 $1,079,693 $1,293,483 $1,318,904
revolving credit line loans
serviced
Loan balance of revolving $2,250 $3,717 $5,161 $5,358 $8,447 $5,364
credit line loans 2 months
delinquent
Loan balance of revolving $22,361 $18,751 $17,508 $22,989 $33,763 $43,610
credit line loans 3 months
or more delinquent
Total of 2 months or more 2.29% 2.11% 2.19% 2.63% 3.26% 3.71%
delinquent as a percentage
of aggregate loan balance
of revolving credit line
line loans
</TABLE>
Revolving Credit Line Loan Loss Experience
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
ENDED
1991 1992 1993 1994 1995 JUNE 30, 1996
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Number of revolving credit $15,913 15,084 13,839 15,598 25,056 27,081
line loans serviced
Aggregate loan balance of $1,073,492 $1,062,930 $1,037,427 $1,079,693 $1,293,483 $1,318,904
revolving credit line loans
serviced
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 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
_____% 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 _____% 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 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.
The Maximum Mortgage Rates range from _____% to _____% per annum and
the weighted average Maximum Mortgage Rate for the Mortgage Loans (by
Cut-off Date Principal Balance) is equal to _____%.
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 "__%", "__%", "__%" and "__%" assume that
prepayments on the Mortgage Loans are made at CPRs of "__%", "__%", "__%"
and "__%", 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 __________ 199__ 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 ___________, 199_; (ix) the Distribution Date is the 15th day of
each month commencing in ______________ 199_; 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:
<TABLE>
<CAPTION>
Remaining Term
Index and Cut-off Date Current Months to Level of Margin (Months) Orig. Term
Frequency of Principal Mortgage Next Index
Adjustment Balance Rate Interest After
Adjustment Current
Date Mortgage
Rate
<S> <C> <C> <C> <C> <C> <C> <C>
Six-Month
LIBOR --
Six Months $______ _____% _____% _____%
Prime -- Six
Months $______ _____% _____% _____%
Treasury --
Six Months $______ _____% _____% _____%
One-Month
LIBOR --
Monthly $______ _____% _____% _____%
Treasury --
Monthly $______ _____% _____% _____%
</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.
PERCENT OF THE ORIGINAL PRINCIPAL BALANCE OF THE CLASS A CERTIFICATES
OUTSTANDING FOR:
<TABLE>
<CAPTION>
Class A Certificate at the
Following Percentages of CPR
<S> <C> <C> <C> <C> <C>
Distribution Date 0% 10% 15% 20% 30%
Initial Percentage . . . . . . . . . 100% 100% 100% 100% 100%
_______ 15, 199_ . . . . . . . . . .
_______ 15, 199_ . . . . . . . . . .
_______ 15, 199_ . . . . . . . . . .
_______ 15, 20__ . . . . . . . . . .
_______ 15, 20__ . . . . . . . . . .
_______ 15, 20__ . . . . . . . . . .
_______ 15, 20__ . . . . . . . . . .
_______ 15, 20__ . . . . . . . . . .
_______ 15, 20__ . . . . . . . . . .
_______ 15, 20__ . . . . . . . . . .
_______ 15, 20__ . . . . . . . . . .
_______ 15, 20__ . . . . . . . . . .
_______ 15, 20__ . . . . . . . . . .
_______ 15, 20__ . . . . . . . . . .
_______ 15, 20__ . . . . . . . . . .
_______ 15, 20__ . . . . . . . . . .
_______ 15, 20__ . . . . . . . . . .
_______ 15, 20__ . . . . . . . . . .
_______ 15, 20__ . . . . . . . . . .
_______ 15, 20__ . . . . . . . . . .
_______ 15, 20__ . . . . . . . . . .
_______ 15, 20__ . . . . . . . . . .
_______ 15, 20__ . . . . . . . . . .
_______ 15, 20__ . . . . . . . . . .
_______ 15, 20__ . . . . . . . . . .
Weighted Average Life without exercise
of optional termination (years)(1) . .
Weighted Average Life with exercise of
optional termination (years) (1)(2) .
</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.
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 _____% in the pool of Mortgage Loans, and the
Class B Certificates will initially evidence the remaining approximate
_____%. 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 $___,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 ___th day of each month, or, if such day is not a
business day, the next succeeding business day (each, a "Distribution
Date") beginning in ____________ 199_, 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 $____ 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
___________ 199_, 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 _____ 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 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 ___________ __,
199_) (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 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
_____% 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
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 such Distribution Date). The "Class A Prepayment Percentage" for a
Distribution Date on or before the Distribution Date in ________ 20__ will
be 100%. The "Class A Prepayment Percentage" for a Distribution Date after
the Distribution Date in ________ 20__ will be as follows: for any
Distribution Date subsequent to ________ 20__ to and including the
Distribution Date in ________ 20__, the Class A Percentage for such
Distribution Date plus 70% of the Subordinated Percentage for such
Distribution Date; for any Distribution Date subsequent to ________ 20__
to and including the Distribution Date in ________ 20__, the Class A
Percentage for such Distribution Date plus 60% of the Subordinated
Percentage for such Distribution Date; for any Distribution Date
subsequent to ________ 20__ to and including the Distribution Date in
________ 20__, the Class A Percentage for such Distribution Date plus 40%
of the Subordinated Percentage for such Distribution Date; for any
Distribution Date subsequent to ________ 20__ to and including the
Distribution Date in ________ 20__, 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 ________ 20__ to and including the Distribution
Date in ________ 20__ 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 _____%.
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 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 _____% 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 _____%. The "Net Mortgage
Rate" of a Mortgage Loan is its Mortgage Rate less the sum of (i) the
Servicing Fee Rate of _____% and (ii) the Certificate Insurance Policy
annual premium rate (which, together with the Servicing Fee Rate, will not
exceed _____%). The "Weighted Average Net Mortgage Rate" is the weighted
average of the Net Mortgage Rates for the Mortgage Loans. Notwithstanding
the foregoing, the _____% margin added to the applicable LIBOR formula for
the calculation of the Class A Pass-Through Rate will instead be _____%
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 ________ __, 199_ in the case of the Distribution Date on
________ __, 199_), 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 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 $________ (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
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 _____ days after the date of the
initial issuance of the Certificates, and at least _____% 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.
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
_____________________ or A3 by ______________________, 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 _____% of
the Mortgage Loans (by Cut-off Date Principal Balance), be covered by a
Primary Mortgage Insurance Policy.
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 _____% 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 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.
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 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.
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.
THE TRUSTEE
______________________________________, a national banking
association, will act as Trustee of the Trust Fund. The mailing address of
the Trustee's corporate trust office is _______________________,
_________________________ and its telephone number is (_____) ____-_______.
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.
THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER
(The following information has been supplied by the AMBAC Indemnity
Corporation ("AMBAC") 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 __________ 1, 199_, 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.
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 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, 1993 December 31, 1994 December 31, 1995 June 30, 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 increase AMBAC's
stockholder's equity $63.6 million, net of tax. The adoption of Statement
115 had no effect on earnings.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or the Prospectus
or any information or disclosure contained herein, or omitted herefrom,
other than with respect to the accuracy of the information regarding the
Certificate Insurance Policy and Certificate Insurer set forth under this
heading "The Certificate Insurance Policy and the Certificate Insurer"
and, the information provided in Appendix A and Appendix B.)
(The following information has been supplied by MBIA Insurance
Corporation (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 Guaranty Insurance
Policy (the "Certificate Insurance Policy"), hereby unconditionally and
irrevocably guarantees to any Owner that an amount equal to each full and
complete Insured Payment will be received by the Trustee, or its
successor, as trustee for the Owners, on behalf of the Owners from the
Certificate Insurer, for distribution by the Trustee to each Owner of each
Owner's proportionate share of the Insured Payment. The Certificate
Insurer's obligations under the Certificate Insurance Policy with respect
to a particular Insured Payment shall be discharged to the extent funds
equal to the applicable Insured Payment are received by the Trustee,
whether or not such funds are properly applied by the Trustee. Insured
Payments shall be made only at the time set forth in the Certificate
Insurance Policy and no accelerated Insured Payments shall be made
regardless of any acceleration of the Certificates, unless such
acceleration is at the sole option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance
Policy does not cover shortfalls, if any, attributable to the liability of
the Trust or the Trustee for withholding taxes, if any (including interest
and penalties in respect of any such liability). The Certificate
Insurance Policy does not cover Net Interest Shortfalls.
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount on the Business Day following receipt on a Business Day
by the Fiscal Agent (as described below) of (i) a certified copy of the
order requiring the return of a preference payment, (ii) an opinion of
counsel satisfactory to the Certificate Insurer that such order is final
and not subject to appeal, (iii) an assignment in such form as is
reasonably required by the Certificate Insurer, irrevocably assigning to
the Certificate Insurer all rights and claims of the Owner relating to or
arising under the Certificates against the debtor which made such
preference payment or otherwise with respect to such preference payment
and (iv) appropriate instruments to effect the appointment of the
Certificate Insurer as agent for such Owner in any legal proceeding
related to such preference payment, such instruments being in a form
satisfactory to the Certificate Insurer, provided that if such documents
are received after 12:00 noon New York City time on such Business Day,
they will be deemed to be received on the following Business Day. Such
payments shall be disbursed to the receiver or trustee in bankruptcy named
in the final order of the court exercising jurisdiction on behalf of the
Owner and not to any Owner directly unless such Owner has returned
principal or interest paid on the Certificates to such receiver or trustee
in bankruptcy, in which case such payment shall be disbursed to such
Owner.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance Policy no later than 12:00 noon New York City time
on the later of the Remittance Date on which the related Deficiency Amount
is due or the Business Day following receipt in New York, New York on a
Business Day by State Street Bank and Trust Company, N.A., as Fiscal Agent
for the Certificate Insurer or any successor fiscal agent appointed by the
Certificate Insurer (the "Fiscal Agent") of a Notice (as described below);
provided that if such Notice is received after 12:00 noon New York City
time on such Business Day, it will be deemed to be received on the
following Business Day. If any such Notice received by the Fiscal Agent
is not in proper form or is otherwise insufficient for the purpose of
making claim under the Certificate Insurance Policy it shall be deemed not
to have been received by the Fiscal Agent for purposes of this paragraph,
and the Certificate Insurer or the Fiscal Agent, as the case may be, shall
promptly so advise the Trustee and the Trustee may submit an amended
Notice.
Insured Payments due under the Certificate Insurance Policy unless
otherwise stated therein will be disbursed by the Fiscal Agent to the
Trustee on behalf of the Owners by wire transfer of immediately available
funds in the amount of the Insured Payment less, in respect of Insured
Payments related to Preference Amounts, any amount held by the Trustee for
the payment of such Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to Owners for any acts of the
Fiscal Agent or any failure of the Certificate Insurer to deposit or cause
to be deposited, sufficient funds to make payments due under the
Certificate Insurance Policy.
As used in the Certificate Insurance Policy, the following terms
shall have the following meanings:
"Agreement" means the Pooling and Servicing Agreement dated as of
, 19 among the Seller, the Servicer and the Trustee without
regard to any amendment or supplement thereto.
"Business Day" means any day other than a Saturday, a Sunday or a day
on which the Certificate Insurer and banking institutions in New York City
or in the city in which the corporate trust office of the Trustee under
the Agreement is located are authorized or obligated by law or executive
order to close.
"Deficiency Amount" means, with respect to any Remittance Date, the
Distribution Account Shortfall for such Remittance Date.
"Insured Payment" means (i) with respect to any Remittance Date, the
Deficiency Amount and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of Exhibit A
attached to the Certificate Insurance Policy, the original of which is
subsequently delivered by registered or certified mail, from the Trustee
specifying the Insured Payment which shall be due and owing on the
applicable Remittance Date.
"Owner" means each holder (as defined in the Agreement) who, on the
applicable Remittance Date, is entitled under the terms of the applicable
Certificates to payment thereunder.
"Preference Amount" means any amount previously distributed to an
Owner on the Certificates that is recoverable and sought to be recovered
as a voidable preference by a trustee in bankruptcy pursuant to the United
States Bankruptcy Code (11 U.S.C.), as amended from time to time in
accordance with a final nonappealable order of a court having competent
jurisdiction.
Capitalized terms used in the Certificate Insurance Policy and not
otherwise defined in the Certificate Insurance Policy shall have the
respective meanings set forth in the Agreement as of the date of execution
of the Certificate Insurance Policy, without giving effect to any
subsequent amendment or modification to the Agreement unless such
amendment or modification has been approved in writing by the Certificate
Insurer.
Any notice under the Certificate Insurance Policy or service of
process on the Fiscal Agent of the Certificate Insurer may be made at the
address listed below for the Fiscal Agent of the Certificate Insurer or
such other address as the Certificate Insurer shall specify in writing to
the Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway,
New York, New York 10006 Attention: Municipal Registrar and Paying Agency,
or such other address as the Fiscal Agent shall specify to the Trustee in
writing.
The Certificate Insurance Policy is being issued under and pursuant
to, and shall be construed under, the laws of the State of New York,
without giving effect to the conflict of laws principles thereof.
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 premium on the Certificate Insurance Policy is not refundable for any
reason including payment, or provision being made for payment, prior to
maturity of the Certificates.
The Certificate Insurer is the principal operating subsidiary of MBIA
Inc., a New York Stock Exchange listed company. MBIA Inc. is not
obligated to pay the debts of or claims against the Certificate Insurer.
The Certificate Insurer is domiciled in the State of New York and licensed
to do business in and is subject to regulation under the laws of all 50
states, the District of Columbia, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Mariana Islands, the Virgin Islands of the
United States and the Territory of Guam. The Certificate Insurer has two
European branches, one in the Republic of France and the other in the
Kingdom of Spain. New York has laws prescribing minimum capital
requirements, limiting classes and concentrations of investments and
requiring the approval of policy rates and forms. State laws also
regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by the Insurer, changes in control and
transactions among affiliates. Additionally, the Certificate Insurer is
required to maintain contingency reserves on its liabilities in certain
amounts and for certain periods of time.
The consolidated financial statements of the Certificate Insurer, a
wholly owned subsidiary of MBIA Inc., and its subsidiaries as of
December 31, 1995 and December 31, 1994 and for the three years ended
December 31, 1995, prepared in accordance with generally accepted
accounting principles, included in the Annual Report on Form 10-K of MBIA
Inc. for the year ended December 31, 1995 and the consolidated financial
statements of the Insurer and its subsidiaries for the six months ended
June 30, 1996 and for the periods ending June 30, 1996 and June 30, 1995
included in the Quarterly Report on Form 10-Q of MBIA, Inc. for the period
ending June 30, 1996, are hereby incorporated by reference into this
Prospectus and shall be deemed to be a part hereof. Any statement
contained in a document incorporated by reference herein shall be modified
or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document
which also is incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this
Prospectus.
The tables below present selected financial information of the
Certificate Insurer determined in accordance with statutory accounting
practices prescribed or permitted by insurance regulatory authorities
("SAP") and generally accepted accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
December 31, 1995 June 30, 1996
(Audited) (Unaudited)
(In millions)
<S> <C> <C>
Admitted Assets . . . . . . . . . . . . . . . . . $3,814 $4,179
Liabilities . . . . . . . . . . . . . . . . . . . 2,540 2,804
Capital and Surplus . . . . . . . . . . . . . . . 1,274 1,375
</TABLE>
<TABLE>
<CAPTION>
GAAP
December 31, 1995 June 30, 1996
(Audited) (Unaudited)
(In millions)
<S> <C> <C>
Assets . . . . . . . . . . . . . . . . . . . . . $4,463 $4,691
Liabilities . . . . . . . . . . . . . . . . . . . 1,937 2,088
Shareholder's Equity . . . . . . . . . . . . . . 2,526 2,602
</TABLE>
Copies of the financial statements of the Certificate Insurer
incorporated by reference herein and copies of the Certificate Insurer's
1995 year-end audited financial statements prepared in accordance with
statutory accounting practices are available, without charge, from the
Certificate Insurer. The address of the Certificate Insurer is 113 King
Street, Armonk, New York 10504. The telephone number of the Certificate
Insurer is (914) 273-4545.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus or any information or
disclosure contained herein, or omitted herefrom, other than with respect
to the accuracy of the information regarding the Certificate Insurance
Policy and the Certificate Insurer set forth under the heading "THE
CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER."
Moody's Investors Service, Inc. rates the claims paying ability of
the Certificate Insurer "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. rates the claims paying ability of the Certificate Insurer
"AAA."
Fitch Investors Service, L.P. rates the claims paying ability of the
Certificate Insurer "AAA."
Each rating of the Certificate Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Certificate Insurer and its
ability to pay claims on its policies of insurance. Any further
explanation as to the significance of the above ratings may be obtained
only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Certificates, and such ratings may be subject to revision or withdrawal at
any time by the rating agencies. Any downward revision or withdrawal of
any of the above ratings may have an adverse effect on the market price of
the Certificates. The Certificate Insurer does not guaranty the market
price of the Certificates nor does it guaranty that the ratings on the
Certificates will not be revised or withdrawn.)
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 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, 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 and Appendix B of this Prospectus Supplement have
been included herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein and
upon the authority of said firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the consolidated
financial statements referred to above of AMBAC Indemnity Corporation
refers to the adoption 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.)
(The consolidated financial statements of the Certificate Insurer,
MBIA Insurance Corporation, as of December 31, 1995 and 1994 and for each
of the three years in the period ended December 31, 1995, incorporated by
reference in this Prospectus Supplement have been audited by Coopers &
Lybrand, independent accountants, as set forth in their report thereon
appearing elsewhere herein. Such consolidated financial statements are
included in reliance upon such report and upon the authority of such firm
as experts in accounting and auditing.)
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 _____ by ________________________ and _____ by
____________________. (Standard & Poor's assigns the additional symbol
of ____ 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 ___ symbol should not be
taken as an indication that a class will exhibit no volatility or
variability in total return.)
The ratings of ________________________ and __________________ 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.
INDEX OF PRINCIPAL TERMS
Page
Accrual Period . . . . . . . . . . . . . . . . . . . . . . . . . S-11, S-48
Additional Collateral . . . . . . . . . . . . . . . . . . . . . . . S-9, S-35
Additional Collateral Loans . . . . . . . . . . . . . . . . . . . . S-9, S-35
Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-16
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5, S-20
AMBAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
Available Distribution Amount . . . . . . . . . . . . . . . . . . . . . S-11
Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
Cede . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-18, S-47
CEDEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-59
CEDEL Participants . . . . . . . . . . . . . . . . . . . . . . . . . . S-59
Certificate Account . . . . . . . . . . . . . . . . . . . . . . . . . . S-20
Certificate Insurance Policy . . . . . . . . . . . . . . . . . . . . . Cover
Certificate Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . Cover
Certificate Owners . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-18
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover
Class A Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
Class A Formula Principal Distribution Amount . . . . . . . . . . . . . S-51
Class A Percentage . . . . . . . . . . . . . . . . . . . . . . . . . . S-51
Class A Prepayment Percentage . . . . . . . . . . . . . . . . . . . . . S-51
Class A Unpaid Interest Shortfall . . . . . . . . . . . . . . . . S-12, S-48
Class B Formula Principal Distribution Amount . . . . . . . . . . . . . S-52
Class B Loss Amount . . . . . . . . . . . . . . . . . . . . . . . . . . S-51
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11
Co-op Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-20
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-17
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover, S-4
Constructive Loan-to-Value Ratio . . . . . . . . . . . . . . . . . . . S-10
Conversion Price . . . . . . . . . . . . . . . . . . . . . . . . . S-2, S-8
Convertible Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . S-2
Converting Mortgage Loan . . . . . . . . . . . . . . . . . . . . . S-2, S-7
Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-20
CPR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-44
Current Subordination Level . . . . . . . . . . . . . . . . . . . . . . S-52
Definitive Class A Certificates . . . . . . . . . . . . . . . . . . . . S-59
Depositaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-58
Determination Date . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
Distribution Account . . . . . . . . . . . . . . . . . . . . . . . . . S-20
Distribution Account Shortfall . . . . . . . . . . . . . . . . . . . . S-52
Distribution Date . . . . . . . . . . . . . . . . . . . . . . S-2, S-11, S-47
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-18, S-47
Due Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2, S-6
Equity Access(Registered Trademark) credit accounts . . . . . . . . . . S-34
Equity Access(Registered Trademark) loans . . . . . . . . . . . . . . . S-34
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-17, S-65
Euroclear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-60
Euroclear Cooperative . . . . . . . . . . . . . . . . . . . . . . . . . S-60
Euroclear Operator . . . . . . . . . . . . . . . . . . . . . . . . . . S-60
Euroclear Participants . . . . . . . . . . . . . . . . . . . . . . . . S-60
Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-65
Formula Excess Interest Amount . . . . . . . . . . . . . . . . . . . . S-50
Formula Principal Distribution Amount . . . . . . . . . . . . . . . . . S-49
GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-64
Global Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
Index Convertible Mortgage Loans . . . . . . . . . . . . . . . . . S-2, S-8
Initial Amount . . . . . . . . . . . . . . . . . . . . . . . . . S-14, S-53
Insured Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
Insured Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
Interest Adjustment Date . . . . . . . . . . . . . . . . . . . . . . . . S-6
LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
LIBOR Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . S-53
Limited Purpose Surety Bond . . . . . . . . . . . . . . . . . . . . . . . S-9
Liquidated Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . S-50
LTV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . Cover, S-20
Maximum Mortgage Rate . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
MBIA Insurance Corporation . . . . . . . . . . . . . . . . . . . . . . S-63
ML & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
MLCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover, S-4
Monthly Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Moody's . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
Mortgage Files . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-55
Mortgage Loan Schedule . . . . . . . . . . . . . . . . . . . . . . . . S-54
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . Cover, S-5
Mortgage Pool . . . . . . . . . . . . . . . . . . . . . . . Cover, S-11, S-20
Mortgage Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Mortgage Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
Mortgaged Properties . . . . . . . . . . . . . . . . . . . . . . . . . S-20
Net Interest Shortfall . . . . . . . . . . . . . . . . . . . . . . . . S-50
Net Mortgage Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
Non-Resident Alien Loans . . . . . . . . . . . . . . . . . . . . . . . S-36
Nonpayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
Nonrecoverable Advances . . . . . . . . . . . . . . . . . . . . . . . . S-57
One-Month LIBOR Index . . . . . . . . . . . . . . . . . . . . . . . S-6, S-37
Original Subordination Level . . . . . . . . . . . . . . . . . . . . . S-52
Outstanding Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . S-50
Parent Power(Registered Trademark) Loans . . . . . . . . . . . . . . . S-35
Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-58
Percentage Interest . . . . . . . . . . . . . . . . . . . . . . . . . . S-11
Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-65
Pool Scheduled Principal Balance . . . . . . . . . . . . . . . . . . . S-13
Preference Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-44
Prepayment Interest Shortfall . . . . . . . . . . . . . . . . . . . . . S-56
Prime Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Principal Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . S-50
Principal Prepayment Period . . . . . . . . . . . . . . . . . . . . . . S-49
Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
Relief Act Reduction . . . . . . . . . . . . . . . . . . . . . . . . . S-50
REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Restricted Group . . . . . . . . . . . . . . . . . . . . . . . . . . . S-66
Reuters Screen LIBO Page . . . . . . . . . . . . . . . . . . . . . . . S-52
SAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-64
Scheduled Formula Principal Distribution Amount . . . . . . . . . . . . S-50
Servicing Fee Rate . . . . . . . . . . . . . . . . . . . . . . . . . . S-56
Six-Month LIBOR Index . . . . . . . . . . . . . . . . . . . . . . . S-6, S-37
Standard & Poor's . . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
Statement 115 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-63
Sub-servicers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-20
Subordinated Certificates . . . . . . . . . . . . . . . . . . . . Cover, S-4
Subordinated Percentage . . . . . . . . . . . . . . . . . . . . . . . . S-51
Subordinated Prepayment Percentage . . . . . . . . . . . . . . . . . . S-52
Surety Bond Provider . . . . . . . . . . . . . . . . . . . . . . . . . . S-9
Terms and Conditions . . . . . . . . . . . . . . . . . . . . . . . . . S-60
Treasury Index . . . . . . . . . . . . . . . . . . . . . . . . . . S-7, S-37
Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover, S-11
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5, S-20
U.S. Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-3
Underwriter . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-4, S-65
Underwriting Agreement . . . . . . . . . . . . . . . . . . . . . . . . S-66
Unrecovered Principal Amount . . . . . . . . . . . . . . . . . . . . . S-50
Unreimbursed Insurer Amounts . . . . . . . . . . . . . . . . . . S-12, S-48
Unscheduled Formula Principal Distribution Amount . . . . . . . . . . . S-50
Weighted Average Net Mortgage Rate . . . . . . . . . . . . . . . . . . . S-5
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 199_-, 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
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:
(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.
<PAGE>
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)
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.
KPMG Peat Marwick LLP
New York, New York
January 31, 1996
<TABLE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars In Thousands Except Share Data)
<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.
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Statements of Operations
(Dollars In Thousands)
<TABLE>
Years Ended December 31,
------------------------------
<CAPTION>
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.
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.
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.
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.
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.
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.
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.
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.
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
Unrealized Estimated Amortized Unrealized
Losses Fair Value Cost Gains
---------- ----------- ---------- ----------
<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
========= ======== ======== =========
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
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> <S> <S>
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.
<TABLE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Net investment income comprised the following:
<CAPTION>
<S> <C> <C> <C>
1995 1994 1993
------ ------ ------
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,
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 1994 1993
--------------------- --------------------- ---------------------
Written Earned Written Earned Written Earned
-------- ------- -------- ------- -------- -------
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 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>
<S> <C> <C> <C>
1995 1994 1993
------ ------ ------
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.
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>
<S> <C>
Year Amount
- ---- ______
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 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>
<S> <C> <C>
1995 1994
----- -----
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>
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.
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Actuarial present value of the benefit obligations:
<TABLE> 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.
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.
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.
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>
As of December 31,
---------------------------------------------------
1995 1994
----------------------- -------------------------
Carrying Estimated Carrying Estimated
(Dollars in Millions) Amount Fair Value Amount Amount
-------- ---------- -------- -----------
<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.
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.
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.
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.
AMBAC Indemnity Corporation and Subsidiaries
(a wholly-owned subsidiary of AMBAC Inc.)
Consolidated Unaudited Financial Statements
as of June 30, 1996 and December 31, 1995
and for the periods ended June 30, 1996 and 1995
<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.
<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
<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.
<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.
<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.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with
the Securities and Exchange Commission. These securities may not be sold
nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there be
any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED NOVEMBER 15, 1996
PROSPECTUS SUPPLEMENT
- ---------- ----------
(To Prospectus dated _______ __, 1996)
$_______________ (APPROXIMATE)
MLCC MORTGAGE INVESTORS, INC., SELLER
ML REVOLVING HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES 199_-_
PRINCIPAL AND INTEREST PAYABLE ON THE __TH DAY OF EACH MONTH,
BEGINNING IN ________ 199_
MERRILL LYNCH CREDIT CORPORATION, SERVICER
_______________
The ML Revolving Home Equity Loan Asset Backed Certificates, Series
199_-_ (the "Certificates") will represent undivided interests in the ML
Revolving Home Equity Loan Trust 199_-_ (the "Trust"). The Trust will be
created pursuant to a Pooling and Servicing Agreement (the "Agreement")
among MLCC Mortgage Investors, Inc. (the "Seller"), Merrill Lynch Credit
Corporation (referred to as "MLCC" or the "Servicer"), an affiliate of the
Seller, and Bankers Trust Company of California, N.A., as trustee (the
"Trustee"). The property of the Trust (the "Trust Fund") will consist
primarily of a pool (the "Mortgage Pool") of home equity revolving credit
line loans (the "Mortgage Loans"), to the extent of their Trust Balances,
made under certain home equity revolving credit line loan agreements. The
Mortgage Loans are secured by mortgages on one- to four-family residential
properties. As of _________, 1996 (the "Cut-off Date"), approximately
_____% of the Mortgage Loans by principal balance are first mortgages and
substantially all of the remainder are second mortgages. The Mortgage
Loans were originated by MLCC in the ordinary course of its lending
business. Terms used and not otherwise defined herein shall have the
respective meanings ascribed to such terms in the Prospectus dated ______
__, 1996 attached hereto (the "Prospectus").
The aggregate undivided interest in the Trust Fund represented by the
Certificates will, as of the Closing Date, represent approximately __% of
the outstanding principal balances of the Mortgage Loans. The remaining
undivided interest in the Trust Fund not represented by the Certificates
(the "Seller Interest") will be initially equal to approximately
$_________, which as of the Closing Date is approximately _% of the
outstanding principal balances of the Mortgage Loans. Only the
Certificates are offered hereby.
(LOGO)
On each Distribution Date, holders of the Certificates will be
entitled to receive, from and to the limited extent of funds available in
the Certificate Account, distributions with respect to interest and
principal calculated as set forth herein. The Certificates will not be
insured or guaranteed by the Seller, the Servicer, the Trustee or any
affiliate thereof. However, on or before the issuance of the Certificates,
the Seller will obtain from (AMBAC Indemnity Corporation) (MBIA Insurance
Corporation) (the "Certificate Insurer") a certificate guaranty insurance
policy (the "Certificate Insurance Policy"), relating to the Certificates,
in favor of the Trustee. The Certificate Insurance Policy will protect
holders of the Certificates against certain 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" herein.
(Cover continued on next page)
_______________
THE CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST FUND
ONLY AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE SELLER, THE
SERVICER, THE TRUSTEE OR ANY AFFILIATE THEREOF. THE CERTIFICATES ARE NOT
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY ANY OTHER PERSON OR
ENTITY (OTHER THAN THE CERTIFICATE INSURER), INCLUDING THE SELLER, THE
SERVICER, THE TRUSTEE OR ANY AFFILIATE THEREOF. DISTRIBUTIONS ON THE
CERTIFICATES WILL BE PAYABLE SOLELY FROM THE ASSETS TRANSFERRED TO THE
TRUST FUND FOR THE BENEFIT OF THE HOLDERS OF THE CERTIFICATES.
FOR A DISCUSSION OF CERTAIN FACTORS RELATING TO AN INVESTMENT IN THE
CERTIFICATES, SEE "SPECIAL CONSIDERATIONS AND RISK FACTORS" ON PAGE S-20
HEREIN.
_______________
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 ATTORNEY GENERAL OF THE STATE OF NEW YORK
HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
_______________
The Certificates are being offered by the Underwriter from time to
time to the public in negotiated transactions or otherwise at varying
prices to be determined, in each case, at the time of sale.
The aggregate proceeds to the Seller from the sale of the
Certificates will be approximately $___________, before deducting expenses
payable by the Seller, estimated to be $________ in the aggregate. The
Underwriter will reimburse the Seller for approximately $______ of such
expenses.
The Underwriter expects to enter into market making transactions in
the Certificates and may act as principal or agent in any such
transactions. Any such purchases or sales will be made at prices related
to prevailing market prices at the time of sale. This Prospectus
Supplement and the Prospectus may be used by the Underwriter in connection
with such transactions.
The Certificates offered hereby are offered subject to prior sale,
when, as and if issued by the Trust 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 Certificates will be made in book-entry form only
through the facilities of The Depository Trust Company, Cedel Bank S.A.
and Euroclear on or about ______, 199_ (the "Closing Date").
_______________
MERRILL LYNCH & CO.
_______________
The date of this Prospectus Supplement is _____________ __, 199__.
(Cover continued from previous page)
Interest on the Certificates will accrue from the Closing Date. Distributions
of principal and interest on the Certificates will be made on the ___th
day of each month or, if such day is not a Business Day, on the next
succeeding Business Day (each, a "Distribution Date"), beginning
in ____ 199__. On each Distribution Date, distributions with respect to
interest will be payable on the aggregate outstanding principal balance of
the Certificates at the Certificate Rate described herein which will
adjust monthly, beginning with the first Distribution Date, to a rate per
annum ____% in excess of the London interbank offered rate for one-month
U.S. dollar deposits ("LIBOR"), calculated and subject to the maximum rate
described herein.
The Seller Interest will be subordinated to the rights of the
Certificateholders to the limited extent of the Seller Subordinated Amount
as described herein.
The interests of the owners of the Certificates (the "Certificate
Owners") will be represented by book-entries on the records of The
Depository Trust Company ("DTC") and participating members thereof. See
"Description of the Certificates--Registration of the Certificates"
herein.
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the
"Underwriter"), an affiliate of the Seller and the Servicer, intends to
make a secondary market in the Certificates, but has no obligation to do
so. There can be no assurance that a secondary market for the Certificates
will develop, or if it does develop, that it will provide holders of the
Certificates with liquidity of investment at any particular time or for
the life of the Certificates. The Certificates will not be listed on any
securities exchange.
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 Seller or the Underwriter will promptly deliver, or cause to be
delivered, without charge, a paper copy of the Prospectus Supplement and
Prospectus.
REPORTS TO THE CERTIFICATE HOLDERS
Unless and until Definitive Certificates are issued, unaudited
monthly and annual reports, containing information concerning the Trust
Fund and prepared by the Servicer, will be sent on behalf of the Trust to
the Trustee and Cede & Co., as registered holder of the Certificates and
the nominee of DTC. Such reports may be made available to Certificate
Owners in accordance with the rules, regulations and procedures creating
and affecting DTC. See "Description of the Certificates--Reports to
Holders of the Certificates" and "--Registration of the Certificates"
herein. The Trust does not intend to provide any financial information to
the holders of the Certificates which has been examined and reported upon,
with an opinion expressed by, an independent public accountant.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Seller 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 this Prospectus and prior to the termination of the
offering of the Certificates made by this Prospectus Supplement are
incorporated herein by reference. The Seller hereby undertakes to provide
without charge to each person to whom this Prospectus Supplement and
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.
THE CERTIFICATES OFFERED HEREBY ARE BEING OFFERED BY THE SELLER 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 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 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.
_______________
UNTIL 90 DAYS FROM THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE 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.
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.
Securities Offered......ML Revolving Home Equity Loan Asset Backed
Certificates, Series 199_-_ (the "Certificates").
Issuer..................ML Revolving Home Equity Loan Trust 199_-_ (the
"Trust") is the issuer of the Certificates.
Seller..................MLCC Mortgage Investors, Inc., a wholly-owned,
limited purpose subsidiary of the Servicer and an
affiliate of the Underwriter, will transfer and
assign the Mortgage Loans to the Trust Fund in
exchange for the Certificates and the Seller
Interest. The Mortgage Loans will be acquired by the
Seller from MLCC.
Servicer................Merrill Lynch Credit Corporation, an indirect
wholly-owned subsidiary of Merrill Lynch & Co., Inc.
("ML & Co.") and an affiliate of the Seller and the
Underwriter, will service the Mortgage Loans.
Agreement...............The Certificates will be issued pursuant to a
Pooling and Servicing Agreement (the "Agreement")
dated as of ______, 199_ (the "Cut-off Date") among
the Seller, MLCC, as Servicer, and Bankers Trust
Company of California, N.A., as trustee (the
"Trustee").
Description of the
Certificates.......The Certificates represent an undivided interest
in the Trust Fund. Each Certificate represents
the right to receive monthly payments of interest
at the variable rate described below (the
"Certificate Rate") and payments of principal at
such times and to the extent provided below.
Distributions on Certificates will be made on the
__th day of each month or, if such day is not a
Business Day, on the next succeeding Business Day
(each, a "Distribution Date"), commencing in _____
199_, to holders of record of the Certificates in
an amount equal to such holder's respective
Percentage Interest multiplied by the amount
distributed in respect of the Certificates
on such Distribution Date.
The initial principal balance of the Certificates
will be $__________ (the "Original Certificate
Principal Balance") (approximate). The Certificate
Principal Balance as of any date is equal to
the Original Certificate Principal Balance minus the
aggregate amounts actually distributed as principal
to Certificateholders. See "Description of the
Certificates" herein and in the Prospectus.
The aggregate undivided interest in the Trust Fund
represented by the Certificates as of the date of
issuance of the Certificates
(the "Closing Date") will equal $__________ (the
"Original Invested Amount"), which represents
approximately ___% of the Cut-off Date Pool Balance.
Following the Closing Date, the "Invested Amount" with
respect to any date will be an amount equal to the
Original Invested Amount minus the sum of (i) the
total of Principal Collections previously distributed
to Certificateholders and (ii) the total of the amount
for each Distribution Date equal to the product of the
Floating Allocation Percentage and the Liquidation
Loss Amount (other than any losses that have been
reallocated to the Seller Interest as described under
"--Limited Subordination of the Seller Interest"
below). The Seller will hold the remaining undivided
interest (the "Seller Interest") in the Trust Balances
of the Mortgage Loans, which interest is equal to the
Pool Balance minus the Invested Amount and initially
will equal approximately _% of the Cut-off Date Pool
Balance.
With respect to any Distribution Date, the "Floating
Allocation Percentage" is the percentage equivalent of
a fraction determined by dividing the Invested Amount
by the Pool Balance as of the beginning of the related
Collection Period.
Certificate Rate........As to any Distribution Date, the per annum rate equal to
LIBOR on the second to the last business day prior to
the preceding Distribution Date (or as of ________,
199_, in the case of the first Distribution Date) plus
_____%, subject to a maximum rate described under
"Description of the Certificates--Distributions on the
Certificates" herein.
Denominations...........The Certificates will be issuable in minimum
denominations of $_______ and integral multiples of
$1,000 in excess thereof. The interest in the Trust
Fund evidenced by a Certificate (the "Percentage
Interest") will be equal to the percentage derived
by dividing the denomination of such Certificate by
the Original Certificate Principal Balance.
The Trust Fund..........The property of the Trust (the "Trust Fund") will
include: a pool of home equity revolving credit line
loans (the "Mortgage Loans"), to the extent of their
Trust Balances, made under certain home equity
revolving credit line loan agreements (the "Credit
Line Agreements") and secured by mortgages on one-to
four-family residential properties (the "Mortgaged
Properties") of which approximately ______% by Cut-off
Date Pool Balance are first mortgages and
substantially all of the remainder are second
mortgages; collections in respect of the Trust's
interest in the Mortgage Loans received on or after
the Cut-off Date; the Trust's interest in property
that secured a Mortgage Loan and which has been
acquired by foreclosure or deed in lieu of
foreclosure or otherwise; the Certificate Insurance
Policy; the Trust's interest in rights under certain
hazard insurance policies covering the Mortgaged
Properties, and certain other property relating to
the Mortgage Loans, as described more fully herein.
The Trust Fund will include all or a portion of
the unpaid principal balance of each Mortgage Loan
as of the Cut-off Date (the "Cut-off Date Trust
Balance") plus any additions thereto as a result of
advances made pursuant to the applicable Credit Line
Agreement (the "Additional Balance") during the
Managed Amortization Period. In the case of any
Common Mortgage Loan, the Cut-off Date Trust Balance
of such Mortgage Loan excludes the portion thereof
owned by one or more Prior Trusts. The aggregate of
the Cut-off Date Trust Balances of the Mortgage
Loans (the "Cut-off Date Pool Balance") is
$____________. With respect to any date, the "Pool
Balance" will be equal to the aggregate of the Trust
Balances of the Mortgage Loans as of such date.
Trust Balance...........The "Trust Balance" of a Mortgage Loan (other
than a Liquidated Mortgage Loan, which has a
Trust Balance of zero) on any day is equal to its
Cut-off Date Trust Balance, plus the Additional
Balances, if any, in respect of such Mortgage
Loan assigned to the Trust each month, minus all
collections credited against the principal balance of
such Mortgage Loan (excluding, in the case of any
Common Mortgage Loan, any such principal collections
applied to reduce the principal balance thereof owned
by one or more Prior Trusts) in accordance with the
related Credit Line Agreement prior to such day. In
certain cases the Cut-off Date Trust Balance of a
Mortgage Loan is zero. The "Loan Balance" of a
Mortgage Loan on any day is equal to the sum of the
Trust Balance and, in the case of a Common Mortgage
Loan, the portion of the principal balance of such
Mortgage Loan owned by one or more Prior Trusts.
Additional Balances.....During the Managed Amortization Period, all Additional
Balances will be transferred to and become property of
the Trust Fund. The Additional Balances initially will
be funded by MLCC. The Pool Balance will generally
fluctuate during a Collection Period because the
amount of draws by borrowers representing Additional
Balances and the amount of principal payments by
borrowers will usually differ from day to day. Because
the Seller Interest represents the interest in the
Trust Fund not represented by the Certificates, the
amount of the Seller Interest will generally fluctuate
during a Collection Period as draws are made and as
principal is paid under the Mortgage Loans.
Common Mortgage Loans...Certain balances outstanding on ________________, 19__
with respect to certain of the Mortgage Loans were
sold by Merrill Lynch Home Equity Acceptance, Inc.
("MLHEA"), an affiliate of the Seller, the Servicer
and the Underwriter, to ML Home Equity Loan Trust
____ ("Trust 1989"); certain balances outstanding on
___________ with respect to certain of the Mortgage
Loans were sold by MLHEA to ML Home Equity Loan Trust
_______ ("Trust 1991"); certain balances outstanding
on ___________ with respect to certain of the Mortgage
Loans were sold by MLHEA to ML Home Equity Loan Trust
_____ ("Trust 1993"); certain balances outstanding on
____________ with respect to certain of the Mortgage
Loans were sold by MLHEA to ML Home Equity Loan Trust
_______ ("Trust 1994-1"); certain balances outstanding
on __________, 1994 with respect to certain of the
Mortgage Loans were sold by the Seller to ML Home
Equity Loan Trust ______ ("Trust 1994-2"); certain
balances outstanding on _________ with respect to
certain of the Mortgage Loans were sold by the Seller
to ML Home Equity Loan Trust ______ ("Trust 1995-1");
and certain balances outstanding on ________ with
respect to certain of the Mortgage Loans were sold by
the Seller to ML Home Equity Loan Trust ______ ("Trust
1995-2" and, together with Trust 1989, Trust 1991,
Trust 1993, Trust 1994-1, Trust 1994-2 and Trust
1995-1, the "Prior Trusts"). Mortgage Loans with
balances sold to one or more of the Prior Trusts are
referred to as "Common Mortgage Loans". The
Certificates will not represent an interest in the
portion of a Common Mortgage Loan owned by one or more
of the Prior Trusts.
The Trust Fund includes _______ Common Mortgage Loans
having $__________ in aggregate Trust Balances which
represent ______% of all the Trust Balances sold and
assigned to the Trust Fund. See the table captioned
"Data on Common Mortgage Loans" under "The Mortgage
Loan Pool" herein. MLCC, which will act as Servicer
of the Trust Fund, also acts as servicer for each of
the Prior Trusts. Bankers Trust Company of Californi,
N.A., which will act as Trustee, also acts as the
trustee for each of the Prior Trusts.
The Mortgage Loans......The Mortgage Loans are home equity revolving credit line
loans secured by mortgages (of which approximately
_____% by Cut-off Date Pool Balance are first
mortgages and substantially all of the remainder are
second mortgages) on residential one- to four-family
properties. The Mortgage Loans were originated by MLCC
in the ordinary course of its lending business. See
"The Mortgage Loan Pool" herein for a description of
the Mortgage Loans.
Each Mortgage Loan bears interest at a variable rate
which may change daily or monthly subject to a maximum
per annum interest rate. The combined loan-to-value
ratio (the "Combined Loan-to-Value Ratio") (computed
at its maximum permitted principal amount or "Credit
Limit" plus the principal balance of any related
senior mortgage loan) of each Mortgage Loan, except
with respect to ____% of the Mortgage Loans by Cut-off
Date Pool Balance, which had Combined Loan-to-Value
Ratios in excess of 85%, did not exceed 85% at the
time of execution of the Credit Line Agreement, based
upon an appraisal of the Mortgaged Property obtained
by MLCC in the course of processing the loan
application. The term to maturity of each Mortgage
Loan at origination was ten years. Interest on each
Mortgage Loan is payable on the fifteenth day of each
month and is computed daily on its outstanding Loan
Balance at a floating rate per annum (the "Loan Rate")
equal, at any time, to
the extent not limited by its applicable interest
rate cap, to a specified margin (the "Margin") over
the "prime rate" at the time in effect, for such day,
as published in The Wall Street Journal. Interest is
billed monthly in arrears based on the daily
outstanding balance during the related Collection
Period. Principal may be drawn down (up to the Credit
Limit) or repaid under each Mortgage Loan from time
to time. There are no required payments of principal
prior to the final maturity of each Mortgage Loan. The
entire outstanding principal balance of each Mortgage
Loan is due at maturity. See "The Mortgage Loan Pool"
herein.
The Trust Balances of the Mortgage Loans at the Cut-off
Date ranged from $0 to $________ and averaged $_______
for those Mortgage Loans with a Cut-off Date Trust
Balance greater than $0. Credit Limits ranged from
$______ to $_________ and averaged $________. The
weighted average credit limit utilization rate
(computed by dividing the Loan Balance as of the
Cut-off Date by the related Credit Limit) was
_______%. The weighted average remaining term to
stated maturity at the Cut-off Date was _____ months
and the latest scheduled maturity of any Mortgage Loan
is ______, 20__. The weighted average second mortgage
ratio for Mortgage Loans in a junior lien position was
______%. The "Second Mortgage Ratio" of a Mortgage
Loan is the ratio computed (i) in the case of a Common
Mortgage Loan, by dividing the difference between
(a) its Credit Limit and (b) the total Prior Trust
balance as of the Cut-off Date of such Common Mortgage
Loan, by the sum of its Credit Limit and the
outstanding balances of any senior mortgages as of
the date of the origination of such Common Mortgage
Loan, and (ii) in the case of any other Mortgage Loan,
by dividing its Credit Limit by the sum of its Credit
Limit and the outstanding balances of any senior
mortgages as of the date of the origination of such
Mortgage Loan.
The borrowers obligated on approximately ______% of the
Mortgage Loans by Cut-off Date Pool Balance are
employees or independent contractors of ML & Co. or
subsidiaries thereof. See "MLCC and Its Equity
Access(R) Program" herein.
The Mortgage Loans are covered by standard hazard
insurance policies insuring against losses due to
fire and various other causes. See "Description of the
Certificates--Servicing and Hazard Insurance" herein.
SUMMARY OF MORTGAGE LOAN
CHARACTERISTICS AS OF THE CUT-OFF DATE
(APPROXIMATE)
Pool Balance...................................................... $
Number of Mortgage Loans..........................................
Number of Mortgage Loans with a $0 Cut-off Date Trust Balance.....
Weighted Average Loan Rate........................................ %
Weighted Average Maximum Loan Rate(1)............................. %
Weighted Average Margin........................................... %
Range of Margins.................................................. % to %
Weighted Average Combined Loan-to-Value Ratio at Origination...... %
Weighted Average Remaining Term to Stated Maturity................ months
Range of Remaining Terms to Stated Maturity....................... to months
Range of Trust Balances.......................................$ to $
Average Trust Balance(2).......................................... $
Latest Maturity Date.............................................. , 20
Weighted Average Credit Limit Utilization Rate.................... %
Weighted Average Second Mortgage Ratio............................ %
__________
(1) For those Mortgage Loans subject to specified lifetime interest rate caps.
(2) For those Mortgage Loans with a Cut-off Date Trust Balance greater than $0.
Removal of Certain
Mortgage Loans..........The Seller may, but shall not be obligated to, remove
from the Trust Fund on the last business day of any
Collection Period (a "Removal Date") during the
Managed Amortization Period, the entire Trust Balance
of certain Mortgage Loans without notice to the
Certificateholders. The Seller is permitted to
designate the Mortgage Loans to be removed. Mortgage
Loans so designated will only be removed upon
satisfaction of certain conditions specified in the
Agreement, including:
(i) the Seller Interest as of the Removal Date
(after giving effect to such removal) exceeds
the Minimum Seller Interest;
(ii) the Seller shall have delivered to the Trustee
a "Mortgage Loan Schedule" containing a list
of all Mortgage Loans remaining in the Trust
Fund after such removal;
(iii) the Seller shall represent and warrant that no
selection procedures which are adverse to the
interests of the Certificateholders or the
Certificate Insurer were used by the Seller in
selecting such Mortgage Loans;
(iv) in connection with the first such removal of
Mortgage Loans, the Rating Agencies shall have
been notified of the proposed transfer and
prior to the Removal Date shall not have
notified the Seller in writing that such
transfer would result in a reduction or
withdrawal of the ratings assigned to the
Certificates without regard to the Certificate
Insurance Policy; and
(v) the Seller shall have delivered to the Trustee
and the Certificate Insurer an officer's
certificate confirming the conditions set forth
in clauses (i) through (iii) above.
The "Minimum Seller Interest" as of any date is an
amount equal to the lesser of (i) _% of the Pool
Balance on such date and (ii) the Seller Interest as
of the Closing Date.
Collections.............Collections on the Mortgage Loans will be allocated in
accordance with the Credit Line Agreements between
amounts collected in respect of interest and amounts
collected in respect of principal.
As to any Distribution Date, "Interest Collections" on
the Mortgage Loans will be equal to the aggregate
amount collected on the Mortgage Loans during the
related Collection Period that is allocated to
interest pursuant to the terms of the Credit Line
Agreements, including Net Liquidation Proceeds so
allocated, reduced by the aggregate Servicing Fee for
such Collection Period. As to any Distribution Date,
"Trust Interest Collections" will be equal to the
total amount of the Trust's share of Interest
Collections. The Trust's share of Interest
Collections for each Mortgage Loan will be the
portion of the amount allocated to interest on such
Mortgage Loan equal to interest accrued at the
Net Loan Rate on the Trust Balance during the related
Interest Period. "Interest Period" means the monthly
period during which interest accrues on the Mortgage
Loans. The first Interest Period will be ______ 1996.
As to any
Distribution Date, the "Collection Period" is
generally the calendar month preceding such
Distribution Date. The "Net Loan Rate" is the Loan
Rate minus the Servicing Fee Rate.
As to any Distribution Date, "Principal Collections"
will be equal to the aggregate amount collected on
the Mortgage Loans during the related Collection
Period that is allocated to principal pursuant to the
terms of the Credit Line Agreements. Principal
Collections on a Common Mortgage Loan will be applied
first to reduce to zero the applicable portion thereof
owned by one or more Prior Trusts before any such
collections are applied in reduction of the Trust
Balance of such Common Mortgage Loan. As to any
Distribution Date, "Trust Principal Collections" will
be equal to the total amount of the Trust's share of
Principal Collections. The Trust's share of Principal
Collections on each Mortgage Loan will equal the sum
of (i) the amount allocated to principal that was
received from the borrower in the related Collection
Period (excluding, in the case of a Common Mortgage
Loan, principal allocated to reduce the portion of
such Common Mortgage Loan owned by one or more Prior
Trusts in accordance with the second preceding
sentence), (ii) the principal portion of Net Trust
Liquidation Proceeds and Trust Insurance Proceeds
and (iii) the principal portion of the Transfer
Deposit Amount of a retransferred Mortgage Loan.
"Net Trust Liquidation Proceeds" with respect to a
Mortgage Loan are equal to the aggregate of all
amounts received upon liquidation of such Mortgage
Loan, including insurance proceeds, reduced by related
expenses, plus accrued and unpaid interest thereon
through the date of liquidation, but not including
the portion, if any, of such amount that exceeds the
Trust Balance of such Mortgage Loan at the end of the
preceding Collection Period.
"Trust Insurance Proceeds" with respect to a Mortgage
Loan and Collection Period are the Trust's share of
insurance proceeds paid to the Servicer during such
Collection Period pursuant to any insurance policy
covering such Mortgage Loan, reduced by related
expenses, which (i) are not liquidation proceeds,
(ii) are not applied to the restoration or repair of
the related Mortgaged Property or released to the
related borrower in accordance with the normal
servicing procedures of the Servicer and (iii) will
be applied by the Servicer in reduction of the Loan
Balance of such Mortgage Loan, but not including the
portion, if any, of such amount that exceeds the
Trust Balance of such Mortgage Loan at the end of
such Collection Period.
"Transfer Deposit Amount" with respect to any
Distribution Date is the amount of cash required to
be deposited in the Certificate Account by the
Servicer to maintain the Minimum Seller Interest with
respect to a repurchased Defective Mortgage Loan after
taking into account any transfer of an Eligible
Substitute Mortgage Loan to the Trust with respect to
such Defective Mortgage Loan.
Application of
Certificate
Interest
Collections..........As to any Distribution Date, interest allocable to the
Certificates ("Certificate Interest Collections") will
equal the product of Trust Interest Collections and the
Floating Allocation Percentage. The remaining amount of
Trust Interest Collections will be allocated to the
Seller Interest as more fully described herein.
On each Distribution Date, the Certificate Interest
Collections will be applied in the following order of
priority:
(i) to pay the premium for the Certificate
Insurance Policy;
(ii) as payment for the accrued interest due and
any overdue accrued interest at the
applicable Certificate Rate on the Certificate
Principal Balance for the related Accrual
Period;
(iii) to pay Certificateholders the "Investor Loss
Amount" equal to the product of the Floating
Allocation Percentage and the Liquidation Loss
Amount for such Distribution Date;
(iv) as payment for any Investor Loss Amount that
was not previously (a) paid from Certificate
Interest Collections, (b) paid from Trust
Interest Collections and Trust Principal
Collections allocable to the Seller Interest or
reallocated to reduce the Seller Interest up to
the Seller Subordinated Amount as described
under "--Limited Subordination of the Seller
Interest" below, (c) covered by
overcollateralization as described under
"--Overcollateralization" below or (d) funded
by draws on the Certificate Insurance Policy;
(v) to reimburse prior draws from the Certificate
Insurance Policy, together with interest
thereon, and to pay any fees and expenses owed
to the Certificate Insurer pursuant to the
Insurance Agreement, together with interest
thereon;
(vi) to pay principal on the Certificates until the
Invested Amount exceeds the Certificate
Principal Balance by the amount, if any, equal
to (x) the Required Amount minus (y) the Seller
Subordinated Amount (such payment is referred
to as the "Accelerated Principal Distribution
Amount"); and
(vii) to the Seller.
Payments to Certificateholders pursuant to clause (ii)
will be interest payments on the Certificates.
Payments to Certificateholders pursuant to clauses
(iii) and (iv) will be principal payments on the
Certificates and will reduce the Certificate
Principal Balance. Although payments of the
Accelerated Principal Distribution Amount, if any, to
Certificateholders pursuant to clause (vi) will reduce
the Certificate Principal Balance, such payments will
not reduce the Invested Amount. Payments to
Certificateholders of Trust Interest Collections and
Trust Principal Collections allocable to the Seller
Interest as described under "--Limited Subordination
of the Seller Interest" below will also reduce the
Certificate Principal Balance. Payments of the
Accelerated Principal Distribution Amount are neither
guaranteed by the Certificate Insurance Policy nor
supported by the Seller Subordinated Amount.
An "Accrual Period" for any Distribution Date is the
period beginning on the preceding Distribution Date
(or the Closing Date in the case of the first
Distribution Date) and ending on the day preceding
such Distribution Date.
For each Distribution Date occurring on or prior to the
__th Distribution Date, the "Required Amount" will
be ___% of the Cut-off Date Pool Balance. For each
Distribution Date thereafter, the Required Amount
will be the lesser of (i) _% of the Cut-off Date
Pool Balance and (ii) _% of the outstanding Pool
Balance; provided that in no event will the
Required Amount be less than a floor amount equal
to the greater of (x) _% of the Cut-off Date Pool
Balance and (y) __% of the aggregate Trust Balances
of all Mortgage Loans delinquent 91 days or more as
of the end of the related Collection Period.
Notwithstanding the foregoing, for each Distribution
Date, if the cumulative principal losses on the
Trust Balances of the Mortgage Loans as of the end
of the related Collection Period exceed ___% of the
Cut-off Date Pool Balance, then the Required Amount
will be ____% of the Cut-off Date Pool Balance.
A "Liquidation Loss Amount" with respect to any
Liquidated Mortgage Loan and Distribution Date will
be the unrecovered Trust Balance thereof at the end
of the related Collection Period in which such
Mortgage Loan became a Liquidated Mortgage Loan,
after giving effect to the principal portion of Net
Trust Liquidation Proceeds in connection therewith.
Principal Payments
from Principal
Collections.............For the period beginning on the first Distribution Date
and, unless a Rapid Amortization Event shall have
earlier occurred, ending on the Distribution Date in
____ 20_ (the "Managed Amortization Period"), the
amount of Trust Principal Collections payable to
Certificateholders on each Distribution Date will
equal, to the extent funds are available therefor
from Trust Principal Collections, the Scheduled
Principal Collections Payment for such Distribution
Date. On any Distribution Date during the Managed
Amortization Period, the "Scheduled Principal
Collections Payment" will equal the lesser of (i) the
Maximum Principal Payment and (ii) the Alternative
Principal Payment.
For the period beginning with the first Distribution
Date following the end of the Managed Amortization
Period (the "Rapid Amortization Period"), the amount
of Trust Principal Collections payable to
Certificateholders on each Distribution Date will be
equal to the Maximum Principal Payment.
With respect to any Distribution Date, the "Maximum
Principal Payment" will equal the product of the
Trust Principal Collections and the Fixed Allocation
Percentage. With respect to any Distribution Date,
the "Alternative Principal Payment" is equal to the
amount, but not less than zero, of Trust Principal
Collections minus the aggregate of Additional Balances
created during the related Collection Period.
With respect to any date of determination, the "Fixed
Allocation Percentage" will equal the greater of (i)
___% and (ii) the percentage equivalent (but not in
excess of 100%) of a fraction, the numerator of which
is the Invested Amount and the denominator of which
is the Pool Balance as of the end of such day. The
Fixed Allocation Percentage initially will be __%.
On the Distribution Date in ____ 20__ (the "Stated
Maturity Date"), to the extent funds are available
therefor, Certificateholders will be entitled to
receive as payment of principal an amount equal to
the outstanding Certificate Principal Balance. To
the extent funds are not otherwise available for
such payment, a
draw on the Certificate Insurance Policy for such
insufficiency will be made on the Stated Maturity
Date.
Distributions of Trust Principal Collections based upon
the Fixed Allocation Percentage may result in
distributions of principal to Certificateholders in
amounts that are greater relative to the declining
Pool Balance than would be the case if the Floating
Allocation Percentage were used to determine the
percentage of Trust Principal Collections distributed
in respect of the Invested Amount.
The aggregate distributions of principal to
Certificateholders will not exceed the Original
Certificate Principal Balance.
The Seller will be entitled to receive the portion of
the Trust Principal Collections on each Distribution
Date that is not distributable on the Certificates;
provided that such distribution will not reduce the
Seller Interest below the Minimum Seller Interest as
of such related Distribution Date.
Certificate
Insurance Policy........On or before the Closing Date, the Certificate
Insurance Policy will be issued by the Certificate
Insurer pursuant to the provisions of the Agreement
and the Insurance and Indemnity Agreement (the
"Insurance Agreement"), among the Seller, the Servicer
and the Certificate Insurer.
The Certificate Insurance Policy will unconditionally
and irrevocably guarantee principal and interest
payments on the Certificates at the times and in the
amounts described below. On each Distribution Date,
other than any Dissolution Distribution Date, a draw
will be made on the Certificate Insurance Policy
equal to (i) the amount by which interest accrued at
the Certificate Rate on the outstanding Certificate
Principal Balance exceeds all amounts on deposit in
the Certificate Account available to be distributed
therefor plus (ii) after the Seller Subordinated
Amount has been reduced to zero, the amount, if any,
by which the Certificate Principal Balance as of such
Distribution Date (after giving effect to all other
amounts distributable and allocable to principal on
the Certificates) exceeds the Invested Amount as of
such Distribution Date (after giving effect to all
other amounts distributable and allocable to principal
on the Certificates).
In addition, the Certificate Insurance Policy will
guarantee the payment of the outstanding Certificate
Principal Balance on the Stated Maturity Date (after
giving effect to all other amounts distributable and
allocable to principal on the Certificates).
In the absence of payments under the Certificate
Insurance Policy, Certificateholders will directly
bear the credit and other risks associated with their
undivided interest in the Trust Fund. See "The
Certificate Insurance Policy and the Certificate
Insurer" herein.
The Certificate Insurance Policy does not guarantee to
Certificateholders, and does not protect against any
adverse consequences caused by, any specified rate of
prepayments of the Mortgage Loans.
Certificate Insurer.....(AMBAC Indemnity Corporation) (MBIA Insurance
Corporation).
Limited Subordination of the
Seller Interest.......If Certificate Interest Collections on any Distribution
Date are insufficient to pay the sum of (i) the
premium for the Certificate Insurance Policy, (ii)
accrued interest due and any overdue accrued
interest on the Certificates, and (iii) the Investor
Loss Amount on such Distribution Date (such
insufficiency is referred to as the "Deficiency
Amount"), Trust Interest Collections and Trust
Principal Collections allocable to the Seller
Interest (but not in excess of the then current
Seller Subordinated Amount, determined as described
below) will be applied to cover the Deficiency
Amount. The portion of the Deficiency Amount in
respect of clause (iii) above not covered by such
collections (up to the remaining Seller Subordinated
Amount and not in excess of the Investor Loss Amount)
will be reallocated to, and will reduce, the Seller
Interest. If such Certificate Interest Collections
plus the amount of collections allocable to the
Seller Interest which have been so applied to cover
the Deficiency Amount are together insufficient to
pay the amount set forth in item (ii) of the
definition of Deficiency Amount, then a draw will be
made on the Certificate Insurance Policy to cover
such shortfall. After the Seller Subordinated Amount
has been reduced to zero, the Deficiency Amount will
no longer be covered by the Seller Interest as
described above.
With respect to any Distribution Date, the "Seller
Subordinated Amount" equals the least of (i) __% of
the Cut-off Date Pool Balance minus the sum of (a)
the aggregate amount of principal collections
allocable to the Seller Interest that have previously
been distributed to Certificateholders to cover a
Deficiency Amount as described above and (b) the
aggregate amount of Investor Loss Amounts that have
previously been reallocated in reduction of the Seller
Interest as described above; or (ii) the Seller
Subordinated Amount on the previous Distribution Date;
or (iii) the Required Amount.
The Seller Subordinated Amount at any time may also be
further reduced if such reduction is consented to by
both of the Rating Agencies and the Certificate
Insurer and upon satisfaction of certain other
conditions specified in the Agreement.
Overcollateralization...The payment of Accelerated Principal Distribution
Amounts, if any, to Certificateholders may result in
the Invested Amount being greater than the Certificate
Principal Balance, thereby creating
overcollateralization. On any Distribution Date,
such overcollateralization, if any, will be available
to absorb any Investor Loss Amount that is not
covered either by (i) Certificate Interest Collections
remaining after the payment of the premium for the
Certificate Insurance Policy and the distribution of
interest on the Certificates or (ii) the limited
subordination of the Seller Interest as described
above. Any Investor Loss Amounts not covered by
Certificate Interest Collections, the limited
subordination of the Seller Interest or such
overcollateralization will be covered by draws on the
Certificate Insurance Policy to the extent provided
therein.
Overcollateralization will be created only by the
payments, if any, of Accelerated Principal
Distribution Amounts. As of the Closing Date, the
Invested Amount
will be equal to the Original Certificate Principal
Balance and, accordingly, there will not be any
initial overcollateralization. Payment of the
Accelerated Principal Distribution Amount on a
Distribution Date is made in an amount equal to the
excess, if any, of the Required Amount over the Seller
Subordinated Amount. As of the Closing Date, the
Required Amount is equal to the Seller Subordinated
Amount. Thus, no Accelerated Principal Distribution
Amount is expected to be paid, and no
overcollateralization will be created, on the first
Distribution Date. Any payments of Trust Principal
Collections allocable to the Seller's Interest that
decrease the Seller Subordinated Amount would be
expected to result in a payment of the Accelerated
Principal Distribution Amount and the creation of, or
increase in, overcollateralization if the Required
Amount is in excess of the Seller Subordinated Amount
on a Distribution Date and there are sufficient Trust
Interest Collections. If the Seller Subordinated
Amount is reduced to zero, then payments of the
Accelerated Principal Distribution Amount from Trust
Interest Collections may be made in an amount up to
the Required Amount. Any such payments would result in
increases in the level of overcollateralization.
Advances................The Servicer will be obligated to make advances of cash,
which will be part of the Trust Interest Collections
and Trust Principal Collections, in an amount equal to
all amounts of interest and principal, if any, at the
time known by the Servicer to be delinquent on the
Trust Balance of each Mortgage Loan and not previously
advanced, but only to the extent that the Servicer
believes that such amounts will be recoverable by it.
Any advance made by the Servicer with respect to the
Trust Balance of each Mortgage Loan will be
reimbursable to it. The Servicer will be entitled to
reimburse itself in respect of otherwise
non-recoverable advances from funds otherwise
distributable to Certificateholders. See "Description
of the Certificates--Advances" herein.
Servicing Fee...........The Servicer will receive a fee (the "Servicing Fee")
computed daily at an annual rate equal to 0.__% (the
"Servicing Fee Rate") on the aggregate Loan Balance
of the Mortgage Loans outstanding during a Collection
Period and, for any Distribution Date, the Servicing
Fee will be deducted from collections allocable to
payments of interest received during the related
Collection Period. See "Description of the
Certificates--Servicing and Other Compensation and
Payment of Expenses" herein.
Substitution or
Repurchase
of Mortgage Loans.....The Servicer has the option either to substitute the
balance of one or more new Mortgage Loans or to
repurchase the Trust Balance of a Mortgage Loan that
was actually retransferred to the Servicer immediately
prior to a Distribution Date on account of (i) a
breach of a representation or warranty regarding such
Mortgage Loan that materially and adversely affects
the interests of the Certificateholders, (ii) a
material defect in the related loan documentation,
(iii) a loss resulting from retention by the Servicer
of the related loan documentation (each Mortgage Loan
described in (i) through (iii) above is a "Defective
Mortgage Loan"), or (iv) the occurrence of certain
circumstances specified in the Agreement for which the
Servicer is either required or permitted to
repurchase, or substitute for, the Trust Balance of a
Mortgage Loan. Any Mortgage Loan so substituted (an
"Eligible Substitute Mortgage
Loan") must, among other things, have a Trust Balance
(or if the new Mortgage Loan is a Common Mortgage
Loan, a balance conveyed to the Trust Fund) not
substantially greater or less than the Trust Balance
of the Mortgage Loan for which it is being
substituted, and a Loan Rate of not less then the
current Loan Rate of the Defective Mortgage Loan it
replaces and not more than __% in excess thereof.
Termination;
Retirement of
the Certificates......The Trust Fund will terminate on the Distribution Date
following the later of (A) payment in full of all
amounts owing to the Certificate Insurer and (B) the
earliest of (i) the Distribution Date on which the
Certificate Principal Balance has been reduced to
zero, (ii) the final payment or other liquidation of
the last Mortgage Loan in the Trust Fund, (iii) the
optional transfer to the Servicer of the Mortgage
Loans, as described below and (iv) the Distribution
Date in ______ 20__.
At their option at any time when the outstanding
Certificate Principal Balance is less than 10% of the
Original Certificate Principal Balance, the Servicer,
or in the absence of the exercise thereof by the
Servicer, the Certificate Insurer, may purchase from
the Trust Fund all remaining Mortgage Loans and other
property held by the Trust Fund. The purchase price
will be equal to the sum of the outstanding
Certificate Principal Balance and accrued and unpaid
interest thereon at the Certificate Rate through the
day preceding the final Distribution Date. See
"Description of the Certificates--Termination;
Retirement of the Certificates" herein.
In addition, the Trust may be liquidated as a result of
certain events of insolvency, receivership or
conservatorship relating to the Seller. See
"Description of the Certificates--Rapid Amortization
Events" herein.
Certain Federal Income
Tax Considerations....In the opinion of tax counsel to the Seller, the
Certificates will be properly characterized as
indebtedness for federal income tax purposes. Under
the Agreement, the Seller and the Certificateholders
will agree to treat the Certificates as indebtedness
for federal income tax purposes. See "Certain Federal
Income Tax Consequences" herein and in the Prospectus.
ERISA Considerations....A fiduciary of a pension or other employee benefit plan
(a "Plan") subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"),
contemplating the purchase of Certificates should
consult with its counsel before making a purchase and
the fiduciary and such legal advisors should consider
the possible application of Prohibited Transaction
Exemption 90-29 and certain other exemptions described
herein. See "ERISA Considerations" herein and in the
Prospectus.
Legal Investment
Considerations........The Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 because, among other
reasons, most of the mortgages securing the Mortgage
Loans are not first mortgages. Accordingly, many
institutions with legal authority to invest in
comparably rated securities based on first mortgage
loans may not be legally authorized to invest in the
Certificates. See "Legal Investment Considerations"
herein.
Use of Proceeds.........Substantially all of the net proceeds from the sale of
the Certificates will be applied by the Seller to the
purchase price of the Trust Balances of the
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Mortgage Loans and to pay expenses connected with
pooling the Mortgage Loans and issuing the
Certificates.
Certificate Rating......It is a condition to the issuance of the Certificates
that they be rated _____ by
____________________________________ ("___") and
_____ by _____________________________ ("______" and
together with ___, the "Rating Agencies"). 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.
There can be no assurance that the ratings assigned
to the Certificates on the date the Certificates are
initially issued will not be lowered or withdrawn at
any time by such Rating Agencies. 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 the
Certificates..........The Certificates initially will be issued in book-entry
form. Persons acquiring beneficial ownership interests
in the Certificates ("Certificate Owners") may elect
to hold their Certificate interests through
The Depository Trust Company ("DTC"), in the United
States, or through Centrale de Livraison de Valeurs
Mobilieres S.A. ("CEDEL") or the Euroclear System
("Euroclear"), in Europe. Transfers within DTC, CEDEL
or Euroclear, as the case may be, will be in
accordance with the usual rules and operating
procedures of the relevant system. So long as the
Certificates are Book-Entry Certificates, such
Certificates will be evidenced by one or more
Certificates registered in the name of Cede & Co.
("Cede"), as the nominee of DTC, or one of the
relevant depositaries (collectively, the "European
Depositaries"). The Certificates will initially be
registered in the name of Cede. The interests of
Certificateholders will be represented by book
entries on the records of DTC and participating
members thereof. Cross-market transfers between
persons holding directly or indirectly through DTC,
on the one hand, and counterparties holding directly
or indirectly through CEDEL or Euroclear, on the
other, will be effected within DTC through Citibank
N.A. or Morgan Guaranty Trust Company of New York,
the relevant depositaries of CEDEL or Euroclear,
respectively, and each a participating member of DTC.
No Certificate Owner will be entitled to receive a
definitive certificate representing such person's
interest, except in the event that Definitive
Certificates are issued under the limited
circumstances described herein. All references
herein to "holders" or "Certificateholders" shall
reflect the rights of Certificate Owners only as
such rights may be exercised through DTC and
participating members thereof for so long as such
Certificates are held by DTC. See "Special
Considerations and Risk Factors -- Book-Entry
Certificates", "Description of the Certificates --
Registration of the Certificates" herein and "Annex
I" hereto.
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<PAGE.
SPECIAL CONSIDERATIONS AND RISK FACTORS
Limited Liquidity. There is currently no market for the Certificates.
While the Underwriter currently intends to make a market in the
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 Certificates with
liquidity of investment or that it will continue for the life of the
Certificates. The Certificates will not be listed on any securities
exchange.
Issuance of the Certificates in book-entry form may reduce the liquidity
of such Certificates in the secondary trading market since investors may
be unwilling to purchase Certificates for which they cannot obtain
physical certificates. See "Description of the Certificates --
Registration of Certificates" herein.
Nature of Security; Subordinate Mortgage Loans. The Mortgage Loans are
revolving credit line loans and a majority of the Mortgage Loans are
secured by second mortgages on residential properties. In the case of
liquidations, Mortgage Loans secured by second mortgages are entitled to
proceeds that remain from the sale of the related Mortgaged Property after
any related first mortgage loan has been satisfied in full (including any
related foreclosure costs). In the event that such proceeds are
insufficient to satisfy both loans in the aggregate, the Trust Fund and,
accordingly, the Certificateholders, as the holders of the second mortgage
loan, bear (i) the risk of loss unless a deficiency judgment is obtained
and realized upon and (ii) even if there is full realization upon a
deficiency judgment, the risk of delay in distributions pending such
realization. See "Certain Legal Aspects of the Mortgage Loans" in the
Prospectus.
Since no payments in reduction of the entire outstanding principal
balances of the Mortgage Loans are required prior to their maturity, the
remaining principal balance of a Mortgage Loan will be due in a balloon
payment at maturity. The ability of a borrower to make such payment may be
dependent on the ability to obtain refinancing of the balance due on the
Mortgage Loan. In addition, an increase in interest rates over the Loan
Rate applicable at the time the Mortgage Loan was originated may have an
adverse effect on the borrower's ability to pay the required monthly
interest payment. Such an increase in interest rates may also reduce the
borrower's ability to obtain refinancing and to pay the balance of the
Mortgage Loan at its maturity.
Even assuming that the Mortgaged Properties provide adequate security
for the Mortgage Loans, substantial delay could be encountered in
connection with the liquidation of defaulted Mortgage Loans and
corresponding delays in the receipt of related proceeds by
Certificateholders could occur. Further, liquidation expenses (such as
legal fees, real estate taxes, and maintenance and preservation expenses)
will reduce the proceeds payable to Certificateholders and thereby reduce
the security for the Mortgage Loans. In the event any Mortgaged Properties
fail to provide adequate security for the related Mortgage Loans, required
payments under the Certificate Insurance Policy were not made, and the
protection provided by the limited subordination of the Seller Interest
and the availability of overcollateralization have been exhausted,
Certificateholders could experience a loss on their investments.
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 Loan Balances, together with the outstanding balances of
any senior lien thereon, equal or exceed the values of the Mortgaged
Properties. Such declines would adversely affect the position of a second
mortgagee before having such an effect on that of the related first
mortgagee and could extinguish the interest of the holder of a second
mortgage on the Mortgaged Property. Residential real estate markets in
many states have softened in recent years. There is no reliable
information available to the Seller with respect to the rate at which real
estate values have declined in such states. The Seller can neither
quantify the impact of such declines in property values nor predict how
long such decline may continue or when such declines will end. During a
period of such declines, the rates of delinquencies, foreclosures and
losses on the Mortgage Loans would be expected to be higher than those
experienced in the mortgage lending industry in general.
Moreover, in many cases home equity revolving credit line borrowers have
primary residences with above average values, and those properties may
experience greater relative declines in value than other properties with
lower values. A rise in interest rates over a period of time and the
general condition of the Mortgaged Property as well as other factors may
have the effect of reducing the value of the Mortgaged Property from the
appraised value at the time the Mortgage
Loan was originated. If there is a reduction in value of the Mortgaged Property,
the ratio of the amount of the Mortgage Loan to the value of the Mortgaged
Property may increase over what it was at the time the Mortgage Loan was
originated. Such an increase may reduce the likelihood of liquidation or other
proceeds being sufficient to satisfy the Mortgage Loan after satisfaction of
any senior liens. In addition, if the borrower has an adjustable rate first
mortgage loan, any increase in the interest rate thereon may adversely affect
such borrower's ability to make payments on the related Mortgage Loan.
Cash Flow Considerations. The rights of the holder of the Seller
Interest to receive Certificate Interest Collections remaining after the
payment of accrued interest due and any overdue accrued interest on the
Certificates, along with certain other expenses, and to receive Trust
Interest Collections and Trust Principal Collections allocable to the
Seller Interest (but not in excess of the then current Seller Subordinated
Amount) are subordinated to certain rights of holders of the Certificates
in order to enhance the likelihood of receipt by holders of the
Certificates of the full amount of their scheduled distributions of
interest on each Distribution Date and the ultimate receipt by such
holders of principal equal to the Original Certificate Principal Balance.
This subordination feature must absorb the risks associated with a
possible narrowing of the spread between the prime rate (which is the
index for determining the Loan Rate for each Mortgage Loan) and the
Certificate Rate (which is based upon LIBOR plus a specified margin). If
this spread disappears (i.e., the Certificate Rate derived from the LIBOR
formula exceeds the weighted average of the Loan Rates (net of the
Servicing Fee Rate of the Mortgage Loans and the monthly premium due on
the Certificate Insurance Policy)), the Certificate Rate for the related
Distribution Date will be the weighted average of such net Loan Rates of
the Mortgage Loans during the prior Collection Period. As described more
fully herein, the percentage amount added to the prime rate to produce the
Loan Rate applicable at any time to certain of the Mortgage Loans may
decrease as additional amounts are borrowed thereunder. The Certificate
Rate could also be limited if all or a significant portion of the Loan
Rates were prevented by their lifetime interest rate caps from increasing
in accordance with increases in the prime rate as described herein.
General credit risk may also be greater to Certificateholders than to
holders of certificates representing interests in level payment first
mortgage loans since no payment of principal is required until final
maturity. Borrowers under the Mortgage Loans are under no obligation to
pay down all or part of their outstanding principal balances prior to
maturity and, in the event such balances have not been substantially paid
down prior to maturity, some borrowers may find themselves unable to make
the required final payment. Even assuming that the Mortgaged Properties
provide adequate security for such Mortgage Loans, substantial delay could
be encountered in connection with the liquidation of defaulted Mortgage
Loans and corresponding delays in the receipt of related liquidation
proceeds by Certificateholders could occur. Further, liquidation expenses
(such as legal fees, real estate taxes, and maintenance and preservation
expenses) will reduce the proceeds payable to Certificateholders and
thereby reduce the security for the Mortgage Loans. In the event any
Mortgaged Properties fail to provide adequate security for the related
Mortgage Loans, required payments under the Certificate Insurance Policy
were not made, and the protection provided by the limited subordination of
the Seller Interest and the availability of overcollateralization have
been exhausted, Certificateholders could experience a loss on their
investments.
Maturity and Prepayment Considerations. The Mortgage Loans may be
prepaid in whole or in part at any time without penalty. There is limited
data available on the rate of prepayment of home equity loans such as the
Mortgage Loans. Generally, home equity loans are not viewed by mortgagors
as permanent financing. Accordingly, the Mortgage Loans may experience a
higher rate of prepayment than traditional mortgage loans. On the other
hand, it can be expected that a portion of borrowers will not prepay their
Mortgage Loans to any significant degree. Borrowers who treat the amounts
borrowed as a long-term loan are more likely to allow their Mortgage Loans
to remain outstanding until maturity. The presence or absence of these two
types of Mortgage Loans in the Trust Fund may have a significant impact on
the rate and timing of principal payments (including prepayments) on the
Mortgage Loans and, as a result, the weighted average lives of the
Certificates. In addition, any future limitations on the right of
borrowers to deduct interest payments on the Mortgage Loans for federal
income tax purposes may result in a higher rate of prepayments of the
Mortgage Loans. 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. In addition, all of the Mortgage Loans
contain due-on-sale provisions. The Servicer is under no obligation to
enforce such provisions and will refrain therefrom if such exercise will
impair or threaten to impair any recovery under any related insurance
policy, is not permitted by applicable law, or in other circumstances
deemed appropriate by MLCC.
The rate of acceleration of amortization of the Certificate Principal
Balance will be affected by the inclusion in the Trust Fund of Common
Mortgage Loans and Mortgage Loans with a Cut-off Date Trust Balance of $0.
Common Mortgage Loans, whose Trust Balances account for ____% by Cut-off
Date principal amount of the balances to be transferred to the Trust Fund,
are those Mortgage Loans which generated prior balances that were
transferred to one or more of the Prior Trusts. See table captioned "Data
on Common Mortgage Loans" under "The Mortgage Loan Pool" herein. Payments
of principal (including prepayments) on a Common Mortgage Loan will be
applied first to reduce to zero the principal balance of such Common
Mortgage Loan assigned to the applicable Prior Trusts before any such
payments are applied to reduce the Trust Balance of such Common Mortgage
Loan. Partial prepayments of Common Mortgage Loans therefore would result
in distributions on the Certificates at a slower rate than partial
prepayments of other Mortgage Loans.
In the event a large number of Mortgage Loans are prepaid, the weighted
average life of the Certificates will be substantially shorter than the
weighted average life calculated on the assumption that all payments on
the Mortgage Loans are made only as scheduled. The weighted average life
of the 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. See "Prepayment and Yield
Considerations" herein.
No assurance can be given as to the level of prepayments that the Trust
Fund will experience. Under the Agreement, the Servicer will be obligated
to purchase Defective Mortgage Loans and Mortgage Loans as to which the
Servicer consented to increases in the related Credit Limits resulting in
Combined Loan-to-Value Ratios in excess of 85%. This will require the
Servicer to deposit in the Certificate Account the full amount of the
Trust Balance of the related Mortgage Loan, together with accrued interest
thereon at the Net Loan Rate. Amounts so deposited will be distributed to
Certificateholders as a prepayment in full of such Trust Balance, further
accelerating payments on the Certificates.
Realization Upon Defaulted Mortgage Loans; Delays and Expenses
Associated with Legal Actions. An action to foreclose a Mortgage Loan is
regulated by statutes and rules and is subject to a court's equitable
powers. A foreclosure action is subject to many of the delays and expenses
of other lawsuits if defenses or counterclaims are interposed, sometimes
requiring several years to complete. Furthermore, an action to obtain a
deficiency judgment also is regulated by statutes and rules, and the
amount of a deficiency judgment may be limited by law. In the event of a
default by a borrower, these restrictions, among others, may impede the
ability of the Servicer to foreclose on or to sell the Mortgaged Property
or to obtain a deficiency judgment in connection therewith. If required
payments under the Certificate Insurance Policy were not made and the
protection afforded the Certificateholders by the limited subordination of
the Seller Interest and the availability of overcollateralization have
been exhausted, such restrictions may delay distributions to the
Certificateholders and may ultimately limit the amounts distributed with
respect to such defaulted Mortgage Loans and result in a loss to the
Certificateholders on their investments. See "Certain Legal Aspects of the
Mortgage Loans" in the Prospectus.
Difficulty in Pledging. Since transactions in Certificates can be
effected only through DTC, CEDEL, Euroclear, participating organizations,
indirect participants and certain banks, the ability of a Certificate
Owner to pledge a Certificate to persons or entities that do not
participate in the DTC, CEDEL, or Euroclear system, or otherwise to take
actions in respect of such Certificates, may be limited due to lack of a
physical certificate representing the Certificates. See "Description of
the Certificates -- Registration of the Certificates" herein.
Potential Delays in Receipt of Distributions. Certificate Owners may
experience some delay in their receipt of distributions of interest and
principal on the Certificates since such distributions will be forwarded
by the Trustee to DTC and DTC will credit such distributions to the
accounts of its Participants (as defined herein) which will thereafter
credit them to the accounts of Certificate Owners either directly or
indirectly through indirect participants. See "Description of the
Certificates -- Registration of The Certificates" herein.
Certificate Ratings. The rating of the Certificates will depend
primarily on an assessment by the Rating Agencies of the underlying
Mortgage Loans, the Certificate Insurance Policy, the amount of
overcollateralization and the limited subordination afforded by the Seller
Interest. The rating by the Rating Agencies of the Certificates is not a
recommendation to purchase, hold or sell the Certificates, inasmuch as
such rating does not comment as to the market
price or suitability for a particular investor. There is no assurance that the
ratings will remain for any given period of time or that the ratings will not
be reduced, suspended or withdrawn by the Rating Agencies. The ratings of the
Certificates do not address the possibility of the imposition of United
States withholding tax with respect to non-U.S. persons.
Certificate Insurance Policy. Credit enhancement with respect to the
Certificates will be provided by the Certificate Insurance Policy. See
"Description of the Certificates -- Certificate Insurance Policy" herein.
If required payments under the Certificate Insurance Policy were not made,
the Certificateholders will be at greater risk with respect to losses on
the Mortgage Loans.
Other Legal Considerations. Applicable state laws generally regulate
interest rates and other charges, and require certain disclosures. In
addition, many states have other laws, such as consumer protection laws,
unfair and deceptive practices acts and debt collection practices acts
which 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 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
Servicer to damages and administrative enforcement. See "Certain Legal
Aspects of the Mortgage Loans" in the Prospectus.
The Mortgage Loans are also subject to federal laws, including:
(i) the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding the
terms of the Mortgage Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
Violations of certain provisions of these federal laws may limit the
ability of the Servicer to collect all or part of the principal of or
interest on the Mortgage Loans, may subject the Servicer to damages and
administrative enforcement and in addition could be raised by borrowers as
a recoupment or setoff in a collection or foreclosure action. See "Certain
Legal Aspects of the Mortgage Loans" in the Prospectus.
Under the terms of the Agreement, so long as ML & Co.'s long-term
unsecured debt is rated at least A- by __________________________________
and A3 by _______________________, the Servicer will be entitled to
maintain possession of the documentation relating to each Mortgage Loan
sold by it, including the Credit Line Agreement or other evidence of
indebtedness signed by the borrower. Failure to deliver such documents to
the Trustee will have the result of making the sale of the Cut-off Date
Trust Balances, any Additional Balances and such documents potentially
ineffective against creditors of the Servicer or, in the event the
Servicer fraudulently or inadvertently resells a Mortgage Loan to a
purchaser who had no notice of the prior sale thereof and takes possession
of the related Credit Line Agreement or other evidence of indebtedness,
against such a purchaser. The Agreement provides that if any loss is
suffered in respect of a Mortgage Loan as a result of the Servicer's
retention of the documentation relating to such Mortgage Loan, the
Servicer will purchase such Mortgage Loan from the Trust Fund. In the
event ML & Co.'s long-term unsecured debt rating does not satisfy the
above referenced standards, the documentation relating to each Mortgage
Loan will be delivered to and maintained by the Trustee.
The Servicer and the Seller will treat the transfer of the Trust
Balances of the Mortgage Loans by the Servicer to the Seller as a sale for
accounting purposes. The Seller and the Trust Fund will treat the transfer
of the Trust Balances of the Mortgage Loans from the Seller to the Trust
Fund as a sale for accounting purposes. As a sale of the Trust Balances of
the Mortgage Loans by the Servicer to the Seller, the Mortgage Loans would
not be part of the Servicer's bankruptcy estate and would not be available
to the Servicer's creditors. However, in the event of the insolvency of
the Servicer, it is
S-23
<PAGE.
possible that the bankruptcy trustee or a creditor of the Servicer or the
Servicer as debtor in possession may attempt to recharacterize the sale of
the Trust Balances of the Mortgage Loans as a
borrowing by the Servicer, secured by a pledge of the Mortgage Loans. This
position, if argued before or accepted by a court, could prevent timely
payments of amounts due on the Certificates and result in a reduction of
payments due on the Certificates. Furthermore, so long as the Servicer
retains the documentation relating to the Mortgage Loans in its
possession, if such recharacterization were to occur, the
Certificateholders may be treated as unsecured creditors of the Servicer.
The Seller will warrant in the Agreement that the transfer of the Trust
Balances of the Mortgage Loans by it to the Trust is either a valid
transfer and assignment of the Trust Balances of the Mortgage Loans to the
Trust or the grant to the Trust of a security interest therein. In
addition, cash collections may be commingled with the Servicer's own funds
prior to each Distribution Date. In the event of the insolvency of the
Servicer, the Trust Fund will likely not have a perfected interest in such
collections since they would not have been deposited in a segregated
account within 10 days after the collection thereof, and the inclusion
thereof in the bankruptcy estate of the Servicer may result in delays in
payment and failure to pay amounts due on the Certificates.
If a conservator, receiver or trustee were appointed for the Seller, or
if certain other events relating to the bankruptcy or insolvency of the
Seller were to occur, Additional Balances would not be sold to the Trust.
In such an event, the Rapid Amortization Period would commence and the
Trustee would attempt to sell the Mortgage Loans (unless
Certificateholders holding Certificates evidencing undivided interests
aggregating at least 51% of the outstanding Certificate Principal Balance
of the Certificates not held by the Seller instruct otherwise), thereby
causing early payment of the Certificate Principal Balance. The net
proceeds of such sale will first be paid to the Certificate Insurer to the
extent of unreimbursed draws under the Certificate Insurance Policy and
other amounts owing to the Certificate Insurer pursuant to the Insurance
Agreement. The Fixed Allocation Percentage of remaining amounts will be
distributed to the Certificateholders. The Certificate Insurance Policy
will not cover any amount by which such remaining net proceeds are
insufficient to pay the Certificate Principal Balance in full.
In the event of a bankruptcy or insolvency of the Servicer, the
bankruptcy trustee or receiver may have the power to prevent the Trustee
or the Certificateholders from appointing a successor Servicer.
THE MORTGAGE LOAN POOL
THE MORTGAGE LOANS
The Mortgage Loans are evidenced by loan agreements (each, a "Credit
Line Agreement") secured by mortgages or deeds of trust (of which
approximately ______% by Cut-off Date Pool Balance are first liens and
substantially all of the remainder are second liens) on Mortgaged
Properties located in ___ states, the Virgin Islands and the District of
Columbia. In the case of Mortgage Loans which are third or fourth liens,
MLCC is generally acting as the servicer of the related second and third,
as the case may be, mortgage or deed of trust. The term to maturity of
each Mortgage Loan at origination was ___ years.
Each Mortgage Loan was selected by MLCC for inclusion in the Trust Fund
from among those that met the following criteria as of the Cut-off Date:
(i) no payment was more than one month past due and (ii) not less than
three months to contractual maturity. The Mortgage Loans were selected
from the mortgage loans in MLCC's servicing portfolio that met the above
criteria using a selection process believed by the Seller and the Servicer
not to be adverse to Certificateholders. The loan application for each
Mortgage Loan was initially approved between _______ and _______ in the
ordinary course of MLCC's home equity revolving credit line loan program.
As of the Cut-off Date, the average Trust Balance was approximately
$_______ for those Mortgage Loans with a Trust Balance greater than $0. As
of the Cut-off Date, the weighted average Margin was approximately ______%
and the weighted average Loan Rate was approximately _____%. The weighted
average Combined Loan-to-Value Ratio at origination was approximately
______%. As of the Cut-off Date, the weighted average credit limit
utilization rate (computed by dividing the Loan Balance for each Mortgage
Loan by the related Credit Limit) was approximately _______%. The weighted
average remaining term to stated maturity at the Cut-off Date was ___
months and the latest scheduled maturity of any Mortgage Loan is _______,
20__.
As of the Cut-off Date, Mortgage Loans representing approximately _____%
by Cut-off Date Pool Balance have a weighted average lifetime interest
rate cap of _____% and lifetime interest rate caps ranging from ____% to
______%. The remaining Mortgage Loans have no interest rate caps but are
generally subject to applicable state usury ceilings. None of the Mortgage
Loans have interest rate floors.
As of the Cut-off Date, the Loan Rates for approximately _____% of the
Mortgage Loans by Pool Balance were calculated on the basis of a zero
Margin. As of the Cut-off Date, borrowers obligated on approximately
_____% of the Mortgage Loans by Pool Balance were employees or independent
contractors of ML & Co. or subsidiaries thereof.
Set forth below is a description of certain additional
characteristics of the Mortgage Loans as of the Cut-off Date.
The sum of the percentages in each table below may not equal the
total of 100% due to rounding.
Geographical Distribution of Mortgaged Properties
-------------------------------------------------
- -------------------------------------------------------------------------------
PERCENT OF
NUMBER OF CUT-OFF
STATE OR MORTGAGE CUT-OFF DATE DATE POOL
TERRITORY LOANS TRUST BALANCES BALANCE
- -------------------------------------------------------------------------------
California................... $ %
Connecticut..................
Florida......................
Michigan.....................
New Jersey...................
New York.....................
Other(1).....................
--------- -------------- -----------
Total................. $ 100.00%
========= ============== ===========
__________
(1) Other includes 43 other states, the Virgin Islands and the District
of Columbia with under 3% concentrations individually.
CREDIT LIMITS(1)
----------------
- --------------------------------------------------------------------------------
PERCENT OF
NUMBER OF CUT-OFF
RANGE OF MORTGAGE CUT-OFF DATE DATE POOL
CREDIT LIMITS LOANS TRUST BALANCE BALANCE
- --------------------------------------------------------------------------------
$ 0.00--$ 24,999.99 $ %
25,000.00-- 49,999.99
50,000.00-- 74,999.99
75,000.00-- 99,999.99
100,000.00-- 124,999.99
125,000.00-- 149,999.99
150,000.00-- 199,999.99
200,000.00-- 249,999.99
250,000.00-- 299,999.99
300,000.00-- 349,999.99
350,000.00-- 399,999.99
400,000.00-- 449,999.99
450,000.00-- 499,999.99
500,000.00-- 749,999.99
750,000.00-- 999,999.99
1,000,000.00--1,249,999.99
1,250,000.00--1,499,999.99
1,500,000.00--1,749,999.99
1,750,000.00--1,999,999.99
2,000,000.00--2,249,999.99
2,750,000.00--2,999,999.99
3,000,000.00--3,249,999.99
3,250,000.00--3,499,999.99
5,000,000.00--5,249,999.99
--------- -------------- ----------
Total $ 100.00%
========= ============== ===========
_________
(1) As of the Cut-off Date, the weighted average Credit Limit was
approximately $___________.
OCCUPANCY STATUS
----------------
- --------------------------------------------------------------------------------
PERCENT OF
NUMBER OF CUT-OFF
MORTGAGE CUT-OFF DATE DATE POOL
STATUS LOANS TRUST BALANCE BALANCE
- --------------------------------------------------------------------------------
Owner-occupied............... $ %
Second home..................
Investment property..........
-------- ------------- -----------
Total................... $ 100.00%
======== ============= ===========
TRUST BALANCES(1)(2)
--------------------
- --------------------------------------------------------------------------------
PERCENT OF
NUMBER OF CUT-OFF
RANGE OF MORTGAGE CUT-OFF DATE DATE POOL
TRUST BALANCES LOANS TRUST BALANCE BALANCE
- --------------------------------------------------------------------------------
$ 0.00--$ 24,999.99 $ %
25,000.00-- 49,999.99
50,000.00-- 74,999.99
75,000.00-- 99,999.99
100,000.00-- 124,999.99
125,000.00-- 149,999.99
150,000.00-- 199,999.99
200,000.00-- 249,999.99
250,000.00-- 299,999.99
300,000.00-- 349,999.99
350,000.00-- 399,999.99
400,000.00-- 449,999.99
450,000.00-- 499,999.99
500,000.00-- 749,999.99
750,000.00-- 999,999.99
1,000,000.00--1,249,999.99
1,500,000.00--1,749,999.99
2,000,000.00--2,249,999.99
3,000,000.00--3,249,999.99
--------- ------------- -----------
Total $ 100.00%
========= ============= ===========
__________
(1) As of the Cut-off Date, the average Trust Balance was approximately
$________ for those Mortgage Loans with a Cut-off Date Trust Balance
greater than $0.
(2) There are _______ Mortgage Loans with a $0 Cut-off Date Trust Balance.
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS(1)
-----------------------------------------
- --------------------------------------------------------------------------------
PERCENT OF
RANGE OF NUMBER OF CUT-OFF
ORIGINAL COMBINED MORTGAGE CUT-OFF DATE DATE POOL
LOAN-TO-VALUE RATIOS LOANS TRUST BALANCE BALANCE
- --------------------------------------------------------------------------------
0.01% -- 10.00%............. $ %
10.01 -- 20.00..............
20.01 -- 30.00..............
30.01 -- 40.00..............
40.01 -- 50.00..............
50.01 -- 60.00..............
60.01 -- 70.00..............
70.01 -- 75.00..............
75.01 -- 80.00..............
80.01 -- 85.00..............
85.01 -- 90.00..............
90.01 -- 95.00..............
95.01 --100.00..............
100.01 --115.00..............
--------- ------------- -----------
Total................... $ 100.00%
========= ============= ============
__________
(1) As of the Cut-off Date, the weighted average Combined Loan-to-Value
Ratio at origination was approximately ________%.
CREDIT LIMIT UTILIZATION RATES(1)
---------------------------------
- --------------------------------------------------------------------------------
PERCENT OF
RANGE OF NUMBER OF CUT-OFF
CREDIT LIMIT MORTGAGE CUT-OFF DATE DATE POOL
UTILIZATION RATES LOANS TRUST BALANCE BALANCE
- --------------------------------------------------------------------------------
0.00%-- 9.99%.............. $ %
10.00 --19.99...............
20.00 --29.99...............
30.00 --39.99...............
40.00 --49.99...............
50.00 --59.99...............
60.00 --69.99...............
70.00 --74.99...............
75.00 --79.99...............
80.00 --84.99...............
85.00 --89.99...............
90.00 --94.99...............
95.00 --99.99...............
100.00.......................
--------- ------------- -----------
Total................... $ 100.0%
--------- ------------- -----------
________
(1) As of the Cut-off Date, the weighted average credit limit utilization
rate was _____%.
MARGINS(1)
----------
- --------------------------------------------------------------------------------
PERCENT OF
NUMBER OF CUT-OFF
MORTGAGE CUT-OFF DATE DATE POOL
MARGINS LOANS TRUST BALANCE BALANCE
- --------------------------------------------------------------------------------
0.00%........................ $ %
0.75.........................
1.00.........................
1.25.........................
1.50.........................
1.75.........................
2.00.........................
--------- ------------- -----------
Total................... $ 100.0%
========= ============= ===========
__________
(1) As of the Cut-Off Date, the weighted average Margin was _______%.
REMAINING TERM TO STATED MATURITY(1)
------------------------------------
- --------------------------------------------------------------------------------
PERCENT OF
RANGE OF REMAINING TERMS NUMBER OF CUT-OFF
TO STATED MATURITY MORTGAGE CUT-OFF DATE DATE POOL
(MONTHS) LOANS TRUST BALANCE BALANCE
- --------------------------------------------------------------------------------
1-- 12..................... $ %
13-- 24.....................
25-- 36.....................
37-- 48.....................
49-- 60.....................
61-- 72.....................
73-- 84.....................
85-- 96.....................
97--108.....................
109--120.....................
--------- ------------- -----------
Total................... $ 100.00%
========= ============= ===========
_________
(1) As of the Cut-off Date, the weighted average remaining term to stated
maturity was ___ months.
SECOND MORTGAGE RATIOS(1)(2)
----------------------------
- --------------------------------------------------------------------------------
PERCENT OF
NUMBER OF CUT-OFF
RANGE OF MORTGAGE CUT-OFF DATE DATE POOL
SECOND MORTGAGE RATIOS LOANS TRUST BALANCE BALANCE
- --------------------------------------------------------------------------------
0.00%-- 9.99%............... $ %
10.00 --19.99................
20.00 --29.99................
30.00 --39.99................
40.00 --49.99................
50.00 --59.99................
60.00 --69.99................
70.00 --74.99................
75.00 --79.99................
80.00 --84.99................
85.00 --89.99................
90.00 --94.99................
95.00 --99.99................
--------- ------------ -----------
Total................... $ 100.0%
========= ============ ===========
__________
(1) The Second Mortgage Ratio of a Mortgage Loan is the ratio (expressed
as a percentage) computed (i) in the case of a Common Mortgage Loan, by
dividing the difference between (a) its Credit Limit and (b) the total
Prior Trust balance as of the Cut-off Date of such Common Mortgage Loan,
by the sum of its Credit Limit and the outstanding balances of any
senior mortgages as of the date of the origination of such Common
Mortgage Loan, and (ii) in the case of any other Mortgage Loan, by
dividing its Credit Limit by the sum of its Credit Limit and the
outstanding balances of any senior mortgages as of the date of the
origination of such Mortgage Loan. The Second Mortgage Ratio is
calculated only with respect to those Mortgage Loans in a junior lien
position.
(2) As of the Cut-off Date, the weighted average Second Mortgage Ratio
was ______%.
LIFETIME INTEREST RATE CAPS(1)
------------------------------
- --------------------------------------------------------------------------------
PERCENT OF
NUMBER OF CUT-OFF
RANGE OF LIFETIME MORTGAGE CUT-OFF DATE DATE POOL
INTEREST RATE CAPS LOANS TRUST BALANCE BALANCE
- --------------------------------------------------------------------------------
No Lifetime Interest Rate $ %
Cap(2).....................
13.01%--13.50%.............
13.51 --14.00..............
14.01 --14.50..............
14.51 --15.00..............
15.01 --15.50..............
15.51 --16.00..............
16.01 --16.50..............
16.51 --17.00..............
17.01 --17.50..............
17.51 --18.00..............
18.01 --18.50..............
18.51 --19.00..............
19.01 --19.50..............
--------- ------------- -----------
Total................... $ 100.0%
--------- ------------- -----------
__________
(1) As of the Cut-off Date, the weighted average lifetime interest rate
cap of the Mortgage Loans subject to specified caps was _____%.
(2) Mortgage Loans originated prior to December 1987 generally did not
have specified lifetime interest rate caps, but were subject to
applicable state usury limits, if any.
Set forth below is a description of certain characteristics of the
Common Mortgage Loans:
DATA ON COMMON MORTGAGE LOANS(1)
--------------------------------
<TABLE>
<CAPTION>
Type of Number of Cut-off Percent of Cut-off Cut-off Mortgage
Mortgage Mortgage Date Cut-off Date Date Loan
Loan Loans Trust Date Balances in Loan Credit
Balance Pool Balance Prior Trusts Balance Limits
<S> <C> <C> <C> <C> <C> <C> <C>
Common
Mortgage
Loan in
Trust
1989 ... $ % $ $ $
1991 ...
1993 ...
1994-1 ..
1994-2 ..
1995-1 ..
1995-2 ..
Other(2)
Total $ 100.0% $ $ $
__________
(1) Common Mortgage Loans are those Mortgage Loans which had balances
that were previously transferred to Trust 1989, Trust 1991, Trust 1993, Trust
1994-1, Trust 1994-2, Trust 1995-1 and/or Trust 1995-2 balance. Principal
collections on a Common Mortgage Loan will be applied first to reduce the
Trust 1989, Trust 1991, Trust 1993, Trust 1994-1, Trust 1994-2,
Trust 1995-1 and/or Trust 1995-2 balance, as applicable, of such Common
Mortgage Loan to zero before any such collections are applied in reduction
of the Trust Balance of such Common Mortgage Loan. See "Special
Considerations and Risk Factors-- Maturity and Prepayment Considerations"
herein.
(2) Other Mortgage Loans are those that do not have a Prior Trust
balance.
MLCC will transfer and assign to the Seller all of its right, title and
interest in the Cut-off Date Pool Balance and the Seller in turn will
assign such aggregate balances to the Trustee for the benefit of the
holders of the Certificates. The Servicer will continue to service the
Mortgage Loans, pursuant to the Agreement, and will receive the monthly
Servicing Fee for such services. See "Description of the Certificates--
Assignment of Trust Balances of the Mortgage Loans" and "--Servicing and
Other Compensation and Payment of Expenses" herein.
MLCC will make certain representations and warranties regarding the
Mortgage Loans, but its transfer and assignment of the Cut-off Date Pool
Balance to the Seller will be without recourse. See "Description of the
Certificates--Assignment of Trust Balances of the Mortgage Loans" herein.
The Servicer's obligations with respect to the Mortgage Loans will consist
principally of its contractual servicing obligations under the Agreement
and its obligation to make certain cash advances in the event of
delinquencies in payments on or with respect to the Mortgage Loans in
amounts described under "Description of the Certificates--Advances"
herein.
MLCC AND ITS EQUITY ACCESS(R) PROGRAM
MLCC, a wholly-owned indirect subsidiary of Merrill Lynch & Co., Inc.
("ML & Co.") and an affiliate of the Seller and the Underwriter, is a
Delaware corporation qualified to do business in each state where its
mortgage program is offered. 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 making real estate secured, revolving credit
line loans ("Home Equity Loans" or "HELs") available to borrowers as well
as making real estate secured, first mortgage loans. These lines of credit
are called "Equity Access(R) credit accounts," or "Equity Access(R)
loans." The first mortgage loans are originated by MLCC through its
various mortgage programs.
In most states, a minimum Credit Limit is imposed with respect to Equity
Access(R) loans. A maximum Credit Limit of $2,000,000 is applied for all
states, but exceptions are made on occasion permitting credit lines in
excess of $2,000,000. The average Credit Limit amount as of __________ 1,
199_ for all Equity Access(R) loans was approximately $__________. In most
instances, these lines of credit are secured by second mortgages on the
borrowers' owner-occupied primary or vacation houses. However, they may be
secured by either purchase money or nonpurchase money first mortgages on
such properties, and they may be secured by first or second mortgages on
one- to four-family rental properties or by first liens on shares issued
by private cooperative apartment housing corporations.
In certain cases, MLCC may originate its Equity Access(R) loans in
conjunction with the origination of a first mortgage on the subject
property. The underwriting guidelines applied to such Equity Access(R)
loans are substantially the same as those described below for MLCC's
stand-alone Equity Access(R) program.
The Equity Access(R) program is marketed through stockbrokers (referred
to as "financial consultants") employed by Merrill Lynch, Pierce, Fenner &
Smith Incorporated, mortgage and credit specialists employed by MLCC,
newspaper and other print advertising, as well as through direct mail
campaigns.
MLCC underwriting guidelines are applied to evaluate the prospective
borrower's credit standing and repayment ability, and the value and
adequacy of the Mortgaged Property as collateral. Initially, the borrower
is required to fill out a detailed application providing pertinent credit
and property information. As part of the description of the borrower's
financial condition, the borrower is required to provide information
concerning assets, liabilities, income and expenses, as well as an
authorization permitting MLCC to apply for a credit report summarizing the
borrower's credit history with merchants and lenders and any record of
recent bankruptcy. In addition, an employment verification is obtained
which must report the borrower's current salary and may contain the length
of employment and an indication as to whether it is expected that the
borrower will continue such employment in the future. If a prospective
borrower is self-employed, the borrower is generally required to submit
copies of signed tax returns.
In determining the adequacy of the Mortgaged Property as collateral, an
appraisal is made of each home considered for financing. Each appraiser is
selected in accordance with predetermined guidelines established for
appraisers. The appraiser is required to inspect the property and verify
that it is in good condition and that construction or renovation, 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 sufficient employment, credit and property information is obtained,
a determination is made as to whether sufficient unencumbered equity in
the property exists and whether the prospective borrower has sufficient
monthly income available to meet the borrower's monthly obligations
consisting of first mortgage payments, property taxes and hazard insurance
premiums, other monthly credit obligations, and the payment of interest on
the credit line to be extended by MLCC. These determinations are made in a
manner similar to the underwriting methods employed by FNMA and FHLMC,
except that MLCC uses a single debt-to-income ratio ("DTI") requirement
that generally does not exceed 50%, (this ratio may be limited to 38% in
cases where certain disposable income thresholds are not met). 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
assuming a fully utilized credit line and an interest rate that is 4%
higher than the original rate) divided by the borrower's total verified
monthly income. In certain limited cases, MLCC may accept verification of
borrower assets 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.
The Mortgaged Properties may be located in states where, in general, a
lender providing credit on a single-family property may not seek a
deficiency judgment against the mortgagor but rather must look solely to
the property for repayment in the event of foreclosure. MLCC's
underwriting standards applicable to all states (including anti-deficiency
states) require that the value of the property being financed, as
indicated by the appraisal, currently supports and is anticipated to
support in the future the outstanding loan balance.
In 1992, MLCC began originating loans through mortgage brokers that are
not affiliated with MLCC. 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.
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.
If an application is approved, the applicant obtains his line of credit
by signing loan documents, including a loan agreement and second mortgage
or deed of trust (or a first mortgage or deed of trust, where appropriate)
encumbering the subject property and securing the credit line. The loan
agreement provides for obligatory advances up to the Credit Limit, and
contains payment obligations similar to those found in a traditional note.
A separate note is not currently used, although separate notes were used
for some of the Mortgage Loans. The loan agreement and mortgage or deed of
trust (generally in a second position) are in the full amount of the
Credit Limit. For Mortgage Loans that closed prior to May 24, 1994 and
that have a Margin greater than 0%, customary closing costs and a fee of
approximately $300 were paid by the borrower. For Mortgage Loans that
closed after such date and that have a Margin greater than 0%, the only
closing costs incurred by the borrower was a fee generally ranging from $0
to $250, and mortgage recording taxes in certain states. Borrowers
obtaining certain Mortgage Loans with credit limits of $200,000 or more
and a Margin equal to 0% were required to pay an origination fee in
addition to customary closing costs (this program is called the "Equity
Access Prime(R) Program"). There is an annual service charge (the maximum
charge of which is $50) for maintaining a borrower's credit line, where
such charge is legally permitted.
The customer may draw funds (up to the amount of his Credit Limit) by
writing checks or by using a special VISA card issued by a New Jersey
state bank that is a subsidiary of ML & Co. Monthly, the customer is
required to pay only interest on his outstanding balance and any fees due
(such as late charges and the annual service charge mentioned above). The
customer may prepay the principal of the funds advanced to him at any time
during the term of the credit line, without penalty. The amount of funds
available to the customer is increased by the amount of principal which
the customer repays. For example, if a customer has a $50,000 Credit
Limit, and draws down $30,000 of that line without repaying any of the
principal, he would be entitled to borrow a maximum of $20,000 more.
However, if that customer is current in his interest payments and repays
$20,000 of principal (reducing his outstanding balance from $30,000 to
$10,000), the customer could borrow up to $40,000 more (the difference
between the amount of his Credit Limit and his outstanding principal
balance). There are no required payments of principal, but the customer
must repay his entire outstanding principal balance ten years from the
date that he opens his credit line.
MLCC generally does not require title insurance on Equity Access(R)
loans except in certain instances deemed appropriate by MLCC. These
instances include, but are not limited to, cases where the Equity
Access(R) loan amount will equal or exceed $1,000,000 and where the Equity
Access(R) loan is being extended as part of a purchase money first
mortgage transaction. However, MLCC obtains a property report showing the
results of a title search on the subject property in those cases in which
it does not require title insurance.
The home equity revolving line of credit bears interest at a variable
rate which may change daily or monthly subject to a maximum interest rate
specified in the Credit Line Agreement. The daily periodic rate (the "Loan
Rate") is 1/365th of the sum of the Index Rate (as defined below) plus a
Margin. The Margin on an Equity Access(R) loan is generally 1.50% for
borrowers who are existing clients of Merrill Lynch, Pierce, Fenner &
Smith Incorporated, and 1.75% for non-clients. Borrowers establishing
lines of credit over $200,000 may elect to pay a 1% origination fee in
exchange for a Margin of 0%. Mortgage Loans originated prior to June 1994
generally carry a variable Margin, which ranges between 1.50% and 2.00%,
and decreases as the outstanding principal balance of the account
increases. Equity Access(R) loans made to employees or affiliates of ML &
Co. or its subsidiaries generally carry a Margin of 0.75%. Upon the
termination of employment or affiliation between such borrower and ML &
Co. or an affiliate thereof, the Margin used for such borrower's Mortgage
Loan is increased to the applicable percentage described above. Interest
on the home equity revolving lines of credit is payable at the Loan Rate.
Interest is billed monthly in arrears based on the daily outstanding
principal balance and the applicable daily rate.
For most Mortgage Loans the "Index Rate" for each day is the "prime
rate" published for that day in The Wall Street Journal. If a prime rate
range is published, then the highest rate of that range will usually be
used. The documentation for some Mortgage Loans provides that the midpoint
of any prime rate range published in The Wall Street Journal will be used.
For other Mortgage Loans, the documentation provides that the "Index Rate"
for any day is the highest "prime rate" (or equivalent rate) quoted for
that day by three specified banks. Furthermore, each Credit Line Agreement
provides for a variety of additional alternatives for the Index Rate if
the provisions described above fail to produce an Index Rate. The Credit
Line Agreements generally provide that the Loan Rate will change when the
Index Rate changes, meaning that an increase or decrease in the Loan Rate
will take effect on the date the Index Rate changes. However, in the
states of New Jersey and Washington, the Loan Rate for a given month
generally is established on the first business day of that month.
The Servicer has the right to require the borrower to make immediate
payment of the entire balance plus all other accrued but unpaid charges
and to cancel his credit privileges under the Credit Line Agreement if,
among other things, the borrower fails to make payment under the Credit
Line Agreement within thirty days (or any longer time period required by
state law) after notice from the Servicer that such payment is past due or
if the borrower transfers any interest in the property securing the Credit
Line Agreement.
In the event of a default on a first mortgage that is senior to a
Mortgage Loan, the Servicer has the right in many states to satisfy the
defaulted senior mortgage in full, or to cure such default and make the
defaulted senior mortgage current as to payment, in either event adding
any amounts expended in connection with such satisfaction or cure to the
then current Loan Balance for such Mortgage Loan. In such event of
default, the Servicer will either take the actions described above, take
other appropriate actions or refrain from taking any action based upon the
Servicer's practice in connection with servicing loans for itself and
others. See "Certain Legal Aspects of the Mortgage Loans --
Foreclosure/Repossession" in the Prospectus.
DELINQUENCY AND LOAN LOSS EXPERIENCE
The following tables set forth information relating to the delinquency
and loan loss experience on the home equity revolving credit line mortgage
loans originated by MLCC for its own account or for the account of MLCC
affiliates and included in MLCC's servicing portfolio 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 set forth in the following tables represents the historical
experience of MLCC for the dates and period given, 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 total
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.
MORTGAGE LOAN DELINQUENCY EXPERIENCE
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
1991 1992 1993 1994 1995
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Number of
revolving credit
line loans
serviced 15,913 15,084 13,839 15,598 25,056
Aggregate loan
balance of
revolving credit
line loans
serviced $1,073,492 $1,062,930 $1,037,427 $1,079,693 $1,293,483
Loan balance of
revolving credit
line loans
2 months
delinquent 2,250 3,717 5,161 5,358 8,447
Loan balance of
revolving credit
line loans
3 months or
more delinquent 22,361 18,751 17,508 22,989 33,763
Total of 2 months
or more
delinquent as a
percentage of
aggregate loan
balance of
revolving credit
line loans 2.29% 2.11% 2.19% 2.63% 3.26%
</TABLE>
MORTGAGE LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
As of December 31,
1991 1992 1993 1994 1995
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Number of
revolving credit
line loans
serviced 15,913 15,084 13,839 15,598 25,056
Aggregate loan
balance of
revolving credit
line loans
serviced $1,073,492 $1,062,930 $1,037,427 $1,079,693 $1,293,483
S OF DECEMBER 31,
For the period:
Gross charge-
offs dollars 936 1,447 3,153 1,118 3,700
Percentage(1) 0.09% 0.14% 0.30% 0.10% 0.29%
</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. If residential real estate markets experience a
further decline in property values such that the outstanding balances of
the Mortgage Loans, together with any primary financing on the Mortgaged
Properties, 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. To the extent that the Mortgaged Properties are concentrated in
areas which experience declining residential real estate values, the
delinquencies, foreclosures and losses with respect to the Mortgage Pool
may be particularly effected. See "The Mortgage Loan Pool" herein. The
likelihood that borrowers will become delinquent in the payment of the
Mortgage Loans, the rate of any subsequent foreclosures, and the severity
of any losses, also may be affected by a number of factors related to each
borrower's personal circumstances, including, but not limited to,
unemployment or change in employment (or in the case of self-employed
borrowers relying on commission income, fluctuations in income) and
marital separation. 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 Loans. To the extent that such
losses are not covered by required payments under the Certificate
Insurance Policy that were not made by the Certificate Insurer or through
the availability of the limited subordination of the Seller Interest and
overcollateralization, they will be borne, at least in part, by holders of
the Certificates. Management of MLCC believes that the principal reason
for the increase in delinquencies over the last several years is the
occurrence of a recession followed by an expansion that did not result in
significant increases in employment. In many cases the expansion has been
accompanied by an increase in unemployment among persons with above
average incomes, who are the typical borrowers under the Mortgage Loans.
Any further continuation or deepening of these trends, particularly as
they may affect affluent persons, would be expected to have a continuing
adverse effect on the delinquency and loan loss experience of home equity
loans in MLCC's servicing portfolio, including the Mortgage Loans. In
addition, home equity revolving credit line borrowers generally have
primary residences with above average values, and those properties may
experience greater declines in value during adverse economic conditions
than other properties with lower values.
ALLOCATIONS OF PAYMENTS ON THE MORTGAGE
LOANS BETWEEN THE TRUST AND THE PRIOR TRUSTS
Balances outstanding on November 1, 1989, September 1, 1991, February 1,
1993, April 1, 1994, September 1, 1994, March 1, 1995 and October 1, 1995
with respect to the Common Mortgage Loans were sold to Trust 1989, Trust
1991, Trust 1993, Trust 1994-1, Trust 1994-2, Trust 1995-1 and Trust 1995-2,
respectively. The Cut-off Date Trust Balances of the Mortgage Loans and
all Additional Balances thereon are being sold and assigned to the Trust
Fund. Future payments on the Common Mortgage Loans will be allocated
between the Trust Fund and the owners of the balances sold and assigned to
the Prior Trusts, in the following manner:
(a) The Servicing Fee for any Distribution Date will be deducted
from payments of interest received on the Mortgage Loans during the
related Collection Period. Following the deduction for the Servicing Fee,
each borrower payment of interest will be applied first to interest on the
Mortgage Loan at the then-current Net Loan Rate. Assuming full payment of
interest by the borrower, such payment will be allocated on a pro rata basis
between the Trust Balance thereof and the balance owned by one or more Prior
Trusts in proportion to the interest owed on each balance.
(b) Any remaining portion of a borrower's payment will be applied
to principal on the Mortgage Loan. Such collections of principal on the
Mortgage Loan during any Collection Period will be applied first to reduce
the Trust 1989 balance thereof, if any, to zero, then to reduce the Trust
1991 balance thereof, if any, to zero, then to reduce the Trust 1993 balance
thereof, if any, to zero, then to reduce the Trust 1994-1 balance thereof, if
any, to zero, then to reduce the Trust 1994-2 balance thereof,
if any, to zero, then to reduce the Trust 1995-1 balance thereof, if any, to
zero, then to reduce the Trust 1995-2 balance thereof, if any, to zero,
before such payment is applied as a principal payment in reduction of the
Trust Balance of such Common Mortgage Loan.
(c) Net Liquidation Proceeds received on a defaulted Mortgage Loan
and any Insurance Proceeds which are not liquidation proceeds and are
applied in reduction of a Loan Balance will be allocated first to unpaid
interest in the manner described above. Any remaining proceeds will be
allocated first to reduce the Trust 1989 balance thereof, the Trust 1991
balance thereof, the Trust 1993 balance thereof, the Trust 1994-1 balance
thereof, the Trust 1994-2 balance thereof, the Trust 1995-1 balance thereof
and the Trust 1995-2 balance thereof in the manner described above. Any
excess remaining after such allocation to one or more of the Prior Trusts
will be applied in reduction of the Trust Balance of such Common Mortgage
Loan.
PREPAYMENT AND YIELD CONSIDERATIONS
All of the Mortgage Loans may be prepaid without penalty in full or in
part at any time. The prepayment experience with respect to the Mortgage
Loans in the Trust Fund will affect the life of the Certificates.
There is limited data available on the rate of prepayment of home equity
loans such as the Mortgage Loans. Generally, home equity loans are not
viewed by borrowers as permanent financing. Accordingly, the Mortgage
Loans may experience a higher rate of prepayment than traditional mortgage
loans. On the other hand, because the Mortgage Loans are non-amortizing,
in the absence of significant voluntary borrower prepayments they would
experience slower rates of principal payment than traditional fully
amortizing first mortgages. 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, borrower cash flow, homeowner mobility and changes
affecting the deductibility for federal income tax purposes of interest
payments on home equity loans.
The rate of amortization of the Certificate Principal Balance will be
affected by the inclusion of the Trust Balances of Common Mortgage Loans
in the Trust Fund. Common Mortgage Loans, which account for ______% by
Cut-off Date Pool Balance, are those Mortgage Loans which generated prior
balances that were transferred to one or more of the Prior Trusts. See
table captioned "Data on Common Mortgage Loans" under "The Mortgage Loan
Pool" herein. Payments of principal (including prepayments) on a Common
Mortgage Loan will be applied first to reduce to zero the principal
balance of the applicable Prior Trusts before any such payments are
applied to reduce the Trust Balance of such Common Mortgage Loan. Partial
prepayments of Common Mortgage Loans therefore would result in
distributions on the Certificates at a slower rate than partial
prepayments of other Mortgage Loans.
Because principal payments on the Mortgage Loans will be distributed to
Certificateholders as they are collected, the rate of principal payments
and the aggregate amount of each interest payment on the Certificates and
the yields to maturity of the Certificates will vary in relation to the
rate and timing of losses sustained by the Certificateholders resulting
from the liquidation of Mortgage Loans or otherwise. Principal prepayments
on the Mortgage Loans may be in the form of prepayments, payments under
the Certificate Insurance Policy, repurchases by the Servicer and
liquidations due to default, casualty, condemnation and the like. The
weighted average life of the 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.
If the actual amount of losses in respect of the Mortgage Loans
experienced by the Trust Fund exceeds the amount of losses assumed by
investors in the Certificates, subject to the protection provided by the
Certificate Insurance Policy and the availability of the limited
subordination of the Seller Interest and overcollateralization, such
investors may experience a loss on their investments.
The Trust Fund's prepayment experience will be affected by any
repurchases of Mortgage Loans by the Servicer pursuant to the Agreement.
Although substantially all of the Mortgage Loans contain due-on-sale
provisions, the Servicer is under no obligation to enforce such provisions
and will refrain therefrom if such exercise is not permitted by applicable
law or will impair or threaten to impair any recovery under any related
insurance policy. However, transfers of Mortgaged Properties resulting in
the voluntary prepayment of the full amount due under the related Credit
Line Agreements will affect the level of prepayments on the Mortgage
Loans. See "The Pooling and Servicing Agreement--Collection Procedures"
and "Certain Legal Aspects of the Mortgage Loans--Due-on-Sale Clauses" in
the Prospectus for a description of certain provisions of the Agreement
referred to below that may affect the prepayment experience on the
Mortgage Loans.
The yield to an investor who purchases the Certificates in the secondary
market at a price other than par will vary from the anticipated yield if
the rate of prepayment on the Mortgage Loans is actually different than
the rate anticipated by such investor at the time such Certificates were
purchased.
Collections on the Mortgage Loans may vary because, among other things,
borrowers may make payments during any month (other than the month in
which the Mortgage Loan matures) as low as the interest payment for such
month or as high as the entire outstanding balance plus accrued interest
thereon. Collections on the Mortgage Loans may also vary due to seasonal
purchasing and payment habits of borrowers.
Although the Servicer is restricted under the Agreement from increasing
the Credit Limit under a Credit Line Agreement above a certain level
without repurchasing the related Mortgage Loan, it is not prohibited from
entering into a new loan agreement with the borrower providing for the
increased credit limit and simultaneously prepaying the Loan Balance on
behalf of the borrower from amounts advanced under such new loan
agreement. Any such prepayments would be passed through to holders of the
Certificates and may affect the weighted average life of the Certificates.
No assurance can be given as to the level of prepayments that the Trust
Fund will experience and it can be expected that a portion of borrowers
will not prepay their Mortgage Loans to any significant degree.
During the Managed Amortization Period, Certificateholders will receive,
to the extent of the availability thereof, amounts from Trust Principal
Collections either based upon the Fixed Allocation Percentage of principal
received or the principal received less amounts drawn under the Credit
Line Agreements, whichever is less. Upon the commencement of the Rapid
Amortization Period, Certificateholders will receive amounts from Trust
Principal Collections based solely upon their Fixed Allocation Percentage.
Because prior distributions of Trust Principal Collections to
Certificateholders serve to reduce the Floating Allocation Percentage but
do not change their Fixed Allocation Percentage, allocations of Trust
Principal Collections based on the Fixed Allocation Percentage may result
in distributions of principal to the Certificateholders in amounts that
are, in most cases, greater relative to the declining balance of the
Mortgage Loans than would be the case if the Floating Allocation
Percentage were used to determine the percentage of Trust Principal
Collections distributed to Certificateholders. This is especially true
during the Rapid Amortization Period when the Certificateholders are
entitled to receive the Maximum Principal Payment and not a lesser amount.
In addition, Certificate Interest Collections may be distributed as
principal to Certificateholders in connection with the Accelerated
Principal Distribution Amount, if any. Furthermore, to the extent of
losses allocable to the Certificateholders, Certificateholders may also
receive as payment of principal the amount of such losses either from (i)
Certificate Interest Collections, (ii) Trust Interest Collections and
Trust Principal Collections otherwise allocable to the Seller Interest up
to the Seller Subordinated Amount or (iii), in some instances, draws under
the Certificate Insurance Policy. The level of losses may therefore affect
the rate of payment of principal on the Certificates.
To the extent borrowers make more draws than principal payments, the
Seller Interest may grow. Because during the Rapid Amortization Period the
Certificateholder's share of Trust Principal Collections is based upon its
Fixed Allocation Percentage (without reduction), an increase in the Seller
Interest due to additional draws may also result in Certificateholders
receiving principal at a greater rate. The Agreement permits the Seller,
at its option, but subject to the satisfaction of certain conditions
specified in the Agreement, including the conditions described below, to
remove certain Mortgage Loans from the Trust during the Managed
Amortization Period, so long as the Seller Interest (after giving effect
to such removal) is not less than the Minimum Seller Interest. Such
removals may affect the rate at which principal is distributed to
Certificateholders by reducing the overall Pool Balance and thus the
amount of Trust Principal Collections. See "Description of the
Certificates--Optional Retransfers of Mortgage Loans to the Seller."
WEIGHTED AVERAGE LIFE OF THE CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments of the Mortgage Loans on the weighted average lives of the
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
Certificates will be affected by the rate at which principal on the
Mortgage Loans supporting such Class of Certificates 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 tables, the column headed "0%" assumes that none
of the Mortgage Loans is prepaid before maturity. The columns headed
"___%", "___%" and "___%" assume that prepayments on the Mortgage Loans
are made at CPRs of "___%", "___%" and "___%", 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 following tables set forth below are based on a conditional
prepayment rate and constant draw rate (which for purposes of these
assumptions is the amount of Additional Balances on the Mortgage Loans
drawn each month expressed as an annualized percentage of the total
principal of the pool of Mortgage Loans outstanding at the beginning of
such month) indicated in the tables below.
The tables below set forth the characteristics of three aggregate pools
that have been assumed for the tables on the following pages. The weighted
average remaining months to balloon payment/maturity represent the number
of months remaining until the final balloon payment. The weighted average
loan rate is based on a prime rate of 8.25% and such rate does not vary.
<TABLE>
<CAPTION>
Weighted
Average Weighted
Cut-off Remaining Average
Date Prior Months to Weighted Credit Limit
Trust Trust Balloon Average Utilization
Pool Balance Balance Payment/Maturity Loan Rate Rate
<S> <C> <C> <C> <C> <C>
1 $ $ % %
2
3
</TABLE>
In addition, such tables assume that (i) the distributions are made in
accordance with the description set forth under "Description of the
Certificates--Distributions on the Certificates" herein, (ii) the
Certificate Rate is ____% and such rate does not vary, (iii) the Servicing
Fee Rate, together with the premium rate on the Certificate Insurance
Policy, is assumed to be ____% per annum, the Servicing Fee is calculated
monthly on the Pool Balance at the beginning of any Collection Period and
the premium on the Certificate Insurance Policy is calculated monthly on
the Certificate Principal Balance at the beginning of any Collection
Period, (iv) distributions of principal and interest on the Certificates
will be made on the ____th day of each calendar month regardless of the
day on which the Distribution Date actually occurs, commencing _______
199_, (v) monthly draws are calculated under each of the assumptions as
set forth in the tables below before giving effect to prepayments, (vi) no
extension past the scheduled maturity date of a Mortgage Loan is made,
(vii) no delinquencies occur, (viii) all prepayments are prepayments in
full and include thirty days' interest thereon, (ix) Mortgage Loans are
removed from the Trust Fund so that the Seller Interest on each Removal
Date equals or exceeds the Minimum Seller Interest, (x) the scheduled due
date for each of the Mortgage Loans is the first day of each month, (xi)
the Closing Date is ______, 199_, (xii) no losses on the Mortgage Loans
will be realized and (xiii) the Original Certificate Principal Balance is
$_________.
Since the tables were prepared on the basis of the assumptions in the
preceding paragraphs, there are discrepancies between the characteristics
of the actual Mortgage Loans and the characteristics of the Mortgage Loans
assumed in preparing the tables. Any such discrepancy may have an effect
upon the percentages of the Original Certificate Principal Balance
outstanding and the weighted average lives of the Certificates set forth
in the tables. In particular, the Loan Rates are adjustable and will most
likely vary from the assumed constant interest rates, which may have a
significant effect on the percentages of the Original Certificate
Principal Balance outstanding and the weighted average lives. In addition,
since the actual Mortgage Loans in the Trust Fund have characteristics
which differ from those assumed in preparing the tables set forth below,
the distributions of principal on the Certificates may be made earlier or
later than as indicated in the tables.
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 months to balloon payment/maturity of the Mortgage Loans are 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 Certificates and sets forth the
percentage of the Original Certificate Principal Balance that would be
outstanding after each of the dates shown at the indicated CPR.
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE--AMORTIZATION
SCHEDULE (1)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Payment Date _% % % %
Closing Date % % % %
_____ 25, 199_ % % % %
_____ 25, 199_ % % % %
_____ 25, 199_ % % % %
_____ 25, 200_ % % % %
_____ 25, 200_ % % % %
_____ 25, 200_ % % % %
_____ 25, 200_ % % % %
_____ 25, 200_ % % % %
_____ 25, 200_ % % % %
_____ 25, 200_ % % % %
Weighted Average Life (years)(2)
</TABLE>
__________
(1) Assumes (i) that an optional termination is exercised when the
outstanding Certificate Principal Balance is less than or equal to __% of the
Original Certificate Principal Balance and (ii) a constant draw rate of __%.
Pool 2 has a monthly draw rate of __% for the first seven months and then has
a monthly draw rate equal to the terminal constant draw rate.
(2) The weighted average life of a Certificate is determined by (i)
multiplying the amount of each principal payment by the number of years from
the date of issuance to the related Distribution Date, (ii) adding the
results, and (iii) dividing the sum by the Original Certificate Principal
Balance.
WEIGHTED AVERAGE LIFE(1) AND FINAL SCHEDULED PAYMENT DATE(2)
SENSITIVITY OF THE CERTIFICATES TO PAYMENTS AND DRAWS
<TABLE>
<CAPTION>
Conditional Prepayment Rate (% CPR)(3)
0% ___% ___% ___%
Terminal
Constant
Draw
Rate(4) WAL Date WAL Date WAL Date WAL Date
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
% __/25/20_ __/25/2005 __/25/20__ __/25/20__
% __/25/20_ __/25/2003 __/25/20__ __/25/20__
% __/25/20_ __/25/2003 __/25/20__ __/25/20__
% __/25/20_ __/25/2003 __/25/20__ __/25/20__
</TABLE>
<TABLE>
<CAPTION>
Conditional Prepayment Rate (% CPR)(5)
0% ___% ___% ___%
Terminal
Constant
Draw
Rate(4) WAL Date WAL Date WAL Date WAL Date
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
% __/25/20_ __/25/2005 __/25/20__ __/25/20__
% __/25/20_ __/25/2003 __/25/20__ __/25/20__
% __/25/20_ __/25/2003 __/25/20__ __/25/20__
% __/25/20_ __/25/2003 __/25/20__ __/25/20__
</TABLE>
__________
(1) The weighted average life of the Certificate is determined by (i)
multiplying the amount of each principal payment by the number of years from
the date of issuance to the related Distribution Date, (ii) adding the
results, and (iii) dividing the sum by the Original Certificate Principal
Balance.
(2) The final scheduled payment date of the Certificates is the date on
which the Certificate Principal Balance is reduced to zero.
(3) Assumes that an optional termination is exercised when the outstanding
Certificate Principal Balance is less than or equal to 10% of the Original
Certificate Principal Balance.
(4) Assumes that each Mortgage Loan has a monthly draw rate equal to the
terminal constant draw rate except for pool 2, which has a monthly draw rate
of ___% for the first seven months and then has a monthly draw rate equal to
the terminal constant draw rate.
(5) Assumes no optional termination is exercised.
The Servicer, or if the Servicer fails to exercise its option, the
Certificate Insurer, has the option of purchasing all of the assets of the
Trust Fund at such time as the outstanding Certificate Principal Balance
is less than 10% of the Original Certificate Principal Balance. Under
these circumstances, distributions allocable to principal will be made to
Certificateholders in advance and possibly significantly in advance of the
time that the aggregate amount of such distributions would otherwise have
been made to Certificateholders. See "Description of Certificates--
Termination; Retirement of the Certificates" herein.
See "Special Considerations and Risk Factors--Maturity and Prepayment
Considerations" herein for certain additional prepayment considerations.
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement among the
Seller, the 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
The Certificates will be available for purchase in denominations of
$_______ and integral multiples of $1,000 in excess thereof and will
evidence specified beneficial ownership interests in the Trust Fund. The
Trust Fund consists of (i) a pool of home equity revolving credit line
loans (the "Mortgage Loans"), to the extent of their Trust Balances, made
under certain Credit Line Agreements; (ii) collections in respect of the
Trust's interest in the Mortgage Loans received on or after the Cut-off
Date; (iii) the Trust's interest in property that secured a Mortgage Loan
and which has been acquired by foreclosure or deed in lieu of foreclosure
or otherwise; (iv) the Certificate Insurance Policy; (v) the Trust's
interest in rights under certain hazard insurance policies covering the
Mortgaged Properties, (vi) and certain other property relating to the
Mortgage Loans as described herein. Definitive Certificates, if issued,
will be transferable and exchangeable at the corporate trust office of the
Trustee, acting as Certificate Registrar. 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 related tax or other governmental
charge.
The initial principal balance of the Certificates will be
$______________ (the "Original Certificate Principal Balance")
(approximate). The Certificate Principal Balance as of any date is equal
to the Original Certificate Principal Balance minus the aggregate amounts
actually distributed as principal to Certificateholders. Each Certificate
represents the right to receive payments of interest at the Certificate
Rate and payments of principal as described below.
The aggregate undivided interest in the Trust Fund represented by the
Certificates as of the Closing Date will equal $____________ (the
"Original Invested Amount"), which represents approximately __% of the
Cut-off Date Pool Balance. Following the Closing Date, the "Invested
Amount" with respect to any date will be an amount equal to the Original
Invested Amount minus the sum of (i) the total of Principal Collections
previously distributed to Certificateholders and (ii) the total of the
amount for each Distribution Date equal to the product of the Floating
Allocation Percentage and the Liquidation Loss Amount (other than any
Investor Loss Amount that has been reallocated to the Seller Interest on
such Distribution Date).
The Seller will hold the remaining undivided interest (the "Seller
Interest") in the Trust Balances of the Mortgage Loans, which interest is
equal to the Pool Balance minus the Invested Amount and initially will
equal approximately __% of the Cut-off Date Pool Balance. In general, the
Pool Balance will vary during a Collection Period as principal is paid on
the Mortgage Loans, liquidation losses are incurred and Additional
Balances are drawn down by borrowers.
The Seller has the right to sell or pledge the Seller Interest at any
time, provided (i) the Rating Agencies have notified the Seller and the
Trustee in writing that such action will not result in the reduction or
withdrawal of the ratings assigned to the Certificates, and (ii) certain
other conditions specified in the Agreement are satisfied.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO CERTIFICATE ACCOUNT
The Certificate Account will be established by the Servicer in the name
of and on behalf of the Trustee. Not later than 1:00 p.m. New York time on
the Business Day prior to each Distribution Date, the Servicer is
obligated under the Agreement to remit to the Trustee for deposit in the
Certificate Account an amount in same day funds equal to the aggregate of
the amounts described below. The Servicer shall include with such deposit
any Monthly Advance for such Distribution Date.
On each Distribution Date upon which there is a Monthly Advance
Reimbursement Amount, the Servicer shall require the Trustee to withdraw
from the Certificate Account an amount, as determined by the Servicer,
equal to the lesser of (i) such Monthly Advance Reimbursement Amount and
(ii) the amount of Trust Interest Collections and Trust Principal
Collections on deposit in the Certificate Account less the required
distribution of interest and principal on the Certificates, the monthly
premium due on the Certificate Insurance Policy and all unreimbursed
amounts owed to the Certificate Insurer. A "Monthly Advance Reimbursement
Amount" means, as to any Distribution Date, all Monthly Advances which
have not been previously reimbursed to the Servicer either from the
Certificate Account or from debits to the mortgage loan payment record
maintained by the Servicer.
ALLOCATIONS AND COLLECTIONS
All collections on the Mortgage Loans will be allocated in accordance
with the Credit Line Agreements between amounts collected in respect of
interest and amounts collected in respect of principal.
As to any Distribution Date, "Interest Collections" on the Mortgage
Loans will be equal to the aggregate amount collected on the Mortgage
Loans during the related Collection Period that is allocated to interest
pursuant to the terms of the Credit Line Agreements, including Net
Liquidation Proceeds so allocated, reduced by the aggregate Servicing Fee
for such Collection Period. As to any Distribution Date, "Trust Interest
Collections" will be equal to the total amount of the Trust's share of
Interest Collections. The Trust's share of Interest Collections for each
Mortgage Loan will be the portion of the amount allocated to interest on
such Mortgage Loan equal to interest accrued at the Net Loan Rate on the
Trust Balance during the related Interest Period. "Interest Period" means
the monthly period during which interest accrues on the Mortgage Loans.
The first Interest Period will be ________ 1996. As to any Distribution
Date, the "Collection Period" is generally the calendar month preceding
such Distribution Date.
As to any Distribution Date, "Principal Collections" will be equal to
the aggregate amount collected on the Mortgage Loans during the related
Collection Period that is allocated to principal pursuant to the terms of
the Credit Line Agreements. Principal Collections on a Common Mortgage
Loan will be applied first to reduce to zero the applicable portion
thereof owned by one or more Prior Trusts before any such collections are
applied in reduction of the Trust Balance of such Common Mortgage Loan. As
to any Distribution Date, "Trust Principal Collections" will be equal to
the total amount of the Trust's share of Principal Collections. The
Trust's share of Principal Collections on each Mortgage Loan will equal
the sum of (i) the amount allocated to principal that was received from
the borrower in the related Collection Period (excluding, in the case of a
Common Mortgage Loan, principal allocated to reduce the portion of such
Common Mortgage Loan owned by one or more Prior Trusts in accordance with
the second preceding sentence), (ii) the principal portion of Net Trust
Liquidation Proceeds and Trust Insurance Proceeds and (iii) the principal
portion of the Transfer Deposit Amount of a retransferred Mortgage Loan.
"Net Trust Liquidation Proceeds" with respect to a Mortgage Loan are
equal to the aggregate of all amounts received upon liquidation of such
Mortgage Loan, including insurance proceeds, reduced by related expenses,
plus accrued and unpaid interest thereon through the date of liquidation,
but not including the portion, if any, of such amount that exceeds the
Trust Balance of such Mortgage Loan at the end of the preceding Collection
Period.
"Trust Insurance Proceeds" with respect to a Mortgage Loan and
Collection Period are the Trust's share of insurance proceeds paid to the
Servicer during such Collection Period pursuant to any insurance policy
covering such Mortgage Loan, reduced by related expenses, which (i) are
not liquidation proceeds, (ii) are not applied to the restoration or
repair of the related Mortgaged Property or released to the related
borrower in accordance with the normal servicing procedures of the
Servicer and (iii) will be applied by the Servicer in reduction of the
Loan Balance of such Mortgage Loan, but not including the portion, if any,
of such amount that exceeds the Trust Balance of such Mortgage Loan at the
end of such Collection Period.
"Transfer Deposit Amount" with respect to any Distribution Date is the
amount of cash required to be deposited to the Certificate Account by the
Servicer to maintain the Minimum Seller Interest with respect to a
repurchased Defective Mortgage Loan after taking into account any transfer
of an Eligible Substitute Mortgage Loan to the Trust with respect to such
Defective Mortgage Loan.
As to any Distribution Date, interest allocable to the Certificates
("Certificate Interest Collections") will equal the product of Trust
Interest Collections for such Distribution Date and the Floating
Allocation Percentage. The remaining amount of Interest Collections will
be allocated to the Seller Interest. With respect to any Distribution
Date, the "Floating Allocation Percentage" is the percentage equivalent of
a fraction determined by dividing the Invested Amount by the Pool Balance
as of the beginning of the related Collection Period.
The Trustee will deposit any amounts drawn under the Certificate
Insurance Policy into the Certificate Account.
With respect to any date, the "Pool Balance" will be equal to the
aggregate of the Trust Balances of the Mortgage Loans as of such date. The
"Trust Balance" of a Mortgage Loan (other than a Liquidated Mortgage Loan,
which shall have a Trust Balance of zero) on any day is equal to its Cut-off
Date Trust Balance, plus the Additional Balances, if any, in respect
of such Mortgage Loan assigned to the Trust each month, minus all
collections credited against the principal balance of such Mortgage Loan
(excluding in the case of any Common Mortgage Loan, any such principal
collections applied to reduce the principal balance thereof owned by one
or more Prior Trusts) in accordance with the related Credit Line Agreement
prior to such day. In certain cases the Cut-off Date Trust Balance of a
Mortgage Loan is zero. In the case of any Common Mortgage Loan, the Cut-off
Date Trust Balance of such Mortgage Loan excludes the portion of the
Loan Balance owned by one or more Prior Trusts.
The "Loan Balance" of a Mortgage Loan on any day is equal to the sum of
the Trust Balance and, in the case of a Common Mortgage Loan, the portion
of the outstanding principal balance of such Mortgage Loan owned by one or
more Prior Trusts.
DISTRIBUTIONS ON THE CERTIFICATES
Beginning with the month after the month in which the Cut-off Date for
the Certificates occurs, distributions of principal and interest on
Certificates will be made by the Trustee on each Distribution Date (i.e.,
the 25th day of each month or, if such day is not a Business Day, then the
next succeeding Business Day) to the persons in whose names such
Certificates are registered on the last Business Day of the month prior to
the month in which such Distribution Date occurs (or, in the case of the
first Distribution Date, on the date of issuance of the Certificates) (the
"Record Date"), except that the final distribution in respect of any
Certificate will only be made upon presentation and surrender of such
Certificate at the office or agency designated by the Trustee for that
purpose in New York, New York.
Distributions to Certificateholders will be made in an amount equal to
each holder's respective Percentage Interest multiplied by the amount
distributed in respect of the Certificates on each Distribution Date. The
undivided percentage interest (the "Percentage Interest") evidenced by any
Certificate will be equal to the percentage obtained by dividing the
initial principal balance of such Certificate by the Original Certificate
Principal Balance.
Each distribution with respect to a Book-Entry Certificate will be paid
to DTC, which will credit the amount of such distribution to the accounts
of its Participants in accordance with its normal procedures. Each
Participant will be responsible for disbursing such distribution to the
Certificate Owners that it represents and to each indirect participating
brokerage firm (a "brokerage firm" or "indirect participating firm") for
which it acts as agent. Each brokerage firm will be responsible for
disbursing funds to the Certificate Owners that it represents. All such
credits and disbursements with respect to a Book-Entry Certificate are to
be made by DTC and the Participants in accordance with the provisions of
the Certificates. For purposes of the Agreement a "Business Day" is
defined as any day other than (i) a Saturday or a Sunday or (ii) a day on
which banks in the states of New York, Florida or California are required
or authorized by law to be closed.
The Certificate Principal Balance as of any date is equal to the
Original Certificate Principal Balance minus the aggregate amounts
actually distributed as principal to Certificateholders.
Application of Interest Collections
On each Distribution Date, the Certificate Interest Collections will be
applied in the following order of priority:
(i) to pay the premium for the Certificate Insurance Policy;
(ii) as payment for the accrued interest due and any overdue accrued
interest at the applicable Certificate Rate on the Certificate Principal
Balance for the related Accrual Period;
(iii) to pay Certificateholders the "Investor Loss Amount" equal to
the product of the Floating Allocation Percentage and the Liquidation Loss
Amount for such Distribution Date;
(iv) as payment for any Investor Loss Amount that was not previously
(a) paid from Certificate Interest Collections, (b) paid from Trust Interest
Collections and Trust Principal Collections allocable to the Seller Interest
or reallocated to reduce the Seller Interest up to the Seller Subordinated
Amount as described under "--Limited Subordination of the Seller Interest"
below, (c) covered by overcollateralization as described under "--
Overcollateralization" below or (d) funded by draws on the Certificate
Insurance Policy;
(v) to reimburse prior draws from the Certificate Insurance Policy,
together with interest thereon, and to pay any fees and expenses owed to the
Certificate Insurer pursuant to the Insurance Agreement, together with
interest thereon;
(vi) to pay principal on the Certificates until the Invested Amount
exceeds the Certificate Principal Balance by the amount, if any, equal to (x)
the Required Amount minus (y) the Seller Subordinated Amount (such payment is
referred to as the "Accelerated Principal Distribution Amount"); and
(vii) to the Seller.
Payments to Certificateholders pursuant to clause (ii) will be interest
payments on the Certificates. Payments to Certificateholders pursuant to
clauses (iii) and (iv) will be principal payments on the Certificates and
will reduce the Certificate Principal Balance. Although payments of the
Accelerated Principal Distribution Amount, if any, to Certificateholders
pursuant to clause (vi) will reduce the Certificate Principal Balance,
such payments will not reduce the Invested Amount. Payments to
Certificateholders of Trust Interest Collections and Trust Principal
Collections allocable to the Seller Interest will reduce the Certificate
Principal Balance. Payments of the Accelerated Principal Distribution
Amount are neither guaranteed by the Certificate Insurance Policy nor
supported by the Seller Subordinated Amount.
An "Accrual Period" for any Distribution Date is the period beginning on
the preceding Distribution Date (or the Closing Date in the case of the
first Distribution Date) and ending on the day preceding such Distribution
Date.
For each Distribution Date occurring on or prior to the _____
Distribution Date, the "Required Amount" will be __% of the Cut-off Date
Pool Balance. For each Distribution Date thereafter, the Required Amount
will be the lesser of (i) __% of the Cut-off Date Pool Balance and (ii)
__% of the outstanding Pool Balance; provided that in no event will the
Required Amount be less than a floor amount equal to the greater of (x) _%
of the Cut-off Date Pool Balance and (y) __% of the aggregate Trust
Balances of all Mortgage Loans delinquent 91 days or more (including for
this purpose any Mortgage Loans in foreclosure and any Mortgage Loans with
respect to which the related Mortgaged Properties have been acquired by
the Trust Fund) as of the end of the related Collection Period.
Notwithstanding the foregoing, for each Distribution Date, if the
cumulative principal losses on the Trust Balances of the Mortgage Loans
(i.e., the excess of (a) the aggregate Trust Balances of Mortgage Loans
liquidated during all Collection Periods subsequent to the Cut-off Date
over (b) the aggregate Net Trust Liquidation Proceeds received during such
Collection Periods) as of the end of the related Collection Period exceed
____% of the Cut-off Date Pool Balance, then the Required Amount will be
____% of the Cut-off Date Pool Balance.
A "Liquidation Loss Amount" with respect to any Liquidated Mortgage Loan
and Distribution Date will be the unrecovered Trust Balance thereof at the
end of the related Collection Period in which such Mortgage Loan became a
Liquidated Mortgage Loan, after giving effect to the principal portion of
Net Trust Liquidation Proceeds in connection therewith.
Certificate Rate
On each Distribution Date, the "Certificate Rate" will be equal to LIBOR
(as described below) on the second LIBOR Business Day prior to the
preceding Distribution Date (or as of _______, 199_ in the case of the
first Distribution Date) plus ____%.
In the event that the Certificate Rate for any such Distribution Date is
greater than the weighted average of the "Net Loan Rates" (the Loan Rate
less the Servicing Fee Rate) applicable to the related Collection Period
minus a per annum rate representing the monthly premium due on the
Certificate Insurance Policy (which monthly premium rate, together with
the Servicing Fee Rate, shall not exceed ____% per annum) the Certificate
Rate for any such Distribution Date will be equal to such weighted average
rate minus such premium rate (the "Alternate Certificate Rate").
Calculation of LIBOR
LIBOR with respect to any Distribution Date following the initial
Distribution Date will be determined by the Trustee and will equal the
arithmetic mean (rounded, if necessary, to the nearest one sixteenth of a
percent, with one thirty-second of a percent 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 (as of ______, 199_ in the case of the first
Distribution Date); 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 Business Day 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 as described above, the Trustee will request the
principal London office of each of the reference banks (which shall be
four major banks specified in the Agreement that are engaged in
transactions in the London interbank market) ("Reference Banks") to
provide the Trustee with such bank's 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, then
LIBOR on such date will be the arithmetic mean (rounded, if necessary, to
the nearest one sixteenth of a percent with one thirty-second of a percent
rounded upwards) of all such 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 one thirty-second of a percent
rounded upwards) of the offered per annum rates which one or more leading
banks in The City of New York selected by the Trustee (after consultation
with the Servicer) 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.
Seller Collections
Collections allocable to the Seller Interest that are not distributed to
Certificateholders will be distributed to the Seller only to the extent
that such distribution will not reduce the amount of the Seller Interest
as of the related Distribution Date below the Minimum Seller Interest.
Amounts not distributed to the Seller because of such limitations will be
retained in the Certificate Account until the Seller Interest exceeds the
Minimum Seller Interest, at which time such excess shall be released to
the Seller. If any such amounts are still retained in the Certificate
Account upon the commencement of the Rapid Amortization Period, such
amounts will be paid to the Certificateholders as a reduction of the
Certificate Principal Balance.
Principal Payments from Principal Collections
For the period beginning on the first Distribution Date and, unless a
Rapid Amortization Event shall have earlier occurred, ending on the
Distribution Date in ____ 20__ (the "Managed Amortization Period"), the
amount of Trust Principal Collections payable to Certificateholders on
each Distribution Date will equal, to the extent funds are available
therefor from Trust Principal Collections, the Scheduled Principal
Collections Payment for such Distribution Date. On any Distribution Date
during the Managed Amortization Period, the "Scheduled Principal
Collections Payment" will equal the lesser of (i) the Maximum Principal
Payment and (ii) the Alternative Principal Payment.
For the period beginning with the first Distribution Date following the
end of the Managed Amortization Period (the "Rapid Amortization Period"),
the amount of Trust Principal Collections payable to Certificateholders on
each Distribution Date will be equal to the Maximum Principal Payment.
With respect to any Distribution Date, the "Maximum Principal Payment"
will equal the product of the Trust Principal Collections and the Fixed
Allocation Percentage. With respect to any Distribution Date, the
"Alternative Principal Payment" is equal to the amount, but not less than
zero, of Trust Principal Collections minus the aggregate of Additional
Balances created during the related Collection Period.
With respect to any date of determination, the "Fixed Allocation
Percentage" will equal the greater of (i) __% and (ii) the percentage
equivalent (but not in excess of ___%) of a fraction, the numerator of
which is the Invested Amount and the denominator of which is the Pool
Balance as of the end of such day. The Fixed Allocation Percentage
initially will be __%.
On the Distribution Date in ____ 20__ (the "Stated Maturity Date"), to
the extent funds are available therefor, Certificateholders will be
entitled to receive as payment of principal an amount equal to the
outstanding Certificate Principal Balance. To the extent funds are not
otherwise available for such payment, a draw on the Certificate Insurance
Policy for such insufficiency will be made on the Stated Maturity Date.
The aggregate distributions of principal to Certificateholders will not
exceed the Original Certificate Principal Balance.
The Seller will be entitled to receive the portion of the Trust
Principal Collections on each Distribution Date that is not distributable
on the Certificates; provided that such distribution will not reduce the
Seller Interest below the Minimum Seller Interest as of such Distribution
Date.
RAPID AMORTIZATION EVENTS
As described above, the Managed Amortization Period will continue
through the Distribution Date in _____ 20__, unless a Rapid Amortization
Event occurs prior to such date in which case the Rapid Amortization
Period will commence prior to such date. "Rapid Amortization Event" refers
to any of the following events:
(a) failure on the part of the Servicer (i) to make a payment or
deposit required under the Agreement within five Business Days after the date
such payment or deposit is required to be made or (ii) to observe or perform
in any material respect any other covenants or agreements of the Servicer set
forth in the Agreement, which failure continues unremedied for a period of 60
days after written notice;
(b) any representation or warranty made by the Servicer in the
Agreement proves to have been incorrect in any material respect when made and
continues to be incorrect in any material respect for a period of 60 days
after written notice and as a result of which the interests of the
Certificateholders are materially and adversely affected; provided, however,
that a Rapid Amortization Event shall not be deemed to occur if the Servicer
has purchased or made a substitution for the related Mortgage
Loan or Mortgage Loans if applicable during such period (or within an
additional 60 days with the consent of the Trustee) in accordance with the
provisions of the Agreement;
(c) the occurrence of certain events of bankruptcy, insolvency or
receivership relating to the Seller or the Servicer;
(d) the Trust becomes subject to regulation by the Securities and
Exchange Commission as an investment company within the meaning of the
Investment Company Act of 1940, as amended; or
(e) the aggregate of all draws under the Certificate Insurance
Policy exceeds 1% of the Cut-off Date Pool Balance.
In the case of any event described in clause (a) or (b), a Rapid
Amortization Event will be deemed to have occurred only if, after the
applicable grace period, if any, described in such clauses, either the
Trustee or Certificateholders holding Certificates evidencing more than
51% of the Percentage Interests or the Certificate Insurer (so long as
there is no default by the Certificate Insurer in the performance of its
obligations under the Certificate Insurance Policy), by written notice to
the Seller and the Servicer (and to the Trustee, if given by the
Certificateholders) declare that a Rapid Amortization Event has occurred
as of the date of such notice. In the case of any event described in
clause (c), (d) or (e), a Rapid Amortization Event will be deemed to have
occurred without any notice or other action on the part of the Trustee,
the Certificate Insurer or the Certificateholders immediately upon the
occurrence of such event.
In addition to the consequences of a Rapid Amortization Event discussed
above, if the Seller files a bankruptcy petition or goes into liquidation
or any person is appointed a receiver or bankruptcy trustee of the Seller,
on the day of any such filing or appointment no further Additional
Balances will be transferred to the Trust Fund, the Seller will
immediately cease to transfer Additional Balances to the Trust and the
Seller will promptly give notice to the Trustee of any such filing or
appointment. Within 15 days, the Trustee will furnish by mail to
Certificateholders a notice of the liquidation or the filing or
appointment stating that the Trustee intends to sell, dispose of or
otherwise liquidate the Trust Balances of the Mortgage Loans in a
commercially reasonable manner and to the best of its ability. Unless
otherwise instructed within a specified period by Certificateholders
representing Percentage Interests aggregating more than 51% of the
Certificate Principal Balance of the Certificates not held by the Seller,
the Trustee will sell, dispose of or otherwise liquidate the Trust
Balances of the Mortgage Loans in a commercially reasonable manner and on
commercially reasonable terms. The proceeds from the sale, disposition or
liquidation of the Trust Balances of the Mortgage Loans will first be paid
to the Certificate Insurer to the extent of unreimbursed draws under the
Certificate Insurance Policy and other amounts owing to the Certificate
Insurer pursuant to the Insurance Agreement. Any remaining amounts will be
treated as collections and the portion thereof allocated to the
Certificateholders will be distributed to the Certificateholders on the
date such proceeds are received (the "Dissolution Distribution Date"). If
the portion of such proceeds allocable to the Certificateholders are not
sufficient to pay in full the remaining amount due on the Certificates,
the Certificateholders will suffer a corresponding loss. The Certificate
Insurance Policy will not be available to cover any such loss.
Notwithstanding the foregoing, if a conservator, receiver or trustee-in-
bankruptcy is appointed for the Servicer and no Rapid Amortization Event
exists other than such conservatorship, receivership or insolvency of the
Servicer, the conservator, receiver or trustee-in-bankruptcy may have the
power to prevent the commencement of the Rapid Amortization Period or the
sale of the Trust Balances of the Mortgage Loans described above.
CERTIFICATE INSURANCE POLICY
On or before the Closing Date, the Seller 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 in
accordance with the terms of the Certificate Insurance Policy solely for
the benefit of the Certificateholders. The Certificate Insurance Policy is
non-cancelable. See "The Certificate Insurance Policy and the Certificate
Insurer" herein.
The Certificate Insurance Policy will be issued by the Certificate
Insurer pursuant to the provisions of the Agreement and the Insurance and
Indemnity Agreement (the "Insurance Agreement"), among the Seller, the
Servicer and the Certificate Insurer. The Certificate Insurance Policy
will unconditionally and irrevocably guarantee principal and interest
payments on the Certificates at the times and in the amounts described
below. On each Distribution Date other than any Dissolution Distribution
Date, a draw will be made on the Certificate Insurance Policy equal to (i)
the amount by which interest accrued at the Certificate Rate on the
outstanding Certificate Principal Balance during the preceding Accrual
Period exceeds all amounts on deposit in the Certificate Account available
to be distributed therefor plus (ii) after the Seller Subordinated Amount
has been reduced to zero, the amount, if any, by which the Certificate
Principal Balance as of such Distribution Date (after giving effect to all
other amounts distributable and allocable to principal on the Certificates
on such Distribution Date) exceeds the Invested Amount as of such
Distribution Date (after giving effect to all other amounts distributable
and allocable to principal on the Certificates on such Distribution Date).
In addition, the Certificate Insurance Policy will guarantee the payment
of the outstanding Certificate Principal Balance on the Stated Maturity
Date (after giving effect to all other amounts distributable and allocable
to principal on the Certificates).
In the absence of payments under the Certificate Insurance Policy,
Certificateholders will directly bear the credit and other risks
associated with their undivided interest in the Trust Fund. See "The
Certificate Insurance Policy and the Certificate Insurer" herein.
The Certificate Insurance Policy does not protect against the adverse
consequences of, and does not guarantee, any specified rate of prepayments
(including any prepayments resulting from payments of Accelerated
Principal Distribution Amounts). The Certificate Insurer has the right to
terminate the Trust Fund, causing the transfer of amounts in certain
accounts and the acceleration of the Certificates, under certain
circumstances if the outstanding Certificate Principal Balance becomes
less than 10% of the Original Certificate Principal Balance.
LIMITED SUBORDINATION OF THE SELLER INTEREST
If Certificate Interest Collections on any Distribution Date are
insufficient to pay the sum of (i) the premium for the Certificate
Insurance Policy, (ii) accrued interest due and any overdue accrued
interest on the Certificates, and (iii) the Investor Loss Amount on such
Distribution Date (such insufficiency, the "Deficiency Amount"), Trust
Interest Collections and Trust Principal Collections allocable to the
Seller Interest (but not in excess of the then current Seller Subordinated
Amount, determined as described below) will be applied to cover the
Deficiency Amount. The portion of the Deficiency Amount in respect of
clause (iii) above not covered by such collections (up to the remaining
Seller Subordinated Amount and not in excess of the Investor Loss Amount)
will be reallocated to, and will reduce, the Seller Interest. If such
Certificate Interest Collections plus the amount of collections allocable
to the Seller Interest which have been so applied to cover the Deficiency
Amount are together insufficient to pay the amount set forth in item (ii)
of the definition of Deficiency Amount, then a draw will be made on the
Certificate Insurance Policy to cover such shortfall. After the Seller
Subordinated Amount has been reduced to zero, the Deficiency Amount will
no longer be covered by the Seller Interest as described above.
With respect to any Distribution Date, the "Seller Subordinated Amount"
equals the least of
(i) __% of the Cut-off Date Pool Balance minus the sum of (a) the
aggregate amount of principal collections allocable to the Seller Interest
that have previously been distributed to Certificateholders to cover a
Deficiency Amount as described above and (b) the aggregate amount of the
Investor Loss Amounts that have previously been reallocated in reduction of
the Seller Interest as described above; or
(ii) the Seller Subordinated Amount on the previous Distribution
Date; or
(iii) the Required Amount.
The Seller Subordinated Amount at any time may also be further reduced
if such reduction is consented to by both of the Rating Agencies and the
Certificate Insurer and upon satisfaction of certain other conditions
specified in the Agreement.
OVERCOLLATERALIZATION
The payment of Accelerated Principal Distribution Amounts, if any, to
Certificateholders may result in the Invested Amount being greater than
the Certificate Principal Balance, thereby creating overcollateralization.
On any Distribution Date, such overcollateralization, if any, will be
available to absorb any Investor Loss Amount that is not covered either by
(i) Certificate Interest Collections remaining after the payment of the
premium for the Certificate Insurance Policy and the distribution of
interest on the Certificates or (ii) the limited subordination of the
Seller Interest as described above. Any Investor Loss Amounts not covered
by Certificate Interest Collections, the limited subordination of the
Seller Interest or such overcollateralization will be covered by draws on
the Certificate Insurance Policy to the extent provided therein.
Overcollateralization will be created only by the payments, if any, of
Accelerated Principal Distribution Amounts. As of the Closing Date, the
Invested Amount will be equal to the Original Certificate Principal
Balance and, accordingly, there will not be any initial
overcollateralization. Payment of the Accelerated Principal Distribution
Amount on a Distribution Date is made in an amount equal to the excess, if
any, of the Required Amount over the Seller Subordinated Amount. As of the
Closing Date, the Required Amount is equal to the Seller Subordinated
Amount. Thus, no Accelerated Principal Distribution Amount is expected to
be paid, and no overcollateralization will be created, on the first
Distribution Date. Any payments of Trust Principal Collections allocable
to the Seller's Interest that decrease the Seller Subordinated Amount
would be expected to result in a payment of the Accelerated Principal
Distribution Amount and the creation of, or increase in,
overcollateralization if the Required Amount is in excess of the Seller
Subordinated Amount on a Distribution Date and there are sufficient Trust
Interest Collections. If the Seller Subordinated Amount is reduced to
zero, then payments of the Accelerated Principal Distribution Amount from
Trust Interest Collections may be made in an amount up to the Required
Amount. Any such payments would result in increases in the level of
overcollateralization.
ADVANCES
Under the Agreement, the Servicer will be obligated to advance an amount
(a "Monthly Advance") of cash, which will be part of Trust Interest
Collections and Trust Principal Collections, equal to the aggregate of all
installments of interest at the related Net Loan Rate and principal, if
any, which (a) were known by the Servicer to be delinquent on the Trust
Balance of each Mortgage Loan as of the end of the related Collection
Period, (b) were not previously the subject of a Servicer advance and (c)
would, in the judgment of the Servicer, be recoverable out of late
payments by the borrowers, Liquidation Proceeds, Insurance Proceeds or
otherwise.
In making advances, the Servicer will endeavor to maintain a regular
flow of scheduled interest payments to holders of the Certificates, rather
than to guarantee or insure against losses. Any Servicer funds advanced as
described in the preceding paragraph will be reimbursable to the Servicer
either out of recoveries on the specific Mortgage Loans in respect of
which such advances were made (e.g., late payment made by the related
borrower, any related Insurance Proceeds, Liquidation Proceeds or proceeds
of any Mortgage Loan purchased by MLCC under the circumstances described
above) or out of amounts otherwise distributable to holders of the
Certificates. In addition to the foregoing, such advances by the Servicer
will be reimbursable to the Servicer from cash otherwise distributable to
the holders of Certificates to the extent that the Servicer determines
that any such advances previously made are not ultimately recoverable as
described above.
REPORTS TO HOLDERS OF THE CERTIFICATES
Not later than the second Business Day prior to each Distribution Date
the Servicer will deliver to the Trustee for mailing to each holder of a
Certificate (which will be Cede as nominee of DTC, unless and until
Definitive Certificates are issued) a statement setting forth among other
items:
(i) the amount being distributed to Certificateholders;
(ii) the amount of interest included in such distribution and the
related Certificate Rate;
(iii) the amount, if any, of overdue accrued interest included in
such distribution;
(iv) the amount, if any, of the remaining overdue accrued interest
after giving effect to such distribution;
(v) the amount, if any, of principal included in such distribution;
(vi) the amount, if any, of the reimbursement of previous Investor
Loss Amounts included in such distribution;
(vii) the amount, if any, of the aggregate unreimbursed Investor
Loss Amounts after giving effect to such distribution;
(viii) the Floating Allocation Percentage for the preceding
Collection Period;
(ix) the Invested Amount, the Certificate Principal Balance and the
"Factor" (the outstanding Certificate Principal Balance divided by the
Original Certificate Principal Balance), each after giving effect to such
distribution;
(x) the Required Amount for such Distribution Date;
(xi) the Seller Subordinated Amount after giving effect to such
distribution;
(xii) the Pool Balance as of the end of the preceding Collection
Period;
(xiii) the amount of any overcollateralization;
(xiv) the Servicing Fee for such Distribution Date;
(xv) the amount of any Monthly Advance by the Servicer;
(xvi) the number and aggregate Loan Balance of Mortgage Loans
delinquent (a) 31 to 60 days, (b) 61 to 90 days and (c) 91 days or more,
respectively, as of the end of the related Collection Period;
(xvii) the book value of any real estate which is acquired by the
Trust through foreclosure or grant of deed in lieu of foreclosure;
(xviii) the amount of any draws on the Certificate Insurance
Policy; and
(xix) the number and aggregate Trust Balance of Mortgage Loans that
will be retransferred from the Trust Fund on the related Removal Date and the
cumulative number and aggregate Trust Balance of all Mortgage Loans that have
been retransferred on all prior Removal Dates.
In the case of information furnished pursuant to clauses (ii), (iii),
(iv), (v), (vi) and (vii) above, the amounts shall be expressed as a
dollar amount per Certificate with a $1,000 denomination.
Within 90 days after the end of each calendar year, the Servicer will
deliver to the Trustee for mailing to each Person who at any time during
the calendar year was a holder of a Certificate a statement containing the
information set forth in clauses (ii) and (v) above aggregated for such
calendar year or, in the case of each Person who was a Certificateholder
for a portion of such calendar year, setting forth such information for
each month thereof.
ASSIGNMENT OF TRUST BALANCES OF THE MORTGAGE LOANS
At the time of issuance of the Certificates, the Seller will transfer
and assign all of its right, title and interest in and to the Trust
Balances of each Mortgage Loan (including any Additional Balances arising
during the Managed Amortization Period, related Credit Line Agreements,
mortgages and other related documents (collectively, the "Related
Documents"), including all collections received on or with respect to each
such Mortgage Loan after the Cut-off Date (other than payments of
principal and interest allocable to payment of the Servicing Fee),
together with all its right, title and interest in and to the Trust Fund's
allocable portion of the proceeds of any related insurance policies
received on and after the Cut-off Date. The Trustee will, concurrently
with such assignment, deliver the Certificates to the Seller in exchange
for the Mortgage Loans and the Seller Interest. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the Agreement. Such
schedule will include information as to the Cut-off Date Trust Balance of
each Mortgage Loan, as well as information respecting the Margin and the
maturity of the Mortgage Loan.
Under the terms of the Agreement, so long as ML & Co.'s long-term
unsecured debt is rated at least A- by _______________ and A3 by
_______________, the Servicer shall be entitled to maintain possession of
certain documents relating to the Mortgage Loans (the "Mortgage Files")
and will not be required to deliver any of them to the Trustee. In the
event that ML & Co.'s long-term unsecured debt rating does not satisfy the
above referenced standards, the documentation relating to each Mortgage
Loan will be delivered to and maintained by the Trustee.
At such time, if any, as the Mortgage Files are delivered to the
Trustee, the Trustee 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 following notification thereof to the Servicer by the
Trustee, the Servicer will repurchase such Mortgage Loan in the manner set
forth below.
The Servicer will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan in the Trust Fund (e.g.,
original Combined Loan-to-Value Ratio, principal balance as of the Cut-off
Date, Margin and maturity). In addition, the Servicer will make certain
other representations and warranties customary to sales of Mortgage Loans
and will also represent and warrant that, as of the Cut-off Date, no
Mortgage Loan was more than one month past due.
If any loss is suffered by the Trust Fund, on behalf of the
Certificateholders, in respect of any Mortgage Loan as a result of (a) a
defective document in any Mortgage File, (b) the Servicer's retention of
such Mortgage File or (c) a breach of any representation made by the
Servicer in the Agreement as to a Mortgage Loan, which materially and
adversely affects the interest of the Certificateholders in such Mortgage
Loan, the Servicer will be obligated to accept the retransfer of such
Mortgage Loan from the Trust. Upon such transfer, the Trust Balance of
such Mortgage Loan will be deducted from the Pool Balance, thus reducing
the amount of the Seller Interest. If the deduction would cause the Seller
Interest to become less than the Minimum Seller Interest at such time, the
Servicer will be obligated to either substitute an Eligible Substitute
Mortgage Loan or make a deposit into the Certificate Account in the amount
(the "Transfer Deposit Amount") equal to the amount by which the Seller
Interest would be reduced to less than the Minimum Seller Interest at such
time. Any such deduction, substitution or deposit, will be considered a
payment in full of such Mortgage Loan. Any Transfer Deposit Amount will be
treated as a Principal Collection. Notwithstanding the foregoing, however,
prior to all required deposits to the Certificate Account being made no
such transfer shall be considered to have occurred unless such deposit is
actually made. The obligation of the Servicer to accept a retransfer of a
Defective Mortgage Loan is the sole remedy regarding any defects in the
Mortgage Loans and Related Documents available to the Trustee or the
Certificateholders; provided, however, that the Trustee as successor
servicer shall have no obligation to repurchase any of the Mortgage Loans.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by
the Servicer for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have a Trust Balance (or in the case of a substitution
of more than one Mortgage Loan for a Defective Mortgage Loan, an aggregate
Trust Balance), not substantially greater or less than the Defective
Mortgage Loan; (ii) have a Loan Rate not less than the Loan Rate of the
Defective Mortgage Loan and not more than ___% in excess of the Loan Rate
of such Defective Mortgage Loan; (iii) have a Loan Rate based on the same
Index as that of the Defective Mortgage Loan; (iv) have a Margin that is
not less than the Margin of the Defective Mortgage Loan and not more than
___ basis points higher than the Margin for the Defective Mortgage Loan;
(v) have a mortgage of the same or higher level of priority as the
mortgage relating to the Defective Mortgage Loan; (vi) have a remaining
term to maturity not more than six months earlier and not more than six
months later than the remaining term to maturity of the Defective Mortgage
Loan and in no case later than _______ 1, 20___; (vii) comply with each
representation and warranty as to the Mortgage Loans set forth in the
Agreement (deemed to be made as of the date of substitution); (viii) have
an original Combined Loan-to-Value Ratio not greater than that of the
Defective Mortgage Loan; and (ix) satisfy certain other conditions
specified in the Agreement. To the extent the Trust Balance of an Eligible
Substitute Mortgage Loan is less than the Trust Balance of the related
Defective Mortgage Loan and to the extent that the Seller Interest would
be reduced below the Minimum Seller Interest, the Servicer will be
required to make a deposit to the Certificate Account equal to such
difference.
Mortgage Loans required to be transferred to the Servicer as described
in the preceding paragraphs are referred to as "Defective Mortgage Loans."
AMENDMENTS TO CREDIT LINE AGREEMENTS
In connection with the servicing of the Mortgage Loans, the Servicer may
at the request of a borrower or at its own initiative agree to modify the
Credit Line Agreement relating to a Mortgage Loan or waive compliance by
the borrower with any provision of the Credit Line Agreement, 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 Credit Line Agreement), or
constitute a cancellation or discharge of the outstanding Loan Balance
under such Mortgage Loan, (ii) is not inconsistent with the 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 Servicer
may agree to changes to the terms of a Credit Line Agreement which would
otherwise be violative of clauses (i) and (iii) above if (a) the Servicer
has determined that such changes are necessary to avoid prepayment of the
related Mortgage Loan as a result of refinancing provided by another
lender 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 and (b) the Servicer repurchases the
related Mortgage Loan on the Business Day preceding the Distribution Date
immediately following the Collection Period during which such changes were
made. Any such retransfer will be accomplished in the manner described
under "Description of the Certificates--Assignment of Trust Balances of
the Mortgage Loans" herein.
CONSENT TO SENIOR LIENS AND INCREASE IN CREDIT LIMITS
The Servicer, acting as agent for the Trust Fund and to the extent
consistent with its then current practice respecting comparable mortgage
loans held in its own portfolio, may permit the placement of a subsequent
senior mortgage on any Mortgaged Property so long as either (i) the
Combined Loan-to-Value Ratio of the related Mortgage Loan immediately
following such placement does not exceed the Combined Loan-to-Value Ratio
at origination of such Mortgage Loan or (ii) the placement of such senior
mortgage is in connection with the refinancing of a prior senior mortgage
and results in a reduction of the interest rate applicable to such senior
mortgage and generally does not result in an increase in the then
outstanding principal balance of such senior mortgage. The Servicer may
also permit an increase of the Credit Limit applicable to a Mortgage Loan
so long as the Combined Loan-to-Value Ratio at such Mortgage Loan
immediately following such increase does not exceed 85%.
OPTIONAL RETRANSFERS OF MORTGAGE LOANS TO THE SELLER
Subject to the conditions specified in the Agreement, on any
Distribution Date during the Managed Amortization Period the Seller may,
but shall not be obligated to, remove from the Trust Fund on such
Distribution Date (the "Removal Date"), certain Mortgage Loans without
notice to the Certificateholders. The Seller is permitted to designate the
Mortgage Loans to be removed. Mortgage Loans so designated will only be
removed upon satisfaction of certain conditions specified in the
Agreement, including: (i) the Seller Interest as of such Removal Date
(after giving effect to such removal) exceeds the Minimum Seller Interest;
(ii) the Seller shall have delivered to the Trustee a "Mortgage Loan
Schedule" containing a list of all Mortgage Loans remaining in the Trust
after such removal; (iii) the Seller shall represent and warrant that no
selection procedures which the Seller reasonably believes are adverse to
the interests of the Certificateholders or the Certificate Insurer were
used by the Seller in selecting such Mortgage Loans; (iv) in connection
with the first such retransfer of Mortgage Loans, the Rating Agencies
shall have been notified of the proposed transfer and prior to the Removal
Date shall not have notified the Seller in writing that such transfer
would result in a reduction or withdrawal of the ratings assigned to the
Certificates without regard to the Certificate Insurance Policy; and (v)
the Seller shall have delivered to the Trustee and the Certificate Insurer
an officer's certificate confirming the conditions set forth in clauses
(i) through (iii) above.
As of any date of determination, the "Minimum Seller Interest" is an
amount equal to the lesser of (a) __% of the Pool Balance on such date and
(b) the Seller Interest as of the Closing Date.
SERVICING AND HAZARD 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.
In any case in which the Servicer becomes aware that a Mortgaged
Property has been conveyed by a borrower (except to, or for the benefit
of, the borrower, a co-borrower or a relative of the borrower), the
Servicer will take reasonable steps to freeze the borrower's Credit Limit
at the level of the current outstanding Loan Balance. The Servicer is not
obligated to enforce any due-on-sale clause in a Credit Line Agreement. If
the Servicer elects not to enforce any due-on-sale clause or is prevented
from enforcing such due-on-sale clause under applicable law, the 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 Credit
Line Agreement and, to the extent permitted by applicable law, the
borrower remains liable thereon. If the Servicer elects to enforce such
"due-on-sale" provisions in connection with transfers of the related
Mortgaged Properties, the acceleration of the Mortgage Loans as a result
of such enforcement will affect the level of prepayments on the Mortgage
Loans, thereby affecting the weighted average life of the Certificates.
See "Yield and Prepayment Considerations" in the Prospectus and
"Prepayment and Yield Considerations" herein.
Under the terms of the Mortgage Loans, each borrower is required to
maintain for the corresponding Mortgaged Property a hazard insurance
policy which contains a standard mortgagee's clause and which insures
against loss by fire and by hazards included within the term "extended
coverage," and by such other hazards for which the Servicer requires
coverage. The hazard insurance must be in the amounts and for the periods
of time required by the Servicer. The Servicer will maintain on property
acquired upon foreclosure, or by deed in lieu of foreclosure, hazard
insurance with extended coverage in a similar amount. All amounts
collected by the Servicer under any hazard policy, to the extent they
constitute Net Trust Liquidation Proceeds or Trust Insurance Proceeds,
will ultimately be deposited in the Certificate Account. The Agreement
provides that as protection against coverage lapses in the individual
hazard insurance policies, the Servicer, or an affiliate thereof, will
obtain and maintain a "mortgagee interest policy" issued by an insurer
acceptable to the Rating Agencies insuring against hazard losses on all of
the Mortgaged Properties in an amount equal to the aggregate Loan Balances
outstanding from time to time under the Mortgage Loans. 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 be covered by a Primary Mortgage Insurance
Policy.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
In the event that title to any Mortgaged Property is acquired by
foreclosure or by deed in lieu of foreclosure, the deed or certificate of
sale will be issued to the Servicer, or to the Trustee or its nominee on
behalf of the Certificateholders. Notwithstanding any such acquisition of
title and cancellation of the related Mortgage Loan, such Mortgage Loan
will be considered for most purposes to be an outstanding Mortgage Loan
held in the Trust Fund until such time as the Mortgaged Property is sold
and such Mortgage Loan is liquidated.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
The Servicer may, in its sole discretion, purchase defaulted Mortgage
Loans from the Trust Fund. Any such purchase will be at a price equal to
100% of the Trust Balance of each such Mortgage Loan together with accrued
interest thereon at the Net Loan Rate from the date through which interest
was last paid by the related borrower or advanced by the Servicer to the
end of the Collection Period preceding the Distribution Date on which the
proceeds of such purchase are required to be distributed.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal servicing compensation to be paid to the Servicer in
respect of its servicing activities relating to the Certificates (the
"Servicing Fee") will be retained by it from collections of interest on
the Mortgage Loans in the Trust Fund at the time such collections are
required to be deposited into the Certificate Account and will be equal to
___% (the "Servicing Fee Rate") per annum of the outstanding Loan Balance
of each such Mortgage Loan. In addition, the Servicer will receive any net
investment income from the investment of funds in the Certificate Account.
All assumption fees and late payment charges, to the extent collected from
borrowers shall be retained by the Servicer.
The Servicer will pay certain ongoing expenses associated with the Trust
Fund and incurred by it in connection with its responsibilities under the
Agreement, including, without limitation, payment of the fees and
disbursements of the Trustee, any custodian appointed by the Trustee, the
Certificate Registrar and any paying agent. In addition, as indicated in
the preceding section, the Servicer will be entitled to reimbursement for
certain expenses incurred by it in connection with defaulted 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 Trust Insurance Proceeds or Net Trust Liquidation
Proceeds.
TERMINATION; RETIREMENT OF THE CERTIFICATES
The Trust Fund will terminate on the Distribution Date following the
later of (A) payment in full of all amounts owing to the Certificate
Insurer and (B) the earliest of (i) the Distribution Date on which the
Certificate Principal Balance has been reduced to zero, (ii) the final
payment or other liquidation of the last Mortgage Loan in the Trust Fund,
(iii) the optional transfer to the Servicer of the Mortgage Loans, as
described below and (iv) the Distribution Date in _________.
The Mortgage Loans and all property acquired in respect of any Mortgage
Loan held in the Trust Fund will be subject to optional transfer to the
Servicer, or in the absence of the exercise thereof by the Servicer, the
Certificate Insurer, on any Distribution Date after the outstanding
Certificate Principal Balance is less than or equal to 10% of the Original
Certificate Principal Balance and all amounts due and owing to the
Certificate Insurer and unreimbursed draws on the Certificate Insurance
Policy, together with interest thereon, as provided under the Insurance
Agreement, have been paid. The purchase price will be equal to the sum of
the outstanding Certificate Principal Balance and accrued and unpaid
interest thereon at the Certificate Rate through the day preceding the
final Distribution Date. In no event, however, will the Trust created by
the Agreement continue in perpetuity. Written notice of termination of the
Agreement will be given to each Certificateholder, and the final
distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency appointed by the Trustee which will be
specified in the notice of termination. Under certain circumstances, the
Certificate Insurer may exercise the Servicer's right of repurchase. See
"Description of the Certificates -- Certificate Insurance Policy" herein.
In addition, the Trust may be liquidated as a result of certain events
of bankruptcy, insolvency or receivership relating to the Seller or the
Servicer. See "-- Rapid Amortization Events" herein.
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 affected thereby, evidencing Percentage Interests aggregating
at least 66%. Amendments to the Agreement may be made only with the prior
written consent of the Certificate Insurer. Certain other actions under
the Agreement also require the prior written consent of the Certificate
Insurer. The Certificate Insurer may direct the Trustee to waive any
default by the 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 Servicer only with the consent of the
Certificate Insurer, and shall terminate the Servicer at the direction of
the Certificate Insurer.
REGISTRATION OF THE CERTIFICATES
The 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 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 counterparties holding directly or
indirectly through CEDEL Participants or Euroclear Participants, on the
other, will be effected within 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 the Certificates may do so only through
Participants (unless and until Definitive Certificates, as defined below,
are issued). In addition, Certificate Owners will receive all
distributions of principal of and interest on the 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 Certificates, except under the limited circumstances
described below.
Unless and until Definitive Certificates (as defined below) are issued,
it is anticipated that the only "Certificateholder" of the 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 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
Certificates and is required to receive and transmit distributions of
principal of, and interest on, the Certificates. Unless and until
Definitive Certificates are issued, Certificate Owners who are not
Participants may transfer ownership of the Certificates only through
Participants by instructing such Participants to transfer 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 the Certificates will be executed
through DTC and the accounts of the respective Participants at DTC will be
debited and credited.
The 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 Certificates"), only if (i) DTC or the
Seller 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 Certificates and the Seller or the Trustee is unable
to locate a qualified successor, (ii) the Seller, 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 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 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 Seller and the Trustee that, unless and until
Definitive Certificates are issued, DTC will take any action permitted to
be taken by a holder of the Certificates under the Agreement only at the
direction of one or more Participants to whose DTC account the
Certificates are credited. DTC has advised the Seller that DTC will take
such action with respect to any Percentage Interests of the Certificates
only at the direction of and on behalf of such Participants with respect
to such Percentage Interests of the Certificates. DTC may take actions, at
the direction of the related Participants, with respect to some
Certificates which conflict with actions taken with respect to other
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.
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, net 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 the 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 the 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 Seller would seek an alternative depositary (if available)
or cause the issuance of Definitive Certificates to Certificate Owners or
their nominees in the manner described above.
Issuance of the Certificates in book-entry form rather than as physical
certificates may adversely affect the liquidity of the Certificates in the
secondary market and the ability of Certificate Owners to pledge them. In
addition, since distributions on the 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.
THE TRUSTEE
_______________________________________, a national banking association,
will act as Trustee of the Trust Fund. The mailing address of the
Trustee's corporate trust office is _________________, ___________________
and its telephone number is (___) ________.
The Trustee may resign at any time, in which event the Servicer will be
obligated to appoint a successor Trustee. The 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 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 Certificates, the 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 by the successor Trustee.
CERTAIN ACTIVITIES
The Trust Fund has not and will not: (i) issue senior securities (except
for the Certificates); (ii) borrow money; (iii) make loans; (iv) invest in
securities for the purpose of exercising control; (v) underwrite
securities; (vi) except as provided in the Agreement, engage in the
purchase and sale (or turnover) of investments; (vii) offer securities in
exchange for property (except Certificates for the Mortgage Loans); or
(viii) repurchase or otherwise reacquire its securities. The Agreement
does not provide for meetings of Certificateholders, and neither the
Seller nor the Servicer contemplate holding such meetings.
THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER
(The following information has been supplied by AMBAC Indemnity
Corporation ("AMBAC") 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 Certificates in accordance with the terms
of the Agreement. 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 (including
prepayments resulting from payments of Accelerated Principal Distribution
Amounts) and does not protect against any risk other than Nonpayment,
including failure of the Trustee to make any Insured Payment due to
holders of the Certificates.
In the event the Trustee has notice that any payment of principal or
interest which has been made to a holder of the 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 Insured Amount payable under the
Certificate Insurance Policy from its own funds on the later of (a) one
Business Day next following the Business Day on which the Certificate
Insurer receives notice of Nonpayment and (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 Certificates to payment
on the related Certificates to the extent of the Insured Payments so made.
Once the Insured Payments have been made to the Trustee, the Certificate
Insurer shall have no further obligation in respect of the related Insured
Amounts.
As used in the Certificate Insurance Policy, the following terms shall
have the following meanings:
"Agreement" means the Pooling and Servicing Agreement dated as of
______, 199_ by and among the Seller, the 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, Florida or
California are authorized or obligated by law or executive order to close.
"Insured Amount" and "Nonpayment" mean with respect to any
Distribution Date other than any Dissolution Distribution Date, the sum of
(a)(i) the amount by which interest accrued at the Certificate Rate on the
outstanding Certificate Principal Balance during the preceding Accrual Period
exceeds all amounts on deposit in the Certificate Account available
to be distributed therefor plus (ii) after the Seller Subordinated Amount has
been reduced to zero, the amount, if any, by which the Certificate Principal
Balance as of such Distribution Date (after giving effect to all
other amounts distributable and allocable to principal on the Certificates)
exceeds the Invested Amount as of such Distribution Date (after giving effect
to all other amounts distributable and allocable to principal on the
Certificates); provided, that the Certificate Insurance Policy will not cover
any such amounts on any Dissolution Distribution Date, plus (iii) the
outstanding Certificate Principal Balance on the Stated Maturity Date (after
giving effect to all other amounts distributable and allocable to principal
on the Certificates, and (b) any
Preference Amount that has not been paid to the Trustee by the Certificate
Insurer prior to such Distribution Date.
"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 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 conflict of laws principles thereof).
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 Certificates.
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, S&P 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 and structured finance insurance policies have 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, in conformity with generally accepted accounting principles.
AMBAC INDEMNITY CORPORATION
CAPITALIZATION TABLE
<TABLE>
<CAPTION>
December December December June
31, 31, 31, 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 stock-
holder's
equity $2,239 $2,238 $2,758 $2,765
</TABLE>
__________
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 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 increase AMBAC's
stockholder's equity $63.6 million, net of tax. The adoption of Statement
115 had no effect on earnings.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or the Prospectus
or any information or disclosure contained herein, or omitted herefrom,
other than with respect to the accuracy of the information regarding the
Certificate Insurance Policy and Certificate Insurer set forth under this
heading "The Certificate Insurance Policy and the Certificate Insurer"
and, the information provided in Appendix A and Appendix B.)
(The following information has been supplied by MBIA Insurance
Corporation (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 Guaranty Insurance Policy (the
"Certificate Insurance Policy"), hereby unconditionally and irrevocably
guarantees to any Owner that an amount equal to each full and complete
Insured Payment will be received by the Trustee, or its successor, as
trustee for the Owners, on behalf of the Owners from the Certificate
Insurer, for distribution by the Trustee to each Owner of each Owner's
proportionate share of the Insured Payment. The Certificate Insurer's
obligations under the Certificate Insurance Policy with respect to a
particular Insured Payment shall be discharged to the extent funds equal
to the applicable Insured Payment are received by the Trustee, whether or
not such funds are properly applied by the Trustee. Insured Payments
shall be made only at the time set forth in the Certificate Insurance
Policy and no accelerated Insured Payments shall be made regardless of any
acceleration of the Certificates, unless such acceleration is at the sole
option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance
Policy does not cover shortfalls, if any, attributable to the liability of
the Trust or the Trustee for withholding taxes, if any (including interest
and penalties in respect of any such liability).
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount on the Business Day following receipt on a Business Day
by the Fiscal Agent (as described below) of (i) a certified copy of the
order requiring the return of a preference payment, (ii) an opinion of
counsel satisfactory to the Certificate Insurer that such order is final
and not subject to appeal, (iii) an assignment in such form as is
reasonably required by the Certificate Insurer, irrevocably assigning to
the Certificate Insurer all rights and claims of the Owner relating to or
arising under the Certificates against the debtor which made such
preference payment or otherwise with respect to such preference payment
and (iv) appropriate instruments to effect the appointment of the
Certificate Insurer as agent for such Owner in any legal proceeding
related to such preference payment, such instruments being in a form
satisfactory to the Certificate Insurer, provided that if such documents
are received after 12:00 noon New York City time on such Business Day,
they will be deemed to be received on the following Business Day. Such
payments shall be disbursed to the receiver or trustee in bankruptcy named
in the final order of the court exercising jurisdiction on behalf of the
Owner and not to any Owner directly unless such Owner has returned
principal or interest paid on the Certificates to such receiver or trustee
in bankruptcy, in which case such payment shall be disbursed to such
Owner.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance Policy no later than 12:00 noon New York City time
on the later of the Distribution Date on which the related Deficiency
Amount is due or the Business Day following receipt in New York, New York
on a Business Day by State Street Bank and Trust Company, N.A., as Fiscal
Agent for the Certificate Insurer or any successor fiscal agent appointed
by the Certificate Insurer (the "Fiscal Agent") of a Notice (as described
below); provided that if such Notice is received after 12:00 noon New York
City time on such Business Day, it will be deemed to be received on the
following Business Day. If any such Notice received by the Fiscal Agent
is not in proper form or is otherwise insufficient for the purpose of
making claim under the Certificate Insurance Policy it shall be deemed not
to have been received by the Fiscal Agent for purposes of this paragraph,
and the Certificate Insurer or the Fiscal Agent, as the case may be, shall
promptly so advise the Trustee and the Trustee may submit an amended
Notice.
Insured Payments due under the Certificate Insurance Policy unless
otherwise stated therein will be disbursed by the Fiscal Agent to the
Trustee on behalf of the Owners by wire transfer of immediately available
funds in the amount of the Insured Payment less, in respect of Insured
Payments related to Preference Amounts, any amount held by the Trustee for
the payment of such Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to Owners for any acts of the
Fiscal Agent or any failure of the Certificate Insurer to deposit or cause
to be deposited, sufficient funds to make payments due under the
Certificate Insurance Policy.
As used in the Certificate Insurance Policy, the following terms shall
have the following meanings:
"Agreement" means the Pooling and Servicing Agreement dated as of
_________, 19__ among the Seller, the 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, a Sunday or a day on
which the Certificate Insurer and national banks in the States of New
York, Florida or California are authorized or obligated by law or
executive order to close.
"Deficiency Amount" means, (i) with respect to any Distribution Date
other than the Dissolution Distribution Date, the sum of (a) the amount by
which interest accrued at the Certificate Rate on the outstanding
Certificate Principal Balance during the preceding Accrual Period exceeds
all amounts on deposit in the Certificate Account available to be
distributed therefor and (b) after the Seller Subordinated Amount has been
reduced to zero, the amount, if any, by which the Certificate Principal
Balance as of such Distribution Date (after giving effect to all other
amounts distributable and allocable to principal on the Certificates)
exceeds the Invested Amount on such Distribution Date (after giving effect
to all other amounts distributable and allocable to principal on the
Certificates); provided, that the Certificate Insurance Policy will not
cover any such amounts on any Dissolution Distribution Date and (ii) the
outstanding Certificate Principal Balance on the Stated Maturity Date
(after giving effect to all other amounts distributable and allocable to
principal on the Certificates.
"Insured Payment" means (i) with respect to any Distribution Date, the
Deficiency Amount and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed
in writing by telecopy substantially in the form of Exhibit A attached to
the Certificate Insurance Policy, the original of which is subsequently
delivered by registered or certified mail, from the Trustee specifying the
Insured Payment which shall be due and owing on the applicable
Distribution Date.
"Owner" means each holder (as defined in the Agreement) who, on the
applicable Distribution Date, is entitled under the terms of the
applicable Certificates to payment thereunder.
"Preference Amount" means any amount previously distributed to an Owner
on the Certificates that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United
States Bankruptcy Code (11 U.S.C.), as amended from time to time in
accordance with a final nonappealable order of a court having competent
jurisdiction.
Capitalized terms used in the Certificate Insurance Policy and not
otherwise defined in the Certificate Insurance Policy shall have the
respective meanings set forth in the Agreement as of the date of execution
of the Certificate Insurance Policy, without giving effect to any
subsequent amendment or modification to the Agreement unless such
amendment or modification has been approved in writing by the Certificate
Insurer.
Any notice under the Certificate Insurance Policy or service of process
on the Fiscal Agent of the Certificate Insurer may be made at the address
listed below for the Fiscal Agent of the Certificate Insurer or such other
address as the Certificate Insurer shall specify in writing to the
Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway,
New York, New York 10006 Attention: Municipal Registrar and Paying Agency,
or such other address as the Fiscal Agent shall specify to the Trustee in
writing.
The Certificate Insurance Policy is being issued under and pursuant to,
and shall be construed under, the laws of the State of New York, without
giving effect to the conflict of laws principles thereof.
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
premium on the Certificate Insurance Policy is not refundable for any
reason including payment, or provision being made for payment, prior to
maturity of the Certificates.
The Certificate Insurer is the principal operating subsidiary of MBIA
Inc., a New York Stock Exchange listed company. MBIA Inc. is not
obligated to pay the debts of or claims against the Certificate Insurer.
The Certificate Insurer is domiciled in the State of New York and licensed
to do business in and is subject to regulation under the laws of all 50
states, the District of Columbia, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Mariana Islands, the Virgin Islands of the
United States and the Territory of Guam. The Certificate Insurer has two
European branches, one in the Republic of France and the other in the
Kingdom of Spain. New York has laws prescribing minimum capital
requirements, limiting classes and concentrations of investments and
requiring the approval of policy rates and forms. State laws also
regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by the Insurer, changes in control and
transactions among affiliates. Additionally, the Certificate Insurer is
required to maintain contingency reserves on its liabilities in certain
amounts and for certain periods of time.
The consolidated financial statements of the Certificate Insurer, a
wholly owned subsidiary of MBIA Inc., and its subsidiaries as of
December 31, 1995 and December 31, 1994 and for the three years ended
December 31, 1995, prepared in accordance with generally accepted
accounting principles, included in the Annual Report on Form 10-K of MBIA
Inc. for the year ended December 31, 1995 and the consolidated financial
statements of the Insurer and its subsidiaries for the six months ended
June 30, 1996 and for the periods ending June 30, 1996 and June 30, 1995
included in the Quarterly Report on Form 10-Q of MBIA, Inc. for the period
ending June 30, 1996, are hereby incorporated by reference into this
Prospectus and shall be deemed to be a part hereof. Any statement
contained in a document incorporated by reference herein shall be modified
or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document
which also is incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this
Prospectus.
The tables below present selected financial information of the
Certificate Insurer determined in accordance with statutory accounting
practices prescribed or permitted by insurance regulatory authorities
("SAP") and generally accepted accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
December 31, 1995 June 30, 1996
(Audited) (Unaudited)
(In millions)
<S> <C> <C>
Admitted Assets $3,814 $4,179
Liabilities 2,540 2,804
Capital and Surplus 1,274 1,375
</TABLE>
<TABLE>
<CAPTION>
SAP
December 31, 1995 June 30, 1996
(Audited) (Unaudited)
(In millions)
<S> <C> <C>
Assets $4,463 $4,691
Liabilities 1,937 2,088
Shareholder's Equity 2,526 2,602
</TABLE>
Copies of the financial statements of the Certificate Insurer
incorporated by reference herein and copies of the Certificate Insurer's
1995 year-end audited financial statements prepared in accordance with
statutory accounting practices are available, without charge, from the
Certificate Insurer. The address of the Certificate Insurer is 113 King
Street, Armonk, New York 10504. The telephone number of the Certificate
Insurer is (914) 273-4545.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus or any information or
disclosure contained herein, or omitted herefrom, other than with respect
to the accuracy of the information regarding the Certificate Insurance
Policy and the Certificate Insurer set forth under the heading "THE
CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER."
Moody's Investors Service, Inc. rates the claims paying ability of the
Certificate Insurer "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. rates the claims paying ability of the Certificate Insurer
"AAA."
Fitch Investors Service, L.P. rates the claims paying ability of the
Certificate Insurer "AAA."
Each rating of the Certificate Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Certificate Insurer and its
ability to pay claims on its policies of insurance. Any further
explanation as to the significance of the above ratings may be obtained
only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Certificates, and such ratings may be subject to revision or withdrawal at
any time by the rating agencies. Any downward revision or withdrawal of
any of the above ratings may have an adverse effect on the market price of
the Certificates. The Certificate Insurer does not guaranty the market
price of the Certificates nor does it guaranty that the ratings on the
Certificates will not be revised or withdrawn.)
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion, which summarizes certain U.S. federal income
tax aspects of the purchase, ownership and disposition of the
Certificates, is based on the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), the Treasury Regulations thereunder, and
published rulings and court decisions in effect as of the date hereof, all
of which are subject to change, possibly retroactively. This discussion
does not address every aspect of the U.S. federal income tax laws which
may be relevant to Certificate Owners in light of their personal
investment circumstances or to certain types of Certificate Owners subject
to special treatment under the U.S. federal income tax laws (for example,
banks and life insurance companies). Accordingly, investors should consult
their tax advisors regarding U.S. federal, state, local, foreign and any
other tax consequences to them of investing in the Certificates.
CHARACTERIZATION OF THE CERTIFICATES AS INDEBTEDNESS
Based on the application of existing law to the facts as set forth in
the Agreement and other relevant documents and assuming compliance with
the terms of the Agreement as in effect on the date of issuance of the
Certificates, Brown & Wood LLP, special tax counsel to the Seller ("Tax
Counsel"), is of the opinion that the Certificates will be treated as debt
instruments for federal income tax purposes as of such date. See "Certain
Federal Income Tax Consequences" in the Prospectus.
The Seller and the Certificateholders express in the Agreement their
intent that, for applicable tax purposes, the Certificates will be
indebtedness secured by the Mortgage Loans. The Seller and the
Certificateholders, by accepting the Certificates, and each Certificate
Owner by its acquisition of a beneficial interest in a Certificate, have
agreed to treat the Certificates as indebtedness for U.S. federal income
tax purposes. However, because different criteria are used to determine
the non-tax accounting characterization of the transaction, the Seller
intends to treat this transaction as a sale of an interest in the Trust
Balance of the Mortgage Loans for financial accounting and certain
regulatory purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is
secured by property, is a question of fact, the resolution of which is
based upon the economic substance of the transaction rather than its form
or the manner in which it is labeled. While the Internal Revenue Service
(the "IRS") and the courts have set forth several factors to be taken into
account in determining whether the substance of a transaction is a sale of
property or a secured loan, the primary factor in making this
determination is whether the transferee has assumed the risk of loss or
other economic burdens relating to the property and has obtained the
benefits of ownership thereof. Tax Counsel has analyzed and relied on
several factors in reaching its opinion that the weight of the benefits
and burdens of ownership of the Mortgage Loans has been retained by the
Seller and has not been transferred to the Certificate Owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of
the transaction does not accord with its form. Tax Counsel has advised
that the rationale of those cases will not apply to this transaction,
because the form of the transaction as reflected in the operative
provisions of the documents either accords with the characterization of
the Certificates as debt or otherwise makes the rationale of those cases
inapplicable to this situation.
TAXATION OF INTEREST INCOME OF CERTIFICATE OWNERS
Assuming that the Certificate Owners are holders of debt obligations for
U.S. federal income tax purposes, the Certificates generally will be
taxable in the following manner. While it is not anticipated that the
Certificates will be issued at a greater than de minimis discount, under
Treasury regulations (the "OID Regulations") it is possible that the
Certificates could nevertheless be deemed to have been issued with
original issue discount ("OID") if the interest were not treated as
"unconditionally payable" under the OID Regulations. If such regulations
were to apply, all of the taxable income to be recognized with respect to
the Certificates would be includible in income of Certificate Owners as
OID, but would not be includible again when the interest is actually
received. See "Certain Federal Income Tax Consequences -- Single Class of
Senior Certificates -- Original Issue Discount" in the Prospectus for a
discussion of the application of the OID rules if the Certificates are in
fact issued at a greater than de minimis discount or are treated as having
been issued with OID under the OID Regulations. For purposes of
calculating OID, it is likely that the Certificates will be treated as
Pay-Through Securities.
POSSIBLE CLASSIFICATION OF THE CERTIFICATES AS A PARTNERSHIP OR
ASSOCIATION TAXABLE AS A CORPORATION
The opinion of Tax Counsel is not binding on the courts or the IRS. It
is possible that the IRS could assert that, for purposes of the Code, the
transaction contemplated by this Prospectus Supplement with respect to the
Certificates constitutes a sale of the Mortgage Loans (or an interest
therein) to the Certificate Owners and that the proper classification of
the legal relationship between the Seller and the Certificate Owners
resulting from this transaction is that of a partnership (including a
publicly traded partnership), a publicly traded partnership treated as a
corporation, or an association taxable as a corporation. Since Tax Counsel
has advised that the Certificates will be treated as indebtedness in the
hands of the Certificateholders for U.S. federal income tax purposes and
that the entity constituted by the Trust will not be a publicly traded
partnership treated as a corporation or an association taxable as a
corporation, the Seller will not attempt to comply with U.S. federal
income tax reporting requirements applicable to partnerships or
corporations as such requirements would apply if the Certificates were
treated as indebtedness.
If it were determined that this transaction created an entity classified
as a corporation (including a publicly traded partnership taxable as a
corporation), the Trust would be subject to U.S. federal income tax at
corporate income tax rates on the income it derives from the Mortgage
Loans, which would reduce the amounts available for distribution to the
Certificate Owners. Cash distributions to the Certificate Owners generally
would be treated as dividends for tax purposes to the extent of such
corporation's earnings and profits.
If the transaction were treated as creating a partnership between the
Certificate Owners and the Seller, the partnership itself would not be
subject to U.S. federal income tax (unless it were to be characterized as
a publicly traded partnership taxable as a corporation); rather, the
Seller and each Certificate Owner would be taxed individually on their
respective distributive shares of the partnership's income, gain, loss,
deductions and credits. The amount and timing of items of income and
deductions of the Certificate Owner could differ if the Certificates were
held to constitute partnership interests rather than indebtedness.
POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any entity
(or a portion of an entity) that is a "taxable mortgage pool" will be
classified as a taxable corporation and will not be permitted to file a
consolidated U.S. federal income tax return with another corporation.
Subject to a grandfather provision for existing entities, any entity (or a
portion of any entity) will be a taxable mortgage pool if (i)
substantially all of its assets consist of debt instruments, more than 50%
of which are real estate mortgages, (ii) the entity is the obligor under
debt obligations with two or more maturities, and (iii) under the terms of
the entity's debt obligations (or an underlying arrangement), payments on
such debt obligations bear a relationship to the debt instruments held by
the entity.
Assuming that all of the provisions of the Agreement, as in effect on
the date of issuance, are complied with, Tax Counsel is of the opinion
that the arrangement created by the Agreement will not be a taxable
mortgage pool under Section 7701(i) of the Code because only one class of
indebtedness secured by the Mortgage Loans is being issued.
The opinion of Tax Counsel is not binding on the IRS or the courts. If
the IRS were to contend successfully (or future regulations were to
provide) that the arrangement created by the Agreement is a taxable
mortgage pool, such arrangement would be subject to U.S. federal corporate
income tax on its taxable income generated by ownership of the Mortgage
Loans. Such a tax might reduce amounts available for distributions to
Certificate Owners. The amount of such a tax would depend upon whether
distributions to Certificate Owners would be deductible as interest
expense in computing the taxable income of such an arrangement as a
taxable mortgage pool.
FOREIGN INVESTORS
In general, subject to certain exceptions, interest (including OID) paid
on a Certificate to a nonresident alien individual, foreign corporation or
other non-United States person is not subject to U.S. federal income tax,
provided that such interest is not effectively connected with a trade or
business of the recipient in the United States and the Certificate Owner
provides the required foreign person information certification. See
"Certain Federal Income Tax Consequences -- Tax Treatment of Foreign
Investors" in the Prospectus.
If the interests of the Certificate Owners were deemed to be partnership
interests, the partnership would be required, on a quarterly basis, to pay
withholding tax equal to the product, for each foreign partner, of such
foreign partner's distributive share of "effectively connected" income of
the partnership multiplied by the highest rate of tax applicable to that
foreign partner. In addition, such foreign partner would be subject to
branch profits tax. Each non-foreign partner would be required to certify
to the partnership that it is not a foreign person. The tax withheld from
each foreign partner would be credited against such foreign partner's U.S.
income tax liability.
If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an
applicable tax treaty.
BACKUP WITHHOLDING
Certain Certificate Owners may be subject to backup withholding at the
rate of 31% with respect to interest paid on the Certificates if the
Certificate Owners, upon issuance of the Certificates, fail to supply the
Trustee or the Certificate Owners' brokers with their respective taxpayer
identification numbers, furnish an incorrect taxpayer identification
number, fail to report interest, dividends, or other "reportable payments"
(as defined in the Code) properly, or, under certain circumstances, fail
to provide the Trustee or the Certificate Owners' brokers with certified
statements, under penalty of perjury, that they are not subject to backup
withholding.
The Trustee will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and OID accrued,
if any) on the Certificates (and the amount of interest withheld for U.S.
federal income taxes, if any) for each calendar year, except as to exempt
holders (generally, holders that are corporations, certain tax-exempt
organizations or nonresident aliens who provide certification as to their
status as nonresidents). As long as the only "Certificateholder" of record
is Cede, as nominee for DTC, Certificate Owners and the IRS will receive
tax and other information including the amount of interest paid on the
Certificates owned from Participants and Indirect Participants rather than
from the Trustee. (The Trustee, however, will respond to requests for
necessary information to enable Participants, Indirect Participants and
certain other persons to complete their reports.) Each non-exempt
Certificate Owner will be required to provide, under penalty of perjury, a
certificate on IRS Form W-9 containing his or her name, address, correct
federal taxpayer identification number and a statement that he or she is
not subject to backup withholding. Should a non-exempt Certificate Owner
fail to provide the required certification, the Participants or Indirect
Participants (or the Paying Agent) will be required to withhold 31% of the
interest (and principal) otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income
tax liability.
STATE TAXES
The Seller makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Certificates under the tax laws
of any state. Investors considering an investment in the Certificates
should consult their own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Certificates.
ERISA CONSIDERATIONS
GENERAL
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.
PROHIBITED TRANSACTIONS
General
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions involving a Plan and its assets
unless a statutory or administrative exemption applies to the transaction.
Section 4975 of the Code (or, in some cases, Section 502(i) of ERISA)
imposes certain excise taxes on parties in interest which engage in non-
exempt prohibited transactions.
The United States Department of Labor ("DOL") has issued a final
regulation (29 C.F.R. Section 2510.3-101) containing rules for determining
what constitutes the assets of a Plan. This regulation provides that, as a
general rule, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan makes an
"equity investment" will be deemed for purposes of ERISA to be assets of
the Plan unless certain exceptions apply.
Under the terms of the regulation, the Trust may be deemed to hold plan
assets by reason of a Plan's investment in a Certificate; such plan assets
would include an undivided interest in the Mortgage Loans and any other
assets held by the Trust. In such an event, the Seller, the Servicer, the
Trustee and other persons, in providing services with respect to the
Mortgage Loans, may be parties in interest, subject to the fiduciary
responsibility provisions of Title I of ERISA, including the prohibited
transaction provisions of Section 406 of ERISA (and of Section 4975 of the
Code), with respect to transactions involving the Mortgage Loans unless
such transactions are subject to a statutory or administrative exemption.
AVAILABILITY OF CLASS EXEMPTION FOR CERTIFICATES
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, 55 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 definition of "receivables" covered
by the Exemption applies to mortgage loans such as the Mortgage Loans in
the Trust Fund. The Exemption will apply to the acquisition, holding and
resale of the 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 Certificates are the following:
(1) The acquisition of the Certificates by a Plan is on terms
(including the price for the Certificates) that are at least as favorable to
the Plan as they would be in an arm's-length transaction with an unrelated
party;
(2) The rights and interests evidenced by the Certificates acquired
by the Plan are not subordinated to the rights and interests evidenced by
other certificates of the Trust Fund;
(3) The 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 Rating 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 Certificates represents not more than
reasonable compensation for underwriting the Certificates. The sum of all
payments made to and retained by the Seller pursuant to the sale of the
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 Servicer represents not more than reasonable compensation for the
Servicer's services under the Agreement and reimbursement of the Servicer's
reasonable expenses in connection therewith; and
(6) The Plan investing in the 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 Certificates in
connection with the initial issuance, at least fifty (50) percent of the
Certificates are acquired by persons independent of the Restricted Group
(as defined below), (ii) the Plan's investment in Certificates does not
exceed twenty-five (25) percent of all of the 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 Seller, the Underwriter, the Trustee,
the 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 Seller believes that the Exemption will apply to the acquisition and
holding by Plans of 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 Certificates without regard to the
ERISA restrictions described above, subject to applicable provisions of
other federal and state laws.
REVIEW BY PLAN FIDUCIARIES
Due to the complexity of these rules and the penalties imposed upon
persons involved in prohibited transactions, it is especially important
that any Plan fiduciary who proposes to cause a Plan to purchase
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 Certificates. Assets of a Plan or individual retirement
account should not be invested in the Certificates unless it is clear that
the assets of the Trust 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 Certificates will be applied by the Seller to the purchase price of
the Mortgage Loans and expenses connected with pooling the Mortgage Loans
and issuing the Certificates.
LEGAL INVESTMENT CONSIDERATIONS
The Certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984
("SMMEA") because, among other things, most of the mortgages securing the
Mortgage Loans are not first mortgages. Accordingly, many institutions
with legal authority to invest in comparably rated securities based on
first mortgage loans (i.e. "mortgage related securities" under SMMEA) may
not be legally authorized to invest in the Certificates. No representation
is made as to whether the Certificates constitute legal investments for
any entity under any applicable statute, law, rule, regulation or order.
Prospective purchasers are urged to consult with their counsel concerning
the status of the Certificates as legal investments for such purchasers
prior to investing in the Certificates.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated, the sole underwriter
(the "Underwriter"), has agreed, on the terms and conditions of the
Underwriting Agreement and a Terms Agreement (together, the "Underwriting
Agreement") relating to the Certificates, to purchase the entire principal
amount of the Certificates offered hereby.
In the Underwriting Agreement, the Underwriter has agreed, subject to
the terms and conditions set forth therein, to purchase all the
Certificates offered hereby if any Certificates are purchased.
The distribution of the 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 Certificates to or
through dealers, and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriter.
In connection with the sale of the Certificates, the Underwriter may be
deemed to have received compensation from the Seller in the form of
underwriting compensation. The Underwriter and any dealers that
participate with the Underwriter in the distribution of the Certificates
may be deemed to be underwriters and any commissions received by them and
any profit on the resale of the Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities
Act of 1933, as amended.
The Seller and the Servicer have agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities
Act of 1933, as amended.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriter or by such
investor's representative within the period during which there is an
obligation to deliver a Prospectus Supplement and Prospectus, the
Underwriter will promptly deliver to such investor a paper copy of the
Prospectus Supplement and Prospectus.
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 and Appendix B of this Prospectus Supplement have
been included herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein and
upon the authority of said firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the consolidated financial
statements referred to above of AMBAC Indemnity Corporation refers to the
adoption 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.)
(The consolidated financial statements of the Certificate Insurer, MBIA
Insurance Corporation, as of December 31, 1995 and 1994 and for each of
the three years in the period ended December 31, 1995, incorporated by
reference in this Prospectus Supplement have been audited by Coopers &
Lybrand, independent accountants, as set forth in their report thereon
appearing elsewhere herein. Such consolidated financial statements are
included in reliance upon such report and upon the authority of such firm
as experts in accounting and auditing.)
LEGAL MATTERS
Certain legal matters will be passed upon for the Seller 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
Seller by Brown & Wood LLP.
CERTIFICATE RATING
It is a condition to the issuance of the Certificates that they be rated
_____ by ________, and _____ by ______ (together with ___, the "Rating
Agencies"). 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. The ratings assigned to the Certificates address
the likelihood of the receipt of distributions due on the 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 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 Certificates affected by such change. The ratings
assigned to the 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 Certificates might suffer a lower than anticipated yield. There can
be no assurance as to whether any other rating agency will rate the
Certificates, or if it does, what rating it will assign to the
Certificates.
INDEX OF PRINCIPAL TERMS
Accelerated Principal Distribution Amount . . . . . . . . . . . . S-13, S-49
Accrual Period . . . . . . . . . . . . . . . . . . . . . . . . . S-13, S-49
Additional Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . Cover, S-5, S-65
Alternate Certificate Rate . . . . . . . . . . . . . . . . . . . . . . S-50
Alternative Principal Payment . . . . . . . . . . . . . . . . . . S-14, S-51
AMBAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-65
Brokerage firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-49
Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . S-49, S-65
Cede . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-19
CEDEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-19, S-62
CEDEL Participants . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
Certificate Insurance Policy . . . . . . . . . . . . . . . . . . . . . Cover
Certificate Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . Cover
Certificate Interest Collections . . . . . . . . . . . . . . . . S-12, S-48
Certificate Owners . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-19
Certificate Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
Certificateholder(s) . . . . . . . . . . . . . . . . . . . S-19, S-61, S-73
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . Cover, S-5
Clearing agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-61
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2, S-6
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-70
Collection Period . . . . . . . . . . . . . . . . . . . . . . . . S-12, S-47
Combined Loan-to-Value Ratio . . . . . . . . . . . . . . . . . . . . . . S-8
Common Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
CPR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
Credit Limit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Credit Line Agreement(s) . . . . . . . . . . . . . . . . . . . . . S-6, S-25
Cut-off Date . . . . . . . . . . . . . . . . . . . . . . . . . . Cover, S-5
Cut-off Date Pool Balance . . . . . . . . . . . . . . . . . . . . . . . . S-7
Cut-off Date Trust Balance . . . . . . . . . . . . . . . . . . . . . . . S-7
Defective Mortgage Loan(s) . . . . . . . . . . . . . . . . . . . S-17, S-57
Deficiency Amount . . . . . . . . . . . . . . . . . . . . . . . . S-16, S-53
Definitive Certificates . . . . . . . . . . . . . . . . . . . . . . . . S-62
Depositaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-61
Dissolution Distribution Date . . . . . . . . . . . . . . . . . . . . . S-53
Distribution Date . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-5
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-19
Eligible Substitute Mortgage Loan . . . . . . . . . . . . . . . . S-18, S-57
Equity Access Prime(R) Program . . . . . . . . . . . . . . . . . . . . S-36
Equity Access(R) credit accounts . . . . . . . . . . . . . . . . . . . S-35
Equity Access(R) loans . . . . . . . . . . . . . . . . . . . . . . . . S-35
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-18, S-73
Euroclear . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-19, S-63
Euroclear Cooperative . . . . . . . . . . . . . . . . . . . . . . . . . S-63
Euroclear Operator . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
Euroclear Participants . . . . . . . . . . . . . . . . . . . . . . . . S-62
European Depositaries . . . . . . . . . . . . . . . . . . . . . . . . . S-19
Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-74
Extended coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . S-59
Factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-55
Financial consultants . . . . . . . . . . . . . . . . . . . . . . . . . S-35
Fixed Allocation Percentage . . . . . . . . . . . . . . . . . . . S-14, S-51
Floating Allocation Percentage . . . . . . . . . . . . . . . . . . S-6, S-48
Global Securites . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex
HELs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-19
Home Equity Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
Index Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
Indirect participating firm . . . . . . . . . . . . . . . . . . . . . . S-49
Insurance Agreement . . . . . . . . . . . . . . . . . . . . . . . S-15, S-53
Insured Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-65
Insured Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-65
Interest Collections . . . . . . . . . . . . . . . . . . . . . . S-11, S-47
Interest Period . . . . . . . . . . . . . . . . . . . . . . . . . S-11, S-47
Invested Amount . . . . . . . . . . . . . . . . . . . . . . . . . . S-6, S-46
Investor Loss Amount . . . . . . . . . . . . . . . . . . . . . . S-13, S-49
LIBO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-50
LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
LIBOR Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . S-50
Liquidation Loss Amount . . . . . . . . . . . . . . . . . . . . . S-14, S-50
Loan Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7, S-48
Loan Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8, S-37
Managed Amortization Period . . . . . . . . . . . . . . . . . . . S-14, S-51
Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-9
Maximum Principal Payment . . . . . . . . . . . . . . . . . . . . S-14, S-51
MBIA Insurance Corporation . . . . . . . . . . . . . . . . . . . . . . S-66
Minimum Seller Interest . . . . . . . . . . . . . . . . . . . . . S-11, S-58
ML & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5, S-35
MLCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover
MLHEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Monthly Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-55
Monthly Advance Reimbursement Amount . . . . . . . . . . . . . . . . . S-47
Mortgage Files . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-56
Mortgage Loan Schedule . . . . . . . . . . . . . . . . . . . . . S-11, S-58
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . Cover, S-6, S-46
Mortgage Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover
Mortgage related securities . . . . . . . . . . . . . . . . . . . S-18, S-73
Mortgaged Properties . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Mortgagee interest policy . . . . . . . . . . . . . . . . . . . . . . . S-59
Net Loan Rate(s) . . . . . . . . . . . . . . . . . . . . . . . . S-12, S-50
Net Trust Liquidation Proceeds . . . . . . . . . . . . . . . . . S-12, S-47
OID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-71
OID Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-71
Original Certificate Principal Balance . . . . . . . . . . . . . . S-5, S-46
Original Invested Amount . . . . . . . . . . . . . . . . . . . . . S-6, S-46
Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-61
Percentage Interest . . . . . . . . . . . . . . . . . . . . . . . . S-6, S-48
Plan(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-18, S-73
Pool Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7, S-48
Preference Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . S-65
Principal Collections . . . . . . . . . . . . . . . . . . . . . . S-12, S-47
Prior Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover
Rapid Amortization Event . . . . . . . . . . . . . . . . . . . . . . . S-52
Rapid Amortization Period . . . . . . . . . . . . . . . . . . . . S-14, S-51
Rating Agencies . . . . . . . . . . . . . . . . . . . . . . . . . S-19, S-77
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-48
Reference Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-50
Related Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . S-56
Removal Date . . . . . . . . . . . . . . . . . . . . . . . . . . S-11, S-58
Required Amount . . . . . . . . . . . . . . . . . . . . . . . . . S-14, S-50
Reuters Screen LIBO Page . . . . . . . . . . . . . . . . . . . . . . . S-50
Scheduled Principal Collections Payment . . . . . . . . . . . . . S-14, S-51
Second Mortgage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . S-9
Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover
Seller Interest . . . . . . . . . . . . . . . . . . . . . . Cover, S-6, S-46
Seller Subordinated Amount . . . . . . . . . . . . . . . . . . . S-16, S-54
Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover
Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . S-17, S-59
Servicing Fee Rate . . . . . . . . . . . . . . . . . . . . . . . S-17, S-59
Stated Maturity Date . . . . . . . . . . . . . . . . . . . . . . S-14, S-51
Tax Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-72
Taxable mortgage pool . . . . . . . . . . . . . . . . . . . . . . . . . S-72
Transfer Deposit Amount . . . . . . . . . . . . . . . . . . S-12, S-48, S-57
Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover, S-5
Trust 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Trust 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Trust 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Trust 1994-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Trust 1994-2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Trust 1995-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Trust 1995-2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Trust Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7, S-48
Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover, S-6
Trust Insurance Proceeds . . . . . . . . . . . . . . . . . . . . S-12, S-48
Trust Interest Collections . . . . . . . . . . . . . . . . . . . S-11, S-47
Trust Principal Collections . . . . . . . . . . . . . . . . . . . S-12, S-47
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover, S-5
Underwriter . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-76
Underwriting Agreement . . . . . . . . . . . . . . . . . . . . . . . . S-76
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered MLCC
Mortgage Investors, Inc. ML Revolving Home Equity Loan Asset Backed
Certificates, Series 199_-_ (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 Certificates 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
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:
(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
Certificates 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.
<PAGE>
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)
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.
KPMG Peat Marwick LLP
New York, New York
January 31, 1996
<TABLE>
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars In Thousands Except Share Data)
<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.
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Statements of Operations
(Dollars In Thousands)
<TABLE>
Years Ended December 31,
------------------------------
<CAPTION>
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.
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.
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.
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.
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.
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.
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.
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.
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
Unrealized Estimated Amortized Unrealized
Losses Fair Value Cost Gains
---------- ----------- ---------- ----------
<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
========= ======== ======== =========
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
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.
<TABLE>
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Net investment income comprised the following:
<CAPTION>
<S> <C> <C> <C>
1995 1994 1993
------ ------ ------
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,
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 1994 1993
--------------------- --------------------- ---------------------
Written Earned Written Earned Written Earned
-------- ------- -------- ------- -------- -------
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 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>
<S> <C> <C> <C>
1995 1994 1993
------ ------ ------
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.
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>
<S> <C>
Year Amount
- ---- ______
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 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>
<S> <C> <C>
1995 1994
----- -----
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>
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.
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Actuarial present value of the benefit obligations:
<TABLE> 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.
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.
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.
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>
As of December 31,
---------------------------------------------------
1995 1994
----------------------- -------------------------
Carrying Estimated Carrying Estimated
(Dollars in Millions) Amount Fair Value Amount Amount
-------- ---------- -------- -----------
<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.
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.
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.
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.
AMBAC Indemnity Corporation and Subsidiaries
(a wholly-owned subsidiary of AMBAC Inc.)
Consolidated Unaudited Financial Statements
as of June 30, 1996 and December 31, 1995
and for the periods ended June 30, 1996 and 1995
<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.
<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
<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.
<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.
<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.
<END>
Information contained herein is subject to completion or amendment. A
registration statement to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell
or the soliciation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitaion or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED NOVEMBER 15, 1996
PROSPECTUS
- ----------
MLCC Mortgage Investors, Inc.
Depositor
Asset Backed Certificates
(Issuable in Series)
_______________
This Prospectus relates to Asset Backed 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 revolving home equity loans or certain balances
thereof, or 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").
Mortgage Loans with a Loan-to-Value Ratio at origination in excess of a
certain level, in addition to being secured by real property, may be either
secured by the pledge of a limited amount of additional collateral or
supported by a third-party guarantee, which in turn is secured by a security
interest in collateral 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 to the guarantor. 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 may include any additional balances
advanced to the borrowers under Mortgage Loans which are revolving home equity
loans or certain balances thereof. 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.
(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 __________ __, 1996.
(Continued from previous page)
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.
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 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, Attention: General Counsel, telephone
number (904) 928-6000.
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".
Title of Securities Asset Backed 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 promissory notes or other
evidences of indebtedness, including revolving home
equity loans or certain balances thereof, secured by
first, second or more junior liens on fee simple or
leasehold interests in single family properties
("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 in the related Prospectus Supplement,
the Mortgage Loans may include certain Mortgage
Loans ("Additional Collateral Loans") with a Loan-
to-Value Ratio at origination in excess of a certain
level which, in addition to being secured by real
property, are either secured by the pledge of a
limited amount of additional collateral or supported
by a third-party guarantee, which in turn is secured
by a security interest in collateral 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 to the guarantor. 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 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 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 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 guidelines 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, or U.S. territories, commonwealths or
possessions. 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 Asset Backed 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.
D. Private Mortgage
-Backed
Securities 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 Certificates, 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 Prospectus
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 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 subordination 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 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 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".
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 Guidelines".
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, or U.S. territories, commonwealths or possessions.
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.
__________________________
* 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.
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,
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 guidelines of the
Seller.
A Trust Fund may include certain Mortgage Loans ("Additional Collateral
Loans") that have a Loan-to-Value Ratio in excess of a certain level
specified in the related Prospectus Supplement and which are, in general,
also either (i) secured by a security interest in additional collateral
(usually securities) owned by the borrower 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 (ususally 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 to the guarantor. The related
Prospectus Supplement will contain information with respect to any Additional
Collateral Loans concerning mimimum requirements on the amount of additional
collateral that must be owned and/or maintained by borrowers.
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.
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, including revolving home equity loans or certain balances thereof,
will consist of mortgage loans, deeds of trust or other beneficial interests
therein, secured by first, second or more junior liens on single family
(i.e., one- to four-family) residential properties. The Mortgage Loans may
include Additional Collateral Loans with a Loan-to-Value Ratio at
origination in excess of a certain level which, in addition
to being secured by real property, are either secured by the pledge of a
limited amount of additional collateral or supported by a third-party
guarantee, which in turn is secured by a security interest in collateral 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 to the guarantor. 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 (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.
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 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 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 Asset Backed
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 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 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, Additional Collateral Loans,
Buydown Loans, adjustable rate mortgage loans, revolving home equity loans or
certain balances thereof or loans having balloon or other special payment
features. Such Mortgage Loans may be secured by single family property, by
the pledge of a limited amount of additional collateral or the support of a
third-party guarantee (which in turn is secured by a security interest in
collateral 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 to
the guarantor), 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 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 originated in accordance with the underwriting criteria
specified below under "Underwriting Guidelines".
UNDERWRITING GUIDELINES
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 guidelines 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 guidelines 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. Initially, a borrower is
typically required to complete 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 is required
to provide information concerning his or her assets, liabilities, income and
expenses, as well as an authorization permitting the lender to apply for a
credit report which summarizes the borrower'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 borrowers, the lender conducts its own review
of the application package and obtains additional information concerning the
prospective borrower prior to loan approval. Along with obtaining a credit
report, the lender may solicit a written verification of the prospective
borrower's existing first mortgage balance, if any, and payment history from
the first mortgage lender, if appropriate. If the first mortgage lender does
not respond in writing and the mortgage payment history is not reported on
the borrower's credit report, the borrower 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 borrower's employer or, in lieu thereof, verbal
verification is obtained if the borrower has supplied a copy of a current pay
stub along with signed personal tax returns. In certain limited
circumstances, the lender may utilize other methods to verify a borrower's
income.
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 sufficient 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 guidelines applied by Sellers, particularly with respect
to the level of loan documentation and the mortgagor's income and credit
history, may be varied in certain cases, on the basis of compensating
factors, as deemed appropriate by Sellers' underwriting personnel.
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 typically 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.
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) in the case of
first mortgage loans, 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 lien on the related
Mortgaged Property (subject only to (a) in the case of a Mortgage Loan
secured by a junior mortgage, the lien of the related senior mortgage or
mortgages, (b) the lien of current real property taxes and assessments, (c)
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 (d)
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 Director of 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 Reform Act
of 1994, such Mortgaged Property is covered by flood insurance, if applicable
regulations at the time such Mortgage Loan was originated required that 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.
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, Attention: General Counsel.
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) 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, in the case of Mortgage
Loans which are revolving home equity loans or certain balances thereof, a
Trust Fund may include any additional balances advanced to the borrowers
under the revolving home equity loans during certain periods.
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 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 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.
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.
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;
(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 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.
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 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.
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 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 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
may, but is not obligated to, 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. The Master Servicer will enforce any due-on-sale clause
only if it reasonably believes that it is entitled to do so under applicable
law and government regulation; 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. The Master Servicer will
exercise its rights to enforce any due-on-sale or due-on-encumbrance clause
only to the extent it deems appropriate. 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.
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.
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, except in the case of Mortgage Loans which are revolving home
equity loans or certain balances thereof, 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.
In the case of Mortgage Loans which are revolving home equity loans or
certain balances thereof, under the terms of the Agreements, so long as
certain rating standards specified in the related Prospectus Supplement are
satisfied, the Master Servicer will be entitled to maintain possession of the
Mortgage Loan documents and will not be required to deliver any of them to
the Trustee. In the event the rating standards specified in the related
Prospectus Supplement are not satisfied, the documentation relating to each
Mortgage Loan will be delivered to and maintained by the Trustee.
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.
At such time, if any, as the Mortgage Loan documents are delivered to the
Trustee (or the custodian hereinafter referred to), the Trustee will review
such Mortgage Loan documents within the time period specified in the related
Prospectus Supplement, 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 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 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;
(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 may,
but is not obligated to, 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 government regulations and will not impair or threaten to
impair any recovery under any related Primary Mortgage Insurance Policy. If
the Master Servicer elects not to enforce any due-on-sale clause or if the
Master Servicer reasonably believes it is unable to enforce such due-on-sale
clause under applicable law, or if such Mortgage Loan is insured by the FHA
or partially guaranteed by the VA, the Master Servicer is authorized to 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. If the Master Servicer elects not to enforce any due-on-sale clause and
not to enter into an assumption and modification agreement with the person to
whom such property has been or is about to be conveyed, then the original
mortgagor remains liable for repayment of the Mortgage Loan. If deemed
appropriate by the Master Servicer after the person to whom such property
has been or is about to be conveyed enters into an assumption and modification
agreement, the original mortgagor may be released from liability under the
Mortgage Loan.
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 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) 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 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 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 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
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 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 receivedan 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.
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. The Additional
Collateral Loans will, in addition to being secured by real property, be
secured by the pledge of a limited amount of additional collateral or
supported by a third-party guarantee, which in turn is secured by a security
interest in collateral 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 to the guarantor. 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. 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 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 may issue a
judgment of foreclosure and appoint a referee or other court officer to
conduct the sale of the property. In some states, mortgages may also be
foreclosed by advertisement, pursuant to a power of sale provided in the
mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by non-judicial power of sale. Generally,
state law controls the amount of foreclosure expenses and costs, including
attorney's fees, which may be recoverable by a lender.
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 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.
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.
In the case of Additional Collateral Loans, Articles 8 and 9 of the UCC
generally govern any realization upon the additional collateral pledged to
secure the related Mortgage Loans. In order for the Master Servicer to
realize on any such security, it will have to proceed in accordance with the
procedures specified in Article 8 and Part 5 of Article 9 of the UCC.
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 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".
Whether actions taken by a lender would constitute participation in the
management of a mortgaged property, or the business of a borrower, so as to
render the secured creditor exemption unavailable to a lender has been a
matter of judicial interpretation of the statutory language, and court
decisions have been inconsistent. In 1990, the Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. suggested that the
mere capacity of the lender to influence a borrower's decisions regarding
disposal of hazardous substances was sufficient participation in the
management of the borrower's business to deny the protection of the secured
creditor exemption to the lender.
This ambiguity appears to have been resolved by the enactment of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996,
which was signed into law in September 1996. The new law provides that in
order to be deemed to have participated in the management of a mortgaged
property, a lender must actually participate in the operational affairs of
the property or the borrower. The law also provides that participation
in the management of the property does not include "merely having the
capacity to influence, or unexercised right to control" operations.
Rather, a lender will lose the protection of the secured creditor
exemption only if it exercises decision-making control over the borrower's
environmental compliance and hazardous substance handling and disposal
practices, or assumes day-to-day management of all operational functions
of the mortgaged property.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous substances are present with respect to any
mortgaged property prior to the origination of the mortgage loan or prior to
foreclosure or accepting a deed-in-lieu of foreclosure. 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. A Seller
makes no representations or warranties or assumes any liability with respect
to the absence or effect of hazardous substances on any Mortgaged Property or
any casualty resulting from the presence or effect of hazardous substances.
See "Mortgage Loan Program--Representations by Sellers; Repurchases" above
for a description of the representations and warranties made by a Seller.
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 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. However, in
certain cases where a due-on-sale clause is not enforced upon the transfer of
the Mortgaged Property to a new home buyer, the Master Servicer may enter
into an assumption and modification agreement with the new home buyer,
pursuant to which such person becomes liable for repayment of the Mortgage
Loan and, unless released in writing by the Master Servicer, the original
mortgagor or obligor remains liable for repayment of the Mortgage Loan.
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.
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 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 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
(iii) 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).
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess
inclusion income from REMIC residual certificates that have "significant
value" within the meaning of the REMIC Regulations, effective for taxable
years beginning after December 31, 1995, except with respect to residual
certificates continuously held by a thrift institution since November 1, 1995.
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 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.
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.
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 "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 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 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 final regulations (the "Contingent Regulations")
governing the calculation of OID on instruments having contingent interest
payments. The Contingent Regulations, specifically do not apply for purposes
of calculating OID on debt instruments subject to Code Section 1272(a)(6),
such as the Regular Certificates. Additionally, 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.
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 the income of
which, from sources outside the United States, is includible in gross income
for federal income tax purposes regardless of its connection with the conduct
of a trade or business within the United States, or a trust if a court within
the United States is able to exercise primary supervision of the
administration of the trust and one or more United States fiduciaries have
the authority to control all substantial decisions of the trust.
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 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
"domestic building and loan association" will constitute assets described in
Code Section 7701(a)(19)(C); (ii) Certificates held by a real estate
investment trust will constitute "real estate assets" within the meaning of
Code Section 856(c)(5)(A); and (iii) 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 LLP, 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 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) "real estate assets" within the meaning of Section 856(c)(5)(A) of the
Code; (ii) "loans secured by an interest in real property" under Section
7701(a)(19)(C) of the Code; and (iii) 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 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 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 based on objective financial or economic information where
such rate is subject to a multiple of not less than .65 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 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 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 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 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 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 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 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 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.
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 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.
The Small Business Job Protection Act of 1996, as part of the repeal of the
bad debt reserve method for thrift institutions, repealed the application of
Code section 593(d) to any taxable year beginning after December 31, 1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the
alternative minimum taxable income of a residual holder. First, alternative
minimum taxable income for such residual holder is determined without regard
to the special rule that taxable income cannot be less than excess
inclusions. Second, a residual holder's alternative minimum taxable income
for tax year cannot be less than the excess inclusions for the year. Third,
the amount of any alternative minimum tax net operating loss deductions must
be computed without regard to any excess inclusions. These rules are
effective for tax years beginning after December 31, 1986, unless a residual
holder elects to have such rules apply to tax years beginning after August
20, 1996.
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 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 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 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. 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 IRS 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 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.
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 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.
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 agency or instrumentality
thereof. 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.
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.
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.
INDEX TO DEFINED TERMS
PAGE
----
Accrual Certificates . . . . . . . . . . . . . . . . . . . . . . . . . -30-
Accrual period . . . . . . . . . . . . . . . . . . . . . . . . . . . . -73-
Additional Collateral Loans . . . . . . . . . . . . . . . . . . . . . . -15-
Adjusted issue price . . . . . . . . . . . . . . . . . . . -67-, -73-, -81-
Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12-
AFR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -68-
Agency Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -4-, -16-
Applicable Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . -81-
ARM Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -67-
Available Distribution Amount . . . . . . . . . . . . . . . . . . . . . -29-
Balloon payments . . . . . . . . . . . . . . . . . . . . . . . . . -6-, -15-
Bankruptcy Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . -38-
Bankruptcy Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
Buydown Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -15-
Buydown Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -15-
Capital asset . . . . . . . . . . . . . . . . . . . . . . . . . . -69-, -77-
Cede . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -33-
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -59-
Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -89-
Certificate Account . . . . . . . . . . . . . . . . . . . . . . . . . . -43-
Certificate Balance . . . . . . . . . . . . . . . . . . . . . . . . . . -30-
Certificate Register . . . . . . . . . . . . . . . . . . . . . . . . . -28-
Certificates . . . . . . . . . . . . . . . . . . . . . . . Cover, -4-, -14-
Charter Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -21-
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -4-
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-
Collateral Value . . . . . . . . . . . . . . . . . . . . . . . . . . . -16-
Cooperative Loans . . . . . . . . . . . . . . . . . . . . . . . . . -5-, -17-
Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . -5-, -17-
Cut-off Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
Deferred Interest . . . . . . . . . . . . . . . . . . . . . . . . -68-, -76-
Definitive Certificates . . . . . . . . . . . . . . . . . . . . . . . . -34-
Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover, -24-
Detailed Description . . . . . . . . . . . . . . . . . . . . . . . . . -14-
Determination Date . . . . . . . . . . . . . . . . . . . . . . . . . . -29-
Disqualified organization . . . . . . . . . . . . . . . . . . . . . . . -85-
Distribution Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . -9-
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34-
Due-on-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . -6-, -15-
Eligible Investments . . . . . . . . . . . . . . . . . . . . . . . . . -43-
EPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -59-
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-
Excess inclusion . . . . . . . . . . . . . . . . . . . . . . . . -81-, -84-
Excess servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . -65-
FDIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25-
Federal long-term rate . . . . . . . . . . . . . . . . . . . . . . . . -82-
FHA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -5-, -17-
FHA Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
FHA Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17-
FHLMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover
FHLMC Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -19-
FHLMC Certificate group . . . . . . . . . . . . . . . . . . . . . . . . -19-
FHLMC Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . -7-
FNMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover
FNMA Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7-
Funding Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12-
Garn-St Germain Act . . . . . . . . . . . . . . . . . . . . . . . . . . -60-
GNMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover
GNMA Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7-
GNMA Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17-
Guaranty Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . -17-
Housing Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17-
HUD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -49-
Indirect Participant . . . . . . . . . . . . . . . . . . . . . . . . . -34-
Insurance Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . -44-
Insured Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . -43-
IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -63-
Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -69-, -78-
Labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -87-
Legislative History . . . . . . . . . . . . . . . . . . . . . . . . . . -67-
Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
Limited Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
Liquidation Expenses . . . . . . . . . . . . . . . . . . . . . . . . . -44-
Liquidation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . -44-
Loan-to-Value Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . -16-
Lockout periods . . . . . . . . . . . . . . . . . . . . . . . . . . -6-, -15-
Master REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -71-
Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -4-
Master Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . -50-
Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -42-
Mortgage Assets . . . . . . . . . . . . . . . . . . . . . . Cover, -4-, -14-
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover
Mortgage Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -41-
Mortgage pass-through certificate . . . . . . . . . . . . . . . . . . . -88-
Mortgage Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . -4-, -14-
Mortgage Pool Insurance Policy . . . . . . . . . . . . . . . . . -11-, -36-
Mortgage Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . -9-, -16-
Mortgage related securities . . . . . . . . . . . . . . . . . . . -13-, -90-
Mortgaged Properties . . . . . . . . . . . . . . . . . . . . . . . . . -14-
NCUA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -90-
OID Regulations . . . . . . . . . . . . . . . . . . . . . . . . . -66-, -68-
Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34-
Parties in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . -88-
Pass-through entity . . . . . . . . . . . . . . . . . . . . . . . . . . -85-
Pass-through interest holder . . . . . . . . . . . . . . . . . . . . . -81-
Pass-Through Rate . . . . . . . . . . . . . . . . . . . . . . . . . -9-, -14-
Payment Lag Certificates . . . . . . . . . . . . . . . . . . . . . . . -77-
Phantom income . . . . . . . . . . . . . . . . . . . . . . . . . . . . -79-
Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -87-
PMBS Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
PMBS Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
PMBS Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
PMBS Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
Policy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . -91-
Pool Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-
Pre-Funded Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . -5-
Pre-Funding Account . . . . . . . . . . . . . . . . . . . . . . . Cover, -12-
Pre-issuance accrued interest . . . . . . . . . . . . . . . . . . . . . -77-
Prepayment Assumption . . . . . . . . . . . . . . . . . . . . . . . . . -67-
Primary Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . -47-
Primary Mortgage Insurance Policy . . . . . . . . . . . . . . . . . . . -14-
Principal Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . -31-
Private Mortgage-Backed Securities . . . . . . . . . . . . . . . . . . Cover
PTE 83-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -88-
Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-
Qualified mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . -71-
Qualified stated interest . . . . . . . . . . . . . . . . . . . . . . . -72-
Rating Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -43-
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-
Regular Certificates . . . . . . . . . . . . . . . . . . . . . . . . . -70-
Regular interests . . . . . . . . . . . . . . . . . . . . . . . . . . . -28-
Relief Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -61-
REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -2-, -13-
REMIC Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . -61-
Reserve Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -10-
Residual Certificates . . . . . . . . . . . . . . . . . . . . . . . . . -70-
Residual interests . . . . . . . . . . . . . . . . . . . . . . . . . . -28-
Retained Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . -27-
Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover
Sellers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -14-
Senior Certificates . . . . . . . . . . . . . . . . . . . . . . . . -8-, -35-
Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover, -4-
Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -4-
Single Family Certificates . . . . . . . . . . . . . . . . . . . . . . -88-
SMMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13-
Special Hazard Insurance Policy . . . . . . . . . . . . . . . . . . . . -11-
Special Hazard Insurer . . . . . . . . . . . . . . . . . . . . . . . . -37-
Stripped ARM Obligations . . . . . . . . . . . . . . . . . . . . . . . -67-
Stripped Bond Certificates . . . . . . . . . . . . . . . . . . . . . . -65-
Stripped bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . -65-
Stripped Coupon Certificates . . . . . . . . . . . . . . . . . . . . . -65-
Stripped coupons . . . . . . . . . . . . . . . . . . . . . . . . . . . -65-
Sub-Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . -12-, -16-
Subordinated Certificates . . . . . . . . . . . . . . . . . . . . . -8-, -35-
Subsequent Mortgage Assets . . . . . . . . . . . . . . . . . . . Cover, -5-
Subsidiary REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . -71-
Super-Premium Certificates . . . . . . . . . . . . . . . . . . . . . . -72-
Surety Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12-
Temporary Regulations . . . . . . . . . . . . . . . . . . . . . . . . . -86-
Title V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -60-
Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -89-
Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . Cover, -14-
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -4-
U.S. Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -69-
UCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34-
Underwriter Exemptions . . . . . . . . . . . . . . . . . . . . . . . . -89-
VA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -5-
VA Guaranty Policy . . . . . . . . . . . . . . . . . . . . . . . . . . -50-
VA Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11-
VA Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17-
Weighted average rate . . . . . . . . . . . . . . . . . . . . . . . . . -74-
___________________________________________________________________________
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 CERTIFICATES OFFERED HEREBY, NOR AN OFFER OF THE
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
PROSPECTUS SUPPLEMENT
Page
----
Incorporation of Certain Documents by Reference S-3
Summary of Terms of the Certificates S-4
Special Considerations S-19
Certain Legal Considerations S-20
The Mortgage Pool S-20
MLCC and Its Mortgage Programs S-34
Prepayment and Yield Considerations S-42
Description of the Certificates S-47
The Certificate Insurance Policy and the
Certificate Insurer S-61
Certain Federal Income Tax Consequences S-64
ERISA Considerations S-65
Use of Proceeds S-66
Underwriting S-66
Experts S-67
Legal Matters S-67
Certificate Rating S-67
Index of Principal Terms S-69
Annex I: Global Clearance, Settlement and Tax
Documentation Procedures I-1
Appendix A and Appendix B--Audited Financial
Statements of AMBAC
PROSPECTUS
Prospectus Supplement 2
Available Information 3
Incorporation of Certain Information by
Reference 3
Summary of Terms 4
The Trust Fund 14
Use of Proceeds 23
The Depositor 24
Mortgage Loan Program 24
Description of the Certificates 27
Credit Enhancement 35
Yield and Prepayment Considerations 40
The Pooling and Servicing Agreement 41
Certain Legal Aspects of the Mortgage Loans 54
Certain Federal Income Tax Consequences 61
State Tax Considerations 87
ERISA Considerations 87
Legal Investment 90
Method of Distribution 91
Legal Matters 92
Financial Information 92
Rating 92
Index to Defined Terms 93
______________________________________________________________________
______________________________________________________________________
$___________
(APPROXIMATE)
MLCC
MORTGAGE INVESTORS, INC.,
SELLER
(ML REVOLVING HOME EQUITY LOAN
ASSET BACKED CERTIFICATES,
SERIES 1996-_)
(MORTGAGE LOAN ASSET BACKED
PASS-THROUGH CERTIFICATES
SERIES 199 - , CLASS A)
-- --
MERRILL LYNCH
CREDIT CORPORATION,
SERVICER
_______________
PROSPECTUS SUPPLEMENT
_______________
MERRILL LYNCH & CO.
________, 1996
______________________________________________________________________
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses in connection with the
offering of the Certificates being registered under this Registration
Statement, other than underwriting discounts and commissions:
SEC Registration Fee $757,575.76
Printing and Engraving $100,000.00
Legal Fees and Expenses $250,000.00
Trustee Fees and Expenses $60,000.00
Blue Sky Fees and Expenses $15,000.00
Rating Agency Fees $425,000.00
Miscellaneous $60,000.00
Total $1,667,575.76
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICER.
The Registrant's By-Laws provide for indemnification of directors and
officers of the Registrant to the full extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents
in connection with actions, suits or proceedings brought against them by a
third party or in the right of the corporation, by reason of the fact that
they were or are such directors, officers, employees or agents, against
expenses incurred in any such action, suit or proceeding. The Delaware
General Corporation Law also provides that the Registrant may purchase
insurance on behalf of any such director, officer, employee or agent.
ITEM 16. EXHIBITS.
1.1 Form of Underwriting Agreement (Home Equity).
1.2 Form of Underwriting Agreement (PrimeFirst).
3.1* Certificate of Incorporation of MLCC Mortgage Investors, Inc.
3.2* By-laws of MLCC Mortgage Investors, Inc. as currently in
effect.
4.1* Form of Pooling and Servicing Agreement for Adjustable Rate
Single Family Mortgages Loans.
4.2* Form of Pooling and Servicing Agreement for Revolving Home
Equity Mortgage Loans.
5.1* Opinion of Brown & Wood LLP as to legality of the Certificates
(including consent of such firm).
8.1* Opinion of Brown & Wood LLP as to certain tax matters
(including consent of such firm).
23.1* Consent of Brown & Wood LLP (included in exhibits 5.1and 8.1
hereof).
23.2* Consent of KPMG Peat Marwick LLP.
23.3* Consent of Coopers & Lybrand LLP.
24.1* Power of Attorney.
_____________
* Filed previously.
ITEM 17. UNDERTAKINGS.
(a) Undertaking pursuant to Rule 415.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change of such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933 each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Undertaking in respect of incorporation of reference.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) Undertaking in respect of indemnification.
The undersigned registrant hereby agrees to provide to the underwriter
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person in
connection with the securities being registered) the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Jacksonville, State of Florida on
the 14th day of November, 1996.
MLCC MORTGAGE INVESTORS, INC.
By: /s/ Robert J. Smith
-------------------------------
Name: Robert J. Smith
Title: Senior Vice President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on November 14, 1996.
Signature Title
--------- -----
* President, Chairman of the
----------------------- Board of Directors (Chief
(Michael A. Johnston) Executive Officer)
* Senior Vice President, Director
-------------------------
(Kevin O'Hanlon)
/s/Robert J. Smith Senior Vice President, Director
--------------------------
(Robert J. Smith)
* Senior Vice President and
-------------------------- Secretary, Director
(John J. Donlon)
* Director
--------------------------
(Thomas O. McConnell)
* Director
--------------------------
(Earle C. Traynham)
* Senior Vice President and
-------------------------- Treasurer
(Francis X. Ervin, Jr.) (Principal Financial Officer and
Principal Accounting Officer)
*By: /s/ Robert J. Smith
---------------------------
Robert J. Smith
Attorney-in-Fact
MLCC MORTGAGE INVESTORS, INC.
and
MERRILL LYNCH CREDIT CORPORATION
ML Revolving Equity Loan Asset Backed Certificates
UNDERWRITING AGREEMENT
----------------------
____________, 199_
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
World Financial Center
North Tower
New York, New York 10281
Dear Sirs:
MLCC Mortgage Investors, Inc. (the "Company"), a Delaware corporation,
with its principal place of business in Jacksonville, Florida, is a wholly-
owned limited-purpose finance company of Merrill Lynch Credit Corporation
("MLCC"), a Delaware corporation, which is an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc., a Delaware corporation. The Company
has authorized the issuance and sale of Asset Backed Certificates having
aggregate outstanding principal balances of up to approximately
$__________________ (such certificates evidencing interests in pools of
mortgage related assets, the "Certificates"). The Certificates may be issued
in various series, and, within each series, in one or more classes, and,
within each class, in one or more sub-classes, in one or more offerings on
terms determined at the time of sale (each such series, a "Series" and each
such class, a "Class"). Each Series of the Certificates will be issued under
a separate pooling and servicing agreement (each, a "Pooling and Servicing
Agreement") with respect to such Series among the Company, as seller, MLCC,
as master servicer or servicer, to be identified in the prospectus supplement
for each such Series (the "Master Servicer" and "Servicer", respectively) and
a trustee to be identified in the prospectus supplement for each such Series
(the "Trustee"). The Certificates of each Series will evidence specified
interests in separate pools (each, a "Mortgage Pool") of mortgage related
assets, including residential first mortgage loans and home equity revolving
credit line mortgage loans (the "Mortgage Loans") and certain other property
held in trust with respect to such Series (each, a "Trust Fund"). The form
of Pooling and Servicing Agreement has been filed as an exhibit to the
Registration Statement (hereinafter defined).
With respect to a Series of Certificates, the Certificates are more
fully described in a Prospectus and Prospectus Supplement (hereinafter
defined) which the Company has furnished to you. Capitalized terms used but
not defined herein shall have the meanings given to them in the Pooling and
Servicing Agreement. The term "you" as used herein, unless the context
otherwise requires, shall mean you and such persons, if any, as are named as
co-managers in the applicable Terms Agreement (defined below).
Each offering of Certificates pursuant to this Agreement will be made
through you or through an underwriting syndicate managed by you. When the
Company determines to make an offering of Certificates it will enter into an
agreement (the "Terms Agreement") providing for the sale of such Certificates
to, and the purchase and offering thereof by, you and such other
underwriters, if any, selected by you as have authorized you to enter into
such Terms Agreement on their behalf (the "Underwriter," which term shall
include you whether acting alone in the sale of Certificates or as a member
of an underwriting syndicate). The Terms Agreement relating to each offering
of Certificates shall specify, among other things, the principal amount or
amounts of Certificates to be issued, the price or prices at which the
Certificates are to be purchased by the Underwriter from the Company and the
initial public offering price or prices or the method by which the price or
prices at which such Certificates are to be sold will be determined. A Terms
Agreement, which shall be substantially in the form of Exhibit A hereto, may
take the form of an exchange of any standard form of written
telecommunication between you and the Company. Each offering of Certificates
will be governed by this Agreement, as supplemented by the applicable Terms
Agreement, and this Agreement and such Terms Agreement shall inure to the
benefit of and be binding upon the Underwriter or Underwriters participating
in the offering of such Certificates.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (File No. _____________)
relating to the Certificates, and the offering thereof from time to time in
accordance with Rule 415 under the Securities Act of 1933, as amended (the
"1933 Act"), and has filed, and proposes to file, such amendments thereto as
may have been required to the date hereof and as shall be required after the
effective date thereof pursuant to the 1933 Act and the rules of the
Commission thereunder (the "Regulations"). Such registration statement, as
amended at the time it became effective under the 1933 Act and at the
Representation Date (defined below), is referred to herein as the
"Registration Statement". The base prospectus relating to the sale of a
particular Series of Certificates by the Company is referred to herein as the
"Basic Prospectus," and a supplement to the Prospectus contemplated by
Section 4(a) hereof is referred to herein as a "Prospectus Supplement". The
Basic Prospectus and the related Prospectus Supplement are collectively
referred to as the "Prospectus".
SECTION 1. Representations and Warranties. (a) The Company
------------------------------
represents and warrants to, and agrees with, you as of the date hereof, and
to the Underwriters, if any, named in the Terms Agreement, all as of the date
of such Terms Agreement (in each case, the "Representation Date"), as
follows:
(1) The Registration Statement, at the time the Registration
Statement became effective did, and the Registration Statement and the
Prospectus as of the applicable Representation Date will, comply in all
material respects with the requirements of the 1933 Act and the
Regulations. The Registration Statement, at the time it became
effective did not, and as of the applicable Representation Date will
not, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading. The Prospectus, as amended or supplemented
as of the applicable Representation Date, does not contain any untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the Company makes no representations or warranties as to
(i) any statements in, or omissions from, the Registration Statement or
the Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by the Underwriter expressly for use
in the Registration Statement or the Prospectus or (ii) information in
any "Computational Materials" or "Structural Term Sheets" (each as
hereinafter defined) provided by the Underwriter to the Company pursuant
to Section 6 except to the extent that the information set forth therein
is based on or constitutes "Pool Information". As used herein, Pool
Information means information with respect to the characteristics of the
Mortgage Loans as provided by, or on behalf of, the Company or MLCC to
the Underwriter in final form and set forth in the Prospectus
Supplement. The conditions to the use by the Company of a registration
statement on Form S-3 under the 1933 Act, as set forth in the General
Instructions to Form S-3, have been satisfied with respect to the
Registration Statement and the Prospectus. There are no contracts or
documents of the Company which are required to be filed as exhibits to
the Registration Statement pursuant to the 1933 Act or the Regulations
which have not been so filed.
(2) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of Delaware
with corporate power and authority to own, lease and operate its
properties and conduct its business as described in the Prospectus and to
enter into and perform its obligations under this Agreement, the
applicable Pooling and Servicing Agreement, and with respect to a Series
of Certificates, the Certificates and the applicable Terms Agreement;
and the Company is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which the owner-
ship or lease of its properties or the conduct of its business requires
such qualification.
(3) The Company is not in violation of its certificate of
incorporation or by-laws or in default in the performance or observance
of any material obligation, agreement, covenant or condition contained
in any contract, indenture, mortgage, loan agreement, note, lease or
other instrument to which it is a party or by which it or its properties
may be bound, which default might result in any material adverse change
in the financial condition, earnings, affairs or business of the Company
or which might materially and adversely affect the properties or assets
thereof.
(4) The execution and delivery by the Company of this Agreement,
the applicable Terms Agreement and the applicable Pooling and Servicing
Agreement are within the corporate power of the Company and have been
duly authorized by all necessary corporate action on the part of the
Company; and with respect to a Series of Certificates, neither the issu-
ance and sale of the Certificates to the Underwriter, nor the execution
and delivery by the Company of this Agreement and the related Pooling
and Servicing Agreement, nor the consummation by the Company of the
transactions therein contemplated, nor compliance by the Company with
the provisions hereof or thereof, will materially conflict with or
result in a material breach of, or constitute a material default under,
any of the provisions of any law, governmental rule, regulation,
judgment, decree or order binding on the Company or its properties or
the restated certificate of incorporation or by-laws of the Company, or
any of the provisions of any indenture, mortgage, contract or other
instrument of which the Company is a party or by which it is bound or
result in the creation or imposition of any lien, charge or encumbrance
upon any of its property pursuant to the terms of any such indenture,
mortgage, contract or other instrument.
(5) This Agreement has been, and the applicable Terms Agreement
when executed and delivered as contemplated hereby and thereby, will
have been duly authorized, executed and delivered by the Company, and
each constitutes, or will constitute when so executed and delivered, a
legal, valid and binding instrument enforceable against the Company in
accordance with its terms, subject (a) to applicable bankruptcy,
insolvency, reorganization, moratorium, or other similar laws
affecting creditors' rights generally, (b) as to enforceability, to
general principles of equity (regardless of whether enforcement is
sought in a proceeding in equity or at law) and (c) as to enforceability
with respect to rights of indemnity thereunder, to limitations of public
policy under applicable securities laws.
(6) The applicable Pooling and Servicing Agreement when executed
and delivered as contemplated hereby and thereby will have been duly
authorized, executed and delivered by the Company, and will constitute
when so executed and delivered, a legal, valid and binding instrument
enforceable against the Company in accordance with its terms, subject
(a) to applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting creditors' rights generally and (b) as to
enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law).
(7) As of the Closing Time (as defined in Section 3 below) with
respect to a Series of Certificates, the Certificates will have been
duly and validly authorized by the Company, and, when executed and
authenticated as specified in the Pooling and Servicing Agreement, will
be validly issued and outstanding and will be entitled to the benefits
of the Pooling and Servicing Agreement.
(8) There are no actions, proceedings or investigations now
pending against the Company or, to the knowledge of the Company,
threatened against the Company, before any court, administrative agency
or other tribunal (i) asserting the invalidity of this Agreement, the
applicable Terms Agreement and Pooling and Servicing Agreement or with
respect to a Series of Certificates, the Certificates, (ii) seeking to
prevent the issuance of such Certificates or the consummation of any of
the transactions contemplated by this Agreement or such Pooling and
Servicing Agreement, (iii) which might materially and adversely affect
the performance by the Company of its obligations under, or the validity
or enforceability of, this Agreement or such Certificates or (iv)
seeking to adversely affect the federal income tax attributes of such
Certificates described in the Prospectus and the related Prospectus
Supplement.
(9) No filing or registration with, notice to or consent,
approval, authorization or order of any court or governmental authority
or agency is required for the consummation by the Company of the
transactions contemplated by this Agreement, the applicable Pooling and
Servicing Agreement or the applicable Terms Agreement, except such as
may be required under the 1933 Act, the Regulations, or state securities
or Blue Sky laws.
(10) The Company possesses all material licenses, certificates,
authorities or permits issued by the appropriate state, federal or
foreign regulatory agencies or bodies necessary to conduct the business
now operated by it and as described in the Prospectus and the Company
has received no notice of proceedings relating to the revocation or
modification of any such license, certificate, authority or permit
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would materially and adversely affect the
conduct of the business, operations, financial condition or income of
the Company.
(11) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as otherwise
stated therein, there has been no material adverse change in the
business, properties or financial condition of the Company, whether or
not arising in the ordinary course of business.
(12) As of the Closing Time, the Company (i) will have good and
marketable title to the Mortgage Loans being transferred by it to the
Trustee pursuant thereto, free and clear of any lien, mortgage, pledge,
charge, encumbrance, adverse claim or other security interest
(collectively, "Liens"), except to the extent permitted in the
applicable Pooling and Servicing Agreement, (ii) will not have assigned
to any person any of its right, title or interest in such Mortgage Loans
or in such Pooling and Servicing Agreement and (iii) will have the power
and authority to sell such Mortgage Loans to the Trustee, and upon the
execution and delivery of the applicable Pooling and Servicing Agreement
by the Trustee, the Trustee will have acquired beneficial ownership of
all of the Company's right, title and interest in and to the Trust
Balance (as defined in the applicable Pooling and Servicing Agreement)
of the Mortgage Loans except to the extent disclosed in the Prospectus
and upon delivery to the Underwriter of the Certificates and payment by
the Underwriter for the Certificates the Underwriter will have title to
the Certificates, in each case free of Liens except to the extent
permitted by the applicable Pooling and Servicing Agreement.
(13) Any taxes, fees and other governmental charges in connection
with the execution and delivery of this Agreement, the applicable Terms
Agreement and Pooling and Servicing Agreement and with respect to a
Series of Certificates, the execution, issuance, delivery and sale of
the Certificates which have become due or will be due on or prior to the
Closing Time shall have been or will be paid on or prior to the Closing
Time.
(14) As of the Closing Time, with respect to a Series of
Certificates, each of the Mortgage Loans will have the characteristics
described in the Prospectus Supplement.
(15) Neither the Company nor the Trust Fund created by the
applicable Pooling and Servicing Agreement will be subject to
registration as an "investment company" under the Investment Company Act
of 1940, as amended (the "1940 Act").
(16) The transfer of the Trust Balances of the Mortgage Loans to
the Trustee at the Closing Time will be treated by the Company as a sale
of assets, and not as a pledge of assets to secure debt, for federal
income tax and financial reporting purposes.
(17) At the Closing Time, with respect to a Series of
Certificates, the Certificates shall have received the certificate
ratings specified in the Prospectus.
(18) At the Closing Time, with respect to a Series of
Certificates, each of the representations and warranties of the Company
set forth in the applicable Pooling and Servicing Agreement will be true
and correct.
(19) As of the Closing Time, with respect to a Series of
Certificates, any corporate guaranty relating to, among other things,
the obligations of the Master Servicer or Servicer to make advances (a
"Guaranty") will have been duly and validly authorized, executed and
delivered by, and will constitute a legal, valid and binding obligation
of, the guarantor (the "Guarantor"), subject to applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally and as to enforceability to general
principles of equity (regardless whether such enforceability is
considered in a proceeding in equity or at law).
(b) MLCC represents and warrants to, and agrees with, you as of the
date hereof, and to the Underwriters, if any, named in the Terms Agreement,
all as of the Representation Date, as follows:
(1) MLCC has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, with corporate power and authority to own, lease and
operate its properties and to conduct its business, as now conducted by
it, and to enter into and perform its obligations under this Agreement,
the applicable Terms Agreement and Pooling and Servicing Agreement.
(2) This Agreement has been, and the applicable Pooling and
Servicing Agreement and Terms Agreement when executed and delivered as
contemplated hereby and thereby, will have been duly authorized,
executed and delivered by MLCC, and each constitutes, or will constitute
when so executed and delivered, a legal, valid and binding instrument
enforceable against MLCC in accordance with its terms, subject (a) to
applicable bankruptcy, insolvency, reorganization, moratorium, or other
similar laws affecting creditors' rights generally, (b) as to
enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law) and (c) as to
enforceability with respect to rights of indemnity thereunder, to
limitations of public policy under applicable securities laws.
(3) The execution, delivery and performance of this Agreement, the
applicable Terms Agreement and Pooling and Servicing Agreement and the
consummation of the transactions contemplated herein and therein have
been duly authorized by all necessary corporate action of MLCC and will
not conflict with or constitute a breach of, or default under, or result
in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of MLCC pursuant to, any contract, indenture,
mortgage, loan agreement, note, lease, pooling and servicing agreement
or other instrument to which MLCC is a party or by which it may be
bound, or to which any of the property or assets of MLCC is subject, nor
will such actions result in any violation of the provisions of the
certificate of incorporation or by-laws of MLCC or to the best knowledge
of MLCC, any applicable law, administrative regulation or administrative
or court order or decree, except for conflicts, violations, breaches and
defaults which would not, individually or in the aggregate, be
materially adverse to MLCC or materially adverse to the transactions
contemplated by this Agreement.
(4) There are no actions, proceedings or investigations now
pending against MLCC or, to the knowledge of MLCC, threatened against
MLCC, before any court, administrative agency or other tribunal (i)
asserting the invalidity of this Agreement, the applicable Terms
Agreement and Pooling and Servicing Agreement the Certificates, (ii)
seeking to prevent the issuance of the Certificates or the consummation
of any of the transactions contemplated by this Agreement or the
applicable Pooling and Servicing Agreement, (iii) which might materially
and adversely affect the performance by MLCC of its obligations under,
or the validity or enforceability of, this Agreement or the Certificates
or (iv) seeking to adversely affect the federal income tax attributes of
the Certificates described in the Prospectus and the related Prospectus
Supplement.
(5) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as otherwise
stated therein, there has been no material adverse change in the
business, properties, financial condition or earnings of MLCC, whether
or not arising in the ordinary course of business.
(6) MLCC possesses all material licenses, certificates,
authorities or permits issued by the appropriate state, federal or
foreign regulatory agencies or bodies necessary to conduct the business
now conducted by it and MLCC has not received notice of proceedings
relating to the revocation or modification of any such license,
certificate, authority or permit which, singly or in the aggregate, if
the subject of any unfavorable decision, ruling or finding, would
materially and adversely affect the business, properties, financial
condition or earnings of MLCC.
(c) The Underwriter represents and warrants to, and agrees with, the
Company and MLCC as of the date hereof and as of the Representation Date that
the Underwriter has complied and will comply with all of its obligations
arising under Section 6 and, with respect to the Computational Materials and
Structural Term Sheets provided by the Underwriter to the Company pursuant to
Section 6, such Computational Materials and Structural Term Sheets are
accurate in all material respects (taking into account the assumptions
explicitly set forth in the Computational Materials and Structural Term
Sheets, except for any errors therein attributable to errors or mistakes in
the Pool Information). The Computational Materials and Structural Term
Sheets provided by the Underwriter to the Company constitute a complete set
of all Computational Materials and Structural Term Sheets required to be
filed with the Commission pursuant to the No-Action Letters.
The Company shall not be deemed to have made the representations and
warranties contained in clause (a)(19) to the extent you have received
representations and warranties from the applicable Guarantor, if any, as to
the matters covered in such clause in a certificate in form satisfactory to
your counsel and delivered to you at the applicable Closing Time.
Any certificate signed by any officer of the Company or MLCC and
delivered to you or your counsel in connection, with respect to a Series of
Certificates, with the sale of the Certificates shall be deemed a
representation and warranty by the Company or MLCC as to the matters covered
thereby.
SECTION 2. Purchase and Sale. The commitment of the Underwriter to
-----------------
purchase Certificates pursuant to the applicable Terms Agreement shall be
deemed to have been made on the basis of the representations and warranties
herein contained and shall be subject to the terms and conditions herein set
forth.
On the basis of the representations and warranties herein contained and
subject to the terms and conditions herein set forth, the Company agrees to
sell to you, and you agree to purchase from the Company, at the price for the
Certificates set forth in the applicable Terms Agreement, the Certificates.
SECTION 3. Delivery and Payment. Payment of the purchase price for,
--------------------
and delivery of, the Certificates to be purchased by the Underwriter shall be
made at the office of Merrill Lynch, Pierce, Fenner & Smith Incorporated,
World Financial Center, North Tower, New York, New York 10281, or at such
other place as shall be agreed upon by you and the Company, at such time or
date as shall be agreed upon by you and the Company in the applicable Terms
Agreement (each such time and date being referred to as the "Closing Time").
Unless otherwise specified in the applicable Terms Agreement, payment shall
be made to the Company, at the option of the Company, either (a) by certified
or official bank check or checks in New York Clearing House or similar next
day funds payable to the order of the Company, or (b) in immediately
available Federal funds wired to such bank as may be designated by the
Company; provided, however, that if payment is made in immediately available
Federal funds, the Company shall simultaneously reimburse the Underwriter for
the cost to the Underwriter of such funds, based on the Underwriter's cost of
borrowing such funds for one day at their most favorable commercial paper
rate at the Closing Time. Such Certificates shall be in such denominations
and registered in such names as you may request in writing at least two
business days prior to the Closing Time. Such Certificates, which may be in
temporary form, will be made available for examination and packaging by you
no later than 12:00 noon on the first business day prior to the Closing Time.
SECTION 4. Covenants of the Company and MLCC. The Company and MLCC
---------------------------------
covenant with you as follows:
(a) Contemporaneously with the execution of the Terms Agreement,
the Company will prepare a Prospectus Supplement setting forth the
principal amount of Certificates covered thereby, the price or prices at
which the Certificates are to be purchased by the Underwriter from the
applicable Trust, either the initial public offering price or prices or
the method by which the price or prices by which the Certificates are to
be sold will be determined, the selling concession(s) and
reallowance(s), if any, any delayed delivery arrangements, and such
other information as you and the Company deem appropriate in connection
with the offering of the Certificates. The Company will promptly
transmit copies of the Prospectus Supplement to the Commission for
filing pursuant to Rule 424 under the 1933 Act and will furnish to the
Underwriter as many copies of the Prospectus and such Prospectus
Supplement as you shall reasonably request.
(b) If at any time when the Prospectus is required by the 1933 Act
to be delivered in connection with sales of the Certificates by you, any
event shall occur or condition exists as a result of which it is neces-
sary, in the opinion of your counsel, counsel for the Company, or
otherwise, to further amend or supplement the Prospectus in order that
the Prospectus will not include an untrue statement of a material fact
or omit to state any material fact necessary to make the statements
therein, in the light of circumstances existing at the time it is deliv-
ered to a purchaser, not misleading or if it shall be necessary, in the
opinion of any such counsel or otherwise, at any such time to amend or
supplement the Registration Statement or the Prospectus in order to
comply with the requirements of the 1933 Act or the Regulations
thereunder, the Company will promptly prepare and file with the
Commission such amendment or supplement as may be necessary to correct
such untrue statement or omission or to make the Registration Statement
comply with such requirements, and within two business days will furnish
to the Underwriter as many copies of the Prospectus, as so amended or
supplemented, as you shall reasonably request.
(c) The Company will give you reasonable notice of its intention
to file any amendment to the Registration Statement or any amendment or
supplement to the Prospectus, whether pursuant to the 1933 Act or
otherwise, will furnish you with copies of any such amendment or
supplement or other documents proposed to be filed a reasonable time in
advance of filing, and will not file any such amendment or supplement or
other documents in a form to which you or your counsel shall object.
(d) The Company will notify you immediately, and confirm the
notice in writing, (i) of the effectiveness of any amendment to the
Registration Statement, (ii) of the mailing or the delivery to the
Commission for filing of any supplement to the Prospectus or any
document, other than quarterly and annual reports to be filed pursuant
to the Securities Exchange Act of 1934, as amended (the "1934 Act"),
(iii) of the receipt of any comments from the Commission with respect to
the Registration Statement, the Basic Prospectus or any Prospectus
Supplement, (iv) of any request by the Commission for any amendment to
the Registration Statement of any amendment or supplement to the
Prospectus or for additional information, and (v) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or the initiation of any proceedings for that
purpose. The Company will make every reasonable effort to prevent the
issuance of any stop order and, if any stop order is issued, to obtain
the lifting thereof at the earliest possible moment.
(e) The Company will deliver to you as many signed and as many
conformed copies of the Registration Statement (as originally filed) and
of each amendment thereto (including exhibits filed therewith or
incorporated by reference therein and documents incorporated by
reference in the Prospectus) as you may reasonably request.
(f) The Company will endeavor, in cooperation with you, to qualify
the Certificates for offering and sale under the applicable securities
laws of such states and other jurisdictions of the United States as you
may designate, and will maintain or cause to be maintained such
qualifications in effect for as long as may be required for the
distribution of the Certificates. The Company will file or cause the
filing of such statements and reports as may be required by the laws of
each jurisdiction in which the Certificates have been qualified as above
provided.
(g) The Company will use the net proceeds received by it from the
sale of the Certificates in the manner specified in the Prospectus
Supplement under the heading "Use of Proceeds".
(h) The Company will file the Computational Materials and
Structural Term Sheets provided to it by the Underwriter under Section 6
with the Commission pursuant to a Current Report on Form 8-K not later
than 10:00 a.m. on the day the Prospectus is delivered to the
Underwriter or, in the case of any Collateral Term Sheet required to be
filed pursuant to the No-Action Letters, not later than the second
business day following the first day on which the Collateral Term Sheet
has been sent to a prospective investor; provided, however, that as a
condition to the filing of the Computational Materials and Structural
Term Sheets by the Company, the Company must receive a letter from a
firm of independent certified public accountants, which letter shall be
satisfactory in form and substance to the Company, MLCC and their
counsel, to the effect that such accountants have performed certain
specified procedures, all of which have been agreed to by the Company,
as a result of which they have determined the accuracy in all material
respects of the numerical and financial information included in the
Computational Materials and Structural Term Sheets provided by the
Underwriter to the Company for filing with the Commission.
(i) If required, the Master Servicer or Servicer will file with
the Commission a Report on Form 8-K within 15 days of the Closing Time
setting forth certain information concerning the Mortgage Loans which
was not specifically set forth in the Prospectus.
(j) Between the date of the applicable Terms Agreement and the
later of the termination of any trading restrictions or
the Closing Time with respect to the Certificates, the Company will
not, without your prior written consent, directly or indirectly,
publicly sell, or offer to sell, any mortgage pass-through certificates,
mortgage pass-through notes, collateralized mortgage obligations or
asset-backed securities or similar securities representing interests in
or secured by mortgage loans or mortgage-backed securities.
SECTION 5. Payment of Expenses. The Company and MLCC jointly will
-------------------
be obligated to pay all expenses incident to the performance of their
obligations under this Agreement and the applicable Terms Agreement,
including without limitation those related to (i) the filing of the
Registration Statement and all amendments thereto, (ii) the printing and
delivery to the Underwriters, in such quantities as you may reasonably
request, of copies of this Agreement, the applicable Terms Agreement, any
agreements among Underwriters, any Legal Investment Memorandum and any
selling agreements and Underwriters' questionnaires and powers of attorney,
(iii) the preparation, issuance and delivery of the Certificates to the
Underwriter, (iv) the fees and disbursements of the Company's counsel and
accountants, (v) the qualification of the Certificates under state securities
and Blue Sky laws and the determination of the eligibility of the
Certificates for investment, including filing fees, and the fees and
disbursements of counsel for the Underwriters in connection therewith and in
connection with the preparation of any Blue Sky Survey and Legal Investment
Memorandum, (vi) the printing and delivery to the Underwriter, in such
quantities as you may reasonably request, hereinabove stated, of copies of
the Registration Statement, and Prospectus and all amendments and Supplements
thereto, and of any Blue Sky Survey and Legal Investment Memorandum, (vii)
the printing and delivery to the Underwriter, in such quantities as you may
reasonably request, of copies of the applicable Pooling and Servicing
Agreement, (viii) the fees charged by investment rating agencies for rating
the Certificates, (ix) the fees and expenses, if any, incurred in connection
with the listing of the Certificates on any national securities exchange, (x)
any fees and expenses incurred with respect to the National Association of
Securities Dealers, Inc., including the fees and disbursements of counsel for
the Underwriter in connection therewith and (xi) the fees and expenses of the
Trustee and its counsel. Reimbursement of the expenses specified in clause
(iv) of the Section 5 may be made by the Underwriter to the Company. The
cost of the accountant's comfort letter referred to in Section 4(h) will be
an expense of the Underwriter.
If this Agreement and the applicable Terms Agreement are terminated by
the Underwriter in accordance with the provisions of Section 7 or Section
11(i), the Company and MLCC shall jointly be obligated to reimburse the
Underwriter for all out-of-pocket expenses, including the reasonable fees and
disbursements of counsel for the Underwriter.
SECTION 6. Computational Materials, Collateral Term Sheets and
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Structural Terms Sheets. It is understood that you may prepare and
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provide to prospective investors certain Computational Materials, Collateral
Term Sheets and Structural Term Sheets in connection with your offering of
the Certificates, subject to the following conditions:
(a) The Underwriter shall comply with all applicable laws and
regulations in connection with the use of Computational Materials,
including the No-Action letter of May 20, 1994 issued by the Commission
to Kidder, Peabody Acceptance Corporation I, Kidder, Peabody & Co.
Incorporated and Kidder Structured Asset Corporation as made applicable
to other issuers and underwriters by the Commission in response to the
request of the Public Securities Association dated May 24, 1994
(collectively, the "Kidder/PSA Letter"), as well as the PSA Letter
referred to below. The Underwriter shall comply with all applicable
laws and regulations in connection with the use of Collateral Terms
Sheets and Structural Term Sheets, including the No-Action Letter of
February 17, 1995 issued by the Commission to the Public Securities
Association (the "PSA Letter" and, together with the Kidder/PSA Letter,
the "No-Action Letters").
(b) As used herein, "Computational Materials" shall have the
meaning given such term in the No-Action Letters, but shall include only
those Computational Materials that have been prepared and delivered to
prospective investors by or at the direction of the Underwriter. As
used herein, "Structural Term Sheets" and "Collateral Term Sheets" shall
have the meanings given such terms in the PSA Letter, but shall include
(i) only those Structural Term Sheets that have been prepared and
delivered to prospective investors by or at the direction of the
Underwriter and (ii) only those Collateral Term Sheets that have been
prepared by the Company or the Underwriter and delivered to prospective
investors by or at the direction of the Underwriter.
(c) The Underwriter shall provide to the Company copies (in such
format as required by the Company) of all Computational Materials and
Structural Term Sheets that are required to be filed with the Commission
pursuant to the No-Action Letters. The Underwriter may provide to the
Company copies of the foregoing in a consolidated or aggregated form,
including all information required to be filed. All Computational
Materials and Structural Term Sheets must be provided to the Company by
the Underwriter not later than 10:00 a.m. on the first business day
prior to the day on which the filing of such materials is to be made
with the Commission.
(d)(i) All Computational Materials and Structural Term Sheets
provided to prospective investors by the Underwriter that are required
to be filed pursuant to the No-Action Letters shall bear a legend on
each page substantially in the following form:
"Recipients must read the information contained in the
attached statement. Do not use or rely on this
information if you have not received and reviewed the
statement. If you have not received the statement, call
your Merrill Lynch account executive for another copy."
The statement referenced in the above paragraph shall be
substantially in the following form:
"The attached tables and other statistical analyses (the
"Computational Materials") are privileged and confidential and are
intended for use by the addressee only. These Computational
Materials are furnished to you solely by Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") and not by the issuer
of the securities or any of its affiliates. The issuer of these
securities has not prepared or taken part in the preparation of
these materials. Neither Merrill Lynch, the issuer of the
securities nor any of its affiliates makes any representation as to
the accuracy or completeness of the information herein. The
information herein is preliminary, and will be superseded by the
applicable Prospectus Supplement and by any other information
subsequently filed with the Securities and Exchange Commission.
They may not be provided to any third party other than the
addressee's legal, tax, financial and/or accounting advisors for
the purposes of evaluating said material.
Numerous assumptions were used in preparing the Computational
Materials which may or may not be stated therein. As such, no
assurance can be given as to the accuracy, appropriateness or
completeness of the Computational Materials in any particular
context; or as to whether the Computational Materials and/or the
assumptions upon which they are based reflect present market
conditions or future market performance. These Computational
Materials should not be construed as either projections or
predictions or as legal, tax, financial or accounting advice.
Any yields or weighted average lives shown in the Computational
Materials are based on prepayment assumptions and actual prepayment
experience may dramatically affect such yields or weighted average
lives. In addition, it is probable that prepayments on the
underlying assets will occur at rates slower or faster than the
rates assumed in the attached Computational Materials. Furthermore
, unless otherwise provided, the Computational Materials assume
no losses on the underlying assets and no interest shortfall.
The specific characteristics of the securities may differ from
those shown in the Computational Materials due to differences
between the actual underlying assets and the hypothetical assets
used in preparing the Computational Materials. The principal amount
and structure of any security described in the Computational
Materials are subject to change prior to issuance.
Although a registration statement (including the prospectus)
relating to the securities discussed in this communication has been
filed with the Securities and Exchange Commission and is effective,
the final prospectus supplement relating to the securities
discussed in this communication has not been filed with the
Securities and Exchange Commission. This communication shall not
constitute an offer to sell or the solicitation of any offer to buy
nor shall there be any sale of the securities discussed in this
communication in any state in which such offer, solicitations or
sale would be unlawful prior to registration or qualification under
the securities laws of any such state. Prospective purchasers are
referred to the final prospectus and prospectus supplement relating
to the securities discussed in this communication for definitive
Computational Materials on any matter discussed in this
communication. The information contained in these Computational
Materials will be superseded by the description of the mortgage
loans and the other information contained in the final prospectus
supplement and prospectus relating to the securities discussed in
this communication. A final prospectus and prospectus supplement
may be obtained by contacting the Merrill Lynch Trading Desk at
(212) 449-3659.
Please be advised that asset-backed securities may not be
appropriate for all investors. Potential investors must be willing
to assume, among other things, market price volatility,
prepayments, yield curve and interest rate risk. Investors should
fully consider the risk of an investment in these securities.
If you have received this communication in error, please notify the
sending party immediately by telephone and return the original to
such party by mail."
(ii) In the case of Collateral Term Sheets, such legend shall
also include a statement in substantially the following form:
"THE INFORMATION CONTAINED HEREIN WILL BE SUPERSEDED BY
THE DESCRIPTION OF THE COLLATERAL POOL CONTAINED IN THE
PROSPECTUS SUPPLEMENT RELATING TO THE SECURITIES AND
SUPERSEDES ALL INFORMATION CONTAINED IN ANY COLLATERAL
TERM SHEETS RELATING TO THE COLLATERAL POOL PREVIOUSLY
PROVIDED BY MERRILL LYNCH."
Notwithstanding the foregoing legends, this subsection (d) shall be
satisfied if all Computational Materials, Structural Term Sheets and
Collateral Term Sheets bear a legend in a form or forms previously
approved in writing by the Company.
(e) The Company shall not be obligated to file any Computational
Materials or Structural Term Sheets that have been determined to contain
any material errors or omissions; provided, however, that, at the
request of the Underwriter, the Company shall file Computational
Materials or Structural Term Sheets containing material errors or
omissions if clearly marked "superseded by materials dated ____________"
and accompanied by corrected Computational Materials or Structural Term
Sheets that are marked "these materials supersede and correct the
materials dated ____________."
SECTION 7. Conditions to the Obligations of the Underwriter. The
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obligations of the Underwriter hereunder are subject to the accuracy of the
representations and warranties of the Company and MLCC herein contained, to
the performance by the Company and MLCC of their obligations hereunder, and
to the following further conditions:
(a) At the Closing Time (i) no stop order suspending the
effectiveness of the Registration Statement shall have been issued or
proceedings therefor initiated or threatened by the Commission, (ii) the
Certificates shall have received the rating or ratings specified in the
applicable Terms Agreement, and (iii) there shall not have come to your
attention any facts that would cause you to believe that the Prospectus
at the time it was required to be delivered to a purchaser of the
Certificates, contained an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances existing at such time,
not misleading.
(b) The Company shall have delivered to you a certificate, dated
the Closing Time, signed by the president, vice president or an
assistant vice president of the Company to the effect that the signer of
such certificate has carefully examined the Registration Statement, the
Prospectus and this Agreement and that: (i) the representations and
warranties of the Company in this Agreement are true and correct in all
material respects at and as of the Closing Time
with the same effect as if made on the Closing Time, (ii) the Company
has complied with all the agreements and satisfied all the conditions on
its part to be performed or satisfied at or prior to the Closing Time,
(iii) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
initiated or, to the Company's knowledge, threatened as of the Closing
Time, and (iv) nothing has come to his/her attention that would lead
him/her to believe that the Prospectus contains any untrue statement of
a material fact or omits to state any material fact necessary in order
to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(c) You shall have received from Brown & Wood LLP, counsel for the
Company, a favorable opinion, dated the Closing Time and satisfactory in
form and substance to counsel for the Underwriter, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Delaware with corporate power to own its properties and
conduct its business, as now conducted by it, and to enter into
and perform its obligations under this Agreement, the applicable
Terms Agreement and Pooling and Servicing Agreement.
(ii) To the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been
issued under the 1933 Act or proceedings therefor initiated or
threatened by the Commission.
(iii) The Registration Statement as of its effective date and
the Prospectus as of and at the Closing Time (other than numerical,
financial and statistical data contained in the Prospectus as to
which counsel need express no opinion) complied as to form in all
material respects with the applicable requirements of the 1933 Act
and the 1933 Act Regulations.
(iv) The conditions to the use by the Company of a
registration statement on Form S-3 to Form S-ll under the 1933 Act,
as set forth in the General Instructions to Form S-3, have been
satisfied with respect to the Registration Statement and the
Prospectus.
(v) To the best of the knowledge and information of such
counsel, there are no material contracts, indentures, or other
documents of a character required to be described or referred to in
the Registration Statement or the Prospectus or to be filed
as exhibits to the Registration Statement other than those
described or referred to therein or filed or incorporated by
reference as exhibits thereto.
(vi) This Agreement and the applicable Terms Agreement have
each been duly and validly authorized, executed and delivered by
the Company.
(vii) The applicable Pooling and Servicing Agreement has been
duly and validly authorized, executed and delivered by the Company
and constitutes a valid, legal and binding agreement of the
Company, enforceable against the Company in accordance with its
terms subject to bankruptcy, insolvency, reorganization or other
similar laws affecting the enforcement of creditors' rights
generally and, as to enforceability, to general principles of
equity regardless of whether enforcement is sought in a proceeding
in equity or at law.
(viii) The direction by the Company to the Trustee to execute,
issue, countersign and deliver the Certificates has been duly
authorized by the Company and the Certificates, assuming that they
have been duly and validly authorized, executed, issued,
countersigned and delivered by the Trustee as specified in such
Pooling and Servicing Agreement, will be validly issued and
outstanding and entitled to the benefits of such Pooling and
Servicing Agreement.
(ix) The statements in the Prospectus Supplement under the
headings "Summary of Terms of the Offered Certificates-- Certain
Federal Income Tax Consequences", "Summary of Terms of the Offered
Certificates -- ERISA Considerations", "Certain Federal Income Tax
Consequences", "State Taxes", "ERISA Considerations" and the first
and second paragraphs under the heading "Special Considerations and
Risk Factors -Other Legal Considerations", to the extent that they
constitute matters of New York or Federal law or legal conclusions
with respect thereto, provide a fair summary of such law or
conclusions.
(x) The applicable Pooling and Servicing Agreement is not
required to be qualified under the Trust Indenture Act of 1939, as
amended.
(xi) Neither the Company nor the Trust Fund is an "investment
company" or under the "control" of any "investment company" as such
terms are defined in the Investment Company Act of 1940, as
amended.
(xii) To the best of the knowledge and information of such
counsel, no consent, approval, authorization or order of any court
or governmental agency or body of the United States is required for
the consummation by the Company of the transactions contemplated by
the terms of this Agreement, the applicable Terms Agreement or
Pooling and Servicing Agreement, except such as may be required
under the blue sky laws of any jurisdiction in connection with the
sale of the Certificates, such other approvals as have been
obtained and except to the extent that the failure to obtain such
consents or approvals would not, individually or in the aggregate,
have a material adverse effect on the transactions contemplated by
the applicable Pooling and Servicing Agreement, this Agreement or
the applicable Terms Agreement.
(xiv) To the best of the knowledge and information of such
counsel, such counsel is not aware of any material legal or
governmental proceedings pending or threatened (A) asserting the
invalidity of the applicable Pooling and Servicing Agreement or the
Certificates, (B) seeking to prevent the issuance of the
Certificates or the consummation by the Company of any of the
transactions contemplated by this Agreement, the applicable Terms
Agreement or Pooling and Servicing Agreement, or (C) which might
materially and adversely affect the performance by the Company of
its obligations under this Agreement, the applicable Terms
Agreement or Pooling and Servicing Agreement.
(xv) The sale of the Certificates to the Underwriter pursuant
to this Agreement and the consummation of any of the transactions
contemplated by the terms of the applicable Pooling and Servicing
Agreement, the applicable Terms Agreement or this Agreement do not
conflict with or result in a breach or violation of any term or
provision of, or constitute a default under, the certificate of
incorporation or by-laws of the Company, or, to the knowledge of
such counsel, any indenture or other agreement or instrument to
which the Company is a party or by which it is bound, or, to the
knowledge of such counsel, any statute, order or regulation
applicable to the Company of any court, regulatory body,
administrative agency or governmental body having jurisdiction over
the Company except for conflicts, violations, breaches and defaults
which would not, individually or in the aggregate, be materially
adverse to the Company or materially adverse to the transactions
contemplated by the applicable Pooling and Servicing Agreement,
this Agreement or the applicable Terms Agreement.
Such counsel shall state that it has participated in conferences
with officers and other representatives of the Company, your counsel,
representatives of the independent accountants for the Company and you
at which the contents of the Registration Statement and the Prospectus
were discussed and, although such counsel is not passing upon and does
not assume responsibility for, the factual accuracy, completeness or
fairness of the statements contained in the Registration Statement or
the Prospectus (except as stated in paragraph (ix) above) and has made
no independent check or verification thereof for the purpose of
rendering this opinion, on the basis of the foregoing (relying as to
materiality to a large extent upon the certificates of officers and
other representatives of the Company), nothing has come to their
attention that leads such counsel to believe that either the
Registration Statement, at the time it became effective, or the
Prospectus at the time the Prospectus was delivered to you contained or
at the Closing Time, contains an untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, except that such counsel need express no view with
respect to the financial statements, schedules and other financial and
statistical data included in or incorporated by reference into the
Registration Statement or the Prospectus.
Such opinion may express its reliance as to factual matters on the
representations and warranties made by, and on certificates or other
documents furnished by officers of, the parties to this Agreement, the
applicable Terms Agreement and Pooling and Servicing Agreement, (b) may
assume the due authorization, execution and delivery of the instruments
and documents referred to therein by the parties thereto other than the
Company, and (c) may be qualified as an opinion only on the laws of the
State of New York, the corporation law of the State of Delaware, and the
federal law of the United States and the Employee Retirement Income
Security Act of 1974, as amended.
(d) In addition, the Underwriter shall have received from such
counsel a letter authorizing the Underwriter to rely upon any opinions
delivered by such counsel to each Rating Agency rating the Certificates
in connection with the transactions contemplated by this Agreement, the
applicable Terms Agreement and Pooling and Servicing Agreement.
(e) The Servicer shall have delivered to you a certificate, dated
the Closing Time, signed by the president, a vice president or an
assistant vice president of the Servicer to the effect that the signer
of such certificate has carefully examined this Agreement and that the
representations and warranties of the Servicer in this Agreement
are true and correct in all material respects at and as of the
Closing Time with the same effect as if made on the Closing Time.
(f) You shall have received from counsel to the Servicer (who may
be an employee of the Servicer), a favorable opinion, dated the Closing
Time and satisfactory in form and substance to counsel for the
Underwriter, to the effect that:
(i) The Servicer has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Delaware with corporate power to own its properties and
conduct its business, as presently conducted by it, and to enter
into and perform its obligations under this Agreement, the
applicable Terms Agreement and Pooling and Servicing Agreement.
(ii) This Agreement and the applicable Terms Agreement have
each been duly and validly authorized, executed and delivered by
the Servicer.
(iii) The applicable Pooling and Servicing Agreement has been
duly and validly authorized, executed and delivered by the Servicer
and constitutes a valid, legal and binding agreement of the
Servicer, enforceable against the Servicer in accordance with its
terms subject to bankruptcy, insolvency, reorganization or other
similar laws affecting the enforcement of creditors' rights
generally and, as to enforceability, to general principles of
equity regardless of whether enforcement is sought in a proceeding
in equity or at law.
(iv) To the best of such counsel's knowledge, no consent,
approval, authorization or order of any court or governmental
agency or body of the United States is required for the
consummation by the Servicer of the transactions contemplated by
the terms of this Agreement, the applicable Terms Agreement or
Pooling and Servicing Agreement, except such as may be required
under the blue sky laws of any jurisdiction in connection with the
sale of the Certificates, such other approvals as have been
obtained and except to the extent that the failure to obtain such
consents or approvals would not, individually or in the aggregate,
have a material adverse effect on the transactions contemplated by
the applicable Pooling and Servicing Agreement, this Agreement or
the applicable Terms Agreement.
(v) The issuance and delivery of the Certificates, the
consummation by the Servicer of any other of the transactions
contemplated by the terms of the applicable Pooling and Servicing
Agreement, the applicable Terms Agreement or this Agreement,
or the fulfillment by the Servicer of the terms of such
Pooling and Servicing Agreement, the applicable Terms Agreement
or this Agreement do not conflict with or result in a
breach or violation of any term or provision of, or constitute a
default under, the certificate of incorporation or by-laws of the
Servicer, or any indenture or other agreement or instrument to
which the Servicer is a party or by which it is bound, or, to the
knowledge of such counsel, any statute, order or regulation
applicable to the Servicer of any court, regulatory body,
administrative agency or governmental body having jurisdiction over
the Servicer and do not conflict with, result in a breach or
violation or the acceleration of or constitute a default under or
result in the creation or imposition of any lien, charge or
encumbrance upon any of the property or assets of the Servicer
pursuant to the terms of any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument known to such
counsel to which the Servicer is a party or by which the Servicer
may be bound or to which any of the property or assets of the
Servicer may be subject except for conflicts, violations, breaches,
accelerations and defaults which would not, individually or in the
aggregate, be materially adverse to the Servicer or materially
adverse to the transactions contemplated by the applicable Pooling
and Servicing Agreement, this Agreement or the applicable Terms
Agreement.
(vi) To the best of such counsel's knowledge, such counsel is
not aware of any material legal or governmental proceedings pending
or threatened (A) asserting the invalidity of the applicable
Pooling and Servicing Agreement or the Certificates, (B) seeking to
prevent the issuance of the Certificates or the consummation by the
Servicer of any of the transactions contemplated by this Agreement,
the applicable Terms Agreement or Pooling and Servicing Agreement,
or (C) which might materially and adversely affect the performance
by the Servicer of its obligations under this Agreement, the
applicable Terms Agreement or Pooling and Servicing Agreement.
(vii) The Servicer is duly authorized under applicable
statutes, laws, regulations and court decisions to conduct in the
various jurisdictions in which it does business the business
therein currently conducted by it, except where failure to be so
permitted or failure to be so authorized will not have a material
adverse effect on the business, properties, financial condition or
earnings of the Servicer.
(viii) The Servicer is not in violation of its certificate of
incorporation or by-laws or, to the best of such counsel's
knowledge, in default in the performance or observance of any
material obligation, agreement, covenant or condition contained in
any contract, indenture, mortgage, loan agreement, note, lease or
other instrument known to such counsel to which the Servicer is a
party or by which it or its properties may be bound, which default
might result in any material adverse change in the business,
properties, financial condition or earnings of the Servicer.
Such opinion (a) may express its reliance as to factual matters on
the representations and warranties made by, and on certificates or other
documents furnished by officers of, the parties to this Agreement, the
applicable Terms Agreement and Pooling and Servicing Agreement, (b) may
assume the due authorization, execution and delivery of the instruments
and documents referred to therein by the parties thereto other than the
Servicer, and (c) may be qualified as an opinion only on the laws of the
State of New York and the general corporation law of the State of
Delaware.
(g) You shall have received the favorable opinion of counsel for
the Trustee (who may be an employee of the Trustee), dated the Closing
Time and satisfactory in form and substance to counsel for the
Underwriter, to the effect that:
(i) The Trustee has full power and authority to execute and
deliver the applicable Pooling and Servicing Agreement and to
perform its obligations thereunder.
(ii) To the best of such counsel's knowledge, there are no
actions, proceedings or investigations pending or threatened
against or affecting the Trustee before or by any court,
arbitrator, administrative agency or other governmental authority
which, if adversely decided, would materially and adversely affect
the ability of the Trustee to carry out the transactions
contemplated in the applicable Pooling and Servicing Agreement.
(iii) No consent, approval or authorization of, or
registration, declaration or filing with, any court or governmental
agency or body of the United States of America or any state thereof
is required for the execution, delivery or performance by the
Trustee of the applicable Pooling and Servicing Agreement.
(h) You shall have received the favorable opinion, dated the
Closing Time, of counsel for the Underwriter with respect to the
issue and sale of the Certificates, the Registration
Statement, this Agreement, the applicable Terms Agreement, the
Prospectus and such other related matters as you may require.
(i) At the Closing Time there shall not have been, since the date
hereof or since the respective dates as of which information is given in
the Registration Statement and the Prospectus, any material adverse
change in the business, properties, financial condition or earnings of
the Company or MLCC.
(j) At the Closing Time you shall have received from independent
certified public accountants acceptable to you, a letter, dated as of
the date of the applicable Terms Agreement and as of the applicable
Closing Time, delivered at such times, in the form heretofore agreed to.
(k) At the Closing Time you shall have received from the Trustee a
certificate signed by one or more duly authorized officers of the
Trustee, dated as of the Closing Time, as to the due acceptance of the
applicable Pooling and Servicing Agreement by the Trustee and the due
execution and delivery of the Certificates delivered by the Trustee
thereunder and such other matters as you shall reasonably request.
(l) At the Closing Time, the Certificates shall have received the
certificate rating or ratings specified in the Prospectus Supplement.
(m) At the Closing Time counsel for the Underwriter shall have
been furnished with such documents and opinions as they may reasonably
require for the purpose of enabling them to pass upon the issuance and
sale of the Certificates as herein contemplated and related proceedings,
or in order to evidence the accuracy of any of the representations or
warranties, or the fulfillment of any of the conditions herein
contained; and all proceedings taken by the Company or MLCC in
connection with the issuance and sale of the Certificates as herein
contemplated shall be satisfactory in form and substance to the
Underwriter and counsel for the Underwriter.
(n) At the Closing Time the Company and MLCC shall have furnished
to the Underwriter such further information and documents as the
Underwriter may have reasonably requested.
If any condition specified in this Section shall not have been fulfilled
when and as required to be fulfilled, the applicable Terms Agreement may be
terminated by the Underwriter by notice to the Company and MLCC at any time
at or prior to Closing Time, and such termination shall be without liability
of any party to any other party except as provided in Section 5.
SECTION 8. Indemnification. (a) As an inducement to the
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Underwriter to participate in the public offering of the Certificates, the
Company and MLCC jointly and severally agree to indemnify and hold harmless
the Underwriter and each person, if any, who controls the Underwriter within
the meaning of Section 15 of the 1933 Act as follows:
(i) against any and all loss, liability, claim, damage
and expense whatsoever arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out
of any untrue statement or alleged untrue statement of a material fact
contained in any Prospectus (or any amendment or supplement thereto) or
the omission or alleged omission therefrom of a material fact necessary
in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, unless (A) such untrue
statement or omission or alleged untrue statement or omission was made
in reliance upon and in conformity with written information furnished to
the Company by the Underwriter expressly for use in the Registration
Statement (or any amendment thereto) or any Prospectus (or any amendment
or supplement thereto) or (B) such untrue statement or omission or
alleged untrue statement or omission relates to information in any
Computational Materials or Structural Term Sheets provided by the
Underwriter to the Company pursuant to Section 6 (except to the extent
that any untrue statements or errors contained therein are based on or
constitute Pool Information);
(ii) against any and all loss, liability, claim, damage
and expense whatsoever to the extent of the aggregate amount paid in
settlement of any litigation, or investigation or proceeding by any
governmental agency, or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, if such
settlement is effected with the written consent of the Company and MLCC;
and
(iii) against any and all expense whatsoever (including
the fees and disbursements of counsel chosen by you) reasonably incurred
in investigating, preparing or defending against any litigation, or
investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under (i) or
(ii) above.
(b) The Underwriter agrees to indemnify and hold harmless the Company
and MLCC, their respective directors, each of the officers of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company and MLCC within the meaning of Section 15 of the 1933 Act against any
and all loss, liability, claim, damage and expense described in the indemnity
contained in subsection (a) of this Section, but only with respect to (i)
untrue statements or omissions, or alleged untrue statements or omissions,
made in the Registration Statement (or any amendment thereto) or the
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company and MLCC by the
Underwriter expressly for use in the Registration Statement (or any amendment
thereto) or the Prospectus (or any amendment or supplement thereto) or (ii)
information in any Computational Materials or Structural Term Sheets provided
by the Underwriter to the Company pursuant to Section 6 (except to the extent
that any untrue statements or errors contained therein are based on or
constitute Pool Information). This indemnity agreement will be in addition
to any liability which such Underwriter may otherwise have.
(c) Each indemnified party shall give prompt notice to each
indemnifying party of any action commenced against it with respect to which
indemnity may be sought hereunder, but failure to so notify an indemnifying
party shall not relieve it from any liability which it may have otherwise
than on account of this indemnity agreement. An indemnifying party may
participate at its own expense in the defense of any such action. In no
event shall the indemnifying parties be liable for the fees and expenses of
more than one counsel (in addition to any local counsel) separate from their
own counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out
of the same general allegations or circumstances.
SECTION 9. Contribution. In order to provide for just and equitable
------------
contribution in circumstances in which the indemnity agreement provided for
in Section 8 is for any reason held to be unenforceable by the indemnified
parties although applicable in accordance with its terms, the Company and
MLCC on the one hand and the Underwriter, on the other, shall contribute to
the aggregate losses, liabilities, claims, damages and expenses, as incurred,
of the nature contemplated by said indemnity agreement incurred by the
Company, MLCC and the Underwriter, in such proportions as will reflect the
relative benefits from the sale of the Certificates received by the Company
and MLCC on the one hand and the Underwriter, on the other, taking into
account the portion of the proceeds of such sale realized by each, and the
relative benefits shall be deemed to be such that the Underwriter is
responsible for that portion of the aggregate losses, liabilities, claims,
damages and expenses represented by the percentage that the underwriting
discount on the cover of the Prospectus bears to the initial public
offering price as set forth thereon, and the Company and MLCC shall be
jointly and severally responsible for the balance; provided, however, that no
person guilty of fraudulent misrepresentation (within the meaning of Section
ll(f) of the 1933 Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. For purposes of this
Section, each person, if any, who controls the Underwriter within the meaning
of Section 15 of the 1933 Act shall have the same rights to contribution as
the Underwriter and each director of the Company and MLCC, each officer of
the Company who signed the Registration Statement, and each person, if any,
who controls the Company and MLCC within the meaning of Section 15 of the
1933 Act shall have the same rights to contribution as the Company and MLCC.
SECTION 10. Representations, Warranties and Agreements to Survive
-----------------------------------------------------
Delivery. All representations, warranties and agreements contained in
- --------
this Agreement or contained in certificates of officers of the Company or
MLCC submitted pursuant hereto, shall remain operative and in full force and
effect, regardless of any investigation made by or on behalf of the
Underwriter or controlling person thereof or by or on behalf of the Company
and MLCC, and shall survive delivery of the Certificates to the Underwriter.
SECTION 11. Termination. This Agreement may be terminated for any
-----------
reason at any time by either the Company and MLCC or you upon the giving of
thirty days' notice of such termination to the other parties hereto. You may
also terminate the applicable Terms Agreement, immediately upon notice to the
Company and MLCC, at any time at or prior to the Closing Time (i) if there
has been, since the date of the applicable Terms Agreement or since the
respective dates as of which information is given in the Registration
Statement or Prospectus any change, or any development involving a
prospective change, in or affecting the condition, financial or otherwise,
earnings, affairs or business of either the Company or MLCC, whether or not
arising in the ordinary course of business, which in your judgment would
materially impair the market for, or the investment quality of, the
Certificates to be purchased pursuant to the Terms Agreement, or (ii) if
there has occurred any outbreak of hostilities or other calamity or crisis
the effect of which on the financial markets of the United States is such as
to make it, in your judgment, impracticable to market such Certificates or
enforce contracts for the sale of such Certificates, or (iii) if trading
generally on either the New York Stock Exchange or the American Stock
Exchange has been suspended, or minimum or maximum prices for trading have
been fixed, or maximum ranges for prices for securities have been required,
by either of said exchanges or by order of the Commission or any other
governmental authority, or if a banking moratorium has been declared by
either Federal or New York authorities. In the event of any such
termination, the provisions of Section 5, the indemnity agreement set forth
in Section 8, the contribution provisions set forth in Section 9, and the
provisions of Sections 10 and 13 shall remain in effect.
SECTION 12. Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to you shall
be directed to you at World Financial Center, North Tower, New York, New York
10281-1201, attention Syndicate Department; notices to the Company and MLCC
shall be directed to Merrill Lynch Credit Corporation at 4802 Deer Lake Drive
East, Jacksonville, Florida 32246-6484, attention of the General Counsel.
SECTION 13. Parties. This Agreement and the applicable Terms
-------
Agreement shall each inure to the benefit of and be binding upon the
Underwriter, the Company and MLCC, and their respective successors. Nothing
expressed or mentioned in this Agreement or the applicable Terms Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the parties hereto or thereto and their respective successors and the
controlling persons and officers and directors referred to in Sections 8 and
9 and their heirs and legal representatives, any legal or equitable right,
remedy or claim under or with respect to this Agreement or the applicable
Terms Agreement or any provision herein or therein contained. This Agreement
and the applicable Terms Agreement and all conditions and provisions hereof
and thereof are intended to be for the sole and exclusive benefit of the
parties and their respective successors and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of
Certificates from the Underwriter shall be deemed to be a successor by reason
merely of such purchase.
SECTION 14. Governing Law and Time. This Agreement and the
----------------------
applicable Terms Agreement shall be governed by and construed in accordance
with the laws of the State of New York applicable to agreements made and to
be performed in said State. Specified times of day refer to New York City
time.
SECTION 15. Counterparts. This Agreement and the applicable Terms
------------
Agreement may be executed in counterparts, each of which shall constitute an
original of any party whose signature appears on it, and all of which shall
together constitute a single instrument.
* * * *
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company and MLCC a counterpart
hereof, whereupon this instrument, along with all counterparts, will become a
binding agreement between the Underwriter, the Company and MLCC in accordance
with its terms.
Very truly yours,
MLCC MORTGAGE INVESTORS, INC.
By:
---------------------------------------
Name:
Title:
MERRILL LYNCH CREDIT CORPORATION
By:
---------------------------------------
Name:
Title:
CONFIRMED AND ACCEPTED, as of
the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
------------------------------
Name:
Title:
EXHIBIT A
---------
MLCC MORTGAGE INVESTORS, INC.
ML Revolving Home Equity Loan Asset Backed Certificates,
Series 199_-_
Terms Agreement
--------------------------------------------
_____, 199_
To: MLCC Mortgage Investors, Inc., as seller (the "Seller")
under the Pooling and Servicing Agreement dated as of
_______, 199_ (the "Pooling and Servicing Agreement").
Re: Underwriting Agreement, dated ________, 199_ (the
"Agreement").
Series Designation:
- ------------------
ML Revolving Home Equity Loan Asset Backed Certificates, Series
199_-_.
Terms of the Certificates and Underwriting Compensation:
- -------------------------------------------------------
Original
Principal Pass-Through Price to
Type (1) Amount Rate Public
- -------- ---------- ------------ --------
* **
___________
(1) The ________ Certificates are the Offered Certificates.
* Approximate. Subject to permitted variance of plus or minus 5%.
** The ________ 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.
Certificate Rating:
- ------------------
Moody's Standard &
Type of Investors Poor's
Certificate Service Ratings Group
- ----------- ------- -------------
Trust Fund:
- ----------
As described in the Prospectus Supplement.
Credit Enhancement:
- ------------------
Payments on the Investor Certificates will be supported by a certificate
insurance policy and by the limited subordination of the Seller Interest, as
described in the Prospectus Supplement.
Cut-off Date:
- ------------
_______, 199_.
Distribution Date:
- -----------------
The 25th day of each month or the first Business Day thereafter
commencing in _____, 199_.
Purchase Price:
- --------------
The purchase price payable by the Underwriter for the ________
Certificates is as follows:
Aggregate Original Percentage of
Type Principal Amount Principal Amount Rate
- ----- ---------------- ---------------- ------------
*
* The _________ 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.
* * * *
Closing Date and Location:
- --------------------------
_____, 199_ at the offices of Brown & Wood LLP, One World Trade Center,
New York, New York 10048.
MERRILL LYNCH & CO.,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:_________________________________
Name:
Title:
ACCEPTED:
MLCC MORTGAGE INVESTORS, INC.
By:_________________________
Name:
Title:
MLCC MORTGAGE INVESTORS, INC.
Mortgage Loan Asset Backed Pass-Through
Certificates
UNDERWRITING AGREEMENT
----------------------
____________, 199_
MERRILL LYNCH & CO.,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
World Financial Center
North Tower
New York, New York 10281
Ladies and Gentlemen:
MLCC Mortgage Investors, Inc. (the "Company"), a Delaware corporation,
with its principal place of business in Jacksonville, Florida, is a wholly-
owned limited-purpose finance company of Merrill Lynch Credit Corporation
("MLCC"), a Delaware corporation, which is an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc., a Delaware corporation. The Company
has authorized the issuance and sale of Mortgage Pass-Through Certificates
having aggregate outstanding principal balances of up to $_______________
(such certificates evidencing interests in pools of mortgage loans, the
"Certificates"). The Certificates may be issued in various series, and,
within each series, in one or more classes, and, within each class, in one or
more sub-classes, in one or more offerings on terms determined at the time of
sale (each such series, a "Series" and each such class, a "Class"). Each
Series of the Certificates will be issued under a separate pooling and
servicing agreement (each, a "Pooling and Servicing Agreement") with respect
to such Series among the Company, as seller, a master servicer to be
identified in the prospectus supplement for each such Series (the "Master
Servicer") and a trustee to be identified in the prospectus supplement for
each such Series (the "Trustee"). The Certificates of each Series will
evidence specified interests in separate pools (each, a "Mortgage Pool") of
one- to four-family mortgage loans (the "Mortgage Loans"), which may include
Additional Collateral Mortgage Loans, and certain other property held in
trust with respect to such Series (each, a "Trust Fund"). The form of each
Pooling and Servicing Agreement has been filed as an exhibit to the
Registration Statement (hereinafter defined).
The Certificates are more fully described in a Prospectus and Prospectus
Supplement (hereinafter defined) which the Company has furnished to you.
Capitalized terms used but not defined herein shall have the meanings given
to them in the Pooling and Servicing Agreement. The term "you" as used
herein, unless the context otherwise requires, shall mean you and such
persons, if any, as are named as co-managers in the applicable Terms
Agreement (defined below).
Each offering of Certificates pursuant to this Agreement will be made
through you or through an underwriting syndicate managed by you. Whenever
the Company determines to make an offering of Certificates it will enter into
an agreement (the "Terms Agreement") providing for the sale of such
Certificates to, and the purchase and offering thereof by, you and such other
underwriters, if any, selected by you as have authorized you to enter into
such Terms Agreement on their behalf (the "Underwriters," which term shall
include you whether acting alone in the sale of Certificates or as a member
of an underwriting syndicate). The Terms Agreement relating to each offering
of Certificates shall specify, among other things, the principal amount or
amounts of Certificates to be issued, the price or prices at which the
Certificates are to be purchased by the Underwriters from the Company and the
initial public offering price or prices or the method by which the price or
prices at which such Certificates are to be sold will be determined. A Terms
Agreement, which shall be substantially in the form of Exhibit A hereto, may
take the form of an exchange of any standard form of written
telecommunication between you and the Company. Each offering of Certificates
will be governed by this Agreement, as supplemented by the applicable Terms
Agreement, and this Agreement and such Terms Agreement shall inure to the
benefit of and be binding upon the Underwriters participating in the offering
of such Certificates.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (File No. _____________)
relating to the Certificates, and the offering thereof from time to time in
accordance with Rule 415 under the Securities Act of 1933, as amended (the
"1933 Act"), and has filed, and proposes to file, such amendments thereto as
may have been required to the date hereof and as shall be required prior to
the effective date thereof pursuant to the 1933 Act and the rules of the
Commission thereunder (the "Regulations"). Such registration statement, as
amended at the time when each becomes effective under the 1933 Act and at the
Representation Date defined below, is referred to herein as the "Registration
Statement". The base prospectus relating to the sale of a particular Series
of Certificates by the Company is referred to herein as the "Basic
Prospectus," and a supplement to the Prospectus contemplated by Section 3(a)
hereof is referred to herein as a "Prospectus Supplement". The Basic
Prospectus and the related Prospectus Supplement are collectively referred to
as the "Prospectus".
SECTION 1. Representations and Warranties. (a) The Company
------------------------------
represents and warrants to you as of the date hereof, and to the
Underwriters, if any, named in the applicable Terms Agreement, all as of the
date of such Terms Agreement (in each case, the "Representation Date"), as
follows:
(1) The Registration Statement, at the time the Registration
Statement became effective did, and the Registration Statement,
Prospectus and Prospectus Supplement as of the applicable Representation
Date will, comply in all material respects with the requirements of the
1933 Act and the Regulations. The Registration Statement, at the time
it became effective did not, and as of the applicable Representation
Date will not, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading. The Prospectus, as amended or
supplemented as of the applicable Representation Date, does not contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the Company makes no representations or warranties as to
(i) any statements in, or omissions from, the Registration Statement or
the Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by the Underwriters expressly for
use in the Registration Statement or the Prospectus or (ii) information
in any "Computational Materials" or "Structural Term Sheets" (each as
hereinafter defined) provided by the Underwriter to the Company pursuant
to Section 4 except to the extent that the information set forth therein
is based on or constitutes "Pool Information". As used herein, Pool
Information means information with respect to the characteristics of the
Mortgage Loans as provided by, or on behalf of, the Company or MLCC to
the Underwriter in final form and set forth in the Prospectus
Supplement. The conditions to the use by the Company of a registration
statement on Form S-3 under the 1933 Act, as set forth in the General
Instructions to Form S-3, have been satisfied with respect to the
Registration Statement and the Prospectus. There are no contracts or
documents of the Company which are required to be filed as exhibits to
the Registration Statement pursuant to the 1933 Act or the Regulations
which have not been so filed.
(2) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of Delaware
with corporate power and authority to own, lease and operate its
properties and conduct its business as described in the Prospectus and
to enter into and perform its obligations under this Agreement, the
applicable Pooling and Servicing Agreement, and with respect to a Series
of Certificates, the Certificates and the applicable Terms Agreement;
and the Company is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which the
ownership or lease of its properties or the conduct of its business
requires such qualification.
(3) The Company is not in violation of its certificate of
incorporation or by-laws or in default in the performance or observance
of any material obligation, agreement, covenant or condition contained
in any contract, indenture, mortgage, loan agreement, note, lease or
other instrument to which it is a party or by which it or its properties
may be bound, which default might result in any material adverse change
in the financial condition, earnings, affairs or business of the Company
or which might materially and adversely affect the properties or assets
thereof.
(4) The execution and delivery by the Company of this Agreement,
the applicable Terms Agreement and the applicable Pooling and Servicing
Agreement are within the corporate power of the Company and have been
duly authorized by all necessary corporate action on the part of the
Company; and with respect to a Series of Certificates, neither the issu-
ance and sale of the Certificates to the Underwriters, nor the execution
and delivery by the Company of this Agreement and the related Pooling
and Servicing Agreement, nor the consummation by the Company of the
transactions therein contemplated, nor compliance by the Company with
the provisions hereof or thereof, will materially conflict with or
result in a material breach of, or constitute a material default under,
any of the provisions of any law, governmental rule, regulation,
judgment, decree or order binding on the Company or its properties or
the restated certificate of incorporation or by-laws of the Company, or
any of the provisions of any indenture, mortgage, contract or other
instrument of which the Company is a party or by which it is bound or
result in the creation or imposition of any lien, charge or encumbrance
upon any of its property pursuant to the terms of any such indenture,
mortgage, contract or other instrument.
(5) This Agreement has been, and each applicable Terms Agreement
when executed and delivered as contemplated hereby and thereby, will
have been duly authorized, executed and delivered by the Company, and
each constitutes, or will constitute when so executed and delivered, a
legal, valid and binding instrument enforceable against the Company in
accordance with its terms, subject (a) to applicable bankruptcy,
insolvency, reorganization, moratorium, or other similar laws affecting
creditors' rights generally, (b) as to enforceability, to general
principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law) and (c) as to enforceability with
respect to rights of indemnity thereunder, to limitations of public
policy under applicable securities laws.
(6) Each applicable Pooling and Servicing Agreement when executed
and delivered as contemplated hereby and thereby will have been duly
authorized, executed and delivered by the Company, and will constitute
when so executed and delivered, a legal, valid and binding instrument
enforceable against the Company in accordance with its terms, subject
(a) to applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting creditors' rights generally and (b) as to
enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law).
(7) As of the Closing Time (as defined in Section 2 below) with
respect to a Series of Certificates, the Certificates will have been
duly and validly authorized by the Company, and, when executed and
authenticated as specified in the related Pooling and Servicing
Agreement, will be validly issued and outstanding and will be entitled
to the benefits of the related Pooling and Servicing Agreement.
(8) There are no actions, proceedings or investigations now
pending against the Company or, to the knowledge of the Company,
threatened against the Company, before any court, administrative agency
or other tribunal (i) asserting the invalidity of this Agreement, the
applicable Pooling and Servicing Agreement or with respect to a Series
of Certificates, the Certificates, (ii) seeking to prevent the issuance
of such Certificates or the consummation of any of the transactions
contemplated by this Agreement or such Pooling and Servicing Agreement,
(iii) which might materially and adversely affect the performance by the
Company of its obligations under, or the validity or enforceability of,
this Agreement or such Certificates or (iv) seeking to adversely affect
the federal income tax attributes of such Certificates described in the
Prospectus and the related Prospectus Supplement.
(9) Any taxes, fees and other governmental charges that are
assessed and due in connection with the execution, delivery and issuance
of this Agreement, the applicable Pooling and Servicing Agreement and
with respect to a Series of Certificates, or the Certificates shall have
been paid at or prior to the Closing Time with respect to such Series of
Certificates.
(10) No filing or registration with, notice to or consent,
approval, authorization or order of any court or governmental authority
or agency is required for the consummation by the Company of the
transactions contemplated by this Agreement, the applicable Pooling and
Servicing Agreement or the applicable Terms Agreement, except such as
may be required under the 1933 Act, the Regulations, or state securities
or Blue Sky laws.
(11) The Company possesses all material licenses, certificates,
authorities or permits issued by the appropriate state, federal or
foreign regulatory agencies or bodies necessary to conduct the business
now operated by it and as described in the Prospectus and the Company
has received no notice of proceedings relating to the revocation or
modification of any such license, certificate, authority or permit
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would materially and adversely affect the
conduct of the business, operations, financial condition or income of
the Company.
(12) As of the Closing Time, with respect to a Series of
Certificates, the security interest of the Trustee (to the extent the
transfer by the Company is deemed to be a grant of a security interest
and not a sale) in the Mortgage Notes and the related Mortgages included
in the Trust Fund will be perfected, with respect to (a) the Mortgage
Notes, upon delivery thereof to the Trustee and will constitute
perfected first priority interest therein, and (b) the Mortgages, upon
delivery to the Trustee of instruments of assignment in recordable form
assigning each Mortgage to the Trustee and the recording of each such
instrument of assignment in the appropriate recording office in which
the Mortgaged Property is located, or if supported by an opinion of
counsel, without recording, and will constitute a perfected first
priority security interest therein.
(13) As of the Closing Time, with respect to a Series of
Certificates, in the event that a Reserve Fund is established and does
not constitute part of the Trust Fund for such Series, the Trustee will
have acquired a duly and validly perfected security interest in the
Reserve Fund with respect to such Series, if any, subject to no prior
lien, mortgage, security interest, pledge, charge or other encumbrance.
(14) As of the Closing Time, with respect to a Series of
Certificates, each of the Mortgage Loans will have the characteristics
described in the Prospectus Supplement.
(15) Neither the Company nor the Trust Fund created by the
applicable Pooling and Servicing Agreement will be subject to
registration as an "investment company" under the Investment Company Act
of 1940, as amended (the "1940 Act").
(16) At the Closing Time, with respect to a Series of
Certificates, the Certificates, the applicable Pooling and Servicing
Agreement, the applicable Terms Agreement and any Primary Insurance
Policies, Mortgage Pool Insurance Policies, Standard Hazard Insurance
Policies, Special Hazard Insurance Policies, Mortgagor Bankruptcy
Insurance and Alternate Credit Enhancement, if any, will conform in all
material respects to the descriptions thereof contained in the Pro-
spectus.
(17) At the Closing Time, with respect to a Series of
Certificates, the Certificates shall have received the certificate
ratings specified in the related Terms Agreement.
(18) At the Closing Time, with respect to a Series of
Certificates, each of the representations and warranties of the Company
set forth in the related Pooling and Servicing Agreement will be true
and correct.
(19) As of the Closing Time, with respect to a Series of
Certificates, any corporate guaranty relating to, among other things,
the obligations of the Master Servicer to make advances (a "Guaranty")
will have been duly and validly authorized, executed and delivered by,
and will constitute a legal, valid and binding obligation of, the
guarantor (the "Guarantor"), subject to applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally and as to enforceability to general
principles of equity (regardless whether such enforceability is
considered in a proceeding in equity or at law).
(20) As of the Closing Time, with respect to a Series of
Certificates, the applicable Pooling and Servicing Agreement will have
been duly authorized, executed and delivered by, and will constitute a
legal, valid and binding obligation of, the Master Servicer, enforceable
against the Master Servicer in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally
and as to enforceability to general principles of equity (regardless
whether such enforceability is considered in a proceeding in equity or
at law).
(21) As of the Closing Time, with respect to a Series of
Certificates, all Primary Insurance Policies, Mortgage Pool Insurance
Policies, Standard Hazard Insurance Policies, Special Hazard Insurance
Policies and Mortgagor Bankruptcy Insurance, if any, with respect to the
Mortgage Loans constituting a portion of the Trust Fund with respect to
such Series (each an "Insurance Policy" and collectively, the "Insurance
Policies") will have been duly and validly authorized, executed and
delivered by, and will constitute legal, valid and binding obligations
of, the Primary Mortgage Insurers, the Mortgage Pool Insurers, the
Standard Hazard Insurers, the Special Hazard Insurers and the Mortgagor
Bankruptcy Insurers (each, an "Insurer" and collectively, the "Insur-
ers") enforceable in accordance with their respective terms, except that
such enforceability thereof may be subject to (a) bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to creditors' rights and (b) general
principles of equity (regardless whether such enforceability is
considered in a proceeding in equity or law).
(22) As of the Closing Time, with respect to a Series of
Certificates, any Alternate Credit Enhancement constituting a portion of
the Trust Fund with respect to such Series will have been duly and
validly authorized, executed and delivered by, and will constitute
legal, valid and binding obligations of the provider of such Alternate
Credit Enhancement, enforceable in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting creditors' rights generally and as to
enforceability to general principles of equity (regardless whether such
enforceability is considered in proceeding in equity or at law).
(b) The Underwriter represents and warrants to, and agrees with, the
Company and MLCC as of the date hereof and as of the Representation Date that
the Underwriter has complied and will comply with all of its obligations
arising under Section 4 and, with respect to the Computational Materials and
Structural Term Sheets, if any, provided by the Underwriter to the Company
pursuant to Section 4, such Computational Materials and Structural Term
Sheets are accurate in all material respects (taking into account the
assumptions explicitly set forth in such Computational Materials and
Structural Term Sheets, except for any errors therein attributable to errors
or mistakes in the Pool Information). The Computational Materials and
Structural Term Sheets provided by the Underwriter to the Company constitute
a complete set of all Computational Materials and Structural Term Sheets
required to be filed with the Commission pursuant to the No-Action Letters.
The Company shall not be deemed to have made the representations and
warranties contained in clauses (a)(19) through (a)(22) to the extent you
have received representations and warranties from the applicable Guarantor,
if any, Master Servicer, Insurer or provider of Alternate Credit Enhancement,
if any, as to the matters covered in such clause in a certificate in form
satisfactory to your counsel and delivered to you at the applicable Closing
Time.
Any certificate signed by an officer of the Company, the Guarantor, the
Master Servicer, the Insurer or a provider of Alternate Credit Enhancement
and delivered to you or counsel for the Underwriters in connection with an
offering of Certificates shall be deemed, a representation and warranty as to
the matters covered thereby to each person to whom the representations and
warranties in this Section 1 are made.
SECTION 2. Purchase and Sale. The commitment of the Underwriters
-----------------
to purchase Certificates pursuant to any Terms Agreement shall be deemed to
have been made on the basis of the representations and warranties herein
contained and shall be subject to the terms and conditions herein set forth.
Payment of the purchase price for, and delivery of, any Certificates to
be purchased by the Underwriters shall be made at the office of Merrill
Lynch, Pierce, Fenner & Smith Incorporated, World Financial Center, North
Tower, New York, New York 10281, or at such other place as shall be agreed
upon by you and the Company, at such time or date as shall be agreed upon by
you and the Company in the Terms Agreement (each such time and date being
referred to as a "Closing Time"). Unless otherwise specified in the
applicable Terms Agreement, payment shall be made to the Company, at the
option of the Company, either (a) by certified or official bank check or
checks in New York Clearing House or similar next day funds payable to the
order of the Company, or (b) in immediately available Federal funds wired to
such bank as may be designated by the Company; provided, however, that if
payment is made in immediately available Federal funds, the Company shall
simultaneously reimburse the Underwriters for the cost to the Underwriters of
such funds, based on the Underwriters' cost of borrowing such funds for one
day at their most favorable commercial paper rate at the Closing Time. Such
Certificates shall be in such denominations and registered in such names as
you may request in writing at least two business days prior to the applicable
Closing Time. Such Certificates, which may be in temporary form, will be
made available for examination and packaging by you no later than 12:00
noon on the first business day prior to the applicable Closing Time.
SECTION 3. Covenants of the Company. The Company covenants with
------------------------
each of you and the Underwriters participating in the applicable offering of
a Series of Certificates, as follows with respect to such Series of
Certificates:
(a) Contemporaneously with the execution of each Terms Agreement,
the Company will prepare a Prospectus Supplement setting forth the
principal amount of Certificates covered thereby, the price or prices at
which the Certificates are to be purchased by the Underwriters from the
applicable Trust, either the initial public offering price or prices or
the method by which the price or prices by which the Certificates are to
be sold will be determined, the selling concession(s) and
reallowance(s), if any, any delayed delivery arrangements, and such
other information as you and the Company deem appropriate in connection
with the offering of the Certificates. The Company will promptly
transmit copies of the Prospectus Supplement to the Commission for
filing pursuant to Rule 424 under the 1933 Act and will furnish to the
Underwriters as many copies of the Prospectus and such Prospectus
Supplement as you shall reasonably request.
(b) If at any time when the Prospectus is required by the 1933 Act
to be delivered in connection with sales of the Certificates by you or
the Underwriters, any event shall occur or condition exists as a result
of which it is necessary, in the opinion of your counsel, counsel for
the Company, or otherwise, to further amend or supplement the Prospectus
in order that the Prospectus will not include an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of circumstances existing at the time
it is delivered to a purchaser, not misleading or if it shall be neces-
sary, in the opinion of any such counsel or otherwise, at any such time
to amend or supplement the Registration Statement or the Prospectus in
order to comply with the requirements of the 1933 Act or the Regulations
thereunder, the Company will promptly prepare and file with the
Commission such amendment or supplement as may be necessary to correct
such untrue statement or omission or to make the Registration Statement
comply with such requirements, and within two business days will furnish
to the Underwriters as many copies of the Prospectus, as so amended or
supplemented, as you shall reasonably request.
(c) The Company will give you reasonable notice of its intention
to file any amendment to the Registration Statement or any amendment or
supplement to the Prospectus, whether pursuant to the 1933 Act or
otherwise, will furnish you with copies of any such amendment or
supplement or other documents proposed to be filed a reasonable time in
advance of filing, and will not file any such amendment or supplement or
other documents in a form to which you or your counsel shall object.
(d) The Company will notify you immediately, and confirm the
notice in writing, (i) of the effectiveness of any amendment to the
Registration Statement, (ii) of the mailing or the delivery to the
Commission for filing of any supplement to the Prospectus or any
document, other than quarterly and annual reports to be filed pursuant
to the Securities Exchange Act of 1934, as amended (the "1934 Act"),
(iii) of the receipt of any comments from the Commission with respect to
the Registration Statement, the Prospectus or any Prospectus Supplement,
(iv) of any request by the Commission for any amendment to the
Registration Statement of any amendment or supplement to the Prospectus
or for additional information, and (v) of the issuance by the Commission
of any stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose. The
Company will make every reasonable effort to prevent the issuance of any
stop order and, if any stop order is issued, to obtain the lifting
thereof at the earliest possible moment.
(e) The Company will deliver to you as many signed and as many
conformed copies of the Registration Statement (as originally filed) and
of each amendment thereto (including exhibits filed therewith or
incorporated by reference therein and documents incorporated by
reference in the Prospectus) as you may reasonably request.
(f) The Company will endeavor, in cooperation with you, to qualify
the Certificates for offering and sale under the applicable securities
laws of such states and other jurisdictions of the United States as you
may designate, and will maintain or cause to be maintained such
qualifications in effect for as long as may be required for the
distribution of the Certificates. The Company will file or cause the
filing of such statements and reports as may be required by the laws of
each jurisdiction in which the Certificates have been qualified as above
provided.
SECTION 4. Computational Materials, Collateral Term Sheets and
---------------------------------------------------
Structural Terms Sheets. It is understood that you may prepare and provide
- -----------------------
to prospective investors certain Computational Materials, Collateral Term
Sheets and Structural Term Sheets in connection with your offering of the
Certificates, subject to the following conditions:
(a) The Underwriter shall comply with all applicable laws and
regulations in connection with the use of Computational Materials,
including the No-Action letter of May 20, 1994 issued by the Commission
to Kidder, Peabody Acceptance Corporation I, Kidder, Peabody & Co.
Incorporated and Kidder Structured Asset Corporation as made applicable
to other issuers and underwriters by the Commission in response to the
request of the Public Securities Association dated May 24, 1994
(collectively, the "Kidder/PSA Letter"), as well as the PSA Letter
referred to below. The Underwriter shall comply with all applicable
laws and regulations in connection with the use of Collateral Terms
Sheets and Structural Term Sheets, including the No-Action Letter of
February 17, 1995 issued by the Commission to the Public Securities
Association (the "PSA Letter" and, together with the Kidder/PSA Letter,
the "No-Action Letters").
(b) As used herein, "Computational Materials" shall have the
meaning given such term in the No-Action Letters, but shall include only
those Computational Materials that have been prepared and delivered to
prospective investors by or at the direction of the Underwriter. As
used herein, "Structural Term Sheets" and "Collateral Term Sheets" shall
have the meanings given such terms in the PSA Letter, but shall include
(i) only those Structural Term Sheets that have been prepared and
delivered to prospective investors by or at the direction of the
Underwriter and (ii) only those Collateral Term Sheets that have been
prepared by the Company or the Underwriter and delivered to prospective
investors by or at the direction of the Underwriter.
(c) The Underwriter shall provide to the Company copies (in such
format as is required by the Company) of all Computational Materials and
Structural Term Sheets that are required to be filed with the Commission
pursuant to the No-Action Letters. The Underwriter may provide to the
Company copies of the foregoing in a consolidated or aggregated form,
including all information required to be filed. All Computational
Materials and Structural Term Sheets must be provided to the Company by
the Underwriter not later than 10:00 a.m. on the first business day
prior to the day on which the filing of such materials is to be made
with the Commission.
(d) (i) All Computational Materials and Structural Term Sheets
provided to prospective investors by the Underwriter that are required
to be filed pursuant to the No-Action Letters shall bear a legend on
each page substantially in the following form:
"Recipients must read the information contained in the
attached statement. Do not use or rely on this
information if you have not received and reviewed the
statement. If you have not received the statement, call
your Merrill Lynch account executive for another copy."
The statement referenced above shall be substantially in the
following form:
"The attached tables and other statistical analyses (the
"Computational Materials") are privileged and confidential and are
intended for use by the addressee only. These Computational
Materials are furnished to you solely by Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") and not by the issuer
of the securities or any of its affiliates. The issuer of these
securities has not prepared or taken part in the preparation of
these materials. Neither Merrill Lynch, the issuer of the
securities nor any of its affiliates makes any representation as to
the accuracy or completeness of the information herein. The
information herein is preliminary, and will be superseded by the
applicable Prospectus Supplement and by any other information
subsequently filed with the Securities and Exchange Commission.
They may not be provided to any third party other than the
addressee's legal, tax, financial and/or accounting advisors for
the purposes of evaluating said material.
Numerous assumptions were used in preparing the Computational
Materials which may or may not be stated therein. As such, no
assurance can be given as to the accuracy, appropriateness or
completeness of the Computational Materials in any particular
context; or as to whether the Computational Materials and/or the
assumptions upon which they are based reflect present market
conditions or future market performance. These Computational
Materials should not be construed as either projections or
predictions or as legal, tax, financial or accounting advice.
Any yields or weighted average lives shown in the Computational
Materials are based on prepayment assumptions and actual prepayment
experience may dramatically affect such yields or weighted average
lives. In addition, it is probable that prepayments on the
underlying assets will occur at rates slower or faster than the
rates assumed in the attached Computational Materials.
Furthermore, unless otherwise provided, the Computational Materials
assume no losses on the underlying assets and no interest short-
fall. The specific characteristics of the securities may differ
from those shown in the Computational Materials due to differences
between the actual underlying assets and the hypothetical assets
used in preparing the Computational Materials. The principal amount
and structure of any security described in the Computational
Materials are subject to change prior to issuance.
Although a registration statement (including the prospectus)
relating to the securities discussed in this communication has been
filed with the Securities and Exchange Commission and is effective,
the final prospectus supplement relating to the securities
discussed in this communication has not been filed with the
Securities and Exchange Commission. This communication shall not
constitute an offer to sell or the solicitation of any offer to buy
nor shall there be any sale of the securities discussed in this
communication in any state in which such offer, solicitations or
sale would be unlawful prior to registration or qualification under
the securities laws of any such state. Prospective purchasers are
referred to the final prospectus and prospectus supplement relating
to the securities discussed in this communication for definitive
Computational Materials on any matter discussed in this
communication. The information contained in these Computational
Materials will be superseded by the description of the mortgage
loans and the other information contained in the final prospectus
supplement and prospectus relating to the securities discussed in
this communication. A final prospectus and prospectus supplement
may be obtained by contacting the Merrill Lynch Trading Desk at
(212) 449-3659.
Please be advised that asset-backed securities may not be
appropriate for all investors. Potential investors must be willing
to assume, among other things, market price volatility,
prepayments, yield curve and interest rate risk. Investors should
fully consider the risk of an investment in these securities.
If you have received this communication in error, please notify the
sending party immediately by telephone and return the original to
such party by mail."
(ii) In the case of Collateral Term Sheets, such legend shall
also include a statement in substantially the following form:
"THE INFORMATION CONTAINED HEREIN WILL BE SUPERSEDED BY
THE DESCRIPTION OF THE COLLATERAL POOL CONTAINED IN THE
PROSPECTUS SUPPLEMENT RELATING TO THE SECURITIES AND
SUPERSEDES ALL INFORMATION CONTAINED IN ANY COLLATERAL
TERM SHEETS RELATING TO THE COLLATERAL POOL PREVIOUSLY
PROVIDED BY MERRILL LYNCH."
Notwithstanding the foregoing legends, this subsection (d) shall be
satisfied if all Computational Materials, Structural Term Sheets and
Collateral Term Sheets bear a legend in a form or forms previously
approved in writing by the Company.
(e) The Company shall not be obligated to file any Computational
Materials or Structural Term Sheets that have been determined to contain
any material errors or omissions; provided, however, that, at the
request of the Underwriter, the Company shall file Computational
Materials or Structural Term Sheets containing material errors or
omissions if clearly marked "superseded by materials dated ____________"
and accompanied by corrected Computational Materials or Structural Term
Sheets that are marked "these materials supersede and correct the
materials dated ____________."
SECTION 5. Conditions of Underwriters' Obligations. The
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obligations of the Underwriters to purchase Certificates pursuant to any
Terms Agreement are subject to the accuracy of the representations and
warranties on the part of the Company herein contained, to the accuracy of
the statements of the Company's officers made pursuant hereto, to the
performance by the Company of all of its obligations hereunder and to the
following further conditions:
(a) At the applicable Closing Time (i) no stop order suspending
the effectiveness of the Registration Statement shall have been issued
or proceedings therefor initiated or threatened by the Commission, (ii)
the Certificates shall have received the rating or ratings specified in
the applicable Terms Agreement, and (iii) there shall not have come to
your attention any facts that would cause you to believe that the
Prospectus at the time it was required to be delivered to a purchaser of
the Certificates, contained an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances existing at such time,
not misleading.
(b) At the applicable Closing Time, you shall have received:
(1) The favorable opinion, dated as of the applicable Closing
Time, of Brown & Wood LLP, special counsel to the Company, in form
and substance satisfactory to such of you as may be named in the
applicable Terms Agreement, to the effect that:
(i) The Company is validly existing as a corporation in
good standing under the laws of the State of Delaware.
(ii) The Company has the corporate power and corporate
authority to carry on its business as described in the
Prospectus and to own and operate its properties in connection
therewith.
(iii) This Agreement has been duly authorized, executed
and delivered by the Company.
(iv) The applicable Pooling and Servicing Agreement has
been duly authorized, executed and delivered by the Company
and is a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms,
except that (A) such enforcement may be subject to bankruptcy,
insolvency, reorganization, moratorium or other similar laws
now or hereafter in effect relating to creditors' rights
generally and (B) such enforcement may be limited by general
principles of equity (regardless of whether enforcement is
sought in a proceeding in equity or at law).
(v) The execution and delivery by the Company of this
Agreement and the applicable Pooling and Servicing Agreement
and the signing of the Registration Statement by the Company
are within the corporate power of the Company and have been
duly authorized by all necessary corporate action on the part
of the Company; and neither the issue and sale of the
Certificates, nor the consummation of the transactions
contemplated in this Agreement nor the fulfillment of the
terms of such Underwriting Agreements will result in any
violation of the provisions of the certificate of
incorporation or by-laws of the Company or, to the best of
such counsel's knowledge, any New York or federal law,
administrative regulation or administrative or court decree
applicable to the Company.
(vi) The Certificates have been duly authorized by the
Company and, when executed and authenticated as specified in
the applicable Pooling and Servicing Agreement and delivered
and paid for pursuant to this Agreement and the Sale
Agreement, will be duly issued and entitled to the benefits of
such Pooling and Servicing Agreement.
(vii) To the best of such counsel's knowledge, no filing
or registration with or notice to or consent, approval,
authorization or order of any New York or federal court or
governmental authority or agency is required for the
consummation by the Company of the transactions contemplated
by this Agreement, except such as may be required under the
1933 Act, the Regulations, state securities or Blue Sky laws.
(viii) The Registration Statement is effective under
the 1933 Act and, to the best of such counsel's knowledge and
information, no stop order suspending the effectiveness of the
Registration Statement has been issued under the 1933 Act or
proceedings therefor initiated or threatened by the
Commission.
(ix) The applicable Pooling and Servicing Agreement is
not required to be qualified under the Trust Indenture Act of
1939, as amended.
(x) To the best of such counsel's knowledge, there are
no contracts or documents of the Company which are required to
be filed as exhibits to the Registration Statement pursuant to
the 1933 Act or the Regulations thereunder which have not been
so filed.
(xi) The statements in the Prospectus under the heading
"Certain Federal Income Tax Consequences," to the extent that
they constitute matters of law or legal conclusions with
respect thereto, have been prepared or reviewed by such
counsel and are correct in all material respects.
(xii) The Trust Fund created by the applicable Pooling and
Servicing Agreement is not required to register as an
"investment company" under the Investment Company Act of 1940,
as amended.
(xiii) The statements in the Prospectus under the caption
"Description of the Certificates," insofar as such statements
purport to summarize certain terms of the Certificates and the
applicable Pooling and Servicing Agreement, constitute a fair
summary of such documents in all material respects.
(xiv) The Registration Statement, as of the date it
becomes effective, and the Prospectus, as of the date thereof
(other than, in each case, the financial statements and other
financial, statistical and numerical information included
therein, as to which no opinion is rendered), complied as to
form in all material respects with the requirements of the
1933 Act and the Regulations thereunder.
(xv) Based solely upon the representations of the Master
Servicer in the applicable Pooling and Servicing Agreement,
the Class A Certificates will be mortgage related securities,
as defined in Section 3(a)(41) of the Securities Exchange Act
of 1934, as amended, so long as such Certificates are rated in
one of the two highest grades by at least one nationally
recognized statistical rating organization.
(xvi) Based solely upon the representations and warranties
of the Master Servicer in the applicable Pooling and Servicing
Agreement and assuming compliance with the pertinent
provisions of such Pooling and Servicing Agreement, as of the
date of such opinion, under existing law, the Trust Fund will
qualify as a real estate mortgage investment conduit (a
"REMIC") under the Internal Revenue Code of 1986, as amended,
the Class A and the Class B Certificates will be treated as
"regular interests" in such REMIC and the Class R Certificates
will be treated as the single class of "residual interests" in
such REMIC.
(xvii) In reliance upon the representations and warranties
of the Master Servicer in the applicable Pooling and Servicing
Agreement and assuming the compliance with all of the
provisions of such Pooling and Servicing Agreement, as of the
date of such opinion (a) the Trust Fund will qualify for
treatment as a REMIC under Sections 24870 and 24871 of the
California Revenue and Taxation Code (the "California Code")
such that it will not be subject to California state income or
franchise taxes other than the minimum tax imposed on a REMIC
under Section 24872 of the California Code and (b) holders of
the Class A and Class B Certificates will be treated as holders
of "regular interests" in such REMIC and holders of the Class R
Certificates will be treated as holders of the single class of
"residual interests" in such REMIC under the California Code.
Such counsel shall deliver to you such additional opinions addressing
the transfer by the Company to the Trustee of its right, title and interest
in and to the Mortgage Loans and other property included in the Trust Fund on
the Closing Time as may be required by each Rating Agency rating the
Certificates.
Such counsel shall state that it has participated in conferences with
officers and other representatives of the Company, your counsel,
representatives of the independent accountants for the Company and you at
which the contents of the Registration Statement and the Prospectus were
discussed and, although such counsel is not passing upon and does not assume
responsibility for, the factual accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus (except
as stated in paragraphs (xii) and (xiv) above) and has made no independent
check or verification thereof for the purpose of rendering this opinion, on
the basis of the foregoing (relying as to materiality to a large extent upon
the certificates of officers and other representatives of the Company),
nothing has come to their attention that leads such counsel to believe that
either the Registration Statement, at the time it became effective, or the
Prospectus at the time the Prospectus was delivered to you contained or at
the closing time, contains an untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading,
except that such counsel need express no view with respect to the financial
statements, schedules and other financial and statistical data included in or
incorporated by reference into the Registration Statement or the Prospectus.
Said counsel may state that they are admitted to practice only in the
State of New York, that they are not admitted to the Bar in any other State
and are not experts in the law of any other State and to the extent that the
foregoing opinions concern the laws of any other State such counsel may rely
upon the opinion of counsel satisfactory to the Underwriters and admitted to
practice in such jurisdiction. Any opinions relied upon by such counsel as
aforesaid shall be addressed to the Underwriters and shall be delivered
together with the opinion of such counsel, which shall state that such
counsel believes that their reliance thereon is justified.
(2) The favorable opinion of counsel to the Trustee,
dated as of the applicable Closing Time,
addressed to you and in form and scope satisfactory to your
counsel, to the effect that:
(i) Trustee is a national banking association with trust
powers, duly organized and validly existing in good standing
under the laws of the United States of America, and has all
requisite power and authority to enter into the Agreement and
perform the obligations of Trustee.
(ii) The applicable Pooling and Servicing Agreement has
been duly authorized, executed, and delivered by Trustee, and
constitutes the legal, valid, and binding obligation of
Trustee enforceable against Trustee in accordance with its
terms, except as enforceability may be limited by applicable
bankruptcy and insolvency laws and other similar laws
affecting the enforcement of creditors' rights generally and
by general equity principles.
In rendering such opinion, such counsel may rely, as to matters of
fact, to the extent deemed proper and stated therein, on certificates of
responsible officers of the Trustee or public officials.
(3) The favorable opinion of counsel to the Master
Servicer, dated as of the applicable Closing Time, addressed to you
and in form and scope satisfactory to your counsel, to the effect
that:
(i) The Master Servicer has been duly organized and is
validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation and is duly
qualified to do business, and is in good standing, as a
foreign corporation under the laws of each jurisdiction in
which the performance of its duties under the applicable
Pooling and Servicing Agreement would require such
qualification.
(ii) The execution and delivery by the Master Servicer of
the applicable Pooling and Servicing Agreement is within the
corporate power of the Master Servicer and has been duly
authorized by all necessary corporate action on the part of
the Master Servicer; and neither the execution and delivery of
such instrument, nor the consummation of the transactions
provided for therein, nor compliance with the provision
thereof, will conflict with or constitute a breach of, or
default under, any contract, indenture, mortgage, loan
agreement, note, lease, deed of trust, or other instrument to
which the Master Servicer is a party or by which it may be
bound, nor will such action result in any violation of the
provisions of the charter or by-laws of the Master Servicer or
any law, administrative regulation or administrative or court
decree.
(iii) The applicable Pooling and Servicing Agreement has
been duly executed and delivered by the Master Servicer and
constitute a valid and binding obligation of the Master
Servicer enforceable against the Master Servicer in accordance
with its terms, except that such enforceability thereof may be
subject to applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights
generally and subject as to enforceability, to general prin-
ciples of equity (regardless whether enforcement is sought in
a proceeding in equity or at law).
(iv) The execution, delivery and performance by the
Master Servicer of the applicable Pooling and Servicing
Agreement do not require the consent or approval of, the
giving of notice to, the registration with, or the taking of
any other action in respect of any federal, state or other
governmental agency or authority which has not previously been
effected.
(v) The description of the Master Servicer in the
Prospectus and the Prospectus Supplement is true and correct
in all material respects.
(4) The favorable opinion of counsel to the Guarantor,
if any, which counsel may be counsel to the Company, dated as of
the applicable Closing Time, addressed to you and in form and scope
satisfactory to your counsel, to the effect that:
(i) The Guarantor, if any, is validly existing and in
good standing under the laws of the jurisdiction of its
incorporation with the corporate power to execute, deliver and
perform the applicable Guaranty.
(ii) The applicable Guaranty has been duly authorized,
executed and delivered by the applicable Guarantor and is a
valid and binding agreement of the Guarantor enforceable in
accordance with its terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium or other
similar laws affecting creditor's rights generally and as to
enforceability general principles of equity (regardless of
whether such enforceability is considered in a proceeding in
equity or at law).
(5) The favorable opinion of counsel to each Mortgage
Pool Insurer, Special Hazard Insurer and Mortgagor Bankruptcy
Insurer, if any, named in each applicable Insurance Policy, dated
as of the applicable Closing Time, addressed to you and in form and
scope satisfactory to your counsel, to the effect that:
(i) Such Insurer is a stock insurance company, duly
organized, validly existing and holding a current certificate
of authority to transact insurance business under the laws of
the jurisdiction of its incorporation, is duly qualified to do
business in all jurisdictions where the nature of its opera-
tions as contemplated by the Insurance Policy legally require
such qualification, and has the power and authority (corporate
and other) to issue, and to take all action required of it
under, the Insurance Policy.
(ii) The execution, delivery and performance by such
Insurer of the Insurance policy have been duly authorized by
all necessary corporate action on the part of the Insurer, and
under present law do not and will not contravene any law or
governmental regulation or order presently binding on such
Insurer or the charter or the by-laws of such Insurer or
contravene any provision of or constitute a default under any
indenture, contract or other instrument to which the Insurer
is a party or by which such Insurer is bound.
(iii) The execution, delivery and performance by such
Insurer of the Insurance Policy do not require the consent or
approval of, the giving of notice to, the registration with,
or the taking of any other action in respect of any federal,
state or other governmental agency or authority which has not
previously been effected.
(iv) The Insurance Policy has been duly issued by such
Insurer and constitutes the valid and binding agreement of
such Insurer, enforceable against the Insurer in accordance
with its terms, except that such enforceability thereof
subject to (A) bankruptcy, insolvency, reorganization, mora-
torium or other similar laws now or hereafter in
effect relating to creditors' rights and (B) general
principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or
law).
(v) Except for changes, if any, approved by you, the
Insurance Policy conforms in all material respects to the
description thereof in the Prospectus under the captions
"Description of the Certificates -- Maintenance of Insurance
Policies and Other Servicing Procedures" and "Description of
Insurance" and in the applicable Prospectus Supplement under
the caption "Insurance." To the extent required by applicable
legal requirements, the Insurance Policy form has been filed
with, and approved by, all governmental authorities having
jurisdiction over the Insurer in connection with such policy.
(6) The favorable opinion of counsel to each provider of
Alternate Credit Enhancement, if any, named in a Prospectus
Supplement, dated as of the applicable Closing Time, addressed to
you and in form and scope satisfactory to your counsel, to the
effect that:
(i) Such provider of Alternate Credit Enhancement has
been duly organized and is validly existing as a corporation
under the laws of the jurisdiction of its incorporation, is
duly qualified to do business in all jurisdictions where the
nature of its operations as contemplated by the Alternate
Credit Enhancement legally requires such qualification, and
has the power and authority (corporate and other) to issue,
and to take all action required of it under, the Alternate
Credit Enhancement.
(ii) The execution, delivery and performance by such
provider of Alternate Credit Enhancement of the Alternate
Credit Enhancement have been duly authorized by all necessary
corporate action on the part of the provider of Alternate
Credit Enhancement, and under present law do not and will not
contravene any law or governmental regulation or order
presently binding on such provider of Alternate Credit
Enhancement or the charter of the by-laws of such provider of
Alternate Credit Enhancement or contravene any provision of or
constitute a default under any indenture, contract or other
instrument to which the provider of Alternate Credit
Enhancement is a party or by which such provider of Alternate
Credit Enhancement is bound.
(iii) The execution, delivery and performance by such
provider of Alternate Credit Enhancement of the Alternate
Credit Enhancement do not require the consent or approval of,
the giving of notice to, the registration with, or the taking
of any other action in respect of any federal, state or other
governmental agency or authority which has not previously been
effected.
(iv) The Alternate Credit Enhancement has been duly
issued by such provider of Alternate Credit Enhancement and
constitutes the valid and binding agreement of such provider
of Alternate Credit Enhancement, enforceable against the pro-
vider of Alternate Credit Enhancement in accordance with its
terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting
creditors' rights generally and subject as to enforceability
to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at
law).
(v) The Alternate Credit Enhancement conforms in all
material respects to the description thereof in the applicable
Prospectus Supplement under the caption "Insurance Alternate
Credit Enhancement." To the extent required by applicable
legal requirements, the Alternate Credit Enhancement form has
been filed with, and approved by, all governmental authorities
having jurisdiction over the provider of Alternate Credit
Enhancement in connection with such Alternate Credit
Enhancement.
(7) To the extent specified in the applicable Terms
Agreement, if any of the Mortgage Loans constituting a portion of
the Trust Fund with respect to a Series have been or are being
purchased by the Company from a third party (other than any such
Mortgage Loans acquired by Merrill Lynch Credit Corporation in the
course of its correspondent lending activities and thereafter sold
to the Company), the favorable opinion of counsel to such third
party, dated as of the applicable Closing Time, addressed to you
and in form and scope satisfactory to your counsel to the effect
that the security interest of the Trustee in the Mortgage Notes and
the related Mortgages included in the Trust Fund will be perfected,
with respect to (i) the Mortgage Note, upon delivery thereof to the
Trustee and will constitute a perfected first priority interest
therein, and (ii) the Mortgages, upon delivery to the Trustee of
instruments of assignment in recordable form assigning each Mortgage
to the Trustee and, if such counsel so indicates in such opinion, the
recording of each such instrument of assignment in the appropriate
recording office in which the Mortgaged Property is located, and
will constitute a perfected first priority security interest
therein. Such counsel shall deliver to you such additional
opinions addressing the transfer of the Mortgage Loans from the
third party to the Company as may be required by each Rating Agency
rating the Certificates.
(8) The favorable opinion or opinions, dated as of the
applicable Closing Time, of counsel for the Underwriters, with
respect to the issue and sale of the Certificates, the Registration
Statement, this Agreement, the applicable Terms Agreement, the
Prospectus, the applicable Prospectus Supplement and other related
matters as the Underwriters may require.
(c) At the applicable Closing Time you shall have received a
certificate of an Assistant Vice President (or more senior officer) of
the Company, dated as of such Closing Time, to the effect that the
representations and warranties of the Company contained in Section 1 are
true and correct with the same force and effect as though such Closing
Time were a Representation Date.
(d) You shall have received from independent certified public
accountants acceptable to you, a letter, dated as of the date of the
applicable Terms Agreement and as of the applicable Closing Time,
delivered at such times, in the form heretofore agreed to.
(e) At the applicable Closing Time, with respect to a Series of
Certificates, each of the representations and warranties of the Master
Servicer set forth in the related Pooling and Servicing Agreement will
be true and correct.
(f) At the applicable Closing Time, with respect to a Series of
Certificates, the Reserve Fund shall be established by the Company with
the Trustee as contemplated by the related Pooling and Servicing
Agreement.
(g) At the applicable Closing Time, with respect to a Series of
Certificates, the Certificates shall have received the certificate
rating or ratings specified in the related Terms Agreement.
(h) At the applicable Closing Time, counsel for the Underwriters
shall have been furnished with such documents and opinions as they may
reasonably require for the purpose of enabling them to pass upon the
issuance and sale of the Certificates as herein contemplated and related
proceedings or in order to evidence the accuracy and completeness of any
of the representations and warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings taken by the Company
in connection with the issuance and sale of the Certificates as herein
contemplated shall be satisfactory in form and substance to you and
counsel for the Underwriters.
If any condition specified in this Section shall not have been
fulfilled when and as required to be fulfilled, the applicable Terms
Agreement may be terminated by you by notice to the Company at any time at or
prior to the Applicable Closing Time, and such termination shall be without
liability of any party to any other party except as provided in Section 6.
SECTION 6. Payment of Expenses. The Company will pay all
-------------------
expenses incident to the performance of its obligations under this Agreement
and any Terms Agreement, including without limitation those related to (i)
the filing of the Registration Statement and all amendments thereto, (ii) the
printing and delivery to the Underwriters, in such quantities as you may
reasonably request, of copies of this Agreement, each Terms Agreement, any
agreements among Underwriters, the Memorandum and any selling agreements and
Underwriters' questionnaires and powers of attorney, (iii) the preparation,
issuance and delivery of the Certificates to the Underwriters, (iv) the fees
and disbursements of the Company's counsel and accountants, (v) the
qualification of the Certificates under Securities and Blue Sky laws and the
determination of the eligibility of the Certificates for investment in
accordance with the provisions of Section 3(f), including filing fees, and
the fees and disbursements of counsel for the Underwriters in connection
therewith and in connection with the preparation of any Blue Sky Survey and
Legal Investment Survey, (vi) the printing and delivery to the Underwriters,
in such quantities as you may reasonably request, hereinabove stated, of
copies of the Registration Statement, and Prospectus and all amendments and
Supplements thereto, and of any Blue Sky Survey and Legal Investment Survey,
(vii) the printing and delivery to the Underwriter, in such quantities as you
may reasonably request, of copies of each Pooling and Servicing Agreement,
(viii) the fees charged by investment rating agencies for rating the
Certificates, (ix) the fee and expenses, if any, incurred in connection with
the listing of the Certificates on any national securities exchange, (x) any
fees and expenses incurred with respect to the National Association of
Securities Dealers, Inc., including the fees and disbursements of counsel for
the Underwriters in connection therewith and (xi) the fees
and expenses of the Trustee and its counsel. The cost of the accountant's
comfort letter referred to in Section 3(g) will be an expense of the
Underwriter.
If a Terms Agreement is terminated by you in accordance with the
provisions of Section 5 or Section 10(i), the Company shall reimburse you for
all reasonable out-of-pocket expenses, including the reasonable fees and
disbursements of counsel for the Underwriters.
SECTION 7. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless the
Underwriters and each person, if any, who controls the Underwriters within
the meaning of Section 15 of the 1933 Act as follows:
(i) against any and all loss, liability, claim, damage
and expense whatsoever arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out
of any untrue statement or alleged untrue statement of a material fact
contained in any Prospectus (or any amendment or supplement thereto) or
the omission or alleged omission therefrom of a material fact necessary
in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, unless (A) such untrue
statement or omission or alleged untrue statement or omission was made
in reliance upon and in conformity with written information furnished to
the Company by the Underwriters expressly for use in the Registration
Statement (or any amendment thereto) or any Prospectus (or any amendment
or supplement thereto) or (B) such untrue statement or omission or
alleged untrue statement or omission relates to information in any
Computational Materials or Structural Term Sheets provided by the
Underwriter to the Company pursuant to Section 4 (except to the extent
that any untrue statements or errors contained therein are based on or
constitute Pool Information);
(ii) against any and all loss, liability, claim, damage
and expense whatsoever to the extent of the aggregate amount paid in
settlement of any litigation, or investigation or proceeding by any
governmental agency, or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, if such
settlement is effected with the written consent of the Company; and
(iii) against any and all expense whatsoever (including
the fees and disbursements of counsel chosen by you) reasonably incurred
in investigating, preparing or defending against any litigation, or
investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under (i) or
(ii) above.
This indemnity agreement will be in addition to any liability which the
Company may otherwise have. Insofar as this indemnity may permit
indemnification for liabilities under the 1933 Act of any person who is a
partner of the Underwriter entitled to indemnity hereby or who controls the
Underwriters within the meaning of Section 15 of the 1933 Act and who, at the
date of this Agreement, is a director, officer or controlling person of the
Company, such indemnity agreement is subject to the undertaking of the
Company in the Registration Statement.
(b) Each Underwriter severally agrees to indemnify and hold
harmless the Company, each of the Company's directors, each of the Company's
officers who signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act against
any and all loss, liability, claim, damage and expense described in the
indemnity contained in subsection (a) of this Section, but only with respect
to (i) untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto) or
any Prospectus (or any amendment or supplement thereto) in reliance upon and
in conformity with written information furnished to the Company by the
Underwriters expressly for use in the Registration Statement (or any
amendment thereto) or any Prospectus (or any amendment or supplement thereto)
or (ii) information in any Computational Materials or Structural Term Sheets
provided by the Underwriter to the Company pursuant to Section 4 (except to
the extent that any untrue statements or errors contained therein are based
on or constitute Pool Information). This indemnity agreement will be in
addition to any liability which such Underwriter may otherwise have.
(c) Each indemnified party shall give prompt notice to each
indemnifying party of any action commenced against it with respect to which
indemnity may be sought hereunder but failure to so notify an indemnifying
party shall not relieve it from any liability which it may have otherwise
than on account of this indemnity agreement. An indemnifying party may
participate at its own expense in the defense of such action. In no event
shall the indemnifying parties be liable for the fees and expenses of more
than one counsel for all indemnified parties in connection with any one
action or separate but similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances.
SECTION 8. Contribution. In order to provide for just and
------------
equitable contribution in circumstances in which the indemnity agreement
provided for in Section 7 is for any reason held to be unenforceable by the
indemnified parties although applicable in accordance with its terms, the
Company on the one hand, and the Underwriters, on the other, shall contribute
to the aggregate losses, liabilities, claims, damages and expenses of the
nature contemplated by said indemnity agreement incurred by the Company and
one or more of the Underwriters in such proportions that the Underwriters are
responsible for that portion represented by the underwriting compensation
earned by them bears to the initial public offering price or prices and the
Company shall be responsible for the balance; provided, however, that no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. For purposes of this
Section, each person, if any, who controls the Underwriters within the
meaning of Section 15 of the 1933 Act shall have the same rights to
contribution as the Underwriters and each director of the Company, such
officer of the Company who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of
the 1933 Act shall have the same rights to contribution as the Company.
SECTION 9. Representations, Warranties, and Agreements to
----------------------------------------------
Survive Delivery. All representations, warranties and agreements
- ----------------
contained in this Agreement, or contained in certificates of officers of the
Company submitted pursuant hereto, shall remain operative and in full force
and effect, regardless of any termination of this Agreement, or any
investigation made by or on behalf of the Underwriters or controlling person
thereof, or by or on behalf of the Company and shall survive delivery of any
Certificates to the Underwriters.
SECTION 10. Termination of Agreement. This Agreement may be
------------------------
terminated for any reason at any time by either the Company or you upon the
giving of thirty days' notice of such termination to the other party hereto.
You, as Representative of the Underwriters named in any Terms Agreement, may
also terminate such Terms Agreement, immediately upon notice to the Company,
at any time at or prior to the applicable Closing Time (i) if there has been,
since the date of such Terms Agreement or since the respective dates as of
which information is given in the Registration Statement or Prospectus any
change, or any development involving a prospective change, in or affecting
the condition, financial or otherwise, earnings, affairs or business of the
Company, whether or not arising in the ordinary course of business, which in
your judgment would materially impair the market
for, or the investment quality of, the Certificates to be purchased pursuant
to such Terms Agreement, or (ii) if there has occurred any outbreak of
hostilities or other calamity or crisis the effect of which on the financial
markets of the United States is such as to make it, in your judgment,
impracticable to market such Certificates or enforce contracts for the sale
of such Certificates, or (iii) if trading generally on either the New York
Stock Exchange or the American Stock Exchange has been suspended, or minimum
or maximum prices for trading have been fixed, or maximum ranges for prices
for securities have been required, by either of said exchanges or by order of
the Commission or any other governmental authority, or if a banking morato-
rium has been declared by either Federal or New York authorities. In the
event of any such termination, (A) the covenants set forth in Section 3 with
respect to any offering of such Certificates shall remain in effect so long
as the Underwriters own any such Certificates purchased from the Company
pursuant to the applicable Terms Agreement and (B) the covenant set forth in
Section 3(c), the provisions of Section 6, the indemnity agreement set forth
in Section 7, the contribution provisions set forth in Section 8, and the
provisions of Section 9 and 14 shall remain in effect.
SECTION 11. Default by One or More of the Underwriters. If one
------------------------------------------
or more of the Underwriters participating in an offering of Certificates
shall fail at the applicable Closing Time to purchase the Certificates which
it or they are obligated to purchase hereunder and under the applicable Terms
Agreement (the "Defaulted Certificates"), then such of you as are named
therein shall have the right, within 24 hours thereafter, to make ar-
rangements for one or more of the non-defaulting Underwriters, or any other
Underwriters, to purchase all, but not less than all, of the Defaulted
Certificates in such amounts as may be agreed upon and upon the terms herein
set forth. If, however, you have not completed such arrangements within such
24-hour period, then:
(a) if the aggregate principal amount of Defaulted
Certificates does not exceed 10% of the aggregate principal amount of
the Certificates to be purchased pursuant to such Terms Agreement, the
non-defaulting Underwriters named in such Terms Agreement shall be
obligated to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all such non-defaulting Underwriters, or
(b) if the aggregate principal amount of Defaulted
Certificates exceeds 10% of the aggregate principal amount of the
Certificates to be purchased pursuant to such Terms Agreement, the
applicable Terms Agreement shall terminate, without any liability on the
part of any non-defaulting Underwriters.
No action taken pursuant to this Section shall relieve any defaulting
Underwriters from liability with respect to any default of such Underwriters
under this Agreement and the applicable Terms Agreement.
In the event of a default by any Underwriters as set forth in this
Section, either you or the Company shall have the right to postpone the
applicable Closing Time for a period of time not exceeding seven days in
order that any required changes in the Registration Statement or Prospectus
or in any other documents or arrangements may be effected.
SECTION 12. Notices. All notices and other communications
-------
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or transmitted by any standard form of telecommunication. Notices to
the Underwriters shall be directed to you at the address set forth on the
first page hereof, attention Syndicate Department. Notices to the Company
shall be directed to MLCC Mortgage Investors, Inc., 4802 Deer Lake Drive
East, Jacksonville, Florida 32246, attention of the General Counsel.
SECTION 13. Parties. This Agreement shall inure to the benefit
-------
of and be binding upon you and the Company and any Terms Agreement shall
inure to the benefit of and be binding upon the Company and any Underwriters
who become a party to any Terms Agreement, and their respective successors.
Nothing expressed or mentioned in this Agreement or any Terms Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the parties hereto or thereto and their respective successors and the
controlling person and officers and directors referred to in Sections 7 and 8
and their heirs and legal representatives any legal or equitable right,
remedy or claim under or with respect to this Agreement or any Terms
Agreement or any provision herein or therein contained. This Agreement and
any Terms Agreement and all conditions and provisions hereof or thereof are
intended to be for the sole and exclusive benefit of the parties and their
respective successors and their heirs and legal representative (to the extent
of their rights as specified herein and therein) and for the benefit of no
other person, firm or corporation. No purchaser of Certificates from any
Underwriters shall be deemed to be a successor by reason merely of such
purchase.
SECTION 14. Governing Law and Time. This Agreement and each
----------------------
Terms Agreement shall be governed by the laws of the State of New York.
Specified times of day refer to New York City time.
SECTION 15. Counterparts. This Agreement and any Terms
------------
Agreement may be executed in counterparts, each of which
shall constitute an original of any party whose signature appears on it, and
all of which shall together constitute a single instrument.
* * *
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us a counterpart hereof, whereupon this
instrument along with all counterparts will become a binding agreement
between you and the Company in accordance with its terms.
Very truly yours,
MLCC MORTGAGE INVESTORS, INC.
By------------------------------------
Name:
Title:
CONFIRMED AND ACCEPTED, as of
the date first above written:
MERRILL LYNCH & CO.,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By____________________________
Name:
Title:
<PAGE>
Exhibit A
MLCC MORTGAGE INVESTORS, INC.
MORTGAGE LOAN ASSET BACKED PASS-THROUGH
CERTIFICATES, SERIES 199_____
TERMS AGREEMENT
---------------
Dated: _____________, 199_
To: MLCC Mortgage Investors, Inc., as Seller (the "Seller") under the
Pooling and Servicing Agreement to be dated as of _____________,
199_ (the "Agreement").
Re: Underwriting Agreement dated ____________, 199_.
Series Designation: MLCC Mortgage Investors, Inc., Mortgage Loan Asset
- ------------------
Backed Pass-Through Certificates, Series 199_-_.
Terms of the Certificates and Underwriting Compensation:
- -------------------------------------------------------
Class (1) Original Pass-Through Price to
Principal Rate Public
Amount ______________ ____________
-----------
$__________* ** ***
_________________________
(1) The Class __ Certificates are the Offered Certificates. The Class __
Certificate is subordinate to the Offered Certificates.
* Approximate. Subject to permitted variance of plus or minus 5%.
** Subject to the more precise formulation described in the Prospectus (as
defined below).
*** The Class __ 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.
Moody's Standard &
Certificate Investors Poor's Ratings
-------------
Rating Service Services
- ----------- --------- --------------
REMIC Election:
- --------------
The Seller intends to cause the Trust Fund (exclusive of the security
interest in the Additional Collateral) to elect to be treated as a REMIC as
described in the Prospectus dated ___________, 199_ and the Prospectus
Supplement relating to the Class __ Certificates, dated ____________, 199_
(together, the "Prospectus").
Trust Fund:
- ----------
As described in the Prospectus.
Credit Enhancement:
- ------------------
Payments on the Class __ Certificates will be supported by (a limited
purpose surety bond), (a certificate insurance policy), (subordinate
class(es)) and (by overcollateralization), as described in the Prospectus.
Cut-off Date:
- ------------
___________, 199_.
Distribution Date:
- -----------------
The 15th day of each month or, if such day is not a Business Day, the
first Business Day thereafter, commencing in _____ 199.
Purchase Price:
- --------------
The purchase price payable by the Underwriter for the Class __
Certificates is a percentage of the principal amount of such Class, as
follows:
<TABLE>
<CAPTION>
Principal of
Class Amount Principal
<S> <C> <C> <C>
$ % *
</TABLE>
* The Class __ 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 undersigned represents and agrees that (i) it has not offered or
sold and, prior to the expiration of the period of six months from the
Closing Date referred to below, will not offer or sell any Class __
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 that 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 __ 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
documents received by it in connection with the issue of the Class __
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.
* * *
Closing Date and Location:
- -------------------------
_____________, 199_ at the offices of Brown & Wood LLP, One World Trade
Center, New York, New York 10048.
MERRILL LYNCH & CO.,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:_____________________________
Name:
Title:
ACCEPTED:
MLCC MORTGAGE INVESTORS, INC.
By:__________________________
Name:
Title:
