<PAGE> 1
As filed pursuant to Rule 424(b)(2)
Registration No. 033-84894
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED NOVEMBER 13, 1996)
$276,159,000 (APPROXIMATE)
MLCC MORTGAGE INVESTORS, INC., TRANSFEROR
ML REVOLVING HOME EQUITY LOAN ASSET BACKED CERTIFICATES,
SERIES 1996-2
PRINCIPAL AND INTEREST PAYABLE ON THE 25TH DAY OF EACH MONTH, BEGINNING IN
DECEMBER 1996
MERRILL LYNCH CREDIT CORPORATION, SERVICER
------------------------
The ML Revolving Home Equity Loan Asset Backed Certificates, Series 1996-2
(the "CERTIFICATES") will represent undivided interests in the ML Revolving Home
Equity Loan Trust 1996-2 (the "TRUST"). The Trust will be created pursuant to a
Pooling and Servicing Agreement (the "AGREEMENT") among MLCC Mortgage Investors,
Inc. (the "TRANSFEROR"), Merrill Lynch Credit Corporation (referred to as "MLCC"
or the "SERVICER"), an affiliate of the Transferor, 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 certain
balances assigned to the Trust ("TRUST BALANCES") of home equity revolving
credit line loans (the "MORTGAGE LOANS") made under home equity revolving credit
line loan agreements (the "CREDIT LINE AGREEMENTS"). The Mortgage Loans are
secured by mortgages on one- to four-family residential properties. As of
November 1, 1996 (the "CUT-OFF DATE"), approximately 40.49% 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 or for
MLCC in the ordinary course of its real estate lending activities. Terms used
and not otherwise defined herein shall have the respective meanings ascribed to
such terms in the Prospectus dated November 13, 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 98% of the
outstanding principal balances of the Mortgage Loans. The remaining undivided
interest in the Trust Fund not represented by the Certificates (the "TRANSFEROR
INTEREST") will be initially equal to approximately $5,636,208, which as of the
Closing Date is approximately 2% 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
Transferor, the Servicer, the Trustee or any affiliate thereof. However, on or
before the issuance of the Certificates, the Transferor will obtain from AMBAC
Indemnity 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.
Interest on the Certificates will accrue from the Closing Date.
Distributions of principal and interest on the Certificates will be made on the
25th 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 December
1996. 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 0.17% 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.
(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 TRANSFEROR, 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 TRANSFEROR, 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 Transferor from the sale of the Certificates
will be approximately $275,192,444, before deducting expenses payable by the
Transferor, estimated to be $500,000 in the aggregate. The Underwriter will
reimburse the Transferor for approximately $100,000 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 November 25,
1996 (the "CLOSING DATE").
------------------------
MERRILL LYNCH & CO.
------------------------
The date of this Prospectus Supplement is November 13, 1996.
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(Cover continued from previous page)
The Transferor Interest will be subordinated to the rights of the
Certificateholders to the limited extent of the Transferor 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 Transferor 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 Transferor 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 CERTIFICATEHOLDERS
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 Transferor 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 Transferor 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, Attention:
General Counsel, or by telephone at (904) 928-6000.
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THE CERTIFICATES OFFERED HEREBY ARE BEING OFFERED BY THE TRANSFEROR 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.
S-3
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SUMMARY OF TERMS OF THE CERTIFICATES
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and in the
accompanying Prospectus. Capitalized terms used herein and not otherwise defined
shall have the respective meanings assigned them in the Prospectus or elsewhere
in this Prospectus Supplement.
SECURITIES OFFERED............ ML Revolving Home Equity Loan Asset Backed
Certificates, Series 1996-2 (the
"CERTIFICATES").
ISSUER........................ ML Revolving Home Equity Loan Trust 1996-2 (the
"TRUST") is the issuer of the Certificates.
TRANSFEROR.................... MLCC Mortgage Investors, Inc., a wholly-owned,
limited purpose subsidiary of the Servicer
and an affiliate of the Underwriter, will
transfer and assign the Trust Balances of the
Mortgage Loans to the Trust Fund in exchange
for the Certificates and the Transferor
Interest. The Trust Balances of the Mortgage
Loans will be acquired by the Transferor from
MLCC.
SERVICER...................... Merrill Lynch Credit Corporation, an indirect
wholly-owned subsidiary of Merrill Lynch &
Co., Inc. ("ML & CO.") and an affiliate of
the Transferor 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 November 1, 1996
(the "CUT-OFF DATE") among the Transferor,
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 25th 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
December 1996, 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 $276,159,000 (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 $276,159,000 (the
"ORIGINAL INVESTED AMOUNT"), which represents
approximately 98% of the Cut-off Date Pool
Balance. Following the Closing Date, the
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"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 Investor Loss Amounts for
prior Distribution Dates (other than any
losses that have been reallocated to the
Transferor Interest as described under
"-- Limited Subordination of the Transferor
Interest" below). The Transferor will hold
the remaining undivided interest (the
"TRANSFEROR 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
2% of the Cut-off Date Pool Balance.
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 November 21,
1996, in the case of the first Distribution
Date) plus 0.17%, 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 $25,000 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: the pool of Trust Balances of
the Mortgage Loans made under the Credit Line
Agreements and secured by mortgages on one-to
four-family residential properties (the
"MORTGAGED PROPERTIES") of which
approximately 40.49% 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 Trust Balances of 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 $281,795,208.
With respect to any date, the "POOL BALANCE"
will be equal to
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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 arising during the Managed
Amortization Period and 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, and the
Additional Balances, if any, in respect of
such Mortgage Loan arising during the Rapid
Amortization Period and not assigned to the
Trust.
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
Transferor Interest represents the interest
in the Trust Fund not represented by the
Certificates, the amount of the Transferor
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 September 1,
1991 with respect to certain of the Mortgage
Loans were sold by Merrill Lynch Home Equity
Acceptance, Inc. ("MLHEA"), an affiliate of
the Transferor, the Servicer and the
Underwriter, to ML Home Equity Loan Trust
1991-2 ("TRUST 1991"); certain balances
outstanding on February 1, 1993 with respect
to certain of the Mortgage Loans were sold by
MLHEA to ML Home Equity Loan Trust 1993-1
("TRUST 1993"); certain balances outstanding
on April 1, 1994 with respect to certain of
the Mortgage Loans were sold by MLHEA to ML
Home Equity Loan Trust 1994-1 ("TRUST
1994-1"); certain balances outstanding on
September 1, 1994 with respect to certain of
the Mortgage Loans were sold by the
Transferor to ML Home Equity Loan Trust
1994-2 ("TRUST 1994-2"); certain balances
outstanding on March 1, 1995 with respect to
certain of the Mortgage Loans were sold by
the Transferor to ML Home Equity Loan Trust
1995-1 ("TRUST 1995-1"); and certain balances
outstanding on October 1, 1995 with respect
to certain of the Mortgage Loans were sold by
the Transferor to ML Home Equity Loan Trust
1995-2 ("TRUST 1995-2" and, together with
Trust 1991, Trust 1993, Trust
S-6
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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 3,568 Common Mortgage
Loans having $43,706,904 in aggregate Trust
Balances which represent 15.51% 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 for the Trust Fund, also acts as
servicer for each of the Prior Trusts.
Bankers Trust Company of California, 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 40.49% 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 or acquired by MLCC in the
ordinary course of its real estate lending
activities or acquired by it in the course of
its correspondent lending activities. 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, in certain
cases, 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
1.88% 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. Some of the aforementioned
appraisals may have been prepared by Lender's
Service, Inc., an affiliate of MLCC. 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
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<PAGE> 8
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 $2,000,000 and
averaged $34,546 for those Mortgage Loans
with a Cut-off Date Trust Balance greater
than $0. Credit Limits ranged from $5,000 to
$5,000,000 and averaged $110,439. 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 74.68%. The weighted average
remaining term to stated maturity at the
Cut-off Date was 100 months and the latest
scheduled maturity of any Mortgage Loan is
October 1, 2006. The weighted average second
mortgage ratio for Mortgage Loans in a junior
lien position was 42.90%. 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 15.27%
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(@)
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.
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<PAGE> 9
SUMMARY OF MORTGAGE LOAN
CHARACTERISTICS AS OF THE CUT-OFF DATE
(APPROXIMATE)
<TABLE>
<S> <C>
Pool Balance.............................................................. $281,795,208
Number of Mortgage Loans.................................................. 9,455
Number of Mortgage Loans with a $0 Cut-off Date Trust Balance............. 1,298
Weighted Average Loan Rate................................................ 9.476%
Weighted Average Maximum Loan Rate(1)..................................... 15.84%
Weighted Average Margin................................................... 1.226%
Range of Margins.......................................................... 0.000% to 2.000%
Weighted Average Combined Loan-to-Value Ratio at Origination.............. 68.24%
Weighted Average Remaining Term to Stated Maturity........................ 100 months
Range of Remaining Terms to Stated Maturity............................... 3 to 119 months
Range of Trust Balances................................................... $0 to $2,000,000
Average Trust Balance(2).................................................. $34,546
Latest Maturity Date...................................................... October 1, 2006
Weighted Average Credit Limit Utilization Rate............................ 74.68%
Weighted Average Second Mortgage Ratio.................................... 42.90%
</TABLE>
- ---------------
(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.
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<PAGE> 10
REMOVAL OF CERTAIN
MORTGAGE LOANS.............. The Transferor 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 Transferor 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 Transferor Interest as of the
Removal Date (after giving effect to
such removal) exceeds the Minimum
Transferor Interest;
(ii) the Transferor 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 Transferor 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
Transferor 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
Transferor 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 Transferor 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 TRANSFEROR INTEREST" as of any
date is an amount equal to the lesser of (i)
5% of the Pool Balance on such date and (ii)
the Transferor 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
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<PAGE> 11
during which interest accrues on the Mortgage
Loans. The first Interest Period will be
November 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 Transferor Interest with respect to a
repurchased Defective Mortgage Loan after
taking into account any transfer of an
Eligible Substitute
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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 Transferor Interest as more
fully described herein.
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.
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 Transferor Interest or reallocated
to reduce the Transferor Interest up to
the Transferor Subordinated Amount as
described under "-- Limited
Subordination of the Transferor
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 Transferor
Subordinated Amount (such payment is
referred to as the "ACCELERATED
PRINCIPAL DISTRIBUTION AMOUNT"); and
(vii) to the Transferor.
Payments to Certificateholders pursuant to
clause (ii) will be interest payments on the
Certificates. Payments to Certificate-
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<PAGE> 13
holders 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 Transferor Interest as
described under "-- Limited Subordination of
the Transferor 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 Transferor 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 30th Distribution Date, the
"REQUIRED AMOUNT" will be 2% of the Cut-off
Date Pool Balance. For each Distribution Date
thereafter, the Required Amount will be the
lesser of (i) 2% of the Cut-off Date Pool
Balance and (ii) 4% 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) 1% of the Cut-off
Date Pool Balance and (y) 50% 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 1.25% of the Cut-off
Date Pool Balance, then the Required Amount
will be 3.75% 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
November 2001 (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.
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<PAGE> 14
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) 98% 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 98%.
On the Distribution Date in January 2007 (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 Transferor 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
Transferor Interest below the Minimum
Transferor 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 Transferor, 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
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<PAGE> 15
(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 Transferor 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.
LIMITED SUBORDINATION OF
THE TRANSFEROR 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, (iii) the Investor Loss Amount
on such Distribution Date and (iv) the
Investor Loss Amounts for previous
Distribution Dates not previously paid (such
insufficiency is referred to as the
"DEFICIENCY AMOUNT"), Trust Interest
Collections and Trust Principal Collections
allocable to the Transferor Interest (but not
in excess of the then current Transferor
Subordinated Amount, determined as described
below) will be applied to cover the
Deficiency Amount. The portion of the
Deficiency Amount in respect of clauses (iii)
and (iv) above not covered by such
collections (up to the remaining Transferor
Subordinated Amount and not in excess of the
Investor Loss Amount) will be reallocated to,
and will reduce, the Transferor Interest and
the Transferor Subordinated Amount in
accordance with clause (i)(b) thereof. If
such Certificate Interest Collections plus
the amount of collections allocable to the
Transferor 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 Transferor
Subordinated Amount has been reduced to zero,
the Deficiency Amount will
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<PAGE> 16
no longer be covered by the Transferor
Interest as described above.
With respect to any Distribution Date, the
"TRANSFEROR SUBORDINATED AMOUNT" equals the
least of
(i) 2% of the Cut-off Date Pool Balance
minus the sum of (a) the aggregate
amount of principal collections
allocable to the Transferor 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 Transferor Interest as
described above; or
(ii) the Transferor Subordinated Amount on
the previous Distribution Date; or
(iii) the Required Amount.
The Transferor 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
Transferor Interest as described above. Any
Investor Loss Amounts not covered by
Certificate Interest Collections, the limited
subordination of the Transferor 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 Transferor Subordinated
Amount. As of the Closing Date, the Required
Amount is equal to the Transferor
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 Transferor's Interest that
decrease the Transferor Subordinated Amount
would be expected to result in a payment of
the Accelerated Principal Distribution Amount
and the creation of, or increase in, overcol-
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<PAGE> 17
lateralization if the Required Amount is in
excess of the Transferor Subordinated Amount
on a Distribution Date and there are
sufficient Certificate Interest Collections.
If the Transferor Subordinated Amount is
reduced to zero, then payments of the
Accelerated Principal Distribution Amount
from Certificate 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 0.50% (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
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<PAGE> 18
Rate of the Defective Mortgage Loan it
replaces and not more than 5% 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 January 2007.
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 Transferor. See "Description of the
Certificates -- Rapid Amortization Events"
herein.
TAX STATUS.................... In the opinion of special tax counsel to the
Transferor and counsel to the Underwriter,
the Certificates will be properly
characterized as indebtedness for federal
income tax purposes. Under the Agreement, the
Transferor and the Certificateholders will
agree to treat the Certificates as
indebtedness for all federal, state and local
income and franchise tax purposes.
Furthermore, special tax counsel to the
Transferor and counsel to the Underwriter is
of the opinion that the Trust Fund will not
be treated as either an association or a
publicly traded partnership taxable as a
corporation or as a taxable mortgage pool.
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
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<PAGE> 19
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 Transferor to the purchase price of the
Trust Balances of the 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 "AAA" by
Standard & Poor's Rating Services ("S&P") and
"Aaa" by Moody's Investors Service, Inc.
("MOODY'S" and together with S&P, 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> 20
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 balances, 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, appraisals, 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
Transferor 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 Transferor with respect to the
rate at which real estate values have declined in such states. The Transferor
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
S-20
<PAGE> 21
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 Transferor
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 Transferor Interest (but not in
excess of the then current Transferor 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.
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 or is not permitted by applicable
law. The Servicer also will refrain from enforcing such provisions under other
circumstances it deems appropriate.
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
S-21
<PAGE> 22
Balance of $0. Common Mortgage Loans, whose Trust Balances account for 15.51% 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, Mortgage Loans as to which the Servicer
consented to increases in the related Credit Limits during the Rapid
Amortization Period that resulted in Combined Loan-to-Value Ratios in excess of
85% and Mortgage Loans as to which the Servicer consented to the placement of a
new senior mortgage on the related Mortgaged Property and such senior mortgage
did not satisfy certain requirements specified in the Agreement. 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 Transferor 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 overcollateraliza-
S-22
<PAGE> 23
tion and the limited subordination afforded by the Transferor 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 Standard & Poor's Rating Services and A3 by Moody's
Investors Service, Inc., 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.
Notwithstanding the characterization of the Certificates as debt for
federal, state and local income and franchise tax purposes, the Servicer and the
Transferor will treat the transfer of the Trust Balances of the Mortgage Loans
by the Servicer to the Transferor as a sale for accounting purposes and the
Transferor and the Trust Fund will treat the transfer of the Trust Balances of
the Mortgage Loans from the Transferor to the
S-23
<PAGE> 24
Trust Fund as a sale for accounting purposes. As a sale of the Trust Balances of
the Mortgage Loans by the Servicer to the Transferor, 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 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, or as
debt of, 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 Transferor 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 Transferor, or
if certain other events relating to the bankruptcy or insolvency of the
Transferor 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
Transferor 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.
S-24
<PAGE> 25
THE MORTGAGE LOAN POOL
THE MORTGAGE LOANS
The Mortgage Loans are evidenced by Credit Line Agreements and secured by
mortgages or deeds of trust (of which approximately 40.49% by Cut-off Date Pool
Balance are first liens and substantially all of the remainder are second liens)
on Mortgaged Properties located in 49 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 10 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 Transferor and the Servicer not to be adverse to
Certificateholders. The loan application for each Mortgage Loan was initially
approved between January 1987 and October 1996 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 $34,546 for those Mortgage Loans with a
Trust Balance greater than $0. As of the Cut-off Date, the weighted average
Margin was approximately 1.226% and the weighted average Loan Rate was
approximately 9.476%. The weighted average Combined Loan-to-Value Ratio at
origination was approximately 68.24%. 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 74.68%. The
weighted average remaining term to stated maturity at the Cut-off Date was 100
months and the latest scheduled maturity of any Mortgage Loan is October 1,
2006.
As of the Cut-off Date, Mortgage Loans representing approximately 96.42% by
Cut-off Date Pool Balance have a weighted average lifetime interest rate cap of
15.84% and lifetime interest rate caps ranging from 8.25% to 19.50%. 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, borrowers obligated on approximately 15.27% of the
Mortgage Loans by Pool Balance were employees or independent contractors of ML &
Co. or subsidiaries thereof.
S-25
<PAGE> 26
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.
<TABLE>
<CAPTION>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
- ----------------------------------------------------------------
PERCENT OF
CUT-OFF CUT-OFF
NUMBER OF DATE DATE
MORTGAGE TRUST POOL
STATE OR TERRITORY LOANS BALANCE BALANCE
----------------------------------------------------
<S> <C> <C> <C>
California............. 1,178 $ 47,721,430 16.93%
Connecticut............ 330 14,716,430 5.22
Florida................ 921 28,669,047 10.17
New Jersey............. 788 25,162,748 8.93
New York............... 1,668 56,513,871 20.05
Other(1)............... 4,570 109,011,682 38.68
--- ------------ -----
Total........... 9,455 $281,795,208 100.00%
=========== ============= ===========
</TABLE>
- ----------------------
(1) Other includes 44 other states, the Virgin Islands and the District of
Columbia with under 5% concentrations individually.
<TABLE>
<CAPTION>
CREDIT LIMITS(1)
------------------------------------------------------PERCENT OF
CUT-OFF CUT-OFF
NUMBER OF DATE DATE
RANGE OF MORTGAGE TRUST POOL
CREDIT LIMITS LOANS BALANCE BALANCE
------------------------------------------------------
<S> <C> <C> <C> <C>
$ 0.00 -- $ 24,999.99 1,009 $ 7,896,248 2.80%
25,000.00 -- 49,999.99 1,901 24,409,268 8.66
50,000.00 -- 74,999.99 1,863 31,240,117 11.09
75,000.00 -- 99,999.99 1,006 22,903,034 8.13
100,000.00 -- 124,999.99 1,218 30,463,768 10.81
125,000.00 -- 149,999.99 530 16,740,592 5.94
150,000.00 -- 199,999.99 673 25,666,245 9.11
200,000.00 -- 249,999.99 472 23,783,323 8.44
250,000.00 -- 299,999.99 244 14,489,553 5.14
300,000.00 -- 349,999.99 144 8,570,722 3.04
350,000.00 -- 399,999.99 92 9,287,516 3.30
400,000.00 -- 449,999.99 66 6,769,245 2.40
450,000.00 -- 499,999.99 42 5,439,568 1.93
500,000.00 -- 749,999.99 119 18,911,078 6.71
750,000.00 -- 999,999.99 25 7,054,960 2.50
1,000,000.00 -- 1,249,999.99 30 10,446,896 3.71
1,250,000.00 -- 1,499,999.99 5 3,843,465 1.36
1,500,000.00 -- 1,749,999.99 5 4,984,877 1.77
1,750,000.00 -- 1,999,999.99 3 4,466,286 1.58
2,000,000.00 -- 2,249,999.99 3 3,295,000 1.17
3,000,000.00 -- 3,249,999.99 2 588,424 0.21
3,250,000.00 -- 3,499,999.99 1 0 0.00
3,500,000.00 -- 3,749,999.99 1 35,023 0.01
5,000,000.00 -- 5,249,999.99 1 510,000 0.18
--- ------------ ---
Total................... 9,455 $281,795,208 100.00%
=========== ============= ===========
</TABLE>
- ----------------------
(1) As of the Cut-off Date, the average Credit Limit was approximately $110,439.
<TABLE>
<CAPTION>
OCCUPANCY STATUS
------------------------------------------------------
PERCENT OF
CUT-OFF CUT-OFF
NUMBER OF DATE DATE
MORTGAGE TRUST POOL
STATUS LOANS BALANCE BALANCE
------------------------------------------------------
<S> <C> <C> <C>
Owner-occupied......... 8,461 $244,956,334 86.93%
Second home............ 472 24,700,833 8.77
Investment property.... 522 12,138,041 4.31
--- ------------ -----
Total................. 9,455 $281,795,208 100.00%
=========== ============= ===========
</TABLE>
<TABLE>
<CAPTION>
TRUST BALANCES(1)(2)
------------------------------------------------------
PERCENT OF
CUT-OFF CUT-OFF
NUMBER OF DATE DATE
RANGE OF MORTGAGE TRUST POOL
TRUST BALANCES LOANS BALANCE BALANCE
------------------------------------------------------
<S> <C> <C> <C> <C>
$0.00 -- $ 24,999.99 6,832 $ 46,430,103 16.48%
25,000.00 -- 49,999.99 1,273 45,029,402 15.98
50,000.00 -- 74,999.99 464 27,873,134 9.89
75,000.00 -- 99,999.99 314 27,036,560 9.59
100,000.00 -- 124,999.99 149 16,173,588 5.74
125,000.00 -- 149,999.99 98 13,331,121 4.73
150,000.00 -- 199,999.99 126 21,696,241 7.70
200,000.00 -- 249,999.99 59 12,936,655 4.59
250,000.00 -- 299,999.99 37 9,978,328 3.54
300,000.00 -- 349,999.99 18 5,769,751 2.05
350,000.00 -- 399,999.99 23 8,525,187 3.03
400,000.00 -- 449,999.99 11 4,549,783 1.61
450,000.00 -- 499,999.99 6 2,822,118 1.00
500,000.00 -- 749,999.99 23 13,770,492 4.89
750,000.00 -- 999,999.99 9 7,664,082 2.72
1,000,000.00 -- 1,249,999.99 5 5,045,000 1.79
1,250,000.00 -- 1,499,999.99 2 2,570,000 0.91
1,500,000.00 -- 1,749,999.99 3 4,864,877 1.73
1,750,000.00 -- 1,999,999.99 2 3,728,786 1.32
2,000,000.00 -- 2,249,999.99 1 2,000,000 0.71
----- ------------ ------
Total................. 9,455 $281,795,208 100.00%
===== ============ ======
</TABLE>
- ----------------------
(1) As of the Cut-off Date, the average Trust Balance was approximately $34,546
for those Mortgage Loans with a Cut-off Date Trust Balance greater than $0.
(2) There are 1,298 Mortgage Loans with a $0 Cut-off Date Trust Balance.
<TABLE>
<CAPTION>
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS(1)
- ------------------------------------------------------------------
PERCENT OF
CUT-OFF CUT-OFF
RANGE OF NUMBER OF DATE DATE
ORIGINAL COMBINED MORTGAGE TRUST POOL
LOAN-TO-VALUE RATIOS LOANS BALANCE BALANCE
- ------------------------------------------------------------------
<S> <C> <C> <C>
0.01% -- 10.00%...... 46 $ 311,328 0.11%
10.01 -- 20.00....... 267 4,261,976 1.51
20.01 -- 30.00....... 421 8,005,881 2.84
30.01 -- 40.00....... 620 13,180,074 4.68
40.01 -- 50.00....... 776 20,829,631 7.39
50.01 -- 60.00....... 1,034 35,347,260 12.54
60.01 -- 70.00....... 1,149 46,709,975 16.58
70.01 -- 75.00....... 1,006 31,977,316 11.35
75.01 -- 80.00....... 1,150 33,659,390 11.94
80.01 -- 85.00....... 2,786 82,196,760 29.17
85.01 -- 90.00....... 163 3,981,392 1.41
90.01 -- 95.00....... 25 736,763 0.26
95.01 -- 100.00....... 7 143,977 0.05
100.01 -- 105.00...... 3 452,485 0.16
105.01 -- 110.00...... 1 1,000 0.00
110.01 -- 115.00...... 1 0 0.00
----- ---------- -----
Total................ 9,455 $281,795,208 100.00%
===== ========== =====
</TABLE>
- ----------------------
(1) As of the Cut-off Date, the weighted average Combined Loan-to-Value Ratio at
origination was approximately 68.24%.
S-26
<PAGE> 27
<TABLE>
<CAPTION>
CREDIT LIMIT UTILIZATION RATES(1)
- ------------------------------------------------------------------
PERCENT OF
CUT-OFF CUT-OFF
RANGE OF NUMBER OF DATE DATE
CREDIT LIMIT MORTGAGE TRUST POOL
UTILIZATION RATES LOANS BALANCE BALANCE
- ------------------------------------------------------------------
<S> <C> <C> <C>
0.00% -- 9.99%........ 2,071 $ 5,091,564 1.81%
10.00 -- 19.99 ....... 768 12,584,351 4.47
20.00 -- 29.99 ....... 599 12,521,318 4.44
30.00 -- 39.99 ....... 554 14,765,118 5.24
40.00 -- 49.99 ....... 525 17,953,702 6.37
50.00 -- 59.99 ....... 498 17,342,368 6.15
60.00 -- 69.99 ....... 519 21,954,506 7.79
70.00 -- 74.99 ....... 241 9,687,952 3.44
75.00 -- 79.99 ....... 296 10,799,425 3.83
80.00 -- 84.99 ....... 282 11,298,005 4.01
85.00 -- 89.99 ....... 368 15,681,900 5.56
90.00 -- 94.99 ....... 527 21,164,281 7.51
95.00 -- 99.99 ....... 1,798 65,642,149 23.29
100.00.................. 409 45,308,569 16.08
----- ---------- -----
Total................ 9,455 $281,795,208 100.00%
===== ========== =====
</TABLE>
- ----------------------
(1) As of the Cut-off Date, the weighted average credit limit utilization rate
was 74.68%.
MARGINS(1)
------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
CUT-OFF CUT-OFF
NUMBER OF DATE DATE
MORTGAGE TRUST POOL
MARGINS LOANS BALANCE BALANCE
------------------------------------------------------
<S> <C> <C> <C>
0.00%.................. 587 $ 41,911,443 14.87%
0.50................... 1 20,000 0.01
0.75................... 1,161 28,844,315 10.24
1.00................... 3 9,538 0.00
1.50................... 6,237 188,622,679 66.94
1.75................... 629 15,823,118 5.62
2.00................... 837 6,564,115 2.33
--- ------------ -----
Total........... 9,455 $281,795,208 100.00%
=========== ============= ===========
</TABLE>
- ----------------------
(1) As of the Cut-Off Date, the weighted average Margin was 1.226%.
REMAINING TERM TO STATED MATURITY(1)
------------------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
CUT-OFF CUT-OFF
RANGE OF REMAINING TERMS NUMBER OF DATE DATE
TO STATED MATURITY MORTGAGE TRUST POOL
(MONTHS) LOANS BALANCE BALANCE
- ------------------------- --------- ------------ ------------
<S> <C> <C> <C>
1 -- 12............... 352 $ 10,332,619 3.67%
13 -- 24............... 309 7,509,663 2.66
25 -- 36............... 329 5,622,805 2.00
37 -- 48............... 144 1,582,180 0.56
49 -- 60............... 147 4,553,994 1.62
61 -- 72............... 194 4,330,335 1.54
73 -- 84............... 315 11,338,925 4.02
85 -- 96............... 1,043 16,485,874 5.85
97 -- 108............... 2,459 39,295,228 13.94
109 -- 120............... 4,163 180,743,585 64.14
----- ----------- -----
Total............. 9,455 $281,795,208 100.00%
===== =========== =====
</TABLE>
- ----------------------
(1) As of the Cut-off Date, the weighted average remaining term to stated
maturity was 100 months.
SECOND MORTGAGE RATIOS(1)(2)
<TABLE>
<CAPTION>
------------------------------------------------------
PERCENT OF
CUT-OFF CUT-OFF
NUMBER OF DATE DATE
RANGE OF MORTGAGE TRUST POOL
SECOND MORTGAGE RATIOS LOANS BALANCE BALANCE
------------------------------------------------------
<S> <C> <C> <C>
0.00% -- 9.99%...... 1,293 $ 10,534,630 6.28%
10.00 -- 19.99 ...... 1,046 25,260,359 15.06
20.00 -- 29.99 ...... 935 28,987,731 17.29
30.00 -- 39.99 ...... 699 22,710,801 13.54
40.00 -- 49.99 ...... 558 22,731,108 13.56
50.00 -- 59.99 ...... 409 12,606,789 7.52
60.00 -- 69.99 ...... 333 14,893,417 8.88
70.00 -- 74.99 ...... 148 5,318,214 3.17
75.00 -- 79.99 ...... 141 4,350,494 2.59
80.00 -- 84.99 ...... 133 6,041,798 3.60
85.00 -- 89.99 ...... 117 4,266,683 2.54
90.00 -- 94.99 ...... 105 5,645,537 3.37
95.00 -- 99.99 ...... 77 4,340,508 2.59
----- ------------ -----
Total........... $ 5,994 $167,688,069 100.00%
===== ============ =====
</TABLE>
- ----------------------
(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
42.90%.
LIFETIME INTEREST RATE CAPS(1)
<TABLE>
<CAPTION>
------------------------------------------------------
PERCENT OF
CUT-OFF CUT-OFF
NUMBER OF DATE DATE
RANGE OF LIFETIME INTEREST MORTGAGE TRUST POOL
RATE CAPS LOANS BALANCE BALANCE
------------------------------------------------------
<S> <C> <C> <C>
No Lifetime Interest Rate
Cap(2).................... 347 $ 10,095,147 3.58%
8.01% -- 8.50%......... 1 674 0.00
12.51 -- 13.00 ......... 1 35,528 0.01
13.01 -- 13.50 ......... 118 8,969,088 3.18
13.51 -- 14.00 ......... 535 8,203,808 2.91
14.01 -- 14.50 ......... 136 1,306,626 0.46
14.51 -- 15.00 ......... 271 2,842,827 1.01
15.01 -- 15.50 ......... 504 10,699,046 3.80
15.51 -- 16.00 ......... 4,421 169,785,113 60.25
16.01 -- 16.50 ......... 2,386 56,075,248 19.90
16.51 -- 17.00 ......... 143 3,624,385 1.29
17.01 -- 17.50 ......... 72 2,200,821 0.78
17.51 -- 18.00 ......... 250 4,336,459 1.54
18.01 -- 18.50 ......... 127 1,447,669 0.51
18.51 -- 19.00 ......... 60 1,174,159 0.42
19.01 -- 19.50 ......... 83 998,610 0.35
----- ------------ -----
Total................... $ 9,455 $281,795,208 100.00%
===== ============ =====
</TABLE>
- ----------------------
(1) As of the Cut-off Date, the weighted average lifetime interest rate cap of
the Mortgage Loans subject to specified caps was 15.84%.
(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.
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<PAGE> 28
Set forth below is a description of certain characteristics of the Common
Mortgage Loans:
DATA ON COMMON MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF CUT-OFF DATE
MORTGAGE CUT-OFF DATE CUT-OFF DATE BALANCES IN CUT-OFF DATE MORTGAGE LOAN
TYPE OF MORTGAGE LOAN LOANS TRUST BALANCE POOL BALANCE PRIOR TRUSTS LOAN BALANCE CREDIT LIMITS
- ---------------------------- --------- ------------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Common Mortgage Loans....... 3,568 $ 43,706,904 15.51% $202,751,892 $246,458,796 $ 344,856,168
Other(2).................... 5,887 238,088,304 84.49% 0 238,088,304 699,346,384
----- ------------ ------ ------------ ------------ --------------
Total.............. 9,455 $ 281,795,208 100.00% $202,751,892 $484,547,100 $1,044,202,552
===== ============ ====== ============ ============ ==============
</TABLE>
- ---------------
(1) Common Mortgage Loans are those Mortgage Loans which had balances that were
previously transferred to 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 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 Transferor all of its right, title and
interest in the Cut-off Date Pool Balance and the Transferor 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 Transferor 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.
S-28
<PAGE> 29
MLCC AND ITS EQUITY ACCESS(R) PROGRAM
MLCC, a wholly-owned indirect subsidiary of ML & Co. and an affiliate of
the Transferor 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 Lines of Credit" or "HELOCS") available to borrowers as
well as making real estate secured, first mortgage loans and other loan
products. These lines of credit are called "EQUITY ACCESS(R) CREDIT ACCOUNTS,"
or "EQUITY ACCESS(R) LOANS."
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 November 1, 1996 for all
Equity Access(R) loans was approximately $126,000. 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 investment
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 marketing campaigns.
MLCC underwriting guidelines are applied to evaluate a prospective
borrower's credit standing and repayment ability, and the value and adequacy of
the mortgaged property as collateral. Initially, the borrower 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 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 MLCC to apply for a
credit report summarizing 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, 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 borrower'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 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
S-29
<PAGE> 30
is obtained if the borrower 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 a prospective borrower's income.
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. Some of the aforementioned appraisals may have been prepared by Lender's
Service, Inc., an affiliate of MLCC.
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.
Prior to the expiration of an existing Equity Access(R) loan, MLCC may
offer the borrower the opportunity to apply for a new loan under its Equity
Access(R) Streamlined Renewal program. The proceeds of any new loan are used to
satisfy, in full or in part, the existing Equity Access(R) loan. So long as the
borrower's prior payment history with respect to the existing Equity Access(R)
loan is satisfactory as determined by MLCC and the borrower is not applying for
an increase in the existing credit line amount, the borrower may be able to
qualify for the new loan by providing MLCC with less documentation than is
typically the case for an applicant applying for an Equity Access(R) loan for
the first time.
In order to qualify under the program, the borrower's payment history on
the existing Equity Access(R) loan generally must not reflect (i) any payments
that were 30 or more days past due during the 12 month period prior to the
submission of the application for the new loan or (ii) any payments that are 90
or more days past due over the life of the existing Equity Access(R) loan. The
borrower must provide MLCC with a satisfactory explanation for any late payments
over the life of the existing Equity Access(R) loan. In addition, the borrower's
overall credit history, as reflected on a credit report obtained by MLCC, must
be satisfactory as determined by MLCC. To the extent that the borrower fulfills
these conditions or is otherwise approved by MLCC, MLCC will waive verification
of the borrower's income, employment and assets when underwriting the proposed
new loan. However, all of MLCC's other standard underwriting guidelines are
generally applied to the new loan, including the requirement for a new appraisal
on the Mortgaged Property and a property report or title insurance, as
applicable. Approximately 7.93% of the Mortgage Loans were originated under
MLCC's Equity Access(R) Streamlined Renewal program.
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 under its Third Party Originator
program 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
S-30
<PAGE> 31
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. The correspondent
lender underwrites the loans in accordance with MLCC's standard underwriting
guidelines as published in the MLCC Seller Guide. Additionally, MLCC conducts a
post-closing review on each loan prior to purchasing it from a correspondent
lender.
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 or her line of
credit by signing loan documents, including a Credit Line 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(R) 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 or she would be entitled to borrow a
maximum of $20,000 more. However, if that customer is current in his or her
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 or her entire outstanding principal balance ten years
from the date that the credit line is opened.
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. 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 Equity Access(R) 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
S-31
<PAGE> 32
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 Equity Access(R) 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. 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 or her 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 and the nine month period ended September 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.
MORTGAGE LOAN DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
-------------------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Number of revolving credit line loans
serviced................................... 15,913 15,084 13,839 15,598 25,056 28,857
Aggregate loan balance of revolving credit
line loans serviced........................ $1,073,492 $1,062,930 $1,037,427 $1,079,693 $1,293,483 $ 1,345,693
Loan balance of revolving credit line loans 2
months delinquent.......................... $ 2,250 $ 3,717 $ 5,161 $ 5,358 $ 8,447 $ 5,893
Loan balance of revolving credit line loans 3
months or more delinquent.................. $ 22,361 $ 18,751 $ 17,508 $ 22,989 $ 33,763 $ 39,947
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% 3.41%
</TABLE>
S-32
<PAGE> 33
MORTGAGE LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
-------------------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Number of revolving credit line loans
serviced................................... 15,913 15,084 13,839 15,598 25,056 28,857
Aggregate loan balance of revolving credit
line loans serviced........................ $1,073,492 $1,062,930 $1,037,427 $1,079,693 $1,293,483 $ 1,345,693
For the period:
Gross charge-offs dollars.................. $ 936 $ 1,447 $ 3,153 $ 1,118 $ 3,700 $ 2,089
Percentage(1).............................. 0.09% 0.14% 0.30% 0.10% 0.29% 0.16%(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. 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 affected. 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 Transferor Interest
and overcollateralization, they will be borne, at least in part, by holders of
the Certificates. Management of MLCC believes that the increase in delinquencies
during the last several years may be attributable to several factors. On the one
hand, the local economies in certain geographic regions whose growth had
exceeded the national average for many years have experienced a general
slow-down in economic activity compared to the national average. This trend has
contributed to a decline in property values in these regions and also may be
responsible for a corresponding decrease in employment and income among high net
worth individuals residing in these regions. On the other hand, it appears that
recent economic expansion within these regions has not resulted in significant
increases in employment and income among persons with above average incomes
residing in these regions. The later trend is a change from historical
experience. In certain cases, economic expansion in these regions has even been
accompanied by increases in unemployment among affluent persons who typically
are the borrowers under the Mortgage Loans. Any further continuation or
deepening of these trends, particularly as they may affect affluent persons, may
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.
The changes in the delinquency and loan loss experience of home equity loans in
MLCC's servicing portfolio may be attributable to factors such as the trends
described above, although there can be no assurance as to whether these changes
are the result of any particular factor or a combination of factors. 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.
S-33
<PAGE> 34
ALLOCATIONS OF PAYMENTS ON THE MORTGAGE
LOANS BETWEEN THE TRUST AND THE PRIOR TRUSTS
Balances outstanding on 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 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 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 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 nonamortizing, 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 15.51% 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
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<PAGE> 35
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 Transferor
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 in circumstances deemed appropriate by MLCC or 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.
From time to time, MLCC may solicit the refinancing of the Mortgage Loans
by offering new loans to the borrowers. Any such refinancing of a Mortgage Loan
would have the effect of a prepayment in full. 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
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<PAGE> 36
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 Transferor Interest up to the Transferor
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
Transferor 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 Transferor
Interest due to additional draws may also result in Certificateholders receiving
principal at a greater rate. The Agreement permits the Transferor, 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
Transferor Interest (after giving effect to such removal) is not less than the
Minimum Transferor 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 Transferor."
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 "20%", "45%" and
"55%" assume that prepayments on the Mortgage Loans are made at CPRs of "20%",
"45%" and "55%", 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
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<PAGE> 37
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 table below sets 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
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.............................. $ 43,706,904 $202,751,892 67 9.40% 75%
2.............................. $180,743,587 $ 0 115 9.51% 75%
3.............................. $ 57,344,717 $ 0 78 9.43% 73%
</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 Servicing
Fee Rate, together with the premium rate on the Certificate Insurance Policy, is
assumed to be 0.60% 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, (iii) distributions of
principal and interest on the Certificates will be made on the 25th day of each
calendar month regardless of the day on which the Distribution Date actually
occurs, commencing in December 1996 (iv) monthly draws are calculated under each
of the assumptions as set forth in the tables below before giving effect to
prepayments, (v) no extension past the scheduled maturity date of a Mortgage
Loan is made, (vi) no delinquencies occur, (vii) all prepayments are prepayments
in full and include thirty days' interest thereon, (viii) Mortgage Loans are
removed from the Trust Fund so that the Transferor Interest on each Removal Date
equals or exceeds the Minimum Transferor Interest, (ix) the scheduled due date
for each of the Mortgage Loans is the first day of each month, (x) the Closing
Date is November 25, 1996, (xi) no losses on the Mortgage Loans will be realized
and (xii) the Original Certificate Principal Balance is $276,159,000.
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.
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<PAGE> 38
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>
PAYMENT DATE 0% 20% 45% 55%
- ------------------------------------------------------------------ --- --- --- ---
<S> <C> <C> <C> <C>
Closing Date...................................................... 100% 100% 100% 100%
November 25, 1997................................................. 100% 100% 95% 89%
November 25, 1998................................................. 100% 100% 83% 61%
November 25, 1999................................................. 100% 100% 57% 34%
November 25, 2000................................................. 100% 100% 39% 19%
November 25, 2001................................................. 100% 100% 26% 10%
November 25, 2002................................................. 71% 37% 0% 0%
November 25, 2003................................................. 53% 16% 0% 0%
November 25, 2004................................................. 53% 0% 0% 0%
November 25, 2005................................................. 53% 0% 0% 0%
November 25, 2006................................................. 0% 0% 0% 0%
Weighted Average Life (years)(2).................................. 7.9 6.1 3.5 2.7
</TABLE>
- ---------------
(1) Assumes (i) 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 and (ii) a constant draw rate of 20%. Pool 2
has a monthly draw rate of 50% 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)
--------------------------------------------------------------------------
TERMINAL 0% 20% 45% 55%
CONSTANT DRAW RATE(4) WAL DATE WAL DATE WAL DATE WAL DATE
- ------------------------------------- --- ---------- --- --------- --- ---------- --- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0%................................... 8.5 6/25/2006 4.5 4/25/2006 2.4 12/25/2001 1.8 8/25/2000
10%.................................. 7.9 6/25/2006 6.0 7/25/2005 2.9 6/25/2002 2.1 2/25/2001
20%.................................. 7.9 6/25/2006 6.1 7/25/2004 3.5 6/25/2002 2.7 12/25/2001
30%.................................. 7.9 6/25/2006 5.9 12/25/2003 4.2 8/25/2002 3.2 6/25/2002
</TABLE>
<TABLE>
<CAPTION>
CONDITIONAL PREPAYMENT RATE (% CPR)(5)
--------------------------------------------------------------------------
TERMINAL 0% 20% 45% 55%
CONSTANT DRAW RATE(4) WAL DATE WAL DATE WAL DATE WAL DATE
- ------------------------------------- --- ---------- --- --------- --- ---------- --- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0%................................... 8.5 6/25/2006 4.6 6/25/2006 2.5 6/25/2006 1.9 5/25/2005
10%.................................. 7.9 6/25/2006 6.1 6/25/2006 3.0 6/25/2004 2.2 12/25/2003
20%.................................. 7.9 6/25/2006 6.1 7/25/2005 3.6 8/25/2003 2.7 5/25/2003
30%.................................. 7.9 6/25/2006 6.0 3/25/2005 4.3 5/25/2003 3.2 3/25/2003
</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.
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<PAGE> 39
(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 50% 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.
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<PAGE> 40
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement among the
Transferor, 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 $25,000
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 Trust Balances of home equity revolving credit line loans (the
"MORTGAGE LOANS") 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 $276,159,000 (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 $276,159,000 (the "ORIGINAL
INVESTED AMOUNT"), which represents approximately 98% 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 Investor Loss Amounts for prior
Distribution Dates (other than any Investor Loss Amounts that have been
reallocated to the Transferor Interest on prior Distribution Dates).
The Transferor will hold the remaining undivided interest (the "TRANSFEROR
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 2% 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 Transferor has the right to sell or pledge the Transferor Interest at
any time, provided (i) the Rating Agencies have notified the Transferor 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.
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<PAGE> 41
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO CERTIFICATE ACCOUNT
The Certificate Account will be created and maintained with the Trustee on
behalf of the holders of the Certificates. 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 November 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
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<PAGE> 42
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 Transferor 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 Transferor
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 arising
during the Managed Amortization Period and 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, and the Additional Balances, if any, in respect of such Mortgage Loan
arising during the Rapid Amortization Period and not assigned to the Trust.
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
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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
Transferor Interest or reallocated to reduce the Transferor Interest up to
the Transferor Subordinated Amount as described under "-- Limited
Subordination of the Transferor 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 Transferor Subordinated Amount (such
payment is referred to as the "ACCELERATED PRINCIPAL DISTRIBUTION AMOUNT");
and
(vii) to the Transferor.
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 Transferor 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 Transferor 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 30th Distribution
Date, the "REQUIRED AMOUNT" will be 2% of the Cut-off Date Pool Balance. For
each Distribution Date thereafter, the Required Amount will be the lesser of (i)
2% of the Cut-off Date Pool Balance and (ii) 4% 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) 1% of the Cut-off Date Pool Balance and (y) 50% 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
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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 1.25% of the Cut-off Date Pool Balance, then the
Required Amount will be 3.75% 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 November 21, 1996 in the case of the first
Distribution Date) plus 0.17%.
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 0.60% 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 November 21, 1996 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,
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provided, however, that if such banks are not quoting as described above, LIBOR
will be the LIBOR applicable to the immediately preceding Distribution Date.
Transferor Collections
Collections allocable to the Transferor Interest that are not distributed
to Certificateholders will be distributed to the Transferor only to the extent
that such distribution will not reduce the amount of the Transferor Interest as
of the related Distribution Date below the Minimum Transferor Interest. Amounts
not distributed to the Transferor because of such limitations will be retained
in the Certificate Account until the Transferor Interest exceeds the Minimum
Transferor Interest, at which time such excess shall be released to the
Transferor. 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 November 2001 (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) 98% 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 98%.
On the Distribution Date in January 2007 (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 Transferor 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 Transferor
Interest below the Minimum Transferor Interest as of such Distribution Date.
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RAPID AMORTIZATION EVENTS
As described above, the Managed Amortization Period will continue through
the Distribution Date in November 2001, 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 Transferor 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 Transferor 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 Transferor files a bankruptcy petition or goes into liquidation or
any person is appointed a receiver or bankruptcy trustee of the Transferor, on
the day of any such filing or appointment no further Additional Balances will be
transferred to the Trust Fund, the Transferor will immediately cease to transfer
Additional Balances to the Trust and the Transferor 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 Transferor, 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
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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 Transferor 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 Transferor, 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 Transferor
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 TRANSFEROR 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, (iii) the Investor Loss Amount on such Distribution Date and (iv)
the Investor Loss Amounts for previous Distribution Dates not previously paid
(such insufficiency, the "DEFICIENCY AMOUNT"), Trust Interest Collections and
Trust Principal Collections allocable to the Transferor Interest (but not in
excess of the then current Transferor Subordinated Amount, determined as
described below) will be applied to cover the Deficiency Amount. The portion of
the Deficiency Amount in respect of clauses (iii) and (iv) above not covered by
such collections (up to the remaining Transferor Subordinated Amount and not in
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excess of the Investor Loss Amount) will be reallocated to, and will reduce, the
Transferor Interest and the Transferor Subordinated Amount in accordance with
clause (i)(b) of the definition thereof. If such Certificate Interest
Collections plus the amount of collections allocable to the Transferor 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 Transferor Subordinated Amount has been
reduced to zero, the Deficiency Amount will no longer be covered by the
Transferor Interest as described above.
With respect to any Distribution Date, the "TRANSFEROR SUBORDINATED AMOUNT"
equals the least of (i) 2% of the Cut-off Date Pool Balance minus the sum of (a)
the aggregate amount of principal collections allocable to the Transferor
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
Transferor Interest as described above; or (ii) the Transferor Subordinated
Amount on the previous Distribution Date; or (iii) the Required Amount.
The Transferor 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 Transferor Interest as
described above. Any Investor Loss Amounts not covered by Certificate Interest
Collections, the limited subordination of the Transferor 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 Transferor
Subordinated Amount. As of the Closing Date, the Required Amount is equal to the
Transferor 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 Transferor's Interest that decrease the Transferor 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 Transferor Subordinated Amount on a
Distribution Date and there are sufficient Certificate Interest Collections. If
the Transferor Subordinated Amount is reduced to zero, then payments of the
Accelerated Principal Distribution Amount from Certificate 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.
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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 Transferor 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 number and aggregate Trust Balance of the Mortgage Loans in
foreclosure as of the end of the preceding Collection Period;
(xviii) the book value of any real estate which is acquired by the
Trust through foreclosure or grant of deed in lieu of foreclosure;
(xix) the amount of any draws on the Certificate Insurance Policy; and
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(xx) 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 Transferor 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 that are allocable to the Trust Balance (but not including (i) all
accrued interest and principal due on or with respect to the Mortgage Loans for
interest periods prior to the Cut-off Date and (ii) 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 Transferor in exchange for the Mortgage Loans and the
Transferor 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 Standard & Poor's Rating Services and A3 by Moody's
Investors Service, Inc., 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 Transferor Interest. If the
deduction would cause the Transferor Interest to become less than the
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Minimum Transferor 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 Transferor Interest would be reduced to less than the
Minimum Transferor 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 5% 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 100 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 October 1, 2006; (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 Transferor Interest would be reduced below the Minimum Transferor
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.
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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, including closing costs, points and other funds for the
borrower's use (not to exceed 1% of the principal balance of such senior
mortgage). The Servicer may also permit an increase of the Credit Limit
applicable to a Mortgage Loan during the Rapid Amortization Period so long as
the Combined Loan-to-Value Ratio of such Mortgage Loan immediately following
such increase does not exceed 85%.
OPTIONAL RETRANSFERS OF MORTGAGE LOANS TO THE TRANSFEROR
Subject to the conditions specified in the Agreement, on any Distribution
Date during the Managed Amortization Period the Transferor 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
Transferor 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 Transferor Interest as of such
Removal Date (after giving effect to such removal) exceeds the Minimum
Transferor Interest; (ii) the Transferor 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 Transferor shall represent and warrant
that no selection procedures which the Transferor reasonably believes are
adverse to the interests of the Certificateholders or the Certificate Insurer
were used by the Transferor 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 Transferor 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 Transferor 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 TRANSFEROR INTEREST" is an
amount equal to the lesser of (a) 5% of the Pool Balance on such date and (b)
the Transferor 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, the Servicer, to the extent it deems
appropriate, 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. The original borrower may
request to be released from liability under the Credit Line Agreement. If deemed
appropriate by the Servicer after the person to whom such Mortgaged Property has
been conveyed enters into an assumption and modification agreement, the original
borrower may be released from liability. If the 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 Mortgaged Property has been conveyed,
then the original borrower remains liable under the Credit Line Agreement. If
the Servicer elects to enforce the due-on-sale clauses in connection with
transfers of the related Mortgaged Properties, the acceleration of the Mortgage
Loans as a
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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 0.50% (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.
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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 January 2007.
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 Transferor 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
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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.
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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 Transferor 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 Transferor or the Trustee is unable to locate a qualified
successor, (ii) the Transferor, 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 Transferor 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 Transferor 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
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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 Transferor 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
Bankers Trust Company of California, N.A., a national banking association,
will act as Trustee of the Trust Fund. The mailing address of the Trustee's
corporate trust office is 3 Park Plaza, 16th Floor, Irvine, California 92614 and
its telephone number is (714) 253-7575.
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
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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 Transferor nor the Servicer contemplate
holding such meetings.
THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer for
inclusion in this Prospectus Supplement.
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of the Certificate Insurance Policy, unconditionally and
irrevocably guarantees that an amount equal to each full and complete Insured
Amount will be received by the Trustee for distribution to holders of the
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
November 1, 1996 by and among the Transferor, 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 Transferor 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
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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).
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 Certificates.
AMBAC Indemnity Corporation ("AMBAC") is a Wisconsin-domiciled stock
insurance corporation regulated by the Office of the Commissioner of Insurance
of the State of Wisconsin and licensed to do business in 50 states, the District
of Columbia, the Commonwealth of Puerto Rico, and Guam. AMBAC primarily insures
newly issued municipal bonds. AMBAC is a wholly owned subsidiary of AMBAC Inc.,
a 100% publicly held company. Moody's, 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.
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The following table sets forth AMBAC's capitalization as of December 31,
1993, December 31, 1994, December 31, 1995 and September 30, 1996, respectively,
in conformity with generally accepted accounting principles.
AMBAC INDEMNITY CORPORATION
CAPITALIZATION TABLE
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1993 1994 1995 1996
------ ------ ------ -------------
(DOLLARS IN MILLIONS) (UNAUDITED)
<S> <C> <C> <C> <C>
Unearned premiums........................................ $ 785 $ 840 $ 906 $ 965
Other liabilities........................................ 192 136 295 282
Stockholder's equity: Common stock....................... 82 82 82 82
Additional paid-in capital............................. 444 444 481 515
Unrealized gain (loss) on bonds; net of tax............ 68 (46) 87 51
Retained earnings...................................... 668 782 907 947
------ ------ ------ ------
Total stockholder's equity..................... $1,262 $1,262 $1,557 $ 1,595
------ ------ ------ ------
Total liabilities and stockholder's equity..... $2,239 $2,238 $2,758 $ 2,842
====== ====== ====== ======
</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 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.
AMBAC makes no representation regarding the Certificates or the
advisability of investing in the Certificates and makes no representation
regarding, nor has it participated in the preparation of, the Prospectus or this
Prospectus Supplement other than the information supplied by AMBAC and presented
under the heading "The Certificate Insurance Policy and the Certificate Insurer"
and in Appendix A and Appendix B to this Prospectus Supplement.
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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 Transferor and counsel to the Underwriter
("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 Transferor 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 Transferor 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 Transferor 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
Transferor 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
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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 TRUST FUND AS A PARTNERSHIP OR ASSOCIATION
TAXABLE AS A CORPORATION
Based on application of existing laws to the facts as set forth in the
Agreement and other relevant documents and assuming compliance with the terms of
the Agreement, Tax Counsel is of the opinion that the transaction contemplated
by this Prospectus Supplement will not be treated as a partnership or an
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 Transferor and the Certificate Owners
resulting from this transaction is that of a partnership (including 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 Transferor 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 Transferor, 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 Transferor
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. 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
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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.
The Small Business Job Protection Act of 1996 changed the definition of a
"foreign" trust. Under prior law, the definition was based on whether a trust's
foreign source income would be subject to U.S. tax. The new definition contains
two objective requirements which, if satisfied, will cause a trust to be treated
as a U.S. trust. It looks first to whether the trust's administration is subject
to a U.S. court's "primary supervision" and second to whether U.S. fiduciaries
control all substantial decisions of the trust. If both these requirements are
met, the trust is a U.S. trust. All other trusts are "foreign" trusts.
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.
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STATE TAXES
The Transferor 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 Transferor, 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.
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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 Transferor 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 Transferor, 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 Transferor 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
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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 Transferor 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 Transferor 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 Transferor 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.
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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 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.
LEGAL MATTERS
Certain legal matters will be passed upon for the Transferor 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 Transferor by
Brown & Wood LLP.
CERTIFICATE RATING
It is a condition to the issuance of the Certificates that they be rated
"AAA" by S&P, and "Aaa" by Moody's (together with S&P, 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.
S-67
<PAGE> 68
INDEX OF PRINCIPAL TERMS
<TABLE>
<CAPTION>
PAGE
-----------------
<S> <C>
Accelerated Principal Distribution Amount.................................. S-12, S-43
Accrual Period............................................................. S-13, S-43
Additional Balance......................................................... S-5
Agreement.................................................................. Cover, S-4, S-5
Alternate Certificate Rate................................................. S-44
Alternative Principal Payment.............................................. S-14, S-45
AMBAC...................................................................... S-59
Brokerage Firm............................................................. S-42
Business Day............................................................... S-43, S-58
Cede....................................................................... S-19
CEDEL...................................................................... S-19, S-56
CEDEL Participants......................................................... S-56
Certificate Insurance Policy............................................... Cover
Certificate Insurer........................................................ Cover
Certificate Interest Collections........................................... S-12, S-42
Certificate Owners......................................................... S-2, S-19
Certificate Rate........................................................... S-4, S-44
Certificates............................................................... Cover, S-4
Clearing Agency............................................................ S-54
Closing Date............................................................... Cover, S-4
Code....................................................................... S-61
Collection Period.......................................................... S-11, S-41
Combined Loan-to-Value Ratio............................................... S-7
Common Mortgage Loans...................................................... S-7
CPR........................................................................ S-36
Credit Limit............................................................... S-7
Credit Line Agreements..................................................... Cover
Cut-off Date............................................................... Cover, S-4
Cut-off Date Pool Balance.................................................. S-5
Cut-off Date Trust Balance................................................. S-5
Defective Mortgage Loan(s)................................................. S-17, S-51
Deficiency Amount.......................................................... S-15, S-47
Definitive Certificates.................................................... S-56
Depositaries............................................................... S-54
Dissolution Distribution Date.............................................. S-46
Distribution Date.......................................................... Cover, S-4
DTI........................................................................ S-30
DTC........................................................................ S-2, S-19
DOL........................................................................ S-64
Eligible Substitute Mortgage Loan.......................................... S-17, S-51
Equity Access(@) Credit Accounts........................................... S-29
Equity Access(@) Loans..................................................... S-29
Equity Access Prime(@) Program............................................. S-31
ERISA...................................................................... S-18, S-64
Euroclear.................................................................. S-19, S-56
Euroclear Cooperative...................................................... S-56
Euroclear Operator......................................................... S-56
Euroclear Participants..................................................... S-56
European Depositaries...................................................... S-19
</TABLE>
S-68
<PAGE> 69
<TABLE>
<CAPTION>
PAGE
-----------------
<S> <C>
Exemption.................................................................. S-64
Financial Consultants...................................................... S-29
Fixed Allocation Percentage................................................ S-14, S-45
Floating Allocation Percentage............................................. S-12, S-42
Global Securities.......................................................... I-1
HELOCs..................................................................... S-29
Index Rate................................................................. S-32
Indirect Participating Firm................................................ S-42
Insurance Agreement........................................................ S-14, S-47
Insured Amount............................................................. S-58
Insured Payment............................................................ S-59
Interest Collections....................................................... S-10, S-41
Interest Period............................................................ S-10, S-41
Invested Amount............................................................ S-5, S-40
Investor Loss Amount....................................................... S-12, S-43
IRS........................................................................ S-61
LIBO....................................................................... S-44
LIBOR...................................................................... Cover
LIBOR Business Day......................................................... S-44
Liquidation Loss Amount.................................................... S-13, S-44
Loan Balance............................................................... S-6, S-42
Loan Rate.................................................................. S-7, S-31
Managed Amortization Period................................................ S-13, S-45
Margin..................................................................... S-7
Maximum Principal Payment.................................................. S-14, S-45
Minimum Transferor Interest................................................ S-10, S-52
ML & Co.................................................................... S-4
MLCC....................................................................... Cover
MLHEA...................................................................... S-6
Monthly Advance............................................................ S-48
Monthly Advance Reimbursement Amount....................................... S-41
Moody's.................................................................... S-19
Mortgage Files............................................................. S-50
Mortgage Loan Schedule..................................................... S-10, S-52
Mortgage Loans............................................................. Cover, S-40
Mortgage Pool.............................................................. Cover
Mortgaged Properties....................................................... S-5
Net Loan Rate(s)........................................................... S-11, S-44
Net Trust Liquidation Proceeds............................................. S-11, S-41
Nonpayment................................................................. S-58
OID........................................................................ S-61
OID Regulations............................................................ S-61
Original Certificate Principal Balance..................................... S-4, S-40
Original Invested Amount................................................... S-4, S-40
Participants............................................................... S-55
Percentage Interest........................................................ S-5, S-42
Plan(s).................................................................... S-18, S-64
Pool Balance............................................................... S-5, S-42
Preference Amount.......................................................... S-59
Principal Collections...................................................... S-11, S-41
Prior Trusts............................................................... S-7
</TABLE>
S-69
<PAGE> 70
<TABLE>
<CAPTION>
PAGE
-----------------
<S> <C>
Prospectus................................................................. Cover
Rapid Amortization Event................................................... S-46
Rapid Amortization Period.................................................. S-14, S-45
Rating Agencies............................................................ S-19, S-67
Record Date................................................................ S-42
Reference Banks............................................................ S-44
Related Documents.......................................................... S-50
Removal Date............................................................... S-10, S-52
Required Amount............................................................ S-13, S-43
Restricted Group........................................................... S-65
Reuters Screen LIBO Page................................................... S-44
Scheduled Principal Collections Payment.................................... S-13, S-45
Second Mortgage Ratio...................................................... S-8
Servicer................................................................... Cover
Servicing Fee.............................................................. S-17, S-53
Servicing Fee Rate......................................................... S-17, S-53
SMMEA...................................................................... S-66
S&P........................................................................ S-19
Stated Maturity Date....................................................... S-14, S-45
Tax Counsel................................................................ S-61
Transfer Deposit Amount.................................................... S-11, S-42
Transferor................................................................. Cover
Transferor Interest........................................................ Cover, S-5, S-40
Transferor Subordinated Amount............................................. S-16, S-48
Trust...................................................................... Cover, S-4
Trust 1991................................................................. S-6
Trust 1993................................................................. S-6
Trust 1994-1............................................................... S-6
Trust 1994-2............................................................... S-6
Trust 1995-1............................................................... S-6
Trust 1995-2............................................................... S-6
Trust Balance(s)........................................................... Cover, S-6, S-42
Trust Fund................................................................. Cover, S-5
Trust Insurance Proceeds................................................... S-11, S-41
Trust Interest Collections................................................. S-10, S-41
Trust Principal Collections................................................ S-11, S-41
Trustee.................................................................... Cover, S-4
Underwriter................................................................ S-2, S-64, S-66
Underwriting Agreement..................................................... S-66
</TABLE>
S-70
<PAGE> 71
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
1996-2 (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.
I-1
<PAGE> 72
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
I-2
<PAGE> 73
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.
I-3
<PAGE> 74
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 the income
of which is includible in gross income for United States tax purposes,
regardless of its source 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. This summary does not deal with all aspects of U.S.
Federal income tax withholding that may be relevant to foreign holders of the
Global Securities. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Securities.
I-4
<PAGE> 75
APPENDIX A
AMBAC INDEMNITY CORPORATION AND SUBSIDIARIES
(a wholly owned subsidiary of AMBAC Inc.)
Consolidated Financial Statements
December 31, 1995 and 1994
(With Independent Auditors' Report Thereon)
A-1
<PAGE> 76
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.
/s/ KPMG Peat Marwick LLP
- -------------------------
KPMG Peat Marwick LLP
New York, New York
January 31, 1996
A-2
<PAGE> 77
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars In Thousands Except Share Data)
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
Assets
Investments:
Bonds held in available-for-sale account, at fair value
(amortized cost of $2,090,101 in 1995 and $1,865,350
in 1994) ........................................... $ 2,224,528 $ 1,795,958
Short-term investments, at cost (approximates fair
value) ............................................. 163,953 85,202
----------- -----------
Total investments .................................. 2,388,481 1,881,160
Cash .................................................... 6,912 2,117
Securities purchased under agreements to resell ......... 4,120 8,011
Receivable for securities ............................... 8,136 21,508
Investment income due and accrued ....................... 38,319 34,902
Investment in affiliate ................................. 25,827 24,976
Deferred acquisition costs .............................. 82,620 71,774
Deferred income taxes ................................... -- 1,778
Current income taxes .................................... 2,171 10,544
Prepaid reinsurance ..................................... 153,372 139,855
Other assets ............................................ 48,472 41,677
----------- -----------
Total assets ....................................... $ 2,758,430 $ 2,238,302
=========== ===========
Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums ..................................... $ 906,136 $ 839,775
Losses and loss adjustment expenses ................... 65,996 65,662
Ceded reinsurance balances payable .................... 14,654 908
Deferred income taxes ................................. 85,008 --
Accounts payable and other liabilities ................ 43,625 43,519
Payable for securities ................................ 86,304 26,696
----------- -----------
Total liabilities .................................. 1,201,723 976,560
----------- -----------
Stockholder's equity:
Preferred stock, par value $1,000.00 per share
Authorized shares -- 285,000; issued and outstanding
shares -- none ..................................... -- --
Common stock, par value $2.50 per share. Authorized
shares -- 40,000,000; issued and outstanding
shares -- 32,800,000 at December 31, 1995 and 1994 . 82,000 82,000
Additional paid-in capital ............................ 481,059 444,258
Unrealized gains (losses) on investments, net of tax .. 87,112 (46,087)
Retained earnings ..................................... 906,536 781,571
----------- -----------
Total stockholder's equity ......................... 1,556,707 1,261,742
----------- -----------
Total liabilities and stockholder's equity ......... $ 2,758,430 $ 2,238,302
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
A-3
<PAGE> 78
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Statements of Operations
(Dollars In Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Gross premiums written ...................... $ 195,033 $ 192,598 $ 321,490
Ceded premiums written ...................... (28,606) 2,815 (35,810)
--------- --------- ---------
Net premiums written ..................... 166,427 195,413 285,680
Increase in unearned premiums, net .......... (52,844) (76,077) (132,862)
--------- --------- ---------
Net premiums earned ...................... 113,583 119,336 152,818
Net investment income ....................... 131,496 119,737 104,609
Net realized gains (losses) ................. 177 (13,386) 30,145
Other income ................................ 6,777 6,887 1,516
--------- --------- ---------
Total revenues ........................... 252,033 232,574 289,088
--------- --------- ---------
Expenses:
Losses and loss adjustment expenses ......... 3,377 2,593 (1,849)
Underwriting and operating expenses ......... 38,722 35,946 34,746
Interest expense ............................ 1,590 1,428 163
--------- --------- ---------
Total expenses ........................... 43,689 39,967 33,060
--------- --------- ---------
Income before income taxes ............... 208,344 192,607 256,028
--------- --------- ---------
Income tax expense:
Current taxes ............................... 29,085 26,286 66,386
Deferred taxes .............................. 14,461 16,277 4,090
--------- --------- ---------
Total income taxes ....................... 43,546 42,563 70,476
--------- --------- ---------
Income before cumulative effect of changes in
accounting principles .................... 164,798 150,044 185,552
Cumulative effect of changes in accounting
principles ............................... -- -- (98)
--------- --------- ---------
Net income ............................... $ 164,798 $ 150,044 $ 185,454
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
A-4
<PAGE> 79
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Statements of Stockholder's Equity
(Dollars In Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Preferred Stock:
Balance at January 1 and December 31 ......... $ -- $ -- $ --
========= ========= =========
Common Stock:
Balance at January 1 and December 31 ......... $ 82,000 $ 82,000 $ 82,000
========= ========= =========
Additional Paid-in Capital:
Balance at January 1 ......................... $ 444,258 $ 444,143 $ 397,570
Capital contributions ........................ 35,000 -- 40,000
Cumulative effect of changes in accounting
principles ................................ -- -- 4,708
Other paid-in capital ........................ 1,801 115 1,865
--------- --------- ---------
Balance at December 31 ....................... $ 481,059 $ 444,258 $ 444,143
========= ========= =========
Unrealized Gains (Losses) on Investments, Net of
Tax:
Balance at January 1 ......................... $ (46,087) $ 68,091 $ 5,285
Unrealized gain from change in accounting
principle ................................. -- -- 63,568
Change in unrealized gain (loss) ............. 133,199 (114,178) (762)
--------- --------- ---------
Balance at December 31 ....................... $ 87,112 ($ 46,087) $ 68,091
========= ========= =========
Retained Earnings:
Balance at January 1 ......................... $ 781,571 $ 667,527 $ 515,073
Net income ................................... 164,798 150,044 185,454
Dividends declared-common stock .............. (40,000) (36,000) (33,000)
Other ........................................ 167 -- --
--------- --------- ---------
Balance at December 31 ....................... $ 906,536 $ 781,571 $ 667,527
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
A-5
<PAGE> 80
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars In Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................... $ 164,798 $ 150,044 $ 185,454
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization ............................ 1,605 1,106 1,080
Amortization of bond premium and
discount .............................................. (831) (1,097) (507)
Current income taxes payable ............................. 8,373 (6,069) (20,844)
Deferred income taxes payable ............................ 14,462 16,277 (2,463)
Deferred acquisition costs ............................... (10,846) (20,757) (7,059)
Unearned premiums ........................................ 52,844 76,077 132,862
Losses and loss adjustment expenses ...................... 334 1,625 (718)
Ceded reinsurance balances payable ....................... 13,746 (2,963) (5,147)
(Gain) loss on sales of investments ...................... (177) 13,386 (30,145)
Proceeds from sales of bonds in trading
account ............................................... -- -- 2,091,143
Proceeds from maturities of bonds in
trading account ....................................... -- -- 34,409
Purchases of bonds for trading account ................... -- -- (2,181,198)
Accounts payable and other liabilities ................... 106 20,497 9,591
Other, net ............................................... (11,273) 7,179 (1,622)
----------- ----------- -----------
Net cash provided by operating
activities ......................................... 233,141 255,305 204,836
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of bonds at amortized
cost .................................................. 1,882,485 1,305,011 18,912
Proceeds from maturities of bonds at
amortized cost ........................................ 163,031 39,126 60,131
Purchases of bonds at amortized cost ..................... (2,192,824) (1,559,982) (258,832)
Investment in preferred stock of
affiliate ............................................. -- -- (3,000)
Change in short-term investments ......................... (78,751) 9,005 (25,252)
Securities purchased under agreements to
resell ................................................ 3,891 (8,011) --
Other, net ............................................... (1,178) (3,786) (2,370)
----------- ----------- -----------
Net cash used in investing
activities ......................................... (223,346) (218,637) (210,411)
----------- ----------- -----------
Cash flows from financing activities:
Dividends paid ........................................... (40,000) (36,000) (33,000)
Capital contribution ..................................... 35,000 -- 40,000
----------- ----------- -----------
Net cash (used in) provided by
financing activities ............................... (5,000) (36,000) 7,000
----------- ----------- -----------
Net cash flow ......................................... 4,795 668 1,425
Cash at beginning of year .................................. 2,117 1,449 24
----------- ----------- -----------
Cash at December 31 ........................................ $ 6,912 $ 2,117 $ 1,449
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes .......................................... $ 19,500 $ 32,153 $ 86,781
=========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
A-6
<PAGE> 81
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar Amounts in Thousands)
1 BACKGROUND
AMBAC Indemnity Corporation ("AMBAC Indemnity") is a leading insurer of
municipal and structured finance obligations. Financial guarantee insurance
underwritten by AMBAC Indemnity guarantees payment when due of the principal of
and interest on the obligation insured. In the case of a default on the insured
bond, payments under the insurance policy may not be accelerated by the
policyholder without AMBAC Indemnity's consent. As of December 31, 1995, AMBAC
Indemnity's net insurance in force (principal and interest) was $199,078,000.
AMBAC Indemnity is a wholly owned subsidiary of AMBAC Inc. (NYSE: ABK), a
holding company that provides financial guarantee insurance and financial
services to both public and private clients through its subsidiaries.
As of December 31, 1995, AMBAC Indemnity owned approximately 26.5% of the
outstanding common stock of an affiliate, HCIA Inc. (NASDAQ: HCIA) ("HCIA"), a
leading health care information content company. AMBAC Inc. owns approximately
19.9% of the outstanding common stock of HCIA. Prior to 1995, AMBAC Inc. and
AMBAC Indemnity combined owned approximately 96% of HCIA. During 1995, HCIA
offered approximately 3.5 million shares of its common stock for sale in two
separate public offerings. In addition, in conjunction with the second public
offering by HCIA, AMBAC Inc. sold approximately 1.1 million shares of HCIA
common stock. As a result of these public offerings, as of December 31, 1995,
AMBAC Indemnity and AMBAC Inc. combined owned 46.4% of the common stock of HCIA.
AMBAC Indemnity, as the sole limited partner, owns a limited partnership
interest representing 90% of the total partnership interests of AMBAC Financial
Services, Limited Partnership ("AFS"), a limited partnership which provides
interest rate swaps primarily to states, municipalities and municipal
authorities. The sole general partner of AFS, AMBAC Financial Services Holdings,
Inc., a wholly owned subsidiary of AMBAC Inc., owns a general partnership
interest representing 10% of the total partnership interest in AFS.
AMBAC Indemnity has one wholly owned subsidiary, American Municipal Bond
Holding Company ("AMBH"), which is a holding company for certain real estate
interests.
2 SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared on
the basis of generally accepted accounting principles ("GAAP"). The preparation
of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
significant accounting policies of AMBAC Indemnity and its subsidiaries are as
described below:
CONSOLIDATION:
The consolidated financial statements include the accounts of AMBAC
Indemnity, AFS and AMBH (sometimes collectively referred to as "AMBAC
Indemnity"). All significant intercompany balances have been eliminated.
A-7
<PAGE> 82
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
INVESTMENTS:
AMBAC Indemnity's investment portfolio is accounted for on a trade-date
basis and consists entirely of investments in debt securities which are
considered available-for-sale and are carried at fair value. Fair value is based
on quotes obtained by AMBAC Indemnity from independent market sources.
Short-term investments are carried at cost, which approximates their fair value.
Unrealized gains and losses, net of deferred income taxes, are included as a
separate component of stockholder's equity and are computed using amortized cost
as the basis. For purposes of computing amortized cost, premiums and discounts
are accounted for using the interest method. For bonds purchased at a price
below par value, discounts are accreted over the remaining term of the
securities. For bonds purchased at a price above par value which have call
features, premiums are amortized to the most likely call dates as determined by
management. For premium bonds which do not have call features, such premiums are
amortized over the remaining term of the securities. Premiums and discounts on
mortgage-backed securities are adjusted for the effects of actual and
anticipated prepayments. Realized gains and losses on the sale of investments
are determined on the basis of specific identification.
Effective December 31, 1993, AMBAC Indemnity adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("Statement 115"). Pursuant to Statement 115, AMBAC Indemnity
has designated all investments as "available-for-sale" and reports them at fair
value. Unrealized gains and losses are excluded from earnings and reported as a
separate component of stockholder's equity, net of tax. The cumulative effect of
adopting Statement 115 as of December 31, 1993 was to increase AMBAC Indemnity's
stockholder's equity by $63,568, net of tax. The adoption of Statement 115 had
no effect on earnings.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL:
Securities purchased under agreements to resell are collateralized
financing transactions, and are recorded at their contracted resale amounts,
plus accrued interest. AMBAC Indemnity takes possession of the collateral
underlying those agreements and monitors its market value on a daily basis and,
when necessary, requires prompt transfer of additional collateral to reflect
current market value.
PREMIUM REVENUE RECOGNITION:
Premiums for municipal new issue and secondary market policies are: (i)
generally computed as a percentage of principal and interest insured; (ii)
typically collected in a single payment at policy inception date; and (iii) are
earned pro rata over the period of risk. Premiums for structured finance
policies can be computed as a percentage of either principal or principal and
interest insured. The timing of the collection of structured finance premiums
varies among individual transactions. For policies where premiums are collected
in a single payment at policy inception date, premiums are earned pro rata over
the period of risk. For policies with premiums that are collected periodically
(i.e., monthly, quarterly or annually), premiums are reflected in income pro
rata over the period covered by the premium payment.
When an AMBAC Indemnity-insured new or secondary market issue has been
refunded or called, the remaining unearned premium is generally earned at that
time, as the risk to AMBAC Indemnity is considered to have been eliminated.
A-8
<PAGE> 83
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
LOSSES AND LOSS ADJUSTMENT EXPENSES:
The liability for losses and loss adjustment expenses consists of the
Active Credit Reserve ("ACR") and case basis loss reserves. The development of
the ACR is based upon estimates of the ultimate aggregate losses inherent in the
obligations insured and reflects the net result of contributions related to the
portion of earnings required to cover those losses, less reductions of ACR no
longer deemed necessary by management. When losses occur (actual monetary
defaults or defaults which are imminent on insured obligations), case basis loss
reserves are established in an amount that is sufficient to cover the present
value of the anticipated defaulted debt service payments over the expected
period of default and estimated expenses associated with settling the claims,
less estimated recoveries under salvage or subrogation rights. All or part of
case basis loss reserves are allocated from any ACR available for such insured
obligation.
AMBAC Indemnity's management believes that the reserves for losses and loss
adjustment expenses are adequate to cover the ultimate net cost of claims, but
the reserves are necessarily based on estimates and there can be no assurance
that the ultimate liability will not exceed such estimates.
DEFERRED ACQUISITION COSTS:
Certain costs incurred which vary with, and are primarily related to, the
production of business have been deferred. These costs include direct and
indirect expenses related to underwriting, marketing and policy issuance, rating
agency fees and premium taxes, net of reinsurance ceding commissions. The
deferred acquisition costs are being amortized over the periods in which the
related premiums are earned, and such amortization amounted to $10,183, $9,348
and $12,120 for 1995, 1994 and 1993, respectively. Deferred acquisition costs,
net of such amortization, amounted to $10,845, $20,757 and $7,059 for 1995, 1994
and 1993, respectively.
DEPRECIATION AND AMORTIZATION:
Depreciation of furniture and fixtures and electronic data processing
equipment is provided over the estimated useful lives of the respective assets
using the straight-line method. Amortization of leasehold improvements and
intangibles, including certain computer software licenses, is provided over the
estimated useful lives of the respective assets using the straight-line method.
INTEREST RATE CONTRACTS:
Interest Rate Contracts Held for Purposes Other Than Trading:
AMBAC Indemnity uses interest rate contracts for hedging purposes as part
of its overall interest rate risk management. Gains and losses on interest rate
futures and options contracts that qualify as accounting hedges of existing
assets or liabilities are included in the carrying amounts and amortized over
the remaining lives of the assets and liabilities as an adjustment to interest
income. When the hedged asset is sold, the unamortized gain or loss on the
related hedge is recognized in income. Gains and losses on interest rate
contracts that do not qualify as accounting hedges are recognized in current
period income.
AMBAC Indemnity accounts for its interest rate futures contracts in
accordance with the provisions of Statement of Financial Accounting Standards
No. 80, "Accounting For Futures Contracts" ("Statement 80"). Statement 80
permits hedge accounting for interest rate futures contracts when the item to be
hedged exposes the Company to price or interest rate risk, and the futures
contract effectively reduces that exposure and is designated as a hedge.
Interest rate futures contracts held for purposes other than trading are used
primarily to hedge interest sensitive assets, and are designated at inception as
a hedge to specific assets.
A-9
<PAGE> 84
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Interest rate swaps that are linked with existing liabilities are accounted
for like a hedge of those liabilities, using the accrual method as an adjustment
to interest expense. Interest rate swaps that are linked with existing assets
classified as available-for-sale are accounted for like hedges of those assets,
using the accrual method as an adjustment to interest income, with unrealized
gains and losses included in stockholder's equity, net of tax.
Interest Rate Contracts Held for Trading Purposes:
AMBAC Indemnity, in connection with its market making activities as a
provider of interest rate swaps, primarily to states, municipalities, municipal
authorities and other entities in connection with their financings, uses
interest rate contracts which are classified as held for trading purposes.
Interest rate contracts are recorded on trade date at fair value. Changes in
fair value are recorded as a component of other income. The fair value of
interest rate swaps is determined through the use of valuation models. The
portion of the interest rate swap's initial fair value that reflects credit
considerations, on-going servicing and transaction hedging costs is recognized
over the life of the interest rate swap, as an adjustment to other income.
Interest rate swaps are recorded on a gross basis; assets and liabilities are
netted by customer only when a legal right of set-off exists.
INCOME TAXES:
AMBAC Inc., as common parent, files a consolidated Federal income tax
return with its subsidiaries. Effective January 1, 1993, AMBAC Indemnity adopted
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("Statement 109"). Under Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date.
The cumulative effect of this change in accounting for income taxes
resulted in an increase to net income for 1993 of $1,162 and an increase to
additional paid-in capital of $4,708. The adjustment to additional paid-in
capital reflects Statement 109 adjustments for prior business combinations.
The Internal Revenue Code permits municipal bond insurance companies to
deduct from taxable income, subject to certain limitations, the amounts added to
the statutory mandatory contingency reserve during the year. The deduction taken
is allowed only to the extent that U.S. Treasury noninterest-bearing tax and
loss bonds are purchased at their par value prior to the original due date of
AMBAC Inc.'s consolidated Federal tax return and held in an amount equal to the
tax benefit attributable to such deductions. The amounts deducted must be
included in taxable income when the contingency reserve is released, at which
time AMBAC Indemnity may redeem the tax and loss bonds to satisfy the additional
tax liability. The purchases of tax and loss bonds are recorded as payments of
Federal income taxes and are not reflected in AMBAC Indemnity's current tax
provision.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS:
AMBAC Inc., through its subsidiaries, provides various postretirement and
postemployment benefits, including pension, and health and life benefits
covering substantially all employees who meet certain age and service
requirements. AMBAC Indemnity accounts for these benefits under the accrual
method of accounting. Amounts related to the defined benefit pension plan and
postretirement health benefits are charged based on actuarial determinations.
A-10
<PAGE> 85
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Effective January 1, 1993, AMBAC Indemnity adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions" ("Statement 106"). Statement 106 requires that the expected
cost of postretirement benefits, other than pensions, be charged to expense
during the period that the employee renders service. AMBAC Indemnity elected to
recognize the transition obligation immediately and recorded a charge of $465,
after reduction of $240 for income tax benefits, as a cumulative effect of a
change in accounting principle as of the date of adoption.
Effective January 1, 1993, AMBAC Indemnity adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" ("Statement 112"), which, similar to Statement 106, requires accrual
of a liability representing the cost of certain benefits earned by employees
over their employment period. Statement 112 applies to vested benefits provided
to former or inactive employees, their beneficiaries and covered dependents,
after employment but before retirement. In adopting Statement 112, AMBAC
Indemnity recorded a charge of $801, after reduction for income tax benefits of
$429, as a cumulative effect of a change in accounting principle as of the date
of adoption.
STOCK COMPENSATION PLANS:
In 1991, AMBAC Inc. adopted the AMBAC Inc. 1991 Stock Incentive Plan. Under
this plan awards are granted to eligible employees of AMBAC Indemnity in the
form of incentive stock options or other stock-based awards. In October 1995,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("Statement 123") which must be adopted no later than 1996. Statement 123
applies to all stock-based employee compensation plans (except employee stock
ownership plans) in which an employer grants shares of its stock or other equity
instruments to employees. Statement 123 permits a company to choose either the
fair value based method of accounting as defined in the statement or the
intrinsic value based method of accounting as prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") for its stock-based
compensation plans. Companies electing the accounting requirements under APB 25
must also make pro forma disclosures of net income and earnings per share as if
the fair value based method of accounting had been applied. AMBAC Indemnity
currently accounts for its plans under APB 25 and intends to continue to do so
after adopting Statement 123 in 1996. The adoption of Statement 123 is expected
to have no effect on AMBAC Indemnity's results of operations.
RECLASSIFICATIONS:
Certain reclassifications have been made to prior years' amounts to conform
to the current year's presentation.
A-11
<PAGE> 86
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
3 INVESTMENTS
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1995
Municipal obligations ............... $1,558,754 $ 98,090 $ 2,428 $1,654,416
Corporate securities ................ 261,492 30,785 3,263 289,014
U.S. Government obligations ......... 214,224 8,796 621 222,399
Mortgage-backed securities (including
GNMA) ............................. 55,631 3,362 294 58,699
Other ............................... 163,953 -- -- 163,953
---------- ---------- ---------- ----------
$2,254,054 $ 141,033 $ 6,606 $2,388,481
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1994
Municipal obligations ............... $1,505,501 $ 23,009 $ 80,935 $1,447,575
Corporate securities ................ 228,992 2,336 11,501 219,827
U.S. Government obligations ......... 61,906 311 1,797 60,420
Mortgage-backed securities (including
GNMA) ............................. 70,251 1,325 2,140 69,436
Other ............................... 83,902 -- -- 83,902
---------- ---------- ---------- ----------
$1,950,552 $ 26,981 $ 96,373 $1,881,160
========== ========== ========== ==========
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1995, by contractual maturity, were as follows:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
---------- ----------
<S> <C> <C>
1995
Due in one year or less ..................... $ 223,069 $ 223,949
Due after one year through five years ....... 168,417 181,772
Due after five years through ten years ...... 302,601 315,385
Due after ten years ......................... 1,504,336 1,608,676
---------- ----------
2,198,423 2,329,782
Mortgage-backed securities .................. 55,631 58,699
---------- ----------
$2,254,054 $2,388,481
========== ==========
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
A-12
<PAGE> 87
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Net investment income comprised the following:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Bonds ................... $ 127,865 $ 118,685 $ 102,020
Short-term investments .. 6,116 3,512 4,278
--------- --------- ---------
Total investment income 133,981 122,197 106,298
Investment expense ...... (2,485) (2,460) (1,689)
--------- --------- ---------
Net investment income . $ 131,496 $ 119,737 $ 104,609
========= ========= =========
</TABLE>
Gross realized gains were $27,786, $26,514 and $42,217 for 1995, 1994 and
1993, respectively, and gross realized losses were $27,609, $39,900 and $12,072
for 1995, 1994 and 1993, respectively.
As of December 31, 1995, AMBAC Indemnity did not have any investment
concentrated in any single repayment source (excluding obligations of the U.S.
Government and its agencies) with a fair value greater than 2.0% of its
stockholder's equity.
As of December 31, 1995 and 1994, AMBAC Indemnity held securities subject
to agreements to resell for $4,120 and $8,011, respectively. Such securities
were held as collateral by AMBAC Indemnity. The agreements had terms of less
than 30 days.
As of December 31, 1995 and 1994, investment securities with a fair value
of $4,583 and $3,948, respectively, were pledged to futures brokers for required
margin.
4 REINSURANCE
In the ordinary course of business, AMBAC Indemnity cedes exposures under
various reinsurance contracts primarily designed to minimize losses from large
risks and to protect capital and surplus. The effect of reinsurance on premiums
written and earned was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1995 1994 1993
--------------------- --------------------- ---------------------
Written Earned Written Earned Written Earned
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Direct................... $192,277 $127,322 $188,057 $136,632 $321,179 $181,320
Assumed.................. 2,756 1,349 4,541 1,325 311 311
Ceded.................... (28,606) (15,088) 2,815 (18,621) (35,810) (28,813)
-------- -------- -------- -------- -------- --------
Net premiums............. $166,427 $113,583 $195,413 $119,336 $285,680 $152,818
======== ======== ======== ======== ======== ========
</TABLE>
The reinsurance of risk does not relieve the ceding insurer of its original
liability to its policyholders. In the event that all or any of the reinsurers
are unable to meet their obligations to AMBAC Indemnity under the existing
reinsurance agreements, AMBAC Indemnity would be liable for such defaulted
amounts. To minimize its exposure to significant losses from reinsurer
insolvencies, AMBAC Indemnity evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk. There were no reinsurance
receivables as of December 31, 1995 and 1994. As of December 31, 1995, prepaid
reinsurance of approximately $48,120 was associated with a single reinsurer. As
of December 31, 1995, AMBAC Indemnity held letters of credit and collateral
amounting to approximately $90,643 from its reinsurers to cover liabilities
ceded under the aforementioned reinsurance contracts.
AMBAC Indemnity terminated reinsurance contracts, resulting in return
premiums to AMBAC Indemnity of $18,141, $30,482 and $36,461 of which $15,700,
$25,891 and $31,010 were recorded as an
A-13
<PAGE> 88
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
increase to the unearned premium reserve in 1995, 1994 and 1993, respectively,
with the remainder recognized as revenue.
5 LOSSES AND LOSS ADJUSTMENT EXPENSES
AMBAC Indemnity's liability for losses and loss adjustment expenses
includes case basis loss reserves and the ACR. Following is a summary of the
activity in the case basis loss and active credit reserve accounts and the
components of the liability for losses and loss adjustment expenses:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Case basis loss reserves:
Balance at January 1......................... $38,892 $35,155 $ 28,321
------- ------- --------
Incurred related to:
Current year............................... 750 8,073 6,630
Prior years................................ 2,650 (3,368) (926)
------- ------- --------
Total incurred.......................... 3,400 4,705 5,704
------- ------- --------
Paid related to:
Current year............................... 150 275 315
Prior years................................ 2,893 693 (1,445)
------- ------- --------
Total paid.............................. 3,043 968 (1,130)
------- ------- --------
Balance at December 31....................... 39,249 38,892 35,155
------- ------- --------
Active credit reserve:
Balance at January 1......................... 26,770 28,882 36,434
Net provision for losses..................... 4,097 4,422 6,709
ACR transfers to case reserves............... (4,120) (6,534) (14,261)
------- ------- --------
Balance at December 31....................... 26,747 26,770 28,882
------- ------- --------
Total................................... $65,996 $65,662 $ 64,037
======= ======= =========
</TABLE>
The terms "current year" and "prior years" in the foregoing table refer to
the year in which case basis loss reserves were established.
A-14
<PAGE> 89
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
6 COMMITMENTS AND CONTINGENCIES
AMBAC Indemnity is responsible for leases on the rental of office space,
principally in New York City. The lease agreements which expire periodically
through September 2014, contain provisions for scheduled periodic rent increases
and are accounted for as operating leases. An estimate of future net minimum
lease payments in each of the next five years ending December 31, and the
periods thereafter, is as follows:
<TABLE>
<CAPTION>
Year Amount
----- -------
<S> <C>
1996........................................................... $ 3,042
1997........................................................... 3,073
1998........................................................... 3,359
1999........................................................... 3,650
2000........................................................... 3,650
All later years................................................ 53,880
-------
$70,654
=======
</TABLE>
Rent expense for the aforementioned leases amounted to $2,924, $2,719 and
$2,778 for the years ended December 31, 1995, 1994 and 1993, respectively.
7 INSURANCE REGULATORY RESTRICTIONS
AMBAC Indemnity is subject to insurance regulatory requirements of the
States of Wisconsin, New York and the other jurisdictions in which it is
licensed to conduct business.
AMBAC Indemnity's ability to pay dividends is generally restricted by law
and subject to approval by the Office of the Commissioner of Insurance of the
State of Wisconsin (the "Wisconsin Commissioner"). Wisconsin insurance law
restricts the payment of dividends in any 12-month period without regulatory
approval to the lesser of (a) 10% of policyholders' surplus as of the preceding
December 31 and (b) the greater of (i) statutory net income for the calendar
year preceding the date of dividend, minus realized capital gains for that
calendar year and (ii) the aggregate of statutory net income for three calendar
years preceding the date of the dividend, minus realized capital gains for those
calendar years and minus dividends paid or credited within the first two of the
three preceding calendar years. AMBAC Indemnity paid dividends of $40,000,
$36,000 and $33,000 on its common stock in 1995, 1994 and 1993, respectively.
Based upon these restrictions, at December 31, 1995, the maximum amount that
will be available during 1996 for payment of dividends by AMBAC Indemnity
without prior approval is approximately $86,000.
However, as discussed in Note 15, AMBAC Indemnity, upon consummation of the
proposed PRIDES offering will deliver to AMBAC Inc. (in the form of an
extraordinary dividend) its 2,378,672 shares of HCIA common stock, at fair
value. The Wisconsin Commissioner has approved such dividend. The fair value of
such dividend will be determined based on the price per share of HCIA common
stock used to price the PRIDES. As a result, any dividends paid by AMBAC
Indemnity to AMBAC Inc. for the twelve months following the extraordinary
dividend will require pre-approval from the Wisconsin Commissioner. The
Wisconsin Commissioner has stated to AMBAC Indemnity management that it does not
foresee any reason such pre-approval would not be given.
The New York Financial Guarantee Insurance Law establishes single risk
limits applicable to all obligations issued by a single entity and backed by a
single revenue source. Under the limit applicable to
A-15
<PAGE> 90
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
municipal bonds, the insured average annual debt service for a single risk, net
of reinsurance and collateral, may not exceed 10% of the sum of the insurer's
policyholders' surplus and contingency reserves. In addition, insured principal
of municipal bonds attributable to any single risk, net of reinsurance and
collateral, is limited to 75% of the insurer's policyholders' surplus and
contingency reserves. Additional single risk limits, which generally are more
restrictive than the municipal bond single risk limit, are also specified for
several other categories of insured obligations.
Statutory capital and surplus was $862,976 and $781,772 at December 31,
1995 and 1994, respectively. Qualified statutory capital (statutory surplus plus
contingency reserve) was $1,358,769 and $1,218,204 at December 31, 1995 and
1994, respectively. Statutory net income was $142,541, $116,238 and $166,157 for
1995, 1994 and 1993, respectively. Statutory capital and surplus differs from
stockholder's equity determined under GAAP principally due to statutory
accounting rules that treat loss reserves, premiums earned, policy acquisition
costs and deferred income taxes differently.
8 INCOME TAXES
The total effect of income taxes on income and stockholder's equity for the
years ended December 31, 1995 and 1994 was as follows:
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Total income taxes charged to income ................... $ 43,546 $ 42,563
--------- --------
Income taxes charged (credited) to stockholder's equity:
Unrealized gain (loss) on bonds ...................... 71,722 (61,480)
Unrealized gain on investment in affiliate ........... 602 --
Other ................................................ (682) (116)
--------- --------
Total charged (credited) to stockholder's
equity .................................... 71,642 (61,596)
--------- --------
Total effect of income taxes ........................... $ 115,188 $(19,033)
========= ========
</TABLE>
The tax provisions in the accompanying consolidated statements of
operations reflect effective tax rates differing from prevailing Federal
corporate income tax rates. The following is a reconciliation of these
differences:
<TABLE>
<CAPTION>
1995 % 1994 % 1993 %
-------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax at
statutory rate ..................... $ 72,920 35.0% $ 67,412 35.0% $ 89,610 35.0%
Increases (reductions) in expected tax
resulting from:
Tax-exempt interest ............. (28,274) (13.6) (26,336) (13.7) (21,043) (8.2)
Adjustment to deferred tax
assets and liabilities
for enacted changes in
tax laws and rates ........... -- -- -- -- 754 0.3
Other, net ...................... (1,100) (0.5) 1,487 0.8 1,155 0.4
-------- ---- -------- ---- -------- ----
Income tax expense on income from
continuing operations .............. $ 43,546 20.9% $ 42,563 22.1% $ 70,476 27.5%
======== ==== ======== ==== ======== ====
</TABLE>
A-16
<PAGE> 91
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liabilities and deferred tax assets at December 31,
1995 and 1994 are presented below:
<TABLE>
<CAPTION>
1995 1994
--------- -------
<S> <C> <C>
Deferred tax liabilities:
Unrealized gains on bonds .................... $ 46,906 $ --
Deferred acquisition costs ................... 28,917 25,121
Unearned premiums ............................ 22,079 14,522
Unrealized gain on investment in affiliate ... 602 --
Investments .................................. 2,911 796
Other ........................................ 1,996 1,613
--------- -------
Total deferred tax liabilities ...... 103,411 42,052
--------- -------
Deferred tax assets:
Unrealized loss on bonds ..................... -- 24,816
Loss reserves ................................ 9,631 9,733
Insurance in force ........................... 2,870 3,205
Compensation ................................. 2,418 2,812
Other ........................................ 3,484 3,264
--------- -------
Sub-total deferred tax assets ....... 18,403 43,830
Valuation allowance .......................... -- --
--------- -------
Total deferred tax assets ........... 18,403 43,830
--------- -------
Net deferred tax (liabilities) assets $ (85,008) $ 1,778
========= =======
</TABLE>
AMBAC Indemnity believes that no valuation allowance is necessary in
connection with the deferred tax assets.
9 EMPLOYEE BENEFITS
Pensions:
AMBAC Inc. has a defined benefit pension plan covering substantially all
employees of AMBAC Indemnity and AFS. The benefits are based on years of service
and the employee's compensation during the last five years of employment. AMBAC
Indemnity's funding policy is to contribute annually the maximum amount that can
be deducted for Federal income tax purposes. Contributions are intended to
provide not only for benefits attributed to service-to-date but also for those
expected to be earned in the future.
The actuarial present value of the benefit obligations shown in the table
below sets forth the plan's funded status and amounts recognized by AMBAC Inc.
as of December 31, 1995 and 1994.
A-17
<PAGE> 92
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Actuarial present value of the benefit obligations:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of
$6,049 and $4,300, respectively ............................ $(6,788) $(5,000)
======= =======
Projected benefit obligation for service rendered to date .... (7,800) (5,500)
Plan assets at fair value, primarily listed stocks, commingled
funds and fixed income securities .......................... 7,054 4,898
------- -------
Unfunded projected benefit ................................... (746) (602)
Unrecognized prior service cost .............................. (1,784) (1,950)
Unrecognized net loss ........................................ 1,906 1,412
Unrecognized net transition asset ............................ (12) (15)
------- -------
Pension liability -- entire plan ............................. $ (636) $(1,155)
======= =======
</TABLE>
Net pension costs for 1995, 1994 and 1993 included the following
components:
<TABLE>
<CAPTION>
1995 1994 1993
------- ----- -----
<S> <C> <C> <C>
Service cost ............................... $ 541 $ 558 $ 447
Interest cost on expected benefit obligation 456 386 297
Actual return on plan assets ............... (1,333) 30 (390)
Net amortization and deferral .............. 760 (547) (149)
------- ----- -----
Net periodic pension cost .................. $ 424 $ 427 $ 205
======= ===== =====
</TABLE>
The weighted-average discount rate used in the determination of the
actuarial present value for the projected benefit obligation was 7.25% and 8.0%
for 1995 and 1994, respectively. The expected long-term rate of return on assets
was 9.25% for both 1995 and 1994. The rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation was 5.0% in both 1995 and 1994.
Substantially all employees of AMBAC Indemnity and AFS are covered by a
defined contribution plan (the "Savings Incentive Plan") for which contributions
and costs are determined as 6% of each covered employee's base salary, plus a
matching company contribution of 50% on contributions up to 6% of base salary
made by eligible employees to the plan. The total cost of the Savings Incentive
Plan to AMBAC Indemnity was $1,435, $1,292 and $1,243 in 1995, 1994 and 1993,
respectively.
Annual Incentive Plan:
AMBAC Indemnity has an annual incentive plan which provides for awards to
key officers and employees based upon predetermined criteria. The cost of the
plan to AMBAC Indemnity for the years ended December 31, 1995, 1994 and 1993 was
$7,669, $8,531 and $6,165, respectively.
Postretirement Health Care and Other Benefits:
AMBAC Indemnity provides certain medical and life insurance benefits for
retired employees and eligible dependents. All plans are contributory. None of
the plans is currently funded.
A-18
<PAGE> 93
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Postretirement benefits expense was $168, $176 and $500 in 1995, 1994 and
1993, respectively. The unfunded accumulated postretirement benefit obligation
was $1,309 and the accrued postretirement liability was $1,368 as of December
31, 1995.
The assumed weighted average health care cost trend rates range from 13.5%
in 1995, decreasing ratably to 5.5% in 2001, and remaining at that level
thereafter. Increasing the assumed health care cost trend rate by one percentage
point in each future year would increase the accumulated postretirement benefit
obligation at December 31, 1995 by $174 and the 1995 benefit expense by $28. The
weighted average discount rate used to measure the accumulated postretirement
benefit obligation and 1995 expense was 7.25%.
10 INSURANCE IN FORCE
The par amount of bonds insured by AMBAC Indemnity, net of reinsurance, was
$110,997,000 and $93,305,000 at December 31, 1995 and 1994, respectively. As of
December 31, 1995, AMBAC Indemnity's insured portfolio was diversified by type
of insured bond as shown in the following table:
<TABLE>
<CAPTION>
Net Par Amount
Outstanding
--------------------
(Dollars in Millions) As of December 31 1995 1994
-------- -------
<S> <C> <C>
Municipal finance:
General obligation........................... $ 30,546 $26,674
Utility revenue.............................. 21,053 19,597
Tax-backed revenue........................... 18,780 16,279
Health care revenue.......................... 12,553 10,922
Transportation revenue....................... 6,293 5,397
Investor Owned Utilities..................... 4,497 3,500
Higher education............................. 3,973 3,447
Student loan................................. 3,769 2,709
Housing revenue.............................. 3,577 2,567
Other........................................ 483 403
-------- -------
Total Municipal finance................... 105,524 91,495
-------- -------
Structured finance:
Domestic..................................... 3,238 902
International................................ 2,235 908
-------- -------
Total Structured finance.................. 5,473 1,810
-------- -------
$110,997 $93,305
========= =======
</TABLE>
As of December 31, 1995, California was the state with the highest
aggregate net par amount inforce, accounting for 14.3% of the total, and the
highest single insured risk represented 0.6% of aggregate net par amount
insured. AMBAC Indemnity's direct insurance in force (principal and interest)
was $235,118,000 and $205,810,000, at December 31, 1995 and 1994, respectively.
Net insurance in force (after giving effect to reinsurance) was $199,078,000 and
$171,678,000 as of December 31, 1995 and 1994, respectively.
A-19
<PAGE> 94
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
11 FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING
Financial instruments with off-balance-sheet risk:
In the normal course of business, AMBAC Indemnity becomes a party to
various financial transactions to reduce its exposure to fluctuations in
interest rates. These financial instruments include an interest rate swap
agreement and exchange traded interest rate futures contracts. The notional
amounts of AMBAC Indemnity's off-balance-sheet financial instruments which are
held for purposes other than trading were as follows:
<TABLE>
<CAPTION>
As of December 31,
--------------------
1995 1994
------- --------
<S> <C> <C>
Interest rate futures contracts................ $44,500 $164,200
Interest rate swap............................. 20,000 20,000
</TABLE>
Notional principal amounts are often used to express the volume of these
transactions and do not reflect the extent to which positions may offset one
another. These amounts do not represent the much smaller amounts potentially
subject to risk.
Interest rate futures contracts are sold to hedge interest rate risk
inherent in fixed rate investment securities. At December 31, 1995, interest
rate futures contracts with an outstanding notional amount of $44,500 were
designated as hedges of fixed rate investment securities.
The interest rate swap held for purposes other than trading is used to
manage interest rate risk by synthetically changing the nature of certain
floating rate investments.
Fair values of financial instruments held for purposes other than trading:
The following fair value amounts were determined by AMBAC Indemnity using
independent market information when available, and appropriate valuation
methodologies when market quotes were not available. In cases where specific
market quotes are unavailable, interpreting market data and estimating market
values necessarily require considerable judgment by management. Accordingly, the
estimates presented are not necessarily indicative of the amount AMBAC Indemnity
could realize in a current market exchange.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Investments: The fair values of bonds are based on quoted market prices or
dealer quotes.
Short-term investments and cash: The fair values of short-term investments
and cash are assumed to equal amortized cost.
Securities purchased under agreements to resell: The fair value of
securities purchased under agreements to resell is assumed to approximate
carrying value.
Investment in affiliate: As of December 31, 1995, the fair value of AMBAC
Indemnity's investment in HCIA is based on the quoted market price of HCIA
common stock. As of December 31, 1994, the fair value of AMBAC Indemnity's
investment in HCIA was assumed to equal carrying value.
Interest rate contracts: Fair values of off-balance-sheet interest rate
contracts (futures and swap) are based on quoted market and dealer prices,
current settlement values, or pricing models.
A-20
<PAGE> 95
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
Liability for net financial guarantees written: The fair value of the
liability for those financial guarantees written related to new issue and
secondary market exposures is based on the estimated cost to reinsure those
exposures at current market rates, which amount consists of the current unearned
premium reserve, less an estimated ceding commission thereon.
Certain other financial guarantee insurance policies have been written on
an installment basis, where the future premiums to be received by AMBAC
Indemnity are determined based on the outstanding exposure at the time the
premiums are due. The fair value of AMBAC Indemnity's liability under its
installment premium policies is measured using the present value of estimated
future installment premiums, less an assumed ceding commission. The estimate of
the amounts and timing of the future installment premiums is based on
contractual premium rates, debt service schedules and expected run-off
scenarios. This measure is used as an estimate of the cost to reinsure AMBAC
Indemnity's liability under these policies. The carrying amount and estimated
fair value of these financial instruments are presented below:
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------
1995 1994
----------------------- -----------------------
Carrying Estimated Carrying Estimated
(Dollars in Millions) Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Investments........................ $2,225 $2,225 $1,796 $1,796
Short-term investments............. 164 164 85 85
Securities purchased under
agreements to resell............. 4 4 8 8
Investment in affiliate............ 26 111 25 25
Cash............................... 7 7 2 2
Unrecognized financial instruments:
Interest rate swap................. -- -- -- (1)
Interest rate futures contracts.... -- -- -- --
Liability for net financial
guarantees
Direct........................... -- 655 -- 609
Net of reinsurance............... -- 543 -- 507
Net installment premiums......... -- 80 -- 51
</TABLE>
12 FINANCIAL INSTRUMENTS HELD FOR TRADING PURPOSES
AMBAC Indemnity, through its affiliate AFS, is a provider of interest rate
swaps to states, municipalities, municipal authorities and other entities,
including its affiliate, AMBAC Capital Management, Inc. ("ACMI"), in connection
with their financings. AMBAC Indemnity manages its interest rate swap business
with the goal of being market neutral to changes in overall interest rates,
while retaining "basis risk", the relationship between changes in floating rate
tax-exempt and floating rate taxable interest rates. If actual or projected
floating rate tax-exempt interest rates rise in relation to floating rate
taxable rates, AMBAC Indemnity will experience an unrealized mark-to-market
loss. Conversely, if actual or projected floating rate tax-exempt interest rates
decline in relation to floating rate taxable interest rates, AMBAC Indemnity
will experience an unrealized mark-to-market gain.
A-21
<PAGE> 96
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
In the ordinary course of business, AMBAC Indemnity manages a variety of
risks -- principally credit, market, liquidity, operational and legal. These
risks are identified, measured and monitored through a variety of control
mechanisms, which are in place at different levels throughout the organization.
Credit risk relates to the ability of counterparties to perform according
to the terms of their contractual commitments. Various procedures and controls
are in place to monitor the credit risk of interest rate swaps. These include
the initial credit approval process, the establishment of credit limits,
management approvals and a process that ensures the continuous monitoring of
credit exposure.
Market risk relates to the impact of price changes on future earnings. This
risk is a consequence of AMBAC Indemnity's market-making activities in the
municipal interest rate swap market. The principal market risk is basis risk,
the relationship between changes in floating rate tax-exempt and floating rate
taxable interest rates. Since the third quarter of 1995, all municipal interest
rate swaps transacted contain provisions which are designed to protect AMBAC
Indemnity against certain forms of tax reform, thus mitigating its basis risk.
An independent risk management group monitors trading risk limits and, together
with senior management, is involved in the application of risk measurement
methodologies.
The estimation of potential losses arising from adverse changes in market
relationships, known as "value at risk," is a key element in managing market
risk. AMBAC Indemnity has developed a value at risk methodology to estimate
potential losses over a specified holding period and based on certain
probabilistic assessments. AMBAC Indemnity estimates value at risk utilizing
historical short and long term interest rate volatilities and the relationship
between changes in tax-exempt and taxable interest rates calculated on a
consistent daily basis. For the year ended December 31, 1995, AMBAC Indemnity's
value at risk averaged approximately $1,358, calculated at a ninety-nine percent
confidence level. Since no single measure can capture all dimensions of market
risk, AMBAC Indemnity bolsters its value at risk methodology by performing daily
analyses of parallel and nonparallel shifts in yield curves and stress test
scenarios which measure the potential impact of market conditions, however
improbable, which might cause abnormal volatility swings or disruptions of
market relationships.
Liquidity risk relates to the possible inability to satisfy contractual
obligations when due. This risk is present in interest rate swap agreements and
in futures contracts used to hedge those agreements. AMBAC Indemnity manages
liquidity risk by maintaining cash and cash equivalents, closely matching the
dates swap payments are made and received and limiting the amount of risk hedged
by futures contracts.
Operational risk relates to the potential for loss caused by a breakdown in
information, communication and settlement systems. AMBAC Indemnity mitigates
operational risk by maintaining a comprehensive system of internal controls.
This includes the establishment of systems and procedures to monitor
transactions and positions, documentation and confirmation of transactions,
ensuring compliance with regulations and periodic reviews by auditors.
Legal risk relates to the uncertainty of the enforceability, through legal
or judicial processes, of the obligations of AMBAC Indemnity's counterparties,
including contractual provisions intended to reduce credit exposure by providing
for the offsetting or netting of mutual obligations. AMBAC Indemnity seeks to
remove or minimize such uncertainties through continuous consultation with
internal and external legal advisers to analyze and understand the nature of
legal risk, to improve documentation and to strengthen transaction structure.
A-22
<PAGE> 97
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
The following table summarizes information about AMBAC Indemnity's
financial instruments held for trading purposes as of December 31, 1995 and
1994:
<TABLE>
<CAPTION>
Net Net Average Net Fair Value
Carrying Estimated ----------------------- Notional
Amount Fair Value Assets Liabilities Amount
-------- ---------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C>
1995:
Interest rate
swaps............ $5,207 $5,207 $17,714 $16,667 $2,152,400
Interest rate
futures
contracts........ -- -- -- -- 569,800
1994:
Interest rate
swaps............ $1,681 $1,681 $ 4,441 $ 3,560 $ 771,900
Interest rate
futures
contracts........ -- -- -- -- 443,000
</TABLE>
The aggregate amount of net trading income recognized from interest rate
financial instruments held for trading purposes was $2,602 and $3,051 for 1995
and 1994, respectively. Average net fair values were calculated based on average
daily net fair values. For 1994, average net fair values began from the
commencement of operations in September 1994.
Notional principal amounts are often used to express the volume of these
transactions and do not reflect the extent to which positions may offset one
another. These amounts do not represent the much smaller amounts potentially
subject to risk.
13 LINES OF CREDIT
AMBAC Inc. and AMBAC Indemnity maintain a three-year revolving credit
facility with two major international banks, as co-agents, for $100,000. As of
December 31, 1995, no amounts were outstanding under this credit facility, which
expires in July 1998. This facility amended a one-year revolving credit facility
for $75,000. As of December 31, 1994, no amounts were outstanding under this
credit facility.
AMBAC Indemnity has an agreement with another major international bank, as
agent, for a $300,000 credit facility, expiring in 2002. This facility is a
seven-year stand-by irrevocable limited recourse line of credit, which was
increased from $225,000 to $300,000 and extended for an additional year in
December 1995. The line will provide liquidity to AMBAC Indemnity in the event
claims from municipal obligations exceed specified levels. Repayment of any
amounts drawn under the line will be limited primarily to the amount of any
recoveries of losses related to policy obligations. As of December 31, 1995 and
1994, no amounts were outstanding under this line.
14 RELATED PARTY TRANSACTIONS
During 1995 and 1994, AMBAC Indemnity guaranteed the timely payment of
principal and interest on obligations under municipal investment contracts and
municipal investment repurchase agreements issued by its affiliate, ACMI. As of
December 31, 1995 and 1994, the aggregate amount of municipal investment
contracts and municipal investment repurchase contracts insured was $2,240,959
and $2,042,230, respectively, including accrued interest. These insurance
policies are collateralized by ACMI's investment securities, accrued interest,
securities purchased under agreements to resell and cash and cash equivalents,
which as of December 31, 1995 and 1994 had a fair value of $2,299,687 and
$1,964,830, respectively, in the aggregate.
A-23
<PAGE> 98
AMBAC Indemnity Corporation and Subsidiaries
Notes to Consolidated Financial Statements -- (Continued)
(Dollar Amounts in Thousands)
During 1995 and 1994, AMBAC Indemnity recorded gross premiums written of $1,707
and $2,692, and net premiums earned of $1,764 and $1,872, respectively, related
to these contracts.
During 1995 and 1994, several interest rate swap transactions were executed
between AFS and ACMI. As of December 31, 1995 and 1994, these contracts had an
outstanding notional amount of approximately $359,000 and $478,000,
respectively. As of December 31, 1995 and 1994, AFS recorded a positive fair
value of $6,539 and a negative fair value of $5,492, respectively, related to
these transactions.
15 SUBSEQUENT EVENTS
On January 19, 1996, AMBAC Inc. filed with the Securities and Exchange
Commission a registration statement related to a proposed offering of 3,781,369
PRIDES(SM) (Provisionally Redeemable Income Debt Exchangeable for Stock). The
PRIDES, which constitute senior debt of AMBAC Inc., will mature in 2001 and will
be mandatorily exchanged at maturity into shares of HCIA common stock (or, at
AMBAC Inc.'s option, cash with an equal value) determined in accordance with an
exchange rate formula. AMBAC Inc. may redeem the PRIDES, in whole or in part,
after three years. AMBAC Inc. has also granted the underwriters an option to
purchase up to 378,136 PRIDES to cover any over-allotments.
AMBAC Indemnity, upon consummation of the PRIDES offering, will deliver to
AMBAC Inc. (in the form of an extraordinary dividend) its 2,378,672 shares of
HCIA common stock, at fair value. The fair value of such dividend will be
determined based on the price per share of HCIA common stock used to price the
PRIDES.
A-24
<PAGE> 99
APPENDIX B
AMBAC Indemnity Corporation and Subsidiaries
(a wholly-owned subsidiary of AMBAC Inc.)
Consolidated Unaudited Financial Statements
as of September 30, 1996 and December 31, 1995
and for the periods ended September 30, 1996 and 1995
B-1
<PAGE> 100
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995
(Dollars in Thousands Except Share Data)
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
(unaudited)
<S> <C> <C>
Assets
Investments:
Bonds held in available for sale account, at fair value
(amortized cost of $2,224,021 in 1996 and $2,090,101 in 1995) $2,302,605 $2,224,528
Short-term investments, at cost (approximates fair value) 151,107 163,953
---------- ----------
Total investments 2,453,712 2,388,481
Cash 9,138 6,912
Securities purchased under agreements to resell 8,466 4,120
Receivable for securities 23,433 8,136
Investment income due and accrued 39,135 38,319
Investment in affiliate - 25,827
Deferred acquisition costs 90,022 82,620
Current income taxes - 2,171
Prepaid reinsurance 166,588 153,372
Other assets 51,443 48,472
---------- ----------
Total assets $2,841,937 $2,758,430
========== ==========
Liabilities and Stockholder's Equity
Liabilities:
Unearned premiums $965,192 $906,136
Losses and loss adjustment expenses 60,170 65,996
Ceded reinsurance balances payable 11,280 14,654
Deferred income taxes 67,253 85,008
Current income taxes 12,963 -
Accounts payable and other liabilities 48,982 43,625
Payable for securities 80,737 86,304
---------- ----------
Total liabilities 1,246,577 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 September 30, 1996 and December 31, 1995 82,000 82,000
Additional paid-in capital 514,809 481,059
Unrealized gains on investments, net of tax 51,079 87,112
Retained earnings 947,472 906,536
---------- ----------
Total stockholder's equity 1,595,360 1,556,707
---------- ----------
Total liabilities and stockholder's equity $2,841,937 $2,758,430
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
B-2
<PAGE> 101
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
For The Periods Ended September 30, 1996 and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ------------------------------
1996 1995 1996 1995
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Gross premiums written $67,875 $43,960 $177,935 $121,425
Ceded premiums written (9,813) (7,369) (29,261) (4,314)
------- ------- -------- --------
Net premiums written 58,062 36,591 148,674 117,111
Increase in unearned premiums (23,900) (9,919) (45,840) (37,482)
------- ------- -------- --------
Net premiums earned 34,162 26,672 102,834 79,629
Net investment income 36,977 33,320 107,466 97,613
Net realized gains (losses) (5,381) (2,455) 64,555 (9,331)
Other income 2,377 1,762 13,182 3,747
------- ------- -------- --------
Total revenues 68,135 59,299 288,037 171,658
------- ------- -------- --------
Expenses:
Losses and loss adjustment expenses 1,301 841 3,811 2,210
Underwriting and operating expenses 9,713 8,900 31,379 28,146
Interest expense 514 505 1,542 1,142
------- ------- -------- --------
Total expenses 11,528 10,246 36,732 31,498
------- ------- -------- --------
Income before income taxes 56,607 49,053 251,305 140,160
------- ------- -------- --------
Income tax expense:
Current taxes 10,521 5,113 62,834 18,656
Deferred taxes 888 5,123 1,648 8,789
------- ------- -------- --------
Total income taxes 11,409 10,236 64,482 27,445
------- ------- -------- --------
Net income 45,198 38,817 186,823 112,715
======= ======= ======== =======
</TABLE>
See accompanying Notes to Consolidated Unaudited Financial Statements
B-3
<PAGE> 102
AMBAC Indemnity Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For The Periods Ended September 30, 1996 and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $186,823 $112,715
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,463 1,240
Amortization of bond premium and discount (1,525) (707)
Current income taxes payable 15,134 4,282
Deferred income taxes payable 1,648 8,789
Deferred acquisition costs (7,402) (11,398)
Unearned premiums 45,840 37,482
Losses and loss adjustment expenses (5,826) 218
Ceded reinsurance balances payable (3,374) 2,089
(Gain) loss on sales of investments (64,555) 9,331
Other, net (2,004) (1,978)
---------- ----------
Net cash provided by operating activities 166,222 162,063
---------- ----------
Cash flows from investing activities:
Proceeds from sales of bonds at amortized cost 1,210,927 1,085,062
Proceeds from maturities of bonds at amortized cost 78,368 121,470
Purchases of bonds at amortized cost (1,462,567) (1,323,132)
Change in short-term investments 12,846 (15,125)
Proceeds from sale of affiliate 115,865 -
Securities purchased under agreements to resell (4,346) (531)
Other, net (1,724) (959)
---------- ----------
Net cash used in investing activities (50,631) (133,215)
---------- ----------
Cash flows from financing activities:
Dividends paid (145,865) (30,000)
Capital contribution 32,500 -
---------- ----------
Net cash used in financing activities (113,365) (30,000)
---------- ----------
Net cash flow 2,226 (1,152)
Cash at beginning of year 6,912 2,117
---------- ----------
Cash at September 30 $9,138 $965
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $13,300 $13,700
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
B-4
<PAGE> 103
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 September 30, 1996, AMBAC
Indemnity's net insurance in force (principal and interest) was $215.4 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 clients in both the public and private sectors.
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. own 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 ("GAAP") and,
in the opinion of management, reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the Company's
financial condition, results of operations and cash flows for the periods
presented. 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 results of operations for the nine months ended September 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
B-5
<PAGE> 104
AMBAC INDEMNITY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS (CONTINUED)
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.
(2) INCOME TAXES
The tax provisions in the accompanying financial statements reflect
effective tax rates differing from prevailing federal corporate income tax
rates, primarily as a result of tax-exempt interest income.
B-6
<PAGE> 105
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" or "TRANSFEROR") 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
borrowers under Mortgage Loans which are revolving home equity loans or certain
balances thereof. A Trust Fund may also include insurance policies, cash
accounts, reserve funds, reinvestment income, guaranties, letters of credit or
other forms of credit enhancement described herein and in the related Prospectus
Supplement, or any combination thereof. In addition, if so specified in the
related Prospectus Supplement, the property of the Trust Fund will include
monies on deposit in a trust account (the "PRE-FUNDING ACCOUNT") to be
established with the Trustee, which will be used to purchase at a predetermined
price additional Mortgage Assets (the "SUBSEQUENT MORTGAGE ASSETS") from the
Depositor from time to time within three months after the issuance of the
Certificates.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust Fund. A Series of
Certificates may include one or more classes that are senior or subordinate in
right of payment to one or more other classes of Certificates of such Series.
One or more classes of Certificates of a Series may be entitled to receive
principal distributions with disproportionate, nominal or no interest
distributions or interest distributions with disproportionate, nominal or no
principal distributions or any combination thereof prior to one or more other
classes of Certificates of such Series or after the occurrence of specified
events, in each case as specified in the related Prospectus Supplement.
Distributions among classes of Certificates in a Series may differ as to timing,
sequential order and priority.
------------------------ (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 November 13, 1996.
<PAGE> 106
(Continued from previous page)
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.
2
<PAGE> 107
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.
3
<PAGE> 108
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
4
<PAGE> 109
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.
5
<PAGE> 110
(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
standards of the Seller.
(e) Certain Mortgage Loans may be originated or
acquired in connection with employee relocation
programs. The real property constituting
security for repayment of a Mortgage Loan may
be located in any one of the fifty states, the
District of Columbia, 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
6
<PAGE> 111
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.
7
<PAGE> 112
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
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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
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(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
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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
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is defined in the related Prospectus
Supplement, the "FUNDING PERIOD") in an amount
and manner specified in the related Prospectus
Supplement.
Legal Investment.............. The Prospectus Supplement for each series of
Certificates will specify which, if any, of the
Classes of Certificates offered thereby will
constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Classes of
Certificates that qualify as "mortgage related
securities" will be legal investments for
certain types of institutional investors to the
extent provided in SMMEA, subject, in any case,
to any other regulations that may govern
investments by such institutional investors.
Institutions whose investment activities are
subject to review by federal or state
authorities should consult with their counsel
or the applicable authorities to determine
whether an investment in a particular class of
Certificates (whether or not such class
constitutes a "mortgage related security")
complies with applicable guidelines, policy
statements or restrictions. See "Legal
Investment".
Certain Federal Income Tax
Consequences.................. The federal income tax consequences to
Certificateholders will vary depending on
whether one or more elections are made to treat
the Trust Fund or specified portions thereof as
a "real estate mortgage investment conduit"
("REMIC") under the provisions of the Internal
Revenue Code of 1986, as amended (the "CODE").
The Prospectus Supplement for each Series of
Certificates will specify whether such an
election will be made. See "Certain Federal
Income Tax Consequences".
ERISA Considerations.......... A fiduciary of any employee benefit plan or
other retirement plan or arrangement subject to
the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or the Code should
carefully review with its legal advisors
whether the purchase or holding of Certificates
could give rise to a transaction prohibited or
not otherwise permissible under ERISA or the
Code. See "ERISA Considerations". Certain
classes of Certificates may not be transferred
unless the Trustee and the Depositor are
furnished with a letter of representations or
an opinion of counsel to the effect that such
transfer will not result in a violation of the
prohibited transaction provisions of ERISA and
the Code and will not subject the Trustee, the
Depositor or the Master Servicer to additional
obligations. See "Description of the
Certificates -- General" and "ERISA
Considerations".
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THE TRUST FUND*
The Trust Fund for each Series will be held by the Trustee for the benefit
of the related Certificateholders. Each Trust Fund will consist of certain
mortgage-related assets (the "MORTGAGE ASSETS") consisting of (A) a mortgage
pool (a "MORTGAGE POOL") comprised of Mortgage Loans, (B) Agency Securities or
(C) Private Mortgage-Backed Securities, in each case as specified in the related
Prospectus Supplement, together with payments in respect of such Mortgage Assets
and certain other accounts, obligations or agreements, in each case as specified
in the related Prospectus Supplement.
The Certificates will be entitled to payment from the assets of the related
Trust Fund or Funds or other assets pledged for the benefit of the
Certificateholders as specified in the related Prospectus Supplement and will
not be entitled to payments in respect of the assets of any other trust fund
established by the Depositor. Unless otherwise specified in the related
Prospectus Supplement, the Mortgage Assets of any Trust Fund will consist of
Mortgage Loans, Agency Securities or Private Mortgage-Backed Securities but not
a combination thereof.
The Mortgage Assets may be acquired by the Transferor, either directly or
through affiliates, from originators or sellers that may be affiliates of the
Transferor (the "SELLERS") and conveyed by the Transferor to the related Trust
Fund. The Sellers may have originated the Mortgage Assets or acquired the
Mortgage Assets from the originators or other entities. See "Mortgage Loan
Program -- Underwriting Standards".
The following is a brief description of the Mortgage Assets expected to be
included in the Trust Funds. If specific information respecting the Mortgage
Assets is not known at the time the related Series of Certificates initially is
offered, more general information of the nature described below will be provided
in the related Prospectus Supplement, and final specific information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance thereof and to be filed with the Securities and Exchange Commission
within fifteen days after the initial issuance of such Certificates (the
"DETAILED DESCRIPTION"). A schedule of the Mortgage Assets relating to such
Series will be attached to the Agreement delivered to the Trustee upon delivery
of the Certificates.
THE MORTGAGE LOANS -- GENERAL
For purposes hereof, the real property that secures repayment of the
Mortgage Loans are collectively referred to as "MORTGAGED PROPERTIES". The
Mortgaged Properties may be located in any one of the fifty states, the District
of Columbia, 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.
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
- ---------------
* Whenever the terms "MORTGAGE POOL" and "CERTIFICATES" are used in this
Prospectus, such terms will be deemed to apply, unless the context indicates
otherwise, to one specific Mortgage Pool and the Certificates representing
certain undivided interests, as described below, in a single trust fund (the
"TRUST FUND") consisting primarily of the Mortgage Loans in such Mortgage Pool.
Similarly, the term "PASS-THROUGH RATE" will refer to the Pass-Through Rate
borne by the Certificates of one specific Series and the term "TRUST FUND" will
refer to one specific Trust Fund.
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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 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
(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
to the guarantor. The related Prospectus Supplement will contain information
with respect to any Additional Collateral Loans concerning minimum 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
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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.
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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.
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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
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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
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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.
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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
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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
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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" or "TRANSFEROR") 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.
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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
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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
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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".
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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,
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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
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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
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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
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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
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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
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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
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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.
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If specified in the related Prospectus Supplement, various classes of
Senior Certificates and Subordinated Certificates may themselves be subordinate
in their right to receive certain distributions to other classes of Senior and
Subordinated Certificates, respectively, through a cross support mechanism or
otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, distributions may be allocated among 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
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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 Transferor 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
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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.
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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.
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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.
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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.
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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 Seller; 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
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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
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(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
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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
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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
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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
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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.
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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.
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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
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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
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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
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Series that have been rated. In addition, if a REMIC election is made with
respect to a Trust Fund, the related Agreement may be amended to modify,
eliminate or add to any of its provisions to such extent as may be necessary to
maintain the qualification of the related Trust Fund as a REMIC, provided that
the Trustee has received an opinion of counsel to the effect that such action is
necessary or helpful to maintain such qualification. Unless otherwise specified
in the related Prospectus Supplement, each Agreement may also be amended by the
Depositor, the Master Servicer and the Trustee with consent of holders of
Certificates of such Series evidencing not less than 66% of the aggregate
Percentage Interests of each class affected thereby for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of the Agreement or of modifying in any manner the rights of the holders of the
related Certificates; provided, however, that no such amendment may (i) reduce
in any manner the amount of or delay the timing of, payments received on
Mortgage Loans which are required to be distributed on any Certificate without
the consent of the holder of such Certificate, or (ii) reduce the aforesaid
percentage of Certificates of any class of holders which are required to consent
to any such amendment without the consent of the holders of all Certificates of
such class covered by such Agreement then outstanding. If a REMIC election is
made with respect to a Trust Fund, the Trustee will not be entitled to consent
to an amendment to the related Agreement without having first received an
opinion of counsel to the effect that such amendment will not cause such Trust
Fund to fail to qualify as a REMIC.
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
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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
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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 nonjudicial 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 nonjudicial 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.
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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.
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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
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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
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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
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(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 1 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
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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, 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.
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.
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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
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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
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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
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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
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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.
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SALE OR EXCHANGE OF A SENIOR CERTIFICATE
Sale or exchange of a Senior Certificate prior to its maturity will result
in gain or loss equal to the difference, if any, between the amount received,
and the owner's adjusted basis in the Senior Certificate. Such adjusted basis
generally will equal the seller's purchase price for the Senior Certificate,
increased by the original issue discount included in the seller's gross income
with respect to the Senior Certificate, and reduced by principal payments on the
Senior Certificate previously received by the seller. Such gain or loss will be
capital gain or loss to an owner for which a Senior Certificate is a "capital
asset" within the meaning of Code Section 1221, and will be long-term or
short-term depending on whether the Senior Certificate has been owned for the
long-term capital gain holding period (currently more than one year).
Senior Certificates will be "evidences of indebtedness" within the meaning
of Code Section 582(c)(1), so that gain or loss recognized from the sale of a
Senior Certificate by a bank or a thrift institution to which such section
applies will be ordinary income or loss.
NON-U.S. PERSONS
Generally, to the extent that a Senior Certificate evidences ownership in
Mortgage Loans that are issued on or before July 18, 1984, interest or original
issue discount paid by the person required to withhold tax under Code Section
1441 or 1442 to (i) an owner that is not a U.S. Person (as defined below), or
(ii) a Senior Certificateholder holding on behalf of an owner that is not a U.S.
Person, will be subject to federal income tax, collected by withholding, at a
rate of 30% or such lower rate as may be provided for interest by an applicable
tax treaty. Accrued original issue discount recognized by the owner on the sale
or exchange of such a Senior Certificate also will be subject to federal income
tax at the same rate. Generally, such payments would not be subject to
withholding to the extent that a Senior Certificate evidences ownership in
Mortgage Loans issued after July 18, 1984, if (i) such Senior Certificateholder
does not actually or constructively own 10 percent or more of the combined
voting power of all classes of equity in the issuer (which for purposes of this
discussion may be defined as the Trust Fund (the "ISSUER")); (ii) such Senior
Certificateholder is not a controlled foreign corporation (within the meaning of
Code Section 957) related to the Issuer; and (iii) such Senior Certificateholder
complies with certain identification requirements (including delivery of a
statement, signed by the Senior Certificateholder under penalties of perjury,
certifying that such Senior Certificateholder is not a U.S. Person and providing
the name and address of such Senior Certificateholder).
A "U.S. PERSON" means a citizen or resident of the United States, a
corporation or a partnership organized in or under the laws of the United
States, or any political subdivision thereof or an estate 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.
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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,
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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
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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
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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 0.65 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.
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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
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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.
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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.
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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,
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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.
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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 noninterest 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
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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 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.
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 nontaxable 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
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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.
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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
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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
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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.
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 the income
of which is includible in gross income for United States tax purposes,
regardless of its source 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.
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
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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
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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
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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
83
<PAGE> 188
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.
84
<PAGE> 189
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.
85
<PAGE> 190
INDEX TO DEFINED TERMS
<TABLE>
<S> <C>
Accrual Certificates.......................................................... 29
Accrual Period................................................................ 68
Additional Collateral Loans................................................... 5
Adjusted Issue Price.......................................................... 63, 68, 69
Advance....................................................................... 11
AFR........................................................................... 64
Agency Securities............................................................. Cover
Agreement..................................................................... 4, 15
Applicable Amount............................................................. 75
ARM Loans..................................................................... 63
Available Distribution Amount................................................. 28
Balloon Payments.............................................................. 6, 14
Bankruptcy Bond............................................................... 36
Bankruptcy Bonds.............................................................. 10
Buydown Fund.................................................................. 14
Buydown Loans................................................................. 14
Cede.......................................................................... 31
CERCLA........................................................................ 56
Certificate Account........................................................... 40
Certificate Balance........................................................... 29
Certificate Register.......................................................... 27
Certificates.................................................................. Cover, 4
Charter Act................................................................... 19
Closing Date.................................................................. 4
Code.......................................................................... 12
Collateral Value.............................................................. 15
Commission.................................................................... 3
Contingent Regulations........................................................ 64
Cooperative Loans............................................................. 5, 16
Cooperatives.................................................................. 5, 16
Cut-off Date.................................................................. 10
Deferred Interest............................................................. 64, 71
Definitive Certificates....................................................... 32
Depositor..................................................................... Cover, 22
Detailed Description.......................................................... 13
Determination Date............................................................ 28
Disqualified Organization..................................................... 79
Distribution Date............................................................. 8
DTC........................................................................... 31
Eligible Investments.......................................................... 41
EPA........................................................................... 56
ERISA......................................................................... 12
Excess Inclusion.............................................................. 75
Excess Servicing.............................................................. 61
FDIC.......................................................................... 24
Federal Long-Term Rate........................................................ 76
FHA........................................................................... 5, 16
FHA Insurance................................................................. 10
FHA Loans..................................................................... 16
FHLMC......................................................................... Cover
FHLMC Act..................................................................... 18
</TABLE>
86
<PAGE> 191
<TABLE>
<S> <C>
FHLMC Certificate Group....................................................... 18
FHLMC Certificates............................................................ 7
FNMA.......................................................................... Cover
FNMA Certificates............................................................. 7
Funding Period................................................................ 12
Garn-St Germain Act........................................................... 57
GNMA.......................................................................... Cover
GNMA Certificates............................................................. 7
GNMA Issuer................................................................... 16
Guaranty Agreement............................................................ 16
Housing Act................................................................... 16
HUD........................................................................... 46
Indirect Participant.......................................................... 32
Insurance Proceeds............................................................ 41
Insured Expenses.............................................................. 41
IRS........................................................................... 60
Issuer........................................................................ 65, 73
Labor......................................................................... 81
Legislative History........................................................... 63
Letter of Credit.............................................................. 11
Limited Guarantee............................................................. 11
Liquidation Expenses.......................................................... 41
Liquidation Proceeds.......................................................... 41
Loan-to-Value Ratio........................................................... 15
Lockout Periods............................................................... 6, 14
Master REMIC.................................................................. 66
Master Servicer............................................................... 4
Master Servicing Fee.......................................................... 48
Mortgage...................................................................... 39
Mortgage Assets............................................................... Cover, 4, 13
Mortgage Loans................................................................ Cover, 4
Mortgage Note................................................................. 39
Mortgage Pool................................................................. 4, 13
Mortgage Pool Insurance Policy................................................ 10, 34
Mortgage Rate................................................................. 9, 15
Mortgage Related Security..................................................... 84
Mortgaged Properties.......................................................... 13
NCUA.......................................................................... 83
OID Regulations............................................................... 62, 64
Participants.................................................................. 32
Parties in Interest........................................................... 81
Pass-Through Entity........................................................... 79
Pass-Through Rate............................................................. 9, 13
Payment Lag Certificates...................................................... 72
Phantom Income................................................................ 74
Plans......................................................................... 80
PMBS Agreement................................................................ 21
PMBS Issuer................................................................... 21
PMBS Servicer................................................................. 21
PMBS Trustee.................................................................. 21
Policy Statement.............................................................. 84
Pool Insurer.................................................................. 34
</TABLE>
87
<PAGE> 192
<TABLE>
<S> <C>
Pre-Funded Amount............................................................. 5
Pre-Funding Account........................................................... Cover, 11
Pre-Issuance Accrued Interest................................................. 72
Prepayment Assumption......................................................... 63
Primary Insurer............................................................... 45
Primary Mortgage Insurance Policy............................................. 13
Principal Prepayments......................................................... 29
Private Mortgage-Backed Securities............................................ Cover
Proposed Regulations.......................................................... 79
PTE 83-1...................................................................... 81
Purchase Price................................................................ 25
Rating Agency................................................................. 41
Record Date................................................................... 27
Regular Certificates.......................................................... 66
Regular Interests............................................................. 27
Relief Act.................................................................... 57
REMIC......................................................................... 2, 12
REMIC Regulations............................................................. 58
Reserve Fund.................................................................. 10
Residual Certificates......................................................... 66
Residual Interests............................................................ 27
Retained Interest............................................................. 26
Seller........................................................................ Cover
Sellers....................................................................... 13
Senior Certificates........................................................... 8, 33
Series........................................................................ Cover, 4
Servicer...................................................................... 4
Single Family Certificates.................................................... 81
SMMEA......................................................................... 12, 83
Special Hazard Insurance Policy............................................... 10
Special Hazard Insurer........................................................ 35
Stripped ARM Obligations...................................................... 64
Stripped Bond Certificates.................................................... 61
Stripped Coupon Certificates.................................................. 61
Sub-Servicer.................................................................. 11, 15
Subordinated Certificates..................................................... 8, 33
Subsequent Mortgage Assets.................................................... Cover, 4
Subsidiary REMIC.............................................................. 66
Super-Premium Certificates.................................................... 68
Surety Bond................................................................... 11
Title V....................................................................... 57
Transferor.................................................................... Cover, 22
Trust Fund.................................................................... Cover, 13
Trustee....................................................................... 4
U.S. Person................................................................... 65, 79, 80
UCC........................................................................... 31
Underwriter Exemptions........................................................ 82
VA............................................................................ 5
VA Guaranty Policy............................................................ 47
VA Insurance.................................................................. 10
VA Loans...................................................................... 16
Weighted Average Rate......................................................... 69
</TABLE>
88
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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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports to the Certificateholders............... S-2
Incorporation of Certain Documents by
Reference..................................... S-2
Summary of Terms of the Certificates............ S-4
Special Considerations and Risk Factors......... S-20
The Mortgage Loan Pool.......................... S-25
MLCC and Its Equity Access(R) Program........... S-29
Allocations of Payments on the Mortgage Loans
Between the Trust and the Prior Trusts........ S-34
Prepayment and Yield Considerations............. S-34
Description of the Certificates................. S-40
The Certificate Insurance Policy and the
Certificate Insurer........................... S-58
Certain Federal Income Tax Consequences......... S-61
State Taxes..................................... S-64
ERISA Considerations............................ S-64
Use of Proceeds................................. S-66
Legal Investment Considerations................. S-66
Underwriting.................................... S-66
Experts......................................... S-67
Legal Matters................................... S-67
Certificate Rating.............................. S-67
Index of Principal Terms........................ S-68
Annex I: Global Clearance, Settlement and Tax
Documentation Procedures...................... I-1
Appendix A -- Audited Financial Statements of
Certificate Insurer........................... A-1
Appendix B -- Unaudited Financial Statements of
Certificate Insurer........................... B-1
PROSPECTUS
Prospectus Supplement........................... 2
Available Information........................... 3
Incorporation of Certain Information by
Reference..................................... 3
Summary of Terms................................ 4
The Trust Fund.................................. 13
Use of Proceeds................................. 22
The Depositor................................... 22
Mortgage Loan Program........................... 23
Description of the Certificates................. 26
Credit Enhancement.............................. 33
Yield and Prepayment Considerations............. 37
The Pooling and Servicing Agreement............. 39
Certain Legal Aspects of the Mortgage Loans..... 51
Certain Federal Income Tax Consequences......... 58
State Tax Considerations........................ 80
ERISA Considerations............................ 80
Legal Investment................................ 83
Method of Distribution.......................... 84
Legal Matters................................... 85
Financial Information........................... 85
Rating.......................................... 85
Index to Defined Terms.......................... 86
</TABLE>
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$276,159,000
(APPROXIMATE)
MLCC
MORTGAGE INVESTORS, INC.,
TRANSFEROR
ML REVOLVING HOME EQUITY LOAN
ASSET BACKED CERTIFICATES,
SERIES 1996-2
MERRILL LYNCH
CREDIT CORPORATION,
SERVICER
------------------------
PROSPECTUS SUPPLEMENT
------------------------
MERRILL LYNCH & CO.
NOVEMBER 13, 1996
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