<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 33-87402
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 20, 1997)
$148,504,257
TRYON MORTGAGE FUNDING, INC.
SPONSOR
NATIONSBANC MORTGAGE CORPORATION
SELLER AND MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1997-1
Distributions payable on the 20th day of each month, commencing in April 1997
---------------------
The Mortgage Pass-Through Certificates, Series 1997-1 (the "Certificates")
will represent the entire beneficial ownership interest in a trust fund (the
"Trust Fund") to be created pursuant to a Pooling and Servicing Agreement, dated
as of March 1, 1997 (the "Pooling Agreement"), among Tryon Mortgage Funding,
Inc. (the "Sponsor"), NationsBanc Mortgage Corporation, as master servicer (the
"Master Servicer") and PNC Bank, National Association, as trustee (the
"Trustee"). The Trust Fund will consist primarily of a pool (the "Mortgage
Pool") of conventional, fixed-rate mortgage loans (the "Mortgage Loans") secured
by first liens on one- to four-family residential properties, all of which will
have original terms to maturity of not more than 360 months. Only the Classes
identified in the table below (the "Offered Certificates") are offered hereby.
PROSPECTIVE INVESTORS IN THE OFFERED CERTIFICATES SHOULD REVIEW THE INFORMATION
SET FORTH UNDER "RISK FACTORS" ON PAGE S-13 OF THIS PROSPECTUS SUPPLEMENT.
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE SPONSOR,
THE SELLER, THE MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR RESPECTIVE
AFFILIATES, EXCEPT AS SET FORTH HEREIN. NEITHER THE CERTIFICATES NOR THE
MORTGAGE LOANS ARE INSURED OR GUARANTEED BY THE UNITED STATES GOVERNMENT, THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY OR
INSTRUMENTALITY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
<TABLE>
<CAPTION>
============================================================================================================
INITIAL CLASS PRINCIPAL PASS-THROUGH INTEREST
CLASS CERTIFICATE BALANCE(1) TYPE(2) RATE TYPE(2)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A-1..................... $31,185,929 SEN 7.00% FIXED
- ------------------------------------------------------------------------------------------------------------
A-2..................... $12,107,857 SEN 7.25% FIXED
- ------------------------------------------------------------------------------------------------------------
A-3..................... $13,893,799 SEN 7.50% FIXED
- ------------------------------------------------------------------------------------------------------------
A-4..................... $24,000,000 SEN 7.50% FIXED
- ------------------------------------------------------------------------------------------------------------
A-5..................... $8,341,459 SEN 7.50% FIXED
- ------------------------------------------------------------------------------------------------------------
A-6..................... $7,683,000 SEN 7.50% FIXED
- ------------------------------------------------------------------------------------------------------------
A-7..................... $10,904,258 SEN 7.50% FIXED
- ------------------------------------------------------------------------------------------------------------
A-8..................... $21,750,000 SEN 7.50% FIXED
- ------------------------------------------------------------------------------------------------------------
F....................... $12,413,285 SEN (4) FLOATING
- ------------------------------------------------------------------------------------------------------------
S....................... (5) NOTIONAL (6) INV FLOAT/IO
- ------------------------------------------------------------------------------------------------------------
X....................... (7) NOTIONAL (8) IO
- ------------------------------------------------------------------------------------------------------------
P....................... $974,317 SEN (9) PO
- ------------------------------------------------------------------------------------------------------------
B-1..................... $2,625,076 SUB 7.50% FIXED
- ------------------------------------------------------------------------------------------------------------
B-2..................... $1,500,044 SUB 7.50% FIXED
- ------------------------------------------------------------------------------------------------------------
B-3..................... $1,125,033 SUB 7.50% FIXED
- ------------------------------------------------------------------------------------------------------------
R-I..................... $100 SEN 7.50% FIXED
- ------------------------------------------------------------------------------------------------------------
R-II.................... $100 SEN 7.50% FIXED
============================================================================================================
<CAPTION>
======================== ========================
LAST SCHEDULED
CLASS DISTRIBUTION DATE(3)
- ------------------------ ------------------------
<S> <C>
A-1..................... May 20, 2023
- --------------------------------------------------
A-2..................... May 20, 2023
- --------------------------------------------------
A-3..................... May 20, 2023
- --------------------------------------------------
A-4..................... July 20, 2024
- --------------------------------------------------
A-5..................... December 20, 2025
- --------------------------------------------------
A-6..................... December 20, 2025
- --------------------------------------------------
A-7..................... February 20, 2027
- --------------------------------------------------
A-8..................... February 20, 2027
- --------------------------------------------------
F....................... May 20, 2023
- --------------------------------------------------
S....................... May 20, 2023
- --------------------------------------------------
X....................... February 20, 2027
- --------------------------------------------------
P....................... February 20, 2027
- --------------------------------------------------
B-1..................... February 20, 2027
- --------------------------------------------------
B-2..................... February 20, 2027
- --------------------------------------------------
B-3..................... February 20, 2027
- --------------------------------------------------
R-I..................... February 20, 2027
- --------------------------------------------------
R-II.................... February 20, 2027
==================================================
</TABLE>
(footnotes on next page)
The Offered Certificates offered hereby will be purchased by NationsBanc
Capital Markets, Inc. ("NCMI") and Salomon Brothers Inc (in such capacity, the
"Underwriters") from the Sponsor and will be offered by the Underwriters from
time to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Sponsor from the sale of the
Offered Certificates are expected to be approximately 101.00% of the aggregate
principal balance of the Mortgage Loans plus accrued interest, before deducting
issuance expenses payable by the Sponsor.
This Prospectus Supplement and the Prospectus may be used by NCMI, an
affiliate of the Sponsor and the Master Servicer, in connection with offers and
sales related to market-making transactions in the Offered Certificates. NCMI
may act as principal or agent in such transactions. Such sales will be made at
prices related to prevailing market prices at the time of sale.
The Offered Certificates are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to its right to reject orders in whole or in part. It is expected that delivery
of the Class R-I and Class R-II Certificates will be made in definitive form at
the offices of NCMI in Charlotte, North Carolina and that delivery of the
remaining Offered Certificates will be made in book-entry form only through the
facilities of The Depository Trust Company, in each case on or about March 27,
1997.
NATIONSBANC CAPITAL MARKETS, INC. SALOMON BROTHERS INC
March 20, 1997
<PAGE> 2
(continued from prior page)
(1) The aggregate initial Class Certificate Balance of the Offered Certificates
is subject to a permitted variance in the aggregate of plus or minus 5%.
(2) See "Description of Certificates -- Categories of Classes of Certificates"
in the Prospectus.
(3) See "Description of the Certificates -- Last Scheduled Distribution Date"
herein.
(4) The Class F Certificates will bear interest at 5.8750% per annum during the
first Interest Accrual Period. During each Interest Accrual Period
thereafter, the Class F Certificates will bear interest, subject to a
maximum rate of 9.00% per annum and a minimum rate of 0.50% per annum, at a
rate per annum equal to 0.50% in excess of the London Interbank Offered
Rate for one-month U.S. dollar deposits ("LIBOR"), as more fully described
under "Description of the Certificates -- LIBOR" herein.
(5) The Class S Certificates have no Class Certificate Balance and will have a
notional principal amount (the "Class S Notional Amount") equal to the
Class Certificate Balance of the Class F Certificates. The Class S
Certificates will not be entitled to distributions of principal.
(6) The Class S Certificates will bear interest at 3.1250% per annum during the
first Interest Accrual Period. During each Interest Accrual Period
thereafter, the Class S Certificates will bear interest on the Class S
Notional Amount, subject to a maximum rate of 8.50% per annum and a minimum
rate of 0.00% per annum, at a rate per annum equal to 8.50% minus LIBOR.
(7) The Class X Certificates will have no Class Certificate Balance and will
have a notional principal amount (the "Class X Notional Amount") equal to
the aggregate Stated Principal Balance of the Mortgage Loans. The Class X
Certificates will not be entitled to distributions of principal.
(8) The Class X Certificates will bear interest on the Class X Notional Amount
at approximately 0.2891% per annum during the first Interest Accrual
Period. During each Interest Accrual Period thereafter, the Class X
Certificates will accrue interest on the Class X Notional Amount at a per
annum rate equal to the weighted average of the excess, if any, of (i) the
Net Mortgage Rates then in effect for each Mortgage Loan over (ii) 7.50%.
The "Net Mortgage Rate" for each Mortgage Loan will equal the Mortgage Rate
thereon on the first day of the month preceding the month of the related
Distribution Date less the related Expense Rate.
(9) The Class P Certificates will not be entitled to receive distributions of
interest.
---------------------
On the 20th day of each month or, if such 20th day is not a business day,
on the first business day thereafter (each, a "Distribution Date"), commencing
in April 1997, from and to the extent of funds available therefor in the
Certificate Account referred to herein, a distribution will be made on the
Offered Certificates in the amounts and in the priorities set forth herein.
All of the Mortgage Loans were purchased or originated by NationsBanc
Mortgage Corporation, and will be sold by NationsBanc Mortgage Corporation (in
its capacity as seller, the "Seller") to an affiliate of the Sponsor and
transferred to the Sponsor for deposit to the Trust Fund prior to the date of
initial issuance of the Certificates.
The rights of holders of the Class B-1, Class B-2, Class B-3, Class B-4,
Class B-5 and Class B-6 Certificates (collectively, the "Subordinate
Certificates") to receive distributions with respect to the Mortgage Loans will
be subordinated to the rights of the holders of the Class A-1, Class A-2, Class
A-3, Class A-4, Class A-5, Class A-6, Class A-7, Class A-8, Class F, Class P,
Class R-I, Class R-II, Class S and Class X Certificates (collectively, the
"Senior Certificates") and to each Class of Subordinate Certificates with a
lower numerical designation to the extent described herein. See "Credit
Support -- Subordination of Subordinate Certificates."
THE YIELD TO MATURITY ON EACH CLASS OF OFFERED CERTIFICATES WILL BE
SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS,
DEFAULTS AND LIQUIDATIONS) ON THE MORTGAGE LOANS, AND MAY FLUCTUATE
SIGNIFICANTLY FROM TIME TO TIME. IN GENERAL, IF AN OFFERED CERTIFICATE IS
PURCHASED AT A PREMIUM AND PRINCIPAL DISTRIBUTIONS THEREON OCCUR AT A RATE
FASTER THAN ANTICIPATED AT THE TIME OF PURCHASE, THE INVESTOR'S ACTUAL YIELD TO
MATURITY WILL BE LOWER THAN THAT ASSUMED AT THE TIME OF PURCHASE. CONVERSELY, IF
AN OFFERED
S-2
<PAGE> 3
CERTIFICATE IS PURCHASED AT A DISCOUNT AND PRINCIPAL DISTRIBUTIONS THEREON OCCUR
AT A RATE SLOWER THAN THAT ASSUMED AT THE TIME OF PURCHASE, THE INVESTOR'S
ACTUAL YIELD TO MATURITY WILL BE LOWER THAN THAT ASSUMED AT THE TIME OF
PURCHASE.
BECAUSE THE CLASS P CERTIFICATES REPRESENT THE RIGHT TO RECEIVE ONLY A
PORTION OF THE PRINCIPAL RECEIVED WITH RESPECT TO THE MORTGAGE LOANS WITH NET
MORTGAGE RATES LESS THAN 7.50% (THE "DISCOUNT MORTGAGE LOANS"), THE YIELD TO
MATURITY ON THE CLASS P CERTIFICATES WILL BE EXTREMELY SENSITIVE TO THE RATE AND
TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) ON THE DISCOUNT MORTGAGE
LOANS. SIMILARLY, BECAUSE THE CLASS X CERTIFICATES REPRESENT THE RIGHT TO
RECEIVE ONLY A PORTION OF THE INTEREST RECEIVED WITH RESPECT TO THE MORTGAGE
LOANS WITH NET MORTGAGE RATES IN EXCESS OF 7.50% (THE "PREMIUM MORTGAGE LOANS"),
THE YIELD TO MATURITY ON THE CLASS X CERTIFICATES WILL BE EXTREMELY SENSITIVE TO
THE RATE AND TIMING OF PRINCIPAL PAYMENTS ON THE PREMIUM MORTGAGE LOANS.
INVESTORS IN THE CLASS X CERTIFICATES SHOULD CONSIDER CAREFULLY THE ASSOCIATED
RISKS, INCLUDING THE RISK THAT A RAPID RATE OF PRINCIPAL PAYMENTS ON THE PREMIUM
MORTGAGE LOANS COULD RESULT IN THE FAILURE OF INVESTORS IN THE CLASS X
CERTIFICATES TO FULLY RECOVER THEIR INITIAL INVESTMENT.
THE YIELD TO MATURITY ON THE CLASS F CERTIFICATES WILL BE SENSITIVE TO
CHANGES IN THE RATE OF LIBOR. THE YIELD TO MATURITY ON THE CLASS S CERTIFICATES
WILL BE EXTREMELY SENSITIVE TO CHANGES IN THE RATE OF LIBOR AND TO THE RATE AND
TIMING OF PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS. INVESTORS IN THE CLASS S
CERTIFICATES SHOULD CONSIDER CAREFULLY THE RISK THAT A RAPID RATE OF PREPAYMENT
OF THE MORTGAGE LOANS OR A HIGH LEVEL OF LIBOR COULD RESULT IN THE FAILURE OF
INVESTORS IN THE CLASS S CERTIFICATES TO FULLY RECOVER THEIR INITIAL INVESTMENT.
Although the Class A-8 Certificates are Senior Certificates, the Class A-8
Certificates will not be entitled to receive the disproportionate share of
principal prepayments that the other Senior Certificates are entitled to
receive. See "Description of the Certificates -- Principal" herein.
See "Prepayment and Yield Considerations" herein and "Maturity, Prepayment
Considerations and Weighted Average Life of Certificates" in the Prospectus.
An election will be made to treat the Trust Fund as two "real estate
mortgage investment conduits" (the "Master REMIC" and the "Subsidiary REMIC" and
each, a "REMIC") for federal income tax purposes. As described more fully herein
and in the Prospectus, the Senior Certificates (other than the Class R-I and
Class R-II Certificates) and the Subordinate Certificates will constitute
"regular interests" in the Master REMIC and the Class R-I Certificates and the
Class R-II Certificates will constitute the sole class of "residual interest" in
the Subsidiary REMIC and the Master REMIC, respectively. Prospective investors
are cautioned that a Residual Certificateholder's REMIC taxable income and the
tax liability thereon will exceed cash distributions in certain periods, in
which event such holder must have sufficient alternative sources of funds to pay
such tax liability. See "Certain Federal Income Tax Consequences" herein and in
the Prospectus.
There is currently no secondary market for the Offered Certificates and
there can be no assurance that such a market will develop or, if it does
develop, that it will continue.
---------------------
This Prospectus Supplement does not contain complete information about the
offering of the Offered Certificates. Additional information is contained in the
Prospectus dated March 20, 1997 (the "Prospectus") and purchasers are urged to
read both this Prospectus Supplement and the Prospectus in full. Sales of the
Offered Certificates may not be consummated unless the purchaser has received
both this Prospectus Supplement and the Prospectus.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
S-3
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CAPTION PAGE
- ------- ----
<S> <C>
Summary of Terms............................................ S-5
Risk Factors................................................ S-13
Prepayment and Yield Considerations....................... S-13
Subordination............................................. S-14
Limited Obligations....................................... S-14
Limited Liquidity......................................... S-15
Geographic Concentration.................................. S-15
Book-Entry System......................................... S-15
Tax Consequences of Residual Certificates................. S-15
The Mortgage Pool........................................... S-15
General................................................... S-15
Mortgage Loan Data........................................ S-17
Underwriting Standards.................................... S-21
NationsBanc Mortgage Corporation............................ S-21
Servicing of Mortgage Loans................................. S-22
General................................................... S-22
Foreclosure and Delinquency Experience.................... S-22
The Pooling and Servicing Agreement......................... S-23
General................................................... S-23
Assignment of Mortgage Loans.............................. S-23
Payments on Mortgage Loans; Accounts...................... S-24
Servicing Compensation and Payment of Expenses............ S-24
Compensating Interest..................................... S-25
Advances.................................................. S-25
Termination: Optional Termination......................... S-25
The Trustee............................................... S-26
Voting Rights............................................. S-26
Separate REMIC Structure.................................. S-26
Description of the Certificates............................. S-26
General................................................... S-26
Denominations and Form.................................... S-27
Book-Entry Certificates................................... S-27
Distributions............................................. S-29
Available Funds........................................... S-29
Priority of Distributions................................. S-29
Interest.................................................. S-29
LIBOR..................................................... S-31
Principal................................................. S-32
Allocation of Losses...................................... S-37
Last Scheduled Distribution Date.......................... S-39
Prepayment and Yield Considerations......................... S-39
General................................................... S-39
Prepayment Considerations and Risks....................... S-39
Assumptions Relating to Tables............................ S-41
Weighted Average Lives of the Offered Certificates........ S-41
Yield on the Class S Certificates......................... S-51
Yield on the Class X Certificates......................... S-52
Yield on the Class P Certificates......................... S-52
Yield on the Residual Certificates........................ S-53
Yield on the Subordinate Certificates..................... S-53
Credit Support.............................................. S-54
Subordination of Subordinate Certificates................. S-54
Use of Proceeds............................................. S-55
Certain Federal Income Tax Consequences..................... S-55
Regular Certificates...................................... S-56
Residual Certificates..................................... S-56
Backup Withholding........................................ S-57
Federal Income Tax Consequences to Foreign Investors...... S-57
State Taxes................................................. S-58
ERISA Considerations........................................ S-58
Method of Distribution...................................... S-59
Legal Matters............................................... S-60
Certificate Ratings......................................... S-60
Index to Defined Terms...................................... S-61
</TABLE>
S-4
<PAGE> 5
SUMMARY OF TERMS
This Summary of Terms is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary of
Terms are defined elsewhere in this Prospectus Supplement or in the Prospectus.
See "Index to Defined Terms" herein and in the Prospectus.
Title of Securities........ Mortgage Pass-Through Certificates, Series 1997-1
(the "Certificates").
Designations:
Offered Certificates..... Class A-1, Class A-2, Class A-3, Class A-4, Class
A-5, Class A-6, Class A-7, Class A-8, Class F,
Class P, Class S, Class X, Class B-1, Class B-2,
Class B-3, Class R-I and Class R-II Certificates.
Only the Offered Certificates are offered hereby.
The aggregate initial Class Certificate Balances
of the Certificates will be subject to a
permitted variance in the aggregate of the plus
or minus 5%. Variances in the Class Certificate
Balances of the Certificates may result in
variances in the Class Notional Amounts.
The "Class X Notional Amount" for any Distribution
Date will be equal to the aggregate Stated
Principal Balances of the Mortgage Loans for such
Distribution Date. The initial Class X Notional
Amount will be equal to approximately
$150,004,303. The "Class S Notional Amount" for
any Distribution Date will be equal to the Class
Certificate Balance of the Class F Certificates
with respect to such Distribution Date. The
initial Class S Notional Amount will be equal to
approximately $12,413,285. The Class X Notional
Amount and the Class S Notional Amount are
referred to herein collectively as the "Class
Notional Amounts."
Non-Offered
Certificates........ In addition to the Offered Certificates, the
following Classes of Subordinate Certificates
(the "Non-Offered Certificates") will be issued
in the indicated approximate initial Class
Certificate Balances and will bear interest at
the indicated Pass-Through Rates, but are not
offered hereby:
<TABLE>
<CAPTION>
APPROXIMATE
INITIAL CLASS PASS-THROUGH
CLASS CERTIFICATE BALANCE RATE
----- ------------------- ------------
<S> <C> <C>
B-4............................ $450,013 7.50%
B-5............................ $525,016 7.50%
B-6............................ $525,016 7.50%
</TABLE>
Class A Certificates..... Class A-1, Class A-2, Class A-3, Class A-4, Class
A-5, Class A-6, Class A-7 and Class A-8
Certificates.
Class B Certificates..... Class B-1, Class B-2, Class B-3, Class B-4, Class
B-5 and Class B-6 Certificates.
Class R Certificates..... Class R-I and Class R-II Certificates.
Senior Certificates...... Class A, Class F, Class P, Class R, Class S and
Class X Certificates.
Subordinate
Certificates........ Class B Certificates.
Floating Rate
Certificates........ Class F Certificates.
S-5
<PAGE> 6
Inverse Floating Rate
Certificates........ Class S Certificates.
Regular Certificates..... All Classes of Certificates other than the Residual
Certificates.
Residual Certificates.... Class R-I and Class R-II Certificates.
Principal Only (PO)
Certificates........ Class P Certificates.
Interest Only (IO)
Certificates........ Class S and Class X Certificates.
Fixed Rate
Certificates........ All Classes of Certificates other than the Variable
Rate Certificates.
Variable Rate
Certificates........ Class F, Class S and Class X Certificates.
Book-Entry
Certificates........ All Classes of Certificates other than the Physical
Certificates.
Physical Certificates.... Residual Certificates, Class B-4, Class B-5 and
Class B-6 Certificates.
Sponsor.................... Tryon Mortgage Funding, Inc., a Delaware
corporation (the "Sponsor").
Seller and Master
Servicer............... NationsBanc Mortgage Corporation (in its capacity
as seller, the "Seller" and, in its capacity as
master servicer, the "Master Servicer"). See
"NationsBanc Mortgage Corporation" herein. All
references to the "Servicer" in the Prospectus
should be read to be references to the Master
Servicer described in this Prospectus Supplement.
Trustee.................... PNC Bank, National Association, a national banking
association organized under the laws of the
United States of America (the "Trustee").
Cut-off Date............... March 1, 1997 (the "Cut-off Date").
Closing Date............... On or about March 27, 1997 (the "Closing Date").
Distribution Date.......... The 20th day of each month or, if such day is not a
business day, the first business day thereafter,
commencing in April 1997 (each, a "Distribution
Date").
Record Date................ The "Record Date" for each Distribution Date will
be the last day of the preceding month.
Mortgage Pool.............. The Mortgage Pool will consist of fully-amortizing,
240- to 360-months, conventional, fixed-rate
mortgage loans (the "Mortgage Loans") secured by
first liens on one- to four-family residential
properties (the "Mortgaged Properties") having,
as of the Cut-off Date, an aggregate Stated
Principal Balance of approximately $150,004,303
(the "Cut-off Date Pool Principal Balance"). See
"The Mortgage Pool" herein.
Pooling and Servicing
Agreement.............. The Certificates will be issued pursuant to a
Pooling and Servicing Agreement to be dated as of
March 1, 1997 (the "Pooling Agreement"), among
the Sponsor, the Master Servicer and the Trustee.
Priority of
Distributions.......... Distributions will be made on each Distribution
Date from Available Funds in the following order
of priority: (i) to the Trustee an amount in
payment for its services for such Distribution
Date; (ii) to interest on each Class of Senior
Certificates (other than the Class P
Certificates); (iii) to principal on the Classes
of Senior Certificates then entitled to receive
distributions of principal, in the order and
subject to
S-6
<PAGE> 7
the priorities set forth herein under
"Description of the Certificates -- Principal,"
in each case in an aggregate amount up to the
maximum amount of principal to be distributed on
such Classes on such Distribution Date; (iv) to
any Class P Deferred Amounts with respect to the
Class P Certificates, but only from amounts that
would otherwise be distributable on such
Distribution Date as principal of the Subordinate
Certificates; (v) to each Class of Subordinate
Certificates, first to pay interest thereon and
then to pay principal thereof, in an amount equal
to its portion of principal payable to the
Subordinate Certificates, in the order of their
numerical Class designations, beginning with the
Class B-1 Certificates, and (vi) any remaining
amounts to the Class R-I Certificates, in each
case subject to the limitations set forth herein
under "Description of the
Certificates -- Principal."
Under certain circumstances described herein,
distributions from Available Funds for a
Distribution Date that would otherwise be made on
the Subordinate Certificates may be distributed
instead on the Senior Certificates. See
"Description of the Certificates -- Allocation of
Losses" herein.
Interest................... On each Distribution Date, each Class of Offered
Certificates (other than the Class P
Certificates), to the extent Available Funds are
available for the distribution of interest on
such Class, as described above under "Summary of
Terms -- Priority of Distributions" (as to each
Class, the "Interest Distribution Amount"), will
receive an amount equal to the sum of (i) one
month's interest at the applicable Pass-Through
Rate set forth on the cover page hereof (as to
each Class, the "Pass-Through Rate") on the
related Class Certificate Balance or Class
Notional Amount, as applicable, immediately prior
to such Distribution Date and (ii) the sum of the
amounts, if any, by which the amount described in
clause (i) above on each prior Distribution Date
exceeded the amount actually distributed as
interest on such prior Distribution Dates and not
subsequently distributed (such shortfall, with
respect to each Class, the "Unpaid Interest
Shortfall"). The interest entitlement for each
Class of Offered Certificates described above
shall be reduced by the allocable share of Net
Interest Shortfalls for each such Class, as
described herein under "Description of the
Certificates -- Interest." The Class P
Certificates are PO Certificates, as described in
the Prospectus under "Description of
Certificates -- Categories of Classes of
Certificates," and, as such, are not entitled to
receive distributions in respect of interest on
the Mortgage Loans. See "Description of the
Certificates -- Distributions" and "-- Interest"
herein.
With respect to each Distribution Date, the
"Interest Accrual Period" for each Class of
Certificates (other than the Class P, Class F and
Class S Certificates) will be the calendar month
preceding the month in which such Distribution
Date occurs. The Interest Accrual Period for the
Class F and Class S Certificates for each
Distribution Date will commence on the 20th day
of the calendar month preceding the calendar
month in which such Distribution Date occurs and
will end on the 19th day of the calendar month in
which such Distribution Date occurs. Interest
will be calculated on the basis of a 360-day year
comprised of twelve 30-day months.
S-7
<PAGE> 8
Principal (including
prepayments)............. On each Distribution Date, to the extent Available
Funds are available for the distribution of
principal on such Class, principal distributions
in reduction of the Class Certificate Balances of
each Class of Certificates (other than the Class
S and Class X Certificates) will be made in the
order and subject to the priorities set forth
herein under "Description of the
Certificates -- Priority of Distributions" in an
aggregate amount equal to such Class' allocable
portion of the Senior Principal Distribution
Amount, the Class A-8 Principal Distribution
Amount, the Class P Principal Distribution Amount
or the Subordinate Principal Distribution Amount,
as applicable. The Class S and Class X
Certificates do not have principal balances and
are not entitled to receive distributions in
respect of principal of the Mortgage Loans. See
"Description of the Certificates -- Principal"
herein.
Shifting of Interests...... The Senior Certificates (other than the Class A-8,
Class P, Class S and Class X Certificates) will
receive 100% of the Non-PO Percentage of
principal prepayments received with respect to
the Mortgage Loans until the fifth anniversary of
the first Distribution Date. During the next four
years, such Senior Certificates will receive a
large, but decreasing, share of such principal
prepayments. This disproportionate allocation of
prepayments will result in an acceleration of the
amortization of such Senior Certificates and will
enhance the likelihood that holders of such
Classes of Certificates will receive the entire
amount of principal to which they are entitled.
See "Description of the
Certificates -- Principal" herein.
Credit Support:
General.............. Credit support for the Senior Certificates will be
provided by the Subordinate Certificates as
described below. Credit support for each Class of
Subordinate Certificates (other than the Class
B-6 Certificates) will be provided by the Class
or Classes of Subordinate Certificates with
higher numerical Class designations, as described
below. The aggregate of the initial Class
Certificate Balances of the Class B-4, Class B-5
and Class B-6 Certificates, which are the only
Certificates supporting the Class B-3
Certificates, is expected to be approximately
$1,500,045.
Subordination......... The rights of holders of the Subordinate
Certificates to receive distributions with
respect to the Mortgage Loans will be
subordinated to such rights of holders of the
Senior Certificates, and the rights of holders of
the Subordinate Certificates (other than the
Class B-1 Certificates) to receive such
distributions will be further subordinated to
such rights of holders of the Class or Classes of
Subordinate Certificates with lower numerical
Class designations only to the extent described
herein. See "Description of the
Certificates -- Priority of Distributions" and
"-- Allocation of Losses," and "Credit
Support -- Subordination of Subordinate
Certificates" herein.
The subordination of the Subordinate Certificates
to the Senior Certificates, and the further
subordination within the Subordinate Certificates
are each intended to increase the likelihood of
receipt by the holders of Certificates with
higher relative payment priority of the maximum
amount to which they are entitled on any
Distribution Date,
S-8
<PAGE> 9
to provide such holders protection against losses
on the Mortgage Loans to the extent described
herein and, to a lesser extent, against Special
Hazard Losses, Fraud Losses and Bankruptcy
Losses. See "Credit Support -- Subordination of
Subordinate Certificates" and "Description of the
Certificates -- Allocation of Losses" herein.
Prepayment and
Yield Considerations..... The yield to maturity on each Class of Offered
Certificates will be sensitive to the rate and
timing of principal payments (including
prepayments, defaults and liquidations) on the
Mortgage Loans, and may fluctuate significantly
from time to time. In general, if an Offered
Certificate is purchased at a premium and
principal distributions thereon occur at a rate
faster than anticipated at the time of purchase,
the investor's actual yield to maturity will be
lower than that assumed at the time of purchase.
Conversely, if an Offered Certificate is
purchased at a discount and principal
distributions thereon occur at a rate slower than
that assumed at the time of purchase, the
investor's actual yield to maturity will be lower
than that assumed at the time of purchase.
Because the Class P Certificates represent the
right to receive only a portion of the principal
received with respect to the Mortgage Loans with
Net Mortgage Rates less than 7.50% (the "Discount
Mortgage Loans"), the yield to maturity on the
Class P Certificates will be extremely sensitive
to the rate and timing of principal payments
(including prepayments) on the Discount Mortgage
Loans. Similarly, because the Class X
Certificates represent the right to receive only
a portion of the interest received with respect
to the Mortgage Loans with Net Mortgage Rates in
excess of 7.50% (the "Premium Mortgage Loans"),
the yield to maturity on the Class X Certificates
will be extremely sensitive to the rate and
timing of principal payments on the Premium
Mortgage Loans. Investors in the Class X
Certificates should consider carefully the
associated risks, including the risk that a rapid
rate of principal payments on the Premium
Mortgage Loans could result in the failure of
investors in the Class X Certificates to fully
recover their initial investment.
The yield to maturity on the Class F Certificates
will be sensitive to changes in the rate of
LIBOR. The yield to maturity on the Class S
Certificates will be extremely sensitive to
changes in the rate of LIBOR and to the timing of
principal payments on the Mortgage Loans.
Investors in the Class S Certificates should
consider carefully the risk that a rapid rate of
prepayment of the Mortgage Loans or a high level
of LIBOR could result in the failure of investors
in the Class S Certificates to fully recover
their initial investment.
The yield to maturity of the Class B-1, Class B-2
and Class B-3 Certificates will be increasingly
sensitive to Realized Losses on the Mortgage
Loans (and the timing thereof) due to the fact
that, once the aggregate Class Certificate
Balance of the Class B-4, Class B-5 and Class B-6
Certificates has been reduced to zero, all
Realized Losses will be allocated to the Class
B-3, Class B-2 and Class B-1 Certificates, in
that order, until the Class Certificate Balance
thereof has been reduced to zero.
S-9
<PAGE> 10
See "Prepayment and Yield Considerations" herein
and "Maturity, Prepayment Considerations and
Weighted Average Life of Certificates" in the
Prospectus.
Because the Mortgage Loans may be prepaid at any
time, it is not possible to predict the rate at
which distributions of principal of the Offered
Certificates will be received. Since prevailing
interest rates are subject to fluctuation, there
can be no assurance that investors in the Offered
Certificates will be able to reinvest the
distributions thereon at yields equaling or
exceeding the yields on such Offered
Certificates. It is possible that yields on any
such reinvestments will be lower, and may be
significantly lower, than the yields on the
Offered Certificates. See "Prepayment and Yield
Considerations" herein.
<TABLE>
<CAPTION>
Weighted Average Lives PSA
(in years)*. -------------------------------------
CLASS 0% 100% 225% 350% 500%
---------------------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
A-1......................... 17.3 6.7 3.5 2.5 2.0
A-2......................... 17.3 6.7 3.5 2.5 2.0
A-3......................... 17.3 6.7 3.5 2.5 2.0
A-4......................... 19.9 9.5 4.7 3.2 2.5
A-5......................... 27.5 19.5 9.8 5.8 4.2
A-6......................... 28.0 21.2 11.0 6.3 4.4
A-7......................... 29.3 26.7 18.4 10.2 5.4
A-8......................... 20.3 15.1 11.8 10.0 8.1
F........................... 17.3 6.7 3.5 2.5 2.0
P........................... 19.9 11.5 7.1 5.0 3.7
B-1......................... 20.3 15.1 11.8 10.0 8.1
B-2......................... 20.3 15.1 11.8 10.0 8.1
B-3......................... 20.3 15.1 11.8 10.0 8.1
R-I......................... 0.1 0.1 0.1 0.1 0.1
R-II........................ 0.1 0.1 0.1 0.1 0.1
---------------
* Determined as described under "Prepayment and Yield Consid-
erations -- Weighted Average Lives of the Offered Certificates"
herein. Prepayments will not occur at any assumed rate shown or any
other constant rate, and the actual weighted average lives of any
or all of the Classes of Offered Certificates are likely to differ
from those shown, perhaps significantly.
</TABLE>
Servicing Fees and Other
Expenses................. As compensation for its services, the Master
Servicer will be entitled to retain, from amounts
received in respect of interest on the Mortgage
Loans, an amount equal to the Master Servicing
Fee which is described herein under "The Pooling
and Servicing Agreement -- Servicing Compensation
and Payment of Expenses."
In addition to the Master Servicing Fee, there will
be payable from amounts received in respect of
the Mortgage Loans which are allocable to
interest an amount sufficient to provide for the
payment of the Trustee's fee. As to each Mortgage
Loan, the sum of the Master Servicing Fee Rate
and the rate at which the Trustee's fee is
determined is referred to as the "Expense Rate."
See "The Pooling and Servicing
Agreement -- Servicing Compensation and Payment
of Expenses" herein.
Advances................... The Master Servicer will be obligated to advance,
prior to each Distribution Date, an amount equal
to all delinquent payments of principal and
S-10
<PAGE> 11
interest (net of the Master Servicing Fee) on
each Mortgage Loan (each such amount, an
"Advance") to the extent that such Advances are
determined by the Master Servicer to be
recoverable.
Any Advance made by the Master Servicer with
respect to a Mortgage Loan is reimbursable to it
as described herein under "The Pooling and
Servicing Agreement -- Advances." Under the
limited circumstances described herein, the
Master Servicer will be entitled to reimburse
itself from funds on deposit in the Certificate
Account before distributions are made to holders
of Certificates.
Compensating Interest...... When a Mortgage Loan is subject to a partial
prepayment or is prepaid in full between Due
Dates, the Mortgagor is required to pay interest
on the amount prepaid only to the date of
prepayment and not thereafter. Prepayments will
be distributed to Certificateholders on the
Distribution Date in the month following the
month of receipt. Pursuant to the Pooling
Agreement, the Master Servicing Fee for any month
will be reduced by an amount sufficient to pass
through to the Trust Fund on such Distribution
Date 30 days' interest at the Mortgage Rate (less
the Master Servicing Fee Rate) on the amount of
each such prepayment (any such reduction,
"Compensating Interest"). Any such shortfalls in
interest as a result of prepayments in excess of
the amount of the Master Servicing Fee for a
month will reduce the amount of interest payable
to the Certificateholders from what would have
been the case in the absence of such prepayments.
See "The Pooling and Servicing
Agreement -- Compensating Interest" and
"Description of the Certificates -- Interest"
herein.
Optional Termination....... At its option, the Sponsor may purchase from the
Trust Fund all remaining Mortgage Loans in the
Trust Fund and thereby effect early retirement of
the Certificates, on any Distribution Date on
which the Pool Principal Balance is less than 5%
of the Cut-off Date Pool Principal Balance. See
"The Pooling and Servicing Agreement --
Termination; Optional Termination" herein.
IF THE SPONSOR EXERCISES ITS RIGHT TO REPURCHASE
ALL OF THE MORTGAGE LOANS, THE CERTIFICATES
OUTSTANDING AT THE TIME OF SUCH REPURCHASE WILL
BE RETIRED EARLIER THAN WOULD OTHERWISE BE THE
CASE. See "Prepayment and Yield Considerations"
herein.
Certain Federal Income Tax
Consequences............. For federal income tax purposes, an election will
be made to treat the Trust Fund as two separate
"real estate mortgage investment conduits" (the
"Master REMIC" and the "Subsidiary REMIC," and
each, a "REMIC"). The Regular Certificates will
constitute the "regular interests" in the Master
REMIC. The Class R-I and Class R-II Certificates
will constitute the sole class of "residual
interest" in the Subsidiary REMIC and the Master
REMIC, respectively.
The Class S, Class X and Class P Certificates will,
and certain other Classes may, be issued with
original issue discount for federal income tax
purposes. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
Legal Investment........... The Senior Certificates and the Class B-1
Certificates will constitute "mortgage related
securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984, as
amended ("SMMEA"), and as such, will be legal
investments for certain entities to the extent
provided in SMMEA. See "Legal Investment
Consideration" in the Prospectus.
S-11
<PAGE> 12
It is anticipated that the Class B-2 and Class B-3
Certificates will not be rated in one of the two
highest rating categories by a nationally
recognized statistical rating organization and,
therefore, will not constitute "mortgage related
securities" for purposes of SMMEA.
Certain Classes of Certificates may be deemed
"high-risk mortgage securities" as defined in the
supervisory policy statement on securities
activities approved by the Federal Financial
Institutions Examination Council on December 3,
1991 and adopted by the Comptroller of the
Currency, the Federal Deposit Insurance
Corporation, the Federal Reserve Board and the
Office of Thrift Supervision. See "Legal
Investment Consideration" in the Prospectus.
ERISA Considerations....... A fiduciary of any employee benefit plan (a "Plan")
subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or
the Internal Revenue Code of 1986, as amended
(the "Code"), should carefully review with its
legal advisors whether the purchase or holding of
an Offered Certificate could give rise to a
transaction prohibited or not otherwise
permissible under ERISA or the Code.
Subject to the considerations and conditions
described under "ERISA Considerations" herein, it
is expected that the Senior Certificates (other
than the Residual Certificates) may be purchased
by a Plan. The Residual Certificates and the
Subordinate Certificates may not be transferred
except upon satisfaction of certain conditions.
See "ERISA Considerations" herein and in the
Prospectus.
Certificate Ratings........ It is a condition to the issuance of the Offered
Certificates that each Class of Offered
Certificates receives at least the rating set
forth below from Moody's Investors Service, Inc.
("Moody's") and Fitch Investors Service, L.P.
("Fitch" and, together with Moody's, the "Rating
Agencies"):
<TABLE>
<CAPTION>
CLASS MOODY'S FITCH
----- ------- -----
<S> <C> <C> <C>
A-1....................................... Aaa AAA
A-2....................................... Aaa AAA
A-3....................................... Aaa AAA
A-4....................................... Aaa AAA
A-5....................................... Aaa AAA
A-6....................................... Aaa AAA
A-7....................................... Aaa AAA
A-8....................................... Aaa AAA
F......................................... Aaa AAA
S......................................... Aaa AAA
X......................................... Aaa AAA
P......................................... Aaa AAA
R-I....................................... Aaa AAA
R-II...................................... Aaa AAA
B-1....................................... Aa2 AA
B-2....................................... A2 A
B-3....................................... Baa2 BBB
</TABLE>
The ratings of the Offered Certificates of any
Class should be evaluated independently from
similar ratings on other types of securities. A
rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or
withdrawal at any time by the Rating Agencies.
See "Certificate Ratings" herein.
S-12
<PAGE> 13
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Offered Certificates:
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on the Certificates, the amount of principal
and interest payments on the Certificates and the yield to maturity of the
Certificates will be directly related to the rate and timing of payments of
principal on the Mortgage Loans. The rate of principal payments on the Mortgage
Loans will in turn be affected by the amortization schedules of the Mortgage
Loans, the rate of principal prepayments (including partial prepayments and
those resulting from refinancing) thereon by mortgagors (each, a "Mortgagor"),
liquidations of defaulted Mortgage Loans, repurchases by the Seller of Mortgage
Loans as a result of defective documentation or breaches of representations or
warranties and purchase by the Sponsor of all of the Mortgage Loans in
connection with the optional termination of the Trust Fund. The Mortgagors may
prepay any Mortgage Loan at any time without penalty.
The rate of payments (including prepayments) on mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing interest rates for similar mortgage loans fall below the Mortgage
Rates on the Mortgage Loans, the rate of prepayment would generally be expected
to increase. Conversely, if prevailing interest rates for similar mortgage loans
rise above the Mortgage Rates on the Mortgage Loans, the rate of prepayment
would generally be expected to decrease. An investor that purchases an Offered
Certificate at a discount should consider the risk that a slower than
anticipated rate of principal payments on the Mortgage Loans will result in an
actual yield that is lower than such investor's expected yield. An investor that
purchases an Offered Certificate at a premium should consider the risk that a
faster than anticipated rate of principal payments on the Mortgage Loans will
result in an actual yield that is lower than such investor's expected yield.
The timing of changes in the rate of prepayments may significantly affect
an investor's actual yield to maturity, even if the average rate of principal
prepayments is consistent with an investor's expectations. In general, the
earlier a prepayment of principal of the Mortgage Loans, the greater the effect
on an investor's yield to maturity. The effect on an investor's yield as a
result of principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Offered Certificates will not be offset by a subsequent like reduction
(or increase) in the rate of principal prepayments. Investors must make their
own decisions as to the appropriate prepayment assumptions to be used in
deciding whether to purchase the Offered Certificates.
Because the Class P Certificates represent the right to receive only a
portion of the principal received with respect to the Discount Mortgage Loans,
the yield to maturity on the Class P Certificates will be extremely sensitive to
the rate and timing of principal payments on the Discount Mortgage Loans.
Similarly, because the Class X Certificates represent the right to receive only
a portion of the interest received with respect to the Premium Mortgage Loans,
the yield to maturity on the Class X Certificates will be extremely sensitive to
the rate and timing of principal payments on the Premium Mortgage Loans.
Investors should consider carefully the associated risks, including the risk
that a rapid rate of principal payments on the Premium Mortgage Loans could
result in the failure of investors in the Class X Certificates to fully recover
their initial investment. See "Prepayment and Yield Considerations -- Yield on
the Class P Certificates" and "-- Yield on the Class X Certificates" herein.
The yield to maturity on the Class F Certificates will be sensitive to
changes in the rate of LIBOR. The yield to maturity on the Class S Certificates
will be extremely sensitive to changes in the rate of LIBOR and timing of
principal payments on the Mortgage Loans. Holders of the Class S Certificates
should consider carefully the risk that a rapid rate of prepayment of the
Mortgage Loans or a high level of LIBOR could result in the failure of investors
in the Class S Certificates to fully recover their initial investment. See
"Prepayment and Yield Considerations -- Yield on the Class S Certificates"
herein.
S-13
<PAGE> 14
SUBORDINATION
The rights of the holders of the Subordinate Certificates to receive
distributions with respect to the Mortgage Loans will be subordinated to such
rights of the Senior Certificates and the rights of the holders of each Class of
Subordinate Certificates (other than the Class B-1 Certificates) to receive
distributions with respect to the Mortgage Loans will be subordinated to such
rights of the Class or Classes of Subordinate Certificates with lower numerical
Class designations, in each case only to the extent described herein.
Delinquencies that are not advanced by or on behalf of the Master Servicer
(because the amounts, if advanced, would be nonrecoverable), will adversely
affect the yield on the Subordinate Certificates. Because of the priority of
distributions, shortfalls resulting from delinquencies not so advanced will be
borne first by the Subordinate Certificates, in reverse order of numerical
designations, and then by the Senior Certificates. If, as a result of such
shortfalls, the aggregate of the Class Certificate Balances of all Classes of
Certificates exceeds the Pool Principal Balance, the Class of Subordinate
Certificates then outstanding with the highest numerical Class designation will
be reduced by the amount of such excess.
The weighted average life of, and the yield to maturity on, the Subordinate
Certificates, in increasing order of their numerical Class designation, will be
progressively more sensitive to the rate and timing of Mortgagor defaults and
the severity of ensuing losses on the Mortgage Loans. If the actual rate and
severity of losses on the Mortgage Loans is higher than those assumed by a
holder of a Subordinate Certificate, the actual yield to maturity of such
Certificate may be lower than the yield expected by such holder based on such
assumption. The timing of losses on the Mortgage Loans will also affect an
investor's actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the Mortgage Loans are consistent with such
investor's expectations. In general, the earlier a loss occurs the greater the
effect on an investor's yield to maturity. Realized Losses on the Mortgage Loans
will reduce the Class Certificate Balance of the Subordinate Certificates to the
extent of any losses allocated thereto without the receipt of cash attributable
to such reduction. See "Description of the Certificates -- Allocation of Losses"
herein. As a result of such reductions, less interest will accrue on such
Classes of Subordinate Certificates than otherwise would have been the case. The
yield to maturity of the Subordinate Certificates will also be affected by
disproportionate allocations of principal prepayments to the Senior Certificates
(other than Class A-8 Certificates), Net Interest Shortfalls, other cash
shortfalls in Available Funds and distributions of funds to Class P
Certificateholders otherwise available for distribution on the Subordinate
Certificates to the extent of reimbursement for Class P Deferred Amounts. See
"Description of the Certificates -- Allocation of Losses" herein.
If on any Distribution Date the Applicable Credit Support Percentage for
any Class of Subordinate Certificates is less than its Original Applicable
Credit Support Percentage, all partial principal prepayments, principal
prepayments in full and the principal portion of any Liquidation Proceeds as
described herein available for distribution on such Subordinate Certificates
will be allocated solely to such Subordinate Certificates and to all other
Classes of Subordinate Certificates with lower numerical Class designations,
thereby accelerating the amortization thereof relative to that of the Classes of
Subordinate Certificates otherwise entitled to such principal prepayments and
reducing the weighted average lives of such Classes of Subordinate Certificates
receiving distributions. Accelerating the amortization of the Classes of
Subordinate Certificates with lower numerical Class designations relative to the
other Classes of Subordinate Certificates is intended to preserve the
availability of the subordination provided by such other Classes.
LIMITED OBLIGATIONS
The Mortgage Loans will be the sole source of payments on the Certificates.
The Certificates do not represent an interest in or obligation of the Sponsor,
the Seller, the Master Servicer, the Trustee or any of their affiliates, except
for limited obligations of the Seller, with respect to certain breaches of its
representations and warranties and of the Master Servicer with respect to its
servicing obligations. Neither the Certificates nor the Mortgage Loans will be
guaranteed by or insured by any governmental agency or instrumentality, the
Sponsor, the Seller, the Master Servicer, the Trustee or any of their
affiliates. Consequently, in the event that payments on the Mortgage Loans are
insufficient or otherwise unavailable to make all payments required on the
Certificates, there will be no recourse to the Sponsor, the Seller, the Master
Servicer, the Trustee or any of their affiliates.
S-14
<PAGE> 15
LIMITED LIQUIDITY
Each Underwriter intends to make a secondary market in the Offered
Certificates being purchased by it, but neither Underwriter has any obligation
to do so. There is currently no secondary market in the Offered Certificates and
there can be no assurance that such a market will develop or, if it does
develop, that it will provide Certificateholders with liquidity of investment or
that it will continue for the life of the Certificates.
GEOGRAPHIC CONCENTRATION
Approximately 19.75% of the Mortgage Loans (by Cut-off Date Pool Principal
Balance) are secured by Mortgaged Properties located in the State of California.
Property values of residential real estate in California have declined in recent
years. If the California residential real estate market should continue to
experience an overall decline in property values after the dates of origination
of the Mortgage Loans, the rates of delinquency, foreclosure, bankruptcy and
loss on the Mortgage Loans may be expected to increase, and may increase
substantially, as compared to such rates in a stable or improving real estate
market.
BOOK-ENTRY SYSTEM
Since transactions in the Book-Entry Certificates generally can be effected
only through DTC and Financial Intermediaries, the ability of a Beneficial Owner
to pledge Book-Entry Certificates to persons or entities that do not participate
in the DTC system, or to otherwise act with respect to such Book-Entry
Certificates, may be limited due to the lack of a physical certificate for such
Book-Entry Certificates. In addition, under a book-entry format, Beneficial
Owners may experience delays in their receipt of payments, since distributions
will be made by the Trustee, or a paying agent on behalf of the Trustee, to CEDE
& Co. ("CEDE"), as nominee for DTC. Also, issuance of Book-Entry Certificates in
book-entry form may reduce the liquidity thereof in any secondary trading market
that may develop therefor, because investors may be unwilling to purchase
securities for which they cannot obtain delivery of physical certificates. See
"Description of the Certificates -- Book-Entry Certificates" herein.
TAX CONSEQUENCES OF RESIDUAL CERTIFICATES
The Class R-I Certificates will be the sole class of "residual interest" in
the Subsidiary REMIC and the Class R-II Certificates will be the sole class of
"residual interest" in the Master REMIC for federal income tax purposes.
Accordingly, the Residual Certificates will be subject to restrictions on
transfer that may affect their liquidity. In addition, the Residual Certificates
may not be acquired by certain benefit plans subject to ERISA. See "Prepayment
and Yield Considerations -- Yield on Residual Certificates," "ERISA
Considerations" and "Certain Federal Income Tax Considerations" herein.
THE MORTGAGE POOL
GENERAL
The following descriptions of the Mortgage Loans and the Mortgaged
Properties are based upon the expected characteristics of the Mortgage Loans as
of the close of business on the Cut-off Date, as adjusted for the scheduled
principal payments due on or before such date. Prior to the Closing Date,
Mortgage Loans may be removed from the Mortgage Pool and other Mortgage Loans
may be substituted therefor. The Sponsor believes that the information set forth
herein with respect to the Mortgage Pool as it is presently expected to be
constituted is representative of the characteristics of the Mortgage Pool as it
will be constituted at the Closing Date, although the range of the Mortgage
Rates and the maturities and certain other characteristics of the Mortgage Loans
in the Mortgage Pool may vary. Unless the context requires otherwise, references
below to percentages of the Mortgage Loans are approximate percentages of the
Cut-off Date Pool Principal Balance.
The Trust Fund will consist primarily of a pool (the "Mortgage Pool") of
fixed-rate, conventional, monthly-pay, fully-amortizing mortgage loans (the
"Mortgage Loans") secured by first liens on one- to four-
S-15
<PAGE> 16
family residential properties (each, a "Mortgaged Property"). As of the Cut-off
Date, the Mortgage Pool is expected to include 517 Mortgage Loans with an
aggregate Stated Principal Balance of approximately $150,004,303. The Mortgage
Loans will have original terms to stated maturity of not more than 30 years. The
Mortgage Loans will have scheduled monthly payments of interest and principal
(each, a "Monthly Payment") due on the first day of each month (each, a "Due
Date"). The interest rate (the "Mortgage Rate") for each Mortgage Loan will be
fixed for the life thereof. The Mortgage Loans are expected to have the
additional characteristics described below and in the Prospectus.
The Mortgage Loans consist of Mortgage Loans either (i) originated by the
Seller or (ii) purchased by the Seller from various entities that either
originated the Mortgage Loans or acquired the Mortgage Loans pursuant to
mortgage loan purchase programs operated by such entities. The Mortgage Loans
will be sold by the Seller to NationsBanc Mortgage Capital Corporation ("NMCC"),
an affiliate of the Sponsor, prior to the Closing Date pursuant to two mortgage
loan sale and servicing agreements between the Seller and NMCC (the "Purchase
Agreements"). All rights of NMCC in the Purchase Agreements, including the
remedies for any breaches of such representations and warranties made by the
Seller and for failure to deliver documentation, will be assigned by NMCC to the
Sponsor on the Closing Date and, in turn, will be assigned by the Sponsor to the
Trust Fund pursuant to the Pooling Agreement. The Sponsor will make no
additional representations or warranties with respect to the Mortgage Loans and
will have no additional obligation to repurchase or substitute for Mortgage
Loans.
As of the Cut-off Date, each Mortgage Loan is expected to have a Stated
Principal Balance of at least $24,983 and of not more than approximately
$650,000 and the average Stated Principal Balance of the Mortgage Loans is
expected to be approximately $290,144. The latest stated maturity date of any of
the Mortgage Loans is expected to be in March 2027; however, Mortgagors may
prepay their Mortgage Loans at any time without penalty. Therefore, the actual
date on which any Mortgage Loan is paid in full may be earlier than the stated
maturity date due to unscheduled payments of principal.
As of the Cut-off Date, no Mortgage Loan was delinquent and no Mortgage
Loan has been more than 30 days delinquent more than once during the preceding
twelve months. No more than 0.5% of the Mortgage Loans will be subject to any
buydown agreement.
As of the Cut-off Date, no Mortgage Loan will have a Loan-to-Value Ratio of
more than 95%. The weighted average of the Loan-to-Value Ratios as of the
Cut-off Date of the Mortgage Loans was approximately 76.7%. Each Mortgage Loan
with a Loan-to-Value Ratio at origination in excess of 80% will be covered by a
primary mortgage guaranty insurance policy which shall conform to the standards
of the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"). No such primary mortgage insurance policy will
be required with respect to any such Mortgage Loan after the date on which the
related Loan-to-Value Ratio is less than 80%.
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is a
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
the lesser of (a) the appraised value of the related Mortgaged Property
determined in an appraisal obtained by the originator at origination of such
Mortgage Loan and (b) the sales price for such Mortgaged Property. No assurance
can be given that the value of any Mortgaged Property has remained or will
remain at the level that existed on the appraisal or sales date. If residential
real estate values generally or in a particular geographic area decline, the
Loan-to-Value Ratios might not be a reliable indicator of the rates of
delinquencies, foreclosures and losses that could occur with respect to such
Mortgage Loans.
Approximately 19.75% of the Mortgage Loans will be secured by Mortgaged
Properties located in California, 10.24% in Texas, 10.01% in Colorado, 7.60% in
Virginia and 5.11% in Georgia, respectively. Except as indicated in the
preceding sentence no more than approximately 4.5% of the Mortgage Loans will be
secured by Mortgaged Properties located in any one state. No more than
approximately 1.23% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one five-digit postal zip code.
S-16
<PAGE> 17
MORTGAGE LOAN DATA
The following tables set forth certain additional expected characteristics
regarding the Mortgage Loans as of the Cut-off Date. The balances and
percentages may not be exact due to rounding.
OCCUPANCY OF MORTGAGE PROPERTIES (1)
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
OCCUPANCY STATUS LOANS CUT-OFF DATE LOANS
- ---------------- --------- ------------------- --------
<S> <C> <C> <C>
Primary Residence......................................... 501 $145,101,535.91 96.73%
Second Home............................................... 16 4,902,766.92 3.27
--- --------------- ------
Total........................................... 517 $150,004,302.83 100.00%
=== =============== ======
</TABLE>
- ---------------
(1) Based solely on representations of the Mortgagor at the time of origination
of the related Mortgage Loan.
PROPERTY TYPES
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
PROPERTY TYPES LOANS CUT-OFF DATE LOANS
- -------------- --------- ------------------- --------
<S> <C> <C> <C>
Single Family Detached.................................... 444 $128,912,749.24 85.94%
PUD....................................................... 60 17,968,856.99 11.98
Condominiums.............................................. 11 2,460,063.86 1.64
Townhome.................................................. 2 662,632.74 0.44
--- --------------- ------
Total........................................... 517 $150,004,302.83 100.00%
=== =============== ======
</TABLE>
MORTGAGE LOAN PURPOSE
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
LOAN PURPOSE LOANS CUT-OFF DATE LOANS
- ------------ --------- ------------------- --------
<S> <C> <C> <C>
Purchase.................................................. 363 $101,936,730.58 67.96%
Refinance -- Rate/Term.................................... 126 39,105,067.65 26.07
Refinance -- Cashout...................................... 28 8,962,504.60 5.97
--- --------------- ------
Total........................................... 517 $150,004,302.83 100.00%
=== =============== ======
</TABLE>
S-17
<PAGE> 18
GEOGRAPHICAL DISTRIBUTION OF THE MORTGAGED PROPERTIES (1)
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
STATE LOANS CUT-OFF DATE LOANS
----- --------- ------------------- --------
<S> <C> <C> <C>
Alabama................................................... 2 $ 908,520.47 0.61%
Arizona................................................... 11 3,088,977.67 2.06
California................................................ 97 29,633,157.11 19.75
Colorado.................................................. 47 15,010,882.05 10.01
Connecticut............................................... 2 592,426.82 0.39
Delaware.................................................. 2 527,576.02 0.35
District of Columbia...................................... 2 467,502.74 0.31
Florida................................................... 25 4,303,237.12 2.87
Georgia................................................... 30 7,669,969.44 5.11
Idaho..................................................... 1 299,625.76 0.20
Illinois.................................................. 22 6,662,363.41 4.44
Indiana................................................... 1 292,308.66 0.19
Iowa...................................................... 1 286,683.13 0.19
Kansas.................................................... 1 364,954.96 0.24
Kentucky.................................................. 5 1,475,255.41 0.98
Maryland.................................................. 20 6,225,881.78 4.15
Massachusetts............................................. 5 1,713,643.11 1.14
Michigan.................................................. 8 2,248,809.80 1.50
Minnesota................................................. 16 4,242,901.14 2.83
Missouri.................................................. 6 2,230,582.48 1.49
Nevada.................................................... 8 2,191,901.85 1.46
New Jersey................................................ 13 3,725,005.13 2.48
New Mexico................................................ 9 3,115,776.05 2.08
New York.................................................. 3 786,676.49 0.52
North Carolina............................................ 13 3,539,203.90 2.36
Ohio...................................................... 9 2,600,480.82 1.73
Oklahoma.................................................. 4 1,132,467.96 0.75
Oregon.................................................... 1 231,741.23 0.15
Pennsylvania.............................................. 18 5,335,740.30 3.56
Rhode Island.............................................. 1 274,665.64 0.18
South Carolina............................................ 18 5,693,254.56 3.80
South Dakota.............................................. 1 309,531.38 0.21
Tennessee................................................. 11 3,306,349.73 2.20
Texas..................................................... 50 15,359,621.53 10.24
Virginia.................................................. 44 11,395,627.23 7.60
Washington................................................ 7 1,816,227.97 1.21
Wisconsin................................................. 3 944,771.96 0.63
--- --------------- ------
517 $150,004,302.83 100.00%
=== =============== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, no more than approximately 1.23% of the Mortgage
Loans are expected to be secured by Mortgaged Properties located in any one
five-digit postal zip code.
S-18
<PAGE> 19
CURRENT MORTGAGE LOAN PRINCIPAL BALANCES (1)
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
CURRENT MORTGAGE LOAN PRINCIPAL BALANCES LOANS CUT-OFF DATE LOANS
- ---------------------------------------- --------- ----------------- --------
<C> <S> <C> <C> <C>
Less than or equal to $214,600.00........................... 40 $ 4,280,260.69 2.85%
$214,600.01- $250,000.00.................................... 145 33,957,071.91 22.64
$250,000.01- $300,000.00.................................... 142 39,150,613.57 26.10
$300,000.01- $350,000.00.................................... 79 25,345,641.91 16.90
$350,000.01- $400,000.00.................................... 56 20,991,030.29 13.99
$400,000.01- $450,000.00.................................... 24 9,963,027.09 6.64
$450,000.01- $500,000.00.................................... 16 7,732,830.58 5.16
$500,000.01- $550,000.00.................................... 6 3,102,947.47 2.07
$550,000.01- $600,000.00.................................... 4 2,300,887.45 1.53
$600,000.01- $650,000.00.................................... 5 3,179,991.86 2.12
--- --------------- ------
Total............................................. 517 $150,004,302.83 100.00%
=== =============== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, the average outstanding principal balance of the
Mortgage Loans is approximately $290,144.
ORIGINAL LOAN-TO-VALUE RATIOS (1)
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ORIGINAL LOAN-TO-VALUE RATIOS LOANS CUT-OFF DATE LOANS
- ----------------------------- --------- ----------------- --------
<S> <C> <C> <C>
25.01%-30.00%............................................. 2 $ 348,234.11 0.23%
30.01%-35.00%............................................. 1 249,827.95 0.17
35.01%-40.00%............................................. 2 360,010.96 0.24
40.01%-45.00%............................................. 3 647,828.15 0.43
45.01%-50.00%............................................. 4 1,190,514.86 0.79
50.01%-55.00%............................................. 7 1,744,278.78 1.16
55.01%-60.00%............................................. 20 5,481,767.47 3.65
60.01%-65.00%............................................. 19 5,249,869.61 3.50
65.01%-70.00%............................................. 34 10,246,691.66 6.83
70.01%-75.00%............................................. 76 20,302,363.32 13.53
75.01%-80.00%............................................. 244 75,688,006.57 50.46
80.01%-85.00%............................................. 10 2,763,359.96 1.84
85.01%-90.00%............................................. 75 20,849,166.33 13.90
90.01%-95.00%............................................. 20 4,882,383.08 3.25
--- --------------- ------
Total........................................... 517 $150,004,302.83 100.00%
=== =============== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the Mortgage Loans is approximately 77.6%.
S-19
<PAGE> 20
MORTGAGE RATES (1)
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
MORTGAGE RATES (%) LOANS CUT-OFF DATE LOANS
- ------------------ --------- ----------------- --------
<S> <C> <C> <C>
7.001 - 7.125............................................. 2 $ 600,844.93 0.40%
7.126 - 7.250............................................. 8 2,152,584.97 1.44
7.251 - 7.375............................................. 7 2,068,110.65 1.38
7.376 - 7.500............................................. 44 13,890,862.30 9.26
7.501 - 7.625............................................. 32 9,385,828.98 6.26
7.626 - 7.750............................................. 51 15,309,512.99 10.21
7.751 - 7.875............................................. 82 25,521,733.58 17.01
7.876 - 8.000............................................. 66 18,429,536.64 12.29
8.001 - 8.125............................................. 55 16,124,116.35 10.75
8.126 - 8.250............................................. 64 19,656,027.30 13.10
8.251 - 8.375............................................. 32 8,579,723.96 5.72
8.376 - 8.500............................................. 37 10,479,034.09 6.99
8.501 - 8.625............................................. 18 3,944,203.08 2.63
8.626 - 8.750............................................. 11 2,509,779.16 1.67
8.751 - 8.875............................................. 4 922,433.98 0.61
8.876 - 9.000............................................. 3 373,530.22 0.25
9.001 - 9.125............................................. 1 56,439.63 0.04
--- --------------- ------
Total........................................... 517 $150,004,302.83 100.00%
=== =============== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage
Loans is approximately 8.00% per annum.
REMAINING TERMS (1)
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
REMAINING TERM LOANS CUT-OFF DATE LOANS
- -------------- --------- ----------------- --------
<S> <C> <C> <C>
229 - 240 months.......................................... 2 $ 598,238.26 0.40%
289 - 300 months.......................................... 2 437,261.78 0.29
349 - 360 months.......................................... 513 148,968,802.79 99.31
--- --------------- ------
Total........................................... 517 $150,004,302.83 100.00%
=== =============== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average stated remaining term of the
Mortgage Loans is expected to be approximately 357.1 months.
DOCUMENTATION TYPES
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
DOCUMENTATION TYPE LOANS CUT-OFF DATE LOANS
------------------ --------- ----------------- --------
<S> <C> <C> <C>
Full...................................................... 479 $146,151,203.82 97.43%
Limited................................................... 38 3,853,099.01 2.57
--- --------------- ------
Total........................................... 517 $150,004,302.83 100.00%
=== =============== ======
</TABLE>
S-20
<PAGE> 21
UNDERWRITING STANDARDS
Each Mortgage Loan has satisfied the credit, appraisal and underwriting
guidelines established by the Seller which may be varied in cases deemed
appropriate by the Seller. The Seller's underwriting guidelines are intended to
evaluate the mortgagor's credit standing and repayment ability and the value and
adequacy of the mortgaged property as collateral. The Seller's underwriting
guidelines are applied in a manner that is intended to comply with applicable
federal and state laws and regulations. Initially, a prospective mortgagor is
required to fill out a detailed application designed to provide pertinent credit
information. As part of the description of the mortgagor's financial condition,
the mortgagor is required to provide a current balance sheet describing assets
and liabilities and a statement of income and expenses, as well as an
authorization for the disclosure of a consumer credit report which summarizes
the mortgagor's credit history with merchants and lenders and any public
records, such as bankruptcy. In addition, an employment verification is obtained
from the mortgagor's employer wherein the employer reports the length of
employment with that organization and the historical and current earnings. If a
prospective mortgagor is self-employed, the mortgagor is required to submit
copies of signed tax returns. The mortgagor also authorizes deposit verification
at all financial institutions where the mortgagor has funds deposited which may
be used for downpayment and closing of the mortgage loan. In lieu of employment
and deposit verifications, the Seller will accept copies of federal withholding
(W-2) forms, pay stubs and account statements.
The Seller has employed alternative underwriting guidelines (the "Limited
Documentation Guidelines") for certain qualifying mortgage loans underwritten by
the Seller through an underwriting program designed to streamline the loan
review process by eliminating the requirement for income verification. The
objective of the use of the Limited Documentation Guidelines is to place
emphasis on underwriting of the credit of the mortgagor's assets rather than the
value and adequacy of the mortgaged property as collateral. The maximum
loan-to-value ratio of any mortgage loan originated under the Limited
Documentation Guidelines was 75% at the time of origination. Less than 3.0% of
the Mortgage Loans have been originated under the Limited Documentation
Guidelines.
Once the employment and deposit documentation and the credit report are
received, a determination is made as to whether the prospective mortgagor has
sufficient monthly income available (i) to meet the mortgagor's monthly
obligations on the proposed mortgage loan and other expenses related to the
mortgaged property (such as property taxes, hazard insurance and maintenance and
utility costs) and (ii) to meet other financial obligations and monthly living
expenses.
To determine the adequacy of the mortgaged property as collateral, an
independent appraisal is made of each mortgaged property considered for
financing. The appraiser is required to inspect the mortgaged property and
verify that it is in acceptable condition and that construction, if recent, has
been completed. The appraisal is based on the appraiser's estimate of values,
giving appropriate weight to both the market value of comparable housing, as
well as the cost of replacing the mortgaged property.
The Seller's underwriting guidelines in all states require that the
underwriting officers be satisfied that the value of the mortgaged property
being financed, as indicated by the independent appraisal, currently supports
and is anticipated to support in the future the outstanding loan balance and
provides sufficient value to mitigate the effects of adverse shifts in real
estate values.
NATIONSBANC MORTGAGE CORPORATION
NationsBanc Mortgage Corporation (in its capacity as seller, the "Seller"
and, in its capacity as master servicer, the "Master Servicer") was incorporated
in Texas on July 10, 1972, as a wholly-owned subsidiary of NationsBank Texas,
which is an indirect, wholly-owned subsidiary of NationsBank Corporation.
NationsBanc Mortgage Corporation is primarily engaged in the origination,
purchase and sale of mortgage loans, the performance of servicing functions and
the underwriting of mortgage loans. NationsBanc Mortgage Corporation's principal
executive offices are located at 101 South Tryon Street, 39th Floor, Charlotte,
North Carolina 28255 and the telephone number is (704) 388-4545, and NationsBanc
Mortgage Corporation's operations offices are located at 101 East Main Street,
Suite 400, Louisville, Kentucky 40202 and the telephone number
S-21
<PAGE> 22
is (502) 566-5100. NationsBanc Mortgage Corporation is approved by Government
National Mortgage Association ("GNMA"), FNMA and FHLMC as a seller-servicer.
SERVICING OF MORTGAGE LOANS
GENERAL
All of the Mortgage Loans will be serviced by NationsBanc Mortgage
Corporation, as Master Servicer. The Master Servicer will service the Mortgage
Loans in accordance with the terms of the Pooling Agreement. The Master Servicer
may perform any of its obligations under the Pooling Agreement through one or
more subservicers. Notwithstanding any such subservicing arrangement, the Master
Servicer will remain primarily liable for its servicing duties and obligations
under the Pooling Agreement as if the Master Servicer alone were servicing the
Mortgage Loans. See "The Pooling and Servicing Agreement" in the Prospectus.
FORECLOSURE AND DELINQUENCY EXPERIENCE
Historically, a variety of factors, including the appreciation of real
estate values, have limited the Master Servicer's foreclosure and delinquency
experience on its portfolio of mortgage loans. There can be no assurance that
factors beyond the Master Servicer's control, such as national or local economic
conditions or downturns in the real estate markets in its lending areas, will
not result in increased rates of delinquencies and foreclosure losses in the
future.
The information in the table below has not been adjusted to eliminate the
effect of the significant growth in the size of the portfolio of mortgage loans
originated by NationsBanc Mortgage Corporation during the periods shown.
Accordingly, foreclosures and delinquencies as percentages of aggregate
principal balance of mortgage loans serviced for each period may be higher than
those that would be shown if a group of mortgage loans were artificially
isolated at a point in time and the information disclosed the activity only in
that isolated group. However, since most of the mortgage loans in the portfolio
of jumbo mortgage loans serviced by the Master Servicer during the periods shown
are not fully seasoned, the foreclosure and delinquency information for such an
isolated group would also be distorted to some degree.
The following table summarizes the delinquency and foreclosure experience,
respectively, on the dates indicated on jumbo first deed of trust or mortgage
loans serviced by the Master Servicer (excluding certain recent bulk
acquisitions of servicing rights) and which were originated in a manner
consistent with the underwriting criteria of the Seller described under "The
Mortgage Pool -- Underwriting Standards." The Master Servicer's portfolio of
jumbo first deed of trust and mortgage loans described below contains fixed and
adjustable rate jumbo mortgage loans, having a variety of original terms to
maturity and payment characteristics and may therefore differ significantly from
the Mortgage Loans at any time in terms of interest rates, principal balances,
geographic distribution, loan-to-value ratios and other possibly relevant
characteristics. There can be no assurance, and no representation is made, that
the delinquency and foreclosure experience with respect to the Mortgage Loans
will be similar to that reflected in the table below, nor is any representation
made as to the rate at which losses may be experienced on liquidation of
defaulted Mortgage Loans. The actual delinquency and foreclosure experience on
the Mortgage Loans will depend, among other things, upon the value of the real
estate securing such Mortgage Loans and the ability and willingness of
mortgagors to make required payments.
S-22
<PAGE> 23
DELINQUENCY AND FORECLOSURE EXPERIENCE
ON MORTGAGE LOANS
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
----------------------------- ----------------------------- -----------------------------
NUMBER/% NUMBER/% NUMBER/%
OF OUTSTANDING OF OUTSTANDING OF OUTSTANDING
MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
----------- --------------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio........... 304,921 $32,561,189,618 260,568 $27,820,905,542 227,068 $21,477,365,031
Delinquencies*
One installment
delinquent............ 6,261 $ 477,963,358 4,727 $ 371,425,718 3,575 $ 248,651,462
Percent Delinquent...... 2.1% 1.5% 1.8% 1.3% 1.6% 1.2%
Two installments
delinquent............ 1,249 $ 90,683,948 827 $ 58,517,191 679 $ 40,584,938
Percent Delinquent...... 0.4% 0.3% 0.3% 0.2% 0.3% 0.2%
Three or more
installments
delinquent............ 1,465 $ 105,654,522 875 $ 61,929,401 676 $ 43,458,765
Percent Delinquent...... 0.5% 0.3% 0.3% 0.2% 0.3% 0.2%
In Foreclosure............ 1,358 $ 112,445,453 499 $ 38,350,914 383 $ 28,626,045
Percent in
Foreclosure........... 0.4% 0.3% 0.2% 0.1% 0.2% 0.1%
Delinquent and in
Foreclosure............. 10,333 $ 786,752,281 6,928 $ 530,225,224 5,313 $ 361,321,210
Percent Delinquent and
in Foreclosure**...... 3.4% 2.4% 2.7% 1.9% 2.3% 1.7%
</TABLE>
- ---------------
* A mortgage loan is deemed to have "one installment delinquent" if any
scheduled payment of principal or interest is delinquent past the end of the
month in which such payment was due, "two installments delinquent" if such
delinquency persists past the end of the month following the month in which
such payment was due, and so forth.
** The sums of the Percent Delinquent and Percent in Foreclosure set forth in
this table may not equal the Percent Delinquent and in Foreclosure due to
rounding.
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement, dated as of March 1, 1997 (the "Pooling Agreement"), among the
Sponsor, the Master Servicer and the Trustee. Reference is made to the
Prospectus for important additional information regarding the terms and
conditions of the Pooling Agreement and the Certificates. 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 Pooling Agreement. When
particular provisions or terms used in the Pooling Agreement are referred to,
the actual provisions (including definitions of terms) are incorporated by
reference. See "The Pooling and Servicing Agreement" in the Prospectus.
ASSIGNMENT OF MORTGAGE LOANS
In connection with the transfer and assignment of the Mortgage Loans to the
Trustee, the Sponsor will deliver or cause to be delivered to the Trustee, or a
custodian for the Trustee, among other things, with respect to each Mortgage
Loan, the original Mortgage Note endorsed without recourse in blank or to the
order of the Trustee (or its nominee) or a certificate signed by an officer of
the Seller certifying that the related original Mortgage Note has been lost, the
original or certified copy of the Mortgage with evidence of recording indicated
thereon (except for any Mortgage not returned from the public recording office,
which will be delivered to the Trustee as soon as the same is available to the
Sponsor), an assignment in recordable form of the Mortgage and, if applicable,
any riders or modifications to such Mortgage Note and Mortgage (collectively,
the "Mortgage File"). Assignments of the Mortgage Loans to the Trustee (or its
nominee) will be recorded in the appropriate public office for real property
records, except in states where, in the opinion of counsel acceptable to the
Trustee, such recording is not required to protect the Trustee's interests in
the
S-23
<PAGE> 24
Mortgage Loan against the claim of any subsequent transferee or any successor to
or creditor of the Sponsor or the Seller.
The Trustee will promptly review each Mortgage File after the Closing Date
(or promptly after the Trustee's receipt of any document permitted to be
delivered after the Closing Date) and if any of the foregoing documents is found
to be missing or defective in any material respect and the Seller does not cure
such omission or defect within 90 days of the Closing Date, the Seller will on
the Distribution Date in the month following the expiration of such 90-day
period either (i) repurchase the related Mortgage Loan (or any property acquired
in respect thereof) at a price (the "Purchase Price") equal to 100% of the
unpaid principal balance of such Mortgage Loan plus accrued and unpaid interest
on such principal balance at the related Mortgage Rate, or (ii) substitute an
Eligible Substitute Mortgage Loan; however, such substitution is permitted only
within 90 days of the Closing Date. An "Eligible Substitute Mortgage Loan"
generally will, on the date of substitution, among other characteristics set
forth in the Pooling Agreement, (i) have a principal balance, after deduction of
all Monthly Payments due in the month of substitution, not in excess of, and not
more than 10% less than, the Stated Principal Balance of the Deleted Mortgage
Loan (the amount of any shortfall to be deposited by the Seller and held for
distribution to the Certificateholders on the related Distribution Date (a
"Substitution Adjustment Amount")), (ii) have a Mortgage Rate not lower than,
and not more than 2% per annum higher than, that of the Deleted Mortgage Loan,
(iii) have a Loan-to-Value Ratio not higher than that of the Deleted Mortgage
Loan, (iv) have a remaining term to maturity not greater than (and not more than
one year less than) that of the Deleted Mortgage Loan, and (v) comply with all
of the representations and warranties incorporated into the Pooling Agreement as
of the date of substitution. This cure, repurchase or substitution obligation
constitutes the sole remedy available to Certificateholders or the Trustee for
omission of, or a material defect in, a Mortgage Loan document. Any Mortgage
Loan repurchased or subject to a substitution as described in this paragraph is
referred to as a "Deleted Mortgage Loan."
PAYMENTS ON MORTGAGE LOANS; ACCOUNTS
On or prior to the Closing Date, the Master Servicer will establish an
account (the "Certificate Account"), which shall be maintained as a separate
trust account by the Master Servicer in trust for the benefit of
Certificateholders. Funds credited to the Certificate Account may be invested
for the benefit and at the risk of the Master Servicer in Eligible Investments,
as defined in the Pooling Agreement, that are scheduled to mature on or prior to
the business day preceding the next Distribution Date. 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 Funds and
shall deposit such Available Funds in an account established and maintained with
the Trustee on behalf of Certificateholders (the "Distribution Account").
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Expense Fees with respect to the Trust Fund are payable out of the
interest payments received on each Mortgage Loan. The "Expense Rate" in respect
of each Mortgage Loan will be 0.26% per annum of the Stated Principal Balance of
such Mortgage Loan. The "Expense Fees" consist of (a) servicing compensation
payable to the Master Servicer in respect of its master servicing activities
(the "Master Servicing Fee") and (b) fees paid to the Trustee. The Master
Servicing Fees will accrue at a rate specified in the Pooling Agreement (the
"Master Servicing Fee Rate") of the Stated Principal Balance of each Mortgage
Loan. The Master Servicer is obligated to pay certain ongoing expenses
associated with the Trust Fund and incurred by the Master Servicer in connection
with its responsibilities under the Pooling Agreement and such amounts will be
paid by the Master Servicer out of the Master Servicing Fee. The amount of the
Master Servicing Fee is subject to adjustment with respect to prepaid Mortgage
Loans, as described herein under "-- Compensating Interest." The Master Servicer
is also entitled to receive all late payment fees, assumption fees and other
similar charges and all investment income earned on amounts on deposit in the
Certificate Account and Distribution Account.
S-24
<PAGE> 25
COMPENSATING INTEREST
When a Mortgage Loan is subject to a partial prepayment or is prepaid in
full between Due Dates, the Mortgagor is required to pay interest on the amount
prepaid only to the date of prepayment and not thereafter. Prepayments will be
distributed to Certificateholders on the Distribution Date in the month
following the month of receipt. Pursuant to the Pooling Agreement, the Master
Servicing Fee for any month will be reduced by an amount sufficient to pass
through to the Trust Fund on such Distribution Date 30 days' interest at the
Mortgage Rate (less the Master Servicing Fee Rate) on the amount of each such
prepayment (any such reduction, "Compensating Interest"). Any such shortfalls in
interest as a result of prepayments in excess of the amount of the Master
Servicing Fee for a month will reduce the amount of interest available to be
distributed to Certificateholders from what would have been the case in the
absence of such prepayments. See "Description of the Certificates -- Interest"
herein.
ADVANCES
Subject to the following limitations, the Master Servicer will be required
to advance (any such advance, an "Advance") prior to each Distribution Date from
its own funds or funds in the Certificate Account that do not constitute
Available Funds for such Distribution Date, in an amount equal to the aggregate
of payments of principal and interest (net of the related Master Servicing Fee)
which were due on the related Due Date and which were delinquent on the related
Determination Date. The obligation to advance with respect to any Mortgage Loan
shall continue until the ultimate disposition of the REO Property or Mortgaged
Property relating to such Mortgage Loan. An "REO Property" is a Mortgaged
Property that has been acquired by the Master Servicer on behalf of the Trust
Fund through foreclosure or grant of a deed in lieu of foreclosure. With respect
to any Distribution Date, the related "Determination Date" shall be five
business days prior thereto.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Certificates rather than to guarantee or insure
against losses. The Master Servicer is obligated to make Advances with respect
to delinquent payments of principal of or interest on each Mortgage Loan (net of
the Master Servicing Fee) to the extent that such Advances are, in its judgment,
reasonably recoverable from future payments and collections or insurance
payments or proceeds of liquidation of the related Mortgage Loan. If the Master
Servicer determines on any Determination Date to make an Advance, such Advance
will be included with the distribution to Certificateholders on the related
Distribution Date. Any failure by the Master Servicer to make an Advance as
required under the Pooling Agreement with respect to the Certificates will
constitute an Event of Default thereunder, in which case the Trustee or the
successor servicer will be obligated to make any such Advance, in accordance
with the terms of the Pooling Agreement.
TERMINATION; OPTIONAL TERMINATION
The circumstances under which the obligations created by the Pooling
Agreement will terminate in respect of the Certificates are described in "The
Pooling and Servicing Agreement -- Termination; Repurchase of Mortgage Loans and
Mortgage Certificates" in the Prospectus. In addition, the Sponsor will have the
option to purchase all remaining Mortgage Loans and other assets in the Trust
Fund, thereby effecting early retirement of the Certificates and causing the
termination of the REMIC status of the Master REMIC and the Subsidiary REMIC,
but such option will not be exercisable until such time as the Pool Principal
Balance as of the Distribution Date on which the purchase proceeds are to be
distributed to Certificateholders is less than 5% of the Cut-off Date Pool
Principal Balance. Distributions in respect of any such optional termination
will be paid to Certificateholders in order of their priority of distribution as
described below under "Description of the Certificates -- Priority of
Distributions." The proceeds from such a distribution may not be sufficient to
distribute the full amount to which each Class is entitled if the purchase price
is based in part on the fair market value of the REO Property and such fair
market value is less than the Stated Principal Balance of the related Mortgage
Loan. In no event will the trust created by the Pooling Agreement continue
beyond the later of (a) the repurchase described above, (b) the expiration of 21
years from the death of the survivor of the person named in the Pooling
Agreement and (c) May 1, 2028. The termination of the Trust Fund will be
effected in a manner consistent with applicable federal income tax regulations
and the REMIC status of the Master REMIC and the Subsidiary REMIC.
S-25
<PAGE> 26
THE TRUSTEE
PNC Bank, National Association will be the Trustee under the Pooling
Agreement. The Sponsor, the Seller and the Master Servicer may maintain other
banking relationships in the ordinary course of business with the Trustee.
Offered Certificates may be surrendered at the Corporate Trust Office of the
Trustee located at 1600 Market Street, 30th Floor, Philadelphia, Pennsylvania
19103, Attention: Constantine Hromych or at such other addresses as the Trustee
may designate from time to time.
VOTING RIGHTS
Certain actions specified in the Pooling Agreement that may be taken by
holders of Offered Certificates evidencing a specified percentage of all
undivided interests in the Trust Fund may be taken by the holders of Offered
Certificates entitled to the aggregate of such percentage of voting rights (the
"Voting Rights") provided in the Pooling Agreement. 96% of all Voting Rights
will be allocated among the holders of the Class A, Class F, Class P and
Subordinate Certificates based on the outstanding Class Certificate Balances of
their Certificates, 1% of all Voting Rights will be allocated to the holders of
the Class S Certificates based on their respective Percentage Interest in such
Class, 1% of all Voting Rights will be allocated to the holders of the Class X
Certificates based on their respective Percentage Interest in such Class, 1% of
all Voting Rights will be allocated to the holders of the Class R-I Certificates
based on their respective Percentage Interest in such Class and 1% of all Voting
Rights will be allocated to the holders of the Class R-II Certificates based on
their respective Percentage Interest in such Class. With respect to any Class of
Certificates and as to any date of determination, the "Percentage Interest" is
the percentage obtained by dividing the initial certificate balance of such
Certificate (or initial notional amount in the case of the Class S or Class X
Certificates) by the aggregate initial Class Certificate Balance (or Class
Notional Amount) of all Certificates of such Class.
SEPARATE REMIC STRUCTURE
For federal income tax purposes, the Trust Fund will include two segregated
asset pools, each of which will be treated as a separate REMIC. The assets of
the Subsidiary REMIC will generally consist of the Mortgage Loans. The assets of
the Master REMIC will generally consist of uncertificated regular interests
issued by the Subsidiary REMIC, which in the aggregate will correspond to the
Certificates.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Mortgage Pass-Through Certificates, Series 1997-1 (the "Certificates")
will consist of the following twenty classes (each, a "Class"): (i) Class A-1,
Class A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class A-7 and Class A-8
(collectively, the "Class A Certificates"); (ii) Class F, Class P, Class S and
Class X; (iii) Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class
B-6 (collectively, the "Subordinate Certificates"); and (iv) Class R-I and Class
R-II (collectively, the "Residual Certificates" and, together with the Class A,
Class F, Class P, Class S and Class X Certificates, the "Senior Certificates").
Only the Senior Certificates and the Class B-1, Class B-2 and Class B-3
Certificates (collectively, the "Offered Certificates") are offered hereby.
The "Class Certificate Balance" of a Class of Certificates as of any
Distribution Date is the initial Class Certificate Balance thereof reduced by
the sum of (i) all amounts previously distributed to holders of Certificates of
such Class as payments of principal, (ii) the amount of Realized Losses
(including Excess Losses) previously allocated to such Class and (iii) in the
case of any Class of Subordinate Certificates, any amounts previously allocated
to such Class in reduction of its Class Certificate Balance in respect of
payments of Class P Deferred Amounts, as described below under "-- Allocation of
Losses." In addition, the Class Certificate Balance of the Class of Subordinate
Certificates then outstanding with the highest numerical Class designation will
be reduced if and to the extent that the aggregate of the Class Certificate
Balances of all Certificates, following all distributions and the allocation of
Realized Losses on a Distribution Date, exceeds the Pool Principal Balance as of
the Due Date occurring in the month of such Distribution Date.
S-26
<PAGE> 27
The Senior Certificates in the aggregate will evidence an initial
beneficial ownership interest of approximately 95.50% in the Trust Fund and the
Subordinate Certificates evidence in the aggregate the remaining 4.50% undivided
interest in the Trust Fund. The Class S and Class X Certificates are "interest
only" or IO Certificates, will have no principal balance, are entitled only to a
portion of the interest on the Mortgage Loans and are not entitled to any
distributions of principal. The Class Notional Amount of the Class X
Certificates for any Distribution Date will be equal to the aggregate of the
Stated Principal Balances of the Mortgage Loans with respect to such
Distribution Date. The Class Notional Amount of the Class S Certificates for any
Distribution Date will be equal to the Class Certificate Balance of the Class F
Certificates with respect to such Distribution Date. The Class P Certificates
are "principal only" or PO Certificates and are not entitled to distributions in
respect of interest.
DENOMINATIONS AND FORM
The Offered Certificates (other than the Residual Certificates) will be
issuable in book-entry form only. The Class A Certificates will be issued in
minimum dollar denominations of $10,000 and integral multiples of $1 in excess
thereof. The Class F, Class P, Class S, Class X, Class B-1, Class B-2 and Class
B-3 Certificates will be issued in minimum dollar denominations or notional
amounts, as applicable, of $25,000 and integral multiples of $1 in excess
thereof. The Class R-I and Class R-II Certificates will be issued as a single
certificate each in a denomination of $100. A single certificate of each Class
may be issued in an amount different than described above.
BOOK-ENTRY CERTIFICATES
The Offered Certificates (other than the Residual Certificates) will be
book-entry Certificates (the "Book-Entry Certificates"). The Book-Entry
Certificates will be issued in one or more certificates which equal the
aggregate Class Certificate Balance of each such Class of Offered Certificates
which will be held by a nominee of The Depository Trust Company ("DTC" and
together with any successor depository selected by the Sponsor, the
"Depository"). Beneficial interests in the Book-Entry Certificates will be
indirectly held by investors through the book-entry facilities of the
Depository, as described herein. Investors may hold such beneficial interests in
the Book-Entry Certificates in minimum denominations specified above under
"-- Denominations and Form". The Sponsor has been informed by the Depository
that its nominee will be CEDE. Accordingly, CEDE is expected to be the holder of
record of the Book-Entry Certificates. Except as described below, no person
acquiring a beneficial interest in a Book-Entry Certificate (each, a "Beneficial
Owner") will be entitled to receive a physical certificate representing such
Certificate (a "Definitive Certificate").
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of the Depository (or of a participating firm that acts as agent for the
Financial Intermediary, whose interests will in turn be recorded on the records
of the Depository, if the Beneficial Owner's Financial Intermediary is not a
Depository participant). Therefore, the Beneficial Owner must rely on the
foregoing procedures to evidence its beneficial ownership of a Book-Entry
Certificate. Beneficial ownership of a Book-Entry Certificate may only be
transferred by compliance with the procedures of such Financial Intermediaries
and Depository participants.
The Depository 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 Uniform Commercial Code as in effect in
the State of New York and a "Clearing Agency" registered pursuant to Section 17A
of the Securities Exchange Act of 1934, as amended. The Depository performs
services for its participants, some of which (and/or their representatives) own
the Depository. In accordance with its normal procedures, the Depository is
expected to record the positions held by each Depository participant in the
Book-Entry Certificates, whether held for its own account or as a nominee for
another person. In general, beneficial ownership of Book-Entry Certificates will
be subject to the rules, regulations and procedures governing the Depository and
Depository participants as in effect from time to time.
S-27
<PAGE> 28
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to CEDE as nominee of the Depository. The
Depository will be responsible for crediting the amount of such payments to the
accounts of the applicable Depository participants in accordance with the
Depository's normal procedures. Each Depository participant will be responsible
for disbursing such payments to the Beneficial Owners of the Book-Entry
Certificates that it represents and to each Financial Intermediary for which it
acts as agent. Each such Financial Intermediary will be responsible for
disbursing funds to the Beneficial Owners of the Book-Entry Certificates that it
represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to CEDE. Because the Depository can only act on
behalf of Financial Intermediaries, the ability of a Beneficial Owner to pledge
Book-Entry Certificates to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
None of the Sponsor, the Master Servicer or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
CEDE, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests. In the event of the
insolvency of the Depository, a Depository participant or an indirect Depository
participant in whose name Book-Entry Certificates are registered, the ability of
the Beneficial Owners of such Book-Entry Certificates to obtain timely payment
may be impaired.
Unless and until Definitive Certificates are issued, it is anticipated that
the only "Certificateholder" of the Book-Entry Certificates will be CEDE, as
nominee of the Depository. Beneficial Owners of the Book-Entry Certificates will
not be Certificateholders, as that term is used in the Pooling Agreement.
Beneficial Owners are only permitted to exercise the rights of
Certificateholders indirectly through Financial Intermediaries and the
Depository. Monthly and annual reports on the Trust Fund provided by the Trustee
to CEDE, as nominee of the Depository, may be made available to Beneficial
Owners upon request, in accordance with the rules, regulations and procedures
creating and affecting the Depository, and to the Financial Intermediaries to
whose Depository accounts the Book-Entry Certificates of such Beneficial Owners
are credited.
The Depository has advised the Sponsor and the Trustee that, unless and
until Definitive Certificates are issued, the Depository will take any action
permitted to be taken by the holders of the Book-Entry Certificates under the
Pooling Agreement only at the direction of one or more Financial Intermediaries
to whose Depository accounts the Book-Entry Certificates are credited, to the
extent that such actions are taken on behalf of Financial Intermediaries whose
holdings include such Book-Entry Certificates.
Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to the Depository, only
if (a) the Depository or the Sponsor advises the Trustee in writing that the
Depository is no longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the Book-Entry
Certificates and the Sponsor or the Trustee is unable to locate a qualified
successor; (b) the Sponsor, at its sole option, elects to terminate a book-entry
system through the Depository; or (c) after the occurrence of an event of
default under the Pooling Agreement, Beneficial Owners having Voting Rights
aggregating not less than 51% of all Voting Rights evidenced by each Class of
the Book-Entry Certificates advise the Trustee and the Depository through the
Financial Intermediaries in writing that the continuation of a book-entry system
through the Depository (or a successor thereto) is no longer in the best
interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through the
Depository of Definitive Certificates. Upon surrender by the Depository of the
global certificate or certificates representing the Book-Entry Certificates and
instructions for re-registration, the Trustee will issue the Definitive
Certificates, and thereafter the Trustee will recognize the holders of such
Definitive Certificates as Certificateholders under the Pooling Agreement.
S-28
<PAGE> 29
DISTRIBUTIONS
Distributions on the Certificates will be made by the Trustee on the 20th
day of each month, or if such day is not a business day, on the first business
day thereafter, commencing in April 1997 (each a "Distribution Date"), to the
persons in whose names such Certificates are registered (each, a
"Certificateholder") at the close of business on the last business day of the
month preceding the month of such Distribution Date (the "Record Date").
Distributions on each Distribution Date will be made by check mailed to the
address of the person entitled thereto as it appears on the applicable
certificate register or, in the case of a Certificateholder who holds 100% of a
Class of Certificates or who holds Certificates with an aggregate initial
certificate balance or notional amount of $1,000,000 or more and who has so
notified the Trustee in writing in accordance with the Pooling Agreement, by
wire transfer in immediately available funds to the account of such
Certificateholder at a bank or other depository institution having appropriate
wire transfer facilities; provided, however, that the final distribution in
retirement of the Certificates will be made only upon presentment and surrender
of such Certificates at the Corporate Trust Office of the Trustee.
AVAILABLE FUNDS
"Available Funds" with respect to any Distribution Date will be equal to
the sum of (i) all scheduled installments of interest (net of the related Master
Servicing Fee) and principal due on the Due Date in the month in which such
Distribution Date occurs and received prior to the related Determination Date,
together with any Advances in respect thereof; (ii) all proceeds of any primary
mortgage guaranty insurance policies and any other insurance policies with
respect to the Mortgage Loans, to the extent such proceeds are not applied to
the restoration of the related Mortgaged Property or released to the Mortgagor
in accordance with the Master Servicer's normal servicing procedures
(collectively, "Insurance Proceeds") and all other cash amounts received and
retained in connection with the liquidation of defaulted Mortgage Loans, by
foreclosure or otherwise (collectively, "Liquidation Proceeds") during the
calendar month preceding the month of such Distribution Date (in each case, net
of unreimbursed expenses incurred in connection with a liquidation or
foreclosure and unreimbursed Advances, if any); (iii) all partial or full
prepayments received during the calendar month preceding the month of such
Distribution Date; and (iv) amounts received with respect to such Distribution
Date as the Substitution Adjustment Amount or repurchase price in respect of any
Deleted Mortgage Loan or amounts received in connection with the optional
termination of the Trust Fund as of such Distribution Date, reduced by amounts
in reimbursement for Advances previously made and other amounts as to which the
Master Servicer is entitled to be reimbursed pursuant to the Pooling Agreement.
PRIORITY OF DISTRIBUTIONS
As more fully described herein, distributions will be made on each
Distribution Date from Available Funds in the following order of priority: (i)
to the Trustee an amount in payment for the Trustee's services for such
Distribution Date; (ii) to interest on each Class of Senior Certificates (other
than the Class P Certificates); (iii) to principal on the Classes of Senior
Certificates then entitled to receive distributions of principal, in the order
and subject to the priorities set forth herein under "-- Principal," in each
case in an aggregate amount up to the maximum amount of principal to be
distributed on such Classes on such Distribution Date; (iv) to any Class P
Deferred Amounts with respect to the Class P Certificates, but only from amounts
that would otherwise be distributable on such Distribution Date as principal of
the Subordinate Certificates; (v) to each Class of Subordinate Certificates,
first to pay interest on and then to pay principal thereof, in an amount equal
to its portion of principal payable to the Subordinate Certificates, in the
order of their numerical Class designations, beginning with the Class B-1
Certificates, and (vi) any remaining amounts to the Class R-I Certificates, in
each case subject to the limitations set forth herein under "-- Principal."
INTEREST
The Pass-Through Rate for each Class of Offered Certificates for each
Distribution Date (the "Pass-Through Rate") is as set forth or described on the
cover hereof.
S-29
<PAGE> 30
On each Distribution Date, to the extent of funds available therefor, each
Class of Certificates (other than the Class P Certificates) will be entitled to
receive an amount allocable to interest (as to each such Class, the "Interest
Distribution Amount") with respect to the related Interest Accrual Period. The
Interest Distribution Amount for any Class of Certificates (other than the Class
P Certificates) will be equal to the sum of (i) interest accrued during the
related Interest Accrual Period at the applicable Pass-Through Rate on the
related Class Certificate Balance or Class Notional Amount, as the case may be,
and (ii) the sum of the amounts, if any, by which the amount described in clause
(i) above on each prior Distribution Date exceeded the amount actually
distributed as interest on such prior Distribution Dates and not subsequently
distributed (such shortfalls, "Unpaid Interest Amounts"). The Class P
Certificates are "principal only" or PO Certificates and will not bear interest.
The interest entitlement described above for each Class of Certificates
will be reduced by the amount of Net Interest Shortfalls for such Distribution
Date. With respect to any Distribution Date, the "Net Interest Shortfall" is
equal to the sum of (i) the amount of interest which would otherwise have been
received with respect to any Mortgage Loan that was the subject of (a) a Relief
Act Reduction or (b) a Special Hazard Loss, Fraud Loss or Bankruptcy Loss, after
the exhaustion of the respective amounts of coverage provided by the Subordinate
Certificates for such types of losses and (ii) any Net Prepayment Interest
Shortfalls. Net Interest Shortfalls on any Distribution Date will be allocated
pro rata among all Classes of Certificates entitled to receive distributions of
interest on such Distribution Date, based on the amount of interest each such
Class of Certificates would otherwise be entitled to receive on such
Distribution Date before taking into account any reduction in such amounts
resulting from such Net Interest Shortfalls. A "Relief Act Reduction" is a
reduction in the amount of monthly interest payment on a Mortgage Loan pursuant
to the Soldiers' and Sailors' Civil Relief Act of 1940. See "Certain Legal
Aspects of the Mortgage Loans -- Soldiers' and Sailors' Civil Relief Act" in the
Prospectus. With respect to any Distribution Date, the "Net Prepayment Interest
Shortfall" is the amount by which the aggregate of Prepayment Interest
Shortfalls during the calendar month preceding the month of such Distribution
Date exceeds the Master Servicing Fee for such period. A "Prepayment Interest
Shortfall" is the amount by which interest paid by a Mortgagor in connection
with a prepayment of principal on a Mortgage Loan is less than one month's
interest at the related Mortgage Rate (net of the related Master Servicing Fee)
on the amount of such prepayment.
Accrued interest to be distributed on any Distribution Date will be
calculated, in the case of each Class of Certificates (other than the Class P
Certificates), on the basis of the related Class Certificate Balance or Class
Notional Amount, as applicable, immediately prior to such Distribution Date.
Interest will be calculated and payable on the basis of a 360-day year divided
into twelve 30-day months.
In the event that, on a particular Distribution Date, Available Funds
applied in the order described above under "-- Priority of Distributions" are
not sufficient to make a full distribution of the Interest Distribution Amount
for each Class of the Certificates, interest will be distributed on each Class
of Certificates of equal priority based on the Interest Distribution Amount each
such Class would otherwise have been entitled to receive in the absence of such
shortfall. Any such unpaid amount will be carried forward and added to the
Interest Distribution Amount holders of each such Class of Certificates will be
entitled to receive on the next Distribution Date. Such a shortfall could occur,
for example, if Realized Losses on the Mortgage Loans were exceptionally high or
were concentrated in a particular month. Any such unpaid amount will not bear
interest.
With respect to each Distribution Date, the "Interest Accrual Period" for
each Class of Certificates (other than the Class P, Class F and Class S
Certificates) will be the calendar month preceding the month in which the
Distribution Date occurs. The Interest Accrual Period for the Class F and Class
S Certificates for each Distribution Date will commence on the 20th day of the
calendar month preceding the calendar month in which such Distribution Date
occurs and will end on the 19th day of the calendar month in which such
Distribution Date occurs.
S-30
<PAGE> 31
LIBOR
The Class F and Class S Certificates will bear interest at their respective
Pass-Through Rates, which are based on the London Interbank Offered Rate for
one-month U.S. dollar deposits ("LIBOR") determined by the Trustee on the bases
of quotations provided by reference banks meeting the criteria set forth herein
(the "Reference Banks"). The initial Reference Banks will be specified in the
Pooling Agreement. The Trustee will determine LIBOR and the respective
Pass-Through Rates for the Class F and Class S Certificates for each Interest
Accrual Period, other than the initial Interest Accrual Period, on the second
London business day prior to the day on which such Interest Accrual Period
commences (each, a "LIBOR Determination Date").
LIBOR will be established by the Trustee on each LIBOR Determination Date
as follows:
(a) The Trustee will determine LIBOR on the basis of LIBOR quotations
provided by each of the Reference Banks as of approximately 11:00 a.m.
(London Time) on such LIBOR Determination Date, as such quotations appear
on the Telerate Page 3750 (as defined in the International Swap Dealers
Association Inc. Code of 1987 Interest Rate and Currency Exchange
Definitions).
(b) If on any LIBOR Determination Date two or more Reference Banks
provide such offered quotations, LIBOR for the next Interest Accrual Period
shall be the arithmetic mean (rounded upwards if necessary to the nearest
whole multiple of 1/32%) of such offered quotations.
(c) If on any LIBOR Determination Date only one or none of the
Reference Banks provides such offered quotations, LIBOR for the next
Interest Accrual Period shall be whichever is the higher of (i) LIBOR as
determined on the previous LIBOR Determination Date or (ii) the Reserve
Interest Rate. The "Reserve Interest Rate" shall be the rate per annum
(rounded upwards if necessary to the nearest whole multiple of 1/32%) which
the Trustee determines to be either (i) the arithmetic mean of the one-
month United States dollar lending rates that New York City banks selected
by the Sponsor are quoting, on the relevant LIBOR Determination Date, to
the principal London offices of at least two of the Reference Banks to
which such quotations are in the opinion of the Trustee, being so made, or
(ii) in the event that the Trustee can determine no such arithmetic mean,
the lowest one-month United States dollar lending rate which New York City
banks selected by the Sponsor are quoting on such LIBOR Determination Date
to leading European banks.
(d) If on any LIBOR Determination Date, the Trustee is required but is
unable to determine the Reserve Interest Rate in the manner provided in
paragraph (c) above, LIBOR shall be LIBOR as in effect for the Interest
Accrual Period immediately preceding the Interest Accrual Period for which
such LIBOR determination is being made.
Each Reference Bank shall (i) be a leading bank engaged in transactions in
Eurodollar deposits in the international Eurocurrency market, (ii) not control,
be controlled by, or be under common control with the Sponsor, and (iii) have an
established place of business in London. If any such Reference Bank should be
unwilling or unable to act as such or if the Sponsor should terminate the
appointment of any such Reference Bank, the Sponsor will promptly appoint
another leading bank meeting the criteria specified above.
The establishment of LIBOR on each LIBOR Determination Date by the Trustee
and the Trustee's calculation of the rate of interest applicable to the Class F
and Class S Certificates for the related Interest Accrual Period shall (in the
absence of manifest error) be final and binding. Each such rate of interest may
be obtained by telephoning the Trustee at (215) 585-8738.
Listed below are some historical values of LIBOR since January 1992. Such
values were not determined in accordance with the provisions set forth above and
are intended only to provide a historical summary of the movement in yields on
LIBOR; the monthly figures set forth below are the value of LIBOR as derived
from various sources.
S-31
<PAGE> 32
<TABLE>
<CAPTION>
YEAR
---------------------------------------------------------
MONTH 1997 1996 1995 1994 1993 1992
----- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
January.................................. 5.43750% 5.43750% 6.09375% 3.12500% 3.18750% 4.18750%
February................................. 5.43750 5.31250 6.12500 3.56250 3.18750 4.25000
March.................................... -- 5.43750 6.12500 3.68750 3.18750 4.25000
April.................................... -- 5.43750 6.06250 4.00000 3.12500 3.93750
May...................................... -- 5.43750 6.06250 4.37500 3.25000 4.00000
June..................................... -- 5.49609 6.12500 4.56250 3.18750 3.93750
July..................................... -- 5.46484 5.87500 4.50000 3.18750 3.37500
August................................... -- 5.43750 5.87500 4.87500 3.18750 3.50000
September................................ -- 5.43359 5.87500 5.06250 3.18750 3.12500
October.................................. -- 5.37500 5.83203 5.06250 3.18750 3.25000
November................................. -- 5.56250 5.97656 6.06250 3.56250 4.25000
December................................. -- 5.50000 5.68750 6.00000 3.25000 3.31250
</TABLE>
PRINCIPAL
General. On each Distribution Date, Certificateholders will be entitled to
receive principal distributions from Available Funds to the extent described
below and in accordance with the priorities set forth under "-- Priority of
Distributions" above. The Class S and Class X Certificates are "interest only"
or IO Certificates and are not entitled to any distributions of principal.
All payments and other amounts received in respect of principal of the
Mortgage Loans will be allocated between (i) the Senior Certificates (other than
the Class P, Class S and Class X Certificates) and the Subordinate Certificates
and (ii) the Class P Certificates, in each case based on the applicable Non-PO
Percentage and the applicable PO Percentage, respectively, of such amounts.
The "Non-PO Percentage" with respect to any Mortgage Loan with a Net
Mortgage Rate less than 7.50% (each such Mortgage Loan, a "Discount Mortgage
Loan") will be equal to the Net Mortgage Rate thereof / 7.50%. The Non-PO
Percentage with respect to any Mortgage Loan with a Net Mortgage Rate greater
than 7.50% (each such Mortgage Loan, a "Premium Mortgage Loan") will be 100%.
The PO Percentage with respect to any Discount Mortgage Loan will be equal to
(7.50% - the Net Mortgage Rate thereof) / 7.50%. The PO Percentage with respect
to any Premium Mortgage Loan will be 0%.
The "Net Mortgage Rate" of a Mortgage Loan is the Mortgage Rate thereof
minus the Expense Rate with respect to such Mortgage Loan.
Non-PO Formula Principal Amount. On each Distribution Date, the Non-PO
Formula Principal Amount will be distributed (i) as principal of the Senior
Certificates (other than the Class A-8, Class P, Class S and Class X
Certificates) in an amount up to the Senior Principal Distribution Amount, (ii)
as principal of the Class A-8 Certificates in an amount up to the Class A-8
Principal Distribution Amount and (iii) as principal of the Subordinate
Certificates in an amount up to the Subordinate Principal Distribution Amount.
The "Non-PO Formula Principal Amount" for any Distribution Date will equal
the sum of the applicable Non-PO Percentage of (a) all monthly payments of
principal due on each Mortgage Loan on the related Due Date, (b) the principal
portion of the purchase price of each Mortgage Loan that was repurchased by the
Seller or the Sponsor pursuant to the Pooling Agreement as of such Distribution
Date, (c) the Substitution Adjustment Amount in connection with any Deleted
Mortgage Loan received with respect to such Distribution Date, (d) any Insurance
Proceeds or Liquidation Proceeds allocable to recoveries of principal of
Mortgage Loans that are not yet Liquidated Mortgage Loans received during the
calendar month preceding the month of such Distribution Date, (e) with respect
to each Mortgage Loan that became a Liquidated Mortgage Loan during the calendar
month preceding the month of such Distribution Date, the amount of the
Liquidation Proceeds allocable to principal received with respect to such
Mortgage Loan and (f) all partial and full principal prepayments by Mortgagors
received during the calendar month preceding the month of such Distribution
Date.
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Senior Principal Distribution Amount. On each Distribution Date prior to
the Senior Credit Support Depletion Date, the Non-PO Formula Principal Amount up
to the amount of the Senior Principal Distribution Amount for such Distribution
Date, will be distributed as principal of the following Classes of Senior
Certificates in the following order of priority:
(i) first, to the Residual Certificates, until the Class Certificate
Balances thereof have been reduced to zero;
(ii) second, concurrently:
(a) 35.8801795325% to the Class A-1 Certificates,
(b) 13.9303877372% to the Class A-2 Certificates,
(c) 15.9851580021% to the Class A-3 Certificates,
(d) 19.9224845533% to the Class A-4 Certificates and
(e) 14.2817901749% to the Class F Certificates,
until the Class Certificate Balance of each of the Class A-1 Certificates,
the Class A-2 Certificates, the Class A-3 Certificates and the Class F
Certificates have been reduced to zero;
(iii) third, concurrently:
(a) 66.6702641744% to the Class A-4 Certificates and
(b) 33.3297358256% to the Class A-5 Certificates,
until the Class Certificate Balance of the Class A-4 Certificates has been
reduced to zero;
(iv) fourth, concurrently:
(a) 39.4228494836% to the Class A-5 Certificates and
(b) 60.5771505164% to the Class A-6 Certificates,
until the Class Certificate Balances thereof have been reduced to zero; and
(v) fifth, to the Class A-7 Certificates, until the Class Certificate
Balance thereof has been reduced to zero.
Notwithstanding the foregoing, on each Distribution Date on and after the
Senior Credit Support Depletion Date, the Non-PO Formula Principal Amount
remaining after distribution of interest on the Senior Certificates will be
distributed, concurrently, as principal of the Classes of Senior Certificates
(other than the Class P, Class S and Class X Certificates) pro rata, in
accordance with their respective Class Certificate Balances immediately prior to
such Distribution Date.
The "Senior Credit Support Depletion Date" is the date on which the
aggregate Class Certificate Balance of the Subordinate Certificates has been
reduced to zero.
The "Senior Principal Distribution Amount" for any Distribution Date will
equal the sum of (i) the Senior Percentage of the applicable Non-PO Percentage
of all amounts described in clauses (a) through (d) of the definition of "Non-PO
Formula Principal Amount" for such Distribution Date, (ii) with respect to each
Mortgage Loan that became a Liquidated Mortgage Loan during the calendar month
preceding the month of such Distribution Date, the lesser of (x) the Senior
Percentage of the applicable Non-PO Percentage of the Stated Principal Balance
of such Mortgage Loan and (y) either (A) the Senior Prepayment Percentage, if
the Senior Prepayment Percentage is less than 100%, or, if the Senior Prepayment
Percentage equals 100%, the percentage obtained by dividing the Senior
Percentage by the sum of the Senior Percentage and the Class A-8 Percentage or
(B) if an Excess Loss was sustained with respect to such Liquidated Mortgage
Loan during such preceding calendar month, the Senior Percentage of the
applicable Non-PO Percentage of the portion of the Liquidation Proceeds that are
allocable to principal received with respect to such Mortgage Loan, and (iii)
the Senior Prepayment Percentage of the applicable Non-PO Percentage of
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<PAGE> 34
the amounts described in clause (f) of the definition of Non-PO Formula
Principal Amount for such Distribution Date; provided, however, that if a
Bankruptcy Loss that is an Excess Loss is sustained with respect to a Mortgage
Loan that is not a Liquidated Mortgage Loan, the Senior Principal Distribution
Amount will be reduced on the related Distribution Date by the Senior Percentage
of the applicable Non-PO Percentage of the principal portion of such Bankruptcy
Loss.
"Stated Principal Balance" means, as to any Mortgage Loan and Due Date, the
unpaid principal balance of such Mortgage Loan as of such Due Date, as specified
in the amortization schedule at the time relating thereto (before any adjustment
to such amortization schedule by reason of any moratorium or similar waiver or
grace period), after giving effect to any previous partial principal prepayments
and Liquidation Proceeds received and to the payment of principal due on such
Due Date and irrespective of any delinquency in payment by the related
Mortgagor. The "Pool Principal Balance" with respect to any Distribution Date
equals the aggregate of the Stated Principal Balances of the Mortgage Loans
outstanding on the Due Date in the month preceding the month of such
Distribution Date.
The "Senior Percentage" for any Distribution Date is the percentage
equivalent of a fraction the numerator of which is the aggregate of the Class
Certificate Balances of each Class of Senior Certificates (other than the Class
A-8 and Class P Certificates) immediately prior to such date and the denominator
of which is the aggregate of the Class Certificate Balances of all Classes of
Certificates (other than the Class P Certificates) immediately prior to such
date. The "Class A-8 Percentage" for any Distribution Date will be the
percentage equivalent of a fraction, the numerator of which is the aggregate of
the Class Certificate Balances of the Class A-8 Certificates immediately prior
to such date and the denominator of which is the aggregate of the Class
Certificate Balances of all Classes of Certificates (other than the Class P
Certificates) immediately prior to such date. The "Subordinate Percentage" for
any Distribution Date will be calculated as the difference between 100% and the
sum of the Senior Percentage and the Class A-8 Percentage for such date. As of
the Cut-off Date, the Senior Percentage, the Class A-8 Percentage and the
Subordinate Percentage are expected to be approximately 81.0%, 14.5% and 4.5%,
respectively.
The "Senior Prepayment Percentage" for any Distribution Date occurring
during the five years beginning on the first Distribution Date will equal 100%.
Thereafter, the Senior Prepayment Percentage will, except as described below, be
subject to gradual reduction as described in the following paragraph. This
disproportionate allocation of certain unscheduled payments in respect of
principal will have the effect of accelerating the amortization of the Senior
Certificates (other than the Class A-8 Certificates) which receive these
unscheduled payments of principal while, in the absence of Realized Losses,
increasing the interest in the Pool Principal Balance evidenced by the Class A-8
Certificates and the Subordinate Certificates. Increasing the respective
interest of the Subordinate Certificates relative to that of the Senior
Certificates is intended to preserve the availability of the subordination
provided by the Subordinate Certificates.
The "Senior Prepayment Percentage" for any Distribution Date occurring on
or after the fifth anniversary of the first Distribution Date will be as
follows: for any Distribution Date in the first year thereafter, the Senior
Percentage plus 70% of the sum of the Class A-8 Percentage and the Subordinate
Percentage for such Distribution Date; for any Distribution Date in the second
year thereafter, the Senior Percentage plus 60% of the sum of the Class A-8
Percentage and the Subordinate Percentage for such Distribution Date; for any
Distribution Date in the third year thereafter, the Senior Percentage plus 40%
of the sum of the Class A-8 Percentage and the Subordinate Percentage for such
Distribution Date; for any Distribution Date in the fourth year thereafter, the
Senior Percentage plus 20% of the sum of the Class A-8 Percentage and the
Subordinate Percentage for such Distribution Date; and for any Distribution Date
thereafter, the Senior Percentage for such Distribution Date (unless on any of
the foregoing Distribution Dates the Senior Percentage exceeds the initial
Senior Percentage, in which case the Senior Prepayment Percentage for such
Distribution Date will once again equal 100%). Notwithstanding the foregoing, no
decrease in the Senior Prepayment Percentage will occur if as of the first
Distribution Date as to which any such decrease applied, (i) the outstanding
principal balance of all Mortgage Loans (including, for this purpose, any
Mortgage Loans in foreclosure or any Mortgage Loans with respect to which the
related Mortgaged Property has been acquired by the Trust Fund) delinquent 60
days or more (averaged over the preceding six-month period), as a percentage of
the aggregate Class Certificate Balance of the Subordinate Certificates
(averaged over the preceding six-month period), is
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<PAGE> 35
equal to or greater than 50%, or (ii) cumulative Realized Losses with respect to
the Mortgage Loans exceed (a) with respect to the Distribution Date on the fifth
anniversary of the first Distribution Date, 30% of the aggregate Class
Certificate Balance of the Subordinate Certificates as of the Closing Date (the
"Original Subordinate Principal Balance"), (b) with respect to the Distribution
Date on the sixth anniversary of the first Distribution Date, 35% of the
Original Subordinate Principal Balance, (c) with respect to the Distribution
Date on the seventh anniversary of the first Distribution Date, 40% of the
Original Subordinate Principal Balance, (d) with respect to the Distribution
Date on the eighth anniversary of the first Distribution Date, 45% of the
Original Subordinate Principal Balance, and (e) with respect to the Distribution
Date on the ninth anniversary of the first Distribution Date, 50% of the
Original Subordinate Principal Balance.
The "Combined Prepayment Percentage" as of any Distribution Date will be
calculated as the difference between 100% and the Senior Prepayment Percentage
for such date. The "Class A-8 Prepayment Percentage" as of any Distribution Date
will be calculated as the product of (i) a fraction, expressed as a percentage,
the numerator of which is the Class Certificate Balance of the Class A-8
Certificates immediately prior to such Distribution Date and the denominator of
which is the aggregate of the Class Certificate Balances of the Class A-8
Certificates and the Subordinate Certificates immediately prior to such
Distribution Date and (ii) the Combined Prepayment Percentage. The "Subordinate
Prepayment Percentage" as of any Distribution Date will be calculated as the
difference between the Combined Prepayment Percentage and the Class A-8
Prepayment Percentage for such date.
If on any Distribution Date the allocation to any Class of Senior
Certificates (other than the Class A-8 and Class P Certificates) then entitled
to distributions of full and partial principal prepayments and other amounts to
be allocated in accordance with the Senior Prepayment Percentage above would
reduce the outstanding Class Certificate Balance of such Class below zero, the
distribution to such Class of Certificates of the Senior Prepayment Percentage
of such amounts for such Distribution Date will be limited to the percentage
necessary to reduce the related Class Certificate Balance to zero.
Class A-8 Principal Distribution Amount. On each Distribution Date prior
to the Senior Credit Support Depletion Date, an amount, to the extent of
Available Funds available therefor up to the amount of the Class A-8 Principal
Distribution Amount for such Distribution Date, will be distributed as principal
to the Class A-8 Certificates until the Class Certificate Balance thereof has
been reduced to zero.
The "Class A-8 Principal Distribution Amount" for any Distribution Date
will equal the sum of (i) the Class A-8 Percentage of the applicable Non-PO
Percentage of all amounts described in clauses (a) through (d) of the definition
of "Non-PO Formula Principal Amount" for such Distribution Date, (ii) with
respect to each Mortgage Loan that became a Liquidated Mortgage Loan during the
calendar month preceding the month of such Distribution Date, the lesser of (x)
the Class A-8 Percentage of the applicable Non-PO Percentage of the Stated
Principal Balance of such Mortgage Loan and (y) either (A) the Class A-8
Prepayment Percentage, if the Class A-8 Prepayment Percentage is greater than
0%, or, if the Class A-8 Prepayment Percentage equals 0%, the percentage
obtained by dividing the Class A-8 Percentage by the sum of the Senior
Percentage and the Class A-8 Percentage or (B) if an Excess Loss was sustained
with respect to such Liquidated Mortgage Loan during such preceding calendar
month, the Class A-8 Percentage, of the applicable Non-PO Percentage of the
portion of the Liquidation Proceeds that are allocable to principal received
with respect to such Mortgage Loan, and (iii) the Class A-8 Prepayment
Percentage of the applicable Non-PO Percentage of the amounts described in
clause (f) of the definition of "Non-PO Formula Principal Amount" for such
Distribution Date; provided, however, that if a Bankruptcy Loss that is an
Excess Loss is sustained with respect to a Mortgage Loan that is not a
Liquidated Mortgage Loan, the Class A-8 Principal Distribution Amount will be
reduced on the related Distribution Date by the Class A-8 Percentage of the
applicable Non-PO Percentage of the principal portion of such Bankruptcy Loss.
Notwithstanding the foregoing, if on any Distribution Date, Available Funds
are not sufficient to pay the Senior Principal Distribution Amount and the Class
A-8 Principal Distribution Amount, any shortfall shall be allocated pro rata
between such amounts based on the amount of the Senior Principal Distribution
Amount and the Class A-8 Principal Distribution Amount for such Distribution
Date.
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<PAGE> 36
Class P Principal Distribution Amount. On each Distribution Date,
distributions of principal of the Class P Certificates will be made in an amount
(the "Class P Principal Distribution Amount") equal to the lesser of (x) the PO
Formula Principal Amount for such Distribution Date and (y) the product of (i)
Available Funds remaining after distribution of interest on the Senior
Certificates and (ii) a fraction, the numerator of which is the PO Formula
Principal Amount and the denominator of which is the sum of the PO Formula
Principal Amount, the Senior Principal Distribution Amount and the Class A-8
Principal Distribution Amount.
If the Class P Principal Distribution Amount on a Distribution Date is
calculated as provided in clause (y) above, (a) principal distributions to
holders of the Senior Certificates (other than the Class A-8 and Class P
Certificates) will be in an amount equal to the product of (i) Available Funds
remaining after distribution of interest on the Senior Certificates and (ii) a
fraction, the numerator of which is the Senior Principal Distribution Amount and
the denominator of which is the sum of the Senior Principal Distribution Amount,
the PO Formula Principal Amount and the Class A-8 Principal Distribution Amount;
and (b) principal distribution to holders of the Class A-8 Certificates will be
in an amount equal to the product of (i) Available Funds remaining after
distribution of interest on the Senior Certificates and (ii) a fraction, the
numerator of which is the Class A-8 Principal Distribution Amount and the
denominator of which is the sum of the PO Formula Principal Amount, the Senior
Principal Distribution Amount and the Class A-8 Principal Distribution Amount.
The "PO Formula Principal Amount" for any Distribution Date will equal the
sum of the applicable PO Percentage of (a) all monthly payments of principal due
on each Discount Mortgage Loan on the related Due Date, (b) the principal
portion of the purchase price of each Discount Mortgage Loan that was
repurchased by the Seller or the Sponsor pursuant to the Pooling Agreement as of
such Distribution Date, (c) the Substitution Adjustment Amount in connection
with any Deleted Mortgage Loan that was a Discount Mortgage Loan received with
respect to such Distribution Date, (d) any Insurance Proceeds or Liquidation
Proceeds allocable to recoveries of principal of Discount Mortgage Loans that
are not yet Liquidated Mortgage Loans received during the calendar month
preceding the month of such Distribution Date, (e) with respect to each Discount
Mortgage Loan that became a Liquidated Mortgage Loan during the calendar month
preceding the month of such Distribution Date, the amount of Liquidation
Proceeds allocable to principal received with respect to such Discount Mortgage
Loan and (f) all partial and full principal prepayments by Mortgagors on
Discount Mortgage Loans received during the calendar month preceding such
Distribution Date; provided, however, that if a Bankruptcy Loss that is an
Excess Loss is sustained with respect to a Discount Mortgage Loan that is not a
Liquidated Mortgage Loan, the PO Formula Principal Amount will be reduced on the
related Distribution Date by the applicable PO Percentage of the principal
portion of such Bankruptcy Loss.
Subordinate Principal Distribution Amount. On each Distribution Date, to
the extent of Available Funds therefor, the Non-PO Formula Principal Amount, up
to the amount of the Subordinate Principal Distribution Amount for such
Distribution Date will be distributed as principal of the Classes of Subordinate
Certificates. Except as provided in the next paragraph, each Class of
Subordinate Certificates will be entitled to receive its pro rata share of the
Subordinate Principal Distribution Amount (based on its respective Class
Certificate Balance), in each case to the extent of the amount available from
Available Funds for distribution of principal on such Class. Distributions of
principal of the Subordinate Certificates will be made on each Distribution Date
sequentially to each Class of Subordinate Certificates in the order of their
numerical Class designations, beginning with the Class B-1 Certificates, until
each such Class has received its respective pro rata share for such Distribution
Date.
With respect to each Class of Subordinate Certificates, if on any
Distribution Date the sum of the related Class Subordination Percentages of such
Class and all Classes of Subordinate Certificates which have higher numerical
Class designations than such Class (the "Applicable Credit Support Percentage"),
is less than the Applicable Credit Support Percentage for such Class on the
Closing Date (the "Original Applicable Credit Support Percentage"), no
distribution of full and partial prepayments will be made to any such Classes
(the "Restricted Classes") and the amount otherwise distributable to the
Restricted Classes in respect of such full and partial prepayments and the
principal portion of any Liquidation Proceeds will be allocated among the
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<PAGE> 37
remaining Classes of Subordinate Certificates, pro rata, based upon their
respective Class Certificate Balances, and distributed in the order described
above.
The "Class Subordination Percentage" with respect to any Distribution Date
and each Class of Subordinate Certificates will equal the fraction (expressed as
a percentage) the numerator of which is the Class Certificate Balance of such
Class of Subordinate Certificates, immediately prior to such Distribution Date
and the denominator of which is the aggregate of the Class Certificate Balances
of all Classes of Certificates immediately prior to such Distribution Date.
The approximate Original Applicable Credit Support Percentages for the
Subordinate Certificates on the Closing Date are expected to be as follows:
<TABLE>
<S> <C>
Class B-1................................................... 4.50%
Class B-2................................................... 2.75%
Class B-3................................................... 1.75%
Class B-4................................................... 1.00%
Class B-5................................................... 0.70%
Class B-6................................................... 0.35%
</TABLE>
The "Subordinate Principal Distribution Amount" for any Distribution Date
will equal (A) the sum of (i) the Subordinate Percentage of the applicable
Non-PO Percentage of all amounts described in clauses (a) through (d) of the
definition of "Non-PO Formula Principal Amount" for such Distribution Date, (ii)
with respect to each Mortgage Loan that became a Liquidated Mortgage Loan during
the calendar month preceding the month of such Distribution Date, the applicable
Non-PO Percentage of the Liquidation Proceeds allocable to principal received
with respect to such Mortgage Loan, after application of amounts pursuant to
clause (ii) of the definition of Senior Principal Distribution Amount and
pursuant to clause (ii) of the definition of Class A-8 Principal Distribution
Amount, up to the Subordinate Percentage of the applicable Non-PO Percentage of
the Stated Principal Balance of such Mortgage Loan and (iii) the Subordinate
Prepayment Percentage of the applicable Non-PO Percentage of the amounts
described in clause (f) of the definition of "Non-PO Formula Principal Amount"
for such Distribution Date reduced by (B) the amount of any payment in respect
of Class P Deferred Amounts (as described below under "-- Allocation of Losses")
on the related Distribution Date.
Residual Certificates. The Residual Certificates will remain outstanding
for so long as the Trust Fund shall exist, whether or not they are receiving
current distributions of principal or interest. In addition to distributions of
interest and principal as described above, on each Distribution Date, the
holders of the Class R-I Certificates will be entitled to receive any Available
Funds remaining after the payment of interest and principal on the Senior
Certificates and Class P Deferred Amounts on the Class P Certificates and
interest and principal on the Subordinate Certificates as described above. It is
not anticipated that there will be any significant amounts remaining for any
such distribution.
ALLOCATION OF LOSSES
On each Distribution Date, the applicable PO Percentage of any Realized
Loss, including any Excess Loss, on a Discount Mortgage Loan will be allocated
to the Class P Certificates until the Class Certificate Balance thereof is
reduced to zero. The amount of any such Realized Loss, other than an Excess
Loss, allocated on or prior to the Senior Credit Support Depletion Date will be
treated as a "Class P Deferred Amount." To the extent funds are available on
such Distribution Date or on any future Distribution Date from amounts that
would otherwise be allocable to the Subordinate Principal Distribution Amount,
Class P Deferred Amounts will be paid on the Class P Certificates prior to
distributions of principal on the Subordinate Certificates. Any distribution of
Available Funds in respect of unpaid Class P Deferred Amounts will not further
reduce the Class Certificate Balance of the Class P Certificates. The Class P
Deferred Amounts will not bear interest. The Class Certificate Balance of the
Class of Subordinate Certificates then outstanding with the highest numerical
Class designation will be reduced by the amount of any payments in respect of
Class P Deferred Amounts. After the Senior Credit Support Depletion Date, no new
Class P Deferred Amounts will be created. In addition, the Class Certificate
Balance of the Class of Subordinate
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<PAGE> 38
Certificates then outstanding with the highest numerical Class designation will
be reduced if and to the extent that the aggregate of the Class Certificate
Balances of all Classes of Certificates, following all distributions and the
allocation of Realized Losses on a Distribution Date, exceeds the Pool Principal
Balance as of the Due Date occurring in the month of such Distribution Date.
On each Distribution Date, the applicable Non-PO Percentage of any Realized
Loss, other than any Excess Loss, will be allocated first to the Subordinate
Certificates, in the reverse order of their numerical Class designations
(beginning with the Class of Subordinate Certificates then outstanding with the
highest numerical Class designation), in each case until the Class Certificate
Balance of the respective Class of Certificates has been reduced to zero, and
then to the Senior Certificates (other than the Class P, Class S and Class X
Certificates) pro rata, based upon their respective Class Certificate Balances.
On each Distribution Date, the applicable Non-PO Percentage of Excess
Losses will be allocated pro rata among the Classes of Senior Certificates
(other than the Class P, Class S and Class X Certificates) and the Subordinate
Certificates based upon their respective Class Certificate Balances. Realized
Losses allocated to the Class F Certificates will reduce the Class Notional
Amount of the Class S Certificates.
Because principal distributions are paid to certain Classes of Senior
Certificates (other than the Class P Certificates) before other Classes of
Senior Certificates, holders of such Senior Certificates that are entitled to
receive principal later bear a greater risk of being allocated Realized Losses
on the Mortgage Loans than holders of Classes that are entitled to receive
principal earlier.
In general, a "Realized Loss" means, with respect to a Liquidated Mortgage
Loan, the amount by which the remaining unpaid principal balance of the Mortgage
Loan exceeds the amount of Liquidation Proceeds applied to the principal balance
of the related Mortgage Loan. "Excess Losses" are (i) Special Hazard Losses in
excess of the Special Hazard Loss Coverage Amount, (ii) Bankruptcy Losses in
excess of the Bankruptcy Loss Coverage Amount and (iii) Fraud Losses in excess
of the Fraud Loss Coverage Amount. "Bankruptcy Losses" are losses that are
incurred as a result of Debt Service Reductions and Deficient Valuations.
"Special Hazard Losses" are Realized Losses in respect of Special Hazard
Mortgage Loans. "Fraud Losses" are Realized Losses sustained by reason of a
default arising from fraud, dishonesty or misrepresentations. See "Credit
Support -- Subordination of Subordinate Certificates" herein.
As used herein, a "Deficient Valuation" is a bankruptcy proceeding whereby
the bankruptcy court may establish the value of the Mortgaged Property at an
amount less than the then-outstanding principal balance of the Mortgage Loan
secured by such Mortgaged Property or may reduce the then-outstanding principal
balance of a Mortgage Loan. In the case of a reduction in the value of the
related Mortgaged Property, the amount of the secured debt could be reduced to
such value, and the holder of such Mortgage Loan thus would become an unsecured
creditor to the extent the then-outstanding principal balance of such Mortgage
Loan exceeds the value so assigned to the Mortgaged Property by the bankruptcy
court. In addition, certain other modifications of the terms of a Mortgage Loan
can result from a bankruptcy proceeding, including the reduction (a "Debt
Service Reduction") of the amount of the Monthly Payment on the related Mortgage
Loan. Notwithstanding the foregoing, no such occurrence shall be considered a
Debt Service Reduction or Deficient Valuation so long as the Master Servicer is
pursuing any other remedies that may be available with respect to the related
Mortgage Loan and (i) such Mortgage Loan is not in default with respect to
payment due thereunder or (ii) scheduled Monthly Payments are being advanced by
the Master Servicer without giving effect to any Debt Service Reduction.
A "Liquidated Mortgage Loan" is a defaulted Mortgage Loan as to which the
Master Servicer has determined that all recoverable liquidation and insurance
proceeds have been received. A "Special Hazard Mortgage Loan" is a Liquidated
Mortgage Loan as to which the ability to recover the full amount due thereunder
was substantially impaired by a hazard not insured against under a standard
hazard insurance policy of the type described in the Prospectus under "Credit
Support -- Special Hazard Insurance Policies." See "Credit
Support -- Subordination of Subordinate Certificates" herein.
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<PAGE> 39
LAST SCHEDULED DISTRIBUTION DATE
The Last Scheduled Distribution Date for each Class of Offered
Certificates, which is set forth on the cover of this Prospectus Supplement, is
the latest date on which the Class Certificate Balance is expected to be reduced
to zero, and has been calculated on the basis of the Modeling Assumptions
described below under "Prepayment and Yield Considerations -- Assumptions
Relating to Tables" except for the additional assumption that no prepayments are
received with respect to the Mortgage Loans. Since the rate of distributions in
reduction of the Class Certificate Balance on each Class of Offered Certificates
will depend on the rate of payments of principal (including principal
prepayments) of the Mortgage Loans as well as the frequency and severity of
losses experienced by the Trust Fund, the Class Certificate Balance of any such
Class could reach zero significantly earlier or later than its Last Scheduled
Distribution Date. The rate of payments on the Mortgage Loans will depend on
their particular characteristics, as well as on prevailing interest rates from
time to time and other economic factors, and no assurance can be given as to the
actual payment experience of the Mortgage Loans. See "Maturity, Prepayment
Considerations and Weighted Average Life of Certificates" in the Prospectus.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
Delinquencies on the Mortgage Loans which are not advanced by or on behalf
of the Master Servicer (because amounts, if advanced, would be nonrecoverable),
will adversely affect the yield on the Certificates. Because of the priority of
distributions, shortfalls resulting from delinquencies not so advanced will be
borne first by the Subordinate Certificates (in the reverse order of their
priority of payment as described herein under "Description of the
Certificates -- Priority of Distributions"), and then by the Senior
Certificates.
Net Interest Shortfalls will adversely affect the yields on the Offered
Certificates. In addition, although all losses initially will be borne by the
Subordinate Certificates, as described herein under "Description of the
Certificates -- Allocation of Losses," Excess Losses will be borne by all
Classes of Certificates in the manner set forth in such section. As a result,
the yields on the Offered Certificates will depend on the rate and timing of
Realized Losses, including Excess Losses. Excess Losses could occur at a time
when one or more Classes of Subordinate Certificates are still outstanding and
otherwise available to absorb other types of Realized Losses.
The effective yields to the holders of the Offered Certificates (other than
the Class F and Class S Certificates) will be lower than the yields otherwise
produced by the applicable rate at which interest is passed through to such
holders and the purchase price of such Certificates because monthly
distributions will not be payable to such holders until the 20th day (or, if
such day is not a business day, the following business day) of the month
following the month in which interest accrues on the Mortgage Loans (without any
additional distribution of interest or earnings thereon in respect of such
delay).
PREPAYMENT CONSIDERATIONS AND RISKS
Because principal payments on the Mortgage Loans will be distributed to
Certificateholders as they are received from Mortgagors, the rate of principal
payments on the Offered Certificates (other than the Class S or Class X
Certificates), the aggregate amount of each interest payment on the Offered
Certificates (other than the Class P Certificates) and the yield to maturity of
Offered Certificates purchased at a price other than par are directly related to
the rate of payments of principal on the Mortgage Loans. The principal payments
on the Mortgage Loans may be in the form of scheduled principal payments or
principal prepayments (for this purpose, the term "principal prepayment"
includes prepayments and any other recovery of principal in advance of its
scheduled Due Date, including repurchases and liquidations due to default,
casualty, condemnation and the like). Any such prepayments will result in
distributions to holders of the Offered Certificates of amounts which would
otherwise be distributed over the remaining term of the Mortgage Loans. See
"Maturity, Prepayment Considerations and Weighted Average Life of the
Certificates" in the Prospectus. The rate at which mortgage loans in general
prepay may be influenced by a number of factors, including general economic
conditions, mortgage market interest rates, availability of mortgage funds and
homeowner
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<PAGE> 40
mobility. In general, if prevailing mortgage interest rates fall significantly
below the Mortgage Rates on the Mortgage Loans, the Mortgage Loans are likely to
prepay at higher rates than if prevailing mortgage interest rates remain at or
above the Mortgage Rates on the Mortgage Loans. Conversely, if mortgage interest
rates rise above the Mortgage Rates on the Mortgage Loans, the rate of
prepayment would be expected to decrease.
The timing of changes in the rate of prepayments may significantly affect
the actual yield to investors, even if the average rate of principal prepayments
is consistent with the expectations of investors. In general, the earlier the
payment of principal of the Mortgage Loans the greater the effect on an
investor's yield to maturity. As a result, the effect on an investor's yield of
principal prepayments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Certificates will not be offset by a subsequent like reduction (or
increase) in the rate of principal prepayments. The yield on the Class X and
Class S Certificates will be highly sensitive to the rate and timing of
prepayments on the Mortgage Loans. A rapid rate of principal prepayments on the
Mortgage Loans may have a material negative effect on the yield of the Class X
and Class S Certificates. See "-- Yield on the Class X Certificates" and
"-- Yield on the Class S Certificates" herein. Investors must make their own
decisions as to the appropriate prepayment assumptions to be used in deciding
whether to purchase the Offered Certificates.
As described herein under "Description of the Certificates -- Principal,"
the Senior Prepayment Percentage of the applicable Non-PO Percentage of all
principal prepayments (excluding for this purpose, liquidations due to default,
casualty, condemnation and the like) will be initially distributed to the
Classes of Senior Certificates (other than the Class A-8 and Class P
Certificates) then entitled to receive principal prepayment distributions. This
may result in all (or a disproportionate percentage) of such principal
prepayments being distributed to holders of the Senior Certificates (other than
the Class A-8 and Class P Certificates) and none (or less than their pro rata
share) of such principal prepayments being distributed to holders of Class A-8
and Subordinate Certificates during the periods of time described in the
definition of "Senior Prepayment Percentage." Holders of the Class A-8
Certificates generally will only receive distributions of principal prepayments
when the Subordinate Certificates are entitled to receive principal prepayments.
Mortgagors are permitted to prepay the Mortgage Loans, in whole or in part,
at any time without penalty. The rate of payment of principal may also be
affected by any repurchase of the Mortgage Loans permitted or required by the
Pooling Agreement including any optional termination of the Trust Fund by the
Sponsor. See "The Pooling and Servicing Agreement -- Termination; Optional
Termination" herein for a description of the Sponsor's option to repurchase the
Mortgage Loans when the Pool Principal Balance is less than 5% of the Cut-off
Date Pool Principal Balance. The Seller may be required to repurchase Mortgage
Loans because of defective documentation or material breaches in its
representations and warranties with respect to such Mortgage Loans. Any such
repurchases will shorten the weighted average lives of the Classes of Offered
Certificates.
All of the Mortgage Loans will include due-on-sale clauses which allow the
holder of the Mortgage Loan to demand payment in full of the remaining principal
balance upon sale or certain transfers of the property securing such Mortgage
Loan. The Master Servicer will enforce "due-on-sale" clauses to the extent
permitted by applicable law. Each Mortgage Note which contains "due-on-sale"
provisions permits the holder of the Mortgage Note to accelerate the maturity of
the Mortgage Loan upon conveyance by the Mortgagor of the underlying Mortgaged
Property. The Master Servicer will enforce any "due-on-sale" clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and reasonably believes that it is entitled to do
so under applicable law; provided, however, that the Master Servicer will not
take any action in relation to the enforcement of any "due-on-sale" provisions
which would impair or threaten to impair any recovery under any related Primary
Mortgage Insurance Policy. See "Maturity, Prepayment Considerations and Weighted
Average Life of Certificates" in the Prospectus. Acceleration of Mortgage Loans
as a result of enforcement of such "due-on-sale" provisions in connection with
transfers of the related Mortgaged Properties or the occurrence of certain other
events resulting in acceleration would affect the level of prepayments on the
Mortgage Loans, thereby affecting the weighted average lives of the Classes of
the Offered Certificates.
S-40
<PAGE> 41
ASSUMPTIONS RELATING TO TABLES
The tables beginning on page S-43 (the "Decrement Tables") have been
prepared on the basis of the following assumptions (the "Modeling Assumptions"):
(i) the Mortgage Pool consists of seventeen hypothetical mortgage loans having
the following characteristics:
<TABLE>
<CAPTION>
UNPAID ORIGINAL TERM REMAINING TERM
PRINCIPAL BALANCE (MONTHS) MORTGAGE RATE (MONTHS)
- ----------------- ------------- ------------- --------------
<C> <C> <C> <C>
$ 600,845 325 7.125% 323
2,152,585 360 7.250% 359
2,068,111 360 7.375% 358
13,890,862 360 7.500% 358
9,385,829 360 7.625% 358
15,309,513 360 7.750% 358
25,521,734 359 7.875% 357
18,429,537 360 8.000% 358
16,124,116 358 8.125% 355
19,656,027 360 8.250% 358
8,579,724 360 8.375% 358
10,479,034 360 8.500% 357
3,944,203 360 8.625% 357
2,509,779 360 8.750% 357
922,434 360 8.875% 357
373,530 346 9.000% 343
56,440 360 9.125% 358
</TABLE>
(ii) the initial Class Certificate Balances and Pass-Through Rates for the
Offered Certificates are as set forth on the cover hereof; (iii) there are no
Net Interest Shortfalls, delinquencies or Realized Losses with respect to the
Mortgage Loans; (iv) scheduled payments of principal and interest with respect
to the Mortgage Loans are received on the applicable Due Date beginning on April
1, 1997; (v) there are no partial prepayments and all prepayments in full are
received, together with a 30 days' interest thereon, on the last day of each
month beginning in March 1997; (vi) the Mortgage Loans prepay at the indicated
percentages of PSA; (vii) optional termination of the Trust Fund does not occur;
(viii) no Mortgage Loans are required to be repurchased from the Trust Fund and
no Mortgage Loans are substituted for the Mortgage Loans included in the Trust
Fund on the Closing Date; (ix) the Certificates are issued on the Closing Date;
and (x) cash payments on the Certificates are received on the 20th day of each
month beginning on April 20, 1997 in accordance with the priorities and amounts
described herein under "Description of the Certificates."
Although the characteristics of the mortgage loans for the Decrement Tables
have been prepared on the basis of the characteristics of the Mortgage Loans
which are expected to be in the Mortgage Pool, there is no assurance that the
Modeling Assumptions will reflect the actual characteristics or performance of
the Mortgage Loans or that the performance of the Offered Certificates will
conform to the results set forth in the tables.
WEIGHTED AVERAGE LIVES OF THE OFFERED CERTIFICATES
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of an Offered Certificate until each dollar in
reduction of the Class Certificate Balance thereof is distributed to the
investor. The weighted average lives of such Classes of Offered Certificates
will be influenced by, among other things, the rate at which principal of the
Mortgage Loans is paid, which may be in the form of scheduled principal payments
or principal prepayments (for this purpose, the term "prepayments" includes
prepayments and liquidations due to default, casualty, condemnation and the
like), the timing of changes in such rate of principal payments and the priority
sequence of distributions of principal of such Offered Certificates. The
interaction of the foregoing factors may have different effects on each Class of
Offered Certificates and the effects on any such Class may vary at different
times during the life of such Class. Accordingly, no assurance can be given as
to the weighted average life of any such Class of Offered Certificates. For an
example of how
S-41
<PAGE> 42
the weighted average lives of the Offered Certificates are affected by the
foregoing factors at various constant percentages of PSA, see the Decrement
Tables set forth below.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The prepayment model used in this Prospectus
Supplement is the Prepayment Standard Assumption ("PSA"), which represents an
assumed rate of principal prepayment each month relative to the then-outstanding
principal balance of a pool of mortgage loans for the life of such mortgage
loans. A prepayment assumption of 100% PSA assumes constant prepayment rates of
0.2% per annum of the then-outstanding principal balance of such mortgage loans
in the first month of the life of the mortgage loans and an additional 0.2% per
annum in each month thereafter until the thirtieth month. Beginning in the
thirtieth month and in each month thereafter during the life of the mortgage
loans, 100% PSA assumes a constant prepayment rate of 6% per annum each month.
As used in the table below, "0% PSA" assumes prepayment rates equal to 0% of
PSA, i.e., no prepayments. Correspondingly, "125% PSA" assumes prepayment rates
equal to 125% of PSA, and so forth. PSA 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. The
Sponsor believes that no existing statistics of which it is aware provide a
reliable basis for holders of Offered Certificates to predict the amount or the
timing of receipt of prepayments on the Mortgage Loans.
The Decrement Tables set forth below have been prepared on the basis of the
Modeling Assumptions described above under "-- Assumptions Relating to Tables."
There will likely be discrepancies between the characteristics of the actual
Mortgage Loans included in the Mortgage Pool and the characteristics of the
Mortgage Loans assumed in preparing the Decrement Tables. Any such discrepancy
may have an effect upon the percentages of initial Class Certificate Balances
outstanding set forth in the Decrement Tables (and the weighted average lives of
the Offered Certificates). In addition, to the extent that the Mortgage Loans
that actually are included in the Mortgage Pool have characteristics that differ
from those assumed in preparing the following Decrement Tables, the Class
Certificate Balance of any such Class of Offered Certificates could be reduced
to zero earlier or later than indicated by such Decrement Tables.
Furthermore, the information contained in the Decrement Tables with respect
to the weighted average life of any Offered Certificate is not necessarily
indicative of the weighted average life of such Class of Offered Certificates
that might be calculated or projected under different or varying prepayment
assumptions.
It is not likely that (i) all of the Mortgage Loans will have the Mortgage
Rates or remaining terms to maturity assumed or (ii) the Mortgage Loans will
prepay at the indicated percentage of PSA until maturity. In addition, the
diverse remaining terms to maturity of the Mortgage Loans (which includes many
recently originated Mortgage Loans) could produce slower or faster distributions
in reduction of Class Certificate Balances than indicated in the Decrement
Tables at the various percentages of PSA specified.
Based upon the Modeling Assumptions, the following Decrement Tables
indicate the projected weighted average life of each Class of the Offered
Certificates and set forth the percentages of the initial Class Certificate
Balance of each such Class that would be outstanding after each of the dates
shown at various constant percentages of the PSA.
S-42
<PAGE> 43
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING
AT THE RESPECTIVE PERCENTAGES OF PSA SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2
------------------------------------- -------------------------------------
DISTRIBUTION DATE 0% 100% 225% 350% 500% 0% 100% 225% 350% 500%
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
March 20, 1998............. 98.8 95.9 92.2 88.5 84.1 98.8 95.9 92.2 88.5 84.1
March 20, 1999............. 97.5 87.8 76.0 64.5 51.1 97.5 87.8 76.0 64.5 51.1
March 20, 2000............. 96.1 77.2 55.5 35.7 14.5 96.1 77.2 55.5 35.7 14.5
March 20, 2001............. 94.6 67.2 37.6 12.8 0.0 94.6 67.2 37.6 12.8 0.0
March 20, 2002............. 93.0 57.7 22.3 0.0 0.0 93.0 57.7 22.3 0.0 0.0
March 20, 2003............. 91.3 49.5 10.5 0.0 0.0 91.3 49.5 10.5 0.0 0.0
March 20, 2004............. 89.3 41.9 1.0 0.0 0.0 89.3 41.9 1.0 0.0 0.0
March 20, 2005............. 87.3 35.2 0.0 0.0 0.0 87.3 35.2 0.0 0.0 0.0
March 20, 2006............. 85.0 29.2 0.0 0.0 0.0 85.0 29.2 0.0 0.0 0.0
March 20, 2007............. 82.6 23.9 0.0 0.0 0.0 82.6 23.9 0.0 0.0 0.0
March 20, 2008............. 80.0 18.8 0.0 0.0 0.0 80.0 18.8 0.0 0.0 0.0
March 20, 2009............. 77.2 14.1 0.0 0.0 0.0 77.2 14.1 0.0 0.0 0.0
March 20, 2010............. 74.1 9.6 0.0 0.0 0.0 74.1 9.6 0.0 0.0 0.0
March 20, 2011............. 70.7 5.4 0.0 0.0 0.0 70.7 5.4 0.0 0.0 0.0
March 20, 2012............. 67.1 1.4 0.0 0.0 0.0 67.1 1.4 0.0 0.0 0.0
March 20, 2013............. 63.2 0.0 0.0 0.0 0.0 63.2 0.0 0.0 0.0 0.0
March 20, 2014............. 59.0 0.0 0.0 0.0 0.0 59.0 0.0 0.0 0.0 0.0
March 20, 2015............. 54.4 0.0 0.0 0.0 0.0 54.4 0.0 0.0 0.0 0.0
March 20, 2016............. 49.4 0.0 0.0 0.0 0.0 49.4 0.0 0.0 0.0 0.0
March 20, 2017............. 44.1 0.0 0.0 0.0 0.0 44.1 0.0 0.0 0.0 0.0
March 20, 2018............. 38.2 0.0 0.0 0.0 0.0 38.2 0.0 0.0 0.0 0.0
March 20, 2019............. 31.9 0.0 0.0 0.0 0.0 31.9 0.0 0.0 0.0 0.0
March 20, 2020............. 25.1 0.0 0.0 0.0 0.0 25.1 0.0 0.0 0.0 0.0
March 20, 2021............. 17.7 0.0 0.0 0.0 0.0 17.7 0.0 0.0 0.0 0.0
March 20, 2022............. 9.7 0.0 0.0 0.0 0.0 9.7 0.0 0.0 0.0 0.0
March 20, 2023............. 1.0 0.0 0.0 0.0 0.0 1.0 0.0 0.0 0.0 0.0
March 20, 2024............. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
March 20, 2025............. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
March 20, 2026............. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
March 20, 2027............. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Weighted Average Life
(in years)(1)............ 17.3 6.7 3.5 2.5 2.0 17.3 6.7 3.5 2.5 2.0
</TABLE>
- ---------------
(1) The weighted average life of a Class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the Class
Certificate Balance thereof by the number of years from the date of the
issuance of such Class to the related Distribution Date, (ii) adding the
results and (iii) dividing the sum by the initial Class Certificate Balance
of such Class.
S-43
<PAGE> 44
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING AT THE
RESPECTIVE PERCENTAGES OF PSA SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS A-3 CLASS A-4
------------------------------------- -------------------------------------
DISTRIBUTION DATE 0% 100% 225% 350% 500% 0% 100% 225% 350% 500%
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
March 20, 1998............. 98.8 95.9 92.2 88.5 84.1 99.1 97.0 94.4 91.7 88.5
March 20, 1999............. 97.5 87.8 76.0 64.5 51.1 98.2 91.2 82.7 74.4 64.7
March 20, 2000............. 96.1 77.2 55.5 35.7 14.5 97.2 83.6 67.9 53.6 38.3
March 20, 2001............. 94.6 67.2 37.6 12.8 0.0 96.1 76.3 55.0 37.1 0.6
March 20, 2002............. 93.0 57.7 22.3 0.0 0.0 95.0 69.5 43.9 15.7 0.0
March 20, 2003............. 91.3 49.5 10.5 0.0 0.0 93.7 63.5 35.4 0.0 0.0
March 20, 2004............. 89.3 41.9 1.0 0.0 0.0 92.3 58.1 28.5 0.0 0.0
March 20, 2005............. 87.3 35.2 0.0 0.0 0.0 90.8 53.2 12.6 0.0 0.0
March 20, 2006............. 85.0 29.2 0.0 0.0 0.0 89.2 48.9 0.0 0.0 0.0
March 20, 2007............. 82.6 23.9 0.0 0.0 0.0 87.5 45.1 0.0 0.0 0.0
March 20, 2008............. 80.0 18.8 0.0 0.0 0.0 85.6 41.4 0.0 0.0 0.0
March 20, 2009............. 77.2 14.1 0.0 0.0 0.0 83.5 38.0 0.0 0.0 0.0
March 20, 2010............. 74.1 9.6 0.0 0.0 0.0 81.3 34.8 0.0 0.0 0.0
March 20, 2011............. 70.7 5.4 0.0 0.0 0.0 78.9 31.7 0.0 0.0 0.0
March 20, 2012............. 67.1 1.4 0.0 0.0 0.0 76.3 28.8 0.0 0.0 0.0
March 20, 2013............. 63.2 0.0 0.0 0.0 0.0 73.5 22.0 0.0 0.0 0.0
March 20, 2014............. 59.0 0.0 0.0 0.0 0.0 70.4 13.3 0.0 0.0 0.0
March 20, 2015............. 54.4 0.0 0.0 0.0 0.0 67.1 5.1 0.0 0.0 0.0
March 20, 2016............. 49.4 0.0 0.0 0.0 0.0 63.5 0.0 0.0 0.0 0.0
March 20, 2017............. 44.1 0.0 0.0 0.0 0.0 59.6 0.0 0.0 0.0 0.0
March 20, 2018............. 38.2 0.0 0.0 0.0 0.0 55.4 0.0 0.0 0.0 0.0
March 20, 2019............. 31.9 0.0 0.0 0.0 0.0 50.9 0.0 0.0 0.0 0.0
March 20, 2020............. 25.1 0.0 0.0 0.0 0.0 46.0 0.0 0.0 0.0 0.0
March 20, 2021............. 17.7 0.0 0.0 0.0 0.0 40.6 0.0 0.0 0.0 0.0
March 20, 2022............. 9.7 0.0 0.0 0.0 0.0 34.8 0.0 0.0 0.0 0.0
March 20, 2023............. 1.0 0.0 0.0 0.0 0.0 28.6 0.0 0.0 0.0 0.0
March 20, 2024............. 0.0 0.0 0.0 0.0 0.0 7.6 0.0 0.0 0.0 0.0
March 20, 2025............. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
March 20, 2026............. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
March 20, 2027............. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Weighted Average Life
(in years)(1)............ 17.3 6.7 3.5 2.5 2.0 19.9 9.5 4.7 3.2 2.5
</TABLE>
- ---------------
(1) The weighted average life of a Class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the Class
Certificate Balance thereof by the number of years from the date of the
issuance of such Class to the related Distribution Date, (ii) adding the
results and (iii) dividing the sum by the initial Class Certificate Balance
of such Class.
S-44
<PAGE> 45
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING AT THE
RESPECTIVE PERCENTAGES OF PSA SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS A-5 CLASS A-6
------------------------------------- -------------------------------------
DISTRIBUTION DATE 0% 100% 225% 350% 500% 0% 100% 225% 350% 500%
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
March 20, 1998............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
March 20, 1999............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
March 20, 2000............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
March 20, 2001............. 100.0 100.0 100.0 100.0 60.8 100.0 100.0 100.0 100.0 100.0
March 20, 2002............. 100.0 100.0 100.0 82.5 0.0 100.0 100.0 100.0 100.0 0.0
March 20, 2003............. 100.0 100.0 100.0 38.2 0.0 100.0 100.0 100.0 63.8 0.0
March 20, 2004............. 100.0 100.0 100.0 4.4 0.0 100.0 100.0 100.0 7.3 0.0
March 20, 2005............. 100.0 100.0 78.0 0.0 0.0 100.0 100.0 100.0 0.0 0.0
March 20, 2006............. 100.0 100.0 58.8 0.0 0.0 100.0 100.0 98.1 0.0 0.0
March 20, 2007............. 100.0 100.0 42.0 0.0 0.0 100.0 100.0 70.1 0.0 0.0
March 20, 2008............. 100.0 100.0 27.6 0.0 0.0 100.0 100.0 46.1 0.0 0.0
March 20, 2009............. 100.0 100.0 15.3 0.0 0.0 100.0 100.0 25.5 0.0 0.0
March 20, 2010............. 100.0 100.0 4.7 0.0 0.0 100.0 100.0 7.9 0.0 0.0
March 20, 2011............. 100.0 100.0 0.0 0.0 0.0 100.0 100.0 0.0 0.0 0.0
March 20, 2012............. 100.0 100.0 0.0 0.0 0.0 100.0 100.0 0.0 0.0 0.0
March 20, 2013............. 100.0 91.6 0.0 0.0 0.0 100.0 100.0 0.0 0.0 0.0
March 20, 2014............. 100.0 79.1 0.0 0.0 0.0 100.0 100.0 0.0 0.0 0.0
March 20, 2015............. 100.0 67.3 0.0 0.0 0.0 100.0 100.0 0.0 0.0 0.0
March 20, 2016............. 100.0 55.4 0.0 0.0 0.0 100.0 92.4 0.0 0.0 0.0
March 20, 2017............. 100.0 42.9 0.0 0.0 0.0 100.0 71.5 0.0 0.0 0.0
March 20, 2018............. 100.0 31.0 0.0 0.0 0.0 100.0 51.6 0.0 0.0 0.0
March 20, 2019............. 100.0 19.6 0.0 0.0 0.0 100.0 32.8 0.0 0.0 0.0
March 20, 2020............. 100.0 8.9 0.0 0.0 0.0 100.0 14.9 0.0 0.0 0.0
March 20, 2021............. 100.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0
March 20, 2022............. 100.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0
March 20, 2023............. 100.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0
March 20, 2024............. 70.9 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0
March 20, 2025............. 31.3 0.0 0.0 0.0 0.0 52.1 0.0 0.0 0.0 0.0
March 20, 2026............. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
March 20, 2027............. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Weighted Average Life
(in years)(1)............ 27.5 19.5 9.8 5.8 4.2 28.0 21.2 11.0 6.3 4.4
</TABLE>
- ---------------
(1) The weighted average life of a Class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the Class
Certificate Balance thereof by the number of years from the date of the
issuance of such Class to the related Distribution Date, (ii) adding the
results and (iii) dividing the sum by the initial Class Certificate Balance
of such Class.
S-45
<PAGE> 46
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING AT THE
RESPECTIVE PERCENTAGES OF PSA SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS A-7 CLASS A-8
------------------------------------- -------------------------------------
DISTRIBUTION DATE 0% 100% 225% 350% 500% 0% 100% 225% 350% 500%
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
March 20, 1998............. 100.0 100.0 100.0 100.0 100.0 99.1 99.1 99.1 99.1 99.1
March 20, 1999............. 100.0 100.0 100.0 100.0 100.0 98.2 98.2 98.2 98.2 98.2
March 20, 2000............. 100.0 100.0 100.0 100.0 100.0 97.2 97.2 97.2 97.2 97.2
March 20, 2001............. 100.0 100.0 100.0 100.0 100.0 96.1 96.1 96.1 96.1 96.1
March 20, 2002............. 100.0 100.0 100.0 100.0 76.4 95.0 95.0 95.0 95.0 95.0
March 20, 2003............. 100.0 100.0 100.0 100.0 3.9 93.7 92.0 89.7 87.3 84.3
March 20, 2004............. 100.0 100.0 100.0 100.0 0.0 92.3 88.4 83.4 78.4 59.2
March 20, 2005............. 100.0 100.0 100.0 68.5 0.0 90.8 83.8 75.3 67.0 40.7
March 20, 2006............. 100.0 100.0 100.0 46.5 0.0 89.2 78.4 65.8 54.5 28.0
March 20, 2007............. 100.0 100.0 100.0 36.0 0.0 87.5 72.2 55.8 42.2 19.2
March 20, 2008............. 100.0 100.0 100.0 27.9 0.0 85.6 66.4 47.3 32.6 13.2
March 20, 2009............. 100.0 100.0 100.0 21.5 0.0 83.5 60.9 39.9 25.2 9.0
March 20, 2010............. 100.0 100.0 100.0 16.5 0.0 81.3 55.8 33.6 19.3 6.1
March 20, 2011............. 100.0 100.0 91.7 12.7 0.0 78.9 50.9 28.2 14.8 4.2
March 20, 2012............. 100.0 100.0 76.7 9.7 0.0 76.3 46.2 23.6 11.3 2.8
March 20, 2013............. 100.0 100.0 63.9 7.4 0.0 73.5 41.9 19.6 8.6 1.9
March 20, 2014............. 100.0 100.0 53.0 5.6 0.0 70.4 37.7 16.3 6.5 1.3
March 20, 2015............. 100.0 100.0 43.7 4.2 0.0 67.1 33.8 13.4 4.9 0.9
March 20, 2016............. 100.0 100.0 35.8 3.1 0.0 63.5 30.1 11.0 3.7 0.6
March 20, 2017............. 100.0 100.0 29.0 2.3 0.0 59.7 26.5 8.9 2.7 0.4
March 20, 2018............. 100.0 100.0 23.4 1.7 0.0 55.5 23.2 7.2 2.0 0.2
March 20, 2019............. 100.0 100.0 18.5 1.2 0.0 50.9 20.0 5.7 1.5 0.2
March 20, 2020............. 100.0 100.0 14.5 0.9 0.0 46.0 17.0 4.5 1.0 0.1
March 20, 2021............. 100.0 97.5 11.1 0.6 0.0 40.7 14.1 3.4 0.7 0.1
March 20, 2022............. 100.0 78.6 8.2 0.4 0.0 34.9 11.4 2.5 0.5 0.0
March 20, 2023............. 100.0 60.6 5.8 0.3 0.0 28.6 8.8 1.8 0.3 0.0
March 20, 2024............. 100.0 43.5 3.9 0.2 0.0 21.8 6.3 1.2 0.2 0.0
March 20, 2025............. 100.0 27.2 2.2 0.1 0.0 14.5 3.9 0.7 0.1 0.0
March 20, 2026............. 73.2 11.7 0.9 0.0 0.0 6.6 1.7 0.3 0.0 0.0
March 20, 2027............. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Weighted Average Life (in
years)(1)................ 29.3 26.7 18.4 10.2 5.4 20.3 15.1 11.8 10.0 8.1
</TABLE>
- ---------------
(1) The weighted average life of a Class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the Class
Certificate Balance thereof by the number of years from the date of the
issuance of such Class to the related Distribution Date, (ii) adding the
results and (iii) dividing the sum by the initial Class Certificate Balance
of such Class.
S-46
<PAGE> 47
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING AT THE
RESPECTIVE PERCENTAGES OF PSA SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS F
-------------------------------------
DISTRIBUTION DATE 0% 100% 225% 350% 500%
- ----------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Initial Percentage......................................... 100.0 100.0 100.0 100.0 100.0
March 20, 1998............................................. 98.8 95.9 92.2 88.5 84.1
March 20, 1999............................................. 97.5 87.8 76.0 64.5 51.1
March 20, 2000............................................. 96.1 77.2 55.5 35.7 14.5
March 20, 2001............................................. 94.6 67.2 37.6 12.8 0.0
March 20, 2002............................................. 93.0 57.7 22.3 0.0 0.0
March 20, 2003............................................. 91.3 49.5 10.5 0.0 0.0
March 20, 2004............................................. 89.3 41.9 1.0 0.0 0.0
March 20, 2005............................................. 87.3 35.2 0.0 0.0 0.0
March 20, 2006............................................. 85.0 29.2 0.0 0.0 0.0
March 20, 2007............................................. 82.6 23.9 0.0 0.0 0.0
March 20, 2008............................................. 80.0 18.8 0.0 0.0 0.0
March 20, 2009............................................. 77.2 14.1 0.0 0.0 0.0
March 20, 2010............................................. 74.1 9.6 0.0 0.0 0.0
March 20, 2011............................................. 70.7 5.4 0.0 0.0 0.0
March 20, 2012............................................. 67.1 1.4 0.0 0.0 0.0
March 20, 2013............................................. 63.2 0.0 0.0 0.0 0.0
March 20, 2014............................................. 59.0 0.0 0.0 0.0 0.0
March 20, 2015............................................. 54.4 0.0 0.0 0.0 0.0
March 20, 2016............................................. 49.4 0.0 0.0 0.0 0.0
March 20, 2017............................................. 44.1 0.0 0.0 0.0 0.0
March 20, 2018............................................. 38.2 0.0 0.0 0.0 0.0
March 20, 2019............................................. 31.9 0.0 0.0 0.0 0.0
March 20, 2020............................................. 25.1 0.0 0.0 0.0 0.0
March 20, 2021............................................. 17.7 0.0 0.0 0.0 0.0
March 20, 2022............................................. 9.7 0.0 0.0 0.0 0.0
March 20, 2023............................................. 1.0 0.0 0.0 0.0 0.0
March 20, 2024............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2025............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2026............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2027............................................. 0.0 0.0 0.0 0.0 0.0
Weighted Average Life (in years)(1)........................ 17.3 6.7 3.5 2.5 2.0
</TABLE>
- ---------------
(1) The weighted average life of a Class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the Class
Certificate Balance thereof by the number of years from the date of the
issuance of such Class to the related Distribution Date, (ii) adding the
results and (iii) dividing the sum by the initial Class Certificate Balance
of such Class.
S-47
<PAGE> 48
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING AT THE
RESPECTIVE PERCENTAGES OF PSA SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS P
-----------------------------------------
DISTRIBUTION DATE 0% 100% 225% 350% 500%
----------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Initial Percentage................................. 100.0 100.0 100.0 100.0 100.0
March 20, 1998..................................... 99.0 97.4 95.3 93.2 90.7
March 20, 1999..................................... 98.0 92.4 85.7 79.1 71.4
March 20, 2000..................................... 96.9 86.0 73.5 62.1 49.8
March 20, 2001..................................... 95.7 79.9 62.8 48.4 34.4
March 20, 2002..................................... 94.4 74.1 53.6 37.7 23.8
March 20, 2003..................................... 93.0 68.6 45.7 29.4 16.4
March 20, 2004..................................... 91.5 63.4 38.9 22.8 11.3
March 20, 2005..................................... 89.9 58.6 33.0 17.7 7.8
March 20, 2006..................................... 88.2 54.0 28.0 13.7 5.3
March 20, 2007..................................... 86.3 49.7 23.7 10.6 3.7
March 20, 2008..................................... 84.3 45.6 20.0 8.2 2.5
March 20, 2009..................................... 82.2 41.8 16.9 6.3 1.7
March 20, 2010..................................... 79.8 38.2 14.2 4.8 1.2
March 20, 2011..................................... 77.3 34.8 11.9 3.7 0.8
March 20, 2012..................................... 74.6 31.5 9.9 2.8 0.5
March 20, 2013..................................... 71.7 28.5 8.3 2.1 0.4
March 20, 2014..................................... 68.6 25.6 6.8 1.6 0.2
March 20, 2015..................................... 65.2 22.9 5.6 1.2 0.2
March 20, 2016..................................... 61.5 20.3 4.6 0.9 0.1
March 20, 2017..................................... 57.6 17.9 3.7 0.7 0.1
March 20, 2018..................................... 53.4 15.6 3.0 0.5 0.0
March 20, 2019..................................... 48.9 13.4 2.4 0.4 0.0
March 20, 2020..................................... 44.0 11.3 1.8 0.3 0.0
March 20, 2021..................................... 38.7 9.4 1.4 0.2 0.0
March 20, 2022..................................... 33.0 7.5 1.0 0.1 0.0
March 20, 2023..................................... 26.9 5.7 0.7 0.1 0.0
March 20, 2024..................................... 20.3 4.1 0.5 0.0 0.0
March 20, 2025..................................... 13.7 2.6 0.3 0.0 0.0
March 20, 2026..................................... 6.5 1.2 0.1 0.0 0.0
March 20, 2027..................................... 0.0 0.0 0.0 0.0 0.0
Weighted Average Life (in years)(1)................ 19.9 11.5 7.1 5.0 3.7
</TABLE>
- ---------------
(1) The weighted average life of a Class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the Class
Certificate Balance thereof by the number of years from the date of the
issuance of such Class to the related Distribution Date, (ii) adding the
results and (iii) dividing the sum by the initial Class Certificate Balance
of such Class.
S-48
<PAGE> 49
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING AT THE
RESPECTIVE PERCENTAGES OF PSA SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS B-1, CLASS B-2, CLASS B-3
-------------------------------------
DISTRIBUTION DATE 0% 100% 225% 350% 500%
----------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Initial Percentage......................................... 100.0 100.0 100.0 100.0 100.0
March 20, 1998............................................. 99.1 99.1 99.1 99.1 99.1
March 20, 1999............................................. 98.2 98.2 98.2 98.2 98.2
March 20, 2000............................................. 97.2 97.2 97.2 97.2 97.2
March 20, 2001............................................. 96.1 96.1 96.1 96.1 96.1
March 20, 2002............................................. 95.0 95.0 95.0 95.0 95.0
March 20, 2003............................................. 93.7 92.0 89.7 87.3 84.3
March 20, 2004............................................. 92.3 88.4 83.4 78.4 59.2
March 20, 2005............................................. 90.8 83.8 75.3 67.0 40.7
March 20, 2006............................................. 89.2 78.4 65.8 54.5 28.0
March 20, 2007............................................. 87.5 72.2 55.8 42.2 19.2
March 20, 2008............................................. 85.6 66.4 47.3 32.6 13.2
March 20, 2009............................................. 83.5 60.9 39.9 25.2 9.0
March 20, 2010............................................. 81.3 55.8 33.6 19.3 6.1
March 20, 2011............................................. 78.9 50.9 28.2 14.8 4.2
March 20, 2012............................................. 76.3 46.2 23.6 11.3 2.8
March 20, 2013............................................. 73.5 41.9 19.6 8.6 1.9
March 20, 2014............................................. 70.4 37.7 16.3 6.5 1.3
March 20, 2015............................................. 67.1 33.8 13.4 4.9 0.9
March 20, 2016............................................. 63.5 30.1 11.0 3.7 0.6
March 20, 2017............................................. 59.7 26.5 8.9 2.7 0.4
March 20, 2018............................................. 55.5 23.2 7.2 2.0 0.2
March 20, 2019............................................. 50.9 20.0 5.7 1.5 0.2
March 20, 2020............................................. 46.0 17.0 4.5 1.0 0.1
March 20, 2021............................................. 40.7 14.1 3.4 0.7 0.1
March 20, 2022............................................. 34.9 11.4 2.5 0.5 0.0
March 20, 2023............................................. 28.6 8.8 1.8 0.3 0.0
March 20, 2024............................................. 21.8 6.3 1.2 0.2 0.0
March 20, 2025............................................. 14.5 3.9 0.7 0.1 0.0
March 20, 2026............................................. 6.6 1.7 0.3 0.0 0.0
March 20, 2027............................................. 0.0 0.0 0.0 0.0 0.0
Weighted Average Life (in years)(1)........................ 20.3 15.1 11.8 10.0 8.1
</TABLE>
- ---------------
(1) The weighted average life of a Class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the Class
Certificate Balance thereof by the number of years from the date of the
issuance of such Class to the related Distribution Date, (ii) adding the
results and (iii) dividing the sum by the initial Class Certificate Balance
of such Class.
S-49
<PAGE> 50
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING AT THE
RESPECTIVE PERCENTAGES OF PSA SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS R-I AND CLASS R-II
-------------------------------------
DISTRIBUTION DATE 0% 100% 225% 350% 500%
----------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Initial Percentage......................................... 100.0 100.0 100.0 100.0 100.0
March 20, 1998............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 1999............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2000............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2001............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2002............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2003............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2004............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2005............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2006............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2007............................................. 0.0 0.0 0.0 0.0 0.0
March 20 ,2008............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2009............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2010............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2011............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2012............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2013............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2014............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2015............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2016............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2017............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2018............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2019............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2020............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2021............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2022............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2023............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2024............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2025............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2026............................................. 0.0 0.0 0.0 0.0 0.0
March 20, 2027............................................. 0.0 0.0 0.0 0.0 0.0
Weighted Average Life (in years)(1)........................ 0.1 0.1 0.1 0.1 0.1
</TABLE>
- ---------------
(1) The weighted average life of a Class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the Class
Certificate Balance thereof by the number of years from the date of the
issuance of such Class to the related Distribution Date, (ii) adding the
results and (iii) dividing the sum by the initial Class Certificate Balance
of such Class.
S-50
<PAGE> 51
YIELD ON THE CLASS S CERTIFICATES
The Class S Certificates will be "interest only" or IO Certificates as
described in the Prospectus under "Description of the Certificates -- Categories
of Classes of Certificates" and, as such, will not be entitled to receive
distributions of principal in respect of the Mortgage Loans. The significance of
the effects of prepayments and changes in LIBOR on the Class S Certificates is
illustrated in the following table entitled "Sensitivity of the Class S
Certificates to Prepayments and LIBOR," which shows the pre-tax yield (on a
corporate bond equivalent basis) to the holders of Class S Certificates under
different constant percentages of PSA and rates of LIBOR. The yields of such
Certificates set forth in the following table were calculated using the Modeling
Assumptions and the additional assumptions that (i) on the LIBOR Determination
Date in March 1997 and on each LIBOR Determination Date thereafter, LIBOR will
be as indicated and (ii) the assumed market price for all of the Class S
Certificates is approximately $744,797 (excluding accrued interest on the
Closing Date).
AS INDICATED IN THE FOLLOWING TABLE, THE YIELD TO INVESTORS IN THE CLASS S
CERTIFICATES WILL BE EXTREMELY SENSITIVE TO CHANGES IN THE RATE OF LIBOR AND TO
THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) ON THE
MORTGAGE LOANS, WHICH GENERALLY CAN BE PREPAID AT ANY TIME. INVESTORS IN THE
CLASS S CERTIFICATES SHOULD CONSIDER CAREFULLY THE ASSOCIATED RISKS, INCLUDING
THE RISK THAT A RAPID RATE OF PREPAYMENT OF THE MORTGAGE LOANS OR A HIGH LEVEL
OF LIBOR COULD RESULT IN THE FAILURE OF INVESTORS IN THE CLASS S CERTIFICATES TO
FULLY RECOVER THEIR INITIAL INVESTMENT.
It is not likely that the Mortgage Loans will prepay at a constant rate
until maturity or that all of the Mortgage Loans will prepay at the same rate or
that they will have the characteristics assumed. There can be no assurance that
the Mortgage Loans will prepay at any of the rates shown in the table or at any
other particular rate. The timing of changes in the rate of prepayments may
affect significantly the yield realized by a holder of a Class S Certificate and
there can be no assurance that the pre-tax yield to an investor in the Class S
Certificates will correspond to any of the pre-tax yields shown herein. Each
investor must make its own decision as to the appropriate prepayment assumptions
to be used in deciding whether or not to purchase a Class S Certificate.
Changes in LIBOR may not correlate with changes in prevailing mortgage
interest rates. It is possible that lower prevailing mortgage interest rates,
which might be expected to result in faster prepayments, could occur
concurrently with an increase in LIBOR.
SENSITIVITY OF THE CLASS S CERTIFICATES
TO PREPAYMENTS AND LIBOR
(PRE-TAX YIELDS TO MATURITY)
<TABLE>
<CAPTION>
PERCENTAGE OF PSA
-----------------------------------
LIBOR 0% 100% 225% 350% 500%
- ----- ---- ---- ----- ----- -----
<C> <C> <C> <C> <C> <C>
3.375% 97.9% 90.2% 79.3% 67.6% 53.5%
4.375% 76.7% 68.5% 56.7% 43.8% 28.8%
5.375% 56.3% 47.6% 34.0% 19.6% 3.5%
6.375% 36.8% 27.0% 10.6% (6.1)% (23.7)%
7.375% 17.6% 5.8% (15.9)% (36.1)% (55.7)%
</TABLE>
The yields set forth in the preceding table were calculated by determining
the monthly discount rates that, when applied to the assumed stream of cash
flows to be paid on the Class S Certificates, would cause the discounted present
value of such assumed stream of cash flows to equal the assumed purchase price
of the Class S Certificates indicated above and converting such monthly rates to
corporate bond equivalent rates. Such calculation does not take into account
variations that may occur in the interest rates at which investors may be able
to reinvest funds received by them as payments of interest on the Class S
Certificates and consequently does not purport to reflect the return on any
investment in the Class S Certificates when such reinvestment rates are
considered.
S-51
<PAGE> 52
YIELD ON THE CLASS X CERTIFICATES
The Class X Certificates will be "interest only" or IO Certificates as
described in the Prospectus under "Description of the Certificates -- Categories
of Classes of Certificates" and, as such, will not be entitled to receive
distributions of principal in respect of the Mortgage Loans. The significance of
the effects of prepayments on the Class X Certificates is illustrated in the
following table entitled "Sensitivity of the Class X Certificates to
Prepayments," which shows the pre-tax yield (on a corporate bond equivalent
basis) to holders of Class X Certificates under different constant percentages
of PSA. The yields of such Certificates set forth in the following table were
calculated using the Modeling Assumptions and the additional assumption that the
market price for all of the Class X Certificates is approximately $1,605,046
(excluding accrued interest on the Closing Date).
AS INDICATED IN THE FOLLOWING TABLE, THE YIELD TO INVESTORS IN THE CLASS X
CERTIFICATES WILL BE HIGHLY SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS
(INCLUDING PREPAYMENTS) OF THE PREMIUM MORTGAGE LOANS, WHICH GENERALLY CAN BE
PREPAID AT ANY TIME. INVESTORS IN THE CLASS X CERTIFICATES SHOULD CONSIDER
CAREFULLY THE ASSOCIATED RISKS, INCLUDING THE RISK THAT A RAPID RATE OF
PREPAYMENTS ON THE PREMIUM MORTGAGE LOANS COULD RESULT IN THE FAILURE OF
INVESTORS IN THE CLASS X CERTIFICATES TO FULLY RECOVER THEIR INITIAL INVESTMENT.
It is not likely that the Premium Mortgage Loans will prepay at a constant
rate until maturity or that all of the Premium Mortgage Loans will prepay at the
same rate or that they will have the characteristics assumed. There can be no
assurance that the Premium Mortgage Loans will prepay at any of the rates shown
in the table or at any other particular rate. The timing of changes in the rate
of prepayments may affect significantly the yield realized by a holder of a
Class X Certificate and there can be no assurance that the pre-tax yield to an
investor in the Class X Certificates will correspond to any of the pre-tax
yields shown herein. Each investor must make its own decision as to the
appropriate prepayment assumptions to be used in deciding whether or not to
purchase a Class X Certificate.
SENSITIVITY OF THE CLASS X CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
<TABLE>
<CAPTION>
PERCENTAGE OF PSA
------------------------------------
0% 100% 225% 350% 500%
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Class X Certificates.................................... 26.8% 21.6% 15.0% 8.2% (0.3)%
</TABLE>
The yields set forth in the preceding table were calculated by determining
the monthly discount rates that, when applied to the assumed stream of cash
flows to be paid on the Class X Certificates, would cause the discounted present
value of such assumed stream of cash flows to equal the assumed purchase price
of the Class X Certificates indicated above and converting such monthly rates to
corporate bond equivalent rates. Such calculation does not take into account
variations that may occur in the interest rates at which investors may be able
to reinvest funds received by them as payments of interest on the Class X
Certificates and consequently does not purport to reflect the return on any
investment in the Class X Certificates when such reinvestment rates are
considered.
YIELD ON THE CLASS P CERTIFICATES
The Class P Certificates will be "principal only" or PO Certificates as
described in the Prospectus under "Description of Certificates -- Categories of
Classes of Certificates" and, as such, will not be entitled to receive
distributions of interest in respect of the Mortgage Loans and will be offered
at a substantial discount to their original principal amount. The significance
of the effects of prepayments on the Class P Certificates is illustrated in the
following table entitled "Sensitivity of the Class P Certificates to
Prepayments," which shows the pre-tax yield (on a corporate bond equivalent
basis) to the holders of Class P Certificates under different constant
percentages of PSA. The yields of such Certificates set forth in the following
table were calculated using the Modeling Assumptions and the additional
assumption that the market price for all of the Class P Certificates is
approximately $662,536.
S-52
<PAGE> 53
AS INDICATED IN THE FOLLOWING TABLE, BECAUSE THE CLASS P CERTIFICATES
REPRESENT THE RIGHT TO RECEIVE ONLY A PORTION OF THE PRINCIPAL RECEIVED WITH
RESPECT TO THE DISCOUNT MORTGAGE LOANS, THE YIELD TO MATURITY ON THE CLASS P
CERTIFICATES WILL BE EXTREMELY SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL
PAYMENTS (INCLUDING PREPAYMENTS) ON THE DISCOUNT MORTGAGE LOANS.
It is not likely that the Discount Mortgage Loans will prepay at a constant
rate until maturity or that all of the Discount Mortgage Loans will prepay at
the same rate or that they will have the characteristics assumed. There can be
no assurance that the Discount Mortgage Loans will prepay at any of the rates
shown in the table or at any other particular rate. The timing of changes in the
rate of prepayments may affect significantly the yield realized by a holder of a
Class P Certificate and there can be no assurance that the pre-tax yield to an
investor in the Class P Certificates will correspond to any of the pre-tax
yields shown herein. Each investor must make its own decision as to the
appropriate prepayment assumptions to be used in deciding whether or not to
purchase a Class P Certificate.
SENSITIVITY OF THE CLASS P CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
<TABLE>
<CAPTION>
PERCENTAGE OF PSA
-----------------------------------
0% 100% 225% 350% 500%
--- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Class P Certificates..................................... 2.0% 3.7% 6.3% 8.9% 11.8%
</TABLE>
The yields set forth in the preceding table were calculated by determining
the monthly discount rates that, when applied to the assumed stream of cash
flows to be paid on the Class P Certificates, would cause the discounted present
value of such assumed stream of cash flows to equal the assumed purchase price
of the Class P Certificates indicated above and converting such monthly rates to
corporate bond equivalent rates. Such calculation does not take into account
variations that may occur in the interest rates at which investors may be able
to reinvest funds received by them as payments of principal of the Class P
Certificates and consequently does not purport to reflect the return on any
investment in the Class P Certificates when such reinvestment rates are
considered.
YIELD ON THE RESIDUAL CERTIFICATES
The Residual Certificateholders' after-tax rate of return on their
Certificates will reflect their pre-tax rate of return, reduced by the taxes
required to be paid with respect to such Certificates. Holders of Residual
Certificates may have tax liabilities with respect to their Certificates during
the early years of the applicable REMIC's term that substantially exceed any
distributions payable thereon during any such period. In addition, holders of
Residual Certificates may have tax liabilities with respect to their
Certificates the present value of which substantially exceeds the present value
of distributions payable thereon and of any tax benefits that may arise with
respect thereto. Accordingly, the after-tax rate of return on the Residual
Certificates may be negative or may otherwise be significantly adversely
affected. The timing and amount of taxable income attributable to the Residual
Certificates will depend on, among other things, the timing and amounts of
prepayments and losses experienced with respect to the Mortgage Loans.
The Residual Certificateholders should consult their own tax advisors as to
the effect of taxes and the receipt of any payments made to such holders in
connection with the purchase of the Residual Certificates on after-tax rates of
return on the Residual Certificates. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
YIELD ON THE SUBORDINATE CERTIFICATES
The weighted average life of, and the yield to maturity on, the Subordinate
Certificates, in increasing order of their numerical Class designation, will be
progressively more sensitive to the rate and timing of Mortgagor defaults and
the severity of ensuing losses on the Mortgage Loans. If the actual rate and
severity of losses on the Mortgage Loans is higher than those assumed by a
holder of a Subordinate Certificate, the actual yield to maturity of such
Certificate may be lower than the yield expected by such holder based on such
S-53
<PAGE> 54
assumption. The timing of losses on Mortgage Loans will also affect an
investor's actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the Trust Fund are consistent with an investor's
expectations. In general, the earlier a loss occurs, the greater the effect on
an investor's yield to maturity. Realized Losses on the Mortgage Loans will
reduce the Class Certificate Balances of the applicable Class of Subordinate
Certificates to the extent of any losses allocated thereto (as described herein
under "Description of the Certificates -- Allocation of Losses"), without the
receipt of cash equal to the amount of such reduction. In addition, shortfalls
in cash available for distributions on the Subordinate Certificates will result
in a reduction in the Class Certificate Balance of the Class of Subordinate
Certificates then outstanding with the highest numerical Class designation if
and to the extent that the aggregate of the Class Certificate Balances of all
Classes of Certificates, following all distributions and the allocation of
Realized Losses on a Distribution Date, exceeds the Pool Principal Balance as of
the Due Date occurring in the month of such Distribution Date. As a result of
such reductions, less interest will accrue on such Class of Subordinate
Certificates than otherwise would be the case. The yield to maturity of the
Subordinate Certificates will also be affected by the disproportionate
allocation of principal prepayments to the Senior Certificates (other than the
Class A-8 Certificates), Net Interest Shortfalls, other cash shortfalls in
Available Funds and distribution of funds to Class P Certificateholders
otherwise available for distribution on the Subordinate Certificates to the
extent of reimbursement for Class P Deferred Amounts. See "Description of the
Certificates -- Allocation of Losses" herein.
If on any Distribution Date, the Applicable Credit Support Percentage for
any Class of Subordinate Certificates is less than its Original Applicable
Credit Support Percentage, all partial principal prepayments and principal
prepayments in full available for distribution on the Subordinate Certificates
will be allocated solely to such Class and all other Classes of Subordinate
Certificates with lower numerical Class designations, thereby accelerating the
amortization thereof relative to that of the Restricted Classes and reducing the
weighted average lives of such Classes of Subordinate Certificates receiving
such distributions. Accelerating the amortization of the Classes of Subordinate
Certificates with lower numerical Class designations relative to the other
Classes of Subordinate Certificates is intended to preserve the availability of
the subordination provided by such other Classes.
CREDIT SUPPORT
SUBORDINATION OF SUBORDINATE CERTIFICATES
The rights of Subordinate Certificateholders to receive distributions with
respect to the Mortgage Loans will be subordinated to such rights of Senior
Certificateholders, and the rights of the holders of the Subordinate
Certificates (other than the Class B-1 Certificates) to receive such
distributions will be further subordinated to such rights of the Class or
Classes of Subordinate Certificates with lower numerical Class designations only
to the extent described herein. The subordination of the Subordinate
Certificates to the Senior Certificates and the subordination of the Classes of
Subordinate Certificates with higher numerical Class designations to those with
lower numerical Class designations is intended to increase the likelihood of
receipt, respectively, by Senior Certificateholders and the holders of the
Subordinate Certificates with higher numerical Class designations of the maximum
amount to which they are entitled on any Distribution Date and to provide such
holders protection against Realized Losses, other than Excess Losses.
In addition, the Subordinate Certificates will provide limited protection
against Special Hazard Losses, Bankruptcy Losses and Fraud Losses up to the
Special Hazard Loss Coverage Amount, Bankruptcy Loss Coverage Amount and Fraud
Loss Coverage Amount, respectively, as described below. The applicable Non-PO
Percentage of Realized Losses, other than Excess Losses, will be allocated to
the Class of Subordinate Certificates then outstanding with the highest
numerical Class designation. In addition, the Class Certificate Balance of such
Class of Subordinate Certificates will be reduced by the amount of distributions
on the Class P Certificates in reimbursement for Class P Deferred Amounts.
The Subordinate Certificates will provide protection to the Classes of
Certificates of higher relative priority against (i) Special Hazard Losses in an
initial amount expected to be up to approximately $1,840,769
S-54
<PAGE> 55
(the "Special Hazard Loss Coverage Amount"), (ii) Bankruptcy Losses in an
initial amount expected to be up to approximately $100,000 (the "Bankruptcy Loss
Coverage Amount") and (iii) Fraud Losses in an initial amount expected to be up
to approximately $2,970,085 (the "Fraud Loss Coverage Amount").
The Special Hazard Loss Coverage Amount will be reduced, from time to time,
to be an amount equal on any Distribution Date to the lesser of (a) the greatest
of (i) 1% of the aggregate principal balance of the Mortgage Loans, (ii) twice
the principal balance of the largest Mortgage Loan and (iii) the aggregate
principal balance of the Mortgage Loans secured by Mortgaged Properties located
in the single California postal zip code area having the highest aggregate
principal balance of any such zip code area and (b) the Special Hazard Loss
Coverage Amount as of the Closing Date less the amount, if any, of Special
Hazard Losses incurred since the Closing Date. All principal balances for the
purpose of this definition will be calculated as of the first day of the month
preceding such Distribution Date after giving effect to scheduled installments
of principal and interest on the Mortgage Loans then due, whether or not paid.
For the period from the Closing Date through the first anniversary thereof,
the Fraud Loss Coverage Amount shall be equal to $2,970,085 reduced by the
cumulative amount of Fraud Losses allocated to the Certificates. The Fraud Loss
Coverage Amount for each Distribution Date occurring during the period from the
first through the fifth anniversaries of the Cut-off Date shall be equal to 1%
of the then current Pool Principal Balance. For each Distribution Date occurring
after the fifth anniversary of the Cut-off Date, the Fraud Loss Coverage Amount
shall be equal to zero.
The Bankruptcy Loss Coverage Amount will be reduced, from time to time, by
the amount of Bankruptcy Losses allocated to the Certificates.
The amount of coverage provided by the Subordinate Certificates for Special
Hazard Losses, Bankruptcy Losses and Fraud Losses may be cancelled or reduced
from time to time for each of the risks covered, provided that the then current
ratings of the Certificates assigned by the Rating Agencies are not adversely
affected thereby. In addition, a reserve fund or other form of credit support
may be substituted for the protection provided by the Subordinate Certificates
for Special Hazard Losses, Bankruptcy Losses and Fraud Losses.
The Senior Certificates (other than the Class A-8, Class P, Class S and
Class X Certificates) will receive 100% of the Non-PO Percentage of principal
prepayments received with respect to the Mortgage Loans until the fifth
anniversary of the first Distribution Date. During the next four years, such
Senior Certificates will receive a large, but decreasing, share of such
principal prepayments. This disproportionate allocation of prepayments will
result in an acceleration of the amortization of such Senior Certificates and
will enhance the likelihood that holders of such Classes of Certificates will
receive the entire amount of principal to which they are entitled. In addition
to this acceleration mechanism, on any Distribution Date on which the Senior
Percentage exceeds the initial Senior Percentage, the Senior Certificates (other
than the Class A-8, Class P, Class S and Class X Certificates) will be entitled
to receive the Non-PO Percentage of principal prepayments received with respect
to the Mortgage Loans. See "Description of the Certificates -- Principal"
herein.
USE OF PROCEEDS
The Sponsor will apply the net proceeds of the sale of the Offered
Certificates against the purchase price of the Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the Trust Fund as two "real estate
mortgage investment conduits" (the "Master REMIC" and the "Subsidiary REMIC"
and, each, a "REMIC") for federal income tax purposes under the Internal Revenue
Code of 1986, as amended (the "Code"). The Regular Certificates will be
designated as "regular interests" in the Master REMIC and the Class R-I
Certificates and the Class R-II Certificates will be designated as the sole
class of "residual interests" in the Subsidiary REMIC and the
S-55
<PAGE> 56
Master REMIC, respectively. See "Certain Federal Income Tax
Consequences -- REMIC Certificates" in the Prospectus.
REGULAR CERTIFICATES
The Regular Certificates generally will be treated as debt instruments
issued by the Master REMIC for federal income tax purposes. Income on the
Regular Certificates must be reported under an accrual method of accounting.
The Class P, Class S and Class X Certificates will, and the other Classes
of Offered Certificates may, depending on their respective issue prices, be
treated for federal income tax purposes as having been issued with an amount of
original issue discount equal to the difference between its principal balance
and its issue price. See "Certain Federal Income Tax Consequences" in the
Prospectus. For purposes of determining the amount and the rate of accrual of
original issue discount and market discount, the Sponsor intends to assume that
there will be prepayments on the Mortgage Loans at a rate equal to 225% PSA.
A reasonable application of the principles of the OID Regulations to the
Class F and S Certificates generally would be to report all income with respect
to such Certificates as original issue discount for each period, computing such
original issue discount (i) by assuming that the value of the applicable
Pass-Through Rate will remain constant for purposes of determining the original
yield to maturity of such Class of Certificates and projecting future
distributions on such Certificates, thereby treating such Certificates as fixed
rate instruments to which the original issue discount computation rules
described in the Prospectus can be applied, and (ii) by accounting for any
positive or negative variation in the actual value of the applicable index in
any period from its assumed value as a current adjustment to original issue
discount with respect to such period. See "Certain Federal Income Tax
Consequences -- Taxation of Debt Securities -- Interest and Acquisition
Discount" in the Prospectus.
The Regular Certificates will be treated as regular interests in a REMIC
under section 860G of the Code. Accordingly, the Regular Certificates will be
treated as (i) assets described in section 7701(a)(19)(C) of the Code, and (ii)
"real estate assets" within the meaning of section 856(c)(5) of the Code, in
each case to the extent described in the Prospectus. Interest on the Regular
Certificates will be treated as interest on obligations secured by mortgages on
real property within the meaning of section 856(c)(3)(B) of the Code to the same
extent that the Regular Certificates are treated as real estate assets. See
"Certain Federal Income Tax Consequences" in the Prospectus.
RESIDUAL CERTIFICATES
The holders of the Residual Certificates must include the taxable income of
the applicable REMIC in their federal taxable income. The resulting tax
liability of the holders may exceed cash distributions to such holders during
certain periods. All or a portion of the taxable income from a Residual
Certificate recognized by a holder may be treated as "excess inclusion" income,
which with limited exceptions, is subject to U.S. federal income tax.
Also, purchasers of a Residual Certificate should consider carefully the
tax consequences of any investment in Residual Certificates discussed in the
Prospectus and should consult their own tax advisors with respect to those
consequences. See "Certain Federal Income Tax Consequences -- REMIC
Certificates" and "-- Residual Certificates" in the Prospectus. Specifically,
prospective holders of Residual Certificates should consult their tax advisors
regarding whether, at the time of acquisition, a Residual Certificate will be
treated as a "noneconomic" residual interest, and a "tax avoidance potential"
residual interest. See "Certain Federal Income Tax Consequences -- Tax-Related
Restrictions on Transfer of Residual Certificates -- Noneconomic Residual
Certificates," "-- Residual Certificates -- Mark to Market Rule," and "-- Excess
Inclusions" and "-- Tax Related Restrictions on Transfers of Residual
Certificates -- Foreign Investors" in the Prospectus. Additionally, for
information regarding Prohibited Transactions, see "Certain Federal Income Tax
Consequences -- Prohibited Transactions and Other Taxes" in the Prospectus.
S-56
<PAGE> 57
BACKUP WITHHOLDING
Certain Beneficial Owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Offered Certificates if the
Beneficial Owners, upon issuance, fail to supply the Trustee or their broker
with their taxpayer identification number, furnish an incorrect taxpayer
identification number, fails to report interest, dividends, or other "reportable
payments" (as defined in the Code) properly, or, under certain circumstances,
fails to provide the Trustee or their broker with a certified statement, 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
Offered Certificateholder of record, the amount of interest paid (and OID
accrued, if any) on the Offered Certificates (and the amount of interest
withheld for 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 "Offered Certificateholder" of record is
CEDE, as nominee for DTC, Beneficial Owners and the IRS will receive tax and
other information including the amount of interest paid on such Certificates
owned from Financial Intermediaries rather than from the Trustee. (The Trustee,
however, will respond to requests for necessary information to enable Financial
Intermediaries and certain other persons to complete their reports.) Each
non-exempt Beneficial 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 nonexempt Beneficial Owner fail to
provide the required certification, the Participants or Indirect Participants
(or the paying agent, if any) 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.
FEDERAL INCOME TAX CONSEQUENCES TO FOREIGN INVESTORS
The following information describes the United States federal income tax
treatment of holders that are Foreign Investors. The term "Foreign Investor"
means any person other than (i) a citizen or resident of the United States, (ii)
a corporation, partnership or other entity organized in or under the laws of the
United States or any state or political subdivision thereof or (iii) an estate
the income of which is includible in gross income for United States federal
income 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.
The Code and Treasury regulations generally subject interest paid to a
Foreign Investor to a withholding tax at a rate of 30% (unless such rate were
changed by an applicable treaty). The withholding tax, however, is eliminated
with respect to certain "portfolio debt investments" issued to Foreign
Investors. Portfolio debt investments include debt instruments issued in
registered form for which the United States payor receives a statement that the
beneficial owner of the instrument is a Foreign Investor. The Offered
Certificates will be issued in registered form, and therefore if the information
required by the Code is furnished (as described below) and no other exceptions
to the withholding tax exemption are applicable, no withholding tax will apply
to the Offered Certificates.
For the Offered Certificates to constitute portfolio debt investments
exempt from the United States withholding tax, the withholding agent must
receive from the Beneficial Owner an executed IRS Form W-8 signed under penalty
of perjury by the Beneficial Owner stating that the Beneficial Owner is a
Foreign Investor and providing such Beneficial Owner's name and address. The
statement must be received by the withholding agent in the calendar year in
which the interest payment is made, or in either of the two preceding calendar
years.
A Beneficial Owner that is a nonresident alien or foreign corporation will
not be subject to United States federal income tax on gain realized on the sale,
exchange, or redemption of such Offered Certificate, provided that (i) such gain
is not effectively connected with a trade or business carried on by the
Beneficial Owner in the United States, (ii) in the case of a Beneficial Owner
that is an individual, such Beneficial Owner is not present in the United States
for 183 days or more during the taxable year in which such sale, exchange or
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<PAGE> 58
redemption occurs and (iii) in the case of gain representing accrued interest,
the conditions described in the immediately preceding paragraph are satisfied.
STATE TAXES
The Sponsor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Offered 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
A fiduciary of any employee benefit plan subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or the Code (each, a "Plan"),
should carefully review with its legal advisors whether the purchase or holding
of an Offered Certificate could give rise to a transaction prohibited or not
otherwise permissible under ERISA or the Code. See "ERISA Considerations" in the
Prospectus.
The U.S. Department of Labor has granted to NationsBanc Capital Markets,
Inc., an administrative exemption (Prohibited Transaction Exemption 93-31;
Exemption Application No. D-9105) (the "Exemption") from certain of the
prohibited transaction rules of ERISA and the related excise tax provisions of
Section 4975 of the Code with respect to the initial purchase, the holding and
the subsequent resale by Plans of certificates in pass-through trusts that
consist of certain receivables, loans and other obligations that meet the
conditions and requirements of the Exemption. The Exemption applies to mortgage
loans such as the Mortgage Loans in the Mortgage Pool.
For a general description of the Exemption and the conditions that must be
satisfied for the Exemption to apply, see "ERISA Considerations" in the
Prospectus.
The Underwriters believe that the Exemption will apply to the acquisition
and holding of the Senior Certificates (other than the Residual Certificates) by
Plans and that all conditions of the Exemption other than those within the
control of the investors will be met. In addition, as of the date hereof, there
is no single Mortgagor that is the obligor on 5% of the Mortgage Loans included
in the Mortgage Pool by aggregate unamortized principal balance of the assets of
the Mortgage Pool.
BECAUSE THE CHARACTERISTICS OF THE CLASS B-1, CLASS B-2, CLASS B-3 AND
RESIDUAL CERTIFICATES MAY NOT MEET THE REQUIREMENTS OF PTE 83-1, THE EXEMPTION
OR ANY OTHER ISSUED EXEMPTION UNDER ERISA, THE PURCHASE AND HOLDING OF THE CLASS
B-1, CLASS B-2, CLASS B-3 AND RESIDUAL CERTIFICATES BY A PLAN OR BY INDIVIDUAL
RETIREMENT ACCOUNTS OR OTHER PLANS SUBJECT TO SECTION 4975 OF THE CODE MAY
RESULT IN PROHIBITED TRANSACTIONS OR THE IMPOSITION OF EXCISE TAXES OR CIVIL
PENALTIES. CONSEQUENTLY, TRANSFERS OF THE CLASS B-1, CLASS B-2, CLASS B-3 AND
RESIDUAL CERTIFICATES WILL NOT BE REGISTERED BY THE TRUSTEE UNLESS THE TRUSTEE
RECEIVES: (I) A REPRESENTATION FROM THE TRANSFEREE OF SUCH CERTIFICATE,
ACCEPTABLE TO AND IN FORM AND SUBSTANCE SATISFACTORY TO THE TRUSTEE, TO THE
EFFECT THAT SUCH TRANSFEREE IS NOT AN EMPLOYEE BENEFIT PLAN SUBJECT TO SECTION
406 OF ERISA OR A PLAN OR ARRANGEMENT SUBJECT TO SECTION 4975 OF THE CODE, NOR A
PERSON ACTING ON BEHALF OF ANY SUCH PLAN OR ARRANGEMENT NOR USING THE ASSETS OF
ANY SUCH PLAN OR ARRANGEMENT TO EFFECT SUCH TRANSFER; (II) IF THE PURCHASER IS
AN INSURANCE COMPANY, A REPRESENTATION THAT THE PURCHASER IS AN INSURANCE
COMPANY WHICH IS PURCHASING SUCH CERTIFICATES WITH FUNDS CONTAINED IN AN
"INSURANCE COMPANY GENERAL ACCOUNT" (AS SUCH TERM IS DEFINED IN SECTION V(E) OF
PROHIBITED TRANSACTION CLASS EXEMPTION 95-60 ("PTCE 95-60")) AND THAT THE
PURCHASE AND HOLDING OF SUCH CERTIFICATES ARE COVERED UNDER PTCE 95-60; OR (III)
AN OPINION OF COUNSEL SATISFACTORY TO THE TRUSTEE THAT THE PURCHASE OR HOLDING
OF SUCH CERTIFICATE BY A PLAN, ANY PERSON ACTING ON BEHALF OF A PLAN OR USING
SUCH PLAN'S ASSETS, WILL NOT RESULT IN THE ASSETS OF THE MORTGAGE POOL BEING
DEEMED TO BE "PLAN ASSETS" AND SUBJECT TO THE PROHIBITED TRANSACTION
REQUIREMENTS OF ERISA AND THE CODE AND WILL NOT SUBJECT THE TRUSTEE TO ANY
OBLIGATION IN ADDITION TO THOSE UNDERTAKEN IN THE POOLING AGREEMENT. SUCH
REPRESENTATION AS DESCRIBED ABOVE SHALL BE DEEMED TO HAVE BEEN MADE TO THE
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<PAGE> 59
TRUSTEE BY THE TRANSFEREE'S ACCEPTANCE OF A CLASS B-1, CLASS B-2 OR CLASS B-3
CERTIFICATE. IN THE EVENT THAT SUCH REPRESENTATION IS VIOLATED, OR ANY ATTEMPT
TO TRANSFER TO A PLAN OR PERSON ACTING ON BEHALF OF A PLAN OR USING SUCH PLAN'S
ASSETS IS ATTEMPTED WITHOUT SUCH OPINION OF COUNSEL, SUCH ATTEMPTED TRANSFER OR
ACQUISITION SHALL BE VOID AND OF NO EFFECT.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTE 83-1
described under "ERISA Considerations" in the Prospectus and the Exemption, and
the potential consequences in their specific circumstances, prior to making an
investment in the Offered Certificates. Moreover, each Plan fiduciary should
determine whether under the general fiduciary standards of investment prudence
and diversification, an investment in the Offered 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.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, dated March 20, 1997 (the "Underwriting Agreement") among the Sponsor
and the Underwriters, the Sponsor has agreed to sell to the Underwriters, and
the Underwriters have agreed to purchase from the Sponsor, all of the Offered
Certificates as set forth opposite their names below:
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5 CLASS A-6
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
----------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NationsBanc Capital Markets, Inc... $31,185,929 $ 0 $13,893,799 $ 0 $8,341,459 $ 0
Salomon Brothers Inc............... 0 12,107,857 0 24,000,000 0 7,683,000
----------- ----------- ----------- ----------- ---------- ----------
Total...................... $31,185,929 $12,107,857 $13,893,799 $24,000,000 $8,341,459 $7,683,000
</TABLE>
<TABLE>
<CAPTION>
CLASS A-7 CLASS A-8 CLASS F CLASS S CLASS X CLASS P
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
----------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
NationsBanc Capital Markets,
Inc............................. $ 0 $10,875,000 $ 0 $ 0 $150,004,303 $ 0
Salomon Brothers Inc.............. 10,904,258 10,875,000 12,413,285 12,413,285 0 974,317
----------- ----------- ----------- ----------- ------------ --------
Total..................... $10,904,258 $21,750,000 $12,413,285 $12,413,285 $150,004,303 $974,317
</TABLE>
<TABLE>
<CAPTION>
CLASS B-1 CLASS B-2 CLASS B-3 CLASS R-I CLASS R-II
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NationsBanc Capital Markets, Inc................ $2,625,076 $1,500,044 $1,125,033 $100 $100
Salomon Brothers Inc............................ 0 0 0 0 0
---------- ---------- ---------- ---- ----
Total................................... $2,625,076 $1,500,044 $1,125,033 $100 $100
</TABLE>
Distribution of the Offered Certificates will be made by the Underwriters
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. In connection with the purchase and sale of
the Offered Certificates, the Underwriters may be deemed to have received
compensation from the Sponsor in the form of underwriting discounts.
The Sponsor has been advised by the Underwriters that they intend to make a
market in the Offered Certificates but have no obligation to do so. There can be
no assurance that a secondary market for the Offered Certificates will develop
or, if it does develop, that it will continue.
The Sponsor has agreed to indemnify the Underwriters against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
NationsBanc Capital Markets, Inc. ("NCMI"), one of the Underwriters, is an
affiliate of the Sponsor and the Master Servicer, and is a registered
broker/dealer. Any obligations of NCMI are the sole responsibility of NCMI and
do not create any obligation or guarantee on the part of any affiliate of NCMI.
This Prospectus Supplement and the Prospectus may be used by NCMI in connection
with offers and sales related to market-making transactions in the Offered
Certificates. NCMI may act as principal or agent in such transactions.
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<PAGE> 60
LEGAL MATTERS
The validity of the Certificates will be passed upon for the Sponsor by
Kennedy Covington Lobdell & Hickman, L.L.P., Charlotte, North Carolina. Brown &
Wood LLP, New York, New York will pass upon certain legal matters on behalf of
the Underwriters. Certain federal income tax consequences with respect to the
Certificates will be passed upon for the Sponsor by Brown & Wood LLP, New York,
New York.
CERTIFICATE RATINGS
It is a condition to the issuance of the Offered Certificates that each
Class of Offered Certificates receives at least the rating set forth below from
Moody's Investors Service, Inc. ("Moody's") and Fitch Investors Service, L.P.
("Fitch"):
<TABLE>
<CAPTION>
CLASS MOODY'S FITCH
----- ------- -----
<S> <C> <C>
A-1......................................................... Aaa AAA
A-2......................................................... Aaa AAA
A-3......................................................... Aaa AAA
A-4......................................................... Aaa AAA
A-5......................................................... Aaa AAA
A-6......................................................... Aaa AAA
A-7......................................................... Aaa AAA
A-8......................................................... Aaa AAA
F........................................................... Aaa AAA
S........................................................... Aaa AAA
X........................................................... Aaa AAA
P........................................................... Aaa AAA
B-1......................................................... Aa2 AA
B-2......................................................... A2 A
B-3......................................................... Baa2 BBB
R-I......................................................... Aaa AAA
R-II........................................................ Aaa AAA
</TABLE>
Ratings on mortgage pass-through certificates address the likelihood of
receipt by Certificateholders of payments required under the Pooling Agreement.
Moody's and Fitch's ratings take into consideration the credit quality of
the Mortgage Pool including any credit support, structural and legal aspects
associated with the Offered Certificates, and the extent to which the payment
stream of the Mortgage Pool is adequate to make payments required under the
Offered Certificates. Moody's and Fitch's ratings on the Offered Certificates do
not, however, constitute a statement regarding frequency of prepayments on the
Mortgage Loans. In addition, Moody's and Fitch's ratings do not address the
remote possibility that, in the event of the insolvency of the Seller, the sale
of the Offered Certificates may be recharacterized as a financing and that, as a
result of such recharacterization, the Offered Certificates may be accelerated.
As a result, holders of the Offered Certificates might suffer a lower than
anticipated yield.
The Sponsor has not requested a rating of any Class of Offered Certificates
by any rating agency other than Moody's and Fitch. However, there can be no
assurance as to whether any other rating agency will rate the Offered
Certificates, or if it does, what rating would be assigned by such other rating
agency. The rating assigned by any such other rating agency to a Class of
Offered Certificates may be lower than the ratings assigned by Moody's and
Fitch.
The rating of the Offered Certificates should be evaluated independently
from similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating agency.
S-60
<PAGE> 61
INDEX TO DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----------------------
<S> <C>
Advance..................................................... S-11, S-25
Applicable Credit Support Percentage........................ S-36
Available Funds............................................. S-29
Bankruptcy Loss Coverage Amount............................. S-55
Bankruptcy Losses........................................... S-38
Beneficial Owner............................................ S-27
Book-Entry Certificates..................................... S-27
CEDE........................................................ S-15
Certificate Account......................................... S-24
Certificateholder........................................... S-29
Certificates................................................ cover, S-5, S-26
Class....................................................... S-26
Class A Certificates........................................ S-26
Class A-8 Percentage........................................ S-34
Class A-8 Prepayment Percentage............................. S-35
Class A-8 Principal Distribution Amount..................... S-35
Class Certificate Balance................................... S-26
Class Notional Amounts...................................... S-5
Class P Deferred Amount..................................... S-37
Class P Principal Distribution Amount....................... S-=36
Class S Notional Amount..................................... S-2
Class Subordination Percentage.............................. S-37
Class X Notional Amount..................................... S-2, S-5
Closing Date................................................ S-6
Code........................................................ S-12
Combined Prepayment Percentage.............................. S-35
Compensating Interest....................................... S-11, S-25
Cut-off Date................................................ S-6
Cut-off Date Pool Principal Balance......................... S-6
Debt Service Reduction...................................... S-38
Decrement Tables............................................ S-41
Deficient Valuation......................................... S-38
Definitive Certificate...................................... S-27
Deleted Mortgage Loan....................................... S-24
Depository.................................................. S-27
Determination Date.......................................... S-25
Discount Mortgage Loan...................................... S-3, S-9, S-32
Distribution Account........................................ S-24
Distribution Date........................................... S-2, S-6, S-29
DTC......................................................... S-27
Due Date.................................................... S-16
Eligible Substitute Mortgage Loan........................... S-24
ERISA....................................................... S-12, S-58
Excess Losses............................................... S-38
Exemption................................................... S-58
Expense Fees................................................ S-24
Expense Rate................................................ S-10, S-24
FHLMC....................................................... S-16
Financial Intermediary...................................... S-27
</TABLE>
S-61
<PAGE> 62
<TABLE>
<CAPTION>
PAGE
----------------------
<S> <C>
Fitch....................................................... S-12, S-60
Foreign Investor............................................ S-57
FNMA........................................................ S-16
Fraud Loss Coverage Amount.................................. S-55
Fraud Losses................................................ S-38
GNMA........................................................ S-22
Insurance Proceeds.......................................... S-29
Interest Accrual Period..................................... S-7, S-30
Interest Distribution Amount................................ S-7, S-30
LIBOR....................................................... S-2, S-31
LIBOR Determination Date.................................... S-31
Limited Documentation Guidelines............................ S-21
Liquidated Mortgage Loan.................................... S-38
Liquidation Proceeds........................................ S-29
Loan-to-Value Ratio......................................... S-16
Master REMIC................................................ S-3, S-11, S-55
Master Servicer............................................. cover, S-6, S-21
Master Servicing Fee........................................ S-24
Master Servicing Fee Rate................................... S-24
Modeling Assumptions........................................ S-41
Monthly Payment............................................. S-16
Moody's..................................................... S-12, S-60
Mortgage File............................................... S-23
Mortgage Loans.............................................. cover, S-6, S-15
Mortgage Pool............................................... cover, S-6, S-15
Mortgage Rate............................................... S-16
Mortgaged Property.......................................... S-6, S-16
Mortgagor................................................... S-13
NCMI........................................................ cover, S-59
Net Interest Shortfall...................................... S-30
Net Mortgage Rate........................................... S-2, S-32
Net Prepayment Interest Shortfall........................... S-30
NMCC........................................................ S-16
Non-Offered Certificates.................................... S-5
Non-PO Formula Principal Amount............................. S-32
Non-PO Percentage........................................... S-32
Offered Certificates........................................ cover, S-26
Original Applicable Credit Support Percentage............... S-36
Original Subordinate Principal Balance...................... S-35
Pass-Through Rate........................................... S-7
Percentage Interest......................................... S-26
Plan........................................................ S-12, S-58
PO Formula Principal Amount................................. S-36
PO Percentage............................................... S-32
Pool Principal Balance...................................... S-34
Pooling Agreement........................................... cover, S-6, S-23
Premium Mortgage Loan....................................... S-3, S-9, S-32
Prepayment Interest Shortfall............................... S-30
Prospectus.................................................. S-3
PSA......................................................... S-42
PTCE 95-60.................................................. S-58
</TABLE>
S-62
<PAGE> 63
<TABLE>
<CAPTION>
PAGE
----------------------
<S> <C>
Purchase Agreement.......................................... S-16
Purchase Price.............................................. S-24
Rating Agencies............................................. S-12
Realized Loss............................................... S-38
Record Date................................................. S-6, S-29
Reference Banks............................................. S-31
Relief Act Reduction........................................ S-30
REMIC....................................................... S-3, S-11, S-55
REO Property................................................ S-25
Reserve Interest Rate....................................... S-31
Residual Certificates....................................... S-26
Restricted Classes.......................................... S-36
Seller...................................................... S-2, S-6, S-21
Senior Certificates......................................... S-2, S-26
Senior Credit Support Depletion Date........................ S-33
Senior Percentage........................................... S-34
Senior Prepayment Percentage................................ S-34
Senior Principal Distribution Amount........................ S-33
SMMEA....................................................... S-11
Special Hazard Loss Coverage Amount......................... S-55
Special Hazard Losses....................................... S-38
Special Hazard Mortgage Loan................................ S-38
Sponsor..................................................... cover, S-6
Stated Principal Balance.................................... S-34
Subordinate Certificates.................................... S-2
Subordinate Percentage...................................... S-34
Subordinate Prepayment Percentage........................... S-35
Subordinate Principal Distribution Amount................... S-37
Subsidiary REMIC............................................ S-3, S-11, S-55
Substitution Adjustment Amount.............................. S-24
Trust Fund.................................................. cover
Trustee..................................................... cover, S-6
Underwriters................................................ cover
Underwriting Agreement...................................... S-59
Unpaid Interest Amounts..................................... S-30
Unpaid Interest Shortfall................................... S-7
Voting Rights............................................... S-26
</TABLE>
S-63
<PAGE> 64
P R O S P E C T U S
TRYON MORTGAGE FUNDING, INC. (SPONSOR)
MORTGAGE PASS-THROUGH CERTIFICATES (ISSUABLE IN SERIES)
THESE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN TRYON
MORTGAGE FUNDING, INC. OR ANY OF ITS AFFILIATES, EXCEPT AS SET FORTH BELOW.
THESE CERTIFICATES ARE NOT INSURED OR GUARANTEED BY ANY AGENCY OR
INSTRUMENTALITY OF THE UNITED STATES.
Each Series of Certificates to be offered from time to time hereby and by
Supplements hereto will evidence the entire ownership interest in a trust fund
(the "Trust Fund") that consists of a pool (the "Pool") of Mortgage Loans and/or
Mortgage Certificates (collectively, "Mortgage Assets"), as described below. The
Prospectus Supplement relating to a particular Series of Certificates (the
"Supplement") will describe any forms of credit support (such as a pool policy,
letter of credit, guaranty, surety bond, insurance contract or reserve fund)
which may be applicable to a Series of Certificates and/or to the assets
included in the related Pool.
Distributions of principal of and interest on each Series of Certificates
will be made (to the extent of available funds) on each Distribution Date and
allocated to the classes of such Series at the Certificate Rates, in the amounts
and in the order specified in the related Supplement. Each Series will consist
of one or more classes of Certificates. 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 Pool. A Series of Certificates may include one or more classes that are
senior 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 distributions of principal, interest 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 Supplement.
Distributions will be made pro rata among the Certificates of each class then
entitled to receive such distributions.
Mortgage Loans may be fixed- or adjustable-rate first mortgage loans
secured primarily by one- to four- family residences or shares in cooperative
corporations and the related proprietary leases, purchased by the Sponsor from
certain seller or sellers specified in the related Supplement (each, a
"Seller"). The credit support (if any) for Mortgage Loans will be subject to the
terms and conditions (including any limitations on amount) described in the
related Supplement. Mortgage Certificates may be (a) GNMA Certificates
guaranteed as to full and timely payment of principal and interest by the
Government National Mortgage Association ("GNMA"), (b) FHLMC Certificates
guaranteed as to timely payment of interest and ultimate collection (and, if so
specified in the related Supplement, timely payment) of principal by the Federal
Home Loan Mortgage Corporation ("FHLMC"), (c) FNMA Certificates guaranteed as to
timely payment of principal and interest by the Federal National Mortgage
Association ("FNMA") or (d) Private Certificates issued and packaged by a
mortgage lending or financial institution which may be affiliated with the
Sponsor. GNMA Certificates will be backed by the full faith and credit of the
United States. FNMA Certificates and FHLMC Certificates will not be backed,
directly or indirectly, by the full faith and credit of the United States. The
credit support (if any) for Private Certificates will be subject to the terms
and conditions (including any limitations on amount) described in the related
Supplement. The only obligations of the Sponsor and the Seller with respect to a
Series of Certificates will be pursuant to their respective representations and
warranties in connection with such Series. The principal obligations of the
Servicer named in the related Supplement will be limited to its contractual
servicing obligations and to obligations pursuant to certain representations and
warranties.
An election may be made to treat a Pool as a real estate mortgage
investment conduit (a "REMIC"). See "Certain Federal Income Tax Consequences".
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
Offers of the Certificates may be made through one or more different
methods, as more fully described under "Plans of Distribution" herein and
"Method of Distribution" in the related Supplement.
This Prospectus may not be used to consummate sales of Certificates unless
accompanied by a Supplement.
MARCH 20, 1997
<PAGE> 65
PROSPECTUS SUPPLEMENT
The Supplement relating to a Series of Certificates to be offered hereunder
and thereunder will, among other things, set forth with respect to such Series:
(i) a description of the class or classes of Certificates to be offered; (ii)
the initial aggregate Certificate Balance of each class of Certificates included
in such Series and offered by such Supplement; (iii) the Certificate Rate (or
the method of determining such Certificate Rate) of each class of such
Certificates; (iv) the Last Scheduled Distribution Date of each class of such
Certificates, if applicable; (v) the method to be used to calculate the amount
to be distributed as principal on each Distribution Date; (vi) the application
of distributions of principal and interest to the classes of such Certificates
and the allocation of the amounts to be so applied; (vii) whether an election
will be made to treat the Pool as a REMIC; (viii) certain information concerning
the Mortgage Assets and any other assets included in the Pool for such Series
(including, in the case of Mortgage Loans: (a) the number of Mortgage Loans; (b)
the geographic distribution of the Mortgage Loans; (c) the aggregate principal
balance of the Mortgage Loans; (d) the types of dwelling constituting the
Mortgaged Properties; (e) the longest and shortest scheduled terms to maturity
of the Mortgage Loans; (f) the maximum principal balance of the Mortgage Loans;
(g) the maximum LTV of the Mortgage Loans at origination; (h) the maximum and
minimum Mortgage Rates borne by the Mortgage Loans; and (i) the aggregate
principal balance of non-owner-occupied properties); (ix) the extent, nature and
terms of any credit support applicable to such Series; (x) the method of
distribution of the Certificates; and (xi) other specific terms of the offering.
Any specific information with respect to the Mortgage Loans included in a
Pool (if any) that is not available for inclusion in the related Supplement will
be included in a Current Report on Form 8-K which will be filed with the
Securities and Exchange Commission (the "Commission") within 15 days of the
initial issuance of the related Series of Certificates.
ADDITIONAL INFORMATION
The Sponsor has filed with the Securities and Exchange Commission a
Registration Statement under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Certificates. This Prospectus, which
forms a part of the Registration Statement, and the Supplement relating to each
Series of Certificates contain 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, which may be inspected and copied at the 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, 500 West Madison Street, Chicago, Illinois 60661; and New York Regional
Office, Seven World Trade Center, New York, New York 10048.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by or on behalf of the Pool referred to in the
accompanying Supplement with the Commission pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), on or after the date of such Supplement and prior to the termination of
any offering of the Certificates issued by such Pool shall be deemed to be
incorporated by reference in this Prospectus and to be a part of this Prospectus
from the date of the filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for all purposes of this Prospectus to the
extent that a statement contained herein (or in the accompanying Supplement) or
in any other subsequently filed document which also is or is deemed to be
incorporated by reference modifies or replaces such statement. Any such
statement so modified or superseded shall not be deemed, except as modified or
superseded, to constitute a part of this Prospectus.
The Sponsor on behalf of any Pool will provide without charge to each
person to whom this Prospectus is delivered, on the written or oral request of
such person, a copy of any or all of the documents referred to above that have
been or may be incorporated by reference in this Prospectus (not including
exhibits to the
2
<PAGE> 66
information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that this Prospectus
incorporates). Such requests should be directed to:
Tryon Mortgage Funding, Inc.
NationsBank Corporate Center
Charlotte, North Carolina 28255
---------------------
UNTIL 90 DAYS AFTER THE DATE OF EACH SUPPLEMENT, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES COVERED BY SUCH SUPPLEMENT, WHETHER OR
NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER SUCH
SUPPLEMENT AND THIS PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS OF THE SERIES
OF CERTIFICATES COVERED BY SUCH SUPPLEMENT AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
NO PERSON HAS BEEN AUTHORIZED TO GIVE INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND ANY SUPPLEMENT
WITH RESPECT HERETO AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON. THIS PROSPECTUS AND ANY 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 OR 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 THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO ITS DATE.
3
<PAGE> 67
SUMMARY OF THE PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
information with respect to each Series of Certificates contained in the
Supplement to be prepared and delivered in connection with the offering of the
Certificates of such Series. THE SUPPLEMENT FOR EACH SERIES WILL SPECIFY THE
EXTENT (IF ANY) TO WHICH THE TERMS OF SUCH SERIES OR THE RELATED POOL VARY FROM
THE DESCRIPTION OF CERTIFICATES AND POOLS IN GENERAL WHICH IS CONTAINED IN THIS
PROSPECTUS.
GENERAL
Title of Security.......... Mortgage Pass-Through Certificates (the
"Certificates"), issuable in series (each a
"Series"). Each Series will be issued under a
separate pooling agreement (each a "Pooling
Agreement").
Sponsor.................... Tryon Mortgage Funding, Inc. (the "Sponsor").
Seller..................... The seller or sellers (each, a "Seller") for a
particular Series will be named in the Supplement
relating to such Series (the "Supplement"). A
Seller may be an affiliate of the Sponsor.
Trustee.................... The trustee (the "Trustee") for a particular Series
will be named in the related Supplement.
Servicer................... The servicer and/or master servicer (the
"Servicer") for a particular Series will be named
in the related Supplement.
REMIC Servicer............. The entity (the "REMIC Servicer") will be specified
in the related Supplement if a REMIC election is
made with respect to the related Pool. The REMIC
Servicer may be the Sponsor or an affiliate
thereof. See "Certain Federal Income Tax
Consequences -- The REMIC Servicer" herein.
Closing Date............... The date (the "Closing Date") of the initial
issuance of a Series, as specified in the related
Supplement.
Description of
Certificates............. Each Certificate will represent an ownership
interest in a Pool to be formed by the Sponsor or
in certain monthly payments with respect to such
Pool. Each Series of Certificates may contain one
or more classes of certificates (the "Senior
Certificates") which are senior in right of
distribution to one or more classes of
certificates (the "Subordinate Certificates") and
may also contain one or more classes of the types
described herein under "Description of
Certificates -- Categories of Classes of
Certificates" herein.
A. Interest.............. Each class of Certificates of a Series will accrue
interest from the date and at the fixed or
adjustable rate set forth (or determined as set
forth) in the related Supplement (the
"Certificate Rate"), except for certain classes
of Certificates that are only entitled to
distributions of principal ("PO Certificates").
Accrued interest will be distributed (to the extent
of funds available therefor), at the times and in
the manner specified in such Supplement.
Distributions of interest on any class of Accrual
Certificates will commence at the time specified
in such Supplement; until then, interest on the
Accrual Certificates will be added to the
Certificate Balance thereof.
4
<PAGE> 68
B. Principal............. Each class of Certificates of a Series will receive
distributions of principal in the amounts, at the
times and in the manner specified in the related
Supplement until its initial aggregate
Certificate Balance has been fully amortized,
except for certain classes of Certificates that
are only entitled to distributions of interest
("IO Certificates"). Allocations of distributions
of principal will be made to the Certificates of
each class during the periods and in the order
specified in the related Supplement. Unless
otherwise specified in the related Supplement,
distributions will be made pro rata among the
Certificates of each class then entitled to
receive such distributions.
Certificates of a Series with Distribution Dates
that are not monthly may receive Special
Distributions of principal on any Special
Distribution Date specified in the related
Supplement. See "Description of
Certificates -- Special Distributions" herein.
C. Credit Support........ The assets in a Pool or the Certificates of one or
more classes in the related Series may have the
benefit of one or more types of credit support as
described in the related Supplement. The
protection against losses afforded by any such
credit support may be limited. The type of credit
support will be determined based on the
characteristics of the Mortgage Assets in the
related Pool and other factors. See "Credit
Support" herein.
1. Subordination...... A Series of Certificates may consist of one or more
classes of Senior Certificates and one or more
classes of Subordinate Certificates. If so
specified in the related Supplement, certain
classes of Subordinate Certificates may be senior
to other Classes of Subordinate Certificates and
be rated investment grade ("Mezzanine
Certificates"). The rights of holders of the
Subordinate Certificates of a Series
("Subordinate Certificateholders") to receive
distributions with respect to the assets in the
related Pool will be subordinated to such rights
of holders of the Senior Certificates of the same
Series ("Senior Certificateholders") to the
extent described in the related Supplement. This
subordination is intended to enhance the
likelihood of regular receipt by Senior
Certificateholders of the full amount of their
scheduled monthly payments of principal and
interest. The protection afforded to Senior
Certificateholders 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 Subordinate Certificates,
the amounts of principal and interest due them on
each Distribution Date out of the funds available
for distribution on such date and, to the extent
described in the related Supplement, by the right
of such holders to receive future distributions
on the assets in the related Pool that would
otherwise have been payable to Subordinate
Certificateholders; (ii) reducing the ownership
interest of the related Subordinate Certificates;
(iii) a combination of clauses (i) and (ii)
above; or (iv) as otherwise described in the
related Supplement. If so specified in the
related 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 mortgagor. The related
Supplement will set forth information concerning,
among other things, the amount of subordination
of a class
5
<PAGE> 69
or classes of Subordinate 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.
2. Reserve Fund....... One or more reserve funds (the "Reserve Fund") may
be established and maintained for each Series.
The related Supplement will specify whether or
not any such Reserve Fund will be included in the
corpus of the Pool 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
Pool.
3. Surety Bond........ A surety bond or bonds may be obtained and
maintained for a Series or certain classes
thereof, which will, subject to certain
conditions and limitations, guaranty payments of
all or limited amounts of principal and interest
due on the classes of such Series or certain
classes thereof.
4. Mortgage Pool
Insurance
Policy........... A mortgage pool insurance policy or policies (the
"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 Pool as of the first day of the month of
issuance of the related Series or such other date
as is specified in the related Supplement (the
"Cut-off Date").
5. Fraud Waiver....... If so specified in the related Supplement, a letter
may be obtained from the issuer of a Mortgage
Pool Insurance Policy (the "Waiver Letter")
waiving its right to deny a claim or rescind
coverage under the related Mortgage Pool
Insurance Policy by reason of fraud, dishonesty
or misrepresentation in connection with the
origination of, or application for insurance for,
the related Mortgage Loan or the denial or
adjustment of coverage under any related Primary
Mortgage Insurance Policy because of such fraud,
dishonesty or misrepresentation. In such
circumstances, the issuer of the Mortgage Pool
Insurance Policy will be indemnified by the
Seller for the amount of any loss paid by the
issuer of the Mortgage Pool Insurance Policy
(each such amount, a "Fraud Loss") under the
terms of the Waiver Letter. The maximum aggregate
amount of Fraud Losses covered under the Waiver
Letter and the period of time during which such
coverage will be provided will be specified in
the related Supplement.
6. Special Hazard
Insurance
Policy........... A special hazard insurance policy or policies (the
"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 Supplement.
7. Bankruptcy Bond.... A bankruptcy bond or bonds (the "Bankruptcy Bonds")
may be obtained to cover certain losses resulting
from action that may be taken by a bankruptcy
court in connection with a Mortgage Loan. The
level
6
<PAGE> 70
of coverage and the limitations in scope of each
Bankruptcy Bond will be specified in the related
Supplement.
8. Cross Support...... If specified in the related Supplement, the
beneficial ownership of separate groups of assets
included in a Pool may be evidenced by separate
classes of the related Series of Certificates. In
such case, credit support may be provided by a
cross-support feature which requires that
distributions be made with respect to
Certificates evidencing beneficial ownership of
one or more asset groups prior to distributions
to Subordinate Certificates evidencing a
beneficial ownership interest in other asset
groups within the same Pool.
9. Other Forms of
Credit
Support.......... Other forms of credit support to provide coverage
for certain risks of default or various types of
losses (such as a letter of credit, limited
guaranty or insurance contract) may be applicable
to a Series of Certificates, to the Mortgage
Assets included in the related Pool and/or to the
mortgage loans underlying such Mortgage
Certificates, as described in the related
Supplement.
D. Advances.............. If so specified in the related Supplement, the
Servicer, directly or through subservicers, will
be obligated or have the right at its option to
make certain advances (each an "Advance") with
respect to delinquent payments on such Mortgage
Loans. Any such advances will be reimbursable to
the extent described herein and in the related
Supplement.
The Pools.................. Each Pool will consist of Mortgage Loans and/or
Mortgage Certificates (collectively, the
"Mortgage Assets"), any real estate acquired
through foreclosure or similar proceeding, any
applicable credit support, the assets in the
Certificate Account, any minimum prepayment,
reinvestment or similar agreement and any other
assets described in the related Supplement, all
as described herein and therein.
A. Mortgage Loans........ The mortgage loans included in a Pool (the
"Mortgage Loans") will be secured primarily by
liens on one- to four-family residential
properties or shares in cooperative corporations
and the related proprietary leases. If so
specified in the related Supplement, the Mortgage
Loans may include Land Sale Contracts. If so
specified in the related Supplement, the Mortgage
Assets of the related Pool may include mortgage
participation certificates or other beneficial
interests evidencing interests in mortgage loans.
Such mortgage loans may be conventional loans
(i.e., loans that are not insured by any
governmental agency) or may be insured or
guaranteed by the Federal Housing Authority
("FHA"), or the Veterans Administration ("VA"),
as specified in the related Supplement. All
Mortgage Loans will have been purchased by the
Sponsor, either directly or through an affiliate,
from one or more Sellers.
The payment terms of the Mortgage Loans to be
included in a Pool will be described in the
related Supplement and may include any of the
following features or combinations thereof or
other features described in the related
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
7
<PAGE> 71
related Supplement), a rate that is fixed for a
period of time or under certain circumstances and
is followed by an adjustable rate, a rate that
otherwise varies from time to time, or a rate
that is convertible from an adjustable rate to a
fixed rate. Changes to an adjustable rate may be
subject to periodic limitations, maximum rates,
minimum rates or a combination of such
limitations. Accrued interest may be deferred and
added to the principal of a loan for such periods
and under such circumstances as may be specified
in the related Supplement. The loan agreement,
promissory note or other evidence of indebtedness
(the "Mortgage Note") in respect of a Mortgage
Loan may provide for the payment of interest at a
rate lower than the interest rate (the "Mortgage
Rate") specified in such Mortgage Note for a
period of time or for the life of the loan, and
the amount of any difference may be contributed
from funds supplied by a third party.
(b) Principal may be payable on a level debt
service basis to fully amortize the loan over its
term, may be calculated on the basis of an
assumed amortization schedule that is 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 Mortgage 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 Supplement,
prepayments of principal may be prohibited for
the life of any such Mortgage Loan or for certain
periods ("lockout periods"), or may be subject to
a prepayment fee, which may be fixed for the life
of any such Mortgage Loan or may decline over
time. 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. 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) The real property constituting security for
repayment of a Mortgage Loan may be located in
any one of the fifty states, the District of
Columbia, Guam, Puerto Rico or any other
territory of the United States. The Mortgage
Loans may be covered by standard hazard insurance
policies insuring against losses due to fire and
various other causes. The Mortgage Loans may be
covered by primary mortgage insurance policies to
the extent provided in the related Supplement.
8
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B. Mortgage
Certificates....... The pool may include certain assets (the "Mortgage
Certificates") which may consist of GNMA
Certificates, FNMA Certificates, FHLMC
Certificates, Private Certificates or a
combination thereof. Any GNMA Certificates
included in a Pool will be guaranteed as to full
and timely payment of principal and interest by
GNMA, which guaranty is backed by the full faith
and credit of the United States. Any FHLMC
Certificates included in the Pool will be
guaranteed as to the timely payment of interest
and ultimate collection (and, if so specified in
the related Supplement, timely payment) of
principal by FHLMC. Any FNMA Certificates
included in a Pool will be guaranteed as to
timely payment of scheduled payments of principal
and interest by FNMA. No FNMA or FHLMC
Certificates will be backed, directly or
indirectly, by the full faith and credit of the
United States. No Private Certificates will be
backed, directly or indirectly, by any agency or
instrumentality of the United States but may have
other forms of credit support, as described in
the related Supplement.
Each Mortgage Certificate will evidence an interest
in a pool of mortgage loans and/or cooperative
loans, and/or in principal distributions and
interest distributions thereon. The Supplement
for each Series will specify the aggregate
approximate principal balance of GNMA, FNMA and
FHLMC Certificates and of Private Certificates
included in a Pool and will describe the
principal characteristics of the underlying
mortgage loans or cooperative loans and any
insurance, guaranty or other credit support
applicable to such underlying loans, the Mortgage
Certificates or both. In addition, the related
Supplement will describe the terms upon which
distributions will be made to the Trustee as the
holder of the Mortgage Certificates. The Mortgage
Certificates included in any Pool will be
registered in the name of the Trustee or its
nominee or in the case of book-entry Mortgage
Certificates in the name of a financial
intermediary with a Federal Reserve Bank or a
clearing corporation and will be held by the
Trustee only for the benefit of holders of the
related Series of Certificates.
The GNMA, FNMA and FHLMC Certificates are
collectively referred to herein as the "Agency
Certificates."
C. Certificate Account... All distributions on any Mortgage Certificates and
all payments (including prepayments, liquidation
proceeds and insurance proceeds) received from
the Servicer on any Mortgage Loans included in
the Pool for a Series will be remitted to an
account (the "Certificate Account"), and,
together with any amounts available pursuant to
the terms of any applicable credit support and
any other amounts described in the related
Supplement, will be available for distribution on
the Certificates of such Series as described in
the related Supplement. Such Certificate Account
shall be an Eligible Account or Accounts
established and maintained by the Servicer for
the benefit of holders of a Series of
Certificates.
Optional Termination....... The Servicer or, if specified in the related
Supplement for a Series of REMIC Certificates,
holders of the Residual Certificates of such
Series or the REMIC may have the option to
repurchase the Mortgage Assets included in the
related Pool and thereby terminate the related
Pooling Agreement. Any such option will be
exercisable at the
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times and upon satisfaction of the conditions
specified in the related Supplement.
Tax Status of REMIC
Certificates............. Regular Certificates of a particular Series will be
treated as "regular interests" in the REMIC and
will be treated as debt instruments for federal
income tax purposes, and the Residual
Certificates of such Series will be treated as
"residual interests" in the REMIC. Holders of
Residual Certificates generally will include
their pro rata shares of the net income or loss
of the REMIC in determining their federal taxable
income.
Holders of Accrual Certificates and any other
classes of Regular Certificates issued with
original issue discount generally will be
required to include the original issue discount
(which for federal income tax purposes includes
interest accrued on Accrual Certificates as well
as current interest paid thereon) in gross income
over the life of the Regular Certificates.
Distributions on Regular Certificates to foreign
investors generally will not be subject to U.S.
withholding tax, provided applicable
certification procedures are complied with.
Subject to certain limitations that may be
applicable to Buydown Loans, REMIC Certificates
will be treated as "regular or residual interests
in a REMIC" for domestic building and loan
associations and "real estate assets" for real
estate investment trusts. See "Certain Federal
Income Tax Consequences -- REMIC Certificates"
herein.
Tax Status of Non-REMIC
Certificates............. For federal income tax purposes, the trust created
to hold the Mortgage Assets for each Series of
Non-REMIC Certificates will be classified as a
grantor trust and not as an association taxable
as a corporation. Holders of Non-REMIC
Certificates of such Series which are not IO
Certificates will be treated as owners of
undivided interests in the trust and as equitable
owners of undivided interests in each of the
Mortgage Assets held by the trust, and such
holders will be taxed on their pro rata shares of
the income from the related Mortgage Assets and
may be allowed to deduct their pro rata shares of
reasonable servicing fees, consistent with their
methods of accounting, subject to limitation in
the case of Non-REMIC Certificates held by
individuals, estates, or trusts (either directly
or indirectly through certain pass-through
entities). If a Series of Non-REMIC Certificates
includes IO Certificates, holders of the
Certificates of such Series will be subject to
the "Stripped Bond Rules" of Section 1286 of the
Code.
Subject to certain limitations that may be
applicable to Buydown Loans, to the extent the
Mortgage Assets and the related interests qualify
for such treatment, interests in the Mortgage
Assets held by holders of applicable Non-REMIC
Certificates which are not IO Certificates will
be considered to represent "loans . . . secured
by an interest in real property" for domestic
building and loan associations and "real estate
assets" for real estate investment trusts.
It is not clear whether IO Certificates will be
treated as representing an ownership interest in
qualifying assets and income under
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Sections 7701(a)(19)(C)(v), 856(c)(5)(A) and
856(c)(3)(B) of the Code, although the policy
considerations underlying those Sections suggest
that such treatment should be available. It is
also not clear whether a reasonable prepayment
assumption should be applied in accruing original
issue discount on the IO Certificates.
See "Certain Federal Income Tax
Consequences -- Non-REMIC Certificates" herein.
Legal Investment........... The 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.
However, institutions whose investment activities
are subject to other legal investment laws and
regulations or review by certain regulatory
authorities may be subject to restrictions on
investment in certain classes of Certificates.
See "Legal Investment" herein.
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" herein. Certain classes of
Certificates may not be transferred unless the
Trustee and the Sponsor are furnished with a
letter of representation or an opinion of counsel
to the effect that such transfer will not result
in violation of the prohibited transaction
provisions of ERISA and the Code and will not
subject the Trustee, the Sponsor or the Servicer
to additional obligations. Additionally, unless
otherwise specified in the related Supplement,
Certificates representing an interest in a Pool
consisting of Private Certificates may not be
transferred to an employee benefit plan or other
retirement plan or arrangement subject to ERISA.
See "ERISA Considerations" herein.
Rating..................... The Certificates of each class offered hereby and
by a Supplement will be rated in one of the four
highest rating categories by one or more
nationally recognized statistical rating
organizations, as specified in such Supplement
(with respect to each Series of Certificates, the
"Rating Agency").
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THE POOLS*
GENERAL
Each Pool will consist of Mortgage Assets, any real estate acquired through
foreclosure or similar proceeding, any applicable credit support, the assets in
the Certificate Account, any minimum prepayment, reinvestment or similar
agreement and any other assets described in the related Supplement, all as
described herein and therein.
THE MORTGAGE LOANS
The Mortgage Loans may be fixed- or adjustable-rate mortgage loans, or
participations or other beneficial interests in such mortgage loans, evidenced
by loan agreements, promissory notes or other evidence of indebtedness (the
"Mortgage Notes") secured primarily by first liens on one- to four-family
residential properties in any one of the fifty states, the District of Columbia,
Guam, Puerto Rico or any other territory of the United States. If so specified
in the related Supplement, the Mortgage Loans may include cooperative apartment
loans ("Cooperative Loans") secured by security interests in shares issued by
private, non-profit cooperative housing corporations and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in such buildings. A "Mortgage" is a mortgage, deed of
trust or similar instrument with respect to a Mortgaged Property. The "Mortgaged
Properties" securing the Mortgage Notes will be comprised of one- to four-family
dwelling units that are either detached or semi-detached townhouses, rowhouses,
individual condominium units, individual units in planned unit developments and
certain other dwelling units. The Mortgaged Properties may include leasehold
interests in residential properties, the title to which is held by third party
lessors. The Mortgaged Properties may include vacation and second homes and
investment properties. Each Mortgage Loan will be selected by the Sponsor for
inclusion in a Pool from among those purchased, either directly or through
affiliates. Originators, servicers or sellers may be affiliated with the
Sponsor. All transactions involving affiliates will be conducted in a
commercially reasonable manner at arm's length.
A Pool may include one or more of the following types of Mortgage Loans:
(1) Fixed-rate, conventional Mortgage Loans providing for full
amortization of principal in level monthly payments;
(2) Conventional adjustable-rate mortgage loans ("ARMs"), as described
under "ARMs" herein;
(3) Fully amortizing graduated-payment Mortgage Loans ("GPMs"), which
provide for lower periodic payments, or for payments of interest only,
during the early years of the term, followed by periodic payments of
principal and interest that increase periodically at a predetermined rate
until the Mortgage Loan is repaid or for a specified number of years, after
which level periodic payments begin; and
(4) Any other type of Mortgage Loan, as described in the related
Supplement.
A Pool may contain certain Mortgage Loans ("Buydown Loans"), which include
provisions whereby the Seller or a third party partially subsidizes the monthly
payments of the Mortgagor during the early years of the Mortgage Loan, the
difference to be made up from a fund (a "Buydown Fund") contributed by the
Seller or 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 Mortgagor will increase during the buydown period as a
result of normal increases in compensation and of inflation, so that the
Mortgagor 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 Supplement will
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* Whenever in this Prospectus the terms "Pool", "Certificates", "REMIC
Certificates" and "Non-REMIC Certificates" are used, those terms apply, unless
the context indicates otherwise, to one specific Pool, and the Certificates
representing undivided interests therein. Similarly, the term "Certificate
Rate" will refer to the Certificate Rate borne by a particular class of
Certificates of a Series.
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contain information with respect to any Buydown Loan concerning limitations on
the interest rate paid by the Mortgagor initially, on annual increases in the
interest rate and on the length of the buydown period.
A Pool may contain certain Mortgage Loans evidenced by Contracts ("Land
Sale Contracts") for the sale of Mortgaged Properties pursuant to which the
mortgagor promises to pay the amount due thereon to the holder thereof with fee
title to the related Mortgaged Property held by such holder until the mortgagor
has made all of the payments required pursuant to such Land Sale Contract, at
which time fee title is conveyed to the mortgagor.
Mortgage Loans with certain LTVs and/or certain principal balances may be
covered wholly or partially by Primary Mortgage Insurance Policies. The
existence, extent and duration of any such coverage will be described in the
related Supplement. The loan-to-value ratio ("LTV") of a Mortgage Loan at any
given time is the ratio, expressed as a percentage, of the then-outstanding
principal balance of the Mortgage Loan to the Appraised Value of the related
Mortgaged Property. Unless otherwise specified in the related Supplement, the
"Appraised Value" is either (x) 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, except that, in the case of Mortgage
Loans the proceeds of which were used to refinance an existing mortgage loan,
the Appraised Value of the related Mortgaged Property is the appraised value
thereof determined in an appraisal obtained at the time of refinancing or (y)
the appraised value determined in an appraisal made at the request of a
Mortgagor subsequent to origination in order to eliminate the Mortgagor's
obligation to keep a Primary Mortgage Insurance Policy in force.
Each Supplement for a Series representing interests in a Pool that consists
of Mortgage Loans will contain information, as of the Cut-off Date and to the
extent known to the Sponsor, with respect to the Mortgage Loans contained in
such Pool, including: (i) the number of Mortgage Loans, (ii) the geographic
distribution of the Mortgage Loans; (iii) the aggregate principal balance of the
Mortgage Loans; (iv) the types of dwelling constituting the Mortgaged
Properties; (v) the longest and shortest scheduled term to maturity; (vi) the
maximum principal balance of the Mortgage Loans; (vii) the maximum LTV of the
Mortgage Loans at origination or such other date specified in the related
Supplement; (viii) the maximum and minimum Mortgage Rates; and (ix) the
aggregate principal balance of non-owner-occupied Mortgaged Properties.
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 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 (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 Pool. If losses on defaulted Mortgage Loans exceed the coverage
of any Primary Mortgage Insurance Policy or the amount of any credit support
arrangement described in the related Supplement, such losses will be borne by
holders of Certificates ("Certificateholders").
ARMs. Each ARM included in a Pool will be a conventional Mortgage Loan
which will bear interest at a Mortgage Rate that is adjusted periodically to be
equal (subject to rounding) to the index (the "Index") plus the specified
percentage (the "Mortgage Margin") added to the applicable Index in order to
compute the Mortgage Rate for such ARM, subject to certain limitations on the
amount of any single increase or decrease in the Mortgage Rate or on the maximum
Mortgage Rate for such ARM. If specified in the related Supplement, ARMs
included in a Pool may permit the Mortgagor to convert the Mortgage Rate to a
fixed rate, in the manner set forth in the related Supplement. Certain ARMs may
provide for periodic adjustments of scheduled payments in order to fully
amortize the Mortgage Loan by its stated maturity, while other ARMs may permit
the maturity to be extended or shortened in accordance with the portion of each
payment that is applied to interest in accordance with the periodic interest
rate adjustments.
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If an ARM provides for limitations on the amount by which monthly payments
may be increased or changes to the Mortgage Rate of the ARM are made more
frequently than payment changes, it is possible that an increase in the rate of
interest would not be covered by the amount of the scheduled payment. In that
case, the amount of the difference between the scheduled monthly payment and the
monthly interest accrued at the Mortgage Rate is added to the unpaid principal
balance of the Mortgage Loan and interest accrues on such added principal at the
then-applicable Mortgage Rate from the date of such addition. Such an adjustment
is referred to as "negative amortization". Negative amortization tends to
lengthen the weighted average life of the Mortgage Loans and may cause payments
near the maturity of the Mortgage Loan to be larger than the previously
scheduled monthly payments unless the terms of the Mortgage Loan permit its
maturity to be extended. If a Pool includes Mortgage Loans that provide for
negative amortization, the related Supplement will describe certain of the
effects on Certificateholders.
At the Cut-off Date for a Pool that includes ARMs, the Pool may contain
ARMs which are newly originated and ARMs as to which one or more adjustments
have occurred. ARMs that have not had their first rate adjustment will generally
bear interest at rates that are lower than the rate that would otherwise be
produced by the sum of the applicable Index and the Mortgage Margin.
MORTGAGE CERTIFICATES
All of the Mortgage Certificates will be registered in the name of the
Trustee or its nominee or, in the case of Mortgage Certificates issued only in
book-entry form, a financial intermediary (which may be the Trustee) that is a
member of the Federal Reserve System or of a clearing corporation on the books
of which the security is held. Each Mortgage Certificate will evidence an
interest in a pool of mortgage loans and/or cooperative loans and/or in
principal distributions and interest distributions thereon.
The descriptions of GNMA, FHLMC and FNMA Certificates and of Private
Certificates that are set forth below are descriptions of certificates
representing proportionate interests in a pool of mortgage loans and in the
payments of principal and interest thereon. GNMA, FHLMC, FNMA or the issuer of a
particular series of Private Certificates may also issue mortgage-backed
securities representing a right to receive distributions of interest only or
principal only or disproportionate distributions of principal or interest or to
receive distributions of principal and/or interest prior or subsequent to
distributions on other certificates representing interests in the same pool of
mortgage loans. In addition, any of such issuers may issue certificates
representing interests in mortgage loans having characteristics that are
different from the types of mortgage loans described below. The terms of any
such certificates to be included in a Pool (and of the underlying mortgage
loans) will be described in the related Supplement, and the descriptions that
follow are subject to modification as appropriate to reflect the terms of any
such certificates that are actually included in a Pool.
GNMA. GNMA is a wholly owned corporate instrumentality of the United
States within the Department of Housing and Urban Development ("HUD"). Section
306(g) of Title III 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 that are based on and backed by a pool of loans
("FHA Loans") insured or guaranteed by the United States Federal Housing
Administration (the "FHA") under the Housing Act or Title V of the Housing Act
of 1949, or by the United States Department of Veteran Affairs (the "VA") under
the Servicemen's Readjustment Act of 1944, as amended, or Chapter 37 of Title
38, United States Code or by pools of other eligible mortgage 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". To meet its
obligations under its guaranties, GNMA is authorized, under Section 306(d) of
the Housing Act, to borrow from the United States Treasury with no limitations
as to amount.
GNMA Certificates. All of the GNMA Certificates (the "GNMA Certificates")
will be mortgage-backed certificates issued and serviced by GNMA- or
FNMA-approved mortgage servicers. The mortgage loans underlying GNMA
Certificates may consist of FHA Loans secured by mortgages on one- to
four-family residential properties or multifamily residential properties, loans
secured by mortgages on one- to four-family
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residential properties or multifamily residential properties, mortgage loans
which are partially guaranteed by the VA and other mortgage loans eligible for
inclusion in mortgage pools underlying GNMA Certificates. Unless otherwise
specified in the related Supplement, at least 90 percent by original principal
amount of the mortgage loans underlying a GNMA Certificate will be mortgage
loans having maturities of 20 years or more.
Each GNMA Certificate provides for the payment by or on behalf of the
issuer of the GNMA Certificate to the registered holder of such GNMA Certificate
of monthly payments of principal and interest equal to the registered holder's
proportionate interest in the aggregate amount of the monthly scheduled
principal and interest payments on each underlying eligible mortgage loan, less
servicing and guaranty fees aggregating the excess of the interest on each such
mortgage loan over the GNMA Certificate pass-through rate. In addition, each
payment to a GNMA Certificateholder will include proportionate pass-through
payments to such holder of any prepayments of principal of the mortgage loan
underlying the GNMA Certificate, and the holder's proportionate interest in the
remaining principal balance in the event of a foreclosure or other disposition
of any such mortgage loan.
The GNMA Certificates included in a Pool may be issued under either or both
of the GNMA I program ("GNMA I Certificates") and the GNMA II program ("GNMA II
Certificates"). All mortgages underlying a particular GNMA I Certificate must
have the same annual interest rate (except for pools of mortgages secured by
mobile homes). The annual interest rate on each GNMA I Certificate is one-half
percentage point less than the annual interest rate on the mortgage loans
included in the pool of mortgages backing such GNMA I Certificate. Mortgages
underlying a particular GNMA II Certificate may have annual interest rates that
vary from each other by up to one percentage point. The annual interest rate on
each GNMA II Certificate will be between one-half percentage point and one and
one-half percentage points less than the highest annual interest rate on the
mortgage loans included in the pool of mortgages backing such GNMA II
Certificate.
GNMA will have approved the issuance of each of the GNMA Certificates in
accordance with a guaranty agreement between GNMA and the servicer of the
mortgage loans underlying such GNMA Certificate. Pursuant to such agreement, the
servicer is required to advance its own funds in order to make timely payments
of all amounts due on the GNMA Certificate, even if the payments received by
such servicer on the mortgage loans backing the GNMA Certificate are less than
the amounts due on such GNMA Certificate. If a servicer is unable to make
payments on a GNMA Certificate as it becomes due, it must promptly notify GNMA
and request GNMA to make such payment. Upon such notification and request, GNMA
will make such payments directly to the registered holder of the GNMA
Certificate. In the event no payment is made by such servicer and such servicer
fails to notify and request GNMA to make such payment, the registered holder of
the GNMA Certificate has recourse only against GNMA to obtain such payment. The
registered holder of the GNMA Certificates included in a Pool is entitled to
proceed directly against GNMA under the terms of each GNMA Certificate or the
guaranty agreement or contract relating to such GNMA Certificate for any amounts
that are not paid when due under each GNMA Certificate.
As described above, the GNMA Certificates included in a Pool, 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 Supplement.
FHLMC. 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"). FHLMC's common stock is owned by the Federal Home Loan Banks, and
its preferred stock is owned by the stockholders of such 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 residential mortgage loans or
participation interests in such mortgage loans and the resale of the mortgage
loans so purchased in the form of mortgage securities. FHLMC is confined to
purchasing, so far as practicable, conventional mortgage loans and participation
interests therein which it deems to be of such
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quality, type and class as to meet generally the purchase standards imposed by
private institutional mortgage investors.
FHLMC Certificates. FHLMC Certificates ("FHLMC Certificates") represent an
undivided interest in a group of mortgage loans purchased by FHLMC. Mortgage
loans underlying the FHLMC Certificates included in a Pool will consist of
fixed- or adjustable-rate mortgage loans with original terms to maturity of from
10 to 30 years, all of which are secured by first liens on one- to four-family
residential properties or properties containing five or more units and designed
primarily for residential use.
FHLMC Certificates are issued and maintained and may be transferred only on
the book-entry system of a Federal Reserve Bank and may only be held of record
by entities eligible to maintain book-entry accounts at a Federal Reserve Bank.
Beneficial owners will hold FHLMC Certificates ordinarily through one or more
financial intermediaries. The rights of a beneficial owner of a FHLMC
Certificate against FHLMC or a Federal Reserve Bank may be exercised only
through the Federal Reserve Bank on whose book-entry system such Certificate is
held.
Under its Cash and Guarantor programs, FHLMC guarantees to each registered
holder of a FHLMC Certificate the timely payment of interest at the rate
provided for by such FHLMC Certificate on the registered holder's pro rata share
of the unpaid principal balance outstanding of the related mortgage loans,
whether or not received. FHLMC also guarantees to each registered holder of a
FHLMC Certificate ultimate collection of all principal of the related 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 Supplement for a Series of Certificates, guarantee the timely payment of
scheduled principal. 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 guarantee of ultimate collection of principal at any time after
default on an underlying mortgage loan, but not later than 30 days following (i)
foreclosure sale, (ii) payment of the claim by any mortgage insurer, or (iii)
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 servicing judgment with respect to the mortgages in the same manner
as for mortgages that it has purchased but not sold.
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 interest rate on the FHLMC Certificate. For FHLMC Pools formed under FHLMC's
Guarantor Program having pool numbers beginning with 18-012, the range between
the lowest and highest annual interest rates on the mortgage loans does not
exceed two percentage points.
Under its Gold PC Program, FHLMC guarantees to each registered holder of a
FHLMC Certificate the timely payment of interest calculated in the same manner
as described above, as well as timely installments of scheduled 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 for the related FHLMC Certificate.
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, nor entitled
to, the full faith and credit of the United States.
As described above, the FHLMC Certificates included in a Pool, 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 Supplement.
FNMA. FNMA is a federally chartered and stockholder owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act, as amended. FNMA was originally established in 1938 as a United States
government agency to provide supplemental liquidity to the mortgage market
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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 home
mortgage loans from local lenders, thereby replenishing their funds for
additional lending. FNMA acquires funds to purchase home 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. In addition, FNMA issues mortgage-backed securities
primarily in exchange for pools of mortgage loans from lenders.
FNMA Certificates. FNMA Certificates ("FNMA Certificates") represent
fractional interests in a pool of mortgage loans formed by FNMA.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing scheduled principal and interest at the
applicable pass-through rate 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. If FNMA were unable to perform such
obligations, distributions on FNMA Certificates would consist solely of payments
and other recoveries on the underlying mortgage loans and, accordingly,
delinquencies and defaults would affect monthly distributions to holders of FNMA
Certificates. The obligations of FNMA under its guarantees are obligations
solely of FNMA and are not backed by, nor entitled to, the full faith and credit
of the United States.
As described above, the FNMA Certificates included in a Pool, 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 Supplement.
Private Certificates. Private Certificates ("Private Certificates") may
consist of (a) mortgage pass-through certificates or participation certificates
representing beneficial interests in loans of the type that would otherwise be
eligible to be Mortgage Loans (the "Underlying Loans") or (b) collateralized
mortgage obligations secured by Underlying Loans. Private Certificates 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 portion of the principal and interest distributions
(but not all such distributions) of certain mortgage loans. The Private
Certificates will have previously been (1) offered and distributed to the public
pursuant to an effective registration statement or (2) purchased in a
transaction not involving any public offering from a person who is not an
affiliate of the issuer of such securities at the time of sale (nor an affiliate
thereof at any time during the three preceding months); provided that a period
of three years has elapsed since the later of the date the securities were
acquired from the issuer or an affiliate thereof. Although individual Underlying
Loans may be insured or guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and the Private Certificates
themselves will not be so insured or guaranteed. Unless otherwise specified in
the related Supplement, the seller/servicer of the underlying mortgage loans
will have entered into a pooling and servicing agreement, an indenture or
similar agreement (a "PC Agreement") with the trustee under such PC Agreement
(the "PC Trustee"). The PC Trustee or its agent, or a custodian, will possess
the mortgage loans underlying such Private Certificates. The mortgage loans
underlying the Private Certificates may be subserviced by one or more loan
servicing institutions under the supervision of a master servicer (the "PC
Servicer").
The sponsor of the Private Certificates (the "PC Sponsor") will be a
financial institution or other entity which is or has affiliates which are
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 mortgage loans to such trusts and selling
beneficial interests in such trusts. The PC Sponsor may be an affiliate of the
Sponsor. The obligations of the PC Sponsor 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 Supplement, the PC
Sponsor will not have guaranteed any of the assets conveyed to the related trust
or any of the Private Certificates issued
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<PAGE> 81
under the PC Agreement. Additionally, although the mortgage loans underlying the
Private Certificates may be guaranteed by an agency or instrumentality of the
United States, the Private Certificates themselves will not be so guaranteed.
The Sponsor will acquire Private Certificates in open market transactions
or in privately negotiated transactions which may be through affiliates.
The Supplement for a Series for which the Pool includes Private
Certificates will specify (such disclosure may be on an approximate basis and
will be as of the date specified in the related Supplement) to the extent
relevant and to the extent such information is reasonably available to the
Sponsor and the Sponsor reasonably believes such information to be reliable (i)
the aggregate approximate principal amount and type of the Private Certificates
to be included in the Pool; (ii) certain characteristics of the mortgage loans
that comprise the underlying assets for the Private Certificates including (A)
the payment features of such underlying 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 underlying 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 Certificates; (iv)
the weighted average term-to-stated maturity of the Private Certificates; (v)
the pass-through or certificate rate of the Private Certificates; (vi) the
weighted average pass-through or certificate rate of the Private Certificates;
(vii) the PC Sponsor, the PC Trustee and the PC Servicer; (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 Certificates or to such Private Certificates
themselves; (ix) the terms on which the underlying mortgage loans for such
Private Certificates may, or are required to, be purchased prior to their stated
maturity or the stated maturity of the Private Certificates; and (x) the terms
on which mortgage loans may be substituted for those originally underlying the
Private Certificates.
CERTIFICATE ACCOUNT
The Servicer or other entity identified in the related Supplement will, as
to each Series of Certificates, establish and maintain a Certificate Account for
the benefit of the Trustee and holders of the Certificates of such Series for
receipt of (i) each distribution or monthly payment, as the case may be, made to
the Trustee with respect to the Mortgage Assets, (ii) the amount of cash, if
any, specified in the related Pooling Agreement to be initially deposited
therein, (iii) the amount of cash, if any, withdrawn from any related Reserve
Fund or other fund, and (iv) the reinvestment income thereon, if any. The
Pooling Agreement for a Series may authorize the Trustee or the Servicer, as
appropriate, to invest the funds in the Certificate Account in certain
investments ("Eligible Investments") that will qualify as "permitted
investments" under Section 860G(a)(5) of the Code in the case of REMIC
Certificates. The Eligible Investments will generally mature not later than the
business day immediately preceding the next Distribution Date for such Series
(or, in certain cases, on such Distribution Date). Eligible Investments include,
among other investments, obligations of the United States and certain agencies
thereof, federal funds, certificates of deposit, commercial paper carrying the
ratings specified in the related Pooling Agreement of each Rating Agency rating
the Certificates of such Series that has rated such commercial paper, demand and
time deposits and banker's acceptances sold by eligible commercial banks,
certain repurchase agreements of United States government securities and certain
Minimum Reinvestment Agreements. Reinvestment earnings, if any, on funds in the
Certificate Account generally will belong to the Servicer.
MINIMUM PREPAYMENT AGREEMENT
The Sponsor may enter into an agreement (a "Minimum Prepayment Agreement")
with an institution meeting the criteria of the Rating Agency rating the related
Series to enable the Trustee to make distributions of principal on the
Certificates of such Series in accordance with a schedule set forth in the
related Supplement. Funds will be provided under the Minimum Prepayment
Agreement in the event that aggregate scheduled principal payments and
prepayments on the Mortgage Assets included in the related Pool were not
sufficient to make distributions in reduction of the Certificate Balance of such
Certificates in accordance with such Minimum Prepayment Schedule. Such Minimum
Prepayment Agreement may obligate the institution
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<PAGE> 82
to purchase, from time to time, Mortgage Assets included in the Pool pursuant to
a selection process set forth in such agreement for an amount specified in the
related Supplement.
The related Supplement will describe the terms and conditions of any
Minimum Prepayment Agreement if a Minimum Prepayment Agreement is to be a part
of the Pool.
MINIMUM REINVESTMENT AGREEMENT
The Sponsor may enter into an agreement (a "Minimum Reinvestment
Agreement") with an institution meeting the criteria of the Rating Agency rating
the related Series. Amounts required to be deposited in any account or fund for
a related Series will be invested pursuant to such agreement. If a Minimum
Reinvestment Agreement is entered into with respect to a Series of Certificates,
reinvestment earnings on funds in the Certificate Account will not belong to the
Servicer as additional servicing compensation but will be available to make
distributions on the Certificates in accordance with their terms. The applicable
interest rates for funds invested under such agreement will be described in the
related Supplement if a Minimum Reinvestment Agreement is to be a part of the
Pool.
DESCRIPTION OF CERTIFICATES
GENERAL
Each Series of Certificates will be issued pursuant to a separate Pooling
Agreement among the Sponsor, the Seller (if so provided in the related
Supplement), the Trustee and the Servicer, if such Series relates to Mortgage
Loans. A form of Pooling Agreement is filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The following summaries describe
certain provisions that may appear in each Pooling Agreement. The 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 Pooling Agreement and the Supplement related to a particular Series of
Certificates. References herein to a Trustee or the Servicer include, unless
otherwise specified, any agents acting on behalf of such Trustee or any
subcontractor of the Servicer, any of which agents or subcontractors may be one
of their affiliates.
The Certificates are issuable in Series, each evidencing the entire
ownership interest in a Pool of assets consisting primarily of Mortgage Assets.
The Certificates of each Series will be issued in fully registered form or
book-entry form and will be issued in the authorized denominations for each
class specified in the related Supplement, will evidence specified beneficial
ownership interests in the related Pool created pursuant to the related Pooling
Agreement and will not be entitled to payments in respect of the assets included
in any other Pool established by the Sponsor. The transfer of the Certificates
may be registered, and the Certificates may be exchanged, at the office or
agency of the Trustee specified in the related Supplement without the payment of
any service charge other than any tax or governmental charge payable in
connection with such registration of transfer or exchange. The transfer of any
class of a Series of Certificates may be subject to the satisfaction of certain
conditions set forth in the related Supplement. The Certificates will not
represent obligations of the Sponsor or any affiliate of the Sponsor. The
Mortgage Assets will not be insured or guaranteed by any governmental entity or
other person, unless otherwise specified in the related Supplement. Any
qualifications on direct or indirect ownership of Residual Certificates, as well
as restrictions on the transfer of such Residual Certificates, will be set forth
in the related Supplement.
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 Pool. A Series of Certificates
may include one or more classes that are senior 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 support, in each case as described herein and in the related
Supplement. One or more classes of Certificates of a Series may be
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<PAGE> 83
entitled to receive distributions of principal, interest 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 Pool, or on a
different basis, in each case as specified in the related Supplement. The timing
and amounts of such distributions may vary among classes or over time as
specified in the related Supplement.
DISTRIBUTIONS
Distributions of principal of and interest on the Certificates of a Series
will be made (to the extent of funds available therefor) on the dates specified
therefor in the related Supplement (each, a "Distribution Date"), and allocated
to the classes of such Series at the Certificate Rates, in the amounts and in
the order specified in the related Supplement. Distributions will be made by
wire transfer (in the case of Certificates which are of a certain minimum
denomination, as specified in the related Supplement) or by check mailed to
record holders of such Certificates as of the related Record Date (as specified
in the related Supplement) at their addresses appearing on the Certificate
Register, except that the final distribution of principal will be made only upon
presentation and surrender of such Certificate at the office or agency of the
Paying Agent for such Certificate specified in the related Supplement. With
respect to any Distribution Date, the "Record Date" will be the close of
business on (i) the last business day of the preceding month, (ii) with respect
to the first Distribution Date for a Series, if the Closing Date of the Series
occurs in the month following the Cut-Off Date, such Closing Date or (iii) such
other date as is specified in the related Supplement. Notice will be mailed
before the Distribution Date on which the final distribution is expected to be
made to the holder of such Certificate. In the event the Certificates of a
Series are issued in book-entry form, distributions on such Certificates,
including the final distribution in retirement of such Certificates, will be
made through the facilities of a depository in accordance with its usual
procedures in the manner described in the related Supplement.
Distributions of principal of and interest on the Certificates will be made
by the Trustee out of the Certificate Account established under the Pooling
Agreement. All distributions on the Mortgage Certificates, if any, included in
the Pool for a Series, remittances on the Mortgage Loans by the Servicer
pursuant to the Pooling Agreement, together with any reinvestment income (if so
specified in the related Supplement) thereon and amounts withdrawn from any
Reserve Fund or other fund or payments in respect of other credit support and
required to be so deposited, will be deposited directly into the Certificate
Account and thereafter will be available (except for funds held for future
distribution and for funds payable to the Servicer) to make distributions on
Certificates of such Series on the next succeeding Distribution Date. See "The
Pools -- Certificate Account" and "Servicing of Mortgage Loans -- Payments on
Mortgage Loans" herein.
Interest. Interest will accrue on the aggregate Certificate Balance (or,
in the case of IO Certificates, the aggregate notional amount) of each class of
Certificates (the "Class Certificate Balance") entitled to interest at the
Certificate Rate (which may be a fixed rate or a rate adjustable as specified in
such Supplement) during each Interest Accrual Period specified in such
Supplement. The "Interest Accrual Period" with respect to any Distribution Date
shall be the period from (and including) the first day of the month preceding
the month of such Distribution Date (or, in the case of the first Distribution
Date, from the Closing Date) through the last day of such preceding month, or
such other period as may be specified in the related Supplement. To the extent
funds are available therefor, interest accrued during each such Interest Accrual
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 Supplement until the Class
Certificate Balance of such class is reduced to zero 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 Supplement. Unless otherwise specified
in the related Supplement, distributions allocable to interest on each Notional
Amount Certificate that is not entitled to distributions allocable to principal
will be calculated based on the notional amount of such Notional Amount
Certificate. The notional amount of a Notional Amount Certificate will not
evidence an interest in or entitlement to distributions allocable to principal
but will be used solely for
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<PAGE> 84
convenience in expressing the calculation of interest and for certain other
purposes. Unless otherwise specified in the related Supplement, interest on the
Certificates of each class will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
Distributions of interest on each class of Accrual Certificates will
commence only after the occurrence of the events specified in the related
Supplement and, prior to such time, such interest will be added to the Class
Certificate Balance of such class of Accrual Certificates. Any such class of
Accrual Certificates will thereafter accrue interest on its outstanding Class
Certificate Balance as so adjusted.
Principal. Unless otherwise specified in the related Supplement, the Class
Certificate Balance of any class of Certificates entitled to distributions of
principal will be the original Class Certificate Balance of such class of
Certificates specified in such Supplement, reduced by all distributions reported
to holders of such Certificates as allocable to principal and adjustments, if
any, in respect of losses and (i) in the case of Accrual Certificates, increased
by all interest accrued but not then distributable on such Accrual Certificates
and (ii) in the case of adjustable rate Certificates, subject to the effect of
negative amortization. The related 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.
Each class of Certificates of a Series (except for IO Certificates) will
(to the extent of funds available therefor) receive distributions of principal
in the amounts, at the times and in the manner specified in the related
Supplement until its initial aggregate Certificate Balance has been fully
amortized. Allocations of distributions of principal will be made to the
Certificates of each class, during the periods and in the order specified in the
related Supplement. Unless otherwise specified in the related Supplement,
distributions will be made pro rata among the Certificates of each class then
entitled to receive such distributions.
The "Last Scheduled Distribution Date" for a class of Certificates is the
latest date as of which the Class Certificate Balance of the Certificates of
such class is expected to be fully amortized, either based on the assumptions
that all scheduled payments (with no prepayments) on the Mortgage Assets in the
related Pool are timely received and, if applicable, that all such scheduled
payments are reinvested on receipt at the rate or rates specified in the related
Supplement at which amounts in the Certificate Account are assumed to earn
interest (the "Assumed Reinvestment Rate") or, if a Minimum Prepayment Agreement
is entered into with respect to such Series that payments on the related
Mortgage Assets are received, in accordance with a minimum prepayment rate or
schedule as set forth in the related Supplement. (If an Assumed Reinvestment
Rate is specified for a Series of Certificates, reinvestment earnings on funds
in the Certificate Account will not belong to the Servicer as additional
servicing compensation. Such amounts will be part of the Pool and will be
available to make distributions on the related Certificates.)
CATEGORIES OF CLASSES OF CERTIFICATES
In general, the classes of certificates of each Series fall into different
categories. The following chart identifies and generally defines certain of the
more typical categories. The Supplement for a series of Certificates may
identify the classes which comprise such Series by reference to the following
categories.
PRINCIPAL TYPES
<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
<S> <C>
Accretion Directed..... A class that receives principal payments from the accreted
interest from specified Accrual Classes. An Accretion
Directed Class also may receive principal payments from
principal paid on the Mortgage Assets or other assets of the
Pool for the related Series.
Component
Certificates......... A class consisting of "Components." The Components of a
class of Component Certificates may have different principal
and/or interest payment characteristics but together
constitute a single class. Each Component of a class of
Component Certificates may be identified as falling into one
or more of the categories in this chart.
</TABLE>
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<PAGE> 85
<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
<S> <C>
Notional Amount
Certificates......... A class having no principal balance and bearing interest on
the related notional amount. The notional amount is used for
purposes of the determination of interest distributions.
Planned Principal Class
(also sometimes
referred to
as "PACs")........... A class that is designed to receive principal payments using
a predetermined principal balance schedule derived by
assuming two constant prepayment rates for the underlying
Mortgage Assets. These two rates are the endpoints for the
"structuring range" for the Planned Principal Class. The
Planned Principal Classes in any Series of Certificates may
be subdivided into different categories (e.g., Primary
Planned Principal Classes, Secondary Planned Principal
Classes and so forth) having different effective structuring
ranges and different principal payment priorities. The
structuring range for the Secondary Planned Principal Class
of a Series of Certificates will be narrower than that for
the Primary Planned Principal Class of such Series.
Scheduled Principal
Class................ A class that is designed to receive principal payments using
a predetermined principal balance schedule but is not
designated as a Planned Principal Class or Targeted
Principal Class. In many cases, the schedule is derived by
assuming two constant prepayment rates for the Mortgage
Assets. These two rates are the endpoints for the
"structuring range" for the Scheduled Principal Class.
Senior Certificates
("SEN").............. Classes that are entitled to receive payments of principal
and interest on each Distribution Date prior to the Classes
of Subordinate Certificates.
Sequential Pay......... Classes that receive principal payments in a prescribed
sequence, that do not have predetermined principal balance
schedules and that under all circumstances receive payments
of principal continuously from the first Distribution Date
on which they receive principal until they are retired. A
single class that receives principal payments before or
after all other classes in the same Series of Certificates
may be identified as a Sequential Pay Class.
Strip.................. A class that receives a constant proportion, or "strip," of
the principal payments on the Mortgage Assets. The constant
proportion of such principal payments may or may not vary
for each Mortgage Asset included in the Pool and will be
calculated in the manner described in the related
Supplement. Such Classes may also receive payments of
interest.
Subordinate
Certificates
("SUB").............. Classes that are entitled to receive payments of principal
and interest on each Distribution Date only after the Senior
Certificates and certain Classes of Subordinate Certificates
with higher priority of distributions have received their
full principal and interest entitlements.
Support Class (also
sometimes referred to
as "companion
classes")............ A class that receives principal payments on any Distribution
Date only if scheduled payments have been made on specified
Planned Principal Classes, Targeted Principal Classes and/or
Scheduled Principal Classes.
Targeted Principal
Class (also sometimes
referred to
as "TACs")........... A class that is designed to receive principal payments using
a predetermined principal balance schedule derived by
assuming a single constant prepayment rate for the Mortgage
Assets.
</TABLE>
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<PAGE> 86
INTEREST TYPES
<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
<S> <C>
Accrual................ A class that accretes the amount of accrued interest
otherwise distributable on such class, which amount will be
added as principal to the principal balance of such class on
each applicable Distribution Date. Such accretion may
continue until some specified event has occurred or until
such class of Accrual Certificates is retired.
Fixed Rate............. A class with a Certificate Rate that is fixed throughout the
life of the class.
Floating Rate.......... A class with a Certificate Rate that resets periodically
based upon a designated Index and that varies directly with
changes in such Index.
Inverse Floating A class with a Certificate Rate that resets periodically
Rate................. based upon a designated Index and that varies inversely with
changes in such Index.
IO..................... Certificates that receive some or all of the interest
payments made on the Mortgage Assets and little or no
principal. IO Certificates have either a nominal principal
balance or a notional amount. A nominal principal balance
represents actual principal that will be paid on such
Certificates. It is referred to as nominal since it is
extremely small compared to other classes. A notional amount
is the amount used as a reference to calculate the amount of
interest due on an IO Certificate that is not entitled to
any distributions in respect of principal.
Partial Accrual........ A class that accretes a portion of the amount of accrued
interest thereon, which amount will be added to the
principal balance of such class on each applicable
Distribution Date, with the remainder of such accrued
interest to be distributed currently as interest on such
class. Such accretion may continue until a specified event
has occurred or until such class of Partial Accrual
Certificates is retired.
PO..................... A class that does not bear interest and is entitled to
receive only distributions in respect of principal.
Variable Rate.......... A class with a Certificate Rate that resets periodically and
is calculated by reference to the rate or rates of interest
applicable to specified assets or instruments (e.g., the
Mortgage Rates borne by the Mortgage Loans in the related
Pool).
</TABLE>
RESIDUAL CERTIFICATES
A Series of REMIC Certificates will include a class of Residual
Certificates representing the right to receive on each Distribution Date, in
addition to any other distributions to which they are entitled in accordance
with their terms and as described in the related Supplement, the excess of the
sum of distributions, payments and other amounts received over the sum of (i)
the amount required to be distributed to Certificateholders on such Distribution
Date and (ii) certain expenses, all as more specifically described in the
related Supplement. In addition, after the aggregate Class Certificate Balances
of all classes of Regular Certificates has been fully amortized, holders of the
Residual Certificates will be the sole owners of the related Pool and will have
sole rights with respect to the Mortgage Assets and other assets remaining in
such Pool. Some or all of the Residual Certificates of a Series may be offered
by this Prospectus and the related Supplement; if so, the terms of such Residual
Certificates will be described in such Supplement. Any qualifications on direct
or indirect ownership of Residual Certificates offered hereby and by the related
Supplement, as well as restrictions on the transfer of such Residual
Certificates, will be set forth in the related Supplement. If such Residual
Certificates are not so offered, the Sponsor may (but need not) sell some or all
of such Residual Certificates on or after the date of original issuance of such
Series in transactions exempt from registration under the Securities Act and
otherwise under circumstances that will not adversely affect the REMIC status of
the Pool.
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<PAGE> 87
ADVANCES
The Servicer may be obligated or have the right at its option under the
Pooling Agreement for a Series of Certificates backed in whole or in part by
Mortgage Loans to advance, on or prior to any Distribution Date, its own funds
and/or funds being held in the Certificate Account for future distribution to
Certificateholders in an amount up to the aggregate of interest and principal
installments on the Mortgage Loans becoming due and payable on the Due Date in
any month and delinquent on the close of business on the following Determination
Date. The Servicer may be obligated to make such Advances only to the extent any
such Advance, in the judgment of the Servicer made on the Determination Date,
will be reimbursable from late payments made by Mortgagors, payments under any
Primary Mortgage Insurance Policy or other form of credit support or proceeds of
liquidation. Any Servicer funds thus advanced are reimbursable to the Servicer
from cash in the Certificate Account to the extent that the Servicer shall
determine that any such Advances previously made are not ultimately recoverable
from the sources described above.
In making Advances, the Servicer will endeavor to maintain a regular flow
of scheduled interest and principal payments to holders of the related classes
of Certificates, rather than to guarantee or insure against losses. If Advances
are made by the Servicer from funds being held for future distribution to
Certificateholders, the Servicer will replace such funds on or before any future
Distribution Date to the extent that funds in the Certificate Account on such
Distribution Date would be less than the amount required to be available for
distributions to Certificateholders on such date.
The Servicer may also be obligated to make advances, to the extent
recoverable out of insurance proceeds, liquidation proceeds or otherwise, in
respect of certain taxes and insurance premiums not paid by Mortgagors on a
timely basis. Funds so advanced are reimbursable to the Servicer to the extent
permitted by the Pooling Agreement. If specified in the related Supplement, the
obligations of the 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 Supplement.
REPORTS TO CERTIFICATEHOLDERS
Prior to or concurrently with each distribution on a Distribution Date and
except as otherwise set forth in the related Supplement, the 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 Supplement, prepayment penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the aggregate amount withdrawn from the Reserve Fund, if any,
that is included in the amounts distributed to Certificateholders;
(v) the Class Certificate Balance or notional amount of each class of
the related Series after giving effect to the distribution of principal on
such Distribution Date;
(vi) the percentage of principal payments on the Mortgage Assets
(excluding prepayments), if any, which each such class will be entitled to
receive on the following Distribution Date;
(vii) the percentage of Principal Prepayments with respect to the
Mortgage Assets, if any, which each such class will be entitled to receive
on the following Distribution Date;
(viii) the related amount of the servicing compensation retained or
withdrawn from the Certificate Account by the Servicer, and the amount of
additional servicing compensation received by the Servicer attributable to
penalties, fees, excess Liquidation Proceeds and other similar charges and
items;
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<PAGE> 88
(ix) the number and aggregate principal balances of Mortgage Loans (A)
delinquent (exclusive of Mortgage Loans in foreclosure) (1) 1 to 30 days,
(2) 31 to 60 days, (3) 61 to 90 days and (4) 91 or more days and (B) in
foreclosure and delinquent, as of the close of business on the last day of
the calendar month preceding such Distribution Date;
(x) the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure ("REO Property");
(xi) the Certificate Rate, if adjusted from the date of the last
statement, of any such class expected to be applicable to the next
distribution to such class;
(xii) if applicable, the amount remaining in the Reserve Fund at the
close of business on the Distribution Date;
(xiii) the Certificate Rate as of the day prior to the immediately
preceding Distribution Date; and
(xiv) any amounts remaining under letters of credit, pool policies or
other forms of credit support.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Certificate of the relevant class specified in the related
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 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.
SPECIAL DISTRIBUTIONS
REMIC Certificates of a Series with Distribution Dates that are not monthly
may receive distributions ("Special Distributions") of principal on any date (a
"Special Distribution Date") specified in the related Supplement in any month in
which a Distribution Date does not occur if it is determined, based on
assumptions specified in the related Pooling Agreement, that the amount of cash
estimated to be on deposit in the Certificate Account on the date specified in
such Supplement, together with any funds available for withdrawal from any
related fund, is not sufficient to make the distributions of interest and
principal scheduled to be made on such date. Special Distributions will be made
in the same priority and manner as distributions are to be made on the next
Distribution Date.
CREDIT SUPPORT
GENERAL
Credit support 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
Pool. Credit support may be in the form of a limited financial guaranty policy
issued by an entity named in the related 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, the use of a mortgage
pool insurance policy, bankruptcy bond, special hazard insurance policy, surety
bond, letter of credit, guaranteed investment contract or other method of credit
support described in the related Supplement, or any combination of the
foregoing. Unless otherwise specified in the related Supplement, no credit
support will provide protection against all risks of loss or guarantee repayment
of the entire principal balance of the Certificates and interest thereon. If
losses occur which exceed the amount covered by credit support or which are not
covered by the credit support, Certificateholders will bear their allocable
share of any deficiencies.
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If specified in the related Supplement, the coverage provided by one or
more forms of credit support may apply concurrently to two or more related
Pools. If applicable, the related Supplement will identify the Pools 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 Pools.
SUBORDINATION
If so specified in the related Supplement, the rights of holders of one or
more classes of Subordinate Certificates will be subordinate to the rights of
holders of one or more classes of Senior Certificates of such Series to
distributions in respect of scheduled principal, Principal Prepayments, interest
or any combination thereof that otherwise would have been payable to holders of
Subordinate Certificates under the circumstances and to the extent specified in
the related Supplement. If so specified in the related Supplement, certain
classes of Subordinate Certificates may be senior to other classes of
Subordinate Certificates and be rated investment grade ("Mezzanine
Certificates"). If specified in the related Supplement, delays in receipt of
scheduled payments on the Mortgage Assets and certain losses with respect to the
Mortgage Assets will be borne first by the various classes of Subordinate
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 Supplement. The aggregate distributions in respect of delinquent
payments on the Mortgage Assets over the lives of the Certificates or at any
time, the aggregate losses in respect of Mortgage Assets which must be borne by
the Subordinate Certificates by virtue of subordination and the amount of
distributions otherwise distributable to Subordinate Certificateholders that
will be distributable to Senior Certificateholders on any Distribution Date may
be limited as specified in the related Supplement. If aggregate distributions in
respect of delinquent payments on the Mortgage Assets or aggregate losses in
respect of such Mortgage Assets were to exceed the amount specified in the
related Supplement, Senior Certificateholders would experience losses on their
Certificates.
If specified in the related Supplement, various classes of Senior
Certificates and Subordinate Certificates may themselves be subordinate in their
right to receive certain distributions to other classes of Senior Certificates
and Subordinate Certificates, respectively, through a cross support mechanism or
otherwise.
As between classes of Senior Certificates and as between classes of
Subordinate 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 Supplement.
SURETY BONDS
A surety bond or bonds may be obtained and maintained for a Series or
certain classes thereof which will, subject to certain conditions and
limitations, guaranty payments of all or limited amounts of principal and
interest due on all or certain of the classes of such Series.
MORTGAGE POOL INSURANCE POLICIES
If specified in the related Supplement, a separate mortgage pool insurance
policy ("Mortgage Pool Insurance Policy") will be obtained for the Pool and
issued by the insurer (the "Pool Insurer") named in such 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 Pool in an
amount equal to a percentage specified in such Supplement of the aggregate
principal balance of such Mortgage Loans on the Cut-off Date. As more fully
described below, the Servicer will present claims thereunder to the Pool Insurer
on behalf of itself, the Trustee and Certificateholders. 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 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.
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Unless otherwise specified in the related 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 Mortgaged Property at a
price equal to the principal balance of the related Mortgage Loan plus accrued
and unpaid interest at the Mortgage Rate to the date of such purchase and
certain expenses incurred by the 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 Mortgaged
Property 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 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 Servicer for its expenses and (ii)
such expenses will be recoverable by it through proceeds of the sale of the
Mortgaged Property or proceeds of the related Mortgage Pool Insurance Policy or
any related Primary Mortgage Insurance Policy.
No Mortgage Pool Insurance Policy will insure (and many Primary Mortgage
Insurance Policies do not insure) against loss sustained by reason of a default
arising from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Mortgagor, the
originator or persons involved in the origination thereof, or (ii) failure to
construct a Mortgaged Property in accordance with plans and specifications. A
failure of coverage attributable to one of the foregoing events might result in
a breach of the related Seller's representations described herein and, in such
event, might give rise to an obligation on the part of such Seller to repurchase
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.
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 Servicer as well as
accrued interest on delinquent Mortgage Loans to the date of payment of the
claim, unless otherwise specified in the related 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 Certificateholders.
FRAUD WAIVER
If so specified in the related Supplement, a letter may be obtained from
the issuer of a Mortgage Pool Insurance Policy (the "Waiver Letter") waiving its
right to deny a claim or rescind coverage under the related Mortgage Pool
Insurance Policy by reason of fraud, dishonesty or misrepresentation in
connection with the origination of, or application for insurance for, the
related Mortgage Loan or the denial or adjustment of coverage under any related
Primary Mortgage Insurance Policy because of such fraud, dishonesty or
misrepresentation. In such circumstances, the issuer of the Mortgage Pool
Insurance Policy will be indemnified by the Seller for the amount of any loss
paid by the issuer of the Mortgage Pool Insurance Policy (each such amount, a
"Fraud Loss") under the terms of the Waiver Letter. The maximum aggregate amount
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of Fraud Losses covered under the Waiver Letter and the period of time during
which such coverage will be provided will be specified in the related
Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related 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 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 and such other hazards as are
specified in the related 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 "Servicing of Mortgage Loans -- Hazard Insurance"
herein. No Special Hazard Insurance Policy will cover losses occasioned by fraud
or conversion by the Trustee or 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 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 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 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 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 such property
will also reduce coverage by such amount. So long as a Mortgage Pool Insurance
Policy remains in effect, the payment by the Special Hazard Insurer of the cost
of repair or of the unpaid principal balance of the related Mortgage Loan plus
accrued interest and certain expenses will not affect the total insurance
proceeds paid to Certificateholders, but will affect the relative amounts of
coverage remaining under the related Special Hazard Insurance Policy and
Mortgage Pool Insurance Policy.
To the extent specified in the Supplement, the 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 in lieu thereof relating to such Certificates 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 Supplement, a bankruptcy bond (the "Bankruptcy
Bond") to cover losses resulting from proceedings under the Bankruptcy Code with
respect to a Mortgage Loan will be issued by an insurer named in such
Supplement. Each Bankruptcy Bond will cover, to the extent specified in the
related 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
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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
Supplement. Coverage under a Bankruptcy Bond may be cancelled or reduced by the
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 Sellers" herein.
To the extent specified in the Supplement, the 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 in lieu thereof relating to
such Certificates 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 FUND
If so specified in the related 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 (the "Reserve Fund") for such Series. The related Supplement will specify
whether or not a Reserve Fund will be included in the Pool for such Series.
The Reserve Fund for a Series will be funded (i) by the deposit therein of
cash, U.S. Treasury securities or 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 Supplement, (ii) by the deposit therein from time to time of certain
amounts, as specified in the related Supplement, to which Subordinate
Certificateholders, if any, would otherwise be entitled or (iii) in such other
manner as may be specified in the related Supplement.
Any amounts on deposit in the Reserve Fund and the proceeds of any other
instrument deposited therein upon maturity will be held in cash or will be
invested in Eligible Investments. Any instrument deposited therein will name the
Trustee, in its capacity as trustee for Certificateholders, or such other entity
as is specified in the related Supplement, 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 Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Fund for distribution to
Certificateholders for the purposes, in the manner and at the times specified in
the related Supplement.
CROSS SUPPORT
If specified in the related Supplement, the beneficial ownership of
separate groups of assets included in a Pool 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 Pool. The related Supplement for a Series that
includes a cross support feature will describe the manner and conditions for
applying such cross support feature.
OTHER INSURANCE, GUARANTIES, LETTERS OF CREDIT AND SIMILAR INSTRUMENTS OR
AGREEMENTS
If specified in the related Supplement, a Pool may also include insurance,
guaranties, letters of credit or similar arrangements for the purpose of (i)
maintaining timely payments or providing additional protection against losses on
the assets included in such Pool, (ii) paying administrative expenses or (iii)
establishing a minimum reinvestment rate on the payments made in respect of such
assets or principal payment rate on such assets. Such arrangements may include
agreements under which Certificateholders are entitled to receive amounts
deposited in various accounts held by the Trustee upon the terms specified in
such Supplement.
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MATURITY, PREPAYMENT CONSIDERATIONS
AND WEIGHTED AVERAGE LIFE OF CERTIFICATES
The weighted average life of a Series of Certificates and the yield to
investors depend in part on the rate at which the Mortgage Loans or mortgage
loans underlying Mortgage Certificates are prepaid. Prepayments on mortgage
loans are commonly measured relative to a prepayment standard or model. The
prepayment model, if any, used with respect to a particular Series will be
identified and described in the related Supplement.
The Supplement for a Series of Certificates may contain a table setting
forth percentages of the initial Certificate Balance of each class expected to
be outstanding after each of the dates shown in such table. Any such table will
be based upon a number of assumptions stated in such Supplement, including
assumptions that prepayments on the mortgage loans underlying the related
Mortgage Certificates or on the Mortgage Loans are made at rates corresponding
to various percentages of the prepayment model specified in the related
Supplement. It is unlikely, however, that the prepayment of the mortgage loans
underlying the Mortgage Certificates, or of the Mortgage Loans, underlying any
Series will conform to any of the percentages of the prepayment model described
in the table set forth in such Supplement.
The rate of principal prepayments on pools of mortgage loans underlying the
Mortgage Certificates and Mortgage Loans is influenced by a variety of economic,
geographic, social and other factors. In general, however, if prevailing
interest rates fall significantly below the interest rates on such mortgage
loans or on the Mortgage Loans included in a Pool, such mortgage loans or
Mortgage Loans are likely to be the subject of higher principal prepayments than
if prevailing rates remain at or above the rates borne by such mortgage loans or
Mortgage Loans. Conversely, if prevailing interest rates rise appreciably above
the interest rates on such mortgage loans or on the Mortgage Rates borne by the
Mortgage Loans included in a Pool, such mortgage loans or Mortgage Loans are
likely to experience a lower prepayment rate than if prevailing rates remain at
or below the rates borne by such mortgage loans or Mortgage Rates. Other factors
affecting prepayment of mortgage loans and Mortgage Loans include changes in
mortgagors, housing needs, job transfers, unemployment, mortgagors' net equity
in the properties securing the mortgage loans and Mortgage Loans and servicing
decisions.
Prepayments may also result from the enforcement of any "due-on-sale"
provisions contained in a Mortgage Note permitting the holder of the Mortgage
Note to demand immediate repayment of the outstanding balance of the Mortgage
Loan upon conveyance by the Mortgagor of the underlying Mortgaged Property. The
Servicer will agree that it or the applicable subservicer will enforce any
"due-on-sale" clause to the extent it has knowledge of the conveyance or
proposed conveyance of the underlying Mortgaged Property and reasonably believes
that it is entitled to do so under applicable law; provided, however, that the
Servicer or the subservicer will not take any action in relation to the
enforcement of any "due-on-sale" provision which would impair or threaten to
impair any recovery under any related Primary Mortgage Insurance Policy. Under
current law, such exercise is permitted for substantially all the mortgage loans
which contain such clauses. Acceleration is not permitted, however, for certain
types of transfers, including transfers upon the death of a joint tenant or
tenant by the entirety and the granting of a leasehold interest of three years
or less not containing an option to purchase.
THE SPONSOR
Tryon Mortgage Funding, Inc., a Delaware corporation (the "Sponsor"), was
organized on November 28, 1994 for the limited purpose of acquiring, owning and
transferring Mortgage Assets and selling interests therein or bonds secured
thereby. The Sponsor is a subsidiary of NationsBanc Mortgage Capital
Corporation, a Texas corporation. The Sponsor maintains its principal office at
NationsBank Corporate Center, Charlotte, North Carolina 28255. Its telephone
number is (704) 386-2400.
Neither the Sponsor nor any of the Sponsor's affiliates will ensure or
guarantee distributions on the Certificates of any Series.
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USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of each
Series of Certificates will be used by the Sponsor to either purchase the
Mortgage Assets related to that Series or to return to the Sponsor the amounts
previously used to effect such a purchase, the costs of carrying the Mortgage
Assets until sale of the Certificates and other expenses connected with pooling
the Mortgage Assets and issuing the Certificates. Any remaining proceeds will be
used for the general corporate purposes of the Sponsor.
MORTGAGE PURCHASE PROGRAM
Set forth below is a description of aspects of the Sponsor's purchase
program for Mortgage Loans eligible for inclusion in a Pool. The related
Supplement will contain information regarding the origination of the Mortgage
Loans.
The Sponsor will purchase Mortgage Loans either directly or indirectly from
the Servicer or from other approved Sellers, which may be affiliates of the
Sponsor or the Servicer. The Sponsor has approved (or will approve) individual
institutions as eligible Sellers by applying certain criteria, including the
Seller's depth of mortgage origination experience, servicing experience and
financial stability. From time to time, however, the Sponsor may purchase
Mortgage Loans from Sellers which, while not meeting the generally applicable
criteria, have been reviewed by the Sponsor and found to be acceptable as
Sellers of Mortgage Loans.
Each Mortgage Loan purchased by the Sponsor must meet certain credit,
appraisal and underwriting standards, as described in the related Supplement.
Underwriting standards are intended to evaluate the Mortgagor's credit
standing and repayment ability and the value and adequacy of the Mortgaged
Property as collateral. Underwriting standards are applied in a standard
procedure which complies with applicable federal and state laws and regulations.
In determining the adequacy of the property as collateral, an appraisal is
generally made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. The appraisal is based on the
appraiser's judgment of values, giving appropriate weight to both the market
value of comparable properties and the cost of replacing the property.
Certain states where the Mortgaged Properties may be located are
"anti-deficiency" states where, in general, lenders providing credit on one- to
four-family properties must look solely to the property for repayment in the
event of foreclosure. Underwriting standards in all states (including
anti-deficiency states) require that the underwriting officers be satisfied 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, and provides sufficient value to mitigate the effects of adverse
shifts in real estate values.
The related Supplement will provide a description of the underwriting
standards applied in originating the Mortgage Loans.
THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of certain provisions of the Pooling Agreement
which are not described elsewhere in this Prospectus.
ASSIGNMENT OF MORTGAGE LOANS
Assignment of Mortgage Loans. At the time of issuance of each Series of
Certificates, the Sponsor will cause the Mortgage Loans comprising the related
Pool to be assigned to the Trustee together with all principal and interest on
the Mortgage Loans, except for principal and interest due on or before the
Cut-off Date. The Trustee will, concurrently with such assignment, authenticate
and deliver the Certificates to the Sponsor or its designated agent in exchange
for the Mortgage Loans and other assets, if any. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the Pooling Agreement. Such
schedule will include
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information as to the principal balance of each Mortgage Loan, the address of
the property, the Mortgage Rate and the maturity of each Mortgage Note.
In addition, the Sponsor will, as to each Mortgage Loan, deliver to the
Trustee the Mortgage Note endorsed without recourse in blank or to the order of
the Trustee, an assignment to the Trustee of the Mortgage in form for recording
or filing as may be appropriate in the state of the Mortgaged Property, the
original recorded Mortgage with evidence of recording or filing indicated
thereon, or a copy of such Mortgage certified by the recording office or
certified by the related title insurance company, a copy of the title insurance
policy or other evidence of title, and evidence of any Primary Mortgage
Insurance Policy for such Mortgage Loan, if applicable. In certain instances
where documents respecting a Mortgage Loan may not be available prior to
execution of the Pooling Agreement, the Sponsor may deliver copies thereof and
deliver such documents to the Trustee promptly upon receipt.
With respect to any Mortgage Loans that are Cooperative Loans, the Sponsor
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 Supplement. The Sponsor will cause to be filed in the appropriate office
an assignment and a financing statement evidencing the Trustee's security
interest in each Cooperative Loan.
The Trustee (or a custodian) will review the mortgage documents within a
specified number of days of receipt thereof in original form to ascertain that
all required documents have been properly executed and received. The Trustee
will hold such documents for each Series in trust for the benefit of holders of
the Certificates of such Series. Unless otherwise specified in the related
Supplement, if any document is found by the Trustee not to have been properly
executed or received or to be unrelated to the Mortgage Loans identified in the
Pooling Agreement, and such defect cannot be cured within the permitted time
period, the Seller will replace such Mortgage Loan with an Eligible Substitute
Mortgage Loan (as described in the related Supplement) or repurchase the related
Mortgage Loan from the Trustee within a specified number of days of receipt of
notice of the defect at a price generally equal to the principal balance
thereof, plus accrued and unpaid interest thereon at the applicable Mortgage
Rate less the applicable servicing fee (the "Net Mortgage Rate") to the first
day of the month following the month of repurchase. Upon receipt of the
repurchase price, in the case of a repurchase, the Trustee will reimburse any
unreimbursed Advances of principal and interest by the Servicer with respect to
such Mortgage Loan or unreimbursed payments under any form of credit support.
The remaining portion of such repurchase price will then be passed through to
holders of the Certificates as liquidation proceeds in accordance with the
procedures specified under "Description of Certificates -- Distributions"
herein. This substitution/repurchase obligation constitutes the sole remedy
available to Certificateholders or the Trustee for such a defect in a
constituent document.
Any restrictions on such substitution or repurchase with respect to a
Series of Certificates will be set forth in the related Supplement.
Unless otherwise specified in the related Supplement, assignments of the
Mortgage Loans to the Trustee will be recorded or filed in the appropriate
jurisdictions except in jurisdictions where, in the written opinion of local
counsel acceptable to the Sponsor, such filing or recording is not required to
protect the Trustee's interest in the Mortgage Loans against sale, further
assignment, satisfaction or discharge by the Sellers, the Servicer, the
subservicers or the Sponsor.
Assignment of Agency Certificates. The Sponsor will cause the Agency
Certificates to be registered in the name of the Trustee or its nominee. The
Trustee (or the custodian) will hold the Agency Certificates in the manner
described in the related Supplement. Each Agency Certificate will be identified
in a schedule appearing as an exhibit to the Pooling Agreement, which will
specify as to each Agency Certificate 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.
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Assignment of Private Certificates. The Sponsor will cause the Private
Certificates to be registered in the name of the Trustee. The Trustee (or the
custodian) will hold the Private Certificates in the manner described in the
related Supplement. The Trustee will not be in possession of or be assignee of
record of any underlying assets for a Private Certificate. Each Private
Certificate will be identified in a schedule appearing as an exhibit to the
related Pooling 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 Certificate conveyed to the Trustee.
REPRESENTATIONS AND WARRANTIES
Unless otherwise specified in the related Supplement, the Sponsor will not
make any representations and warranties regarding the Mortgage Loans, and its
assignment of the Mortgage Loans to the Trustee will be without recourse. As
further described below, the Seller will make certain representations and
warranties concerning the Mortgage Loans and under certain circumstances may be
required to repurchase or substitute a Mortgage Loan as a result of a breach of
any such representation or warranty. In addition, pursuant to the related
Pooling Agreement the Sponsor will assign to the Trustee its rights with respect
to representations and warranties made by the Seller in the agreement pursuant
to which the Mortgage Loans are sold to the Sponsor or its affiliate (each, a
"Seller's Agreement").
In the Pooling Agreement or the Seller's Agreement for each Series of
Certificates backed in whole or in part by Mortgage Loans, the Seller will
represent and warrant, unless otherwise specified in the related Supplement,
among other things, that: (i) the information set forth in the schedule of
Mortgage Loans is true and correct in all material respects; (ii) at the time of
transfer the Seller had good title to the Mortgage Loans and the Mortgage Notes
were subject to no offsets, defenses or counterclaims, except to the extent that
the buydown agreement for a Buydown Loan forgives certain indebtedness of a
Mortgagor; (iii) as of the Cut-off Date, no Mortgage Loan was more than 30 days
delinquent; (iv) a title policy (or other satisfactory evidence of title) was
issued on the date of the origination of each Mortgage Loan and each such policy
or other evidence of title is valid and remains in full force and effect; (v) if
a Primary Mortgage Insurance Policy is required with respect to such Mortgage
Loan, such policy is valid and remains in full force and effect as of the
Closing Date; (vi) as of the Closing Date, each Mortgage Loan is secured by a
first lien Mortgage or by a Land Sale Contract on the related Mortgaged Property
free and clear of all liens, claims and encumbrances, other than the Land Sale
Contract, if applicable (subject only to (a) liens for current real property
taxes and special assessments, (b) covenants, conditions and restrictions,
rights of way, easements and other matters of public record as of the date of
recording of such Mortgage, such exceptions appearing of record being acceptable
to mortgage lending institutions generally or specifically reflected in the
mortgage originator's appraisal, and (c) other matters to which like properties
are commonly subject which do not materially interfere with the benefits of the
security intended to be provided by the Mortgage); (vii) as of the Closing Date,
each Mortgaged Property is free of damage and is in good repair; (viii) as of
the time each Mortgage Loan was originated, the Mortgage Loan complied with all
applicable state and federal laws, including usury, equal credit opportunity,
disclosure and recording laws; and (ix) as of the Closing Date, there are no
delinquent tax or assessment liens against any Mortgaged Property.
In the event of the discovery by the Seller of a breach of any of its
representations or warranties which materially and adversely affects the
interest of Certificateholders in the related Mortgage Loan, or the receipt of
notice thereof from the Trustee or the Servicer, the Seller will, with respect
to a breach of its representations or warranties, cure the breach within the
time permitted by the related Pooling Agreement or substitute a substantially
similar substitute mortgage loan for such Mortgage Loan or repurchase the
related Mortgage Loan, or any Mortgaged Property acquired in respect thereof, on
the terms set forth above under "-- Assignment of Mortgage Loans" and in the
related Supplement. The proceeds of any such repurchase will be passed through
to Certificateholders as liquidation proceeds. This substitution/repurchase
obligation constitutes the sole remedy available to Certificateholders and the
Trustee for any such breach.
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SERVICING
The Servicer will be responsible for servicing and administering the
Mortgage Loans and will agree to perform diligently all services and duties
customary to the servicing by prudent mortgage lending institutions or mortgages
of the same type as the Mortgage Loans in those jurisdictions where the related
Mortgaged Properties are located. The Servicer may enter into a subservicing
agreement with a subservicer to perform, as an independent contractor, certain
servicing functions for the Servicer subject to its supervision. A subservicing
agreement will not contain any terms or conditions that are inconsistent with
the related Pooling Agreement. The subservicer will receive a fee for such
services which will be paid by the Servicer out of the Servicing Fee. The
Servicer will have the right to remove the subservicer of any Mortgage Loan at
any time for cause and at any other time upon the giving of the required notice.
In such event, the Servicer would continue to be responsible for servicing such
Mortgage Loan and may designate a replacement subservicer (which may include an
affiliate of the Sponsor or the Servicer).
The Servicer is required to maintain a fidelity bond and errors and
omissions policy or their equivalent with respect to officers and employees
which provide coverage against losses which may be sustained as a result of an
officer's or employee's misappropriation of funds or errors and omissions in
failing to maintain insurance, subject to certain limitations as to amount of
coverage, deductible amounts, conditions, exclusions and exceptions in the form
and amount specified in the Pooling Agreement.
PAYMENTS ON MORTGAGE LOANS
The Servicer will establish and maintain or cause to be established and
maintained with respect to the related Pool a Certificate Account or accounts
for the collection of payments on the related Mortgage Loans, which must be an
Eligible Account. An "Eligible Account" is an account or accounts which is
either (i) maintained with a depository institution the obligations of which
(or, in the case of a depository institution that is the principal subsidiary of
a holding company, the obligations of such holding company) are rated in one of
the two highest short-term rating categories by the Rating Agency that rated one
or more classes of the related Series of Certificates, (ii) an account or
accounts the deposits in which are fully insured by the FDIC, (iii) an account
or accounts the deposits in which are insured by the FDIC 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, Certificateholders
have a claim with respect to the funds in such account or accounts, 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 such account or accounts are
maintained or (iv) an account or accounts otherwise acceptable to such Rating
Agency. The collateral eligible to secure amounts in the Certificate Account is
limited to Eligible Investments consisting of United States government
securities and other high-quality 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. The
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
Servicer or the Seller or with a depository institution that is an affiliate of
the Servicer or the Sponsor, provided it is an Eligible Account.
Unless otherwise specified in the related Supplement, the Servicer will
deposit in the Certificate Account for each Pool on a daily basis, to the extent
applicable, the following payments and collections received by or on behalf of
it subsequent to the Cut-off Date (other than payments due on or before the
Cut-off Date):
(i) All payments on account of principal and interest (which, at its
option, may be net of the servicing fee), including principal prepayments
(in whole or in part);
(ii) All amounts received by foreclosure or otherwise in connection
with the liquidation of defaulted Mortgage Loans, net of expenses incurred
in connection with such liquidation;
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(iii) All proceeds received under any Primary Mortgage Insurance
Policy or title, hazard or other insurance policy covering any Mortgage
Loan, other than proceeds to be applied to the restoration or repair of the
related Mortgaged Property;
(iv) All advances as described herein under "Description of
Certificates -- Advances";
(v) All proceeds of any Mortgage Loans or property acquired in respect
thereof repurchased as described herein under "-- Assignment of Mortgage
Loans" and "-- Representations and Warranties";
(vi) Any Buydown Funds (and, if applicable, investment earnings
thereon) required to be deposited in the Certificate Account as described
below;
(vii) 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" herein;
(viii) Any amount required to be deposited by the Servicer in
connection with losses realized on investments for the benefit of the
Servicer of funds held in the Certificate Account; and
(ix) All other amounts required to be deposited in the Certificate
Account.
Under the Pooling Agreement for each Series, the Servicer will be
authorized to make the following withdrawals from the Certificate Account:
(i) To clear and terminate the Certificate Account upon liquidation of
all Mortgage Loans or other termination of the Pool;
(ii) To reimburse any provider of credit support for payments under
such credit support from amounts received as late payments on related
Mortgage Loans or from related insurance or liquidation proceeds;
(iii) To reimburse the Servicer for Advances of principal and interest
from amounts received as late payments on related Mortgage Loans, from
related insurance or liquidation proceeds or from other amounts received
with respect to such Mortgage Loans;
(iv) To reimburse the Servicer from related insurance or liquidation
proceeds for amounts expended by the Servicer in connection with the
restoration of property damaged by an uninsured cause or the liquidation of
a Mortgage Loan;
(v) To pay to the Servicer its Servicing Fee and to the Trustee its
fee;
(vi) To reimburse the Servicer for Advances which the Servicer has
determined to be otherwise nonrecoverable; and
(vii) To pay any expenses which were incurred and are reimbursable
pursuant to the Pooling Agreement.
COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer will agree to proceed diligently to collect all payments
called for under the Mortgage Notes. Consistent with the above, the Servicer
may, in its discretion, (i) waive any prepayment charge, assumption fee, late
payment charge or any other charge in connection with the prepayment of a
Mortgage Loan and (ii) arrange with a Mortgagor a plan of relief, other than a
modification or extension of the Mortgage, when appropriate rather than
recommending liquidation. Such arrangement will be made only upon determining
that the coverage of such Mortgage Loan by any Primary Mortgage Insurance Policy
will not be affected. In the event of any such arrangement, but only to the
extent of the amount of any credit support, the provider of such credit support
will honor requests for payment or otherwise distribute funds with respect to
such Mortgage Loan during the scheduled period in accordance with the
amortization schedule thereof and without regard to the temporary modification
thereof. In addition, in the event of any such arrangement, the Servicer's
obligation to make Advances on the related Mortgage Loan shall continue during
the scheduled period.
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Under the Pooling Agreement, the Servicer will be required to enforce
"due-on-sale" clauses with respect to the Mortgage Loans to the extent
contemplated by the terms of the Mortgage Loans and permitted by applicable law.
Where an assumption of, or substitution of liability with respect to, a Mortgage
Loan is required by law, upon receipt of assurance that the Primary Mortgage
Insurance Policy covering such Mortgage Loan will not be affected, the Servicer
may permit the assumption of a Mortgage Loan, pursuant to which the Mortgagor
would remain liable on the Mortgage Note, or a substitution of liability with
respect to such Mortgage Loan, pursuant to which the new Mortgagor would be
substituted for the original Mortgagor as being liable on the Mortgage Note. Any
fees collected for entering into an assumption or substitution of liability
agreement may be retained by the Servicer as additional servicing compensation.
In connection with any assumption or substitution, the Mortgage Rate borne by
the related Mortgage Note may not be changed.
The Pooling Agreement may require the Servicer to establish and maintain
one or more escrow accounts into which Mortgagors deposit amounts sufficient to
pay taxes, assessments, hazard insurance premiums or comparable items.
Withdrawals from the escrow accounts maintained for Mortgagors may be made to
effect timely payment of taxes, assessments and hazard insurance premiums or
comparable items, to reimburse the Servicer out of related assessments for
maintaining hazard insurance, to refund to Mortgagors amounts determined to be
overages, to remit to Mortgagors, if required, interest earned, if any, on
balances in any of the escrow accounts, to repair or otherwise protect the
Mortgaged Property and to clear and terminate any of the escrow accounts. The
Servicer will be solely responsible for administration of the escrow accounts
and will be expected to make advances to such account when a deficiency exists
therein.
HAZARD INSURANCE
Unless otherwise specified in the related Supplement, under the Pooling
Agreement, the Servicer will be required to maintain for each Mortgage Loan a
hazard insurance policy providing coverage against loss by fire and other
hazards which are covered under the standard extended coverage endorsement
customary in the state in which the property is located. Such coverage will be
in an amount at least equal to the lesser of the original principal balance on
such Mortgage Loan and the replacement cost of the Mortgaged Property. As set
forth above, all amounts collected by the 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 in accordance with the Servicer's normal
servicing procedures) will be deposited in the Certificate Account. In the event
that the Servicer maintains a blanket policy insuring against hazard losses on
all of the Mortgage Loans, it shall 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 Servicer will deposit in the
Certificate Account all sums 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 on the property by fire,
lightening, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers under different state laws in accordance with
different applicable state forms and therefore will not contain identical terms
and conditions, the basic terms thereof are dictated by respective state laws,
and most such policies typically do not cover (among other things) 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. If,
however, any Mortgaged Property is located in an area identified by the Flood
Emergency Management Agency as having special flood hazards and flood insurance
has been made available, if required by applicable law, the Servicer will cause
to be maintained with a generally acceptable insurance carrier a flood insurance
policy meeting the requirements of the current guidelines of the Federal
Insurance Administration. Such flood insurance policy will provide coverage in
an amount not less than the least of (i) the original principal balance of the
Mortgage Loan, (ii) the insurable value of the Mortgaged Property or (iii) the
maximum amount of insurance available under the Flood Disaster Protection Act of
1973, as amended.
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The hazard insurance policies covering the Mortgaged Properties 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 improvements on the property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clause provides that the insurer's liability in the
event of partial loss does not exceed the larger of (i) the replacement cost of
the improvements less physical depreciation, and (ii) such proportion of the
loss as the amount of insurance carried bears to the specified percentage of the
full replacement cost of such improvements. Since residential properties
historically have appreciated in value over time, in the event of partial loss,
hazard insurance proceeds may be insufficient to restore fully the damaged
property.
PRIMARY MORTGAGE INSURANCE
If specified in the related Supplement, a Mortgage Loan secured by a
Mortgaged Property having an LTV in excess of 80% will have a policy (a "Primary
Mortgage Insurance Policy") insuring against default all or a specified portion
of the principal amount thereof in excess of such percentage of the value of the
Mortgaged Property, as specified in the related Supplement.
Evidence of each Primary Mortgage Insurance Policy will be provided to the
Trustee simultaneously with the transfer to the Trustee of the related Mortgage
Loan. The Servicer, on behalf of itself, the Trustee and Certificateholders, is
required to present claims to the insurer under any Primary Mortgage Insurance
Policy and to take such reasonable steps as are necessary to permit recovery
thereunder with respect to defaulted Mortgage Loans. Amounts collected by the
Servicer on behalf of the Servicer, the Trustee and Certificateholders shall be
deposited in the Certificate Account for distribution as set forth above. The
Servicer will not cancel or refuse to renew any Primary Mortgage Insurance
Policy required to be kept in force by the Pooling Agreement.
MAINTENANCE OF INSURANCE POLICIES; CLAIMS THEREUNDER AND OTHER REALIZATION UPON
DEFAULTED MORTGAGE LOANS
The Servicer will exercise its best reasonable efforts to keep each Primary
Mortgage Insurance Policy (if any) in full force and effect at least until the
outstanding principal balance of the related Mortgage Note is equal to the
percentage of the appraised value of the Mortgaged Property specified in the
related Supplement. The Servicer has agreed (or will agree) to pay the premium
for each Primary Mortgage Insurance Policy on a timely basis in the event that
the Mortgagor does not make such payments.
The Servicer, on behalf of the Trustee and Certificateholders, will present
claims to the insurer under any applicable Primary Mortgage Insurance Policy and
will take such reasonable steps as are necessary to permit recovery under such
insurance policies respecting defaulted Mortgage Loans. If any property securing
a defaulted Mortgage Loan is damaged and proceeds, if any, from the related
hazard insurance policy are insufficient to restore the damaged property to a
condition sufficient to permit recovery under any applicable Primary Mortgage
Insurance Policy, the Servicer will not be required to expend its own funds to
restore the damaged property unless the Servicer determines (i) that such
restoration will increase the proceeds to Certificateholders upon liquidation of
the Mortgage Loan after reimbursement of the Servicer for its expenses and (ii)
that such expenses will be recoverable to it through liquidation proceeds.
Regardless of whether recovery under any Primary Mortgage Insurance Policy
is available or any further amount is payable under the credit support for a
Series of Certificates, the Servicer is nevertheless obligated to follow such
normal practices and procedures as it deems necessary or advisable to realize
upon the defaulted Mortgage Loan. If at any time no further amount is payable
under the credit support for a Series of Certificates, and if the proceeds of
any liquidation of the property securing the defaulted Mortgage Loan are less
than the principal balance of the defaulted Mortgage Loans plus interest accrued
thereon, Certificateholders will realize a loss in the amount of such difference
plus the aggregate of unreimbursed advances of the Servicer with respect to such
Mortgage Loan and expenses incurred by the Servicer in connection with such
proceedings and which are reimbursable under the Pooling Agreement.
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SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer's primary compensation for its activities as Servicer will
come from the payment to it, with respect to each interest payment on a Mortgage
Loan, of the amount specified in the related Supplement (the "Servicing Fee").
As principal payments are made on the Mortgage Loans, the portion of each
monthly payment which represents interest will decline, and thus servicing
compensation to the Servicer will decrease as the Mortgage Loans amortize.
Prepayments and liquidations of Mortgage Loans prior to maturity will also cause
servicing compensation to the Servicer to decrease.
In addition, the Servicer will be entitled to retain all prepayment fees,
assumption fees and late payment charges, to the extent collected from
Mortgagors.
The Servicer will pay all expenses incurred in connection with its
activities as Servicer (subject to limited reimbursement), including payment of
the fees and disbursements of the Trustee, payment of any fees for providing
credit support and payment of expenses incurred in connection with distributions
and reports to Certificateholders of each Series.
EVIDENCE AS TO COMPLIANCE
Each Pooling Agreement relating to a Series of Certificates backed in whole
or in part by Mortgage Loans will provide that the Servicer at its expense shall
cause a firm of independent public accountants to furnish a report annually to
the Trustee to the effect that such firm has verified the mathematical accuracy
of certain reports furnished by the Servicer to the Trustee relating to the
Mortgage Loans based on information obtained from subservicers and that such
review has disclosed no items of noncompliance with the provisions of such
Pooling Agreement which, in the opinion of such firm, are material, except for
such items of noncompliance as shall be set forth in such report.
Each Pooling Agreement will provide for delivery to the Trustee of an
annual statement signed by an officer of the Servicer to the effect that the
Servicer has fulfilled its obligations under the Pooling Agreement throughout
the preceding year.
CERTAIN MATTERS REGARDING THE SPONSOR, THE SELLER AND THE SERVICER
The Pooling Agreement for each Series of Certificates backed in whole or in
part by Mortgage Loans will provide that the Servicer may not resign from its
obligations and duties as Servicer thereunder, except upon (a) appointment of a
successor servicer and receipt by the Trustee of a letter from the Rating Agency
that such resignation and appointment will not result in the downgrading of the
Certificates or (b) determination that its duties thereunder are no longer
permissible under applicable law. No such resignation under (b) above will
become effective until the Trustee or a successor has assumed the Servicer's
obligations and duties under such Pooling Agreement.
The Pooling Agreement for each such Series will also provide that neither
the Sponsor, the Servicer nor the Seller, nor any directors, officers, employees
or agents of any of them (collectively, the "Indemnified Parties") will be under
any liability to the Pool or Certificateholders or the Trustee, any subservicer
or others for any action taken (or not taken) by any Indemnified Party, any
subservicer or the Trustee in good faith pursuant to the Pooling Agreement, or
for errors in judgment; provided, however, that neither the Sponsor, the Seller,
the Servicer nor any such person will be protected against any liability which
would otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties or by reason of reckless disregard of
obligations and duties thereunder. The Pooling Agreement will further provide
that each Indemnified Party is entitled to indemnification by the Pool and will
be held harmless against any loss, liability or expense incurred in connection
with any legal action relating to the Pooling Agreement or the Certificates for
such Series, 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 Pooling Agreement) and any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence in the performance of such Indemnified Party's duties
thereunder or by reason of reckless disregard by such indemnified Party of its
obligations and duties thereunder. In addition, the Pooling Agreement will
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provide that neither the Sponsor, the Seller nor the Servicer is under any
obligation to appear in, prosecute or defend any legal action which is not
incidental to, in the case of the Sponsor, the Seller or the Servicer, its
duties under the Pooling Agreement and which in its opinion may involve it in
any expense or liability. Each of the Sponsor, the Seller and the Servicer may,
however, in its discretion, undertake any such action which it may deem
necessary or desirable with respect to the Pooling Agreement and the rights and
duties of the parties thereto and the interests of Certificateholders
thereunder. In such event, the legal expenses and costs of such action and any
liability resulting therefrom will be expenses, costs and liabilities of the
Pool and the Sponsor, the Seller and the Servicer will be entitled to be
reimbursed therefor out of the Certificate Account.
EVENTS OF DEFAULT
Events of default by the Servicer under the Pooling Agreement for each
Series of Certificates evidencing an interest in Mortgage Loans will consist of
(i) any failure by the Servicer to make or cause to be made any required payment
pursuant to the terms of the Agreement (other than an advance required
thereunder) which continues unremedied for five days; (ii) any failure by the
Servicer duly to observe or perform in any material respects any other of its
covenants or agreements in the Certificates or in such Pooling Agreement which
continues unremedied for 30 days after the giving of written notice of such
failure to the Servicer by the Trustee, or to the Servicer and the Trustee by
holders of Certificates evidencing not less than 25% of the aggregate voting
rights of the Certificates for such Series; and (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings and certain actions by the Servicer indicating insolvency,
reorganization or inability to pay its obligations.
RIGHTS UPON EVENT OF DEFAULT
As long as an event of default under the Pooling Agreement for any Series
of Certificates evidencing an interest in Mortgage Loans remains unremedied, the
Trustee or holders of Certificates evidencing not less than 50% of the aggregate
voting rights of the Certificates for such Series may terminate all of the
rights and obligations of the Servicer under such Pooling Agreement, whereupon
the Trustee will succeed to all the responsibilities, duties and liabilities of
the Servicer under such Pooling Agreement and will be entitled to similar
compensation arrangements and limitations on liability. 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 housing and home finance
institution with a net worth of at least $10,000,000 to act as successor
Servicer under such Pooling Agreement. Pending any such appointment, the Trustee
is obligated to act in such capacity. The Trustee and such successor may agree
upon the servicing compensation to be paid, which in no event may be greater
than the compensation to the Servicer under such Pooling Agreement.
ENFORCEMENT
No Certificateholder of any Series will have any right under the applicable
Pooling Agreement to institute any proceeding with respect to such Pooling
Agreement unless such Certificateholder previously has given to the Trustee
written notice of default and unless holders of Certificates evidencing not less
than 25% of the aggregate voting rights of the Certificates for such Series have
made written requests to the Trustee to institute such proceeding in its own
name as Trustee thereunder and have offered and provided to the Trustee
reasonable indemnity and the Trustee for 60 days has neglected or refused to
institute any such proceeding. However, the Trustee is under no obligation to
exercise any of the trusts or powers vested in it by the Pooling Agreement for
any Series or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any Certificateholders, unless such
Certificateholders have offered and provided to the Trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
AMENDMENT
The Pooling Agreement for each Series may be amended by the Sponsor, the
Seller (if a party thereto), the Servicer and the Trustee, without notice to or
the consent of any Certificateholder, (i) to cure any ambiguity, (ii) to correct
a defective provision or correct or supplement any provision therein that may be
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inconsistent with any other provision therein, (iii) to make any other
provisions with respect to matters or questions arising under such Pooling
Agreement which are not inconsistent with the provisions of such Pooling
Agreement, or (iv) to comply with any requirements imposed by the Code or any
regulation thereunder; provided, however, that no such amendments (except those
pursuant to clause (iv)) will adversely affect in any material respect the
interests of any Certificateholder of that Series. Any such amendment except
pursuant to clause (iv) of the preceding sentence should be deemed not to
adversely affect in any material respect the interests of any Certificateholders
if the Trustee receives written confirmation from the Rating Agency rating such
Certificates that such amendment will not cause such Rating Agency to reduce the
then current rating thereof. The Pooling Agreement for each Series may also be
amended by the Sponsor, the Seller, the Servicer and the Trustee with the
consent of holders of Certificates evidencing not less than 66 2/3% of the
aggregate voting rights of each class of Certificates for such Series affected
thereby for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of such Pooling Agreement or of modifying in
any manner the rights of holders of Certificates of that Series; 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 in respect to any such Certificate without the consent of the
holder of such Certificate or (ii) with respect to any Series of Certificates,
reduce the aforesaid percentages of Certificates the holders of which are
required to consent to any such amendment without the consent of the holders of
all Certificates of such Series then outstanding.
LIST OF CERTIFICATEHOLDERS
In the event the Trustee is not the certificate registrar for a Series of
Certificates, upon written request of the Trustee, the certificate registrar
will provide to the Trustee within 30 days after the receipt of such request a
list of the names and addresses of all Certificateholders of record of a
particular Series as of the most recent Record Date for payment of distributions
to Certificateholders of that Series. Upon written request of three or more
Certificateholders of record of a Series of Certificates, for purposes of
communicating with other Certificateholders with respect to their rights under
the Pooling Agreement for such Series, the Trustee will afford such
Certificateholders access during business hours to the most recent list of
Certificateholders of that Series held by the Trustee.
TERMINATION; REPURCHASE OF MORTGAGE LOANS AND MORTGAGE CERTIFICATES
The obligations of the Sponsor, the Seller (if a party thereto), the
Servicer and the Trustee created by the Pooling Agreement will terminate upon
the earlier of (i) the maturity or other liquidation of the last Mortgage Loan
or Mortgage Certificate subject thereto and the disposition of all property
acquired upon foreclosure of any Mortgage Loan and (ii) the payment to
Certificateholders of that Series of all amounts required to be paid to them
pursuant to such Pooling Agreement. In no event, however, will the Trust created
by any Pooling Agreement continue beyond the expiration of 21 years from the
death of the survivor of the persons named in such Pooling Agreement.
The Pooling Agreement for each Series may permit the Servicer (or another
party named therein) to repurchase all remaining Mortgage Loans and property
acquired in respect thereof at a purchase price equal to no less than the
Certificate Balance of the Certificates, together with accrued and unpaid
interest at the applicable Certificate Rate from the last date to which interest
has been paid to the first day of the month in which such repurchase occurs
(subject to reduction as provided in the Pooling Agreement, if the purchase
price is based in part on the appraised value of any REO Property and such
appraised value is less than the principal balance of the related Mortgage Loan
at the time of foreclosure). The exercise of such right will effect early
retirement of the Certificates of such Series, but such party's right so to
repurchase is subject to the aggregate principal balances of the Mortgage Loans
at the time of repurchase being less than the percentage of the aggregate
initial principal amount of all Certificates of such Series at the Cut-off Date
specified in the related Supplement.
The holder or holders of the Residual Certificates of a REMIC Series may
have the option to repurchase the remaining Mortgage Assets included in the Pool
relating to such Series. Any such option will be exercisable, in the case of
holders of Residual Certificates, at such time and under the circumstances
specified
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in the related Supplement provided that the Trustee has received an opinion of
counsel that the repurchase and related distributions to Certificateholders will
be part of a "qualified liquidation" as defined in Code Section 860F(a)(4)(A),
will not cause the Pool to be treated as an association taxable as a corporation
and will not otherwise subject the REMIC Pool to tax.
For each Series, the holder or holders of the Residual Certificates or the
Trustee, as the case may be, will give written notice of termination of the
Pooling Agreement to each Certificateholder, and the final distribution will be
made only upon surrender and cancellation of the Certificates at an office or
agency of the Trustee specified in the notice of termination.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as Trustee for each Series of Certificates will be set forth in
the related Supplement. The Trustee may have normal banking relationships with
the Sponsor, the Seller, the Servicer and/or the subservicers.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
MORTGAGES
The Mortgages will be either deeds of trust, security deeds or mortgages,
depending upon the prevailing practice in the state in which the Mortgaged
Property is located. A mortgage creates a lien upon the real property encumbered
by the mortgage. It is 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 in a county or municipal office. There are two parties to
a mortgage: the mortgagor, who is the borrower and homeowner, 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-homeowner, 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 trustor 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. The trustee's authority under a
deed of trust and the mortgagee's authority under a mortgage are governed by
law, by the express provisions of the deed of trust or mortgage and, in some
cases, by the directions of the beneficiary.
COOPERATIVES
"Cooperative Loans" are loans with respect to a residential property
evidenced by a promissory note secured by a security interest in shares issued
by a cooperative corporation. The cooperative is owned by tenant-stockholders
who, through ownership of stock, shares or membership certificates in the
corporation, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific units. Generally, a tenant-stockholder of a
cooperative must make a monthly payment to the cooperative representing such
tenant-stockholder's pro rata share of the cooperative's payments for its
blanket mortgage, real property taxes, maintenance expenses and other capital or
ordinary expenses. An ownership interest in a cooperative and accompanying
occupancy rights are financed through a cooperative share loan evidenced by a
promissory note and secured by a security interest in the occupancy agreement or
proprietary lease and in the related cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the tenant-
stockholder, the lender may sue for judgment on the promissory note, dispose of
the collateral at a public or private sale or otherwise proceed against the
collateral or tenant-stockholder as an individual as provided in the security
agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of corporate shares. See "Foreclosure -- Shares of
Cooperatives" below.
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The private, cooperative apartment corporation 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 apartment building
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 entered into by the cooperative in connection with the
construction, rehabilitation or purchase of the cooperative's apartment
building. The interests of the occupant under proprietary leases or occupancy
agreements to which that cooperative is a party are generally subordinate to the
interests of the holder of the blanket mortgage on that building and/or
underlying land. If the cooperative is unable to meet the payment obligations
arising under its blanket mortgage note, the mortgagee holding the blanket
mortgage could foreclose on that mortgage and terminate all subordinate
proprietary leases and occupancy agreements. Also, the blanket mortgage note
given by the cooperative may 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 Pool, the collateral securing the
Cooperative Loans.
LAND SALE CONTRACTS
Under an installment land sale contract for the sale of real estate (a
"land sale contract") the contract seller (hereinafter referred to as the
"lender") retains legal title to the property and enters into an agreement with
the contract purchaser (hereinafter referred to as the "borrower") for the
payment of the purchase price, plus interest, over the term of the land sale
contract. Only after full performance by the borrower of the contract is the
lender obligated to convey title to the real estate to the purchaser. As with
mortgage or deed of trust financing, during the effective period of the land
sale contract, the borrower is responsible for maintaining the property in good
condition and for paying real estate taxes, assessments and hazard insurance
premiums associated with the property.
The method of enforcing the rights of the lender under an installment
contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to its terms. The terms of land sale contracts
generally provide that upon default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated, and
the buyer's equitable interest in the property is forfeited. The lender in such
a situation does not have to foreclose in order to obtain title to the property,
although in some cases a quiet title action is in order if the borrower has
filed the land sale contract in local land records and an ejectment action may
be necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of a land sale contract, the courts will
permit ejectment of the buyer and a forfeiture of his or her interest in the
property. However, most state legislatures have enacted provisions by analogy to
mortgage law protecting borrowers under land sale contracts from the harsh
consequences of forfeiture. Under such statutes, a judicial or nonjudicial
foreclosure may be required, the borrower may be granted some grace period
during which the contract may be reinstated upon full payment of the default
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states, courts in equity may permit a borrower with significant
investment in the property under a land sale contract for the sale of real
estate to share the proceeds of sale of the property after the indebtedness is
repaid or may otherwise refuse to enforce the forfeiture clause. Nevertheless,
generally speaking, the lender's procedures for obtaining possession and clear
title under a land sale contract for the sale of real estate in a given state
are simpler and less time consuming and costly than are the procedures for
foreclosing and obtaining clear title to a mortgaged property.
FORECLOSURE
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
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completion of the foreclosure may occasionally result from difficulties in
locating necessary parties defendant. Judicial foreclosure proceedings are
generally not contested by any of the parties defendant. However, 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 judicial
foreclosure, the court would issue a judgment of foreclosure and would generally
appoint a referee or other court officer to conduct the sale of the property.
Foreclosure of a deed of trust is generally accomplished by non-judicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property to a third party upon any default by the
trustor under the terms of the note or deed of trust. In some states, the
trustee must record a notice of default and send a copy to the borrower or any
person who has recorded a request for a copy of a notice of default and notice
of sale. In addition, the trustee must provide notice in some states to any
other individual having an interest in the real property, including any junior
lienholders. The Mortgagor, 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. Generally, state law controls the amount of foreclosure expenses
and costs, including limiting attorneys' fees, which may be recovered by a
lender. If the deed of trust is not reinstated, a notice of sale must be posted
in a public place and, in most states, published for a specified period of time
in one or more newspapers. In addition, some state laws require that a copy of
the notice of sale be posted on the property and sent to all parties having an
interest in the real property.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the receiver or other designated officer or by the trustee is a public sale.
However, because of the difficulty a potential buyer at the sale would have in
determining the exact status of title and because the physical condition of the
property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at a foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
referee for an amount equal to the principal amount of the mortgage or deed of
trust, accrued and unpaid interest and the expenses of foreclosure. Thereafter,
the lender will assume the burdens of ownership, including obtaining casualty
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. Any
loss may be reduced by the receipt of mortgage insurance proceeds.
Courts have usually imposed general equitable principles upon foreclosure
proceedings. These equitable principles are generally designed to relieve the
trustor from the legal effect of his defaults under the loan documents. Examples
of judicial remedies that have been fashioned include judicial requirements that
the lender undertake affirmative actions to determine the causes for the
Mortgagors' default and the likelihood that the Mortgagor will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate Mortgagors who are suffering from a
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the Mortgagor failing to adequately maintain the property or
the Mortgagor executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that trustors under deeds of trust receive notices in
addition to the statutorily prescribed minimum. 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 protections to the trustor.
Shares of Cooperatives. 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 in 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
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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 a 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.
Foreclosure on cooperative shares is accomplished by a sale in accordance
with the provisions of Article 9 of the Uniform Commercial Code (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 the
reimbursement is subject to the right of the cooperative corporation to receive
sums due under the proprietary lease or occupancy agreement. If there are
proceeds remaining, the lender must account to the tenant-stockholder for the
surplus. Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See
"Anti-Deficiency Legislation and Other Limitations on Sellers" below.
Leasehold Risks. Mortgage Loans may be secured by a mortgage on a ground
lease. Leasehold mortgages are subject to certain risks not associated with
mortgage loans secured by the fee estate of the mortgagor. The most significant
of these risks is that the ground lease creating the leasehold estate could
terminate, leaving the leasehold mortgagee without its security. The ground
lease may terminate, if among other reasons, the ground lessee breaches or
defaults in its obligations under the ground lease or there is a bankruptcy of
the ground lessee or the ground lessor. This risk may be minimized if the ground
lease contains certain provisions protective of the mortgagee, but the ground
leases that secure Mortgage Loans may not contain some of these protective
provisions, and mortgages may not contain the other protection discussed in the
next paragraph. Protective ground lease provisions include the right of the
leasehold mortgagee to receive notices from the ground lessor of any defaults by
the mortgagor; the right to cure such defaults, with adequate cure periods; if a
default is not susceptible of cure by the leasehold mortgagee, the right to
acquire the leasehold estate through foreclosure or otherwise; the ability of
the ground lease to be assigned to and by the leasehold mortgagee or purchaser
at a foreclosure sale and for the concomitant release of the ground lessee's
liabilities thereunder; and the right of the leasehold mortgagee to enter into a
new ground lease with the ground lessor on the same terms and conditions as the
old ground lease in the event of a termination thereof.
In addition to the foregoing protections, a leasehold mortgagee may require
that the ground lease or leasehold mortgage prohibit the ground lessee from
treating the ground lease as terminated in the event of the ground lessor's
bankruptcy and rejection of the ground lease by the trustee for the
debtor-ground lessor. As
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further protection, a leasehold mortgage may provide for the assignment of the
debtor-ground lessee's right to reject a lease pursuant to Section 365 of the
Bankruptcy Reform Act of 1978, as amended (11 U.S.C.) (the "Bankruptcy Code"),
although the enforceability of such clause has not been established. Without the
protections described in the foregoing paragraph, a leasehold mortgagee may lose
the collateral securing its leasehold mortgage. In addition, terms and
conditions of a leasehold mortgage are subject to the terms and conditions of
the ground lease. Although certain rights given to a ground lessee can be
limited by the terms of a leasehold mortgage, the rights of a ground lessee or a
leasehold mortgagee with respect to, among other things, insurance, casualty and
condemnation will be governed by the provisions of the ground lease.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of
the mortgage, the Mortgagor and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. The right of
redemption should be distinguished from the equity of redemption, which is a
nonstatutory right that must be exercised prior to the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former Mortgagor pays only a portion of the
sums due. The effect of a statutory right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The right of redemption
would defeat the title of any purchaser from the lender subsequent to
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 SELLERS
Certain states have imposed statutory prohibitions which restrict or
eliminate the remedies of a beneficiary under a deed of trust or a mortgagee
under a mortgage. In some states, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the Mortgagor following
foreclosure or sale under a deed of trust. A deficiency judgment would be a
personal judgment against the former Mortgagor equal in most cases to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Other statutes may require the
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 Mortgagor. Finally, other statutory
provisions may limit any deficiency judgment against the former Mortgagor
following a judicial sale to the excess of the outstanding debt over the fair
market value of the property at the time of the public sale. The purpose of
these statutes is to prevent a beneficiary or a mortgagee from obtaining a large
deficiency judgment against the former Mortgagor as a result of low or no bids
at the judicial sale.
In addition to anti-deficiency and related legislation, numerous other
statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon its security. The Internal Revenue Code
of 1986, as amended, provides priority to certain tax liens over the lien of the
mortgage. Numerous federal and some state consumer protection laws impose
substantive requirements upon mortgage lenders in connection with the
origination and the servicing of mortgage loans. These laws include the federal
Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal Credit
Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and related
statutes. These federal laws impose specific statutory liabilities upon lenders
who originate mortgage loans and who fail to comply with the provisions of the
law. In some cases, this liability may affect assignees of the mortgage loans.
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related 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 have 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
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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 Garn-St Germain 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.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Mortgage Loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the Mortgage Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such interest rate limitation could have an effect,
for an indeterminate period of time, on the ability of the Servicer to collect
full amounts of interest on certain of the Mortgage Loans. In addition, the
Relief Act imposes limitations which would impair the ability of the 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. As used herein, a "Relief Act Mortgage
Loan" refers to any Mortgage Loan as to which the Relief Act has limited the
amount of interest the related Mortgagor is required to pay each month.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien will generally have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In addition, under federal environmental
legislation and possibly under state law in a number of states, a secured party
which takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale or otherwise is deemed an "owner" or "operator" of the property
may be liable for the costs of cleaning up a contaminated site. Although such
costs could be substantial, it is unclear whether they would be imposed on a
secured lender.
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ERISA CONSIDERATIONS
ERISA and Section 4975 of the Code impose certain requirements on those
employee benefit plans and arrangements to which either ERISA or the Code
applies (each a "Plan") and on those persons who are fiduciaries with respect to
such Plans. In accordance with ERISA's general fiduciary standards, before
investing in a Certificate a Plan fiduciary should determine whether such an
investment is permitted under the governing Plan instruments and is appropriate
for the Plan in view of its overall investment policy and the composition and
diversification of its portfolio. Other provisions of ERISA and the Code
prohibit certain transactions involving the assets of a Plan and persons who
have certain specified relationships to the Plan (i.e., "parties in interest"
within the meaning of ERISA or "disqualified persons" within the meaning of the
Code). Thus, a Plan fiduciary considering an investment in Certificates should
also consider whether such an investment might constitute or give rise to a
prohibited transaction under ERISA or the Code.
PLAN ASSETS REGULATIONS
If an investing Plan's assets were deemed to include an undivided ownership
interest in the assets included in a Pool, a Plan's investment in the
Certificates might be deemed to constitute a delegation under ERISA of the duty
to manage Plan assets by the fiduciaries deciding to invest in the Certificates,
and certain transactions involved in the operation of the Pool might be deemed
to constitute prohibited transactions under ERISA and the Code. ERISA and the
Code do not define "plan assets". The U.S. Department of Labor has published
regulations (the "Labor Regulations") concerning whether or not a Plan's assets
would be deemed to include an interest in the underlying assets of an entity for
purposes of the reporting, disclosure and fiduciary responsibility provisions of
ERISA, if the Plan acquires an "equity interest" in such entity (such as by
acquiring Certificates). The Labor Regulations state that the underlying assets
of an entity will not be considered "plan assets" if, immediately after the most
recent acquisition of any equity interest in the entity, whether from the issuer
or an underwriter, less than twenty-five percent (25%) of the value of each
class of equity interest is held by "benefit plan investors", individual
retirement accounts, and other employee benefit plans not subject to ERISA (for
example, governmental plans). The Sponsor cannot predict whether under the Labor
Regulations the assets of a Plan investing in Certificates will be deemed to
include an interest in the assets of the Pool.
The Labor Regulations provide that where a Plan acquires a "guaranteed
governmental mortgage pool certificate", the Plan's assets include such
certificate but do not solely by reason of the Plan's holdings of such
certificate include any of the mortgages underlying such certificate. The Labor
Regulations include in the definition of a "guaranteed governmental mortgage
pool certificate" the types of FHLMC Certificates, GNMA Certificates and FNMA
Certificates which may be included in a Pool underlying a Series of
Certificates. Accordingly, even if such Mortgage Certificates included in a Pool
were deemed to be assets of Plan investors, the mortgages underlying such
Mortgage Certificates would not be treated as assets of such Plans. Private
Certificates are not "guaranteed governmental mortgage pool certificates".
Potential Plan investors should consult the ERISA discussion in the related
Supplement before purchasing any such Certificates.
UNDERWRITER'S EXEMPTIONS
The U.S. Department of Labor has granted to certain underwriters individual
administrative exemptions (the "Underwriter's Exemptions") from certain of the
prohibited transaction rules of ERISA and the related excise tax provisions of
Section 4975 of the Code with respect to the initial purchase, the holding and
the subsequent resale by Plans of certificates in pass-through trusts that
consist of certain receivables, loans and other obligations that meet the
conditions and requirements of the Underwriter's Exemptions.
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While each Underwriter's Exemption is an individual exemption separately
granted to a specific underwriter, the terms and conditions which generally
apply to the Underwriter's Exemptions are substantially identical, and include
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 interest 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 required by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies ("S&P"), Moody's Investors Service, Inc. ("Moody's"),
Duff & Phelps Credit Rating Co. ("D&P") or Fitch Investors Service, L.P.
("Fitch");
(4) the trustee must not be an affiliate of any other member of the
Restricted Group;
(5) the sum of all payments made to and retained by the underwriters
in connection with the distribution of the certificates represents not more
than reasonable compensation for underwriting the certificates; the sum of
all payments made to and retained by the seller pursuant to the assignment
of the loans to the trust fund represents not more than the fair market
value of such loans; the sum of all payments made to and retained by the
servicer and any other servicer represents not more than reasonable
compensation for such person's services under the agreement pursuant to
which the loans are pooled and reimbursements of such person'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.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of the
type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated
in one of the three highest rating categories of S&P, Moody's, Fitch or D&P
for at least one year prior to the Plan's acquisition of certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of certificates.
Moreover, the Underwriter's Exemptions generally provide relief from
certain self-dealing/conflict of interest prohibited transactions that may occur
when the Plan fiduciary causes a Plan to acquire certificates in a trust as to
which the fiduciary (or its affiliate) is an obligor on the receivables held in
the trust provided that, among other requirements: (i) in the case of an
acquisition in connection with the initial issuance of certificates, at least
fifty percent (50%) of each class of certificates in which Plans have invested
is acquired by persons independent of the Restricted Group, (ii) such fiduciary
(or its affiliate) is an obligor with respect to five percent (5%) or less of
the fair market value of the obligations contained in the trust; (iii) the
Plan's investment in certificates of any class does not exceed twenty-five
percent (25%) of all of the certificates of that class outstanding at the time
of the acquisition; and (iv) immediately after the acquisition, no more than
twenty-five percent (25%) of the assets of the Plan with respect to which such
person is a fiduciary is invested in certificates representing an interest in
one or more trusts containing assets sold or serviced by the same entity. The
Underwriter's Exemptions do not apply to Plans sponsored by the Seller, the
related underwriter, the Trustee, the Servicer, any insurer with respect to the
Mortgage Loans, any obligor with respect to Mortgage Loans included in the Trust
Fund constituting more than five percent (5%) of the aggregate unamortized
principal balance of the assets in the Trust Fund, or any affiliate of such
parties.
The Supplement for each Series of Certificates will indicate the classes of
Certificates, if any, offered thereby as to which it is expected than an
Underwriter's Exemption will apply.
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OTHER EXEMPTIONS
In addition to making its own determination as to the availability of the
exemptive relief provided in the Underwriter's Exemptions, the Plan fiduciary
should consider the possible availability of any other prohibited transaction
exemptions, in particular, Prohibited Transaction Class Exemption 83-1 for
Certain Transactions Involving Mortgage Pool Investment Trusts ("PTE 83-1"). PTE
83-1 permits certain transactions involving the creation, maintenance and
termination of certain residential mortgage pools and the acquisition and
holding of certain residential mortgage pool pass-through certificates by Plans,
whether or not the Plan's assets would be deemed to include an ownership
interest in the mortgages in the mortgage pool, and whether or not such
transactions would otherwise be prohibited under ERISA. The Sponsor believes
that the "general conditions" set forth in Section II of PTE 83-1, which are
required for its applicability, would be met with respect to most classes of
Certificates evidencing ownership interest in a Pool consisting solely of
Mortgage Loans secured by first or second mortgages or deeds of trust on
single-family residential property. PTE 83-1 would not apply to Certificates
which are part of a class that is subordinate to one or more other classes of
the same Series of Certificates. It is not clear whether PTE 83-1 applies to
Residual Certificates, Certificates which do not pass through both principal and
interest, to any Certificates evidencing ownership interests in a Pool
containing Mortgage Certificates, or to any Certificates evidencing ownership
interests in the reinvestment income of funds on deposit in the related
Certificate Account or in Mortgage Loans secured by shares in a cooperative
corporation. Before purchasing any Certificates, a Plan fiduciary should consult
with its counsel and determine whether PTE 83-1 applies, including whether the
appropriate "specific conditions" set forth in Section I of PTE 83-1, in
addition to the "general conditions" set forth in Section II, would be met, or
whether any other ERISA prohibited transaction exemption is applicable.
Furthermore, a Plan fiduciary should consult the ERISA discussion in the related
Supplement relating to a Series of Certificates before purchasing Certificates.
The Sponsor, or certain affiliates of the Sponsor, might be considered or
might become "parties in interest" (as defined under ERISA) or "disqualified
persons" (as defined under the Code) with respect to a Plan. If so, the
acquisition or holding of Certificates by or on behalf of such Plan could be
considered to give rise to a "prohibited transaction" within the meaning of
ERISA and the Code unless PTE 83-1, the Underwriter's Exemptions, or some other
exemption as available. Special caution ought to be exercised before a Plan
purchases a Certificate in such circumstances.
Employee benefit plans which 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 the ERISA fiduciary requirements. However, the
purchase of a Residual Certificate by some of such plans, or by most varieties
of ERISA Plans, may give rise to "unrelated business taxable income" as
described in Sections 511-515 and 860E of the Code. Prior to the purchase of
Residual Certificates, a prospective purchaser may be required to provide an
affidavit to the Trustee and the Sponsor that it is not a "disqualified
organization", which term as defined herein includes certain tax-exempt entities
not subject to Section 511 of the Code, including certain governmental plans. In
addition, prior to the transfer of a Residual Certificate, the Trustee or the
Sponsor may require an opinion of counsel to the effect that such transfer will
not result in a violation of the prohibited transactions provisions of ERISA and
the Code and will not subject the Trustee, the Sponsor or the Servicer to
additional obligations.
Due to the complexity of these rules and the penalties imposed upon persons
involved in prohibited transactions, it is particularly important that potential
Plan investors consult with their counsel regarding the consequences under ERISA
and the Code of their acquisition and ownership of Certificates.
LEGAL INVESTMENT CONSIDERATION
Institutions whose investment activities are subject to legal investment
laws and regulations or to review by certain regulatory authorities may be
subject to restrictions on investment in certain types of Certificates. Any
financial institution that is subject to the jurisdiction of the Comptroller of
the Currency, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Office of Thrift Supervision, the National
Credit Union Administration or other federal or state agencies with similar
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authority should review any applicable rules, guidelines and regulations prior
to purchasing any Certificates. Financial institutions should review and
consider the applicability of the Federal Financial Institutions Examination
Council Supervisory Policy Statement on Securities Activities (to the extent
adopted by their respective federal regulators), which, among other things, set
forth guidelines for investing in certain types of mortgage related securities,
including securities such as the Certificates. In addition, financial
institutions should consult their regulators concerning the risk-based capital
treatment of any Certificates. Investors should consult their own legal advisors
in determining whether and to what extent Certificates constitute legal
investments or are subject to restrictions on investment.
LEGAL MATTERS
The validity of the Certificates will be passed upon for the Sponsor by
Kennedy Covington Lobdell & Hickman, L.L.P., Charlotte, North Carolina or Brown
& Wood LLP, New York, New York as provided in the Supplement. Certain federal
income tax consequences with respect to the Certificates will be passed upon for
the Sponsor by Brown & Wood LLP.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Certificates is based
on the advice of Brown & Wood LLP, counsel to the Sponsor. 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 Pool relating to a
particular Series of Certificates as a real estate mortgage investment conduit
("REMIC") under the Internal Revenue Code of 1986, as amended (the "Code"). The
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 Pool will be classified as a grantor trust under subpart E, Part I of
subchapter J of the Code. In this case, owners of Certificates will be treated
for federal income tax purposes as owners of a portion of the Pool's assets as
described below.
SINGLE CLASS OF SENIOR CERTIFICATES
Characterization. The Pool may be created with one class of Senior
Certificates and one class of Subordinate 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 Pool 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 Pool represented by that Senior Certificate,
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including interest, original issue discount, if any, prepayment fees, assumption
fees, any gain recognized upon an assumption and late payment charges received
by the Servicer in accordance with such Senior Certificateholder's method of
accounting. Under Code Sections 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 Servicer, provided that such amounts are reasonable compensation
for services rendered to the Pool. 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
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 Servicer, whichever is earlier. If the Servicing Fees paid to
the Servicer were deemed to exceed reasonable servicing compensation, the amount
of such excess could be considered as a retained ownership interest by the
Servicer (or any person to whom the 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 Supplement, as to each series of
Certificates Brown & Wood LLP will have advised the Sponsor 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); provided that the real property securing the Mortgage
Loans represented by that Senior Certificate is 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); provided that the real property securing the
Mortgage Loans represented by that Senior Certificate is 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.
The assets constituting certain Pools 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 Pool 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
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payments are made. Amortizable bond premium will be treated as an offset to
interest income on such Senior Certificate. The basis for such Senior
Certificate will be reduced to the extent that amortizable premium is applied to
offset interest payments.
It is not clear whether a reasonable prepayment assumption should be used
in computing amortization of premium allowable under Code Section 171.
If a premium is not subject to amortization using a reasonable prepayment
assumption, the holder of a Senior Certificate acquired at a premium should
recognize a loss, if a Mortgage Loan prepays in full, equal to the difference
between the portion of the prepaid principal amount of the Mortgage Loan that is
allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Mortgage Loan. If a reasonable prepayment
assumption is used to amortize such premium, it appears that such a loss would
be available, if at all, only if prepayments have occurred at a rate faster than
the reasonable assumed prepayment rate. It is not clear whether any other
adjustments would be required to reflect differences between an assumed
prepayment rate and the actual rate of prepayments.
On June 27, 1996 the IRS issued proposed regulations (the "Amortizable Bond
Premium Regulations") dealing with amortizable bond premium. These regulations
specifically do not apply to prepayable debt instruments subject to Code Section
1272(a)(6) such as the Certificates. Absent further guidance from the IRS, the
Trustee intends to account for amortizable bond premium in the manner described
above. Prospective purchasers of the Certificates should consult their tax
advisors regarding the possible application of the Amortizable Bond Premium
Regulations.
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. Additionally, under
regulations issued on January 27, 1994 with respect to original issue discount
(the "OID Regulations"), original issue discount may be created when the rate
produced (on the issue date) by the index formula on an adjustable rate mortgage
("ARM") is greater than the initial interest rate payable on the ARM. 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,
market discount is 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.
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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 control. 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 Senior Certificates issued without original
issue discount, the amount of market discount that accrues during a period is
equal to the product of (i) the total remaining market discount, multiplied by
(ii) a fraction, the numerator of which is the amount of stated interest paid
during the accrual period and the denominator of which is the total amount of
stated interest remaining to be paid at the beginning of the accrual period. For
purposes of calculating market discount under any of the above methods in the
case of instruments (such as the Senior Certificates) which provide for payments
which may be accelerated by reason of prepayments of other obligations securing
such instruments, the same prepayment assumption applicable to calculating the
accrual of original issue discount will apply. Because the regulations described
above have not been issued, it is impossible to predict what effect those
regulations might have on the tax treatment of a Senior Certificate purchased at
a discount or premium in the secondary market.
A holder who acquired a Senior Certificate at a market discount also may be
required to defer, until the maturity date of such Senior Certificate or its
earlier disposition in a taxable transaction, the deduction of a portion of the
amount of interest that the holder paid or accrued during the taxable year on
indebtedness incurred or maintained to purchase or carry the Senior Certificate
in excess of the aggregate amount of interest (including original issue
discount) includible in such holder's gross income for the taxable year with
respect to such Senior Certificate. The amount of such net interest expense
deferred in a taxable year may not exceed the amount of market discount accrued
on the Senior Certificate for the days during the taxable year on which the
holder held the Senior Certificate and, in general, would be deductible when
such market discount is includible in income. The amount of any remaining
deferred deduction is to be taken into account in the taxable year in which the
Senior Certificate matures or is disposed of in a taxable transaction. In the
case of a disposition in which gain or loss is not recognized in whole or in
part, any remaining deferred deduction will be allowed to the extent of gain
recognized on the disposition. This deferral rule does not apply, if the Senior
Certificateholder elects to include such market discount in income currently as
it accrues on all market discount obligations acquired by such Senior
Certificateholder in that taxable year or thereafter.
MULTIPLE CLASSES OF SENIOR CERTIFICATES
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 on such obligation 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 purchased. If a Pool 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 Senior
Certificates will represent the right to some or all of the interest on such
portion (the "Stripped Coupon Certificates").
Although not entirely clear, based on recent IRS guidance, a Stripped Bond
Certificate generally should be 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 -- Single Class of Senior Certificates -- Original Issue Discount"
herein. However, a purchaser of
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a Stripped Bond Certificate will be required to account for any discount on the
certificate as market discount rather than original issue discount if either (i)
the amount of original issue discount with respect to the certificate was
treated as zero under the original issue discount de minimis rule when the
certificate was stripped or (ii) no more than 100 basis points (including any
amount of servicing in excess of reasonable servicing) is stripped off of the
Pool's Loans. See "Certain Federal Income Tax Consequences -- Non-REMIC
Certificates -- Single Class of Senior Certificates -- Market Discount" herein.
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 Pool. 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).
Senior 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. Based in part on the OID Regulations, 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
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described below under "-- Accrual of Original Issue Discount." Owners should be
aware, however, that the OID Regulations either do not address, or are subject
to varying interpretations with regard to, several issues relevant to
obligations, such as the Mortgage Loans, which are subject to prepayment.
Under the Code, the Mortgage Loans underlying the Senior Certificates will
be treated as having been issued on the date they were originated with an amount
of OID equal to the excess of such Mortgage Loan's stated redemption price at
maturity over its issue price. The issue price of a Mortgage Loan is generally
the amount lent to the mortgagee, which may be adjusted to take into account
certain loans origination fees. The stated redemption price at maturity of a
Mortgage Loan is the sum of all payments to be made on such Mortgage Loan other
than payments that are treated as qualified stated interest payments. The
accrual of this OID, 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 Certificates
calculated based on a reasonable assumed prepayment rate for the mortgage loans
underlying the Senior Certificates (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 that 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 any
Senior Certificate will prepay assumption contained in the Code literally only
applies to debt instruments collateralized by other debt instruments that are
subject to prepayment rather than direct ownership interest in such debt
instruments, such as the Senior Certificates represent. However, no other legal
authority provides guidance with regard to the proper method for accruing OID on
obligations that are subject to prepayment, and, until further guidance is
issued, the Servicer intends to calculate and report OID 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 OID on such Senior Certificate for each day on which it
owns such Senior Certificate, including the date of purchase but excluding the
date of disposition. In the case of an original owner, the daily portions of OID
with respect to each component generally will be determined as set forth under
the OID Regulations. A calculation will be made by the Servicer or such other
entity specified in the related Supplement of the portion of OID 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 Certificates (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 OID allocable to that accrual period reduced by the
amount of any payment made at the end of or during that accrual period. The OID
accruing during such accrual period will then be divided by the number of days
in the period to determine the daily portion of OID for each day in the period.
With respect to an initial accrual period shorter than a full monthly accrual
period, the daily portions of OID must be determined according to an appropriate
allocation under any reasonable method.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest as it accrues rather than when received. However, the
amount of original issue discount includible in the income of a holder of an
obligation is reduced when the obligation is acquired after its initial issuance
at a price greater than the sum of the original issue price and the previously
accrued original issue discount, less prior payments of principal. Accordingly,
if such Mortgage Loans acquired by a Certificateholder are purchased at a price
equal to the then unpaid principal amount of such Mortgage Loan, no original
issue discount attributable to the difference between the issue price and the
original principal amount of such Mortgage Loan (i.e. points) will be includible
by such holder.
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Other original issue discount on the Mortgage Loans (e.g., that arising from a
"teaser" rate) would still need to be accrued.
Senior Certificates Representing Interests in ARM Loans. The OID
Regulations do not address the treatment of instruments, 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 Servicer will report original issue discount on Senior
Certificates attributable to ARM Loans ("Stripped ARM Obligations") to holders
in a manner it believes is consistent with the rules described above under the
heading "Senior Certificates Representing Interests in Loans Other Than ARM
Loans" and with the OID Regulations. In general, application of these rules may
require inclusion of income on a Stripped ARM Obligation in advance of the
receipt of cash attributable to such income. Further, the addition of interest
deferred by reason of negative amortization to the principal balance of an ARM
Loan may require the inclusion of such amount in the income of the
Certificateholder when such amount accrues. Furthermore, the addition of
Deferred Interest to the Certificate's principal balance will result in
additional income (including possibly original issue discount income) to the
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.
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).
For purposes of this discussion, 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, an
estate, the income of which, from sources outside the United States, is
includible in gross income
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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 over the administration of
the trust and one or more United States trustees have authority to control all
substantial decisions of the trust.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Servicer will furnish or make available, within a reasonable time after
the end of each calendar year, to each Certificateholder at any time during such
year, such information as may be deemed necessary or desirable to assist
Certificateholders in preparing their federal income tax returns, or to enable
holders to make such information available to owners or other financial
intermediaries of holders that hold such Certificates as nominees. If a holder,
owner or other recipient of a payment on behalf of an owner fails to supply a
certified taxpayer identification number or if the Secretary of the Treasury
determines that such person has not reported all interest and dividend income
required to be shown on its federal income tax return, 31% backup withholding
may be required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability.
REMIC CERTIFICATES
The Pool 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"), if a Pool
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 Pool will not be treated as a REMIC for
such year and thereafter. In that event, such entity may be taxable as a
separate corporation under Treasury regulations, 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 REMIC status, no
such regulations have been issued. Any such relief moreover, may be accompanied
by sanctions, such as the imposition of a corporate tax on all or a portion of
the REMIC's income for the period in which the requirements for such status are
not satisfied. With respect to each such Pool that elects REMIC status, Brown &
Wood will deliver its opinion generally to the effect that, under then existing
law and assuming compliance with all provisions of the related Agreement, such
Pool 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 Supplement for each Series of Certificates will indicate whether the
Pool 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 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 treated as real estate assets for purposes of Code
Section 856(c).
Tiered REMIC Structures. For certain series of Certificates, two separate
elections may be made to treat designated portions of the related Pool as REMICs
(respectively, the "Subsidiary REMIC" and the "Master REMIC") for federal income
tax purposes. Upon the issuance of any such series of Certificates, Brown & Wood
LLP, counsel to the Sponsor, will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the related Pooling Agreement,
the Subsidiary REMIC and the Master
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REMIC will each qualify as a REMIC and the REMIC Certificates issued by the
Subsidiary REMIC and the Master REMIC, 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 (other than the Residual Certificates in the
Subsidiary REMIC) 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,
as it accrues rather than in accordance with receipt of the interest payments.
The following discussion is based in part on Treasury regulations issued on
January 27, 1994 under Code Sections 1271 through 1273 and 1275 (the "OID
Regulations ") and in part on the provisions of the Tax Reform Act of 1986 (the
"1986 Act"). The holder of a Regular Certificate should be aware, however, that
the OID Regulations do not adequately address certain issues relevant to
prepayable securities, such as the Regular Certificates.
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 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 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
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deferred interest will accrue, will not constitute qualified stated interest
payments, in which case the stated redemption price at maturity of such Regular
Certificates includes all distributions of interest as well as principal
thereon.
Where the interval between the issue date and the first Distribution Date
on a Regular Certificate is longer than the interval between subsequent
Distribution Dates, the greater of any original issue discount disregarding the
rate in the first period and any interest foregone during the first period is
treated as the amount by which the stated redemption price of the Regular
Certificate exceeds its issue price for purposes of 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 will be
treated as OID. Where the interval between the issue date and the first
Distribution Date on a Regular Certificate is shorter than the interval between
subsequent Distribution Dates, interest due on the first Distribution Date in
excess of the amount that accrued during the first period would be added to the
Certificate's stated redemption price at maturity. 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 assumed rate of
prepayment of the Mortgage Loans and the anticipated reinvestment rate, if any,
relating to the Regular Certificates (the "Prepayment Assumption"). The
Prepayment Assumption with respect to a Series of Regular Certificates will be
set forth in the related 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.
Generally, a Regular Certificateholder must include in gross income the
"daily portions," as determined below, of the original issue discount that
accrues on a Regular Certificate for each day the Regular Certificateholder
holds the Regular Certificate, including the purchase date but excluding the
disposition date. In the case of an original holder of a Regular Certificate, a
calculation will be made of the portion of the original issue discount that
accrues during each successive period ("an accrual period") that ends on the day
in the calendar year corresponding to a Distribution Date (or if Distribution
Dates are on the first day or first business day of the immediately preceding
month, interest may be treated as payable on the last day of the immediately
preceding month) and begins on the day after the end of the immediately
preceding accrual period (or on the issue date in the case of the first accrual
period). This will be done, in the case of each full accrual period, by (i)
adding (a) the present value at the end of the accrual period (determined by
using as a discount factor the original yield to maturity of the Regular
Certificates as calculated under the Prepayment Assumption) of all remaining
payments to be received on the Regular Certificate under the Prepayment
Assumption, and (b) any payments included in the stated redemption price at
maturity received during such accrual period, and (ii) subtracting from that
total the "adjusted issue price" of the Regular Certificates at the beginning of
such accrual period. The "adjusted issue price" of a Regular Certificate at the
beginning of the first accrual period is its issue price; the "adjusted issue
price" of a Regular Certificate at the beginning of a subsequent accrual period
is the "adjusted issue price" at the beginning of the immediately preceding
accrual period plus the amount of original issue discount allocable to that
accrual period and reduced by the amount of any payment other than a payment of
qualified stated 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
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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 must 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), (b) less 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. A holder who pays an acquisition premium instead may elect to accrue
OID by treating the purchase as a purchase of original issue.
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, the OID Regulations do not contain
provisions specifically interpreting Code Section 1272(a)(6). Until the Treasury
issues guidance to the contrary, the Trustee intends to base its computation on
Code Section 1272(a)(6) and the OID Regulations as described in this Prospectus.
However, because no regulatory guidance currently exists under Code Section
1272(a)(6), there can be no assurance that such methodology represents the
correct manner of calculating OID.
Variable Rate Regular Certificates. Regular Certificates may provide for
interest based on a variable rate. 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 by more than a specified amount, and (ii)
the compound compounds or is payable at least annually at current values of
certain objective rates measured by or based on lending rate for newly borrowed
funds. 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 OID with respect to a Regular Certificate bearing a variable
rate of interest will accrue in the manner described above under "-- Original
Issue Discount," by assuming generally that the index used for the variable rate
will remain fixed throughout the term of the Certificate. Approximate
adjustments are made for the actual variable rate.
Although unclear at present, it is anticipated that Regular Certificates
bearing an interest rate that is a weighted average of the net interest rates on
Mortgage Loans will be treated as variable rate certificates. In such case, the
weighted average rates used to compute the initial pass-through rate on the
Regular Certificates will be deemed to be the index in effect through the life
of the Regular Certificates. 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. Additionally, if some or all of the Mortgage Loans are
subject to "teaser rates" (i.e., the initial rates on the Mortgage Loans are
less than subsequent rates on the Mortgage Loans) the interest paid on some or
all of the Regular Certificates may be subject to accrual using a constant yield
method notwithstanding the fact that such Certificates may not have been issued
with "true" non-de minimis original issue discount.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as
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interest, based on a constant yield method for Certificates acquired on or after
April 4, 1994. If such an election were to be made with respect to a Regular
Certificate with market discount, the Certificateholder would be 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 a
premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium with that such
Certificateholder owns or acquires. See "-- Regular Certificates -- Premium"
herein. The election to accrue interest, discount and premium on a constant
yield method with respect to a Certificate cannot be revoked without the consent
of the IRS.
Market Discount. A purchaser of a Regular Certificate also may 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 gain 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 either the accrual or cash 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 would be 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 "-- Taxation of 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 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 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
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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 (i) the total remaining market discount,
multiplied by (ii) a fraction, the numerator of which is the amount of stated
interest paid during the accrual period and the denominator of which is the
total amount of stated interest remaining to be paid at the beginning of the
period. For purposes of calculating market discount under any of the above
methods in the case of instruments (such as the Regular Certificates) which
provide for payments which may be accelerated by reason of prepayments of other
obligations securing such instruments, the same Prepayment Assumption applicable
to calculating the accrual of original issue discount will apply.
A holder of a Regular Certificate who 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 who 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 Certificate 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.
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
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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, within one year of the
issue date, that equals or exceeds the amount of the pre-issuance accrued
interest, then the Regular Certificates 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.
Sale, Exchange or Redemption of Regular Certificates. 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 or redemption 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 his adjusted
basis in the Regular Certificate. A holder of a Regular Certificate who receives
a final payment which is less than his adjusted basis in the Regular Certificate
will generally recognize a loss. Except as provided in the following paragraph
and as provided under "Market Discount" below, 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.
Additionally, gain will be treated as ordinary income if the Pool had an
"intention to call" the Regular Certificates prior to maturity. The OID
Regulations provide that the presence of a sinking fund or optimal call does not
give rise to such an intention, and the Seller does not believe such an
intention is otherwise present; however, the application of these rules to REMIC
Certificates is unclear.
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.
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 Regular Certificate purchased at a discount or premium in the
secondary market.
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
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this provision will only require information pertaining to the appropriate
proportionate method of accruing market discount.
REMIC Expenses. As a general rule, all of the 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 temporary 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 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 Certificate directly or through a pass-through
entity 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 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, the personal exemptions
and itemized deductions of individuals with adjusted gross incomes above
particular levels are subject to certain limitations which reduce or eliminate
the benefit of such items. The reduction or disallowance of this deduction
coupled with the allocation of additional income may have a significant impact
on the yield of the Regular Certificate to such a holder. 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. 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 related
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.
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% 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 Pool 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.
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 such acquisition.
Information Reporting and Backup Withholding. The 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 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.
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Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against such recipient's federal income tax liability.
RESIDUAL CERTIFICATES
Allocation of the Income of the REMIC to the Residual Certificates. The
REMIC will not be subject to federal income tax except with respect to income
from prohibited transactions and certain other transactions. See "-- Prohibited
Transactions and Other Taxes" herein. Instead, each original holder of a
Residual Certificate will report on its federal income tax return, as ordinary
income, its share of the taxable income of the REMIC for each day during the
taxable year on which such holder owns any Residual Certificates. The taxable
income of the REMIC for each day will be determined by allocating the taxable
income of the REMIC for each calendar quarter ratably to each day in the
quarter. Such a holder's share of the taxable income of the REMIC for each day,
will be based on the portion of the outstanding Residual Certificates that such
holder owns on that day. The taxable income of the REMIC will be determined
under an accrual method and will be taxable to the Residual Certificateholders
without regard to the timing or amounts of cash distributions by the REMIC.
Ordinary income derived from Residual Certificates will be "portfolio income"
for purposes of the taxation of taxpayers subject to the limitations on the
deductibility of "passive losses." As residual interests, the Residual
Certificates will be subject to tax rules, described below, that differ from
those that would apply if the Residual Certificates were treated for federal
income tax purposes as direct ownership interests in the Certificates, or as
debt instruments issued by the REMIC.
A Residual Certificateholder may be required to include taxable income from
the Residual Certificate in excess of the cash distributed. For example, a
structure where principal distributions are made serially on regular interests
(that is, a fast-pay, slow-pay structure) may generate such a mismatching of
income and cash distributions (that is, "phantom income"). This mismatching may
be caused by the use of certain required tax accounting methods by the REMIC,
variations in the prepayment rate of the underlying Mortgage Loans and certain
other factors. Depending upon the structure of a particular transaction, the
aforementioned factors may significantly reduce the after-tax yield of a
Residual Certificate to a Residual Certificateholder. Investors should consult
their own tax advisors concerning the federal income tax treatment of a Residual
Certificate and the impact of such tax treatment on the after-tax yield of a
Residual Certificate.
A subsequent Residual Certificateholder also will report on its federal
income tax return amounts representing a daily share of the taxable income of
the REMIC for each day that such Residual Certificateholder owns such Residual
Certificate. Those daily amounts generally would equal the amounts that would
have been reported for the same days by an original Residual Certificateholder,
as described above. The Legislative History indicates that certain adjustments
may be appropriate to reduce (or increase) the income of a subsequent holder of
a Residual Certificate that purchased such Residual Certificate at a price
greater than (or less than) the adjusted basis (see "-- Sales of Residual
Certificates" below) such Residual Certificate would have in the hands of an
original Residual Certificateholder. It is not clear, however, whether such
adjustments will in fact be permitted or required and, if so, how they would be
made.
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 "-- 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
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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 "-- Sales of Residual Certificates" herein. For a discussion of
possible adjustments to income of a subsequent holder of a Residual Certificate
to reflect any difference between the actual cost of such Residual Certificate
to such holder and the adjusted basis such Residual Certificate would have in
the hands of an original Residual Certificateholder, see "-- Allocation of the
Income of the REMIC to the Residual Certificates" above.
Net Losses of the REMIC. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. Such net loss would be
allocated among the Residual Certificateholders in the same manner as the
REMIC's taxable income. The net loss allocable to any Residual Certificate will
not be deductible by the holder to the extent that such net loss exceeds such
holder's adjusted basis in such Residual Certificate. Any net loss that is not
currently deductible by reason of this limitation may 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.
Non-Interest Expenses of the REMIC. As a general rule, the REMIC's taxable
income will be determined in the same manner as if the REMIC were an individual.
However, all or a portion of the REMIC's servicing, administrative and other
non-interest expenses will be allocated as a separate item to Residual
Certificateholders that are "pass-through interest holders." Such a holder would
be required to add its allocable share, if any, of such expenses to its gross
income and to treat the same amount as an item of investment expense. An
individual would generally be allowed a deduction for such an expense item only
as a miscellaneous itemized deduction subject to the limitations under Code
Section 67. That section allows such deduction only to the extent that in the
aggregate all such expenses exceed two percent of an individual's adjusted gross
income. The REMIC is required to report to each pass-through interest holder and
to the IRS such holder's allocable share, if any, of the REMIC's non-interest
expenses. The term "pass-through interest holder" generally refers to
individuals, entities taxed as individuals and certain pass-through entities,
but does not include real estate investment trusts. Residual Certificateholders
that are "pass-through interest holders" should consult their own tax advisors
about the impact of these rules on an investment in the Residual Certificates.
See "-- Regular Certificates -- Non-Interest Expenses of the REMIC" above.
Deferred Interest. Any Deferred Interest that accrues with respect to any
ARM Loans held by the REMIC will constitute income to the REMIC and will be
treated in a manner similar to the Deferred Interest that accrues with respect
to Regular Certificates as described above under "-- Regular Certificates --
Deferred Interest."
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
be subject to federal income tax in all events. Thus, for example, an excess
inclusion (i) may not, except as described below, be offset by any unrelated
losses 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
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that is subject to tax only on its unrelated business taxable income (see
"-- Tax-Exempt Investors" below); and (iii) is not eligible for any reduction in
the rate of withholding tax in the case of a Residual Certificateholder that is
a foreign investor. See "-- Non-U.S. Persons" below. The exception for thrift
institutions is available only to the institution holding the Residual
Certificate, and not to any affiliate of the institution, unless the affiliate
is a subsidiary all the stock of which, and substantially all the indebtedness
of which, is held by the institution, and which is organized and operated
exclusively in connection with the organization and operation of one or more
REMICs.
With respect to any Residual Certificateholder, the excess inclusion 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% 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 of 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 a tax year cannot be less than
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 only to tax years
beginning after August 20, 1996.
Payments. Any payment made on a Residual Certificate to a Residual
Certificateholder will be treated as a non-taxable return of capital to the
extent it does not exceed the Residual Certificateholder's adjusted basis in
such Residual Certificate. To the extent a distribution exceeds such adjusted
basis, it will be treated as gain from the sale of the Residual Certificate.
Sale or Exchange of Residual Certificates. If a Residual Certificate is
sold or exchanged, the seller will generally recognize gain or loss equal to the
difference between the amount realized on the sale or exchange and its adjusted
basis in the Residual Certificate (except that the recognition of loss may be
limited under the "wash sale" rules described below). A holder's adjusted basis
in a Residual Certificate generally equals the cost of such Residual Certificate
to such Residual Certificateholder, increased by the taxable income of the REMIC
that was included in the income of such Residual Certificateholder with respect
to such Residual
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Certificate, and decreased (but not below zero) by the net losses that have been
allowed as deductions to such Residual Certificateholder with respect to such
Residual Certificate and by the distributions received thereon by such Residual
Certificateholder. In general, any such gain or loss will be capital gain or
loss provided the Residual Certificate is held as a capital asset. However,
Residual Certificates will be "evidences of indebtedness" within the meaning of
Code Section 582(c)(1), so that gain or loss recognized from sale of a Residual
Certificate by a bank or thrift institution to which such section applies would
be ordinary income or loss.
Except as provided in Treasury regulations, 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.
Mark to Market Rules. On January 3, 1995, the IRS released proposed
regulations under Code Section 475 (the "Proposed Mark-to-Market Regulations").
The Proposed Mark-to-Market Regulations provide that any REMIC Residual Interest
acquired after January 3, 1995 cannot be marked to market, regardless of the
value of such REMIC Residual Interest.
PROHIBITED TRANSACTIONS AND OTHER TAXES
The REMIC is subject to a tax at a rate equal to 100% 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% 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 Supplement, such tax would be borne first by
the Residual Certificateholders, to the extent of amounts distributable to them,
and then by the 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
REMIC's 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 recognize no gain or loss on the sale of its assets,
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, although the
matter is not entirely free from doubt, 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.
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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 Temporary Regulations if
there is at no time during the taxable year more than one Residual
Certificateholder, a REMIC shall not be subject to the rules of Subchapter C of
chapter 63 of the Code, relating to the treatment of Partnership items for a
taxable year. Accordingly, the REMIC will file an annual tax return on Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. In
addition, certain other information will be furnished quarterly to each Residual
Certificateholder who held such Residual Certificate on any day in the previous
calendar quarter.
Each Residual Certificateholder is required to treat items on its return
consistently with their treatment on the REMIC's return, unless the Residual
Certificateholder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information received
from the REMIC. The IRS may assert a deficiency resulting from a failure to
comply with the consistency requirement without instituting an administrative
proceeding at the REMIC level. The REMIC does not intend to register as a tax
shelter pursuant to Code Section 6111 because it is not anticipated that the
REMIC will have a net loss for any of the first five taxable years of its
existence. Any person that holds a Residual Certificate as a nominee for another
person may be required to furnish the REMIC, in a manner to be provided in
Treasury regulations, with the name and address of such person and other
information.
TAX-EXEMPT INVESTORS
Any Residual Certificateholder that is a pension fund or other entity that
is subject to federal income taxation only on its "unrelated business taxable
income" within the meaning of Code Section 512 will be subject to such tax on
that portion of the distributions received on a Residual Certificate that is
considered an "excess inclusion." See "-- Excess Inclusions" herein.
NON-U.S. PERSONS
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. 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 an excess inclusion 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 this purpose, a "U.S. Person" includes a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
under the laws of the United States or any political subdivision thereof, or an
estate whose income from sources without the United States is includible in
gross income for United States federal income tax purposes regardless of its
connection with the conduct of a trade or business in 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.
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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 doing so.
TAX-RELATED RESTRICTIONS ON TRANSFER
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 regulations) equal to the present value of the total
anticipated "excess inclusions" with respect to such interest for periods after
the transfer, and (B) the highest marginal federal income tax rate applicable to
corporations. The tax is imposed on the transferor unless the transfer is
through an agent (including a broker or other middlemen) for a disqualified
organization, in which event the tax is imposed on the agent. The person
otherwise liable for the tax shall be relieved of liability for the tax if the
transferee furnished to such person an affidavit that the transferee is not a
disqualified organization and, at the time of the transfer, such person does not
have actual knowledge that the affidavit is false. A "disqualified organization"
means (A) the United States, any State, possession, or political subdivision
thereof, any foreign government, any international organization, or any agency
or instrumentality of any of the foregoing (provided that such term does not
include an instrumentality if all its activities are subject to tax and, except
for FHLMC, a majority of its board of directors is not selected by any such
governmental agency), (B) any organization (other than certain farmers'
cooperatives) generally exempt from federal income taxes unless such
organization is subject to the tax on "unrelated business taxable income" and
(C) a rural electric or telephone cooperative.
A tax is imposed on a "pass-through entity" (as defined below) holding a
residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of (A)
the amount of excess inclusions for the taxable year allocable to the interest
held by the disqualified organization, and (B) the highest marginal federal
income tax rate applicable to corporations. The pass-through entity otherwise
liable for the tax, for any period during which the disqualified organization is
the record holder of an interest in such entity, will be relieved of liability
for the tax if such record holder furnishes to such entity an affidavit that
such record holder is not a disqualified organization and, for such period, the
pass-through entity does not have actual knowledge that the affidavit is false.
For this purpose, a "pass-through entity" means (i) a regulated investment
company, real estate investment trust or common trust fund, (ii) a partnership,
trust or estate and (iii) certain cooperatives. Except as may be provided in
Treasury regulations, 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. The tax on pass-through entities is generally effective for
periods after March 31, 1988, except that in the case of regulated investment
companies, real estate investment trusts, common trust funds and publicly-traded
partnerships the tax shall apply only to taxable years of such entities
beginning after December 31, 1988.
In order to comply with these rules, the Pooling 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 Trustee. The Trustee 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.
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.
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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 in the following section of this discussion,
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, (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.
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", as defined below, 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% 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 provisions in the
REMIC Regulations regarding transfers of Residual Certificates that have tax
avoidance potential to foreign persons are effective for all transfers after
June 30, 1992. Until further guidance is issued concerning the treatment of
Residual Certificates held by non-U.S. Persons, the Pooling 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.
For purposes of this discussion, a "U.S. Person" means a citizen or
resident 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.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Considerations", potential investors should consider the
state income tax consequences of the acquisition, ownership, and disposition of
the Certificates. State 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. Therefore, potential investors
should consult their own tax advisors with respect to the various tax
consequences of investments in the Certificates.
71
<PAGE> 135
PLANS OF DISTRIBUTION
Certificates are being offered hereby in Series through one or more of the
various methods described below.
The Sponsor intends that Certificates will be offered through the following
methods from time to time and that offerings may be made concurrently through
more than one of these methods or that an offering of a particular Series of
Certificates may be made through a combination of two or more of these methods.
Such methods are as follows:
1. By negotiated firm commitment underwriting and public offering by
an underwriter specified in the related Supplement;
2. By agency placements through one or more placement agents specified
in the related Supplement primarily with institutional investors and
dealers; and
3. Through offerings by the Sponsor.
A Supplement for each Series will describe the method of offering being
used for that Series and either the price at which such Series is being offered,
the nature and amount of any underwriting discounts or additional compensation
to such underwriters and the proceeds of the offering to the Sponsor, or the
method by which the price at which the underwriters will sell the Certificates
will be determined. A firm commitment underwriting and public offering by
underwriters may be done through underwriting syndicates led by one or more
managing underwriters or through one or more underwriters acting alone. The
managing underwriter or underwriters with respect to the offer and sale of a
particular Series of Certificates will be set forth on the cover of the
Supplement relating to such Series and the members of the underwriting
syndicate, if any, will be named in such Supplement. The firms acting as
underwriters with respect to the Certificates may include NationsBanc Capital
Markets, Inc., an affiliate of the Sponsor. If such firm is not named in the
Supplement, such firm will not be a party to the Underwriting Agreement in
respect of such Certificates, will not be purchasing any such Certificates from
the Sponsor and will have no direct or indirect participation in the
underwriting of such Certificates, although such firm may participate in the
distribution of such Certificates under circumstances entitling it to a dealer's
commission. Each Supplement for an underwritten offering will also contain
information regarding the nature of the underwriters' obligations, any material
relationships between the Sponsor and any underwriter, and, where appropriate,
information regarding any discounts or concessions to be allowed or reallowed to
dealers or others and any arrangements to stabilize the market for the
Certificates so offered. In a firm commitment underwritten offering, the
underwriters will be obligated to purchase all of the Certificates of such
Series if any such Certificates are purchased. Certificates may be acquired by
the underwriters for their own accounts and may be resold from time to time in
one or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale. In
connection with the sale of the Certificates, underwriters may receive
compensation from the Sponsor or from purchasers of Certificates in the form of
discounts, concessions or commissions. The related Supplement will describe any
such compensation paid by the Sponsor.
In underwritten offerings, the underwriters and agents may be entitled,
under agreements entered into with the Sponsor, to indemnification by the
Sponsor against certain civil liabilities, including liabilities under the
Securities Act, or to contribution with respect to payments which such
underwriters or agents may be required to make in respect thereof.
If a Series is offered otherwise than through underwriters, the Supplement
relating thereto will contain information regarding the nature of such offering
and any agreements to be entered into between the Sponsor and purchasers of
Certificates of such Series. It is contemplated that NationsBanc Capital
Markets, Inc. will act as a placement agent on behalf of the Sponsor in such
offerings of a Series of Certificates. If NationsBanc Capital Markets, Inc. does
act as placement agent in the sale of Certificates, it will receive a selling
commission which will be disclosed in the related Supplement. NationsBanc
Capital Markets, Inc. may also purchase Certificates acting as principal.
72
<PAGE> 136
INDEX TO DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
1986 Act.................................................... 58
Accrual Certificates........................................ 20
Advance..................................................... 7
Agency Certificates......................................... 9
Amortizable Bond Premium Regulations........................ 52
Appraised Value............................................. 13
ARMs........................................................ 12, 52
ARM Loans................................................... 56
Assumed Reinvestment Rate................................... 21
Bankruptcy Bonds............................................ 6, 28
Bankruptcy Code............................................. 45
Buydown Fund................................................ 12
Buydown Loans............................................... 12
Certificate Account......................................... 9
Certificate Rate............................................ 4
Certificateholders.......................................... 13
Certificates................................................ 4
Class Certificate Balance................................... 20
Closing Date................................................ 4
Code........................................................ 50
Commission.................................................. 2
Components.................................................. 21
Contingent Regulations...................................... 60
Cooperative Loans........................................... 12, 41
Cut-off Date................................................ 6
D&P......................................................... 48
Deferred Interest........................................... 62
Distribution Date........................................... 20
Eligible Account............................................ 34
Eligible Investments........................................ 18
ERISA....................................................... 11
Exchange Act................................................ 2
Federal long-term rate...................................... 67
FHA......................................................... 7, 14
FHA Loans................................................... 14
FHLMC....................................................... cover
FHLMC Act................................................... 15
FHLMC Certificates.......................................... 16
Fitch....................................................... 48
FNMA........................................................ cover
FNMA Certificates........................................... 17
Fraud Loss.................................................. 6, 27
Garn -- St Germain Act...................................... 46
GNMA........................................................ cover
GNMA Certificates........................................... 14
GNMA I Certificates......................................... 15
GNMA II Certificates........................................ 15
GPMs........................................................ 12
Housing Act................................................. 14
</TABLE>
73
<PAGE> 137
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
HUD......................................................... 14
Indemnified Parties......................................... 38
Index....................................................... 13
Interest Accrual Period..................................... 20
Issuer...................................................... 56, 64
IO Certificates............................................. 5
IRS......................................................... 52
Labor Regulations........................................... 47
Land Sale Contracts......................................... 13, 42
Last Scheduled Distribution Date............................ 21
Legislative History......................................... 55
LTV......................................................... 13
Master REMIC................................................ 57
Mezzanine Certificates...................................... 5, 26
Minimum Prepayment Agreement................................ 18
Minimum Reinvestment Agreement.............................. 19
Moody's..................................................... 48
Mortgage.................................................... 12
Mortgage Assets............................................. cover, 7
Mortgage Certificates....................................... 9, 26
Mortgage Loans.............................................. 7
Mortgage Margin............................................. 13
Mortgage Note............................................... 8, 12
Mortgage Pool Insurance Policy.............................. 6, 26
Mortgage Rate............................................... 8
Mortgage Related Securities................................. 11
Mortgaged Properties........................................ 12
Net Mortgage Rate........................................... 32
OID Regulations............................................. 52, 58
PACs........................................................ 22
Payment Lag Certificates.................................... 62
PC Agreement................................................ 17
PC Trustee.................................................. 17
PC Servicer................................................. 17
PC Sponsor.................................................. 17
Plan........................................................ 47
PO Certificates............................................. 4
Pool........................................................ cover
Pool Insurer................................................ 26
Pooling Agreement........................................... 4
Prepayment Assumption....................................... 55, 59
Primary Mortgage Insurance Policy........................... 37
Private Certificates........................................ 17
Proposed Contingent Regulations............................. 60
Proposed Mark-to-Market Regulations......................... 68
PTE 83-1.................................................... 49
Rating Agency............................................... 11
Record Date................................................. 20
Regular Certificates........................................ 57
Relief Act.................................................. 46
Relief Act Mortgage Loan.................................... 46
</TABLE>
74
<PAGE> 138
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
REMIC....................................................... cover, 50
REMIC Regulations........................................... 50
REMIC Servicer.............................................. 4
REO Property................................................ 25
Reserve Fund................................................ 6, 29
Residual Certificates....................................... 57
S&P......................................................... 48
Securities Act.............................................. 2
Seller...................................................... cover, 4
Seller's Agreement.......................................... 33
SEN......................................................... 22
Senior Certificates......................................... 4
Senior Certificateholders................................... 5
Series...................................................... 4
Servicer.................................................... 4
Servicing Fee............................................... 38
SMMEA....................................................... 11
Special Distribution Date................................... 25
Special Distributions....................................... 25
Special Hazard Insurance Policy............................. 6
Special Hazard Insurer...................................... 28
Sponsor..................................................... 4, 30
Stripped ARM Obligation..................................... 56
Stripped Bond Certificates.................................. 53
Stripped Coupon Certificates................................ 53
SUB......................................................... 22
Subordinate Certificates.................................... 4
Subordinate Certificateholders.............................. 5
Subsidiary REMIC............................................ 57
Supplement.................................................. cover, 4
TACs........................................................ 22
Temporary Regulations....................................... 68
Title V..................................................... 46
Trust Fund.................................................. cover
Trustee..................................................... 4
UCC......................................................... 44
Underlying Loans............................................ 17
Underwriter's Exemption..................................... 47
U.S. Person................................................. 56, 71
VA.......................................................... 7, 14
Waiver Letter............................................... 6, 27
</TABLE>
75
<PAGE> 139
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement....................................... 2
Additional Information...................................... 2
Incorporation of Certain Documents by Reference............. 2
Summary of the Prospectus................................... 4
The Pools................................................... 12
General................................................... 12
The Mortgage Loans........................................ 12
Mortgage Certificates..................................... 14
Certificate Account....................................... 18
Minimum Prepayment Agreement.............................. 18
Minimum Reinvestment Agreement............................ 19
Description of Certificates................................. 19
General................................................... 19
Distributions............................................. 20
Categories of Classes of Certificates..................... 21
Residual Certificates..................................... 23
Advances.................................................. 24
Reports to Certificateholders............................. 24
Special Distributions..................................... 25
Credit Support.............................................. 25
General................................................... 25
Subordination............................................. 26
Surety Bonds.............................................. 26
Mortgage Pool Insurance Policies.......................... 26
Fraud Waiver.............................................. 27
Special Hazard Insurance Policies......................... 28
Bankruptcy Bonds.......................................... 28
Reserve Fund.............................................. 29
Cross Support............................................. 29
Other Insurance, Guaranties, Letters of Credit and Similar
Instruments or Agreements.............................. 29
Maturity, Prepayment Considerations and Weighted Average
Life of Certificates...................................... 30
The Sponsor................................................. 30
Use of Proceeds............................................. 31
Mortgage Purchase Program................................... 31
The Pooling and Servicing Agreement......................... 31
Assignment of Mortgage Loans.............................. 31
Representations and Warranties............................ 33
Servicing................................................. 34
Payments on Mortgage Loans................................ 34
Collection and Other Servicing Procedures................. 35
Hazard Insurance.......................................... 36
Primary Mortgage Insurance................................ 37
Maintenance of Insurance Policies; Claims Thereunder and
Other Realization Upon Defaulted Mortgage Loans........ 37
Servicing Compensation and Payment of Expenses............ 38
Evidence as to Compliance................................. 38
Certain Matters Regarding the Sponsor, the Seller and the
Servicer............................................... 38
Events of Default......................................... 39
Rights Upon Event of Default.............................. 39
Enforcement............................................... 39
</TABLE>
76
<PAGE> 140
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Amendment................................................. 39
List of Certificateholders................................ 40
Termination; Repurchase of Mortgage Loans and Mortgage
Certificates........................................... 40
The Trustee............................................... 41
Certain Legal Aspects of the Mortgage Loans................. 41
Mortgages................................................. 41
Cooperatives.............................................. 41
Land Sale Contracts....................................... 42
Foreclosure............................................... 42
Rights of Redemption...................................... 45
Anti-Deficiency Legislation and Other Limitations on
Sellers................................................ 45
Due-on-Sale Clauses....................................... 45
Applicability of Usury Laws............................... 46
Soldiers' and Sailors' Civil Relief Act................... 46
Environmental Legislation................................. 46
ERISA Considerations........................................ 47
Plan Assets Regulations................................... 47
Underwriter's Exemptions.................................. 47
Other Exemptions.......................................... 49
Legal Investment Consideration.............................. 49
Legal Matters............................................... 50
Certain Federal Income Tax Consequences..................... 50
General................................................... 50
Non-REMIC Certificates.................................... 50
Single Class of Senior Certificates....................... 50
Multiple Classes of Senior Certificates................... 53
Sale or Exchange of a Senior Certificate.................. 56
Non-U.S. Persons.......................................... 56
Information Reporting and Backup Withholding.............. 57
REMIC Certificates........................................ 57
Regular Certificates...................................... 58
Residual Certificates..................................... 65
Prohibited Transactions and Other Taxes................... 68
Liquidation and Termination............................... 68
Administrative Matters.................................... 69
Tax-Exempt Investors...................................... 69
Non-U.S. Persons.......................................... 69
Tax-Related Restrictions on Transfer...................... 70
State Tax Considerations.................................... 71
Plans of Distribution....................................... 72
Index to Defined Terms...................................... 73
</TABLE>
77
<PAGE> 141
============================================================
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 OF THE SECURITIES
OFFERED HEREBY, NOR AN OFFER OF OFFERED CERTIFICATES IN ANY STATE OR
JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE UNLAWFUL.
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AT ANY TIME DOES
NOT IMPLY THAT THE INFORMATION CONTAINED 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 IS REQUIRED BY LAW TO BE DELIVERED, THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED
ACCORDINGLY.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary of Terms.......................... S-5
Risk Factors.............................. S-13
The Mortgage Pool......................... S-15
NationsBanc Mortgage Corporation.......... S-21
Servicing of Mortgage Loans............... S-22
The Pooling and Servicing Agreement....... S-23
Description of the Certificates........... S-26
Prepayment and Yield Considerations....... S-39
Credit Support............................ S-54
Use of Proceeds........................... S-55
Certain Federal Income Tax Consequences... S-55
State Taxes............................... S-58
ERISA Considerations...................... S-58
Method of Distribution.................... S-59
Legal Matters............................. S-60
Certificate Ratings....................... S-60
Index to Defined Terms.................... S-61
PROSPECTUS
Prospectus Supplement..................... 2
Additional Information.................... 2
Incorporation of Certain Documents by
Reference............................... 2
Summary of the Prospectus................. 4
The Pools................................. 12
Description of Certificates............... 19
Credit Support............................ 25
Maturity, Prepayment Considerations and
Weighted Average Life of Certificates... 30
The Sponsor............................... 30
Use of Proceeds........................... 31
Mortgage Purchase Program................. 31
The Pooling and Servicing Agreement....... 31
Certain Legal Aspects of the Mortgage
Loans................................... 41
ERISA Considerations...................... 47
Legal Investment Consideration............ 49
Legal Matters............................. 50
Certain Federal Income Tax Consequences... 50
State Tax Considerations.................. 71
Plans of Distribution..................... 72
Index to Defined Terms.................... 73
</TABLE>
============================================================
============================================================
$148,504,257
TRYON MORTGAGE FUNDING, INC.
SPONSOR
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 1997-1
NATIONSBANC MORTGAGE CORPORATION
SELLER AND MASTER SERVICER
----------------------------------------
PROSPECTUS SUPPLEMENT
----------------------------------------
NATIONSBANC CAPITAL MARKETS, INC.
SALOMON BROTHERS INC
March 20, 1997
============================================================
