<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-48879
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED AUGUST 14, 1998)
$568,303,695
NATIONSBANC MONTGOMERY FUNDING CORP.
SPONSOR
NATIONSBANC MORTGAGE CORPORATION
SELLER AND MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1998-1
Distributions payable on the 25th day of each month, commencing in September
1998
------------------
The Mortgage Pass-Through Certificates, Series 1998-1 (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 August 1, 1998 (the "Pooling Agreement"), among NationsBanc Montgomery
Funding Corp. (the "Sponsor"), NationsBanc Mortgage Corporation, as master
servicer (the "Master Servicer"), and Norwest Bank Minnesota, National
Association, as trustee (the "Trustee"). The Trust Fund will consist primarily
of a pool (the "Mortgage Pool") of fixed-rate, conventional, fully-amortizing
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.
(Cover continued on next page)
PROSPECTIVE INVESTORS IN THE OFFERED CERTIFICATES SHOULD REVIEW THE INFORMATION
SET FORTH UNDER
"RISK FACTORS" ON PAGE S-14 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.
------------------
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.................. $164,351,856.00 SEN/SEQ 6.75% FIXED
- --------------------------------------------------------------------------------------------------------------------------
A-2.................. $25,000,000.00 SEN/SEQ 6.50% FIXED
- --------------------------------------------------------------------------------------------------------------------------
A-3.................. $60,896,001.00 SEN/SEQ 6.50% FIXED
- --------------------------------------------------------------------------------------------------------------------------
A-4.................. $25,000,000.00 SEN/SEQ 7.25% FIXED
- --------------------------------------------------------------------------------------------------------------------------
A-5.................. $5,357,143.00 SEN/SEQ (4) FLOATING
- --------------------------------------------------------------------------------------------------------------------------
A-6.................. (5) SEN/NOTIONAL (6) INV FLOAT/IO
- --------------------------------------------------------------------------------------------------------------------------
A-7.................. $10,000,000.00 SEN/SEQ 6.75% FIXED
- --------------------------------------------------------------------------------------------------------------------------
A-8.................. $50,000,000.00 SEN/SEQ 6.75% FIXED
- --------------------------------------------------------------------------------------------------------------------------
A-9.................. $75,000,000.00 SEN/SEQ 6.75% FIXED
- --------------------------------------------------------------------------------------------------------------------------
A-10................. $1,604,000.00 SEN/SEQ 6.50% FIXED
- --------------------------------------------------------------------------------------------------------------------------
A-11................. $41,794,000.00 SEN/SEQ 6.75% FIXED
- --------------------------------------------------------------------------------------------------------------------------
A-12................. $4,381,000.00 SEN/SEQ 7.00% FIXED
- --------------------------------------------------------------------------------------------------------------------------
A-13................. $6,981,000.00 SEN/SEQ 7.00% FIXED
- --------------------------------------------------------------------------------------------------------------------------
A-14................. $11,362,000.00 SEN/SEQ 6.50% FIXED
- --------------------------------------------------------------------------------------------------------------------------
A-15................. $10,000,000.00 SEN/SEQ 6.75% FIXED
- --------------------------------------------------------------------------------------------------------------------------
A-16................. $56,700,000.00 SEN/LOCKOUT 6.75% FIXED
- --------------------------------------------------------------------------------------------------------------------------
A-PO................. $1,544,110.41 SEN/RATIO STRIP (7) PO
- --------------------------------------------------------------------------------------------------------------------------
B-1.................. $10,884,853.00 SUB 6.75% FIXED
- --------------------------------------------------------------------------------------------------------------------------
B-2.................. $4,869,540.00 SUB 6.75% FIXED
- --------------------------------------------------------------------------------------------------------------------------
B-3.................. $2,577,992.00 SUB 6.75% FIXED
- --------------------------------------------------------------------------------------------------------------------------
R-I.................. $100.00 SEN/SEQ 6.75% FIXED
- --------------------------------------------------------------------------------------------------------------------------
R-II................. $100.00 SEN/SEQ 6.75% FIXED
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------- -----------------------
- --------------------- -----------------------
LAST SCHEDULED
CLASS DISTRIBUTION DATE(3)
- --------------------- -----------------------
<S> <C>
A-1.................. September 25, 2025
- ----------------------------------------------
A-2.................. December 25, 2024
- ----------------------------------------------
A-3.................. September 25, 2025
- ----------------------------------------------
A-4.................. September 25, 2025
- ----------------------------------------------
A-5.................. September 25, 2025
- ----------------------------------------------
A-6.................. September 25, 2025
- ----------------------------------------------
A-7.................. August 25, 2027
- ----------------------------------------------
A-8.................. August 25, 2027
- ----------------------------------------------
A-9.................. August 25, 2027
- ----------------------------------------------
A-10................. September 25, 2025
- ----------------------------------------------
A-11................. August 25, 2027
- ----------------------------------------------
A-12................. December 25, 2027
- ----------------------------------------------
A-13................. June 25, 2028
- ----------------------------------------------
A-14................. June 25, 2028
- ----------------------------------------------
A-15................. June 25, 2028
- ----------------------------------------------
A-16................. June 25, 2028
- ----------------------------------------------
A-PO................. June 25, 2028
- ----------------------------------------------
B-1.................. June 25, 2028
- ----------------------------------------------
B-2.................. June 25, 2028
- ----------------------------------------------
B-3.................. June 25, 2028
- ----------------------------------------------
R-I.................. September 25, 1998
- ----------------------------------------------
R-II................. September 25, 1998
- ----------------------------------------------
- ----------------------------------------------
</TABLE>
(footnotes on next page)
The Offered Certificates offered hereby will be purchased by NationsBanc
Montgomery Securities LLC ( the "Underwriter") from the Sponsor and will be
offered by the Underwriter 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 99.41% 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 the
Underwriter, an affiliate of the Sponsor and the Master Servicer, in connection
with offers and sales related to market-making transactions in the Offered
Certificates. The Underwriter 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 Underwriter, subject to prior
sale, when, as and if delivered to and accepted by the Underwriter and subject
to its right to reject orders in whole or in part. It is expected that delivery
of the Class A-PO, Class B-1, Class B-2, Class B-3, Class R-I and Class R-II
Certificates will be made in definitive form at the offices of the Underwriter
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 August 25, 1998 (the "Closing
Date").
NATIONSBANC MONTGOMERY SECURITIES LLC
August 14, 1998
<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 Certificates -- Last Scheduled Distribution Date"
herein.
(4) The Class A-5 Certificates will bear interest at 6.05625% per annum during
the first Interest Accrual Period. During each Interest Accrual Period
thereafter, the Class A-5 Certificates will bear interest, subject to a
maximum rate of 8.50% per annum and a minimum rate of 0.40% per annum, at a
rate per annum equal to 0.40% in excess of the London Interbank Offered Rate
for one-month U.S. dollar deposits ("LIBOR"), as more fully described under
"Description of Certificates -- LIBOR" herein.
(5) The Class A-6 Certificates have no Class Certificate Balance and will have a
notional principal amount (the "Class A-6 Notional Amount") equal to the
Class Certificate Balance of the Class A-5 Certificates. The Class A-6
Certificates will not be entitled to distributions of principal.
(6) The Class A-6 Certificates will bear interest at 2.44375% per annum during
the first Interest Accrual Period. During each Interest Accrual Period
thereafter, the Class A-6 Certificates will bear interest on the Class A-6
Notional Amount, subject to a maximum rate of 8.10% per annum and a minimum
rate of 0.00% per annum, at a rate per annum equal to 8.10% minus LIBOR.
(7) The Class A-PO Certificates will not be entitled to receive distributions of
interest.
------------------
On the 25th day of each month (or, if such day is not a business day, the
next business day), commencing in September 1998 (each, a "Distribution Date"),
from and to the extent of funds available therefor in the Certificate Account
referred to herein, a distribution will be made to the holders of the Offered
Certificates (each, a "Certificateholder" or "Holder") in the amounts and in the
priorities set forth herein. See "Description of Certificates -- Distributions"
herein.
All of the Mortgage Loans were purchased or originated by NationsBanc
Mortgage Corporation and will be sold by NationsBanc Mortgage Corporation (in
such capacity, the "Seller") to the Sponsor for deposit to the Trust Fund on the
Closing Date.
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 A-9, Class
A-10, Class A-11, Class A-12, Class A-13, Class A-14, Class A-15, Class A-16,
Class A-PO, Class R-I and Class R-II Certificates (collectively, the "Senior
Certificates") and to the rights of the Holders of each Class of Subordinate
Certificates with a lower numerical designation to the extent described herein.
See "Credit Support -- Subordination of Subordinate Certificates" herein.
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 A-PO 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 6.75% (THE "DISCOUNT MORTGAGE LOANS"), THE YIELD TO
MATURITY ON THE CLASS A-PO CERTIFICATES WILL BE EXTREMELY SENSITIVE TO THE RATE
AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) ON THE DISCOUNT
MORTGAGE LOANS.
THE YIELD TO MATURITY ON THE CLASS A-5 CERTIFICATES WILL BE SENSITIVE TO
CHANGES IN THE RATE OF LIBOR. THE YIELD TO MATURITY ON THE CLASS A-6
CERTIFICATES WILL BE EXTREMELY SENSITIVE TO CHANGES IN THE RATE OF
S-2
<PAGE> 3
LIBOR AND TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS.
INVESTORS IN THE CLASS A-6 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 A-6 CERTIFICATES TO FULLY
RECOVER THEIR INITIAL INVESTMENT.
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
in the Class R-I or Class R-II Certificates are cautioned that their REMIC
taxable income and the tax liability thereon will exceed cash distributions in
certain periods, in which event such investors 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 August 14, 1998 (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-14
Prepayment and Yield
Considerations................... S-14
Subordination....................... S-14
Limited Obligations................. S-15
Limited Liquidity................... S-15
Geographic Concentration............ S-16
Book-Entry System................... S-16
Tax Consequences of Residual
Certificates..................... S-16
Risk of Year 2000................... S-16
The Mortgage Pool..................... S-17
General............................. S-17
Mortgage Loan Data.................. S-18
Underwriting Standards.............. S-22
NationsBanc Mortgage Corporation...... S-23
NationsBank Corporation Merger........ S-23
Servicing of Mortgage Loans........... S-24
General............................. S-24
Foreclosure and Delinquency
Experience....................... S-24
The Pooling and Servicing Agreement... S-25
General............................. S-25
Assignment of Mortgage Loans........ S-25
Payments on Mortgage Loans;
Accounts......................... S-26
Servicing Compensation and Payment
of Expenses...................... S-26
Compensating Interest............... S-27
Advances............................ S-27
Termination; Optional Termination... S-27
The Trustee......................... S-28
Voting Rights....................... S-28
Separate REMIC Structure............ S-28
Description of Certificates........... S-29
General............................. S-29
Denominations and Form.............. S-29
Book-Entry Certificates............. S-29
Distributions....................... S-31
</TABLE>
<TABLE>
<CAPTION>
CAPTION PAGE
- ------- ----
<S> <C>
Available Funds..................... S-31
Priority of Distributions........... S-32
Interest............................ S-32
LIBOR............................... S-33
Principal........................... S-34
Allocation of Losses................ S-39
Last Scheduled Distribution Date.... S-40
Restrictions on Transfer of the
Class R Certificates............. S-41
Restrictions on Transfer of the
Class B Certificates............. S-42
Prepayment and Yield Considerations... S-42
General............................. S-42
Prepayment Considerations and
Risks............................ S-43
Assumptions Relating to Tables...... S-44
Weighted Average Lives of the
Offered Certificates............. S-44
Yield on the Class A-6
Certificates..................... S-56
Yield on the Class A-PO
Certificates..................... S-57
Yield on the Residual
Certificates..................... S-57
Yield on the Subordinate
Certificates..................... S-58
Yield Considerations with Respect to
the Class B-2 and Class B-3
Certificates..................... S-58
Credit Support........................ S-60
Subordination of Subordinate
Certificates..................... S-60
Use of Proceeds....................... S-62
Certain Federal Income Tax
Consequences........................ S-62
Regular Certificates................ S-62
Residual Certificates............... S-63
Backup Withholding and Reporting
Requirements..................... S-63
State Taxes........................... S-63
ERISA Considerations.................. S-64
Method of Distribution................ S-65
Legal Matters......................... S-65
Certificate Ratings................... S-66
Index to Defined Terms................ S-68
</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 1998-1
(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 A-9,
Class A-10, Class A-11, Class A-12, Class A-13,
Class A-14, Class A-15, Class A-16, Class A-PO,
Class B-1, Class B-2, Class B-3, Class R-I and
Class R-II Certificates (collectively, the
"Offered Certificates"). Only the Offered
Certificates are offered hereby. The aggregate
initial Class Certificate Balances of the Offered
Certificates will be subject to a permitted
variance in the aggregate of plus or minus 5%.
Variances in the Class Certificate Balance of the
Class A-5 Certificates will result in variances
in the Class A-6 Notional Amount.
The "Class A-6 Notional Amount" for any
Distribution Date will be equal to the Class
Certificate Balance of the Class A-5 Certificates
with respect to such Distribution Date. The
initial Class A-6 Notional Amount will be equal
to approximately $5,357,143.
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............................... $2,005,105.00 6.75%
B-5............................... $1,145,774.00 6.75%
B-6............................... $1,432,381.60 6.75%
</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, Class A-8, Class A-9,
Class A-10, Class A-11, Class A-12, Class A-13,
Class A-14, Class A-15, Class A-16 and Class A-PO
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 and Class R Certificates.
Subordinate
Certificates........... Class B Certificates.
Regular Certificates..... All Classes of Certificates other than the Residual
Certificates.
Residual Certificates.... Class R-I and Class R-II Certificates.
Book-Entry
Certificates........... All Classes of Certificates other than the Physical
Certificates.
Physical Certificates.... Class A-PO, Class B and Class R Certificates.
S-5
<PAGE> 6
Sponsor.................... NationsBanc Montgomery Funding Corp., 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.................... Norwest Bank Minnesota, National Association, a
national banking association (the "Trustee").
Cut-off Date............... August 1, 1998 (the "Cut-off Date").
Closing Date............... On or about August 25, 1998 (the "Closing Date").
Distribution Date.......... The 25th day of each month (or, if such day is not
a business day, the next business day),
commencing in September 1998 (each, a
"Distribution Date").
Record Date................ The "Record Date" for each Distribution Date will
be the last business day of the preceding month.
Mortgage Pool.............. The Mortgage Pool will consist of fixed-rate,
conventional, fully-amortizing, mortgage loans
(the "Mortgage Loans") secured by first liens on
one- to four-family residential properties (the
"Mortgaged Properties"). The Mortgage Loans will
have an aggregate Stated Principal Balance of
approximately $572,886,956 as of the Cut-off Date
(the "Cut-off Date Pool Principal Balance") and
will have original terms to stated maturity
ranging from 240 to 360 months. 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
August 1, 1998 (the "Pooling Agreement"), among
the Sponsor, the Master Servicer and the Trustee.
See "The Pooling and Servicing Agreement" herein
and in the Prospectus.
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 A-PO
Certificates); (iii) to principal on the Classes
of Senior Certificates then entitled to receive
distributions of principal, in the order, amount
and subject to the priorities set forth herein
under "Description of Certificates -- Principal";
(iv) to any Class A-PO Deferred Amounts with
respect to the Class A-PO 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 Certificates -- Principal."
S-6
<PAGE> 7
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
on the Senior Certificates instead. See
"Description of Certificates -- Allocation of
Losses" herein.
Interest................... On each Distribution Date, each Class of Offered
Certificates (other than the Class A-PO
Certificates), to the extent Available Funds are
available for the distribution of interest on
such Class (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 or
described on the cover page hereof (as to each
Class, the "Pass-Through Rate") on the related
Class Certificate Balance (or, in the case of the
Class A-6 Certificates, the Class A-6 Notional
Amount) 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. The interest entitlement for each
Class of Offered Certificates described in clause
(i) above shall be reduced by the allocable share
of Net Interest Shortfalls for such Class, as
described herein under "Description of
Certificates -- Interest." The Class A-PO
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
Certificates -- Distributions" and "-- Interest"
herein.
With respect to each Distribution Date, the
"Interest Accrual Period" for each Class of
Certificates (other than the Class A-PO, Class
A-5 and Class A-6 Certificates) will be the
calendar month preceding the month in which such
Distribution Date occurs. The Interest Accrual
Period for the Class A-5 and Class A-6
Certificates for each Distribution Date will
commence on the 25th day of the calendar month
preceding the calendar month in which such
Distribution Date occurs and will end on the 24th
day of the calendar month in which such
Distribution Date occurs. Interest will be
calculated on the basis of a 360-day year of
twelve 30-day months.
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
A-6 Certificates) will be made in the order and
subject to the priorities set forth herein under
"Description of Certificates -- Priority of
Distributions" in an aggregate amount equal to
such Class' allocable portion of the Senior
Principal Distribution Amount, the Class A-PO
Principal Distribution Amount or the Subordinate
Principal Distribution Amount, as applicable. The
Class A-6 Certificates do not have a principal
balance and are not entitled to receive
distributions in respect of principal of the
Mortgage Loans. See "Description of
Certificates -- Principal" herein.
Shifting of Interests...... The Senior Certificates (other than the Class A-16,
Class A-PO and Class A-6 Certificates) will
receive 100% of the Non-PO Percentage
S-7
<PAGE> 8
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 generally 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
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
$4,583,260.60.
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, in each case only to the
extent described herein. See "Description of
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 (i) 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 and (ii) 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
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
S-8
<PAGE> 9
actual yield to maturity will be lower than that
assumed at the time of purchase.
Because the Class A-PO 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 6.75% (the "Discount
Mortgage Loans"), the yield to maturity on the
Class A-PO Certificates will be extremely
sensitive to the rate and timing of principal
payments (including prepayments) on the Discount
Mortgage Loans.
The yield to maturity on the Class A-5 Certificates
will be sensitive to changes in the rate of
LIBOR. The yield to maturity on the Class A-6
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 A-6 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 A-6 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 (other than the portion of Excess
Losses allocated to more senior Classes of
Certificates) 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.
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
and "Maturity, Prepayment Considerations and
Weighted Average Life of Certificates" in the
Prospectus.
S-9
<PAGE> 10
<TABLE>
<CAPTION>
PSA
-------------------------------------
CLASS 0% 100% 275% 400% 500%
WEIGHTED AVERAGE LIVES (IN YEARS)*. ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
A-1....................... 17.55 7.64 3.47 2.64 2.28
A-2....................... 16.97 7.03 3.24 2.50 2.16
A-3....................... 17.55 7.64 3.47 2.64 2.28
A-4....................... 17.55 7.64 3.47 2.64 2.28
A-5....................... 17.55 7.64 3.47 2.64 2.28
A-6....................... 17.55 7.64 3.47 2.64 2.28
A-7....................... 18.43 8.80 3.98 2.93 2.49
A-8....................... 19.15 9.74 4.39 3.17 2.67
A-9....................... 20.28 11.22 5.05 3.55 2.95
A-10...................... 26.67 17.15 7.01 4.91 4.09
A-11...................... 28.06 21.44 9.55 6.13 4.88
A-12...................... 29.20 26.06 13.85 7.98 5.95
A-13...................... 29.62 28.35 19.07 11.68 6.77
A-14...................... 29.46 27.46 17.06 10.25 6.45
A-15...................... 29.46 27.46 17.06 10.25 6.45
A-16...................... 21.00 15.63 11.34 9.90 8.87
A-PO...................... 19.74 11.45 6.04 4.49 3.74
B-1....................... 19.96 14.89 10.85 9.49 8.78
B-2....................... 19.96 14.89 10.85 9.49 8.78
B-3....................... 19.96 14.89 10.85 9.49 8.78
R-I....................... 0.08 0.08 0.08 0.08 0.08
R-II...................... 0.08 0.08 0.08 0.08 0.08
</TABLE>
---------------------------------------------
* Determined as described under "Prepayment and
Yield Considerations -- 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.
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 Fee
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
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.
S-10
<PAGE> 11
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 in the case of a prepayment in full or
to the Due Date in the month in which a partial
prepayment is made, 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 the lesser of (i)
one-twelfth of 0.25% of the Pool Principal
Balance and (ii) 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
Compensating Interest 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
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 A-6 and Class A-PO 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
S-11
<PAGE> 12
Market Enhancement Act of 1984, as amended
("SMMEA"), so long as they are rated in one of
the two highest rating categories by at least one
nationally recognized statistical rating
organization. The Class B-2 and Class B-3
Certificates will not constitute "mortgage
related securities" under SMMEA. Prospective
purchasers whose investment activities are
subject to legal investment laws and regulations,
regulatory capital requirements or review by
regulatory authorities may be subject to
restrictions on investment in the Offered
Certificates and should consult their own legal,
tax and accounting advisers in determining the
suitability of and consequences to them of the
purchase, ownership and disposition of Offered
Certificates. See "Legal Investment
Considerations" 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"), including an individual retirement
account (an "IRA"), 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 or IRA. 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 Standard & Poor's, a division of
The McGraw-Hill Companies, Inc. ("S&P") and Fitch
IBCA, Inc. ("Fitch" and, together with S&P, the
"Rating Agencies"):
<TABLE>
<CAPTION>
CLASS S&P 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.................................... AAAr AAA
A-7.................................... AAA AAA
A-8.................................... AAA AAA
A-9.................................... AAA AAA
A-10................................... AAA AAA
A-11................................... AAA AAA
A-12................................... AAA AAA
A-13................................... AAA AAA
A-14................................... AAA AAA
A-15................................... AAA AAA
A-16................................... AAA AAA
A-PO................................... AAAr AAA
R-I.................................... AAA AAA
R-II................................... AAA AAA
</TABLE>
S-12
<PAGE> 13
<TABLE>
<CAPTION>
CLASS S&P FITCH
----- ---- -----
<S> <C> <C>
B-1.................................... * AA
B-2.................................... * A
B-3.................................... * BBB
</TABLE>
---------------------------------------------
* The Sponsor has requested ratings of the Class
B-1, Class B-2 and Class B-3 Certificates only
from Fitch.
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.
The "r" symbol is appended to the rating by S&P
of the Class A-6 and Class A-PO Certificates
because they are interest-only or principal-only
mortgage-backed securities that S&P believes may
experience high volatility or high variability in
expected returns due to non-credit risks created
by the terms of such Certificates. See
"Certificate Ratings" herein.
S-13
<PAGE> 14
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. A Mortgagor may
prepay its 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 A-PO 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 A-PO CERTIFICATES WILL BE EXTREMELY SENSITIVE
TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS ON THE DISCOUNT MORTGAGE LOANS. SEE
"PREPAYMENT AND YIELD CONSIDERATIONS -- YIELD ON THE CLASS A-PO CERTIFICATES"
HEREIN.
THE YIELD TO MATURITY ON THE CLASS A-5 CERTIFICATES WILL BE SENSITIVE TO
CHANGES IN THE RATE OF LIBOR. THE YIELD TO MATURITY ON THE CLASS A-6
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 A-6
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 A-6 CERTIFICATES TO FULLY RECOVER THEIR INITIAL
INVESTMENT. SEE "PREPAYMENT AND YIELD CONSIDERATIONS -- YIELD ON THE CLASS A-6
CERTIFICATES" HEREIN.
See "Prepayment and Yield Considerations" herein and "Maturity, Prepayment
Considerations and Weighted Average Life of Certificates" in the Prospectus.
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 each
Class of Subordinate Certificates (other than the Class B-1 Certificates) to
receive such distributions
S-14
<PAGE> 15
will be further subordinated to such rights of Holders of the Class or Classes
of Subordinate Certificates with lower numerical Class designations, in each
case 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 Class
Certificate Balance of the Certificates exceeds the Pool Principal Balance, 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 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 are 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 a Class of Subordinate Certificates
to the extent of any losses allocated thereto without the receipt of cash
attributable to such reduction. See "Description of 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 the Class A-6 and Class A-PO Certificates), Net
Interest Shortfalls, other cash shortfalls in Available Funds and distributions
of funds to Holders of the Class A-PO Certificates otherwise available for
distribution on the Subordinate Certificates to the extent of reimbursement for
Class A-PO Deferred Amounts. See "Description of Certificates -- Allocation of
Losses" herein.
If on any Distribution Date the Credit Support Percentage for any Class of
Subordinate Certificates is less than its Original Credit Support Percentage,
all partial principal prepayments, principal prepayments in full and the
principal portion of any Liquidation Proceeds 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. This disproportionate allocation will accelerate
the amortization of such Classes relative to that of the Classes of Subordinate
Certificates otherwise entitled to such principal prepayments and will reduce
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, if 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.
LIMITED LIQUIDITY
The Underwriter intends to make a secondary market in the Offered
Certificates being purchased by it, but the Underwriter has no obligation to do
so. There is currently no secondary market in the Offered
S-15
<PAGE> 16
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
From time to time, certain geographic regions of the United States will
experience weaker economic conditions and housing markets and, consequently,
will experience higher rates of delinquency and loss on mortgage loans
generally. Any concentration of Mortgaged Properties in such a region may
present risk considerations in addition to those generally present for
mortgage-backed securities without such a concentration. In particular,
approximately 28.77%, 14.59%, 9.00% and 6.06% of the Mortgage Loans (by Cut-off
Date Pool Principal Balance) are secured by Mortgaged Properties located in the
States of California, Texas, Colorado and Virginia, respectively. In addition,
California and several other regions have experienced natural disasters,
including earthquakes, fires, floods and hurricanes, which may adversely affect
property values. Any deterioration in housing prices in the states in which
there is a significant concentration of Mortgaged Properties, as a result of
adverse economic conditions, natural disaster or otherwise, as well as the other
states in which the Mortgaged Properties are located, and any deterioration of
economic conditions in such states which adversely affects the ability of
borrowers to make payments on the Mortgage Loans, may increase the likelihood of
losses on the Mortgage Loans. Such losses, if they occur, may have an adverse
effect on the yield to maturity of the Offered Certificates. See "The Mortgage
Pool" herein for further information regarding the geographic concentration of
the Mortgage Loans.
BOOK-ENTRY SYSTEM
Since transactions in the Book-Entry Certificates generally can be effected
only through DTC and DTC Participants, 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, as nominee for DTC, and not directly to Beneficial Owners. 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 Certificates -- Book-Entry
Certificates" herein.
TAX CONSEQUENCES OF RESIDUAL CERTIFICATES
The Class R-I Certificates will be the sole "residual interest" in the
Subsidiary REMIC and the Class R-II Certificates will be the sole "residual
interest" in the Master REMIC for federal income tax purposes. Accordingly,
Holders of the Residual Certificates must report their pro rata share of the net
income or the net loss of the applicable REMIC whether or not any cash
distributions are made thereon. This allocation of income or loss may result in
a zero or negative after-tax return. In addition, the Residual Certificates will
be subject to restrictions on transfer that may affect their liquidity. The
Residual Certificates may not be acquired by certain benefit plans subject to
ERISA. See "Description of Certificates -- Restrictions on Transfer of the Class
R Certificates," "Prepayment and Yield Considerations -- Yield on the Residual
Certificates," "ERISA Considerations" and "Certain Federal Income Tax
Considerations" herein.
RISK OF YEAR 2000
The transition from the year 1999 to the year 2000 may disrupt the ability
of computerized systems to process information. The Master Servicer and the
Trustee currently are working to modify their computer systems and applications
such that they will be year 2000 compliant. If the Master Servicer or the
Trustee is unable to complete such modifications by the year 2000, the ability
of the Master Servicer or the Trustee to service the Mortgage Loans and make
distributions to the Certificateholders, respectively, may be materially and
adversely affected.
S-16
<PAGE> 17
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. 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, fully-amortizing mortgage loans (the "Mortgage Loans")
secured by first liens on one- to four- family residential properties (each, a
"Mortgaged Property"). As of the Cut-off Date, the Mortgage Pool is expected to
include 1,788 Mortgage Loans with an aggregate Stated Principal Balance of
approximately $572,886,956. The Mortgage Loans will have original terms to
stated maturity ranging from 240 to 360 months. 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 Pool consists 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 the Sponsor on the Closing Date pursuant to a
mortgage loan sale agreement between the Seller and the Sponsor (the "Sale
Agreement"). All rights of the Sponsor in the Sale Agreement, 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 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 $77,139 and of not more than approximately
$840,000 and the average Stated Principal Balance of the Mortgage Loans is
expected to be approximately $320,407. The latest stated maturity date of any of
the Mortgage Loans is expected to be August 1, 2028; 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. None 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 74.6%. Subject to minor
exceptions permitted in the Seller's discretion, 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
S-17
<PAGE> 18
an appraisal obtained by the originator at origination of such Mortgage Loan and
(b) except for Mortgage Loans made for refinancing purposes, 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 the Mortgage Loans.
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 % OF
NUMBER OF STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
OCCUPANCY STATUS LOANS CUT-OFF DATE BALANCE
- ---------------- --------- ---------------- --------------
<S> <C> <C> <C>
Primary Residence...................................... 1,750 $560,321,451.54 97.81%
Second Home............................................ 35 11,667,204.69 2.04
Investor Property...................................... 3 898,299.78 0.16
----- --------------- ------
Total........................................ 1,788 $572,886,956.01 100.00%
===== =============== ======
</TABLE>
- ---------------
(1) Based solely on representations of the Mortgagor at the time of origination
of the related Mortgage Loan.
PROPERTY TYPES
<TABLE>
<CAPTION>
AGGREGATE % OF
NUMBER OF STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
PROPERTY TYPE LOANS CUT-OFF DATE BALANCE
- ------------- --------- ---------------- --------------
<S> <C> <C> <C>
Single Family Detached................................. 1,285 $416,681,488.59 72.73%
PUD.................................................... 480 148,941,381.25 26.00
Condominium............................................ 17 5,532,480.41 0.97
Townhome............................................... 5 1,426,061.38 0.25
Duplex................................................. 1 305,544.38 0.05
----- --------------- ------
Total........................................ 1,788 $572,886,956.01 100.00%
===== =============== ======
</TABLE>
MORTGAGE LOAN PURPOSE
<TABLE>
<CAPTION>
AGGREGATE % OF
NUMBER OF STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
LOAN PURPOSE LOANS CUT-OFF DATE BALANCE
- ------------ --------- ---------------- --------------
<S> <C> <C> <C>
Purchase............................................... 1,027 $322,033,761.46 56.21%
Refinance - Rate/Term.................................. 590 193,068,503.56 33.70
Refinance - Cashout.................................... 171 57,784,690.99 10.09
----- --------------- ------
Total........................................ 1,788 $572,886,956.01 100.00%
===== =============== ======
</TABLE>
S-18
<PAGE> 19
GEOGRAPHICAL DISTRIBUTION OF THE MORTGAGED PROPERTIES(1)
<TABLE>
<CAPTION>
AGGREGATE % OF
NUMBER OF STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
GEOGRAPHIC AREA LOANS CUT-OFF DATE BALANCE
- --------------- --------- ---------------- --------------
<S> <C> <C> <C>
Alabama................................................ 21 $ 6,910,182.85 1.21%
Arizona................................................ 28 8,627,982.17 1.51
Arkansas............................................... 3 940,255.94 0.16
California............................................. 465 164,822,193.58 28.77
Colorado............................................... 173 51,563,464.00 9.00
Connecticut............................................ 10 3,396,133.11 0.59
Delaware............................................... 3 947,264.40 0.17
District of Columbia................................... 10 3,286,631.11 0.57
Florida................................................ 20 6,258,312.72 1.09
Georgia................................................ 85 26,068,577.02 4.55
Hawaii................................................. 1 243,172.95 0.04
Idaho.................................................. 3 992,667.66 0.17
Illinois............................................... 70 21,179,729.44 3.70
Indiana................................................ 6 1,760,006.95 0.31
Iowa................................................... 3 814,836.86 0.14
Kansas................................................. 8 2,266,326.38 0.40
Kentucky............................................... 23 6,857,533.02 1.20
Louisiana.............................................. 2 613,886.72 0.11
Maryland............................................... 59 18,407,090.70 3.21
Massachusetts.......................................... 9 2,725,326.01 0.48
Michigan............................................... 3 967,374.48 0.17
Minnesota.............................................. 20 5,902,845.72 1.03
Mississippi............................................ 2 523,975.01 0.09
Missouri............................................... 17 5,294,689.77 0.92
Nebraska............................................... 5 1,849,809.40 0.32
Nevada................................................. 9 3,517,719.34 0.61
New Jersey............................................. 13 3,675,415.10 0.64
New Mexico............................................. 12 3,758,483.00 0.66
New York............................................... 3 1,006,317.00 0.18
North Carolina......................................... 82 26,176,651.36 4.57
Ohio................................................... 32 9,531,570.59 1.66
Oklahoma............................................... 11 3,196,743.45 0.56
Oregon................................................. 26 8,133,081.40 1.42
Pennsylvania........................................... 39 12,807,401.30 2.24
South Carolina......................................... 22 6,894.897.91 1.20
Tennessee.............................................. 46 13,492,089,64 2.36
Texas.................................................. 270 83,556,327.95 14.59
Utah................................................... 12 3,929,464.57 0.69
Virginia............................................... 115 34,738,819.97 6.06
Washington............................................. 45 14,713,599.70 2.57
Wisconsin.............................................. 2 538,105.76 0.09
----- --------------- ------
Total........................................ 1,788 $572,886,956.01 100.00%
===== =============== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, no more than approximately 1.0% of the Mortgage
Loans are expected to be secured by Mortgaged Properties located in any one
five-digit postal zip code.
S-19
<PAGE> 20
CURRENT MORTGAGE LOAN PRINCIPAL BALANCES(1)
<TABLE>
<CAPTION>
AGGREGATE % OF
NUMBER OF STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
CURRENT MORTGAGE LOAN PRINCIPAL BALANCES LOANS CUT-OFF DATE BALANCE
- ---------------------------------------- --------- ---------------- --------------
<S> <C> <C> <C>
Less than or equal to $100,000.00...................... 4 $ 347,850.06 0.06%
$100,000.01 - $150,000.00.............................. 8 980,569.95 0.17
$150,000.01 - $200,000.00.............................. 6 1,037,564.96 0.18
$200,000.01 - $250,000.00.............................. 261 63,270,663.40 11.04
$250,000.01 - $300,000.00.............................. 655 180,718,988.25 31.55
$300,000.01 - $350,000.00.............................. 426 138,404,629.09 24.16
$350,000.01 - $400,000.00.............................. 195 73,535,837.05 12.84
$400,000.01 - $450,000.00.............................. 91 38,854,366.87 6.78
$450,000.01 - $500,000.00.............................. 63 30,136,587.68 5.26
$500,000.01 - $550,000.00.............................. 36 18,996,581.52 3.32
$550,000.01 - $600,000.00.............................. 20 11,561,967.25 2.02
$600,000.01 - $650,000.00.............................. 20 12,802,418.50 2.23
$650,000.01 - $700,000.00.............................. 2 1,398,931.43 0.24
$800,000.01 - $850,000.00.............................. 1 840,000.00 0.15
----- --------------- ------
Total........................................ 1,788 $572,886,956.01 100.00%
===== =============== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, the average outstanding principal balance of the
Mortgage Loans is expected to be approximately $320,407.
ORIGINAL LOAN-TO-VALUE RATIOS(1)
<TABLE>
<CAPTION>
AGGREGATE % OF
NUMBER OF STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
ORIGINAL LOAN-TO-VALUE RATIOS LOANS CUT-OFF DATE BALANCE
- ----------------------------- --------- ---------------- --------------
<S> <C> <C> <C>
0.01% - 50.00%........................................ 73 $ 25,751,675.47 4.50%
50.01% - 55.00%........................................ 46 16,314,252.26 2.85
55.01% - 60.00%........................................ 64 21,801,059.05 3.81
60.01% - 65.00%........................................ 83 29,069,347.19 5.07
65.01% - 70.00%........................................ 151 52,103,347.91 9.09
70.01% - 75.00%........................................ 255 82,291,133.25 14.36
75.01% - 80.00%........................................ 897 283,447,928.18 49.48
80.01% - 85.00%........................................ 27 7,786,864.50 1.36
85.01% - 90.00%........................................ 128 37,335,289.80 6.52
90.01% - 95.00%........................................ 64 16,986,058.40 2.96
----- --------------- ------
Total........................................ 1,788 $572,886,956.01 100.00%
===== =============== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the Mortgage Loans is expected to be approximately 74.6%.
S-20
<PAGE> 21
MORTGAGE RATES(1)
<TABLE>
<CAPTION>
AGGREGATE % OF
NUMBER OF STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
MORTGAGE RATES LOANS CUT-OFF DATE BALANCE
- -------------- --------- ---------------- --------------
<S> <C> <C> <C>
6.251% - 6.500%........................................ 9 $ 2,745,965.94 0.48%
6.501% - 6.750%........................................ 55 17,898,581.17 3.12
6.751% - 7.000%........................................ 250 79,111,332.06 13.81
7.001% - 7.250%........................................ 751 244,258,443.89 42.64
7.251% - 7.500%........................................ 529 164,305,791.18 28.68
7.501% - 7.750%........................................ 187 62,163,220.97 10.85
7.751% - 8.000%........................................ 6 1,805,070.80 0.32
8.001% - 8.250%........................................ 1 598,550.00 0.10
----- --------------- ------
Total........................................ 1,788 $572,886,956.01 100.00%
===== =============== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage
Loans is expected to be approximately 7.269% per annum.
REMAINING TERMS(1)
<TABLE>
<CAPTION>
AGGREGATE % OF
NUMBER OF STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
REMAINING TERM LOANS CUT-OFF DATE BALANCE
- -------------- --------- ---------------- --------------
<S> <C> <C> <C>
229 - 240 months....................................... 3 $ 1,227,524.06 0.21%
289 - 300 months....................................... 8 2,502,929.97 0.44
349 - 360 months....................................... 1,777 569,156,501.98 99.35
----- --------------- ------
Total........................................ 1,788 $572,886,956.01 100.00%
===== =============== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average stated remaining term of the
Mortgage Loans is expected to be approximately 358 months.
CREDIT SCORING OF MORTGAGORS(1)
<TABLE>
<CAPTION>
AGGREGATE % OF
NUMBER OF STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
CREDIT SCORES LOANS CUT-OFF DATE BALANCE
- ------------- --------- ---------------- --------------
<S> <C> <C> <C>
551 - 600.............................................. 6 $ 2,155,329.16 0.38%
601 - 650.............................................. 70 21,761,807.11 3.80
651 - 700.............................................. 294 93,944,581.43 16.40
701 - 750.............................................. 655 209,280,735.32 36.53
751 - 800.............................................. 734 235,888,602.04 41.18
801 - 850.............................................. 15 5,040,010.46 0.88
Unknown Scores......................................... 14 4,815,890.49 0.84
----- --------------- ------
Total........................................ 1,788 $572,886,956.01 100.00%
===== =============== ======
</TABLE>
- ---------------
(1) The scores shown are FICO Scores from Experian ("FICO Scores"). FICO Scores
range from approximately 250 to approximately 900 with a higher score
indicating an individual with a more favorable credit history than an
individual with a lower score. If there are co-borrowers on a Mortgage Loan,
the FICO Score set forth above is the FICO Score for the primary borrower.
In its underwriting process, the Seller obtains FICO Scores as well as
Empirica Scores from TransUnion and Beacon Scores from Equifax with respect
to a prospective borrower. The Seller uses the middle score of these three
S-21
<PAGE> 22
scores as the basis for its underwriting (or, if there are co-borrowers, the
lowest of the middle scores obtained with respect to both borrowers).
Accordingly, some of the scores set forth above may be higher than the
credit score used by the Seller to underwrite a Mortgage Loan. Credit scores
such as the FICO Scores are statistical credit scores designed to assess a
borrower's creditworthiness and their likelihood to default on a consumer
obligation over a two-year period. Such scores are derived from a scoring
model developed by the Fair, Isaac Company. FICO Scores were not developed
to predict the likelihood of default on mortgage loans and, accordingly, may
not be indicative of the ability of a Mortgagor to repay its Mortgage Loan.
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 standard procedure which is intended to comply with
applicable federal and state laws and regulations. With respect to the Seller's
underwriting guidelines, such underwriting standards generally include a set of
specific criteria pursuant to which the underwriting evaluation is made.
However, the application of such underwriting guidelines does not imply that
each specific criteria was satisfied individually. The Seller will have
considered a Mortgage Loan to be originated in accordance with a given set of
underwriting guidelines if, based on an overall qualitative evaluation, the loan
is in substantial compliance with such underwriting guidelines. A Mortgage Loan
may be considered to comply with a set of underwriting standards, even if one or
more specific criteria included in such underwriting standards were not
satisfied, if other factors compensated for the criteria that were not satisfied
or the Mortgage Loan is considered to be in substantial compliance with the
underwriting standards.
Initially, a prospective mortgagor is required to fill out a detailed
industry standard application designed to provide pertinent credit information.
As part of the description of the prospective mortgagor's financial condition,
the applicant is required to provide current information describing assets and
liabilities and a statement of income and expenses, as well as an authorization
to apply for a credit report which summarizes the applicant's credit history
with merchants and lenders and any record of bankruptcy. In addition, an
employment verification is obtained from the applicant's employer wherein the
employer reports the length of employment with that organization, the current
salary and an indication as to whether it is expected that the applicant will
continue such employment in the future. If a prospective mortgagor is
self-employed, the applicant is required to submit copies of signed tax returns.
The applicant also authorizes deposit verification at all financial institutions
where the applicant has accounts. In lieu of employment and deposit
verifications, the Seller will accept copies of federal withholding (W-2) forms,
current payroll earnings statements and account statements. The Seller may, as
part of its overall evaluation of the applicant's creditworthiness, use a credit
scoring system or mortgage scoring system to evaluate in a statistical manner
the expected performance of a Mortgage Loan based on the pertinent credit
information concerning the applicant provided through national credit bureaus,
certain other information provided by the applicant and an assessment of
specific mortgage loan characteristics, including loan-to-value ratio and type
of loan product.
The Seller has employed alternative underwriting guidelines (the "Limited
or Reduced Documentation Guidelines") for certain qualifying mortgage loans
underwritten by the Seller through an underwriting program designed to
streamline the loan review process. Certain reduced loan documentation programs
may not require income, employment or asset verifications. Generally, in order
to be eligible for a reduced loan documentation program, the mortgaged property
must have a loan-to-value ratio which supports the amount of the mortgage loan
and the mortgagor must have a good credit history. Eligibility for such program
may be determined by use of a credit scoring model. None of the Mortgage Loans
have been originated under the Limited or Reduced Documentation Guidelines.
Once all applicable 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
S-22
<PAGE> 23
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.
Certain states where the Mortgaged Properties securing the Mortgage Loans
are 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. See "Certain Legal Aspects of the
Mortgage Loans -- Anti-Deficiency Legislation and Other Limitations on Sellers"
in the Prospectus. The Seller's underwriting guidelines in all states (including
anti-deficiency states) require 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, although there can be no assurance that such value will support the
outstanding loan balance in the future.
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, and is a wholly-owned subsidiary of NationsBank,
N.A., which is an indirect, wholly-owned subsidiary of NationsBank Corporation.
NationsBanc Mortgage Corporation is primarily engaged in the business of (i)
originating and purchasing residential mortgage loans in its own name and (ii)
servicing residential mortgage loans for its own account or for the account of
others. NationsBanc Mortgage Corporation's principal executive offices are
located at 201 North Tryon Street, 14th 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 is (502) 566-5100.
NationsBanc Mortgage Corporation is approved by Government National Mortgage
Association, FNMA and FHLMC as a seller-servicer.
NATIONSBANK CORPORATION MERGER
NationsBank Corporation is the bank holding company that is the ultimate
corporate parent of the Sponsor, the Seller, the Master Servicer and the
Underwriter. On April 13, 1998, BankAmerica Corporation and NationsBank
Corporation announced a definitive agreement to merge in a stock-for-stock
transaction. The merger is subject to regulatory and shareholder approval.
S-23
<PAGE> 24
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 non-conforming and FHLMC- and
FNMA-conforming, first deed of trust or mortgage loans serviced by the Master
Servicer (excluding certain recent bulk acquisitions of servicing rights) at its
Louisville servicing center and which were originated in a manner consistent
with the underwriting criteria of the Seller described herein under "The
Mortgage Pool -- Underwriting Standards." The Master Servicer's portfolio of
non-conforming and FHLMC- and FNMA-conforming, first deed of trust and mortgage
loans described below contains fixed- and adjustable-rate 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, substantially all
of which are non-conforming 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-24
<PAGE> 25
DELINQUENCY AND FORECLOSURE EXPERIENCE
ON MORTGAGE LOANS
<TABLE>
<CAPTION>
AT JUNE 30, 1998 AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
-------------------------- -------------------------- --------------------------
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................. 372,313 $40,627,219,532 339,638 $36,056,082,222 304,921 $32,561,189,618
Delinquencies*
One installment delinquent..... 6,774 $ 536,387,715 7,241 $ 574,492,392 6,261 $ 477,963,358
Percent Delinquent............. 1.8% 1.3% 2.1% 1.6% 2.1% 1.5%
Two installments delinquent.... 1,356 $ 104,383,479 1,530 $ 107,777,563 1,249 $ 90,683,948
Percent Delinquent............. 0.4% 0.3% 0.5% 0.3% 0.4% 0.3%
Three or more installments
delinquent................... 1,541 $ 111,957,596 1,811 $ 132,979,230 1,465 $ 105,654,522
Percent Delinquent............. 0.4% 0.3% 0.5% 0.4% 0.5% 0.3%
In Foreclosure.................. 1,462 $ 108,164,906 1,435 $ 110,815,100 1,358 $ 112,445,453
Percent in Foreclosure......... 0.4% 0.3% 0.4% 0.3% 0.4% 0.3%
Delinquent and in Foreclosure... 11,133 $ 860,873,695 12,017 $ 926,064,285 10,333 $ 786,752,281
Percent Delinquent and in
Foreclosure**................ 3.0% 2.1% 3.5% 2.6% 3.4% 2.4%
<CAPTION>
AT DECEMBER 31, 1995
--------------------------
NUMBER/%
OF OUTSTANDING
MORTGAGE PRINCIPAL
LOANS AMOUNT
-------- ---------------
<S> <C> <C>
Total Portfolio................. 260,568 $27,820,905,542
Delinquencies*
One installment delinquent..... 4,727 $ 371,425,718
Percent Delinquent............. 1.8% 1.3%
Two installments delinquent.... 827 $ 58,517,191
Percent Delinquent............. 0.3% 0.2%
Three or more installments
delinquent................... 875 $ 61,929,401
Percent Delinquent............. 0.3% 0.2%
In Foreclosure.................. 499 $ 38,350,914
Percent in Foreclosure......... 0.2% 0.1%
Delinquent and in Foreclosure... 6,928 $ 530,225,224
Percent Delinquent and in
Foreclosure**................ 2.7% 1.9%
</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 August 1, 1998 (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 (or a copy, if such
assignment has been submitted for recording) 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 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) to determine if
any of the foregoing documents is missing.
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If any portion of the Mortgage File is not delivered to the Trustee or if a
Mortgage Loan breaches any of the representations made by the Seller in the Sale
Agreement in any material respect and the Seller does not cure such omission or
defect within 90 days, 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 generally is permitted only within two years 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 Net Mortgage Rate equal to 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 certain eligible
investments, as described 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 will withdraw from the Certificate Account the amount of
Available Funds and will 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 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 Expense Fees will accrue at the applicable Expense Fee Rate on
the Stated Principal Balance of each Mortgage Loan. The "Expense Fee Rate" with
respect to a Mortgage Loan will be equal to the sum of the Master Servicing Fee
Rate for such Mortgage Loan and the Trustee Fee Rate. The "Trustee Fee Rate"
will be 0.005% per annum. The "Master Servicing Fee Rate" with respect to each
Mortgage Loan will be the per annum rate equal to (i) the related Mortgage Rate
less (ii) the sum of 6.75% and the Trustee Fee Rate; provided, however, that the
Master Servicing Fee Rate will not be less than 0.25% per annum with respect to
any Mortgage Loan. The Master Servicing Fee Rates for the Mortgage Loans are
expected to range from 0.25% to 1.495% per annum and, as of the Cut-off Date,
the weighted average Master Servicing Fee Rate is expected to be approximately
0.532%. 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 below 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.
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The Trustee is also entitled to receive all investment income earned on
amounts on deposit in the Distribution Account. In addition to its compensation,
the Trustee is entitled to be reimbursed from and indemnified by the Trust Fund
for certain expenses incurred by the Trustee in connection with its
responsibilities under the Pooling Agreement.
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 in the case of a prepayment in full or to
the Due Date in the month in which a partial prepayment is made, 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
the lesser of (i) one-twelfth of 0.25% of the Pool Principal Balance and (ii) 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
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 make an 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" will 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 (if it
succeeds to the obligations of the Master Servicer under the Pooling Agreement)
or the successor master 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
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"Description of 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) the final distribution to
Certificateholders of amounts received in respect of the assets of the Trust
Fund. 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.
THE TRUSTEE
Norwest Bank Minnesota, National Association ("Norwest Bank") will be the
Trustee under the Pooling Agreement. Norwest Bank, a direct, wholly owned
subsidiary of Norwest Corporation, is a national banking association originally
chartered in 1872 and is engaged in a wide range of activities typical of a
national bank. Norwest Bank's principal office is located at Norwest Center,
Sixth Street and Marquette Avenue, Minneapolis, Minnesota 55479-0113.
Certificate transfer services are conducted at Norwest Bank's offices in
Minneapolis. Norwest Bank otherwise conducts its trustee and securities
administration services at its offices in Columbia, Maryland. Its address there
is 11000 Broken Land Parkway, Columbia, Maryland 21044-3562. Certificateholders
and other interested parties should direct their inquires to the Minneapolis
office. The telephone number of the Trustee in Minneapolis is (612) 667-9764.
The Sponsor, the Seller and the Master Servicer may maintain other banking
relationships in the ordinary course of business with the Trustee. The Trustee
may appoint one or more co-trustees if necessary to comply with the fiduciary
requirements imposed by any jurisdiction in which a Mortgaged Property is
located.
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. 97% of all Voting Rights
will be allocated among the Holders of the Class A Certificates (other than the
Class A-6 Certificates) 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 A-6 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 A-6 Certificates) by the
aggregate initial Class Certificate Balance (or Class A-6 Notional Amount) 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.
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DESCRIPTION OF CERTIFICATES
GENERAL
The Mortgage Pass-Through Certificates, Series 1998-1 (the "Certificates")
will consist of the following twenty-five 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, Class
A-8, Class A-9, Class A-10, Class A-11, Class A-12, Class A-13, Class A-14,
Class A-15, Class A-16 and Class A-PO (collectively, the "Class A
Certificates"); (ii) Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and
Class B-6 (collectively, the "Subordinate Certificates"); and (iii) Class R-I
and Class R-II (collectively, the "Residual Certificates" and, together with the
Class A 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 and (ii) the amount of Realized Losses
(including Excess Losses) previously allocated to such Class. 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.
The Senior Certificates in the aggregate will evidence an initial
beneficial ownership interest of approximately 96.0% in the Trust Fund and the
Subordinate Certificates will evidence in the aggregate the remaining 4.0%
undivided interest in the Trust Fund. The Class A-6 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 A-6 Notional Amount for any Distribution
Date will be equal to the Class Certificate Balance of the Class A-5
Certificates with respect to such Distribution Date. The Class A-PO 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 Class A-PO, Class B-1, Class B-2,
Class B-3 and Class R Certificates) will be issuable in book-entry form only
(the "Book-Entry Certificates"). The Class A-PO, Class B-1, Class B-2, Class B-3
and Class R Certificates will be issued in definitive, fully-registered form
(the "Definitive Certificates"). The Class A Certificates (other than the Class
A-5, Class A-6 and Class A-PO Certificates) will be issued in minimum dollar
denominations of $1,000 and integral multiples of $1 in excess thereof. The
Class A-5, Class A-6, Class A-PO, 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
Each Class of the Book-Entry Certificates initially will be represented by
one or more physical certificates registered in the name of Cede & Co. ("Cede"),
as nominee of The Depository Trust Company ("DTC"), which will be the "Holder"
of "Certificateholder" of such Certificates, as such terms are used herein. No
person acquiring an interest in a Book-Entry Certificate (a "Beneficial Owner")
will be entitled to receive a Definitive Certificate representing such person's
interest in the Book-Entry Certificate, except as set forth below. Unless and
until Definitive Certificates are issued under the limited circumstances
described herein, all references to actions taken by Certificateholders or
Holders shall, in the case of the Book-Entry Certificates, refer to actions
taken by DTC upon instructions from its DTC Participants, and all references
herein to distributions, notices, reports and statements to Certificateholders
or Holders shall, in the case of the Book-
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Entry Certificates, refer to distributions, notices, reports and statements to
DTC or Cede, as the registered holder of the Book-Entry Certificates, as the
case may be, for distribution to Beneficial Owners in accordance with DTC
procedures.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to Section 17A of the Securities Exchange
Act of 1934, as amended. DTC was created to hold securities for its
participating organizations ("DTC Participants") and to facilitate the clearance
and settlement of securities transactions among DTC Participants through
electronic book-entries, thereby eliminating the need for physical movement of
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies and clearing corporations. Indirect access to the DTC system
also is available to banks, brokers, dealers, trust companies and other
institutions that clear through or maintain a custodial relationship with a DTC
Participant, either directly or indirectly ("Indirect DTC Participants").
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Book-Entry Certificates among DTC Participants on whose behalf it acts with
respect to the Book-Entry Certificates and to receive and transmit distributions
of principal of and interest on the Book-Entry Certificates. DTC Participants
and Indirect DTC Participants with which Beneficial Owners have accounts with
respect to the Book-Entry Certificates similarly are required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
Beneficial Owners.
Beneficial Owners that are not DTC Participants or Indirect DTC
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, Book-Entry Certificates may do so only through DTC
Participants and Indirect DTC Participants. In addition, Beneficial Owners will
receive all distributions of principal and interest from the Trustee through DTC
Participants. DTC will forward such distributions to its DTC Participants, which
thereunder will forward them to Indirect DTC Participants or Beneficial Owners.
Beneficial Owners will not be recognized by the Trustee, the Master Servicer or
any paying agent as Certificateholders, as such term is used in the Pooling
Agreement, and Beneficial Owners will be permitted to exercise the rights of
Certificateholders only indirectly through DTC and its DTC Participants.
Because DTC can only act on behalf of DTC Participants, who in turn act on
behalf of Indirect DTC Participants and certain banks, 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 to Cede, as nominee for DTC.
DTC has advised the Sponsor that it will take any action permitted to be
taken by a Certificateholder under the Pooling Agreement only at the direction
of one or more DTC Participants to whose accounts with DTC the Book-Entry
Certificates are credited. Additionally, DTC has advised the Sponsor that it
will take such actions with respect to specified Voting Rights only at the
direction of and on behalf of DTC Participants whose holdings of Book-Entry
Certificates evidence such specified Voting Rights. DTC may take conflicting
actions with respect to Voting Rights to the extent that DTC Participants whose
holdings of Book-Entry Certificates evidence such Voting Rights authorize
divergent action.
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 DTC, a DTC Participant or an Indirect DTC Participant in whose
name Book-Entry Certificates are registered, the ability of the Beneficial
Owners of such Book-Entry Certificates to obtain timely payment and, if the
limits of applicable insurance coverage by the Securities Investor Protection
Corporation are exceeded or if such coverage is otherwise unavailable, ultimate
payment, of amounts distributable with respect to such Book-Entry Certificates
may be impaired.
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Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Sponsor advises the Trustee in writing that DTC 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 DTC; 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
through DTC, in writing, that the continuation of a book-entry system through
DTC (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 DTC
Participants of Definitive Certificates. Upon surrender by DTC 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.
DISTRIBUTIONS
Distributions on the Certificates will be made by the Trustee on the 25th
day of each month (or, if such day is not a business day, the next business
day), commencing in September 1998 (each, a "Distribution Date"), to the persons
in whose names such Certificates are registered (each, a "Certificateholder" or
"Holder") 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 or any Compensating Interest; (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 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.
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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 A-PO 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 below 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 A-PO Deferred
Amounts with respect to the Class A-PO 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 below 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.
On each Distribution Date, to the extent of funds available therefor, each
Class of Certificates (other than the Class A-PO 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
A-PO 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 A-6 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. The Class A-PO Certificates are "principal only" or PO Certificates
and will not bear interest.
The interest entitlement described in clause (i) 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 shortfall in interest received with
respect to any Mortgage Loan as a result 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
Compensating Interest 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 A-PO
Certificates), on the basis of the related Class Certificate Balance or Class
A-6 Notional Amount, as applicable, immediately prior to such Distribution Date.
Interest will be calculated and payable on the basis of a 360-day year of twelve
30-day months.
S-32
<PAGE> 33
If 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 that 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 A-5, Class A-6 and Class A-PO
Certificates) will be the calendar month preceding the month in which the
Distribution Date occurs. The Interest Accrual Period for the Class A-5 and
Class A-6 Certificates for each Distribution Date will commence on the 25th day
of the calendar month preceding the calendar month in which such Distribution
Date occurs and will end on the 24th day of the calendar month in which such
Distribution Date occurs.
LIBOR
The Class A-5 and Class A-6 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 as
described below. The Trustee will determine LIBOR and the respective
Pass-Through Rates for the Class A-5 and Class A-6 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").
On each LIBOR Determination Date, the Trustee will determine LIBOR for the
succeeding Interest Accrual Period on the basis of the British Bankers'
Association ("BBA") "Interest Settlement Rate" for one-month deposits in U.S.
dollars as found on Telerate page 3750 as of 11:00 A.M. London time on such
LIBOR Determination Date. Such Interest Settlement Rates currently are based on
rates quoted by 16 BBA designated banks as being in the view of such banks, the
offered rate at which deposits are being quoted to prime banks in the London
interbank market. Such Interest Settlement Rates are calculated by eliminating
the four highest rates and the four lowest rates, averaging the eight remaining
rates, carrying the result (expressed as a percentage) out to six decimal
places, and rounding to five decimal places. As used herein "Telerate page 3750"
means the display designated as page 3750 on the Dow Jones Telerate Service.
If on any LIBOR Determination Date the Trustee is unable to determine LIBOR
on the basis of the method set forth in the preceding paragraph, LIBOR for the
next Interest Accrual Period will be the higher of (i) LIBOR as determined on
the previous LIBOR Determination Date or (ii) the Reserve Interest Rate. The
"Reserve Interest Rate" will be the rate per annum which the Trustee determines
to be either (a) the arithmetic mean (rounding such arithmetic mean upwards if
necessary to the nearest whole multiple of 1/16%) of the one-month Eurodollar
lending rate that New York City banks selected by the Trustee are quoting on the
relevant LIBOR Determination Date, to the principal London offices of at least
two leading banks in the London interbank market or (b) in the event that the
Trustee can determine no such arithmetic mean, the lowest one-month Eurodollar
lending rate that the New York City banks selected by the Trustee are quoting on
such LIBOR Determination Date to leading European Banks.
If on any LIBOR Determination Date the Trustee is required but is unable to
determine the Reserve Interest Rate in the manner provided in the preceding
paragraph, LIBOR for the next Interest Accrual Period will be LIBOR as
determined on the previous LIBOR Determination Date or, in the case of the first
LIBOR Determination Date, 5.65625%.
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
A-5 and Class A-6 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 (410) 884-2100.
S-33
<PAGE> 34
Listed below are some historical values of LIBOR since January 1993. 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.
<TABLE>
<CAPTION>
YEAR
---------------------------------------------------------
MONTH 1998 1997 1996 1995 1994 1993
----- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
January.................................. 5.59766% 5.43750% 5.43750% 6.09375% 3.12500% 3.18750%
February................................. 5.68750 5.43750 5.31250 6.12500 3.56250 3.18750
March.................................... 5.68750 5.68750 5.43750 6.12500 3.68750 3.18750
April.................................... 5.65625 5.68750 5.43750 6.06250 4.00000 3.12500
May...................................... 5.65625 5.68750 5.43750 6.06250 4.37500 3.25000
June..................................... 5.66016 5.68750 5.49609 6.12500 4.56250 3.18750
July..................................... 5.65625 5.62500 5.46484 5.87500 4.50000 3.18750
August................................... -- 5.65625 5.43750 5.87500 4.87500 3.18750
September................................ -- 5.65625 5.43359 5.87500 5.06250 3.18750
October.................................. -- 5.64844 5.37500 5.83203 5.06250 3.18750
November................................. -- 5.96875 5.56250 5.97656 6.06250 3.56250
December................................. -- 5.71875 5.50000 5.68750 6.00000 3.25000
</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 A-6 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 A-6 and Class A-PO Certificates) and the Subordinate Certificates and
(ii) the Class A-PO 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 6.75% (each such Mortgage Loan, a "Discount Mortgage
Loan") will be equal to the Net Mortgage Rate thereof divided by 6.75%. The
Non-PO Percentage with respect to any Mortgage Loan with a Net Mortgage Rate
greater than or equal to 6.75% (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 100% minus the Non-PO Percentage for such Mortgage Loan.
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 Fee Rate with respect to such Mortgage Loan.
Non-PO Principal Amount. On each Distribution Date, the Non-PO Principal
Amount will be distributed (i) as principal of the Senior Certificates (other
than the Class A-6 and Class A-PO Certificates) in an amount up to the Senior
Principal Distribution Amount and (ii) as principal of the Subordinate
Certificates in an amount up to the Subordinate Principal Distribution Amount.
The "Non-PO 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) any
Substitution Adjustment Amount in connection with a Deleted Mortgage Loan
received with respect to such Distribution Date, (d) any 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
S-34
<PAGE> 35
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.
Senior Principal Distribution Amount. On each Distribution Date, an amount
equal to the lesser of (a) the Senior Principal Distribution Amount for such
Distribution Date and (b) the product of (1) Available Funds remaining after
payment of funds due to the Trustee and distributions of interest on the Senior
Certificates and (2) a fraction, the numerator of which is the Senior Principal
Distribution Amount and the denominator of which is the sum of the PO Principal
Amount and the Senior Principal Distribution Amount, will be distributed as
principal of the following Classes of Senior Certificates in the following order
of priority:
(i) first, to the Residual Certificates pro rata, until the Class
Certificate Balances thereof have been reduced to zero;
(ii) second, to the Class A-16 Certificates, up to the Class A-16
Principal Distribution Amount for such Distribution Date, until the Class
Certificate Balance thereof has been reduced to zero;
(iii) third, concurrently:
(a) 42.21774710% to the Class A-1 Certificates;
(b) 6.83388050% to the Class A-2 Certificates, until the Class
Certificate Balance thereof has been reduced to zero, and then to the
Class A-10 Certificates;
(c) 15.64260990% to the Class A-3 Certificates;
(d) 6.42185433% to the Class A-4 Certificates;
(e) 1.37611168% to the Class A-5 Certificates;
(f) 2.35373805% to the Class A-7 Certificates;
(g) 10.89317499% to the Class A-8 Certificates; and
(h) 14.26088346% to the Class A-9 Certificates;
until the Class Certificate Balances of the Class A-1, Class A-3, Class
A-4, Class A-5 and Class A-10 Certificates have been reduced to zero;
(iv) fourth, concurrently:
(a) 1.20073434% to the Class A-7 Certificates;
(b) 10.89317499% to the Class A-8 Certificates;
(c) 27.94970975% to the Class A-9 Certificates; and
(d) 59.95638092% to the Class A-11 Certificates;
until the Class Certificate Balances thereof have been reduced to zero;
(v) fifth, concurrently:
(a) 34.72069429% to the Class A-12 Certificates, until the Class
Certificate Balance thereof has been reduced to zero, and then to the
Class A-13 Certificates;
(b) 34.72069429% to the Class A-14 Certificates; and
(c) 30.55861142% to the Class A-15 Certificates;
until the Class Certificate Balances thereof have been reduced to zero; and
(vi) sixth, to the Class A-16 Certificates, until the Class
Certificate Balance thereof has been reduced to zero.
S-35
<PAGE> 36
Notwithstanding the foregoing, on each Distribution Date on and after the
Senior Credit Support Depletion Date, the amount to be distributed as principal
to the Senior Certificates (other than the Class A-PO Certificates) will be
distributed, concurrently, as principal of the Classes of Senior Certificates
(other than the Class A-6 and Class A-PO 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
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 (A) the Senior Percentage of
the applicable Non-PO Percentage of the Stated Principal Balance of such
Mortgage Loan and (B) either (1) the Senior Prepayment Percentage of the
applicable Non-PO Percentage of the portion of the Liquidation Proceeds that are
allocable to principal of such Mortgage Loan or (2) 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 of such
Mortgage Loan, and (iii) the Senior Prepayment Percentage of the applicable
Non-PO Percentage of the amounts described in clause (f) of the definition of
"Non-PO Principal Amount" for such Distribution Date; provided, however, that if
a Debt Service Reduction 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 Debt Service Reduction.
"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, irrespective of any delinquency in payment by the related Mortgagor
and after giving effect to any Deficient Valuation. 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 will equal (i) the
aggregate Class Certificate Balance of the Senior Certificates (other than the
Class A-PO Certificates) immediately prior to such date, divided by (ii) the
aggregate Class Certificate Balance of the Certificates (other than the Class
A-PO Certificates) immediately prior to such date. The "Subordinate Percentage"
for any Distribution Date will equal 100% minus the Senior Percentage for such
date. As of the Cut-off Date, the Senior Percentage and the Subordinate
Percentage are expected to be approximately 96.0% and 4.0%, respectively.
The "Senior Prepayment Percentage" for any Distribution Date occurring
during the periods set forth below will be as follows:
<TABLE>
<CAPTION>
DISTRIBUTION DATE OCCURRING IN SENIOR PREPAYMENT PERCENTAGE
- ------------------------------ ----------------------------
<S> <C>
September 1998 through August 2003............. 100%
September 2003 through August 2004............. the Senior Percentage, plus 70% of the
Subordinate Percentage;
September 2004 through August 2005............. the Senior Percentage, plus 60% of the
Subordinate Percentage;
September 2005 through August 2006............. the Senior Percentage, plus 40% of the
Subordinate Percentage;
</TABLE>
S-36
<PAGE> 37
<TABLE>
<CAPTION>
DISTRIBUTION DATE OCCURRING IN SENIOR PREPAYMENT PERCENTAGE
- ------------------------------ ----------------------------
<S> <C>
September 2006 through August 2007............. the Senior Percentage, plus 20% of the
Subordinate Percentage; and
September 2007 and thereafter.................. the Senior Percentage;
</TABLE>
provided, however, that if on any Distribution Date the Senior Percentage
exceeds the initial Senior Percentage, the Senior Prepayment Percentage for such
Distribution Date will 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 REO
Property) 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
equal to or greater than 50%, or (ii) cumulative Realized Losses with respect to
the Mortgage Loans exceed the percentages of the aggregate Class Certificate
Balance of the Subordinate Certificates as of the Closing Date (the "Original
Subordinate Principal Balance") indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
ORIGINAL SUBORDINATE
DISTRIBUTION DATE OCCURRING IN PRINCIPAL BALANCE
- ------------------------------ --------------------
<S> <C>
September 2003 through August 2004.......................... 30%
September 2004 through August 2005.......................... 35%
September 2005 through August 2006.......................... 40%
September 2006 through August 2007.......................... 45%
September 2007 and thereafter............................... 50%
</TABLE>
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-PO Certificates) while, in the absence of
Realized Losses, increasing the interest in the Pool Principal Balance evidenced
by the Subordinate Certificates. Increasing the respective interest of the
Subordinate Certificates relative to that of the Senior Certificates (other than
the Class A-PO Certificates) is intended to preserve the availability of the
subordination provided by the Subordinate Certificates.
The "Subordinate Prepayment Percentage" as of any Distribution Date will
equal 100% minus the Senior Prepayment Percentage for such date.
If on any Distribution Date the allocation to any Class of Senior
Certificates (other than the Class A-PO 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-16 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-16 Principal
Distribution Amount for such Distribution Date, will be distributed as principal
to the Class A-16 Certificates until the Class Certificate Balance thereof has
been reduced to zero.
The "Class A-16 Principal Distribution Amount" for any Distribution Date
(i) occurring in or prior to August 2003 will be zero and (ii) occurring in
September 2003 and thereafter will equal the lesser of (a) the Class Certificate
Balance of the Class A-16 Certificates and (b) the sum of (1) the Class A-16
Percentage of all amounts described in clause (i) of the definition of "Senior
Principal Distribution Amount" (but without such amounts being multiplied by the
Senior Percentage) and (2) the product of (A) the Class A-16 Shift Percentage,
(B) the Class A-16 Percentage and (C) all amounts described in clauses (ii) and
(iii) of the definition of "Senior Principal Distribution Amount" (but without
such amounts being multiplied by the Senior Percentage or the Senior Prepayment
Percentage, as the case may be).
S-37
<PAGE> 38
The "Class A-16 Percentage" for any Distribution Date will equal (i) the
Class Certificate Balance of the Class A-16 Certificates, divided by (ii) the
aggregate Class Certificate Balance of the Certificates (other than the Class
A-PO Certificates) immediately prior to such date.
The "Class A-16 Shift Percentage" for any Distribution Date will be the
percentage indicated below:
<TABLE>
<CAPTION>
CLASS A-16
DISTRIBUTION DATE OCCURRING IN SHIFT PERCENTAGE
- ------------------------------ ----------------
<S> <C>
September 1998 through August 2003.......................... 0%
September 2003 through August 2004.......................... 30%
September 2004 through August 2005.......................... 40%
September 2005 through August 2006.......................... 60%
September 2006 through August 2007.......................... 80%
September 2007 and thereafter............................... 100%
</TABLE>
Class A-PO Principal Distribution Amount. On each Distribution Date,
distributions of principal of the Class A-PO Certificates will be made in an
amount (the "Class A-PO Principal Distribution Amount") equal to the lesser of
(a) the PO Principal Amount for such Distribution Date and (b) the product of
(i) Available Funds remaining after distribution of funds due to the Trustee and
interest on the Senior Certificates and (ii) a fraction, the numerator of which
is the PO Principal Amount and the denominator of which is the sum of the PO
Principal Amount and the Senior Principal Distribution Amount.
The "PO 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) any Substitution Adjustment Amount in connection with a Deleted
Mortgage Loan that was a Discount Mortgage Loan received with respect to such
Distribution Date, (d) any 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
Debt Service Reduction that is an Excess Loss is sustained with respect to a
Discount Mortgage Loan that is not a Liquidated Mortgage Loan, the PO Principal
Amount will be reduced on the related Distribution Date by the applicable PO
Percentage of the principal portion of such Debt Service Reduction.
Subordinate Principal Distribution Amount. On each Distribution Date, to
the extent of Available Funds therefor, the Subordinate Principal Distribution
Amount for such Distribution Date will be distributed as principal of the
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 Class Subordination Percentages of all Classes
of Subordinate Certificates which have higher numerical Class designations than
such Class (each, a "Credit Support Percentage"), is less than the Credit
Support Percentage for such Class on the Closing Date (each, an "Original Credit
Support Percentage"), no distribution of principal will be made to any Classes
junior to such Class (the "Restricted Classes") and the amount otherwise
distributable to the Restricted Classes in respect of principal will be
allocated among the Classes of Subordinate Certificates that are not Restricted
Classes pro rata, based upon their respective Class Certificate Balances, and
distributed in the order described above.
S-38
<PAGE> 39
The "Class Subordination Percentage" with respect to any Distribution Date
and each Class of Subordinate Certificates will equal (i) the Class Certificate
Balance of such Class of Subordinate Certificates immediately prior to such
Distribution Date, divided by (ii) the aggregate Class Certificate Balance of
all the Certificates immediately prior to such Distribution Date.
The approximate Original Credit Support Percentages for the Subordinate
Certificates on the Closing Date are expected to be as follows:
<TABLE>
<S> <C>
Class B-1................................................... 2.11%
Class B-2................................................... 1.25%
Class B-3................................................... 0.80%
Class B-4................................................... 0.45%
Class B-5................................................... 0.25%
Class B-6................................................... 0.00%
</TABLE>
The "Subordinate Principal Distribution Amount" for any Distribution Date
will equal 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 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, 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 Principal Amount" for such 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 A-PO Deferred Amounts on the Class A-PO 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 A-PO 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 A-PO 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 A-PO Deferred Amounts will be paid on the Class A-PO Certificates prior to
distributions of principal on the Subordinate Certificates. Any distribution of
Available Funds in respect of unpaid Class A-PO Deferred Amounts will not
further reduce the Class Certificate Balance of the Class A-PO Certificates. The
Class A-PO 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 A-PO Deferred Amounts. Any excess of the Class A-PO
Deferred Amounts over the Class Certificate Balance of such Class will be
allocated to the next most subordinate Class to reduce its Class Certificate
Balance and so on, as necessary. After the Senior Credit Support Depletion Date,
no new Class A-PO Deferred Amounts will be created. 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
S-39
<PAGE> 40
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 A-6 and Class A-PO
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 A-6 and Class A-PO Certificates) and the Subordinate
Certificates based upon their respective Class Certificate Balances. Realized
Losses allocated to the Class A-5 Certificates will reduce the Class A-6
Notional Amount.
Because principal distributions are paid to certain Classes of Senior
Certificates (other than the Class A-PO 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 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.
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
S-40
<PAGE> 41
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.
RESTRICTIONS ON TRANSFER OF THE CLASS R CERTIFICATES
The Class R Certificates will be subject to the following restrictions on
transfer, and the Class R Certificates will contain a legend describing such
restrictions.
The REMIC provisions of the Code impose certain taxes on (i) transferors of
residual interests to, or agents that acquire residual interests on behalf of,
Disqualified Organizations (as defined in the Prospectus) and (ii) certain
Pass-Through Entities (as defined in the Prospectus) that have Disqualified
Organizations as beneficial owners. No tax will be imposed on a Pass-Through
Entity (other than an "electing large partnership" as defined in the Prospectus)
with respect to the Class R Certificates to the extent it has received an
affidavit from the owner thereof that such owner is not a Disqualified
Organization or a nominee for a Disqualified Organization. The Pooling Agreement
will provide that no legal or beneficial interest in the Class R Certificates
may be transferred to or registered in the name of any person unless (i) the
proposed purchaser provides to the Trustee an affidavit to the effect that,
among other items, such transferee is not a Disqualified Organization and is not
purchasing the Class R Certificates as an agent for a Disqualified Organization
(i.e., as a broker, nominee, or other middleman thereof) and (ii) the transferor
states in writing to the Trustee that it has no actual knowledge that such
affidavit or letter is false. Further, such affidavit or letter requires the
transferee to affirm that it (i) historically has paid its debts as they have
come due and intends to do so in the future, (ii) understands that it may incur
tax liabilities with respect to the Class R Certificates in excess of cash flows
generated thereby, (iii) intends to pay taxes associated with holding the Class
R Certificates as such taxes become due and (iv) will not transfer the Class R
Certificates to any person or entity that does not provide a similar affidavit
or letter. The transferor must certify in writing to the Trustee that, as of the
date of the transfer, it had no knowledge or reason to know that the
affirmations made by the transferee pursuant to the preceding sentence were
false.
In addition, the Class R Certificates may not be purchased by or
transferred to any person that is not a U.S. Person, unless (i) such person
holds such Class R Certificate in connection with the conduct of a trade or
business within the United States and furnishes the transferor and the Trustee
with an effective Internal Revenue Service Form 4224 or (ii) the transferee
delivers to both the transferor and the Trustee an opinion of a nationally
recognized tax counsel to the effect that such transfer is in accordance with
the requirements of the Code and the regulations promulgated thereunder and that
such transfer of the Class R Certificates will not be disregarded for federal
income tax purposes. The term "U.S. Person" means a citizen or resident of the
United States, a corporation, partnership (except to the extent provided in the
applicable Treasury regulations) or other entity created or organized in or
under the laws of the United States or any political subdivision thereof, an
estate that is subject to United States federal income tax regardless of the
source of its income, or a trust if a court within the United States is able to
exercise primary supervision over the administration of such trust, and one or
more United States fiduciaries have the authority to control all substantial
decisions of such trust (or, to the extent provided in applicable Treasury
regulations, certain trusts in existence on August 20, 1996 which are eligible
to elect to be treated as U.S. Persons).
The Pooling Agreement will provide that any attempted or purported transfer
in violation of these transfer restrictions will be null and void and will vest
no rights in any purported transferee. Any transferor or agent to whom the
Trustee provides information as to any applicable tax imposed on such transferor
or agent may be
S-41
<PAGE> 42
required to bear the cost of computing or providing such information. See
"Certain Federal Income Tax Consequences -- Federal Income Tax Consequences for
REMIC Certificates -- Taxation of Residual Certificates -- Tax-Related
Restrictions on Transfer of Residual Certificates" in the Prospectus.
The Class R Certificates may not be purchased by or transferred to any Plan
or IRA or any person acting on behalf of or investing the assets of such Plan or
IRA. See "ERISA Considerations" herein and in the Prospectus.
RESTRICTIONS ON TRANSFER OF THE CLASS B CERTIFICATES
Under current law the purchase and holding of the Class B Certificates by
or on behalf of a Plan may result in "prohibited transactions" within the
meaning of ERISA and Section 4975 of the Code. Transfer of the Class B
Certificates will not be made unless the transferee (i) executes a
representation letter in form and substance satisfactory to the Trustee stating
that (a) it is not, and is not acting on behalf of, any such Plan or using the
assets of any such Plan to effect such purchase or (b) if it is an insurance
company, that the source of funds used to purchase the Class B Certificates is
an "insurance company general account" (as such term is defined in Section V(e)
of Prohibited Transaction Class Exemption 95-60 ("PTCE 95-60"), 60 Fed. Reg.
35925 (July 12, 1995)) and there is no Plan with respect to which the amount of
such general account's reserves and liabilities for the contract(s) held by or
on behalf of such Plan and all other Plans maintained by the same employer (or
affiliate thereof as defined in Section V(a)(1) of PTCE 95-60) or by the same
employee organization exceeds 10% of the total of all reserves and liabilities
of such general account (as such amounts are determined under Section I(a) of
PTCE 95-60) at the date of acquisition or (ii) provides (a) an opinion of
counsel in form and substance satisfactory to the Trustee that the purchase or
holding of the Class B Certificates by or on behalf of such Plan will not result
in the assets of the Trust Fund being deemed to be "plan assets" and subject to
the prohibited transaction provisions of ERISA or the Code and will not subject
the Seller, the Master Servicer or the Trustee to any obligation in addition to
those undertaken in the Pooling Agreement and (b) such other opinions of
counsel, officers' certificates and agreements as the Seller or the Master
Servicer may require in connection with such transfer. The Class B Certificates
will contain a legend describing such restrictions on transfer and the Pooling
Agreement will provide that any attempted or purported transfer in violation of
these transfer restrictions will be null and void and will vest no rights in any
purported transferee. See "ERISA Considerations" herein and 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
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
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 A-5 and Class A-6 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 next 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).
S-42
<PAGE> 43
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 A-6 Certificates),
the aggregate amount of each interest payment on the Offered Certificates (other
than the Class A-PO 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 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 A-6
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 A-6 Certificates.
See "-- Yield on the Class A-6 Certificates" below. 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 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 Holders of
the Classes of Senior Certificates (other than the Class A-PO 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-PO
Certificates) and none (or less than their pro rata share) of such principal
prepayments being distributed to Holders of the Subordinate Certificates during
the periods of time described in the definition of "Senior Prepayment
Percentage".
As described herein under "Description of Certificates -- Principal,"
unless the Class Certificate Balances of the other Class A Certificates (other
than the Class A-PO Certificates) have been reduced to zero, the Class A-16
Certificates will not be entitled to any distributions of principal for five
years following the Closing Date, and during the following five years the
percentage of principal prepayments payments allocated to the Class A-16
Certificates will gradually increase.
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
S-43
<PAGE> 44
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.
ASSUMPTIONS RELATING TO TABLES
The tables beginning on page S-46 (the "Decrement Tables") have been
prepared on the basis of the following assumptions (the "Modeling Assumptions"):
(i) the Mortgage Pool consists of two hypothetical mortgage loans having the
following characteristics:
<TABLE>
<CAPTION>
UNPAID ORIGINAL TERM REMAINING TERM
PRINCIPAL BALANCE (MONTHS) MORTGAGE RATE (MONTHS)
- ----------------- ------------- ------------- --------------
<S> <C> <C> <C>
$ 99,755,879 360 6.9005174835% 358
$473,131,077 360 7.3463017336% 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
September 1, 1998; (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 August 1998; (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 September 20, 1998 in accordance with the
priorities and amounts described herein under "Description of Certificates."
Although the characteristics of the mortgage loans for the Decrement Tables
have been prepared on the basis of the weighted average 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 of a Class of Offered Certificates (other than the
Class A-6 Certificates) refers to the average amount of time that will elapse
from the date of issuance of the Offered Certificate until each dollar in
reduction of the Class Certificate Balance thereof is distributed to investors.
The weighted average life of the Class A-6 Certificates refers to the average
amount of time that will elapse from the date of issuance of the Offered
Certificates until each dollar in reduction of the Class Certificate Balance of
the Class A-5 Certificates (which corresponds to the Class A-6 Notional Amount)
is distributed to investors. The weighted
S-44
<PAGE> 45
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 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, "275% PSA" assumes
prepayment rates equal to 275% 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 (or Class A-6 Notional Amount) 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 reductions of
the Class Certificate Balances (or Class A-6 Notional Amount) 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 (or initial Class A-6 Notional Amount) of each such Class that would be
outstanding after each of the dates shown at various constant percentages of the
PSA.
S-45
<PAGE> 46
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% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage......... 100 100 100 100 100 100 100 100 100 100
August 25, 1999............ 99 96 92 89 86 99 96 91 88 85
August 25, 2000............ 97 89 75 65 58 97 88 73 63 55
August 25, 2001............ 96 79 54 38 26 95 78 51 34 21
August 25, 2002............ 94 71 36 17 4 93 69 32 12 0
August 25, 2003............ 92 62 22 1 0 91 60 17 0 0
August 25, 2004............ 90 55 11 0 0 90 52 5 0 0
August 25, 2005............ 88 48 3 0 0 88 45 0 0 0
August 25, 2006............ 86 42 0 0 0 85 38 0 0 0
August 25, 2007............ 84 36 0 0 0 83 32 0 0 0
August 25, 2008............ 82 31 0 0 0 81 27 0 0 0
August 25, 2009............ 79 27 0 0 0 78 22 0 0 0
August 25, 2010............ 77 22 0 0 0 75 17 0 0 0
August 25, 2011............ 74 18 0 0 0 72 13 0 0 0
August 25, 2012............ 70 14 0 0 0 69 8 0 0 0
August 25, 2013............ 67 10 0 0 0 65 4 0 0 0
August 25, 2014............ 63 7 0 0 0 61 1 0 0 0
August 25, 2015............ 60 3 0 0 0 57 0 0 0 0
August 25, 2016............ 55 * 0 0 0 52 0 0 0 0
August 25, 2017............ 51 0 0 0 0 48 0 0 0 0
August 25, 2018............ 46 0 0 0 0 42 0 0 0 0
August 25, 2019............ 41 0 0 0 0 37 0 0 0 0
August 25, 2020............ 35 0 0 0 0 31 0 0 0 0
August 25, 2021............ 29 0 0 0 0 24 0 0 0 0
August 25, 2022............ 23 0 0 0 0 18 0 0 0 0
August 25, 2023............ 16 0 0 0 0 10 0 0 0 0
August 25, 2024............ 8 0 0 0 0 2 0 0 0 0
August 25, 2025............ * 0 0 0 0 0 0 0 0 0
August 25, 2026............ 0 0 0 0 0 0 0 0 0 0
August 25, 2027............ 0 0 0 0 0 0 0 0 0 0
August 25, 2028............ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)............ 17.55 7.64 3.47 2.64 2.28 16.97 7.03 3.24 2.50 2.16
</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.
* Less than 0.5%, but greater than zero.
S-46
<PAGE> 47
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% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage......... 100 100 100 100 100 100 100 100 100 100
August 25, 1999............ 99 96 92 89 86 99 96 92 89 86
August 25, 2000............ 97 89 75 65 58 97 89 75 65 58
August 25, 2001............ 96 79 54 38 26 96 79 54 38 26
August 25, 2002............ 94 71 36 17 4 94 71 36 17 4
August 25, 2003............ 92 62 22 1 0 92 62 22 1 0
August 25, 2004............ 90 55 11 0 0 90 55 11 0 0
August 25, 2005............ 88 48 3 0 0 88 48 3 0 0
August 25, 2006............ 86 42 0 0 0 86 42 0 0 0
August 25, 2007............ 84 36 0 0 0 84 36 0 0 0
August 25, 2008............ 82 31 0 0 0 82 31 0 0 0
August 25, 2009............ 79 27 0 0 0 79 27 0 0 0
August 25, 2010............ 77 22 0 0 0 77 22 0 0 0
August 25, 2011............ 74 18 0 0 0 74 18 0 0 0
August 25, 2012............ 70 14 0 0 0 70 14 0 0 0
August 25, 2013............ 67 10 0 0 0 67 10 0 0 0
August 25, 2014............ 63 7 0 0 0 63 7 0 0 0
August 25, 2015............ 60 3 0 0 0 60 3 0 0 0
August 25, 2016............ 55 * 0 0 0 55 * 0 0 0
August 25, 2017............ 51 0 0 0 0 51 0 0 0 0
August 25, 2018............ 46 0 0 0 0 46 0 0 0 0
August 25, 2019............ 41 0 0 0 0 41 0 0 0 0
August 25, 2020............ 35 0 0 0 0 35 0 0 0 0
August 25, 2021............ 29 0 0 0 0 29 0 0 0 0
August 25, 2022............ 23 0 0 0 0 23 0 0 0 0
August 25, 2023............ 16 0 0 0 0 16 0 0 0 0
August 25, 2024............ 8 0 0 0 0 8 0 0 0 0
August 25, 2025............ * 0 0 0 0 * 0 0 0 0
August 25, 2026............ 0 0 0 0 0 0 0 0 0 0
August 25, 2027............ 0 0 0 0 0 0 0 0 0 0
August 25, 2028............ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in
years)(1)................ 17.55 7.64 3.47 2.64 2.28 17.55 7.64 3.47 2.64 2.28
</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.
* Less than 0.5%, but greater than zero.
S-47
<PAGE> 48
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE (1) OUTSTANDING AT THE
RESPECTIVE PERCENTAGES OF PSA SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS A-5 AND CLASS A-6 CLASS A-7
------------------------------------- -------------------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage......... 100 100 100 100 100 100 100 100 100 100
August 25, 1999............ 99 96 92 89 86 99 96 92 90 87
August 25, 2000............ 97 89 75 65 58 97 90 77 68 61
August 25, 2001............ 96 79 54 38 26 96 81 58 43 32
August 25, 2002............ 94 71 36 17 4 94 73 42 24 12
August 25, 2003............ 92 62 22 1 0 93 65 28 9 3
August 25, 2004............ 90 55 11 0 0 91 58 19 4 0
August 25, 2005............ 88 48 3 0 0 89 52 11 1 0
August 25, 2006............ 86 42 0 0 0 87 47 7 0 0
August 25, 2007............ 84 36 0 0 0 85 42 5 0 0
August 25, 2008............ 82 31 0 0 0 83 37 3 0 0
August 25, 2009............ 79 27 0 0 0 81 33 2 0 0
August 25, 2010............ 77 22 0 0 0 78 29 1 0 0
August 25, 2011............ 74 18 0 0 0 76 25 0 0 0
August 25, 2012............ 70 14 0 0 0 73 21 0 0 0
August 25, 2013............ 67 10 0 0 0 70 18 0 0 0
August 25, 2014............ 63 7 0 0 0 66 14 0 0 0
August 25, 2015............ 60 3 0 0 0 63 11 0 0 0
August 25, 2016............ 55 * 0 0 0 59 9 0 0 0
August 25, 2017............ 51 0 0 0 0 55 7 0 0 0
August 25, 2018............ 46 0 0 0 0 50 6 0 0 0
August 25, 2019............ 41 0 0 0 0 46 5 0 0 0
August 25, 2020............ 35 0 0 0 0 41 3 0 0 0
August 25, 2021............ 29 0 0 0 0 35 2 0 0 0
August 25, 2022............ 23 0 0 0 0 29 1 0 0 0
August 25, 2023............ 16 0 0 0 0 23 * 0 0 0
August 25, 2024............ 8 0 0 0 0 16 0 0 0 0
August 25, 2025............ * 0 0 0 0 8 0 0 0 0
August 25, 2026............ 0 0 0 0 0 4 0 0 0 0
August 25, 2027............ 0 0 0 0 0 0 0 0 0 0
August 25, 2028............ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in
years)(2)................ 17.55 7.64 3.47 2.64 2.28 18.43 8.80 3.98 2.93 2.49
</TABLE>
- ---------------
(1) With respect to the Class A-6 Certificates, percentages are expressed as
percentages of the initial Class A-6 Notional Amount.
(2) 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 or Class A-6 Notional Amount 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 or Class A-6 Notional Amount of such
Class.
* Less than 0.5%, but greater than zero.
S-48
<PAGE> 49
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING AT THE
RESPECTIVE PERCENTAGES OF PSA SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS A-8 CLASS A-9
------------------------------------- -------------------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage......... 100 100 100 100 100 100 100 100 100 100
August 25, 1999............ 99 97 93 90 88 99 97 94 92 90
August 25, 2000............ 98 91 79 71 64 98 92 81 74 69
August 25, 2001............ 96 83 61 47 37 97 85 66 54 45
August 25, 2002............ 95 75 46 30 18 95 78 53 39 29
August 25, 2003............ 93 68 34 16 5 94 72 42 27 9
August 25, 2004............ 92 62 25 8 0 93 66 34 13 0
August 25, 2005............ 90 56 17 2 0 91 61 28 3 0
August 25, 2006............ 88 51 12 0 0 90 57 21 0 0
August 25, 2007............ 87 46 8 0 0 88 53 14 0 0
August 25, 2008............ 85 42 5 0 0 86 49 9 0 0
August 25, 2009............ 82 38 3 0 0 85 46 5 0 0
August 25, 2010............ 80 34 1 0 0 83 42 2 0 0
August 25, 2011............ 78 30 0 0 0 80 39 0 0 0
August 25, 2012............ 75 27 0 0 0 78 36 0 0 0
August 25, 2013............ 72 24 0 0 0 76 34 0 0 0
August 25, 2014............ 69 21 0 0 0 73 31 0 0 0
August 25, 2015............ 66 18 0 0 0 70 28 0 0 0
August 25, 2016............ 62 15 0 0 0 67 26 0 0 0
August 25, 2017............ 58 13 0 0 0 64 22 0 0 0
August 25, 2018............ 54 10 0 0 0 60 18 0 0 0
August 25, 2019............ 50 8 0 0 0 56 14 0 0 0
August 25, 2020............ 45 6 0 0 0 52 10 0 0 0
August 25, 2021............ 40 4 0 0 0 47 7 0 0 0
August 25, 2022............ 34 2 0 0 0 43 4 0 0 0
August 25, 2023............ 28 * 0 0 0 38 1 0 0 0
August 25, 2024............ 22 0 0 0 0 32 0 0 0 0
August 25, 2025............ 15 0 0 0 0 26 0 0 0 0
August 25, 2026............ 8 0 0 0 0 13 0 0 0 0
August 25, 2027............ 0 0 0 0 0 0 0 0 0 0
August 25, 2028............ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in
years)(1)................ 19.15 9.74 4.39 3.17 2.67 20.28 11.22 5.05 3.55 2.95
</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.
* Less than 0.5%, but greater than zero.
S-49
<PAGE> 50
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING AT THE
RESPECTIVE PERCENTAGES OF PSA SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS A-10 CLASS A-11
------------------------------------- -------------------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage......... 100 100 100 100 100 100 100 100 100 100
August 25, 1999............ 100 100 100 100 100 100 100 100 100 100
August 25, 2000............ 100 100 100 100 100 100 100 100 100 100
August 25, 2001............ 100 100 100 100 100 100 100 100 100 100
August 25, 2002............ 100 100 100 100 63 100 100 100 100 100
August 25, 2003............ 100 100 100 19 0 100 100 100 100 35
August 25, 2004............ 100 100 100 0 0 100 100 100 50 0
August 25, 2005............ 100 100 44 0 0 100 100 100 12 0
August 25, 2006............ 100 100 0 0 0 100 100 80 0 0
August 25, 2007............ 100 100 0 0 0 100 100 54 0 0
August 25, 2008............ 100 100 0 0 0 100 100 36 0 0
August 25, 2009............ 100 100 0 0 0 100 100 21 0 0
August 25, 2010............ 100 100 0 0 0 100 100 8 0 0
August 25, 2011............ 100 100 0 0 0 100 100 0 0 0
August 25, 2012............ 100 100 0 0 0 100 100 0 0 0
August 25, 2013............ 100 100 0 0 0 100 100 0 0 0
August 25, 2014............ 100 100 0 0 0 100 100 0 0 0
August 25, 2015............ 100 55 0 0 0 100 100 0 0 0
August 25, 2016............ 100 3 0 0 0 100 100 0 0 0
August 25, 2017............ 100 0 0 0 0 100 84 0 0 0
August 25, 2018............ 100 0 0 0 0 100 69 0 0 0
August 25, 2019............ 100 0 0 0 0 100 54 0 0 0
August 25, 2020............ 100 0 0 0 0 100 40 0 0 0
August 25, 2021............ 100 0 0 0 0 100 27 0 0 0
August 25, 2022............ 100 0 0 0 0 100 14 0 0 0
August 25, 2023............ 100 0 0 0 0 100 2 0 0 0
August 25, 2024............ 100 0 0 0 0 100 0 0 0 0
August 25, 2025............ * 0 0 0 0 100 0 0 0 0
August 25, 2026............ 0 0 0 0 0 52 0 0 0 0
August 25, 2027............ 0 0 0 0 0 0 0 0 0 0
August 25, 2028............ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in
years)(1)................ 26.67 17.15 7.01 4.91 4.09 28.06 21.44 9.55 6.13 4.88
</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.
* Less than 0.5%, but greater than zero.
S-50
<PAGE> 51
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING AT THE
RESPECTIVE PERCENTAGES OF PSA SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS A-12 CLASS A-13
------------------------------------- -------------------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage......... 100 100 100 100 100 100 100 100 100 100
August 25, 1999............ 100 100 100 100 100 100 100 100 100 100
August 25, 2000............ 100 100 100 100 100 100 100 100 100 100
August 25, 2001............ 100 100 100 100 100 100 100 100 100 100
August 25, 2002............ 100 100 100 100 100 100 100 100 100 100
August 25, 2003............ 100 100 100 100 100 100 100 100 100 100
August 25, 2004............ 100 100 100 100 29 100 100 100 100 100
August 25, 2005............ 100 100 100 100 0 100 100 100 100 24
August 25, 2006............ 100 100 100 39 0 100 100 100 100 0
August 25, 2007............ 100 100 100 0 0 100 100 100 82 0
August 25, 2008............ 100 100 100 0 0 100 100 100 61 0
August 25, 2009............ 100 100 100 0 0 100 100 100 45 0
August 25, 2010............ 100 100 100 0 0 100 100 100 33 0
August 25, 2011............ 100 100 87 0 0 100 100 100 25 0
August 25, 2012............ 100 100 40 0 0 100 100 100 18 0
August 25, 2013............ 100 100 1 0 0 100 100 100 13 0
August 25, 2014............ 100 100 0 0 0 100 100 81 10 0
August 25, 2015............ 100 100 0 0 0 100 100 65 7 0
August 25, 2016............ 100 100 0 0 0 100 100 51 5 0
August 25, 2017............ 100 100 0 0 0 100 100 40 4 0
August 25, 2018............ 100 100 0 0 0 100 100 32 3 0
August 25, 2019............ 100 100 0 0 0 100 100 24 2 0
August 25, 2020............ 100 100 0 0 0 100 100 19 1 0
August 25, 2021............ 100 100 0 0 0 100 100 14 1 0
August 25, 2022............ 100 100 0 0 0 100 100 10 1 0
August 25, 2023............ 100 100 0 0 0 100 100 7 * 0
August 25, 2024............ 100 51 0 0 0 100 100 5 * 0
August 25, 2025............ 100 0 0 0 0 100 95 3 * 0
August 25, 2026............ 100 0 0 0 0 100 60 2 * 0
August 25, 2027............ 97 0 0 0 0 100 26 1 * 0
August 25, 2028............ 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (in
years)(1)................ 29.20 28.06 13.85 7.98 5.95 29.62 28.35 19.07 11.68 6.77
</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.
* Less than 0.5%, but greater than zero.
S-51
<PAGE> 52
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING AT THE
RESPECTIVE PERCENTAGES OF PSA SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS A-14 CLASS A-15
------------------------------------ ------------------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------- ----- ----- ----- ----- ---- ----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........... 100 100 100 100 100 100 100 100 100 100
August 25, 1999.............. 100 100 100 100 100 100 100 100 100 100
August 25, 2000.............. 100 100 100 100 100 100 100 100 100 100
August 25, 2001.............. 100 100 100 100 100 100 100 100 100 100
August 25, 2002.............. 100 100 100 100 100 100 100 100 100 100
August 25, 2003.............. 100 100 100 100 100 100 100 100 100 100
August 25, 2004.............. 100 100 100 100 73 100 100 100 100 73
August 25, 2005.............. 100 100 100 100 15 100 100 100 100 15
August 25, 2006.............. 100 100 100 77 0 100 100 100 77 0
August 25, 2007.............. 100 100 100 50 0 100 100 100 50 0
August 25, 2008.............. 100 100 100 37 0 100 100 100 37 0
August 25, 2009.............. 100 100 100 28 0 100 100 100 28 0
August 25, 2010.............. 100 100 100 21 0 100 100 100 21 0
August 25, 2011.............. 100 100 95 15 0 100 100 95 15 0
August 25, 2012.............. 100 100 77 11 0 100 100 77 11 0
August 25, 2013.............. 100 100 62 8 0 100 100 62 8 0
August 25, 2014.............. 100 100 50 6 0 100 100 50 6 0
August 25, 2015.............. 100 100 40 4 0 100 100 40 4 0
August 25, 2016.............. 100 100 31 3 0 100 100 31 3 0
August 25, 2017.............. 100 100 25 2 0 100 100 25 2 0
August 25, 2018.............. 100 100 19 2 0 100 100 19 2 0
August 25, 2019.............. 100 100 15 1 0 100 100 15 1 0
August 25, 2020.............. 100 100 12 1 0 100 100 12 1 0
August 25, 2021.............. 100 100 9 1 0 100 100 9 1 0
August 25, 2022.............. 100 100 6 * 0 100 100 6 * 0
August 25, 2023.............. 100 100 5 * 0 100 100 5 * 0
August 25, 2024.............. 100 81 3 * 0 100 81 3 * 0
August 25, 2025.............. 100 58 2 * 0 100 58 2 * 0
August 25, 2026.............. 100 37 1 * 0 100 37 1 * 0
August 25, 2027.............. 99 16 * * 0 99 16 * * 0
August 25, 2028.............. 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1).............. 29.46 27.46 17.06 10.25 6.45 29.46 27.46 17.06 10.25 6.45
</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.
* Less than 0.5%, but greater than zero.
S-52
<PAGE> 53
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING AT THE
RESPECTIVE PERCENTAGES OF PSA SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS A-16 CLASS A-PO
----------------------------------- ----------------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------- ----- ----- ----- ---- ---- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.............. 100 100 100 100 100 100 100 100 100 100
August 25, 1999................. 100 100 100 100 100 99 97 94 92 90
August 25, 2000................. 100 100 100 100 100 98 92 83 76 71
August 25, 2001................. 100 100 100 100 100 97 86 68 57 49
August 25, 2002................. 100 100 100 100 100 95 79 56 43 34
August 25, 2003................. 100 100 100 100 100 94 74 46 32 24
August 25, 2004................. 99 97 93 91 89 92 68 38 24 16
August 25, 2005................. 97 93 85 80 76 91 63 31 18 11
August 25, 2006................. 95 88 75 67 55 89 58 26 13 8
August 25, 2007................. 93 82 64 53 37 87 53 21 10 5
August 25, 2008................. 91 75 52 39 25 85 49 17 7 4
August 25, 2009................. 89 69 43 29 17 83 45 14 6 2
August 25, 2010................. 87 63 35 21 12 81 41 11 4 2
August 25, 2011................. 84 58 28 16 8 79 38 9 3 1
August 25, 2012................. 82 53 23 12 5 76 34 7 2 1
August 25, 2013................. 79 48 18 9 4 73 31 6 2 1
August 25, 2014................. 76 43 15 6 2 70 28 5 1 *
August 25, 2015................. 73 39 12 5 2 67 25 4 1 *
August 25, 2016................. 69 35 9 3 1 64 22 3 1 *
August 25, 2017................. 65 31 7 2 1 60 20 2 * *
August 25, 2018................. 61 27 6 2 * 56 17 2 * *
August 25, 2019................. 57 24 4 1 * 52 15 1 * *
August 25, 2020................. 52 20 3 1 * 48 13 1 * *
August 25, 2021................. 47 17 3 1 * 43 11 1 * *
August 25, 2022................. 41 14 2 * * 38 9 1 * *
August 25, 2023................. 35 12 1 * * 32 7 * * *
August 25, 2024................. 29 9 1 * * 27 6 * * *
August 25, 2025................. 22 6 1 * * 20 4 * * *
August 25, 2026................. 15 4 * * * 14 3 * * *
August 25, 2027................. 7 2 * * * 6 1 * * *
August 25, 2028................. 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)................. 21.00 15.63 11.34 9.90 8.87 19.74 11.45 6.04 4.49 3.74
</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.
* Less than 0.5%, but greater than zero.
S-53
<PAGE> 54
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING AT THE
RESPECTIVE PERCENTAGES OF PSA SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS B-1, CLASS B-2 AND CLASS B-3
-----------------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500%
----------------- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage.......................................... 100 100 100 100 100
August 25, 1999............................................. 99 99 99 99 99
August 25, 2000............................................. 98 98 98 98 98
August 25, 2001............................................. 97 97 97 97 97
August 25, 2002............................................. 96 96 96 96 96
August 25, 2003............................................. 94 94 94 94 94
August 25, 2004............................................. 93 91 88 86 84
August 25, 2005............................................. 91 88 81 76 71
August 25, 2006............................................. 90 83 71 63 57
August 25, 2007............................................. 88 77 60 50 42
August 25, 2008............................................. 86 71 49 37 29
August 25, 2009............................................. 84 65 40 27 20
August 25, 2010............................................. 82 60 33 20 13
August 25, 2011............................................. 80 55 27 15 9
August 25, 2012............................................. 77 50 21 11 6
August 25, 2013............................................. 74 45 17 8 4
August 25, 2014............................................. 72 41 14 6 3
August 25, 2015............................................. 68 37 11 4 2
August 25, 2016............................................. 65 33 9 3 1
August 25, 2017............................................. 61 29 7 2 1
August 25, 2018............................................. 58 26 5 2 1
August 25, 2019............................................. 53 22 4 1 *
August 25, 2020............................................. 49 19 3 1 *
August 25, 2021............................................. 44 16 2 1 *
August 25, 2022............................................. 39 14 2 * *
August 25, 2023............................................. 33 11 1 * *
August 25, 2024............................................. 27 8 1 * *
August 25, 2025............................................. 21 6 1 * *
August 25, 2026............................................. 14 4 * * *
August 25, 2027............................................. 7 2 * * *
August 25, 2028............................................. 0 0 0 0 0
Weighted Average Life
(in years)(1)............................................. 19.96 14.89 10.85 9.49 8.78
</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.
* Less than 0.5%, but greater than zero.
S-54
<PAGE> 55
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% 275% 400% 500%
----------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Initial Percentage......................................... 100 100 100 100 100
August 25, 1999............................................ 0 0 0 0 0
August 25, 2000............................................ 0 0 0 0 0
August 25, 2001............................................ 0 0 0 0 0
August 25, 2002............................................ 0 0 0 0 0
August 25, 2003............................................ 0 0 0 0 0
August 25, 2004............................................ 0 0 0 0 0
August 25, 2005............................................ 0 0 0 0 0
August 25, 2006............................................ 0 0 0 0 0
August 25, 2007............................................ 0 0 0 0 0
August 25, 2008............................................ 0 0 0 0 0
August 25, 2009............................................ 0 0 0 0 0
August 25, 2010............................................ 0 0 0 0 0
August 25, 2011............................................ 0 0 0 0 0
August 25, 2012............................................ 0 0 0 0 0
August 25, 2013............................................ 0 0 0 0 0
August 25, 2014............................................ 0 0 0 0 0
August 25, 2015............................................ 0 0 0 0 0
August 25, 2016............................................ 0 0 0 0 0
August 25, 2017............................................ 0 0 0 0 0
August 25, 2018............................................ 0 0 0 0 0
August 25, 2019............................................ 0 0 0 0 0
August 25, 2020............................................ 0 0 0 0 0
August 25, 2021............................................ 0 0 0 0 0
August 25, 2022............................................ 0 0 0 0 0
August 25, 2023............................................ 0 0 0 0 0
August 25, 2024............................................ 0 0 0 0 0
August 25, 2025............................................ 0 0 0 0 0
August 25, 2026............................................ 0 0 0 0 0
August 25, 2027............................................ 0 0 0 0 0
August 25, 2028............................................ 0 0 0 0 0
Weighted Average Life
(in years)(1)............................................ 0.08 0.08 0.08 0.08 0.08
</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-55
<PAGE> 56
YIELD ON THE CLASS A-6 CERTIFICATES
The Class A-6 Certificates will be "interest only" or IO 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 principal in respect of the Mortgage Loans. The significance of
the effects of prepayments and changes in LIBOR on the Class A-6 Certificates is
illustrated in the following table entitled "Sensitivity of the Class A-6
Certificates to Prepayments and LIBOR," which shows the pre-tax yield (on a
corporate bond equivalent basis) to the Holders of Class A-6 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 August 1998 and on each LIBOR Determination Date thereafter, LIBOR will
be as indicated and (ii) the purchase price for all of the Class A-6
Certificates is approximately $267,857.15 (excluding accrued interest on the
Closing Date).
AS INDICATED IN THE FOLLOWING TABLE, THE YIELD TO INVESTORS IN THE CLASS
A-6 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 A-6 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 A-6 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 A-6 Certificate
and there can be no assurance that the pre-tax yield to an investor in the Class
A-6 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 A-6 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 A-6 CERTIFICATES
TO PREPAYMENTS AND LIBOR
(PRE-TAX YIELDS TO MATURITY)
<TABLE>
<CAPTION>
PERCENTAGE OF PSA
---------------------------------------------
LIBOR 0% 100% 275% 400% 500%
- ----- ------ ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
3.65625%....................................... 101.15% 94.80% 82.59% 73.14% 65.51%
4.65625........................................ 76.14 69.40 55.93 45.45 37.15
5.65625........................................ 52.18 44.85 29.18 17.09 7.86
6.65625........................................ 29.13 20.76 0.81 (13.89) (24.49)
7.65625........................................ 5.25 (5.90) (36.37) (56.13) (69.02)
</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 A-6 Certificates, would cause the discounted
present value of such assumed stream of cash flows to equal the assumed purchase
price of the Class A-6 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
A-6 Certificates and consequently does not purport to reflect the return on any
investment in the Class A-6 Certificates when such reinvestment rates are
considered.
S-56
<PAGE> 57
YIELD ON THE CLASS A-PO CERTIFICATES
The Class A-PO 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. As a result, the
Class A-PO Certificates will be offered at a substantial discount to their
original principal amount. The significance of the effects of prepayments on the
Class A-PO Certificates is illustrated in the following table entitled
"Sensitivity of the Class A-PO Certificates to Prepayments," which shows the
pre-tax yield (on a corporate bond equivalent basis) to the Holders of Class
A-PO 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 A-PO Certificates is approximately $1,003,671.80.
AS INDICATED IN THE FOLLOWING TABLE, BECAUSE THE CLASS A-PO 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 A-PO
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, 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 A-PO Certificate and there can be no assurance that the pre-tax yield to
an investor in the Class A-PO 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 A-PO Certificate.
SENSITIVITY OF THE CLASS A-PO CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
<TABLE>
<CAPTION>
PERCENTAGE OF PSA
--------------------------------------
0% 100% 275% 400% 500%
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Class A-PO Certificates............................... 2.28% 4.25% 8.36% 11.20% 13.35%
</TABLE>
The yields set forth in the preceding table were calculated by (i)
determining the monthly discount rates that, when applied to the assumed stream
of cash flows to be paid on the Class A-PO Certificates, would cause the
discounted present value of such assumed stream of cash flows to equal the
assumed purchase price of the Class A-PO Certificates indicated above and (ii)
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 A-PO Certificates and consequently does not
purport to reflect the return on any investment in the Class A-PO Certificates
when such reinvestment rates are considered.
YIELD ON THE RESIDUAL CERTIFICATES
The after-tax rate of return to Holders of the Class R-I or Class R-II
Certificates ("Residual Certificateholders") 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, Residual Certificateholders 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.
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<PAGE> 58
Residual Certificateholders should consult their 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
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 Balance of the applicable Class of Subordinate
Certificates to the extent of any losses allocated thereto (as described herein
under "Description of 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-6 and Class A-PO Certificates), Net Interest Shortfalls, other cash
shortfalls in Available Funds and distribution of funds to Holders of Class A-PO
Certificates otherwise available for distribution on the Subordinate
Certificates to the extent of reimbursement for Class A-PO Deferred Amounts. See
"Description of Certificates -- Allocation of Losses" herein.
If on any Distribution Date, the Credit Support Percentage for any Class of
Subordinate Certificates is less than its Original 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.
YIELD CONSIDERATIONS WITH RESPECT TO THE CLASS B-2 AND CLASS B-3 CERTIFICATES
Defaults on mortgage loans may be measured relative to a default standard
of model. The model used in this Prospectus Supplement, the standard default
assumption ("SDA"), represents an assumed rate of default each month relative to
the then-outstanding performing principal balance of a pool of new mortgage
loans. A default assumption of 100% SDA assumes constant default rates of 0.02%
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 0.02% per
annum in each month thereafter until the 30th month. Beginning in the 30th month
and in each month thereafter through the 60th month of the life of the mortgage
loans, 100% SDA assumes a constant default rate of 0.60% per annum each month.
Beginning in the 61st month and in each month thereafter through the 120th month
of the life of the mortgage loans, 100% SDA assumes that the constant default
rate declines each month by 0.0095% per annum, and that the constant default
rate remains at 0.03% per annum in each month after the 120th month. For the
purposes of the following tables, it is assumed that there is no delay
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<PAGE> 59
between the default and liquidation of the mortgage loans. As used in the
following tables, "0% SDA" assumes default rates equal to 0% of SDA (no
defaults). SDA does not purport to be a historical description of default
experience or a prediction of the anticipated rate of default of any pool of
mortgage loans, including the Mortgage Loans.
The following tables indicate the sensitivity of the pre-tax yield to
maturity on the Class B-2 and Class B-3 Certificates to various rates of
prepayment and varying levels of aggregate Realized Losses. The tables set forth
below are based upon, among other things, the Modeling Assumptions (other than
the assumption that no defaults shall have occurred with respect to the Mortgage
Loans) and the additional assumption that liquidations (other than those
scenarios indicated as 0% of SDA (no defaults)) occur monthly on the last day of
the preceding month (other than on a Due Date) at the percentages of SDA set
forth in the table.
In addition, it was assumed that (i) Realized Losses on liquidations of 25%
or 50% of the outstanding principal balance of such Liquidated Mortgage Loans,
as indicated in the tables below (referred to as a "Loss Severity Percentage")
will occur at the time of liquidation, (ii) there are no Special Hazard Losses,
Fraud Losses or Bankruptcy Losses and (iii) the Class B-2 and Class B-3
Certificates are purchased on the Closing Date at assumed purchase prices equal
to 99.12% and 97.20%, respectively, of the Class Certificate Balances thereof
plus accrued interest from August 1, 1998 to (but not including) the Closing
Date.
It is highly unlikely that the Mortgage Loans will have the precise
characteristics referred to herein or that they will prepay or liquidate at any
of the rates specified or that the Realized Losses will be incurred according to
one particular pattern. The assumed percentages of SDA and PSA and the loss
severities shown in the tables below are for illustrative purposes only and the
Sponsor makes no representations with respect to the reasonableness of such
assumptions or that the actual rates of prepayment and liquidation and loss
severity experience of the Mortgage Loans will in any way correspond to any of
the assumptions made herein. For these reasons, and because the timing of cash
flows is critical to determining yield, the pre-tax yield to maturity of the
Class B-2 and Class B-3 Certificates are likely to differ from the pre-tax
yields to maturity shown below in the tables.
The pre-tax yields to maturity set forth in the following tables were
calculated by determining the monthly discount rates which, when applied to the
assumed streams of cash flows to be paid on the Class B-2 and Class B-3
Certificates, would cause the discounted present value of such assumed streams
of cash flows to equal the aggregate assumed purchase prices of the Class B-2
and Class B-3 Certificates set forth above. In all cases, monthly rates were
then converted to the semi-annual corporate bond equivalent yields shown below.
Implicit in the use of any discounted present value or internal rate or return
calculations such as these is the assumption that intermediate cash flows are
reinvested at the discount rates at which investors may be able to reinvest
funds received by them as distributions on the Class B-2 and Class B-3
Certificates. Consequently, these yields do not purport to reflect the total
return on any investment in the Class B-2 and Class B-3 Certificates when such
reinvestment rates are considered.
SENSITIVITY OF PRE-TAX YIELDS TO MATURITY OF
THE CLASS B-2 CERTIFICATES TO PREPAYMENTS AND REALIZED LOSSES
<TABLE>
<CAPTION>
LOSS PERCENTAGE OF PSA
PERCENTAGE SEVERITY ---------------------------------------------
OF SDA PERCENTAGE 0% 100% 275% 400% 500%
- ---------- ----------- ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
0%................................ 0% 6.86% 6.87% 6.87% 6.87% 6.87%
50................................. 25 6.86 6.87 6.87 6.87 6.87
50................................. 50 6.86 6.87 6.87 6.87 6.87
75................................. 25 6.86 6.87 6.87 6.87 6.87
75................................. 50 5.87 6.86 6.87 6.87 6.87
100................................. 25 6.86 6.87 6.87 6.87 6.87
100................................. 50 0.52 4.90 6.87 6.87 6.87
150................................. 25 5.99 6.86 6.87 6.87 6.87
150................................. 50 (32.93) (25.38) 2.67 6.38 6.87
</TABLE>
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<PAGE> 60
SENSITIVITY OF PRE-TAX YIELDS TO MATURITY OF
THE CLASS B-3 CERTIFICATES TO PREPAYMENTS AND REALIZED LOSSES
<TABLE>
<CAPTION>
LOSS PERCENTAGE OF PSA
PERCENTAGE SEVERITY ---------------------------------------------
OF SDA PERCENTAGE 0% 100% 275% 400% 500%
- ---------- ----------- ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
0%................................ 0% 7.04% 7.08% 7.12% 7.14% 7.16%
50................................. 25 7.01 7.08 7.12 7.14 7.16
50................................. 50 5.18 7.03 7.12 7.14 7.16
75................................. 25 7.01 7.06 7.12 7.14 7.16
75................................. 50 (22.99) 0.30 6.89 7.15 7.16
100................................. 25 5.30 7.04 7.12 7.15 7.16
100................................. 50 (37.17) (31.08) 0.56 5.61 7.16
150................................. 25 (22.47) 0.78 7.03 7.15 7.16
150................................. 50 (57.81) (53.62) (44.01) (32.29) (3.87)
</TABLE>
The following table sets forth the amount of Realized losses that would be
incurred with respect to the Mortgage Loans, expressed as a percentage of the
aggregate outstanding principal balance of the Mortgage Loans as of the Cut-off
Date.
AGGREGATE REALIZED LOSSES
<TABLE>
<CAPTION>
LOSS PERCENTAGE OF PSA
PERCENTAGE SEVERITY ---------------------------------------------
OF SDA PERCENTAGE 0% 100% 275% 400% 500%
- ---------- ----------- ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
50%................................ 25% 0.49% 0.39% 0.27% 0.22% 0.19%
50................................. 50 0.98 0.77 0.55 0.44 0.37
75................................. 25 0.73 0.58 0.41 0.33 0.28
75................................. 50 1.46 1.15 0.81 0.65 0.55
100................................. 25 0.97 0.77 0.54 0.43 0.37
100................................. 50 1.94 1.53 1.08 0.87 0.74
150................................. 25 1.44 1.14 0.81 0.65 0.55
150................................. 50 2.88 2.28 1.61 1.30 1.10
</TABLE>
Investors are urged to make their investment decisions based on their
determinations as to anticipated rates of prepayment and Realized Losses under a
variety of scenarios. Investors in Class B-2 and Class B-3 Certificates should
fully consider the risk that Realized Losses on the Mortgage Loans could result
in the failure of such investors to fully recover their investments.
CREDIT SUPPORT
SUBORDINATION OF SUBORDINATE CERTIFICATES
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 each
Class of 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, in each case 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 Holders of the Senior
Certificates and the Holders of the Subordinate Certificates with lower
numerical Class designations of the maximum amount to which they are entitled on
any Distribution Date and to provide such Holders with protection against
Realized Losses, other than Excess Losses.
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<PAGE> 61
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 A-PO Certificates in reimbursement for Class A-PO 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 $5,730,555.80 (the "Special
Hazard Loss Coverage Amount"), (ii) Bankruptcy Losses in an initial amount
expected to be up to approximately $207,394.69 (the "Bankruptcy Loss Coverage
Amount") and (iii) Fraud Losses in an initial amount expected to be up to
approximately $5,728,869.56 (the "Fraud Loss Coverage Amount").
The Special Hazard Loss Coverage Amount will be reduced, from time to time,
to be an amount on any Distribution Date equal to the lesser of (a) the greatest
of (i) 1% of the Pool Principal Balance, (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 initial Special Hazard Loss Coverage Amount 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 will be equal to the initial Fraud Loss Coverage
Amount 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 third anniversaries of
the Cut-off Date will be equal to 1% of the then current Pool Principal Balance.
The Fraud Loss Coverage Amount for each Distribution Date occurring during the
period from the third through the fifth anniversaries of the Cut-off Date will
be equal to 0.5% 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 will be 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 in the aggregate (other than the Class A-6 and
Class A-PO 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 generally 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-6 and Class A-PO Certificates) will be entitled to receive 100%
of the Non-PO Percentage of principal prepayments received with respect to the
Mortgage Loans. See "Description of Certificates -- Principal" herein.
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<PAGE> 62
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 Master REMIC,
respectively. See "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for 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 A-6 and Class A-PO 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 original issue
discount. 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 275% PSA. No representation
is made as to the actual rate at which the Mortgage Loans will be prepaid.
The Class A-5 and Class A-6 Certificates will bear interest at variable
rates. A reasonable application of the principles of the OID Regulations to the
Class A-5 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 -- Federal Income Tax Consequences for REMIC
Certificates -- Taxation of Regular Certificates -- Original Issue Discount" and
"-- Variable Rate Regular Certificates" in the Prospectus.
The federal income tax treatment of regular interests in a REMIC, such as
the Class A-6 Certificates, the payments on which consist solely of interest on
a notional principal amount is unclear. However, it is anticipated that the
Class A-6 Certificates will be considered to be issued with original issue
discount in an amount equal to the excess of all distributions of interest
expected to be received thereon over their issue price (including accrued
interest). Any "negative" amounts of original issue discount on the Class A-6
Certificates attributable to rapid prepayments with respect to the Mortgage
Loans will not be deductible currently, but may be offset against future
positive accruals of original issue discount, if any. See "Certain Federal
Income Tax Consequences -- Federal Income Tax Consequences for REMIC
Certificates -- Taxation of Regular Certificates -- Original Issue Discount" in
the Prospectus.
The Regular Certificates will be treated as regular interests in a REMIC
under Section 860G of the Code. Accordingly, (i) the Regular Certificates will
be treated as assets described in Section 7701(a)(19)(C) of the Code, (ii) the
Regular Certificates will be treated as "real estate assets" within the meaning
of Section 856(c)(4)(A) of the Code, and (iii) 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, in each
case to the extent described in the Prospectus. For purposes of determining the
extent to which the
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<PAGE> 63
Regular Certificates qualify for the treatment described in the preceding
sentence, the Master REMIC and the Subsidiary REMIC will be treated as one
REMIC. See "Certain Federal Income Tax Consequences" in the Prospectus.
RESIDUAL CERTIFICATES
The Holders of the Residual Certificates must include the taxable income or
loss of the applicable REMIC in determining their federal taxable income. The
resulting tax liability of the Holders may exceed cash distributions to such
Holders during certain periods. In addition, all or a portion of the taxable
income from a Residual Certificate recognized by a Holder may be treated as
"excess inclusion" income, which, among other consequences, will result in the
inability of such Holder to use net operating losses to offset such income from
the applicable REMIC.
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" 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 -- Federal Income Tax Consequences for REMIC
Certificates -- Taxation of Residual Certificates -- Tax-Related Restrictions on
Transfer of Residual Certificates -- Noneconomic Residual Interests", "-- Mark
to Market Regulations" 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 -- Federal Income Tax Consequences for REMIC Certificates -- Taxes
That May Be Imposed on the REMIC Pool -- Prohibited Transactions" in the
Prospectus.
BACKUP WITHHOLDING AND REPORTING REQUIREMENTS
Certain Holders or other beneficial owners of Offered Certificates may be
subject to backup withholding at the rate of 31% with respect to interest paid
on the Offered Certificates if such Holders or beneficial owners, upon issuance,
fail to supply the Trustee or their broker with their taxpayer identification
number, furnish an incorrect taxpayer identification number, fail to report
interest, dividends or other "reportable payments" (as defined in the Code)
properly, or, under certain circumstances, fails to provide the Trustee or their
broker with a certified statement, under penalty of perjury, that they are not
subject to backup withholding. See "Certain Federal Income Tax
Consequences -- Federal Income Tax Consequences for REMIC Certificates -- Backup
Withholding" in the Prospectus.
The Trustee will be required to report annually to the Internal Revenue
Service (the "IRS"), and to each Certificateholder of record, the amount of
interest paid (and OID accrued, if any) on the Regular 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 "Certificateholder" of
record of the Offered Certificates (other than the Residual Certificates) is
Cede, as nominee for DTC, beneficial owners of the Offered Certificates and the
IRS will receive tax and other information including the amount of interest paid
on such Certificates from DTC Participants rather than from the Trustee. (The
Trustee, however, will respond to requests for necessary information to enable
DTC Participants and certain other persons to complete their reports.) See
"Certain Federal Income Tax Consequences -- Federal Income Tax Consequences for
REMIC Certificates -- Reporting Requirements" in the Prospectus.
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 tax advisors regarding such tax consequences.
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<PAGE> 64
All investors should consult their 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 NationsBank Corporation, the
corporate parent of NationsBanc Montgomery Securities LLC, 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.
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 Underwriter believes 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 Cut-off Date Pool
Principal Balance of the Mortgage Loans.
Because the Class B Certificates are subordinated to the Senior
Certificates, the Class B Certificates may not be transferred unless the
transferee has delivered (i) a representation letter to the Trustee stating
either (a) that the transferee is not a Plan and is not acting on behalf of a
Plan or using the assets of a Plan to effect such purchase or (b) subject to the
conditions described herein, that the source of funds used to purchase the Class
B Certificates is an "insurance company general account" or (ii) an opinion of
counsel and such other documentation as described herein under "Description of
Certificates -- Restrictions on Transfer of the Class B Certificates" herein.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 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 governing plan instruments and 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.
A person investing on behalf of an individual retirement account
established under Section 408 of the Code (an "IRA") is regarded as a fiduciary
and the IRA as a Plan if the IRA is endorsed by or contributed to by the IRA
participant's employer or employee organization. Other IRAs are subject to
ERISA-like requirements as well as the prohibited transaction provisions of the
Code, but are not covered by the administrative exemptions discussed herein and
under "ERISA Considerations" in the Prospectus. Therefore, prospective IRA
investors should consult with their legal advisors concerning the impact of
ERISA and the Code prior to making an investment in the Offered Certificates.
The Class R Certificates may not be purchased by or transferred to a Plan
or IRA or a person acting on behalf of or investing assets of a Plan or IRA. See
"Description of Certificates -- Restrictions on Transfer of the Class R
Certificates" herein.
S-64
<PAGE> 65
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") between the Sponsor and the Underwriter, the
Sponsor has agreed to sell to the Underwriter, and the Underwriter has agreed to
purchase from the Sponsor, all of the Offered Certificates:
Distribution of the Offered Certificates will be made by the Underwriter
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 Underwriter may be deemed to have received
compensation from the Sponsor in the form of underwriting discounts.
The Sponsor has been advised by the Underwriter that it intends 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 Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
The Underwriter is an affiliate of the Sponsor, the Seller and the Master
Servicer, and is a registered broker/dealer. Any obligations of the Underwriter
are the sole responsibility of the Underwriter and do not create any obligation
or guarantee on the part of any affiliate of the Underwriter. This Prospectus
Supplement and the Prospectus may be used by the Underwriter in connection with
offers and sales related to market-making transactions in the Offered
Certificates. The Underwriter may act as principal or agent in such
transactions.
LEGAL MATTERS
The validity of the Offered Certificates and certain federal income tax
matters with respect thereto will be passed upon for the Sponsor by Kennedy
Covington Lobdell & Hickman, L.L.P., Charlotte, North Carolina. Cadwalader,
Wickersham & Taft, New York, New York will pass upon certain legal matters on
behalf of the Underwriter.
S-65
<PAGE> 66
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
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P") and
Fitch IBCA, Inc. ("Fitch"):
<TABLE>
<CAPTION>
CLASS S&P 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......................................................... AAAr AAA
A-7......................................................... AAA AAA
A-8......................................................... AAA AAA
A-9......................................................... AAA AAA
A-10........................................................ AAA AAA
A-11........................................................ AAA AAA
A-12........................................................ AAA AAA
A-13........................................................ AAA AAA
A-14........................................................ AAA AAA
A-15........................................................ AAA AAA
A-16........................................................ AAA AAA
A-PO........................................................ AAAr AAA
R-I......................................................... AAA AAA
R-II........................................................ AAA AAA
B-1......................................................... * AA
B-2......................................................... * A
B-3......................................................... * BBB
</TABLE>
- ---------------
* The Sponsor has requested ratings of the Class B-1, Class B-2 and Class
B-3 Certificates only from Fitch.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by Certificateholders of payments required under the Pooling Agreement.
S&P'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. S&P's and Fitch's ratings on the Offered Certificates do
not, however, constitute a statement regarding frequency of prepayments on the
Mortgage Loans. The "r" symbol is appended to the rating by S&P of the Class A-6
and Class A-PO Certificates because they are interest-only or principal-only
mortgage-backed securities that S&P believes may experience high volatility or
high variability in expected returns due to non-credit risks created by the
terms of such Certificates. The absence of an "r" symbol in the ratings of the
other Offered Certificates should not be taken as an indication such
Certificates will exhibit no volatility or variability in total return. The
ratings also do not address the possibility that, as a result of principal
prepayments, the Holder of a Class A-6 Certificate may not fully recover its
initial investment. In addition, S&P'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 S&P 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
S-66
<PAGE> 67
assigned by any such other rating agency to a Class of Offered Certificates may
be lower than the ratings assigned by S&P 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-67
<PAGE> 68
INDEX TO DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Advance..................................................... S-10, S-27
Available Funds............................................. S-31
Bankruptcy Loss Coverage Amount............................. S-61
Bankruptcy Losses........................................... S-40
BBA......................................................... S-33
Beneficial Owner............................................ S-29
Book-Entry Certificates..................................... S-29
Cede........................................................ S-29
Certificate Account......................................... S-26
Certificateholder........................................... S-2, S-31
Certificates................................................ Cover, S-5, S-29
Class....................................................... S-29
Class A Certificates........................................ S-29
Class A-16 Percentage....................................... S-38
Class A-6 Notional Amount................................... S-2, S-5
Class A-16 Principal Distribution Amount.................... S-37
Class A-16 Shift Percentage................................. S-38
Class A-PO Deferred Amount.................................. S-39
Class A-PO Principal Distribution Amount.................... S-38
Class Certificate Balance................................... S-29
Class Subordination Percentage.............................. S-39
Closing Date................................................ Cover, S-6
Code........................................................ S-12, S-62
Compensating Interest....................................... S-11, S-27
Credit Support Percentage................................... S-38
Cut-off Date................................................ S-6
Cut-off Date Pool Principal Balance......................... S-6
Debt Service Reduction...................................... S-40
Decrement Tables............................................ S-44
Deficient Valuation......................................... S-40
Definitive Certificates..................................... S-29
Deleted Mortgage Loan....................................... S-26
Determination Date.......................................... S-27
Discount Mortgage Loan...................................... S-2, S-9, S-34
Distribution Account........................................ S-26
Distribution Date........................................... S-2, S-6, S-31
DTC......................................................... S-29
DTC Participant............................................. S-30
Due Date.................................................... S-17
Eligible Substitute Mortgage Loan........................... S-26
ERISA....................................................... S-12, S-64
Excess Losses............................................... S-40
Exemption................................................... S-64
Expense Fee Rate............................................ S-10, S-26
Expense Fees................................................ S-26
FHLMC....................................................... S-17
FICO Scores................................................. S-21
Fitch....................................................... S-12, S-66
FNMA........................................................ S-17
</TABLE>
S-68
<PAGE> 69
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fraud Loss Coverage Amount.................................. S-61
Fraud Losses................................................ S-40
Holder...................................................... S-2, S-31
Indirect DTC Participants................................... S-30
Interest Accrual Period..................................... S-7, S-33
Interest Distribution Amount................................ S-7, S-32
Interest Settlement Rate.................................... S-33
IRA......................................................... S-12, S-64
IRS......................................................... S-63
Last Scheduled Distribution Date............................ S-40
LIBOR....................................................... S-2, S-33
LIBOR Determination Date.................................... S-33
Limited or Reduced Documentation Guidelines................. S-22
Liquidated Mortgage Loan.................................... S-40
Liquidation Proceeds........................................ S-31
Loan-to-Value Ratio......................................... S-17
Loss Severity Percentage.................................... S-59
Master REMIC................................................ S-3, S-11, S-62
Master Servicer............................................. Cover, S-6, S-23
Master Servicing Fee........................................ S-26
Master Servicing Fee Rate................................... S-26
Modeling Assumptions........................................ S-44
Monthly Payment............................................. S-17
Mortgage File............................................... S-25
Mortgage Loans.............................................. Cover, S-6, S-17
Mortgage Pool............................................... Cover, S-17
Mortgage Rate............................................... S-17
Mortgaged Property.......................................... S-6, S-17
Mortgagor................................................... S-14
Net Interest Shortfall...................................... S-32
Net Mortgage Rate........................................... S-34
Net Prepayment Interest Shortfall........................... S-32
Non-Offered Certificates.................................... S-5
Non-PO Percentage........................................... S-34
Non-PO Principal Amount..................................... S-34
Norwest Bank................................................ S-28
Offered Certificates........................................ Cover, S-5, S-29
Original Credit Support Percentage.......................... S-38
Original Subordinate Principal Balance...................... S-37
Pass-Through Rate........................................... S-7, S-32
Percentage Interest......................................... S-28
Plan........................................................ S-12, S-64
PO Percentage............................................... S-34
PO Principal Amount......................................... S-38
Pool Principal Balance...................................... S-36
Pooling Agreement........................................... Cover, S-6, S-25
Premium Mortgage Loan....................................... S-34
Prepayment Interest Shortfall............................... S-32
Prospectus.................................................. S-3
PSA......................................................... S-45
PTCE 95-60.................................................. S-42
</TABLE>
S-69
<PAGE> 70
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Purchase Price.............................................. S-26
Rating Agencies............................................. S-12
Realized Loss............................................... S-40
Record Date................................................. S-6, S-31
Relief Act Reduction........................................ S-32
REMIC....................................................... S-3, S-11, S-62
REO Property................................................ S-27
Reserve Interest Rate....................................... S-33
Residual Certificateholders................................. S-57
Residual Certificates....................................... S-29
Restricted Classes.......................................... S-38
Rules....................................................... S-30
S&P......................................................... S-12, S-66
Sale Agreement.............................................. S-17
SDA......................................................... S-58
Seller...................................................... S-2, S-6, S-23
Senior Certificates......................................... S-2, S-29
Senior Credit Support Depletion Date........................ S-36
Senior Percentage........................................... S-36
Senior Prepayment Percentage................................ S-36
Senior Principal Distribution Amount........................ S-36
SMMEA....................................................... S-12
Special Hazard Loss Coverage Amount......................... S-61
Special Hazard Losses....................................... S-40
Special Hazard Mortgage Loan................................ S-40
Sponsor..................................................... Cover, S-6
Stated Principal Balance.................................... S-36
Subordinate Certificates.................................... S-2, S-29
Subordinate Percentage...................................... S-36
Subordinate Prepayment Percentage........................... S-37
Subordinate Principal Distribution Amount................... S-39
Subsidiary REMIC............................................ S-3, S-11, S-62
Substitution Adjustment Amount.............................. S-26
Telerate Page 3750.......................................... S-33
Trust Fund.................................................. Cover
Trustee..................................................... Cover, S-6
Trustee Fee Rate............................................ S-26
Underwriter................................................. Cover
Underwriting Agreement...................................... S-65
U.S. Person................................................. S-41
Voting Rights............................................... S-28
</TABLE>
S-70
<PAGE> 71
PROSPECTUS
NATIONSBANC MONTGOMERY FUNDING CORP.
SPONSOR
MORTGAGE PASS-THROUGH CERTIFICATES (ISSUABLE IN SERIES)
THESE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN
NATIONSBANC MONTGOMERY FUNDING CORP. 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 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 Trust Fund.
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 Trust Fund. 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 lien 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) Freddie Mac 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 ("Freddie Mac"), (c) Fannie Mae Certificates
guaranteed as to timely payment of principal and interest by the Federal
National Mortgage Association ("Fannie Mae") 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. Fannie Mae Certificates and Freddie Mac
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 each 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 Trust Fund 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.
August 14, 1998
<PAGE> 72
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 Trust Fund as a REMIC; (viii) certain information
concerning the Mortgage Assets and any other assets included in the Trust Fund
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
Trust Fund (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.
2
<PAGE> 73
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by or on behalf of the Trust Fund 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 Trust Fund 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 Trust Fund 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 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:
NationsBanc Montgomery Funding Corp.
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> 74
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT....................................... 2
ADDITIONAL INFORMATION...................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 3
SUMMARY OF THE PROSPECTUS................................... 6
THE TRUST FUNDS............................................. 14
General................................................... 14
The Mortgage Loans........................................ 14
Mortgage Certificates..................................... 16
Certificate Account....................................... 20
Minimum Prepayment Agreement.............................. 20
Minimum Reinvestment Agreement............................ 21
DESCRIPTION OF CERTIFICATES................................. 21
General................................................... 21
Distributions............................................. 22
Categories of Classes of Certificates..................... 24
Residual Certificates..................................... 26
Advances.................................................. 27
Reports to Certificateholders............................. 27
Special Distributions..................................... 28
CREDIT SUPPORT.............................................. 28
General................................................... 28
Subordination............................................. 29
Surety Bonds.............................................. 29
Mortgage Pool Insurance Policies.......................... 29
Fraud Waiver.............................................. 30
Special Hazard Insurance Policies......................... 31
Bankruptcy Bonds.......................................... 31
Reserve Fund.............................................. 32
Cross Support............................................. 32
Other Insurance, Guaranties, Letters of Credit and Similar
Instruments or Agreements.............................. 32
MATURITY, PREPAYMENT CONSIDERATIONS AND WEIGHTED AVERAGE
LIFE OF CERTIFICATES...................................... 33
THE SPONSOR................................................. 33
USE OF PROCEEDS............................................. 34
MORTGAGE PURCHASE PROGRAM................................... 34
THE POOLING AND SERVICING AGREEMENT......................... 34
Assignment of Mortgage Loans.............................. 34
Representations and Warranties............................ 36
Servicing................................................. 37
Payments on Mortgage Loans................................ 37
Collection and Other Servicing Procedures................. 38
Hazard Insurance.......................................... 39
Primary Mortgage Insurance................................ 40
Maintenance of Insurance Policies; Claims Thereunder and
Other Realization Upon Defaulted Mortgage Loans........ 40
Servicing Compensation and Payment of Expenses............ 41
Evidence as to Compliance................................. 41
Certain Matters Regarding the Sponsor, the Seller and the
Servicer............................................... 41
Events of Default......................................... 42
Rights Upon Event of Default.............................. 42
</TABLE>
4
<PAGE> 75
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Enforcement............................................... 42
Amendment................................................. 42
List of Certificateholders................................ 43
Termination; Repurchase of Mortgage Loans and Mortgage
Certificates........................................... 43
The Trustee............................................... 44
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS................. 44
Mortgages................................................. 44
Cooperatives.............................................. 44
Land Sale Contracts....................................... 45
Foreclosure............................................... 45
Rights of Redemption...................................... 48
Anti-Deficiency Legislation and Other Limitations on
Sellers................................................ 48
Due-on-Sale Clauses....................................... 48
Applicability of Usury Laws............................... 49
Soldiers' and Sailors' Civil Relief Act................... 49
Environmental Legislation................................. 49
ERISA CONSIDERATIONS........................................ 50
Plan Assets Regulations................................... 50
Underwriters' Exemptions.................................. 51
Other Exemptions.......................................... 52
Exempt Plans.............................................. 53
Unrelated Business Taxable Income -- Residual
Certificates........................................... 53
LEGAL INVESTMENT CONSIDERATIONS............................. 53
LEGAL MATTERS............................................... 55
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................... 55
Federal Income Tax Consequences for REMIC Certificates.... 55
General................................................ 55
Status of REMIC Certificates........................... 56
Qualification as a REMIC............................... 56
Taxation of Regular Certificates....................... 58
Taxation of Residual Certificates...................... 65
Taxes that May Be Imposed on the REMIC Pool............ 71
Liquidation of the REMIC Pool.......................... 72
Administrative Matters................................. 72
Limitations on Deduction of Certain Expenses........... 72
Taxation of Certain Foreign Investors.................. 73
Backup Withholding..................................... 74
Reporting Requirements................................. 74
Federal Income Tax Consequences for Certificates as to
Which No REMIC Election Is Made........................ 75
General................................................ 75
Tax Status............................................. 75
Premium and Discount................................... 76
Recharacterization of Servicing Fees................... 77
Sale or Exchange of Certificates....................... 77
Stripped Certificates.................................. 78
Reporting Requirements and Backup Withholding.......... 81
Taxation of Certain Foreign Investors.................. 81
STATE TAX CONSIDERATIONS.................................... 81
PLANS OF DISTRIBUTION....................................... 81
INDEX TO DEFINED TERMS...................................... 83
</TABLE>
5
<PAGE> 76
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. CERTAIN CAPITALIZED TERMS USED IN THIS SUMMARY OF
THE PROSPECTUS ARE DEFINED ELSEWHERE IN THE PROSPECTUS. SEE "INDEX TO DEFINED
TERMS." THE SUPPLEMENT FOR EACH SERIES WILL SPECIFY THE EXTENT (IF ANY) TO WHICH
THE TERMS OF SUCH SERIES OR THE RELATED TRUST FUND VARY FROM THE DESCRIPTION OF
CERTIFICATES AND TRUST FUNDS IN GENERAL WHICH IS CONTAINED IN THIS PROSPECTUS.
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.................... NationsBanc Montgomery Funding Corp. (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"), if such duties
are not performed by the Servicer or the Trustee,
will be specified in the related Supplement if a
REMIC election is made with respect to the
related Trust Fund, the REMIC Servicer may be the
Sponsor, the Servicer, the Trustee or an
affiliate thereof.
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 Trust Fund to be formed by the
Sponsor or in certain monthly payments with
respect to such Trust Fund. 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.
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
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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 Trust Fund or the Certificates of
one or more classes in the related Series may
have the benefit of one or more types of credit
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 Trust Fund 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 Trust Fund 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 Trust Fund 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 or classes of Subordinate Certificates
in a Series, the circumstances in which such
subordination will be applicable and the man-
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<PAGE> 78
ner, 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 Trust Fund for such Series and will
also specify the manner of funding the related
Reserve Fund and the conditions under which the
amounts in any such Reserve Fund will be used to
make distributions to holders of Certificates of
a particular class or released from the related
Trust Fund.
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 Trust Fund 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 (each, a "Bankruptcy
Bond") 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
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<PAGE> 79
level 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 Trust Fund may be evidenced by
separate classes of the related Series of
Certificates. In such case, credit support may be
provided by a cross-support feature which
requires that distributions be made with respect
to Certificates evidencing beneficial ownership
of one or more asset groups prior to
distributions to Subordinate Certificates
evidencing a beneficial ownership interest in
other asset groups within the same Trust Fund.
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 Trust Fund and/or
to the mortgage loans underlying the 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 the Mortgage
Loans. Any such Advances will be reimbursable to
the extent described herein and in the related
Supplement.
The Trust Funds............ Each Trust Fund 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 Trust Fund (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 Trust Fund 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 Trust Fund 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:
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<PAGE> 80
(a) Interest may be payable at a fixed rate, a
rate adjustable from time to time in relation to
an index (which will be specified in the related
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
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<PAGE> 81
causes. The Mortgage Loans may be covered by
Primary Mortgage Insurance Policies to the extent
provided in the related Supplement.
B. Mortgage
Certificates........ The Trust Fund may include certain assets (the
"Mortgage Certificates") which may consist of
GNMA Certificates, Fannie Mae Certificates,
Freddie Mac Certificates, Private Certificates or
a combination thereof. Any GNMA Certificates
included in a Trust Fund 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
Freddie Mac Certificates included in the Trust
Fund 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 Freddie Mac. Any Fannie
Mae Certificates included in a Trust Fund will be
guaranteed as to timely payment of scheduled
payments of principal and interest by Fannie Mae.
No Fannie Mae or Freddie Mac 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, Fannie Mae
and Freddie Mac Certificates and of Private
Certificates included in a Trust Fund 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 Trust Fund
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, Fannie Mae and Freddie Mac 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 Trust Fund 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.
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<PAGE> 82
Optional Termination....... The Servicer, such other entity specified in the
related Supplement, 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 Trust Fund and thereby
terminate the related Pooling Agreement. Any such
option will be exercisable at the 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 "qualifying real property
loans" for mutual savings banks and domestic
building and loan associations, "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 -- Federal Income Tax Consequences
for 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
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<PAGE> 83
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 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 -- Federal Income Tax Consequences
for Certificates as to Which No REMIC Election is
Made" 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 Considerations" 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 Trust
Fund 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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<PAGE> 84
THE TRUST FUNDS*
GENERAL
Each Trust Fund 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 (each, a
"Mortgage Note") 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 Trust Fund from among those purchased by the Sponsor, 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 Trust Fund 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 Trust Fund 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
- ---------------
* 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.
14
<PAGE> 85
increased income is not fulfilled, the possibility of defaults on Buydown Loans
is increased. The related Supplement will 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 Trust Fund may contain certain Mortgage Loans evidenced by installment
sale contract ("Land Sale Contracts") for the sale of Mortgaged Properties
pursuant to which the Borrower promises to pay the amount due thereon to the
Lender thereof with fee title to the related Mortgaged Property held by the
Lender until the Borrower has made all of the payments required pursuant to such
Land Sale Contract, at which time fee title is conveyed to the Borrower.
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 Trust Fund 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 Trust Fund, 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 nonowner-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 Trust Fund 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 Trust Fund. 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 Trust Fund 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 Trust Fund 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
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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.
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 Trust Fund 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 Trust Fund that includes ARMs, the Trust Fund 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, Freddie Mac and Fannie Mae 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, Freddie Mac, Fannie Mae 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 Trust Fund (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 Trust Fund.
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.
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GNMA Certificates. All of the GNMA Certificates (the "GNMA Certificates")
will be mortgage-backed certificates issued and serviced by GNMA- or Fannie
Mae-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 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 Trust Fund 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 Trust Fund 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 Trust Fund, and the
related underlying mortgage loans, may have characteristics and terms different
from those described above. Any such different characteristics and terms will be
described in the related Supplement.
Freddie Mac. Freddie Mac is a federally-chartered and stockholder-owned
corporation created pursuant to Title III of the Emergency Home Finance Act of
1970, as amended (the "Freddie Mac Act"). Freddie Mac 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 Freddie Mac currently consists of the purchase of first lien
conventional
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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. Freddie Mac is confined to purchasing, so far as practicable,
conventional mortgage loans and participation interests therein which it deems
to be of such quality, type and class as to meet generally the purchase
standards imposed by private institutional mortgage investors.
Freddie Mac Certificates. Freddie Mac Certificates ("Freddie Mac
Certificates") represent an undivided interest in a group of mortgage loans
purchased by Freddie Mac. Mortgage loans underlying the Freddie Mac Certificates
included in a Trust Fund 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.
Freddie Mac 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 Freddie Mac Certificates ordinarily through
one or more financial intermediaries. The rights of a beneficial owner of a
Freddie Mac Certificate against Freddie Mac 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, Freddie Mac guarantees to each
registered holder of a Freddie Mac Certificate the timely payment of interest at
the rate provided for by such Freddie Mac Certificate on the registered holder's
pro rata share of the unpaid principal balance outstanding of the related
mortgage loans, whether or not received. Freddie Mac also guarantees to each
registered holder of a Freddie Mac 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,
Freddie Mac indemnifies holders of Freddie Mac Certificates against any
diminution in principal by reason of charges for property repairs, maintenance
and foreclosure. Freddie Mac 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 Freddie Mac Certificates,
including the timing of demand for acceleration, Freddie Mac 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 Freddie Mac's Cash Program, there is no limitation on the amount by
which interest rates on the mortgage loans underlying a Freddie Mac Certificate
may exceed the interest rate on the Freddie Mac Certificate. For Freddie Mac
Pools formed under Freddie Mac'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, Freddie Mac guarantees to each registered holder
of a Freddie Mac 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 Freddie Mac Certificate.
Freddie Mac 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 Freddie Mac under its
guarantee are obligations solely of Freddie Mac and are not backed by, nor
entitled to, the full faith and credit of the United States.
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As described above, the Freddie Mac Certificates included in a Trust Fund,
and the related underlying mortgage loans, may have characteristics and terms
different from those described above. Any such different characteristics and
terms will be described in the related Supplement.
Fannie Mae. Fannie Mae is a federally-chartered and stockholder-owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act, as amended. Fannie Mae was originally established in
1938 as a United States government agency to provide supplemental liquidity to
the mortgage market and was transformed into a stockholder owned and privately
managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market primarily by purchasing
home mortgage loans from local lenders, thereby replenishing their funds for
additional lending. Fannie Mae 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, Fannie Mae helps to redistribute mortgage funds from capital-surplus
to capital-short areas. In addition, Fannie Mae issues mortgage-backed
securities primarily in exchange for pools of mortgage loans from lenders.
Fannie Mae Certificates. Fannie Mae Certificates ("Fannie Mae
Certificates") represent fractional interests in a pool of mortgage loans formed
by Fannie Mae.
Fannie Mae guarantees to each registered holder of a Fannie Mae 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 Fannie Mae were unable to perform
such obligations, distributions on Fannie Mae 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 Fannie Mae Certificates. The obligations of Fannie Mae under its
guarantees are obligations solely of Fannie Mae and are not backed by, nor
entitled to, the full faith and credit of the United States.
As described above, the Fannie Mae Certificates included in a Trust Fund,
and the related underlying mortgage loans, may have characteristics and terms
different from those described above. Any such different characteristics and
terms will be described in the related 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) or 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 two 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").
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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 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 Trust Fund 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 Trust Fund; (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 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.
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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 Trust Fund 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 to purchase, from time to
time, Mortgage Assets included in the Trust Fund 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 Trust Fund.
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
Trust Fund.
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 Trust Fund 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 Trust Fund created pursuant to the related
Pooling Agreement and will not be entitled to payments in respect of the assets
included in any other Trust Fund 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
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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 Trust Fund. 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
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 Trust Fund, 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 Trust Fund 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
Trust Funds -- Certificate Account" and "The Pooling and Servicing
Agreement -- 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
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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 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 Trust Fund 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 Trust Fund
and will be available to make distributions on the related Certificates.)
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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 Class............. A class that receives principal payments from amounts that
would otherwise be distributed as interest on specified
Accrual Classes. Such principal payments may be in lieu of
or in addition to principal payments from principal receipts
on the Mortgage Assets or other assets of the Trust Fund for
the related Series.
Component Certificates............... A class consisting of two or more specified components
(each, a "Component"), as described in the applicable
Supplement. The Components of a class of Component
Certificates may have different principal and/or interest
payment characteristics but together constitute a single
class and do not represent several interests. Each Component
of a class of Component Certificates may be identified as
falling into one or more of the categories in this chart.
Lockout Class........................ A senior class that is designed not to participate in (i.e.,
is to be "locked out" of), for a specified period, the
receipt of (1) principal prepayments on the Mortgage Loans
that are allocated disproportionately to the senior classes
of such Series as a group pursuant to a "shifting interest"
structure and/or (2) scheduled principal payments on the
Mortgage Loans that are allocated to the senior classes of
such Series as a group. A Lockout Class typically will not
be entitled to receive distributions of principal
prepayments and/or scheduled principal payments, as
applicable, for a period of several years, during which time
all or a portion of such principal payments that it would
otherwise be entitled to receive in the absence of a
"lockout" structure will be distributed in reduction of the
Class Certificate Balances of other senior classes. Lockout
Classes are designed to minimize their weighted average life
volatility during the lockout period.
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 Amortization Class (also
sometimes referred to as a
"PAC")............................. 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 Amortization Class. The
Planned Amortization Classes in any Series of Certificates
may be subdivided into different categories (e.g., Planned
Amortization Class I ("PAC I"), Planned Amortization Class
II ("PAC II") and so forth) derived using different
structuring ranges. A PAC is designed to provide protection
against prepayments occurring at a constant rate within the
structuring range.
</TABLE>
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<PAGE> 95
<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
- --------------------- ----------
<S> <C>
Scheduled Amortization Class......... A class that is designed to receive principal payments using
a predetermined principal balance schedule but is not
designated as a Planned Amortization Class or Targeted
Amortization Class. The schedule is derived by assuming
either two constant prepayment rates or a single constant
prepayment rate for the Mortgage Assets. In the former case,
these two rates are the endpoints for the "structuring
range" for the Scheduled Amortization Class and such range
is generally narrower than that for a Planned Amortization
Class. Typically, the Support Class for the applicable
Series of Certificates generally will represent a smaller
percentage of the Scheduled Amortization Class than a
Support Class generally would represent in relation to a
Planned Amortization Class or a Targeted Amortization Class.
A Scheduled Amortization Class is generally less sensitive
to prepayments than a Support Class, but more sensitive than
a Planned Amortization Class or a Targeted Amortization
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 Class................. Classes that receive principal payments in a prescribed
sequence, that do not have predetermined principal balance
schedules and that, in most cases, are entitled to receive
payments of principal continuously from the first
Distribution Date on which they receive principal until they
are retired. Sequential Pay Classes may receive payments of
principal concurrently with one or more other sequential Pay
Classes. A single class that is entitled to receive
principal payments before or after all other classes in the
same Series of Certificates may be identified as a
Sequential Pay Class.
Ratio Strip Class.................... A class that receives a constant proportion, or "ratio
strip," of the principal payments on the Mortgage Assets.
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 a "Companion
Class")............................ A class that is entitled to receive principal payments on
any Distribution Date only if scheduled payments have been
made on specified Planned Amortization Classes, Targeted
Amortization Classes and/or Scheduled Amortization Classes.
Targeted Amortization Class (also
sometimes referred to as a
"TAC")............................. 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. A TAC is designed to provide some protection against
prepayments at a rate exceeding the assumed constant
prepayment used to derive the principal balance schedule for
such Class.
</TABLE>
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<PAGE> 96
<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
- --------------------- ----------
<S> <C>
INTEREST TYPES
Accrual Class........................ 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 Class..................... A class with a Certificate Rate that is fixed throughout the
life of the class.
Floating Rate Class.................. 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 Rate Class.......... A class with a Certificate Rate that resets periodically
based upon a designated Index and that varies inversely with
changes in such Index. The Certificate Rate for an Inverse
Floating Rate Class typically will vary inversely with
changes in the Certificate Rate on a Floating Rate Class in
the same Series.
IO or Interest-Only Class............ Certificates that receive some or all of the interest
payments made on the Mortgage Assets and little or no
principal. Interest-Only Classes 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 Interest-Only Class that is not entitled
to any distributions in respect of principal.
PO or Principal-Only Class........... A class that does not bear interest and is entitled to
receive only distributions in respect of principal.
Variable Rate Class.................. 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
Trust Fund).
</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 Trust Fund and will
have sole rights with respect to the Mortgage Assets and other assets remaining
in such Trust Fund. 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 Trust Fund.
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<PAGE> 97
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> 98
(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
Trust Fund. 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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<PAGE> 99
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 Trust
Funds. If applicable, the related Supplement will identify the Trust Funds to
which such credit support relates and the manner of determining the amount of
the coverage provided thereby and of the application of such coverage to the
identified Trust Funds.
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 Trust Fund
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 Trust Fund
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 Trust Fund for such
Series.
The Reserve Fund for a Series will be funded (i) by the deposit therein of
cash, U.S. Treasury securities 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 Trust Fund may be evidenced by separate
classes of the related Series of Certificates. In such case, credit support may
be provided by a cross support feature which requires that distributions be made
with respect to Certificates evidencing a beneficial ownership interest in other
asset groups within the same Trust Fund. The related 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 Trust Fund 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 Trust Fund, (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
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entitled to receive amounts deposited in various accounts held by the Trustee
upon the terms specified in such Supplement.
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 Trust Fund, 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 Trust Fund, 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
NationsBanc Montgomery Funding Corp. (formerly known as 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 an indirect subsidiary of NationsBank Corporation. The Sponsor
maintains its principal office at NationsBank Corporate Center, Charlotte, North
Carolina 28255. Its telephone number is (704) 386-2400.
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Neither the Sponsor nor any of the Sponsor's affiliates will ensure or
guarantee distributions on the Certificates of any Series.
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 Trust Fund. 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
Trust Fund to be assigned to the Trustee together with all
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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 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 in those
jurisdictions where the original is retained 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
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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.
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 in the related Pooling Agreement 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 (each, a "Sale Agreement").
In the Sale Agreement or, if a party thereto, the Pooling 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
Mortgage 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 Trust Fund 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 Trust Fund 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 Trust Fund;
(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
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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.
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 applicable law.
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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 Trust Fund 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 Trust Fund 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,
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the Pooling Agreement will 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
Trust Fund 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 distribute to the Trustee, on behalf of
Certificateholders, any required payment 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 60 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
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ambiguity, (ii) to correct a defective provision or correct or supplement any
provision therein that may be 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 (if a party thereto), 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 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 such other
entity specified in the related Supplement 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 the Servicer'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
Trust Fund relating to such Series. Any such option will be
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exercisable, in the case of holders of Residual Certificates, at such time and
under the circumstances specified 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 Trust Fund to be
treated as an association taxable as a corporation and will not otherwise
subject the REMIC Trust Fund 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 Trust Fund, the collateral securing the
Cooperative Loans.
LAND SALE CONTRACTS
Under a Land Sale Contract the contract seller (the "Lender") retains legal
title to the property and enters into an agreement with the contract purchaser
(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
Borrower. 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 a Land Sale 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 Borrower'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 Borrower 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, 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 completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties defendant.
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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 performance of
covenants required thereunder. Typically, the lender and the cooperative enter
into a
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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 further protection, a leasehold mortgage may provide
for the assignment of the debtor-ground lessee's right to
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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
generally unenforceable. However, the Garn-St Germain Depository Institutions
Act of 1982 (the "Garn-St
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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. A Plan fiduciary should consider especially
the ERISA requirement of investment prudence and the sensitivity of the return
on the Certificates to the rate of principal payments on the Mortgage Loans, as
discussed under "Maturity, Prepayment Considerations and Weighted Average Life
of Certificates" herein and "Prepayment and Yield Considerations" in the
applicable Supplement.
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 Trust Fund, 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 Trust Fund 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 (including the prohibited transaction provisions of ERISA and the Code),
if the Plan acquires an "equity interest" in such entity (such as by acquiring
Certificates). Certain exceptions are provided in the Labor Regulations whereby
an investing Plan's assets would be deemed merely to include its interest in the
Certificates instead of being deemed to include an interest in the underlying
assets of the related Trust Fund. However, it cannot be predicted in advance nor
can there be any continuing assurance whether such exceptions may be met,
because of the factual nature of certain of the rules set forth in the Labor
Regulations. For example, one of the exceptions in the Labor Regulations states
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 initial issuance or in the secondary market, less than
twenty-five percent (25%) of the value of each class of equity interest is held
by "benefit plan investors", which term is defined to include Plans, individual
retirement accounts, other employee benefit plans not subject to ERISA (for
example, governmental plans) and any entity whose underlying assets include
"plan assets" by reason of employee benefit plan investments in such entity.
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 Freddie Mac Certificates, GNMA Certificates and
Fannie Mae Certificates which may be included in a Trust Fund underlying a
Series of Certificates. Accordingly, even if such Mortgage Certificates included
in a Trust Fund 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.
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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.
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, a division of The McGraw-Hill
Companies ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff &
Phelps Credit Rating Co. ("DCR") or Fitch IBCA, Inc. ("Fitch");
(4) the trustee must not be an affiliate of any other member of the
Restricted Group (as described below);
(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 in the marketplace;
(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 DCR
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 and hold 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,
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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 (collectively, the "Restricted Group").
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.
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 ("PTCE 83-1").
PTCE 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 or the Code. The term
"mortgage pool pass-through certificate" is defined in PTCE 83-1 as "a
certificate representing a beneficial undivided fractional interest in a
mortgage pool and entitling the holder of such certificate to pass-through
payment of principal and interest from the pooled mortgage loans, less any fees
retained by the pool sponsor." It appears that, for purposes of PTCE 83-1, the
term "mortgage pool pass-through certificate" would include Certificates issued
in a single Class or in multiple Classes that evidence the beneficial ownership
of both a specified percentage of future interest payments (after permitted
deductions) and a specified percentage of future principal payments on a Trust
Fund.
However, it appears that PTCE 83-1 does not or might not apply to the
purchase and holding of (a) Certificates that evidence the beneficial ownership
only of a specified percentage of future interest payments (after permitted
deductions) from a Trust Fund or only a specified percentage of future principal
payments from a Trust Fund, (b) Residual Certificates, (c) Certificates
evidencing ownership interests in a Trust Fund which includes Mortgage Loans
secured by multi family residential properties or shares issued by cooperative
housing corporations, (d) Subordinated Certificates, (e) Certificates evidencing
ownership interests in a Trust Fund containing Mortgage Certificates or (f)
Certificates evidencing ownership interests in the reinvestment income of funds
on deposit in the related Certificate Account.
PTCE 83-1 sets forth "general conditions" and "specific conditions" to its
applicability. Section II of PTCE 83-1 sets forth the following general
conditions to the application of the exemption: (i) the maintenance of a system
of insurance and other protection for the pooled mortgage loans or the property
securing such loans, and for indemnifying certificateholders against reductions
in pass-through payments due to property damage or defaults in loan payments;
(ii) the existence of a pool trustee who is not an affiliate of the pool
sponsor; and (iii) a requirement that the sum of all payments made to and
retained by the pool sponsor, and all funds inuring to the benefit of the pool
sponsor as a result of the administration of the mortgage pool, must represent
not more than adequate consideration for selling the mortgage loans plus
reasonable compensation for services provided by the pool sponsor to the pool.
The system of insurance or protection referred to in clause (i) above must
provide such protection and indemnification up to an amount not less than the
greater of one percent of the aggregate unpaid principal balance of the pooled
mortgages or the unpaid principal balance of the largest mortgage in the pool.
It should be noted that in promulgating PTCE 83-1 (and a predecessor exemption),
the Department of Labor did not have under its consideration interests in pools
of the exact nature as some of the Certificates described herein.
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Before purchasing any Certificates, a Plan fiduciary should consult with
its counsel and determine whether PTCE 83-1 applies, including whether the
appropriate "specific conditions" set forth in Section I of PTCE 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.
EXEMPT PLANS
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 described above.
However, such plans may be subject to the provisions of other federal, state and
local laws imposing investment requirements and restrictions on such plans.
UNRELATED BUSINESS TAXABLE INCOME -- RESIDUAL CERTIFICATES
The purchase of a Residual Certificate by any employee benefit plan
qualified under Code Section 401(a) and exempt from taxation under Code Section
501(a), including most varieties of ERISA Plans, may give rise to "unrelated
business taxable income" as described in Sections 511-515 and 860E of the Code.
Further, prior to the purchase of Residual Certificates, a prospective purchaser
may be required to provide an affidavit to the transferor of the Residual
Certificates, 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 CONSIDERATIONS
As will be specified in the applicable Supplement, certain classes of
Certificates will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984, as amended ("SMMEA"), so long
as (i) they are rated in one of the two highest rating categories by at least
one Rating Agency and (ii) are part of a Series representing interests in a
Trust Fund consisting of Mortgage Loans originated by certain types of
originators specified in SMMEA. As "mortgage related securities," such classes
will constitute legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including but
not limited to state-chartered depository institutions, insurance companies and
pension funds) created pursuant to or existing under the laws of the United
States or of any state (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulation, to the same extent
that, under applicable law, obligations issued by or guaranteed as to principal
and interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Pursuant to SMMEA, a number of
states enacted legislation, on or before the October 3, 1991 cut-off for such
enactments, limiting to varying extents the ability of certain entities (in
particular, insurance companies) to invest in "mortgage related securities," in
most cases by requiring the affected investors to rely solely upon existing
state law, and not SMMEA. Accordingly, the investors affected by such
legislation will be authorized to invest in the Certificates only to the extent
provided in such legislation.
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SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in mortgage related
securities without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in such securities, and national banks
may purchase mortgage related securities for their own account without regard to
the limitations generally applicable to investment securities set forth in 12
U.S.C. sec. 24 (Seventh), subject in each case to such regulations as the
applicable federal regulatory authority may prescribe. In this connection, the
Office of the Comptroller of the Currency (the "OCC") has amended 12 C.F.R. Part
1 to authorize national banks to purchase and sell for their own account,
without limitation as to a percentage of the bank's capital and surplus (but
subject to compliance with certain general standards concerning "safety and
soundness" and retention of credit information in 12 C.F.R. sec. 1.5), certain
"Type IV securities," defined in 12 C.F.R. sec. 1.2(1) to include certain
"residential mortgage-related securities." As so defined "residential
mortgage-related security" means, in relevant part, "mortgage related security"
within the meaning of SMMEA. The National Credit Union Administration ("NCUA")
has adopted rules, codified at 12 C.F.R. Part 703 which permit federal credit
unions to invest in "mortgage related securities" under certain limited
circumstances, other than stripped mortgage related securities, residual
interests in mortgage related securities and commercial mortgage related
securities, unless the credit union has obtained written approval from the NCUA
to participate in the "investment pilot program" described in 12 C.F.R. sec.
703.140.
All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Investment Securities and
End-User Derivatives Activities" (the "1998 Policy Statement") of the Federal
Financial Institutions Examination Council ("FFIEC"), which has been adopted by
the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the OCC and the Office of Thrift Supervision, effective
May 26, 1998, and by the NCUA, effective October 1, 1998. The 1998 Policy
Statement sets forth general guidelines which depository institutions must
follow in managing risks (including market, credit, liquidity, operational
(transaction), and legal risks) applicable to all securities (including mortgage
pass-through securities and mortgage-derivative products) used for investment
purposes. Until October 1, 1998, federal credit unions will still be subject to
the FFIEC's now-superseded "Supervisory Policy Statement on Securities
Activities" dated January 28, 1992, as adopted by the NCUA with certain
modifications, which prohibited depository institutions from investing in
certain "high-risk mortgage securities," exempt under limited circumstances, and
set forth certain investment practices deemed to be unsuitable for regulated
institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any of the
Certificates, as certain Series or classes (in particular, Certificates which
are entitled solely or disproportionately to distributions of principal or
interest) may be deemed unsuitable investments, or may otherwise be restricted,
under such rules, policies or guidelines (in certain instances irrespective of
SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investment in securities which are not
"interest-bearing" or "income-paying," and, with regard to any Certificates
issued in book-entry form, provisions which may restrict or prohibit investments
in securities which are issued in book-entry form.
Except as to the status of certain classes of Certificates as "mortgage
related securities," no representation is made as to the proper characterization
of the Certificates for legal investment purposes, financial institution
regulatory purposes, or other purposes, or as to the ability of particular
investors to purchase Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Certificates) may adversely affect the liquidity of the
Certificates.
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their legal advisors in
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determining whether and to what extent the Certificates of any class constitute
legal investments or are subject to investment, capital or other restrictions
and, if applicable, whether SMMEA has been overridden in any jurisdiction
relevant to such investor.
LEGAL MATTERS
Certain legal matters, including the federal income tax consequences to
Certificateholders of an investment in the Certificates of a Series, will be
passed upon for the Sponsor by Kennedy Covington Lobdell & Hickman, L.L.P.,
Charlotte, North Carolina, or Cadwalader, Wickersham & Taft, New York, New York,
as provided in the related Supplement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion represents the opinion of Cadwalader,
Wickersham & Taft or Kennedy Covington Lobdell & Hickman, L.L.P. as to the
anticipated material federal income tax consequences of the purchase, ownership
and disposition of Certificates. The discussion below does not purport to
address all federal income tax consequences that may be applicable to particular
categories of investors, some of which may be subject to special rules. The
authorities on which this discussion is based are subject to change or differing
interpretations, and any such change or interpretation could apply
retroactively. This discussion reflects the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as regulations
(the "REMIC Regulations") promulgated by the U.S. Department of the Treasury.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of Certificates.
For purposes of this discussion, where the applicable Supplement provides
for a fixed retained yield with respect to the Mortgage Loans of a Series of
Certificates, references to the Mortgage Loans will be deemed to refer to that
portion of the Mortgage Loans held by the Trust Fund that does not include the
Fixed Retained Yield. References to a "holder" or "Certificateholder" in this
discussion generally mean the beneficial owner of a Certificate.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
GENERAL
With respect to a particular Series of Certificates, an election may be
made to treat the Trust Fund or one or more segregated pools of assets therein
as one or more REMICs within the meaning of Code Section 860D. A Trust Fund or a
portion or portions thereof as to which one or more REMIC elections will be made
will be referred to as a "REMIC Pool." For purposes of this discussion,
Certificates of a Series as to which one or more REMIC elections are made are
referred to as "REMIC Certificates" and will consist of one or more Classes of
"Regular Certificates" and one Class of "Residual Certificates" in the case of
each REMIC Pool. Qualification as a REMIC requires ongoing compliance with
certain conditions. With respect to each Series of REMIC Certificates,
Cadwalader, Wickersham & Taft or Kennedy Covington Lobdell & Hickman, L.L.P.,
counsel to the Sponsor, has advised the Sponsor that in each firm's opinion,
assuming (i) the making of an appropriate election, (ii) compliance with the
Pooling Agreement, and (iii) compliance with any changes in the law, including
any amendments to the Code or applicable Treasury regulations thereunder, each
REMIC Pool will qualify as a REMIC. In such case, the Regular Certificates will
be considered to be "regular interests" in the REMIC Pool and generally will be
treated for federal income tax purposes as if they were newly originated debt
instruments, and the Residual Certificates will be considered to be "residual
interests" in the REMIC Pool. The Supplement for each Series of Certificates
will indicate whether one or more REMIC elections with respect to the related
Trust Fund will be made, in which event references to "REMIC" or "REMIC Pool"
herein shall be deemed to refer to each such REMIC Pool.
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STATUS OF REMIC CERTIFICATES
REMIC Certificates held by a domestic building and loan association will
constitute "a regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi) in the same proportion that the assets of the
REMIC Pool would be treated as "loans . . . secured by an interest in real
property which is . . . residential real property" within the meaning of Code
Section 7701(a)(19)(C)(v) or as other assets described in Code Section
7701(a)(19)(C). REMIC Certificates held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code Section 856(c)(4)(A),
and interest on the Regular Certificates and income with respect to Residual
Certificates will be considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of Code
Section 856(c)(3)(B) in the same proportion that, for both purposes, the assets
of the REMIC Pool would be so treated. If at all times 95% or more of the assets
of the REMIC Pool qualify for each of the foregoing treatments, the REMIC
Certificates will qualify for the corresponding status in their entirety. For
purposes of Code Section 856(c)(4)(A), payments of principal and interest on the
Mortgage Loans that are reinvested pending distribution to holders of REMIC
Certificates qualify for such treatment. Where two REMIC Pools are a part of a
tiered structure they will be treated as one REMIC for purposes of the tests
described above respecting asset ownership of more or less than 95%. In
addition, if the assets of the REMIC include Buy-Down Loans, it is possible that
the percentage of such assets constituting "loans . . . secured by an interest
in real property which is . . . residential real property" for purposes of Code
Section 7701(a)(19)(C)(v), may be required to be reduced by the amount of the
related Buydown Funds. REMIC Certificates held by a regulated investment company
will not constitute "Government securities" within the meaning of Code Section
851(b)(3)(A)(i). REMIC Certificates held by certain financial institutions will
constitute an "evidence of indebtedness" within the meaning of Code Section
582(c)(1). The Small Business Job Protection Act of 1996 (the "SBJPA of 1996")
repealed the reserve method for bad debts of domestic building and loan
associations and mutual savings banks, and thus has eliminated the asset
category of "qualifying real property loans" in former Code Section 593(d) for
taxable years beginning after December 31, 1995. The requirement in the SBJPA of
1996 that such institutions must "recapture" a portion of their existing bad
debt reserves is suspended if a certain portion of their assets are maintained
in "residential loans" under Code Section 7701(a)(19)(C)(v), but only if such
loans were made to acquire, construct or improve the related real property and
not for the purpose of refinancing. However, no effort will be made to identify
the portion of the Mortgage Loans of any Series meeting this requirement, and no
representation is made in this regard.
QUALIFICATION AS A REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Certificates) and at all
times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a safe harbor pursuant to
which the de minimis requirement will be met if at all times the aggregate
adjusted basis of the nonqualified assets is less than 1% of the aggregate
adjusted basis of all the REMIC Pool's assets. An entity that fails to meet the
safe harbor may nevertheless demonstrate that it holds no more than a de minimis
amount of nonqualified assets. A REMIC Pool also must provide "reasonable
arrangements" to prevent its residual interests from being held by "disqualified
organizations" or agents thereof and must furnish applicable tax information to
transferors or agents that violate this requirement. See "-- Taxation of
Residual Certificates -- Tax-Related Restrictions on Transfer of Residual
Certificates -- Disqualified Organizations" below.
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
and, generally, certificates of beneficial interest in a grantor trust that
holds mortgage loans, regular interests in another REMIC, such as lower-tier
regular interests in a tiered REMIC and regular interests in a Financial Asset
Securitization Investment Trust (a
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"FASIT") within the meaning of Code Section 860L if 95% or more of the value of
the assets of the FASIT is at all times attributable to whole mortgage loans
such as the Mortgage Loans. The REMIC Regulations specify that loans secured by
timeshare interests and shares held by a tenant stockholder in a cooperative
housing corporation can be qualified mortgages. A qualified mortgage includes a
qualified replacement mortgage, which is any property that would have been
treated as a qualified mortgage if it were transferred to the REMIC Pool on the
Startup Day and that is received either (i) in exchange for any qualified
mortgage within a three-month period thereafter or (ii) in exchange for a
"defective obligation" within a two-year period thereafter. A "defective
obligation" includes (i) a mortgage in default or as to which default is
reasonably foreseeable, (ii) a mortgage as to which a customary representation
or warranty made at the time of transfer to the REMIC Pool has been breached,
(iii) a mortgage that was fraudulently procured by the mortgagor, and (iv) a
mortgage that was not in fact principally secured by real property (but only if
such mortgage is disposed of within 90 days of discovery). A Mortgage Loan that
is "defective" as described in clause (iv) that is not sold or, if within two
years of the Startup Day, exchanged, within 90 days of discovery, ceases to be a
qualified mortgage after such 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and certain other contingencies. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in such fund
for the year is derived from the sale or other disposition of property held for
less than three months, unless required to prevent a default on the regular
interests caused by a default on one or more qualified mortgages. A reserve fund
must be reduced "promptly and appropriately" as payments on the Mortgage Loans
are received. Foreclosure property is real property acquired by the REMIC Pool
in connection with the default or imminent default of a qualified mortgage and
generally not held beyond the close of the third calendar year following the
year in which such property is acquired with an extension that may be granted by
the Internal Revenue Service.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following: (i) one or more classes of regular interests or
(ii) a single class of residual interests on which distributions, if any, are
made pro rata. A regular interest is an interest in a REMIC Pool that is issued
on the Startup Day with fixed terms, is designated as a regular interest, and
unconditionally entitles the holder to receive a specified principal amount (or
other similar amount), and provides that interest payments (or other similar
amounts), if any, at or before maturity either are payable based on a fixed rate
or a qualified variable rate, or consist of a specified, nonvarying portion of
the interest payments on qualified mortgages. Such a specified portion may
consist of a fixed number of basis points, a fixed percentage of the total
interest, or a qualified variable rate, inverse variable rate or difference
between two fixed or qualified variable rates on some or all of the qualified
mortgages. The specified principal amount of a regular interest that provides
for interest payments consisting of a specified, nonvarying portion of interest
payments on qualified mortgages may be zero. A residual interest is an interest
in a REMIC Pool other than a regular interest that is issued on the Startup Day
and that is designated as a residual interest. An interest in a REMIC Pool may
be treated as a regular interest even if payments of principal with respect to
such interest are subordinated to payments on other regular interests or the
residual interest in the REMIC Pool, and are dependent on the absence of
defaults or delinquencies on qualified mortgages or permitted investments, lower
than reasonably expected returns on permitted investments, unanticipated
expenses incurred by the REMIC Pool or prepayment interest shortfalls.
Accordingly, the Regular Certificates of a Series will constitute one or more
classes of regular interests, and the Residual Certificates with respect to that
Series will constitute a single class of residual interests on which
distributions are made pro rata.
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If an entity, such as the REMIC Pool, fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable year,
the Code provides that the entity will not be treated as a REMIC for such year
and thereafter. In this event, an entity with multiple classes of ownership
interests may be treated as a separate association taxable as a corporation
under Treasury regulations, and the Regular Certificates may be treated as
equity interests therein. The Code, however, authorizes the Treasury Department
to issue regulations that address situations where failure to meet one or more
of the requirements for REMIC status occurs inadvertently and in good faith, and
disqualification of the REMIC Pool would occur absent regulatory relief.
Investors should be aware, however, that the Conference Committee Report to the
Tax Reform Act of 1986 (the "1986 Act") indicates that the relief may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the REMIC Pool's income for the period of time in which the
requirements for REMIC status are not satisfied.
TAXATION OF REGULAR CERTIFICATES
General
In general, interest, original issue discount, and market discount on a
Regular Certificate will be treated as ordinary income to a holder of the
Regular Certificate (the "Regular Certificateholder"), and principal payments on
a Regular Certificate will be treated as a return of capital to the extent of
the Regular Certificateholder's basis in the Regular Certificate allocable
thereto (other than accrued market discount not previously reported as income).
Regular Certificateholders must use the accrual method of accounting with regard
to Regular Certificates, regardless of the method of accounting otherwise used
by such Regular Certificateholders.
Original Issue Discount
Accrual Certificates will be, and other classes of Regular Certificates may
be, issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any Class of Regular Certificates having original issue
discount generally must include original issue discount in ordinary income for
federal income tax purposes as it accrues, in accordance with a constant
interest method that takes into account the compounding of interest, in advance
of receipt of the cash attributable to such income. The following discussion is
based in part on temporary and final Treasury regulations issued on February 2,
1994, as amended on June 14, 1996, (the "OID Regulations") under Code Sections
1271 through 1273 and 1275 and in part on the provisions of the 1986 Act.
Regular Certificateholders should be aware, however, that the OID Regulations do
not adequately address certain issues relevant to prepayable securities, such as
the Regular Certificates. To the extent such issues are not addressed in such
regulations, it is anticipated that the Trustee will apply the methodology
described in the Conference Committee Report to the 1986 Act. No assurance can
be provided that the Internal Revenue Service will not take a different position
as to those matters not currently addressed by the OID Regulations. Moreover,
the OID Regulations include an anti-abuse rule allowing the Internal Revenue
Service to apply or depart from the OID Regulations where necessary or
appropriate to ensure a reasonable tax result in light of the applicable
statutory provisions. A tax result will not be considered unreasonable under the
anti-abuse rule in the absence of a substantial effect on the present value of a
taxpayer's tax liability. Investors are advised to consult their own tax
advisors as to the discussion herein and the appropriate method for reporting
interest and original issue discount with respect to the Regular Certificates.
Each Regular Certificate (except to the extent described below with respect
to a Regular Certificate on which principal is distributed in a single
installment or by lots of specified principal amounts upon the request of a
Certificateholder or by random lot (a "Non-Pro Rata Certificate")) will be
treated as a single installment obligation for purposes of determining the
original issue discount includible in a Regular Certificateholder's income. The
total amount of original issue discount on a Regular Certificate is the excess
of the "stated redemption price at maturity" of the Regular Certificate over its
"issue price." The issue price of a Class of Regular Certificates offered
pursuant to this Prospectus generally is the first price at which a substantial
amount of such Class is sold to the public (excluding bond houses, brokers and
underwriters). Although unclear under the OID Regulations, it is anticipated
that the Trustee will treat the issue price of a Class as to
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which there is no substantial sale as of the issue date or that is retained by
the Sponsor as the fair market value of that Class as of the issue date. The
issue price of a Regular Certificate also includes any amount paid by an initial
Regular Certificateholder for accrued interest that relates to a period prior to
the issue date of the Regular Certificate, unless the Regular Certificateholder
elects on its federal income tax return to exclude such amount from the issue
price and to recover it on the first Distribution Date. The stated redemption
price at maturity of a Regular Certificate always 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 a 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. Because there is no penalty or default remedy in the case of
nonpayment of interest with respect to a Regular Certificate, it is possible
that no interest on any Class of Regular Certificates will be treated as
qualified stated interest. However, except as provided in the following three
sentences or in the applicable Supplement, because the underlying Mortgage Loans
provide for remedies in the event of default, it is anticipated that the Trustee
will treat interest with respect to the Regular Certificates as qualified stated
interest. Distributions of interest on a Accrual Certificate, or on other
Regular Certificates with respect to which deferred interest will accrue, will
not constitute qualified stated interest, in which case the stated redemption
price at maturity of such Regular Certificates includes all distributions of
interest as well as principal thereon. Likewise, it is anticipated that the
Trustee will treat an interest-only Class or a Class on which interest is
substantially disproportionate to its principal amount (a so-called
"super-premium" Class) as having no qualified stated interest. 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,
the interest attributable to the additional days will be included in the stated
redemption price at maturity.
Under a 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. The Conference Committee Report to the 1986 Act provides that the
schedule of such distributions should be determined in accordance with the
assumed rate of prepayment of the Mortgage Loans (the "Prepayment Assumption")
and the anticipated reinvestment rate, if any, relating to the Regular
Certificates. The Prepayment Assumption with respect to a Series of Regular
Certificates will be set forth in the applicable Supplement. Holders generally
must report de minimis original issue discount pro rata as principal payments
are received, and such income will be capital gain if the Regular Certificate is
held as a capital asset. Under the OID Regulations, however, Regular
Certificateholders may elect to accrue all de minimis original issue discount as
well as market discount and market premium, under the constant yield method. See
"-- Election to Treat All Interest Under the Constant Yield Method" below.
A Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Certificate accrued during an accrual period for
each day on which it holds the Regular Certificate, including the date of
purchase but excluding the date of disposition. The Trustee will treat the
monthly period ending on the day before each Distribution Date as the accrual
period. With respect to each Regular Certificate, a calculation will be made of
the original issue discount that accrues during each successive full accrual
period (or shorter period from the date of original issue) that ends on the day
before the related Distribution Date on the Regular Certificate. The Conference
Committee Report to the 1986 Act states that the rate of accrual of original
issue discount is intended to be based on the Prepayment Assumption. Other than
as discussed below with respect to a Non-Pro Rata Certificate, the original
issue discount accruing in a full accrual period would be the excess, if any, of
(i) the sum of (a) the present value of all of the remaining distributions to be
made on the Regular Certificate as of the end of that accrual period, and (b)
the distributions made on the Regular Certificate during the
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accrual period that are included in the Regular Certificate's stated redemption
price at maturity, over (ii) the adjusted issue price of the Regular Certificate
at the beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence is calculated based on (i)
the yield to maturity of the Regular Certificate at the issue date, (ii) events
(including actual prepayments) that have occurred prior to the end of the
accrual period, and (iii) the Prepayment Assumption. For these purposes, the
adjusted issue price of a Regular Certificate at the beginning of any accrual
period equals the issue price of the Regular Certificate, increased by the
aggregate amount of original issue discount with respect to the Regular
Certificate that accrued in all prior accrual periods and reduced by the amount
of distributions included in the Regular Certificate's stated redemption price
at maturity that were made on the Regular Certificate in such prior periods. The
original issue discount accruing during any accrual period (as determined in
this paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. With respect to an initial accrual period shorter than a full accrual
period, the daily portions of original issue discount must be determined
according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the Mortgage Loans with respect to a Series of
Regular Certificates can result in both a change in the priority of principal
payments with respect to certain Classes (each, a "Class") of Regular
Certificates and either an increase or decrease in the daily portions of
original issue discount with respect to such Regular Certificates.
In the case of a Non-Pro Rata Certificate, it is anticipated that the
Trustee will determine the yield to maturity of such Certificate based upon the
anticipated payment characteristics of the Class as a whole under the Prepayment
Assumption. In general, the original issue discount accruing on each Non-Pro
Rata Certificate in a full accrual period would be its allocable share of the
original issue discount with respect to the entire Class, as determined in
accordance with the preceding paragraph. However, in the case of a distribution
in retirement of the entire unpaid principal balance of any Non-Pro Rata
Certificate (or portion of such unpaid principal balance), (a) the remaining
unaccrued original issue discount allocable to such Certificate (or to such
portion) will accrue at the time of such distribution, and (b) the accrual of
original issue discount allocable to each remaining Certificate of such Class
(or the remaining unpaid principal balance of a partially redeemed Non-Pro Rata
Certificate after a distribution of principal has been received) will be
adjusted by reducing the present value of the remaining payments on such Class
and the adjusted issue price of such Class to the extent attributable to the
portion of the unpaid principal balance thereof that was distributed. The
Sponsor believes that the foregoing treatment is consistent with the "pro rata
prepayment" rules of the OID Regulations, but with the rate of accrual of
original issue discount determined based on the Prepayment Assumption for the
Class as a whole. Investors are advised to consult their tax advisors as to this
treatment.
Acquisition Premium
A purchaser of a Regular Certificate at a price greater than its adjusted
issue price but less than its stated redemption price at maturity will be
required to include in gross income the daily portions of the original issue
discount on the Regular Certificate reduced pro rata by a fraction, the
numerator of which is the excess of its purchase price over such adjusted issue
price and the denominator of which is the excess of the remaining stated
redemption price at maturity over the adjusted issue price. Alternatively, such
a subsequent purchaser may elect to treat all such acquisition premium under the
constant yield method, as described below under the heading "-- Election to
Treat All Interest Under the Constant Yield Method" below.
Variable Rate Regular Certificates
Regular Certificates may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate if,
generally, (i) the issue price does not exceed the original principal balance by
more than a specified amount and (ii) the interest compounds or is payable at
least
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annually at current values of (a) one or more "qualified floating rates," (b) a
single fixed rate and one or more qualified floating rates, (c) a single
"objective rate," or (d) a single fixed rate and a single objective rate that is
a "qualified inverse floating rate." A floating rate is a qualified floating
rate if variations in the rate can reasonably be expected to measure
contemporaneous variations in the cost of newly borrowed funds, where such rate
is subject to a fixed multiple that is greater than 0.65 but not more than 1.35.
Such rate may also be increased or decreased by a fixed spread or subject to a
fixed cap or floor, or a cap or floor that is not reasonably expected as of the
issue date to affect the yield of the instrument significantly. An objective
rate is any rate (other than a qualified floating rate) that is determined using
a single fixed formula and that is based on objective financial or economic
information, provided that such information is not (i) within the control of the
issuer or a related party or (ii) unique to the circumstances of the issuer or a
related party. A qualified inverse floating rate is a rate equal to a fixed rate
minus a qualified floating rate that inversely reflects contemporaneous
variations in the cost of newly borrowed funds; an inverse floating rate that is
not a qualified inverse floating rate may nevertheless be an objective rate. A
Class of Regular Certificates may be issued under this Prospectus that does not
have a variable rate under the foregoing rules, for example, a Class that bears
different rates at different times during the period it is outstanding such that
it is considered significantly "front-loaded" or "back-loaded" within the
meaning of the OID Regulations. It is possible that such a Class may be
considered to bear "contingent interest" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to Regular Certificates. However, if
final regulations dealing with contingent interest with respect to Regular
Certificates apply the same principles as the OID Regulations, such regulations
may lead to different timing of income inclusion than would be the case under
the OID Regulations for non-contingent debt instruments. Furthermore,
application of such principles could lead to the characterization of gain on the
sale of contingent interest Regular Certificates as ordinary income. Investors
should consult their tax advisors regarding the appropriate treatment of any
Regular Certificate that does not pay interest at a fixed rate or variable rate
as described in this paragraph.
Under the REMIC Regulations, a Regular Certificate (i) bearing a rate that
qualifies as a variable rate under the OID Regulations that is tied to current
values of a variable rate (or the highest, lowest or average of two or more
variable rates, including a rate based on the average cost of funds of one or
more financial institutions), or a positive or negative multiple of such a rate
(plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans, including such a
rate that is subject to one or more caps or floors, or (ii) bearing one or more
such variable rates for one or more periods, or one or more fixed rates for one
or more periods, and a different variable rate or fixed rate for other periods,
qualifies as a regular interest in a REMIC. Accordingly, unless otherwise
indicated in the applicable Supplement, it is anticipated that the Trustee will
treat Regular Certificates that qualify as regular interests under this rule in
the same manner as obligations bearing a variable rate for original issue
discount reporting purposes.
The amount of original issue discount with respect to a Regular Certificate
bearing a variable rate of interest will accrue in the manner described above
under "-- Original Issue Discount," with the yield to maturity and future
payments on such Regular Certificate generally to be determined by assuming that
interest will be payable for the life of the Regular Certificate based on the
initial rate (or, if different, the value of the applicable variable rate as of
the pricing date) for the relevant Class. Unless required otherwise by
applicable final regulations, it is anticipated that the Trustee will treat such
variable interest as qualified stated interest, other than variable interest on
an interest-only or super-premium Class, which will be treated as non-qualified
stated interest includible in the stated redemption price at maturity. Ordinary
income reportable for any period will be adjusted based on subsequent changes in
the applicable interest rate index.
Although unclear under the OID Regulations, unless required otherwise by
applicable final regulations, it is anticipated that the Trustee will treat
Regular Certificates bearing an interest rate that is a weighted average of the
net interest rates on Mortgage Loans as having qualified stated interest, except
to the extent that initial "teaser" rates cause sufficiently "back-loaded"
interest to create more than de minimis original issue discount. The yield on
such Regular Certificates for purposes of accruing original issue discount will
be a hypothetical fixed-rate based on the fixed rates, in the case of fixed rate
Mortgage Loans, and initial "teaser rates" followed
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by fully indexed rates, in the case of adjustable-rate Mortgage Loans. In the
case of adjustable-rate Mortgage Loans, the applicable index used to compute
interest on the Mortgage Loans in effect on the pricing date (or possibly the
issue date) will be deemed to be in effect beginning with the period in which
the first weighted average adjustment date occurring after the issue date
occurs. Adjustments will be made in each accrual period either increasing or
decreasing the amount of ordinary income reportable to reflect the actual Pass-
Through Rate on the Regular Certificates.
Market Discount
A purchaser of a Regular Certificate also may be subject to the market
discount rules of Code Sections 1276 through 1278. Under these sections and the
principles applied by the OID Regulations in the context of original issue
discount, "market discount" is the amount by which the purchaser's original
basis in the Regular Certificate (i) is exceeded by the then-current principal
amount of the Regular Certificate, or (ii) in the case of a Regular Certificate
having original issue discount, is exceeded by the adjusted issue price of such
Regular Certificate at the time of purchase. Such purchaser generally will be
required to recognize ordinary income to the extent of accrued market discount
on such Regular Certificate as distributions includible in the stated redemption
price at maturity thereof are received, in an amount not exceeding any such
distribution. Such market discount would accrue in a manner to be provided in
Treasury regulations and should take into account the Prepayment Assumption. The
Conference Committee Report to the 1986 Act provides that until such regulations
are issued, such market discount would accrue either (i) on the basis of a
constant interest rate, or (ii) in the ratio of stated interest allocable to the
relevant period to the sum of the interest for such period plus the remaining
interest as of the end of such period, or in the case of a Regular Certificate
issued with original issue discount, in the ratio of original issue discount
accrued for the relevant period to the sum of the original issue discount
accrued for such period plus the remaining original issue discount as of the end
of such period. Such purchaser also generally will be required to treat a
portion of any gain on a sale or exchange of the Regular Certificate as ordinary
income to the extent of the market discount accrued to the date of disposition
under one of the foregoing methods, less any accrued market discount previously
reported as ordinary income as partial distributions in reduction of the stated
redemption price at maturity were received. Such purchaser will be required to
defer deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Certificate over the
interest distributable thereon. The deferred portion of such interest expense in
any taxable year generally will not exceed the accrued market discount on the
Regular Certificate for such year. Any such deferred interest expense is, in
general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Certificate is disposed of.
As an alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Certificateholder may elect to include market discount in
income currently as it accrues on all market discount instruments acquired by
such Regular Certificateholder in that taxable year or thereafter, in which case
the interest deferral rule will not apply. See "-- Election to Treat All
Interest Under the Constant Yield Method" below regarding an alternative manner
in which such election may be deemed to be made.
By analogy to the OID Regulations, market discount with respect to a
Regular Certificate will be considered to be zero if such market discount is
less than 0.25% of the remaining stated redemption price at maturity of such
Regular Certificate multiplied by the weighted average maturity of the Regular
Certificate (determined as described above in the third paragraph under
"-- Original Issue Discount") remaining after the date of purchase. It appears
that de minimis market discount would be reported in a manner similar to de
minimis original issue discount. See "-- Original Issue Discount" above.
Treasury regulations implementing the market discount rules have not yet been
issued, and therefore investors should consult their own tax advisors regarding
the application of these rules. Investors should also consult Revenue Procedure
92-67 concerning the elections to include market discount in income currently
and to accrue market discount on the basis of the constant yield method.
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Premium
A Regular Certificate purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Certificateholder holds such Regular Certificate as a
"capital asset" within the meaning of Code Section 1221, the Regular
Certificateholder may elect under Code Section 171 to amortize such premium
under the constant yield method. Such election will apply to all debt
obligations acquired by the Regular Certificateholder at a premium held in that
taxable year or thereafter, unless revoked with the permission of the Internal
Revenue Service. The Conference Committee Report to the 1986 Act indicates a
Congressional intent that the same rules that apply to the accrual of market
discount on installment obligations will also apply to amortizing bond premium
under Code Section 171 on installment obligations such as the Regular
Certificates, although it is unclear whether the alternatives to the constant
interest method described above under "-- Market Discount" are available.
Amortizable bond premium will be treated as an offset to interest income on a
Regular Certificate, rather than as a separate deduction item. See "-- Election
to Treat All Interest Under the Constant Yield Method" below regarding an
alternative manner in which the Code Section 171 election may be deemed to be
made.
Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Certificate may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to such an election, (i) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (ii) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make such an election on an instrument by instrument basis or for
a class or group of debt instruments. However, if the holder makes such an
election with respect to a debt instrument with amortizable bond premium or with
market discount, the holder is deemed to have made elections to amortize bond
premium or to report market discount income currently as it accrues under the
constant yield method, respectively, for all premium bonds held or market
discount bonds acquired by the holder in the same taxable year or thereafter.
The election is made on the holder's federal income tax return for the year in
which the debt instrument is acquired and is irrevocable except with the
approval of the Internal Revenue Service. Investors should consult their own tax
advisors regarding the advisability of making such an election.
Treatment of Losses
Regular Certificateholders will be required to report income with respect
to Regular Certificates on the accrual method of accounting, without giving
effect to delays or reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans, except to the extent it can be established
that such amounts are uncollectible. Accordingly, the holder of a Regular
Certificate, particularly a Subordinate Certificate, may have income, or may
incur a diminution in cash flow as a result of a default or delinquency, but may
not be able to take a deduction (subject to the discussion below) for the
corresponding loss until a subsequent taxable year. In this regard, investors
are cautioned that while they may generally cease to accrue interest income if
it reasonably appears that the interest will be uncollectible, the Internal
Revenue Service may take the position that original issue discount must continue
to be accrued in spite of its uncollectibility until the debt instrument is
disposed of in a taxable transaction or becomes worthless in accordance with the
rules of Code Section 166. To the extent the rules of Code Section 166 regarding
bad debts are applicable, it appears that Regular Certificateholders that are
corporations or that otherwise hold the Regular Certificates in connection with
a trade or business should in general be allowed to deduct as an ordinary loss
such loss with respect to principal sustained during the taxable year on account
of any such Regular Certificates becoming wholly or partially worthless, and
that, in general, Regular Certificateholders that are not corporations and do
not hold the Regular Certificates in connection with a trade or business should
be allowed to deduct as a short-term capital
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loss any loss sustained during the taxable year on account of a portion of any
such Regular Certificates becoming wholly worthless. Although the matter is not
free from doubt, such non-corporate Regular Certificateholders should be allowed
a bad debt deduction at such time as the principal balance of such Regular
Certificates is reduced to reflect losses resulting from any liquidated Mortgage
Loans. The Internal Revenue Service, however, could take the position that
non-corporate holders will be allowed a bad debt deduction to reflect such
losses only after all the Mortgage Loans remaining in the Trust Fund have been
liquidated or the applicable Class of Regular Certificates has been otherwise
retired. The Internal Revenue Service could also assert that losses on the
Regular Certificates are deductible based on some other method that may defer
such deductions for all holders, such as reducing future cash flow for purposes
of computing original issue discount. This may have the effect of creating
"negative" original issue discount which would be deductible only against future
positive original issue discount or otherwise upon termination of the Class.
Regular Certificateholders are urged to consult their own tax advisors regarding
the appropriate timing, amount and character of any loss sustained with respect
to such Regular Certificates. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate and
non-corporate holders, the Internal Revenue Service may take the position that
losses attributable to accrued original issue discount may only be deducted as
capital losses in the case of non-corporate holders who do not hold the Regular
Certificates in connection with a trade or business. Special loss rules are
applicable to banks and thrift institutions, including rules regarding reserves
for bad debts. Such taxpayers are advised to consult their tax advisors
regarding the treatment of losses on Regular Certificates.
Sale or Exchange of Regular Certificates
If a Regular Certificateholder sells or exchanges a Regular Certificate,
the Regular Certificateholder will recognize gain or loss equal to the
difference, if any, between the amount received and its adjusted basis in the
Regular Certificate. The adjusted basis of a Regular Certificate generally will
equal the cost of the Regular Certificate to the seller, increased by any
original issue discount or market discount previously included in the seller's
gross income with respect to the Regular Certificate and reduced by amounts
included in the stated redemption price at maturity of the Regular Certificate
that were previously received by the seller, by any amortized premium and by any
recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate as
a capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Certificate has been held for the applicable
holding period (as described below). Such gain will be treated as ordinary
income (i) if a Regular Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Regular Certificateholder's net investment in the
conversion transaction at 120% of the appropriate applicable federal rate under
Code Section 1274(d) in effect at the time the taxpayer entered into the
transaction minus any amount previously treated as ordinary income with respect
to any prior disposition of property that was held as part of such transaction,
(ii) in the case of a non-corporate taxpayer, to the extent such taxpayer has
made an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates, or (iii) to the extent that such
gain does not exceed the excess, if any, of (a) the amount that would have been
includible in the gross income of the holder if its yield on such Regular
Certificate were 110% of the applicable federal rate as of the date of purchase,
over (b) the amount of income actually includible in the gross income of such
holder with respect to such Regular Certificate. In addition, gain or loss
recognized from the sale of a Regular Certificate by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code Section
582(c). Capital gains of certain non-corporate taxpayers generally are subject
to a lower maximum tax rate (20%) than ordinary income of such taxpayers (39.6%)
for property held for more than one year. The maximum tax rate for corporations
is the same with respect to both ordinary income and capital gains.
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TAXATION OF RESIDUAL CERTIFICATES
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will be
includible as ordinary income or loss in determining the federal taxable income
of holders of Residual Certificates ("Residual Holders"), and will not be taxed
separately to the REMIC Pool. The daily portions of REMIC taxable income or net
loss of a Residual Holder are determined by allocating the REMIC Pool's taxable
income or net loss for each calendar quarter ratably to each day in such quarter
and by allocating such daily portion among the Residual Holders in proportion to
their respective holdings of Residual Certificates in the REMIC Pool on such
day. REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using the accrual method of accounting, except,
in addition to certain other adjustments, that (i) the limitations on
deductibility of investment interest expense and expenses for the production of
income do not apply, (ii) all bad loans will be deductible as business bad debts
and (iii) the limitation on the deductibility of interest and expenses related
to tax-exempt income will apply. The REMIC Pool's gross income includes
interest, original issue discount income and market discount income, if any, on
the Mortgage Loans, reduced by amortization of any premium on the Mortgage
Loans, plus income from amortization of issue premium, if any, on the Regular
Certificates, plus income on reinvestment of cash flows and reserve assets, plus
any cancellation of indebtedness income upon allocation of realized losses to
the Regular Certificates. The REMIC Pool's deductions include interest and
original issue discount expense on the Regular Certificates, servicing fees on
the Mortgage Loans, other administrative expenses of the REMIC Pool and realized
losses on the Mortgage Loans. The requirement that Residual Holders report their
pro rata share of taxable income or net loss of the REMIC Pool will continue
until there are no Certificates of any Class of the related Series outstanding.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest and original issue discount or market discount income or
amortization of premium with respect to the Mortgage Loans, on the one hand, and
the timing of deductions for interest (including original issue discount) or
income from amortization of issue premium on the Regular Certificates on the
other hand. In the event that an interest in the Mortgage Loans is acquired by
the REMIC Pool at a discount, and one or more of such Mortgage Loans is prepaid,
the Residual Holder may recognize taxable income without being entitled to
receive a corresponding amount of cash because (i) the prepayment may be used in
whole or in part to make distributions in reduction of principal on the Regular
Certificates and (ii) the discount on the Mortgage Loans which is includible in
income may exceed the deduction allowed upon such distributions on those Regular
Certificates on account of any unaccrued original issue discount relating to
those Regular Certificates. When there is more than one Class of Regular
Certificates that distribute principal sequentially, this mismatching of income
and deductions is particularly likely to occur in the early years following
issuance of the Regular Certificates when distributions in reduction of
principal are being made in respect of earlier Classes of Regular Certificates
to the extent that such Classes are not issued with substantial discount or are
issued at a premium. If taxable income attributable to such a mismatching is
realized, in general, losses would be allowed in later years as distributions on
the later maturing Classes of Regular Certificates are made. Taxable income may
also be greater in earlier years than in later years as a result of the fact
that interest expense deductions, expressed as a percentage of the outstanding
principal amount of such a Series of Regular Certificates, may increase over
time as distributions in reduction of principal are made on the lower yielding
Classes of Regular Certificates, whereas, to the extent the REMIC Pool consists
of fixed-rate Mortgage Loans, interest income with respect to any given Mortgage
Loan will remain constant over time as a percentage of the outstanding principal
amount of that loan. Consequently, Residual Holders must have sufficient other
sources of cash to pay any federal, state, or local income taxes due as a result
of such mismatching or unrelated deductions against which to offset such income,
subject to the discussion of "excess inclusions" below under "-- Limitations on
Offset or Exemption of REMIC Income." The timing of such mismatching of income
and deductions described in this paragraph, if present with respect to a Series
of Certificates, may have a significant adverse effect upon a Residual Holder's
after-tax rate of return. In addition, a Residual Holder's taxable income during
certain periods may exceed the income reflected by such Residual Holder for such
periods in accordance with
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generally accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in Residual
Certificates.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into account
by the Residual Holder is limited to the adjusted basis of the Residual
Certificate as of the close of the quarter (or time of disposition of the
Residual Certificate if earlier), determined without taking into account the net
loss for the quarter. The initial adjusted basis of a purchaser of a Residual
Certificate is the amount paid for such Residual Certificate. Such adjusted
basis will be increased by the amount of taxable income of the REMIC Pool
reportable by the Residual Holder and will be decreased (but not below zero),
first, by a cash distribution from the REMIC Pool and, second, by the amount of
loss of the REMIC Pool reportable by the Residual Holder. Any loss that is
disallowed on account of this limitation may be carried over indefinitely with
respect to the Residual Holder as to whom such loss was disallowed and may be
used by such Residual Holder only to offset any income generated by the same
REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of
its Residual Certificate as an offset to its share of the taxable income of the
related REMIC Pool. However, that taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Such recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Certificates over their life.
However, in view of the possible acceleration of the income of Residual Holders
described above under "-- Taxation of REMIC Income," the period of time over
which such issue price is effectively amortized may be longer than the economic
life of the Residual Certificates.
A Residual Certificate may have a negative value if the net present value
of anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of such a residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool's basis in its assets. The preamble to the REMIC Regulations
states that the Internal Revenue Service may provide future guidance on the
proper tax treatment of payments made by a transferor of such a residual
interest to induce the transferee to acquire the interest, and Residual Holders
should consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Certificate is greater than the
corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of such basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The REMIC
Regulations currently in effect do not so provide. See "-- Treatment of Certain
Items of REMIC Income and Expense -- Market Discount" below regarding the basis
of Mortgage Loans to the REMIC Pool and "-- Sale or Exchange of a Residual
Certificate" below regarding possible treatment of a loss upon termination of
the REMIC Pool as a capital loss.
Treatment of Certain Items of REMIC Income and Expense
Although the Sponsor intends to compute REMIC income and expense in
accordance with the Code and applicable regulations, the authorities regarding
the determination of specific items of income and expense are subject to
differing interpretations. The Sponsor makes no representation as to the
specific method that it will use for reporting income with respect to the
Mortgage Loans and expenses with respect to the Regular Certificates and
different methods could result in different timing of reporting of taxable
income or net loss to Residual Holders or differences in capital gain versus
ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of issue
premium will be determined in the same manner as original issue discount income
on Regular Certificates as described above under "-- Taxation of Regular
Certificates -- Original Issue Discount" and "-- Variable Rate Regular
Certificates," without regard to the de minimis rule described therein, and
"-- Premium."
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Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool in such
Mortgage Loans is exceeded by their unpaid principal balances. The REMIC Pool's
basis in such Mortgage Loans is generally the fair market value of the Mortgage
Loans immediately after the transfer thereof to the REMIC Pool. The REMIC
Regulations provide that such basis is equal in the aggregate to the issue
prices of all regular and residual interests in the REMIC Pool. The accrued
portion of such market discount would be recognized currently as an item of
ordinary income in a manner similar to original issue discount. Market discount
income generally should accrue in the manner described above under "-- Taxation
of Regular Certificates -- Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired such Mortgage Loans at a premium equal to the amount of such
excess. As stated above, the REMIC Pool's basis in Mortgage Loans is the fair
market value of the Mortgage Loans, based on the aggregate of the issue prices
of the regular and residual interests in the REMIC Pool immediately after the
transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "-- Taxation of Regular Certificates -- Premium," a person that
holds a Mortgage Loan as a capital asset under Code Section 1221 may elect under
Code Section 171 to amortize premium on Mortgage Loans originated after
September 27, 1985 under the constant yield method. Amortizable bond premium
will be treated as an offset to interest income on the Mortgage Loans, rather
than as a separate deduction item. Because substantially all of the mortgagors
on the Mortgage Loans are expected to be individuals, Code Section 171 will not
be available for premium on Mortgage Loans originated on or prior to September
27, 1985. Premium with respect to such Mortgage Loans may be deductible in
accordance with a reasonable method regularly employed by the holder thereof.
The allocation of such premium pro rata among principal payments should be
considered a reasonable method; however, the Internal Revenue Service may argue
that such premium should be allocated in a different manner, such as allocating
such premium entirely to the final payment of principal.
Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in determining
the federal income tax liability of a Residual Holder will be subject to special
treatment. That portion, referred to as the "excess inclusion," is equal to the
excess of REMIC taxable income for the calendar quarter allocable to a Residual
Certificate over the daily accruals for such quarterly period of (i) 120% of the
long-term applicable federal rate that would have applied to the Residual
Certificate (if it were a debt instrument) on the Startup Day under Code Section
1274(d), multiplied by (ii) the adjusted issue price of such Residual
Certificate at the beginning of such quarterly period. For this purpose, the
adjusted issue price of a Residual Certificate at the beginning of a quarter is
the issue price of the Residual Certificate, plus the amount of such daily
accruals of REMIC income described in this paragraph for all prior quarters,
decreased by any distributions made with respect to such Residual Certificate
prior to the beginning of such quarterly period. Accordingly, the portion of the
REMIC Pool's taxable income that will be treated as excess inclusions will be a
larger portion of such income as the adjusted issue price of the Residual
Certificates diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including net
operating loss carryforwards, on such Residual Holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of such
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax with respect to certain persons who are
not U.S. Persons (as defined below under "-- Tax-Related Restrictions on
Transfer of Residual Certificates -- Foreign Investors"), and the portion
thereof attributable to excess inclusions is not eligible for any reduction in
the rate of withholding tax (by treaty or otherwise). See "-- Taxation of
Certain Foreign Investors -- Residual Certificates" below. Finally, if a real
estate investment trust or a regulated investment company owns a Residual
Certificate, a portion (allocated under Treasury regulations yet to be issued)
of dividends paid by the real estate investment trust or regulated investment
company could not be offset by net operating losses of its shareholders, would
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constitute unrelated business taxable income for tax-exempt shareholders, and
would be ineligible for reduction of withholding to certain persons who are not
U.S. Persons. The SBJPA 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 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 SBJPA 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 a Residual Holder
is determined without regard to the special rule, discussed above, that taxable
income cannot be less than excess inclusions. Second, a Residual Holder's
alternative minimum taxable income for a taxable year cannot be less than the
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deduction must be computed without regard to any excess
inclusions. These rules are effective for taxable years beginning after December
31, 1986, unless a Residual Holder elects to have such rules apply only to
taxable years beginning after August 20, 1996.
Tax-Related Restrictions on Transfer of Residual Certificates
Disqualified Organizations. If any legal or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Certificate for periods after the transfer and (ii) the highest
marginal federal income tax rate applicable to corporations. The REMIC
Regulations provide that the anticipated excess inclusions are based on actual
prepayment experience to the date of the transfer and projected payments based
on the Prepayment Assumption. The present value rate equals the applicable
federal rate under Code Section 1274(d) as of the date of the transfer for a
term ending with the last calendar quarter in which excess inclusions are
expected to accrue. Such rate is applied to the anticipated excess inclusions
from the end of the remaining calendar quarters in which they arise to the date
of the transfer. Such a tax generally would be imposed on the transferor of the
Residual Certificate, except that where such transfer is through an agent
(including a broker, nominee or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Certificate would in no event be liable for such tax
with respect to a transfer if the transferee furnishes to the transferor an
affidavit stating that the transferee is not a Disqualified Organization and, as
of the time of the transfer, the transferor does not have actual knowledge that
such affidavit is false. The tax also may be waived by the Internal Revenue
Service if the Disqualified Organization promptly disposes of the Residual
Certificate and the transferor pays income tax at the highest corporate rate on
the excess inclusion for the period the Residual Certificate is actually held by
the Disqualified Organization.
In addition, if a Pass-Through Entity (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such Disqualified
Organization, and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that it is not
a Disqualified Organization or stating such holder's taxpayer identification
number and, during the period such person is the record holder of the Residual
Certificate, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Certificate, all interests in the electing
large partnership are treated as held by Disqualified Organizations for purposes
of the tax imposed upon a Pass-Through Entity by Section 860E(c) of the Code. An
exception to this tax, otherwise available to a Pass-Through Entity that is
furnished certain affidavits by record holders of interests in the entity and
that does not know such affidavits are false, is not available to an electing
large partnership.
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For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis, and (iii) an "electing large partnership"
means any partnership having more than 100 members during the preceding tax year
(other than certain service partnerships and commodity pools), which elect to
apply simplified reporting provisions under the Code. 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 Pooling Agreement with respect to a Series will provide that no legal
or beneficial interest in a Residual Certificate may be transferred or
registered unless (i) the proposed transferee furnishes to the Sponsor and the
Trustee an affidavit providing its taxpayer identification number and stating
that such transferee is the beneficial owner of the Residual Certificate and is
not a Disqualified Organization and is not purchasing such Residual Certificate
on behalf of a Disqualified Organization (i.e., as a broker, nominee or
middleman thereof) and (ii) the transferor provides a statement in writing to
the Sponsor and the Trustee that it has no actual knowledge that such affidavit
is false. Moreover, the Pooling Agreement will provide that any attempted or
purported transfer in violation of these transfer restrictions will be null and
void and will vest no rights in any purported transferee. Each Residual
Certificate with respect to a Series will bear a legend referring to such
restrictions on transfer, and each Residual Holder will be deemed to have
agreed, as a condition of ownership thereof, to any amendments to the related
Pooling Agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Sponsor or the
Trustee may charge a fee for computing and providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor would
continue to be treated as the owner of the Residual Certificates and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a noneconomic residual
interest (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person, as defined below under "-- Foreign Investors") is
disregarded for all federal income tax purposes if a significant purpose of the
transferor is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of the transfer, (i) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest federal 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 on each excess inclusion. The
anticipated excess inclusions and the present value rate are determined in the
same manner as set forth above under "-- Disqualified Organizations." The REMIC
Regulations explain that 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 safe harbor is
provided if (i) the transferor conducted, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and found
that the transferee historically had paid its debts as they came due and found
no significant evidence to indicate that the transferee would not continue to
pay its debts as they came due in the future, and (ii) the transferee represents
to the transferor that it understands that, as the holder of the non-economic
residual interest, the transferee may incur tax liabilities in excess of any
cash flows generated by the interest and that the transferee intends to pay
taxes
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associated with holding the residual interest as they become due. The Pooling
Agreement with respect to each Series of Certificates will require the
transferee of a Residual Certificate to certify to the matters in the preceding
sentence as part of the affidavit described above under the heading
"-- Disqualified Organizations."
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended to
apply to a transferee who is not a U.S. Person (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Certificate is deemed to have tax
avoidance potential unless, at the time of the transfer, (i) the future value of
expected distributions equals at least 30% of the anticipated excess inclusions
after the transfer, and (ii) the transferor reasonably expects that the
transferee will receive sufficient distributions from the REMIC Pool at or after
the time at which the excess inclusions accrue and prior to the end of the next
succeeding taxable year for the accumulated withholding tax liability to be
paid. If the non-U.S. Person transfers the Residual Certificate back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Supplement relating to the Certificates of a Series may provide that a
Residual Certificate may not be purchased by or transferred to any person that
is not a U.S. Person or may describe the circumstances and restrictions pursuant
to which such a transfer may be made. The term "U.S. Person" means a citizen or
resident of the United States, a corporation, partnership (except to the extent
provided in applicable Treasury Regulations) or other entity created or
organized in or under the laws of the United States or any political subdivision
thereof, an estate that is subject to U.S. federal income tax regardless of the
source of its income, or a trust if a court within the United States is able to
exercise primary supervision over the administration of such trust, and one or
more such U.S. Persons have the authority to control all substantial decisions
of such trust (or, to the extent provided in applicable Treasury regulations,
certain trusts in existence on August 20, 1996 which are eligible to elect to be
treated as U.S. Persons).
Sale or Exchange of a Residual Certificate
Upon the sale or exchange of a Residual Certificate, the Residual Holder
will recognize gain or loss equal to the excess, if any, of the amount realized
over the adjusted basis (as described above under "-- Basis and Losses") of such
Residual Holder in such Residual Certificate at the time of the sale or
exchange. In addition to reporting the taxable income of the REMIC Pool, a
Residual Holder will have taxable income to the extent that any cash
distribution to it from the REMIC Pool exceeds such adjusted basis on that
Distribution Date. Such income will be treated as gain from the sale or exchange
of the Residual Certificate. It is possible that the termination of the REMIC
Pool may be treated as a sale or exchange of a Residual Holder's Residual
Certificate, in which case, if the Residual Holder has an adjusted basis in its
Residual Certificate remaining when its interest in the REMIC Pool terminates,
and if it holds such Residual Certificate as a capital asset under Code Section
1221, then it will recognize a capital loss at that time in the amount of such
remaining adjusted basis.
Any gain on the sale of a Residual Certificate will be treated as ordinary
income (i) if a Residual Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as a part of such transaction or (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. In addition, gain or loss recognized from the sale of a
Residual Certificate by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual
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Certificates where the seller of the Residual Certificate, during the period
beginning six months before the sale or disposition of the Residual Certificate
and ending six months after such sale or disposition, acquires (or enters into
any other transaction that results in the application of Code Section 1091) any
residual interest in any REMIC or any interest in a "taxable mortgage pool"
(such as a non-REMIC owner trust) that is economically comparable to a Residual
Certificate.
Mark to Market Regulations
The Internal Revenue Service has issued final regulations (the "Mark to
Market Regulations") under Code Section 475 relating to the requirement that a
securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities of a dealer, except to the
extent that the dealer has specifically identified a security as held for
investment. The Mark to Market Regulations provide that, for purposes of this
mark-to-market requirement, a Residual Certificate is not treated as a security
and thus may not be marked to market. The Mark to Market Regulations apply to
all Residual Certificates acquired on or after January 4, 1995.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
Prohibited Transactions
Income from certain transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include (i) the disposition of a qualified mortgage other than for (a)
substitution within two years of the Startup Day for a defective (including a
defaulted) obligation (or repurchase in lieu of substitution of a defective
(including a defaulted) obligation at any time) or for any qualified mortgage
within three months of the Startup Day, (b) foreclosure, default, or imminent
default of a qualified mortgage, (c) bankruptcy or insolvency of the REMIC Pool,
or (d) a qualified (complete) liquidation, (ii) the receipt of income from
assets that are not the type of mortgages or investments that the REMIC Pool is
permitted to hold, (iii) the receipt of compensation for services, or (iv) the
receipt of gain from disposition of cash flow investments other than pursuant to
a qualified liquidation. Notwithstanding (i) and (iv) of the preceding sentence,
it is not a prohibited transaction to sell REMIC Pool property to prevent a
default on Regular Certificates as a result of a default on qualified mortgages
or to facilitate a clean-up call (generally, an optional prepayment of the
remaining principal balance of a Class of Regular Certificates to save
administrative costs when no more than a small percentage of the Certificates is
outstanding). The REMIC Regulations indicate that the modification of a
qualified mortgage generally will not be treated as a disposition if it is
occasioned by a default or reasonably foreseeable default, an assumption of the
Mortgage Loan, the waiver of a due-on-sale or due-on-encumbrance clause, or the
conversion of an interest rate by a mortgagor pursuant to the terms of a
convertible adjustable rate Mortgage Loan.
Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during the
three months following the Startup Day, (ii) made to a qualified reserve fund by
a Residual Holder, (iii) in the nature of a guarantee, (iv) made to facilitate a
qualified liquidation or clean-up call, and (v) as otherwise permitted in
Treasury regulations yet to be issued. It is not anticipated that there will be
any contributions to the REMIC Pool after the Startup Day.
Net Income from Foreclosure Property
The REMIC Pool will be subject to federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" for a period not exceeding the close of the third
calendar year after the year in which the REMIC Pool acquired
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such property, with a possible extension. Net income from foreclosure property
generally means gain from the sale of a foreclosure property that is inventory
property and gross income from foreclosure property other than qualifying rents
and other qualifying income for a real estate investment trust. It is not
anticipated that the REMIC Pool will have any taxable net income from
foreclosure property.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool 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 Pool'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 Pool will not be subject to the prohibited
transaction rules on the sale of its assets, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims) to holders of Regular Certificates
and Residual Holders within the 90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Holder for an entire
taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit in a unified
administrative proceeding. The Servicer will be obligated to act as "tax matters
person," as defined in applicable Treasury regulations, with respect to the
REMIC Pool, in its capacity as either Residual Holder or agent of the Residual
Holders. If the Code or applicable Treasury regulations do not permit the
Servicer to act as tax matters person in its capacity as agent of the Residual
Holders, the Residual Holder chosen by the Residual Holders or such other person
specified pursuant to Treasury regulations will be required to act as tax
matters person.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $124,500 for 1998 ($62,250 in the case of a
married individual filing a separate return) (subject to adjustment for
inflation in subsequent years), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. In the case of a REMIC Pool, such deductions
may include deductions under Code Section 212 for the Servicing Fee and all
administrative and other expenses relating to the REMIC Pool, or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it holds
in another REMIC. Such investors who hold REMIC Certificates either directly or
indirectly through certain pass-through entities may have their pro rata share
of such expenses allocated to them as additional gross income, but may be
subject to such limitation on deductions. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Temporary Treasury regulations provide that the additional gross income and
corresponding amount of expenses generally are to be allocated entirely to the
holders of Residual Certificates in the case of a REMIC Pool that would not
qualify as a fixed investment trust in the absence of a REMIC election. However,
such additional gross income and limitation on deductions will apply to the
allocable portion of such expenses to holders of Regular Certificates, as well
as holders of Residual Certificates, where such Regular Certificates are issued
in a manner that is similar to pass-through certificates in a fixed investment
trust. Unless indicated otherwise in the applicable Supplement, all such
expenses will be allocable to the Residual Certificates. In general, such
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allocable portion will be determined based on the ratio that a REMIC
Certificateholder's income, determined on a daily basis, bears to the income of
all holders of Regular Certificates and Residual Certificates with respect to a
REMIC Pool. As a result, individuals, estates or trusts holding REMIC
Certificates (either directly or indirectly through a grantor trust,
partnership, S corporation, REMIC or certain other pass-through entities
described in the foregoing temporary Treasury regulations) may have taxable
income in excess of the interest income at the pass-through rate on Regular
Certificates that are issued in a single class or otherwise consistently with
fixed investment trust status or in excess of cash distributions for the related
period on Residual Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
Regular Certificates
Interest, including original issue discount, distributable to Regular
Certificateholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), will be considered "portfolio interest"
and, therefore, generally will not be subject to 30% United States withholding
tax, provided that such Non-U.S. Person (i) is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (ii) provides the
Trustee, or the person who would otherwise be required to withhold tax from such
distributions under Code Section 1441 or 1442, with an appropriate statement,
signed under penalties of perjury, identifying the beneficial owner and stating,
among other things, that the beneficial owner of the Regular Certificate is a
Non-U.S. Person, and the Non-U.S. Person provides the Trustee, or the person who
would otherwise be required to withhold tax from such distributions under Code
Section 1441 or 1442, with the appropriate Internal Revenue Service form
establishing the applicability of either of these two exemptions. If such
statement, or any other required statement, is not provided, 30% withholding
will apply unless reduced or eliminated pursuant to an applicable tax treaty or
unless the interest on the Regular Certificate is effectively connected with the
conduct of a trade or business within the United States by such Non-U.S. Person.
In the latter case, such Non-U.S. Person will be subject to United States
federal income tax at regular rates. Investors who are Non-U.S. Persons should
consult their own tax advisors regarding the specific tax consequences to them
of owning a Regular Certificate. The term "Non-U.S. Person" means any person who
is not a U.S. Person.
The Internal Revenue Service recently issued final regulations (the "New
Regulations") which would provide alternative methods of satisfying the
beneficial ownership certification requirement described above. The New
Regulations are effective January 1, 2000, although valid withholding
certificates that are held on December 31, 1999, remain valid until the earlier
of December 31, 2000 or the due date of expiration of the certificate under the
rules as currently in effect. The New Regulations would require, in the case of
Regular Certificates held by a foreign partnership, that (x) the certification
described above be provided by the partners rather than by the foreign
partnership and (y) the partnership provide certain information, including a
United States taxpayer identification number. A look-through rule would apply in
the case of tiered partnerships. Non-U.S. Persons should consult their own tax
advisors concerning the application of the certification requirements in the New
Regulations.
Residual Certificates
The Conference Committee Report to the 1986 Act indicates that amounts paid
to Residual Holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amounts distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "-- Regular Certificates" above, but only to the extent that (i)
the Mortgage Loans were issued after July 18, 1984 and (ii) the Trust Fund or
segregated pool of assets therein (as to which a separate REMIC election will be
made), to which the Residual Certificate relates, consists of obligations issued
in "registered form" within the meaning of Code Section 163(f)(1). Generally,
Mortgage Loans will not be, but regular interests in another REMIC Pool will be,
considered obligations issued in registered form. Furthermore, a Residual Holder
will not be entitled to any exemption from the 30% withholding tax (or lower
treaty rate) to the extent of that portion of REMIC taxable
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income that constitutes an "excess inclusion." See "-- Taxation of Residual
Certificates -- Limitations on Offset or Exemption of REMIC Income" above. If
the amounts paid to Residual Holders who are Non-U.S. Persons are effectively
connected with the conduct of a trade or business within the United States by
such Non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such Non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account for
purposes of withholding only when paid or otherwise distributed (or when the
Residual Certificate is disposed of) under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See
"-- Taxation of Residual Certificates -- Tax-Related Restrictions on Transfer of
Residual Certificates -- Foreign Investors" above concerning the disregard of
certain transfers having "tax avoidance potential." Investors who are Non-U.S.
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning Residual Certificates.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under certain
circumstances, principal distributions) unless the Regular Certificateholder
complies with certain reporting and/or certification procedures, including the
provision of its taxpayer identification number to the Trustee, its agent or the
broker who effected the sale of the Regular Certificate, or such
Certificateholder is otherwise an exempt recipient under applicable provisions
of the Code. Any amounts to be withheld from distribution on the Regular
Certificates would be refunded by the Internal Revenue Service or allowed as a
credit against the Regular Certificateholder's federal income tax liability. The
New Regulations change certain of the rules relating to certain presumptions
currently available relating to information reporting and backup withholding.
Non-U.S. Persons are urged to contact their own tax advisors regarding the
application to them of backup withholding and information reporting.
REPORTING REQUIREMENTS
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to the
Internal Revenue Service and to individuals, estates, non-exempt and
non-charitable trusts, and partnerships who are either holders of record of
Regular Certificates or beneficial owners who own Regular Certificates through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Certificates (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request such information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 with respect to a particular Series of Regular
Certificates. Holders through nominees must request such information from the
nominee.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Holder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual Holders,
furnished annually, if applicable, to holders of Regular Certificates, and filed
annually with the Internal Revenue Service concerning Code Section 67 expenses
(see "-- Limitations on Deduction of Certain Expenses" above) allocable to such
holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Holders, furnished annually to holders of Regular
Certificates and filed annually with the Internal Revenue Service concerning the
percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under "-- Status of REMIC Certificates."
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FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES
AS TO WHICH NO REMIC ELECTION IS MADE
GENERAL
In the event that no election is made to treat a Trust Fund (or a
segregated pool of assets therein) with respect to a Series of Certificates as a
REMIC, the Trust Fund will be classified as a grantor trust under subpart E,
Part 1 of subchapter J of the Code and not as an association taxable as a
corporation or a "taxable mortgage pool" within the meaning of Code Section
7701(i). Where there is no fixed retained yield with respect to the Mortgage
Loans underlying the Certificates of a Series, and where such Certificates are
not designated as the holder of each such Certificate in such Series will be
treated as the owner of a pro rata undivided interest in the ordinary income and
corpus portions of the Trust Fund represented by its Certificate and will be
considered the beneficial owner of a pro rata undivided interest in each of the
Mortgage Loans, subject to the discussion below under "-- Recharacterization of
Servicing Fees." Accordingly, the holder of a Certificate of a particular Series
will be required to report on its federal income tax return its pro rata share
of the entire income from the Mortgage Loans represented by its Certificate,
including interest at the coupon rate on such Mortgage Loans, original issue
discount (if any), prepayment fees, assumption fees, and late payment charges
received by the Servicer, in accordance with such Certificateholder's method of
accounting. A Certificateholder generally will be able to deduct its share of
the Servicing Fee and all administrative and other expenses of the Trust Fund in
accordance with its method of accounting, provided that such amounts are
reasonable compensation for services rendered to that Trust Fund. However,
investors who are individuals, estates or trusts who own Certificates, either
directly or indirectly through certain pass-through entities, will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, including deductions under Code Section 212 for the Servicing Fee and all
such administrative and other expenses of the Trust Fund, to the extent that
such deductions, in the aggregate, do not exceed two percent of an investor's
adjusted gross income. In addition, Code Section 68 provides that itemized
deductions otherwise allowable for a taxable year of an individual taxpayer will
be reduced by the lesser of (i) 3% of the excess, if any, of adjusted gross
income over $124,500 for 1998 ($62,250 in the case of a married individual
filing a separate return) (in each case, as adjusted for inflation in subsequent
years), or (ii) 80% of the amount of itemized deductions otherwise allowable for
such year. As a result, such investors holding Certificates, directly or
indirectly through a pass-through entity, may have aggregate taxable income in
excess of the aggregate amount of cash received on such Certificates with
respect to interest at the pass-through rate or as discount income on such
Certificates. In addition, such expenses are not deductible at all for purposes
of computing the alternative minimum tax, and may cause such investors to be
subject to significant additional tax liability. Moreover, where there is fixed
retained yield with respect to the Mortgage Loans underlying a Series of
Certificates or where the servicing fees are in excess of reasonable servicing
compensation, the transaction will be subject to the application of the
"stripped bond" and "stripped coupon" rules of the Code, as described below
under "-- Stripped Certificates" and "-- Recharacterization of Servicing Fees,"
respectively.
TAX STATUS
Cadwalader, Wickersham & Taft or Kennedy Covington Lobdell & Hickman,
L.L.P. has advised the Sponsor that, except as described below with respect to
Stripped Certificates:
(i) A Certificate owned by a "domestic building and loan association"
within the meaning of Code Section 7701(a)(19) will be considered to
represent "loans . . . secured by an interest in real property which is . .
. residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), provided that the real property securing the Mortgage
Loans represented by that Certificate is of the type described in such
section of the Code.
(ii) A Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code
Section 856(c)(4)(A) to the extent that the assets of the related Trust
Fund consist of qualified assets, and interest income on such assets will
be considered "interest on
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obligations secured by mortgages on real property" to such extent within
the meaning of Code Section 856(c)(3)(B).
(iii) A Certificate owned by a REMIC will be considered to represent
an "obligation (including any participation or certificate of beneficial
ownership therein) which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A) to the extent
that the assets of the related Trust Fund consist of "qualified mortgages"
within the meaning of Code Section 860G(a)(3).
(iv) a Certificate owned by a financial asset securitization
investment trust will be considered to represent "permitted assets" within
the meanings of Section 860L(c) to the extent that the assets of the
related Trust Fund consist of "debt instruments" within the meaning of Code
Section 860L(c)(1)(B).
An issue arises as to whether Buydown Loans may be characterized in their
entirety under the Code provisions cited in clauses (i) and (ii) of the
immediately preceding paragraph. There is indirect authority supporting
treatment of an investment in a Buydown Loan as entirely secured by real
property if the fair market value of the real property securing the loan exceeds
the principal amount of the loan at the time of issuance or acquisition, as the
case may be. There is no assurance that the treatment described above is proper.
Accordingly, Certificateholders are urged to consult their own tax advisors
concerning the effects of such arrangements on the characterization of such
Certificateholder's investment for federal income tax purposes.
PREMIUM AND DISCOUNT
Certificateholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon initial
acquisition of Certificates or thereafter.
Premium
The treatment of premium incurred upon the purchase of a Certificate will
be determined generally as described above under "-- Federal Income Tax
Consequences for REMIC Certificates -- Taxation of Residual
Certificates -- Premium."
Original Issue Discount
The original issue discount rules of Code Sections 1271 through 1275 will
be applicable to a Certificateholder's interest in those Mortgage Loans as to
which the conditions for the application of those sections are met. 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. Under the OID
Regulations, such original issue discount could arise by the charging of points
by the originator of the mortgages in an amount greater than the statutory de
minimis exception, including a payment of points that is currently deductible by
the borrower under applicable Code provisions or, under certain circumstances,
by the presence of "teaser" rates on the Mortgage Loans. See "-- Stripped
Certificates" below regarding original issue discount on Stripped Certificates.
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, in advance of the cash attributable to such income.
Unless indicated otherwise in the applicable Supplement, no prepayment
assumption will be assumed for purposes of such accrual. However, Code Section
1272 provides for a reduction in the amount of original issue discount
includible in the income of a holder of an obligation that acquires the
obligation 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 Loans, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Loans (i.e., points) will be includible by such holder.
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Market Discount
Certificateholders also will be subject to the market discount rules to the
extent that the conditions for application of those sections are met. Market
discount on the Mortgage Loans will be determined and will be reported as
ordinary income generally in the manner described above under "-- Federal Income
Tax Consequences for REMIC Certificates -- Taxation of Regular
Certificates -- Market Discount," except that the ratable accrual methods
described therein will not apply. Rather, the holder will accrue market discount
pro rata over the life of the Mortgage Loans, unless the constant yield method
is elected. Unless indicated otherwise in the applicable Supplement, no
prepayment assumption will be assumed for purposes of such accrual.
RECHARACTERIZATION OF SERVICING FEES
If the servicing fees paid to a Servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess would represent neither income
nor a deduction to Certificateholders. In this regard, there are no
authoritative guidelines for federal income tax purposes as to either the
maximum amount of servicing compensation that may be considered reasonable in
the context of this or similar transactions or whether, in the case of the
Certificate, the reasonableness of servicing compensation should be determined
on a weighted average or loan-by-loan basis. If a loan-by-loan basis is
appropriate, the likelihood that such amount would exceed reasonable servicing
compensation as to some of the Mortgage Loans would be increased. Internal
Revenue Service guidance indicates that a servicing fee in excess of reasonable
compensation ("excess servicing") will cause the Mortgage Loans to be treated
under the "stripped bond" rules. Such guidance provides safe harbors for
servicing deemed to be reasonable and requires taxpayers to demonstrate that the
value of servicing fees in excess of such amounts is not greater than the value
of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
Servicer who receives a servicing fee in excess of such amounts would be viewed
as retaining an ownership interest in a portion of the interest payments on the
Mortgage Loans. Under the rules of Code Section 1286, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from the right to receive some or all of the principal payments on
the obligation would result in treatment of such Mortgage Loans as "stripped
coupons" and "stripped bonds." Subject to the de minimis rule discussed below
under "-- Stripped Certificates," each stripped bond or stripped coupon could be
considered for this purpose as a non-interest bearing obligation issued on the
date of issue of the Certificates, and the original issue discount rules of the
Code would apply to the holder thereof. While Certificateholders would still be
treated as owners of beneficial interests in a grantor trust for federal income
tax purposes, the corpus of such trust could be viewed as excluding the portion
of the Mortgage Loans the ownership of which is attributed to the Servicer, or
as including such portion as a second class of equitable interest. Applicable
Treasury regulations treat such an arrangement as a fixed investment trust,
since the multiple classes of trust interests should be treated as merely
facilitating direct investments in the trust assets and the existence of
multiple classes of ownership interests is incidental to that purpose. In
general, such a recharacterization should not have any significant effect upon
the timing or amount of income reported by a Certificateholder, except that the
income reported by a cash method holder may be slightly accelerated. See
"-- Stripped Certificates" below for a further description of the federal income
tax treatment of stripped bonds and stripped coupons.
SALE OR EXCHANGE OF CERTIFICATES
Upon sale or exchange of a Certificate, a Certificateholder will recognize
gain or loss equal to the difference between the amount realized on the sale and
its aggregate adjusted basis in the Mortgage Loans and other assets represented
by the Certificate. In general, the aggregate adjusted basis will equal the
Certificateholder's cost for the Certificate, increased by the amount of any
income previously reported with respect to the Certificate and decreased by the
amount of any losses previously reported with respect to the Certificate and the
amount of any distributions received thereon. Except as provided above with
respect to market discount on any Mortgage Loans, and except for certain
financial institutions subject to the provisions of Code Section 582(c), any
such gain or loss generally would be capital gain or loss if the Certificate was
held as a
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capital asset. However, gain on the sale of a Certificate will be treated as
ordinary income (i) if a Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Certificateholder's net investment in the
conversion transaction at 120% of the appropriate applicable Federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as a part of such transaction or (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. Capital gains of certain noncorporate taxpayers generally
are subject to a lower maximum tax rate (20%) than ordinary income of such
taxpayers (39.6%) for property held more than one year. The maximum tax rate for
corporations is the same with respect to both ordinary income and capital gains.
STRIPPED CERTIFICATES
General
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership of
the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Certificates that are subject to those rules will be referred to as "Stripped
Certificates." The Certificates will be subject to those rules if (i) the
Sponsor or any of its affiliates retains (for its own account or for purposes of
resale), in the form of Fixed Retained Yield or otherwise, an ownership interest
in a portion of the payments on the Mortgage Loans, (ii) the Sponsor or any of
its affiliates is treated as having an ownership interest in the Mortgage Loans
to the extent it is paid (or retains) servicing compensation in an amount
greater than reasonable consideration for servicing the Mortgage Loans (see
"-- Recharacterization of Servicing Fees" above), and (iii) a Class of
Certificates issued in two or more Classes or subclasses representing the right
to non-pro-rata percentages of the interest and principal payments on the
Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or "stripped coupons" with respect
to its pro rata share of all or a portion of the interest payments on each
Mortgage Loan, including the Stripped Certificate's allocable share of the
servicing fees paid to a Servicer, to the extent that such fees represent
reasonable compensation for services rendered. See the discussion above under
"-- Recharacterization of Servicing Fees." Although not free from doubt, for
purposes of reporting to Stripped Certificateholders, the servicing fees will be
allocated to the Stripped Certificates in proportion to the respective
entitlements to distributions of each Class of Stripped Certificates for the
related period or periods. The holder of a Stripped Certificate generally will
be entitled to a deduction each year in respect of the servicing fees, as
described above under "Federal Income Tax Consequences for Certificates as to
Which No REMIC Election Is Made -- General," subject to the limitation described
therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
an obligation issued at an original issue discount on the date that such
stripped interest is purchased. Although the treatment of Stripped Certificates
for federal income tax purposes is not clear in certain respects at this time,
particularly where such Stripped Certificates are issued with respect to a
Mortgage Pool containing variable-rate Mortgage Loans, the Sponsor has been
advised by counsel that (i) the Trust Fund will be treated as a grantor trust
under subpart E, Part I of subchapter J of the Code and not as an association
taxable as a corporation or a "taxable mortgage pool" within the meaning of Code
Section 7701(i), and (ii) each Stripped Certificate should be treated as a
single installment obligation for purposes of calculating original issue
discount and gain or loss on disposition. This treatment is based on the
interrelationship of Code Section 1286, Code Sections 1272 through 1275, and the
OID Regulations. Although it is possible that computations with respect to
Stripped Certificates could be made in one of the ways described below under
"-- Taxation of Stripped Certificates -- Possible Alternative
Characterizations," the OID Regulations state, in general, that two or more debt
instruments issued by a single issuer to a single investor in a single
transaction should be treated as a single debt instrument. Accordingly, for OID
purposes, all payments on any Stripped Certificates should be aggregated and
treated as
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though they were made on a single debt instrument. The Pooling Agreement will
require that the Trustee make and report all computations described below using
this aggregate approach, unless substantial legal authority requires otherwise.
Furthermore, Treasury regulations issued December 28, 1992 provide for
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is purchased for purposes of calculating any original issue discount. In
addition, under these regulations, a Stripped Certificate that represents a
right to payments of both interest and principal may be viewed either as issued
with original issue discount or market discount (as described below), at a de
minimis original issue discount, or, presumably, at a premium. This treatment
indicates that the interest component of such a Stripped Certificate would be
treated as qualified stated interest under the OID Regulations, assuming it is
not an interest-only or super-premium Stripped Certificate. Further, these final
regulations provide that the purchaser of such a Stripped Certificate will be
required to account for any discount as market discount rather than original
issue discount if either (i) the initial discount with respect to the Stripped
Certificate was treated as zero under the de minimis rule, or (ii) no more than
100 basis points in excess of reasonable servicing is stripped off the related
Mortgage Loans. Any such market discount would be reportable as described above
under "Federal Income Tax Consequences for REMIC Certificates -- Taxation of
Regular Certificates -- Market Discount," without regard to the de minimis rule
therein, assuming that a prepayment assumption is employed in such computation.
Status of Stripped Certificates
No specific legal authority exists as to whether the character of the
Stripped Certificates, for federal income tax purposes, will be the same as that
of the Mortgage Loans. Although the issue is not free from doubt, counsel has
advised the Sponsor that Stripped Certificates owned by applicable holders
should be considered to represent "real estate assets" within the meaning of
Code Section 856(c)(4)(A), "obligation[s] . . . principally secured by an
interest in real property" within the meaning of Code Section 860G(a)(3)(A), and
"loans . . . secured by an interest in real property" within the meaning of Code
Section 7701(a)(19)(C)(v), and interest (including original issue discount)
income attributable to Stripped 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 Mortgage
Loans and interest on such Mortgage Loans qualify for such treatment. The
application of such Code provisions to Buy-Down Loans is uncertain. See "-- Tax
Status" above.
Taxation of Stripped Certificates
Original Issue Discount. Except as described above under "-- General,"
each Stripped Certificate will be considered to have been issued at an original
issue discount for Federal income tax purposes. Original issue discount with
respect to a Stripped Certificate must be included in ordinary income as it
accrues, in accordance with a constant interest method that takes into account
the compounding of interest, which may be prior to the receipt of the cash
attributable to such income. Based in part on the OID Regulations and the
amendments to the original issue discount sections of the Code made by the 1986
Act, the amount of original issue discount required to be included in the income
of a holder of a Stripped Certificate (referred to in this discussion as a
"Stripped Certificateholder") in any taxable year likely will be computed
generally as described above under "-- Federal Income Tax Consequences for REMIC
Certificates -- Taxation of Regular Certificates -- Original Issue Discount" and
"-- Variable Rate Regular Certificates." However, with the apparent exception of
a Stripped Certificate qualifying as a market discount obligation as described
above under "-- General," the issue price of a Stripped Certificate will be the
purchase price paid by each holder thereof, and the stated redemption price at
maturity will include the aggregate amount of the payments to be made on the
Stripped Certificate to such Stripped Certificateholder, presumably under the
Prepayment Assumption, other than qualified stated interest.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition of
original issue discount will be either accelerated or decelerated and the amount
of such original issue discount will be either increased or decreased depending
on the relative interests in principal and interest on each Mortgage Loan
represented by such Stripped
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Certificateholder's Stripped Certificate. While the matter is not free from
doubt, the holder of a Stripped Certificate should be entitled in the year that
it becomes certain (assuming no further prepayments) that the holder will not
recover a portion of its adjusted basis in such Stripped Certificate to
recognize a loss (which may be a capital loss) equal to such portion of
unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Certificates will not be
made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as the
Stripped Certificates. However, if final regulations dealing with contingent
interest with respect to the Stripped Certificates apply the same principles as
the OID Regulations, such regulations may lead to different timing of income
inclusion than would be the case under the OID Regulations for non-contingent
debt instruments. Furthermore, application of such principles could lead to the
characterization of gain on the sale of contingent interest Stripped
Certificates as ordinary income. Investors should consult their tax advisors
regarding the appropriate tax treatment of Stripped Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "-- Federal Income Tax Consequences for REMIC
Certificates -- Taxation of Regular Certificates -- Sale or Exchange of Regular
Certificates." To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Certificates, such subsequent
purchaser will be required for federal income tax purposes to accrue and report
such excess as if it were original issue discount in the manner described above.
It is not clear for this purpose whether the assumed prepayment rate that is to
be used in the case of a Stripped Certificateholder other than an original
Stripped Certificateholder should be the Prepayment Assumption or a new rate
based on the circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. When an investor
purchases more than one Class of Stripped Certificates, it is currently unclear
whether for federal income tax purposes such Classes of Stripped Certificates
should be treated separately or aggregated for purposes of the rules described
above.
Possible Alternative Characterizations. The characterizations of the
Stripped Certificates discussed above are not the only possible interpretations
of the applicable Code provisions. For example, the Stripped Certificateholder
may be treated as the owner of (i) one installment obligation consisting of such
Stripped Certificate's pro rata share of the payments attributable to principal
on each Mortgage Loan and a second installment obligation consisting of such
Stripped Certificate's pro rata share of the payments attributable to interest
on each Mortgage Loan, (ii) as many stripped bonds or stripped coupons as there
are scheduled payments of principal and/or interest on each Mortgage Loan, or
(iii) a separate installment obligation for each Mortgage Loan, representing the
Stripped Certificate's pro rata share of payments of principal and/or interest
to be made with respect thereto. Alternatively, the holder of one or more
Classes of Stripped Certificates may be treated as the owner of a pro rata
fractional undivided interest in each Mortgage Loan to the extent that such
Stripped Certificate, or Classes of Stripped Certificates in the aggregate,
represent the same pro rata portion of principal and interest on each such
Mortgage Loan, and a stripped bond or stripped coupon (as the case may be),
treated as an installment obligation or contingent payment obligation, as to the
remainder. Final regulations issued on December 28, 1992 regarding original
issue discount on stripped obligations make the foregoing interpretations less
likely to be applicable. The preamble to those regulations states that they are
premised on the assumption that an aggregation approach is appropriate for
determining whether original issue discount on a stripped bond or stripped
coupon is de minimis, and solicits comments on appropriate rules for aggregating
stripped bonds and stripped coupons under Code Section 1286.
Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income tax
purposes.
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REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Servicer will furnish, within a reasonable time after the end of each
calendar year, to each Certificateholder or Stripped Certificateholder at any
time during such year, such information (prepared on the basis described above)
as is necessary to enable such Certificateholders to prepare their federal
income tax returns. Such information will include the amount of original issue
discount accrued on Certificates held by persons other than Certificateholders
exempted from the reporting requirements. The amount required to be reported by
the Master Servicer may not be equal to the proper amount of original issue
discount required to be reported as taxable income by a Certificateholder, other
than an original Certificateholder that purchased at the issue price. In
particular, in the case of Stripped Certificates, unless provided otherwise in
the applicable Supplement, such reporting will be based upon a representative
initial offering price of each Class of Stripped Certificates. The Servicer will
also file such original issue discount information with the Internal Revenue
Service. If a Certificateholder fails to supply an accurate taxpayer
identification number or if the Secretary of the Treasury determines that a
Certificateholder has not reported all interest and dividend income required to
be shown on his federal income tax return, 31% backup withholding may be
required in respect of any reportable payments, as described above under
"-- Federal Income Tax Consequences for REMIC Certificates -- Backup
Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a 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
nonresident aliens, foreign corporations, or other non-U.S. persons ("foreign
persons") generally will be subject to 30% United States withholding tax, or
such lower rate as may be provided for interest by an applicable tax treaty.
Accrued original issue discount recognized by the Certificateholder on the sale
or exchange of such a Certificate also will be subject to federal income tax at
the same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a foreign person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will be
subject to the same certification requirements, described above under
"-- Federal Income Tax Consequences for REMIC Certificates -- Taxation of
Certain Foreign Investors -- Regular Certificates."
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.
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;
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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 Montgomery
Securities LLC, 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 Montgomery
Securities LLC will act as a placement agent on behalf of the Sponsor in such
offerings of a Series of Certificates. If NationsBanc Montgomery Securities LLC
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.
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INDEX TO DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
1986 Act.................................................... 58
1998 Policy Statement....................................... 54
Accretion Directed Class.................................... 24
Accrual Certificates........................................ 23
Accrual Class............................................... 26
Advance..................................................... 9
Agency Certificates......................................... 11
Appraised Value............................................. 15
ARMs........................................................ 14
Assumed Reinvestment Rate................................... 23
Balloon Payments............................................ 10
Bankruptcy Bond............................................. 8, 31
Bankruptcy Code............................................. 48
Borrower.................................................... 45
Buydown Fund................................................ 14
Buydown Loans............................................... 14
Certificate Account......................................... 11
Certificate Rate............................................ 6
Certificateholders.......................................... 15
Certificates................................................ 6
Class....................................................... 60
Class Certificate Balance................................... 22
Closing Date................................................ 6
Code........................................................ 55
Commission.................................................. 2
Companion Class............................................. 25
Component Certificates...................................... 24
Components.................................................. 24
Cooperative Loans........................................... 14, 44
Cut-off Date................................................ 8
DCR......................................................... 51
Disqualified Organization................................... 69
Distribution Date........................................... 22
electing large partnership.................................. 69
Eligible Account............................................ 37
Eligible Investments........................................ 20
ERISA....................................................... 13
Exchange Act................................................ 3
Fannie Mae.................................................. 1
Fannie Mae Certificates..................................... 19
FASIT....................................................... 57
FFIEC....................................................... 54
FHA......................................................... 9, 16
FHA Loans................................................... 16
Fitch....................................................... 51
Fixed Rate Class............................................ 26
Floating Rate Class......................................... 26
Fraud Loss.................................................. 8, 30
Freddie Mac................................................. 1
Freddie Mac Act............................................. 17
</TABLE>
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<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Freddie Mac Certificates.................................... 18
Garn-St Germain Act......................................... 48
GNMA........................................................ 1
GNMA Certificates........................................... 17
GNMA I Certificates......................................... 17
GNMA II Certificates........................................ 17
GPMs........................................................ 14
Housing Act................................................. 16
HUD......................................................... 16
Indemnified Parties......................................... 41
Index....................................................... 15
Interest Accrual Period..................................... 22
Interest-Only Class......................................... 26
Inverse Floating Rate Class................................. 26
IO.......................................................... 26
IO Certificates............................................. 7
Labor Regulations........................................... 50
Land Sale Contracts......................................... 15
Last Scheduled Distribution Date............................ 23
Lender...................................................... 45
Lockout Class............................................... 24
Lockout Periods............................................. 10
LTV......................................................... 15
Mark to Market Regulations.................................. 71
Mezzanine Certificates...................................... 7, 29
Minimum Prepayment Agreement................................ 21
Minimum Reinvestment Agreement.............................. 21
Moody's..................................................... 51
Mortgage.................................................... 14
Mortgage Assets............................................. 1, 9
Mortgage Certificates....................................... 11
Mortgage Loans.............................................. 9
Mortgage Margin............................................. 15
Mortgage Note............................................... 10, 14
Mortgage Pool Insurance Policy.............................. 8, 29
Mortgage Rate............................................... 10
Mortgaged Properties........................................ 14
NCUA........................................................ 54
Net Mortgage Rate........................................... 35
New Regulations............................................. 73
Non-Pro Rata Certificate.................................... 58
Non-U.S. Person............................................. 73
Notional Amount Certificates................................ 24
OCC......................................................... 54
OID Regulations............................................. 58
PAC......................................................... 24
Pass-Through Entity......................................... 69
PC Agreement................................................ 19
PC Servicer................................................. 19
PC Sponsor.................................................. 20
PC Trustee.................................................. 19
</TABLE>
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<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Plan........................................................ 50
Planned Amortization Class.................................. 24
PO.......................................................... 26
PO Certificates............................................. 6
Pool Insurer................................................ 29
Pooling Agreement........................................... 6
Primary Mortgage Insurance Policy........................... 40
Prepayment Assumption....................................... 59
Principal-Only Class........................................ 26
Private Certificates........................................ 19
PTCE 83-1................................................... 52
Rating Agency............................................... 13
Ratio Strip Class........................................... 25
Record Date................................................. 22
Regular Certificateholder................................... 58
Regular Certificates........................................ 55
Relief Act.................................................. 49
Relief Act Mortgage Loan.................................... 49
REMIC....................................................... 1
REMIC Certificates.......................................... 55
REMIC Pool.................................................. 55
REMIC Regulations........................................... 55
REMIC Servicer.............................................. 6
REO Property................................................ 28
Reserve Fund................................................ 8, 32
Residual Certificates....................................... 55
Residual Holders............................................ 65
Restricted Group............................................ 52
S&P......................................................... 51
Sale Agreement.............................................. 36
SBJPA of 1996............................................... 56
Scheduled Amortization Class................................ 25
Securities Act.............................................. 2
Seller...................................................... 1, 6
SEN......................................................... 25
Senior Certificateholders................................... 7
Senior Certificates......................................... 6, 25
Sequential Pay Class........................................ 25
Series...................................................... 6
Servicer.................................................... 6
Servicing Fee............................................... 41
SMMEA....................................................... 13, 53
Special Distribution Date................................... 28
Special Distributions....................................... 28
Special Hazard Insurance Policy............................. 8
Special Hazard Insurer...................................... 31
Sponsor..................................................... 6, 33
Startup Day................................................. 56
Stripped Certificateholder.................................. 79
Stripped Certificates....................................... 78
SUB......................................................... 25
</TABLE>
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<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Subordinate Certificateholders.............................. 7
Subordinate Certificates.................................... 6, 25
Supplement.................................................. 1, 6
Support Class............................................... 25
TAC......................................................... 25
Targeted Amortization Class................................. 25
Title V..................................................... 49
Trust Fund.................................................. 1
Trustee..................................................... 6
U.S. Person................................................. 70
UCC......................................................... 47
Underlying Loans............................................ 19
Underwriter's Exemptions.................................... 51
VA.......................................................... 9, 16
Variable Rate Class......................................... 26
Waiver Letter............................................... 8, 30
</TABLE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY 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 WILL BE AMENDED OR SUPPLEMENTED
ACCORDINGLY.
-------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Summary of Terms........................... S-5
Risk Factors............................... S-14
The Mortgage Pool.......................... S-17
NationsBanc Mortgage Corporation........... S-23
NationsBank Corporation Merger............. S-23
NationsBank Corporation Merger............. S-23
Servicing of Mortgage Loans................ S-24
The Pooling and Servicing Agreement........ S-25
Description of Certificates................ S-29
Prepayment and Yield Considerations........ S-42
Credit Support............................. S-60
Use of Proceeds............................ S-62
Certain Federal Income Tax Consequences.... S-62
State Taxes................................ S-63
ERISA Considerations....................... S-64
Method of Distribution..................... S-65
Legal Matters.............................. S-65
Certificate Ratings........................ S-66
Index to Defined Terms..................... S-68
PROSPECTUS
Prospectus Supplement...................... 2
Additional Information..................... 2
Incorporation of Certain Documents by
Reference................................ 3
Summary of the Prospectus.................. 6
The Trust Funds............................ 14
Description of Certificates................ 21
Credit Support............................. 28
Maturity, Prepayment Considerations and
Weighted Average Life of Certificates.... 33
The Sponsor................................ 33
Use of Proceeds............................ 34
Mortgage Purchase Program.................. 34
The Pooling and Servicing Agreement........ 34
Certain Legal Aspects of the Mortgage
Loans.................................... 44
ERISA Considerations....................... 50
Legal Investment Considerations............ 53
Legal Matters.............................. 55
Certain Federal Income Tax Consequences.... 55
State Tax Considerations................... 81
Plans of Distribution...................... 81
Index to Defined Terms..................... 83
</TABLE>
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- ------------------------------------------------------
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$568,303,695
NATIONSBANC MONTGOMERY FUNDING CORP.
SPONSOR
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 1998-1
NATIONSBANC MORTGAGE CORPORATION
SELLER AND MASTER SERVICER
----------------------------------------
PROSPECTUS SUPPLEMENT
----------------------------------------
NATIONSBANC MONTGOMERY
SECURITIES LLC
August 14, 1998
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