As filed with the Securities and Exchange Commission on March 30, 1998
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
NATIONSBANC MONTGOMERY FUNDING CORP.
(Exact name of registrant as specified in its Charter)
Delaware 56-193-0085
(State of Incorporation) (I.R.S. Employer Identification No.)
NationsBank Corporate Center
Charlotte, North Carolina 28255
(704) 386-2400
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
Robert W. Long, Esq.
NationsBanc Montgomery Funding Corp.
NationsBank Corporate Center
Charlotte, North Carolina 28255
(704) 386-2400
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
With a copy to:
Gail G. Watson, Esq. A. Bradley Ives, Esq.
Michael P. Braun, Esq. Kennedy Covington Lobdell &
Hickman, L.L.P.
Brown & Wood LLP 100 North Tryon Street, 42nd Floor
One World Trade Center Charlotte, North Carolina 28202
New York, New York 10048
Approximate date of commencement of proposed sale to the public:
From time to time on or after the effective date of the registration
statement, as determined by market conditions.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. / /
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, other than securities offered only in connection with dividend
or interest reinvestment plans, please check the following box. /x/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b), under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Amount Maximum Maximum Amount of
Title of Each Class of to be Offering Price Aggregate Registration
Securities to Be Registered Registered Per Unit/(1)/ Offering Price* Fee
<S> <C> <C> <C> <C>
Certificates/(2)/ . . . . . . . . . . . . . . $1,011,002,484 100% $1,011,002,484 $299,137.12
</TABLE>
/(1)/ Estimated for the purpose of calculating the registration fee.
/(2)/ $111,002,484 in securities are being carried forward and
$33,637.12 of the filing fee is associated with the securities
being carried forward and was previously paid with the earlier
registration statement.
Pursuant to Rule 429 of the Securities and Exchange Commission's Rules
and Regulations under the Securities Act of 1933, as amended, the Prospectus
and Prospectus Supplement contained in this Registration Statement also
relate to the Registrant's registration statement No. 33-87402 as previously
filed by the Registrant on Form S-3.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED MARCH 30, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED __________, ____)
NATIONSBANC MONTGOMERY FUNDING CORP.
SPONSOR
( )
SELLER
( )
MASTER SERVICER
Mortgage Pass-Through Certificates, Series 199_-
Distributions payable on the __th day of each month, commencing on _______
__, 199_ _________________
The Mortgage Pass Through Certificates, Series 199_-___ (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 __________ __, 199_ (the "Pooling
Agreement"), among NationsBanc Montgomery Funding Corp. (the "Sponsor"),
( ), as servicer (the "Master Servicer"), ( ), as seller
(the "Seller") and ( ), as trustee (the "Trustee"). The Trust
Fund will consist primarily of a pool of conventional (adjustable-rate)
(fixed rate) mortgage loans (the "Mortgage Loans") secured by first liens on
one- to four-family residential properties, substantially all of which will
have original terms to maturity of not more than ___ months. (The Mortgage
Loans will be subject to (semi-annual) (annual) mortgage rate adjustments
based upon (the weekly average yield on United States Treasury securities
adjusted to a constant maturity of one year) (the weekly average of secondary
market interest rates on six-month negotiable certificates of deposit) (the
London interbank offered rate ("LIBOR") for (three month) United States
dollar deposits) (the "Index"), as described herein under "The Mortgage
Pool.") Only the Classes identified in the table below (the "Offered
Certificates") are offered hereby.
On the __th day of each month or, if such __th day is not a business
day, on the first business day thereafter (each, a "Distribution Date"),
commencing in _________ 19__, from and to the extent of funds available
therefor in the Certificate Account referred to herein, a distribution will
be made on the Offered Certificates in the amounts and in the priorities set
forth herein.
<TABLE>
<CAPTION>
Initial Pass-Through
Class Certificate Principal Rate Interest Last Scheduled
Class Balance(1) Type(2) Type(2) Distribution Date(3)
<S> <C> <C> <C> <C> <C>
A-1 . . . . . . . . . $ ( %) (Variable Rate (5))
X . . . . . . . . . . (4) (6)
M-1 . . . . . . . . . ( %) Variable Rate (5))
</TABLE>
(1) The aggregate initial Class Certificate Balance of the Offered
Certificates is subject to a permitted variance in the aggregate of plus
or minus __%.
(2) See "Description of the Certificates--Categories of Classes of
Certificates" in the Prospectus.
(3) See "Description of the Certificates--Last Scheduled Distribution Date"
herein.
(4) The Class X Certificates will have no principal balances and will bear
interest on the Class X Notional Amount.
((5) The Pass-Through Rate for any Distribution Date will equal the weighted
average of the Net Mortgage Rates then in effect for each Mortgage Loan.
The Net Mortgage Rate for each Mortgage Loan will equal the Mortgage
Rate thereon on the first day of the month preceding the month of the
related Distribution Date less the related Expense Rate. The Pass-
Through Rate for the first Distribution Date is expected to be
approximately ___% per annum.)
(6) The Pass-Through Rate for this Class for any Distribution Date will be
equal to the excess of (a) the weighted average of the Net Mortgage
Rates of the Mortgage Loans over (b) __%.
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
SPONSOR, THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES, EXCEPT AS SET
FORTH HEREIN. NEITHER THE CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY THE UNITED STATES GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTIVE INVESTORS IN THE OFFERED CERTIFICATES SHOULD REVIEW THE
INFORMATION SET FORTH UNDER "RISK FACTORS" ON PAGE S-7 OF THIS PROSPECTUS
SUPPLEMENT.
The Offered Certificates offered hereby will be purchased by
_________________ (in such capacity, the "Underwriter(s)") from the Sponsor
and will be offered by the Underwriter(s) 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 ___% of the aggregate principal balance of the
Mortgage Loans plus accrued interest, before deducting issuance expenses
payable by the Sponsor.
The Offered Certificates are offered by the Underwriter(s), subject to
prior sale, when, as and if delivered to and accepted by the Underwriter(s)
and subject to its right to reject orders in whole or in part. It is
expected that delivery of the Senior Certificates will be made (in book-entry
form only through the facilities of The Depository Trust Company) (at the
office of the Underwriter(s)) and that the Class M-1 Certificates will be
made (in book-entry form only through the facilities of The Depository Trust
Company) (at the office of the Underwriter(s)), in each case on or about
_______ __, 19__.
___________ __, 19__
(All) (specify percentage) of the Mortgage Loans were purchased by
(specify entity or entities) ((each) (the) "Seller"), and will be sold to
NationsBanc Montgomery Funding Corp. (the "Sponsor") for deposit to the Trust
Fund prior to the date of initial issuance of the Certificates.
THE RIGHTS OF MEZZANINE CERTIFICATEHOLDERS TO RECEIVE DISTRIBUTIONS WITH
RESPECT TO THE MORTGAGE LOANS WILL BE SUBORDINATED TO THE RIGHTS OF SENIOR
CERTIFICATEHOLDERS TO THE EXTENT DESCRIBED HEREIN.
THE YIELD TO INVESTORS ON EACH CLASS OF OFFERED CERTIFICATES WILL BE
SENSITIVE IN VARYING DEGREES TO, AMONG OTHER THINGS, THE RATE AND TIMING OF
PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) OF THE MORTGAGE LOANS (AND TO THE
LEVEL OF THE INDEX). THE YIELD TO MATURITY OF A CLASS OF OFFERED
CERTIFICATES PURCHASED AT A DISCOUNT OR PREMIUM WILL BE MORE SENSITIVE TO THE
RATE AND TIMING OF PAYMENTS THEREON THAN A CLASS PURCHASED AT PAR. HOLDERS
OF CERTIFICATES SHOULD CONSIDER, IN THE CASE OF ANY SUCH CERTIFICATES
PURCHASED AT A DISCOUNT, THE RISK THAT A LOWER THAN ANTICIPATED RATE OF
PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE
ANTICIPATED YIELD AND, IN THE CASE OF ANY CERTIFICATES PURCHASED AT A
PREMIUM, AND PARTICULARLY THE CLASS X CERTIFICATES, THE RISK THAT A FASTER
THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD
THAT IS LOWER THAN THE ANTICIPATED YIELD. HOLDERS OF THE CLASS X
CERTIFICATES SHOULD CAREFULLY CONSIDER THE RISK THAT A RAPID RATE OF
PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS COULD RESULT IN THE FAILURE OF SUCH
HOLDERS TO RECOVER THEIR INITIAL INVESTMENT. THE YIELD TO INVESTORS IN THE
OFFERED CERTIFICATES, AND PARTICULARLY THE CLASS M-1 CERTIFICATES, ALSO WILL
BE ADVERSELY AFFECTED BY NET INTEREST SHORTFALLS AND BY REALIZED LOSSES.
(An election will be made to treat the Trust Fund as a real estate
mortgage investment conduit (the "REMIC") for federal income tax purposes.
As described more fully herein and in the Prospectus, the Senior Certificates
and the Subordinate Certificates will constitute "regular interests" in the
REMIC. 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 __________, 19__ (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.
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.
Title of Securities Mortgage Pass-Through Certificates,
Series 199_-___ (the "Certificates").
Designations
Offered Certificates Class A-1, Class X and Class M-1
Certificates.
APPROXIMATE
INITIAL CLASS PASS-THROUGH
CLASS CERTIFICATE BALANCE RATE
----- ------------------- ----
Non-Offered
Certificates B-1 $ %
B-2 $ %
R (1) (1)
___________
(1) The Class R Certificates will not
have a Class Certificate Balance and
will not bear interest.
Senior Certificates Class A-1 and Class X Certificates.
Mezzanine Certificates Class M-1 Certificates.
Subordinate Certificates The Mezzanine Certificates and the
Class B-1 and B-2 Certificates.
Residual Certificates Class R Certificates.
(Fixed Rate Certificates
)
(Variable Rate Certificates
)
Book-Entry Certificates
Sponsor NationsBanc Montgomery Funding Corp.,
a Delaware corporation (the
"Sponsor").
Seller ( ) (the "Seller").
Master Servicer ( ) (the "Master
Servicer"). See "Servicing of
Mortgage Loans--The Master Servicer"
herein. (All references to the
"Servicer" in the Prospectus should
be read to be references to the
Master Servicer described in this
Prospectus Supplement.)
(REMIC Servicer ( ) (the "REMIC Servicer").)
Trustee ( ) (the "Trustee").
Cut-off Date _________ __, 199_.
Distribution Date The ___th day of each month, or, if
such day is not a Business Day, the
next succeeding Business Day,
commencing in ______ 199_.
Record Date The Record Date for each Distribution
Date will be the last day of the
preceding month.
Mortgage Pool The Mortgage Pool will consist of
fully-amortizing, ___ to ___ month,
(fixed interest) (adjustable) rate,
conventional first mortgage loans
(the "Mortgage Loans") having, as of
the Cut-off Date, an aggregate
principal balance equal to
approximately $ (the "Cut-off
Date Pool Principal Balance"). See
"The Mortgage Pool"----- herein.
Pooling and Servicing
Agreement The Certificates will be issued
pursuant to a Pooling and Servicing
Agreement to be dated as of
__________ 1, 199_ (the "Pooling
Agreement") among the Sponsor, the
Master Servicer, (the REMIC
Servicer,) the Seller and the
Trustee.
Priority of Distributions As more fully described herein,
distributions will be made on the
Certificates on each Distribution
Date from Available Funds in the
following order of priority:
(i) to interest on each
(interest bearing) Class of Senior
Certificates;
(ii) to principal on the Class
A-1 Certificates, up to the maximum
amount of principal distributed
on such Class on such Distribution
Date as described herein;
(iii) to interest on the Class
M-1 Certificates;
(iv) to principal on the
Class M-1 Certificates, up to the
maximum amount of principal to be
distributed on such Class on such
Distribution Date as described
herein; and
(v) to interest on and then
principal of each other Class of
Subordinate Certificates in
increasing order of numerical Class
designation, up to the maximum amount
of interest and principal to be
distributed on each such Class on
such Distribution Date (and subject
to certain limitations set forth
herein under "Description of the
Certificates--Principal").
Class X Notional Amount With respect to the first
Distribution Date, the initial Class
X Notional Amount will be equal to
the aggregate principal balance of
the Mortgage Loans as of the Cut-off
Date. On any Distribution Date
thereafter, the Class X Notional
Amount will be equal to the aggregate
of the Principal Balances of the
Mortgage Loans (the "Pool Principal
Balance") as of the first day of the
month preceding the month of such
Distribution Date.
Interest On each Distribution Date, each Class
of interest bearing Offered
Certificates, to the extent Available
Funds are available for the
distribution of interest on such
Class on such Distribution Date, as
described above under "Priority of
Distributions", generally will be
entitled to receive an amount
allocable to interest equal to the
sum of (i) one month's interest at
the applicable Pass-Through Rate set
forth on the cover page hereof (as to
each Class, the "Pass-Through Rate")
on the related Class Certificate
Balance or the Class X Notional
Amount, as applicable, immediately
prior to such Distribution Date and
(ii) the sum of the amounts, if any,
by which the amount described in
clause (i) above on each prior
Distribution Date exceeded the amount
actually distributed as interest on
such prior Distribution Dates and not
subsequently distributed ("Unpaid
Interest Shortfall"). The interest
entitlement for each Class of Offered
Certificates described above shall be
reduced by the allocable share of Net
Interest Shortfalls for each such
Class, as described herein under
"Description of the Certificates --
Interest."
Principal (including
prepayments) On each Distribution Date an amount
allocable to principal will be
distributed on the Class A-1
Certificates generally equal to the
lesser of (x) Available Funds reduced
by the amount of interest distributed
on the Senior Certificates on such
Distribution Date and (y) the sum of
(i) the Class A-1 Percentage of (a)
all scheduled payments of principal
due on each Mortgage Loan on the Due
Date for such Mortgage Loan in the
month in which such Distribution Date
occurs, (b) the Principal Balance of
each Mortgage Loan that became a
Liquidated Mortgage Loan during the
month preceding the month of such
Distribution Date, (c) the Principal
Balance of each Mortgage Loan that
was repurchased by the Seller or
another person as of such
Distribution Date pursuant to the
Agreement, (d) certain amounts that
may be required to be paid in
connection with any substitution of
Mortgage Loans on such Distribution
Date pursuant to the Pooling
Agreement and (e) any net insurance
or liquidation proceeds received
during the month preceding the month
of such Distribution Date allocable
to recoveries of principal of
Mortgage Loans that are not yet
Liquidated Mortgage Loans and (ii)
the Class A-1 Prepayment Percentage
of all partial principal prepayments
and all principal prepayments in full
("Principal Prepayments") received
during such preceding month.
On each Distribution Date an amount
allocable to principal will be
distributed on Class M-1 Certificates
equal to the lesser of (x) Available
Funds reduced by the amount of
interest and principal distributed on
the Senior Certificates and interest
on the Class M-1 Certificates, in
each case on such Distribution Date
and (y) the sum of (i) the applicable
Subordinate Percentage Allocation of
the sum of the amounts calculated
pursuant to clauses (a) through (e)
in the preceding paragraph for such
Distribution Date and (ii) the
applicable Subordinate Prepayment
Percentage Allocation of all
Principal Prepayments received during
the preceding month.
See "Description of the Certificates-
-Principal" herein.
(Credit Support
General Credit support for the Senior
Certificates will be provided by the
Subordinate Certificates as described
below. Credit support for the
Mezzanine Certificates will be
provided by the Class B-1 and Class
B-2 Certificates. (other credit
support)
A. Subordination The rights of holders of the
Subordinate Certificates to receive
distributions with respect to the
Mortgage Loans in the Trust Fund will
be subordinated to such rights of
holders of the Senior Certificates,
and the rights of holders of the
Class B-1 and Class B-2 Certificates
to receive such distributions will be
further subordinated to such rights
of holders of the Mezzanine
Certificates, in each case only to
the extent described below. See
"Description of the Certificates--
Priority of Distributions Among
Classes of Certificates," "--
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 of the Class B-1 and
Class B-2 Certificates to the
Mezzanine Certificates is intended to
increase the likelihood of receipt by
Senior Certificateholders and
Mezzanine Certificateholders,
respectively, of the maximum amount
to which they are entitled on any
Distribution Date, to provide such
holders protection against losses on
the Mortgage Loans to the extent
described herein and, to a lesser
extent, against losses on (Special
Hazard Mortgage Loans) (Fraud Loans)
(and) (Bankruptcy Loans.) See
"Credit Support--Subordination of
Subordinated Certificates" and
"Description of the Certificates--
Allocation of Losses" herein.
(B. Description of other types
of credit support,
if any)
Weighted Average
Lives (in years)*
PSA
________________________________________________________
CLASS % % % %
------ - - - -
A-1
X
M-1
*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 their services,
the servicers engaged by the Master
Servicer to perform the day-to-day
servicing functions relating to the
Mortgage Loans and the Master
Servicer will be entitled to retain,
from amounts received in respect of
the Mortgage Loans which are
allocable to interest, an amount
equal to the Servicing Fee and Master
Servicing Fee, respectively.
In addition to the Servicing Fee and
the Master Servicing Fee, there will
be deducted 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, the Servicing Fee
Rate and the rate at which the
Trustee's fee is determined is
referred to as the "Expense Rate."
See "Servicing of Mortgage Loans--
Servicing Compensation and Payment of
Expenses" herein.
(Advances The Master Servicer, directly or
through one or more servicers, will
be obligated to advance, prior to
each Distribution Date (occurring on
or before the Distribution Date in
__________) an amount equal to all
delinquent amounts (net of the
related Servicing Fee and Master
Servicing Fee) on each Mortgage Loan
in the Mortgage Pool and not
previously advanced to the extent
that such Advances are determined by
the Master Servicer to be
recoverable.
(With respect to any Mortgage Loan
requiring a balloon payment on the
maturity date of such Mortgage Loan,
in the event of default in any such
payment, the Master Servicer will
continue to advance, subject to the
Master Servicer's determination as to
recoverability, an amount equal to
interest on the principal balance of
such Mortgage Loan deemed to be due
thereon after such default.)
Any Advance made by the Master
Servicer or a servicer with respect
to a Mortgage Loan is reimbursable to
it as described herein under
"Servicing of Mortgage Loans--
Advances." Under the limited
circumstances described herein, the
Master Servicer will be entitled to
reimburse itself and any servicer
from funds on deposit in the
Certificate Account before
distributions are made to holders of
Certificates.)
(Optional Termination At its option, the Master Servicer
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
__% of the Cut-off Date Pool
Principal Balance. See "Description
of the Certificates--Termination;
Optional Termination" herein.)
IF THE MASTER SERVICER 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, the
Trust Fund will be treated as a "real
estate mortgage investment conduit"
("REMIC"). The Senior Certificates
and the Subordinate Certificates will
constitute "regular interests" in the
REMIC and will be treated as debt
instruments of the Trust Fund for
federal income tax purposes with
payment terms equivalent to the terms
of such Certificates. The Class R
Certificates will constitute the sole
class of "residual interest" in the
REMIC and will be the Class of
Residual Certificates, as described
in the Prospectus.)
Holders of the Offered Certificates
will be required to include in income
interest on such Certificates in
accordance with the accrual method of
accounting. The Class X Certificates
will, and the other Classes of
Offered Certificates may, depending
on their respective issue prices, be
treated as having been issued with
original issue discount for federal
income tax purposes. For further
information regarding the federal
income tax consequences of investing
in the Certificates, see "Certain
Federal Income Tax Consequences"
herein and in the Prospectus.
Legal Investment The Senior Certificates (and the
Class M-1 Certificates) will
constitute "mortgage related
securities" for purposes of the
Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"), and as such,
will be legal investments for certain
entities to the extent provided in
SMMEA. See "Legal Investment
Consideration" in the Prospectus.
(It is anticipated that the Class M-1
Certificates will not be rated in one
of the two highest rating categories
by a nationally recognized
statistical rating organization and,
therefore, will not constitute
"mortgage related securities" for
purposes of SMMEA.)
Certain Classes of Certificates may
be deemed "high-risk mortgage
securities" as defined in the
supervisory policy statement on
securities activities approved by the
Federal Financial Institutions
Examination Council on December 3,
1991 and adopted by the Comptroller
of the Currency, the Federal Deposit
Insurance Corporation, the Federal
Reserve Board and the Office of
Thrift Supervision. See "Legal
Investment Consideration" in the
Prospectus.
ERISA Considerations A fiduciary of any employee benefit
plan subject to the Employee
Retirement Income Security Act of
1974, as amended ("ERISA"), or the
Internal Revenue Code of 1986, as
amended (the "Code"), should
carefully review with its legal
advisors whether the purchase or
holding of an Offered Certificate
could give rise to a transaction
prohibited or not otherwise
permissible under ERISA or the Code.
The Class M-1 Certificates may not be
transferred except upon satisfaction
of certain conditions. See "ERISA
Considerations" herein and in the
Prospectus.
Certificate Rating It is a condition to the issuance of
the Offered Certificates that the
Senior Certificates and the Class M-1
Certificates be rated by (
) ( ) and by ( ) (
) at least as follows:
CLASS
------ ----- ------
A-1
X
M-1
See "Certificate Rating" herein.
RISK FACTORS
YIELD AND PREPAYMENT 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 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,
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 optional purchase by the Master Servicer of
all of the Mortgage Loans in connection with the termination of the Trust.
(The Mortgagors may prepay any Mortgage Loan at any time without penalty.)
The rate of payments (including prepayments) on mortgage loans is
influenced by a variety of economic, geographic, social and other factors.
If prevailing 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 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 the
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 the 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. The yield on the Class X 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 (as defined below) may have a
material negative effect on the yield of the Class X Certificates. Investors
must make their own decisions as to the appropriate prepayment assumptions to
be used in deciding whether to purchase the Offered Certificates. See
"Prepayment and Yield Considerations--Sensitivity of the Class X
Certificates" herein.
SUBORDINATION
The rights of the holders of the Class M-1 Certificates to receive
distributions with respect to the Mortgage Loans will be subordinated to such
rights of the Senior Certificates and the rights of the holders of the Class
B-1 Certificates to receive distributions with respect to the Mortgage Loans
will be subordinated to such rights of the Senior Certificates and the Class
M-1 Certificates. 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 Certificates. Because of the priority
of distributions, shortfalls resulting from delinquencies not so advanced
will be borne first by the Class B-1 Certificates, then by the Class M-1
Certificates and finally by the Senior Certificates.
The weighted average life of, and the yield to maturity on, the Class M-
1 Certificates will be 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 Class M-1 Certificate, the actual yield to maturity of such
Certificate may be lower than the yield expected by such holder based on such
assumption. The timing of losses on the Mortgage Loans will also affect an
investor's actual yield to maturity, even if the rate of defaults and
severity of losses over the life of the Mortgage Loans are consistent with
such investor's expectations. In general, the earlier a loss occurs the
greater the effect on an investor's yield to maturity. Realized Losses on
the Mortgage Loans will reduce the Class Certificate Balance of the Class M-1
Certificates to the extent of any losses allocated thereto without the
receipt of cash attributable to such reduction. See "Description of the
Certificates--Allocation of Losses" herein.
LIMITED OBLIGATIONS
The Mortgage Loans are be the sole source of payments on the
Certificates. The Certificates do not represent an interest in or obligation
of the Seller, the Master Servicer, the Trustee or any of their affiliates,
except for limited obligations of the Master Servicer with respect to certain
breaches of its representations and warranties and its obligations as Master
Servicer. Neither the Certificates nor the Mortgage Loans will be guaranteed
by or insured by any governmental agency or instrumentality, the Seller, the
Master Servicer, the Trustee or any of their affiliates. Consequently, in
the event that payments on the Mortgage Loans are insufficient or otherwise
unavailable to make all payments required on the Certificates, there will be
no recourse to the Seller, the Master Servicer, the Trustee or any of their
affiliates.
LIQUIDITY
The Underwriter intends to make a secondary market in the Offered
Certificates, but has no obligation to do so. There is currently no
secondary market in the Offered Certificates and there can be no assurance
that such a market will develop or, if it does develop, that it will provide
Certificateholders with liquidity of investment or that it will continue for
the life of the Certificates.
GEOGRAPHIC CONCENTRATION
(Approximately ____% of the Mortgage Loans (by aggregate outstanding
principal balance as of the Cut-off Date) are secured by Mortgaged Properties
located in the State of California. Property values of residential real
estate in California have declined in recent years. If the California
residential real estate market should continue to experience an overall
decline in property values after the dates of origination of the Mortgage
Loans, the rates of delinquency, foreclosure, bankruptcy and loss on the
Mortgage Loans may be expected to increase, and may increase substantially,
as compared to such rates in a stable or improving real estate market.)
(On ______ ___, 199__, ___ counties in California were declared federal
disaster areas as a result of recent flooding. A significant portion of the
Mortgage Pool secured by Mortgaged Properties in California are located in
such counties (the "Damaged Area"). In general, primary hazard policies do
not cover damage resulting from floods. However, any such Mortgaged Property
materially damaged by flooding prior to the Closing Date will be subject to
repurchase by the Seller as a result of a breach of the Seller's
representation and warranty.
It is not certain what effect the flood damage will have on the rates of
delinquency, foreclosure, bankruptcy and loss of the Mortgage Loans located
in the Damaged Area. It is possible that the affected Mortgage Loans may
experience higher levels of delinquencies, foreclosures, bankruptcies and
losses. It is also possible that such Mortgage Loans will experience a
higher or lower rate of prepayments due to higher or lower rates of sales of
the Mortgaged Properties in the Damaged Area. Furthermore, it is too early
to determine what effect, if any, the flood will have on the market prices of
residential housing in the Damaged Area and the California real estate market
in general.)
(CONVERTIBLE MORTGAGE LOANS
Approximately ____% of the Mortgage Loans (by aggregate outstanding
principal balance as of the Cut-off Date) will initially bear interest at
fixed rates for a specified period of time and will thereafter bear interest
at adjustable rates until maturity. After the Mortgage Rate resets from a
fixed rate to an adjustable rate, such Mortgage Loans are assumable in
connection with a transfer of the related Mortgaged Property, at the option
of the Master Servicer. The extent to which such Mortgage Loans are assumed
by purchasers of the Mortgaged Properties rather than prepaid by the related
Mortgagors in connection with the sales of the Mortgaged Properties will
affect the weighted average lives of the Certificates. Furthermore, such
Mortgage Loans may be more sensitive to changes in the level of market
interest rates than is typical for adjustable rate mortgage loans due to the
length of time before which the Mortgage Rates reset from fixed rates to
adjustable rates.)
BOOK-ENTRY SYSTEM
Since transactions in the ( ) Certificates (the "Book-Entry
Certificates") generally can be effected only through DTC, Participants and
Indirect 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 &
Co., as nominee for DTC. Also, issuance of Book-Entry Certificates in book-
entry form may reduce the liquidity thereof in any secondary trading market
that may develop therefor because investors may be unwilling to purchase
securities for which they cannot obtain delivery of physical certificates.
See "Description of the Certificates--Book-Entry Certificates" herein.
THE MORTGAGE POOL
GENERAL
Certain information with respect to the Mortgage Loans included in the
Mortgage Pool is set forth below. A detailed description of such Mortgage
Loans on Form 8-K (the "Detailed Description") will be available to
purchasers of the Offered Certificates at or before, and will be filed with
the Securities and Exchange Commission within fifteen days of, the initial
delivery of the Offered Certificates. The Detailed Description will specify
the aggregate principal balances of the Mortgage Loans included in the
Mortgage Pool as of the Cut-off Date (the "Cut-off Date Pool Principal
Balance") and will also include the following information in tabular format
regarding such Mortgage Loans: years of origination of such Mortgage Loans,
the purposes of such Mortgage Loans, the original principal balances of such
Mortgage Loans, the outstanding principal balances of such Mortgage Loans as
of the Cut-off Date, the Mortgage Rates borne by such Mortgage Loans, the
original Loan-to-Value Ratios of such Mortgage Loans, the remaining months to
stated maturity of such Mortgage Loans, the types of properties securing such
Mortgage Loans and the geographical distribution of such Mortgage Loans by
state. 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 presently constituted is representative of the
characteristics of the Mortgage Pool as it will be constituted at the Closing
Date, although the range of the Mortgage Rates and the maturities and certain
other characteristics of the Mortgage Loans in the Mortgage Pool may vary.
The Mortgage Pool will consist of Mortgage Loans with a Cut-off Date
Principal Balance expected to be approximately $____________. The Mortgage
Loans provide for the amortization of the amount financed over a series of
monthly payments. All the Mortgage Loans provide for payments due (as of the
first day of each month (each a "Due Date")). The Mortgage Loans to be
included in the Mortgage Pool were originated or acquired in the normal
course of its mortgage banking business by (the) (each) Seller substantially
in accordance with the underwriting criteria specified herein. At
origination, (substantially all) (specify percentage) of the Mortgage Loans
had a stated term to maturity of __ years. (Monthly payments made by the
Mortgagors on the Mortgage Loans either earlier or later than the related Due
Date will not affect the amortization schedule or the relative application of
such payments to principal and interest.) (The Mortgagors may prepay any
Mortgage Loan at any time without penalty.)
(Other than during the first (six) (twelve) months following
origination, during which time each such Mortgage Loan will bear interest at
a Mortgage Rate fixed at origination, each Mortgage Loan has a Mortgage Rate
subject to (semi-annual) (annual) adjustment on the first day of the month
specified in the related Mortgage Note (each such date, an "Adjustment Date")
to equal the sum, rounded to the nearest ____%, of (i) (the weekly average
yield on United States Treasury securities adjusted to a constant maturity of
one year) (the weekly average of secondary market interest rates on six-month
negotiable certificates of deposit) (the London interbank offered rate
("LIBOR") for (three-month) United States dollar deposits) (other indices)
(the "Index")(, as published by the Federal Reserve Board in Statistical
Release H.15(519) and most recently available as of 45 days prior to the
Adjustment Date) (which appears on the Reuters Screen LIBO Page as of
_________, London time, on the first business day of the month prior to the
Adjustment Date) and (ii) a fixed percentage amount specified in the related
Mortgage Note (the "Gross Margin"); provided, however, that the Mortgage Rate
will not increase or decrease by more than the Periodic Rate Cap on any
Adjustment Date. All the Mortgage Loans provide that over the life of the
Mortgage Loan the Mortgage Rate will in no event be more than the initial
Mortgage Rate plus a fixed percentage (such rate, the "Maximum Rate"). (In
addition, each Mortgage Loan provides that in no event will the Mortgage Rate
be less than the initial Mortgage Rate (such rate, the "Minimum Rate").)
Effective with the first payment due on a Mortgage Loan after each related
Adjustment Date, the monthly payment will be adjusted to an amount which will
fully amortize the outstanding principal balance of the Mortgage Loan over
its remaining term. (Approximately ___% of the Mortgage Loans were
originated with a Mortgage Rate less than the sum of the then-applicable
Index and Gross Margin, rounded as described herein.) If the Index ceases to
be published or is otherwise unavailable, the Master Servicer will select an
alternative index for mortgage loans on single-family residential properties,
based upon comparable information, over which it has no control and which is
readily verifiable by mortgagors.)
(Each Mortgage Loan was originated on or after ___________ __, 199_,
(and has an initial Adjustment Date on or before _________ __, 199_).)
The latest date on which any Mortgage Loan matures is ________ __, ____.
The earliest stated maturity date of any Mortgage Loan is __________,
________.
(As of the Cut-off Date, no Mortgage Loan was delinquent more than 30
days.)
(None) of the Mortgage Loans will be subject to any buydown agreement.
No Mortgage Loan will have a Loan-to-Value Ratio as of the Cut-off Date
of more than ____%. The weighted average of the Loan-to-Value Ratios as of
the Cut-off Date of the Mortgage Loans was approximately ____%. (Each
Mortgage Loan with a Loan-to-Value Ratio as of the Cut-off Date of greater
than 80% will be covered by a primary mortgage guaranty insurance policy
issued by a mortgage insurance company approved by the Federal National
Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage
Corporation ("Freddie Mac"), which policy will provide coverage in an amount
equal to the excess of the original principal balance of the related Mortgage
Loan plus accrued interest thereon and related foreclosure expenses in excess
of 75% of the value of the related Mortgaged Property. No such primary
mortgage insurance policy will be required with respect to any such Mortgage
Loan after the date on which the related Loan-to-Value Ratio is less than
80%.)
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is a
fraction, expressed as a percentage, (the numerator of which is the original
principal balance of the related Mortgage Loan and the denominator of which
is the lesser of (a) the appraised value of the related Mortgaged Property
determined in an appraisal obtained by the originator at origination of such
Mortgage Loan and (b) the sales price for such property.) No assurance can
be given that the value of any Mortgaged Property has remained or will remain
at the level that existed on the appraisal or sales date. If residential
real estate values generally or in a particular geographic area decline, the
Loan-to-Value Ratios might not be a reliable indicator of the rates of
delinquencies, foreclosures and losses that could occur with respect to such
Mortgage Loans.
(None of the Mortgage Loans is insured by any primary mortgage guaranty
insurance policy.)
(No) Mortgage Loan provides for deferred interest or negative
amortization. Approximately _____% and ____% (by Cut-off Date Pool Principal
Balance) will be secured by Mortgaged Properties located in ( ) and (
), respectively. Except as indicated in the preceding sentence no more
than approximately ____% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one state. No more than approximately ____% of the
Mortgage Loans (by principal balance as of the Cut-off Date) will be secured
by Mortgaged Properties located in any one postal zip code area.
The first and last date on which any Convertible Mortgage Loan is
convertible from an adjustable Mortgage Rate to a fixed Mortgage Rate is
________ and ______, respectively.
The following information sets forth in tabular format certain
information, as of the Cut-off Date, as to the Mortgage Loans. Percentages
(approximate) are stated by principal balance as of the Cut-off Date.
MORTGAGE LOAN STATISTICS
MORTGAGE POOL
-------------
Number of Mortgage Loans . . . . . . . .
Cut-off Date Pool Principal Balance . . . $
(Rate Adjustment Frequency:) . . . . . .
(6 months) . . . . . . . . . . . . . %
(12 months) . . . . . . . . . . . . %
(24 months) . . . . . . . . . . . . %
(36 months) . . . . . . . . . . . . %
(60 months) . . . . . . . . . . . . %
(Payment Adjustment Frequency:) . . . . .
(6 months) . . . . . . . . . . . . . %
(12 months) . . . . . . . . . . . . %
(24 months) . . . . . . . . . . . . %
(36 months) . . . . . . . . . . . . %
(60 months) . . . . . . . . . . . . %
Convertible Mortgage Loans . . . . . . . %
Original Principal Balance:
Ranges . . . . . . . . . . . . . . . $ to $
Average . . . . . . . . . . . . . . $
Original Term to Stated Maturity:
Ranges . . . . . . . . . . . . . . . to months
Weighted Average . . . . . . . . . . months
Remaining Months to Stated Maturity:
Ranges . . . . . . . . . . . . . . . to months
Weighted Average . . . . . . . . . . months
Mortgage Rate:
Ranges . . . . . . . . . . . . . . . % to %
Weighted Average . . . . . . . . . . %
(Net Mortgage Rate:)
Ranges . . . . . . . . . . . . . . . % to %
Weighted Average . . . . . . . . . . %
(Gross Margin:)
Ranges . . . . . . . . . . . . . . . % to %
Weighted Average . . . . . . . . . . %
(Weighted Average Months to Next Rate Not more than
Adjustment Date) . . . . . . . . . . months
(Periodic Rate Cap:)
Ranges . . . . . . . . . . . . . . .
Weighted Average . . . . . . . . . .
(Maximum Rate:)
Ranges . . . . . . . . . . . . . . . % to %
Weighted Average . . . . . . . . . . %
(Minimum Rate:)
Ranges . . . . . . . . . . . . . . . % to %
Weighted Average . . . . . . . . . . %
Expense Fees:
Ranges . . . . . . . . . . . . . . . % to %
Weighted Average . . . . . . . . . . %
Primary Residences . . . . . . . . . . . At least %
Investment Properties . . . . . . . . . . No more than %
Second Homes . . . . . . . . . . . . . . No more than %
Single-family Detached Residences . . . . At least %
Condominiums . . . . . . . . . . . . . . No more than %
Planned Unit Developments or De Minimis
Planned Unit Developments . . . . . No more than %
Located in ( ) . . . . . . . . . No more than %
Number of Other States* . . . . . . . . . No more than %
Two- to Four-Family Residences . . . . . No more than %
Purchase Money Mortgage Loans . . . . . . At least %
Rate/Term Refinancing Mortgage Loans . . No more than %
Cash Out Refinance Mortgage Loans . . . . No more than %
Limited Documentation . . . . . . . . . . No more than %
No Asset and/or Income Certificate . . . No more than %)
________________
* No more than 5% of the Mortgage Loans (by aggregate principal balance as
of the Cut-off Date) are secured by Mortgaged Properties in such states.
THE INDEX
(The Index is the figure derived from the average weekly quoted yield on
U.S. Treasury securities adjusted to a constant maturity of one year as
published in the Federal Reserve Statistical Release H.15(519). Yields on
treasury securities are estimated from the U.S. Treasury's daily yield curve.
This curve, which relates the yield on a security to its time to maturity, is
based on the closing market bid yields on actively-traded treasury securities
in the over-the-counter market. These market yields are calculated from
composites of quotations reported by five leading U.S. Treasury securities
dealers to the Federal Reserve Bank of New York. The constant yield values
are read from the yield curve at fixed maturities. This method permits
estimation of the yield for a one year maturity, for example, even if no
outstanding security has exactly one year remaining to maturity.)
(The Index is the figure derived from the weekly average of secondary
market interest rates on six-month negotiable certificates of deposit as
published in the Federal Reserve Statistical Release H.15(519).)
(The Index shall be established by the Trustee and shall equal the
arithmetic mean (rounded upwards, if necessary, to the nearest (one-eighth)
of one percent of LIBOR for (three-month) United States dollar deposits which
appears on the Reuters Screen LIBO Page as of _________, London time, on the
first business day of the month prior to any Adjustment Date for a Mortgage
Loan.)
Listed below are monthly historical values of the Index beginning with
January 1990. The values listed below do not purport to be a prediction of
the performance of the Index in the future.
<TABLE>
<CAPTION> Year (1)
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
MONTH
January . . . . . . . . . . . . . .
February . . . . . . . . . . . . .
March . . . . . . . . . . . . . . .
April . . . . . . . . . . . . . . .
May . . . . . . . . . . . . . . . .
June . . . . . . . . . . . . . . .
July . . . . . . . . . . . . . . .
August . . . . . . . . . . . . . .
September . . . . . . . . . . . . .
October . . . . . . . . . . . . . .
November . . . . . . . . . . . . .
December . . . . . . . . . . . . .
</TABLE>
- -------------------------
(1) Monthly figures are averages of daily rates.
In the event that the Index becomes unavailable or otherwise
unpublished, the Master Servicer will select a comparable alternative index
over which it has no direct control and which is readily verifiable by the
Mortgagors.
(CONVERTIBLE MORTGAGE LOANS
Approximately __% of the Mortgage Loans (by Cut-off Date Pool Principal
Balance) provide that the mortgagor may convert the adjustable Mortgage Rate
on the Mortgage Loan to a fixed Mortgage Rate (each, a "Convertible Mortgage
Loan"), generally within a period from ____ to ___ months after origination.
In determining the fixed Mortgage Rate applicable to a Mortgage Loan eligible
for conversion, the Master Servicer, acting on behalf of the Trustee, will
quote a fixed mortgage rate generally equal to the sum of the current rate
then quoted by Fannie Mae as its required net yield for conventional mortgage
loans covered by 60-day mandatory delivery commitments plus a fixed
percentage amount ranging from ____ % to ____ %. In the event that the
applicable Fannie Mae rate is not available, the Master Servicer will quote a
fixed mortgage rate based upon comparable information. In order to be
eligible to convert from an adjustable to a fixed Mortgage Rate on a Mortgage
Loan, the Mortgagor must execute and submit to the Master Servicer certain
conversion documents, including a loan modification agreement, pay the
applicable conversion fee, if any, and not be in default under the related
Mortgage Note or security documents and not have been more than 30 days
delinquent in the payment of any amounts due under the related Mortgage Note
at any time during the twelve months prior to the Cut-off Date. Upon
conversion, the monthly payments of principal and interest on such Mortgage
Loan will be adjusted to provide for fully amortizing, level monthly payments
until maturity.
Upon the conversion of any Mortgage Loan from an adjustable rate
Mortgage Loan to a fixed rate Mortgage Loan, the (Seller) (Master Servicer)
is obligated to purchase such Mortgage Loan at a price (the "Purchase Price")
equal to 100% of the Principal Balance of such Mortgage Loan plus accrued
interest thereon at the Net Mortgage Rate (applicable to such Mortgage Loan
immediately prior to such conversion date) to the first day of the month in
which the Purchase Price is to be distributed (less any unreimbursed Advances
with respect to such Mortgage Loan). In the event the (Seller) (Master
Servicer) defaults in its obligation to purchase any converted Mortgage Loan,
the (Seller) (Master Servicer) (Trustee) will attempt to sell such converted
Mortgage Loan at the Purchase Price. If such converted Mortgage Loan cannot
be sold at such price, however, it will remain in the Trust Fund as a
Mortgage Loan with a fixed Mortgage Rate. (So long as ( ) serves
as Master Servicer, the failure of ( ) to purchase a converted Mortgage
Loan is an Event of Default under the Agreement. If the Trustee or another
entity become a successor master servicer because of an Event of Default or
the resignation of the Master Servicer, such successor will not be obligated
to purchase converted Mortgage Loans. In any event, the Master Servicer will
remain obligated to purchase converted Mortgage Loans.)
ASSIGNMENT OF THE MORTGAGE LOANS
Pursuant to the Pooling Agreement, the Sponsor on the Closing Date will
sell, transfer, assign, set over and otherwise convey without recourse to the
Trustee in trust for the benefit of Certificateholders all right, title and
interest of the Sponsor in and to each Mortgage Loan and all right, title and
interest in and to all other assets included in the Trust Fund, including all
principal and interest received by the Master Servicer on or with respect to
the Mortgage Loans after the Cut-off Date (to the extent not applied in
computing the Cut-off Date Pool Principal Balance), exclusive of interest
accruing thereon prior to the Cut-off Date.
In connection with such transfer and assignment, the Sponsor will
deliver or cause to be delivered to the Trustee, or a custodian for the
Trustee, among other things, the original loan agreement or promissory note
(the "Mortgage Note") (and any modification or amendment thereto) endorsed
without recourse to the order of the Trustee (or its nominee), the original
agreement or instrument creating a first lien on the related Mortgaged
Property (the "Mortgage") with evidence of recording indicated thereon
(except for any Mortgage not returned from the public recording office, which
will be delivered to the Trustee as soon as the same is available to the
Sponsor), an assignment in recordable form of the Mortgage and, if
applicable, any riders or modifications to such Mortgage Note and Mortgage
(collectively, the "Mortgage File"). Assignments of the Mortgage Loans to
the Trustee (or its nominee) will be recorded in the appropriate public
office for real property records, except in states where, in the opinion of
counsel acceptable to the Trustee, such recording is not required to protect
the Trustee's interests in the Mortgage Loan against the claim of any
subsequent transferee or any successor to or creditor of the Sponsor or the
Seller.
The Trustee will review each Mortgage File within 90 days of the Closing
Date (or promptly after the Trustee's receipt of any document permitted to be
delivered after the Closing Date) and if any such document is found to be
defective in a material respect and the Seller does not cure such defect
within 90 days of notice thereof from the Trustee, the Seller following
delivery of the opinion referred to below, 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 equal to 100% of the unpaid principal balance of such
Mortgage Loan plus accrued and unpaid interest on such principal balance at
the related Net Mortgage Rate less any unreimbursed Advances made with
respect thereto, or (ii) during a limited period of time after the Closing
Date as specified in the Pooling Agreement and upon satisfaction of the
conditions set forth in the Pooling Agreement, substitute an Eligible
Substitute Mortgage Loan (as defined in the Pooling Agreement) meeting the
criteria specified in the Pooling Agreement. This repurchase or substitution
obligation constitutes the sole remedy available to Certificateholders or the
Trustee for a material defect in a constituent document. The Sponsor will
make no representations and warranties with respect to the Mortgage Loans and
will have no obligation to purchase or substitute for a Mortgage Loan with
deficient documentation or which is otherwise defective. Prior to any such
repurchase or substitution, the Seller shall deliver an opinion of counsel to
the Trustee to the effect that such repurchase or substitution will not (i)
give rise to a "prohibited transaction" under Section 860F(A)(2) of the Code,
(ii) be deemed a contribution to the Trust Fund after the "start-up date"
that would give rise to the tax specified under Section 860G(a)(1) of the
Code or (iii) adversely affect the status of the Trust Fund as a REMIC. Any
such substitution or purchase that otherwise would have been required but for
the inability to deliver the opinion referred to above will not be permitted
until such opinion is delivered.
UNDERWRITING STANDARDS
(Except as described below, each Mortgage Loan has satisfied the credit,
appraisal and underwriting guidelines established by the Seller. Such
underwriting guidelines may be varied in cases deemed appropriate by the
Seller. To determine satisfaction of such underwriting guidelines, an
authorized officer of the Seller reviewed the Mortgage Loans.
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 complies with applicable
federal and state laws and regulations. Initially, a prospective Mortgagor
is required to fill out a detailed application designed to provide pertinent
credit information. As part of the description of the Mortgagor's financial
condition, the Mortgagor is required to provide a current balance sheet
describing assets and liabilities and a statement of income and expenses, as
well as an authorization to apply for a credit report which summarizes the
Mortgagor's credit history with local merchants and lenders and any record of
bankruptcy. In addition, an employment verification is obtained from the
Mortgagor'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 Mortgagor will continue such employment in the
future. If a prospective Mortgagor is self-employed, the Mortgagor is
required to submit copies of signed tax returns. The Mortgagor also
authorizes deposit verification at all financial institutions where the
Mortgagor has demand or savings accounts.
Once the employment and deposit verifications and the credit report are
received, a determination is made as to whether the prospective Mortgagor has
sufficient monthly income available (i) to meet the Mortgagor's monthly
obligations on the proposed mortgage loan and other expenses related to the
Mortgaged Property (such as property taxes, hazard insurance and maintenance
and utility costs) and (ii) to meet other financial obligations and monthly
living expenses.
In determining the adequacy of the property as collateral, an
independent appraisal is 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 homes and the cost of replacing the
property.
Certain states where the Mortgaged Properties 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. The Seller's underwriting guidelines 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
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.
The Seller employs alternative underwriting guidelines for certain
qualifying mortgage loans underwritten by the Seller through underwriting
programs designed to streamline the underwriting process by eliminating the
requirement for income verification. Depending on the facts and
circumstances of a particular case, the Seller may accept other Mortgage
Loans based on limited documentation that eliminates the need for either
income verification and/or asset verification. The objective of the use of
limited documentation is to shift the emphasis of the underwriting process
from the credit standing of the Mortgagor to the value and adequacy of the
Mortgaged Property as collateral.)
SERVICING OF MORTGAGE LOANS
GENERAL
The Master Servicer will service the Mortgage Loans in accordance with
the terms set forth in 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 liable for its servicing duties and obligations
under the Pooling Agreement as if the Master Servicer alone were servicing
the Mortgage Loans.
THE MASTER SERVICER
( ), a subsidiary of ( ), a ( )
corporation, will act as Master Servicer for the Mortgage Loans pursuant to
the Agreement. ( ) is engaged primarily in the mortgage banking
business, and as such, originates, purchases, sells and services mortgage
loans. (The mortgage loans serviced by the Master Servicer are principally
(first-lien, fixed rate mortgage loans secured by single-family residences.)
The principal executive officers of ( ) are located at (
), ( ), ( ) ( ).
(Because the Master Servicer only recently began its operations, it does
not yet have any meaningful information regarding delinquency and loss
experience for its portfolio of mortgage loans.)
The information set forth in this section concerning the Master Servicer
has been provided by it. Accordingly, the Sponsor makes no representations
as to the completeness or accuracy of such information.
(FORECLOSURE AND DELINQUENCY EXPERIENCE
Historically, a variety of factors, including the appreciation of real
estate values, have limited the Master Servicer's loss and delinquency
experience on its portfolio of serviced 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 of its
lending areas, will not result in increased rates of delinquencies and
foreclosure losses in the future.
The following table summarizes the foreclosure and delinquency
experience on the dates indicated on conventional first trust deed or
mortgage loans serviced by the Master Servicer. No assurances can be given
that the foreclosure and delinquency experience presented in the table below
will be indicative of such experience on the Mortgage Loans:
<TABLE>
<CAPTION> At 30, At 30, At 30, At 30,
--------------- --------------- --------------- ---------------
1993 1994 1993 1994
---- ---- ---- ----
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Principal Balances (end of period) . . . . . . . . . . $ $ $ $
Total Number of Loans . . . . . . . . . . . . . . . . .
Total Number of Foreclosures . . . . . . . . . . . . .
Percent Foreclosed by Number of Loans . . . . . . . . . % % % %
Period of Delinquency
30-59 days:
Principal Balance . . . . . . . . . . . . . . . . $ $ $ $
Number of Loans . . . . . . . . . . . . . . . . .
Percent Delinquent by Number of Loans . . . . . . % % % %
60-89 days:
Principal Balance . . . . . . . . . . . . . . . . $ $ $ $
Number of Loans . . . . . . . . . . . . . . . . .
Percent Delinquent by Number of Loans . . . . . . % % % %
90 days or more:
Principal Balance . . . . . . . . . . . . . . . . $ $ $ $
Number of Loans . . . . . . . . . . . . . . . . .
Percent Delinquent by Number of Loans . . . . . . % % % %
In Foreclosure
Principal Balance . . . . . . . . . . . . . . . . $ $ $ $
Number of Loans . . . . . . . . . . . . . . . . .
Percent by Number of Loans . . . . . . . . . . . . % % % %
Total Delinquent and in Foreclosure
Principal Balance . . . . . . . . . . . . . . . . $ $ $ $
Number of Loans . . . . . . . . . . . . . . . . .
Percent by Number of Loans . . . . . . . . . . . . % % % %
</TABLE>
(DISCUSS REASONS FOR VARIATIONS IN DELINQUENCY AND FORECLOSURE EXPERIENCE, IF
ANY)
(SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Expense Fees with respect to the Mortgage Pool are payable out of
the interest payments on each Mortgage Loan. The Expense Rate in respect of
each Mortgage Loan will be at least ____% per annum and not more than ____%
per annum of the Principal Balance of such Mortgage Loan. The Expense Fees
consist of (a) servicing compensation payable to the Master Servicer in
respect of its master servicing activities (the "Master Servicing Fee"), (b)
servicing and other related compensation payable to the Master Servicer in
respect of its servicing activities (the "Servicing Fee") and (c) certain
credit support fees and fees paid to the Trustee. The Master Servicing Fees
will be ____% per annum of the Principal Balance of each Mortgage Loan and
the Servicing Fee will be ____% per annum of the Principal Balance of each
Mortgage Loan. The Master Servicer is obligated to pay certain ongoing
expenses associated with the Trust Fund and incurred by the Master Servicer
in connection with its responsibilities under the Pooling Agreement and such
amounts will be paid by the Master Servicer out of the Master Servicing Fee.
(The amount of the Master Servicing Fee is subject to adjustment with respect
to prepaid Mortgage Loans, as described herein under "--Adjustment to the
Master Servicing Fee in Connection with Prepaid Mortgage Loans.") (The
Master Servicer is also entitled to receive all late payment fees, assumption
fees and other similar charges and all reinvestment income earned on amounts
on deposit in the Certificate Account and Distribution Account.)
(ADJUSTMENT TO MASTER SERVICING FEE IN CONNECTION WITH PREPAID MORTGAGE LOANS
When a Mortgage Loan is prepaid between Due Dates, the borrower is
required to pay interest on the amount prepaid only to the date of prepayment
and not thereafter. Prepayments received during a calendar month will be
distributed to Certificateholders on the Distribution Date in the month
following the month of receipt. Pursuant to the Agreement, the Master
Servicing Fee for any month will be reduced by an amount with respect to each
such Mortgage Loan sufficient to pass through to the Trust Fund on such
Distribution Date an amount equal to 30 days' interest at the Net Mortgage
Rate for each such Mortgage Loan. Any such shortfalls in interest as a
result of prepayments in excess of the amount of the Master Servicing Fee for
a month will reduce the amount of interest available to be distributed to
Certificateholders from what would have been the case in the absence of such
prepayments. See "Description of the Certificates--Interest" herein.)
(ADVANCES
Subject to the following limitations, the Master Servicer will be
required to advance prior to each Distribution Date (occurring on or before
the Distribution Date in _______) 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 (adjusted to the applicable Net Mortgage Rate) which
were due on the related Due Date and which were delinquent on the related
Determination Date, together with an amount equivalent to interest on each
Mortgaged Property acquired by the Master Servicer through foreclosure or
deed-in-lieu of foreclosure in connection with a defaulted Mortgage Loan
("REO Property") (any such advance, an "Advance").)
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 (with such payments of interest adjusted to the related Net Mortgage
Rate) 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 Agreement with respect to the Certificates will constitute
an Event of Default thereunder, in which case the Trustee or the successor
servicer will be obligated to make any such Advance, in accordance with the
terms of the Agreement.)
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement, dated as of ______ __, 199_ (the "Pooling Agreement"), among the
Sponsor, the Seller, the Master Servicer (, the REMIC 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.
The Mortgage Pass-Through Certificates, Series 199_-___ (the
"Certificates") will consist of the Class A-1 Certificates and the Class X
Certificates (the "Class A-1 Certificates" and the "Class X Certificates,"
respectively, and collectively, the "Senior Certificates"), three classes of
subordinated certificates (the "Class M-1 Certificates," the "Class B-1
Certificates" and the "Class B-2 Certificates," respectively and
collectively, the "Subordinate Certificates"), and the Class R Certificates
(the "Residual Certificates"). Only the Senior Certificates and the Class M-
1 Certificates (the "Offered Certificates") are offered hereby.
The Senior Certificates in the aggregate will evidence an initial
beneficial ownership interest of approximately ____% in the Trust Fund, the
Class M-1 Certificates in the aggregate will evidence approximately ___% of
the undivided interest in the principal balance of the Trust Fund and the
Class B-1 and Class B-2 Certificates evidence in the aggregate the remaining
___% undivided interest in the principal balance of the assets in the Trust
Fund. The Class X 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 Residual Certificates will not have a
Class Certificate Balance and will not bear interest.
The Class A-1 Certificates will be issuable in (book-entry) (fully
registered) form only. (The Class A-1 Certificates will be issued in minimum
dollar denominations of $( ) and integral multiples of $( ) in excess
thereof.) The Class X (and Class M-1) Certificates will be issued in fully
registered certificated form in minimum dollar denomination of ($ ) and
integral multiples of ($ ) in excess thereof. A single certificate of
each Class may be issued in an amount different than described above.
(BOOK-ENTRY CERTIFICATES
The ( ) will be book-entry Certificates (the "Book-Entry
Certificates"). The Book-Entry Certificates will be issued in one or more
certificates which equal the aggregate principal balance of each such Class
of Offered Certificates which will be held by a nominee of The Depository
Trust Company (together with any successor depository selected by the
Sponsor, the "Depository"). Beneficial interests in the Book-Entry
Certificates will be indirectly held by investors through the book-entry
facilities of the Depository, as described herein. Investors may hold such
beneficial interests in the Book-Entry Certificates in minimum denominations
of $1,000 and in integral multiples in excess thereof, except that one Book-
Entry Certificate of each such Class may be issued in an amount which is not
an integral multiple of $1,000. The Sponsor has been informed by the
Depository that its nominee will be CEDE & Co. ("CEDE"). Accordingly, CEDE
is expected to be the holder of record of the Book-Entry Certificates.
Except as described below, no person acquiring a Book-Entry Certificate
(each, a "beneficial owner") will be entitled to receive a physical
certificate representing such Certificate (a "Definitive Certificate").
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that
maintains the beneficial owner's account for such purpose. In turn, the
Financial Intermediary's ownership of such Book-Entry Certificate will be
recorded on the records of the Depository (or of a participating firm that
acts as agent for the Financial Intermediary, whose interests will in turn be
recorded on the records of the Depository, if the beneficial owner's
Financial Intermediary is not a Depository participant). Therefore, the
beneficial owner must rely on the foregoing procedures to evidence its
beneficial ownership of a Book-Entry Certificate. Beneficial ownership of a
Book-Entry Certificate may only be transferred by compliance with the
procedures of such Financial Intermediaries and Depository participants.
The Depository is a limited purpose trust company organized under the
laws of the State of New York, a member of the Federal Reserve System, a
"Clearing Corporation" within the meaning of the Uniform Commercial Code as
in effect in the State of New York and a "Clearing Agency" registered
pursuant to Section 17A of the Securities Exchange Act of 1934, as amended.
The Depository performs services for its participants, some of which (and/or
their representatives) own the Depository. In accordance with its normal
procedures, the Depository is expected to record the positions held by each
Depository participant in the Book-Entry Certificates, whether held for its
own account or as a nominee for another person. In general, beneficial
ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing the Depository and Depository
participants as in effect from time to time.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to the Depository. The Depository will be
responsible for crediting the amount of such payments to the accounts of the
applicable Depository participants in accordance with the Depository's normal
procedures. Each Depository participant will be responsible for disbursing
such payments to the beneficial owners of the Book-Entry Certificates that it
represents and to each Financial Intermediary for which it acts as agent.
Each such Financial Intermediary will be responsible for disbursing funds to
the beneficial owners of the Book-Entry Certificates that it represents.
Under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since
such payments will be forwarded by the Trustee to CEDE. Because the
Depository can only act on behalf of Financial Intermediaries, the ability of
a beneficial owner to pledge Book-Entry Certificates to persons or entities
that do not participate in the Depository system, or otherwise take actions
in respect of such Book-Entry Certificates, may be limited due to the lack of
physical certificates for such Book-Entry Certificates. In addition,
issuance of the Book-Entry Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary market since certain
potential investors may be unwilling to purchase Certificates for which they
cannot obtain physical certificates.
None of the Sponsor, the Master Servicer or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held
by CEDE, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests. In the event of the
insolvency of the Depository, a Depository participant or an indirect
Depository participant in whose name Book-Entry Certificates are registered,
the ability of the Beneficial Owners of such Book-Entry Certificates to
obtain timely payment may be impaired.
Unless and until Definitive Certificates are issued, it is anticipated
that the only "Certificateholder" of the Book-Entry Certificates will be
CEDE, as nominee of the Depository. Beneficial owners of the Book-Entry
Certificates will not be Certificateholders, as that term is used in the
Pooling Agreement. Beneficial owners are only permitted to exercise the
rights of Certificateholders indirectly through Financial Intermediaries and
the Depository. Monthly and annual reports on the Trust Fund provided by the
Master Servicer to CEDE, as nominee of the Depository, may be made available
to beneficial owners upon request, in accordance with the rules, regulations
and procedures creating and affecting the Depository, and to the Financial
Intermediaries to whose Depository accounts the Book-Entry Certificates of
such beneficial owners are credited.
The Depository has advised the Sponsor and the Trustee that, unless and
until Definitive Certificates are issued, the Depository will take any action
permitted to be taken by the holders of the Book-Entry Certificates under the
Pooling Agreement only at the direction of one or more Financial
Intermediaries to whose Depository accounts the Book-Entry Certificates are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Certificates.
Definitive Certificates will be issued to beneficial owners of the Book-
Entry Certificates, or their nominees, rather than to the Depository, only if
(a) the Depository or the Sponsor advises the Trustee in writing that the
Depository is no longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the Book-Entry
Certificates and the Sponsor or the Trustee is unable to locate a qualified
successor; (b) the Sponsor, at its sole option, elects to terminate a book-
entry system through the Depository; or (c) after the occurrence of an Event
of Default (as described in the accompanying Prospectus), beneficial owners
having Percentage Interests aggregating not less than 51% of all Percentage
Interests evidenced by each Class of the Book-Entry Certificates advise the
Trustee and the Depository through the Financial Intermediaries in writing
that the continuation of a book-entry system through the Depository (or a
successor thereto) is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through the
Depository of Definitive Certificates. Upon surrender by the Depository of
the global certificate or certificates representing the Book-Entry
Certificates and instructions for re-registration, the Trustee will issue the
Definitive Certificates, and thereafter the Trustee will recognize the
holders of such Definitive Certificates as Certificateholders under the
Pooling Agreement.
PAYMENTS ON MORTGAGE LOANS; ACCOUNTS
On or prior to the Closing Date, the Master Servicer will establish an
account (the "Certificate Account") with __________, which shall be
maintained (as a separate trust account) by the Master Servicer in trust for
the benefit of Certificateholders. Funds credited to the Certificate Account
may be invested for the benefit and at the risk of the Master Servicer in
Eligible Investments, as defined in the Pooling Agreement, that are scheduled
to mature on or prior to the business day preceding the next Distribution
Date. On or prior to the business day immediately preceding each
Distribution Date, the Master Servicer shall withdraw from the Certificate
Account the amount of Available Funds and shall deposit such Available Funds
in an account established and maintained with the Trustee on behalf of
Certificateholders (the "Distribution Account").
PRIORITY OF DISTRIBUTIONS AMONG CLASSES OF CERTIFICATES
As more fully described herein, distributions will be made on the
Certificates on each Distribution Date from Available Funds in the following
order of priority: (i) to interest on each Class of Senior Certificates,
(ii) to principal on the Class A-1 Certificates, up to the maximum amount of
principal to be distributed on the Class A-1 Certificates on such
Distribution Date, (iii) to interest on the Class M-1 Certificates, (iv) to
principal on the Class M-1 Certificates, up the maximum amount of principal
to be distributed on such Class on such Distribution Date, and (v) to
interest on and then principal of each other Class of Subordinate
Certificates, up to the maximum amount of interest and principal to be
distributed on such Class on such Distribution Date (and subject to certain
limitations set forth below under "--Principal.")
DISTRIBUTIONS
Distributions of principal and interest to holders of the Offered
Certificates will be made on each Distribution Date to the extent of
Available Funds to holders of record of such Offered Certificates on (the
last day of the preceding month) (the "Record Date"), except that the final
distribution in respect of any Class of Offered Certificates will be made
only upon presentation and surrender of such Certificates at the office or
agency appointed by the Trustee for that purpose in ( ).
Distributions of interest and principal to holders of Subordinate
Certificates will be subordinate to distributions of interest on and
principal of the Senior Certificates and distributions of interest and
principal to holders of the Class B-1 and Class B-2 Certificates will be
subordinate to distributions of interest on and principal of the Class M-1
Certificates. See "--Allocation of Losses" and "Credit Support."
The aggregate amount of funds available in the Certificate Account on a
Distribution Date for distribution on the Certificates is equal to "Available
Funds." Available Funds for any Distribution Date are the sum of (i) all
scheduled installments of interest (net of related Expense Fees) and
principal due on the first day of the month in which such Distribution Date
occurs and received prior to the related Determination Date together with any
Advances in respect thereof, (ii) all insurance and liquidation proceeds (net
of related expenses) received during the month preceding such Distribution
Date, (iii) all partial or full prepayments received during the month
preceding such Distribution Date and (iv) the amount required to be paid in
respect of a Mortgage Loan that became required to be repurchased or
substituted during the month preceding such Distribution Date, reduced by
amounts in reimbursement for Advances previously made and other amounts as to
which the Master Servicer or a servicer is entitled to be reimbursed from the
Certificate Account pursuant to the Pooling Agreement. See "The Mortgage
Pool--Assignment of the Mortgage Loans" herein.
The Trustee will forward with each distribution on a Distribution Date
to each Offered Certificateholder and the Master Servicer a statement or
statements setting forth, among other things, (i) the amount of such
distribution allocable to principal and (ii) the amount of such distribution
allocable to interest. Such amounts will be expressed as a dollar amount per
$1,000 of Class Certificate Balance. See "Description of the Certificates--
Reports to Certificateholders" in the Prospectus for a detailed description
of the information to be included in such statements.
INTEREST
On each Distribution Date, each Class of Offered Certificates, to the
extent of Available Funds on such Distribution Date applied in the order
described above under "--Priority of Distributions Among Classes of
Certificates", will be entitled to receive an amount allocable to interest
equal to the sum of (i) one month's interest at the applicable Pass-Through
Rate on the Class Certificate Balance or Class X 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 ("Unpaid Interest Amounts"). (Interest will be
calculated and payable on the basis of a 360-day year divided into twelve 30-
day months.)
The interest entitlement described above for each Class of Offered
Certificates will be reduced by (i) such Class of Certificates allocable
share of "Net Interest Shortfalls" with respect to such Distribution Date,
which is equal to (i) the amount of interest any Class of Certificateholders
would otherwise have been entitled to receive with respect to any Mortgage
Loan that was the subject of (a) a Relief Act Reduction (or (b) after the
coverage provided by the Subordinate Certificates is exhausted for such type
of loss, a Special Hazard Loss, Fraud Loss or a Bankruptcy Loss,) and (ii)
such Class' pro rata share of Net Prepayment 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 Mortgage Loans--Soldiers' and Sailors'
Civil Relief Act" in the Prospectus. "Net Prepayment Interest Shortfall" is
the amount by which the aggregate of Prepayment Interest Shortfalls during
the calendar month immediately preceding the month in which the related Due
Date occurs exceeds the aggregate amount of the Master Servicing Fee for such
period. A "Prepayment Interest Shortfall" is the amount by which interest at
the Net Mortgage Rate received in connection with a prepayment of principal
on a Mortgage Loan is less than one month's interest at the Net Mortgage Rate
on the Principal Balance of the related Mortgage Loan that is prepaid. Each
Class' pro rata share of such Net Prepayment Interest Shortfalls will be
based on the amount of interest such Class of Certificates otherwise would
have been entitled to receive.
In the event that, on a particular Distribution Date, Available Funds on
such Distribution Date applied in the order described above under "--Priority
of Distributions Among Classes of Certificates," are not sufficient to make a
full distribution of interest to holders of the Offered Certificates,
interest will be distributed on such Class or Classes of Offered Certificates
of equal priority in proportion to the amount of interest each such Class or
Classes would otherwise have been entitled to receive in the absence of such
shortfall. The amount of any resulting shortfall will be carried forward and
added to the amount holders of each such Class of Offered Certificates will
be entitled to receive on the next Distribution Date. Such a shortfall could
occur, for example, if losses realized on the Mortgage Loans were
exceptionally high or were concentrated in a particular month. Any such
amount so carried forward will not bear interest.
PRINCIPAL
On each Distribution Date, the Class A-1 Certificates will be entitled
to receive a amount allocable to principal equal to the lesser of (x)
Available Funds reduced by the amount of interest distributed on the Senior
Certificates on such Distribution Date and (y) the sum of (i) the Class A-1
Percentage of (a) all scheduled payments of principal due on each Mortgage
Loan on the Due Date for such Mortgage Loan in the month in which such
Distribution Date occurs, (b) the Principal Balance of each Mortgage Loan
that became a Liquidated Mortgage Loan during the month preceding the month
of such Distribution Date, (c) the Pooling Principal Balance of each Mortgage
Loan that was repurchased by the Seller or another person as of such
Distribution Date pursuant to the Pooling Agreement, (d) certain amounts that
may be required to be paid in connection with any substitution of Mortgage
Loans and (e) any net insurance or liquidation proceeds received during the
month preceding the month of such Distribution Date allocable to recoveries
of principal of Mortgage Loans that are not yet Liquidated Mortgage Loans and
(ii) the Class A-1 Prepayment Percentage of all partial principal prepayments
and of all principal prepayments in full ("Principal Prepayments") received
during such preceding month.
On each Distribution Date, the Class M-1 Certificates will be entitled
to receive an amount allocable to principal equal to the lesser of (x)
Available Funds reduced by the amount of interest and principal distributed
on the Senior Certificates and interest on the Class M-1 Certificates, in
each case on such Distribution Date and (y) the sum of (i) the applicable
Subordinate Percentage Allocation of the sum of the amounts calculated
pursuant to clauses (a) through (e) in the preceding paragraph for such
Distribution Date and (ii) the applicable Subordinate Prepayment Percentage
Allocation of all Principal Prepayments received during the preceding month.
"Principal Balance" of a Mortgage Loan as of any Due Date is the unpaid
principal balance of such Mortgage Loan as specified in the amortization
schedule at the time relating thereto (before any adjustment to such schedule
by reason of moratorium or similar waiver or grace period) for such Due Date,
after giving effect to any previous partial payments and to the payment of
principal due on such Due Date and irrespective of any delinquency in payment
by the Mortgagor. The "Pool Principal Balance" will equal the aggregate of
the Principal Balances of all Mortgage Loans. The "Due Date" for a Mortgage
Loan is the first day of each calendar month on which the scheduled
installment of principal and interest with respect thereto is due.
(The "Class A-1 Percentage" for any Distribution Date is the percentage
obtained by dividing the sum of the Class Certificate Balance of the Class A-
1 Certificates immediately prior to such date by the aggregate of the Class
Certificate Balances of all Classes of Certificates immediately prior to such
date. The "Subordinate Percentage" for any Distribution Date is the
percentage calculated as the difference between 100% and the Class A-1
Percentage for such date.
The "Subordinate Percentage Allocation" for any Distribution Date and
Class of Subordinate Certificates, is equal to a fraction, the numerator of
which is the related Class Certificate Balance immediately prior to such date
and the denominator of which is the aggregate of the Class Certificate
Balances of all Subordinate Certificates immediately prior to such date.
The "Class A-1 Prepayment Percentage" for any Distribution Date
occurring during the five years beginning on the first Distribution Date
will, except as provided below, equal 100%. Thereafter, the Class A-1
Prepayment Percentage will be subject to gradual reduction as described in
the following paragraph. This disproportionate allocation of certain
unscheduled payments in respect of principal will have the effect of
accelerating the amortization of the Class A-1 Certificates while, in the
absence of Realized Losses, increasing the interest in the principal balance
of the Mortgage Loans evidenced by the Subordinate Certificates. Increasing
the respective interest of the Subordinate Certificates relative to that of
the Senior Certificates is intended to preserve the availability of the
subordination provided by the Subordinate Certificates.
(The "Class A-1 Prepayment Percentage" for any Distribution Date
occurring on or after the fifth anniversary of the first Distribution Date
will be as follows: for any Distribution Date in the first year thereafter,
the Class A-1 Percentage for such Distribution Date plus 70% of the
Subordinate Percentage for such Distribution Date; for any distribution Date
in the second year thereafter, the Class A-1 Percentage for such Distribution
Date plus 60% of the Subordinate Percentage for such Distribution Date; for
any Distribution Date in the third year thereafter, the Class A-1 Percentage
for such Distribution Date plus 40% of the Subordinate Percentage for such
Distribution Date; for any Distribution Date in the fourth year thereafter,
the Class A-1 Percentage for such Distribution Date plus 20% of the
Subordinate Percentage for such Distribution Date; and for any Distribution
Date thereafter, the Class A-1 Percentage for such Distribution Date (unless
on any of the foregoing Distribution Dates the Class A-1 Percentage exceeds
the initial Class A-1 Percentage, in which case the Class A-1 Prepayment
Percentage for such Distribution Date will once again equal 100%).
Notwithstanding the foregoing, no reduction to the Senior Prepayment
Percentage will occur if ((i) as of the first Distribution Date as to which
any such reduction applies, the dollar amount of all monthly payments on the
Mortgage Loans due in each of the preceding six months that are delinquent 60
days or more exceeds a monthly average of ___% of all monthly payments due in
such month (including for this purpose any Mortgage Loans in foreclosure and
Mortgage Loans with respect to which the related Mortgaged Property has been
acquired by the Trust Fund), or (ii) cumulative Realized Losses with respect
to the Mortgage Loans exceed (a) with respect to the Distribution Date in (
), ( %) of the Class Certificate Balance of the Subordinate Certificates
as of the Cut-off Date (the "Original Subordinate Principal Balance"), (b)
with respect to the Distribution Date in ( ), ( %) of the
Original Subordinate Principal Balance, (c) with respect to the Distribution
Date in ( ), ( %) of the Original Subordinate Principal Balance,
(d) with respect to the Distribution Date in ( ), ( %) of the
Original Subordinate Principal Balance, and (e) with respect to the
Distribution Date in ( ), ( %) of the Original Subordinate
Principal Balance.
The "Subordinate Prepayment Percentage" for any Distribution Date is
100% minus the Senior Prepayment Percentage for such Distribution Date. The
"Subordinate Prepayment Percentage Allocation" for any Distribution Date and
Class of Subordinate Certificates, is equal to the product of the Subordinate
Prepayment Percentage and a fraction, the numerator of which is the related
Class Certificate Balance immediately prior to such date and the denominator
of which is the aggregate of the Class Certificate Balances of all
Subordinate Certificates immediately prior to such date.
If on any Distribution Date the allocation to the Class of Certificates
then entitled to principal of full and partial principal prepayments and
other amounts in the percentages required above would reduce the outstanding
Class Certificate Balance of such Class below zero, the distribution to such
Class of Certificates will be limited to the amount necessary to reduce the
related Class Certificate Balance to zero and any remaining portion thereof
will be distributed to the Class of Certificates next entitled to
distributions of principal.)
ALLOCATION OF LOSSES
On each Distribution Date, any Realized Loss on a Mortgage Loan, other
than any Excess Loss, will be allocated first, sequentially, to the Class B-
2, Class B-1 and Class M-1 Certificates, in that order, in each case until
the respective Class Certificate Balance thereof is reduced to zero, and
thereafter to the Class A-1 Certificates.
On each Distribution Date, Excess Losses will be allocated pro rata
among the Class A-1 Certificates and the Subordinate Certificates based upon
their respective Class Certificate Balances.
In general, a "Realized Loss" means, with respect to a Liquidated
Mortgage Loan, the among by which the remaining unpaid principal balance of
the Mortgage Loan exceeds the amount of liquidation proceeds applied to the
principal balance of the 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 losses
sustained on a Liquidated Mortgage Loan by reason of a default arising from
fraud, dishonesty or misrepresentation. See "Credit Support--Subordination
of Subordinate Certificates" herein.
A "Liquidated Mortgage Loan" is a defaulted Mortgage Loan as to which
the Master Servicer has determined that all recoverable liquidation and
insurance proceeds have been received. A "Special Hazard Mortgage Loan" is a
Liquidated Mortgage Loan as to which the ability to recover the full amount
due thereunder was substantially impaired by a hazard not insured against
under a standard hazard insurance policy of the type described in the
Prospectus under "Credit Support--Special Hazard Insurance Policies." See
"Credit Support--Subordination of Subordinate Certificates" herein.
The "Class Certificate Balance" of any 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 such Class
as payments of principal and (ii) the amount of Realized Losses and Excess
Losses allocated to such Class, as described in the preceding paragraph.
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. (The Master Servicer 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 Trust Fund's status as a 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 _% 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 under "--Priority of Distributions Among Classes of
Certificates." 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 property acquired upon
foreclosure of a Mortgage Loan and such fair market value is less than the
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 termination of the Trust Fund will be effected in a manner consistent
with applicable federal income tax regulations (and the status of the Trust
Fund as a REMIC.)
LAST SCHEDULED DISTRIBUTION DATE
The Last Scheduled Distribution Date for each Class of Offered
Certificates is the latest date on which the Class Certificate Balance is
expected to be reduced to zero, and has been calculated on the basis of the
assumptions described above under "Prepayment and Yield Considerations--
Assumptions Relating to Tables" except for the following additional
assumptions: (describe). Since the rate of distributions in reduction of
the Class Certificate Balance on each Class of Offered Certificates will
depend on the rate of payment (including 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.
EVENTS OF DEFAULT
Events of Default will consist of: (i) any failure by the Master
Servicer to deposit in the Certificate Account the required amounts or remit
to the Trustee any payment (other than an Advance required to be made under
the terms of the Agreement) which continues unremedied for five business days
after the giving of written notice of such failure to the Master Servicer by
the Trustee or the Sponsor or to the Master Servicer and the Trustee by
holders of Certificates of any Class evidencing not less then 25% of the
aggregate Percentage Interest constituting such Class; (ii) any failure by
the Master Servicer to observe or perform in any material respect any other
of its covenants or agreements in the Pooling Agreement, which continues
unremedied for 60 days after the giving of written notice of such failure to
the Master Servicer by the Trustee or the Sponsor or to the Master Servicer
and the Trustee by holders of Certificates of any Class evidencing not less
than 25% of the aggregate Percentage Interest constituting such Class; (iii)
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings, and certain actions by or on behalf of the Master
Servicer indicating its insolvency or inability to pay its obligations; or
(iv) any failure of the Master Servicer to make any Advance which continues
unremedied for a period of five business days after the date on which
telecopied notice of such failure, requiring the same to be remedied, shall
have been given to the Master Servicer by the Trustee.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default remains unremedied, the Sponsor or the
Trustee may, and upon the receipt of instructions from holders of
Certificates of any Class evidencing not less than 25% of the aggregate
Percentage Interest constituting such class, the Sponsor or Trustee shall
terminate all of the rights and obligations of the Master Servicer under the
Pooling Agreement and in and to the Mortgage Loans, whereupon the Trustee
will succeed to all of the responsibilities, duties, and liabilities of the
Master Servicer under the Pooling Agreement, including the obligation to make
Advances. Notwithstanding the foregoing, in the event of an Event of Default
arising from the Master Servicer's failure to make an Advance as described in
clause (iv) in the preceding paragraph, the Trustee shall terminate all of
the rights and obligations of the Master Servicer under the Pooling Agreement
and in and to the Mortgage Loans as described in the preceding sentence.
No Certificateholder, solely by virtue of such holder's status as a
Certificateholder, will have any right under the Pooling Agreement to
institute any proceeding with respect thereto, unless such holder previously
has given to the Trustee written notice of an Event of Default and unless the
holders of Certificates of any Class evidencing not less than 25% of the
aggregate Percentage Interest constituting such Class have made written
request to the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity, and
the Trustee for ___ days has neglected or refused to institute any such
proceeding.
THE TRUSTEE
( ) will be the Trustee under the Pooling Agreement. The
Sponsor and ( ) may maintain other banking relationships in the
ordinary course of business with the Trustee. Offered Certificates may be
surrendered at the Corporate Trust Office of the Trustee located at (
), Attention: ____________ or at such other
addresses as the Trustee may designate from time to time.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
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, the aggregate amount of each
interest payment on the interest bearing Offered 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 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 interest rates fall
significantly below the interest rates on the Mortgage Loans, the Mortgage
Loans are likely to prepay at higher rates than if prevailing rates remain at
or above the interest rates on the Mortgage Loans. Conversely, if interest
rates rise above the interest rates on the Mortgage Loans, the rate of
prepayment would be expected to decrease.
The timing of changes in the rate of prepayments may significantly
affect the actual yield to investors, even if the average rate of principal
prepayments is consistent with the expectations of investors. In general,
the earlier the payment of principal of the Mortgage Loans the greater the
effect on an investor's yield to maturity. As a result, the effect on an
investor's yield of principal prepayments occurring at a rate higher (or
lower) than the rate anticipated by the investor during the period
immediately following the issuance of the Certificates will not be offset by
a subsequent like reduction (or increase) in the rate of principal
prepayments. The yield on the Class X 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 (as defined below) may have a
material negative effect on the yield of the Class X Certificates. Investors
must make their own decisions as to the appropriate prepayment assumptions to
be used in deciding whether to purchase the Offered Certificates. See "--
Sensitivity of the Class X Certificates" herein.
As described herein under "Description of the Certificates--Principal",
the Class A-1 Prepayment Percentage of Principal Prepayments and excluding
for this purpose, liquidations due to default, casualty, condemnation and the
like will be initially distributed to the Class A-1 Certificates. This may
result in all (or a disproportionate percentage) of such principal
prepayments being distributed to holders of the Class A-1 Certificates and
none (or less than their pro rata share) of such principal prepayments being
distributed to holders of Subordinate Certificates during the periods of time
described in the definition of "Class A-1 Prepayment Percentage."
(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. See "The Mortgage Pool--Assignment of the
Mortgage Loans" and "Description of the Certificates--Termination; Optional
Termination" herein.
Each monthly interest payment on a Mortgage Loan will be calculated as
the product of one-twelfth of the applicable Mortgage Rate at the time of
such calculation and the then unpaid principal balance on such Mortgage Loan.
The Net Mortgage Rate with respect to each Mortgage Loan will be similarly
calculated on a loan-by-loan basis, by subtracting from the applicable
Mortgage Rate the related Expense Rate.
The effective yield to holders of interest bearing Offered Certificates
will be reduced slightly below the yield otherwise produced by the applicable
Pass-Through Rate because, while interest will accrue from the first day of
each month, the distribution of such interest will not be made until the
___th day of the month following the month of accrual.
(Substantially 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, or the applicable
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, or the applicable 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 or any such 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.
(See "Description of the Certificates--Termination; Optional
Termination" herein and in the Prospectus for a description of the Master
Servicer's option to repurchase the Mortgage Loans when the Pool Principal
Balance is less than _% of the Cut-off Date Pool Principal Balance. The
Seller may be required to repurchase Mortgage Loans because of defective
documentation or material breaches in its representations and warranties with
respect to such Mortgage Loans. Any such repurchases will shorten the
weighted average lives of the Classes of Offered Certificates.
(All of the Mortgage Loans are adjustable rate mortgage loans ("ARM
Loans"). The rate of principal prepayments with respect to ARM Loans has
fluctuated in recent years. As is the case with conventional fixed rate
mortgage loans, ARM Loans may be subject to a greater rate of principal
prepayments in a declining interest rate environment. For example, if
prevailing interest rates were to fall significantly, ARM Loans could be
subject to higher prepayment rates than if prevailing interest rates were to
remain constant because the availability of fixed rate mortgage loans at
competitive interest rates may encourage mortgagors to refinance their ARM
Loans to "lock in" lower fixed interest rates.) Conversely, if prevailing
interest rates were to rise significantly, the rate of prepayments on ARM
Loans would generally be expected to decrease, and the rate of defaults might
increase if Mortgagors were unable to meet the resulting increases in debt
service payments. The rate of payments (including prepayments) on pools of
mortgage loans is also influenced by a variety of economic, geographic,
social and other factors, including changes in mortgagors' housing needs, job
transfers, unemployment, mortgagors' net equity in the mortgaged properties
and servicing decisions. No assurances can be given as to the rate of
prepayments on the Mortgage Loans in stable or changing interest rate
environments.
(Although each of the Mortgage Loans bears interest at an adjustable
Mortgage Rate, the (semi-annual) (annual) adjustments of the Mortgage Rate
for any Mortgage Loan will not exceed the Periodic Rate Cap and the Mortgage
Rate will in no event exceed the Maximum Rate for such Mortgage Loan,
regardless of the level of interest rates generally or the rate otherwise
produced by the Index and the Gross Margin. (In addition, such adjustments
will be subject to rounding to the nearest one-eighth of 1%.)
ASSUMPTIONS RELATING TO TABLES
The Decrement Tables have been prepared on the basis of the following
assumptions (the "Assumptions"): (describe assumptions). Although the
characteristics of the mortgage loans for the Decrement Tables have been
prepared on the basis of the characteristics of the Mortgage Loans which are
expected to be in the Trust Fund, there is no assurance that the Assumptions
will reflect the actual characteristics or performance of the Mortgage Loans
or that the performance of the Offered Certificates will conform to the
results set forth in the tables.
WEIGHTED AVERAGE LIVES OF THE OFFERED CERTIFICATES
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of an Offered Certificate until each dollar
in reduction of the Class Certificate Balance thereof is distributed to the
investor. The weighted average lives of such Classes of Offered Certificates
will be influenced by, among other things, the rate at which principal of the
Mortgage Loans is paid, which may be in the form of scheduled amortization or
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 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 below.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement
is the Prepayment Standard Assumption ("PSA"), which represents an assumed
rate of prepayment each month relative to the then outstanding principal
balance of a pool of mortgage loans for the life of such mortgage loans. A
prepayment assumption of 100% PSA assumes constant prepayment rates of 0.2%
per annum of the then outstanding principal balance of such mortgage loans in
the first month of the life of the mortgage loans and an additional 0.2% per
annum in each month thereafter until the thirtieth month. Beginning in the
thirtieth month and in each month thereafter during the life of the mortgage
loans, 100% PSA assumes a constant prepayment rate of 6% per annum each
month. As used in the table below, "0% PSA" assumes prepayment rates equal
to 0% of PSA, i.e., no prepayments. Correspondingly, "125% PSA" assumes
prepayment rates equal to 125% of PSA, and so forth. PSA does not purport to
be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans. The Sponsor believes that no existing statistics of which it
is aware provide a reliable basis for holders of Offered Certificates to
predict the amount or the timing of receipt of prepayments on the Mortgage
Loans.
The Decrement Tables set forth below have been prepared on the basis of
the Assumptions described above under "--Assumptions Relating to Tables."
There will likely be discrepancies between the characteristics of the actual
Mortgage Loans included in the Trust Fund 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 Trust Fund
have characteristics that differ from those assumed in preparing the
following Decrement Tables, the Class Certificate Balance of any such Class
of Offered Certificates will 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
Certificate that might be calculated or projected under different or varying
prepayment assumptions.
It is not likely that (i) all of the Mortgage Loans will have the
Mortgage Rates or remaining terms to maturity assumed or (ii) the Mortgage
Loans will prepay at the indicated percentage of PSA until maturity. In
addition, the diverse remaining terms to maturity of the Mortgage Loans
(which includes many recently originated Mortgage Loans) could produce slower
or faster distributions in reduction of Class Certificate Balances than
indicated in the Decrement Table at the various percentages of PSA specified.
Based upon the foregoing assumptions, the following Decrement Tables
indicate the projected weighted average life of each Class of the Offered
Certificates and set forth the percentages of the initial Class Certificate
Balance of each such Class that would be outstanding after each of the dates
shown at various constant percentages of the PSA.
PERCENTAGE OF INITIAL CLASS CERTIFICATE BALANCE OUTSTANDING FOR THE OFFERED
CERTIFICATES AT THE RESPECTIVE PERCENTAGES OF PSA SET FORTH BELOW:
<TABLE>
<CAPTION> Class A-1 Class M-1
------------------------------------------------ -----------------------------
DISTRIBUTION DATE % % % % % % % % % %
- ------------------ --- ---- --- ---- ---- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Class
Certificate Balance
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
--------------
Weighted Average
Life
(in years)/F1/
Years to Maturity
</TABLE>
- ----------------------
/F1/ THE WEIGHTED AVERAGE LIFE OF AN OFFERED CERTIFICATE 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 THE OFFERED CERTIFICATE TO THE RELATED
DISTRIBUTION DATE, (II) ADDING THE RESULTS AND (III) DIVIDING THE
SUM BY THE INITIAL CLASS CERTIFICATE BALANCE OF THE OFFERED
CERTIFICATES OF SUCH CLASS.
SENSITIVITY OF THE CLASS X CERTIFICATES
As indicated in the table below, the yield to investors in the Class X
Certificates will be sensitive to the rate of principal payments (including
prepayments) of the Mortgage Loans, which generally can be prepaid at any
time. On the basis of the assumptions described below, the yield to maturity
on the Class X Certificates would be approximately 0% if prepayments were to
occur at a constant rate of ( %) PSA. If the actual prepayment rate of the
Mortgage Loans were to exceed the foregoing level for as little as one month
while equaling such level for the remaining months, the investors in the
Class X Certificates would not fully recoup their initial investments.
The information set forth in the following table has been prepared on
the basis of the Assumptions and on the assumption that the aggregate
purchase price of the Class X Certificates (expressed as a percentage of
initial Class X Notional Amount) is as follows:
Class PRICE*
Class X . . . . . . . . . . . . .
* The price does not include accrued interest. Accrued
interest has been added to such price in calculating the
yields set forth in the table below.
<TABLE>
<CAPTION>
Sensitivity of the Interest Only Certificates to Prepayments
(Pre-Tax Yields to Maturity)
PSA Prepayment Assumption
-----------------------------------------------------------------------
Class % % % % %
- ---------- ---------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Class X . . . . . . . . . . .
</TABLE>
It is highly unlikely that all of the Mortgage Loans will have the
characteristics assumed or that the Mortgage Loans will prepay at the same
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate or time. As a result of these factors, the pre-tax yields on the Class
X Certificates are likely to differ from those shown in the table above, even
if all of the Mortgage Loans prepay at the indicated percentages of PSA. No
representation is made as to the actual rate of principal payments on the
Mortgage Loans for any period or over the life of the Class X Certificates or
as to the yield on the Class X Certificates. Investors must make their own
decisions as to the appropriate prepayment assumptions to be used in deciding
whether to purchase the Class X Certificates.
CREDIT SUPPORT
SUBORDINATION OF SUBORDINATE CERTIFICATES
The rights of Subordinate Certificateholders to receive distributions
with respect to the Mortgage Loans will be subordinated to such rights of
Senior Certificateholders, and the rights of the holders of the Class B-1 and
Class B-2 Certificates to receive such distributions will be further
subordinated to such rights of the Mezzanine Certificates, in each case only
to the extent described herein. The subordination of the Subordinate
Certificates to the Senior Certificates and the subordination of the Class B-
1 and Class B-2 Certificates to the Mezzanine Certificates is intended to
increase the likelihood of receipt, respectively, by Senior
Certificateholders and Mezzanine Certificateholders, respectively, of the
maximum amount to which they are entitled on any Distribution Date and to
provide such holders protection against Realized Losses, other than Excess
Losses.
In addition, the Subordinate Certificates will provide limited
protection against Special Hazard Losses, Bankruptcy Losses and Fraud Losses
up to the Special Hazard Loss Coverage Amount, Bankruptcy Loss Coverage
Amount and Fraud Loss Coverage Amount, respectively, as described below.
The Subordinated 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 $______ (the "Special
Hazard Loss Coverage Amount"), (ii) Bankruptcy Losses in an initial amount
expected to be upon to approximately $_____ (the "Bankruptcy Loss Coverage
Amount") and (iii) Fraud Losses in an initial amount expected to be up to
approximately $_______ (the "Fraud Loss Coverage Amount").
The Special Hazard Loss Coverage Amount will be reduced, from time to
time, to be an amount equal on any Distribution Date to the lesser of ((a)
the greatest of (i) 1% of the aggregate of the principal balances of the
Mortgage Loans, (ii) twice the principal balance of the largest Mortgage Loan
and (iii) the aggregate principal balances of the Mortgage Loans secured by
Mortgaged Properties located in the single California postal zip code area
having the highest aggregate principal balance of any such zip code area and
(b) the Special Hazard Loss Coverage Amount as of the Closing Date less the
amount, if any, of losses attributable to Special Hazard Mortgage Loans
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.
The Fraud Loss Coverage Amount will be reduced, from time to time, by
the amount of Fraud Losses allocated to the Certificates. In addition, on
each anniversary of the Cut-off Date, the Fraud Loss Coverage Amount will be
reduced as follows: ((a) on the first and second anniversaries of the Cut-off
Date, to an amount equal to the excess of ( %) of the Cut-off Date Pool
Principal Balance over the cumulative amount of Fraud Losses allocated to the
Certificates, (b) on the third and fourth anniversaries of the Cut-off Date,
to an amount equal to the excess of ( %) of the Cut-off Date Pool Principal
Balance over the cumulative amount of Fraud Losses allocated to the
Certificates and (c) on the fifth anniversary of the Cut-off Date, to zero.)
The Bankruptcy Loss Coverage Amount will be reduced, from time to time,
by the amount of Bankruptcy Losses allocated to the Certificates.
The amount of coverage provided by the Subordinate Certificates for
Special Hazard Losses, Bankruptcy Losses and Fraud Losses may be cancelled or
reduced from time to time for each of the risks covered, provided that the
then current ratings of the Certificates assigned by the Rating Agencies are
not adversely affected thereby. In addition, a reserve fund or other form of
credit support may be substituted for the protection provided by the
Subordinated Certificates for Special Hazard Losses, Bankruptcy Losses and
Fraud Losses.
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
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 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 of principal and interest are
being advanced by the Master Servicer without giving effect to any Debt
Service Reduction.
(Describe terms of any Additional Credit Support)
USE OF PROCEEDS
The Sponsor will apply the net proceeds of the sale of the Offered
Certificates ((together with the net proceeds of the sale of the Class B-1
and Class B-2 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 a "real estate
mortgage investment conduit" ("REMIC") for federal income tax purposes under
the Internal Revenue Code of 1986, as amended (the "Code"). The Offered
Certificates will be designated as "regular interests" in the REMIC and the
Residual Certificate will be designated as the sole class of residual
interests in the REMIC. See "Certain Federal Income Tax Consequences--REMIC
Certificates" in the Prospectus.
Offered Certificates. The Offered Certificates generally will be
treated as debt instruments issued by the REMIC for federal income tax
purposes. Income on the Offered Certificates must be reported under an
accrual method of accounting.)
The Class X Certificates will, and the other Classes of Offered
Certificates may, depending on their respective issue prices, be treated for
federal income tax purposes as having been issued with an amount of original
issue discount equal to the difference between its principal balance and its
issue price. See "Certain Federal Income Tax Consequences" in the
Prospectus. For purposes of determining the amount and the rate of accrual
of original issue discount and market discount, the Sponsor intends to assume
that there will be prepayments on the Mortgage Loans at a rate equal to __%
PSA.
(The Offered Certificates will be treated as regular interests in a
REMIC under section 860G of the Code. Accordingly, the Offered Certificates
will be treated as (i) assets described in section 7701(a)(19)(C) of the
Code, and (ii) "real estate assets" within the meaning of section
856(c)(5)(B) of the Code, in each case to the extent described in the
Prospectus. Interest on the Offered Certificates will be treated as interest
on obligations secured by mortgages on real property within the meaning of
section 856(c)(3)(B) of the Code to the same extent that the Offered
Certificates are treated as real estate assets. See "Certain Federal Income
Tax Consequences" in the Prospectus.)
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or the Code,
should carefully review with its legal advisors whether the purchase or
holding of an Offered Certificate could give rise to a transaction prohibited
or not otherwise permissible under ERISA or the Code. No Class M-1
Certificate may be transferred unless the transferor delivers to the Trustee
(i) a certificate satisfactory to the Trustee to the effect that such
transferee neither is nor is acting on behalf of a plan subject to ERISA or
(ii) an opinion of counsel satisfactory to the Trustee to the effect that
such transfer will not result in the assets of the Trust Fund being "plan
assets." See "ERISA Considerations" in the Prospectus.
(The U.S. Department of Labor has granted to
___________________________, an administrative exemption (Prohibited
Transaction Exemption _____; Exemption Application No. ______) (the
"Exemption") from certain of the prohibited transaction rules of ERISA and
the related excise tax provisions of Section 4975 of the Code with respect to
the initial purchase, the holding and the subsequent resale by Plans of
certificates in pass-through trusts that consist of certain receivables,
loans and other obligations that meet the conditions and requirements of the
Exemption. The Exemption applies to mortgage loans such as the Mortgage Loans
in the Trust Fund.
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(s) believes that the Exemption will apply to the
acquisition and holding of the Class A-1 Certificates and the Class X
Certificates by Plans and that all conditions of the Exemption other than
those within the control of the investors will be met. In addition, as of
the date hereof, there is no single Mortgagor that is the obligor on 5% of
the Mortgage Loans included in the Trust Fund by aggregate unamortized
principal balance of the assets of the Trust Fund.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1
described in the Prospectus and the Exemption, and the potential consequences
in their specific circumstances, prior to making an investment in the Class
A-1 Certificates or the Class X Certificates. Moreover, each Plan fiduciary
should determine whether under the general fiduciary standards of investment
prudence and diversification, an investment in the Class A-1 Certificates or
the Class X Certificates is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Sponsor and the Underwriter(s), the Sponsor has agreed
to sell to the Underwriter(s), and the Underwriter(s) has agreed to purchase
from the Sponsor, the Offered Certificates. Distribution of the Offered
Certificates will be made by the Underwriter(s) from time to time in
negotiated transactions or otherwise at varying prices to be determined at
the time of sale. In connection with the sale of the Offered Certificates,
the Underwriter(s) may be deemed to have received compensation from the
Sponsor in the form of underwriting discounts.
The Sponsor has been advised by the Underwriter(s) that it intends to
make a market in the Offered Certificates but has 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(s) against, or make
contributions to the Underwriter(s) with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
The validity of the Certificates, including certain federal income tax
consequences with respect thereto, will be passed upon for the Sponsor by (
). ( ) will pass upon certain legal matters on
behalf of the Underwriter(s).
CERTIFICATE RATING
It is a condition to the issuance of the Offered Certificates that the
Senior Certificates and the Class M-1 Certificates be rated by ( ) and (
) at least as follows:
Class . . . . . . . . . . . . . ___ ___
- -----
A-1 . . . . . . . . . . . . . . .
X . . . . . . . . . . . . . . .
M-1 . . . . . . . . . . . . . . .
Ratings on mortgage pass-through certificates address the likelihood of
receipt by Certificateholders of payments required under the Pooling
Agreement.
( )'s and ( )'s ratings take into consideration the credit quality
of the Mortgage Pool including any credit support providers, 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 and ( )'s ratings on the
Offered Certificates do not, however, constitute a statement regarding
frequency of prepayments on the Mortgage Loans. In addition, ( )'s and (
)'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 Senior 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 ( ) and ( ). However, there
can be no assurance as to whether any other rating agency will rate the
Offered Certificates, or if it does, what rating would be assigned by such
other rating agency. The rating assigned by any such other rating agency to
a Class of Offered Certificates may be lower than the ratings assigned by
( ) and ( ).
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.
INDEX TO DEFINED TERMS
----------------------
Page
----
Adjustment Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-9
Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-17
ARM Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-25
Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-26
Available Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-20
Bankruptcy Loss Coverage Amount . . . . . . . . . . . . . . . . . . . . S-30
Bankruptcy Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
beneficial owner . . . . . . . . . . . . . . . . . . . . . . . . . . . S-18
Book-Entry Certificates . . . . . . . . . . . . . . . . . . . . . . S-9, S-17
CEDE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-18
Certificate Account . . . . . . . . . . . . . . . . . . . . . . . . . . S-19
Certificateholder . . . . . . . . . . . . . . . . . . . . . . . . . . . S-18
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . 1, S-1, S-17
Class A-1 Certificates . . . . . . . . . . . . . . . . . . . . . . . . S-17
Class A-1 Percentage . . . . . . . . . . . . . . . . . . . . . . . . . S-21
Class A-1 Prepayment Percentage . . . . . . . . . . . . . . . . . S-21, S-22
Class B-1 Certificates . . . . . . . . . . . . . . . . . . . . . . . . S-17
Class B-2 Certificates . . . . . . . . . . . . . . . . . . . . . . . . S-17
Class Certificate Balance . . . . . . . . . . . . . . . . . . . . . . . S-23
Class M-1 Certificates . . . . . . . . . . . . . . . . . . . . . . . . S-17
Class X Certificates . . . . . . . . . . . . . . . . . . . . . . . . . S-17
Clearing Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-18
Clearing Corporation . . . . . . . . . . . . . . . . . . . . . . . . . S-18
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6, S-31
Convertible Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . S-13
Cut-off Date Pool Principal Balance . . . . . . . . . . . . . . . . S-2, S-9
Damaged Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Debt Service Reduction . . . . . . . . . . . . . . . . . . . . . . . . S-30
Deficient Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . S-30
Definitive Certificate . . . . . . . . . . . . . . . . . . . . . . . . S-18
Depository . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-18
Detailed Description . . . . . . . . . . . . . . . . . . . . . . . . . . S-9
Distribution Account . . . . . . . . . . . . . . . . . . . . . . . . . S-19
Distribution Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Due Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-9, S-21
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6, S-31
Excess Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-31
Expense Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10
Financial Intermediary . . . . . . . . . . . . . . . . . . . . . . . . S-18
Fraud Loss Coverage Amount . . . . . . . . . . . . . . . . . . . . . . S-30
Fraud Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10
Gross Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-9
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, S-9
LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, S-9
Liquidated Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . S-22
Loan-to-Value Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . S-10
Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, S-1
Master Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . S-16
Maximum Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10
Minimum Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10
Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
Mortgage File . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, S-2
Mortgage Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
Net Interest Shortfalls . . . . . . . . . . . . . . . . . . . . . . . . S-20
Net Prepayment Interest Shortfall . . . . . . . . . . . . . . . . . . . S-20
Offered Certificates . . . . . . . . . . . . . . . . . . . . . . . . 1, S-17
Original Subordinate Principal Balance . . . . . . . . . . . . . . . . S-22
Pass-Through Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Pool Principal Balance . . . . . . . . . . . . . . . . . . . . . . S-2, S-21
Pooling Agreement . . . . . . . . . . . . . . . . . . . . . . . 1, S-2, S-17
Prepayment Interest Shortfall . . . . . . . . . . . . . . . . . . . . . S-20
Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-26
Principal Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
principal prepayment . . . . . . . . . . . . . . . . . . . . . . . . . S-24
Principal Prepayments . . . . . . . . . . . . . . . . . . . . . . . S-3, S-21
Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
PSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-26
Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
Realized Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-19
Relief Act Reduction . . . . . . . . . . . . . . . . . . . . . . . . . S-20
REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, S-5, S-31
REMIC Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
REO Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-17
Residual Certificates . . . . . . . . . . . . . . . . . . . . . . . . . S-17
Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 3, S-1
Senior Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . S-17
Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-16
SMMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Special Hazard Loss Coverage Amount . . . . . . . . . . . . . . . . . . S-30
Special Hazard Losses . . . . . . . . . . . . . . . . . . . . . . . . . S-22
Special Hazard Mortgage Loan . . . . . . . . . . . . . . . . . . . . . S-22
Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 3, S-1
Subordinate Certificates . . . . . . . . . . . . . . . . . . . . . . . S-17
Subordinate Percentage . . . . . . . . . . . . . . . . . . . . . . . . S-21
Subordinate Percentage Allocation . . . . . . . . . . . . . . . . . . . S-21
Subordinate Prepayment Percentage . . . . . . . . . . . . . . . . . . . S-22
Subordinate Prepayment Percentage Allocation . . . . . . . . . . . . . S-22
Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, S-1
Underwriter(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Unpaid Interest Amounts . . . . . . . . . . . . . . . . . . . . . . . . S-20
Unpaid Interest Shortfall . . . . . . . . . . . . . . . . . . . . . . . . S-3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION DATED MARCH 30, 1998
P R O S P E C T U S
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.
_____________ ___, 19__
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.
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.
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 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
S e r i e s ( " S u b o r d i n a t e
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
manner, if any, in which the amount of
subordination will decrease over time.
2. Reserve Fund . . . . . One or more reserve funds (the "Reserve
Fund") may be established and maintained
for each Series. The related Supplement
will specify whether or not any such
Reserve Fund will be included in the
corpus of the 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 (the
"Bankruptcy Bonds") may be obtained to
cover certain losses resulting from
action that may be taken by a bankruptcy
court in connection with a Mortgage
Loan. The level 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:
(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 speci-
fied 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 mini-
mum amounts of monthly payments.
(d) The Mortgage Loans generally may be
prepaid at any time without payment of
any prepayment fee. If so specified in
the related Supplement, prepayments of
principal may be prohibited for the life
of any such Mortgage Loan or for certain
periods ("Lockout Periods"), or may be
subject to a prepayment fee, which may be
fixed for the life of any such Mortgage
Loan or may decline over time. Certain
Mortgage Loans may permit prepayments
after expiration of the applicable
Lockout Period and may require the
payment of a prepayment fee in connection
with any such subsequent prepayment. The
Mortgage Loans may include "due-on-sale"
clauses which permit the mortgagee to
demand payment of the entire Mortgage
Loan in connection with the sale or
certain transfers of the related
Mortgaged Property. Other Mortgage Loans
may be assumable by persons meeting the
then applicable underwriting standards of
the Seller.
(e) The real property constituting
security for repayment of a Mortgage Loan
may be located in any one of the fifty
states, the District of Columbia, Guam,
Puerto Rico or any other territory of the
United States. The Mortgage Loans may be
covered by standard hazard insurance
policies insuring against losses due to
fire and various other causes. The
Mortgage Loans may be covered by Primary
Mortgage Insurance Policies to the extent
provided in the related Supplement.
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.
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--REMIC
Certificates" herein.
Tax Status of Non-REMIC
Certificates For federal income tax purposes, the
trust created to hold the Mortgage
Assets for each Series of Non-REMIC
Certificates will be classified as a
grantor trust and not as an association
taxable as a corporation. Holders of
Non-REMIC Certificates of such Series
which are not IO Certificates will be
treated as owners of undivided interests
in the trust and as equitable owners of
undivided interests in each of the
Mortgage Assets held by the trust, and
such holders will be taxed on their pro
rata shares of the income from the
related Mortgage Assets and may be
allowed to deduct their pro rata shares
of reasonable servicing fees, consistent
with their methods of accounting,
subject to limitation in the case of
Non-REMIC Certificates held by
individuals, estates, or trusts (either
directly or indirectly through certain
pass-through entities). If a Series of
Non-REMIC Certificates includes IO
Certificates, holders of the
Certificates of such Series will be
subject to the "Stripped Bond Rules" of
Section 1286 of the Code.
Subject to certain limitations that may
be applicable to Buydown Loans, to the
extent the Mortgage Assets and the
related interests qualify for such
treatment, interests in the Mortgage
Assets held by holders of applicable
Non-REMIC Certificates which are not IO
Certificates will be considered to
represent "loans... secured by an
interest in real property" for domestic
building and loan associations and "real
estate assets" for real estate
investment trusts.
It is not clear whether IO Certificates
will be treated as representing an
ownership interest in qualifying assets
and income under Sections
7701(a)(19)(C)(v), 856(c)(5)(A) and
856(c)(3)(B) of the Code, although the
policy considerations underlying those
Sections suggest that such treatment
should be available. It is also not
clear whether a reasonable prepayment
assumption should be applied in accruing
original issue discount on the IO
Certificates.
See "Certain Federal Income Tax
Consequences--Non-REMIC Certificates"
herein.
Legal Investment . . . . . . . . The Supplement for each Series of
Certificates will specify which, if any,
of the classes of Certificates offered
thereby will constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Classes of
Certificates that qualify as "mortgage
related securities" will be legal
investments for certain types of
institutional investors to the extent
provided in SMMEA. However,
institutions whose investment activities
are subject to other legal investment
laws and regulations or review by
certain regulatory authorities may be
subject to restrictions on investment in
certain classes of Certificates. See
"Legal Investment Consideration" 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").
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 (the "Mortgage Notes") secured primarily by first liens on one-
to four-family residential properties in any one of the fifty states, the
District of Columbia, Guam, Puerto Rico or any other territory of the United
States. If so specified in the related Supplement, the Mortgage Loans may
include cooperative apartment loans ("Cooperative Loans") secured by security
interests in shares issued by private, non-profit cooperative housing
corporations and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in such
buildings. A "Mortgage" is a mortgage, deed of trust or similar instrument
with respect to a Mortgaged Property. The "Mortgaged Properties" securing
the Mortgage Notes will be comprised of one- to four-family dwelling units
that are either detached or semi-detached townhouses, rowhouses, individual
condominium units, individual units in planned unit developments and certain
other dwelling units. The Mortgaged Properties may include leasehold
interests in residential properties, the title to which is held by third
party lessors. The Mortgaged Properties may include vacation and second
homes and investment properties. Each Mortgage Loan will be selected by the
Sponsor for inclusion in a 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 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
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.
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 corporate instrumentality of the United
States created pursuant to Title III of the Emergency Home Finance Act of
1970, as amended (the "Freddie Mac Act"). Freddie Mac's common stock is
owned by the Federal Home Loan Banks, and its preferred stock is owned by the
stockholders of such Federal Home Loan Banks. 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 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.
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").
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.
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 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 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.)
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 the accreted interest from specified Accrual
Classes. An Accretion Directed Class also may receive principal payments from principal
paid on the Mortgage Assets or other assets of the Trust Fund for the related Series.
Component Certificates . . . A class consisting of "Components." The Components of a class of Component Certificates
may have different principal and/or interest payment characteristics but together
constitute a single class. Each Component of a class of Component Certificates may be
identified as falling into one or more of the categories in this chart.
Notional Amount
Certificates . . . . . . . A class having no principal balance and bearing interest on the related notional amount.
The notional amount is used for purposes of the determination of interest distributions.
Planned Principal Class
(also sometimes
referred to as "PACs") . . A class that is designed to receive principal payments using a predetermined principal
balance schedule derived by assuming two constant prepayment rates for the underlying
Mortgage Assets. These two rates are the endpoints for the "structuring range" for the
Planned Principal Class. The Planned Principal Classes in any Series of Certificates may
be subdivided into different categories (e.g., Primary Planned Principal Classes, Secondary
Planned Principal Classes and so forth) having different effective structuring ranges and
different principal payment priorities. The structuring range for the Secondary Planned
Principal Class of a Series of Certificates will be narrower than that for the Primary
Planned Principal Class of such Series.
Scheduled Principal Class . . A class that is designed to receive principal payments using a predetermined principal
balance schedule but is not designated as a Planned Principal Class or Targeted Principal
Class. In many cases, the schedule is derived by assuming two constant prepayment rates
for the Mortgage Assets. These two rates are the endpoints for the "structuring range" for
the Scheduled Principal Class.
Senior Certificates
("SEN") . . . . . . . . . . Classes that are entitled to receive payments of principal and interest on each
Distribution Date prior to the Classes of Subordinate Certificates.
Sequential Pay Class . . . . Classes that receive principal payments in a prescribed sequence, that do not have
predetermined principal balance schedules and that under all circumstances receive payments
of principal continuously from the first Distribution Date on which they receive principal
until they are retired. A single class that receives principal payments before or after
all other classes in the same Series of Certificates may be identified as a Sequential Pay
Class.
Strip Class . . . . . . . . . A class that receives a constant proportion, or "strip," of the principal payments on the
Mortgage Assets. The constant proportion of such principal payments may or may not vary
for each Mortgage Asset included in the Trust Fund and will be calculated in the manner
described in the related Supplement. Such Classes may also receive payments of interest.
Subordinate Certificates
("SUB") . . . . . . . . . . Classes that are entitled to receive payments of principal and interest on each
Distribution Date only after the Senior Certificates and certain Classes of Subordinate
Certificates with higher priority of distributions have received their full principal and
interest entitlements.
Support Class (also
sometimes referred to
as "Companion Classes") . . A class that receives principal payments on any Distribution Date only if scheduled
payments have been made on specified Planned Principal Classes, Targeted Principal Classes
and/or Scheduled Principal Classes.
Targeted Principal Class
(also sometimes
referred to as "TACs") . . A class that is designed to receive principal payments using a predetermined principal
balance schedule derived by assuming a single constant prepayment rate for the Mortgage
Assets.
INTEREST TYPES
Accrual . . . . . . . . . . . A class that accretes the amount of accrued interest otherwise distributable on such class,
which amount will be added as principal to the principal balance of such class on each
applicable Distribution Date. Such accretion may continue until some specified event has
occurred or until such class of Accrual Certificates is retired.
Fixed Rate . . . . . . . . . A class with a Certificate Rate that is fixed throughout the life of the class.
Floating Rate . . . . . . . . A class with a Certificate Rate that resets periodically based upon a designated Index and
that varies directly with changes in such Index.
Inverse Floating Rate . . . . A class with a Certificate Rate that resets periodically based upon a designated Index and
that varies inversely with changes in such Index.
IO . . . . . . . . . . . . . Certificates that receive some or all of the interest payments made on the Mortgage Assets
and little or no principal. IO Certificates have either a nominal principal balance or a
notional amount. A nominal principal balance represents actual principal that will be paid
on such Certificates. It is referred to as nominal since it is extremely small compared to
other classes. A notional amount is the amount used as a reference to calculate the amount
of interest due on an IO Certificate that is not entitled to any distributions in respect
of principal.
Partial Accrual . . . . . . . A class that accretes a portion of the amount of accrued interest thereon, which amount
will be added to the principal balance of such class on each applicable Distribution Date,
with the remainder of such accrued interest to be distributed currently as interest on such
class. Such accretion may continue until a specified event has occurred or until such
class of Partial Accrual Certificates is retired.
PO . . . . . . . . . . . . . A class that does not bear interest and is entitled to receive only distributions in
respect of principal.
Variable Rate . . . . . . . . A class with a Certificate Rate that resets periodically and is calculated by reference to
the rate or rates of interest applicable to specified assets or instruments (e.g., the
Mortgage Rates borne by the Mortgage Loans in the related 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.
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;
(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.
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.
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 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 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 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 a subsidiary of NationsBank, N.A., a national
banking association. The Sponsor maintains its principal office at
NationsBank Corporate Center, Charlotte, North Carolina 28255. Its
telephone number is (704) 386-2400.
Neither the Sponsor nor any of the Sponsor's affiliates will ensure or
guarantee distributions on the Certificates of any Series.
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 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 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 "Seller's Agreement").
In the Seller's 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.
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;
(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 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 the Flood Disaster Protection
Act of 1973, as amended.
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.
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, 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 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 662/3% 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 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.
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. 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 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 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 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.
ERISA CONSIDERATIONS
ERISA and Section 4975 of the Code impose certain requirements on those
employee benefit plans and arrangements to which either ERISA or the Code
applies (each a "Plan") and on those persons who are fiduciaries with respect
to such Plans. In accordance with ERISA's general fiduciary standards,
before investing in a Certificate a Plan fiduciary should determine whether
such an investment is permitted under the governing Plan instruments and is
appropriate for the Plan in view of its overall investment policy and the
composition and diversification of its portfolio. Other provisions of ERISA
and the Code prohibit certain transactions involving the assets of a Plan and
persons who have certain specified relationships to the Plan (i.e., "parties
in interest" within the meaning of ERISA or "disqualified persons" within the
meaning of the Code). Thus, a Plan fiduciary considering an investment in
Certificates should also consider whether such an investment might constitute
or give rise to a prohibited transaction under ERISA or the Code.
PLAN ASSETS REGULATIONS
If an investing Plan's assets were deemed to include an undivided
ownership interest in the assets included in a 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, if the Plan acquires an "equity interest" in such entity (such as
by acquiring Certificates). The Labor Regulations state that the underlying
assets of an entity will not be considered "plan assets" if, immediately
after the most recent acquisition of any equity interest in the entity,
whether from the issuer or an underwriter, less than twenty-five percent
(25%) of the value of each class of equity interest is held by "benefit plan
investors", individual retirement accounts, and other employee benefit plans
not subject to ERISA (for example, governmental plans). The Sponsor cannot
predict whether under the Labor Regulations the assets of a Plan investing in
Certificates will be deemed to include an interest in the assets of the Trust
Fund.
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.
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 Ratings Services, a division of
The McGraw-Hill Companies ("S&P"), Moody's Investors Service, Inc.
("Moody's"), Duff & Phelps Credit Rating Co. ("DCR") or Fitch Investors
Service, L.P. ("Fitch");
(4) the trustee must not be an affiliate of any other member of
the Restricted Group;
(5) the sum of all payments made to and retained by the
underwriters in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the seller
pursuant to the assignment of the loans to the trust fund represents not
more than the fair market value of such loans; the sum of all payments
made to and retained by the servicer and any other servicer represents
not more than reasonable compensation for such person's services under
the agreement pursuant to which the loans are pooled and reimbursements
of such person's reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of
the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been
rated in one of the three highest rating categories of S&P, Moody's,
Fitch or 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 certificates in a
trust as to which the fiduciary (or its affiliate) is an obligor on the
receivables held in the trust provided that, among other requirements: (i) in
the case of an acquisition in connection with the initial issuance of
certificates, at least fifty percent (50%) of each class of certificates in
which Plans have invested is acquired by persons independent of the
Restricted Group, (ii) such fiduciary (or its affiliate) is an obligor with
respect to five percent (5%) or less of the fair market value of the
obligations contained in the trust; (iii) the Plan's investment in
certificates of any class does not exceed twenty-five percent (25%) of all of
the certificates of that class outstanding at the time of the acquisition;
and (iv) immediately after the acquisition, no more than twenty-five percent
(25%) of the assets of the Plan with respect to which such person is a
fiduciary is invested in certificates representing an interest in one or more
trusts containing assets sold or serviced by the same entity. The
Underwriter's Exemptions do not apply to Plans sponsored by the Seller, the
related underwriter, the Trustee, the Servicer, any insurer with respect to
the Mortgage Loans, any obligor with respect to Mortgage Loans included in
the Trust Fund constituting more than five percent (5%) of the aggregate
unamortized principal balance of the assets in the Trust Fund, or any
affiliate of such parties.
The Supplement for each Series of Certificates will indicate the classes
of Certificates, if any, offered thereby as to which it is expected than an
Underwriter's Exemption will apply.
OTHER EXEMPTIONS
In addition to making its own determination as to the availability of
the exemptive relief provided in the Underwriter's Exemptions, the Plan
fiduciary should consider the possible availability of any other prohibited
transaction exemptions, in particular, Prohibited Transaction Class Exemption
83-1 for Certain Transactions Involving Mortgage Pool Investment Trusts ("PTE
83-1"). PTE 83-1 permits certain transactions involving the creation,
maintenance and termination of certain residential mortgage pools and the
acquisition and holding of certain residential mortgage pool pass-through
certificates by Plans, whether or not the Plan's assets would be deemed to
include an ownership interest in the mortgages in the mortgage pool, and
whether or not such transactions would otherwise be prohibited under ERISA.
The Sponsor believes that the "general conditions" set forth in Section II of
PTE 83-1, which are required for its applicability, would be met with respect
to most classes of Certificates evidencing ownership interest in a Trust Fund
consisting solely of Mortgage Loans secured by first or second mortgages or
deeds of trust on single-family residential property. PTE 83-1 would not
apply to Certificates which are part of a class that is subordinate to one or
more other classes of the same Series of Certificates. It is not clear
whether PTE 83-1 applies to Residual Certificates, Certificates which do not
pass through both principal and interest, to any Certificates evidencing
ownership interests in a Trust Fund containing Mortgage Certificates, or to
any Certificates evidencing ownership interests in the reinvestment income of
funds on deposit in the related Certificate Account or in Mortgage Loans
secured by shares in a cooperative corporation. Before purchasing any
Certificates, a Plan fiduciary should consult with its counsel and determine
whether PTE 83-1 applies, including whether the appropriate "specific
conditions" set forth in Section I of PTE 83-1, in addition to the "general
conditions" set forth in Section II, would be met, or whether any other ERISA
prohibited transaction exemption is applicable. Furthermore, a Plan
fiduciary should consult the ERISA discussion in the related Supplement
relating to a Series of Certificates before purchasing Certificates.
The Sponsor, or certain affiliates of the Sponsor, might be considered
or might become "parties in interest" (as defined under ERISA) or
"disqualified persons" (as defined under the Code) with respect to a Plan.
If so, the acquisition or holding of Certificates by or on behalf of such
Plan could be considered to give rise to a "prohibited transaction" within
the meaning of ERISA and the Code unless PTE 83-1, the Underwriter's
Exemptions, or some other exemption as available. Special caution ought to
be exercised before a Plan purchases a Certificate in such circumstances.
Employee benefit plans which are governmental plans (as defined in
Section 3(32) of ERISA), and certain church plans (as defined in Section
3(33) of ERISA), are not subject to the ERISA fiduciary requirements.
However, the purchase of a Residual Certificate by some of such plans, or by
most varieties of ERISA Plans, may give rise to "unrelated business taxable
income" as described in Sections 511-515 and 860E of the Code. Prior to the
purchase of Residual Certificates, a prospective purchaser may be required to
provide an affidavit to the Trustee and the Sponsor that it is not a
"disqualified organization", which term as defined herein includes certain
tax-exempt entities not subject to Section 511 of the Code, including certain
governmental plans. In addition, prior to the transfer of a Residual
Certificate, the Trustee or the Sponsor may require an opinion of counsel to
the effect that such transfer will not result in a violation of the
prohibited transactions provisions of ERISA and the Code and will not subject
the Trustee, the Sponsor or the Servicer to additional obligations.
Due to the complexity of these rules and the penalties imposed upon
persons involved in prohibited transactions, it is particularly important
that potential Plan investors consult with their counsel regarding the
consequences under ERISA and the Code of their acquisition and ownership of
Certificates.
LEGAL INVESTMENT CONSIDERATION
Institutions whose investment activities are subject to legal investment
laws and regulations or to review by certain regulatory authorities may be
subject to restrictions on investment in certain types of Certificates. Any
financial institution that is subject to the jurisdiction of the Comptroller
of the Currency, the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the
National Credit Union Administration or other federal or state agencies with
similar authority should review any applicable rules, guidelines and
regulations prior to purchasing any Certificates. Financial institutions
should review and consider the applicability of the Federal Financial
Institutions Examination Council Supervisory Policy Statement on Securities
Activities (to the extent adopted by their respective federal regulators),
which, among other things, set forth guidelines for investing in certain
types of mortgage related securities, including securities such as the
Certificates. In addition, financial institutions should consult their
regulators concerning the risk-based capital treatment of any Certificates.
Investors should consult their own legal advisors in determining whether and
to what extent Certificates constitute legal investments or are subject to
restrictions on investment.
LEGAL MATTERS
The validity of the Certificates will be passed upon for the Sponsor by
Kennedy Covington Lobdell & Hickman, L.L.P., Charlotte, North Carolina or
Brown & Wood LLP, New York, New York, as provided in the Supplement. Certain
federal income tax consequences with respect to the Certificates will be
passed upon for the Sponsor by Brown & Wood LLP.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Certificates is
based on the advice of Brown & Wood LLP, counsel to the Sponsor. This
summary is based on laws, regulations, including the REMIC regulations
promulgated by the Treasury Department on December 23, 1992, and generally
effective for REMICs with start-up dates on or after November 12, 1991 (the
"REMIC Regulations"), rulings and decisions now in effect or (with respect to
regulations) proposed, all of which are subject to change either
prospectively or retroactively. This summary does not address the federal
income tax consequences of an investment in Certificates applicable to all
categories of investors, some of which (for example, banks and insurance
companies) may be subject to special rules. Prospective investors should
consult their tax advisors regarding the federal, state, local and any other
tax consequences to them of the purchase, ownership and disposition of
Certificates.
GENERAL
The federal income tax consequences to Certificateholders will vary
depending on whether an election is made to treat the Trust Fund relating to
a particular Series of Certificates as a real estate mortgage investment
conduit ("REMIC") under the Internal Revenue Code of 1986, as amended (the
"Code"). The Supplement for each Series of Certificates will specify whether
a REMIC election will be made.
NON-REMIC CERTIFICATES
If a REMIC election is not made, Brown & Wood LLP will deliver its
opinion that the Trust Fund will be classified as a grantor trust under
subpart E, Part I of subchapter J of the Code. In this case, owners of
Certificates will be treated for federal income tax purposes as owners of a
portion of the Trust Fund's assets as described below.
SINGLE CLASS OF SENIOR CERTIFICATES
Characterization. The Trust Fund may be created with one class of
Senior Certificates and one class of Subordinate Certificates. In this case,
each Senior Certificateholder will be treated as the owner of a pro rata
undivided interest in the interest and principal portions of the Trust Fund
represented by that Senior Certificate and will be considered the equitable
owner of a pro rata undivided interest in each of the Mortgage Loans in the
Trust Fund. Any amounts received by a Senior Certificateholder in lieu of
amounts due with respect to any Mortgage Loan because of a default or
delinquency in payment will be treated for federal income tax purposes as
having the same character as the payments they replace.
Each holder of a Senior Certificate will be required to report on its
federal income tax return its pro rata share of the entire income from the
Mortgage Loans in the Trust Fund represented by that Senior Certificate,
including interest, original issue discount, if any, prepayment fees,
assumption fees, any gain recognized upon an assumption and late payment
charges received by the Servicer in accordance with such Senior
Certificateholder's method of accounting. Under Code Sections 162 or 212
each Senior Certificateholder will be entitled to deduct its pro rata share
of servicing fees, prepayment fees, assumption fees, any loss recognized upon
an assumption and late payment charges retained by the Servicer, provided
that such amounts are reasonable compensation for services rendered to the
Trust Fund. Senior Certificateholders that are individuals, estates or
trusts will be entitled to deduct their share of expenses only to the extent
such expenses plus all other Code Section 212 expenses exceed two percent of
its adjusted gross income. A Senior Certificateholder using the cash method
of accounting must take into account its pro rata share of income and
deductions as and when collected by or paid to the Servicer. A Senior
Certificateholder using an accrual method of accounting must take into
account its pro rata share of income and deductions as they become due or are
paid to the Servicer, whichever is earlier. If the Servicing Fees paid to
the Servicer were deemed to exceed reasonable servicing compensation, the
amount of such excess could be considered as a retained ownership interest by
the Servicer (or any person to whom the Servicer assigned for value all or a
portion of the Servicing Fees) in a portion of the interest payments on the
Mortgage Loans. The Mortgage Loans may then be subject to the "coupon
stripping" rules of the Code discussed below.
Unless otherwise specified in the related Supplement, as to each series
of Certificates, Brown & Wood LLP will have advised the Sponsor that:
(i) a Senior Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) representing
principal and interest payments on Mortgage Loans will be considered to
represent "loans . . . secured by an interest in real property which is
. . . residential property" within the meaning of Code Section
7701(a)(19)(C)(v); provided that the real property securing the Mortgage
Loans represented by that Senior Certificate is of a type described in
such Code section;
(ii) a Senior Certificate owned by a real estate investment trust
representing an interest in Mortgage Loans will be considered to
represent "real estate assets" within the meaning of Code Section
856(c)(5)(A), and interest income on the Mortgage Loans will be
considered "interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B); provided that
the real property securing the Mortgage Loans represented by that Senior
Certificate is of a type described in such Code section; and
(iii) a Senior Certificate owned by a REMIC will be an "obligation
. . . which is principally secured, directly or indirectly, by an
interest in real property" within the meaning of Code Section
860G(a)(3).
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for thrift institutions, repealed the application
of Code Section 593(d) to any taxable year beginning after December 31, 1995.
The assets constituting certain Trust Funds may include Buydown Mortgage
Loans. The characterization of any investment in Buydown Mortgage Loans will
depend upon the precise terms of the related Buydown Agreement, but to the
extent that such Buydown Mortgage Loans are secured in part by a bank account
or other personal property, they may not be treated in their entirety as
assets described in the foregoing sections of the Code. There are no
directly applicable precedents with respect to the federal income tax
treatment or the characterization of investments in Buydown Mortgage Loans.
Accordingly, holders of Senior Certificates should consult their own tax
advisors with respect to characterization of investments in Senior
Certificates representing an interest in a Trust Fund that includes Buydown
Mortgage Loans.
Premium. The price paid for a Senior Certificate by a holder will be
allocated to such holder's undivided interest in each Mortgage Loan based on
each Mortgage Loan's relative fair market value, so that such holder's
undivided interest in each Mortgage Loan will have its own tax basis. A
Senior Certificateholder that acquires an interest in Mortgage Loans at a
premium may elect to amortize such premium under a constant interest method,
provided that such Mortgage Loan was originated after September 27, 1985.
Premium allocable to a Mortgage Loan originated on or before September 27,
1985 should be allocated among the principal payments on the Mortgage Loan
and allowed as an ordinary deduction as principal payments are made.
Amortizable bond premium will be treated as an offset to interest income on
such Senior Certificate. The basis for such Senior Certificate will be
reduced to the extent that amortizable premium is applied to offset interest
payments.
It is not clear whether a reasonable prepayment assumption should be
used in computing amortization of premium allowable under Code Section 171.
If a premium is not subject to amortization using a reasonable
prepayment assumption, the holder of a Senior Certificate acquired at a
premium should recognize a loss, if a Mortgage Loan prepays in full, equal to
the difference between the portion of the prepaid principal amount of the
Mortgage Loan that is allocable to the Certificate and the portion of the
adjusted basis of the Certificate that is allocable to the Mortgage Loan. If
a reasonable prepayment assumption is used to amortize such premium, it
appears that such a loss would be available, if at all, only if prepayments
have occurred at a rate faster than the reasonable assumed prepayment rate.
It is not clear whether any other adjustments would be required to reflect
differences between an assumed prepayment rate and the actual rate of
prepayments.
On December 30, 1997 the IRS issued final regulations (the "Amortizable
Bond Premium Regulations") dealing with amortizable bond premium. These
regulations specifically do not apply to prepayable debt instruments subject
to Code Section 1272(a)(6) such as the Certificates. Absent further guidance
from the IRS, the Trustee intends to account for amortizable bond premium in
the manner described above. Prospective purchasers of the Certificates
should consult their tax advisors regarding the possible application of the
Amortizable Bond Premium Regulations.
Original Issue Discount. The Internal Revenue Service (the "IRS") has
stated in published rulings that, in circumstances similar to those described
herein, the special rules of the Code relating to "original issue discount"
(currently Code Sections 1271 through 1273 and 1275) will be applicable to a
Senior Certificateholder's interest in those Mortgage Loans meeting the
conditions necessary for these sections to apply. Rules regarding periodic
inclusion of original issue discount income are applicable to mortgages of
corporations originated after May 27, 1969, mortgages of noncorporate
mortgagors (other than individuals) originated after July 1, 1982, and
mortgages of individuals originated after March 2, 1984. Such original issue
discount could arise by the financing of points or other charges by the
originator of the mortgages in an amount greater than a statutory de minimis
exception to the extent that the points are not currently deductible under
applicable Code provisions or are not for services provided by the lender.
Additionally, under regulations issued on January 27, 1994, as amended on
June 11, 1996, under Code Sections 1271 through 1273 and 1275 with respect to
original issue discount (the "OID Regulations"), original issue discount may
be created when the rate produced (on the issue date) by the index formula on
an ARM is greater than the initial interest rate payable on the ARM.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method. See "--Multiple Classes of
Senior Certificates--Accrual of Original Issue Discount" below.
Market Discount. A Senior Certificateholder that acquires an undivided
interest in Mortgage Loans may be subject to the market discount rules of
Code Sections 1276 through 1278 to the extent an undivided interest in a
Mortgage Loan is considered to have been purchased at a "market discount."
Generally, market discount is the excess of the portion of the principal
amount of such Mortgage Loan allocable to such holder's undivided interest
over such holder's tax basis in such interest). Market discount with respect
to a Senior Certificate will be considered to be zero if the amount allocable
to the Senior Certificate is less than 0.25% of the Senior Certificate's
stated redemption price at maturity multiplied by the weighted average
maturity remaining after the date of purchase. Treasury regulations
implementing the market discount rules have not yet been issued; therefore,
investors should consult their own tax advisors regarding the application of
these rules and the advisability of making any of the elections allowed under
Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986 shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at
the time of such payment. The amount of accrued market discount for purposes
of determining the tax treatment of subsequent principal payments or
dispositions of the market discount bond is to be reduced by the amount so
treated as ordinary income.
The Code also grants the Treasury Department authority to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
While the Treasury Department has not yet issued regulations, rules described
in the relevant legislative history will control. Under those rules, the
holder of a market discount bond may elect to accrue market discount either
on the basis of a constant interest rate or according to one of the following
methods. If a Senior Certificate is issued with original issue discount, the
amount of market discount that accrues during any accrual period would be
equal to the product of (i) the total remaining market discount, multiplied
by (ii) a fraction, the numerator of which is the original issue discount
accruing during the period and the denominator of which is the total
remaining original issue discount at the beginning of the accrual period.
For Senior Certificates issued without original issue discount, the amount of
market discount that accrues during a period is equal to the product of (i)
the total remaining market discount, multiplied by (ii) a fraction, the
numerator of which is the amount of stated interest paid during the accrual
period and the denominator of which is the total amount of stated interest
remaining to be paid at the beginning of the accrual period. For purposes of
calculating market discount under any of the above methods in the case of
instruments (such as the Senior Certificates) which provide for payments
which may be accelerated by reason of prepayments of other obligations
securing such instruments, the same prepayment assumption applicable to
calculating the accrual of original issue discount will apply. Because the
regulations described above have not been issued, it is impossible to predict
what effect those regulations might have on the tax treatment of a Senior
Certificate purchased at a discount or premium in the secondary market.
A holder who acquired a Senior Certificate at a market discount also may
be required to defer, until the maturity date of such Senior Certificate or
its earlier disposition in a taxable transaction, the deduction of a portion
of the amount of interest that the holder paid or accrued during the taxable
year on indebtedness incurred or maintained to purchase or carry the Senior
Certificate in excess of the aggregate amount of interest (including original
issue discount) includible in such holder's gross income for the taxable year
with respect to such Senior Certificate. The amount of such net interest
expense deferred in a taxable year may not exceed the amount of market
discount accrued on the Senior Certificate for the days during the taxable
year on which the holder held the Senior Certificate and, in general, would
be deductible when such market discount is includible in income. The amount
of any remaining deferred deduction is to be taken into account in the
taxable year in which the Senior Certificate matures or is disposed of in a
taxable transaction. In the case of a disposition in which gain or loss is
not recognized in whole or in part, any remaining deferred deduction will be
allowed to the extent of gain recognized on the disposition. This deferral
rule does not apply, if the Senior Certificateholder elects to include such
market discount in income currently as it accrues on all market discount
obligations acquired by such Senior Certificateholder in that taxable year or
thereafter.
MULTIPLE CLASSES OF SENIOR CERTIFICATES
Stripped Bonds and Stripped Coupons. Pursuant to Code Section 1286, the
separation of ownership of the right to receive some or all of the interest
payments on an obligation from ownership of the right to receive some or all
of the principal payments on such obligation results in the creation of
"stripped bonds" with respect to principal payments and "stripped coupons"
with respect to interest payments. For purposes of Code Sections 1271
through 1288, Code Section 1286 treats a stripped bond or a stripped coupon
as an obligation issued on the date that such stripped interest is purchased.
If a Trust Fund is created with two classes of Senior Certificates, one class
of Senior Certificates will represent the right to principal and interest, or
principal only, on all or a portion of the Loans (the "Stripped Bond
Certificates"), while the second class of Senior Certificates will represent
the right to some or all of the interest on such portion (the "Stripped
Coupon Certificates").
Although not entirely clear, based on recent IRS guidance, a Stripped
Bond Certificate generally should be treated as a single debt instrument
issued on the day it is purchased for purposes of calculating any original
issue discount. Generally, if the discount on a Stripped Bond Certificate is
larger than a de minimis amount (as calculated for purposes of the original
issue discount rules) a purchaser of such a certificate will be required to
accrue the discount under the original issue discount rules of the Code. See
"--Non-REMIC Certificates" and "--Single Class of Senior Certificates--
Original Issue Discount" herein. However, a purchaser of a Stripped Bond
Certificate will be required to account for any discount on the certificate
as market discount rather than original issue discount if either (i) the
amount of original issue discount with respect to the certificate was treated
as zero under the original issue discount de minimis rule when the
certificate was stripped or (ii) no more than 100 basis points (including any
amount of servicing in excess of reasonable servicing) is stripped off of the
Mortgage Loans in a Trust Fund. See "Certain Federal Income Tax
Consequences--Non-Remic Certificates" and "--Single Class of Senior
Certificates--Market Discount" herein. Pursuant to Revenue Procedure 91-49,
issued on August 8, 1991, purchasers of Stripped Bond Certificates using an
inconsistent method of accounting must change their method of accounting and
request the consent of the IRS to the change in their accounting method on a
statement attached to their first timely tax return filed after August 8,
1991.
The precise tax treatment of Stripped Coupon Certificates is
substantially uncertain. The Code could be read literally to require that
original issue discount computations be made on a Loan by Loan basis.
However, based on the recent IRS guidance, it appears that a Stripped Coupon
Certificate should be treated as a single installment obligation subject to
the original issue discount rules of the Code. As a result, all payments on
a Stripped Coupon Certificate would be included in the certificate's stated
redemption price at maturity for purposes of calculating income on such
certificate under the original issue discount rules of the Code.
It is unclear under what circumstances, if any, the prepayment of
Mortgage Loans will give rise to a loss to the holder of a Stripped Bond
Certificate purchased at a premium or a Stripped Coupon Certificate. If such
Certificate is treated as a single instrument (rather than an interest in
discrete mortgage loans) and the effect of prepayments is taken into account
in computing yield with respect to such Senior Certificate, it appears that
no loss may be available as a result of any particular prepayment unless
prepayments occur at a rate faster than the assumed prepayment rate.
However, if such Certificate is treated as an interest in discrete Mortgage
Loans, or if no prepayment assumption is used, then when a Mortgage Loan is
prepaid, the holder of such Certificate should be able to recognize a loss
equal to the portion of the adjusted issue price of such Certificate that is
allocable to such Mortgage Loan.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates
are urged to consult with their own tax advisors regarding the proper
treatment of these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections provide beneficial
treatment to certain taxpayers that invest in mortgage loans of the type that
make up the Trust Fund. With respect to these Code sections, no specific
legal authority exists regarding whether the character of the Senior
Certificates for federal income tax purposes, will be the same as that of the
underlying Mortgage Loans. While Code Section 1286 treats a stripped
obligation as a separate obligation for purposes of the Code provisions
addressing original issue discount, it is not clear whether such
characterization would apply with regard to these other Code sections.
Although the issue is not free from doubt, based on policy considerations,
each class of Senior Certificates should be considered to represent "real
estate assets" within the meaning of Code Section 856(c)(4)(A) and "loans .
. . secured by, an interest in real property which is . . . residential real
property" within the meaning of Code Section 7701(a)(19)(C)(v), and interest
income attributable to Senior Certificates should be considered to represent
"interest on obligations secured by mortgages on real property." Within the
meaning of Code Section 856(c)(3)(B), provided that in each case the
underlying Mortgage Loans and interest on such Mortgage Loans qualify, for
such treatment. Prospective purchasers to which such characterization of an
investment in Senior Certificates is material should consult their own tax
advisors regarding the characterization of the Senior Certificates and the
income therefrom. Senior Certificates will be "obligation(s) (including any
participation or certificate of beneficial ownership therein) which (are)
principally secured, directly or indirectly, by an interest in real property"
within the meaning of Code Section 860G(a)(3).
Senior Certificates Representing Interests in Loans Other Than ARMs.
Original issue discount on each Senior Certificate must be included in the
owner's ordinary income for federal income tax purposes as it accrues, in
accordance with a constant interest method that takes into account the
compounding of interest, in advance of receipt of the cash attributable to
such income. Based in part on the OID Regulations, the amount of original
issue discount required to be included in an owner's income in any taxable
year with respect to a Senior Certificate representing an interest in
Mortgage Loans other than ARMs likely will be computed as described below
under "--Accrual of Original Issue Discount." Owners should be aware,
however, that the OID Regulations either do not address, or are subject to
varying interpretations with regard to, several issues relevant to
obligations, such as the Mortgage Loans, which are subject to prepayment.
Under the Code, the Mortgage Loans underlying the Senior Certificates
will be treated as having been issued on the date they were originated with
an amount of OID equal to the excess of such Mortgage Loan's stated
redemption price at maturity over its issue price. The issue price of a
Mortgage Loan is generally the amount lent to the mortgagee, which may be
adjusted to take into account certain loans origination fees. The stated
redemption price at maturity of a Mortgage Loan is the sum of all payments to
be made on such Mortgage Loan other than payments that are treated as
qualified stated interest payments. The accrual of this OID, as described
below under "--Accrual of Original Issue Discount," will, unless otherwise
specified in the related Prospectus Supplement, utilize the original yield to
maturity of the Senior Certificates calculated based on a reasonable assumed
prepayment rate for the mortgage loans underlying the Senior Certificates
(the "Prepayment Assumption"), and will take into account events that occur
during the calculation period. The Prepayment Assumption will be determined
in the manner prescribed by regulations that have not yet been issued. The
legislative history of the 1986 Act (the "Legislative History") provides,
however, that the regulations will require that the Prepayment Assumption be
the prepayment assumption that is used in determining the offering price of
such Certificate. No representation is made that any Senior Certificate will
prepay at such rate or at any other rate. The rules in the Code requiring
use of a Prepayment Assumption for purposes of applying the OID Regulations
literally only applies to debt instruments collateralized by other debt
instruments that are subject to prepayment rather than direct ownership
interest in such debt instruments, such as the Senior Certificates represent.
For taxpayer years beginning after August 5, 1997, the Taxpayer Relief Act of
1997 may allow the accrual of OID based on a Prepayment Assumption because it
provides that such method applies to any pool of debt instruments, the yield
of which may be affected by prepayments.
Accrual of Original Issue Discount. Generally, the owner of a Senior
Certificate must include in gross income the sum of the "daily portions," as
defined below, of the OID on such Senior Certificate for each day on which it
owns such Senior Certificate, including the date of purchase but excluding
the date of disposition. In the case of an original owner, the daily
portions of OID with respect to each component generally will be determined
as set forth under the OID Regulations. A calculation will be made by the
Servicer or such other entity specified in the related Supplement of the
portion of OID that accrues during each successive monthly accrual period (or
shorter period from the date of original issue) that ends on the day in the
calendar year corresponding to each of the Distribution Dates on the Senior
Certificates (or the day prior to each such date). This will be done, in the
case of each full month accrual period, by adding (i) the present value at
the end of the accrual period (determined by using as a discount factor the
original yield to maturity of the respective component under the Prepayment
Assumption) of all remaining payments to be received under the Prepayment
Assumption on the respective component and (ii) any payments received during
such accrual period, and subtracting from that total the "adjusted issue
price" of the respective component at the beginning of such accrual period.
The adjusted issue price of a Senior Certificate at the beginning of the
first accrual period is its issue price; the adjusted issue price of a Senior
Certificate at the beginning of a subsequent accrual period is the adjusted
issue priced at the beginning of the immediately preceding accrual period
plus the amount of OID allocable to that accrual period reduced by the amount
of any payment made at the end of or during that accrual period. The OID
accruing during such accrual period will then be divided by the number of
days in the period to determine the daily portion of OID for each day in the
period. With respect to an initial accrual period shorter than a full
monthly accrual period, the daily portions of OID must be determined
according to an appropriate allocation under any reasonable method.
Original issue discount generally must be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest as it accrues rather than when received.
However, the amount of original issue discount includible in the income of a
holder of an obligation is reduced when the obligation is acquired after its
initial issuance at a price greater than the sum of the original issue price
and the previously accrued original issue discount, less prior payments of
principal. Accordingly, if such Mortgage Loans acquired by a
Certificateholder are purchased at a price equal to the then unpaid principal
amount of such Mortgage Loan, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Loan (i.e., points) will be includible by such holder. Other
original issue discount on the Mortgage Loans (e.g., that arising from a
"teaser" rate) would still need to be accrued.
Senior Certificates Representing Interests in ARM Loans. The OID
Regulations do not address the treatment of instruments, which represent
interests in Mortgage Loans with Mortgage Rates which adjust periodically
("ARM Loans"). Additionally, the IRS has not issued guidance under the
Code's coupon stripping rules with respect to such instruments. In the
absence of any authority, the Servicer will report original issue discount on
Senior Certificates attributable to ARM Loans ("Stripped ARM Obligations") to
holders in a manner it believes is consistent with the rules described above
under the heading "Senior Certificates Representing Interests in Loans Other
Than ARM Loans" and with the OID Regulations. In general, application of
these rules may require inclusion of income on a Stripped ARM Obligation in
advance of the receipt of cash attributable to such income. Further, the
addition of interest deferred by reason of negative amortization to the
principal balance of an ARM Loan may require the inclusion of such amount in
the income of the Certificateholder when such amount accrues. Furthermore,
the addition of Deferred Interest to the Certificate's principal balance will
result in additional income (including possibly original issue discount
income) to the Certificateholder over the remaining life of such Senior
Certificates.
Because the treatment of Stripped ARM Obligations is uncertain,
investors are urged to consult their tax advisors regarding how income will
be includible with respect to such Certificates.
SALE OR EXCHANGE OF A SENIOR CERTIFICATE
Sale or exchange of a Senior Certificate prior to its maturity will
result in gain or loss equal to the difference, if any, between the amount
received, and the owner's adjusted basis in the Senior Certificate. Such
adjusted basis generally will equal the seller's purchase price for the
Senior Certificate, increased by the original issue discount included in the
seller's gross income with respect to the Senior Certificate, and reduced by
principal payments on the Senior Certificate previously received by the
seller. Such gain or loss will be capital gain or loss to an owner for which
a Senior Certificate is a "capital asset" within the meaning of Code Section
1221, and will be long-term or short-term depending on whether the Senior
Certificate has been owned for the long-term capital gain holding period
(currently more than one year).
Senior Certificates will be "evidences of indebtedness" within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the
sale of a Senior Certificate by a bank or a thrift institution to which such
section applies will be ordinary income or loss.
NON-U.S. PERSONS
Generally, to the extent that a Senior Certificate evidences ownership
in Mortgage Loans that are issued on or before July 18, 1984, interest or
original issue discount paid by the person required to withhold tax under
Code Section 1441 or 1442 to (i) an owner that is not a U.S. Person (as
defined below), or (ii) a Senior Certificateholder holding on behalf of an
owner that is not a U.S. Person, will be subject to federal income tax,
collected by withholding, at a rate of 30% or such lower rate as may be
provided for interest by an applicable tax treaty. Accrued original issue
discount recognized by the owner on the sale or exchange of such a Senior
Certificate also will be subject to federal income tax at the same rate.
Generally, such payments would not be subject to withholding to the extent
that a Senior Certificate evidences ownership in Mortgage Loans issued after
July 18, 1984 if (i) such Senior Certificateholder does not actually or
constructively own 10 percent or more of the combined voting power of all
classes of equity in the issuer (which for purposes of this discussion may be
defined as the Trust Fund (the "Issuer")); (ii) such Senior Certificateholder
is not a controlled foreign corporation (within the meaning of Code Section
957) related to the Issuer; and (iii) such Senior Certificateholder complies
with certain identification requirements (including delivery of a statement,
signed by the Senior Certificateholder under penalties of perjury, certifying
that such Senior Certificateholder is not a U.S. Person and providing the
name and address of such Senior Certificateholder).
As used herein, the term "U.S. Person" means a citizen or resident of
the United States, a corporation or a partnership organized in or under the
laws of the United States (other than a partnership that is not treated as a
United States person under any applicable Treasury regulations), or any
political subdivision thereof or an estate, the income of which, from sources
outside the United States, is includible in gross income for federal income
tax purposes regardless of its connection with the conduct of a trade or
business within the United States, or a trust if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more United States persons have authority to control all
substantial decisions of the trust. Notwithstanding the preceding sentence,
to the extent provided in Treasury regulations, certain trusts in existence
on August 20, 1996, and treated as United States persons under the Code and
applicable Treasury regulations thereunder prior to such date, that elect to
continue to be treated as United States persons under the Code or applicable
Treasury regulations thereunder also will be a U.S. Person.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Servicer will furnish or make available, within a reasonable time
after the end of each calendar year, to each Certificateholder at any time
during such year, such information as may be deemed necessary or desirable to
assist Certificateholders in preparing their federal income tax returns, or
to enable holders to make such information available to owners or other
financial intermediaries of holders that hold such Certificates as nominees.
If a holder, owner or other recipient of a payment on behalf of an owner
fails to supply a certified taxpayer identification number or if the
Secretary of the Treasury determines that such person has not reported all
interest and dividend income required to be shown on its federal income tax
return, 31% backup withholding may be required with respect to any payments.
Any amounts deducted and withheld from a distribution to a recipient would be
allowed as a credit against such recipient's federal income tax liability.
NEW WITHHOLDING REGULATIONS
Final regulations dealing with withholding tax on income paid to foreign
persons, backup withholding and related matters (the "New Withholding
Regulations") were issued by the Treasury Department on October 6, 1997. The
New Withholding Regulations generally attempt to unify certification
requirements and modify reliance standards. The New Withholding Regulations
generally will be effective for payments made after December 31, 1999,
subject to certain transition rules. Prospective Certificateholders are
strongly urged to consult their own tax advisors with respect to the New
Withholding Regulations.
REMIC CERTIFICATES
The Trust Fund relating to a Series of Certificates may elect to be
treated as a REMIC. Qualification as a REMIC requires ongoing compliance
with certain conditions. Although a REMIC is not generally subject to
federal income tax (see, however "--Prohibited Transactions and Other
Taxes"), if a Trust Fund with respect to which a REMIC election is made fails
to comply with one or more of the ongoing requirements of the Code for REMIC
status during any taxable year, including the implementation of restrictions
on the purchase and transfer of the residual interest in a REMIC as described
below under "Residual Certificates", the Code provides that a Trust Fund will
not be treated as a REMIC for such year and thereafter. In that event, such
entity may be taxable as a separate corporation under Treasury regulations,
and the related REMIC Certificates may not be accorded the status or given
the tax treatment described below. While the Code authorizes the Treasury
Department to issue regulations providing relief in the event of an
inadvertent termination of REMIC status, no such regulations have been
issued. Any such relief moreover, may be accompanied by sanctions, such as
the imposition of a corporate tax on all or a portion of the REMIC's income
for the period in which the requirements for such status are not satisfied.
With respect to each such Trust Fund that elects REMIC status, Brown & Wood
LLP will deliver its opinion generally to the effect that, under then
existing law and assuming compliance with all provisions of the related
Agreement, such Trust Fund will qualify as a REMIC and the related
Certificates will be considered to be regular interests ("Regular
Certificates") or residual interests ("Residual Certificates") in the REMIC.
The Supplement for each Series of Certificates will indicate whether the
Trust Fund will make a REMIC election and whether a class of Certificates
will be treated as a regular or residual interest in the REMIC.
In general, with respect to each Series of Certificates for which a
REMIC election is made, (i) Certificates held by a thrift institution taxed
as a "domestic building and loan association" will constitute assets
described in Code Section 7701(a)(19)(C); (ii) Certificates held by a real
estate investment trust will constitute "real estate assets" within the
meaning of Code Section 856(c)(4)(A); and (iii) interest on Certificates will
be considered "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B). If less than 95% of the
REMIC's assets are assets qualifying under any of the foregoing Code
sections, the Certificates will be qualifying assets only to the extent that
the REMIC's assets are qualifying assets. In addition, payments on Mortgage
Loans held pending distribution on the REMIC Certificates will be treated as
Real estate assets for purposes of Code Section 856(c).
Tiered REMIC Structures. For certain series of Certificates, two
separate elections may be made to treat designated portions of the related
Trust Fund as REMICs (respectively, the "Subsidiary REMIC" and the "Master
REMIC") for federal income tax purposes. Upon the issuance of any such
series of Certificates, Brown & Wood LLP, counsel to the Sponsor, will
deliver its opinion generally to the effect that, assuming compliance with
all provisions of the related Pooling Agreement, the Subsidiary REMIC and the
Master REMIC will each qualify as a REMIC and the REMIC Certificates issued
by the Subsidiary REMIC and the Master REMIC, respectively, will be
considered to evidence ownership of Regular Certificates or Residual
Certificates in the related REMIC within the meaning of the REMIC provisions.
Only REMIC Certificates (other than the Residual Certificates in the
Subsidiary REMIC) issued by the Master REMIC will be offered hereunder. The
Subsidiary REMIC and the Master REMIC will be treated as one REMIC solely for
purposes of determining whether the REMIC Certificates will be (i) "real
estate assets" within the meaning of Section 856(c)(4)(A) of the Code, (ii)
"loans secured by an interest in real property" under Section 7701(a)(19)(C)
of the Code and (iii) whether the income on such Certificates is Interest
described in Section 856(c)(3)(B) of the Code.
REGULAR CERTIFICATES
General. Except as otherwise stated in this discussion, Regular
Certificates will be treated for federal income tax purposes as debt
instruments issued by the REMIC and not as ownership interests in the REMIC
or its assets. Moreover, holders of Regular Certificates that otherwise
report income under a cash method of accounting will be required to report
income with respect to Regular Certificates under an accrual method.
Original Issue Discount and Premium. The Regular Certificates may be
issued with "original issue discount" within the meaning of Code Section
1273(a). Generally, such original issue discount, if any, will equal the
difference between the "stated redemption price at maturity" of a Regular
Certificate and its "issue price." Holders of any class of Certificates
issued with original issue discount will be required to include such original
issue discount in gross income for federal income tax purposes as it accrues,
in accordance with a constant interest method based on the compounding of
interest, as it accrues rather than in accordance with receipt of the
interest payments. The following discussion is based in part on the OID
Regulations and in part on the provisions of the Tax Reform Act of 1986 (the
"1986 Act"). The holder of a Regular Certificate should be aware, however,
that the OID Regulations do not adequately address certain issues relevant to
prepayable securities, such as the Regular Certificates.
Rules governing original issue discount are set forth in Code Sections
1271 through 1273 and 1275. These rules require that the amount and rate of
accrual of original issue discount be calculated based on a Prepayment
Assumption and prescribe a method for adjusting the amount and rate of
accrual of such discount where the actual prepayment rate differs from the
Prepayment Assumption. Under the Code, the Prepayment Assumption must be
determined in the manner prescribed by regulations which have not yet been
issued. The Legislative History provides, however, that Congress intended
the regulations to require that the Prepayment Assumption be the prepayment
assumption that is used in determining the initial offering price of such
Regular Certificates. The Supplement for each Series of Regular Certificates
will specify the Prepayment Assumption to be used for the purpose of
determining the amount and rate of accrual of original issue discount. No
representation is made that the Regular Certificates will prepay at the
Prepayment Assumption or at any other rate.
In general, each Regular Certificate will be treated as a single
installment obligation issued with an amount of original issue discount equal
to the excess of its "stated redemption price at maturity" over its "issue
price." The issue price of a Regular Certificate is the first price at which
a substantial amount of Regular Certificates of that class are sold to the
public (excluding bond houses, brokers, underwriters or wholesalers). The
issue price of a Regular Certificate also includes the amount paid by an
initial Regular Certificateholder for accrued interest that relates to a
period prior to the issue date of the Regular Certificate. The stated
redemption price at maturity of a Regular Certificate includes the original
principal amount of the Regular Certificate, but generally will not include
distributions of interest if such distributions constitute "qualified stated
interest." Under the OID Regulations, qualified stated interest generally
means interest payable at a single fixed rate or qualified variable rate (as
described below) provided that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the
Regular Certificate. Interest is payable at a single fixed rate only if the
rate appropriately takes into account the length of the interval between
payments. Distributions of interest on Regular Certificates with respect to
which deferred interest will accrue, will not constitute qualified stated
interest payments, in which case the stated redemption price at maturity of
such Regular Certificates includes all distributions of interest as well as
principal thereon.
Where the interval between the issue date and the first Distribution
Date on a Regular Certificate is longer than the interval between subsequent
Distribution Dates, the greater of any original issues discount disregarding
the rate in the first period and any interest foregone during the first
period is treated as the amount by which the stated redemption price of the
Regular Certificate exceeds its issued price for purposes of the de minimis
rule described below. The OID Regulations suggest that all interest on a
long first period Regular Certificate that is issued with non-de minimis OID
will be treated as OID. Where the interval between the issue date and the
first Distribution Date on a Regular Certificate is shorter than the interval
between subsequent Distribution Dates, interest due on the first Distribution
Date in excess of the amount that accrued during the first period would be
added to the Certificates stated redemption price at maturity. Regular
Certificateholders should consult their own tax advisors to determine the
issue price and stated redemption price at maturity of a Regular Certificate
Under the de minimis rule, original issue discount on a Regular
Certificate will be considered to be zero if such original issue discount is
less than 0.25% of the stated redemption price at maturity of the Regular
Certificate multiplied by the weighted average maturity of the Regular
Certificate. For this purpose, the weighted average maturity of the Regular
Certificate is computed as the sum of the amounts determined by multiplying
the number of full years (i.e., rounding down partial years) from the issue
date until each distribution in reduction of stated redemption price at
maturity is scheduled to be made by a fraction, the numerator of which is the
amount of each distribution included in the stated redemption price at
maturity of the Regular Certificate and the denominator of which is the
stated redemption price at maturity of the Regular Certificate. Although
currently unclear, it appears that the schedule of such distributions should
be determined in accordance with the Prepayment Assumption. The Prepayment
Assumption with respect to a Series of Regular Certificates will be set forth
in the related Supplement. Holders generally must report de minimis OID pro
rata as principal payments are received, and such income will be capital gain
if the Regular Certificate is held as a capital asset.
Generally, a Regular Certificateholder must include in gross income the
"daily portions," as determined below, of the original issue discount that
accrues on a Regular Certificate for each day the Regular Certificateholder
holds the Regular Certificate, including the purchase date but excluding the
disposition date. In the case of an original holder of a Regular
Certificate, a calculation will be made of the portion of the original issue
discount that accrues during each successive period (an "accrual period")
that ends on the day in the calendar year corresponding to a Distribution
Date (or if Distribution Dates are on the first day or first business day of
the immediately preceding month, interest may be treated as payable on the
last day of the immediately preceding month) and begins on the day after the
end of the immediately preceding accrual period (or on the issue date in the
case of the first accrual period). This will be done, in the case of each
full accrual period, by (i) adding (a) the present value at the end of the
accrual period (determined by using as a discount factor the original yield
to maturity of the Regular Certificates as calculated under the Prepayment
Assumption) of all remaining payments to be received on the Regular
Certificate under the Prepayment Assumption, and (b) any payments included in
the stated redemption price at maturity received during such accrual period,
and (ii) subtracting from that total the "adjusted issue price" of the
Regular Certificates at the beginning of such accrual period. The "adjusted
issue price" of a Regular Certificate at the beginning of the first accrual
period is its issue price; the "adjusted issue price" of a Regular
Certificate at the beginning of a subsequent accrual period is the "adjusted
issue price" at the beginning of the immediately preceding accrual period
plus the amount of original issue discount allocable to that accrual period
and reduced by the amount of any payment other than a payment of qualified
stated interest made at the end of or during that accrual period. The
original issue discount accrued during an accrual period will then be divided
by the number of days in the period to determine the daily portion of
original issue discount for each day in the accrual period. The calculation
of original issue discount under the method described above will cause the
accrual of original issue discount to either increase or decrease (but never
below zero) in a given accrual period to reflect the fact that prepayments
are occurring faster or slower than under the Prepayment Assumption. With
respect to an initial accrual period shorter than a full accrual period the
daily portions of original issue discount must be determined according to an
appropriate allocation under any reasonable method.
A subsequent purchaser of a Regular Certificate issued with original
issue discount who purchases the Regular Certificate at a cost less than the
remaining stated redemption price at maturity will also be required to
include in gross income the sum of the daily portions of original issue
discount on that Regular Certificate. In computing the daily portions of
original issue discount for such a purchaser (as well as an initial purchaser
that purchases at a price higher than the adjusted issue price but less than
the stated redemption price at maturity), however, the daily portion is
reduced by the amount that would be the daily portion for such day (computed
in accordance with the rules set forth above) multiplied by a fraction, the
numerator of which is the amount, if any, by which the price paid by such
holder for that Regular Certificate exceeds the following amount: (a) the
sum of the issue price plus the aggregate amount of original issue discount
that would have been includible in the gross income of an original Regular
Certificateholder (who purchased the Regular Certificate at its issue price),
(b) less any prior payments included in the stated redemption price at
maturity, and the denominator of which is the sum of the daily portions for
that Regular Certificate for all days beginning on the date after the
purchase date and ending on the maturity date computed under the Prepayment
Assumption. A holder who pays an acquisition premium instead may elect to
accrue OID by treating the purchase as a purchase of original issue.
The IRS issued final regulations in June, 1996 (the "Contingent
Regulations") governing the calculation of OID on instruments having
contingent interest payments. The Contingent Regulations specifically do not
apply for purposes of calculating OID on debt instruments subject to Code
Section 1272(a)(6), such as the Regular Certificates. Additionally, the OID
Regulations do not contain provisions specifically interpreting Code Section
1272(a)(6). Until the Treasury issues guidance to the contrary, the Trustee
intends to base its computation on Code Section 1272(a)(6) and the OID
Regulations as described in this Prospectus. However, because no regulatory
guidance currently exists under Code Section 1272(a)(6), there can be no
assurance that such methodology represents the correct manner of calculating
OID.
Variable Rate Regular Certificates. Regular Certificates may provide
for interest based on a variable rate. Interest is treated as payable at a
variable rate and not as contingent interest if, generally, (i) the issue
price does not exceed the original principal balance by more than a specified
amount, and (ii) the interest compounds or is payable at least annually at
current values of certain objective rates measured by or based on lending
rate for newly borrowed funds. The variable interest generally will be
qualified stated interest to the extent it is unconditionally payable at
least annually and, to the extent successive variable rates are used,
interest is not significantly accelerated or deferred.
The amount of OID with respect to a Regular Certificate bearing a
variable rate of interest will accrue in the manner described above under "--
Original Issue Discount and Premium," by assuming generally that the index
used for the variable rate will remain fixed throughout the term of the
Certificate. Approximate adjustments are made for the actual variable rate.
Although unclear at present, it is anticipated that Regular Certificates
bearing an interest rate that is a weighted average of the net interest rates
on Mortgage Loans will be treated as variable rate certificates. In such
case, the weighted average rates used to compute the initial pass-through
rate on the Regular Certificates will be deemed to be the index in effect
through the life of the Regular Certificates. It is possible, however, that
the IRS may treat some or all of the interest on Regular Certificates with a
weighted average rate as taxable under the rules relating to obligations
providing for contingent payments. Such treatment may affect the timing of
income accruals on such Regular Certificates. Additionally, if some or all
of the Mortgage Loans are subject to "teaser rates" (i.e., the initial rates
on the Mortgage Loans are less than subsequent rates on the Mortgage Loans)
the interest paid on some or all of the Regular Certificates may be subject
to accrual using a constant yield method notwithstanding the fact that such
Certificates may not have been issued with "true" non-de minimis original
issue discount.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method for Certificates acquired on or after April
4, 1994. If such an election were to be made with respect to a Regular
Certificate with market discount, the Certificateholder would be deemed to
have made an election to include in income currently market discount with
respect to all other debt instruments having market discount that such
Certificateholder acquires during the year of the election or thereafter.
Similarly, a Certificateholder that makes this election for a Certificate
that is acquired at a premium will be deemed to have made an election to
amortize bond premium with respect to all debt instruments having amortizable
bond premium that such Certificateholder owns or acquires. See "--Premium"
herein. The election to accrue interest, discount and premium on a constant
yield method with respect to a Certificate cannot be revoked without the
consent of the IRS.
Market Discount. A purchaser of a Regular Certificate also may be
subject to the market discount provisions of Code Sections 1276 through 1278.
Under these provisions and the OID Regulations "market discount" equals the
excess, if any, of (i) the Regular Certificate's stated principal amount or,
in the case of a Regular Certificate with original issue discount, the
adjusted issue price (determined for this purpose as if the purchaser had
purchased such Regular Certificate from an original holder) over (ii) the
price for such Regular Certificate paid by the purchaser. A
Certificateholder that purchases a REMIC Regular Certificate at a market
discount, will recognize gain upon receipt of each distribution representing
stated redemption price. In particular, under Section 1276 of the Code such
a holder generally will be required to allocate each such principal
distribution first to accrued market discount not previously included in
income, and to recognize ordinary income to that extent. A Certificateholder
may elect to include market discount in income currently as it accrues rather
than including it on a deferred basis in accordance with the foregoing. If
made, such election will apply to all market discount bonds acquired by such
Certificateholder on or after the first day of the first taxable year to
which such election applies. In addition, the OID Regulations permit a
Certificateholder using either the accrual or cash method of accounting to
elect to accrue all interest, discount (including de minimis market or
original issue discount) and premium in income as interest, based on a
constant yield method. If such an election were made with respect to a REMIC
Regular Certificate with market discount, the Certificateholder would be
deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount
that such Certificateholder acquires during the year of the election or
thereafter. Similarly, a Certificateholder that makes this election for a
Certificate that is acquired at a premium is deemed to have made an election
to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. See
"--Premium" herein. The election to accrue interest, discount and premium on
a constant yield method with respect to a Certificate is irrevocable.
Market discount with respect to a Regular Certificate will be considered
to be zero if the amount allocable to the Regular Certificate is less than
0.25% of the Regular Certificate's stated redemption price at maturity
multiplied by the Regular Certificate's weighted average maturity remaining
after the date of purchase. If market discount on a Regular Certificate is
considered to be zero under this rule, the actual amount of market discount
must be allocated to the remaining principal payments on the Regular
Certificate and gain equal to such allocated amount will be recognized when
the corresponding principal payment is made. Treasury regulations
implementing the market discount rules have not yet been issued; therefore,
investors should consult their own tax advisors regarding the application of
these rules and the advisability of making any of the elections allowed under
Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986, shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at
the time of such payment. The amount of accrued market discount for purposes
of determining the tax treatment of subsequent principal payments or
dispositions of the market discount bond is to be reduced by the amount so
treated as ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis
of a constant interest rate or according to one of the following methods.
For Regular Certificates issued with original issue discount, the amount of
market discount that accrues during a period is equal to the product of (i)
the total remaining market discount, multiplied by (ii) a fraction, the
numerator of which is the original issue discount accruing during the period
and the denominator of which is the total remaining original issue discount
at the beginning of the period. For Regular Certificates issued without
original issue discount, the amount of market discount that accrues during a
period is equal to the product of (i) the total remaining market discount,
multiplied by (ii) a fraction, the numerator of which is the amount of stated
interest paid during the accrual period and the denominator of which is the
total amount of stated interest remaining to be paid at the beginning of the
period. For purposes of calculating market discount under any of the above
methods in the case of instruments (such as the Regular Certificates) which
provide for payments which may be accelerated by reason of prepayments of
other obligations securing such instruments, the same Prepayment Assumption
applicable to calculating the accrual of original issue discount will apply.
A holder of a Regular Certificate who acquires such Regular Certificate
at a market discount also may be required to defer, until the maturity date
of such Regular Certificate or its earlier disposition in a taxable
transaction, the deduction of a portion of the amount of interest that the
holder paid or accrued during the taxable year on indebtedness incurred or
maintained to purchase or carry the Regular Certificate in excess of the
aggregate amount of interest (including original issue discount) includible
in such holder's gross income for the taxable year with respect to such
Regular Certificate. The amount of such net interest expense deferred in a
taxable year may not exceed the amount of market discount accrued on the
Regular Certificate for the days during the taxable year on which the holder
held the Regular Certificate and, in general, would be deductible when such
market discount is includible in income. The amount of any remaining
deferred deduction is to be taken into account in the taxable year in which
the Regular Certificate matures or is disposed of in a taxable transaction.
In the case of a disposition in which gain or loss is not recognized in whole
or in part any remaining deferred deduction will be allowed to the extent of
gain recognized on the disposition. This deferral rule does not apply if the
Regular Certificateholder elects to include such market discount in income
currently as it accrues on all market discount obligations acquired by such
Regular Certificateholder in that taxable year or thereafter.
Premium. A purchaser of a Regular Certificate who purchases the Regular
Certificate at a cost (not including accrued qualified stated interest)
greater than its remaining stated redemption price at maturity will be
considered to have purchased the Regular Certificate at a premium, and may
elect to amortize such premium under a constant yield method. It is not
clear whether the Prepayment Assumption would be taken into account in
determining the life of the Regular Certificate for this purpose. However,
the Legislative History states that the same rules that apply to accrual of
market discount (which rules require use of a Prepayment Assumption in
accruing market discount with respect to Regular Certificates without regard
to whether such Certificates have original issue discount) will also apply in
amortizing bond premium under Code Section 171. The Code provides that
amortizable bond premium will be allocated among the interest payments on
such Regular Certificates and will be applied as an offset against such
interest payment.
Deferred Interest. Certain classes of Regular Certificates will provide
for the accrual of interest when one or more ARM Loans are adding interest to
their principal balance by reason of negative amortization ("Deferred
Interest"). Any Deferred Interest that accrues with respect to a class of
Regular Certificates will constitute income to the holders of such
Certificates prior to the time distributions of cash with respect to such
Deferred Interest are made. It is unclear, under the OID Regulations,
whether any of the interest on such Certificates will constitute qualified
stated interest or whether all or a portion of the interest payable on the
Certificate must be included in the stated redemption price at maturity of
the Certificate and accounted for as original issue discount (which could
accelerate such inclusion). Interest on Regular Certificates must in any
event be accounted for under an accrual method by the holders of such
Certificates, and therefore applying the latter analysis may result only in a
slight difference in the timing of the inclusion in income of interest on
such Regular Certificates.
Accrued Interest Certificates. Certain of the Regular Certificates
("Payment Lag Certificates") may provide for payments of interest based on a
period that corresponds to the interval between Distribution Dates but that
ends prior to each such Distribution Date. The period between the Closing
Date for Payment Lag Certificates and their first Distribution Date may or
may not exceed such interval. Purchasers of Payment Lag Certificates for
which the period between the Closing Date and the first Distribution Date
does not exceed such interval could pay upon purchase of the Regular
Certificates accrued interest in excess of the accrued interest that would be
paid if the interest paid on the Distribution Date were interest accrued from
Distribution Date to Distribution Date. If a portion of the initial purchase
price of a Regular Certificate is allocable to interest that has accrued
prior to the issue date ("pre-issuance accrued interest") and the Regular
Certificate provides for a payment of stated interest on the first payment
date, within one year of the issue date, that equals or exceeds the amount of
the pre-issuance accrued interest, then the Regular Certificates issue price
may be computed by subtracting from the issue price the amount of pre-
issuance accrued interest, rather than as an amount payable on the Regular
Certificate. However, it is unclear under this method how the OID
Regulations treat interest on Payment Lag Certificates as described above.
Therefore, in the case of a Payment Lag Certificate, the REMIC intends to
include accrued interest in the issue price and report interest payments made
on the first Distribution Date as interest to the extent such payments
represent interest for the number of days which the Certificateholder has
held such Payment Lag Certificate during the first Accrual Period.
Sale, Exchange or Redemption of Regular Certificates. If a Regular
Certificate is sold, exchanged, redeemed or retired, the seller will
recognize gain or loss equal to the difference between the amount realized on
the sale, exchange or redemption and the seller's adjusted basis in the
Regular Certificate. Such adjusted basis generally will equal the cost of
the Regular Certificate to the seller, increased by any original issue
discount and market discount included in the seller's gross income with
respect to the Regular Certificate, and reduced (but not below zero) by
payments included in the stated redemption price at maturity previously
received by the seller and by any amortized premium. Similarly, a holder who
receives a payment which is part of the stated redemption price at maturity
of a Regular Certificate will recognize gain equal to the excess, if any, of
the amount of the payment over his adjusted basis in the Regular Certificate.
A holder of a Regular Certificate who receives a final payment which is less
than his adjusted basis in the Regular Certificate will generally recognize a
loss. Except as provided in the following paragraph and as provided under "-
- -Market Discount" above, any such gain or loss will be capital gain or loss,
provided that the Regular Certificate is held as a "capital asset"
(generally, property held for investment) within the meaning of Code Section
1221.
Any such gain or loss will generally be long-term capital gain or long-
term capital loss if the Regular Certificate was held for more than one year.
Pursuant to recently enacted legislation, the maximum long-term capital rates
on capital assets held by individuals taxpayers for more than eighteen months
as of the date of disposition have been reduced. Prospective investors should
consult their own tax advisors concerning these tax law changes.
Gain from the sale or other disposition of a Regular Certificate that
might otherwise be capital gain will be treated as ordinary income to the
extent that such gain does not exceed the excess, if any, of (i) the amount
that would have been includible in such holder's income with respect to the
Regular Certificate had income accrued thereon at a rate equal to 110% of the
AFR as defined in Code Section 1274(d) determined as of the date of purchase
of such Regular Certificate, over (ii) the amount actually includible in such
holder's income. Additionally, gain will be treated as ordinary income if
the Trust Fund had an "intention to call" the Regular Certificates prior to
maturity. The OID Regulations provide that the presence of a sinking fund or
optimal call does not give rise to such an intention, and the Seller does not
believe such an intention is otherwise present; however, the application of
these rules to REMIC Certificates is unclear.
Regular Certificates will be "evidences of indebtedness" within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the
sale of a Regular Certificate by a bank or a thrift institution to which such
section applies will be ordinary income or loss.
Because the regulations described above have not been issued, it is
impossible to predict what effect those regulations might have on the tax
treatment of a Regular Certificate purchased at a discount or premium in the
secondary market.
The Regular Certificate information reports will include a statement of
the adjusted issue price of the Regular Certificate at the beginning of each
accrual period. In addition, the reports will include information necessary
to compute the accrual of any market discount that may arise upon secondary
trading of Regular Certificates. Because exact computation of the accrual of
market discount on a constant yield method would require information relating
to the holder's purchase price which the REMIC may not have, it appears that
this provision will only require information pertaining to the appropriate
proportionate method of accruing market discount.
REMIC Expenses. As a general rule, all of the expenses of a REMIC will
be taken into account by holders of the Residual Interests. In the case of a
"single class REMIC", however, the expenses and a matching amount of
additional income will be allocated, under temporary Treasury regulations,
among the holders of the Regular Certificates and the holders of the Residual
Interests on a daily basis in proportion to the relative amounts of income
accruing to each Certificateholder on that day. In the case of individuals
(or trusts, estates, or other persons who compute their income in the same
manner as individuals) who own an interest in a Regular Certificate directly
or through a pass-through entity which is required to pass miscellaneous
itemized deductions through to its owners or beneficiaries (e.g., a
partnership, an S corporation, or a grantor trust), such expenses will be
deductible only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the individual, exceed 2% of such individual's
adjusted gross income. In addition, the personal exemptions and itemized
deductions of individuals with adjusted gross incomes above particular levels
are subject to certain limitations which reduce or eliminate the benefit of
such items. The reduction or disallowance of this deduction coupled with the
allocation of additional income may have a significant impact on the yield of
the Regular Certificate to such a Holder. Further, holders (other than
corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holders' alternative
minimum taxable income. In general terms, a single class REMIC is one that
either (i) would qualify, under existing Treasury regulations, as a grantor
trust if it were not a REMIC (treating all interests as ownership interests,
even if they would be classified as debt for federal income tax purposes) or
(ii) is similar to such a trust and is structured with the principal purpose
of avoiding the single class REMIC rules. Unless otherwise stated in the
related Supplement, the expenses of the REMIC will be allocated to holders of
the related Residual Interests in their entirety and not to holders of the
related Regular Certificates.
Non-U.S. Persons. Generally, payments of interest (including any
payment with respect to accrued original issue discount) on the Regular
Certificates to a Regular Certificateholder who is a non-U.S. Person not
engaged in a trade or business within the United States, will not be subject
to federal withholding tax if (i) such Regular Certificateholder does not
actually or constructively own 10 percent or more of the combined voting
power of all classes of equity in the Issuer (which for purposes of this
discussion may be defined as the Trust Fund or the beneficial owners of the
related Residual Certificates); (ii) such Regular Certificateholder is not a
controlled foreign corporation (within the meaning of Code Section 957)
related to the Issuer; and (iii) such Regular Certificateholder complies with
certain identification requirements (including delivery of a statement,
signed by the Regular Certificateholder under penalties of perjury,
certifying that such Regular Certificateholder is a foreign person and
providing the name and address of such Regular Certificateholder). If a
Regular Certificateholder is not exempt from withholding, distributions of
interest, including distributions in respect of accrued original issue
discount, such holder may be subject to a 30% withholding tax, subject to
reduction under any applicable tax treaty.
Regular Certificateholders who are non-U.S. Persons and persons related
to such holders should not acquire any Residual Certificates, and Residual
Certificateholders and persons related to Residual Certificateholders should
not acquire any Regular Certificates without consulting their tax advisors as
to the possible adverse tax consequences of such acquisition.
Information Reporting and Backup Withholding. The Servicer will furnish
or make available, within a reasonable time after the end of each calendar
year, to each Regular Certificateholder at any time during such year, such
information as may be deemed necessary or desirable to assist Regular
Certificateholders in preparing their federal income tax returns, or to
enable holders to make such information available to owners or other
financial intermediaries of holders that hold such Regular Certificates as
nominees. If a holder, owner or other recipient of a payment on behalf of an
owner fails to supply a certified taxpayer identification number or if the
Secretary of the Treasury determines that such person has not reported all
interest and dividend income required to be shown on its federal income tax
return, 31% backup withholding may be required with respect to any payments.
Any amounts deducted and withheld from a distribution to a recipient
would be allowed as a credit against such recipient's federal income tax
liability.
RESIDUAL CERTIFICATES
Allocation of the Income of the REMIC to the Residual Certificates. The
REMIC will not be subject to federal income tax except with respect to income
from prohibited transactions and certain other transactions. See "--
Prohibited Transactions and Other Taxes" herein. Instead, each original
holder of a Residual Certificate will report on its federal income tax
return, as ordinary income, its share of the taxable income of the REMIC for
each day during the taxable year on which such holder owns any Residual
Certificates. The taxable income of the REMIC for each day will be
determined by allocating the taxable income of the REMIC for each calendar
quarter ratably to each day in the quarter. Such a holder's share of the
taxable income of the REMIC for each day, will be based on the portion of the
outstanding Residual Certificates that such holder owns on that day. The
taxable income of the REMIC will be determined under an accrual method and
will be taxable to the Residual Certificateholders without regard to the
timing or amounts of cash distributions by the REMIC. Ordinary income
derived from Residual Certificates will be "portfolio income" for purposes of
the taxation of taxpayers subject to the limitations on the deductibility of
"passive losses." As residual interests, the Residual Certificates will be
subject to tax rules, described below, that differ from those that would
apply if the Residual Certificates were treated for federal income tax
purposes as direct ownership interests in the Certificates, or as debt
instruments issued by the REMIC.
A Residual Certificateholder may be required to include taxable income
from the Residual Certificate in excess of the cash distributed. For
example, a structure where principal distributions are made serially on
regular interests (that is, a fast-pay, slow-pay structure) may generate such
a mismatching of income and cash distributions (that is, "phantom income").
This mismatching may be caused by the use of certain required tax accounting
methods by the REMIC, variations in the prepayment rate of the underlying
Mortgage Loans and certain other factors. Depending upon the structure of a
particular transaction, the aforementioned factors may significantly reduce
the after-tax yield of a Residual Certificate to a Residual
Certificateholder. Investors should consult their own tax advisors
concerning the federal income tax treatment of a Residual Certificate and the
impact of such tax treatment on the after-tax yield of a Residual
Certificate.
A subsequent Residual Certificateholder also will report on its federal
income tax return amounts representing a daily share of the taxable income of
the REMIC for each day that such Residual Certificateholder owns such
Residual Certificate. Those daily amounts generally would equal the amounts
that would have been reported for the same days by an original Residual
Certificateholder, as described above. The Legislative History indicates
that certain adjustments may be appropriate to reduce (or increase) the
income of a subsequent holder of a Residual Certificate that purchased such
Residual Certificate at a price greater than (or less than) the adjusted
basis (see "--Sales or Exchange of Residual Certificates" below) such
Residual Certificate would have in the hands of an original Residual
Certificateholder. It is not clear, however, whether such adjustments will
in fact be permitted or required and, if so, how they would be made.
Taxable Income of the REMIC Attributable to Residual Interests. The
taxable income of the REMIC will reflect a netting of (i) the income from the
Mortgage Loans and the REMIC's other assets, and (ii) the deductions allowed
to the REMIC for interest and original issue discount on the Regular
Certificates and, except as described below under "--Non-Interest Expenses of
the REMIC," other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue
prices of the Regular and Residual Certificates (or, if a class of
Certificates is not sold initially, their fair market values). Such
aggregate basis will be allocated among the Mortgage Loans and other assets
of the REMIC in proportion to their respective fair market values. A
Mortgage Loan will be deemed to have been acquired with discount or premium
to the extent that the REMIC's basis therein is less than or greater than its
principal balance, respectively. Any such discount (whether market discount
or original issue discount) will be includible in the income of the REMIC as
it accrues, in advance of receipt of the cash attributable to such income,
under a method similar to the method described above for accruing original
issue discount on the Regular Certificates. The REMIC expects to elect under
Code Section 171 to amortize any premium on the Mortgage Loans. Premium on
any Mortgage Loan to which such election applies would be amortized under a
constant yield method. It is not clear whether the yield of a Mortgage Loan
would be calculated for this purpose based on scheduled payments or taking
account of the Prepayment Assumption. Additionally, such an election would
not apply to any Mortgage Loan originated on or before September 27, 1985.
Instead, premium on such a Mortgage Loan would be allocated among the
principal payments thereon and would be deductible by the REMIC as those
payments become due.
The REMIC will be allowed a deduction for interest and original issue
discount on the Regular Certificates. The amount and method of accrual of
original issue discount will be calculated for this purpose in the same
manner as described above with respect to Regular Certificates (except that
the 0.25% per annum de minimis rule and adjustments for subsequent holders
described therein will not apply).
A Residual Certificateholder will not be permitted to amortize the cost
of the Residual Certificate as an offset to its share of the REMIC's taxable
income. However, that taxable income will not include cash received by the
REMIC that represents a recovery of the REMIC's basis in its assets, and, as
described above, the issue price of the Residual Certificates will be added
to the issue price of the Regular Certificates in determining the REMIC's
initial basis in its assets. See "--Sales or Exchange of Residual
Certificates" herein. For a discussion of possible adjustments to income of
a subsequent holder of a Residual Certificate to reflect any difference
between the actual cost of such Residual Certificate to such holder and the
adjusted basis such Residual Certificate would have in the hands of an
original Residual Certificateholder, see "--Allocation of the Income of the
REMIC to the Residual Certificates" above.
Net Losses of the REMIC. The REMIC will have a net loss for any
calendar quarter in which its deductions exceed its gross income. Such net
loss would be allocated among the Residual Certificateholders in the same
manner as the REMIC's taxable income. The net loss allocable to any Residual
Certificate will not be deductible by the holder to the extent that such net
loss exceeds such holder's adjusted basis in such Residual Certificate. Any
net loss that is not currently deductible by reason of this limitation may be
used by such Residual Certificateholder to offset its share of the REMIC's
taxable income in future periods (but not otherwise). The ability of
Residual Certificateholders that are individuals or closely held corporations
to deduct net losses may be subject to additional limitations under the Code.
Non-Interest Expenses of the REMIC. As a general rule, the REMIC's
taxable income will be determined in the same manner as if the REMIC were an
individual. However, all or a portion of the REMIC's servicing,
administrative and other non-interest expenses will be allocated as a
separate item to Residual Certificateholders that are "pass-through interest
holders." Such a holder would be required to add its allocable share, if
any, of such expenses to its gross income and to treat the same amount as an
item of investment expense. An individual would generally be allowed a
deduction for such an expense item only as a miscellaneous itemized deduction
subject to the limitations under Code Section 67. That section allows such
deduction only to the extent that in the aggregate all such expenses exceed
two percent of an individual's adjusted gross income. The REMIC is required
to report to each pass-through interest holder and to the IRS such holder's
allocable share, if any, of the REMIC's non-interest expenses. The term
"pass-through interest holder" generally refers to individuals, entities
taxed as individuals and certain pass-through entities, but does not include
real estate investment trusts. Residual Certificateholders that are "pass-
through interest holders" should consult their own tax advisors about the
impact of these rules on an investment in the Residual Certificates.
Deferred Interest. Any Deferred Interest that accrues with respect to
any ARM Loans held by the REMIC will constitute income to the REMIC and will
be treated in a manner similar to the Deferred Interest that accrues with
respect to Regular Certificates as described above under "--Regular
Certificates--Deferred Interest."
Excess Inclusions. A portion of the income on a Residual Certificate
(referred to in the Code as an "excess inclusion") for any calendar quarter
will be subject to federal income tax in all events. Thus, for example, an
excess inclusion (i) may not, except as described below, be offset by any
unrelated losses or loss carryovers of a Residual Certificateholder; (ii)
will be treated as "unrelated business taxable income" within the meaning of
Code Section 512 if the Residual Certificateholder is a pension fund or any
other organization that is subject to tax only on its unrelated business
taxable income (see "--Tax-Exempt Investors" below); and (iii) is not
eligible for any reduction in the rate of withholding tax in the case of a
Residual Certificateholder that is a foreign investor. See "--Non-U.S.
Persons" below. The exception for thrift institutions is available only to
the institution holding the Residual Certificate, and not to any affiliate of
the institution, unless the affiliate is a subsidiary all the stock of which,
and substantially all the indebtedness of which, is held by the institution,
and which is organized and operated exclusively in connection with the
organization and operation of one or more REMICs.
With respect to any Residual Certificateholder, the excess inclusion for
any calendar quarter is the excess, if any, of (i) the income of such
Residual Certificateholder for that calendar quarter from its Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
all days during the calendar quarter on which the Residual Certificateholder
holds such Residual Certificate. For this purpose, the daily accruals with
respect to a Residual Certificate are determined by allocating to each day in
the calendar quarter its ratable portion of the product of the "adjusted
issue price" (as defined below) of the Residual Certificate at the beginning
of the calendar quarter and 120% of the "Federal long-term rate" in effect at
the time the Residual Certificate is issued. For this purpose, the "adjusted
issue price" of a Residual Certificate at the beginning of any calendar
quarter equals the issue price of the Residual Certificate, increased by the
amount of daily accruals for all prior quarters, and decreased (but not below
zero) by the aggregate amount of payments made on the Residual Certificate
before the beginning of such quarter. The "Federal long-term rate" is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS.
In the case of any Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Code Section
857(b)(2), excluding any net capital gain), will be allocated among the
shareholders of such trust in proportion to the dividends received by such
shareholders from such trust, and any amount so allocated will be treated as
an excess inclusion with respect to a Residual Certificate as if held
directly by such shareholder. Regulated investment companies, common trust
funds, and certain cooperatives are subject to similar rules.
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess
inclusion income from REMIC residual certificates that have "significant
value" within the meaning of the REMIC Regulations, effective for taxable
years beginning after December 31, 1995, except with respect to residual
certificates continuously held by a thrift institution since November 1,
1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect of excess inclusions on the
alternative minimum taxable income of a residual holder. First, alternative
minimum taxable income for such residual holder is determined without regard
to the special rule that taxable income cannot be less than excess
inclusions. Second, a residual holder's alternative minimum taxable income
for a tax year cannot be less than excess inclusions for the year. Third,
the amount of any alternative minimum tax net operating loss deductions must
be computed without regard to any excess inclusions. These rules are
effective for tax years beginning after December 31, 1986, unless a residual
holder elects to have such rules apply only to tax years beginning after
August 20, 1996.
Payments. Any payment made on a Residual Certificate to a Residual
Certificateholder will be treated as a non-taxable return of capital to the
extent it does not exceed the Residual Certificateholder's adjusted basis in
such Residual Certificate. To the extent a distribution exceeds such
adjusted basis, it will be treated as gain from the sale of the Residual
Certificate.
Sale or Exchange of Residual Certificates. If a Residual Certificate is
sold or exchanged, the seller will generally recognize gain or loss equal to
the difference between the amount realized on the sale or exchange and its
adjusted basis in the Residual Certificate (except that the recognition of
loss may be limited under the "wash sale" rules described below). A holder's
adjusted basis in a Residual Certificate generally equals the cost of such
Residual Certificate to such Residual Certificateholder, increased by the
taxable income of the REMIC that was included in the income of such Residual
Certificateholder with respect to such Residual Certificate, and decreased
(but not below zero) by the net losses that have been allowed as deductions
to such Residual Certificateholder with respect to such Residual Certificate
and by the distributions received thereon by such Residual Certificateholder.
In general, any such gain or loss will be capital gain or loss provided the
Residual Certificate is held as a capital asset. However, Residual
Certificates will be "evidences of indebtedness" within the meaning of Code
Section 582(c)(1), so that gain or loss recognized from sale of a Residual
Certificate by a bank or thrift institution to which such section applies
would be ordinary income or loss.
Except as provided in Treasury regulations, if the seller of a Residual
Certificate reacquires such Residual Certificate, or acquires any other
Residual Certificate, any residual interest in another REMIC or similar
interest in a "taxable mortgage pool" (as defined in Code Section 7701(i))
during the period beginning six months before, and ending six months after,
the date of such sale, such sale will be subject to the "wash sale" rules of
Code Section 1091. In that event, any loss realized by the Residual
Certificateholder on the sale will not be deductible, but, instead, will
increase such Residual Certificateholder's adjusted basis in the newly
acquired asset.
Mark to Market Rules. On January 3, 1995, the IRS released final
regulations under Code Section 475 (the "Mark-to-Market Regulations"). The
Mark-to-Market Regulations provide that any REMIC Residual Interest acquired
after January 3, 1995 cannot be marked to market, regardless of the value of
such REMIC Residual Interest.
PROHIBITED TRANSACTIONS AND OTHER TAXES
The REMIC is subject to a tax at a rate equal to 100% of the net income
derived from "prohibited transactions." In general, a prohibited transaction
means the disposition of a Mortgage Loan other than pursuant to certain
specified exceptions, the receipt of investment income from a source other
than a Mortgage Loan or certain other permitted investments, or the
disposition of an asset representing a temporary investment of payments on
the Mortgage Loans pending payment on the Residual Certificates or Regular
Certificates. In addition, the assumption of a Mortgage Loan by a subsequent
purchaser could cause the REMIC to recognize gain, which would also be
subject to the 100 percent tax on prohibited transactions.
In addition, certain contributions to a REMIC made after the Closing
Date could result in the imposition of a tax on the REMIC equal to 100% of
the value of the contributed property.
It is not anticipated that the REMIC will engage in any prohibited
transactions or receive any contributions subject to the contributions tax.
However, in the event that the REMIC is subject to any such tax, unless
otherwise disclosed in the related Supplement, such tax would be borne first
by the Residual Certificateholders, to the extent of amounts distributable to
them, and then by the Servicer.
LIQUIDATION AND TERMINATION
If the REMIC adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on such date, the REMIC will recognize no gain or loss on the sale
of its assets, provided that the REMIC credits or distributes in liquidation
all of the sale proceeds plus its cash (other than the amounts retained to
meet claims) to holders of Regular and Residual Certificates within the 90-
day period.
The REMIC will terminate shortly following the retirement of the Regular
Certificates. If a Residual Certificateholder's adjusted basis in the
Residual Certificate exceeds the amount of cash distributed to such Residual
Certificateholder in final liquidation of its interest, then, although the
matter is not entirely free from doubt, it would appear that the Residual
Certificateholder would be entitled to a loss equal to the amount of such
excess. It is unclear whether such a loss, if allowed, will be a capital
loss or an ordinary loss.
ADMINISTRATIVE MATTERS
Solely for the purpose of the administrative provisions of the Code, the
REMIC will be treated as a partnership and the Residual Certificateholders
will be treated as the partners thereof; however, under Temporary Regulations
if there is at no time during the taxable year more than one Residual
Certificateholder, a REMIC shall not be subject to the rules of Subchapter C
of chapter 63 of the Code, relating to the treatment of Partnership items for
a taxable year. Accordingly, the REMIC will file an annual tax return on
Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return.
In addition, certain other information will be furnished quarterly to each
Residual Certificateholder who held such Residual Certificate on any day in
the previous calendar quarter.
Each Residual Certificateholder is required to treat items on its return
consistently with their treatment on the REMIC's return, unless the Residual
Certificateholder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information
received from the REMIC. The IRS may assert a deficiency resulting from a
failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC level. The REMIC does not intend to
register as a tax shelter pursuant to Code Section 6111 because it is not
anticipated that the REMIC will have a net loss for any of the first five
taxable years of its existence. Any person that holds a Residual Certificate
as a nominee for another person may be required to furnish the REMIC, in a
manner to be provided in Treasury regulations, with the name and address of
such person and other information.
TAX-EXEMPT INVESTORS
Any Residual Certificateholder that is a pension fund or other entity
that is subject to federal income taxation only on its "unrelated business
taxable income" within the meaning of Code Section 512 will be subject to
such tax on that portion of the distributions received on a Residual
Certificate that is considered an "excess inclusion." See "--Residual
Certificates--Excess Inclusions" herein.
RESIDUAL CERTIFICATES
Non-U.S. Persons. Amounts paid to Residual Certificateholders who are
not U.S. Persons (see "--Regular Certificates--Non-U.S. Persons") are treated
as interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Amounts distributed to Residual Holders should qualify as
"portfolio interest," subject to the conditions described in "--Regular
Certificates" above, but only to the extent that the Mortgage Loans were
originated after July 18, 1984. Furthermore, the rate of withholding on any
income on a Residual Certificate that is an excess inclusion will not be
subject to reduction under any applicable tax treaties. See "--Residual
Certificates--Excess Inclusions." If the portfolio interest exemption is
unavailable, such amount will be subject to United States withholding tax
when paid or otherwise distributed (or when the Residual Certificate is
disposed of) under rules similar to those for withholding upon disposition of
debt instruments that have original issue discount. The Code, however,
grants the Treasury Department authority to issue regulations requiring that
those amounts be taken into account earlier than otherwise provided where
necessary to prevent avoidance of tax (for example, where the Residual
Certificates do not have significant value). See "--Residual Certificates--
Excess Inclusions." If the amounts paid to Residual Certificateholders that
are not U.S. persons are effectively connected with their conduct of a trade
or business within the United States, the 30% (or lower treaty rate)
withholding will not apply. Instead, the amounts paid to such non-U.S.
Person will be subject to U.S. federal income taxation at regular graduated
rates.
Regular Certificateholders and persons related to such holders should
not acquire any Residual Certificates, and Residual Certificateholders and
persons related to Residual Certificateholders should not acquire any Regular
Certificates without consulting their tax advisors as to the possible adverse
tax consequences of doing so.
TAX-RELATED RESTRICTIONS ON TRANSFER
An entity may not qualify as a REMIC unless there are reasonable
arrangements designed to ensure that residual interests in such entity are
not held by "disqualified organizations" (as defined below). Further, a tax
is imposed on the transfer of a residual interest in a REMIC to a
"disqualified organization." The amount of the tax equals the product of (A)
an amount (as determined under regulations) equal to the present value of the
total anticipated "excess inclusions" with respect to such interest for
periods after the transfer, and (B) the highest marginal federal income tax
rate applicable to corporations. The tax is imposed on the transferor unless
the transfer is through an agent (including a broker or other middlemen) for
a disqualified organization, in which event the tax is imposed on the agent.
The person otherwise liable for the tax shall be relieved of liability for
the tax if the transferee furnished to such person an affidavit that the
transferee is not a disqualified organization and, at the time of the
transfer, such person does not have actual knowledge that the affidavit is
false. A "disqualified organization" means (A) the United States, any State,
possession, or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of any of the
foregoing (provided that such term does not include an instrumentality if all
its activities are subject to tax and, except for Freddie Mac, a majority of
its board of directors is not selected by any such governmental agency), (B)
any organization (other than certain farmers' cooperatives) generally exempt
from federal income taxes unless such organization is subject to the tax on
"unrelated business taxable income" and (C) a rural electric or telephone
cooperative.
A tax is imposed on a "pass-through entity" (as defined below) holding a
residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of
(A) the amount of excess inclusions for the taxable year allocable to the
interest held by the disqualified organization, and (B) the highest marginal
federal income tax rate applicable to corporations. The pass-through entity
otherwise liable for the tax, for any period during which the disqualified
organization is the record holder of an interest in such entity, will be
relieved of liability for the tax if such record holder furnishes to such
entity an affidavit that such record holder is not a disqualified
organization and, for such period, the pass-through entity does not have
actual knowledge that the affidavit is false. For this purpose, a "pass-
through entity" means (i) a regulated investment company, real estate
investment trust or common trust fund, (ii) a partnership, trust or estate
and (iii) certain cooperatives. Except as may be provided in Treasury
regulations, any person holding an interest in a pass-through entity as a
nominee for another will, with respect to such interest, be treated as a
pass-through entity. The tax on pass-through entities is generally effective
for periods after March 31, 1988, except that in the case of regulated
investment companies, real estate investment trusts, common trust funds and
publicly-traded partnerships the tax shall apply only to taxable years of
such entities beginning after December 31, 1988.
In order to comply with these rules, the Pooling Agreement will provide
that no record or beneficial ownership interest in a Residual Certificate may
be, directly or indirectly, purchased, transferred or sold without the
express written consent of the Trustee. The Trustee will grant such consent
to a proposed transfer only if it receives the following: (i) an affidavit
from the proposed transferee to the effect that it is not a disqualified
organization and is not acquiring the Residual Certificate as a nominee or
agent for a disqualified organization, and (ii) a covenant by the proposed
transferee to the effect that the proposed transferee agrees to be bound by
and to abide by the transfer restrictions applicable to the Residual
Certificate.
Any attempted transfer or pledge in violation of the transfer
restrictions shall be absolutely null and void and shall vest no rights in
any purported transferee. Investors in Residual Certificates are advised to
consult their own tax advisors with respect to transfers of the Residual
Certificates and, in addition, pass-through entities are advised to consult
their own tax advisors with respect to any tax which may be imposed on a
pass-through entity.
The Taxpayer Relief Act of 1997 adds provisions to the Code that will
apply to an "electing large partnership." 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(e) 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.
Noneconomic Residual Certificates. The REMIC Regulations disregard, for
federal income tax purposes, any transfer of a Noneconomic Residual
Certificate to a "U.S. Person," as defined in the following section of this
discussion, unless no significant purpose of the transfer is to enable the
transferor to impede the assessment or collection of tax. A Noneconomic
Residual Certificate is any Residual Certificate (including a Residual
Certificate with a positive value at issuance) unless, at the time of
transfer, taking into account the Prepayment Assumption, (i) the present
value of the expected future distributions on the Residual Certificate at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year
in which the transfer occurs and (ii) the transferor reasonably expects that
the transferee will receive distributions from the REMIC at or after the time
at which taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of
the REMIC. A transferor is presumed not to have such knowledge if (i) the
transferor conducted a reasonable investigation of the transferee and (ii)
the transferee acknowledges to the transferor that the residual interest may
generate tax liabilities in excess of the cash flow and the transferee
represents that it intends to pay such taxes associated with the residual
interest as they become due. If a transfer of a Noneconomic Residual
Certificate is disregarded, the transferor would continue to be treated as
the owner of the Residual Certificate and would continue to be subject to tax
on its allocable portion of the net income of the REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has a "tax avoidance potential" to a "foreign
person" will be disregarded for federal income tax purposes. This rule
appears to apply to a transferee who is not a "U.S. Person", as defined
above, unless such transferee's income in respect of the Residual Certificate
is effectively connected with the conduct of a United States trade or
business. A Residual Certificate is deemed to have a tax avoidance potential
unless, at the time of transfer, the transferor reasonably expects that the
REMIC will distribute to the transferee amounts that will equal at least 30%
of each excess inclusion, and that such amounts will be distributed at or
after the time the excess inclusion accrues and not later than the end of the
calendar year following the year of accrual. If the non-U.S. Person
transfers the Residual Certificate to a U.S. Person, the transfer will be
disregarded, and the foreign transferor will continue to be treated as the
owner, if the transfer has the effect of allowing the transferor to avoid tax
on accrued excess inclusions. The provisions in the REMIC Regulations
regarding transfers of Residual Certificates that have tax avoidance
potential to foreign persons are effective for all transfers after June
30,1992. Until further guidance is issued concerning the treatment of
Residual Certificates held by non-U.S. Persons, the Pooling Agreement will
provide that no record or beneficial ownership interest in a Residual
Certificate may be, directly or indirectly, transferred to a non-U.S. Person
unless such person provides the Trustee with a duly completed I.R.S. Form
4224 and the Trustee consents to such transfer in writing.
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;
2. By agency placements through one or more placement agents specified
in the related Supplement primarily with institutional investors and
dealers; and
3. Through offerings by the Sponsor.
A Supplement for each Series will describe the method of offering being
used for that Series and either the price at which such Series is being
offered, the nature and amount of any underwriting discounts or additional
compensation to such underwriters and the proceeds of the offering to the
Sponsor, or the method by which the price at which the underwriters will sell
the Certificates will be determined. A firm commitment underwriting and
public offering by underwriters may be done through underwriting syndicates
led by one or more managing underwriters or through one or more underwriters
acting alone. The managing underwriter or underwriters with respect to the
offer and sale of a particular Series of Certificates will be set forth on
the cover of the Supplement relating to such Series and the members of the
underwriting syndicate, if any, will be named in such Supplement. The firms
acting as underwriters with respect to the Certificates may include
NationsBanc Capital Markets, Inc., an affiliate of the Sponsor. If such firm
is not named in the Supplement, such firm will not be a party to the
Underwriting Agreement in respect of such Certificates, will not be
purchasing any such Certificates from the Sponsor and will have no direct or
indirect participation in the underwriting of such Certificates, although
such firm may participate in the distribution of such Certificates under
circumstances entitling it to a dealer's commission. Each Supplement for an
underwritten offering will also contain information regarding the nature of
the underwriters' obligations, any material relationships between the Sponsor
and any underwriter, and, where appropriate, information regarding any
discounts or concessions to be allowed or reallowed to dealers or others and
any arrangements to stabilize the market for the Certificates so offered. In
a firm commitment underwritten offering, the underwriters will be obligated
to purchase all of the Certificates of such Series if any such Certificates
are purchased. Certificates may be acquired by the underwriters for their
own accounts and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale. In connection with the sale
of the Certificates, underwriters may receive compensation from the Sponsor
or from purchasers of Certificates in the form of discounts, concessions or
commissions. The related Supplement will describe any such compensation paid
by the Sponsor.
In underwritten offerings, the underwriters and agents may be entitled,
under agreements entered into with the Sponsor, to indemnification by the
Sponsor against certain civil liabilities, including liabilities under the
Securities Act, or to contribution with respect to payments which such
underwriters or agents may be required to make in respect thereof.
If a Series is offered otherwise than through underwriters, the
Supplement relating thereto will contain information regarding the nature of
such offering and any agreements to be entered into between the Sponsor and
purchasers of Certificates of such Series. It is contemplated that
NationsBanc Capital Markets, Inc. will act as a placement agent on behalf of
the Sponsor in such offerings of a Series of Certificates. If NationsBanc
Capital Markets, Inc. does act as placement agent in the sale of
Certificates, it will receive a selling commission which will be disclosed in
the related Supplement. NationsBanc Capital Markets, Inc. may also purchase
Certificates acting as principal.
INDEX TO DEFINED TERMS
PAGE
----
1986 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Accrual Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 24
accrual period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Agency Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Amortizable Bond Premium Regulations . . . . . . . . . . . . . . . . . . 56
Appraised Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARM Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
ARMs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Assumed Reinvestment Rate . . . . . . . . . . . . . . . . . . . . . . . . 24
Balloon Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Bankruptcy Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Bankruptcy Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Bankruptcy Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Buydown Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Buydown Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Certificate Account . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Certificate Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Certificateholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Class Certificate Balance . . . . . . . . . . . . . . . . . . . . . . . . 23
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Companion Classes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Contingent Regulations . . . . . . . . . . . . . . . . . . . . . . . . . 65
Cooperative Loans . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 46
Cut-off Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
DCR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Deferred Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
disqualified organization . . . . . . . . . . . . . . . . . . . . . . . . 75
Distribution Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Eligible Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Eligible Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Fannie Mae Certificates . . . . . . . . . . . . . . . . . . . . . . . . . 20
Federal long-term rate . . . . . . . . . . . . . . . . . . . . . . . . . 72
FHA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 17
FHA Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Fitch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Fraud Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 32
Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Freddie Mac Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Freddie Mac Certificates . . . . . . . . . . . . . . . . . . . . . . . . 19
Garn-St Germain Act . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
GNMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
GNMA Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
GNMA I Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
GNMA II Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 18
GPMs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Housing Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
HUD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Indemnified Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Interest Accrual Period . . . . . . . . . . . . . . . . . . . . . . . . . 24
IO Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Labor Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Land Sale Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Last Scheduled Distribution Date . . . . . . . . . . . . . . . . . . . . 24
Legislative History . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Lockout Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
LTV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Mark-to-Market Regulations . . . . . . . . . . . . . . . . . . . . . . . 73
Master REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Mezzanine Certificates . . . . . . . . . . . . . . . . . . . . . . . . 6, 30
Minimum Prepayment Agreement . . . . . . . . . . . . . . . . . . . . . . 22
Minimum Reinvestment Agreement . . . . . . . . . . . . . . . . . . . . . 22
Moody's . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Mortgage Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 9
Mortgage Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Mortgage Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Mortgage Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Mortgage Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Mortgage Pool Insurance Policy . . . . . . . . . . . . . . . . . . . . 7, 30
Mortgage Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Mortgaged Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 15
negative amortization . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Net Mortgage Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
New Withholding Regulations . . . . . . . . . . . . . . . . . . . . . . . 62
OID Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
PACs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
pass-through entity . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Payment Lag Certificates . . . . . . . . . . . . . . . . . . . . . . . . 67
PC Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
PC Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PC Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PC Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
phantom income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
PO Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Pool Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Pooling Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
pre-issuance accrued interest . . . . . . . . . . . . . . . . . . . . . . 68
Prepayment Assumption . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Primary Mortgage Insurance Policy . . . . . . . . . . . . . . . . . . . . 41
Private Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 20
PTE 83-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Rating Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Regular Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Relief Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Relief Act Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . 51
REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 55
REMIC Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
REMIC Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
REO Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Reserve Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 33
Residual Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 62
S&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Securities Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 5
Seller's Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SEN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Senior Certificateholders . . . . . . . . . . . . . . . . . . . . . . . . . 6
Senior Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SMMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Special Distribution Date . . . . . . . . . . . . . . . . . . . . . . . . 29
Special Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Special Hazard Insurance Policy . . . . . . . . . . . . . . . . . . . . . . 8
Special Hazard Insurer . . . . . . . . . . . . . . . . . . . . . . . . . 32
Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 35
Stripped ARM Obligations . . . . . . . . . . . . . . . . . . . . . . . . 60
Stripped Bond Certificates . . . . . . . . . . . . . . . . . . . . . . . 58
Stripped Coupon Certificates . . . . . . . . . . . . . . . . . . . . . . 58
SUB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Subordinate Certificateholders . . . . . . . . . . . . . . . . . . . . . . 6
Subordinate Certificates . . . . . . . . . . . . . . . . . . . . . . . . . 5
Subsidiary REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Supplement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 5
TACs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
thrift institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Title V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
U.S. Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
UCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Underlying Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Underwriter's Exemptions . . . . . . . . . . . . . . . . . . . . . . . . 52
VA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 17
Waiver Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 31
Table of Contents
-----------------
Page
----
PROSPECTUS SUPPLEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . 3
SUMMARY OF THE PROSPECTUS . . . . . . . . . . . . . . . . . . . . . . . . 5
THE TRUST FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
The Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . 15
Mortgage Certificates . . . . . . . . . . . . . . . . . . . . . . . 17
Certificate Account . . . . . . . . . . . . . . . . . . . . . . . . 21
Minimum Prepayment Agreement . . . . . . . . . . . . . . . . . . . . 22
Minimum Reinvestment Agreement . . . . . . . . . . . . . . . . . . . 22
DESCRIPTION OF CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . 22
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Categories of Classes of Certificates . . . . . . . . . . . . . . . 25
Residual Certificates . . . . . . . . . . . . . . . . . . . . . . . 27
Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Reports to Certificateholders . . . . . . . . . . . . . . . . . . . 28
Special Distributions . . . . . . . . . . . . . . . . . . . . . . . 29
CREDIT SUPPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Surety Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Mortgage Pool Insurance Policies . . . . . . . . . . . . . . . . . . 30
Fraud Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Special Hazard Insurance Policies . . . . . . . . . . . . . . . . . 32
Bankruptcy Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Reserve Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Cross Support . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Other Insurance, Guaranties, Letters of Credit and Similar
Instruments or Agreements . . . . . . . . . . . . . . . . . . . 33
MATURITY, PREPAYMENT CONSIDERATIONS
AND WEIGHTED AVERAGE LIFE OF CERTIFICATES . . . . . . . 34
THE SPONSOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
MORTGAGE PURCHASE PROGRAM . . . . . . . . . . . . . . . . . . . . . . . . 35
THE POOLING AND SERVICING AGREEMENT . . . . . . . . . . . . . . . . . . . 36
Assignment of Mortgage Loans . . . . . . . . . . . . . . . . . . . . 36
Representations and Warranties . . . . . . . . . . . . . . . . . . . 37
Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Payments on Mortgage Loans . . . . . . . . . . . . . . . . . . . . . 38
Collection and Other Servicing Procedures . . . . . . . . . . . . . 40
Hazard Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Primary Mortgage Insurance . . . . . . . . . . . . . . . . . . . . . 41
Maintenance of Insurance Policies; Claims Thereunder and Other
Realization Upon Defaulted Mortgage Loans . . . . . . . . . . . 41
Servicing Compensation and Payment of Expenses . . . . . . . . . . . 42
Evidence as to Compliance . . . . . . . . . . . . . . . . . . . . . 42
Certain Matters Regarding the Sponsor, the Seller and the Servicer . 42
Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . 43
Rights Upon Event of Default . . . . . . . . . . . . . . . . . . . . 43
Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
List of Certificateholders . . . . . . . . . . . . . . . . . . . . . 44
Termination; Repurchase of Mortgage Loans and Mortgage
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . 45
The Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS . . . . . . . . . . . . . . . 45
Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Cooperatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Land Sale Contracts . . . . . . . . . . . . . . . . . . . . . . . . 46
Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Rights of Redemption . . . . . . . . . . . . . . . . . . . . . . . . 49
Anti-Deficiency Legislation and Other Limitations on Sellers . . . . 49
Due-on-Sale Clauses . . . . . . . . . . . . . . . . . . . . . . . . 50
Applicability of Usury Laws . . . . . . . . . . . . . . . . . . . . 50
Soldiers' and Sailors' Civil Relief Act . . . . . . . . . . . . . . 50
Environmental Legislation . . . . . . . . . . . . . . . . . . . . . 51
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Plan Assets Regulations . . . . . . . . . . . . . . . . . . . . . . 51
Underwriter's Exemptions . . . . . . . . . . . . . . . . . . . . . . 52
Other Exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . 53
LEGAL INVESTMENT CONSIDERATION . . . . . . . . . . . . . . . . . . . . . 54
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . 54
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Non-REMIC Certificates . . . . . . . . . . . . . . . . . . . . . . . 55
Single Class of Senior Certificates . . . . . . . . . . . . . . . . 55
Multiple Classes of Senior Certificates . . . . . . . . . . . . . . 58
Sale or Exchange of a Senior Certificate . . . . . . . . . . . . . . 61
Non-U.S. Persons . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Information Reporting and Backup Withholding . . . . . . . . . . . . 61
New Withholding Regulations . . . . . . . . . . . . . . . . . . . . 62
REMIC Certificates . . . . . . . . . . . . . . . . . . . . . . . . . 62
Regular Certificates . . . . . . . . . . . . . . . . . . . . . . . . 63
Residual Certificates . . . . . . . . . . . . . . . . . . . . . . . 70
Prohibited Transactions and Other Taxes . . . . . . . . . . . . . . 73
Liquidation and Termination . . . . . . . . . . . . . . . . . . . . 73
Administrative Matters . . . . . . . . . . . . . . . . . . . . . . . 74
Tax-Exempt Investors . . . . . . . . . . . . . . . . . . . . . . . . 74
Residual Certificates . . . . . . . . . . . . . . . . . . . . . . . 74
Tax-Related Restrictions on Transfer . . . . . . . . . . . . . . . . 75
STATE TAX CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . 76
PLANS OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . 77
INDEX TO DEFINED TERMS . . . . . . . . . . . . . . . . . . . . . . . . . 79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the Certificates being registered under this
Registration Statement, other than underwriting discounts and commissions:
SEC Registration Fee $ 265,500.00
Printing and Engraving $ 25,000.00
Legal Fees and Expenses $ 90,000.00
Trustee Fees and Expenses $ 8,000.00
Rating Agency Fees $ 40,000.00
Miscellaneous $ 10,000.00
Total $ 438,500.00
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Certificate of Incorporation and By-Laws provide for
indemnification of directors and officers of the Registrant to the fullest
extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law, provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents
in connection with actions, suits or proceedings brought against them by a
third party or in the right of the corporation, by reason of the fact that
they were or are such directors, officers, employees or agents, against
expenses incurred in any such action, suit or proceeding. The Delaware
General Corporation Law also provides that the Registrant may purchase
insurance on behalf of any such director, officer, employee or agent.
ITEM 16. FINANCIAL STATEMENT AND EXHIBITS.
1.1* Form of Underwriting Agreement.
3.1 Certificate of Amendment to Certificate of Incorporation of the
Registrant.
3.2* Bylaws of the Registrant.
4.1* Form of Pooling and Servicing Agreement.
5.1 Opinion of Brown & Wood LLP as to legality of the Certificates
(including consent of such firm).
5.2 Opinion of Kennedy Covington Lobdell & Hickman, L.L.P. as to
legality of the Certificates (including consent of such firm).
8.1 Opinion of Brown & Wood LLP as to certain tax matters (included
in exhibit 5.1 hereof).
23.1 Consent of Brown & Wood LLP (included in exhibits 5.1 and 8.1
hereof).
23.2 Consent of Kennedy Covington Lobdell & Hickman, L.L.P. (included
in exhibit 5.2 hereof).
24.1 Power of Attorney included at II-3.
_____________
*Incorporated by reference from Registration Statement File No. 33-87402.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933, as amended (the "Act");
(ii) To reflect in the prospectus any fact or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information
set forth in the Registration Statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
The Registrant hereby undertakes that, for purposes of determining any
liability under the Act, each filing of the Registrant's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934 that is incorporated by reference in this Registration Statement shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The Registrant hereby agrees to provide to the underwriter at the closing
specified in the underwriting agreement certificates in such denominations
and registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Charlotte, State of North Carolina,
on the 30th day of March, 1998.
NATIONSBANC MONTGOMERY FUNDING CORP.
By /s/John T. McCarthy
-------------------------------------
John T. McCarthy
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Robert J. Perret, James H. Sherrill
and John T. McCarthy, or any of them, his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and
his name, place and stead, in any and all capacities, to sign any or all
amendments (including post-effective amendments) to the Registration
Statement, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or
their or his substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/John T. McCarthy President March 30, 1998
- -------------------------
John T. McCarthy (Principal Executive Officer)
/s/Neil Cotty Treasurer March 30, 1998
- --------------------------
Neil Cotty (Principal Financial Officer and
Principal Accounting Officer)
/s/F. William Vandiver, Jr. Director March 30, 1998
- --------------------------
F. William Vandiver, Jr.
/s/William A. Hodges Director March 30, 1998
- --------------------------
William A. Hodges
/s/William L. Maxwell Director March 30, 1998
- --------------------------
William L. Maxwell
EXHIBIT INDEX
EXHIBIT PAGE
- ------- ----
1.1* Form of Underwriting Agreement.
3.1 Certificate of Amendment to Certificate of Incorporation of the
Registrant.
3.2* Bylaws of the Registrant.
4.1* Form of Pooling and Servicing Agreement.
5.1 Opinion of Brown & Wood LLP as to legality of the Certificates
(including consent of such firm).
5.2 Opinion of Kennedy Covington Lobdell & Hickman, L.L.P. as to legality
of the Certificates (including consent of such firm).
8.1 Opinion of Brown & Wood LLP as to certain tax matters (included in
exhibit 5.1 hereof).
23.1 Consent of Brown & Wood LLP (included in exhibits 5.1 and 8.1
hereof).
23.2 Consent of Kennedy Covington Lobdell & Hickman, L.L.P. (included in
exhibit 5.2 hereof).
24.1 Power of Attorney included at II-3.
_____________
*Incorporated by reference from Registration Statement File No. 33-87402.
EXHIBIT 1.1
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF TRYON MORTGAGE FUNDING, INC.
Tryon Mortgage Funding, Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"),
DOES HEREBY CERTIFY:
FIRST: That, by the unanimous written consent of the Board of
Directors of the Corporation, resolutions were duly adopted setting
forth a proposed amendment of the Certificate of Incorporation of
the Corporation, declaring said amendment to be advisable and
directing that said amendment be submitted to the stockholders of
the Corporation for consideration and approval thereof. The
resolutions setting forth the proposed amendment are as follows:
RESOLVED, that it is advisable and in the best interest
of the Corporation that, pursuant to Section 242 of the
Delaware General Corporation Law, Article I of the
Corporation's Certificate of Incorporation be amended in
its entirety as follows:
The name of the Corporation is NationsBanc
Montgomery Funding Corp.
FURTHER RESOLVED, that the foregoing amendment (the
"Amendment") to the Certificate of Incorporation of the
Corporation be submitted to the stockholders of the
Corporation for consideration and approval thereof and,
upon approval thereof by the stockholders of the
Corporation, that the Amendment to the Certificate of
Incorporation of the Corporation be effective upon the
effective date of the filing of a Certificate of
Amendment of the Certificate of Incorporation of the
Corporation, setting forth the foregoing Amendment, with
the Secretary of State of the State of Delaware.
SECOND: That thereafter the holders of all of the issued and
outstanding stock of said Corporation waived all notice of the
time, place and purposes of a meeting of the stockholders of the
Corporation and gave their written consent, in accordance with
Section 228 of the Delaware General Corporation Law, to the
proposed amendment, which consent was filed with the Secretary of
the Corporation.
THIRD: That said amendment was duly adopted in accordance
with the provisions of Section 242 of the Delaware General
Corporation Law.
IN WITNESS WHEREOF, said Tryon Mortgage Funding, Inc. has caused this
Certificate to be executed by its President, and attested by its Secretary,
and its seal affixed hereto as of this 16/th/ day of March, 1998.
ATTEST: TRYON MORTGAGE FUNDING, INC.
By:/s/Mary-Ann Lucas By:/s/John T. McCarthy
----------------- -------------------
Mary-Ann Lucas John T. McCarthy, President
Secretary
(CORPORATE SEAL)
EXHIBIT 5.1
(BROWN & WOOD LLP LETTERHEAD)
March 30, 1998
NationsBanc Montgomery Funding Corp.
NationsBank Corporate Center
Charlotte, North Carolina 28255
Re: NationsBanc Montgomery Funding Corp.
Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We have acted as counsel for NationsBanc Montgomery Funding Corp.,
a Delaware corporation (the "Company"), in connection with the preparation of
a registration statement on Form S-3, as amended (the "Registration
Statement"), referred to above relating to $900,000,000 aggregate principal
amount of Mortgage Pass-Through Certificates (the "Certificates"), issuable
in series (each, a "Series"). The Registration Statement has been filed with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended. As set forth in the Registration Statement, each Series of
Certificates will be issued under and pursuant to the conditions of a
separate pooling agreement (each a "Pooling Agreement") among the Company, a
trustee and, where appropriate, a servicer to be identified in the prospectus
supplement for such Series (the "Trustee" and the "Servicer" for such Series,
respectively).
We have examined copies of the Company's Certificate of
Incorporation and Bylaws, minutes of the meetings of the Company's Board of
Directors, the form of the Pooling Agreement filed as Exhibit 4.1 to the
Registration Statement, the forms of Certificates included in such Pooling
Agreement, the prospectus contained in the Registration Statement (the
"Prospectus"), and such other records, documents and instruments as we have
deemed necessary for purposes of this opinion.
Based upon the foregoing, we are of the opinion that:
1. When a Pooling Agreement for a Series of Certificates has been
duly and validly authorized by all necessary action on the part of the
Company and has been duly executed and delivered by the Company, the
Servicer, if any, the Trustee and any other party thereto, such Pooling
Agreement will constitute a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as
enforcement thereof may be limited by bankruptcy, insolvency or other laws
relating to or affecting creditors' rights generally or by general equity
principles.
2. When a Series of Certificates has been duly authorized by all
necessary action on the part of the Company (subject to the terms thereof
being otherwise in compliance with applicable law at such time), duly
executed and authenticated by the Trustee for such Series in accordance with
the terms of the related Pooling Agreement and issued and delivered against
payment therefor as contemplated in the Registration Statement, such Series
of Certificates will be legally and validly issued, fully paid and
nonassessable, and the holders thereof will be entitled to the benefits of
the related Pooling Agreement.
In rendering the foregoing opinions, we express no opinion as to
the laws of any jurisdiction other than the laws of the State of New York
(excluding choice of law principles therein) and the federal laws of the
United States of America.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Legal Matters" in the Prospectus forming a part of the Registration
Statement, without admitting that we are "experts" within the meaning of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission issued thereunder, with respect to any
part of the Registration Statement, including this exhibit.
Very truly yours,
/S/BROWN & WOOD LLP
EXHIBIT 5.2
(KENNEDY COVINGTON LOBDELL & HICKMAN, L.L.P. LETTERHEAD)
March 30, 1998
NationsBanc Montgomery Funding Corp.
NationsBank Corporate Center
100 North Tryon Street
Charlotte, North Carolina 28255
Ladies and Gentlemen:
We have acted as special counsel to NationsBanc Montgomery Funding
Corp., a Delaware corporation (the "Company"), in connection with the
registration statement on Form S-3 (the "Registration Statement") filed with
the Securities and Exchange Commission (the "Commission") on March 30, 1998,
pursuant to the Securities Act of 1933, as amended (the "Securities Act").
The Registration Statement covers Mortgage Pass-Through Certificates
("Certificates") to be sold by the Company in one or more series (each, a
"Series") of Certificates. Each Series of Certificates will be issued under
a separate pooling and servicing agreement (each, a "Pooling and Servicing
Agreement") among the Company and a trustee (a "Trustee") and a master
servicer (a "Master Servicer") to be named therein. A form of Pooling and
Servicing Agreement is included as an exhibit to the Registration Statement.
In rendering the opinion set forth below, we have examined and relied
upon the following: (i) the Registration Statement, the Prospectus and the
form of Prospectus Supplement constituting a part thereof, each in the form
filed with the Commission, (ii) the form of the Pooling and Servicing
Agreement in the form filed with the Commission and (iii) such other
documents, records and instruments as we have deemed necessary for the
purposes of this opinion. In such examination, we have assumed the
authenticity of all documents submitted to us as originals, the genuineness
of all signatures, the legal capacity of natural persons and the conformity
to the originals of all documents submitted to us as copies. We have assumed
that all parties had the corporate power and authority to enter into and
perform all obligations thereunder. As to such parties, we also have assumed
the due authorization by all requisite corporate action and the due execution
and delivery of such documents.
Based upon and subject to the foregoing, we are of the opinion (i) that
the issuance of each Series of Certificates has been duly authorized by
appropriate corporate action and (ii) that once the Certificates of such
Series have been duly executed, authenticated and delivered in accordance
with the terms of the Pooling and Servicing Agreement relating to such Series
and sold in the manner described in the Registration Statement, any amendment
thereto and the prospectus and prospectus supplement relating thereto, the
Certificates will be legally issued, fully paid, binding obligations of the
trust created by the Pooling and Servicing Agreement, and the holders of the
Certificates will be entitled to the benefits of the Pooling and Servicing
Agreement, except as enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance,
moratorium, or other laws relating to or affecting the rights of creditors
generally and general principles of equity, including without limitation
concepts of materiality, reasonableness, good faith and fair dealing, and the
possible unavailability of specific performances or injunctive relief,
regardless of whether such enforceability is considered in a proceeding in
equity or at law.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the reference to this firm wherever it appears
in the Prospectus forming a part of the Registration Statement. This consent
is not to be construed as an admission that we are in the category of persons
whose consent is required to be filed with the Registration Statement under
the provisions of the Securities Act.
Very truly yours,
/S/KENNEDY COVINGTON LOBDELL & HICKMAN, L.L.P.
EXHIBIT 8.1
(BROWN & WOOD LLP LETTERHEAD)
March 30, 1998
NationsBanc Montgomery Funding Corp.
NationsBank Corporate Center
Charlotte, North Carolina 28255
Re: NationsBanc Montgomery Funding Corp.
Registration Statement on Form S-3
------------------------------------
Ladies and Gentlemen:
We have acted as special tax counsel for NationsBanc Montgomery
Funding Corp., a Delaware corporation (the "Company"), in connection with the
preparation of a registration statement on Form S-3, as amended (the
"Registration Statement"), referred to above relating to $900,000,000
aggregate principal amount of Mortgage Pass-Through Certificates (the
"Certificates") issuable in series (each a "Series"). The Registration
Statement has been filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended. As set forth in the Registration
Statement, each Series of Certificates will be issued under and pursuant to
the conditions of a separate pooling agreement (each a "Pooling Agreement")
among the Company, a trustee and, where appropriate, a servicer to be
identified in the prospectus supplement for such Series (the "Trustee" and
the "Servicer" for such Series, respectively).
We have examined the prospectus contained in the Registration
Statement (the "Prospectus") and such other records, documents and
instruments as we have deemed necessary for the purposes of this opinion.
In arriving at the opinion expressed below, we have assumed that
each Pooling Agreement will be duly authorized by all necessary corporate
action on the part of the Company, the Trustee, the Servicer, if any, and any
other party thereto and will be duly executed and delivered by the Company,
the Trustee, the Servicer, if any, and any other party thereto substantially
in the form filed as an exhibit to the Registration Statement; that each
Series of Certificates will be duly executed and delivered in substantially
the forms set forth in the related Pooling Agreement filed as an exhibit to
the Registration Statement; and that Certificates will be sold as described
in the Registration Statement.
As special tax counsel to the Company, we have advised the Company
with respect to certain federal income tax aspects of the proposed issuance
of each Series of Certificates pursuant to the related Pooling Agreement.
Such advice has formed the basis for the description of selected federal
income tax consequences for holders of such Certificates that appears under
the heading "Certain Federal Income Tax Consequences" in the Prospectus
forming a part of the Registration Statement. Such description does not
purport to discuss all possible federal income tax ramifications of the
proposed issuance of the Certificates, but with respect to those federal
income tax consequences which are discussed, in our opinion, the description
is accurate in all material respects.
This opinion is based on the facts and circumstances set forth in
the Registration Statement and in the other documents reviewed by us. Our
opinion as to the matters set forth herein could change with respect to a
particular Series of Certificates as a result of changes in facts and
circumstances, changes in the terms of the documents reviewed by us, or
changes in the law subsequent to the date hereof. As the Prospectus
contemplates Series of Certificates with numerous different characteristics,
you should be aware that the particular characteristics of each Series of
Certificates must be considered in determining the applicability of this
opinion to a particular Series of Certificates.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Certain Federal Income Tax Consequences" in the Prospectus forming a part of
the Registration Statement, without admitting that we are "experts" within
the meaning of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission issued thereunder, with
respect to any part of the Registration Statement, including this exhibit.
Very truly yours,
/S/BROWN & WOOD LLP
