<PAGE> 1
Filed Pursuant to Rule 424(b)(2)
Registration No. 333-62301
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED DECEMBER 17, 1998)
$279,714,190 (APPROXIMATE)
NATIONSBANC MONTGOMERY FUNDING CORP., DEPOSITOR
NATIONSBANC MORTGAGE CORPORATION, SELLER AND SERVICER
BANK OF AMERICA, FSB, SELLER AND SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1998-5
Principal and/or interest payable monthly, beginning January 25, 1999.
THE NMFC SERIES 1998-5 TRUST FUND WILL ISSUE THE FOLLOWING CERTIFICATES WHICH
ARE OFFERED BY THIS PROSPECTUS SUPPLEMENT:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
INITIAL PRINCIPAL PASS-THROUGH INTEREST LAST SCHEDULED S&P/FITCH
CLASS BALANCE(1) TYPE(2) RATE TYPE(2) DISTRIBUTION DATE(3) RATING(4)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
A-1 $275,420,000.00 Senior/Sequential 6.00% Fixed November 25, 2013 AAA/AAA
- ---------------------------------------------------------------------------------------------------------------
A-PO $ 215,029.00 Senior/Ratio Strip (5) Principal-Only November 25, 2013 AAAr/AAA
- ---------------------------------------------------------------------------------------------------------------
B-1 $ 2,110,233.00 Subordinate 6.00% Fixed November 25, 2013 NR/AA
- ---------------------------------------------------------------------------------------------------------------
B-2 $ 984,414.00 Subordinate 6.00% Fixed November 25, 2013 NR/A
- ---------------------------------------------------------------------------------------------------------------
B-3 $ 984,414.00 Subordinate 6.00% Fixed November 25, 2013 NR/BBB
- ---------------------------------------------------------------------------------------------------------------
R $ 100.00 Senior/Sequential 6.00% Fixed January 25, 1999 AAA/AAA
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(footnotes relating to this table appear on the next page)
The Offered Certificates are mortgage-backed securities whose yields to maturity
may be affected by the principal payment rates on the underlying mortgage loans.
THE CLASS A-PO CERTIFICATES ARE PRINCIPAL-ONLY CERTIFICATES, THE YIELD ON WHICH
IS PARTICULARLY SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS ON MORTGAGE LOANS
WITH NET MORTGAGE INTEREST RATES LESS THAN 6.00%.
THE ASSETS OF THE TRUST FUND WILL CONSIST PRIMARILY OF SINGLE-FAMILY MORTGAGE
LOANS:
- Originated or acquired by NationsBanc Mortgage Corporation or Bank of
America, FSB, both of which are affiliates of the Depositor and the
Underwriter.
- All of which are fixed-rate, conventional, fully-amortizing mortgage loans
secured by first liens on one- to four-family properties.
- All of which have original terms to maturity of 15 years or less.
Neither the Offered Certificates nor the Mortgage Loans are insured or
guaranteed by any governmental agency or instrumentality. The Offered
Certificates represent interests in the Trust Fund only and will not be
obligations of NationsBanc Montgomery Funding Corp. or any other entity.
- --------------------------------------------------------------------------------
CAREFULLY CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE S-11 OF THIS PROSPECTUS
SUPPLEMENT.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE OFFERED CERTIFICATES OR DETERMINED THAT THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus Supplement may be used to offer and sell the Offered
Certificates only if it is accompanied by the Prospectus. Please read both
documents carefully to understand the risks associated with these investments.
- --------------------------------------------------------------------------------
The Offered Certificates will be offered by NationsBanc Montgomery Securities
LLC, as underwriter, at varying prices to be determined at the time of sale to
investors. The anticipated delivery date for the Offered Certificates is
December 23, 1998.
NATIONSBANC MONTGOMERY SECURITIES LLC
December 17, 1998
<PAGE> 2
(footnotes relating to the table on the cover)
(1) The initial balance of the Offered Certificates may vary by a total of plus
or minus 5%.
(2) See "Description of Certificates -- Categories of Classes of Certificates"
in the Prospectus for a description of these principal and interest types
and see "Description of Certificates -- Priority of Distributions" and
"-- Allocation of Losses" in this Prospectus Supplement for a description of
the effects of subordination.
(3) For a description of the method used to determine these dates, see
"Description of Certificates -- Last Scheduled Distribution Date" in this
Prospectus Supplement.
(4) See "Certificate Ratings" in this Prospectus Supplement. The Depositor has
requested ratings of the Class B Certificates only from Fitch IBCA, Inc.
(5) The Class A-PO Certificates are principal only and will not bear interest.
---------------------
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED
IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
The Offered Certificates are described in two separate documents that
progressively provide more detail: (i) the accompanying Prospectus, which
provides general information, some of which may not apply to a particular series
of Certificates such as your Certificates; and (ii) this Prospectus Supplement,
which describes the specific terms of your Certificates and may differ from
information in the Prospectus.
IF THE DESCRIPTION OF THE TERMS OF YOUR CERTIFICATES VARY BETWEEN THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN
THIS PROSPECTUS SUPPLEMENT.
Cross-references are included in this Prospectus Supplement and the
Prospectus to captions in these materials where you can find additional
information. The following Table of Contents and the Table of Contents in the
Prospectus provide the locations of these captions.
The Index to Defined Terms beginning on page S-64 of this Prospectus
Supplement and the Index to Defined Terms beginning on page 84 of the Prospectus
direct you to the locations of the definitions of capitalized terms used in each
of the documents. Any capitalized terms that are not defined in this Prospectus
Supplement and that do not have obvious meanings are defined in the Prospectus.
---------------------
This Prospectus Supplement and the accompanying Prospectus contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended. Specifically, forward-looking statements, together with
related qualifying language and assumptions, are found in the material
(including tables) under the headings "Risk Factors" and "Prepayment and Yield
Considerations." Forward-looking statements are also found in other places
throughout this Prospectus Supplement and the Prospectus, and may be identified
by, among other things, accompanying language such as "expects," "intends,"
"anticipates," "estimates" or analogous expressions, or by qualifying language
or assumptions. These statements involve known and unknown risks, uncertainties
and other important factors that could cause the actual results or performance
to differ materially from the forward-looking statements. These risks,
uncertainties and other factors include, among others, general economic and
business conditions, competition, changes in political, social and economic
conditions, regulatory initiatives and compliance with governmental regulations,
customer preference and various other matters, many of which are beyond the
Depositor's control. These forward-looking statements speak only as of the date
of this Prospectus Supplement. The Depositor expressly disclaims any obligation
or undertaking to disseminate any updates or revisions to any forward-looking
statements to reflect changes in the Depositor's expectations with regard to
those statements or any change in events, conditions or circumstances on which
any forward-looking statement is based.
S-2
<PAGE> 3
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Summary of Terms................. S-4
Risk Factors..................... S-11
The Rate of Principal Payments
on the Mortgage Loans Will
Affect the Yield on the
Offered Certificates........ S-11
Subordination of Class B
Certificates Increases Risk
of Loss..................... S-12
Limited Source of Payments --No
Recourse to Depositor,
Sellers, Servicers or
Trustee..................... S-12
Limited Liquidity.............. S-13
Geographic Concentration May
Increase Risk of Loss Due to
Adverse Economic Conditions
or Natural Disaster......... S-13
Rights of Beneficial Owners May
Be Limited by Book-Entry
System...................... S-13
Tax Consequences of Residual
Certificates................ S-14
Risk Associated with Year 2000
Compliance.................. S-14
The Mortgage Pool................ S-15
Mortgage Loan Data............. S-17
Underwriting Standards of
NationsBanc Mortgage
Corporation................. S-21
Underwriting Standards of Bank
of America, FSB............. S-22
NationsBanc Mortgage
Corporation.................... S-24
Bank of America, FSB............. S-24
Servicing of Mortgage Loans...... S-24
Foreclosure and Delinquency
Experience of NationsBanc
Mortgage Corporation........ S-25
Foreclosure and Delinquency
Experience of Bank of
America, FSB................ S-26
The Pooling and Servicing
Agreement...................... S-28
Assignment of Mortgage Loans... S-28
Repurchases of Mortgage
Loans....................... S-28
Payments on Mortgage Loans;
Accounts.................... S-29
Servicing Compensation and
Payment of Expenses......... S-29
Compensating Interest.......... S-30
Advances....................... S-30
Optional Termination........... S-31
The Trustee.................... S-31
Voting Rights.................. S-31
Description of Certificates...... S-32
Denominations and Form......... S-32
Book-Entry Certificates........ S-32
Distributions.................. S-34
Available Funds................ S-35
Priority of Distributions...... S-35
Interest....................... S-36
Principal...................... S-37
Allocation of Losses........... S-42
Last Scheduled Distribution
Date........................ S-43
Restrictions on Transfer of the
Class R Certificates........ S-43
Restrictions on Transfer of the
Class B Certificates........ S-45
Prepayment and Yield
Considerations................. S-45
Prepayment Considerations and
Risks....................... S-46
Assumptions Relating to
Tables...................... S-47
Weighted Average Lives of the
Offered Certificates........ S-48
Yield on the Class A-PO
Certificates................ S-53
Yield on the Class R
Certificates................ S-53
Yield on the Subordinate
Certificates................ S-54
Yield Considerations with
Respect to the Class B-2 and
Class B-3 Certificates...... S-55
Credit Support................... S-57
Use of Proceeds.................. S-58
Certain Federal Income Tax
Consequences................... S-58
Regular Certificates........... S-58
Residual Certificates.......... S-59
Backup Withholding and
Reporting Requirements...... S-59
State Taxes...................... S-60
Benefit Plan Considerations...... S-60
Method of Distribution........... S-61
Legal Matters.................... S-62
Certificate Ratings.............. S-62
Index to Defined Terms........... S-64
</TABLE>
S-3
<PAGE> 4
SUMMARY OF TERMS
This summary highlights selected information from this Prospectus
Supplement. It does not contain all of the information that you need to consider
in making your investment decision. To understand the terms of the Offered
Certificates, you should read this entire Prospectus Supplement and the
Prospectus carefully.
<TABLE>
<S> <C>
TITLE OF
SERIES: NationsBanc Montgomery
Funding Corp., Mortgage
Pass-Through Certificates,
Series 1998-5 (the
"CERTIFICATES")
DEPOSITOR: NationsBanc Montgomery
Funding Corp.
TRUST FUND: NMFC Series 1998-5 Trust
Fund
SELLERS: NationsBanc Mortgage
Corporation and Bank of
America, FSB
SERVICERS: NationsBanc Mortgage
Corporation and Bank of
America, FSB
TRUSTEE: Norwest Bank Minnesota,
National Association
DISTRIBUTION
DATE: The 25th day of each month
(or, if not a business day,
the next business day)
beginning January 25, 1999
CLOSING DATE: On or about December 23,
1998
CUT-OFF DATE: December 1, 1998
RECORD DATE: The last business day of
the month preceding a
Distribution Date
</TABLE>
------------------------------------------
OFFERED CERTIFICATES
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated as of December 1, 1998 (the "POOLING AGREEMENT"), among
the Depositor, the Servicers and the Trustee. A summary chart of the initial
class balances, principal types, pass-through rates, interest types, last
scheduled distribution dates and ratings of the Offered Certificates is set
forth on the cover.
The Certificates represent all of the beneficial ownership interest in the
Trust Fund.
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------
CLASSIFICATIONS OF CLASSES OF CERTIFICATES
- --------------------------------------------------------------------------------------------------
Offered Certificates: A-1, A-PO, R, B-1, B-2 and B-3
- --------------------------------------------------------------------------------------------------
Non-Offered Certificates: B-4, B-5 and B-6
- --------------------------------------------------------------------------------------------------
Senior Certificates: A-1, A-PO and R
- --------------------------------------------------------------------------------------------------
Subordinate Certificates: B-1, B-2, B-3, B-4, B-5 and B-6
- --------------------------------------------------------------------------------------------------
Class A Certificates: A-1 and A-PO
- --------------------------------------------------------------------------------------------------
Class B Certificates: B-1, B-2, B-3, B-4, B-5 and B-6
- --------------------------------------------------------------------------------------------------
Principal-Only Certificates: A-PO
- --------------------------------------------------------------------------------------------------
Residual Certificates: R
- --------------------------------------------------------------------------------------------------
</TABLE>
S-4
<PAGE> 5
CERTIFICATES NOT OFFERED
The Trust Fund will issue the following three classes of Certificates that
are not offered by this Prospectus Supplement. These Non-Offered Certificates
are subordinated to the Offered Certificates for distributions of principal and
interest and for allocations of losses on the Mortgage Loans.
<TABLE>
<CAPTION>
INITIAL CLASS
CLASS CERTIFICATE BALANCE PASS-THROUGH RATE
- ----- ------------------- -----------------
<S> <C> <C>
Class B-4........................... $ 562,523.00 6.00%
Class B-5........................... $ 421,892.00 6.00%
Class B-6........................... $ 562,523.28 6.00%
</TABLE>
Information provided with respect to the Non-Offered Certificates is
included solely to aid your understanding of the Offered Certificates.
MORTGAGE POOL
The "MORTGAGE POOL" will consist of fixed-rate, conventional,
fully-amortizing mortgage loans (the "MORTGAGE LOANS") secured by first liens on
one- to four-family properties. All of the Mortgage Loans were originated or
acquired by NationsBanc Mortgage Corporation or Bank of America, FSB, both of
which are affiliates of the Depositor and the Underwriter.
The Depositor expects the Mortgage Loans to have the following approximate
characteristics:
SELECTED MORTGAGE LOAN DATA AS OF DECEMBER 1, 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
RANGE OR TOTAL WEIGHTED AVERAGE
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------
Number of Mortgage Loans 806 --
- -----------------------------------------------------------------------------------------------------
Aggregate Unpaid Principal Balance $281,261,128.64 --
- -----------------------------------------------------------------------------------------------------
Unpaid Principal Balance $229,250.40 to $854,438.67 $348,959.22 (1)
- -----------------------------------------------------------------------------------------------------
Interest Rates 6.000% to 7.750% 6.77%
- -----------------------------------------------------------------------------------------------------
Expense Fee Rate 0.26% to 1.75% 0.77326%
- -----------------------------------------------------------------------------------------------------
Remaining Terms to Stated Maturity 116 months to 180 months 177 months
- -----------------------------------------------------------------------------------------------------
Loan Age 0 months to 9 months 1 month
- -----------------------------------------------------------------------------------------------------
Original Loan-to-Value Ratio 15.00% to 95.00% 65.73%
- -----------------------------------------------------------------------------------------------------
Geographic Concentration of Mortgaged Properties in
Excess of 5% of the Aggregate Unpaid Principal
Balance:
California....................................... 32.45% --
Texas............................................ 8.76% --
- -----------------------------------------------------------------------------------------------------
Maximum Single Zip Code Concentration 1.35% --
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1)The balance shown is the average unpaid principal balance of the Mortgage
Loans.
The characteristics of the Mortgage Pool may change because:
- Prior to the issuance of the Certificates, the Depositor may remove
Mortgage Loans from the Mortgage Pool. The Depositor also may substitute
new Mortgage Loans for Mortgage Loans in the Mortgage Pool prior to the
Closing Date.
- After the issuance of the Certificates, Mortgage Loans may be removed
from the Trust Fund because of repurchases by the Sellers for breaches
of representations or failure to deliver
S-5
<PAGE> 6
required documents. Under certain circumstances, the Sellers may make
substitutions for repurchased Mortgage Loans.
These removals and/or substitutions may result in changes in the Mortgage Pool
characteristics shown above. These changes may affect the weighted average lives
and yields to maturity of the Offered Certificates.
Additional information on the Mortgage Pool appears under "The Mortgage
Pool" in this Prospectus Supplement.
OPTIONAL TERMINATION
At its option, the Depositor may purchase all remaining Mortgage Loans in
the Trust Fund and effect early retirement of the Certificates on any
Distribution Date on which the scheduled balance of the Mortgage Pool is less
than 5% of the initial scheduled balance of the Mortgage Pool.
See "The Pooling and Servicing Agreement -- Optional Termination" in this
Prospectus Supplement.
IF THE DEPOSITOR EXERCISES ITS RIGHT TO REPURCHASE ALL OF THE MORTGAGE
LOANS, THE CERTIFICATES OUTSTANDING AT THAT TIME WILL BE RETIRED EARLIER THAN
WOULD OTHERWISE BE THE CASE.
See "Prepayment and Yield Considerations" in this Prospectus Supplement.
PRIORITY OF DISTRIBUTIONS
Distributions will be made on each Distribution Date from Available Funds
in the following order of priority:
- First, to the Trustee an amount in payment for its services for such
Distribution Date;
- Second, to each class of Senior Certificates (other than the Class A-PO
Certificates) to pay interest;
- Third, to the classes of Senior Certificates entitled to receive
distributions of principal, as set forth in this Prospectus Supplement
under "Description of Certificates -- Principal," to pay principal;
- Fourth, to the Class A-PO Certificates, to pay any Class A-PO Deferred
Amounts, but only from amounts that would otherwise be distributable on
such Distribution Date as principal of the Subordinate Certificates;
- Fifth, to each class of Subordinate Certificates, first to pay interest
and then to pay principal in the order of numerical class designations,
beginning with the Class B-1 Certificates; and
- Sixth, to the Class R Certificates, any remaining amounts.
All of the distributions described above are subject to the limitations set
forth in this Prospectus Supplement under "Description of
Certificates -- Interest" and "-- Principal."
Under certain circumstances described in this Prospectus Supplement,
distributions that would otherwise be made on the Subordinate Certificates may
be made on the Senior Certificates instead. See "Description of
Certificates -- Allocation of Losses" in this Prospectus Supplement.
S-6
<PAGE> 7
INTEREST DISTRIBUTIONS
The amount of interest that will accrue on your Certificates each month
(unless you own a Class A-PO Certificate) is equal to:
- one-twelfth of the pass-through rate for your class set forth on the
cover multiplied by the principal balance of your Certificate on the
Distribution Date, minus
- the amount of certain interest shortfalls arising from the timing of
prepayments on the Mortgage Loans and interest losses allocated to your
class, as described under "Description of Certificates -- Allocation of
Losses" in this Prospectus Supplement.
The Class A-PO Certificates are principal-only certificates and are not
entitled to interest.
See "Description of Certificates -- Distributions" and "-- Interest" in
this Prospectus Supplement.
PRINCIPAL DISTRIBUTIONS
On each Distribution Date, principal distributions to the Certificates will
be made in the order and priority described under "Description of
Certificates -- Priority of Distributions" in this Prospectus Supplement.
CREDIT SUPPORT
Credit support for the Offered Certificates is provided by subordination as
follows:
SUBORDINATION OF CLASS B CERTIFICATES
(CHART)
- ---------------
(1) The credit support percentage set forth in this chart shows the initial
balance of the classes of Certificates subordinate to a class or classes as
a percentage of the scheduled balance of the initial Mortgage Pool.
(2) This order of loss allocation does not apply to losses due to fraud,
borrower bankruptcies or special hazards that are in excess of certain
amounts. These "EXCESS LOSSES" will be allocated to all of the Certificates
pro rata on the basis of their outstanding balances.
S-7
<PAGE> 8
See "Description of Certificates -- Priority of Distributions" and
"-- Allocation of Losses" and "Credit Support" in this Prospectus Supplement.
Shifting Interest in Prepayments
Additional credit enhancement is provided by the allocation of all
principal prepayments to the Senior Certificates (other than Class A-PO) for the
first five years and the disproportionately greater allocation of prepayments to
the Senior Certificates over the following four years. The disproportionate
allocation of prepayments will accelerate the amortization of those Senior
Certificates relative to the amortization of the Subordinate Certificates. As a
result, the credit support percentage for the Class A Certificates should be
maintained and may be increased during the first nine years.
See "Description of Certificates -- Principal" in this Prospectus
Supplement.
PREPAYMENT AND YIELD CONSIDERATIONS
The yield to maturity on your Offered Certificates will be sensitive to the
rate and timing of principal payments (which will be affected by prepayments,
defaults and liquidations) on the Mortgage Loans. As a result, your yield may
fluctuate significantly.
- In general, if you purchased your Offered Certificate at a premium and
principal distributions occur at a rate faster than you assumed, your
actual yield to maturity will be lower than anticipated.
- Conversely, if you purchased your Offered Certificate at a discount and
principal distributions occur at a rate slower than you assumed, your
actual yield to maturity will be lower than anticipated.
Because the Class A-PO Certificates represent the right to receive only a
portion of the principal received with respect to the Mortgage Loans with Net
Mortgage Rates less than 6.00% (the "DISCOUNT MORTGAGE LOANS"), the yield to
maturity on the Class A-PO Certificates will be extremely sensitive to the rate
and timing of principal payments on the Discount Mortgage Loans.
The yield to maturity of the Class B-1, Class B-2 and Class B-3
Certificates will be increasingly sensitive to the amounts and timing of losses
on the Mortgage Loans due to the fact that, once the aggregate balance of the
Class B-4, Class B-5 and Class B-6 Certificates has been reduced to zero, all
losses (other than the portion of Excess Losses allocated to more senior classes
of Certificates) will be allocated to the Class B-3, Class B-2 and Class B-1
Certificates, in that order, until the balance of each class has been reduced to
zero.
Because the Mortgage Loans may be prepaid at any time, it is not possible
to predict the rate at which you will receive distributions of principal. Since
prevailing interest rates are subject to fluctuation, you may not be able to
reinvest your distributions at yields equaling or exceeding the yields on the
Offered Certificates. Yields on any reinvestments may be lower, and could be
significantly lower, than the yields on your Offered Certificates.
See "Prepayment and Yield Considerations" in this Prospectus Supplement and
"Maturity, Prepayment Considerations and Weighted Average Life of Certificates"
in the Prospectus.
S-8
<PAGE> 9
WEIGHTED AVERAGE LIVES (IN YEARS)(1)
<TABLE>
<CAPTION>
PSA(2)
------------------------------------
CLASS 0% 100% 275% 400% 500%
- ----- ----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C>
A-1................................... 8.63 6.76 4.72 3.83 3.33
A-PO.................................. 8.63 6.78 4.76 3.89 3.39
B-1................................... 8.63 8.17 7.52 7.15 6.90
B-2................................... 8.63 8.17 7.52 7.15 6.90
B-3................................... 8.63 8.17 7.52 7.15 6.90
R..................................... 0.09 0.09 0.09 0.09 0.09
</TABLE>
- ---------------
(1) Determined as described under "Prepayment and Yield
Considerations -- Weighted Average Lives of the Offered Certificates" in
this Prospectus Supplement. 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.
(2) "PSA" is the Prepayment Standard Assumption which is described under
"Prepayment and Yield Considerations -- Weighted Average Lives of the
Offered Certificates" in this Prospectus Supplement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, an election will be made to treat the
Trust Fund as a "real estate mortgage investment conduit" (the "REMIC").
- The Offered Certificates (other than the Class R Certificates) will
constitute "regular interests" in the REMIC and will be treated as debt
instruments for federal income tax purposes.
- The Class R Certificates will constitute the sole class of "residual
interest" in the REMIC.
Interest on the Offered Certificates must be included in your income under
an accrual method of tax accounting, even if you are otherwise a cash method
taxpayer.
The Class A-PO Certificates will, and certain other Classes may, be issued
with original issue discount for federal income tax purposes. If you hold such a
Certificate, you will be required to include original issue discount in income
as it accrues on a constant yield method, regardless of whether you receive
concurrently the cash attributable to such original issue discount.
Holders of Class R Certificates will be required to report as ordinary
income or loss their pro rata share of the net income or the net loss of the
REMIC, and will be required to fund tax liabilities with respect to any such net
income although no cash distributions are expected to be made with respect to
the Class R Certificates.
See "Certain Federal Income Tax Consequences" in this Prospectus Supplement
and in the Prospectus.
LEGAL INVESTMENT
If your investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory
authorities, then you may be subject to restrictions on investment in the
Offered Certificates. You should consult your legal, tax and accounting advisers
for assistance in determining the suitability of and consequences to you of the
purchase, ownership and sale of Offered Certificates.
- The Senior Certificates and the Class B-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as
S-9
<PAGE> 10
amended ("SMMEA"), so long as they are rated in one of the two highest
rating categories by at least one nationally recognized rating agency.
- The Class B-2 and Class B-3 Certificates will not constitute "mortgage
related securities" under SMMEA.
See "Legal Investment Considerations" in the Prospectus.
BENEFIT PLAN CONSIDERATIONS
If you are a fiduciary or other person acting on behalf of any employee
benefit plan or arrangement, including an individual retirement account (an
"IRA"), subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), the Internal Revenue Code of 1986, as amended (the "CODE"),
or any federal, state or local law ("SIMILAR LAW") which is similar to ERISA or
the Code (collectively, a "BENEFIT PLAN"), you should carefully review with your
legal advisors whether the purchase or holding of an Offered Certificate could
give rise to a transaction prohibited or not otherwise permissible under ERISA,
the Code or Similar Law.
Subject to the considerations and conditions described under "Benefit Plan
Considerations" in this Prospectus Supplement, it is expected that the Senior
Certificates (other than the Class R Certificates) may be purchased by Benefit
Plans. THE CLASS R CERTIFICATES MAY NOT BE ACQUIRED BY BENEFIT PLANS AND THE
CLASS B CERTIFICATES MAY NOT BE ACQUIRED BY BENEFIT PLANS EXCEPT UPON
SATISFACTION OF CERTAIN CONDITIONS.
See "Benefit Plan Considerations" in this Prospectus Supplement and in the
Prospectus.
S-10
<PAGE> 11
- --------------------------------------------------------------------------------
RISK FACTORS
- --------------------------------------------------------------------------------
- The Offered Certificates are not suitable investments for all investors.
- The Offered Certificates are complex financial instruments, so you should
not purchase any Offered Certificates unless you or your financial
advisor possess the necessary expertise to analyze the potential risks
associated with an investment in mortgage-backed securities.
- You should not purchase any Offered Certificates unless you understand,
and are able to bear, the prepayment, credit, liquidity and market risks
associated with those Offered Certificates.
- You should carefully consider the risk factors discussed below in
addition to the other information contained in this Prospectus
Supplement and the Prospectus.
THE RATE OF PRINCIPAL PAYMENTS ON THE
MORTGAGE LOANS WILL AFFECT THE YIELD
ON THE OFFERED CERTIFICATES
The rate of distributions of principal and the yield to maturity on your
Certificates will be directly related to (i) the rate of payments of principal
on the Mortgage Loans and (ii) the amount and timing of defaults by borrowers
that result in losses on the Mortgage Loans. Borrowers are permitted to prepay
their Mortgage Loans, in whole or in part, at any time without penalty.
The rate of principal payments on the Mortgage Loans mainly will be
affected by the following:
- the amortization schedules of the Mortgage Loans;
- the rate of partial prepayments and full prepayments by borrowers due to
refinancing, job transfer, changes in property values or other factors;
- liquidations of the properties that secure defaulted Mortgage Loans;
repurchases of Mortgage Loans by the Sellers as a result of defective
documentation or breaches of representations or warranties made by the
Sellers; and
- the optional repurchase of all the Mortgage Loans by the Depositor to
effect a termination of the trust.
For a more detailed discussion of these factors, see "The Pooling and
Servicing Agreement -- Optional Termination" and "Prepayment and Yield
Considerations" in this Prospectus Supplement and "The Pooling and Servicing
Agreement -- Assignment of Mortgage Loans" and "-- Termination; Repurchase of
Mortgage Loans and Mortgage Certificates" and "Maturity, Prepayment
Considerations and Weighted Average Life of Certificates" in the Prospectus.
The rate of payments (including prepayments) on mortgage loans is
influenced by a variety of economic, geographic, social and other factors, but
depends greatly on the level of mortgage interest rates:
- If prevailing interest rates for similar mortgage loans fall below the
interest rates on the Mortgage Loans, the rate of prepayment would
generally be expected to increase due to refinancings.
- Conversely, if prevailing interest rates for similar mortgage loans rise
above the interest rates on the Mortgage Loans, the rate of prepayment
would generally be expected to decrease.
S-11
<PAGE> 12
Mortgage originators (including NationsBanc Mortgage Corporation and Bank
of America, FSB) make general and targeted solicitations for refinancings. Any
such solicited refinancings may result in a rate of prepayment that is higher
than you might otherwise expect.
If you are purchasing an Offered Certificate at a discount, and
specifically if you are purchasing the Class A-PO Certificates, you should
consider the risk that a slower than anticipated rate of principal payments on
the Mortgage Loans will result in an actual yield that is lower than your
expected yield. See "Prepayment and Yield Considerations -- Yield on the Class
A-PO Certificates" in this Prospectus Supplement for a more detailed description
of risks associated with the purchase of the Class A-PO Certificates.
If you are purchasing an Offered Certificate at a premium, you should
consider the risk that a faster than anticipated rate of principal payments on
the Mortgage Loans will result in an actual yield that is lower than your
expected yield.
SUBORDINATION OF CLASS B CERTIFICATES
INCREASES RISK OF LOSS
If you purchase Class B Certificates, you are more likely to suffer losses
as a result of losses or delinquencies on the Mortgage Loans than are holders of
the Class A Certificates.
- The rights of the holders of each class of Class B Certificates to
receive distributions of interest and principal are subordinated to the
rights of the holders of the Class A Certificates and the holders of
each class of Class B Certificates with a lower numerical designation.
For example, the holders of the Class B-2 Certificates will not receive
principal or interest on a Distribution Date until the holders of the
Class A and Class B-1 Certificates have received the amounts to which
they are entitled on that Distribution Date.
- Losses that are realized on the Mortgage Loans (other than Excess Losses)
will be allocated first to the Class B-6 Certificates, then to the Class
B-5 Certificates and so on, in reverse of the numerical order of the
Class B Certificates, until the outstanding balances of those classes
have been reduced to zero. After the outstanding balances of the Class B
Certificates have been reduced to zero, all losses will be allocated to
the Class A Certificates.
For a more detailed description of the subordination feature of the Class B
Certificates, see "Description of Certificates -- Allocation of Losses" and
"Credit Support" in this Prospectus Supplement.
LIMITED SOURCE OF PAYMENTS - NO
RECOURSE TO DEPOSITOR, SELLERS,
SERVICERS OR TRUSTEE
Proceeds of the Mortgage Loans will be the sole source of payments on the
Certificates. The Certificates do not represent an interest in or obligation of
the Depositor, either Seller, either Servicer, the Trustee or any of their
affiliates. There are, however, limited obligations of the Sellers with respect
to certain breaches of their representations and warranties, and limited
obligations of the Servicers with respect to their servicing obligations.
Neither the Certificates nor the Mortgage Loans will be guaranteed by or
insured by any governmental agency or instrumentality, the Depositor, either
Seller, either Servicer, the Trustee or any of their affiliates. Consequently,
if payments on the Mortgage Loans are insufficient or otherwise
S-12
<PAGE> 13
unavailable to make all payments required on the Certificates, there will be no
recourse to the Depositor, either Seller, either Servicer, the Trustee or any of
their affiliates.
LIMITED LIQUIDITY
The Underwriter intends to make a market for purchase and sale of the
Offered Certificates after their initial issuance, but the Underwriter has no
obligation to do so. There is no assurance that such a secondary market will
develop or, if it does develop, that it will provide you with liquidity of
investment or that it will continue for the life of the Offered Certificates. As
a result, you may not be able to sell your Certificates or you may not be able
to sell your Certificates at a high enough price to produce your desired return
on investment.
The secondary market for mortgage-backed securities has experienced periods
of illiquidity and can be expected to do so in the future. Illiquidity means
that there may not be any purchasers for your class of Certificates. Although
any class of Certificates may experience illiquidity, it is more likely that
classes of Certificates that are more sensitive to prepayment, credit or
interest rate risk (like the Class A-PO or Class B Certificates) will experience
illiquidity.
GEOGRAPHIC CONCENTRATION MAY
INCREASE RISK OF LOSS DUE TO
ADVERSE ECONOMIC CONDITIONS
OR NATURAL DISASTER
At various times, certain geographic regions will experience weaker
economic conditions and housing markets and, consequently, will experience
higher rates of delinquency and loss on mortgage loans generally. In addition,
California, Florida and several other states have experienced natural disasters,
including earthquakes, fires, floods and hurricanes, which may adversely affect
property values. Any concentration of mortgaged properties in a state or region
may present unique risk considerations. See the chart on page S-5 for a listing
of the locations and concentrations of mortgaged properties.
Any deterioration in housing prices in a state or region due to adverse
economic conditions, natural disaster or other factors, and any deterioration of
economic conditions in a state or region that adversely affects the ability of
borrowers to make payments on the Mortgage Loans, may result in losses on the
Mortgage Loans. Any losses may adversely effect the yield to maturity of the
Offered Certificates.
See "The Mortgage Pool" in this Prospectus Supplement for further
information regarding the geographic concentration of the Mortgage Loans.
RIGHTS OF BENEFICIAL OWNERS MAY
BE LIMITED BY BOOK-ENTRY SYSTEM
All of the Offered Certificates other than the Class R Certificates are
Book-Entry Certificates and will be held through the book-entry system of The
Depository Trust Company, and transactions in the Book-Entry Certificates
generally can be effected only through DTC and DTC Participants. As a result:
- your ability to pledge Book-Entry Certificates to entities that do not
participate in the DTC system, or to otherwise act with respect to
Book-Entry Certificates, may be limited due to the lack of a physical
certificate for your Certificates; and
- under a book-entry format, you may experience delays in the receipt of
payments, since distributions will be made by the Trustee to DTC, and
not directly to you.
S-13
<PAGE> 14
For a more detailed discussion of the Book-Entry Certificates, see
"Description of Certificates -- Book-Entry Certificates" in this Prospectus
Supplement.
TAX CONSEQUENCES OF RESIDUAL CERTIFICATES
- The Class R Certificates will be the sole "residual interest" in the
REMIC for federal income tax purposes.
- Holders of Class R Certificates must report as ordinary income or loss
their pro rata share of the net income or the net loss of the REMIC
whether or not any cash distributions are made to them. This allocation
of income or loss may result in a zero or negative after-tax return.
- Due to their tax consequences, the Class R Certificates will be subject
to restrictions on transfer that may affect their liquidity. In
addition, the Class R Certificates may not be acquired by Benefit Plans.
See "Description of Certificates -- Restrictions on Transfer of the Class R
Certificates," "Prepayment and Yield Considerations -- Yield on the Class R
Certificates," "Benefit Plan Considerations" and "Certain Federal Income Tax
Consequences" in this Prospectus Supplement.
RISK ASSOCIATED WITH YEAR 2000 COMPLIANCE
The following is a Year 2000 readiness disclosure within the meaning of the
Year 2000 Information and Readiness Disclosure Act.
Each of the Servicers and their ultimate corporate parent, BankAmerica
Corporation (the "CORPORATION"), like all financial institutions, are faced with
the challenge of correctly stating and processing data containing dates from the
Year 2000 and beyond, i.e. becoming Year 2000 ready. Computers programmed with a
two-digit field for identifying the year interpret "98" as "1998," but may
interpret "00" as "1900" rather than "2000." If not remedied, this problem could
create system errors and failures resulting in the disruption of normal business
operations. The Corporation has established project teams to address these Year
2000 issues. For additional information on the Corporation's Year 2000
remediation efforts, readers of this Prospectus Supplement are referred to the
Corporation's Quarterly Report on Form 10-Q for the period ended September 30,
1998, which is incorporated herein by reference, and any subsequent reports
filed by the Corporation under the Securities Exchange Act of 1934, as amended.
The Servicers and their major vendors of mortgage servicing software are
preparing contingency plans which will be implemented, if required, to minimize
interruptions to mortgage servicing operations. However, due to the size and
complexity of some systems, some of which are provided by outside vendors, and
the necessity for these systems to interface correctly, both within and outside
the Servicers, there is the possibility that some systems may not handle
date-related data correctly after January 1, 2000. Nevertheless, based on their
efforts and those of their major vendors and the information available to date,
and assuming the continued availability to the Servicers and to their
significant vendors of staff and other technical resources and no unexpected
difficulty in implementing system enhancements, each Servicer believes that it
will not incur significant operational disruptions to mortgage servicing
operations as a result of the Year 2000 problem. Each Servicer is currently on
schedule to make its mission critical mortgage servicing systems Year 2000 ready
by the end of 1998, and expects the mission critical systems provided by vendors
will be Year 2000 ready before January 1, 2000. However, the Servicers are
heavily dependent on their outside vendors and the systems of third parties.
There can be no assurance that the systems of third parties with which the
Servicers deal will be timely converted.
S-14
<PAGE> 15
Likewise, the Servicers do not have the same ability to monitor and control
their outside vendors as they have for their internal systems.
The Trustee has informed the Depositor and the Servicers that it will use
commercially reasonable efforts to (i) make the computer hardware and software
owned by the Trustee and used to provide its services under the Pooling
Agreement Year 2000 ready before December 31, 1999, (ii) test software that the
Trustee licenses from third parties to provide services under the Pooling
Agreement and subject to certain conditions, if any such software is not Year
2000 ready by September 30, 1999, obtain replacement software that is warranted
by its vendor as Year 2000 ready and (iii) contact third party service providers
that the Trustee may use to provide services under the Pooling Agreement to
obtain assurances from them that the computer hardware and software used to
provide services under the Pooling Agreement are Year 2000 ready. However, there
can be no assurance that the systems of the Trustee or third parties with which
the Trustee deals will be Year 2000 ready.
If either of the Servicers or any of their vendors or third party service
providers is not Year 2000 ready, that Servicer most likely will not be able to
process payments on the Mortgage Loans on a timely basis or accurately. These
problems could lead to the occurrence of an event of default under the Pooling
Agreement. For the remedies available upon the occurrence of an event of
default, see "The Pooling and Servicing Agreement -- Rights Upon Events of
Default" in the Prospectus.
If the Trustee or any of its vendors or third party service providers is
not Year 2000 ready, the Trustee may not be able to make timely or accurate
payments to certificateholders. The Pooling Agreement provides that the holders
of Certificates evidencing at least 50% of the voting rights have the right to
remove the Trustee by providing written notice to the Servicers and the Trustee.
Replacement of a Servicer or the Trustee could lead to payment delays on
the Certificates during any transition period.
The forward-looking statements contained in this Year 2000 discussion
should be read in conjunction with the continuing statement included in the last
paragraph on page S-2 of this Prospectus Supplement.
- --------------------------------------------------------------------------------
THE MORTGAGE POOL
- --------------------------------------------------------------------------------
The following descriptions of the Mortgage Loans and the mortgaged
properties are based upon the expected characteristics of the Mortgage Loans as
of the close of business on the Cut-off Date. The balances shown have been
adjusted for the scheduled principal payments due on or before the Cut-off Date.
Prior to the Closing Date, Mortgage Loans may be removed from the Mortgage Pool
and other Mortgage Loans may be substituted for them. The Depositor believes
that the information set forth in this Prospectus Supplement is representative
of the characteristics of the Mortgage Pool as it will be constituted on the
Closing Date. Unless the context requires otherwise, references below to
percentages of the Mortgage Loans are approximate percentages of the aggregate
scheduled balance of the Mortgage Loans as of the Cut-off Date.
The Trust Fund will consist primarily of a pool (the "MORTGAGE POOL") of
fixed-rate, conventional, fully-amortizing mortgage loans (the "MORTGAGE LOANS")
secured by first liens on one- to four-family residential properties. As of the
Cut-off Date, the Mortgage Pool is expected to include 806 Mortgage Loans with
an aggregate Stated Principal Balance of approximately $281,261,129. The
Mortgage Loans will have original terms to stated maturity ranging from 120 to
180 months. The Mortgage Loans will
S-15
<PAGE> 16
have scheduled monthly payments of interest and principal due on the first day
of each month. Each Mortgage Loan bears interest at a fixed rate.
The Mortgage Pool consists of Mortgage Loans either (i) originated by one
of the Sellers or (ii) purchased by one of the Sellers from various entities
that either originated the Mortgage Loans or acquired the Mortgage Loans
pursuant to mortgage loan purchase programs operated by such entities. The
Mortgage Loans will be sold by the Sellers to NationsBanc Mortgage Capital
Corporation ("NMCC"), an affiliate of the Depositor, prior to the Closing Date
pursuant to two or more mortgage loan sale agreements, each between one of the
Sellers and NMCC (the "SALE AGREEMENTS"). All rights of NMCC in the Sale
Agreements, including the remedies for any breaches of such representations and
warranties made by the Sellers and for failure to deliver documentation, will be
assigned by NMCC to the Depositor on the Closing Date and, in turn, will be
assigned by the Depositor to the Trust Fund pursuant to the Pooling Agreement.
The Depositor will make no additional representations or warranties with respect
to the Mortgage Loans and will have no additional obligation to repurchase or
substitute for Mortgage Loans.
As of the Cut-off Date, each Mortgage Loan is expected to have a Stated
Principal Balance of at least approximately $229,250 and of not more than
approximately $854,439 and the average Stated Principal Balance of the Mortgage
Loans is expected to be approximately $348,959. The latest stated maturity date
of any of the Mortgage Loans is expected to be December 1, 2013; however,
borrowers may prepay their Mortgage Loans at any time without penalty.
Accordingly, the actual date on which any Mortgage Loan is paid in full may be
earlier than the stated maturity date due to unscheduled payments of principal.
As of the Cut-off Date, no Mortgage Loan was delinquent and no Mortgage
Loan has been more than 30 days delinquent more than once during the preceding
twelve months. None of the Mortgage Loans will be subject to any buydown
agreement.
As of the Cut-off Date, no Mortgage Loan will have a Loan-to-Value Ratio of
more than 95.00%. For more information on the Loan-to-Value Ratios of the
Mortgage Loans, see the "Original Loan-to-Value Ratios" table below. Subject to
minor exceptions permitted in each Seller's discretion, each Mortgage Loan with
a Loan-to-Value Ratio at origination in excess of 80% will be covered by a
primary mortgage guaranty insurance policy which shall conform to the standards
of Fannie Mae ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC").
No such primary mortgage insurance policy will be required with respect to any
such Mortgage Loan after the date on which the related Loan-to-Value Ratio is
less than 80%.
The "LOAN-TO-VALUE RATIO" of a Mortgage Loan at any time is the percentage
equal to (i) the principal balance of the related Mortgage Loan divided by (ii)
the lesser of (a) the appraised value of the related mortgaged property
determined in an appraisal obtained by the originator at origination of the
Mortgage Loan and (b) except for Mortgage Loans made for refinancing purposes,
the sales price for the mortgaged property. The value of any mortgaged property
generally will change from the level that existed on the appraisal or sales
date. If residential real estate values generally or in a particular geographic
area decline, the Loan-to-Value Ratios might not be a reliable indicator of the
rates of delinquencies, foreclosures and losses that could occur with respect to
the Mortgage Loans.
S-16
<PAGE> 17
MORTGAGE LOAN DATA
The following tables set forth certain characteristics of the Mortgage
Loans as of the Cut-off Date. The balances and percentages may not be exact due
to rounding.
OCCUPANCY OF MORTGAGED PROPERTIES(1)
<TABLE>
<CAPTION>
AGGREGATE % OF
NUMBER OF STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
OCCUPANCY STATUS LOANS CUT-OFF DATE BALANCE
- ---------------- --------- ---------------- --------------
<S> <C> <C> <C>
Primary Residence.................................. 769 $268,288,788.23 95.39%
Second Home........................................ 37 12,972,340.41 4.61
--- --------------- ------
Total.................................... 806 $281,261,128.64 100.00%
=== =============== ======
</TABLE>
- ---------------
(1) Based solely on representations of the mortgagor at the time of origination
of the related Mortgage Loan.
PROPERTY TYPES
<TABLE>
<CAPTION>
AGGREGATE % OF
NUMBER OF STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
PROPERTY TYPE LOANS CUT-OFF DATE BALANCE
- ------------- --------- ---------------- --------------
<S> <C> <C> <C>
Single Family Detached................................. 580 $201,900,511.06 71.78%
PUD.................................................... 200 70,305,016.48 25.00
Condominium............................................ 22 7,838,471.85 2.79
Townhome............................................... 3 897,371.71 0.32
Duplex................................................. 1 319,757.54 0.11
--- --------------- ------
Total........................................ 806 $281,261,128.64 100.00%
=== =============== ======
</TABLE>
MORTGAGE LOAN PURPOSE
<TABLE>
<CAPTION>
AGGREGATE % OF
NUMBER OF STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
LOAN PURPOSE LOANS CUT-OFF DATE BALANCE
- ------------ --------- ---------------- --------------
<S> <C> <C> <C>
Refinance -- Rate/Term............................. 534 $190,676,907.80 67.79%
Purchase........................................... 139 48,426,833.15 17.22
Refinance -- Cashout............................... 133 42,157,387.69 14.99
--- --------------- ------
Total.................................... 806 $281,261,128.64 100.00%
=== =============== ======
</TABLE>
S-17
<PAGE> 18
GEOGRAPHICAL DISTRIBUTION OF THE MORTGAGED PROPERTIES(1)
<TABLE>
<CAPTION>
AGGREGATE % OF
NUMBER OF STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
GEOGRAPHIC AREA LOANS CUT-OFF DATE BALANCE
- --------------- --------- ---------------- --------------
<S> <C> <C> <C>
Alabama............................................ 4 $ 1,321,288.38 0.47%
Arizona............................................ 19 7,061,222.38 2.51
Arkansas........................................... 1 323,929.32 0.12
California......................................... 260 91,276,958.98 32.45
Colorado........................................... 35 11,963,039.11 4.25
Connecticut........................................ 7 2,201,884.53 0.78
Delaware........................................... 2 765,252.24 0.27
District of Columbia............................... 3 937,158.17 0.33
Florida............................................ 25 8,220,096.48 2.92
Georgia............................................ 23 8,015,163.80 2.85
Hawaii............................................. 1 553,000.00 0.20
Idaho.............................................. 1 238,513.64 0.08
Illinois........................................... 37 12,948,274.54 4.60
Indiana............................................ 3 978,076.51 0.35
Iowa............................................... 4 1,152,163.05 0.41
Kansas............................................. 6 2,469,147.03 0.88
Kentucky........................................... 8 2,809,839.80 1.00
Maryland........................................... 18 6,707,814.72 2.38
Massachusetts...................................... 32 10,833,968.35 3.85
Michigan........................................... 11 4,339,959.67 1.54
Minnesota.......................................... 11 3,586,425.11 1.28
Mississippi........................................ 1 235,621.56 0.08
Missouri........................................... 17 6,249,058.91 2.22
Nebraska........................................... 2 786,506.18 0.28
Nevada............................................. 3 1,046,972.89 0.37
New Hampshire...................................... 3 1,303,707.10 0.46
New Jersey......................................... 7 2,289,847.21 0.81
New Mexico......................................... 4 1,213,805.19 0.43
New York........................................... 6 1,758,799.17 0.63
North Carolina..................................... 25 8,639,681.28 3.07
Ohio............................................... 10 2,977,772.03 1.06
Oklahoma........................................... 3 1,048,319.99 0.37
Oregon............................................. 11 4,551,855.75 1.62
Pennsylvania....................................... 13 4,488,105.18 1.60
Rhode Island....................................... 2 549,400.00 0.20
South Carolina..................................... 29 9,246,616.05 3.29
Tennessee.......................................... 25 8,306,541.19 2.95
Texas.............................................. 66 24,631,611.81 8.76
Utah............................................... 8 2,713,869.27 0.96
Virginia........................................... 26 9,152,703.26 3.25
Washington......................................... 23 7,518,705.12 2.67
Wisconsin.......................................... 11 3,848,453.69 1.37
--- --------------- ------
Total.................................... 806 $281,261,128.64 100.00%
=== =============== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, no more than approximately 1.35% of the Mortgage
Loans are expected to be secured by mortgaged properties located in any one
five-digit postal zip code.
S-18
<PAGE> 19
CURRENT MORTGAGE LOAN PRINCIPAL BALANCES(1)
<TABLE>
<CAPTION>
AGGREGATE % OF
NUMBER OF STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
CURRENT MORTGAGE LOAN PRINCIPAL BALANCES LOANS CUT-OFF DATE BALANCE
- ---------------------------------------- --------- ---------------- --------------
<S> <C> <C> <C>
Less than or equal to $250,000.00...................... 67 $ 16,214,239.27 5.76%
$250,000.01-$300,000.00................................ 246 68,165,656.27 24.24
$300,000.01-$350,000.00................................ 193 62,892,448.64 22.36
$350,000.01-$400,000.00................................ 132 49,591,580.21 17.63
$400,000.01-$450,000.00................................ 55 23,394,775.58 8.32
$450,000.01-$500,000.00................................ 42 20,026,036.68 7.12
$500,000.01-$550,000.00................................ 30 15,808,645.47 5.62
$550,000.01-$600,000.00................................ 16 9,151,881.07 3.25
$600,000.01-$650,000.00................................ 23 14,339,976.78 5.10
$800,000.01-$850,000.00................................ 1 821,450.00 0.29
$850,000.01-$900,000.00................................ 1 854,438.67 0.30
--- --------------- ------
Total........................................ 806 $281,261,128.64 100.00%
=== =============== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, the average outstanding principal balance of the
Mortgage Loans is expected to be approximately $348,959.
ORIGINAL LOAN-TO-VALUE RATIOS(1)
<TABLE>
<CAPTION>
AGGREGATE % OF
NUMBER OF STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
ORIGINAL LOAN-TO-VALUE RATIOS LOANS CUT-OFF DATE BALANCE
- ----------------------------- --------- ---------------- --------------
<S> <C> <C> <C>
10.01%-15.00%.......................................... 1 $ 300,000.00 0.11%
20.01%-25.00%.......................................... 2 780,000.00 0.28
25.01%-30.00%.......................................... 9 3,276,132.69 1.16
30.01%-35.00%.......................................... 8 2,964,515.13 1.05
35.01%-40.00%.......................................... 26 8,708,140.99 3.10
40.01%-45.00%.......................................... 34 12,154,940.79 4.32
45.01%-50.00%.......................................... 37 12,673,405.29 4.51
50.01%-55.00%.......................................... 52 20,345,445.74 7.23
55.01%-60.00%.......................................... 52 16,993,465.50 6.04
60.01%-65.00%.......................................... 83 29,814,470.81 10.60
65.01%-70.00%.......................................... 130 49,890,783.23 17.74
70.01%-75.00%.......................................... 153 49,374,706.83 17.55
75.01%-80.00%.......................................... 193 66,122,550.47 23.51
80.01%-85.00%.......................................... 9 2,793,836.98 0.99
85.01%-90.00%.......................................... 16 4,788,534.19 1.70
90.01%-95.00%.......................................... 1 280,200.00 0.10
--- --------------- ------
Total........................................ 806 $281,261,128.64 100.00%
=== =============== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the Mortgage Loans is expected to be approximately 65.73%.
S-19
<PAGE> 20
MORTGAGE INTEREST RATES(1)
<TABLE>
<CAPTION>
AGGREGATE % OF
NUMBER OF STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
MORTGAGE INTEREST RATES LOANS CUT-OFF DATE BALANCE
- ----------------------- --------- ---------------- --------------
<S> <C> <C> <C>
5.501%-6.000%.......................................... 11 $ 3,762,902.24 1.34%
6.001%-6.250%.......................................... 25 8,463,437.14 3.01
6.251%-6.500%.......................................... 138 49,125,763.99 17.47
6.501%-6.750%.......................................... 276 97,788,800.87 34.77
6.751%-7.000%.......................................... 267 91,371,662.16 32.49
7.001%-7.250%.......................................... 73 25,117,370.06 8.93
7.251%-7.500%.......................................... 12 4,263,998.37 1.52
7.501%-7.750%.......................................... 4 1,367,193.81 0.49
--- --------------- ------
Total........................................ 806 $281,261,128.64 100.00%
=== =============== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average mortgage interest rate of the
Mortgage Loans is expected to be approximately 6.769% per annum.
REMAINING TERMS(1)
<TABLE>
<CAPTION>
AGGREGATE % OF
NUMBER OF STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
REMAINING TERM LOANS CUT-OFF DATE BALANCE
- -------------- --------- ---------------- --------------
<S> <C> <C> <C>
61-120 months......................................... 16 $ 6,044,467.17 2.15%
121-180 months......................................... 790 275,216,661.47 97.85
--- --------------- ------
Total........................................ 806 $281,261,128.64 100.00%
=== =============== ======
</TABLE>
- ---------------
(1) As of the Cut-off Date, the weighted average stated remaining term of the
Mortgage Loans is expected to be approximately 177 months.
CREDIT SCORING OF MORTGAGORS(1)
<TABLE>
<CAPTION>
AGGREGATE % OF
NUMBER OF STATED PRINCIPAL CUT-OFF DATE
MORTGAGE BALANCE AS OF POOL PRINCIPAL
CREDIT SCORES LOANS CUT-OFF DATE BALANCE
- ------------- --------- ---------------- --------------
<S> <C> <C> <C>
0-550................................................ 5 $ 1,948,773.18 0.69%
551-600................................................ 1 386,400.00 0.14
601-650................................................ 28 10,112,301.37 3.60
651-700................................................ 108 37,971,267.77 13.50
701-750................................................ 285 100,242,520.07 35.64
751-800................................................ 359 123,473,974.24 43.90
801-850................................................ 16 5,526,531.42 1.96
Unknown Scores......................................... 4 1,599,360.59 0.57
--- --------------- ------
Total........................................ 806 $281,261,128.64 100.00%
=== =============== ======
</TABLE>
- ---------------
(1) The scores shown are FICO Scores from Experian ("FICO SCORES"). FICO Scores
generally range from approximately 250 to approximately 900 with a higher
score indicating an individual with a more favorable credit history than an
individual with a lower score. Credit scores such as the FICO Scores are
statistical credit scores designed to assess a borrower's creditworthiness
and likelihood to default on a consumer obligation over a two-year period.
Such scores are derived from
S-20
<PAGE> 21
a scoring model developed by the Fair, Isaac Company. FICO Scores were not
developed to predict the likelihood of default on mortgage loans and,
accordingly, may not be indicative of the ability of a mortgagor to repay
its Mortgage Loan.
UNDERWRITING STANDARDS OF
NATIONSBANC MORTGAGE CORPORATION
Each Mortgage Loan originated or acquired by NationsBanc Mortgage
Corporation has satisfied the credit, appraisal and underwriting guidelines
established by NationsBanc Mortgage Corporation which may be varied in cases
deemed appropriate by NationsBanc Mortgage Corporation. NationsBanc Mortgage
Corporation'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. These underwriting guidelines are applied in a
standard procedure which is intended to comply with applicable federal and state
laws and regulations. With respect to NationsBanc Mortgage Corporation's
underwriting guidelines, such underwriting standards generally include a set of
specific criteria pursuant to which the underwriting evaluation is made.
However, the application of such underwriting guidelines does not imply that
each specific criteria was satisfied individually. NationsBanc Mortgage
Corporation will have considered a Mortgage Loan to be originated in accordance
with a given set of underwriting guidelines if, based on an overall qualitative
evaluation, the loan is in substantial compliance with such underwriting
guidelines. A Mortgage Loan may be considered to comply with a set of
underwriting standards, even if one or more specific criteria included in such
underwriting standards were not satisfied, if other factors compensated for the
criteria that were not satisfied or the Mortgage Loan is considered to be in
substantial compliance with the underwriting standards.
Initially, a prospective mortgagor is required to fill out a detailed
industry standard application designed to provide pertinent credit information.
As part of the description of the prospective mortgagor's financial condition,
the applicant is required to provide current information describing assets and
liabilities and a statement of income and expenses, as well as an authorization
to apply for a credit report which summarizes the applicant's credit history
with merchants and lenders and any record of bankruptcy. In most cases, an
employment verification is obtained either from the applicant's employer wherein
the employer reports the length of employment with that organization, the
current salary and an indication as to whether it is expected that the applicant
will continue such employment in the future or through analysis of copies of
federal withholding (IRS W-2) forms, current payroll earnings statements and
account statements of the applicant. If a prospective mortgagor is
self-employed, the applicant is required to submit copies of signed tax returns.
The applicant also authorizes deposit verification at all financial institutions
where the applicant has accounts. The Seller may, as part of its overall
evaluation of the applicant's creditworthiness, use a credit scoring system or
mortgage scoring system to evaluate in a statistical manner the expected
performance of a Mortgage Loan based on the pertinent credit information
concerning the applicant provided through national credit bureaus, certain other
information provided by the applicant and an assessment of specific mortgage
loan characteristics, including loan-to-value ratio and type of loan product.
NationsBanc Mortgage Corporation has employed alternative underwriting
guidelines (the "LIMITED OR REDUCED DOCUMENTATION GUIDELINES") for certain
qualifying mortgage loans underwritten by NationsBanc Mortgage Corporation
through an underwriting program designed to streamline the loan review process.
Certain reduced loan documentation programs may not require income, employment
or asset verifications. Generally, in order to be eligible for a reduced loan
documentation program, the mortgaged property must have a loan-to-value ratio
which supports the amount of the mortgage loan and the mortgagor must have a
good credit history. Eligibility for such program may be
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<PAGE> 22
determined by use of a credit scoring model. None of the Mortgage Loans acquired
from NationsBanc Mortgage Corporation have been originated under the Limited or
Reduced Documentation Guidelines.
Once all applicable employment and deposit documentation and the credit
report are received, a determination is made as to whether the prospective
mortgagor has sufficient monthly income available (i) to meet the mortgagor's
monthly obligations on the proposed mortgage loan and other expenses related to
the mortgaged property (such as property taxes, hazard insurance and maintenance
and utility costs) and (ii) to meet other financial obligations and monthly
living expenses.
To determine the adequacy of the mortgaged property as collateral, an
independent appraisal is made of each mortgaged property considered for
financing. The appraiser is required to inspect the mortgaged property and
verify that it is in acceptable condition and that construction, if recent, has
been completed. The appraisal is based on the appraiser's estimate of values,
giving appropriate weight to both the market value of comparable housing, as
well as the cost of replacing the mortgaged property.
Certain states where the mortgaged properties securing the Mortgage Loans
are located are "anti-deficiency" states where, in general, lenders providing
credit on one- to four-family properties must look solely to the property for
repayment in the event of foreclosure. See "Certain Legal Aspects of the
Mortgage Loans -- Anti-Deficiency Legislation and Other Limitations on Sellers"
in the Prospectus. NationsBanc Mortgage Corporation's underwriting guidelines in
all states (including anti-deficiency states) require that the value of the
mortgaged property being financed, as indicated by the independent appraisal,
currently supports and is anticipated to support in the future the outstanding
loan balance and provides sufficient value to mitigate the effects of adverse
shifts in real estate values, although there can be no assurance that such value
will support the outstanding loan balance in the future.
UNDERWRITING STANDARDS OF
BANK OF AMERICA, FSB
Bank of America, FSB and certain affiliated sellers (the "AFFILIATED
SELLERS") have written, and are continuously updating, underwriting guides for
the origination of one- to four-family residential first mortgage loans (as
modified from time to time, the "GUIDES"). The underwriting standards as set
forth in the Guides are continuously revised based on prevailing conditions in
the residential mortgage market, evolving credit standards of the Affiliated
Sellers and the investment market for residential mortgage loans. Each Mortgage
Loan originated or acquired by Bank of America, FSB has satisfied the
underwriting standards set forth in the Guides.
The underwriting standards set forth in the Guides are intended to assess
the prospective borrower's ability and willingness to repay the debt and the
adequacy of the property as collateral for the loan requested. Credit policies
of the Affiliated Sellers require that loan underwriters be satisfied that the
value of the property being financed supports the outstanding loan balance with
sufficient value at loan origination to mitigate the effects of adverse shifts
in real estate values. The emphasis, however, remains on the borrowers' ability
to repay debt.
The real estate lending processes of the Affiliated Sellers for one-to
four-family mortgage loans follow standard procedures, designed to comply with
applicable federal and state laws and regulations. Initially, a prospective
borrower is required to complete a detailed application designed to provide to
the underwriter pertinent information about the prospective borrower, the
property to be financed and the type of loan desired. Information regarding the
property to be financed may be provided by the prospective borrower after the
applicable Affiliated Seller has approved, subject to review of the property to
be financed, a loan to the prospective borrower. As part of the description of
the prospective borrower's financial condition, the Affiliated Sellers generally
require a description of assets and liabilities and income and expenses and
obtain a credit report which summarizes the prospective
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<PAGE> 23
borrower's credit history with merchants and lenders and any public records,
such as bankruptcy. In most cases, employment verification is obtained providing
current and historical income information. Such employment verification is
obtained either through the applicable Affiliated Seller's analysis of the
prospective borrower's W-2 forms for the most recent two years and year-to-date
earnings statement or most recent two years' tax returns, or from the
prospective borrower's employer, wherein the employer reports the length of
employment and current salary with that organization. Self-employed prospective
borrowers generally are required to submit their federal tax returns for the
past two years plus year-to-date financial statements if the loan application is
made 120 days or longer after the end of the most recent tax year for which a
federal tax return was provided. In general, an employment verification is
obtained, and with respect to certain loans, a telephonic employment
confirmation is obtained by the Affiliated Seller.
Beginning in April 1994, the Affiliated Sellers began using an automated
process to assist in making credit decisions on certain residential real estate
loans. A prospective borrower's credit history is assigned a score based on
standard criteria designed to predict the possibility of a default by the
prospective borrower on a mortgage loan. An application from a prospective
borrower whose score indicates a high probability of a default will receive
scrutiny from a senior underwriter who may override a decision based on the
credit score. An application from a prospective borrower whose score indicates a
low probability of default is eligible for the Affiliated Sellers' rapid
processing program (the "RAPID PROCESSING PROGRAM"). Loans in the Rapid
Processing Program are subject to less stringent underwriting guidelines and
documentation standards to verify the information in the application. 59.4% of
the Mortgage Loans acquired from Bank of America, FSB have been originated under
the Rapid Processing Program.
With respect to most mortgage loans originated by the Affiliated Sellers,
once the employment verification (or confirmation) and the credit report are
received by the underwriter considering the loan application, a determination is
made as to whether the prospective borrower has sufficient monthly income
available to meet the borrower's monthly obligations on the proposed loan and
other expenses related to the residence as well as to meet other financial
obligations and monthly living expenses. Where there are two individuals
co-signing any mortgage note, the income and payment obligations of both may be
included in the computation.
Prior to final loan approval a prospective borrower generally is expected
to have liquid assets sufficient to cover the down-payment, closing costs and
cash reserves that could be used to pay future housing expenses in a depository
or related account of the borrower. However, the Affiliated Sellers generally do
not require prospective borrowers to have such liquid assets when they originate
refinance loans.
An appraisal is made of each property to be financed. The appraisal is
conducted by either a staff appraiser of the applicable Affiliated Seller, or in
some instances, an independent fee appraiser licensed in the jurisdiction where
such property is located. Generally, as part of the loan origination process,
the appraiser personally visits the property and estimates its market value on
the basis of comparable properties and other factors.
The Affiliated Sellers have generally not made one- to four-family mortgage
loans having Loan-to Value Ratios above 80% unless they have obtained or caused
the borrowers to obtain primary mortgage insurance policies.
The mortgaged properties may be located in states where, in general, a
lender providing credit on a single-family property may not seek a deficiency
judgment against the mortgagor but rather must look solely to the property for
repayment in the event of foreclosure. See "Certain Legal Aspects of the
Mortgage Loans -- Anti-Deficiency Legislation and Other Limitations on Sellers"
in the Prospectus.
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<PAGE> 24
The underwriting standards contained in the Guides applicable to all states
(including anti-deficiency states) require that the value of the property being
financed, as indicated by the appraisal, currently supports and is anticipated
to support in the future the outstanding loan balance, although there can be no
assurance that such value will support the loan balance in the future.
- --------------------------------------------------------------------------------
NATIONSBANC MORTGAGE CORPORATION
- --------------------------------------------------------------------------------
NationsBanc Mortgage Corporation is a wholly-owned subsidiary of
NationsBank, N.A., which is an indirect, wholly-owned subsidiary of BankAmerica
Corporation. NationsBanc Mortgage Corporation is primarily engaged in the
business of (i) originating and purchasing residential mortgage loans in its own
name and (ii) servicing residential mortgage loans for its own account or for
the account of others. NationsBanc Mortgage Corporation's principal executive
offices are located at 201 North Tryon Street, 14th Floor, Charlotte, North
Carolina 28255 and the telephone number is (704) 388-4545, and NationsBanc
Mortgage Corporation's operations offices are located at 101 East Main Street,
Suite 400, Louisville, Kentucky 40202 and the telephone number is (502)
566-5100. NationsBanc Mortgage Corporation is approved by the Government
National Mortgage Association, FNMA and FHLMC as a seller/servicer.
- --------------------------------------------------------------------------------
BANK OF AMERICA, FSB
- --------------------------------------------------------------------------------
Bank of America, FSB is a wholly-owned subsidiary of BankAmerica
Corporation. Bank of America, FSB originates and services home loans nationwide
through retail, wholesale, and other specialized channels.
Bank of America, FSB's headquarters is located in Portland, Oregon, and its
administrative offices are located at 555 California Street, San Francisco,
California 94104, and the telephone number is (415) 622-2220. Bank of America,
FSB has been approved as a mortgagee and seller/servicer by the Department of
Housing and Urban Development, the Veterans Administration, the Government
National Mortgage Association, FNMA and FHLMC.
- --------------------------------------------------------------------------------
SERVICING OF MORTGAGE LOANS
- --------------------------------------------------------------------------------
All of the Mortgage Loans acquired from NationsBanc Mortgage Corporation
will be serviced by NationsBanc Mortgage Corporation. All of the Mortgage Loans
acquired from Bank of America, FSB will be serviced by Bank of America, FSB.
NationsBanc Mortgage Corporation and Bank of America, FSB (together, in their
capacity as servicers, the "SERVICERS") will service the Mortgage Loans in
accordance with the terms of the Pooling Agreement. The Servicers may perform
any of their obligations under the Pooling Agreement through one or more
subservicers. Despite the existence of subservicing arrangements, each Servicer
will be liable for its servicing duties and obligations under the Pooling
Agreement as if that Servicer alone were servicing the Mortgage Loans. See "The
Pooling and Servicing Agreement" in the Prospectus.
S-24
<PAGE> 25
FORECLOSURE AND DELINQUENCY EXPERIENCE
OF NATIONSBANC MORTGAGE CORPORATION
Historically, a variety of factors, including the appreciation of real
estate values, have limited NationsBanc Mortgage Corporation's foreclosure and
delinquency experience on its portfolio of mortgage loans. Factors beyond
NationsBanc Mortgage Corporation's control, such as national or local economic
conditions or downturns in the real estate markets in its lending areas, may
result in increased rates of delinquencies and foreclosure losses in the future.
The information in the table below has not been adjusted to eliminate the
effect of the significant growth in the size of the portfolio of mortgage loans
originated by NationsBanc Mortgage Corporation during the periods shown.
Accordingly, foreclosures and delinquencies as percentages of aggregate
principal balance of mortgage loans serviced for each period may be higher than
those that would be shown if a group of mortgage loans were artificially
isolated at a point in time and the information disclosed the activity only in
that isolated group. However, since most of the mortgage loans in the portfolio
of jumbo mortgage loans serviced by NationsBanc Mortgage Corporation during the
periods shown are not fully seasoned, the foreclosure and delinquency
information for such an isolated group would also be distorted to some degree.
The following table summarizes the delinquency and foreclosure experience
on the dates indicated on non-conforming and FHLMC- and FNMA-conforming first
deed of trust or mortgage loans serviced by NationsBanc Mortgage Corporation
(excluding certain recent bulk acquisitions of servicing rights) at its
Louisville servicing center and which were originated in a manner consistent
with the underwriting criteria of NationsBanc Mortgage Corporation described in
this Prospectus Supplement under "The Mortgage Pool -- Underwriting Standards of
NationsBanc Mortgage Corporation." NationsBanc Mortgage Corporation's portfolio
of non-conforming and FHLMC- and FNMA-conforming, first deed of trust and
mortgage loans described below contains fixed- and adjustable-rate mortgage
loans having a variety of original terms to maturity and payment
characteristics. Accordingly, this portfolio may differ significantly from the
Mortgage Loans at any time in terms of interest rates, principal balances,
geographic distribution, loan-to-value ratios and other possibly relevant
characteristics. It is highly likely that the delinquency and foreclosure
experience with respect to the Mortgage Loans will differ from that reflected in
the table below. Likewise, it is highly likely that any losses experienced on
liquidation of defaulted Mortgage Loans will occur at different rates than those
shown below. The actual delinquency and foreclosure experience on the Mortgage
Loans, substantially all of which are non-conforming loans, will depend, among
other things, upon the value of the real estate securing such Mortgage Loans and
the ability and willingness of mortgagors to make required payments.
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<PAGE> 26
NATIONSBANC MORTGAGE CORPORATION
DELINQUENCY AND FORECLOSURE EXPERIENCE ON MORTGAGE LOANS
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998 AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
-------------------------- -------------------------- --------------------------
NUMBER/% NUMBER/% NUMBER/%
OF OUTSTANDING OF OUTSTANDING OF OUTSTANDING
MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL MORTGAGE PRINCIPAL
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
-------- --------------- -------- --------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio............................ 386,559 $42,367,531,072 339,638 $36,056,082,222 304,921 $32,561,189,618
Delinquencies*
One installment delinquent................ 6,982 $ 562,270,707 7,241 $ 574,492,392 6,261 $ 477,968,358
Percent Delinquent........................ 1.8% 1.3% 2.1% 1.6% 2.1% 1.5%
Two installments delinquent............... 1,421 $ 101,218,274 1,530 $ 107,777,563 1,249 $ 90,683,948
Percent Delinquent........................ 0.4% 0.2% 0.5% 0.3% 0.4% 0.3%
Three or more installments delinquent..... 1,524 $ 107,225,950 1,811 $ 132,979,230 1,465 $ 105,654,522
Percent Delinquent........................ 0.4% 0.3% 0.5% 0.4% 0.5% 0.3%
In Foreclosure............................. 1,661 $ 122,936,520 1,435 $ 110,815,100 1,358 $ 112,445,453
Percent in Foreclosure.................... 0.4% 0.3% 0.4% 0.3% 0.4% 0.3%
Delinquent and in Foreclosure.............. 11,588 $ 893,651,451 12,017 $ 926,064,285 10,333 $ 786,752,281
Percent Delinquent and in Foreclosure**... 3.0% 2.1% 3.5% 2.6% 3.4% 2.4%
<CAPTION>
AT DECEMBER 31, 1995
--------------------------
NUMBER/%
OF OUTSTANDING
MORTGAGE PRINCIPAL
LOANS AMOUNT
-------- ---------------
<S> <C> <C>
Total Portfolio............................ 260,568 $27,820,905,542
Delinquencies*
One installment delinquent................ 4,727 $ 371,425,718
Percent Delinquent........................ 1.8% 1.3%
Two installments delinquent............... 827 $ 58,519,191
Percent Delinquent........................ 0.3% 0.2%
Three or more installments delinquent..... 875 $ 61,929,401
Percent Delinquent........................ 0.3% 0.2%
In Foreclosure............................. 499 $ 38,350,914
Percent in Foreclosure.................... 0.2% 0.1%
Delinquent and in Foreclosure.............. 6,928 $ 530,225,224
Percent Delinquent and in Foreclosure**... 2.7% 1.9%
</TABLE>
- ---------------
* A mortgage loan is deemed to have "one installment delinquent" if any
scheduled payment of principal or interest is delinquent past the end of the
month in which such payment was due, "two installments delinquent" if such
delinquency persists past the end of the month following the month in which
such payment was due, and so forth.
** The sums of the Percent Delinquent and Percent in Foreclosure set forth in
this table may not equal the Percent Delinquent and in Foreclosure due to
rounding.
FORECLOSURE AND DELINQUENCY EXPERIENCE
OF BANK OF AMERICA, FSB
The delinquency, foreclosure and loss experience on the portfolios of one-
to four-family first mortgage loans owned by Bank of America, FSB and its
affiliate, Bank of America NT&SA, and serviced or subserviced by Bank of
America, FSB are set forth in the following table. The delinquency, foreclosure
and loss experience indicated excludes certain loans originated by private
banking units of Bank of America, FSB's affiliates. The portfolio of mortgage
loans serviced or subserviced by Bank of America, FSB includes both fixed and
adjustable interest rate mortgage loans, including "buydown" mortgage loans,
loans with stated maturities of 15 to 40 years and other types of mortgage loans
having a variety of payment characteristics, and includes mortgage loans secured
by mortgaged properties in geographic locations that may not be representative
of the geographic distribution or concentration of the mortgaged properties
securing the Mortgage Loans. There can be no assurance that the delinquency,
foreclosure and loss experience set forth below will be similar to the results
that may be experienced with respect to the Mortgage Loans.
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<PAGE> 27
BANK OF AMERICA, FSB
DELINQUENCY, FORECLOSURE AND LOSS EXPERIENCE ON MORTGAGE LOANS
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
AT OR FOR THE ---------------------------------------------------------------------------
NINE-MONTH
PERIOD ENDED
SEPTEMBER 30, 1998 1997 1996 1995
----------------------- ----------------------- ----------------------- -----------------------
BY DOLLAR BY DOLLAR BY DOLLAR BY DOLLAR
BY AMOUNT OF BY AMOUNT OF BY AMOUNT OF BY AMOUNT OF
NO. OF LOANS NO. OF LOANS NO. OF LOANS NO. OF LOANS
LOANS (IN MILLIONS) LOANS (IN MILLIONS) LOANS (IN MILLIONS) LOANS (IN MILLIONS)
------- ------------- ------- ------------- ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio...... 113,534 $25,828.6 150,688 $28,721.2 149,178 $27,832.2 174,863 $26,335.1
Average Portfolio
Balance(1)......... 124,892 26,058.8 178,809 32,381.2 160,712 27,105.7 178,221 26,308.5
Period of Delinquency
31 to 59 days...... 2,755 374.2 3,180 415.8 2,613 366.2 2,728 367.5
60 to 89 days...... 696 84.1 817 113.1 662 96.7 779 118.3
90 days or
more(2).......... 517 74.1 780 107.0 613 98.3 877 161.7
------- --------- ------- --------- ------- --------- ------- ---------
Total Delinquent
Loans.............. 3,968 $ 532.4 4,777 $ 635.9 3,888 $ 561.2 4,384 $ 647.5
Delinquency Ratio.... 3.49% 2.06% 3.17% 2.21% 2.61% 2.02% 2.51% 2.46%
Foreclosures
Pending(3)......... 980 $ 144.7 1,082 $ 178.0 904 $ 160.4 1,101 $ 216.0
Foreclosure Ratio.... 0.86% 0.56% 0.72% 0.62% 0.61% 0.58% 0.63% 0.82%
Losses(4)............ 609 $ 15.5 1,363 $ 50.8 1,832 $ 98.8 1,286 $ 112.6
Loss Ratio(5)........ 0.65% 0.08% 0.76% 0.16% 1.14% 0.36% 0.72% 0.43%
</TABLE>
- ---------------
(1) Average Portfolio Balance for the period indicated is based on end of month
balances divided by the number of months in the period indicated.
(2) Does not include Foreclosures Pending.
(3) Includes mortgage loans for which foreclosure proceedings had been
instituted and title to which had not been acquired by Bank of America, FSB,
Bank of America NT&SA, a third party or by an insurer at the date indicated.
(4) Losses shown are the sum of (i) losses less (ii) net gains (Excess
Recoveries) on all mortgage loans liquidated during the period indicated.
"Loss" for any mortgage loan is equal to the difference between (a) the sum
of the outstanding principal balance plus accrued interest, lost interest
income accrued at Bank of America, FSB's internal reinvestment rate or Bank
of America NT&SA's internal reinvestment rate, as applicable, from the date
such mortgage loan became a REO mortgage loan until the date it was
liquidated, servicing advances and all liquidation expenses related to such
mortgage loan and (b) all amounts received in connection with the
liquidation of the related mortgaged property. Losses are included in the
year in which they were expensed or written down.
(5) Loss Ratios are computed by dividing the annualized Losses during the period
indicated by the Average Portfolio Balance during such period.
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<PAGE> 28
- --------------------------------------------------------------------------------
THE POOLING AND SERVICING AGREEMENT
- --------------------------------------------------------------------------------
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated as of December 1, 1998 (the "POOLING AGREEMENT"), among
the Depositor, the Servicers and the Trustee. The Prospectus contains important
additional information regarding the terms and conditions of the Pooling
Agreement and the Certificates. See "The Pooling and Servicing Agreement" in the
Prospectus.
The following summaries do not purport to be complete and are subject to
the provisions of the Pooling Agreement which are incorporated by reference. The
Depositor plans to file a final copy of the Pooling Agreement with the
Securities and Exchange Commission pursuant to a Current Report on Form 8-K
after the Closing Date.
ASSIGNMENT OF MORTGAGE LOANS
In connection with the transfer and assignment of the Mortgage Loans to the
Trustee, the Depositor will deliver or cause to be delivered to the Trustee, or
a custodian for the Trustee, among other things, with respect to each Mortgage
Loan (collectively, the "MORTGAGE FILE"):
- the original Mortgage Note endorsed without recourse in blank or to the
order of the Trustee (or its nominee) or a certificate signed by an
officer of the appropriate Seller certifying that the related original
Mortgage Note has been lost;
- the original or a certified copy of the Mortgage with evidence of
recording indicated thereon (except for any Mortgage not returned from
the public recording office, which will be delivered to the Trustee as
soon as the same is available to the Depositor);
- an assignment in recordable form of the Mortgage (or a copy, if such
assignment has been submitted for recording); and
- if applicable, any riders or modifications to such Mortgage Note and
Mortgage.
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 Depositor or the Sellers. The Trustee will promptly review each
Mortgage File after the Closing Date (or promptly after the Trustee's receipt of
any document permitted to be delivered after the Closing Date) to determine if
any of the foregoing documents is missing.
REPURCHASES OF MORTGAGE LOANS
If any portion of the Mortgage File is not delivered to the Trustee or if a
Mortgage Loan breaches any of the representations made by a Seller in the
relevant Sale Agreement in any material respect and that Seller does not cure
such omission or defect within 90 days, that Seller will on the Distribution
Date in the month following the expiration of the 90-day period either (i)
repurchase the related Mortgage Loan (or any property acquired in respect
thereof) at a price (the "PURCHASE PRICE") equal to 100% of the unpaid principal
balance of such Mortgage Loan plus accrued and unpaid interest on such principal
balance at the related mortgage interest rate, or (ii) substitute an Eligible
Substitute Mortgage Loan; however, such substitution generally is permitted only
within two years of the Closing
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<PAGE> 29
Date. Any Mortgage Loan repurchased or subject to a substitution as described in
this paragraph is referred to as a "DELETED MORTGAGE LOAN."
An "ELIGIBLE SUBSTITUTE MORTGAGE LOAN" generally will:
- have a principal balance, after deduction of all Monthly Payments due in
the month of substitution, not in excess of, and not more than 10% less
than, the Stated Principal Balance of the Deleted Mortgage Loan (the
amount of any shortfall to be deposited by the Seller and held for
distribution to the certificateholders on the related Distribution Date
(a "SUBSTITUTION ADJUSTMENT AMOUNT"));
- have a Net Mortgage Rate equal to that of the Deleted Mortgage Loan;
- have a Loan-to-Value Ratio not higher than that of the Deleted Mortgage
Loan;
- have a remaining term to maturity not greater than (and not more than one
year less than) that of the Deleted Mortgage Loan; and
- comply with all of the representations and warranties incorporated into
the Pooling Agreement as of the date of substitution.
This cure, repurchase or substitution obligation constitutes the sole
remedy available to certificateholders or the Trustee for omission of, or a
material defect in, a Mortgage Loan document.
PAYMENTS ON MORTGAGE LOANS; ACCOUNTS
On or prior to the Closing Date, each Servicer will establish an account
(each, a "COLLECTION ACCOUNT"), which shall be maintained as separate trust
accounts by each Servicer in trust for the benefit of certificateholders. Funds
credited to a Collection Account may be invested for the benefit and at the risk
of the related Servicer in certain eligible investments, as described in the
Pooling Agreement, that are scheduled to mature on or prior to the business day
preceding the next Distribution Date. On or prior to the business day
immediately preceding each Distribution Date, each Servicer will withdraw from
the related Collection Account the amount of Available Funds and will deposit
such Available Funds in an account established and maintained with the Trustee
on behalf of certificateholders (the "DISTRIBUTION ACCOUNT"). Funds credited to
the Distribution Account may be invested for the benefit and at the risk of the
Trustee in certain eligible investments, as described in the Pooling Agreement.
SERVICING COMPENSATION AND PAYMENT
OF EXPENSES
The Expense Fees with respect to the Trust Fund are payable out of the
interest payments received on each Mortgage Loan. The "EXPENSE FEES" consist of
(a) servicing compensation payable to the related Servicer in respect of its
servicing activities (the "SERVICING FEE") and (b) fees paid to the Trustee. The
Expense Fees will accrue on the Stated Principal Balance of each Mortgage Loan
at a rate (the "EXPENSE FEE RATE") equal to the sum of the Servicing Fee Rate
for such Mortgage Loan and the Trustee Fee Rate. The "TRUSTEE FEE RATE" will be
0.01% per annum. The "SERVICING FEE RATE" with respect to each Mortgage Loan
will be the per annum rate equal to (i) the related mortgage interest rate less
(ii) the sum of 6.00% and the Trustee Fee Rate; provided, however, that the
Servicing Fee Rate will not be less than 0.25% per annum with respect to any
Mortgage Loan. The Servicing Fee Rates for the Mortgage Loans are expected to
range from 0.25% to 1.74% per annum and, as of the Cut-off Date, the weighted
average Servicing Fee Rate is expected to be approximately 0.76326%.
The Servicers are obligated to pay certain ongoing expenses associated with
the Trust Fund and incurred by the Servicers in connection with their
responsibilities under the Pooling Agreement. Those
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amounts will be paid by the Servicers out of their Servicing Fee. The amount of
each Servicer's Servicing Fee is subject to adjustment with respect to prepaid
Mortgage Loans, as described below under "-- Compensating Interest." The
Servicers are also entitled to receive all late payment fees, assumption fees
and other similar charges and all investment income earned on amounts on deposit
in the Collection Accounts.
The Trustee is also entitled to receive all investment income earned on
amounts on deposit in the Distribution Account. In addition to its compensation,
the Trustee is entitled to be reimbursed from and indemnified by the Trust Fund
for certain expenses incurred by the Trustee in connection with its
responsibilities under the Pooling Agreement.
COMPENSATING INTEREST
When a Mortgage Loan is subject to a partial prepayment or is prepaid in
full between due dates, the mortgagor is required to pay interest on the amount
prepaid only to the date of prepayment in the case of a prepayment in full or to
the due date in the month in which a partial prepayment is made. No interest
will be paid by the mortgagor on the amount prepaid after those dates.
Prepayments will be distributed to certificateholders on the Distribution Date
in the month following the month of receipt.
Pursuant to the Pooling Agreement, the aggregate Servicing Fee payable to a
Servicer for any month will be reduced by an amount sufficient to pass through
to the Trust Fund on such Distribution Date the lesser of (i) one-twelfth of
0.25% of the balance of the Mortgage Loans serviced by such Servicer and (ii) 30
days' interest at the mortgage interest rate (less the Servicing Fee Rate) on
the amount of each prepayment of a Mortgage Loan serviced by such Servicer (any
such reduction, "COMPENSATING INTEREST"). Any such shortfalls in interest as a
result of prepayments in excess of the amount of Compensating Interest for a
month will reduce the amount of interest available to be distributed to
certificateholders from what would have been the case in the absence of such
prepayments. See "Description of Certificates -- Interest" in this Prospectus
Supplement.
ADVANCES
Subject to the following limitations, the Servicers will be required to
advance (any such advance, an "ADVANCE") prior to each Distribution Date an
amount equal to the aggregate of payments of principal and interest (net of the
related Servicing Fee) which were due on the related due date on the Mortgage
Loans serviced by that Servicer and which were delinquent on the related
Determination Date. Advances by each Servicer will be made from its own funds or
funds in the related Collection Account that do not constitute Available Funds
for such Distribution Date. The obligation to make an Advance with respect to
any Mortgage Loan shall continue until the ultimate disposition of the REO
Property or mortgaged property relating to such Mortgage Loan. An "REO PROPERTY"
is a mortgaged property that has been acquired by either Servicer on behalf of
the Trust Fund through foreclosure or grant of a deed in lieu of foreclosure.
With respect to any Distribution Date, the "DETERMINATION DATE" will be the
fifth business day prior to that Distribution Date.
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. Each Servicer is obligated to make Advances if the 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
either 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 either Servicer to make a required
Advance will constitute an event of default and the Trustee (if it succeeds to
the
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obligations of the defaulting Servicer under the Pooling Agreement) or the
successor servicer will be obligated to make the Advance, in accordance with the
terms of the Pooling Agreement.
OPTIONAL TERMINATION
The circumstances under which the obligations created by the Pooling
Agreement will terminate in respect of the Certificates are described in "The
Pooling and Servicing Agreement -- Termination; Repurchase of Mortgage Loans and
Mortgage Certificates" in the Prospectus. In addition, the Depositor will have
the option to purchase all remaining Mortgage Loans and other assets in the
Trust Fund when the scheduled balance of the Mortgage Pool as of the
Distribution Date on which the purchase proceeds are to be distributed is less
than 5% of the initial balance of the Mortgage Pool.
Distributions in respect of an optional termination will be paid to
certificateholders in order of their priority of distribution as described below
under "Description of Certificates -- Priority of Distributions." The proceeds
from such a distribution may not be sufficient to distribute the full amount to
which each class is entitled if the purchase price is based in part on the fair
market value of the REO Property and such fair market value is less than the
scheduled balance of the related Mortgage Loan.
In no event will the trust created by the Pooling Agreement continue beyond
the later of (a) the repurchase described above, (b) the expiration of 21 years
from the death of the survivor of the person named in the Pooling Agreement and
(c) the final distribution to certificateholders of amounts received in respect
of the assets of the Trust Fund. The termination of the Trust Fund will be
effected in a manner consistent with applicable federal income tax regulations
and the REMIC status of the REMIC.
THE TRUSTEE
Norwest Bank Minnesota, National Association ("NORWEST BANK") will be the
Trustee under the Pooling Agreement. Norwest Bank, a direct, wholly-owned
subsidiary of Wells Fargo & Company, is a national banking association
originally chartered in 1872 and is engaged in a wide range of activities
typical of a national bank. Norwest Bank's principal office is located at
Norwest Center, Sixth Street and Marquette Avenue, Minneapolis, Minnesota
55479-0113 (the "CORPORATE TRUST OFFICE"). Certificate transfer services are
conducted at Norwest Bank's offices in Minneapolis. Norwest Bank otherwise
conducts its trustee and securities administration services at its offices in
Columbia, Maryland. Its address there is 11000 Broken Land Parkway, Columbia,
Maryland 21044-3562. Certificateholders and other interested parties should
direct their inquires to the Minneapolis office. The telephone number of the
Trustee in Minneapolis is (612) 667-9764. The Trustee may make available each
month, to any interested party, the monthly statement to Certificateholders via
the Trustee's website, electronic bulletin board and its fax-on-demand service.
The Trustee's website will be located at "www.ctslink.com." The Trustee's
electronic bulletin board may be accessed by calling (301) 815-6620, and its
fax-on-demand service may be accessed by calling (301) 815-6610. The Depositor,
the Sellers and the Servicers may maintain other banking relationships in the
ordinary course of business with the Trustee. The Trustee may appoint one or
more co-trustees if necessary to comply with the fiduciary requirements imposed
by any jurisdiction in which a mortgaged property is located.
VOTING RIGHTS
Voting rights for certain actions specified in the Pooling Agreement will
be allocated as follows:
- 99% of all voting rights will be allocated among the holders of the Class
A Certificates and Subordinate Certificates based on the outstanding
balances of their Certificates.
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- 1% of all voting rights will be allocated to the holders of the Class R
Certificates based on their respective Percentage Interest in such
class.
The "PERCENTAGE INTEREST" of a Certificate is the percentage obtained by
dividing the initial balance of such Certificate by the aggregate initial
balance of such class.
- --------------------------------------------------------------------------------
DESCRIPTION OF CERTIFICATES
- --------------------------------------------------------------------------------
The Certificates will consist of (i) the six classes listed in the table on
the cover of this Prospectus Supplement and (ii) the Class B-4, Class B-5 and
Class B-6 Certificates which are not offered by this Prospectus Supplement.
The Senior Certificates in the aggregate will evidence an initial
beneficial ownership interest of approximately 98.00% in the Trust Fund and the
Subordinate Certificates will evidence in the aggregate the remaining 2.00%
undivided interest in the Trust Fund. The Class A-PO Certificates are principal-
only certificates and are not entitled to distributions in respect of interest.
DENOMINATIONS AND FORM
The Offered Certificates (other than the Class R Certificates) will be
issuable in book-entry form only (the "BOOK-ENTRY CERTIFICATES"). The Class R
Certificates will be issued in definitive, fully-registered form (the
"DEFINITIVE CERTIFICATES"). The following table sets forth the original
Certificate form, the minimum denomination and the incremental denomination of
the Offered Certificates. The Offered Certificates are not intended to be and
should not be directly or indirectly held or beneficially owned in amounts lower
than such minimum denominations. A single certificate of each class may be
issued in an amount different than described above.
FORM AND DENOMINATIONS OF OFFERED CERTIFICATES
<TABLE>
<CAPTION>
ORIGINAL MINIMUM INCREMENTAL
CLASS CERTIFICATE FORM DENOMINATION DENOMINATION
- ----- ---------------- ------------ ------------
<S> <C> <C> <C>
Class A-1................................... Book-Entry $1,000 $1
Class A-PO.................................. Book-Entry $25,000 $1
Class R..................................... Definitive $100 N/A
Classes B-1, B-2 and B-3.................... Book-Entry $25,000 $1
</TABLE>
BOOK-ENTRY CERTIFICATES
Each class of the Book-Entry Certificates initially will be represented by
one or more physical certificates registered in the name of Cede & Co., as
nominee of The Depository Trust Company ("DTC"), which will be the "holder" or
"certificateholder" of such Certificates, as such terms are used in this
Prospectus Supplement. No beneficial owner acquiring an interest in a Book-Entry
Certificate will be entitled to receive a Definitive Certificate representing
their interest in the Book-Entry Certificate, except as set forth below. Unless
and until Definitive Certificates are issued under the limited circumstances
described in this Prospectus Supplement, all references to actions taken by
certificateholders or holders shall, in the case of the Book-Entry Certificates,
refer to actions taken by DTC upon instructions from its DTC Participants, and
all references to distributions, notices, reports and statements to
certificateholders or holders shall, in the case of the Book-Entry Certificates,
refer to distributions, notices, reports and statements to DTC or Cede & Co., as
the registered holder of the
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Book-Entry Certificates, as the case may be, for distribution to beneficial
owners in accordance with DTC procedures.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to Section 17A of the Securities Exchange
Act of 1934, as amended. DTC was created to hold securities for its
participating organizations ("DTC PARTICIPANTS") and to facilitate the clearance
and settlement of securities transactions among DTC Participants through
electronic book-entries, thereby eliminating the need for physical movement of
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies and clearing corporations. Indirect access to the DTC system
also is available to banks, brokers, dealers, trust companies and other
institutions that clear through or maintain a custodial relationship with a DTC
Participant, either directly or indirectly ("INDIRECT DTC PARTICIPANTS").
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "RULES"), DTC is required to make book-entry transfers of
Book-Entry Certificates among DTC Participants on whose behalf it acts with
respect to the Book-Entry Certificates and to receive and transmit distributions
of principal of and interest on the Book-Entry Certificates. DTC Participants
and Indirect DTC Participants with which beneficial owners have accounts with
respect to the Book-Entry Certificates similarly are required to make book-entry
transfers and receive and transmit such payments on behalf of their respective
beneficial owners.
Beneficial owners that are not DTC Participants or Indirect DTC
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, Book-Entry Certificates may do so only through DTC
Participants and Indirect DTC Participants. In addition, beneficial owners will
receive all distributions of principal and interest from the Trustee through DTC
Participants. DTC will forward such distributions to its DTC Participants, which
will forward them to Indirect DTC Participants or beneficial owners. Beneficial
owners will not be recognized by the Trustee, the Servicers or any paying agent
as certificateholders, as such term is used in the Pooling Agreement, and
beneficial owners will be permitted to exercise the rights of certificateholders
only indirectly through DTC and its DTC Participants.
Because DTC can only act on behalf of DTC Participants, who in turn act on
behalf of Indirect DTC Participants and certain banks, the ability of a
beneficial owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the DTC system, or to otherwise act with respect to such
Book-Entry Certificates, may be limited due to the lack of a physical
certificate for such Book-Entry Certificates. In addition, under a book-entry
format, beneficial owners may experience delays in their receipt of payments,
since distributions will be made by the Trustee to Cede & Co., as nominee for
DTC.
DTC has advised the Depositor that it will take any action permitted to be
taken by a certificateholder under the Pooling Agreement only at the direction
of one or more DTC Participants to whose accounts with DTC the Book-Entry
Certificates are credited. Additionally, DTC has advised the Depositor that it
will take such actions with respect to specified voting rights only at the
direction of and on behalf of DTC Participants whose holdings of Book-Entry
Certificates evidence such specified voting rights. DTC may take conflicting
actions with respect to voting rights to the extent that DTC Participants whose
holdings of Book-Entry Certificates evidence such voting rights authorize
divergent action.
DTC management is aware that some computer applications, systems, and the
like for processing data that are dependent upon calendar dates, including dates
before, on, and after January 1, 2000, may encounter "Year 2000 problems." DTC
has informed its Participants and other members of the
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financial community (the "INDUSTRY") that it has developed and is implementing a
program so that its systems, as the same relate to the timely payment of
distributions (including principal and income payments) to securityholders,
book-entry deliveries, and settlement of trades within DTC, continue to function
appropriately. This program includes a technical assessment and a remediation
plan, each of which is complete. Additionally, DTC's plan includes a testing
phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to: (i)
impress upon them the importance of such services being Year 2000 compliant; and
(ii) determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the Industry for informational purposes only and is not intended to
serve as a representation, warranty, or contract modification of any kind.
None of the Depositor, 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 & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests. In the event of the
insolvency of DTC, a DTC Participant or an Indirect DTC Participant in whose
name Book-Entry Certificates are registered, the ability of the beneficial
owners of such Book-Entry Certificates to obtain timely payment and, if the
limits of applicable insurance coverage by the Securities Investor Protection
Corporation are exceeded or if such coverage is otherwise unavailable, ultimate
payment, of amounts distributable with respect to such Book-Entry Certificates
may be impaired.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor; (b) the Depositor, at its
sole option, elects to terminate a book-entry system through DTC; or (c) after
the occurrence of an event of default under the Pooling Agreement, beneficial
owners having voting rights aggregating not less than 51% of all voting rights
evidenced by each Class of the Book-Entry Certificates advise the Trustee
through DTC, in writing, that the continuation of a book-entry system through
DTC (or a successor thereto) is no longer in the best interests of beneficial
owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC
Participants of Definitive Certificates. Upon surrender by DTC of the global
certificate or certificates representing the Book-Entry Certificates and
instructions for re-registration, the Trustee will issue the Definitive
Certificates, and thereafter the Trustee will recognize the holders of such
Definitive Certificates as "certificateholders" under the Pooling Agreement.
DISTRIBUTIONS
Distributions on the Certificates will be made by the Trustee on the 25th
day of each month (or, if not a business day, the next business day), commencing
in January 1999 (each, a "DISTRIBUTION DATE"),
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to the persons in whose names such Certificates are registered at the close of
business on the last business day of the month preceding the month of such
Distribution Date (the "RECORD DATE").
Distributions on each Distribution Date will be made by check mailed to
your address as it appears on the applicable certificate register or, if you
hold 100% of a class of Certificates or if you hold Certificates with an
aggregate initial certificate balance of $1,000,000 or more and have notified
the Trustee in writing in accordance with the Pooling Agreement, by wire
transfer in immediately available funds to your account at a bank or other
depository institution having appropriate wire transfer facilities. However, the
final distribution in retirement of a Certificate will be made only upon
presentment and surrender of the Certificate at the Corporate Trust Office of
the Trustee.
AVAILABLE FUNDS
"AVAILABLE FUNDS" with respect to any Distribution Date will be equal to
the sum of:
(i) all scheduled installments of interest (net of the related
Servicing Fee) and principal due on the due date in the month in which such
Distribution Date occurs and received prior to the related Determination
Date, together with any Advances in respect thereof or any Compensating
Interest;
(ii) all proceeds of any primary mortgage guaranty insurance policies
and any other insurance policies with respect to the Mortgage Loans, to the
extent such proceeds are not applied to the restoration of the related
mortgaged property or released to the mortgagor in accordance with the
related Servicer's normal servicing procedures and all other cash amounts
received and retained in connection with the liquidation of defaulted
Mortgage Loans, by foreclosure or otherwise (collectively, "LIQUIDATION
PROCEEDS"), during the calendar month preceding the month of such
Distribution Date (in each case, net of unreimbursed expenses incurred in
connection with a liquidation or foreclosure and unreimbursed Advances, if
any);
(iii) all partial or full prepayments received during the calendar month
preceding the month of such Distribution Date; and
(iv) amounts received with respect to such Distribution Date as the
Substitution Adjustment Amount or Purchase Price in respect of any Deleted
Mortgage Loan or amounts received in connection with the optional
termination of the Trust Fund as of such Distribution Date, reduced by
amounts in reimbursement for Advances previously made and other amounts as
to which the Servicers are entitled to be reimbursed pursuant to the
Pooling Agreement.
PRIORITY OF DISTRIBUTIONS
As more fully described herein, distributions will be made on each
Distribution Date from Available Funds in the following order of priority:
(i) to the Trustee an amount in payment for its services for such
Distribution Date;
(ii) to interest on each class of Senior Certificates (other than the
Class A-PO Certificates);
(iii) to the classes of Senior Certificates entitled to receive
distributions of principal, as described below under "-- Principal," to pay
principal;
(iv) to the Class A-PO Certificates, to pay any Class A-PO Deferred
Amounts, but only from amounts that would otherwise be distributable on
such Distribution Date as principal of the Subordinate Certificates;
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(v) to each class of Subordinate Certificates, first to pay interest
and then to pay principal in the order of their numerical class
designations, beginning with the Class B-1 Certificates; and
(vi) to the Class R Certificates, any remaining amounts;
in each case subject to the limitations set forth below under "-- Interest" and
"-- Principal."
INTEREST
The pass-through rate for each class of Offered Certificates for each
Distribution Date is as set forth in the table on the cover of this Prospectus
Supplement.
On each Distribution Date, to the extent of Available Funds, each class of
Certificates (other than the Class A-PO Certificates) will be entitled to
receive interest (as to each class, the "INTEREST DISTRIBUTION AMOUNT") with
respect to the related Interest Accrual Period. The Interest Distribution Amount
for any class of Certificates (other than the Class A-PO Certificates) will be
equal to the sum of (i) interest accrued during the related Interest Accrual
Period at the applicable pass-through rate on the related class balance and (ii)
the sum of the amounts, if any, by which the amount described in clause (i)
above on each prior Distribution Date exceeded the amount actually distributed
as interest on such prior Distribution Dates and not subsequently distributed.
The Class A-PO Certificates are principal-only certificates and will not bear
interest.
The interest entitlement described in clause (i) above for each class of
Certificates will be reduced by the amount of Net Interest Shortfalls for such
Distribution Date. With respect to any Distribution Date, the "NET INTEREST
SHORTFALL" is equal to the sum of (i) the shortfall in interest received with
respect to any Mortgage Loan as a result of (a) a Relief Act Reduction or (b) a
Special Hazard Loss, Fraud Loss or Bankruptcy Loss, after the exhaustion of the
amounts of coverage provided by the Subordinate Certificates for those types of
losses and (ii) any Net Prepayment Interest Shortfalls. Net Interest Shortfalls
on any Distribution Date will be allocated pro rata among all classes of
Certificates entitled to receive distributions of interest on such Distribution
Date, based on the amount of interest each class of Certificates would otherwise
be entitled to receive on such Distribution Date before taking into account any
reduction in such amounts resulting from such Net Interest Shortfalls. A "RELIEF
ACT REDUCTION" is a reduction in the amount of monthly interest payment on a
Mortgage Loan pursuant to the Soldiers' and Sailors' Civil Relief Act of 1940.
See "Certain Legal Aspects of the Mortgage Loans -- Soldiers' and Sailors' Civil
Relief Act" in the Prospectus. With respect to any Distribution Date, the "NET
PREPAYMENT INTEREST SHORTFALL" is the amount by which the aggregate of
Prepayment Interest Shortfalls during the calendar month preceding the month of
such Distribution Date exceeds Compensating Interest for such period. A
"PREPAYMENT INTEREST SHORTFALL" is the amount by which interest paid by a
mortgagor in connection with a prepayment of principal on a Mortgage Loan is
less than one month's interest at the related mortgage interest rate (net of the
related Servicing Fee Rate) on the amount of such prepayment.
Accrued interest to be distributed on any Distribution Date will be
calculated for each class of Certificates (other than the Class A-PO
Certificates) on the basis of the related class balance immediately prior to
such Distribution Date. Interest will be calculated and payable on the basis of
a 360-day year of twelve 30-day months.
If on a particular Distribution Date, Available Funds applied in the order
described above under "-- Priority of Distributions" are not sufficient to make
a full distribution of the Interest Distribution Amount for each class of
Certificates, interest will be distributed on each class of Certificates of
equal priority pro rata based on the Interest Distribution Amount the class
would otherwise have been entitled to receive in the absence of such shortfall.
Any unpaid amount will be carried forward and added to the
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Interest Distribution Amount that holders of that class of Certificates will be
entitled to receive on the next Distribution Date. Such a shortfall could occur,
for example, if Realized Losses on the Mortgage Loans were exceptionally high or
were concentrated in a particular month. Any such unpaid amount will not bear
interest.
With respect to each Distribution Date, the "INTEREST ACCRUAL PERIOD" for
each class of Certificates (other than the Class A-PO Certificates) will be the
calendar month preceding the month in which the Distribution Date occurs.
PRINCIPAL
On each Distribution Date, certificateholders will be entitled to receive
principal distributions from Available Funds to the extent described below and
in accordance with the priorities set forth under "-- Priority of Distributions"
above.
All payments and other amounts received in respect of principal of the
Mortgage Loans will be allocated between (i) the Senior Certificates (other than
the Class A-PO Certificates) and the Subordinate Certificates and (ii) the Class
A-PO Certificates, in each case based on the applicable Non-PO Percentage and
the applicable PO Percentage, respectively, of such amounts.
The "NON-PO PERCENTAGE" with respect to any Mortgage Loan with a Net
Mortgage Rate less than 6.00% (each such Mortgage Loan, a "DISCOUNT MORTGAGE
LOAN") will be equal to the Net Mortgage Rate thereof divided by 6.00%. The
Non-PO Percentage with respect to any Mortgage Loan with a Net Mortgage Rate
greater than or equal to 6.00% (each such Mortgage Loan, a "PREMIUM MORTGAGE
LOAN") will be 100%.
The "PO PERCENTAGE" with respect to any Discount Mortgage Loan will be
equal to 100% minus the Non-PO Percentage for such Mortgage Loan. The PO
Percentage with respect to any Premium Mortgage Loan will be 0%.
The "NET MORTGAGE RATE" of a Mortgage Loan is the excess of its mortgage
interest rate over applicable Expense Fee Rate.
Non-PO Principal Amount
On each Distribution Date, the Non-PO Principal Amount will be distributed
(i) as principal of the Senior Certificates (other than the Class A-PO
Certificates) in an amount up to the Senior Principal Distribution Amount and
(ii) as principal of the Subordinate Certificates in an amount up to the
Subordinate Principal Distribution Amount.
The "NON-PO PRINCIPAL AMOUNT" for any Distribution Date will equal the sum
of the applicable Non-PO Percentage of:
(a) all monthly payments of principal due on each Mortgage Loan on the
related Due Date;
(b) the principal portion of the Purchase Price of each Mortgage Loan
that was repurchased by the related Seller or the Depositor pursuant to the
Pooling Agreement as of that Distribution Date;
(c) any Substitution Adjustment Amount in connection with a Deleted
Mortgage Loan received with respect to that Distribution Date;
(d) any Liquidation Proceeds allocable to recoveries of principal of
Mortgage Loans that are not yet Liquidated Mortgage Loans received during
the calendar month preceding the month of that Distribution Date;
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(e) with respect to each Mortgage Loan that became a Liquidated Mortgage
Loan during the calendar month preceding the month of that Distribution
Date, the amount of the Liquidation Proceeds allocable to principal
received with respect to that Mortgage Loan; and
(f) all partial and full principal prepayments by mortgagors received
during the calendar month preceding the month of that Distribution Date.
Senior Principal Distribution Amount
On each Distribution Date, an amount equal to the lesser of (a) the Senior
Principal Distribution Amount for such Distribution Date and (b) the product of
(1) Available Funds remaining after payment of funds due to the Trustee and
distributions of interest on the Senior Certificates and (2) a fraction, the
numerator of which is the Senior Principal Distribution Amount and the
denominator of which is the sum of the PO Principal Amount and the Senior
Principal Distribution Amount, will be distributed as principal of the following
Classes of Senior Certificates in the following order of priority (percentages
set forth are approximate):
(i) first, to the Class R Certificates, until their class balance has
been reduced to zero; and
(ii) second, to the Class A-1 Certificates, until their class balance
has been reduced to zero.
The preceding distribution priorities will not apply on any Distribution
Date on or after the Senior Credit Support Depletion Date. On each of those
Distribution Dates, the amount to be distributed as principal to the Senior
Certificates (other than the Class A-PO Certificates) will be distributed,
concurrently, as principal of the classes of Senior Certificates (other than the
Class A-PO Certificates) pro rata in accordance with their respective balances
immediately prior to that Distribution Date.
The "SENIOR CREDIT SUPPORT DEPLETION DATE" is the date on which the
aggregate balance of the Subordinate Certificates has been reduced to zero.
The "SENIOR PRINCIPAL DISTRIBUTION AMOUNT" for any Distribution Date will
equal the sum of:
(a) the Senior Percentage of the applicable Non-PO Percentage of the
amounts described in clauses (a) through (d) of the definition of "Non-PO
Principal Amount" for that Distribution Date; and
(b) the Senior Prepayment Percentage of the applicable Non-PO
Percentage of the amounts described in clauses (e) and (f) of the
definition of "Non-PO Principal Amount" for that Distribution Date;
provided, however, that if a Debt Service Reduction that is an Excess Loss is
sustained with respect to a Mortgage Loan that is not a Liquidated Mortgage
Loan, the Senior Principal Distribution Amount will be reduced on the related
Distribution Date by the Senior Percentage of the applicable Non-PO Percentage
of the principal portion of the Debt Service Reduction.
"STATED PRINCIPAL BALANCE" means, as to any Mortgage Loan and due date, the
unpaid principal balance of such Mortgage Loan as of such due date, as specified
in the amortization schedule at the time relating thereto (before any adjustment
to such amortization schedule by reason of any moratorium or similar waiver or
grace period), after giving effect to any previous partial principal prepayments
and Liquidation Proceeds received and to the payment of principal due on such
due date and irrespective of any delinquency in payment by the related mortgagor
and after giving effect to any Deficient Valuation.
The "POOL PRINCIPAL BALANCE" with respect to any Distribution Date equals
the aggregate of the Stated Principal Balances of the Mortgage Loans outstanding
on the due date in the month preceding the month of such Distribution Date.
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The "SENIOR PERCENTAGE" for any Distribution Date will equal (i) the
aggregate Class Certificate Balance of the Senior Certificates (other than the
Class A-PO Certificates) immediately prior to such date, divided by (ii) the
aggregate Class Certificate Balance of the Certificates (other than the Class A-
PO Certificates) immediately prior to such date.
The "SUBORDINATE PERCENTAGE" for any Distribution Date will equal 100%
minus the Senior Percentage for such date.
As of the Cut-off Date, the Senior Percentage and the Subordinate
Percentage are expected to be approximately 97.9982% and 2.0018%, respectively.
The "SENIOR PREPAYMENT PERCENTAGE" for any Distribution Date occurring
during the periods set forth below will be as follows:
<TABLE>
<CAPTION>
DISTRIBUTION DATE OCCURRING IN SENIOR PREPAYMENT PERCENTAGE
- ------------------------------ ----------------------------
<S> <C>
January 1999 through December 2003.......................... 100%;
January 2004 through December 2004.......................... the Senior Percentage, plus 70% of
the Subordinate Percentage;
January 2005 through December 2005.......................... the Senior Percentage, plus 60% of
the Subordinate Percentage;
January 2006 through December 2006.......................... the Senior Percentage, plus 40% of
the Subordinate Percentage;
January 2007 through December 2007.......................... the Senior Percentage, plus 20% of
the Subordinate Percentage; and
January 2008 and thereafter................................. the Senior Percentage;
</TABLE>
provided, however, that if on any Distribution Date the Senior Percentage
exceeds the initial Senior Percentage, the Senior Prepayment Percentage for such
Distribution Date will equal 100%.
No decrease in the Senior Prepayment Percentage will occur, however, if as
of the first Distribution Date as to which any such decrease applied, (i) the
outstanding principal balance of all Mortgage Loans (including, for this
purpose, any Mortgage Loans in foreclosure or any REO Property) delinquent 60
days or more (averaged over the preceding six-month period), as a percentage of
the aggregate class balance of the Subordinate Certificates (averaged over the
preceding six-month period), is equal to or greater than 50%, or (ii) cumulative
Realized Losses with respect to the Mortgage Loans exceed the percentages of the
aggregate balance of the Subordinate Certificates as of the Closing Date (the
"ORIGINAL SUBORDINATE PRINCIPAL BALANCE") indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
ORIGINAL SUBORDINATE
DISTRIBUTION DATE OCCURRING IN PRINCIPAL BALANCE
- ------------------------------ --------------------
<S> <C>
January 2004 through December 2004.......................... 30%
January 2005 through December 2005.......................... 35%
January 2006 through December 2006.......................... 40%
January 2007 through December 2007.......................... 45%
January 2008 and thereafter................................. 50%
</TABLE>
This disproportionate allocation of certain unscheduled payments in respect
of principal will have the effect of accelerating the amortization of the Senior
Certificates (other than the Class A-PO Certificates) while, in the absence of
Realized Losses, increasing the interest in the Pool Principal Balance evidenced
by the Subordinate Certificates. Increasing the respective interest of the
Subordinate Certificates relative to that of the Senior Certificates (other than
the Class A-PO Certificates) is intended to preserve the availability of the
subordination provided by the Subordinate Certificates.
S-39
<PAGE> 40
The "SUBORDINATE PREPAYMENT PERCENTAGE" as of any Distribution Date will
equal 100% minus the Senior Prepayment Percentage for such date.
If on any Distribution Date the allocation to any class of Senior
Certificates (other than the Class A-PO Certificates) then entitled to
distributions of full and partial principal prepayments and other amounts to be
allocated in accordance with the Senior Prepayment Percentage, as described
above, would reduce the outstanding class balance of such class below zero, the
distribution to that class of the Senior Prepayment Percentage of those amounts
for such Distribution Date will be limited to the percentage necessary to reduce
the related class balance to zero.
Class A-PO Principal Distribution Amount
On each Distribution Date, distributions of principal of the Class A-PO
Certificates will be made in an amount (the "CLASS A-PO PRINCIPAL DISTRIBUTION
AMOUNT") equal to the lesser of:
(a) the PO Principal Amount for such Distribution Date; and
(b) the product of (1) Available Funds remaining after distribution of
funds due to the Trustee and interest on the Senior Certificates and (2) a
fraction, the numerator of which is the PO Principal Amount and the
denominator of which is the sum of the PO Principal Amount and the Senior
Principal Distribution Amount.
The "PO PRINCIPAL AMOUNT" for any Distribution Date will equal the sum of
the applicable PO Percentage of:
(a) all monthly payments of principal due on each Discount Mortgage Loan
on the related Due Date;
(b) the principal portion of the Purchase Price of each Discount
Mortgage Loan that was repurchased by the related Seller or the Depositor
pursuant to the Pooling Agreement as of such Distribution Date;
(c) any Substitution Adjustment Amount in connection with a Deleted
Mortgage Loan that was a Discount Mortgage Loan received with respect to
such Distribution Date;
(d) any Liquidation Proceeds allocable to recoveries of principal of
Discount Mortgage Loans that are not yet Liquidated Mortgage Loans received
during the calendar month preceding the month of such Distribution Date;
(e) with respect to each Discount Mortgage Loan that became a Liquidated
Mortgage Loan during the calendar month preceding the month of such
Distribution Date, the amount of Liquidation Proceeds allocable to
principal received with respect to such Discount Mortgage Loan; and
(f) all partial and full principal prepayments by mortgagors on Discount
Mortgage Loans received during the calendar month preceding such
Distribution Date;
provided, however, that if a Debt Service Reduction that is an Excess Loss is
sustained with respect to a Discount Mortgage Loan that is not a Liquidated
Mortgage Loan, the PO Principal Amount will be reduced on the related
Distribution Date by the applicable PO Percentage of the principal portion of
such Debt Service Reduction.
S-40
<PAGE> 41
Subordinate Principal Distribution Amount
On each Distribution Date, to the extent of remaining Available Funds, the
Subordinate Principal Distribution Amount will be distributed as principal of
the Subordinate Certificates. Except as provided in the next paragraph, each
class of Subordinate Certificates will be entitled to receive its pro rata share
of the Subordinate Principal Distribution Amount (based on its class balance),
in each case to the extent of the amount available from Available Funds for
distribution of principal on that class. Distributions of principal of the
Subordinate Certificates will be made on each Distribution Date sequentially to
each class of Subordinate Certificates in the order of their numerical class
designations, beginning with the Class B-1 Certificates, until each such class
has received its respective pro rata share for the Distribution Date.
With respect to each class of Subordinate Certificates, if on any
Distribution Date the Credit Support Percentage is less than the Credit Support
Percentage for that class on the Closing Date, no distribution of principal will
be made to any classes junior to that class (the "RESTRICTED CLASSES") and the
amount otherwise distributable to the Restricted Classes in respect of principal
will be allocated among the classes of Subordinate Certificates that are not
Restricted Classes pro rata, based upon their respective balances, and
distributed in the order described above until the principal balances of such
Classes have been reduced to zero. Any funds remaining will be paid to the
Restricted Classes in the order described above. The "CREDIT SUPPORT PERCENTAGE"
with respect to any Distribution Date and each class of Subordinate Certificates
will equal (i) the aggregate of the class balances immediately prior to such
Distribution Date of all classes of Subordinate Certificates that have higher
numerical class designations than such class, divided by (ii) the aggregate
balance of all the Certificates immediately prior to such Distribution Date.
The approximate Credit Support Percentages for the Subordinate Certificates
on the Closing Date are expected to be as follows:
<TABLE>
<S> <C>
Class B-1................................................... 1.25%
Class B-2................................................... 0.90%
Class B-3................................................... 0.55%
Class B-4................................................... 0.35%
Class B-5................................................... 0.20%
Class B-6................................................... 0.00%
</TABLE>
The "SUBORDINATE PRINCIPAL DISTRIBUTION AMOUNT" for any Distribution Date
will equal the sum of:
(a) the Subordinate Percentage of the applicable Non-PO Percentage of
all amounts described in clauses (a) through (d) of the definition of
"Non-PO Principal Amount" for such Distribution Date; and
(b) the Subordinate Prepayment Percentage of the applicable Non-PO
Percentage of the amounts described in clauses (e) and (f) of the
definition of "Non-PO Principal Amount" for such Distribution Date;
provided, however, that if a Debt Service Reduction that is an Excess Loss is
sustained with respect to a Mortgage Loan that is not a Liquidated Mortgage
Loan, the Subordinate Principal Distribution Amount will be reduced on the
related Distribution Date by the Subordinate Percentage of the applicable Non-PO
Percentage of the principal portion of that Debt Service Reduction.
Residual Certificates
The Residual Certificates will remain outstanding for so long as the Trust
Fund exists, whether or not they are receiving current distributions of
principal or interest. In addition to distributions of interest
S-41
<PAGE> 42
and principal as described above, on each Distribution Date, the holders of the
Class R Certificates will be entitled to receive any Available Funds remaining
after the payment of interest and principal on the Senior Certificates and Class
A-PO Deferred Amounts on the Class A-PO Certificates and interest and principal
on the Subordinate Certificates, as described above. It is not anticipated that
there will be any significant amounts remaining for any such distribution.
ALLOCATION OF LOSSES
On each Distribution Date, the applicable PO Percentage of any Realized
Loss, including any Excess Loss, on a Discount Mortgage Loan will be allocated
to the Class A-PO Certificates until their class balance is reduced to zero. The
amount of any such Realized Loss, other than an Excess Loss, allocated on or
prior to the Senior Credit Support Depletion Date will be treated as a "CLASS
A-PO DEFERRED AMOUNT." To the extent funds are available on such Distribution
Date or on any future Distribution Date from amounts that would otherwise be
allocable to the Subordinate Principal Distribution Amount, Class A-PO Deferred
Amounts will be paid on the Class A-PO Certificates prior to distributions of
principal on the Subordinate Certificates. Any distribution of Available Funds
in respect of unpaid Class A-PO Deferred Amounts will not further reduce the
class balance of the Class A-PO Certificates. The Class A-PO Deferred Amounts
will not bear interest. The class balance of the class of Subordinate
Certificates then outstanding with the highest numerical Class designation will
be reduced by the amount of any payments in respect of Class A-PO Deferred
Amounts. Any excess of the Class A-PO Deferred Amounts over the class balance of
that class will be allocated to the next most subordinate class to reduce its
class balance and so on, as necessary. After the Senior Credit Support Depletion
Date, no new Class A-PO Deferred Amounts will be created. In addition, the class
balance of the class of Subordinate Certificates then outstanding with the
highest numerical class designation will be reduced if and to the extent that
the aggregate of the class balances of all classes of Certificates, following
all distributions and the allocation of Realized Losses on a Distribution Date,
exceeds the Pool Principal Balance as of the due date occurring in the month of
such Distribution Date.
On each Distribution Date, the applicable Non-PO Percentage of any Realized
Loss, other than any Excess Loss, will be allocated first to the Subordinate
Certificates, in the reverse order of their numerical class designations
(beginning with the class of Subordinate Certificates then outstanding with the
highest numerical class designation), in each case until the class balance of
the respective class of Certificates has been reduced to zero, and then to the
Senior Certificates (other than the Class A-PO Certificates) pro rata based upon
their respective class balances.
On each Distribution Date, the applicable Non-PO Percentage of Excess
Losses will be allocated pro rata among the classes of Senior Certificates
(other than the Class A-PO Certificates) and the Subordinate Certificates based
upon their respective class balances.
Because principal distributions are paid to certain classes of Senior
Certificates (other than the Class A-PO Certificates) before other classes of
Senior Certificates, holders of those Senior Certificates that are entitled to
receive principal later bear a greater risk of being allocated Realized Losses
on the Mortgage Loans than holders of classes that are entitled to receive
principal earlier.
In general, a "REALIZED LOSS" means, with respect to a Liquidated Mortgage
Loan, the amount by which the remaining unpaid principal balance of the Mortgage
Loan exceeds the amount of Liquidation Proceeds applied to the principal balance
of the related Mortgage Loan. "EXCESS LOSSES" are (i) Special Hazard Losses in
excess of the Special Hazard Loss Coverage Amount, (ii) Bankruptcy Losses in
excess of the Bankruptcy Loss Coverage Amount and (iii) Fraud Losses in excess
of the Fraud Loss Coverage Amount. "BANKRUPTCY LOSSES" are losses that are
incurred as a result of Debt Service Reductions and Deficient Valuations.
"SPECIAL HAZARD LOSSES" are Realized Losses in respect of
S-42
<PAGE> 43
Special Hazard Mortgage Loans. "FRAUD LOSSES" are Realized Losses sustained by
reason of a default arising from fraud, dishonesty or misrepresentations. See
"Credit Support" in this Prospectus Supplement.
As used in this Prospectus Supplement, a "DEFICIENT VALUATION" occurs when
a bankruptcy court establishes the value of a mortgaged property at an amount
less than the then-outstanding principal balance of the Mortgage Loan secured by
such mortgaged property or reduces the then-outstanding principal balance of a
Mortgage Loan. In the case of a reduction in the value of the related mortgaged
property, the amount of the secured debt could be reduced to such value, and the
holder of such Mortgage Loan thus would become an unsecured creditor to the
extent the then-outstanding principal balance of such Mortgage Loan exceeds the
value so assigned to the mortgaged property by the bankruptcy court. In
addition, certain other modifications of the terms of a Mortgage Loan can result
from a bankruptcy proceeding, including the reduction (a "DEBT SERVICE
REDUCTION") of the amount of the Monthly Payment on the related Mortgage Loan.
However, none of these events shall be considered a Debt Service Reduction or
Deficient Valuation so long as the related 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 any payment due thereunder
or (ii) scheduled Monthly Payments are being advanced by the related Servicer
without giving effect to any Debt Service Reduction.
A "LIQUIDATED MORTGAGE LOAN" is a defaulted Mortgage Loan as to which the
related Servicer has determined that all recoverable Liquidation Proceeds have
been received. A "SPECIAL HAZARD MORTGAGE LOAN" is a Liquidated Mortgage Loan as
to which the ability to recover the full amount due thereunder was substantially
impaired by a hazard not insured against under a standard hazard insurance
policy of the type described in the Prospectus under "Credit Support -- Special
Hazard Insurance Policies." See "Credit Support" in this Prospectus Supplement.
LAST SCHEDULED DISTRIBUTION DATE
The "LAST SCHEDULED DISTRIBUTION DATE" for each class of Offered
Certificates, which is set forth on the cover of this Prospectus Supplement, is
the latest date on which the class balance is expected to be reduced to zero,
and has been calculated on the basis of the Modeling Assumptions described below
under "Prepayment and Yield Considerations -- Assumptions Relating to Tables"
except for the additional assumption that no prepayments are received with
respect to the Mortgage Loans. Since the rate of distributions in reduction of
the class balance on each class of Offered Certificates will depend on the rate
of payments of principal (including principal prepayments) of the Mortgage Loans
as well as the frequency and severity of losses experienced by the Trust Fund,
the class balance of any such class could reach zero significantly earlier or
later than its Last Scheduled Distribution Date. The rate of payments on the
Mortgage Loans will depend on their particular characteristics, as well as on
prevailing interest rates from time to time and other economic factors, and no
assurance can be given as to the actual payment experience of the Mortgage
Loans. See "Maturity, Prepayment Considerations and Weighted Average Life of
Certificates" in the Prospectus.
RESTRICTIONS ON TRANSFER OF THE CLASS R
CERTIFICATES
The Class R Certificates will be subject to the following restrictions on
transfer, and the Class R Certificates will contain a legend describing such
restrictions.
The REMIC provisions of the Code impose certain taxes on (i) transferors of
residual interests to, or agents that acquire residual interests on behalf of,
Disqualified Organizations (as defined in the Prospectus) and (ii) certain
Pass-Through Entities (as defined in the Prospectus) that have Disqualified
S-43
<PAGE> 44
Organizations as beneficial owners. No tax will be imposed on a Pass-Through
Entity (other than an "electing large partnership" (as defined in the
Prospectus)) with respect to the Class R Certificates to the extent it has
received an affidavit from the owner thereof that such owner is not a
Disqualified Organization or a nominee for a Disqualified Organization.
The Pooling Agreement will provide that no legal or beneficial interest in
the Class R Certificates may be transferred to or registered in the name of any
person unless:
- the proposed purchaser provides to the Trustee an affidavit to the effect
that, among other items, such transferee is not a Disqualified
Organization and is not purchasing the Class R Certificates as an agent
for a Disqualified Organization (i.e., as a broker, nominee or other
middleman thereof); and
- the transferor states in writing to the Trustee that it has no actual
knowledge that such affidavit is false.
Further, such affidavit will require the transferee to affirm that it (a)
historically has paid its debts as they have come due and intends to do so in
the future, (b) understands that it may incur tax liabilities with respect to
the Class R Certificates in excess of cash flows generated thereby, (c) intends
to pay taxes associated with holding the Class R Certificates as such taxes
become due and (d) will not transfer the Class R Certificates to any person or
entity that does not provide a similar affidavit. The transferor must certify in
writing to the Trustee that, as of the date of the transfer, it had no knowledge
or reason to know that the affirmations made by the transferee pursuant to the
preceding sentence were false.
In addition, the Class R Certificates may not be purchased by or
transferred to any person that is not a U.S. Person, unless:
- such person holds its Class R Certificate in connection with the conduct
of a trade or business within the United States and furnishes the
transferor and the Trustee with an effective Internal Revenue Service
Form 4224; or
- the transferee delivers to both the transferor and the Trustee an opinion
of a nationally-recognized tax counsel to the effect that such transfer
is in accordance with the requirements of the Code and the regulations
promulgated thereunder and that such transfer of the Class R
Certificates will not be disregarded for federal income tax purposes.
The term "U.S. PERSON" means a citizen or resident of the United States, a
corporation, partnership (except to the extent provided in the applicable
Treasury regulations) or other entity created or organized in or under the laws
of the United States or any political subdivision thereof, an estate that is
subject to United States federal income tax regardless of the source of its
income, or a trust if a court within the United States is able to exercise
primary supervision over the administration of such trust, and one or more
United States fiduciaries have the authority to control all substantial
decisions of such trust (or, to the extent provided in applicable Treasury
regulations, certain trusts in existence on August 20, 1996 which are eligible
to elect to be treated as U.S. Persons).
THE POOLING AGREEMENT WILL PROVIDE THAT ANY ATTEMPTED OR PURPORTED TRANSFER
IN VIOLATION OF THESE TRANSFER RESTRICTIONS WILL BE NULL AND VOID AND WILL VEST
NO RIGHTS IN ANY PURPORTED TRANSFEREE.
Any transferor or agent to whom the Trustee provides information as to any
applicable tax imposed on such transferor or agent may be required to bear the
cost of computing or providing such information.
See "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Certificates -- Taxation of Residual
Certificates -- Tax-Related Restrictions on Transfer of Residual Certificates"
in the Prospectus.
S-44
<PAGE> 45
THE CLASS R CERTIFICATES MAY NOT BE PURCHASED BY OR TRANSFERRED TO ANY
BENEFIT PLAN OR ANY PERSON ACTING ON BEHALF OF OR INVESTING THE ASSETS OF SUCH
BENEFIT PLAN.
See "Benefit Plan Considerations" in this Prospectus Supplement and in the
Prospectus.
RESTRICTIONS ON TRANSFER OF THE CLASS B
CERTIFICATES
Under current law the purchase and holding of the Class B Certificates by
or on behalf of a Benefit Plan may result in "prohibited transactions" within
the meaning of ERISA, Section 4975 of the Code or Similar Law. Transfer of the
Class B Certificates will not be made unless the transferee delivers to the
Trustee either:
(a) a representation letter, in form and substance satisfactory to the
Trustee, stating that:
(1) it is not, and is not acting on behalf of, any such Benefit Plan
or using the assets of any such Benefit Plan to effect such purchase; or
(2) if it is an insurance company, that the source of funds used to
purchase the Class B Certificates is an "insurance company general
account" (as such term is defined in Section V(e) of Prohibited
Transaction Class Exemption 95-60 ("PTCE 95-60"), 60 Fed. Reg. 35925
(July 12, 1995)), that there is no Benefit Plan with respect to which
the amount of such general account's reserves and liabilities for the
contract(s) held by or on behalf of such Benefit Plan and all other
Benefit Plans maintained by the same employer (or affiliate thereof as
defined in Section V(a)(1) of PTCE 95-60) or by the same employee
organization exceeds 10% of the total of all reserves and liabilities of
such general account (as such amounts are determined under Section I(a)
of PTCE 95-60) at the date of acquisition and that all Benefit Plans
that have an interest in such general account are Benefit Plans to which
PTCE 95-60 applies; or
(b) an opinion of counsel, in form and substance satisfactory to the
Trustee and the Servicers, to the effect that the purchase or holding of
the Class B Certificates by or on behalf of such Benefit Plan will not
result in the assets of the Trust Fund being deemed to be "plan assets" and
subject to the prohibited transaction provisions of ERISA, the Code or
Similar Law and will not subject the Depositor, the Servicers or the
Trustee to any obligation in addition to those undertaken in the Pooling
Agreement.
The Class B Certificates will contain a legend describing these
restrictions on transfer.
THE POOLING AGREEMENT WILL PROVIDE THAT ANY ATTEMPTED OR PURPORTED TRANSFER
IN VIOLATION OF THESE TRANSFER RESTRICTIONS WILL BE NULL AND VOID AND WILL VEST
NO RIGHTS IN ANY PURPORTED TRANSFEREE.
See "Benefit Plan Considerations" in this Prospectus Supplement and in the
Prospectus.
- --------------------------------------------------------------------------------
PREPAYMENT AND YIELD CONSIDERATIONS
- --------------------------------------------------------------------------------
Delinquencies on the Mortgage Loans which are not advanced by or on behalf
of the Servicers (because amounts, if advanced, would be nonrecoverable), will
adversely affect the yield on the Certificates. Because of the priority of
distributions, shortfalls resulting from delinquencies not so advanced will be
borne first by the Subordinate Certificates (in the reverse order of their
priority of their numerical designations), and then by the Senior Certificates.
S-45
<PAGE> 46
Net Interest Shortfalls will adversely affect the yields on the Offered
Certificates. In addition, although all losses initially will be borne by the
Subordinate Certificates, as described in this Prospectus Supplement under
"Description of Certificates -- Allocation of Losses," Excess Losses will be
borne by all classes of Certificates in the manner set forth in that section. As
a result, the yields on the Offered Certificates will depend on the rate and
timing of Realized Losses, including Excess Losses. Excess Losses could occur at
a time when one or more classes of Subordinate Certificates are still
outstanding and otherwise available to absorb other types of Realized Losses.
The effective yields to investors will be lower than the yields otherwise
produced by the applicable rate at which interest is passed through to investors
and the purchase price of their Certificates because monthly distributions will
not be payable to investors until the 25th day (or, if not a business day, the
next business day) of the month following the month in which interest accrues on
the Mortgage Loans (without any additional distribution of interest or earnings
thereon in respect of such delay).
PREPAYMENT CONSIDERATIONS AND RISKS
Because principal payments on the Mortgage Loans will be distributed to
certificateholders as they are received from mortgagors, the rate of principal
payments on the Offered Certificates, the aggregate amount of each interest
payment on the Offered Certificates (other than the Class A-PO Certificates) and
the yield to maturity of Offered Certificates purchased at a price other than
par are directly related to the rate of payments of principal on the Mortgage
Loans. The principal payments on the Mortgage Loans may be in the form of
scheduled principal payments or principal prepayments (for this purpose, the
term "principal prepayment" includes prepayments and any other recovery of
principal in advance of its scheduled due date, including repurchases and
liquidations due to default, casualty, condemnation and the like). Any such
prepayments will result in distributions to you of amounts that would otherwise
be distributed over the remaining term of the Mortgage Loans. See "Maturity,
Prepayment Considerations and Weighted Average Life of Certificates" in the
Prospectus.
The rate at which mortgage loans in general prepay may be influenced by a
number of factors, including general economic conditions, mortgage market
interest rates, availability of mortgage funds and homeowner mobility.
- In general, if prevailing mortgage interest rates fall significantly
below the mortgage interest rates on the Mortgage Loans, the Mortgage
Loans are likely to prepay at higher rates than if prevailing mortgage
interest rates remain at or above the mortgage interest rates on the
Mortgage Loans.
- Conversely, if prevailing mortgage interest rates rise above the mortgage
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 you, even if the average rate of principal prepayments is
consistent with your expectations. In general, the earlier the payment of
principal of the Mortgage Loans the greater the effect on your yield to
maturity. As a result, the effect on your yield of principal prepayments
occurring at a rate higher (or lower) than the rate you anticipate 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. You must make your own decisions as to the appropriate prepayment
assumptions to be used in deciding whether to purchase Offered Certificates.
As described in this Prospectus Supplement under "Description of
Certificates -- Principal," the Senior Prepayment Percentage of the applicable
Non-PO Percentage of all principal prepayments (excluding for this purpose,
liquidations due to default, casualty, condemnation and the like) initially will
S-46
<PAGE> 47
be distributed to holders of the classes of Senior Certificates (other than the
Class A-PO Certificates) then entitled to receive principal prepayment
distributions. This may result in all (or a disproportionate percentage) of
those principal prepayments being distributed to holders of the Senior
Certificates (other than the Class A-PO Certificates) and none (or less than
their pro rata share) of such principal prepayments being distributed to holders
of the Subordinate Certificates during the periods of time described in the
definition of "Senior Prepayment Percentage."
Mortgagors are permitted to prepay the Mortgage Loans, in whole or in part,
at any time without penalty. The rate of payment of principal may also be
affected by any repurchase of the Mortgage Loans permitted or required by the
Pooling Agreement including any optional termination of the Trust Fund by the
Depositor. See "The Pooling and Servicing Agreement -- Optional Termination" in
this Prospectus Supplement for a description of the Depositor's option to
repurchase the Mortgage Loans when the scheduled balance of the Mortgage Pool is
less than 5% of the initial balance of the Mortgage Pool. The Sellers 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 repurchases will shorten the weighted average lives of the
classes of Offered Certificates.
All of the Mortgage Loans will include "due-on-sale" clauses which allow
the holder of the Mortgage Loan to demand payment in full of the remaining
principal balance upon sale or certain transfers of the property securing such
Mortgage Loan. The Servicers 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 Servicers 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. However, the Servicers will not take any action in relation to
the enforcement of any "due-on-sale" provisions which would impair or threaten
to impair any recovery under any related primary mortgage insurance policy. See
"Maturity, Prepayment Considerations and Weighted Average Life of Certificates"
in the Prospectus. Acceleration of Mortgage Loans as a result of enforcement of
such "due-on-sale" provisions in connection with transfers of the related
mortgaged properties or the occurrence of certain other events resulting in
acceleration would affect the level of prepayments on the Mortgage Loans,
thereby affecting the weighted average lives of the classes of the Offered
Certificates.
ASSUMPTIONS RELATING TO TABLES
The tables beginning on page S-50 (the "DECREMENT TABLES") have been
prepared on the basis of the following assumptions (the "MODELING ASSUMPTIONS"):
(a) the Mortgage Pool consists of two hypothetical mortgage loans having
the following characteristics:
<TABLE>
<CAPTION>
UNPAID MORTGAGE REMAINING TERM AGE
PRINCIPAL BALANCE INTEREST RATE (MONTHS) (MONTHS)
- ----------------- ------------- -------------- --------
<S> <C> <C> <C>
$ 12,226,339.38 6.1544756809% 179 1
$269,034,789.26 6.7965883363% 177 1
</TABLE>
(b) the initial balances and pass-through rates for the Offered
Certificates are as set forth on the cover;
(c) there are no Net Interest Shortfalls, delinquencies or Realized
Losses with respect to the Mortgage Loans;
S-47
<PAGE> 48
(d) scheduled payments of principal and interest with respect to the
Mortgage Loans are received on the applicable due date beginning on January
1, 1999;
(e) there are no partial prepayments and all prepayments in full are
received, together with a 30 days' interest thereon, on the last day of
each month beginning in December 1998;
(f) the Mortgage Loans prepay at the indicated percentages of PSA;
(g) optional termination of the Trust Fund does not occur;
(h) no Mortgage Loans are required to be repurchased from the Trust Fund
and no Mortgage Loans are substituted for the Mortgage Loans included in
the Trust Fund on the Closing Date;
(i) the Certificates are issued on the Closing Date; and
(j) cash payments on the Certificates are received on the 25th day of
each month beginning in January 1999 in accordance with the priorities and
amounts described in this Prospectus Supplement under "Description of
Certificates."
Although the characteristics of the mortgage loans for the Decrement Tables
have been prepared on the basis of the weighted average characteristics of the
Mortgage Loans which are expected to be in the Mortgage Pool, there is no
assurance that the Modeling Assumptions will reflect the actual characteristics
or performance of the Mortgage Loans or that the performance of the Offered
Certificates will conform to the results set forth in the tables.
WEIGHTED AVERAGE LIVES OF THE OFFERED
CERTIFICATES
Weighted average life of a class of Offered Certificates refers to the
average amount of time that will elapse from the date of issuance of the
Certificate until each dollar in reduction of its balance is distributed to
investors. The weighted average lives of classes of Offered Certificates will be
influenced by, among other things, the rate at which principal of the Mortgage
Loans is paid, which may be in the form of scheduled principal payments or
principal prepayments (for this purpose, the term "prepayments" includes
prepayments and liquidations due to default, casualty, condemnation and the
like), the timing of changes in such rate of principal payments and the priority
sequence of distributions of principal of such Offered Certificates. The
interaction of the foregoing factors may have different effects on each class of
Offered Certificates and the effects on any such class may vary at different
times during the life of such class. Accordingly, no assurance can be given as
to the weighted average life of any such class of Offered Certificates. For an
example of how the weighted average lives of the Offered Certificates are
affected by the foregoing factors at various constant percentages of PSA, see
the Decrement Tables set forth below.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The prepayment model used in this Prospectus
Supplement is the Prepayment Standard Assumption ("PSA"), which represents an
assumed rate of principal prepayment each month relative to the then-outstanding
principal balance of a pool of mortgage loans for the life of such mortgage
loans. A prepayment assumption of 100% PSA assumes constant prepayment rates of
0.2% per annum of the then-outstanding principal balance of such mortgage loans
in the first month of the life of the mortgage loans and an additional 0.2% per
annum in each month thereafter until the thirtieth month. Beginning in the
thirtieth month and in each month thereafter during the life of the mortgage
loans, 100% PSA assumes a constant prepayment rate of 6% per annum each month.
As used in the table below, "0% PSA" assumes prepayment rates equal to 0% of
PSA, i.e., no prepayments. Correspondingly, "275%
S-48
<PAGE> 49
PSA" assumes prepayment rates equal to 275% of PSA, and so forth. PSA does not
purport to be a historical description of prepayment experience or a prediction
of the anticipated rate of prepayment of any pool of mortgage loans, including
the Mortgage Loans. The Depositor believes that no existing statistics of which
it is aware provide a reliable basis for investors to predict the amount or the
timing of receipt of prepayments on the Mortgage Loans.
The Decrement Tables set forth below have been prepared on the basis of the
Modeling Assumptions described above under "-- Assumptions Relating to Tables."
There will likely be discrepancies between the characteristics of the actual
Mortgage Loans included in the Mortgage Pool and the characteristics of the
Mortgage Loans assumed in preparing the Decrement Tables. Any such discrepancy
may have an effect upon the percentages of initial class balances outstanding
set forth in the Decrement Tables (and the weighted average lives of the Offered
Certificates). In addition, to the extent that the Mortgage Loans that actually
are included in the Mortgage Pool have characteristics that differ from those
assumed in preparing the following Decrement Tables, the class balance of an
Offered Certificate could be reduced to zero earlier or later than indicated by
such Decrement Tables.
Furthermore, the information contained in the Decrement Tables with respect
to the weighted average life of any Offered Certificate is not necessarily
indicative of the weighted average life of that class of Offered Certificates
that might be calculated or projected under different or varying prepayment
assumptions.
It is not likely that (i) all of the Mortgage Loans will have the interest
rates or remaining terms to maturity assumed or (ii) the Mortgage Loans will
prepay at the indicated percentage of PSA until maturity. In addition, the
diverse remaining terms to maturity of the Mortgage Loans (which includes many
recently originated Mortgage Loans) could produce slower or faster reductions of
the class balances than indicated in the Decrement Tables at the various
percentages of PSA specified.
Based upon the Modeling Assumptions, the following Decrement Tables
indicate the projected weighted average life of each class of the Offered
Certificates and set forth the percentages of the initial class balance of each
class that would be outstanding after each of the dates shown at various
constant percentages of the PSA.
S-49
<PAGE> 50
PERCENTAGE OF INITIAL CLASS BALANCE OUTSTANDING
AT THE RESPECTIVE PERCENTAGES OF PSA SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-PO
-------------------------------- --------------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500% 0% 100% 275% 400% 500%
- ----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................... 100 100 100 100 100 100 100 100 100 100
December 25, 1999.................... 96 94 92 90 89 96 94 92 90 89
December 25, 2000.................... 92 87 78 72 68 91 86 78 72 68
December 25, 2001.................... 87 77 62 52 45 87 77 62 53 46
December 25, 2002.................... 82 68 48 37 29 81 68 49 38 30
December 25, 2003.................... 76 60 38 26 19 76 60 38 27 20
December 25, 2004.................... 71 52 29 18 12 70 52 29 19 13
December 25, 2005.................... 65 45 22 12 7 64 45 22 13 8
December 25, 2006.................... 58 38 16 8 4 58 38 17 9 5
December 25, 2007.................... 51 31 12 6 3 51 31 12 6 3
December 25, 2008.................... 44 25 9 4 2 43 25 9 4 2
December 25, 2009.................... 36 19 6 2 1 36 19 6 2 1
December 25, 2010.................... 27 14 4 1 * 27 14 4 1 1
December 25, 2011.................... 18 8 2 1 * 19 9 2 1 *
December 25, 2012.................... 8 4 1 * * 9 4 1 * *
December 25, 2013.................... 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(in years)(1)...................... 8.63 6.76 4.72 3.83 3.33 8.63 6.78 4.76 3.89 3.39
</TABLE>
- ---------------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the balance
thereof by the number of years from the date of the issuance of such class
to the related Distribution Date, (ii) adding the results and (iii) dividing
the sum by the initial balance of that class.
* Less than 0.5%, but greater than zero.
S-50
<PAGE> 51
PERCENTAGE OF INITIAL CLASS BALANCE OUTSTANDING
AT THE RESPECTIVE PERCENTAGES OF PSA SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS B-1, CLASS B-2 AND CLASS B-3
-------------------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500%
- ----------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Initial Percentage.......................................... 100 100 100 100 100
December 25, 1999........................................... 96 96 96 96 96
December 25, 2000........................................... 92 92 92 92 92
December 25, 2001........................................... 87 87 87 87 87
December 25, 2002........................................... 82 82 82 82 82
December 25, 2003........................................... 76 76 76 76 76
December 25, 2004........................................... 71 69 67 65 64
December 25, 2005........................................... 65 62 57 53 50
December 25, 2006........................................... 58 54 46 41 37
December 25, 2007........................................... 51 45 35 29 24
December 25, 2008........................................... 44 36 25 19 14
December 25, 2009........................................... 36 28 17 12 8
December 25, 2010........................................... 27 20 11 7 4
December 25, 2011........................................... 18 12 6 3 2
December 25, 2012........................................... 8 5 2 1 1
December 25, 2013........................................... 0 0 0 0 0
Weighted Average Life
(in years)(1)............................................. 8.63 8.17 7.52 7.15 6.90
</TABLE>
- ---------------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the balance
thereof by the number of years from the date of the issuance of such class
to the related Distribution Date, (ii) adding the results and (iii) dividing
the sum by the initial balance of that class.
S-51
<PAGE> 52
PERCENTAGE OF INITIAL CLASS BALANCE OUTSTANDING
AT THE RESPECTIVE PERCENTAGES OF PSA SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS R
--------------------------------
DISTRIBUTION DATE 0% 100% 275% 400% 500%
- ----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage.......................................... 100 100 100 100 100
December 25, 1999........................................... 0 0 0 0 0
December 25, 2000........................................... 0 0 0 0 0
December 25, 2001........................................... 0 0 0 0 0
December 25, 2002........................................... 0 0 0 0 0
December 25, 2003........................................... 0 0 0 0 0
December 25, 2004........................................... 0 0 0 0 0
December 25, 2005........................................... 0 0 0 0 0
December 25, 2006........................................... 0 0 0 0 0
December 25, 2007........................................... 0 0 0 0 0
December 25, 2008........................................... 0 0 0 0 0
December 25, 2009........................................... 0 0 0 0 0
December 25, 2010........................................... 0 0 0 0 0
December 25, 2011........................................... 0 0 0 0 0
December 25, 2012........................................... 0 0 0 0 0
December 25, 2013........................................... 0 0 0 0 0
Weighted Average Life
(in years)(1)............................................. 0.09 0.09 0.09 0.09 0.09
</TABLE>
- ---------------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the balance
thereof by the number of years from the date of the issuance of such class
to the related Distribution Date, (ii) adding the results and (iii) dividing
the sum by the initial balance of that class.
S-52
<PAGE> 53
YIELD ON THE CLASS A-PO CERTIFICATES
The Class A-PO Certificates are principal-only certificates and will not be
entitled to receive distributions of interest in respect of the Mortgage Loans.
As a result, the Class A-PO Certificates will be offered at a substantial
discount to their original principal amount.
The significance of the effects of prepayments on the Class A-PO
Certificates is illustrated in the following table entitled "Sensitivity of the
Class A-PO Certificates to Prepayments," which shows the pre-tax yield (on a
corporate bond equivalent basis) to the holders of Class A-PO Certificates under
different constant percentages of PSA. The yields set forth were calculated
using the Modeling Assumptions and the additional assumption that the Class A-PO
Certificates are purchased on the Closing Date at an assumed purchase price
equal to 75% of their balance.
AS INDICATED IN THE FOLLOWING TABLE, BECAUSE THE CLASS A-PO CERTIFICATES
REPRESENT THE RIGHT TO RECEIVE ONLY A PORTION OF THE PRINCIPAL RECEIVED WITH
RESPECT TO THE DISCOUNT MORTGAGE LOANS, THE YIELD TO MATURITY ON THE CLASS A-PO
CERTIFICATES WILL BE EXTREMELY SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL
PAYMENTS (INCLUDING PREPAYMENTS) ON THE DISCOUNT MORTGAGE LOANS.
It is not likely that the Discount Mortgage Loans will prepay at a constant
rate until maturity, that all of the Discount Mortgage Loans will prepay at the
same rate or that they will have the characteristics assumed. There can be no
assurance that the Discount Mortgage Loans will prepay at any of the rates shown
in the table or at any other particular rate. The timing of changes in the rate
of prepayments may affect significantly the yield realized by a holder of a
Class A-PO Certificate and there can be no assurance that your pre-tax yield on
the Class A-PO Certificates will correspond to any of the pre-tax yields shown
in this Prospectus Supplement. You must make your own decision as to the
appropriate prepayment assumptions to be used in deciding whether to purchase a
Class A-PO Certificate.
SENSITIVITY OF THE CLASS A-PO CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
<TABLE>
<CAPTION>
PERCENTAGE OF PSA
-----------------------------------------
0% 100% 275% 400% 500%
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Class A-PO Certificates........................ 3.49% 4.54% 6.60% 8.12% 9.32%
</TABLE>
The yields set forth in the preceding table were calculated by (i)
determining the monthly discount rates that, when applied to the assumed stream
of cash flows to be paid on the Class A-PO Certificates, would cause the
discounted present value of such assumed stream of cash flows to equal the
assumed purchase price of the Class A-PO Certificates indicated above and (ii)
converting such monthly rates to corporate bond equivalent rates. This
calculation does not take into account variations that may occur in the interest
rates at which you may be able to reinvest funds received as payments of
principal of the Class A-PO Certificates and consequently does not purport to
reflect the return on any investment in the Class A-PO Certificates when such
reinvestment rates are considered.
YIELD ON THE CLASS R CERTIFICATES
The after-tax rate of return to holders of the Class R Certificates will
reflect their pre-tax rate of return, reduced by the taxes required to be paid
with respect to those Certificates. If you hold a Class R Certificate, you may
have tax liabilities during the early years of the REMIC's term that
substantially exceed any distributions payable thereon during any such period.
In addition, the present value of the tax liabilities with respect to your Class
R Certificates may substantially exceed the present value of expected
distributions on those certificates and of any tax benefits that may arise with
respect to them.
S-53
<PAGE> 54
Accordingly, the after-tax rate of return on the Class R Certificates may be
negative or may be otherwise significantly adversely affected. The timing and
amount of taxable income attributable to the Class R Certificates will depend
on, among other things, the timing and amounts of prepayments and losses
experienced with respect to the Mortgage Loans.
If you own a Class R Certificate, you should consult your tax advisors
regarding the effect of taxes and the receipt of any payments made in connection
with the purchase of the Class R Certificates on your after-tax rate of return.
See "Certain Federal Income Tax Consequences" in this Prospectus Supplement and
in the Prospectus.
YIELD ON THE SUBORDINATE CERTIFICATES
The weighted average life of, and the yield to maturity on, the Subordinate
Certificates, in increasing order of their numerical class designation, will be
progressively more sensitive to the rate and timing of mortgagor defaults and
the severity of ensuing losses on the Mortgage Loans. If the actual rate and
severity of losses on the Mortgage Loans is higher than those you assumed, the
actual yield to maturity of your Subordinate Certificate may be lower than the
yield you expected. The timing of losses on Mortgage Loans will also affect your
actual yield to maturity, even if the rate of defaults and severity of losses
over the life of the Trust Fund are consistent with your 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 be allocated to
reduce the balance of the applicable class of Subordinate Certificates (as
described in this Prospectus Supplement under "Description of
Certificates -- Allocation of Losses"), without the receipt of cash equal to the
reduction. In addition, shortfalls in cash available for distributions on the
Subordinate Certificates will result in a reduction in the balance of the class
of Subordinate Certificates then outstanding with the highest numerical class
designation if and to the extent that the aggregate balance of all classes of
Certificates, following all distributions and the allocation of Realized Losses
on a Distribution Date, exceeds the balance of the Mortgage Pool as of the due
date occurring in the month of such Distribution Date. As a result of such
reductions, less interest will accrue on that class of Subordinate Certificates
than otherwise would be the case. The yield to maturity of the Subordinate
Certificates will also be affected by the disproportionate allocation of
principal prepayments to the Senior Certificates (other than the Class A-PO
Certificates), Net Interest Shortfalls, other cash shortfalls in Available Funds
and distribution of funds to holders of Class A-PO Certificates otherwise
available for distribution on the Subordinate Certificates to the extent of
reimbursement for Class A-PO Deferred Amounts. See "Description of
Certificates -- Allocation of Losses" in this Prospectus Supplement.
If on any Distribution Date, the Credit Support Percentage for any class of
Subordinate Certificates is less than its original Credit Support Percentage,
all partial principal prepayments and principal prepayments in full available
for distribution on the Subordinate Certificates will be allocated solely to
that class and all other classes of Subordinate Certificates with lower
numerical class designations, thereby accelerating the amortization thereof
relative to that of the Restricted Classes and reducing the weighted average
lives of the classes of Subordinate Certificates receiving such distributions.
Accelerating the amortization of the classes of Subordinate Certificates with
lower numerical class designations relative to the other classes of Subordinate
Certificates is intended to preserve the availability of the subordination
provided by those other classes.
S-54
<PAGE> 55
YIELD CONSIDERATIONS WITH RESPECT TO
THE CLASS B-2 AND CLASS B-3 CERTIFICATES
Defaults on mortgage loans may be measured relative to a default standard
or model. The model used in this Prospectus Supplement, the standard default
assumption ("SDA"), represents an assumed rate of default each month relative to
the outstanding performing principal balance of a pool of new mortgage loans. A
default assumption of 100% SDA assumes constant default rates of 0.02% per annum
of the outstanding principal balance of such mortgage loans in the first month
of the life of the mortgage loans and an additional 0.02% per annum in each
month thereafter until the 30th month. Beginning in the 30th month and in each
month thereafter through the 60th month of the life of the mortgage loans, 100%
SDA assumes a constant default rate of 0.60% per annum each month. Beginning in
the 61st month and in each month thereafter through the 120th month of the life
of the mortgage loans, 100% SDA assumes that the constant default rate declines
each month by 0.0095% per annum, and that the constant default rate remains at
0.03% per annum in each month after the 120th month. For the following tables,
it is assumed that there is no delay between the default and liquidation of the
mortgage loans. As used in the following tables, "0% SDA" assumes no defaults.
SDA is not a historical description of default experience or a prediction of the
rate of default of any pool of mortgage loan.
The following tables indicate the sensitivity of the pre-tax yield to
maturity on the Class B-2 and Class B-3 Certificates to various rates of
prepayment and varying levels of Realized Losses. The tables set forth below are
based upon, among other things, the Modeling Assumptions (other than the
assumption that no defaults shall have occurred with respect to the Mortgage
Loans) and the additional assumption that liquidations (other than those
scenarios indicated as 0% of SDA (no defaults)) occur monthly on the last day of
the preceding month (other than on a due date) at the percentages of SDA set
forth in the table.
In addition, it was assumed that (i) Realized Losses on liquidations of 25%
or 50% of the outstanding principal balance of the Liquidated Mortgage Loans, as
indicated in the tables below (referred to as a "LOSS SEVERITY PERCENTAGE"),
will occur at the time of liquidation, (ii) there are no Special Hazard Losses,
Fraud Losses or Bankruptcy Losses and (iii) the Class B-2 and Class B-3
Certificates are purchased on the Closing Date at assumed purchase prices equal
to 98.00% and 94.50%, in each case, of their balance plus accrued interest from
December 1, 1998 to (but not including) the Closing Date.
It is highly unlikely that the Mortgage Loans will have the precise
characteristics referred to in this Prospectus Supplement or that they will
prepay or liquidate at any of the rates specified or that the Realized Losses
will be incurred according to one particular pattern. The assumed percentages of
SDA and PSA and the Loss Severity Percentages shown below are for illustrative
purposes only. Those assumptions may not be correct and the actual rates of
prepayment and liquidation and loss severity experience of the Mortgage Loans
may not correspond to any of the assumptions made in this Prospectus Supplement.
For these reasons, and because the timing of cash flows is critical to
determining yield, the pre-tax yield to maturity of the Class B-2 and Class B-3
Certificates are likely to differ from the pre-tax yields to maturity shown
below.
The pre-tax yields to maturity set forth below were calculated by
determining the monthly discount rates which, when applied to the assumed
streams of cash flows to be paid on the Class B-2 and Class B-3 Certificates,
would cause the discounted present value of those assumed streams of cash flows
to equal the aggregate assumed purchase prices of the Class B-2 and Class B-3
Certificates set forth above. In all cases, monthly rates were then converted to
the semi-annual corporate bond equivalent yields shown below. Implicit in the
use of any discounted present value or internal rate or return calculations such
as these is the assumption that intermediate cash flows are reinvested at the
discount
S-55
<PAGE> 56
rates at which investors may be able to reinvest funds received by them as
distributions on the Class B-2 and Class B-3 Certificates. Consequently, these
yields do not purport to reflect the total return on any investment in the Class
B-2 and Class B-3 Certificates when reinvestment rates are considered.
SENSITIVITY OF PRE-TAX YIELDS TO MATURITY OF THE CLASS B-2
CERTIFICATES TO PREPAYMENTS AND REALIZED LOSSES
<TABLE>
<CAPTION>
LOSS PERCENTAGE OF PSA
PERCENTAGE SEVERITY ------------------------------------------
OF SDA PERCENTAGE 0% 100% 275% 400% 500%
- ------------------------------------ ---------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
0%................................ 0% 6.33% 6.35% 6.36% 6.37% 6.38%
25................................. 20 6.34 6.35 6.36 6.37 6.38
25................................. 40 6.34 6.36 6.37 6.37 6.38
50................................. 20 6.34 6.36 6.37 6.37 6.38
50................................. 40 6.29 6.38 6.37 6.38 6.38
100................................. 20 6.29 6.39 6.37 6.38 6.38
100................................. 40 (6.78) 3.62 6.40 6.38 6.39
</TABLE>
SENSITIVITY OF PRE-TAX YIELDS TO MATURITY OF THE CLASS B-3
CERTIFICATES TO PREPAYMENTS AND REALIZED LOSSES
<TABLE>
<CAPTION>
LOSS PERCENTAGE OF PSA
PERCENTAGE SEVERITY ------------------------------------------
OF SDA PERCENTAGE 0% 100% 275% 400% 500%
- ------------------------------------ ---------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
0%................................ 0% 6.92% 6.96% 7.01% 7.05% 7.07%
25................................. 20 6.93 6.98 7.01 7.05 7.07
25................................. 40 6.82 7.00 7.03 7.05 7.07
50................................. 20 6.82 7.00 7.03 7.05 7.07
50................................. 40 5.44 6.82 7.04 7.07 7.08
100................................. 20 5.55 6.83 7.04 7.07 7.08
100................................. 40 (39.16) (32.61) (0.79) 4.49 7.11
</TABLE>
The following table sets forth the amount of Realized Losses that would be
incurred with respect to the Mortgage Loans, expressed as a percentage of the
aggregate outstanding principal balance of the Mortgage Loans as of the Cut-off
Date.
AGGREGATE REALIZED LOSSES
<TABLE>
<CAPTION>
LOSS PERCENTAGE OF PSA
PERCENTAGE SEVERITY ------------------------------------------
OF SDA PERCENTAGE 0% 100% 275% 400% 500%
- ------------------------------------ ---------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
25%................................ 20% 0.15% 0.13% 0.09% 0.08% 0.07%
25................................. 40 0.30 0.25 0.19 0.15 0.13
50................................. 20 0.30 0.25 0.19 0.15 0.13
50................................. 40 0.61 0.50 0.37 0.31 0.26
100................................. 20 0.60 0.50 0.37 0.30 0.26
100................................. 40 1.20 1.00 0.74 0.61 0.52
</TABLE>
You should make your investment decisions based on your determinations of
anticipated rates of prepayment and Realized Losses under a variety of
scenarios. If you are purchasing Class B-2 or Class B-3 Certificates you should
fully consider the risk that Realized Losses on the Mortgage Loans could result
in the failure to fully recover your investments.
S-56
<PAGE> 57
- --------------------------------------------------------------------------------
CREDIT SUPPORT
- --------------------------------------------------------------------------------
The rights of holders of each class of Class B Certificates to receive
distributions of principal and interest are subordinated to such rights of
holders of the Class A Certificates and the holders of each class of Class B
Certificates with a lower numerical designation. For example, the holders of the
Class B-2 Certificates will not receive principal or interest on a Distribution
Date until the holders of the Class A and Class B-1 Certificates have received
the amounts to which they are entitled on that Distribution Date. The
subordination described above is intended to increase the likelihood of receipt
by holders of the Class A Certificates and the holders of the Class B
Certificates with lower numerical class designations of the amount to which they
are entitled on any Distribution Date and to provide those holders with
protection against Realized Losses, other than Excess Losses.
The Class B Certificates also 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, as described below. The applicable Non-PO Percentage of
Realized Losses, other than Excess Losses, will be allocated to the class of
Class B Certificates then outstanding with the highest numerical class
designation. In addition, the balance of that class of Class B Certificates will
be reduced by the amount of distributions on the Class A-PO Certificates in
reimbursement for Class A-PO Deferred Amounts.
The Class B Certificates will provide protection to the classes of
Certificates of higher relative priority against (i) Special Hazard Losses in an
initial amount of approximately $2,905,723.88 (the "SPECIAL HAZARD LOSS COVERAGE
AMOUNT"), (ii) Bankruptcy Losses in an initial amount of approximately
$100,000.00 (the "BANKRUPTCY LOSS COVERAGE AMOUNT") and (iii) Fraud Losses in an
initial amount of approximately $2,812,611.29 (the "FRAUD LOSS COVERAGE
AMOUNT").
On any Distribution Date, the Special Hazard Loss Coverage Amount will be
reduced to equal the lesser of (a) the greatest of (i) 1% of the scheduled
balance of the Mortgage Pool, (ii) twice the principal balance of the largest
Mortgage Loan and (iii) the aggregate principal balance of the Mortgage Loans
secured by mortgaged properties located in the single California postal zip code
area having the highest aggregate principal balance of any zip code area and (b)
the initial Special Hazard Loss Coverage Amount less any Special Hazard Losses
incurred since the Closing Date. All principal balances for the purpose of this
definition will be calculated as of the first day of the month preceding the
Distribution Date after giving effect to scheduled installments of principal and
interest due on the Mortgage Loans, whether or not paid.
For the period from the Closing Date through the first anniversary of the
Cut-off Date, the Fraud Loss Coverage Amount equals the initial Fraud Loss
Coverage Amount reduced by the cumulative amount of Fraud Losses allocated to
the Certificates. After that period, the Fraud Loss Coverage Amount equals the
lesser of (i) the initial Fraud Loss Coverage Amount reduced by the cumulative
amount of Fraud Losses allocated to the Certificates and (ii) for each
Distribution Date occurring (a) during the period from the day after the first
anniversary through the third anniversary of the Cut-off Date, 1% of the
scheduled balance of the Mortgage Pool, (b) during the period from the day after
the third anniversary through the fifth anniversary of the Cut-off Date, 0.5% of
the scheduled balance of the Mortgage Pool and (c) after the fifth anniversary
of the Cut-off Date, zero.
The Bankruptcy Loss Coverage Amount will be reduced, from time to time, by
the Bankruptcy Losses allocated to the Certificates.
S-57
<PAGE> 58
The amount of coverage provided by the Class B Certificates for Special
Hazard Losses, Bankruptcy Losses and Fraud Losses may be cancelled or reduced if
the ratings of the Certificates assigned by the Rating Agencies are not
adversely affected. In addition, a reserve fund or other form of credit support
may be substituted for the protection provided by the Class B Certificates for
Special Hazard Losses, Bankruptcy Losses and Fraud Losses.
The Senior Certificates (other than the Class A-PO Certificates) will
receive 100% of the Non-PO Percentage of principal prepayments received with
respect to the Mortgage Loans until the fifth anniversary of the first
Distribution Date. During the following four years, those Senior Certificates
will receive a large, but generally decreasing, share of such principal
prepayments. This disproportionate allocation of prepayments will result in an
acceleration of the amortization of those Senior Certificates and will enhance
the likelihood that holders of those Certificates will receive the entire amount
of principal to which they are entitled. In addition to this acceleration
mechanism, on any Distribution Date on which the Senior Percentage exceeds the
initial Senior Percentage, the Senior Certificates (other than the Class A-PO
Certificates) will be entitled to receive 100% of the Non-PO Percentage of
principal prepayments received with respect to the Mortgage Loans. See
"Description of Certificates -- Principal" in this Prospectus Supplement.
- --------------------------------------------------------------------------------
USE OF PROCEEDS
- --------------------------------------------------------------------------------
The Depositor will apply the net proceeds of the sale of the Offered
Certificates against the purchase price of the Mortgage Loans.
- --------------------------------------------------------------------------------
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
- --------------------------------------------------------------------------------
An election will be made to treat the Trust Fund as a "real estate mortgage
investment conduit" (the "REMIC") for federal income tax purposes under the
Internal Revenue Code of 1986, as amended (the "CODE").
- The Certificates other than the Class R Certificates will be designated
as "regular interests" in the REMIC. All of the Certificates other than
the Class R Certificates are "REGULAR CERTIFICATES" for purposes of the
following discussion.
- Class R Certificates will be designated as the sole class of "residual
interests" in the REMIC.
See "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Certificates" in the Prospectus.
REGULAR CERTIFICATES
The Regular Certificates generally will be treated as debt instruments
issued by the REMIC for federal income tax purposes. Income on the Regular
Certificates must be reported under an accrual method of accounting.
The Class A-PO Certificates will, and the other classes of Offered
Certificates may, depending on their respective issue prices, be treated for
federal income tax purposes as having been issued with original issue discount.
See "Certain Federal Income Tax Consequences" in the Prospectus. For purposes of
determining the amount and the rate of accrual of original issue discount and
market
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<PAGE> 59
discount, the Depositor intends to assume that there will be prepayments on the
Mortgage Loans at a rate equal to 275% PSA. No representation is made as to the
actual rate at which the Mortgage Loans will be prepaid.
The Regular Certificates will be treated as regular interests in a REMIC
under Section 860G of the Code. Accordingly, to the extent described in the
Prospectus:
- the Regular Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code;
- the Regular Certificates will be treated as "real estate assets" within
the meaning of Section 856(c)(4)(A) of the Code; and
- interest on the Regular Certificates will be treated as interest on
obligations secured by mortgages on real property within the meaning of
Section 856(c)(3)(B) of the Code.
See "Certain Federal Income Tax Consequences" in the Prospectus.
RESIDUAL CERTIFICATES
If you hold a Class R Certificate, you must include the taxable income or
loss of the REMIC in determining your federal taxable income. Your resulting tax
liability may exceed cash distributions to you during certain periods. In
addition, all or a portion of the taxable income you recognize from a Class R
Certificate may be treated as "excess inclusion" income, which, among other
consequences, will result in your inability to use net operating losses to
offset such income from the REMIC.
You should consider carefully the tax consequences of any investment in
Class R Certificates discussed in the Prospectus and should consult your tax
advisors with respect to those consequences. See "Certain Federal Income Tax
Consequences" in the Prospectus. Specifically, you should consult your tax
advisors regarding whether, at the time of acquisition, a Class R Certificate
will be treated as a "noneconomic" residual interest, and a "tax avoidance
potential" residual interest. See "Certain Federal Income Tax
Consequences -- Federal Income Tax Consequences for REMIC
Certificates -- Taxation of Residual Certificates -- Tax-Related Restrictions on
Transfer of Residual Certificates -- Noneconomic Residual Interests",
"-- Foreign Investors" and "-- Mark to Market Regulations" in the Prospectus.
Additionally, for information regarding Prohibited Transactions, see "Certain
Federal Income Tax Consequences -- Federal Income Tax Consequences for REMIC
Certificates -- Taxes That May Be Imposed on the REMIC Pool -- Prohibited
Transactions" in the Prospectus.
BACKUP WITHHOLDING AND REPORTING REQUIREMENTS
Certain holders or other beneficial owners of Offered Certificates may be
subject to backup withholding at the rate of 31% with respect to interest paid
on the Offered Certificates if those holders or beneficial owners, upon
issuance, fail to supply the Trustee or their broker with their taxpayer
identification number, furnish an incorrect taxpayer identification number, fail
to report interest, dividends or other "reportable payments" (as defined in the
Code) properly, or, under certain circumstances, fail to provide the Trustee or
their broker with a certified statement, under penalty of perjury, that they are
not subject to backup withholding. See "Certain Federal Income Tax
Consequences -- Federal Income Tax Consequences for REMIC Certificates -- Backup
Withholding" in the Prospectus.
The Trustee will be required to report annually to the Internal Revenue
Service (the "IRS"), and to each certificateholder of record, the amount of
interest paid (and original issue discount accrued, if any) on the Regular
Certificates and the amount of interest withheld for federal income taxes, if
any, for
S-59
<PAGE> 60
each calendar year, except as to exempt holders (generally, holders that are
corporations, certain tax-exempt organizations or nonresident aliens who provide
certification as to their status as nonresidents). As long as the only
"certificateholder" of record of the Offered Certificates (other than the Class
R Certificates) is Cede & Co., as nominee for DTC, beneficial owners of the
Offered Certificates and the IRS will receive tax and other information
including the amount of interest paid on such Certificates from DTC Participants
rather than from the Trustee. (The Trustee, however, will respond to requests
for necessary information to enable DTC Participants and certain other persons
to complete their reports.) See "Certain Federal Income Tax
Consequences -- Federal Income Tax Consequences for REMIC
Certificates -- Reporting Requirements" in the Prospectus.
- --------------------------------------------------------------------------------
STATE TAXES
- --------------------------------------------------------------------------------
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Offered
Certificates should consult their tax advisors regarding such tax consequences.
All investors should consult their tax advisors regarding the federal,
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the Offered Certificates.
- --------------------------------------------------------------------------------
BENEFIT PLAN CONSIDERATIONS
- --------------------------------------------------------------------------------
A fiduciary or other person acting on behalf of any employee benefit plan
or arrangement, including an individual retirement account (an "IRA"), subject
to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
the Code or any federal, state or local law ("SIMILAR LAW") which is similar to
ERISA or the Code (collectively, a "BENEFIT PLAN") should carefully review with
its legal advisors whether the purchase or holding of an Offered Certificate
could give rise to a transaction prohibited or not otherwise permissible under
ERISA, the Code or Similar Law. See "Benefit Plan Considerations" in the
Prospectus.
The U.S. Department of Labor has extended to BankAmerica Corporation, as
successor to NationsBank Corporation, the corporate parent of NationsBanc
Montgomery Securities LLC, an administrative exemption (Prohibited Transaction
Exemption 93-31; Exemption Application No. D-9105) (the "EXEMPTION") from
certain of the prohibited transaction rules of ERISA and the related excise tax
provisions of Section 4975 of the Code with respect to the initial purchase, the
holding and the subsequent resale by certain Benefit 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, but does not
cover certain IRAs and other Non-ERISA Plans (as defined in the Prospectus)
which are subject to the prohibited transaction provisions of the Code.
For a general description of the Exemption and the conditions that must be
satisfied for the Exemption to apply, see "Benefit Plan Considerations" in the
Prospectus.
The Underwriter believes that the Exemption will cover the acquisition and
holding of the Senior Certificates (other than the Residual Certificates) by the
Benefit Plans to which it applies and that all conditions of the Exemption other
than those within the control of the investors will be met. In
S-60
<PAGE> 61
addition, as of the date hereof, there is no single mortgagor that is the
obligor on 5% of the initial balance of the Mortgage Pool.
Because the Class B Certificates are subordinated to the Senior
Certificates, the Class B Certificates may not be transferred unless the
transferee has delivered (i) a representation letter to the Trustee stating
either (a) that the transferee is not a Benefit Plan and is not acting on behalf
of a Benefit Plan or using the assets of a Benefit Plan to effect such purchase
or (b) subject to the conditions described in this Prospectus Supplement, that
the source of funds used to purchase the Class B Certificates is an "insurance
company general account" or (ii) an opinion of counsel and such other
documentation as described in this Prospectus Supplement under "Description of
Certificates -- Restrictions on Transfer of the Class B Certificates."
Prospective Benefit Plan investors should consult with their legal advisors
concerning the impact of ERISA, the Code and Similar Law, the applicability of
PTCE 83-1 described under "Benefit Plan Considerations" in the Prospectus and
the Exemption, and the potential consequences in their specific circumstances,
prior to making an investment in the Offered Certificates. Moreover, each
Benefit Plan fiduciary should determine whether under the governing plan
instruments and the applicable fiduciary standards of investment prudence and
diversification, an investment in the Offered Certificates is appropriate for
the Benefit Plan, taking into account the overall investment policy of the
Benefit Plan and the composition of the Benefit Plan's investment portfolio.
The Class R Certificates may not be purchased by or transferred to a
Benefit Plan or a person acting on behalf of or investing assets of a Benefit
Plan. See "Description of Certificates -- Restrictions on Transfer of the Class
R Certificates" in this Prospectus Supplement.
- --------------------------------------------------------------------------------
METHOD OF DISTRIBUTION
- --------------------------------------------------------------------------------
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "UNDERWRITING AGREEMENT") among the Depositor, NationsBanc Montgomery
Securities LLC (the "UNDERWRITER"), NationsBanc Mortgage Corporation and Bank of
America, FSB, the Depositor has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from the Depositor, all of the Offered
Certificates. Proceeds to the Depositor from the sale of the Offered
Certificates are expected to be approximately 99.38% of the initial balance of
those Certificates plus accrued interest from December 1, 1998 to (but not
including) the Closing Date, before deducting estimated expenses of $400,000.00
payable by the Depositor.
Distribution of the Offered Certificates will be made by the Underwriter
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. In connection with the purchase and sale of
the Offered Certificates, the Underwriter may be deemed to have received
compensation from the Depositor in the form of underwriting discounts.
The Depositor has been advised by the Underwriter 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 Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
S-61
<PAGE> 62
The Underwriter is an affiliate of the Depositor, the Sellers and the
Servicers, and is a registered broker/dealer. Any obligations of the Underwriter
are the sole responsibility of the Underwriter and do not create any obligation
or guarantee on the part of any affiliate of the Underwriter. This Prospectus
Supplement and the Prospectus may be used by the Underwriter in connection with
offers and sales related to market-making transactions in the Offered
Certificates. The Underwriter may act as principal or agent in such
transactions.
- --------------------------------------------------------------------------------
LEGAL MATTERS
- --------------------------------------------------------------------------------
The validity of and certain federal income tax matters with respect to the
Offered Certificates will be passed upon for the Depositor by Kennedy Covington
Lobdell & Hickman, L.L.P., Charlotte, North Carolina. Cadwalader, Wickersham &
Taft, New York, New York will pass upon certain legal matters on behalf of the
Underwriter.
- --------------------------------------------------------------------------------
CERTIFICATE RATINGS
- --------------------------------------------------------------------------------
At their issuance, each class of Offered Certificates is required to
receive from Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P") and Fitch IBCA, Inc. ("FITCH") at least the rating set forth in the
table appearing on the cover of this Prospectus Supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of payments required under the Pooling Agreement.
- S&P's and Fitch's ratings take into consideration the credit quality of
the Mortgage Pool including any credit support, structural and legal
aspects associated with the Offered Certificates, and the extent to
which the payment stream of the Mortgage Pool is adequate to make
payments required under the Offered Certificates. S&P's and Fitch's
ratings on the Offered Certificates do not, however, constitute a
statement regarding frequency of prepayments on the Mortgage Loans.
- The "r" symbol is appended to the rating by S&P of the Class A-PO
Certificates because they are principal-only mortgage-backed securities
that S&P believes may experience high volatility or high variability in
expected returns due to non-credit risks created by the terms of those
Certificates. The absence of an "r" symbol in the ratings of the other
Offered Certificates should not be taken as an indication those
Certificates will exhibit no volatility or variability in total return.
- S&P's and Fitch's ratings do not address the remote possibility that, in
the event of the insolvency of either Seller, the sale of the Offered
Certificates may be recharacterized as a financing and that, as a result
of such recharacterization, the Offered Certificates may be accelerated.
As a result, holders of the Offered Certificates might suffer a lower
than anticipated yield.
The Depositor has not requested a rating of any class of Offered
Certificates by any rating agency other than S&P and Fitch. However, there can
be no assurance as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by such other rating
agency. The rating assigned by any such other rating agency to a class of
Offered Certificates may be lower than the ratings assigned by S&P and Fitch.
S-62
<PAGE> 63
The rating of the Offered Certificates should be evaluated independently
from similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating agency.
S-63
<PAGE> 64
- --------------------------------------------------------------------------------
INDEX TO DEFINED TERMS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Advance..................................................... S-30
Affiliated Sellers.......................................... S-22
Available Funds............................................. S-35
Bankruptcy Loss Coverage Amount............................. S-57
Bankruptcy Losses........................................... S-42
Benefit Plan................................................ S-10, S-60
Book-Entry Certificates..................................... S-32
Certificates................................................ S-4
Class A Certificates........................................ S-4
Class A-PO Deferred Amount.................................. S-42
Class A-PO Principal Distribution Amount.................... S-40
Class B Certificates........................................ S-4
Closing Date................................................ S-4
Code........................................................ S-10, S-58
Collection Account.......................................... S-29
Compensating Interest....................................... S-30
Corporate Trust Office...................................... S-31
Corporation................................................. S-14
Credit Support Percentage................................... S-41
Cut-off Date................................................ S-4
Debt Service Reduction...................................... S-43
Decrement Tables............................................ S-47
Deficient Valuation......................................... S-43
Definitive Certificates..................................... S-32
Deleted Mortgage Loan....................................... S-29
Depositor................................................... S-4
Determination Date.......................................... S-30
Discount Mortgage Loan...................................... S-8, S-37
Distribution Account........................................ S-29
Distribution Date........................................... S-4, S-34
DTC......................................................... S-32
DTC Participants............................................ S-33
Eligible Substitute Mortgage Loan........................... S-29
ERISA....................................................... S-10, S-60
Excess Losses............................................... S-7, S-42
Exemption................................................... S-60
Expense Fee Rate............................................ S-29
Expense Fees................................................ S-29
FHLMC....................................................... S-16
FICO Scores................................................. S-20
Fitch....................................................... S-62
FNMA........................................................ S-16
Fraud Loss Coverage Amount.................................. S-57
Fraud Losses................................................ S-43
Guides...................................................... S-22
Indirect DTC Participants................................... S-33
Industry.................................................... S-34
</TABLE>
S-64
<PAGE> 65
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Interest Accrual Period..................................... S-37
Interest Distribution Amount................................ S-36
IRA......................................................... S-10, S-60
IRS......................................................... S-59
Last Scheduled Distribution Date............................ S-43
Limited or Reduced Documentation Guidelines................. S-21
Liquidated Mortgage Loan.................................... S-43
Liquidation Proceeds........................................ S-35
Loan-to-Value Ratio......................................... S-16
Loss Severity Percentage.................................... S-55
Modeling Assumptions........................................ S-47
Mortgage File............................................... S-28
Mortgage Loans.............................................. S-5, S-15
Mortgage Pool............................................... S-5, S-15
Net Interest Shortfall...................................... S-36
Net Mortgage Rate........................................... S-37
Net Prepayment Interest Shortfall........................... S-36
NMCC........................................................ S-16
Non-Offered Certificates.................................... S-4
Non-PO Percentage........................................... S-37
Non-PO Principal Amount..................................... S-37
Norwest Bank................................................ S-31
Offered Certificates........................................ S-4
Original Subordinate Principal Balance...................... S-39
Percentage Interest......................................... S-32
PO Percentage............................................... S-37
PO Principal Amount......................................... S-40
Pooling Agreement........................................... S-4, S-28
Pool Principal Balance...................................... S-38
Premium Mortgage Loan....................................... S-37
Prepayment Interest Shortfall............................... S-36
Principal-Only Certificates................................. S-4
PSA......................................................... S-48
PTCE 95-60.................................................. S-45
Purchase Price.............................................. S-28
Rapid Processing Program.................................... S-23
Realized Loss............................................... S-42
Record Date................................................. S-4, S-35
Regular Certificates........................................ S-58
Relief Act Reduction........................................ S-36
REMIC....................................................... S-9, S-58
REO Property................................................ S-30
Residual Certificates....................................... S-4
Restricted Classes.......................................... S-41
Rules....................................................... S-33
S&P......................................................... S-62
Sale Agreements............................................. S-16
SDA......................................................... S-55
Sellers..................................................... S-4
Senior Certificates......................................... S-4
Senior Credit Support Depletion Date........................ S-38
</TABLE>
S-65
<PAGE> 66
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Senior Percentage........................................... S-39
Senior Prepayment Percentage................................ S-39
Senior Principal Distribution Amount........................ S-38
Servicers................................................... S-4, S-24
Servicing Fee............................................... S-29
Servicing Fee Rate.......................................... S-29
Similar Law................................................. S-10, S-60
SMMEA....................................................... S-10
Special Hazard Loss Coverage Amount......................... S-57
Special Hazard Losses....................................... S-42
Special Hazard Mortgage Loan................................ S-43
Stated Principal Balance.................................... S-38
Subordinate Certificates.................................... S-4
Subordinate Percentage...................................... S-39
Subordinate Prepayment Percentage........................... S-40
Subordinate Principal Distribution Amount................... S-41
Substitution Adjustment Amount.............................. S-29
Trust Fund.................................................. S-4
Trustee..................................................... S-4
Trustee Fee Rate............................................ S-29
Underwriter................................................. S-61
Underwriting Agreement...................................... S-61
U.S. Person................................................. S-44
</TABLE>
S-66
<PAGE> 67
PROSPECTUS
NATIONSBANC MONTGOMERY FUNDING CORP.
DEPOSITOR
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
Prospectus 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
"Prospectus 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 Prospectus 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 Prospectus 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 Depositor from
certain seller or sellers specified in the related Prospectus 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 Prospectus 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 Prospectus 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 Depositor. 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
Prospectus Supplement. The only obligations of the Depositor 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 Master Servicer named in the related Prospectus 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 Prospectus Supplement.
This Prospectus may not be used to consummate sales of Certificates unless
accompanied by a Prospectus Supplement.
December 17, 1998
<PAGE> 68
PROSPECTUS SUPPLEMENT
The Prospectus 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
Prospectus 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
Prospectus Supplement will be included in a Current Report on Form 8-K which
will be filed with the Securities and Exchange Commission (the "SEC") within 15
days of the initial issuance of the related Series of Certificates.
ADDITIONAL INFORMATION
The Depositor has filed with the SEC 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 Prospectus Supplement relating to each Series of Certificates contain
information set forth in the Registration Statement pursuant to the Rules and
Regulations of the SEC. 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 SEC at its Public Reference Room, 450
Fifth Street, N.W, Washington, D.C. 20549. Information on the operations of the
Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
Copies of the Registration Statement and certain other information may also be
reviewed at the Internet site maintained by the SEC which is located at
http://www.sec.gov.
2
<PAGE> 69
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by or on behalf of the Trust Fund referred to in the
accompanying Prospectus Supplement with the SEC 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 Prospectus 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 Prospectus 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 Depositor 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
Attention: Secretary
Telephone: (704) 386-2400
3
<PAGE> 70
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement............ 2
Additional Information........... 2
Incorporation of Certain
Documents by Reference......... 3
Summary of the Prospectus........ 6
The Trust Funds.................. 14
General........................ 14
The Mortgage Loans............. 14
Mortgage Certificates.......... 16
Distribution Account........... 20
Minimum Prepayment Agreement... 21
Minimum Reinvestment
Agreement................... 21
Description of Certificates...... 21
General........................ 21
Distributions.................. 22
Categories of Classes of
Certificates................ 24
Residual Certificates.......... 26
Advances....................... 27
Reports to
Certificateholders.......... 27
Special Distributions.......... 28
Credit Support................... 28
General........................ 28
Subordination.................. 29
Surety Bonds................... 29
Mortgage Pool Insurance
Policies.................... 29
Fraud Waiver................... 30
Special Hazard Insurance
Policies.................... 31
Bankruptcy Bonds............... 32
Reserve Fund................... 32
Cross Support.................. 32
Other Insurance, Guaranties,
Letters of Credit and
Similar Instruments or
Agreements.................. 33
Maturity, Prepayment
Considerations and Weighted
Average Life of Certificates... 33
The Depositor.................... 34
Use of Proceeds.................. 34
Mortgage Purchase Program........ 34
The Pooling and Servicing
Agreement...................... 35
Assignment of Mortgage Loans... 35
Representations and
Warranties.................. 36
Servicing...................... 37
Payments on Mortgage Loans..... 37
Collection and Other Servicing
Procedures.................. 39
Hazard Insurance............... 39
</TABLE>
<TABLE>
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<S> <C>
Primary Mortgage Insurance..... 40
Maintenance of Insurance
Policies; Claims Thereunder
and Other Realization Upon
Defaulted Mortgage Loans.... 40
Servicing Compensation and
Payment of Expenses......... 41
Evidence as to Compliance...... 41
Certain Matters Regarding the
Depositor, the Seller and
the Master Servicer......... 42
Events of Default.............. 42
Rights Upon Event of Default... 42
Enforcement.................... 43
Amendment...................... 43
List of Certificateholders..... 43
Termination; Repurchase of
Mortgage Loans and Mortgage
Certificates................ 44
The Trustee.................... 44
Certain Legal Aspects of the
Mortgage Loans................. 44
Mortgages...................... 44
Cooperatives................... 45
Land Sale Contracts............ 45
Foreclosure.................... 46
Rights of Redemption........... 48
Anti-Deficiency Legislation and
Other Limitations on
Sellers..................... 48
Due-on-Sale Clauses............ 49
Applicability of Usury Laws.... 49
Soldiers' and Sailors' Civil
Relief Act.................. 49
Environmental Legislation...... 50
Benefit Plan Considerations...... 50
General........................ 50
Certain ERISA and Code
Requirements................ 50
ERISA Administrative
Exemptions.................. 52
Non-ERISA Plans and Exempt
Plans....................... 54
Unrelated Business Taxable
Income -- Residual
Certificates................ 54
Investment Decision............ 54
Legal Investment
Considerations................. 55
Legal Matters.................... 56
Certain Federal Income Tax
Consequences................... 56
</TABLE>
4
<PAGE> 71
<TABLE>
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<S> <C>
Federal Income Tax Consequences
for REMIC Certificates...... 57
General..................... 57
Status of REMIC
Certificates.............. 57
Qualification as a REMIC.... 58
Taxation of Regular
Certificates.............. 59
Taxation of Residual
Certificates.............. 66
Taxes that May Be Imposed on
the REMIC Pool............ 72
Liquidation of the REMIC
Pool...................... 73
Administrative Matters...... 73
Limitations on Deduction of
Certain Expenses.......... 73
Taxation of Certain Foreign
Investors................. 74
Backup Withholding.......... 75
Reporting Requirements...... 75
</TABLE>
<TABLE>
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Federal Income Tax Consequences
for Certificates as to Which
No REMIC Election Is Made... 76
General..................... 76
Tax Status.................. 77
Premium and Discount........ 77
Recharacterization of
Servicing Fees............ 78
Sale or Exchange of
Certificates.............. 79
Stripped Certificates....... 79
Reporting Requirements and
Backup Withholding........ 82
Taxation of Certain Foreign
Investors................. 82
State Tax Considerations......... 82
Plans of Distribution............ 83
Index to Defined Terms........... 84
</TABLE>
5
<PAGE> 72
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
Prospectus 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 PROSPECTUS SUPPLEMENT FOR EACH SERIES WILL SPECIFY
THE EXTENT (IF ANY) TO WHICH THE TERMS OF SUCH SERIES OR THE RELATED TRUST FUND
VARY FROM THE 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").
Depositor.................. NationsBanc Montgomery Funding Corp. (the
"Depositor").
Seller..................... The seller or sellers (each, a "Seller") for a
particular Series will be named in the Prospectus
Supplement relating to such Series (the
"Prospectus Supplement"). A Seller may be an
affiliate of the Depositor.
Trustee.................... The trustee (the "Trustee") for a particular Series
will be named in the related Prospectus
Supplement.
Master Servicer............ The servicer and/or master servicer (collectively,
the "Master Servicer") for a particular Series
will be named in the related Prospectus
Supplement. More than one servicer may be named
for any particular Series.
REMIC Servicer............. The entity (the "REMIC Servicer"), if such duties
are not performed by the Master Servicer or the
Trustee, will be specified in the related
Prospectus Supplement if a REMIC election is made
with respect to the related Trust Fund. The REMIC
Servicer may be the Depositor, the Master
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
Prospectus Supplement.
Description of
Certificates............... Each Certificate will represent an ownership
interest in a Trust Fund to be formed by the
Depositor 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 Prospectus 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 Prospectus
Supplement. Distributions of interest on any
class of Accrual Certificates will commence at
the time specified in such Prospectus Supplement;
until then, interest on the Accrual Certificates
will be added to the Certificate Balance thereof.
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<PAGE> 73
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
Prospectus 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 Prospectus Supplement.
Unless otherwise specified in the related
Prospectus 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
Prospectus 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 Prospectus
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 Prospectus Supplement,
certain classes of Subordinate Certificates may
be senior to other Classes of Subordinate
Certificates and be rated investment grade
("Mezzanine Certificates"). The rights of holders
of the Subordinate Certificates of a Series
("Subordinate Certificateholders") to receive
distributions with respect to the assets in the
related Trust Fund will be subordinated to such
rights of holders of the Senior Certificates of
the same Series ("Senior Certificateholders") to
the extent described in the related Prospectus
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 Prospectus Supplement,
by the right of such holders to receive future
distributions on the assets in the related Trust
Fund that would otherwise have been payable to
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 Prospectus Supplement. If so
specified in the related Prospectus Supplement,
subordination may apply only in the event of
certain types of losses not covered by other
forms of credit support, such as hazard losses
not covered by standard hazard insurance policies
or losses due to the
7
<PAGE> 74
bankruptcy or fraud of the mortgagor. The related
Prospectus 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 Prospectus Supplement will specify
whether or not any such Reserve Fund will be
included in the corpus of the Trust Fund for such
Series and will also specify the manner of
funding the related Reserve Fund and the
conditions under which the amounts in any such
Reserve Fund will be used to make distributions
to holders of Certificates of a particular class
or released from the related Trust Fund.
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
Prospectus Supplement (the "Cut-off Date").
5. Fraud Waiver....... If so specified in the related Prospectus
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 Prospectus 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 Prospectus Supplement.
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<PAGE> 75
7. Bankruptcy Bond.... A bankruptcy bond or bonds (each, a "Bankruptcy
Bond") may be obtained to cover certain losses
resulting from action that may be taken by a
bankruptcy court in connection with a Mortgage
Loan. The level of coverage and the limitations
in scope of each Bankruptcy Bond will be
specified in the related Prospectus Supplement.
8. Cross Support...... If specified in the related Prospectus Supplement,
the beneficial ownership of separate groups of
assets included in a Trust Fund may be evidenced
by separate classes of the related Series of
Certificates. In such case, credit support may be
provided by a cross-support feature which
requires that distributions be made with respect
to Certificates evidencing beneficial ownership
of one or more asset groups prior to
distributions to 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
Prospectus Supplement.
D. Advances.............. If so specified in the related Prospectus
Supplement, the Master 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 Prospectus 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
Distribution Account and the Collection Account,
any minimum prepayment, reinvestment or similar
agreement and any other assets described in the
related Prospectus 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 Prospectus Supplement,
the Mortgage Loans may include Land Sale
Contracts. If so specified in the related
Prospectus 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 Prospectus
Supplement. All Mortgage Loans will have been
purchased by the Depositor, 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 Prospectus Supplement and may include any
of the following features or combinations thereof
or other features described in the related
Prospectus Supplement:
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<PAGE> 76
(a) Interest may be payable at a fixed rate, a
rate adjustable from time to time in relation to
an index (which will be specified in the related
Prospectus Supplement), a rate that is fixed for
a period of time or under certain circumstances
and is followed by an adjustable rate, a rate
that otherwise varies from time to time, or a
rate that is convertible from an adjustable rate
to a fixed rate. Changes to an adjustable rate
may be subject to periodic limitations, maximum
rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and
added to the principal of a loan for such periods
and under such circumstances as may be specified
in the related Prospectus Supplement. The loan
agreement, promissory note or other evidence of
indebtedness (the "Mortgage Note") in respect of
a Mortgage Loan may provide for the payment of
interest at a rate lower than the interest rate
(the "Mortgage Rate") specified in such Mortgage
Note for a period of time or for the life of the
loan, and the amount of any difference may be
contributed from funds supplied by a third party.
(b) Principal may be payable on a level debt
service basis to fully amortize the loan over its
term, may be calculated on the basis of an
assumed amortization schedule that is longer than
the original term to maturity or on an interest
rate that is different from the interest rate on
the Mortgage Loan or may not be amortized during
all or a portion of the original term. Payment of
all or a substantial portion of the principal may
be due on maturity ("Balloon Payments").
Principal may include interest that has been
deferred and added to the principal balance of
the Mortgage Loan.
(c) Monthly payments of principal and interest
may be fixed for the life of the Mortgage Loan,
may increase over a specified period of time or
may change from period to period. Mortgage Loans
may include limits on periodic increases or
decreases in the amount of monthly payments and
may include maximum or minimum amounts of monthly
payments.
(d) The Mortgage Loans generally may be prepaid
at any time without payment of any prepayment
fee. If so specified in the related Prospectus
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
10
<PAGE> 77
causes. The Mortgage Loans may be covered by
Primary Mortgage Insurance Policies to the extent
provided in the related Prospectus 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 Prospectus 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 Prospectus 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 Prospectus
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 Prospectus 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. Distribution
Account............... All distributions on any Mortgage Certificates and
all payments (including prepayments, liquidation
proceeds and insurance proceeds) received from
the Master Servicer on any Mortgage Loans
included in the Trust Fund for a Series will be
remitted to an account (the "Distribution
Account"), and, together with any amounts
available pursuant to the terms of any applicable
credit support and any other amounts described in
the related Prospectus Supplement, will be
available for distribution on the Certificates of
such Series as described in the related
Prospectus Supplement. Such Distribution Account
shall be an Eligible Account or Accounts
established and maintained by the Trustee for the
benefit of holders of a Series of Certificates.
D. Collection Account.... All payments received by the Master Servicer on any
Mortgage Loans included in the Trust Fund for a
Series will be deposited in an account
11
<PAGE> 78
(the "Collection Account"). Funds on deposit in
the Collection Account will be remitted to the
Trustee for deposit in the Distribution Account
as described in the related Prospectus
Supplement. Such Collection Account shall be an
Eligible Account or Accounts established and
maintained by the Master Servicer for the benefit
of holders of a Series of Certificates.
Optional Termination....... The Master Servicer, such other entity specified in
the related Prospectus Supplement, or, if
specified in the related Prospectus 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 Prospectus Supplement.
Tax Status of REMIC
Certificates............. Regular Certificates of a particular Series will be
treated as "regular interests" in the REMIC and
will be treated as debt instruments for federal
income tax purposes, and the Residual
Certificates of such Series will be treated as
"residual interests" in the REMIC. Holders of
Residual Certificates generally will include
their pro rata shares of the net income or loss
of the REMIC in determining their federal taxable
income.
Holders of Accrual Certificates and any other
classes of Regular Certificates issued with
original issue discount generally will be
required to include the original issue discount
(which for federal income tax purposes includes
interest accrued on Accrual Certificates as well
as current interest paid thereon) in gross income
over the life of the Regular Certificates.
Distributions on Regular Certificates to foreign
investors generally will not be subject to U.S.
withholding tax, provided applicable
certification procedures are complied with.
Subject to certain limitations that may be
applicable to Buydown Loans, REMIC Certificates
will be treated as "qualifying real property
loans" for mutual savings banks and domestic
building and loan associations, "regular or
residual interests in a REMIC" for domestic
building and loan associations and "real estate
assets" for real estate investment trusts. See
"Certain Federal Income Tax
Consequences -- Federal Income Tax Consequences
for REMIC Certificates" herein.
Tax Status of Non-REMIC
Certificates............. For federal income tax purposes, the trust created
to hold the Mortgage Assets for each Series of
Non-REMIC Certificates will be classified as a
grantor trust and not as an association taxable
as a corporation. Holders of Non-REMIC
Certificates of such Series which are not IO
Certificates will be treated as owners of
undivided interests in the trust and as equitable
owners of undivided interests in each of the
Mortgage Assets held by the trust, and such
holders will be taxed on their pro rata shares of
the income from the related Mortgage Assets and
may be allowed to deduct their pro rata shares of
reasonable servicing fees, consistent with their
methods of accounting, subject to limitation in
the case of Non-REMIC Certificates held by
individuals, estates, or trusts (either directly
or indirectly through certain pass-through
entities). If a Series of Non-REMIC Certificates
includes IO Certificates, holders of the
Certificates
12
<PAGE> 79
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 -- Federal Income Tax Consequences
for Certificates as to Which No REMIC Election is
Made" herein.
Legal Investment........... The Prospectus Supplement for each Series of
Certificates will specify which, if any, of the
classes of Certificates offered thereby will
constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Classes of
Certificates that qualify as "mortgage related
securities" will be legal investments for certain
types of institutional investors to the extent
provided in SMMEA. However, institutions whose
investment activities are subject to other legal
investment laws and regulations or review by
certain regulatory authorities may be subject to
restrictions on investment in certain classes of
Certificates. See "Legal Investment
Considerations" herein.
Benefit Plan
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 "Benefit
Plan Considerations" herein. Certain classes of
Certificates may not be transferred unless the
Trustee and the Depositor are furnished with a
letter of representation or an opinion of counsel
to the effect that such transfer will not result
in a violation of the prohibited transaction
provisions of ERISA and the Code and will not
subject the Trustee, the Depositor or the Master
Servicer to additional obligations. Additionally,
unless otherwise specified in the related
Prospectus 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 "Benefit Plan
Considerations" herein.
Rating..................... The Certificates of each class offered hereby and
by a Prospectus 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 Prospectus
Supplement (with respect to each Series of
Certificates, the "Rating Agency").
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<PAGE> 80
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 Distribution Account and the Collection Account, any minimum
prepayment, reinvestment or similar agreement and any other assets described in
the related Prospectus Supplement, all as described herein and therein.
THE MORTGAGE LOANS
The Mortgage Loans may be fixed- or adjustable-rate mortgage loans, or
participations or other beneficial interests in such mortgage loans, evidenced
by loan agreements, promissory notes or other evidence of indebtedness (each, a
"Mortgage Note") secured primarily by first liens on one- to four-family
residential properties in any one of the fifty states, the District of Columbia,
Guam, Puerto Rico or any other territory of the United States. If so specified
in the related Prospectus 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 Depositor for inclusion in a Trust Fund from among those purchased by the
Depositor, either directly or through affiliates. Originators, servicers or
sellers may be affiliated with the Depositor. 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
Prospectus 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
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* Whenever in this Prospectus the terms "Pool", "Certificates", "REMIC
Certificates" and "Non-REMIC Certificates" are used, those terms apply, unless
the context indicates otherwise, to one specific Pool, and the Certificates
representing undivided interests therein. Similarly, the term "Certificate
Rate" will refer to the Certificate Rate borne by a particular class of
Certificates of a Series.
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increased income is not fulfilled, the possibility of defaults on Buydown Loans
is increased. The related Prospectus Supplement will contain information with
respect to any Buydown Loan concerning limitations on the interest rate paid by
the 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 Prospectus 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
Prospectus 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 Prospectus 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 Depositor, 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 Prospectus 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 Prospectus 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 Prospectus 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 Prospectus
Supplement. Certain ARMs may provide for periodic adjustments of scheduled
payments in order to fully amortize the Mortgage Loan by
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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 Prospectus 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 Prospectus Supplement, and the
descriptions that follow are subject to modification as appropriate to reflect
the terms of any such certificates that are actually included in a Trust Fund.
GNMA. GNMA is a wholly owned corporate instrumentality of the United
States within the Department of Housing and Urban Development ("HUD"). Section
306(g) of Title III of the National Housing Act of 1934, as amended (the
"Housing Act"), authorizes GNMA to guarantee the timely payment of the principal
of and interest on certificates that are based on and backed by a pool of loans
("FHA Loans") insured or guaranteed by the United States Federal Housing
Administration (the "FHA") under the Housing Act or Title V of the Housing Act
of 1949, or by the United States Department of Veteran Affairs (the "VA") under
the Servicemen's Readjustment Act of 1944, as amended, or Chapter 37 of Title
38, United States Code or by pools of other eligible mortgage loans.
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guaranty under this subsection." To meet its
obligations under its guaranties, GNMA is authorized, under Section 306(d) of
the Housing Act, to borrow from the United States Treasury with no limitations
as to amount.
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GNMA Certificates. All of the GNMA Certificates (the "GNMA Certificates")
will be mortgage-backed certificates issued and serviced by GNMA- or Fannie
Mae-approved mortgage servicers. The mortgage loans underlying GNMA Certificates
may consist of FHA Loans secured by mortgages on one- to four-family residential
properties or multifamily residential properties, loans secured by mortgages on
one- to four-family residential properties or multifamily residential
properties, mortgage loans which are partially guaranteed by the VA and other
mortgage loans eligible for inclusion in mortgage pools underlying GNMA
Certificates. Unless otherwise specified in the related Prospectus 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 Prospectus Supplement.
Freddie Mac. Freddie Mac is a federally-chartered and stockholder-owned
corporation created pursuant to Title III of the Emergency Home Finance Act of
1970, as amended (the "Freddie Mac Act"). Freddie Mac was established primarily
for the purpose of increasing the availability of mortgage credit for the
financing of urgently needed housing. It seeks to provide an enhanced degree of
liquidity for residential mortgage investments primarily by assisting in the
development of secondary markets for conventional mortgages. The principal
activity of Freddie Mac currently consists of the purchase of first lien
conventional
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residential mortgage loans or participation interests in such mortgage loans and
the resale of the mortgage loans so purchased in the form of mortgage
securities. Freddie Mac is confined to purchasing, so far as practicable,
conventional mortgage loans and participation interests therein which it deems
to be of such quality, type and class as to meet generally the purchase
standards imposed by private institutional mortgage investors.
Freddie Mac Certificates. Freddie Mac Certificates ("Freddie Mac
Certificates") represent an undivided interest in a group of mortgage loans
purchased by Freddie Mac. Mortgage loans underlying the Freddie Mac Certificates
included in a Trust Fund will consist of fixed- or adjustable-rate mortgage
loans with original terms to maturity of from 10 to 30 years, all of which are
secured by first liens on one- to four-family residential properties or
properties containing five or more units and designed primarily for residential
use.
Freddie Mac Certificates are issued and maintained and may be transferred
only on the book-entry system of a Federal Reserve Bank and may only be held of
record by entities eligible to maintain book-entry accounts at a Federal Reserve
Bank. Beneficial owners will hold Freddie Mac Certificates ordinarily through
one or more financial intermediaries. The rights of a beneficial owner of a
Freddie Mac Certificate against Freddie Mac or a Federal Reserve Bank may be
exercised only through the Federal Reserve Bank on whose book-entry system such
Certificate is held.
Under its Cash and Guarantor programs, Freddie Mac guarantees to each
registered holder of a Freddie Mac Certificate the timely payment of interest at
the rate provided for by such Freddie Mac Certificate on the registered holder's
pro rata share of the unpaid principal balance outstanding of the related
mortgage loans, whether or not received. Freddie Mac also guarantees to each
registered holder of a Freddie Mac Certificate ultimate collection of all
principal of the related mortgage loans, without any offset or deduction, to the
extent of such holder's pro rata share thereof, but does not, except if and to
the extent specified in the related Prospectus Supplement for a Series of
Certificates, guarantee the timely payment of scheduled principal. Pursuant to
its guarantees, Freddie Mac indemnifies holders of Freddie Mac Certificates
against any diminution in principal by reason of charges for property repairs,
maintenance and foreclosure. Freddie Mac may remit the amount due on account of
its guarantee of ultimate collection of principal at any time after default on
an underlying mortgage loan, but not later than 30 days following (i)
foreclosure sale, (ii) payment of the claim by any mortgage insurer, or (iii)
the expiration of any right of redemption, whichever occurs later, but in any
event no later than one year after demand has been made upon the mortgagor for
accelerated payment of principal. In taking actions regarding the collection of
principal after default on the mortgage loans underlying Freddie Mac
Certificates, including the timing of demand for acceleration, Freddie Mac
reserves the right to exercise its servicing judgment with respect to the
mortgages in the same manner as for mortgages that it has purchased but not
sold.
Under Freddie Mac's Cash Program, there is no limitation on the amount by
which interest rates on the mortgage loans underlying a Freddie Mac Certificate
may exceed the interest rate on the Freddie Mac Certificate. For Freddie Mac
Pools formed under Freddie Mac's Guarantor Program having pool numbers beginning
with 18-012, the range between the lowest and highest annual interest rates on
the mortgage loans does not exceed two percentage points.
Under its Gold PC Program, Freddie Mac guarantees to each registered holder
of a Freddie Mac Certificate the timely payment of interest calculated in the
same manner as described above, as well as timely installments of scheduled
principal based on the difference between the pool factor published in the month
preceding the month of distribution and the pool factor published in such month
of distribution for the related Freddie Mac Certificate.
Freddie Mac Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of Freddie Mac under its
guarantee are obligations solely of Freddie Mac and are not backed by, nor
entitled to, the full faith and credit of the United States.
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As described above, the Freddie Mac Certificates included in a Trust Fund,
and the related underlying mortgage loans, may have characteristics and terms
different from those described above. Any such different characteristics and
terms will be described in the related Prospectus 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 Prospectus 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 Prospectus Supplement, the seller/servicer of the underlying
mortgage loans will have entered into a pooling and servicing agreement, an
indenture or similar agreement (a "PC Agreement") with the trustee under such PC
Agreement (the "PC Trustee"). The PC Trustee or its agent, or a custodian, will
possess the mortgage loans underlying such Private Certificates. The mortgage
loans underlying the Private Certificates may be subserviced by one or more loan
servicing institutions under the supervision of a master servicer (the "PC
Servicer").
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The sponsor of the Private Certificates (the "PC Sponsor") will be a
financial institution or other entity which is or has affiliates which are
engaged generally in the business of mortgage lending, a public agency or
instrumentality of a state, local or federal government, or a limited purpose
corporation organized for the purpose of, among other things, establishing
trusts and acquiring and selling mortgage loans to such trusts and selling
beneficial interests in such trusts. The PC Sponsor may be an affiliate of the
Depositor. 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 Prospectus
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 Depositor will acquire Private Certificates in open market transactions
or in privately negotiated transactions which may be through affiliates.
The Prospectus 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 Prospectus Supplement)
to the extent relevant and to the extent such information is reasonably
available to the Depositor and the Depositor 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.
DISTRIBUTION ACCOUNT
The Trustee or other entity identified in the related Prospectus Supplement
will, as to each Series of Certificates, establish and maintain a Distribution
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 Distribution 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 Distribution Account generally will belong to
the Trustee.
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MINIMUM PREPAYMENT AGREEMENT
The Depositor 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 Prospectus 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
Prospectus Supplement.
The related Prospectus 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 Depositor 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 Collection Account will not belong to the
Master 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 Prospectus 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 Depositor, the Seller (if so provided in the related
Prospectus Supplement), the Trustee and the Master 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 Prospectus Supplement for a Series of Certificates will describe any
provision of the Agreement relating to such Series that materially differs from
the description thereof contained in this Prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Pooling Agreement and the
Prospectus Supplement related to a particular Series of Certificates. References
herein to a Trustee or the Master Servicer include, unless otherwise specified,
any agents acting on behalf of such Trustee or any subcontractor of the Master
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 Prospectus 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 Depositor. 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
Prospectus 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
Prospectus Supplement. The Certificates will not represent obligations of the
Depositor or any affiliate of the Depositor. The Mortgage Assets will not be
insured or guaranteed by any governmental entity or other person, unless
otherwise specified in the related Prospectus Supplement. Any qualifications on
direct or indirect ownership of
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Residual Certificates, as well as restrictions on the transfer of such Residual
Certificates, will be set forth in the related Prospectus 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 Prospectus 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 Prospectus Supplement. The timing and amounts of such distributions may
vary among classes or over time as specified in the related Prospectus
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 Prospectus 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 Prospectus 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 Prospectus Supplement)
or by check mailed to record holders of such Certificates as of the related
Record Date (as specified in the related Prospectus 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 Prospectus 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 Prospectus 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 Prospectus Supplement.
Distributions of principal of and interest on the Certificates will be made
by the Trustee out of the Distribution 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 Master
Servicer pursuant to the Pooling Agreement, together with any reinvestment
income (if so specified in the related Prospectus 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 Distribution Account and thereafter will be available (except for funds
held for future distribution and for funds payable to the Master Servicer) to
make distributions on Certificates of such Series on the next succeeding
Distribution Date. See "The Trust Funds -- Distribution 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 Prospectus Supplement) during each Interest Accrual Period specified in
such Prospectus 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
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the related Prospectus 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 Prospectus 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 Prospectus Supplement. Unless otherwise specified
in the related Prospectus 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 Prospectus 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
Prospectus 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 Prospectus
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 Prospectus 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
Prospectus Supplement will specify the method by which the amount of principal
to be distributed on the Certificates on each Distribution Date will be
calculated and the manner in which such amount will be allocated among the
classes of Certificates entitled to distributions of principal.
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
Prospectus 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 Prospectus Supplement. Unless otherwise specified in the related
Prospectus 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 Prospectus Supplement at which amounts in the Collection 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 Prospectus Supplement.
(If an Assumed Reinvestment Rate is specified for a Series of Certificates,
reinvestment earnings on funds in the Collection Account will not belong to the
Master Servicer as additional servicing compensation. Such amounts will be part
of the Trust Fund and will be available to make distributions on the related
Certificates.)
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CATEGORIES OF CLASSES OF CERTIFICATES
In general, the classes of certificates of each Series fall into different
categories. The following chart identifies and generally defines certain of the
more typical categories. The Prospectus Supplement for a Series of Certificates
may identify the classes which comprise such Series by reference to the
following categories.
PRINCIPAL TYPES
<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
- --------------------- ----------
<S> <C>
Accretion Directed Class............. A class that receives principal payments from amounts that
would otherwise be distributed as interest on specified
Accrual Classes. Such principal payments may be in lieu of
or in addition to principal payments from principal receipts
on the Mortgage Assets or other assets of the Trust Fund for
the related Series.
Component Certificates............... A class consisting of two or more specified components
(each, a "Component"), as described in the applicable
Prospectus Supplement. The Components of a class of
Component Certificates may have different principal and/or
interest payment characteristics but together constitute a
single class and do not represent several interests. Each
Component of a class of Component Certificates may be
identified as falling into one or more of the categories in
this chart.
Lockout Class........................ A senior class that is designed not to participate in (i.e.,
is to be "locked out" of), for a specified period, the
receipt of (1) principal prepayments on the Mortgage Loans
that are allocated disproportionately to the senior classes
of such Series as a group pursuant to a "shifting interest"
structure and/or (2) scheduled principal payments on the
Mortgage Loans that are allocated to the senior classes of
such Series as a group. A Lockout Class typically will not
be entitled to receive distributions of principal
prepayments and/or scheduled principal payments, as
applicable, for a period of several years, during which time
all or a portion of such principal payments that it would
otherwise be entitled to receive in the absence of a
"lockout" structure will be distributed in reduction of the
Class Certificate Balances of other senior classes. Lockout
Classes are designed to minimize their weighted average life
volatility during the lockout period.
Notional Amount Certificates......... A class having no principal balance and bearing interest on
the related notional amount. The notional amount is used for
purposes of the determination of interest distributions.
Planned Amortization Class or PAC.... A class that is designed to receive principal payments using
a predetermined principal balance schedule derived by
assuming two constant prepayment rates for the underlying
Mortgage Assets. These two rates are the endpoints for the
"structuring range" for the Planned Amortization Class. The
Planned Amortization Classes in any Series of Certificates
may be subdivided into different categories (e.g., Planned
Amortization Class I ("PAC I"), Planned Amortization Class
II ("PAC II") and so forth) derived using different
structuring ranges. A PAC is designed to provide protection
against prepayments occurring at a constant rate within the
structuring range.
</TABLE>
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<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
- --------------------- ----------
<S> <C>
Ratio Strip Class.................... A class that receives a constant proportion, or "ratio
strip," of the principal payments on the Mortgage Assets.
Scheduled Amortization Class......... A class that is designed to receive principal payments using
a predetermined principal balance schedule but is not
designated as a Planned Amortization Class or Targeted
Amortization Class. The schedule is derived by assuming
either two constant prepayment rates or a single constant
prepayment rate for the Mortgage Assets. In the former case,
these two rates are the endpoints for the "structuring
range" for the Scheduled Amortization Class and such range
is generally narrower than that for a Planned Amortization
Class. Typically, the Support Class for the applicable
Series of Certificates generally will represent a smaller
percentage of the Scheduled Amortization Class than a
Support Class generally would represent in relation to a
Planned Amortization Class or a Targeted Amortization Class.
A Scheduled Amortization Class is generally less sensitive
to prepayments than a Support Class, but more sensitive than
a Planned Amortization Class or a Targeted Amortization
Class.
Senior Certificates.................. Classes that are entitled to receive payments of principal
and interest on each Distribution Date prior to the Classes
of Subordinate Certificates.
Sequential Pay Class................. Classes that receive principal payments in a prescribed
sequence, that do not have predetermined principal balance
schedules and that, in most cases, are entitled to receive
payments of principal continuously from the first
Distribution Date on which they receive principal until they
are retired. Sequential Pay Classes may receive payments of
principal concurrently with one or more other sequential Pay
Classes. A single class that is entitled to receive
principal payments before or after all other classes in the
same Series of Certificates may be identified as a
Sequential Pay Class.
Subordinate Certificates............. 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........................ A class that is entitled to receive principal payments on
any Distribution Date only if scheduled payments have been
made on specified Planned Amortization Classes, Targeted
Amortization Classes and/or Scheduled Amortization Classes.
Targeted Amortization Class or TAC... A class that is designed to receive principal payments using
a predetermined principal balance schedule derived by
assuming a single constant prepayment rate for the Mortgage
Assets. A TAC is designed to provide some protection against
prepayments at a rate exceeding the assumed constant
prepayment used to derive the principal balance schedule for
such Class.
INTEREST TYPES
Accrual Class........................ A class that accretes the amount of accrued interest
otherwise distributable on such class, which amount will be
added as principal to the principal balance of such class on
each applicable Distribution Date. Such accretion may
continue until some specified event has occurred or until
such class of Accrual Certificates is retired.
</TABLE>
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<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
- --------------------- ----------
<S> <C>
Fixed Rate Class..................... A class with a Certificate Rate that is fixed throughout the
life of the class.
Floating Rate Class.................. A class with a Certificate Rate that resets periodically
based upon a designated Index and that varies directly with
changes in such Index.
Inverse Floating Rate Class.......... A class with a Certificate Rate that resets periodically
based upon a designated Index and that varies inversely with
changes in such Index. The Certificate Rate for an Inverse
Floating Rate Class typically will vary inversely with
changes in the Certificate Rate on a Floating Rate Class in
the same Series.
IO or Interest-Only Class............ Certificates that receive some or all of the interest
payments made on the Mortgage Assets and little or no
principal. Interest-Only Classes have either a nominal
principal balance or a notional amount. A nominal principal
balance represents actual principal that will be paid on
such Certificates. It is referred to as nominal since it is
extremely small compared to other classes. A notional amount
is the amount used as a reference to calculate the amount of
interest due on an Interest-Only Class that is not entitled
to any distributions in respect of principal.
PO or Principal-Only Class........... A class that does not bear interest and is entitled to
receive only distributions in respect of principal.
Step Coupon Class.................... A class with a fixed Certificate Rate that is reduced to a
lower fixed rate after a specified period of time. The
difference between the initial Certificate Rate and the
lower Certificate Rate will be supported by a reserve fund
established on the Closing Date.
Variable Rate Class.................. A class with a Certificate Rate that resets periodically and
is calculated by reference to the rate or rates of interest
applicable to specified assets or instruments (e.g., the
Mortgage Rates borne by the Mortgage Loans in the related
Trust Fund).
</TABLE>
RESIDUAL CERTIFICATES
A Series of REMIC Certificates will include a class of Residual
Certificates representing the right to receive on each Distribution Date, in
addition to any other distributions to which they are entitled in accordance
with their terms and as described in the related Prospectus 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 Prospectus 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
Prospectus Supplement; if so, the terms of such Residual Certificates will be
described in such Prospectus Supplement. Any qualifications on direct or
indirect ownership of Residual Certificates offered hereby and by the related
Prospectus Supplement, as well as restrictions on the transfer of such Residual
Certificates, will be set forth in the related Prospectus Supplement. If such
Residual Certificates are not so offered, the Depositor may (but need not) sell
some or all of such Residual Certificates on or after the date of original
issuance of such Series in transactions exempt from registration under the
Securities Act and otherwise under circumstances that will not adversely affect
the REMIC status of the Trust Fund.
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ADVANCES
The Master 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 Collection 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 Master Servicer may be obligated to make such Advances only to the
extent any such Advance, in the judgment of the Master 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 Master Servicer funds thus advanced are
reimbursable to the Master Servicer from cash in the Collection Account to the
extent that the Master Servicer shall determine that any such Advances
previously made are not ultimately recoverable from the sources described above.
In making Advances, the Master 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 Master Servicer from funds being held for future
distribution to Certificateholders, the Master Servicer will replace such funds
on or before any future Distribution Date to the extent that funds in the
Collection Account on such Distribution Date would be less than the amount
required to be available for distributions to Certificateholders on such date.
The Master 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 Master Servicer to the
extent permitted by the Pooling Agreement. If specified in the related
Prospectus Supplement, the obligations of the Master Servicer to make Advances
may be supported by a cash advance reserve fund, a surety bond or other
arrangement, in each case as described in such Prospectus Supplement.
REPORTS TO CERTIFICATEHOLDERS
Prior to or concurrently with each distribution on a Distribution Date and
except as otherwise set forth in the related Prospectus Supplement, the Master
Servicer or the Trustee will furnish to each Certificateholder of record of the
related Series a statement setting forth, to the extent applicable to such
Series of Certificates, among other things:
(i) the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and,
if so specified in the related Prospectus Supplement, prepayment
penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the 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 Collection Account by the Master Servicer, and
the amount of additional servicing compensation
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<PAGE> 94
received by the Master 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
Prospectus Supplement. The report to Certificateholders for any Series of
Certificates may include additional or other information of a similar nature to
that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Certificateholder of record at any time during such calendar year a report (a)
as to the aggregate of amounts reported pursuant to (i) and (ii) for such
calendar year or, in the event such person was a Certificateholder of record
during a portion of such calendar year, for the applicable portion of such year
and (b) such other customary information as may be deemed necessary or desirable
for Certificateholders to prepare their tax returns.
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 Prospectus 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 Collection Account on the date specified
in such Prospectus 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 Prospectus Supplement, the
subordination of one or more classes of the Certificates of such Series, the
establishment of one or more reserve funds, the use of a cross-support feature,
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 Prospectus
Supplement, or any combination of the foregoing. Unless otherwise specified in
the related Prospectus 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
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<PAGE> 95
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 Prospectus Supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two or more
related Trust Funds. If applicable, the related Prospectus Supplement will
identify the Trust Funds to which such credit support relates and the manner of
determining the amount of the coverage provided thereby and of the application
of such coverage to the identified Trust Funds.
SUBORDINATION
If so specified in the related Prospectus 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 Prospectus Supplement. If so specified in the related
Prospectus 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 Prospectus 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 Prospectus 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 Prospectus 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
Prospectus Supplement, Senior Certificateholders would experience losses on
their Certificates.
If specified in the related Prospectus 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 Prospectus 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 Prospectus 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
Prospectus Supplement. Each Mortgage Pool Insurance Policy will, subject to the
limitations described below, cover loss by reason of default in payment on
Mortgage Loans in the Trust Fund in an amount equal to a percentage specified in
such Prospectus Supplement of the aggregate principal balance of such Mortgage
Loans on the Cut-off Date. As more fully described below, the Master 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
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<PAGE> 96
only respecting particular defaulted Mortgage Loans and only upon satisfaction
of certain conditions precedent described below. Unless otherwise specified in
the related Prospectus Supplement, the Mortgage Pool Insurance Policies will not
cover losses due to a failure to pay or denial of a claim under a Primary
Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool Insurance Policy will provide that no claims may be validly
presented unless (i) any required Primary Mortgage Insurance Policy is in effect
for the defaulted Mortgage Loan and a claim thereunder has been submitted and
settled; (ii) hazard insurance on the related Mortgaged Property has been kept
in force and real estate taxes and other protection and preservation expenses
have been paid; (iii) if there has been physical loss or damage to the Mortgaged
Property, it has been restored to its physical condition (reasonable wear and
tear excepted) at the time of issuance of the policy; and (iv) the insured has
acquired good and merchantable title to the Mortgaged Property free and clear of
liens except certain permitted encumbrances. Upon satisfaction of these
conditions, the Pool Insurer will have the option either (a) to purchase the
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 Master Servicer on behalf
of the Trustee and Certificateholders or (b) to pay the amount by which the sum
of the principal balance of the defaulted Mortgage Loan plus accrued and unpaid
interest at the Mortgage Rate to the date of payment of the claim and the
aforementioned expenses exceeds the proceeds received from an approved sale of
the Mortgaged Property, in either case net of certain amounts paid or assumed to
have been paid under the related Primary Mortgage Insurance Policy. If any
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 Master Servicer will not
be required to expend its own funds to restore the damaged property unless it
determines that (i) such restoration will increase the proceeds to
Certificateholders on liquidation of the Mortgage Loan after reimbursement of
the Master Servicer for its expenses and (ii) such expenses will be recoverable
by it through proceeds of the sale of the 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 Master Servicer as
well as accrued interest on delinquent Mortgage Loans to the date of payment of
the claim, unless otherwise specified in the related Prospectus Supplement.
Accordingly, if aggregate net claims paid under any Mortgage Pool Insurance
Policy reach the original policy limit, coverage under that Mortgage Pool
Insurance Policy will be exhausted and any further losses will be borne by
Certificateholders.
FRAUD WAIVER
If so specified in the related Prospectus 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
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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 Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy will be obtained for the Mortgage Pool and will be
issued by the insurer (the "Special Hazard Insurer") named in such Prospectus
Supplement. Each Special Hazard Insurance Policy will, subject to limitations
described below, protect holders of the related Certificates from (i) loss by
reason of damage to Mortgaged Properties caused by certain hazards (including
earthquakes and, to a limited extent, tidal waves and related water damage and
such other hazards as are specified in the related Prospectus Supplement) not
insured against under the standard form of hazard insurance policy for the
respective states in which the Mortgaged Properties are located or under a flood
insurance policy if the Mortgaged Property is located in a federally designated
flood area and (ii) loss caused by reason of the application of the coinsurance
clause contained in hazard insurance policies. See "The Pooling and Servicing
Agreement--Hazard Insurance" herein. No Special Hazard Insurance Policy will
cover losses occasioned by fraud or conversion by the Trustee or Master
Servicer, war, insurrection, civil war, certain governmental action, errors in
design, faulty workmanship or materials (except under certain circumstances),
nuclear or chemical reaction, flood (if the Mortgaged Property is located in a
federally designated flood area), nuclear or chemical contamination and certain
other risks. The amount of coverage under any Special Hazard Insurance Policy
will be specified in the related Prospectus Supplement. Each Special Hazard
Insurance Policy will provide that no claim may be paid unless hazard and, if
applicable, flood insurance on the property securing the Mortgage Loan have been
kept in force and other protection and preservation expenses have been paid.
Subject to the foregoing limitations and unless otherwise specified in the
related Prospectus Supplement, each Special Hazard Insurance Policy will provide
that where there has been damage to property securing a foreclosed Mortgage Loan
(title to which has been acquired by the insured) and to the extent such damage
is not covered by the hazard insurance policy or flood insurance policy, if any,
maintained by the Mortgagor or the Master Servicer, the Special Hazard Insurer
will pay the lesser of (i) the cost of repair or replacement of such property or
(ii) upon transfer of the property to the Special Hazard Insurer, the unpaid
principal balance of such Mortgage Loan at the time of acquisition of such
property by foreclosure or deed in lieu of foreclosure, plus accrued interest to
the date of claim settlement and certain expenses incurred by the Master
Servicer with respect to such property. If the unpaid principal balance of a
Mortgage Loan plus accrued interest and certain expenses is paid by the Special
Hazard Insurer, the amount of further coverage under the related Special Hazard
Insurance Policy will be reduced by such amount less any net proceeds from the
sale of the property. Any amount paid as the cost of repair of 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 Prospectus Supplement, the Master Servicer
may deposit cash, an irrevocable letter of credit or any other instrument
acceptable to each nationally recognized rating agency rating the Certificates
of the related Series in a special trust account to provide protection in lieu
of or in addition to that provided by a Special Hazard Insurance Policy. The
amount of any Special Hazard Insurance Policy or of the deposit to the special
trust account 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.
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BANKRUPTCY BONDS
If specified in the related Prospectus 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 Prospectus Supplement. Each Bankruptcy Bond will cover, to the
extent specified in the related Prospectus Supplement, certain losses resulting
from a reduction by a bankruptcy court of scheduled payments of principal and
interest on a Mortgage Loan or a reduction by such court of the principal amount
of a Mortgage Loan and will cover certain unpaid interest on the amount of such
a principal reduction from the date of the filing of a bankruptcy petition. The
required amount of coverage under each Bankruptcy Bond will be set forth in the
related Prospectus Supplement. Coverage under a Bankruptcy Bond may be cancelled
or reduced by the Master Servicer if such cancellation or reduction would not
adversely affect the then current rating or ratings of the related Certificates.
See "Certain Legal Aspects of the Mortgage Loans -- Anti-Deficiency Legislation
and Other Limitations on Sellers" herein.
To the extent specified in the Prospectus Supplement, the Master Servicer
may deposit cash, an irrevocable letter of credit or any other instrument
acceptable to each nationally recognized rating agency rating the Certificates
of the related Series in a special trust account to provide protection in lieu
of or in addition to that provided by a Bankruptcy Bond. The amount of any
Bankruptcy Bond or of the deposit to the special trust account 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 Prospectus Supplement, credit support with
respect to a Series of Certificates may be provided by the establishment and
maintenance with the Trustee for such Series of Certificates, in trust, of one
or more reserve funds (the "Reserve Fund") for such Series. The related
Prospectus 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 Prospectus Supplement, (ii) by the deposit therein from time to time of
certain amounts, as specified in the related Prospectus Supplement, to which
Subordinate Certificateholders, if any, would otherwise be entitled or (iii) in
such other manner as may be specified in the related Prospectus Supplement.
Any amounts on deposit in the Reserve Fund and the proceeds of any other
instrument 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 Prospectus 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 Prospectus 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 Prospectus Supplement.
CROSS SUPPORT
If specified in the related Prospectus Supplement, the beneficial ownership
of separate groups of assets included in a Trust Fund may be evidenced by
separate classes of the related Series of Certificates. In such case, credit
support may be provided by a cross support feature which requires that
distributions be made with respect to Certificates evidencing a beneficial
ownership interest in other asset groups within the same Trust Fund. The related
Prospectus Supplement for a Series that includes a cross support feature will
describe the manner and conditions for applying such cross support feature.
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OTHER INSURANCE, GUARANTIES, LETTERS OF CREDIT AND SIMILAR INSTRUMENTS OR
AGREEMENTS
If specified in the related Prospectus 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 Prospectus 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 Prospectus Supplement.
The Prospectus 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 Prospectus
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 Prospectus 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 Prospectus
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
Master 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
Master 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.
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THE DEPOSITOR
NationsBanc Montgomery Funding Corp. (formerly known as Tryon Mortgage
Funding, Inc.), a Delaware corporation (the "Depositor"), 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
Depositor is an indirect subsidiary of BankAmerica Corporation. The Depositor
maintains its principal office at NationsBank Corporate Center, Charlotte, North
Carolina 28255. Its telephone number is (704) 386-2400.
Neither the Depositor nor any of the Depositor'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 Depositor to either purchase the
Mortgage Assets related to that Series or to return to the Depositor 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 Depositor.
MORTGAGE PURCHASE PROGRAM
Set forth below is a description of aspects of the Depositor's purchase
program for Mortgage Loans eligible for inclusion in a Trust Fund. The related
Prospectus Supplement will contain information regarding the origination of the
Mortgage Loans.
The Depositor will purchase Mortgage Loans either directly or indirectly
from the Master Servicer or from other approved Sellers, which may be affiliates
of the Depositor or the Master Servicer. The Depositor 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
Depositor may purchase Mortgage Loans from Sellers which, while not meeting the
generally applicable criteria, have been reviewed by the Depositor and found to
be acceptable as Sellers of Mortgage Loans.
Each Mortgage Loan purchased by the Depositor must meet certain credit,
appraisal and underwriting standards, as described in the related Prospectus
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 Prospectus Supplement will provide a description of the
underwriting standards applied in originating the Mortgage Loans.
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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 Depositor 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 Depositor 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 Depositor 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 Depositor 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
Depositor will cause to be delivered to the Trustee the related original
cooperative note endorsed without recourse in blank or to the order of the
Trustee, the original security agreement, the proprietary lease or occupancy
agreement, the recognition agreement, an executed financing agreement and the
relevant stock certificate, related blank stock powers and any other document
specified in the related Prospectus Supplement. The Depositor will cause to be
filed in the appropriate office an assignment and a financing statement
evidencing the Trustee's security interest in each Cooperative Loan.
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
Prospectus 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 Prospectus
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 Master
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 Prospectus Supplement.
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Unless otherwise specified in the related Prospectus 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 Depositor, 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 Master
Servicer, the subservicers or the Depositor.
Assignment of Agency Certificates. The Depositor 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 Prospectus 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 Depositor 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 Prospectus 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 Prospectus Supplement, the
Depositor 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
Depositor 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 Depositor (each, a "Sale Agreement").
In the Sale Agreement or, if a party thereto, the Pooling Agreement for
each Series of Certificates backed in whole or in part by Mortgage Loans, the
Seller will represent and warrant, unless otherwise specified in the related
Prospectus 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.
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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 Master 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 Prospectus 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 Master 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 Master Servicer may enter into a
subservicing agreement with a subservicer to perform, as an independent
contractor, certain servicing functions for the Master 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 Master Servicer out of
the Servicing Fee. The Master 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 Master Servicer would
continue to be responsible for servicing such Mortgage Loan and may designate a
replacement subservicer (which may include an affiliate of the Depositor or the
Master Servicer).
The Master 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 Master Servicer will establish and maintain or cause to be established
and maintained with respect to the related Trust Fund a Collection 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 Collection
Account is limited to Eligible Investments consisting of United States
government securities and other high-quality investments. A Collection 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 Master Servicer or its designee will be entitled to receive any such
interest or other income earned on funds in the Collection Account as additional
compensation and will be obligated to deposit in the Collection Account the
amount of any loss immediately as realized. The Collection Account may be
maintained with the Master Servicer or the Seller or with a depository
institution that is an affiliate of the Master Servicer or the Depositor,
provided it is an Eligible Account.
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Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will deposit in the Collection 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 Collection Account as
described below;
(vii) All payments required to be deposited in the Collection 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 Master Servicer in
connection with losses realized on investments for the benefit of
the Master Servicer of funds held in the Collection Account; and
(ix) All other amounts required to be deposited in the Collection
Account.
Under the Pooling Agreement for each Series, the Master Servicer will be
authorized to make the following withdrawals from the Collection Account:
(i) To clear and terminate the Collection 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 Master 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 Master Servicer from related insurance or
liquidation proceeds for amounts expended by the Master 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 Master Servicer its Servicing Fee and to the Trustee
its fee;
(vi) To reimburse the Master Servicer for Advances which the Master
Servicer has determined to be otherwise nonrecoverable; and
(vii) To pay any expenses which were incurred and are reimbursable
pursuant to the Pooling Agreement.
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COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer will agree to proceed diligently to collect all
payments called for under the Mortgage Notes. Consistent with the above, the
Master 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
Master Servicer's obligation to make Advances on the related Mortgage Loan shall
continue during the scheduled period.
Under the Pooling Agreement, the Master 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 Master
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 Master 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 Master 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 Master 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 Master 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 Prospectus Supplement, under the
Pooling Agreement, the Master 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 Master
Servicer under any hazard policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the Mortgagor in
accordance with the Master Servicer's normal servicing procedures) will be
deposited in the Collection Account. In the event that the Master 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 Master Servicer will deposit in the
Collection 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
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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
Master Servicer will cause to be maintained with a generally acceptable
insurance carrier a flood insurance policy meeting the requirements of the
current guidelines of the Federal Insurance Administration. Such flood insurance
policy will provide coverage in an amount not less than the least of (i) the
original principal balance of the Mortgage Loan, (ii) the insurable value of the
Mortgaged Property or (iii) the maximum amount of insurance available under
applicable law.
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.
The Master Servicer may maintain a blanket policy insuring against hazard
losses on all of the Mortgaged Properties in lieu of maintaining the required
hazard insurance policies and may maintain a blanket policy insuring against
special flood hazards in lieu of maintaining any required flood insurance. The
Master Servicer will be liable for the amount of any deductible under a blanket
policy if such amount would have been covered by a required hazard insurance
policy or flood insurance, had it been maintained.
PRIMARY MORTGAGE INSURANCE
If specified in the related Prospectus 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 Prospectus
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 Master 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 Master Servicer on behalf of the Master
Servicer, the Trustee and Certificateholders shall be deposited in the
Collection Account for distribution as set forth above. The Master 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 Master 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 Prospectus Supplement. The Master 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.
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The Master 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 Master Servicer will not be required to
expend its own funds to restore the damaged property unless the Master Servicer
determines (i) that such restoration will increase the proceeds to
Certificateholders upon liquidation of the Mortgage Loan after reimbursement of
the Master 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 Master 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 Master
Servicer with respect to such Mortgage Loan and expenses incurred by the Master
Servicer in connection with such proceedings and which are reimbursable under
the Pooling Agreement.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer's primary compensation for its activities as Master
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 Prospectus 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 Master Servicer will decrease as the Mortgage
Loans amortize. Prepayments and liquidations of Mortgage Loans prior to maturity
will also cause servicing compensation to the Master Servicer to decrease.
In addition, the Master Servicer will be entitled to retain all prepayment
fees, assumption fees and late payment charges, to the extent collected from
Mortgagors.
The Master Servicer will pay all expenses incurred in connection with its
activities as Master 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 Master 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 Master 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 Master Servicer to the effect that
the Master Servicer has fulfilled its obligations under the Pooling Agreement
throughout the preceding year.
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CERTAIN MATTERS REGARDING THE DEPOSITOR, THE SELLER AND THE MASTER SERVICER
The Pooling Agreement for each Series of Certificates backed in whole or in
part by Mortgage Loans will provide that the Master Servicer may not resign from
its obligations and duties as Master 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
Master Servicer's obligations and duties under such Pooling Agreement.
The Pooling Agreement for each such Series will also provide that neither
the Depositor, the Master 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 Depositor, the Seller, the Master 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 Depositor, the Seller nor the
Master Servicer is under any obligation to appear in, prosecute or defend any
legal action which is not incidental to, in the case of the Depositor, the
Seller or the Master Servicer, its duties under the Pooling Agreement and which
in its opinion may involve it in any expense or liability. Each of the
Depositor, the Seller and the Master 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 Depositor, the Seller
and the Master Servicer will be entitled to be reimbursed therefor out of the
Collection Account.
EVENTS OF DEFAULT
Events of default by the Master Servicer under the Pooling Agreement for
each Series of Certificates evidencing an interest in Mortgage Loans will
consist of (i) any failure by the Master Servicer to distribute to the Trustee,
on behalf of Certificateholders, any required payment which continues unremedied
for five days; (ii) any failure by the Master 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 Master Servicer by the
Trustee, or to the Master 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 Master 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 Master Servicer under such Pooling Agreement,
whereupon the Trustee will succeed to all the responsibilities, duties and
liabilities of the Master Servicer under such Pooling Agreement and will be
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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 Master 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 Master 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 Depositor, the
Seller (if a party thereto), the Master 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 Depositor, the Seller (if a party thereto), the Master Servicer
and the Trustee with the consent of holders of Certificates evidencing not less
than 66 2/3% of the aggregate voting rights of each class of Certificates for
such Series affected thereby for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such Pooling
Agreement or of modifying in any manner the rights of holders of Certificates of
that Series; provided, however, that no such amendment may (i) reduce in any
manner the amount of, or delay the timing of, payments received on Mortgage
Loans which are required to be distributed in respect any such Certificate
without the consent of the holder of such Certificate or (ii) with respect to
any Series of Certificates, reduce the aforesaid percentages of Certificates the
holders of which are required to consent to any such amendment without the
consent of the holders of all Certificates of such Series then outstanding.
LIST OF CERTIFICATEHOLDERS
In the event the Trustee is not the certificate registrar for a Series of
Certificates, upon written request of the Trustee, the certificate registrar
will provide to the Trustee within 30 days after the receipt of such request a
list of the names and addresses of all Certificateholders of record of a
particular Series as of the most recent Record Date for payment of distributions
to Certificateholders of that Series. Upon written request of three or more
Certificateholders of record of a Series of Certificates, for purposes of
communicating with other Certificateholders with respect to their rights under
the Pooling Agreement for such Series, the Trustee will
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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 Depositor, the Seller (if a party thereto), the
Master 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 Master Servicer or
such other entity specified in the related Prospectus 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 Master 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
Prospectus 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 Prospectus 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 Prospectus Supplement. The Trustee may have normal banking
relationships with the Depositor, the Seller, the Master 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
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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
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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
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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.
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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
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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 Prospectus Supplement, each
conventional Mortgage Loan will contain a due-on-sale clause which will
generally provide that if the mortgagor or obligor sells, transfers or conveys
the Mortgaged Property, the loan may be accelerated by the mortgagee. In recent
years, court decisions and legislative actions 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
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origination of the Mortgage Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of such borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that such interest rate limitation could have an effect,
for an indeterminate period of time, on the ability of the Master Servicer to
collect full amounts of interest on certain of the Mortgage Loans. In addition,
the Relief Act imposes limitations which would impair the ability of the Master
Servicer to foreclose on an affected Mortgage Loan during the borrower's period
of active duty status. Thus, in the event that such a Mortgage Loan goes into
default there may be delays and losses occasioned by the inability to realize
upon the mortgaged property in a timely fashion. 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.
BENEFIT PLAN CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Code impose certain requirements on those employee
benefit plans and arrangements to which they apply and on those persons who are
fiduciaries with respect to such employee benefit plans and arrangements. The
following is a general discussion of such requirements, and certain applicable
exceptions to and administrative exemptions from such requirements.
For purposes of this discussion, employee benefit plans and arrangements to
which both ERISA and the Code apply are referred to as "ERISA Plans." An
individual retirement account established under Code Section 408 (an "IRA") is
regarded as an ERISA Plan if the IRA is endorsed by or contributed to by the IRA
participant's employer or employee organization. Other IRAs, as well as certain
employee benefit plans covering only self-employed individuals (collectively,
"Non-ERISA Plans"), are not considered ERISA Plans, but such Non-ERISA Plans are
subject to ERISA-like requirements as well as the prohibited transaction
provisions of the Code. Employee benefit plans that are governmental plans (as
defined in Section 3(32) of ERISA) and certain church plans (as defined in
Section 3(33) of ERISA) (collectively, "Exempt Plans") are exempt from the
provisions of Title I of ERISA and the prohibited transaction provisions of the
Code. Accordingly, Exempt Plans also are not considered ERISA Plans, but such
Exempt Plans may be subject to the provisions and special requirements of other
applicable federal, state and local law. Exempt Plans, ERISA Plans and Non-ERISA
Plans are collectively referred to as "Benefit Plans."
CERTAIN ERISA AND CODE REQUIREMENTS
General
Before purchasing any Certificates, an ERISA Plan fiduciary should consult
with its counsel and determine whether any prohibition to such purchase exists
under the requirements of ERISA or the Code, whether any prohibited transaction
exemption such as PTCE 83-1 or any individual administrative exemption (as
described below) applies to such purchase, including whether the appropriate
conditions set forth therein would be met, or whether any statutory prohibited
transaction exemption is applicable to such purchase.
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Furthermore, an ERISA Plan fiduciary should consult the discussion under
"Benefit Plan Considerations" in the applicable Prospectus Supplement relating
to such Series of Certificates.
In accordance with ERISA's general fiduciary standards, before investing in
a Certificate, an ERISA Plan fiduciary should determine whether such an
investment is permitted under the governing instruments of the ERISA Plan and is
appropriate for the ERISA Plan in view of its overall investment policy and the
composition and diversification of its portfolio. An ERISA Plan fiduciary should
especially consider the ERISA requirement of investment prudence and the
sensitivity of the return on the Certificates to the rate of principal payments
(including prepayments) on the Mortgage Loans, as discussed under "Maturity,
Prepayment Considerations and Weighted Average Life of Certificates" herein and
"Prepayment and Yield Considerations" in the applicable Prospectus Supplement.
Parties in Interest/Disqualified Persons
Other provisions of ERISA (and corresponding provisions of the Code)
prohibit certain transactions involving the assets of an ERISA Plan and persons
who have certain specified relationships to the ERISA Plan (so-called "parties
in interest" within the meaning of ERISA or "disqualified persons" within the
meaning of the Code). The Depositor, a Seller, a Master Servicer or the Trustee
or certain affiliates thereof might be considered or might become "parties in
interest" or "disqualified persons" with respect to an ERISA Plan. Thus, the
acquisition or holding of Certificates by or on behalf of such ERISA Plan could
be considered to give rise to a "prohibited transaction" within the meaning of
ERISA and the Code unless an administrative exemption described below or some
other exemption is available.
Special caution should be exercised before the assets of an ERISA Plan
(including assets that may be held in an insurance company's separate or general
accounts where assets in such accounts may be deemed plan assets for purposes of
ERISA) are used to purchase a Certificate if, with respect to such assets, the
Depositor, a Seller, a Master Servicer or the Trustee or an affiliate thereof
either (a) has investment discretion with respect to the investment of such
assets of such ERISA Plan; or (b) has authority or responsibility to give, or
regularly gives, investment advice with respect to such assets for a fee and
pursuant to an agreement or understanding that such advice will serve as a
primary basis for investment decisions with respect to such assets and that such
advice will be based on the particular investment needs of the ERISA Plan.
Delegation of Fiduciary Duty -- Plan Assets
If an investing ERISA Plan's assets were deemed to include an undivided
ownership interest in the assets included in a Trust Fund, an ERISA Plan's
investment in the Certificates might be deemed to constitute a delegation under
ERISA of the duty to manage plan assets by the fiduciary 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. Neither ERISA nor the Code define the term "plan assets."
The U.S. Department of Labor (the "Department") has published regulations
(the "Regulations") concerning whether an ERISA Plan's assets would be deemed to
include an interest in the underlying assets of an entity (such as a Trust Fund)
for purposes of the reporting, disclosure and fiduciary responsibility
provisions of ERISA, as well as for the prohibited transaction provisions of
ERISA and the Code, if the ERISA Plan acquires an "equity interest" (such as a
Certificate) in such an entity.
Certain exceptions are provided in the Regulations whereby an investing
ERISA Plan's assets would be deemed merely to include its interest in the
Certificates instead of being deemed to include an interest in the underlying
assets of the related Trust Fund. However, it cannot be predicted in advance,
nor can there be any continuing assurance whether such exceptions may be met,
because of the factual nature of certain of the rules set forth in the
Regulations. For example, one of the exceptions in the Regulations states that
the underlying assets of an entity will not be considered "plan assets" if less
than twenty-five percent (25%) of the value of all classes of equity interests
are held by "benefit plan investors," which term is defined to include ERISA
Plans, Non-ERISA Plans and Exempt Plans and any entity whose assets include
"plan assets" by reason of benefit
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plan investments in such entity, but this exception is tested immediately after
each acquisition of an equity interest in the entity whether upon initial
issuance or in the secondary market.
The Regulations provide that where an ERISA Plan acquires a "guaranteed
governmental mortgage pool certificate," the ERISA Plan's assets include such
certificate, but do not, solely by reason of the ERISA Plan's holdings of such
certificate, include any of the mortgage loans underlying such certificate. The
Regulations include in the definition of a "guaranteed governmental mortgage
pool certificate" the types of Freddie Mac Certificates, GNMA Certificates and
Fannie Mae Certificates that may be included in a Trust Fund underlying a Series
of Certificates. Accordingly, even if such "guaranteed governmental mortgage
pool certificates" included in a Trust Fund were deemed to be assets of Plan
investors the mortgage loans underlying such "guaranteed governmental mortgage
pool certificates" would not be treated as plan assets of such ERISA Plans.
Private Certificates are not "guaranteed governmental mortgage pool
certificates." Potential ERISA Plan investors should consult the discussion
under "Benefit Plan Considerations" in the related Prospectus Supplement before
purchasing any such Certificates.
Applicability to Non-ERISA Plans
Since Non-ERISA Plans are subject to the prohibited transaction provisions
of the Code, the discussion above with respect to "disqualified persons,"
prohibited transactions, delegation of fiduciary duty and plan assets applies to
Non-ERISA Plans as well as ERISA Plans. However, the administrative exemptions
discussed below are not applicable to Non-ERISA Plans.
ERISA ADMINISTRATIVE EXEMPTIONS
Individual Administrative Exemptions
The Department has granted to certain underwriters individual
administrative exemptions (the "Underwriter's Exemptions") from certain of the
prohibited transaction provisions of ERISA and the Code with respect to the
initial purchase, the holding and the subsequent resale by ERISA 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 an ERISA Plan is on terms
(including the price for the certificates) that are at least as favorable
to the ERISA Plan as they would be in an arm's-length transaction with an
unrelated party;
(2) the rights and interests evidenced by the certificates acquired by
the ERISA Plan are not subordinated to the rights and interests evidenced
by other certificates of the trust fund;
(3) the certificates acquired by the ERISA Plan have received a rating
at the time of such acquisition that is one of the three highest generic
rating categories from Standard & Poor's, a division of The McGraw-Hill
Companies ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff &
Phelps Credit Rating Co. ("DCR") or Fitch IBCA, Inc. ("Fitch");
(4) the trustee must not be an affiliate of any other member of the
Restricted Group (as described below);
(5) the sum of all payments made to and retained by the underwriters
in connection with the distribution of the certificates represents not more
than reasonable compensation for underwriting the certificates; the sum of
all payments made to and retained by the sponsor 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 any
servicer represents not more than reasonable compensation for such persons'
services under the agreement pursuant to which the loans are pooled and
reimbursements of such persons' reasonable expenses in connection
therewith; and
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(6) the ERISA Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Commission
under the Securities Act.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of the
type that have been included in other investment pools in the marketplace;
(ii) certificates in such other investment pools must have been rated
in one of the three highest rating categories of S&P, Moody's, Fitch or DCR
for at least one year prior to the ERISA Plan's acquisition of
certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than ERISA Plans for at least
one year prior to any ERISA 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 ERISA Plan fiduciary causes an ERISA Plan to acquire and hold
certificates in a trust fund as to which the fiduciary (or its affiliate) is an
obligor on the receivables held in the trust fund; 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 ERISA Plans have invested is acquired by persons
independent of members of the Restricted Group (as described below) and at least
fifty percent (50%) of the aggregate interest in the trust fund is acquired by
persons independent of the Restricted Group (as described below); (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 fund;
(iii) the ERISA 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 ERISA 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 ERISA Plans sponsored by the
Depositor, the related underwriter, the Trustee, any Master Servicer, any
insurer with respect to the Mortgage Assets, any obligor with respect to
Mortgage Assets included in the Trust Fund constituting more than five percent
(5%) of the aggregate unamortized principal balance of the assets in the Trust
Fund, or any affiliate of such parties (collectively, the "Restricted Group").
The Prospectus Supplement for each Series of Certificates will indicate the
classes of Certificates, if any, offered thereby as to which it is expected that
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, an ERISA Plan
fiduciary should consider the possible availability of any other prohibited
transaction exemptions and, in particular, Prohibited Transaction Class
Exemption 83-1 for Certain Transactions Involving Mortgage Pool Investment
Trusts ("PTCE 83-1"). PTCE 83-1 permits certain transactions involving the
creation, maintenance and termination of certain residential mortgage pools and
the acquisition and holding of certain residential mortgage pool pass-through
certificates by ERISA Plans, whether or not the ERISA Plan's assets would be
deemed to include an ownership interest in the mortgage loans in the mortgage
pool, and whether or not such transactions would otherwise be prohibited under
ERISA or the Code. The term "mortgage pool pass-through certificate" is defined
in PTCE 83-1 as "a certificate representing a beneficial undivided fractional
interest in a mortgage pool and entitling the holder of such certificate to
pass-through payment of principal and interest from the pooled mortgage loans,
less any fees retained by the pool sponsor." It appears that, for purposes of
PTCE 83-1, the term "mortgage pool pass-through certificate" would include
Certificates issued in a single class or in multiple classes that evidence the
beneficial ownership of both a specified percentage of future interest payments
(after permitted deductions) and a specified percentage of future principal
payments on a Trust Fund.
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However, it appears that PTCE 83-1 does not or might not apply to the
purchase and holding of (a) Certificates that evidence the beneficial ownership
only of a specified percentage of future interest payments (after permitted
deductions) from a Trust Fund or only a specified percentage of future principal
payments from a Trust Fund, (b) Residual Certificates, (c) Certificates
evidencing ownership interests in a Trust Fund which includes Mortgage Loans
secured by multifamily residential properties or shares issued by cooperative
housing corporations, (d) Subordinate Certificates, (e) Certificates evidencing
ownership interests in a Trust Fund containing Mortgage Certificates or (f)
Certificates evidencing ownership interests in the reinvestment income of funds
on deposit in the related Collection Account or Distribution Account.
PTCE 83-1 sets forth "general conditions" and "specific conditions" to its
applicability. Section II of PTCE 83-1 sets forth the following general
conditions to the application of the exemption: (i) the maintenance of a system
of insurance and other protection for the pooled mortgage loans and the property
securing such loans, and for indemnifying certificateholders against reductions
in pass-through payments due to property damage or defaults in loan payments;
(ii) the existence of a pool trustee who is not an affiliate of the pool
sponsor; and (iii) a requirement that the sum of all payments made to and
retained by the pool sponsor, and all funds inuring to the benefit of the pool
sponsor as a result of the administration of the mortgage pool, must represent
not more than adequate consideration for selling the mortgage loans plus
reasonable compensation for services provided by the pool sponsor to the pool.
The system of insurance or protection referred to in clause (i) above must
provide such protection and indemnification up to an amount not less than the
greater of one percent of the aggregate unpaid principal balance of the pooled
mortgages or the unpaid principal balance of the largest mortgage in the pool.
It should be noted that in promulgating PTCE 83-1 (and a predecessor exemption),
the Department did not have under its consideration interests in pools of the
exact nature as some of the Certificates described herein.
NON-ERISA PLANS AND EXEMPT PLANS
Although Non-ERISA Plans and Exempt Plans are not considered ERISA Plans
for purposes of the above discussion, Non-ERISA Plans are subject to the
prohibited transaction provisions of the Code, and both Non-ERISA Plans and
Exempt Plans may be subject to certain other ERISA-like requirements of
applicable law. Therefore, before purchasing any Certificates by or on behalf of
a Non-ERISA Plan or any Exempt Plan, the prospective purchaser should exercise
special caution and should consult with its legal counsel concerning the
propriety and implications of such investment under the Code or other applicable
law.
UNRELATED BUSINESS TAXABLE INCOME -- RESIDUAL CERTIFICATES
The purchase of a Residual Certificate by an IRA or any employee benefit
plan qualified under Code Section 401(a) and exempt from taxation under Code
Section 501(a), including most varieties of Benefit Plans, may give rise to
"unrelated business taxable income" as described in Code Sections 511 through
515 and Code Section 860E. Further, prior to the purchase of Residual
Certificates, a prospective purchaser may be required to provide an affidavit to
the transferor, the Trustee and the Depositor that it is not a "disqualified
organization," which term as defined herein includes certain tax-exempt entities
not subject to Code Section 511, including certain governmental plans. In
addition, prior to the transfer of a Residual Certificate, the Trustee or the
Depositor 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 or the Code and will not subject the Trustee, the Depositor or any Master
Servicer to additional obligations.
INVESTMENT DECISION
DUE TO THE COMPLEXITY OF THESE RULES AND THE PENALTIES IMPOSED UPON PERSONS
INVOLVED IN PROHIBITED TRANSACTIONS, IT IS PARTICULARLY IMPORTANT THAT POTENTIAL
INVESTORS WHO ARE ACTING ON BEHALF OF A BENEFIT PLAN OR ANY OTHER EMPLOYEE
BENEFIT PLAN OR ARRANGEMENT CONSULT WITH THEIR LEGAL COUNSEL REGARDING THE
CONSEQUENCES UNDER ERISA, THE CODE AND OTHER APPLICABLE LAW OF THEIR ACQUISITION
AND OWNERSHIP OF CERTIFICATES.
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THE SALE OF CERTIFICATES TO A BENEFIT PLAN OR ANY OTHER EMPLOYEE BENEFIT
PLAN OR ARRANGEMENT IS IN NO RESPECT A REPRESENTATION BY THE DEPOSITOR OR THE
APPLICABLE UNDERWRITER THAT THIS INVESTMENT MEETS ALL RELEVANT LEGAL
REQUIREMENTS WITH RESPECT TO INVESTMENTS BY EMPLOYEE BENEFIT PLANS GENERALLY OR
ANY PARTICULAR PLAN OR ARRANGEMENT, OR THAT THIS INVESTMENT IS APPROPRIATE FOR
EMPLOYEE BENEFIT PLANS GENERALLY OR ANY PARTICULAR PLAN OR ARRANGEMENT.
LEGAL INVESTMENT CONSIDERATIONS
As will be specified in the applicable Prospectus Supplement, certain
classes of Certificates will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended
("SMMEA"), so long as (i) they are rated in one of the two highest rating
categories by at least one Rating Agency and (ii) are part of a Series
representing interests in a Trust Fund consisting of Mortgage Loans originated
by certain types of originators specified in SMMEA. As "mortgage related
securities," such classes will constitute legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including but not limited to state-chartered depository institutions, insurance
companies and pension funds) created pursuant to or existing under the laws of
the United States or of any state (including the District of Columbia and Puerto
Rico) whose authorized investments are subject to state regulation, to the same
extent that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Pursuant to SMMEA, a
number of states enacted legislation, on or before the October 3, 1991 cut-off
for such enactments, limiting to varying extents the ability of certain entities
(in particular, insurance companies) to invest in "mortgage related securities,"
in most cases by requiring the affected investors to rely solely upon existing
state law, and not SMMEA. Accordingly, the investors affected by such
legislation will be authorized to invest in the Certificates only to the extent
provided in such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in mortgage related
securities without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in such securities, and national banks
may purchase mortgage related securities for their own account without regard to
the limitations generally applicable to investment securities set forth in 12
U.S.C. sec. 24 (Seventh), subject in each case to such regulations as the
applicable federal regulatory authority may prescribe. In this connection, the
Office of the Comptroller of the Currency (the "OCC") has amended 12 C.F.R. Part
1 to authorize national banks to purchase and sell for their own account,
without limitation as to a percentage of the bank's capital and surplus (but
subject to compliance with certain general standards concerning "safety and
soundness" and retention of credit information in 12 C.F.R. sec. 1.5), certain
"Type IV securities," defined in 12 C.F.R. sec. 1.2(1) to include certain
"residential mortgage-related securities." As so defined "residential
mortgage-related security" means, in relevant part, "mortgage related security"
within the meaning of SMMEA. The National Credit Union Administration ("NCUA")
has adopted rules, codified at 12 C.F.R. Part 703 which permit federal credit
unions to invest in "mortgage related securities" under certain limited
circumstances, other than stripped mortgage related securities, residual
interests in mortgage related securities and commercial mortgage related
securities, unless the credit union has obtained written approval from the NCUA
to participate in the "investment pilot program" described in 12 C.F.R. sec.
703.140.
All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Investment Securities and
End-User Derivatives Activities" (the "1998 Policy Statement") of the Federal
Financial Institutions Examination Council ("FFIEC"), which has been adopted by
the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the OCC and the Office of Thrift Supervision, effective
May 26, 1998, and by the NCUA, effective October 1, 1998. The 1998 Policy
Statement sets forth general guidelines which depository institutions must
follow in managing risks (including market, credit, liquidity, operational
(transaction), and legal risks) applicable to all securities (including mortgage
pass-through securities and mortgage-derivative products) used for investment
purposes. Until October 1, 1998, federal credit unions will still be subject to
the FFIEC's now-superseded "Supervisory Policy Statement on Securities
Activities" dated January 28, 1992, as adopted by the NCUA with certain
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modifications, which prohibited depository institutions from investing in
certain "high-risk mortgage securities," exempt under limited circumstances, and
set forth certain investment practices deemed to be unsuitable for regulated
institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any of the
Certificates, as certain Series or classes (in particular, Certificates which
are entitled solely or disproportionately to distributions of principal or
interest) may be deemed unsuitable investments, or may otherwise be restricted,
under such rules, policies or guidelines (in certain instances irrespective of
SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investment in securities which are not
"interest-bearing" or "income-paying," and, with regard to any Certificates
issued in book-entry form, provisions which may restrict or prohibit investments
in securities which are issued in book-entry form.
Except as to the status of certain classes of Certificates as "mortgage
related securities," no representation is made as to the proper characterization
of the Certificates for legal investment purposes, financial institution
regulatory purposes, or other purposes, or as to the ability of particular
investors to purchase Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Certificates) may adversely affect the liquidity of the
Certificates.
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their legal advisors in determining
whether and to what extent the Certificates of any class constitute legal
investments or are subject to investment, capital or other restrictions and, if
applicable, whether SMMEA has been overridden in any jurisdiction relevant to
such investor.
LEGAL MATTERS
Certain legal matters, including the federal income tax consequences to
Certificateholders of an investment in the Certificates of a Series, will be
passed upon for the Depositor by Kennedy Covington Lobdell & Hickman, L.L.P.,
Charlotte, North Carolina, or Cadwalader, Wickersham & Taft, New York, New York,
as provided in the related Prospectus Supplement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion represents the opinion of Cadwalader,
Wickersham & Taft or Kennedy Covington Lobdell & Hickman, L.L.P. as to the
anticipated material federal income tax consequences of the purchase, ownership
and disposition of Certificates. The discussion below does not purport to
address all federal income tax consequences that may be applicable to particular
categories of investors, some of which may be subject to special rules. The
authorities on which this discussion is based are subject to change or differing
interpretations, and any such change or interpretation could apply
retroactively. This discussion reflects the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as regulations
(the "REMIC Regulations") promulgated by the U.S. Department of the Treasury.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of Certificates.
For purposes of this discussion, where the applicable Prospectus Supplement
provides for a fixed retained yield with respect to the Mortgage Loans of a
Series of Certificates, references to the Mortgage Loans will be deemed to refer
to that portion of the Mortgage Loans held by the Trust Fund that does not
include the Fixed Retained Yield. References to a "holder" or
"Certificateholder" in this discussion generally mean the beneficial owner of a
Certificate.
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FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
GENERAL
With respect to a particular Series of Certificates, an election may be
made to treat the Trust Fund or one or more segregated pools of assets therein
as one or more REMICs within the meaning of Code Section 860D. A Trust Fund or a
portion or portions thereof as to which one or more REMIC elections will be made
will be referred to as a "REMIC Pool." For purposes of this discussion,
Certificates of a Series as to which one or more REMIC elections are made are
referred to as "REMIC Certificates" and will consist of one or more classes of
"Regular Certificates" and one class of "Residual Certificates" in the case of
each REMIC Pool. Qualification as a REMIC requires ongoing compliance with
certain conditions. With respect to each Series of REMIC Certificates,
Cadwalader, Wickersham & Taft or Kennedy Covington Lobdell & Hickman, L.L.P.,
counsel to the Depositor, has advised the Depositor that in each firm's opinion,
assuming (i) the making of an appropriate election, (ii) compliance with the
Pooling Agreement, and (iii) compliance with any changes in the law, including
any amendments to the Code or applicable Treasury regulations thereunder, each
REMIC Pool will qualify as a REMIC. In such case, the Regular Certificates will
be considered to be "regular interests" in the REMIC Pool and generally will be
treated for federal income tax purposes as if they were newly originated debt
instruments, and the Residual Certificates will be considered to be "residual
interests" in the REMIC Pool. The Prospectus Supplement for each Series of
Certificates will indicate whether one or more REMIC elections with respect to
the related Trust Fund will be made, in which event references to "REMIC" or
"REMIC Pool" herein shall be deemed to refer to each such REMIC Pool.
STATUS OF REMIC CERTIFICATES
REMIC Certificates held by a domestic building and loan association will
constitute "a regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi) in the same proportion that the assets of the
REMIC Pool would be treated as "loans . . . secured by an interest in real
property which is . . . residential real property" within the meaning of Code
Section 7701(a)(19)(C)(v) or as other assets described in Code Section
7701(a)(19)(C). REMIC Certificates held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code Section 856(c)(4)(A),
and interest on the Regular Certificates and income with respect to Residual
Certificates will be considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of Code
Section 856(c)(3)(B) in the same proportion that, for both purposes, the assets
of the REMIC Pool would be so treated. If at all times 95% or more of the assets
of the REMIC Pool qualify for each of the foregoing treatments, the REMIC
Certificates will qualify for the corresponding status in their entirety. For
purposes of Code Section 856(c)(4)(A), payments of principal and interest on the
Mortgage Loans that are reinvested pending distribution to holders of REMIC
Certificates qualify for such treatment. Where two REMIC Pools are a part of a
tiered structure they will be treated as one REMIC for purposes of the tests
described above respecting asset ownership of more or less than 95%. In
addition, if the assets of the REMIC include Buy-Down Loans, it is possible that
the percentage of such assets constituting "loans . . . secured by an interest
in real property which is . . . residential real property" for purposes of Code
Section 7701(a)(19)(C)(v), may be required to be reduced by the amount of the
related Buydown Funds. REMIC Certificates held by a regulated investment company
will not constitute "Government securities" within the meaning of Code Section
851(b)(3)(A)(i). REMIC Certificates held by certain financial institutions will
constitute an "evidence of indebtedness" within the meaning of Code Section
582(c)(1). The Small Business Job Protection Act of 1996 (the "SBJPA of 1996")
repealed the reserve method for bad debts of domestic building and loan
associations and mutual savings banks, and thus has eliminated the asset
category of "qualifying real property loans" in former Code Section 593(d) for
taxable years beginning after December 31, 1995. The requirement in the SBJPA of
1996 that such institutions must "recapture" a portion of their existing bad
debt reserves is suspended if a certain portion of their assets are maintained
in "residential loans" under Code Section 7701(a)(19)(C)(v), but only if such
loans were made to acquire, construct or improve the related real property and
not for the purpose of refinancing. However, no effort will be made to identify
the portion of the Mortgage Loans of any Series meeting this requirement, and no
representation is made in this regard.
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QUALIFICATION AS A REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Certificates) and at all
times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a safe harbor pursuant to
which the de minimis requirement will be met if at all times the aggregate
adjusted basis of the nonqualified assets is less than 1% of the aggregate
adjusted basis of all the REMIC Pool's assets. An entity that fails to meet the
safe harbor may nevertheless demonstrate that it holds no more than a de minimis
amount of nonqualified assets. A REMIC Pool also must provide "reasonable
arrangements" to prevent its residual interests from being held by "disqualified
organizations" or agents thereof and must furnish applicable tax information to
transferors or agents that violate this requirement. See "-- Taxation of
Residual Certificates -- Tax-Related Restrictions on Transfer of Residual
Certificates -- Disqualified Organizations" below.
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
and, generally, certificates of beneficial interest in a grantor trust that
holds mortgage loans, regular interests in another REMIC, such as lower-tier
regular interests in a tiered REMIC and regular interests in a Financial Asset
Securitization Investment Trust (a "FASIT") within the meaning of Code Section
860L if 95% or more of the value of the assets of the FASIT is at all times
attributable to whole mortgage loans such as the Mortgage Loans. The REMIC
Regulations specify that loans secured by timeshare interests and shares held by
a tenant stockholder in a cooperative housing corporation can be qualified
mortgages. A qualified mortgage includes a qualified replacement mortgage, which
is any property that would have been treated as a qualified mortgage if it were
transferred to the REMIC Pool on the Startup Day and that is received either (i)
in exchange for any qualified mortgage within a three-month period thereafter or
(ii) in exchange for a "defective obligation" within a two-year period
thereafter. A "defective obligation" includes (i) a mortgage in default or as to
which default is reasonably foreseeable, (ii) a mortgage as to which a customary
representation or warranty made at the time of transfer to the REMIC Pool has
been breached, (iii) a mortgage that was fraudulently procured by the mortgagor,
and (iv) a mortgage that was not in fact principally secured by real property
(but only if such mortgage is disposed of within 90 days of discovery). A
Mortgage Loan that is "defective" as described in clause (iv) that is not sold
or, if within two years of the Startup Day, exchanged, within 90 days of
discovery, ceases to be a qualified mortgage after such 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and certain other contingencies. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in such fund
for the year is derived from the sale or other disposition of property held for
less than three months, unless required to prevent a default on the regular
interests caused by a default on one or more qualified mortgages. A reserve fund
must be reduced "promptly and appropriately" as payments on the Mortgage Loans
are received. Foreclosure property is real property acquired by the REMIC Pool
in connection with the default or imminent default of a qualified mortgage and
generally not held beyond the close of the third calendar year following the
year in which such property is acquired with an extension that may be granted by
the Internal Revenue Service.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following: (i) one or more classes of
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regular interests or (ii) a single class of residual interests on which
distributions, if any, are made pro rata. A regular interest is an interest in a
REMIC Pool that is issued on the Startup Day with fixed terms, is designated as
a regular interest, and unconditionally entitles the holder to receive a
specified principal amount (or other similar amount), and provides that interest
payments (or other similar amounts), if any, at or before maturity either are
payable based on a fixed rate or a qualified variable rate, or consist of a
specified, nonvarying portion of the interest payments on qualified mortgages.
Such a specified portion may consist of a fixed number of basis points, a fixed
percentage of the total interest, or a qualified variable rate, inverse variable
rate or difference between two fixed or qualified variable rates on some or all
of the qualified mortgages. The specified principal amount of a regular interest
that provides for interest payments consisting of a specified, nonvarying
portion of interest payments on qualified mortgages may be zero. A residual
interest is an interest in a REMIC Pool other than a regular interest that is
issued on the Startup Day and that is designated as a residual interest. An
interest in a REMIC Pool may be treated as a regular interest even if payments
of principal with respect to such interest are subordinated to payments on other
regular interests or the residual interest in the REMIC Pool, and are dependent
on the absence of defaults or delinquencies on qualified mortgages or permitted
investments, lower than reasonably expected returns on permitted investments,
unanticipated expenses incurred by the REMIC Pool or prepayment interest
shortfalls. Accordingly, the Regular Certificates of a Series will constitute
one or more classes of regular interests, and the Residual Certificates with
respect to that Series will constitute a single class of residual interests on
which distributions are made pro rata.
If an entity, such as the REMIC Pool, fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable year,
the Code provides that the entity will not be treated as a REMIC for such year
and thereafter. In this event, an entity with multiple classes of ownership
interests may be treated as a separate association taxable as a corporation
under Treasury regulations, and the Regular Certificates may be treated as
equity interests therein. The Code, however, authorizes the Treasury Department
to issue regulations that address situations where failure to meet one or more
of the requirements for REMIC status occurs inadvertently and in good faith, and
disqualification of the REMIC Pool would occur absent regulatory relief.
Investors should be aware, however, that the Conference Committee Report to the
Tax Reform Act of 1986 (the "1986 Act") indicates that the relief may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the REMIC Pool's income for the period of time in which the
requirements for REMIC status are not satisfied.
TAXATION OF REGULAR CERTIFICATES
General
In general, interest, original issue discount, and market discount on a
Regular Certificate will be treated as ordinary income to a holder of the
Regular Certificate (the "Regular Certificateholder"), and principal payments on
a Regular Certificate will be treated as a return of capital to the extent of
the Regular Certificateholder's basis in the Regular Certificate allocable
thereto (other than accrued market discount not previously reported as income).
Regular Certificateholders must use the accrual method of accounting with regard
to Regular Certificates, regardless of the method of accounting otherwise used
by such Regular Certificateholders.
Original Issue Discount
Accrual Certificates will be, and other classes of Regular Certificates may
be, issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any class of Regular Certificates having original issue
discount generally must include original issue discount in ordinary income for
federal income tax purposes as it accrues, in accordance with a constant
interest method that takes into account the compounding of interest, in advance
of receipt of the cash attributable to such income. The following discussion is
based in part on temporary and final Treasury regulations issued on February 2,
1994, as amended on June 14, 1996, (the "OID Regulations") under Code Sections
1271 through 1273 and 1275 and in part on the provisions of the 1986 Act.
Regular Certificateholders should be aware, however, that the OID Regulations do
not adequately address certain issues relevant to prepayable securities, such as
the Regular Certificates. To the
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extent such issues are not addressed in such regulations, it is anticipated that
the Trustee will apply the methodology described in the Conference Committee
Report to the 1986 Act. No assurance can be provided that the Internal Revenue
Service will not take a different position as to those matters not currently
addressed by the OID Regulations. Moreover, the OID Regulations include an
anti-abuse rule allowing the Internal Revenue Service to apply or depart from
the OID Regulations where necessary or appropriate to ensure a reasonable tax
result in light of the applicable statutory provisions. A tax result will not be
considered unreasonable under the anti-abuse rule in the absence of a
substantial effect on the present value of a taxpayer's tax liability. Investors
are advised to consult their own tax advisors as to the discussion herein and
the appropriate method for reporting interest and original issue discount with
respect to the Regular Certificates.
Each Regular Certificate (except to the extent described below with respect
to a Regular Certificate on which principal is distributed in a single
installment or by lots of specified principal amounts upon the request of a
Certificateholder or by random lot (a "Non-Pro Rata Certificate")) will be
treated as a single installment obligation for purposes of determining the
original issue discount includible in a Regular Certificateholder's income. The
total amount of original issue discount on a Regular Certificate is the excess
of the "stated redemption price at maturity" of the Regular Certificate over its
"issue price." The issue price of a class of Regular Certificates offered
pursuant to this Prospectus generally is the first price at which a substantial
amount of such class is sold to the public (excluding bond houses, brokers and
underwriters). Although unclear under the OID Regulations, it is anticipated
that the Trustee will treat the issue price of a class as to which there is no
substantial sale as of the issue date or that is retained by the Depositor as
the fair market value of that class as of the issue date. The issue price of a
Regular Certificate also includes any amount paid by an initial Regular
Certificateholder for accrued interest that relates to a period prior to the
issue date of the Regular Certificate, unless the Regular Certificateholder
elects on its federal income tax return to exclude such amount from the issue
price and to recover it on the first Distribution Date. The stated redemption
price at maturity of a Regular Certificate always includes the original
principal amount of the Regular Certificate, but generally will not include
distributions of interest if such distributions constitute "qualified stated
interest." Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or a qualified variable rate (as
described below) provided that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Regular
Certificate. Because there is no penalty or default remedy in the case of
nonpayment of interest with respect to a Regular Certificate, it is possible
that no interest on any class of Regular Certificates will be treated as
qualified stated interest. However, except as provided in the following three
sentences or in the applicable Prospectus Supplement, because the underlying
Mortgage Loans provide for remedies in the event of default, it is anticipated
that the Trustee will treat interest with respect to the Regular Certificates as
qualified stated interest. Distributions of interest on a Accrual Certificate,
or on other Regular Certificates with respect to which deferred interest will
accrue, will not constitute qualified stated interest, in which case the stated
redemption price at maturity of such Regular Certificates includes all
distributions of interest as well as principal thereon. Likewise, it is
anticipated that the Trustee will treat an interest-only class or a class on
which interest is substantially disproportionate to its principal amount (a
so-called "super-premium" class) as having no qualified stated interest. Where
the interval between the issue date and the first Distribution Date on a Regular
Certificate is shorter than the interval between subsequent Distribution Dates,
the interest attributable to the additional days will be included in the stated
redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Certificate multiplied
by the weighted average maturity of the Regular Certificate. For this purpose,
the weighted average maturity of the Regular Certificate is computed as the sum
of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included in
the stated redemption price at maturity of the Regular Certificate and the
denominator of which is the stated redemption price at maturity of the Regular
Certificate. The Conference Committee Report to the 1986 Act provides that the
schedule of such distributions should be determined in accordance with the
assumed rate of prepayment of the Mortgage Loans
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(the "Prepayment Assumption") and the anticipated reinvestment rate, if any,
relating to the Regular Certificates. The Prepayment Assumption with respect to
a Series of Regular Certificates will be set forth in the applicable Prospectus
Supplement. Holders generally must report de minimis original issue discount pro
rata as principal payments are received, and such income will be capital gain if
the Regular Certificate is held as a capital asset. Under the OID Regulations,
however, Regular Certificateholders may elect to accrue all de minimis original
issue discount as well as market discount and market premium, under the constant
yield method. See "-- Election to Treat All Interest Under the Constant Yield
Method" below.
A Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Certificate accrued during an accrual period for
each day on which it holds the Regular Certificate, including the date of
purchase but excluding the date of disposition. The Trustee will treat the
monthly period ending on the day before each Distribution Date as the accrual
period. With respect to each Regular Certificate, a calculation will be made of
the original issue discount that accrues during each successive full accrual
period (or shorter period from the date of original issue) that ends on the day
before the related Distribution Date on the Regular Certificate. The Conference
Committee Report to the 1986 Act states that the rate of accrual of original
issue discount is intended to be based on the Prepayment Assumption. Other than
as discussed below with respect to a Non-Pro Rata Certificate, the original
issue discount accruing in a full accrual period would be the excess, if any, of
(i) the sum of (a) the present value of all of the remaining distributions to be
made on the Regular Certificate as of the end of that accrual period, and (b)
the distributions made on the Regular Certificate during the accrual period that
are included in the Regular Certificate's stated redemption price at maturity,
over (ii) the adjusted issue price of the Regular Certificate at the beginning
of the accrual period. The present value of the remaining distributions referred
to in the preceding sentence is calculated based on (i) the yield to maturity of
the Regular Certificate at the issue date, (ii) events (including actual
prepayments) that have occurred prior to the end of the accrual period, and
(iii) the Prepayment Assumption. For these purposes, the adjusted issue price of
a Regular Certificate at the beginning of any accrual period equals the issue
price of the Regular Certificate, increased by the aggregate amount of original
issue discount with respect to the Regular Certificate that accrued in all prior
accrual periods and reduced by the amount of distributions included in the
Regular Certificate's stated redemption price at maturity that were made on the
Regular Certificate in such prior periods. The original issue discount accruing
during any accrual period (as determined in this paragraph) will then be divided
by the number of days in the period to determine the daily portion of original
issue discount for each day in the period. With respect to an initial accrual
period shorter than a full accrual period, the daily portions of original issue
discount must be determined according to an appropriate allocation under any
reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the Mortgage Loans with respect to a Series of
Regular Certificates can result in both a change in the priority of principal
payments with respect to certain classes of Regular Certificates and either an
increase or decrease in the daily portions of original issue discount with
respect to such Regular Certificates.
In the case of a Non-Pro Rata Certificate, it is anticipated that the
Trustee will determine the yield to maturity of such Certificate based upon the
anticipated payment characteristics of the class as a whole under the Prepayment
Assumption. In general, the original issue discount accruing on each Non-Pro
Rata Certificate in a full accrual period would be its allocable share of the
original issue discount with respect to the entire class, as determined in
accordance with the preceding paragraph. However, in the case of a distribution
in retirement of the entire unpaid principal balance of any Non-Pro Rata
Certificate (or portion of such unpaid principal balance), (a) the remaining
unaccrued original issue discount allocable to such Certificate (or to such
portion) will accrue at the time of such distribution, and (b) the accrual of
original issue discount allocable to each remaining Certificate of such class
(or the remaining unpaid principal balance of a partially redeemed Non-Pro Rata
Certificate after a distribution of principal has been received) will be
adjusted by
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reducing the present value of the remaining payments on such class and the
adjusted issue price of such class to the extent attributable to the portion of
the unpaid principal balance thereof that was distributed. The Depositor
believes that the foregoing treatment is consistent with the "pro rata
prepayment" rules of the OID Regulations, but with the rate of accrual of
original issue discount determined based on the Prepayment Assumption for the
class as a whole. Investors are advised to consult their tax advisors as to this
treatment.
Acquisition Premium
A purchaser of a Regular Certificate at a price greater than its adjusted
issue price but less than its stated redemption price at maturity will be
required to include in gross income the daily portions of the original issue
discount on the Regular Certificate reduced pro rata by a fraction, the
numerator of which is the excess of its purchase price over such adjusted issue
price and the denominator of which is the excess of the remaining stated
redemption price at maturity over the adjusted issue price. Alternatively, such
a subsequent purchaser may elect to treat all such acquisition premium under the
constant yield method, as described below under the heading "-- Election to
Treat All Interest Under the Constant Yield Method" below.
Variable Rate Regular Certificates
Regular Certificates may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate if,
generally, (i) the issue price does not exceed the original principal balance by
more than a specified amount and (ii) the interest compounds or is payable at
least annually at current values of (a) one or more "qualified floating rates,"
(b) a single fixed rate and one or more qualified floating rates, (c) a single
"objective rate," or (d) a single fixed rate and a single objective rate that is
a "qualified inverse floating rate." A floating rate is a qualified floating
rate if variations in the rate can reasonably be expected to measure
contemporaneous variations in the cost of newly borrowed funds, where such rate
is subject to a fixed multiple that is greater than 0.65 but not more than 1.35.
Such rate may also be increased or decreased by a fixed spread or subject to a
fixed cap or floor, or a cap or floor that is not reasonably expected as of the
issue date to affect the yield of the instrument significantly. An objective
rate is any rate (other than a qualified floating rate) that is determined using
a single fixed formula and that is based on objective financial or economic
information, provided that such information is not (i) within the control of the
issuer or a related party or (ii) unique to the circumstances of the issuer or a
related party. A qualified inverse floating rate is a rate equal to a fixed rate
minus a qualified floating rate that inversely reflects contemporaneous
variations in the cost of newly borrowed funds; an inverse floating rate that is
not a qualified inverse floating rate may nevertheless be an objective rate. A
class of Regular Certificates may be issued under this Prospectus that does not
have a variable rate under the foregoing rules, for example, a class that bears
different rates at different times during the period it is outstanding such that
it is considered significantly "front-loaded" or "back-loaded" within the
meaning of the OID Regulations. It is possible that such a class may be
considered to bear "contingent interest" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to Regular Certificates. However, if
final regulations dealing with contingent interest with respect to Regular
Certificates apply the same principles as the OID Regulations, such regulations
may lead to different timing of income inclusion than would be the case under
the OID Regulations for non-contingent debt instruments. Furthermore,
application of such principles could lead to the characterization of gain on the
sale of contingent interest Regular Certificates as ordinary income. Investors
should consult their tax advisors regarding the appropriate treatment of any
Regular Certificate that does not pay interest at a fixed rate or variable rate
as described in this paragraph.
Under the REMIC Regulations, a Regular Certificate (i) bearing a rate that
qualifies as a variable rate under the OID Regulations that is tied to current
values of a variable rate (or the highest, lowest or average of two or more
variable rates, including a rate based on the average cost of funds of one or
more financial institutions), or a positive or negative multiple of such a rate
(plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans, including such a
rate that is subject to one or more caps or floors, or (ii) bearing one or more
such variable rates for one or more periods, or one or more fixed rates for one
or more periods, and a different variable rate or fixed rate for
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other periods, qualifies as a regular interest in a REMIC. Accordingly, unless
otherwise indicated in the applicable Prospectus Supplement, it is anticipated
that the Trustee will treat Regular Certificates that qualify as regular
interests under this rule in the same manner as obligations bearing a variable
rate for original issue discount reporting purposes.
The amount of original issue discount with respect to a Regular Certificate
bearing a variable rate of interest will accrue in the manner described above
under "-- Original Issue Discount," with the yield to maturity and future
payments on such Regular Certificate generally to be determined by assuming that
interest will be payable for the life of the Regular Certificate based on the
initial rate (or, if different, the value of the applicable variable rate as of
the pricing date) for the relevant class. Unless required otherwise by
applicable final regulations, it is anticipated that the Trustee will treat such
variable interest as qualified stated interest, other than variable interest on
an interest-only or super-premium class, which will be treated as non-qualified
stated interest includible in the stated redemption price at maturity. Ordinary
income reportable for any period will be adjusted based on subsequent changes in
the applicable interest rate index.
Although unclear under the OID Regulations, unless required otherwise by
applicable final regulations, it is anticipated that the Trustee will treat
Regular Certificates bearing an interest rate that is a weighted average of the
net interest rates on Mortgage Loans as having qualified stated interest, except
to the extent that initial "teaser" rates cause sufficiently "back-loaded"
interest to create more than de minimis original issue discount. The yield on
such Regular Certificates for purposes of accruing original issue discount will
be a hypothetical fixed-rate based on the fixed rates, in the case of fixed rate
Mortgage Loans, and initial "teaser rates" followed by fully indexed rates, in
the case of adjustable-rate Mortgage Loans. In the case of adjustable-rate
Mortgage Loans, the applicable index used to compute interest on the Mortgage
Loans in effect on the pricing date (or possibly the issue date) will be deemed
to be in effect beginning with the period in which the first weighted average
adjustment date occurring after the issue date occurs. Adjustments will be made
in each accrual period either increasing or decreasing the amount of ordinary
income reportable to reflect the actual Pass-Through Rate on the Regular
Certificates.
Market Discount
A purchaser of a Regular Certificate also may be subject to the market
discount rules of Code Sections 1276 through 1278. Under these sections and the
principles applied by the OID Regulations in the context of original issue
discount, "market discount" is the amount by which the purchaser's original
basis in the Regular Certificate (i) is exceeded by the then-current principal
amount of the Regular Certificate, or (ii) in the case of a Regular Certificate
having original issue discount, is exceeded by the adjusted issue price of such
Regular Certificate at the time of purchase. Such purchaser generally will be
required to recognize ordinary income to the extent of accrued market discount
on such Regular Certificate as distributions includible in the stated redemption
price at maturity thereof are received, in an amount not exceeding any such
distribution. Such market discount would accrue in a manner to be provided in
Treasury regulations and should take into account the Prepayment Assumption. The
Conference Committee Report to the 1986 Act provides that until such regulations
are issued, such market discount would accrue either (i) on the basis of a
constant interest rate, or (ii) in the ratio of stated interest allocable to the
relevant period to the sum of the interest for such period plus the remaining
interest as of the end of such period, or in the case of a Regular Certificate
issued with original issue discount, in the ratio of original issue discount
accrued for the relevant period to the sum of the original issue discount
accrued for such period plus the remaining original issue discount as of the end
of such period. Such purchaser also generally will be required to treat a
portion of any gain on a sale or exchange of the Regular Certificate as ordinary
income to the extent of the market discount accrued to the date of disposition
under one of the foregoing methods, less any accrued market discount previously
reported as ordinary income as partial distributions in reduction of the stated
redemption price at maturity were received. Such purchaser will be required to
defer deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Certificate over the
interest distributable thereon. The deferred portion of such interest expense in
any taxable year generally will not exceed the accrued market discount on the
Regular Certificate for such year. Any such deferred interest expense is, in
general, allowed as a deduction not later than the year in which the related
market discount
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income is recognized or the Regular Certificate is disposed of. As an
alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Certificateholder may elect to include market discount in
income currently as it accrues on all market discount instruments acquired by
such Regular Certificateholder in that taxable year or thereafter, in which case
the interest deferral rule will not apply. See "-- Election to Treat All
Interest Under the Constant Yield Method" below regarding an alternative manner
in which such election may be deemed to be made.
By analogy to the OID Regulations, market discount with respect to a
Regular Certificate will be considered to be zero if such market discount is
less than 0.25% of the remaining stated redemption price at maturity of such
Regular Certificate multiplied by the weighted average maturity of the Regular
Certificate (determined as described above in the third paragraph under
"-- Original Issue Discount") remaining after the date of purchase. It appears
that de minimis market discount would be reported in a manner similar to de
minimis original issue discount. See "-- Original Issue Discount" above.
Treasury regulations implementing the market discount rules have not yet been
issued, and therefore investors should consult their own tax advisors regarding
the application of these rules. Investors should also consult Revenue Procedure
92-67 concerning the elections to include market discount in income currently
and to accrue market discount on the basis of the constant yield method.
Premium
A Regular Certificate purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Certificateholder holds such Regular Certificate as a
"capital asset" within the meaning of Code Section 1221, the Regular
Certificateholder may elect under Code Section 171 to amortize such premium
under the constant yield method. Such election will apply to all debt
obligations acquired by the Regular Certificateholder at a premium held in that
taxable year or thereafter, unless revoked with the permission of the Internal
Revenue Service. The Conference Committee Report to the 1986 Act indicates a
Congressional intent that the same rules that apply to the accrual of market
discount on installment obligations will also apply to amortizing bond premium
under Code Section 171 on installment obligations such as the Regular
Certificates, although it is unclear whether the alternatives to the constant
interest method described above under "-- Market Discount" are available.
Amortizable bond premium will be treated as an offset to interest income on a
Regular Certificate, rather than as a separate deduction item. See "-- Election
to Treat All Interest Under the Constant Yield Method" below regarding an
alternative manner in which the Code Section 171 election may be deemed to be
made.
Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Certificate may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to such an election, (i) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (ii) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make such an election on an instrument by instrument basis or for
a class or group of debt instruments. However, if the holder makes such an
election with respect to a debt instrument with amortizable bond premium or with
market discount, the holder is deemed to have made elections to amortize bond
premium or to report market discount income currently as it accrues under the
constant yield method, respectively, for all premium bonds held or market
discount bonds acquired by the holder in the same taxable year or thereafter.
The election is made on the holder's federal income tax return for the year in
which the debt instrument is acquired and is irrevocable except with the
approval of the Internal Revenue Service. Investors should consult their own tax
advisors regarding the advisability of making such an election.
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Treatment of Losses
Regular Certificateholders will be required to report income with respect
to Regular Certificates on the accrual method of accounting, without giving
effect to delays or reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans, except to the extent it can be established
that such amounts are uncollectible. Accordingly, the holder of a Regular
Certificate, particularly a Subordinate Certificate, may have income, or may
incur a diminution in cash flow as a result of a default or delinquency, but may
not be able to take a deduction (subject to the discussion below) for the
corresponding loss until a subsequent taxable year. In this regard, investors
are cautioned that while they may generally cease to accrue interest income if
it reasonably appears that the interest will be uncollectible, the Internal
Revenue Service may take the position that original issue discount must continue
to be accrued in spite of its uncollectibility until the debt instrument is
disposed of in a taxable transaction or becomes worthless in accordance with the
rules of Code Section 166. To the extent the rules of Code Section 166 regarding
bad debts are applicable, it appears that Regular Certificateholders that are
corporations or that otherwise hold the Regular Certificates in connection with
a trade or business should in general be allowed to deduct as an ordinary loss
such loss with respect to principal sustained during the taxable year on account
of any such Regular Certificates becoming wholly or partially worthless, and
that, in general, Regular Certificateholders that are not corporations and do
not hold the Regular Certificates in connection with a trade or business should
be allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of a portion of any such Regular Certificates becoming
wholly worthless. Although the matter is not free from doubt, such non-corporate
Regular Certificateholders should be allowed a bad debt deduction at such time
as the principal balance of such Regular Certificates is reduced to reflect
losses resulting from any liquidated Mortgage Loans. The Internal Revenue
Service, however, could take the position that non-corporate holders will be
allowed a bad debt deduction to reflect such losses only after all the Mortgage
Loans remaining in the Trust Fund have been liquidated or the applicable class
of Regular Certificates has been otherwise retired. The Internal Revenue Service
could also assert that losses on the Regular Certificates are deductible based
on some other method that may defer such deductions for all holders, such as
reducing future cash flow for purposes of computing original issue discount.
This may have the effect of creating "negative" original issue discount which
would be deductible only against future positive original issue discount or
otherwise upon termination of the class. Regular Certificateholders are urged to
consult their own tax advisors regarding the appropriate timing, amount and
character of any loss sustained with respect to such Regular Certificates. While
losses attributable to interest previously reported as income should be
deductible as ordinary losses by both corporate and non-corporate holders, the
Internal Revenue Service may take the position that losses attributable to
accrued original issue discount may only be deducted as capital losses in the
case of non-corporate holders who do not hold the Regular Certificates in
connection with a trade or business. Special loss rules are applicable to banks
and thrift institutions, including rules regarding reserves for bad debts. Such
taxpayers are advised to consult their tax advisors regarding the treatment of
losses on Regular Certificates.
Sale or Exchange of Regular Certificates
If a Regular Certificateholder sells or exchanges a Regular Certificate,
the Regular Certificateholder will recognize gain or loss equal to the
difference, if any, between the amount received and its adjusted basis in the
Regular Certificate. The adjusted basis of a Regular Certificate generally will
equal the cost of the Regular Certificate to the seller, increased by any
original issue discount or market discount previously included in the seller's
gross income with respect to the Regular Certificate and reduced by amounts
included in the stated redemption price at maturity of the Regular Certificate
that were previously received by the seller, by any amortized premium and by any
recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate as
a capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Certificate has been held for the applicable
holding period (as described below). Such gain will be treated as ordinary
income (i) if a Regular Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Regular
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Certificateholder's net investment in the conversion transaction at 120% of the
appropriate applicable federal rate under Code Section 1274(d) in effect at the
time the taxpayer entered into the transaction minus any amount previously
treated as ordinary income with respect to any prior disposition of property
that was held as part of such transaction, (ii) in the case of a non-corporate
taxpayer, to the extent such taxpayer has made an election under Code Section
163(d)(4) to have net capital gains taxed as investment income at ordinary
income rates, or (iii) to the extent that such gain does not exceed the excess,
if any, of (a) the amount that would have been includible in the gross income of
the holder if its yield on such Regular Certificate were 110% of the applicable
federal rate as of the date of purchase, over (b) the amount of income actually
includible in the gross income of such holder with respect to such Regular
Certificate. In addition, gain or loss recognized from the sale of a Regular
Certificate by certain banks or thrift institutions will be treated as ordinary
income or loss pursuant to Code Section 582(c). Long-term capital gains of
certain non-corporate taxpayers generally are subject to a lower maximum tax
rate (20%) than ordinary income or short-term capital gains of such taxpayers
(39.6%) for property held for more than one year. The maximum tax rate for
corporations is the same with respect to both ordinary income and capital gains.
TAXATION OF RESIDUAL CERTIFICATES
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will be
includible as ordinary income or loss in determining the federal taxable income
of holders of Residual Certificates ("Residual Holders"), and will not be taxed
separately to the REMIC Pool. The daily portions of REMIC taxable income or net
loss of a Residual Holder are determined by allocating the REMIC Pool's taxable
income or net loss for each calendar quarter ratably to each day in such quarter
and by allocating such daily portion among the Residual Holders in proportion to
their respective holdings of Residual Certificates in the REMIC Pool on such
day. REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using the accrual method of accounting, except,
in addition to certain other adjustments, that (i) the limitations on
deductibility of investment interest expense and expenses for the production of
income do not apply, (ii) all bad loans will be deductible as business bad debts
and (iii) the limitation on the deductibility of interest and expenses related
to tax-exempt income will apply. The REMIC Pool's gross income includes
interest, original issue discount income and market discount income, if any, on
the Mortgage Loans, reduced by amortization of any premium on the Mortgage
Loans, plus income from amortization of issue premium, if any, on the Regular
Certificates, plus income on reinvestment of cash flows and reserve assets, plus
any cancellation of indebtedness income upon allocation of realized losses to
the Regular Certificates. The REMIC Pool's deductions include interest and
original issue discount expense on the Regular Certificates, servicing fees on
the Mortgage Loans, other administrative expenses of the REMIC Pool and realized
losses on the Mortgage Loans. The requirement that Residual Holders report their
pro rata share of taxable income or net loss of the REMIC Pool will continue
until there are no Certificates of any class of the related Series outstanding.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest and original issue discount or market discount income or
amortization of premium with respect to the Mortgage Loans, on the one hand, and
the timing of deductions for interest (including original issue discount) or
income from amortization of issue premium on the Regular Certificates on the
other hand. In the event that an interest in the Mortgage Loans is acquired by
the REMIC Pool at a discount, and one or more of such Mortgage Loans is prepaid,
the Residual Holder may recognize taxable income without being entitled to
receive a corresponding amount of cash because (i) the prepayment may be used in
whole or in part to make distributions in reduction of principal on the Regular
Certificates and (ii) the discount on the Mortgage Loans which is includible in
income may exceed the deduction allowed upon such distributions on those Regular
Certificates on account of any unaccrued original issue discount relating to
those Regular Certificates. When there is more than one class of Regular
Certificates that distribute principal sequentially, this mismatching of income
and deductions is particularly likely to occur in the early years following
issuance of the Regular Certificates when distributions in reduction of
principal are being made in respect of earlier classes of Regular Certificates
to the extent that
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such classes are not issued with substantial discount or are issued at a
premium. If taxable income attributable to such a mismatching is realized, in
general, losses would be allowed in later years as distributions on the later
maturing classes of Regular Certificates are made. Taxable income may also be
greater in earlier years than in later years as a result of the fact that
interest expense deductions, expressed as a percentage of the outstanding
principal amount of such a Series of Regular Certificates, may increase over
time as distributions in reduction of principal are made on the lower yielding
classes of Regular Certificates, whereas, to the extent the REMIC Pool consists
of fixed-rate Mortgage Loans, interest income with respect to any given Mortgage
Loan will remain constant over time as a percentage of the outstanding principal
amount of that loan. Consequently, Residual Holders must have sufficient other
sources of cash to pay any federal, state, or local income taxes due as a result
of such mismatching or unrelated deductions against which to offset such income,
subject to the discussion of "excess inclusions" below under "-- Limitations on
Offset or Exemption of REMIC Income." The timing of such mismatching of income
and deductions described in this paragraph, if present with respect to a Series
of Certificates, may have a significant adverse effect upon a Residual Holder's
after-tax rate of return. In addition, a Residual Holder's taxable income during
certain periods may exceed the income reflected by such Residual Holder for such
periods in accordance with generally accepted accounting principles. Investors
should consult their own accountants concerning the accounting treatment of
their investment in Residual Certificates.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into account
by the Residual Holder is limited to the adjusted basis of the Residual
Certificate as of the close of the quarter (or time of disposition of the
Residual Certificate if earlier), determined without taking into account the net
loss for the quarter. The initial adjusted basis of a purchaser of a Residual
Certificate is the amount paid for such Residual Certificate. Such adjusted
basis will be increased by the amount of taxable income of the REMIC Pool
reportable by the Residual Holder and will be decreased (but not below zero),
first, by a cash distribution from the REMIC Pool and, second, by the amount of
loss of the REMIC Pool reportable by the Residual Holder. Any loss that is
disallowed on account of this limitation may be carried over indefinitely with
respect to the Residual Holder as to whom such loss was disallowed and may be
used by such Residual Holder only to offset any income generated by the same
REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of
its Residual Certificate as an offset to its share of the taxable income of the
related REMIC Pool. However, that taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Such recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Certificates over their life.
However, in view of the possible acceleration of the income of Residual Holders
described above under "-- Taxation of REMIC Income," the period of time over
which such issue price is effectively amortized may be longer than the economic
life of the Residual Certificates.
A Residual Certificate may have a negative value if the net present value
of anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of such a residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool's basis in its assets. The preamble to the REMIC Regulations
states that the Internal Revenue Service may provide future guidance on the
proper tax treatment of payments made by a transferor of such a residual
interest to induce the transferee to acquire the interest, and Residual Holders
should consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Certificate is greater than the
corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of such basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The REMIC
Regulations currently in effect do not so provide. See "-- Treatment of Certain
Items of REMIC Income and Expense -- Market Discount" below regarding the basis
of Mortgage Loans to the REMIC Pool and "-- Sale or Exchange of a Residual
Certificate" below regarding possible treatment of a loss upon termination of
the REMIC Pool as a capital loss.
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Treatment of Certain Items of REMIC Income and Expense
Although the Depositor intends to compute REMIC income and expense in
accordance with the Code and applicable regulations, the authorities regarding
the determination of specific items of income and expense are subject to
differing interpretations. The Depositor makes no representation as to the
specific method that it will use for reporting income with respect to the
Mortgage Loans and expenses with respect to the Regular Certificates and
different methods could result in different timing of reporting of taxable
income or net loss to Residual Holders or differences in capital gain versus
ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of issue
premium will be determined in the same manner as original issue discount income
on Regular Certificates as described above under "-- Taxation of Regular
Certificates -- Original Issue Discount" and "-- Variable Rate Regular
Certificates," without regard to the de minimis rule described therein, and
"-- Premium."
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool in such
Mortgage Loans is exceeded by their unpaid principal balances. The REMIC Pool's
basis in such Mortgage Loans is generally the fair market value of the Mortgage
Loans immediately after the transfer thereof to the REMIC Pool. The REMIC
Regulations provide that such basis is equal in the aggregate to the issue
prices of all regular and residual interests in the REMIC Pool. The accrued
portion of such market discount would be recognized currently as an item of
ordinary income in a manner similar to original issue discount. Market discount
income generally should accrue in the manner described above under "-- Taxation
of Regular Certificates -- Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired such Mortgage Loans at a premium equal to the amount of such
excess. As stated above, the REMIC Pool's basis in Mortgage Loans is the fair
market value of the Mortgage Loans, based on the aggregate of the issue prices
of the regular and residual interests in the REMIC Pool immediately after the
transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "-- Taxation of Regular Certificates -- Premium," a person that
holds a Mortgage Loan as a capital asset under Code Section 1221 may elect under
Code Section 171 to amortize premium on Mortgage Loans originated after
September 27, 1985 under the constant yield method. Amortizable bond premium
will be treated as an offset to interest income on the Mortgage Loans, rather
than as a separate deduction item. Because substantially all of the mortgagors
on the Mortgage Loans are expected to be individuals, Code Section 171 will not
be available for premium on Mortgage Loans originated on or prior to September
27, 1985. Premium with respect to such Mortgage Loans may be deductible in
accordance with a reasonable method regularly employed by the holder thereof.
The allocation of such premium pro rata among principal payments should be
considered a reasonable method; however, the Internal Revenue Service may argue
that such premium should be allocated in a different manner, such as allocating
such premium entirely to the final payment of principal.
Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in determining
the federal income tax liability of a Residual Holder will be subject to special
treatment. That portion, referred to as the "excess inclusion," is equal to the
excess of REMIC taxable income for the calendar quarter allocable to a Residual
Certificate over the daily accruals for such quarterly period of (i) 120% of the
long-term applicable federal rate that would have applied to the Residual
Certificate (if it were a debt instrument) on the Startup Day under Code Section
1274(d), multiplied by (ii) the adjusted issue price of such Residual
Certificate at the beginning of such quarterly period. For this purpose, the
adjusted issue price of a Residual Certificate at the beginning of a quarter is
the issue price of the Residual Certificate, plus the amount of such daily
accruals of REMIC income described in this paragraph for all prior quarters,
decreased by any distributions made with respect to such Residual Certificate
prior to the beginning of such quarterly period. Accordingly, the portion of the
REMIC Pool's taxable income that will be treated as excess inclusions will be a
larger portion of such income as the adjusted issue price of the Residual
Certificates diminishes.
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The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including net
operating loss carryforwards, on such Residual Holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of such
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax with respect to certain persons who are
not U.S. Persons (as defined below under "-- Tax-Related Restrictions on
Transfer of Residual Certificates -- Foreign Investors"), and the portion
thereof attributable to excess inclusions is not eligible for any reduction in
the rate of withholding tax (by treaty or otherwise). See "-- Taxation of
Certain Foreign Investors -- Residual Certificates" below. Finally, if a real
estate investment trust or a regulated investment company owns a Residual
Certificate, a portion (allocated under Treasury regulations yet to be issued)
of dividends paid by the real estate investment trust or regulated investment
company could not be offset by net operating losses of its shareholders, would
constitute unrelated business taxable income for tax-exempt shareholders, and
would be ineligible for reduction of withholding to certain persons who are not
U.S. Persons. The SBJPA of 1996 has eliminated the special rule permitting
Section 593 institutions ("thrift institutions") to use net operating losses and
other allowable deductions to offset their excess inclusion income from Residual
Certificates that have "significant value" within the meaning of the REMIC
Regulations, effective for taxable years beginning after December 31, 1995,
except with respect to Residual Certificates continuously held by a thrift
institution since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Holder. First, alternative minimum taxable income for a Residual Holder
is determined without regard to the special rule, discussed above, that taxable
income cannot be less than excess inclusions. Second, a Residual Holder's
alternative minimum taxable income for a taxable year cannot be less than the
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deduction must be computed without regard to any excess
inclusions. These rules are effective for taxable years beginning after December
31, 1986, unless a Residual Holder elects to have such rules apply only to
taxable years beginning after August 20, 1996.
Tax-Related Restrictions on Transfer of Residual Certificates
Disqualified Organizations. If any legal or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Certificate for periods after the transfer and (ii) the highest
marginal federal income tax rate applicable to corporations. The REMIC
Regulations provide that the anticipated excess inclusions are based on actual
prepayment experience to the date of the transfer and projected payments based
on the Prepayment Assumption. The present value rate equals the applicable
federal rate under Code Section 1274(d) as of the date of the transfer for a
term ending with the last calendar quarter in which excess inclusions are
expected to accrue. Such rate is applied to the anticipated excess inclusions
from the end of the remaining calendar quarters in which they arise to the date
of the transfer. Such a tax generally would be imposed on the transferor of the
Residual Certificate, except that where such transfer is through an agent
(including a broker, nominee or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Certificate would in no event be liable for such tax
with respect to a transfer if the transferee furnishes to the transferor an
affidavit stating that the transferee is not a Disqualified Organization and, as
of the time of the transfer, the transferor does not have actual knowledge that
such affidavit is false. The tax also may be waived by the Internal Revenue
Service if the Disqualified Organization promptly disposes of the Residual
Certificate and the transferor pays income tax at the highest corporate rate on
the excess inclusion for the period the Residual Certificate is actually held by
the Disqualified Organization.
In addition, if a Pass-Through Entity (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess
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inclusions that are allocable to the interest in the Pass-Through Entity during
the period such interest is held by such Disqualified Organization, and (ii) the
highest marginal federal corporate income tax rate. Such tax would be deductible
from the ordinary gross income of the Pass-Through Entity for the taxable year.
The Pass-Through Entity would not be liable for such tax if it has received an
affidavit from such record holder that it is not a Disqualified Organization or
stating such holder's taxpayer identification number and, during the period such
person is the record holder of the Residual Certificate, the Pass-Through Entity
does not have actual knowledge that such affidavit is false.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Certificate, all interests in the electing
large partnership are treated as held by Disqualified Organizations for purposes
of the tax imposed upon a Pass-Through Entity by Section 860E(c) of the Code. An
exception to this tax, otherwise available to a Pass-Through Entity that is
furnished certain affidavits by record holders of interests in the entity and
that does not know such affidavits are false, is not available to an electing
large partnership.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis, and (iii) an "electing large partnership"
means any partnership having more than 100 members during the preceding tax year
(other than certain service partnerships and commodity pools), which elect to
apply simplified reporting provisions under the Code. Except as may be provided
in Treasury regulations, any person holding an interest in a Pass-Through Entity
as a nominee for another will, with respect to such interest, be treated as a
Pass-Through Entity.
The Pooling Agreement with respect to a Series will provide that no legal
or beneficial interest in a Residual Certificate may be transferred or
registered unless (i) the proposed transferee furnishes to the Depositor and the
Trustee an affidavit providing its taxpayer identification number and stating
that such transferee is the beneficial owner of the Residual Certificate and is
not a Disqualified Organization and is not purchasing such Residual Certificate
on behalf of a Disqualified Organization (i.e., as a broker, nominee or
middleman thereof) and (ii) the transferor provides a statement in writing to
the Depositor and the Trustee that it has no actual knowledge that such
affidavit is false. Moreover, the Pooling Agreement will provide that any
attempted or purported transfer in violation of these transfer restrictions will
be null and void and will vest no rights in any purported transferee. Each
Residual Certificate with respect to a Series will bear a legend referring to
such restrictions on transfer, and each Residual Holder will be deemed to have
agreed, as a condition of ownership thereof, to any amendments to the related
Pooling Agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Depositor or the
Trustee may charge a fee for computing and providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor would
continue to be treated as the owner of the Residual Certificates and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a noneconomic residual
interest (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person, as defined below under "-- Foreign Investors") is
disregarded for all federal income tax purposes if a significant purpose of the
transferor is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of the transfer, (i) the
present value of the expected future distributions on the residual interest at
least equals
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the product of the present value of the anticipated excess inclusions and the
highest federal corporate income tax rate in effect for the year in which the
transfer occurs, and (ii) the transferor reasonably expects that the transferee
will receive distributions from the REMIC at or after the time at which taxes
accrue on the anticipated excess inclusions in an amount sufficient to satisfy
the accrued taxes on each excess inclusion. The anticipated excess inclusions
and the present value rate are determined in the same manner as set forth above
under "-- Disqualified Organizations." The REMIC Regulations explain that a
significant purpose to impede the assessment or collection of tax exists if the
transferor, at the time of the transfer, either knew or should have known that
the transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A safe harbor is provided if (i) the transferor
conducted, at the time of the transfer, a reasonable investigation of the
financial condition of the transferee and found that the transferee historically
had paid its debts as they came due and found no significant evidence to
indicate that the transferee would not continue to pay its debts as they came
due in the future, and (ii) the transferee represents to the transferor that it
understands that, as the holder of the non-economic residual interest, the
transferee may incur tax liabilities in excess of any cash flows generated by
the interest and that the transferee intends to pay taxes associated with
holding the residual interest as they become due. The Pooling Agreement with
respect to each Series of Certificates will require the transferee of a Residual
Certificate to certify to the matters in the preceding sentence as part of the
affidavit described above under the heading "-- Disqualified Organizations."
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended to
apply to a transferee who is not a U.S. Person (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Certificate is deemed to have tax
avoidance potential unless, at the time of the transfer, (i) the future value of
expected distributions equals at least 30% of the anticipated excess inclusions
after the transfer, and (ii) the transferor reasonably expects that the
transferee will receive sufficient distributions from the REMIC Pool at or after
the time at which the excess inclusions accrue and prior to the end of the next
succeeding taxable year for the accumulated withholding tax liability to be
paid. If the non-U.S. Person transfers the Residual Certificate back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to the Certificates of a Series may
provide that a Residual Certificate may not be purchased by or transferred to
any person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership (except to the extent provided in applicable Treasury Regulations)
or other entity created or organized in or under the laws of the United States
or any political subdivision thereof, an estate that is subject to U.S. federal
income tax regardless of the source of its income, or a trust if a court within
the United States is able to exercise primary supervision over the
administration of such trust, and one or more such U.S. Persons have the
authority to control all substantial decisions of such trust (or, to the extent
provided in applicable Treasury regulations, certain trusts in existence on
August 20, 1996 which are eligible to elect to be treated as U.S. Persons).
Sale or Exchange of a Residual Certificate
Upon the sale or exchange of a Residual Certificate, the Residual Holder
will recognize gain or loss equal to the excess, if any, of the amount realized
over the adjusted basis (as described above under "-- Basis and Losses") of such
Residual Holder in such Residual Certificate at the time of the sale or
exchange. In addition to reporting the taxable income of the REMIC Pool, a
Residual Holder will have taxable income to the extent that any cash
distribution to it from the REMIC Pool exceeds such adjusted basis on that
Distribution Date. Such income will be treated as gain from the sale or exchange
of the Residual Certificate. It is possible that the termination of the REMIC
Pool may be treated as a sale or exchange of a Residual Holder's Residual
Certificate, in which case, if the Residual Holder has an adjusted basis in its
Residual Certificate remaining when its interest in the REMIC Pool terminates,
and if it holds such Residual Certificate as a capital asset
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under Code Section 1221, then it will recognize a capital loss at that time in
the amount of such remaining adjusted basis.
Any gain on the sale of a Residual Certificate will be treated as ordinary
income (i) if a Residual Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as a part of such transaction or (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. In addition, gain or loss recognized from the sale of a
Residual Certificate by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six months
after such sale or disposition, acquires (or enters into any other transaction
that results in the application of Code Section 1091) any residual interest in
any REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC
owner trust) that is economically comparable to a Residual Certificate.
Mark to Market Regulations
The Internal Revenue Service has issued final regulations (the "Mark to
Market Regulations") under Code Section 475 relating to the requirement that a
securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities of a dealer, except to the
extent that the dealer has specifically identified a security as held for
investment. The Mark to Market Regulations provide that, for purposes of this
mark-to-market requirement, a Residual Certificate is not treated as a security
and thus may not be marked to market. The Mark to Market Regulations apply to
all Residual Certificates acquired on or after January 4, 1995.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
Prohibited Transactions
Income from certain transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include (i) the disposition of a qualified mortgage other than for (a)
substitution within two years of the Startup Day for a defective (including a
defaulted) obligation (or repurchase in lieu of substitution of a defective
(including a defaulted) obligation at any time) or for any qualified mortgage
within three months of the Startup Day, (b) foreclosure, default, or imminent
default of a qualified mortgage, (c) bankruptcy or insolvency of the REMIC Pool,
or (d) a qualified (complete) liquidation, (ii) the receipt of income from
assets that are not the type of mortgages or investments that the REMIC Pool is
permitted to hold, (iii) the receipt of compensation for services, or (iv) the
receipt of gain from disposition of cash flow investments other than pursuant to
a qualified liquidation. Notwithstanding (i) and (iv) of the preceding sentence,
it is not a prohibited transaction to sell REMIC Pool property to prevent a
default on Regular Certificates as a result of a default on qualified mortgages
or to facilitate a clean-up call (generally, an optional prepayment of the
remaining principal balance of a Class of Regular Certificates to save
administrative costs when no more than a small percentage of the Certificates is
outstanding). The REMIC Regulations indicate that the modification of a
qualified mortgage generally will not be treated as a disposition if it is
occasioned by a default or reasonably foreseeable default, an assumption of the
Mortgage Loan, the waiver of a due-on-sale or due-on-encumbrance clause, or the
conversion of an interest rate by a mortgagor pursuant to the terms of a
convertible adjustable rate Mortgage Loan.
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Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during the
three months following the Startup Day, (ii) made to a qualified reserve fund by
a Residual Holder, (iii) in the nature of a guarantee, (iv) made to facilitate a
qualified liquidation or clean-up call, and (v) as otherwise permitted in
Treasury regulations yet to be issued. It is not anticipated that there will be
any contributions to the REMIC Pool after the Startup Day.
Net Income from Foreclosure Property
The REMIC Pool will be subject to federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" for a period not exceeding the close of the third
calendar year after the year in which the REMIC Pool acquired such property,
with a possible extension. Net income from foreclosure property generally means
gain from the sale of a foreclosure property that is inventory property and
gross income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust. It is not anticipated that
the REMIC Pool will have any taxable net income from foreclosure property.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC Pool's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on such date, the REMIC Pool will not be subject to the prohibited
transaction rules on the sale of its assets, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims) to holders of Regular Certificates
and Residual Holders within the 90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Holder for an entire
taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit in a unified
administrative proceeding. The Master Servicer or the Trustee, as specified in
the related Pooling Agreement, will be obligated to act as "tax matters person,"
as defined in applicable Treasury regulations, with respect to the REMIC Pool,
in its capacity as either Residual Holder or agent of the Residual Holders. If
the Code or applicable Treasury regulations do not permit the Master Servicer to
act as tax matters person in its capacity as agent of the Residual Holders, the
Residual Holder chosen by the Residual Holders or such other person specified
pursuant to Treasury regulations will be required to act as tax matters person.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $124,500 for 1998 ($62,250 in the case of a
married individual filing a separate return) (subject to adjustment for
inflation in subsequent years), or
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(ii) 80% of the amount of itemized deductions otherwise allowable for such year.
In the case of a REMIC Pool, such deductions may include deductions under Code
Section 212 for the Servicing Fee and all administrative and other expenses
relating to the REMIC Pool, or any similar expenses allocated to the REMIC Pool
with respect to a regular interest it holds in another REMIC. Such investors who
hold REMIC Certificates either directly or indirectly through certain
pass-through entities may have their pro rata share of such expenses allocated
to them as additional gross income, but may be subject to such limitation on
deductions. In addition, such expenses are not deductible at all for purposes of
computing the alternative minimum tax, and may cause such investors to be
subject to significant additional tax liability. Temporary Treasury regulations
provide that the additional gross income and corresponding amount of expenses
generally are to be allocated entirely to the holders of Residual Certificates
in the case of a REMIC Pool that would not qualify as a fixed investment trust
in the absence of a REMIC election. However, such additional gross income and
limitation on deductions will apply to the allocable portion of such expenses to
holders of Regular Certificates, as well as holders of Residual Certificates,
where such Regular Certificates are issued in a manner that is similar to
pass-through certificates in a fixed investment trust. Unless indicated
otherwise in the applicable Prospectus Supplement, all such expenses will be
allocable to the Residual Certificates. In general, such allocable portion will
be determined based on the ratio that a REMIC Certificateholder's income,
determined on a daily basis, bears to the income of all holders of Regular
Certificates and Residual Certificates with respect to a REMIC Pool. As a
result, individuals, estates or trusts holding REMIC Certificates (either
directly or indirectly through a grantor trust, partnership, S corporation,
REMIC or certain other pass-through entities described in the foregoing
temporary Treasury regulations) may have taxable income in excess of the
interest income at the pass-through rate on Regular Certificates that are issued
in a single class or otherwise consistently with fixed investment trust status
or in excess of cash distributions for the related period on Residual
Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
Regular Certificates
Interest, including original issue discount, distributable to Regular
Certificateholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), will be considered "portfolio interest"
and, therefore, generally will not be subject to 30% United States withholding
tax, provided that such Non-U.S. Person (i) is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (ii) provides the
Trustee, or the person who would otherwise be required to withhold tax from such
distributions under Code Section 1441 or 1442, with an appropriate statement,
signed under penalties of perjury, identifying the beneficial owner and stating,
among other things, that the beneficial owner of the Regular Certificate is a
Non-U.S. Person, and the Non-U.S. Person provides the Trustee, or the person who
would otherwise be required to withhold tax from such distributions under Code
Section 1441 or 1442, with the appropriate Internal Revenue Service form
establishing the applicability of either of these two exemptions. If such
statement, or any other required statement, is not provided, 30% withholding
will apply unless reduced or eliminated pursuant to an applicable tax treaty or
unless the interest on the Regular Certificate is effectively connected with the
conduct of a trade or business within the United States by such Non-U.S. Person.
In the latter case, such Non-U.S. Person will be subject to United States
federal income tax at regular rates. Investors who are Non-U.S. Persons should
consult their own tax advisors regarding the specific tax consequences to them
of owning a Regular Certificate. The term "Non-U.S. Person" means any person who
is not a U.S. Person.
The Internal Revenue Service recently issued final regulations (the "New
Regulations") which would provide alternative methods of satisfying the
beneficial ownership certification requirement described above. The New
Regulations are effective January 1, 2000, although valid withholding
certificates that are held on December 31, 1999, remain valid until the earlier
of December 31, 2000 or the due date of expiration of the certificate under the
rules as currently in effect. The New Regulations would require, in the case of
Regular Certificates held by a foreign partnership, that (x) the certification
described above be provided by the partners rather than by the foreign
partnership and (y) the partnership provide certain information, including
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a United States taxpayer identification number. A look-through rule would apply
in the case of tiered partnerships. Non-U.S. Persons should consult their own
tax advisors concerning the application of the certification requirements in the
New Regulations.
Residual Certificates
The Conference Committee Report to the 1986 Act indicates that amounts paid
to Residual Holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amounts distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "-- Regular Certificates" above, but only to the extent that (i)
the Mortgage Loans were issued after July 18, 1984 and (ii) the Trust Fund or
segregated pool of assets therein (as to which a separate REMIC election will be
made), to which the Residual Certificate relates, consists of obligations issued
in "registered form" within the meaning of Code Section 163(f)(1). Generally,
Mortgage Loans will not be, but regular interests in another REMIC Pool will be,
considered obligations issued in registered form. Furthermore, a Residual Holder
will not be entitled to any exemption from the 30% withholding tax (or lower
treaty rate) to the extent of that portion of REMIC taxable income that
constitutes an "excess inclusion." See "-- Taxation of Residual
Certificates -- Limitations on Offset or Exemption of REMIC Income" above. If
the amounts paid to Residual Holders who are Non-U.S. Persons are effectively
connected with the conduct of a trade or business within the United States by
such Non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such Non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account for
purposes of withholding only when paid or otherwise distributed (or when the
Residual Certificate is disposed of) under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See
"-- Taxation of Residual Certificates -- Tax-Related Restrictions on Transfer of
Residual Certificates -- Foreign Investors" above concerning the disregard of
certain transfers having "tax avoidance potential." Investors who are Non-U.S.
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning Residual Certificates.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under certain
circumstances, principal distributions) unless the Regular Certificateholder
complies with certain reporting and/or certification procedures, including the
provision of its taxpayer identification number to the Trustee, its agent or the
broker who effected the sale of the Regular Certificate, or such
Certificateholder is otherwise an exempt recipient under applicable provisions
of the Code. Any amounts to be withheld from distribution on the Regular
Certificates would be refunded by the Internal Revenue Service or allowed as a
credit against the Regular Certificateholder's federal income tax liability. The
New Regulations change certain of the rules relating to certain presumptions
currently available relating to information reporting and backup withholding.
Non-U.S. Persons are urged to contact their own tax advisors regarding the
application to them of backup withholding and information reporting.
REPORTING REQUIREMENTS
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to the
Internal Revenue Service and to individuals, estates, non-exempt and
non-charitable trusts, and partnerships who are either holders of record of
Regular Certificates or beneficial owners who own Regular Certificates through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Certificates (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request such information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal Revenue
Service
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Publication 938 with respect to a particular Series of Regular Certificates.
Holders through nominees must request such information from the nominee.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Holder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual Holders,
furnished annually, if applicable, to holders of Regular Certificates, and filed
annually with the Internal Revenue Service concerning Code Section 67 expenses
(see "-- Limitations on Deduction of Certain Expenses" above) allocable to such
holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Holders, furnished annually to holders of Regular
Certificates and filed annually with the Internal Revenue Service concerning the
percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under "-- Status of REMIC Certificates."
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES
AS TO WHICH NO REMIC ELECTION IS MADE
GENERAL
In the event that no election is made to treat a Trust Fund (or a
segregated pool of assets therein) with respect to a Series of Certificates as a
REMIC, the Trust Fund will be classified as a grantor trust under subpart E,
Part 1 of subchapter J of the Code and not as an association taxable as a
corporation or a "taxable mortgage pool" within the meaning of Code Section
7701(i). Where there is no fixed retained yield with respect to the Mortgage
Loans underlying the Certificates of a Series, and where such Certificates are
not designated as the holder of each such Certificate in such Series will be
treated as the owner of a pro rata undivided interest in the ordinary income and
corpus portions of the Trust Fund represented by its Certificate and will be
considered the beneficial owner of a pro rata undivided interest in each of the
Mortgage Loans, subject to the discussion below under "-- Recharacterization of
Servicing Fees." Accordingly, the holder of a Certificate of a particular Series
will be required to report on its federal income tax return its pro rata share
of the entire income from the Mortgage Loans represented by its Certificate,
including interest at the coupon rate on such Mortgage Loans, original issue
discount (if any), prepayment fees, assumption fees, and late payment charges
received by the Master Servicer, in accordance with such Certificateholder's
method of accounting. A Certificateholder generally will be able to deduct its
share of the Servicing Fee and all administrative and other expenses of the
Trust Fund in accordance with its method of accounting, provided that such
amounts are reasonable compensation for services rendered to that Trust Fund.
However, investors who are individuals, estates or trusts who own Certificates,
either directly or indirectly through certain pass-through entities, will be
subject to limitation with respect to certain itemized deductions described in
Code Section 67, including deductions under Code Section 212 for the Servicing
Fee and all such administrative and other expenses of the Trust Fund, to the
extent that such deductions, in the aggregate, do not exceed two percent of an
investor's adjusted gross income. In addition, Code Section 68 provides that
itemized deductions otherwise allowable for a taxable year of an individual
taxpayer will be reduced by the lesser of (i) 3% of the excess, if any, of
adjusted gross income over $124,500 for 1998 ($62,250 in the case of a married
individual filing a separate return) (in each case, as adjusted for inflation in
subsequent years), or (ii) 80% of the amount of itemized deductions otherwise
allowable for such year. As a result, such investors holding Certificates,
directly or indirectly through a pass-through entity, may have aggregate taxable
income in excess of the aggregate amount of cash received on such Certificates
with respect to interest at the pass-through rate or as discount income on such
Certificates. In addition, such expenses are not deductible at all for purposes
of computing the alternative minimum tax, and may cause such investors to be
subject to significant additional tax liability. Moreover, where there is fixed
retained yield with respect to the Mortgage Loans underlying a Series of
Certificates or where the servicing fees are in excess of reasonable servicing
compensation, the transaction will be subject to
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the application of the "stripped bond" and "stripped coupon" rules of the Code,
as described below under "-- Stripped Certificates" and "-- Recharacterization
of Servicing Fees," respectively.
TAX STATUS
Cadwalader, Wickersham & Taft or Kennedy Covington Lobdell & Hickman,
L.L.P. has advised the Depositor that, except as described below with respect to
Stripped Certificates:
(i) A Certificate owned by a "domestic building and loan association"
within the meaning of Code Section 7701(a)(19) will be considered to
represent "loans . . . secured by an interest in real property which is . .
. residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), provided that the real property securing the Mortgage
Loans represented by that Certificate is of the type described in such
section of the Code.
(ii) A Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code
Section 856(c)(4)(A) to the extent that the assets of the related Trust
Fund consist of qualified assets, and interest income on such assets will
be considered "interest on obligations secured by mortgages on real
property" to such extent within the meaning of Code Section 856(c)(3)(B).
(iii) A Certificate owned by a REMIC will be considered to represent
an "obligation (including any participation or certificate of beneficial
ownership therein) which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A) to the extent
that the assets of the related Trust Fund consist of "qualified mortgages"
within the meaning of Code Section 860G(a)(3).
(iv) A Certificate owned by a financial asset securitization
investment trust will be considered to represent "permitted assets" within
the meanings of Section 860L(c) to the extent that the assets of the
related Trust Fund consist of "debt instruments" within the meaning of Code
Section 860L(c)(1)(B).
An issue arises as to whether Buydown Loans may be characterized in their
entirety under the Code provisions cited in clauses (i) and (ii) of the
immediately preceding paragraph. There is indirect authority supporting
treatment of an investment in a Buydown Loan as entirely secured by real
property if the fair market value of the real property securing the loan exceeds
the principal amount of the loan at the time of issuance or acquisition, as the
case may be. There is no assurance that the treatment described above is proper.
Accordingly, Certificateholders are urged to consult their own tax advisors
concerning the effects of such arrangements on the characterization of such
Certificateholder's investment for federal income tax purposes.
PREMIUM AND DISCOUNT
Certificateholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon initial
acquisition of Certificates or thereafter.
Premium
The treatment of premium incurred upon the purchase of a Certificate will
be determined generally as described above under "-- Federal Income Tax
Consequences for REMIC Certificates -- Taxation of Residual
Certificates -- Premium."
Original Issue Discount
The original issue discount rules of Code Sections 1271 through 1275 will
be applicable to a Certificateholder's interest in those Mortgage Loans as to
which the conditions for the application of those sections are met. Rules
regarding periodic inclusion of original issue discount income are applicable to
mortgages of corporations originated after May 27, 1969, mortgages of
noncorporate mortgagors (other than individuals) originated after July 1, 1982,
and mortgages of individuals originated after March 2, 1984. Under the OID
Regulations, such original issue discount could arise by the charging of points
by the originator of the mortgages in an amount greater than the statutory de
minimis exception, including a payment of points that is
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currently deductible by the borrower under applicable Code provisions or, under
certain circumstances, by the presence of "teaser" rates on the Mortgage Loans.
See "-- Stripped Certificates" below regarding original issue discount on
Stripped Certificates.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
Unless indicated otherwise in the applicable Prospectus Supplement, no
prepayment assumption will be assumed for purposes of such accrual. However,
Code Section 1272 provides for a reduction in the amount of original issue
discount includible in the income of a holder of an obligation that acquires the
obligation after its initial issuance at a price greater than the sum of the
original issue price and the previously accrued original issue discount, less
prior payments of principal. Accordingly, if such Mortgage Loans acquired by a
Certificateholder are purchased at a price equal to the then unpaid principal
amount of such Mortgage Loans, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Loans (i.e., points) will be includible by such holder.
Market Discount
Certificateholders also will be subject to the market discount rules to the
extent that the conditions for application of those sections are met. Market
discount on the Mortgage Loans will be determined and will be reported as
ordinary income generally in the manner described above under "-- Federal Income
Tax Consequences for REMIC Certificates -- Taxation of Regular
Certificates -- Market Discount," except that the ratable accrual methods
described therein will not apply. Rather, the holder will accrue market discount
pro rata over the life of the Mortgage Loans, unless the constant yield method
is elected. Unless indicated otherwise in the applicable Prospectus Supplement,
no prepayment assumption will be assumed for purposes of such accrual.
RECHARACTERIZATION OF SERVICING FEES
If the servicing fees paid to a Master Servicer were deemed to exceed
reasonable servicing compensation, the amount of such excess would represent
neither income nor a deduction to Certificateholders. In this regard, there are
no authoritative guidelines for federal income tax purposes as to either the
maximum amount of servicing compensation that may be considered reasonable in
the context of this or similar transactions or whether, in the case of the
Certificate, the reasonableness of servicing compensation should be determined
on a weighted average or loan-by-loan basis. If a loan-by-loan basis is
appropriate, the likelihood that such amount would exceed reasonable servicing
compensation as to some of the Mortgage Loans would be increased. Internal
Revenue Service guidance indicates that a servicing fee in excess of reasonable
compensation ("excess servicing") will cause the Mortgage Loans to be treated
under the "stripped bond" rules. Such guidance provides safe harbors for
servicing deemed to be reasonable and requires taxpayers to demonstrate that the
value of servicing fees in excess of such amounts is not greater than the value
of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a Master
Servicer who receives a servicing fee in excess of such amounts would be viewed
as retaining an ownership interest in a portion of the interest payments on the
Mortgage Loans. Under the rules of Code Section 1286, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from the right to receive some or all of the principal payments on
the obligation would result in treatment of such Mortgage Loans as "stripped
coupons" and "stripped bonds." Subject to the de minimis rule discussed below
under "-- Stripped Certificates," each stripped bond or stripped coupon could be
considered for this purpose as a non-interest bearing obligation issued on the
date of issue of the Certificates, and the original issue discount rules of the
Code would apply to the holder thereof. While Certificateholders would still be
treated as owners of beneficial interests in a grantor trust for federal income
tax purposes, the corpus of such trust could be viewed as excluding the portion
of the Mortgage Loans the ownership of which is attributed to the Master
Servicer, or as including such portion as a second class of equitable interest.
Applicable Treasury regulations treat such an arrangement as a fixed investment
trust, since the multiple classes of trust interests should be treated as merely
facilitating direct investments in the trust assets and the existence of
multiple classes of ownership
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interests is incidental to that purpose. In general, such a recharacterization
should not have any significant effect upon the timing or amount of income
reported by a Certificateholder, except that the income reported by a cash
method holder may be slightly accelerated. See "-- Stripped Certificates" below
for a further description of the federal income tax treatment of stripped bonds
and stripped coupons.
SALE OR EXCHANGE OF CERTIFICATES
Upon sale or exchange of a Certificate, a Certificateholder will recognize
gain or loss equal to the difference between the amount realized on the sale and
its aggregate adjusted basis in the Mortgage Loans and other assets represented
by the Certificate. In general, the aggregate adjusted basis will equal the
Certificateholder's cost for the Certificate, increased by the amount of any
income previously reported with respect to the Certificate and decreased by the
amount of any losses previously reported with respect to the Certificate and the
amount of any distributions received thereon. Except as provided above with
respect to market discount on any Mortgage Loans, and except for certain
financial institutions subject to the provisions of Code Section 582(c), any
such gain or loss generally would be capital gain or loss if the Certificate was
held as a capital asset. However, gain on the sale of a Certificate will be
treated as ordinary income (i) if a Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Certificateholder's net investment in the
conversion transaction at 120% of the appropriate applicable Federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as a part of such transaction or (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. Long-term capital gains of certain noncorporate taxpayers
generally are subject to a lower maximum tax rate (20%) than ordinary income or
short-term capital gains of such taxpayers (39.6%) for property held more than
one year. The maximum tax rate for corporations is the same with respect to both
ordinary income and capital gains.
STRIPPED CERTIFICATES
General
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership of
the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Certificates that are subject to those rules will be referred to as "Stripped
Certificates." The Certificates will be subject to those rules if (i) the
Depositor or any of its affiliates retains (for its own account or for purposes
of resale), in the form of Fixed Retained Yield or otherwise, an ownership
interest in a portion of the payments on the Mortgage Loans, (ii) the Depositor
or any of its affiliates is treated as having an ownership interest in the
Mortgage Loans to the extent it is paid (or retains) servicing compensation in
an amount greater than reasonable consideration for servicing the Mortgage Loans
(see "-- Recharacterization of Servicing Fees" above), and (iii) a class of
Certificates issued in two or more classes or subclasses representing the right
to non-pro-rata percentages of the interest and principal payments on the
Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or "stripped coupons" with respect
to its pro rata share of all or a portion of the interest payments on each
Mortgage Loan, including the Stripped Certificate's allocable share of the
servicing fees paid to a Master Servicer, to the extent that such fees represent
reasonable compensation for services rendered. See the discussion above under
"-- Recharacterization of Servicing Fees." Although not free from doubt, for
purposes of reporting to Stripped Certificateholders, the servicing fees will be
allocated to the Stripped Certificates in proportion to the respective
entitlements to distributions of each class of Stripped Certificates for the
related period or periods. The holder of a Stripped Certificate generally will
be entitled to a deduction each year in respect of the servicing fees, as
described above under "Federal Income Tax Consequences for Certificates as to
Which No REMIC Election Is Made -- General," subject to the limitation described
therein.
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Code Section 1286 treats a stripped bond or a stripped coupon generally as
an obligation issued at an original issue discount on the date that such
stripped interest is purchased. Although the treatment of Stripped Certificates
for federal income tax purposes is not clear in certain respects at this time,
particularly where such Stripped Certificates are issued with respect to a
Mortgage Pool containing variable-rate Mortgage Loans, the Depositor has been
advised by counsel that (i) the Trust Fund will be treated as a grantor trust
under subpart E, Part I of subchapter J of the Code and not as an association
taxable as a corporation or a "taxable mortgage pool" within the meaning of Code
Section 7701(i), and (ii) each Stripped Certificate should be treated as a
single installment obligation for purposes of calculating original issue
discount and gain or loss on disposition. This treatment is based on the
interrelationship of Code Section 1286, Code Sections 1272 through 1275, and the
OID Regulations. Although it is possible that computations with respect to
Stripped Certificates could be made in one of the ways described below under
"-- Taxation of Stripped Certificates -- Possible Alternative
Characterizations," the OID Regulations state, in general, that two or more debt
instruments issued by a single issuer to a single investor in a single
transaction should be treated as a single debt instrument. Accordingly, for OID
purposes, all payments on any Stripped Certificates should be aggregated and
treated as though they were made on a single debt instrument. The Pooling
Agreement will require that the Trustee make and report all computations
described below using this aggregate approach, unless substantial legal
authority requires otherwise.
Furthermore, Treasury regulations issued December 28, 1992 provide for
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is purchased for purposes of calculating any original issue discount. In
addition, under these regulations, a Stripped Certificate that represents a
right to payments of both interest and principal may be viewed either as issued
with original issue discount or market discount (as described below), at a de
minimis original issue discount, or, presumably, at a premium. This treatment
indicates that the interest component of such a Stripped Certificate would be
treated as qualified stated interest under the OID Regulations, assuming it is
not an interest-only or super-premium Stripped Certificate. Further, these final
regulations provide that the purchaser of such a Stripped Certificate will be
required to account for any discount as market discount rather than original
issue discount if either (i) the initial discount with respect to the Stripped
Certificate was treated as zero under the de minimis rule, or (ii) no more than
100 basis points in excess of reasonable servicing is stripped off the related
Mortgage Loans. Any such market discount would be reportable as described above
under "Federal Income Tax Consequences for REMIC Certificates -- Taxation of
Regular Certificates -- Market Discount," without regard to the de minimis rule
therein, assuming that a prepayment assumption is employed in such computation.
Status of Stripped Certificates
No specific legal authority exists as to whether the character of the
Stripped Certificates, for federal income tax purposes, will be the same as that
of the Mortgage Loans. Although the issue is not free from doubt, counsel has
advised the Depositor that Stripped Certificates owned by applicable holders
should be considered to represent "real estate assets" within the meaning of
Code Section 856(c)(4)(A), "obligation[s] . . . principally secured by an
interest in real property" within the meaning of Code Section 860G(a)(3)(A), and
"loans . . . secured by an interest in real property" within the meaning of Code
Section 7701(a)(19)(C)(v), and interest (including original issue discount)
income attributable to Stripped Certificates should be considered to represent
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B), provided that in each case the Mortgage
Loans and interest on such Mortgage Loans qualify for such treatment. The
application of such Code provisions to Buy-Down Loans is uncertain. See "-- Tax
Status" above.
Taxation of Stripped Certificates
Original Issue Discount. Except as described above under "-- General,"
each Stripped Certificate will be considered to have been issued at an original
issue discount for Federal income tax purposes. Original issue discount with
respect to a Stripped Certificate must be included in ordinary income as it
accrues, in accordance with a constant interest method that takes into account
the compounding of interest, which may be prior to the receipt of the cash
attributable to such income. Based in part on the OID Regulations and the
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amendments to the original issue discount sections of the Code made by the 1986
Act, the amount of original issue discount required to be included in the income
of a holder of a Stripped Certificate (referred to in this discussion as a
"Stripped Certificateholder") in any taxable year likely will be computed
generally as described above under "-- Federal Income Tax Consequences for REMIC
Certificates -- Taxation of Regular Certificates -- Original Issue Discount" and
"-- Variable Rate Regular Certificates." However, with the apparent exception of
a Stripped Certificate qualifying as a market discount obligation as described
above under "-- General," the issue price of a Stripped Certificate will be the
purchase price paid by each holder thereof, and the stated redemption price at
maturity will include the aggregate amount of the payments to be made on the
Stripped Certificate to such Stripped Certificateholder, presumably under the
Prepayment Assumption, other than qualified stated interest.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition of
original issue discount will be either accelerated or decelerated and the amount
of such original issue discount will be either increased or decreased depending
on the relative interests in principal and interest on each Mortgage Loan
represented by such Stripped Certificateholder's Stripped Certificate. While the
matter is not free from doubt, the holder of a Stripped Certificate should be
entitled in the year that it becomes certain (assuming no further prepayments)
that the holder will not recover a portion of its adjusted basis in such
Stripped Certificate to recognize a loss (which may be a capital loss) equal to
such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Certificates will not be
made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as the
Stripped Certificates. However, if final regulations dealing with contingent
interest with respect to the Stripped Certificates apply the same principles as
the OID Regulations, such regulations may lead to different timing of income
inclusion than would be the case under the OID Regulations for non-contingent
debt instruments. Furthermore, application of such principles could lead to the
characterization of gain on the sale of contingent interest Stripped
Certificates as ordinary income. Investors should consult their tax advisors
regarding the appropriate tax treatment of Stripped Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "-- Federal Income Tax Consequences for REMIC
Certificates -- Taxation of Regular Certificates -- Sale or Exchange of Regular
Certificates." To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Certificates, such subsequent
purchaser will be required for federal income tax purposes to accrue and report
such excess as if it were original issue discount in the manner described above.
It is not clear for this purpose whether the assumed prepayment rate that is to
be used in the case of a Stripped Certificateholder other than an original
Stripped Certificateholder should be the Prepayment Assumption or a new rate
based on the circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. When an investor
purchases more than one class of Stripped Certificates, it is currently unclear
whether for federal income tax purposes such classes of Stripped Certificates
should be treated separately or aggregated for purposes of the rules described
above.
Possible Alternative Characterizations. The characterizations of the
Stripped Certificates discussed above are not the only possible interpretations
of the applicable Code provisions. For example, the Stripped Certificateholder
may be treated as the owner of (i) one installment obligation consisting of such
Stripped Certificate's pro rata share of the payments attributable to principal
on each Mortgage Loan and a second installment obligation consisting of such
Stripped Certificate's pro rata share of the payments attributable to interest
on each Mortgage Loan, (ii) as many stripped bonds or stripped coupons as there
are scheduled payments of principal and/or interest on each Mortgage Loan, or
(iii) a separate installment obligation for each Mortgage Loan, representing the
Stripped Certificate's pro rata share of payments of principal and/or interest
to be made with respect thereto. Alternatively, the holder of one or more
classes of Stripped
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Certificates may be treated as the owner of a pro rata fractional undivided
interest in each Mortgage Loan to the extent that such Stripped Certificate, or
classes of Stripped Certificates in the aggregate, represent the same pro rata
portion of principal and interest on each such Mortgage Loan, and a stripped
bond or stripped coupon (as the case may be), treated as an installment
obligation or contingent payment obligation, as to the remainder. Final
regulations issued on December 28, 1992 regarding original issue discount on
stripped obligations make the foregoing interpretations less likely to be
applicable. The preamble to those regulations states that they are premised on
the assumption that an aggregation approach is appropriate for determining
whether original issue discount on a stripped bond or stripped coupon is de
minimis, and solicits comments on appropriate rules for aggregating stripped
bonds and stripped coupons under Code Section 1286.
Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income tax
purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Master Servicer will furnish, within a reasonable time after the end of
each calendar year, to each Certificateholder or Stripped Certificateholder at
any time during such year, such information (prepared on the basis described
above) as is necessary to enable such Certificateholders to prepare their
federal income tax returns. Such information will include the amount of original
issue discount accrued on Certificates held by persons other than
Certificateholders exempted from the reporting requirements. The amount required
to be reported by the Master Servicer may not be equal to the proper amount of
original issue discount required to be reported as taxable income by a
Certificateholder, other than an original Certificateholder that purchased at
the issue price. In particular, in the case of Stripped Certificates, unless
provided otherwise in the applicable Prospectus Supplement, such reporting will
be based upon a representative initial offering price of each class of Stripped
Certificates. The Master Servicer will also file such original issue discount
information with the Internal Revenue Service. If a Certificateholder fails to
supply an accurate taxpayer identification number or if the Secretary of the
Treasury determines that a Certificateholder has not reported all interest and
dividend income required to be shown on his federal income tax return, 31%
backup withholding may be required in respect of any reportable payments, as
described above under "-- Federal Income Tax Consequences for REMIC
Certificates -- Backup Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage Loans that
are issued on or before July 18, 1984, interest or original issue discount paid
by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other non-U.S. persons ("foreign
persons") generally will be subject to 30% United States withholding tax, or
such lower rate as may be provided for interest by an applicable tax treaty.
Accrued original issue discount recognized by the Certificateholder on the sale
or exchange of such a Certificate also will be subject to federal income tax at
the same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a foreign person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will be
subject to the same certification requirements, described above under
"-- Federal Income Tax Consequences for REMIC Certificates -- Taxation of
Certain Foreign Investors -- Regular Certificates."
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences", 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.
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PLANS OF DISTRIBUTION
Certificates are being offered hereby in Series through one or more of the
various methods described below.
The Depositor 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 Prospectus Supplement;
2. By agency placements through one or more placement agents specified
in the related Prospectus Supplement primarily with institutional investors
and dealers; and
3. Through offerings by the Depositor.
A Prospectus 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
Depositor, 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
Prospectus Supplement relating to such Series and the members of the
underwriting syndicate, if any, will be named in such Prospectus Supplement. The
firms acting as underwriters with respect to the Certificates may include
NationsBanc Montgomery Securities LLC, an affiliate of the Depositor. If such
firm is not named in the Prospectus 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 Depositor 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 Prospectus Supplement
for an underwritten offering will also contain information regarding the nature
of the underwriters' obligations, any material relationships between the
Depositor 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 Depositor or from purchasers of
Certificates in the form of discounts, concessions or commissions. The related
Prospectus Supplement will describe any such compensation paid by the Depositor.
In underwritten offerings, the underwriters and agents may be entitled,
under agreements entered into with the Depositor, to indemnification by the
Depositor 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 Prospectus
Supplement relating thereto will contain information regarding the nature of
such offering and any agreements to be entered into between the Depositor and
purchasers of Certificates of such Series. It is contemplated that NationsBanc
Montgomery Securities LLC will act as a placement agent on behalf of the
Depositor in such offerings of a Series of Certificates. If NationsBanc
Montgomery Securities LLC does act as placement agent in the sale of
Certificates, it will receive a selling commission which will be disclosed in
the related Prospectus Supplement. NationsBanc Montgomery Securities LLC may
also purchase Certificates acting as principal.
83
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INDEX TO DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
1986 Act.................................................... 59
1998 Policy Statement....................................... 55
Accretion Directed Class.................................... 24
Accrual Certificates........................................ 23
Accrual Class............................................... 25
Advance..................................................... 9
Agency Certificates......................................... 11
Appraised Value............................................. 15
ARMs........................................................ 14
Assumed Reinvestment Rate................................... 23
Balloon Payments............................................ 10
Bankruptcy Bond............................................. 9, 32
Bankruptcy Code............................................. 48
Benefit Plans............................................... 50
Borrower.................................................... 45
Buydown Fund................................................ 14
Buydown Loans............................................... 14
Certificate Rate............................................ 6
Certificateholders.......................................... 15
Certificates................................................ 6
Class Certificate Balance................................... 22
Closing Date................................................ 6
Code........................................................ 56
Collection Account.......................................... 12
Component Certificates...................................... 24
Components.................................................. 24
Cooperative Loans........................................... 14, 45
Cut-off Date................................................ 8
DCR......................................................... 52
Department.................................................. 51
Depositor................................................... 6, 34
Disqualified Organization................................... 70
Distribution Account........................................ 11
Distribution Date........................................... 22
Eligible Account............................................ 37
Eligible Investments........................................ 20
ERISA....................................................... 13, 50
ERISA Plan.................................................. 50
Exchange Act................................................ 3
Exempt Plan................................................. 50
Fannie Mae.................................................. 1
Fannie Mae Certificates..................................... 19
FASIT....................................................... 58
FFIEC....................................................... 55
FHA......................................................... 9, 16
FHA Loans................................................... 16
</TABLE>
84
<PAGE> 151
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Fitch....................................................... 52
Fixed Rate Class............................................ 26
Floating Rate Class......................................... 26
Fraud Loss.................................................. 8, 31
Freddie Mac................................................. 1
Freddie Mac Act............................................. 17
Freddie Mac Certificates.................................... 18
Garn-St Germain Act......................................... 49
GNMA........................................................ 1
GNMA Certificates........................................... 17
GNMA I Certificates......................................... 17
GNMA II Certificates........................................ 17
GPMs........................................................ 14
Housing Act................................................. 16
HUD......................................................... 16
Indemnified Parties......................................... 42
Index....................................................... 15
Interest Accrual Period..................................... 22
Interest-Only Class......................................... 26
Inverse Floating Rate Class................................. 26
IO.......................................................... 26
IO Certificates............................................. 7
IRA......................................................... 50
Land Sale Contracts......................................... 15
Last Scheduled Distribution Date............................ 23
Lender...................................................... 45
Lockout Class............................................... 24
Lockout Periods............................................. 10
LTV......................................................... 15
Mark to Market Regulations.................................. 72
Master Servicer............................................. 6
Mezzanine Certificates...................................... 7, 29
Minimum Prepayment Agreement................................ 21
Minimum Reinvestment Agreement.............................. 21
Moody's..................................................... 52
Mortgage.................................................... 14
Mortgage Assets............................................. 1, 9
Mortgage Certificates....................................... 11
Mortgage Loans.............................................. 9
Mortgage Margin............................................. 15
Mortgage Note............................................... 10, 14
Mortgage Pool Insurance Policy.............................. 8, 29
Mortgage Rate............................................... 10
Mortgaged Properties........................................ 14
</TABLE>
85
<PAGE> 152
<TABLE>
<CAPTION>
PAGE
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<S> <C>
NCUA........................................................ 55
Net Mortgage Rate........................................... 35
New Regulations............................................. 74
Non-ERISA Plan.............................................. 50
Non-Pro Rata Certificate.................................... 60
Non-U.S. Person............................................. 74
Notional Amount Certificates................................ 24
OCC......................................................... 55
OID Regulations............................................. 59
PAC......................................................... 24
Pass-Through Entity......................................... 70
PC Agreement................................................ 19
PC Servicer................................................. 19
PC Sponsor.................................................. 20
PC Trustee.................................................. 19
Planned Amortization Class.................................. 24
PO.......................................................... 26
PO Certificates............................................. 6
Pool Insurer................................................ 29
Pooling Agreement........................................... 6
Primary Mortgage Insurance Policy........................... 40
Prepayment Assumption....................................... 61
Principal-Only Class........................................ 26
Private Certificates........................................ 19
Prospectus Supplement....................................... 1, 6
PTCE 83-1................................................... 53
Rating Agency............................................... 13
Ratio Strip Class........................................... 25
Record Date................................................. 22
Regular Certificateholder................................... 59
Regular Certificates........................................ 57
Regulations................................................. 51
Relief Act.................................................. 49
Relief Act Mortgage Loan.................................... 50
REMIC....................................................... 1
REMIC Certificates.......................................... 57
REMIC Pool.................................................. 57
REMIC Regulations........................................... 56
REMIC Servicer.............................................. 6
REO Property................................................ 28
Reserve Fund................................................ 8, 32
Residual Certificates....................................... 57
Residual Holders............................................ 66
Restricted Group............................................ 53
S&P......................................................... 52
Sale Agreement.............................................. 36
</TABLE>
86
<PAGE> 153
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SBJPA of 1996............................................... 57
Scheduled Amortization Class................................ 25
SEC......................................................... 2
Securities Act.............................................. 2
Seller...................................................... 1, 6
Senior Certificateholders................................... 7
Senior Certificates......................................... 6, 25
Sequential Pay Class........................................ 25
Series...................................................... 6
Servicing Fee............................................... 41
SMMEA....................................................... 13, 55
Special Distribution Date................................... 28
Special Distributions....................................... 28
Special Hazard Insurance Policy............................. 8
Special Hazard Insurer...................................... 31
Startup Day................................................. 58
Step Coupon Class........................................... 26
Stripped Certificateholder.................................. 81
Stripped Certificates....................................... 79
Subordinate Certificateholders.............................. 7
Subordinate Certificates.................................... 6, 25
Support Class............................................... 25
TAC......................................................... 25
Targeted Amortization Class................................. 25
Title V..................................................... 49
Trust Fund.................................................. 1
Trustee..................................................... 6
U.S. Person................................................. 71
UCC......................................................... 47
Underlying Loans............................................ 19
Underwriter's Exemptions.................................... 52
VA.......................................................... 9, 16
Variable Rate Class......................................... 26
Waiver Letter............................................... 8, 30
</TABLE>
87
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE DIFFERENT INFORMATION TO YOU.
THE OFFERED CERTIFICATES ARE NOT OFFERED IN ANY STATE WHERE THEIR OFFER IS
IMPERMISSIBLE.
DEALERS WILL DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS
UNDERWRITERS OF THE OFFERED CERTIFICATES AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS. IN ADDITION, ALL DEALERS SELLING OFFERED
CERTIFICATES WILL DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS UNTIL MARCH 17,
1999.
-------------------------------------
TABLE OF CONTENTS
-------------------------------------
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary of Terms.......................... S-4
Risk Factors.............................. S-11
The Mortgage Pool......................... S-15
NationsBanc Mortgage Corporation.......... S-24
Bank of America, FSB...................... S-24
Servicing of Mortgage Loans............... S-24
The Pooling and Servicing Agreement....... S-28
Description of Certificates............... S-32
Prepayment and Yield Considerations....... S-45
Credit Support............................ S-57
Use of Proceeds........................... S-58
Certain Federal Income Tax Consequences... S-58
State Taxes............................... S-60
Benefit Plan Considerations............... S-60
Method of Distribution.................... S-61
Legal Matters............................. S-62
Certificate Ratings....................... S-62
Index to Defined Terms.................... S-64
PROSPECTUS
Prospectus Supplement..................... 2
Additional Information.................... 2
Incorporation of Certain Documents by
Reference............................... 3
Summary of the Prospectus................. 6
The Trust Funds........................... 14
Description of Certificates............... 21
Credit Support............................ 28
Maturity, Prepayment Considerations and
Weighted Average Life of Certificates... 33
The Depositor............................. 34
Use of Proceeds........................... 34
Mortgage Purchase Program................. 34
The Pooling and Servicing Agreement....... 35
Certain Legal Aspects of the Mortgage
Loans................................... 44
Benefit Plan Considerations............... 50
Legal Investment Considerations........... 55
Legal Matters............................. 56
Certain Federal Income Tax Consequences... 56
State Tax Considerations.................. 82
Plans of Distribution..................... 83
Index to Defined Terms.................... 84
</TABLE>
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$279,714,190
(APPROXIMATE)
NATIONSBANC MONTGOMERY
FUNDING CORP.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 1998-5
NATIONSBANC MORTGAGE CORPORATION
SELLER AND SERVICER
BANK OF AMERICA, FSB
SELLER AND SERVICER
--------------------------------------
PROSPECTUS SUPPLEMENT
--------------------------------------
NATIONSBANC MONTGOMERY
SECURITIES LLC
December 17, 1998
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