<PAGE> 1
REGISTRATION NO. 333-38154
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
PRE-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------------
BANC OF AMERICA FUNDING CORPORATION
(Exact name of registrant as specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 56-193-0085
(State of Incorporation) (I.R.S. Employer Identification No.)
</TABLE>
BANK OF AMERICA CORPORATE CENTER
CHARLOTTE, NORTH CAROLINA 28255
(704) 386-2400
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
---------------------
GLENN J. REID, ESQ.
BANC OF AMERICA FUNDING CORPORATION
BANK OF AMERICA CORPORATE CENTER
CHARLOTTE, NORTH CAROLINA 28255
(704) 386-2400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
WITH A COPY TO:
<TABLE>
<S> <C>
A. BRADLEY IVES, ESQ. JORDAN M. SCHWARTZ, ESQ.
KENNEDY COVINGTON LOBDELL & HICKMAN, L.L.P. PATRICK T. QUINN, ESQ.
100 NORTH TRYON STREET, 42ND FLOOR CADWALADER, WICKERSHAM & TAFT
CHARLOTTE, NORTH CAROLINA 28202 100 MAIDEN LANE
(704) 331-7400 NEW YORK, NEW YORK 10038
(212) 504-6000
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time on or after the effective date of the registration statement, as
determined by market conditions.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b), under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE FEE
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Certificates(2)........... $2,000,000,000 100% $2,000,000,000 $528,000.00(3)
---------------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Estimated for the purpose of calculating the registration fee.
(2) This Registration Statement also registers an indeterminate amount of
Securities which may be sold by Banc of America Securities LLC in
market-making transactions, to the extent required.
(3) Previously paid.
---------------------
Pursuant to Rule 429 of the Securities and Exchange Commission's Rules and
Regulations under the Securities Act of 1933, as amended, the Prospectus and
Prospectus Supplement contained in this Registration Statement also relate to
the Registrant's registration statement No. 333-62301 as previously filed by the
Registrant on Form S-3.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a)
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. THE DEPOSITOR MAY NOT SELL THESE SECURITIES UNTIL
THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION IS EFFECTIVE. THE PROSPECTUS SUPPLEMENT IS NOT AN OFFER TO
SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED AUGUST 16, 2000
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED AUGUST 16, 2000)
BANC OF AMERICA FUNDING CORPORATION
DEPOSITOR
[ ]
SELLER AND SERVICER
$
(APPROXIMATE)
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES [ - ]
PRINCIPAL AND/OR INTEREST PAYABLE MONTHLY, BEGINNING IN [ , ]
THE BANC OF AMERICA FUNDING CORPORATION SERIES [ - ] TRUST FUND WILL
ISSUE--
- Three classes of senior Class A Certificates.
- Six classes of Class B Certificates, all of which are subordinated to, and
provide credit enhancement for, the Class A Certificates. Each class of Class
B Certificates is also subordinated to each class of Class B Certificates, if
any, with a lower number.
The classes of offered certificates are listed in the table on page S-4.
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 [ ]%. 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 WITH NET MORTGAGE
RATES LESS THAN [ ]% MAY RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN YOUR
EXPECTED YIELD.
THE ASSETS OF THE TRUST FUND WILL CONSIST PRIMARILY OF SINGLE-FAMILY MORTGAGE
LOANS--
- Originated or acquired by [ ] [which is an affiliate 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 [ ] 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 the depositor or any other entity.
--------------------------------------------------------------------------------
YOU SHOULD 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 accompanied by the prospectus. Please read both documents
carefully to understand the risks associated with these investments.
--------------------------------------------------------------------------------
The offered certificates will be offered by [Banc of America Securities LLC]
[OTHER UNDERWRITER], as underwriter, at varying prices to be determined at the
time of sale to investors. The anticipated delivery date for the offered
certificates is [ , ]. Total proceeds to Banc of America Funding
Corporation for the offered certificates will be approximately [ ]% of the
initial principal balance of the offered certificates.
[BANC OF AMERICA SECURITIES LLC]
[OTHER UNDERWRITER]
[date]
<PAGE> 3
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-61 of this prospectus
supplement and the "Index to Defined Terms" beginning on page 108 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.
Banc of America Funding Corporation's principal offices are located at Bank
of America Corporate Center, 100 North Tryon Street, Charlotte, North Carolina
28255, and its phone number is (704) 386-2400.
---------------------
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> 4
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
Important Notice About
Information Presented in this
Prospectus Supplement and the
Prospectus..................... S-2
Summary of Terms................. S-5
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,
Seller, Servicer 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
The Mortgage Pool................ S-14
Mortgage Loan Data............. S-15
Underwriting Standards of
[Seller].................... S-20
[Seller]/[Servicer].............. S-21
Servicing of Mortgage Loans...... S-22
Foreclosure and Delinquency
Experience of [Servicer].... S-22
The Pooling and Servicing
Agreement...................... S-23
Assignment of Mortgage Loans... S-23
Repurchases of Mortgage
Loans....................... S-24
Optional Repurchases of Certain
Mortgage Loans.............. S-24
Payments on Mortgage Loans;
Accounts.................... S-24
Servicing Compensation and
Payment of Expenses......... S-25
Compensating Interest.......... S-25
Advances....................... S-26
Optional Termination........... S-26
[Special Servicing
Agreements]................. S-26
The Trustee.................... S-27
Voting Rights.................. S-27
Description of Certificates...... S-27
Denominations and Form......... S-28
Book-Entry Certificates........ S-28
Distributions.................. S-30
Available Funds................ S-30
Priority of Distributions...... S-31
Interest....................... S-31
Principal...................... S-33
Allocation of Losses........... S-38
Last Scheduled Distribution
Date........................ S-40
Restrictions on Transfer of the
Class R Certificates........ S-40
Restrictions on Transfer of the
Class B Certificates........ S-41
Prepayment and Yield
Considerations................. S-42
Prepayment Considerations and
Risks....................... S-43
Assumptions Relating to
Tables...................... S-44
Weighted Average Lives of the
Offered Certificates........ S-45
Yield on the Class A-PO
Certificates................ S-50
Yield on the Class R
Certificates................ S-50
Yield on the Subordinate
Certificates................ S-51
Yield Considerations with
Respect to the Class B-2 and
Class B-3 Certificates...... S-51
Credit Support................... S-54
Use of Proceeds.................. S-55
Federal Income Tax
Consequences................... S-55
Regular Certificates........... S-55
Residual Certificates.......... S-56
Backup Withholding and
Reporting Requirements...... S-56
State Taxes...................... S-57
Benefit Plan Considerations...... S-57
Method of Distribution........... S-58
Legal Matters.................... S-59
Certificate Ratings.............. S-59
Index to Defined Terms........... S-61
</TABLE>
S-3
<PAGE> 5
THE SERIES [ _______ - ___ ] CERTIFICATES
<TABLE>
<CAPTION>
INITIAL RATING OF
CERTIFICATES(3)
INITIAL CLASS PASS-THROUGH -----------------
CLASS BALANCE(1) RATE PRINCIPAL TYPES(2) INTEREST TYPES(2) [ ] [ ]
----- ------------- ------------ ---------------------- ----------------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
OFFERED CERTIFICATES
Class A-1................... $ % Senior, Sequential Pay Fixed Rate
Class A-PO.................. $ (4) Senior, Ratio Strip Principal Only
Class A-R................... $ % Senior, Sequential Pay Fixed Rate
Class B-1................... $ % Subordinated Fixed Rate
Class B-2................... $ % Subordinated Fixed Rate
Class B-3................... $ % Subordinated Fixed Rate
NON-OFFERED CERTIFICATES
Class B-4................... $ % Subordinated Fixed Rate
Class B-5................... $ % Subordinated Fixed Rate
Class B-6................... $ % Subordinated Fixed Rate N/A N/A
</TABLE>
----------------------------
(1) Approximate. The aggregate initial class 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) See "Certificate Ratings" in this prospectus supplement. The depositor has
requested ratings of the Class A-R and Class B Certificates only from
[____________].
(4) The Class A-PO Certificates are principal-only certificates and will not be
entitled to distributions in respect of interest.
S-4
<PAGE> 6
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: Banc of America Funding
Corporation, Mortgage
Pass-Through Certificates,
Series [ - ]
DEPOSITOR: Banc of America Funding
Corporation
TRUST FUND: [ ] Series
[ - ]
Trust Fund
SELLER: [ ]
SERVICER: [ ]
TRUSTEE: [ ]
DISTRIBUTION
DATE: The 25th day of each month
(or, if not a business day,
the next business day)
beginning [ ,
]
CLOSING
DATE: On or about [ ,
]
CUT-OFF
DATE: [ , ]
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 [ , ], among the depositor, the
servicer 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 offered by this prospectus
supplement is set forth on page S-4.
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-5
<PAGE> 7
Only the Class A, Class B-1, Class B-2 and Class B-3 Certificates are
offered by this prospectus supplement.
The Class B-4, Class B-5 and Class B-6 certificates 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.
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 secured by first liens on one- to four-family
properties. All of the mortgage loans were originated or acquired by
[ ] [which is an affiliate of the
depositor and the underwriter].
The depositor expects the mortgage loans to have the following approximate
characteristics:
SELECTED MORTGAGE LOAN DATA AS OF [ , ]
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
RANGE OR TOTAL WEIGHTED AVERAGE
<S> <C> <C>
-----------------------------------------------------------------------------------------------------
Number of Mortgage Loans --
-----------------------------------------------------------------------------------------------------
Aggregate Unpaid Principal Balance $ . --
-----------------------------------------------------------------------------------------------------
Unpaid Principal Balance $ . to $ . $ . (1)
-----------------------------------------------------------------------------------------------------
Interest Rates % to % %
-----------------------------------------------------------------------------------------------------
Administrative Fee Rate % to % %
-----------------------------------------------------------------------------------------------------
Remaining Terms to Stated Maturity months to months months
-----------------------------------------------------------------------------------------------------
Loan Age months to months month
-----------------------------------------------------------------------------------------------------
Original Loan-to-Value Ratio % to % %
-----------------------------------------------------------------------------------------------------
Geographic Concentration of Mortgaged Properties in
Excess of 5% of the Aggregate Unpaid Principal
Balance:
[STATE].......................................... % --
[STATE].......................................... % --
-----------------------------------------------------------------------------------------------------
Maximum Single Zip Code Concentration % --
-----------------------------------------------------------------------------------------------------
</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 seller for breaches of
representations or failure to deliver required documents. Under certain
circumstances, the seller 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.
S-6
<PAGE> 8
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 [10]% of the initial scheduled balance of the mortgage pool.
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.
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.
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 page S-4
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 distributions of interest.
S-7
<PAGE> 9
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 SHOWING PRIORITY OF PAYMENT AND ORDER OF LOSS ALLOCATION)
---------------
(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 as
described under "Description of Certificates -- Allocation of Losses" 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 the Class A-PO
Certificates) 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.
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.
S-8
<PAGE> 10
- 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 [ ]%, the yield to maturity on the Class A-PO
Certificates will be extremely sensitive to the rate and timing of principal
payments on these 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.
WEIGHTED AVERAGE LIVES (IN YEARS)(1)
<TABLE>
<CAPTION>
PSA(2)
------------------------------------
CLASS 0% 100% 275% 400% 500%
----- ----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C>
A-1...................................
A-PO..................................
B-1...................................
B-2...................................
B-3...................................
R.....................................
</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.
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 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.
S-9
<PAGE> 11
The Class [ ] and 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 [other than the distribution of their $100 class
balance and interest on that balance].
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 amended, 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 the Secondary Mortgage Market Enhancement Act.
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, subject
to the Employee Retirement Income Security Act of 1974, as amended, the Internal
Revenue Code of 1986, as amended, or any federal, state or local law which is
similar to ERISA or the Internal Revenue Code, 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 Internal Revenue 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.
S-10
<PAGE> 12
--------------------------------------------------------------------------------
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 seller as a result of defective
documentation or breaches of representations or warranties made by the
seller; and
- the optional repurchase of all the mortgage loans by the depositor to
effect a termination of the trust fund.
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 to the Trustee" and "-- Termination;
Repurchase of Mortgage Loans and Mortgage Certificates" and "Prepayment and
Yield Considerations" 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> 13
Mortgage originators (including [ ]) 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 offered certificates at a discount, and specifically
if you are purchasing Class A-PO Certificates, you should consider the risk that
a slower than anticipated rate of principal payments on the mortgage loans, or,
in the case of Class A-PO Certificates, mortgage loans having net mortgage rates
less than [ ]%, 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, including
tables demonstrating the particular sensitivity of the Class A-PO Certificates
to the rate of prepayments.
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, SELLER,
SERVICER 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, the seller, the servicer, the trustee or any of their affiliates.
There are, however, limited obligations of the seller with respect to certain
breaches of their representations and warranties, and limited obligations of the
servicer with respect to its servicing obligations.
Neither the certificates nor the mortgage loans will be guaranteed by or
insured by any governmental agency or instrumentality, the depositor, the
seller, the servicer, the trustee or any of their
S-12
<PAGE> 14
affiliates. Consequently, if payments on the mortgage loans are insufficient or
otherwise unavailable to make all payments required on the certificates, there
will be no recourse to the depositor, the seller, the 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-17 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> 15
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. [No
cash distributions are expected to be made with respect to the Class R
Certificate other than the distribution of the $100 class balance and
interest on that balance.]
- 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 "Federal Income Tax
Consequences" in 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 [ ] Mortgage Loans with
an aggregate Stated Principal Balance of approximately $[ ]. The
Mortgage Loans will have original terms to stated maturity ranging from [ ] to
[ ] months. The Mortgage Loans will 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 the
Seller or (ii) purchased by the Seller from various entities that either
originated the Mortgage Loans or acquired the Mortgage Loans pursuant to
mortgage loan purchase programs operated by such entities. The Mortgage Loans
will be sold by the Seller to the Depositor prior to the Closing Date pursuant
to one or more mortgage loan sale agreements, between the Seller and the
Depositor. All rights of the Depositor in the mortgage loan sale agreement,
including the remedies for any breaches of representations and warranties made
by the Seller and for failure to deliver documentation with respect to the
Mortgage Loans, will be assigned
S-14
<PAGE> 16
by the Depositor to the Trust Fund pursuant to the pooling and servicing
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 $[ ] and of not more than
approximately $[ ] and the average Stated Principal Balance of the
Mortgage Loans is expected to be approximately $[ ]. The latest stated
maturity date of any of the Mortgage Loans is expected to be [ ,
]; 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 [ ]%. 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 the Seller's discretion, each Mortgage Loan with a
Loan-to-Value Ratio at origination in excess of 80% will be covered by a primary
mortgage guaranty insurance policy which shall conform to the standards of
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.
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.................................. $ %
Investor Property..................................
Second Home........................................
--- --------------- ------
Total.................................... $ 100.00%
=== =============== ======
</TABLE>
---------------
(1) Based solely on representations of the mortgagor at the time of origination
of the related Mortgage Loan.
S-15
<PAGE> 17
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................................. $ %
PUD....................................................
Condominium............................................
Townhome...............................................
Duplex.................................................
--- --------------- ------
Total........................................ $ 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............................. $ %
Purchase...........................................
Refinance -- Cashout...............................
--- --------------- ------
Total.................................... $ 100.00%
=== =============== ======
</TABLE>
S-16
<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............................................ $ %
Arizona............................................
Arkansas...........................................
California.........................................
Colorado...........................................
Connecticut........................................
Delaware...........................................
District of Columbia...............................
Florida............................................
Georgia............................................
Hawaii.............................................
Idaho..............................................
Illinois...........................................
Indiana............................................
Iowa...............................................
Kansas.............................................
Kentucky...........................................
Maryland...........................................
Massachusetts......................................
Michigan...........................................
Minnesota..........................................
Mississippi........................................
Missouri...........................................
Nebraska...........................................
Nevada.............................................
New Hampshire......................................
New Jersey.........................................
New Mexico.........................................
New York...........................................
North Carolina.....................................
Ohio...............................................
Oklahoma...........................................
Oregon.............................................
Pennsylvania.......................................
Rhode Island.......................................
South Carolina.....................................
Tennessee..........................................
Texas..............................................
Utah...............................................
Virginia...........................................
Washington.........................................
Wisconsin..........................................
--- --------------- ------
Total.................................... $ 100.00%
=== =============== ======
</TABLE>
---------------
(1) As of the Cut-off Date, no more than approximately [ ]% of the Mortgage
Loans are expected to be secured by mortgaged properties located in any one
five-digit postal zip code.
S-17
<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 $[ ].................... $ %
$[ ] to $[ ].........................
$[ ] to $[ ].........................
$[ ] to $[ ].........................
$[ ] to $[ ].........................
$[ ] to $[ ].........................
$[ ] to $[ ].........................
$[ ] to $[ ].........................
$[ ] to $[ ].........................
$[ ] to $[ ].........................
$[ ] to $[ ].........................
--- --------------- ------
Total........................................ $ 100.00%
=== =============== ======
</TABLE>
---------------
(1) As of the Cut-off Date, the average outstanding principal balance of the
Mortgage Loans is expected to be approximately $[ ].
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% to 15.00%....................................... $ %
15.01% to 20.00%.......................................
20.01% to 25.00%.......................................
25.01% to 30.00%.......................................
30.01% to 35.00%.......................................
35.01% to 40.00%.......................................
40.01% to 45.00%.......................................
45.01% to 50.00%.......................................
50.01% to 55.00%.......................................
55.01% to 60.00%.......................................
60.01% to 65.00%.......................................
65.01% to 70.00%.......................................
70.01% to 75.00%.......................................
75.01% to 80.00%.......................................
80.01% to 85.00%.......................................
85.01% to 90.00%.......................................
[90.01% to 95.00%].....................................
[95.01% to 100.00%]....................................
--- --------------- ------
Total........................................ $ 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 [ ]%.
S-18
<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>
[ ]% to [ ]%................................... $ %
[ ]% to [ ]%...................................
[ ]% to [ ]%...................................
[ ]% to [ ]%...................................
[ ]% to [ ]%...................................
[ ]% to [ ]%...................................
[ ]% to [ ]%...................................
[ ]% to [ ]%...................................
--- --------------- ------
Total........................................ $ 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 [ ]% 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>
[ ] to [ ] months...................................... $
[ ] to [ ] months......................................
--- --------------- ------
Total........................................ $ 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 [ ] 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 to 550............................................. $ %
551 to 600.............................................
601 to 650.............................................
651 to 700.............................................
701 to 750.............................................
751 to 800.............................................
801 to 850.............................................
Unknown Scores.........................................
--- --------------- ------
Total........................................ $ 100.00%
=== =============== ======
</TABLE>
---------------
(1) [The scores shown are Bureau Credit Scores from Experian (FICO), Equifax
(Beacon) and TransUnion (Empirica) ("CREDIT SCORES"). Credit 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 are statistical credit scores
designed to assess a borrower's creditworthiness and likelihood to default
on a consumer obligation over a two-
S-19
<PAGE> 21
year period.] Credit 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 [SELLER]
Each mortgage loan originated or acquired by the Seller has been
underwritten in accordance with guidelines established in the Seller's Product
and Policy Guides (the "PRODUCT GUIDES"). These underwriting standards applied
by the Seller are intended to evaluate the applicant's repayment ability, credit
standing and assets available for downpayment, closing costs and cash reserves.
Additionally, guidelines are established regarding the adequacy of the property
as collateral for the loan requested. The underwriting standards as established
in the Product Guides are continuously updated to reflect prevailing conditions
in the residential market, new mortgage products, and the investment market for
residential mortgage loans.
The use of standardized underwriting guidelines does not imply that each
specific criteria was satisfied individually. The Seller will consider a
mortgage loan to be originated in accordance with a given set of guidelines if,
based on an overall qualitative evaluation, the loan is in substantial
compliance with such underwriting guidelines. Even if one or more specific
criteria included in such underwriting guidelines were not satisfied, if other
factors compensated for the standards that were not satisfied, the mortgage loan
may be considered to be in substantial compliance with the underwriting
guidelines.
The real estate lending processes 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
an application designed to provide 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 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 Seller generally requires a
description of assets and liabilities and income and expenses and obtains a
credit report, which summarizes the prospective borrower's credit history with
merchants and lenders and any public records, such as bankruptcy. In general, an
employment verification is obtained providing current and historical income
information, and with respect to certain loans, a telephonic employment
confirmation is obtained. Such employment verification may be obtained, either
through 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 refund was provided.
The Seller may, as part of its overall evaluation of a prospective
borrower's creditworthiness, use Credit Scores. A prospective borrower with a
higher score, which indicates a more favorable credit history, is eligible for
the Seller's accelerated processing programs (the "ACCELERATED PROCESSING
PROGRAMS"). Loans in the Accelerated Processing Programs are subject to less
stringent credit guidelines and documentation requirements. Approximately [ ]%
of the Mortgage Loans have been originated under the Accelerated Processing
Programs.
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 mortgager's
monthly obligations on the proposed mortgage loan and other expenses
S-20
<PAGE> 22
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,
generally an independent appraisal is made of each mortgaged property considered
for financing. In certain instances the appraisal may be conducted by an
employee of the Seller or an affiliate. An 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 evaluation is based on the
appraiser's estimate of value, 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, the Bankruptcy Code and Other
Limitations on Lenders" in the prospectus. The Seller's underwriting guidelines
in all states (including anti-deficiency states) require that the value of the
mortgaged property being financed, as indicated by the independent evaluation,
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.
A substantial majority of the Mortgage Loans (other than the Bulk Purchase
Mortgage Loans) were underwritten by the Seller on or after April 19, 1999.
Mortgage Loans underwritten by the Seller prior to April 19, 1999 were
underwritten using standards which were materially similar to those described
above.
Approximately [ ]% of the Mortgage Loans were purchased by
the Seller from correspondents who have satisfied financial and operational
standards specified by the Seller in bulk purchase transactions (the "BULK
PURCHASE MORTGAGE LOANS"). The Bulk Purchase Mortgage Loans were underwritten by
the related correspondents using underwriting standards which may vary from the
underwriting standards used by the Seller. However, the Seller has in each case
reviewed and approved the underwriting standards prior to purchase and
determined that such standards are not materially different from the
underwriting standards currently employed by the Seller. The Seller will have
performed post-purchase reviews of a sampling of the mortgage loans for
compliance with approved underwriting standards.
[DESCRIPTION OF OTHER UNDERWRITING STANDARDS, IF APPLICABLE]
--------------------------------------------------------------------------------
[SELLER]/[SERVICER]
--------------------------------------------------------------------------------
[SELLER]/[SERVICER] is an indirect wholly-owned subsidiary of
[ ]. [SELLER]/[SERVICER] is engaged in a general commercial
banking business, offering a full range of commercial, corporate, international,
financial and retail banking services to corporations, governments and
individuals. [SELLER]/[SERVICER] originates and services residential mortgage
loans and performs subservicing functions for affiliates, including
[ ].
[SELLER]/[SERVICER]'s headquarters and its executive offices are located at
, and the telephone number is ( )[ ].
[SELLER]/[SERVICER] is subject to regulation, supervision and examination by
[the Office of the Comptroller of the Currency] and has
S-21
<PAGE> 23
been approved as a mortgagee and seller/servicer by the Department of Housing
and Urban Development, the Veterans Administration, FNMA and FHLMC.
--------------------------------------------------------------------------------
SERVICING OF MORTGAGE LOANS
--------------------------------------------------------------------------------
All of the Mortgage Loans will be serviced by [SERVICER]. [SERVICER] (in
its capacity as servicer, the "SERVICER") will service the Mortgage Loans in
accordance with the terms of the Pooling Agreement. The Servicer may perform any
of its obligations under the Pooling Agreement through one or more subservicers.
Despite the existence of subservicing arrangements, the Servicer will be liable
for its servicing duties and obligations under the Pooling Agreement as if the
Servicer alone were servicing the Mortgage Loans. [It is expected that
[ ] will act as the subservicer for the Mortgage Loans.] See "The
Pooling and Servicing Agreement" in the prospectus.
FORECLOSURE AND DELINQUENCY EXPERIENCE
OF [SERVICER]
The delinquency, foreclosure and loss experience on the portfolios of one-
to four-family first mortgage loans owned by [SERVICER] and serviced or
subserviced by [SERVICER] are set forth in the following table. The delinquency,
foreclosure and loss experience indicated excludes certain loans originated by
units of [SERVICER]'s affiliates. The portfolio of mortgage loans serviced or
subserviced by [SERVICER] includes both fixed and adjustable interest rate
mortgage loans, including "buydown" mortgage loans, loans with stated maturities
of [ ] to [ ] 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.
[SERVICER]
DELINQUENCY, FORECLOSURE AND LOSS EXPERIENCE ON MORTGAGE LOANS
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
AT OR FOR THE ---------------------------------------------------------------------------
[ ]-MONTH
PERIOD ENDED
[ ], 1999 1998 1997 1996
----------------------- ----------------------- ----------------------- -----------------------
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........... $ . $ . $ . $ .
Average Portfolio
Balance(1).............. . . . .
Period of Delinquency
31 to 59 days........... . . . .
60 to 89 days........... . . . .
90 days or more(2)...... . . . .
------- --------- ------- --------- ------- --------- ------- ---------
Total Delinquent Loans.... $ . $ . $ . $ .
Delinquency Ratio......... % . % .% .% .% .% .%
Foreclosures Pending(3)... % . % .% .% .% .% .%
Foreclosure Ratio......... . % .% .% .% .% .%
</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.
S-22
<PAGE> 24
(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 [SERVICER], a third
party or by an insurer at the date indicated.
--------------------------------------------------------------------------------
THE POOLING AND SERVICING AGREEMENT
--------------------------------------------------------------------------------
The certificates (the "CERTIFICATES") will be issued pursuant to a pooling
and servicing agreement to be dated as of [ , ], among the
Depositor, the Servicer 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 and servicing agreement which are incorporated by
reference. The Depositor plans to file a final copy of the pooling and servicing
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 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 Seller and except with respect to any Mortgage
which has been recorded in the name of Mortgage Electronic Registration Systems,
Inc. ("MERS") or its designee. With respect to any Mortgage that has been
recorded in the name of MERS or its designee, no mortgage assignment in favor of
the Trustee will be required to be prepared or delivered. Instead, the Servicer
will be required to take all actions as are necessary to cause the Trust Fund to
be shown as the owner of the related Mortgage Loan on the records of MERS for
purposes of the system of recording transfers of beneficial ownership of
mortgages maintained by MERS. 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.
S-23
<PAGE> 25
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 the Seller in the
mortgage loan sale agreement in any material respect and the Seller does not
cure such omission or defect within 90 days, the Seller, on the Distribution
Date in the month following the expiration of the 90-day period, will be
required either (i) to 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) to substitute an Eligible Substitute Mortgage Loan; however, such
substitution generally is permitted only within two years of the Closing 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.
OPTIONAL REPURCHASES OF CERTAIN MORTGAGE LOANS
The Depositor, in its sole discretion, may repurchase from the Trust Fund:
- any defaulted Mortgage Loan or any Mortgage Loan as to which default is
reasonably forseeable; and
- any Mortgage Loan as to which the originator or prior owner of such
Mortgage Loan has breached a representation or warranty to the Seller
regarding the characteristics of the Mortgage Loan.
Any such repurchase will be at the Purchase Price.
PAYMENTS ON MORTGAGE LOANS; ACCOUNTS
On or prior to the Closing Date, the Servicer will establish an account
(the "COLLECTION ACCOUNT"), which shall be maintained as a separate trust
account by the 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 Servicer in certain eligible investments, as described in the pooling and
servicing agreement, that are scheduled to mature on or prior to the business
day preceding the next Distribution Date. On or prior to the business day
immediately preceding each Distribution Date, the Servicer will withdraw from
the
S-24
<PAGE> 26
Collection Account the amount of Available Funds and will deposit the 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 and
servicing agreement.
SERVICING COMPENSATION AND PAYMENT
OF EXPENSES
The Administrative Fees with respect to the Trust Fund are payable out of
the interest payments received on each Mortgage Loan. The "ADMINISTRATIVE FEES"
consist of (a) servicing compensation payable to the Servicer in respect of its
servicing activities (the "SERVICING FEE") and (b) fees paid to the Trustee. The
Administrative Fees will accrue on the Stated Principal Balance of each Mortgage
Loan at a rate (the "ADMINISTRATIVE 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 [ . ]% 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 [ . ]% and the Trustee Fee Rate;
provided, however, that the Servicing Fee Rate will not be less than [ . ]%
per annum with respect to any Mortgage Loan. The Servicing Fee Rates for the
Mortgage Loans are expected to range from [ . ]% to [ . ]% per annum
and, as of the Cut-off Date, the weighted average Servicing Fee Rate is expected
to be approximately [ . ]%.
The Servicer is obligated to pay certain ongoing expenses associated with
the Trust Fund and incurred by the Servicer in connection with its
responsibilities under the pooling and servicing agreement. Those amounts will
be paid by the Servicer out of its Servicing Fee. The amount of the Servicer's
Servicing Fee is subject to adjustment with respect to prepaid Mortgage Loans,
as described below under "-- Compensating Interest." The Servicer is also
entitled to receive all late payment fees, assumption fees and other similar
charges and all investment income earned on amounts on deposit in the 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 and servicing 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 and servicing agreement, the aggregate Servicing
Fee payable to the 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 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 (any reduction of this type,
"COMPENSATING INTEREST"). Any 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 prepayments. See "Description of
Certificates -- Interest" in this prospectus supplement.
S-25
<PAGE> 27
ADVANCES
Subject to the following limitations, the Servicer 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 and which were delinquent on the related Determination Date. Advances by
the Servicer will be made from its own funds or funds in the 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 the 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 [ ] day of
the month in which that Distribution Date occurs or, if that day is not a
business day, the preceding business day.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Certificates rather than to guarantee or insure
against losses. The 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
the Servicer determines on any Determination Date to make an Advance, such
Advance will be included with the distribution to certificateholders on the
related Distribution Date. Any failure by the Servicer to make a required
Advance will constitute an event of default and the Trustee (if it succeeds to
the obligations of a defaulting Servicer under the pooling and servicing
agreement) or the successor servicer will be obligated to make the Advance, in
accordance with the terms of the pooling and servicing agreement.
OPTIONAL TERMINATION
The circumstances under which the obligations created by the pooling and
servicing 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 [10]% 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 and servicing 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 Trust Fund.
[SPECIAL SERVICING AGREEMENTS]
[The pooling and servicing agreement will permit the Servicer to enter into
a special servicing agreement with an unaffiliated holder of a class of Class B
Certificates or of a class of securities
S-26
<PAGE> 28
representing interests in one or more classes of Class B Certificates alone or
together with other subordinated mortgage pass-through certificates. Pursuant to
this type of agreement, the specified holder may instruct the Servicer to
commence or delay foreclosure proceedings with respect to a delinquent Mortgage
Loan.]
THE TRUSTEE
[TRUSTEE] ("[TRUSTEE]") will be the Trustee under the pooling and servicing
agreement. [TRUSTEE], a direct, wholly-owned subsidiary of [ ], is
a [ ] banking association originally chartered in [ ] and is
engaged in a wide range of activities typical of a [ ] bank.
[TRUSTEE]'s principal office is located at [
] (the "CORPORATE TRUST OFFICE"). Certificate transfer services are
conducted at [TRUSTEE]'s offices in [ ]. [TRUSTEE] otherwise
conducts its trustee and securities administration services at its offices in
[ ]. Its address there is [ ]. Certificateholders and other
interested parties should direct their inquires to the [ ] office.
The telephone number of the Trustee in [ ] is ( ) [ ].
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.[ ].com." The Trustee's electronic bulletin board may be accessed by
calling ( ) [ ], and its fax-on-demand service may be accessed by
calling ( ) [ ]. The Depositor, the Seller and the Servicer may
maintain other banking relationships in the ordinary course of business with the
Trustee. The Trustee may appoint one or more co-trustees if necessary to comply
with the fiduciary requirements imposed by any jurisdiction in which a mortgaged
property is located.
VOTING RIGHTS
Voting rights for certain actions specified in the pooling and servicing
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.
- 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 the Certificate by the aggregate initial balance
of its class.
--------------------------------------------------------------------------------
DESCRIPTION OF CERTIFICATES
--------------------------------------------------------------------------------
The Certificates will consist of (i) the [six] classes listed in the table
on page S-4 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 . % in the Trust Fund and the
Subordinate Certificates will evidence in the aggregate the remaining . %
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.
S-27
<PAGE> 29
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 (Certificates
in that 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 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
S-28
<PAGE> 30
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 Servicer or any paying agent
as certificateholders, as such term is used in the Pooling Agreement, and
beneficial owners will be permitted to exercise the rights of certificateholders
only indirectly through DTC and its DTC Participants.
Because DTC can only act on behalf of DTC Participants, who in turn act on
behalf of Indirect DTC Participants and certain banks, the ability of a
beneficial owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the DTC system, or to otherwise act with respect to such
Book-Entry Certificates, may be limited due to the lack of a physical
certificate for such Book-Entry Certificates. In addition, under a book-entry
format, beneficial owners may experience delays in their receipt of payments,
since distributions will be made by the Trustee to Cede & 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 financial community (the
"INDUSTRY") that it has developed and has implemented 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, a remediation plan and a testing phase,
each of which is complete.
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 has contacted 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 continually developing and
updating 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.
S-29
<PAGE> 31
None of the Depositor, the 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 [ , ] (each, a "DISTRIBUTION DATE"), 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 and servicing 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. If you own a Book-Entry Certificate, distributions will be made
to you through the facilities of DTC, as described above under "-- Book-Entry
Certificates."
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
S-30
<PAGE> 32
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
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 Servicer is entitled to be reimbursed pursuant to the Pooling
Agreement.
Available Funds will not include any profit received by the Servicer on the
foreclosure of a Mortgage Loan. These amounts, if any, will be retained by the
Servicer as additional servicing compensation.
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;
(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 page S-4 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
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<PAGE> 33
(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) of the Interest
Distribution Amount 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 interest-bearing Certificates, based on
the amount of interest accrued on each class of Certificates on the Distribution
Date before taking into account any reduction in interest resulting from 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 and Similar Laws" 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 that Distribution
Date exceeds Compensating Interest for that calendar month. 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 that 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 a
shortfall. Any unpaid amount will be carried forward and added to the 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 resulting unpaid amount will not
bear interest.
Interest will accrue on each class of Certificates (other than the Class
A-PO Certificates) during each one-month period ending on the last day of the
month preceding the month in which each Distribution Date occurs (each, an
"INTEREST ACCRUAL PERIOD"). The initial Interest Accrual Period will be deemed
to have commenced on [ , ]. Interest that accrues during an
Interest Accrual Period will be calculated on the assumption that distributions
in reduction of the principal balance of a class on the Distribution Date in
that Interest Accrual Period are made on the first day of the Interest Accrual
Period.
The class balance of a class of Certificates at any time will equal its
initial class balance less (i) all distributions of principal made to the class,
(ii) losses allocated to the class as described under
S-32
<PAGE> 34
"-- Allocation of Losses" below and (iii) other adjustments made to the class
balance as described under "-- Allocation of Losses" below.
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 those amounts.
The "NON-PO PERCENTAGE" with respect to any Mortgage Loan with a Net
Mortgage Rate less than [ . ]% (each of those Mortgage Loans, a
"DISCOUNT MORTGAGE LOAN") will be equal to the Net Mortgage Rate thereof divided
by [ . ]%. The Non-PO Percentage with respect to any Mortgage Loan with
a Net Mortgage Rate greater than or equal to [ . ]% (each of those
Mortgage Loans, 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 the applicable Administrative 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 Seller or the Depositor pursuant to the pooling
and servicing 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;
(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
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<PAGE> 35
(f) all partial and full principal prepayments by mortgagors received
during the calendar month preceding the month of that Distribution Date.
The amounts described in clauses (a) through (d) are referred to as
"SCHEDULED PRINCIPAL PAYMENTS." The amounts described in clauses (e) and (f) are
referred to as "UNSCHEDULED PRINCIPAL PAYMENTS."
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:
first, to the Class R Certificates, until their class balance has been
reduced to zero; and
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
Scheduled Principal Payments for that Distribution Date; and
(b) the Senior Prepayment Percentage of the applicable Non-PO
Percentage of the Unscheduled Principal Payments 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 that Distribution Date.
The "SENIOR PERCENTAGE" for any Distribution Date will equal (i) the
aggregate class balance of the Senior Certificates (other than the Class A-PO
Certificates) immediately prior to that date, divided by
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<PAGE> 36
(ii) the aggregate class balance of the Certificates (other than the Class A-PO
Certificates) immediately prior to that date.
The "SUBORDINATE PERCENTAGE" for any Distribution Date will equal 100%
minus the Senior Percentage for that date.
As of the Cut-off Date, the Senior Percentage and the Subordinate
Percentage are expected to be approximately [ . ]% and [ . ]%,
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>
[month] [year] through [month] [year]....................... 100%;
[month] [year] through [month] [year]....................... the Senior Percentage, plus 70% of
the Subordinate Percentage;
[month] [year] through [month] [year]....................... the Senior Percentage, plus 60% of
the Subordinate Percentage;
[month] [year] through [month] [year]....................... the Senior Percentage, plus 40% of
the Subordinate Percentage;
[month] [year] through [month] [year]....................... the Senior Percentage, plus 20% of
the Subordinate Percentage; and
[month] [year] 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 that
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 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>
[month] [year] through [month] [year]....................... []%
[month] [year] through [month] [year]....................... []%
[month] [year] through [month] [year]....................... []%
[month] [year] through [month] [year]....................... []%
[month] [year] and thereafter............................... []%
</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 aggregate principal balance of
the Mortgage Pool 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-35
<PAGE> 37
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 that class below zero, the
distribution to that class of the Senior Prepayment Percentage of those amounts
for that 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 that 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 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 that was a Discount Mortgage Loan received with respect to
that 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 that Distribution Date;
(e) with respect to each Discount Mortgage Loan that became a Liquidated
Mortgage Loan during the calendar month preceding the month of that
Distribution Date, the amount of Liquidation Proceeds allocable to
principal received with respect to that Discount Mortgage Loan; and
(f) all partial and full principal prepayments by mortgagors on Discount
Mortgage Loans received during the calendar month preceding that
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
the Debt Service Reduction.
S-36
<PAGE> 38
Subordinate Principal Distribution Amount
On each Distribution Date, to the extent of remaining Available Funds, each
class of Subordinate Certificates that is entitled to receive a principal
distribution will receive its pro rata share (based on the class balances of all
the Subordinate Certificates that are entitled to receive a principal
distribution) of the Subordinate Principal Distribution Amount. With respect to
each class of Subordinate Certificates, if on any Distribution Date the
Fractional Interest is less than the Fractional Interest for that class on the
Closing Date, no classes junior to that class will receive a principal
distribution.
Distributions of principal on the Subordinate Certificates that are
entitled to receive a principal distribution on a Distribution Date will be made
sequentially to each class of Subordinate Certificates in the order of their
numerical class designations, beginning with the Class B-1 Certificates, until
each class has received its respective pro rata share for the Distribution Date.
However, the Class A-PO Deferred Amount will be paid to the Class A-PO
Certificates from amounts otherwise distributable as principal to the
Subordinate Certificates, beginning with amounts otherwise distributable as
principal to the class of Subordinate Certificates with the highest numerical
designation.
The "FRACTIONAL INTEREST" 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 that
class, divided by (ii) the aggregate balance of all the Certificates (other than
the Class A-PO Certificates) immediately prior to such Distribution Date.
The approximate Fractional Interests for the Subordinate Certificates on
the Closing Date are expected to be as follows:
<TABLE>
<S> <C>
Class B-1................................................... . %
Class B-2................................................... . %
Class B-3................................................... . %
Class B-4................................................... . %
Class B-5................................................... . %
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 Scheduled Principal Payments for
that Distribution Date; and
(b) the Subordinate Prepayment Percentage of the applicable Non-PO
Percentage of the Unscheduled Principal Payments 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 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 Class R 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 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 (i) interest and principal on the Senior Certificates, (ii) Class
A-PO Deferred Amounts on the Class A-PO Certificates and
S-37
<PAGE> 39
(iii) interest and principal on the Subordinate Certificates, as described
above. It is not anticipated that there will be any significant amounts
remaining for any distribution to the Class R Certificates.
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, on each
Distribution Date, 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 that Distribution Date, exceeds the Adjusted Pool Amount as of the due date
occurring in the month of that 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.
After the Senior Credit Support Depletion Date, on each Distribution Date,
the aggregate of the class balances of all classes of Senior Certificates (other
than the Class A-PO Certificates) then outstanding will be reduced if it exceeds
the difference between the Adjusted Pool Amount and the Adjusted Pool Amount (PO
Portion) for that Distribution Date after taking into account the amount of all
distributions to be made on that Distribution Date and the allocation of
Realized Losses on that Distribution Date. The amount of this reduction will be
allocated among the Senior Certificates (other than the Class A-PO
Certificates), pro rata based on their respective class balances.
In addition, on each Distribution Date after the Senior Credit Support
Depletion Date, the class balance of the Class A-PO Certificates will be reduced
if it exceeds the Adjusted Pool Amount (PO Portion) for that Distribution Date
after taking into account the amount of all distributions to be made on that
Distribution Date and the allocation of Realized Losses on that Distribution
Date.
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
S-38
<PAGE> 40
that are entitled to receive principal later bear a greater risk of being
allocated Realized Losses on the Mortgage Loans than holders of classes that are
entitled to receive principal earlier.
In general, a "REALIZED LOSS" means, with respect to a Liquidated Mortgage
Loan, the amount by which the remaining unpaid principal balance of the Mortgage
Loan exceeds the amount of Liquidation Proceeds applied to the principal balance
of the related Mortgage Loan. "EXCESS LOSSES" are (i) Special Hazard Losses in
excess of the Special Hazard Loss Coverage Amount, (ii) Bankruptcy Losses in
excess of the Bankruptcy Loss Coverage Amount and (iii) Fraud Losses in excess
of the Fraud Loss Coverage Amount. "BANKRUPTCY LOSSES" are losses that are
incurred as a result of Debt Service Reductions and Deficient Valuations.
"SPECIAL HAZARD LOSSES" are Realized Losses in respect of Special Hazard
Mortgage Loans. "FRAUD LOSSES" are Realized Losses sustained by reason of a
default arising from fraud, dishonesty or misrepresentations. See "Credit
Support" 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 outstanding principal balance of the Mortgage Loan secured by such
mortgaged property or reduces the outstanding principal balance of a Mortgage
Loan. In the case of a reduction in the value of the related mortgaged property,
the amount of the secured debt could be reduced to that value, and the holder of
the Mortgage Loan would become an unsecured creditor to the extent the
outstanding principal balance of that Mortgage Loan exceeds the value 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 will constitute a Debt Service Reduction or Deficient Valuation so long
as the Servicer is pursuing any other remedies that may be available with
respect to the related Mortgage Loan and (i) the Mortgage Loan is not in default
with respect to any payment due thereunder or (ii) scheduled Monthly Payments
are being advanced by the Servicer without giving effect to any Debt Service
Reduction.
A "LIQUIDATED MORTGAGE LOAN" is a defaulted Mortgage Loan as to which the
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
Enhancement -- Special Hazard Insurance Policies." See "Credit Support" in this
prospectus supplement.
With respect to any Distribution Date, the "ADJUSTED POOL AMOUNT" will
equal the aggregate unpaid principal balance of the Mortgage Loans as of the
Cut-off Date minus the sum of (i) all amounts in respect of principal received
in respect of the Mortgage Loans (including amounts received as Advances,
principal prepayments and Liquidation Proceeds in respect of principal) and
distributed to holders of the Certificates on that Distribution Date and all
prior Distribution Dates and (ii) the principal portion of all Realized Losses
(other that Debt Service Reduction) incurred on the Mortgage Loans from the Cut-
off Date through the end of the month preceding that Distribution Date.
With respect to any Distribution Date, the "ADJUSTED POOL AMOUNT (PO
PORTION)" will equal the sum as to each Mortgage Loan outstanding at the Cut-off
Date of the product of (A) the PO Percentage for that Mortgage Loan and (B) the
principal balance of that Mortgage Loan as of the Cut-off Date less the sum of
(i) all amounts in respect of principal received in respect of that Mortgage
Loan (including amounts received as Advances, principal prepayments and
Liquidation Proceeds in respect of principal) and distributed to holders of the
Certificates on such Distribution Date and all prior Distribution Dates and (ii)
the principal portion of any Realized Loss (other than a Debt Service
S-39
<PAGE> 41
Reduction) incurred on that Mortgage Loan from the Cut-off Date through the end
of the month preceding the month in which that Distribution Date occurs.
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 "Prepayment and Yield Considerations" in the prospectus.
RESTRICTIONS ON TRANSFER OF THE CLASS R
CERTIFICATES
The Class R Certificates will be subject to the following restrictions on
transfer, and the Class R Certificates will contain a legend describing such
restrictions.
The REMIC provisions of the Code impose certain taxes on (i) transferors of
residual interests to, or agents that acquire residual interests on behalf of,
Disqualified Organizations (as defined in the prospectus) and (ii) certain
Pass-Through Entities (as defined in the prospectus) that have Disqualified
Organizations as beneficial owners. No tax will be imposed on a Pass-Through
Entity (other than an "electing large partnership" (as defined in the
prospectus)) that owns a Class R Certificate if the Trustee has received an
affidavit from that entity stating that it 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); and
- the transferor states in writing to the Trustee that it has no actual
knowledge that such affidavit is false.
Further, the 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 by the Class R
Certificates, (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.
S-40
<PAGE> 42
In addition, the Class R Certificates may not be purchased by or
transferred to any person that is not a U.S. Person, unless:
- that 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 applicable
regulations 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) created or organized in or under the laws of the United
States, any state thereof or the District of Columbia, including an entity
treated as a corporation or partnership for federal income tax purposes, an
estate whose income is subject to United States federal income tax regardless of
its source, 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 AND SERVICING 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 "Federal Income Tax Consequences -- Federal Income Tax Consequences for
REMIC Certificates -- Taxation of Residual Certificates -- Tax-Related
Restrictions on Transfer of Residual Certificates" in the prospectus.
THE CLASS R CERTIFICATES MAY NOT BE PURCHASED BY OR TRANSFERRED TO ANY
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 its 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
S-41
<PAGE> 43
such general account's reserves and liabilities for the contract(s) held
by or on behalf of that 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 that 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 Servicer, to the effect that the purchase or holding of the
Class B Certificates by or on behalf of the 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 Servicer or the Trustee to any
obligation in addition to those undertaken in the pooling and servicing
agreement.
The Class B Certificates will contain a legend describing these
restrictions on transfer. Any transferee of a Class B Certificate that does not
comply with either clause (a) or clause (b) above will be deemed to have made
the representation described in clause (a) above.
THE POOLING AND SERVICING 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 Servicer (because amounts, if advanced, would be nonrecoverable), will
adversely affect the yield on the Certificates. Because of the priority of
distributions, shortfalls resulting from delinquencies not 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.
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 that delay).
S-42
<PAGE> 44
PREPAYMENT CONSIDERATIONS AND RISKS
Because principal payments on the Mortgage Loans will be distributed to
certificateholders, 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 (or in the case of the Class
A-PO Certificates, the Discount 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 prepayments will result in distributions to you
of amounts that would otherwise be distributed over the remaining term of the
Mortgage Loans. See "Prepayment and Yield Considerations" 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 should also consider the risk, in the case of an Offered
Certificate purchased at a discount, particularly the Class A-PO Certificates,
that a slower than anticipated rate of payments in respect of principal
(including prepayments) on the Mortgage Loans (or on the Discount Mortgage Loans
in the case of the Class A-PO Certificates) will have a negative effect on the
yield to maturity of such Offered Certificates. You should also consider the
risk, in the case of an Offered Certificate purchased at a premium, that a
faster than anticipated rate of payments in respect of principal (including
prepayments) on the Mortgage Loans will have a negative effect on the yield to
maturity of such Offered Certificates. 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
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 those principal prepayments being distributed to
holders of the Subordinate Certificates during the periods of time described in
the definition of "Senior Prepayment Percentage."
S-43
<PAGE> 45
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 and servicing 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 [10]% of the initial balance of the Mortgage Pool.
The Depositor or the Seller may be required to repurchase Mortgage Loans because
of defective documentation or material breaches in their 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 Servicer will enforce "due-on-sale" clauses to the extent
permitted by applicable law. Each mortgage note which contains "due-on-sale"
provisions permits the holder of the mortgage note to accelerate the maturity of
the Mortgage Loan upon conveyance by the mortgagor of the underlying mortgaged
property. The Servicer will enforce any "due-on-sale" clause to the extent it
has knowledge of the conveyance or proposed conveyance of the underlying
mortgaged property and reasonably believes that it is entitled to do so under
applicable law. However, the Servicer will not take any action in relation to
the enforcement of any "due-on-sale" provisions which would impair or threaten
to impair any recovery under any related primary mortgage insurance policy. See
"Prepayment and Yield Considerations" 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-47 (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>
$ -.- -.- % -- --
$ -.- -.- % -- --
</TABLE>
(b) the initial balances and pass-through rates for the Offered
Certificates are as set forth on page S-4 of this prospectus supplement;
(c) there are no Net Interest Shortfalls, delinquencies or Realized
Losses with respect to the Mortgage Loans;
(d) scheduled payments of principal and interest with respect to the
Mortgage Loans are received on the applicable due date beginning on
[ , ];
(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 [ , ];
S-44
<PAGE> 46
(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 [ , ] 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 the rate of principal payments and the priority
sequence of distributions of principal of such Offered Certificates. The
interaction of these factors may have different effects on each class of Offered
Certificates and the effects on any class may vary at different times during the
life of that class. Accordingly, no assurance can be given as to the weighted
average life of any 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 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 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 following month until the thirtieth month. Beginning in the
thirtieth month and in each following month during the life of the mortgage
loans, 100% PSA assumes a constant prepayment rate of 6% per annum each month.
As used in the table below, "0% PSA" assumes prepayment rates equal to 0% of
PSA, i.e., no prepayments. Correspondingly, "275% PSA" assumes prepayment rates
equal to 275% of PSA, and so forth. PSA does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the Mortgage Loans. The
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.
S-45
<PAGE> 47
The Decrement Tables set forth below have been prepared on the basis of the
Modeling Assumptions described above under "-- Assumptions Relating to Tables."
There likely will 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, if 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-46
<PAGE> 48
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% % % % % 0% % % % %
----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................... 100 100 100 100 100 100 100 100 100 100
[month] 25, [year]...................
[month] 25, [year]...................
[month] 25, [year]...................
[month] 25, [year]...................
[month] 25, [year]...................
[month] 25, [year]...................
[month] 25, [year]...................
[month] 25, [year]...................
[month] 25, [year]...................
[month] 25, [year]...................
[month] 25, [year]...................
[month] 25, [year]...................
[month] 25, [year]...................
[month] 25, [year]...................
[month] 25, [year]...................
Weighted Average Life
(in years)(1)......................
</TABLE>
---------------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the 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-47
<PAGE> 49
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% % % % %
----------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Initial Percentage.......................................... 100 100 100 100 100
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
Weighted Average Life
(in years)(1).............................................
</TABLE>
---------------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the 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-48
<PAGE> 50
PERCENTAGE OF INITIAL CLASS BALANCE OUTSTANDING
AT THE RESPECTIVE PERCENTAGES OF PSA SET FORTH BELOW:
<TABLE>
<CAPTION>
CLASS R
--------------------------------
DISTRIBUTION DATE 0% % % % %
----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage.......................................... 100 100 100 100 100
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
[month] 25, [year]..........................................
Weighted Average Life
(in years)(1).............................................
</TABLE>
---------------
(1) The weighted average life of a class of Certificates is determined by (i)
multiplying the amount of each distribution in reduction of the 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-49
<PAGE> 51
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 [ ]% 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........................ .% .% .% .% .%
</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 on your Class R Certificate during any of
those periods. In addition, the present value of the tax liabilities with
respect to your Class R Certificate may substantially exceed the present value
of expected distributions on your Certificate and of any tax benefits that may
arise with respect to
S-50
<PAGE> 52
them. 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 "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 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 Fractional Interest for any class of
Subordinate Certificates is less than its original Fractional Interest, 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, which will accelerate the amortization of those classes
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.
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
S-51
<PAGE> 53
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 the mortgage loans in the first month of the life of the mortgage
loans and an additional 0.02% per annum in each following month until the 30th
month. Beginning in the 30th month and in each following month 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
following month 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 %
or % 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 . % and . %, in each case, of their balance plus accrued
interest from , 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 like
these is the assumption that intermediate cash flows are reinvested at the
discount rates at which investors may be able to reinvest funds received by them
as distributions on the Class B-2 and Class B-3 Certificates. Consequently,
these yields do not purport to reflect the total return on any investment in the
Class B-2 and Class B-3 Certificates when reinvestment rates are considered.
S-52
<PAGE> 54
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% % % % % %
..............................
..............................
..............................
..............................
..............................
..............................
</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% .............................. % % % % % %
..............................
..............................
..............................
..............................
..............................
..............................
</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>
0% .............................. % % % % % %
..............................
..............................
..............................
..............................
..............................
..............................
</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-53
<PAGE> 55
--------------------------------------------------------------------------------
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 $ . (the "SPECIAL HAZARD LOSS COVERAGE
AMOUNT"), (ii) Bankruptcy Losses in an initial amount of approximately
$ . (the "BANKRUPTCY LOSS COVERAGE AMOUNT") and (iii) Fraud Losses in
an initial amount of approximately $ . (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-54
<PAGE> 56
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.
--------------------------------------------------------------------------------
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 "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 [ ] and Class A-PO Certificates will, and the other classes
of Offered Certificates may, depending on their respective issue prices, be
treated for federal income tax purposes as having been issued with original
issue discount. See "Federal Income Tax Consequences" in the prospectus.
S-55
<PAGE> 57
[Certain classes of the Regular Certificates may be treated for federal income
tax purposes as having been issued at a premium. Whether any holder of a class
of Certificates issued at a premium will be treated as holding a Certificate
with amortizable bond premium will depend on such certificateholder's purchase
price and the distributions remaining to be made on such Certificate at the time
of its acquisition by that certificateholder. Holders of these classes of
Certificates should consult their tax advisors regarding the possibility of
making an election to amortize such premium. See "Federal Income Tax
Consequences -- Federal Income Tax Consequences for REMIC
Certificates -- Taxation of Regular Certificates -- Premium" in the prospectus.]
For purposes of determining the amount and the rate of accrual of original issue
discount and market discount, the Depositor intends to assume that there will be
prepayments on the Mortgage Loans at a rate equal to [ ]% 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 "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 "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 "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 "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
S-56
<PAGE> 58
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 "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 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 "Federal Income Tax Consequences -- Federal
Income Tax Consequences for REMIC Certificates -- Reporting Requirements" in the
prospectus.
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.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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 [ ] an
administrative exemption (Prohibited Transaction Exemption [ ]; Exemption
Application No. [ ]) (the "EXEMPTION") from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section 4975
of the Code with respect to the initial purchase, the holding and the subsequent
resale by 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 certain
employee benefit plans covering only self-employed individuals which are subject
to the prohibited transaction provisions of the Code.
S-57
<PAGE> 59
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 Class R 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 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." Any
transferee of a Class B Certificate that does not comply with either clause (i)
or clause (ii) of the preceding sentence will be deemed to have made one of the
representations described in clause (i) of that sentence.
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, [Banc of America Securities
LLC] [OTHER UNDERWRITER] (the "UNDERWRITER") and [ ], 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 [ . ]% of the initial balance of those Certificates plus accrued
interest from [ , ] to (but not including) the Closing Date,
before deducting estimated expenses 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.
S-58
<PAGE> 60
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.
[The Underwriter is an affiliate of the Depositor, the Seller and the
Servicer, and is a registered broker/dealer. Any obligations of the Underwriter
are the sole responsibility of the Underwriter and do not create any obligation
or guarantee on the part of any affiliate of the Underwriter. This prospectus
supplement and the prospectus may be used by the Underwriter in connection with
offers and sales related to market-making transactions in the Offered
Certificates. The Underwriter may act as principal or agent in such
transactions.]
--------------------------------------------------------------------------------
LEGAL MATTERS
--------------------------------------------------------------------------------
The validity of 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]. [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 [ ] (" ") and [ ] (" ") 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 and
servicing agreement.
- [ ]'s and [ ]'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 and
[ ]'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 [ ] of the Class A-PO
Certificates because they are principal-only mortgage-backed securities
that [ ] 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-59
<PAGE> 61
- [ ]'s and [ ]'s ratings do not address the remote possibility
that, in the event of the insolvency of the Seller, the sale of the
Offered Certificates may be recharacterized as a financing and that, as
a result of such recharacterization, the 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 [ ] or [ ]. 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 [ ] or
[ ].
The rating of the Offered Certificates should be evaluated independently
from similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating agency.
S-60
<PAGE> 62
--------------------------------------------------------------------------------
INDEX TO DEFINED TERMS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Accelerated Processing Programs............................. S-20
Adjusted Pool Amount........................................ S-39
Adjusted Pool Amount (PO Portion)........................... S-39
Administrative Fee Rate..................................... S-25
Administrative Fees......................................... S-25
Advance..................................................... S-26
Available Funds............................................. S-30
Bankruptcy Loss Coverage Amount............................. S-54
Bankruptcy Losses........................................... S-39
Benefit Plan................................................ S-57
Book-Entry Certificates..................................... S-28
Bulk Purchase Mortgage Loans................................ S-21
Certificates................................................ S-23
Class A Certificates........................................ S-5
Class A-PO Deferred Amount.................................. S-38
Class A-PO Principal Distribution Amount.................... S-36
Class B Certificates........................................ S-5
Closing Date................................................ S-5
Code........................................................ S-55
Collection Account.......................................... S-24
Compensating Interest....................................... S-25
Corporate Trust Office...................................... S-27
Credit Scores............................................... S-19
Cut-off Date................................................ S-5
Debt Service Reduction...................................... S-39
Decrement Tables............................................ S-44
Deficient Valuation......................................... S-39
Definitive Certificates..................................... S-28
Deleted Mortgage Loan....................................... S-24
Depositor................................................... S-5
Determination Date.......................................... S-26
Discount Mortgage Loan...................................... S-33
Distribution Account........................................ S-25
Distribution Date........................................... S-5, S-30
DTC......................................................... S-28
DTC Participants............................................ S-28
Eligible Substitute Mortgage Loan........................... S-24
ERISA....................................................... S-57
Excess Losses............................................... S-39
Exemption................................................... S-57
FHLMC....................................................... S-15
FNMA........................................................ S-15
Fractional Interest......................................... S-37
Fraud Loss Coverage Amount.................................. S-54
Fraud Losses................................................ S-39
Indirect DTC Participants................................... S-28
Industry.................................................... S-29
Interest Accrual Period..................................... S-32
</TABLE>
S-61
<PAGE> 63
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Interest Distribution Amount................................ S-31
IRA......................................................... S-57
IRS......................................................... S-57
Last Scheduled Distribution Date............................ S-40
Liquidated Mortgage Loan.................................... S-39
Liquidation Proceeds........................................ S-31
Loan-to-Value Ratio......................................... S-15
Loss Severity Percentage.................................... S-52
MERS........................................................ S-23
Modeling Assumptions........................................ S-44
Mortgage File............................................... S-23
Mortgage Loans.............................................. S-14
Mortgage Pool............................................... S-14
Net Interest Shortfall...................................... S-32
Net Mortgage Rate........................................... S-33
Net Prepayment Interest Shortfall........................... S-32
Non-Offered Certificates.................................... S-35
Non-PO Percentage........................................... S-33
Non-PO Principal Amount..................................... S-33
Offered Certificates........................................ S-5
Original Subordinate Principal Balance...................... S-35
Percentage Interest......................................... S-27
PO Percentage............................................... S-34
PO Principal Amount......................................... S-36
Pool Principal Balance...................................... S-34
Premium Mortgage Loan....................................... S-33
Prepayment Interest Shortfall............................... S-32
Principal-Only Certificates................................. S-5
Product Guides.............................................. S-20
PSA......................................................... S-45
PTCE 95-60.................................................. S-41
Purchase Price.............................................. S-24
Realized Loss............................................... S-39
Record Date................................................. S-5, S-30
Regular Certificates........................................ S-55
Relief Act Reduction........................................ S-32
REMIC....................................................... S-55
REO Property................................................ S-26
Residual Certificates....................................... S-5
Rules....................................................... S-28
Scheduled Principal Payments................................ S-34
SDA......................................................... S-51
Seller...................................................... S-5
Senior Certificates......................................... S-5
Senior Credit Support Depletion Date........................ S-34
Senior Percentage........................................... S-34
Senior Prepayment Percentage................................ S-35
Senior Principal Distribution Amount........................ S-34
Servicer.................................................... S-5, S-22
Servicing Fee............................................... S-25
Servicing Fee Rate.......................................... S-25
</TABLE>
S-62
<PAGE> 64
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Similar Law................................................. S-57
Special Hazard Loss Coverage Amount......................... S-54
Special Hazard Losses....................................... S-39
Special Hazard Mortgage Loan................................ S-39
Stated Principal Balance.................................... S-34
Subordinate Certificates.................................... S-5
Subordinate Percentage...................................... S-35
Subordinate Prepayment Percentage........................... S-36
Subordinate Principal Distribution Amount................... S-37
Substitution Adjustment Amount.............................. S-24
Trustee..................................................... S-5, S-27
Trustee Fee Rate............................................ S-25
Trust Fund.................................................. S-5
Underwriter................................................. S-58
Underwriting Agreement...................................... S-58
Unscheduled Principal Payments.............................. S-34
U.S. Person................................................. S-41
</TABLE>
S-63
<PAGE> 65
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
DEPOSITOR MAY NOT SELL THESE SECURITIES UNTIL
THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO
SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED AUGUST 16, 2000
PROSPECTUS
BANC OF AMERICA FUNDING CORPORATION
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES BY SEPARATE TRUST FUNDS)
EACH TRUST FUND --
- will issue a series of mortgage pass-through certificates that will consist
of one or more classes of certificates; and
- will own either:
- one or more pools of fixed or adjustable interest rate, conventional
mortgage loans, each of which is secured by a first lien on a one- to
four-family residential property; or
- mortgage-backed certificates that represent an interest in or are secured
by a pool of mortgage loans.
- may own other assets described in this prospectus and the accompanying
prospectus supplement.
EACH POOL OF MORTGAGE LOANS --
- will be sold to the related trust fund by the depositor, who will have in
turn purchased them from one or more affiliated or unaffiliated sellers;
- will be underwritten to the standards described in this prospectus and the
accompanying prospectus supplement; and
- will be serviced by one or more servicers affiliated or unaffiliated with
the depositor.
EACH SERIES OF CERTIFICATES --
- will represent interests in the related trust fund;
- may provide credit support by "subordinating" certain classes to other
classes of certificates; any subordinated classes will be entitled to
payment subject to the payment of more senior classes and may bear losses
before more senior classes;
- may be entitled to one or more of the other types of credit support
described in this prospectus; and
- will be paid only from the assets of the related trust fund.
Neither the certificates of any series nor the underlying mortgage loans will be
insured or guaranteed by any governmental agency or instrumentality. The
certificates of each series will represent interests in the related trust fund
only and will not be obligations of the depositor or any other entity.
CAREFULLY CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE CERTIFICATES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This prospectus may be used to offer and sell any series of certificates
only if accompanied by the prospectus supplement for that series. Please read
both documents carefully to understand the risks associated with these
investments.
August 16, 2000
<PAGE> 66
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED
IN THIS PROSPECTUS AND THE PROSPECTUS SUPPLEMENT
Information is provided to you about the certificates in two separate
documents that progressively provide more detail: (a) this prospectus, which
provides general information, some of which may not apply to your series of
certificates; and (b) the accompanying prospectus supplement, which will
describe the specific terms of your series of certificates including:
- the principal balances and/or interest rates of each class;
- the timing and priority of interest and principal payments;
- statistical and other information about the mortgage loans;
- information about credit enhancement for each class;
- the ratings for each class; and
- the method for selling the certificates.
YOU SHOULD RELY ON THE INFORMATION IN THE PROSPECTUS SUPPLEMENT FOR THE
TERMS OF YOUR SERIES OF CERTIFICATES.
You should rely only on the information in this prospectus and the
accompanying prospectus supplement including the information incorporated by
reference. No one has been authorized to provide different information to you.
The certificates are not being offered in any state where the offer is not
permitted. The depositor does not claim the accuracy of the information in this
prospectus or the accompanying prospectus supplement as of any date other than
the dates stated on their covers.
Cross-references are included in this prospectus and in the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The following table of contents and the table of contents
included in the accompanying prospectus supplement provide the pages on which
these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus are defined under the caption "Index to Defined Terms" beginning on
page 108 of this prospectus.
The depositor's principal executive offices are located at Bank of America
Corporate Center, 100 North Tryon Street, Charlotte, North Carolina 28255 and
the depositor's phone number is (704) 386-2400.
2
<PAGE> 67
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Important Notice About
Information Presented in this
Prospectus and the Prospectus
Supplement..................... 2
Summary of Terms................. 5
Risk Factors..................... 11
Limited Liquidity for
Certificates May Affect Your
Ability to Resell
Certificates................ 11
Limited Assets for Payment of
Certificates................ 11
Credit Enhancement is Limited
in Amount and Coverage...... 12
Real Estate Market Conditions
Affect Mortgage Loan
Performance................. 13
Geographic Concentration May
Increase Rates of Loss and
Delinquency................. 13
Unpredictability of Prepayments
on Assets May Adversely
Affect Average Lives and
Yields of Certificates...... 14
Bankruptcy of the Depositor or
a Seller May Delay or Reduce
Collections on Mortgage
Loans....................... 14
Owners of Book-Entry
Certificates Are Not
Entitled to Exercise Rights
of Holders of
Certificates................ 15
Cash Flow Agreements Are
Subject to Counterparty
Risk........................ 15
Effects of Failure to Comply
With Consumer Protection
Laws........................ 15
Increased Risk of Loss if
Delinquent Mortgage Loans
Are Assets of a Trust
Fund........................ 16
The Trust Funds.................. 16
General........................ 16
The Mortgage Loans............. 17
Mortgage Certificates.......... 20
Distribution Account........... 25
Description of Certificates...... 26
General........................ 26
Definitive Form................ 27
Book-Entry Form................ 27
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Distributions.................. 29
Categories of Classes of
Certificates................ 31
Residual Certificates.......... 34
Advances....................... 34
Reports to
Certificateholders.......... 35
Credit Enhancement............... 36
General........................ 36
Subordination.................. 36
Surety Bonds................... 37
Mortgage Pool Insurance
Policies.................... 37
Fraud Waiver................... 37
Special Hazard Insurance
Policies.................... 38
Bankruptcy Bonds............... 38
Reserve Fund................... 38
Cross Support.................. 38
Cash Flow Agreements........... 39
Prepayment and Yield
Considerations................. 39
Factors Affecting Prepayment... 39
Effect of Principal
Prepayments................. 40
Weighted Average Life of
Certificates................ 40
Scheduled Delays in
Distributions............... 41
The Depositor.................... 41
Use of Proceeds.................. 42
Mortgage Purchase Program........ 42
The Pooling and Servicing
Agreement...................... 43
Assignment of Mortgage Loans to
the Trustee................. 43
Representations and
Warranties.................. 45
Servicing...................... 46
Payments on Mortgage Loans..... 47
Collection and Other Servicing
Procedures.................. 48
Hazard Insurance............... 49
Primary Mortgage Insurance..... 50
Recoveries Under Primary
Mortgage Insurance
Policies.................... 51
Servicing Compensation and
Payment of Expenses......... 51
Evidence as to Compliance...... 52
</TABLE>
3
<PAGE> 68
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Certain Matters Regarding the
Depositor, the Seller and
the Master Servicer......... 52
Events of Default.............. 53
Rights Upon Event of Default... 53
Enforcement.................... 53
Amendment...................... 54
List of Certificateholders..... 54
Termination; Repurchase of
Mortgage Loans and Mortgage
Certificates................ 55
The Trustee.................... 55
Certain Legal Aspects of the
Mortgage Loans................. 56
General........................ 56
Cooperatives................... 56
Foreclosure.................... 57
Rights of Redemption........... 59
Anti-Deficiency Legislation,
the Bankruptcy Code and
Other Limitations on
Lenders..................... 60
Texas Home Equity Loans........ 63
"Due-on-Sale" Clauses.......... 63
Applicability of Usury Laws.... 63
Homeowners Protection Act of
1998........................ 64
Soldiers' and Sailors' Civil
Relief Act and Similar
Laws........................ 64
Environmental Considerations... 65
Benefit Plan Considerations...... 67
General........................ 67
Certain ERISA and Code
Requirements................ 68
ERISA Administrative
Exemptions.................. 69
Non-ERISA Plans and Exempt
Plans....................... 72
Unrelated Business Taxable
Income -- Residual
Certificates................ 72
Investment Decision............ 72
Legal Investment
Considerations................. 73
Federal Income Tax
Consequences................... 74
Federal Income Tax Consequences
for REMIC Certificates...... 75
General..................... 75
Status of REMIC
Certificates.............. 75
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Qualification as a REMIC.... 76
Taxation of Regular
Certificates.............. 78
Taxation of Residual
Certificates.............. 85
Taxes That May Be Imposed on
the REMIC Pool............ 92
Liquidation of the REMIC
Pool...................... 93
Administrative Matters...... 93
Limitations on Deduction of
Certain Expenses.......... 94
Taxation of Certain Foreign
Investors................. 94
Backup Withholding.......... 96
Reporting Requirements...... 96
Federal Income Tax Consequences
for Certificates as to Which
No REMIC Election is Made... 97
General..................... 97
Tax Status.................. 97
Premium and Discount........ 98
Recharacterization of
Servicing Fees............ 99
Sale or Exchange of
Certificates.............. 100
Stripped Certificates....... 100
Reporting Requirements and
Backup Withholding........ 103
Taxation of Certain Foreign
Investors................. 104
State Tax Considerations......... 104
Plan of Distribution............. 104
Use of Proceeds.................. 106
Financial Information............ 106
Legal Matters.................... 106
Rating........................... 106
Reports to Certificateholders.... 106
Incorporation of Certain
Information by Reference....... 107
Where You Can Find More
Information.................... 107
Index to Defined Terms........... 108
</TABLE>
4
<PAGE> 69
SUMMARY OF TERMS
- This summary highlights selected information from this document, but does not
contain all of the information that you should consider in making your
investment decision. To understand all of the terms of a series of
certificates, please read this entire document and the accompanying prospectus
supplement carefully.
- This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding of the terms of the certificates
and is qualified by the full description of these calculations, cash flows and
other information in this prospectus and the accompanying prospectus
supplement.
RELEVANT PARTIES
ISSUER
Each series of mortgage pass-through certificates will be issued by a
separate trust fund. Each series of certificates will be issued under a separate
pooling and servicing agreement to be entered into with respect to the series.
DEPOSITOR
Banc of America Funding Corporation will serve as the depositor for each
trust fund under the related pooling and servicing agreement. The depositor is
an indirect subsidiary of Bank of America Corporation.
SELLER
The depositor will acquire the collateral that will serve as security for a
series from one or more sellers. A seller may be an affiliate of the depositor
and/or a servicer.
SERVICER
One or more entities named in the applicable prospectus supplement will
service the mortgage loans held by a trust fund. A servicer may be an affiliate
of the depositor and/or a seller.
MASTER SERVICER
If there is more than one servicer for a trust fund, the related prospectus
supplement may provide for a master servicer for that series of certificates.
The master servicer will supervise the servicers. A master servicer may be an
affiliate of the depositor, a servicer and/or a seller.
For ease of understanding, this prospectus uses the term "Master Servicer"
to describe rights and duties that may be handled by a servicer if there is only
one servicer for a series.
TRUSTEE
A trustee for the trust fund for a series will be named in the applicable
prospectus supplement.
5
<PAGE> 70
TRUST FUND ASSETS
Each Trust Fund will own the assets specified in the related prospectus
supplement. These assets will consist of any combination of the following items:
- mortgage loans, or mortgage-backed securities or mortgage certificates
that are secured by mortgage loans;
- any real estate acquired through foreclosure of a mortgage loan;
- any credit enhancement device;
- amounts on deposit in the collection account or the distribution account
maintained for the trust fund; and
- any other assets described in the related prospectus supplement.
If specified in the related prospectus supplement, the master servicer or
another party may retain the right to receive specified payments to be made with
respect to the mortgage loans or the mortgage certificates. Payments generated
by these retained interests will not be available to make payments on any
certificates.
The related prospectus supplement will specify the cut-off date after which
the trust fund is entitled to receive collections on the mortgage loans and/or
mortgage certificates that it holds.
MORTGAGE LOANS
The mortgage loans in a trust fund:
- will be secured by first liens on fee simple or leasehold interests in
one- to four- family properties;
- may include cooperative apartment loans secured by shares issued by
private, nonprofit cooperative housing corporations;
- may be secured by second homes or investor properties;
- may be conventional loans not insured or guaranteed by any governmental
agency or may be loans insured by the Federal Housing Authority or
partially guaranteed by the Veterans' Administration; and
- will be secured by real property located in one of the fifty states, the
District of Columbia, Guam, Puerto Rico or any other territory of the
United States.
The payment terms on the mortgage loans may include one or more of the
following types of provisions:
- interest may be paid at a fixed or an adjustable rate;
- payment of interest may be deferred and the deferred interest may be
added to the outstanding principal balance of the loan;
- part of the interest may be paid by a party other than the borrower;
- monthly payments may consist of interest only;
- principal may be fully amortized over the life of the loan;
- principal may be amortized over a longer period than the life of the loan
so that a substantial balloon payment is due at the maturity of the loan;
and
6
<PAGE> 71
- monthly payments of principal and/or interest may be fixed for the life
of the loan or they may change periodically.
The mortgage loans will be:
- acquired by the depositor from one or more sellers, either directly or
indirectly through an affiliate of the depositor;
- originated by entities that may be affiliates of the depositor and/or a
seller; and
- underwritten to the standards described in this prospectus and the
applicable prospectus supplement.
You should refer to the applicable prospectus supplement for the precise
characteristics or expected characteristics of the Mortgage Loans and other
property included in a Trust Fund.
MORTGAGE CERTIFICATES
The mortgage certificates in a trust fund may include:
- Fannie Mae mortgage pass-through certificates;
- Freddie Mac mortgage pass-through certificates;
- Ginnie Mae mortgage pass-through certificates; or
- Private mortgage pass-through certificates or mortgage-backed debt
securities.
Each mortgage certificate will represent an interest in a pool of mortgage
loans and/or payments of interest or principal on mortgage loans. The related
prospectus supplement will describe the mortgage certificates for a series in
detail including the underlying collateral and any credit enhancement for the
mortgage certificates.
THE CERTIFICATES
Each certificate of a series will represent an ownership interest in a
trust fund or in specified monthly payments with respect to that trust fund. A
series of certificates will include one or more classes. A class of certificates
will be entitled, to the extent of funds available, to either:
- principal and interest payments in respect of the related mortgage loans;
- principal distributions, with no interest distributions;
- interest distributions, with no principal distributions; or
- other distributions as are described in the applicable prospectus
supplement.
INTEREST DISTRIBUTIONS
With respect to each series of certificates, interest on the related
mortgage loans at the weighted average of their mortgage interest rates, after
netting out servicing fees and certain other amounts as described in this
prospectus or in the applicable prospectus supplement, will be passed through to
holders of the related classes of certificates in accordance with the particular
terms of each class of certificates. The terms of each class of certificates
will be described in the related prospectus supplement.
Except as otherwise specified in the applicable prospectus supplement,
interest on each class of certificates of each series will accrue at the
pass-through rate for each class indicated in the applicable prospectus
supplement on its outstanding certificate balance or notional amount.
7
<PAGE> 72
PRINCIPAL DISTRIBUTIONS
With respect to a series of certificates, principal payments, including
prepayments, on the related mortgage loans will be passed through to holders of
the certificates or otherwise applied in accordance with the related pooling and
servicing agreement on each distribution date. Distributions in reduction of
principal balance will be allocated among the classes of certificates of a
series in the manner specified in the applicable prospectus supplement.
DISTRIBUTION DATES
Distributions on the certificates will be made on the dates specified in
the related prospectus supplement.
Distributions on certificates may be made monthly, quarterly or
semi-annually, as specified in the prospectus supplement.
RECORD DATES
Distributions will be made on each distribution date to certificateholders
of record at the close of business on the last business day of the month
preceding the month in which the distribution date occurs or on another date
specified in the applicable prospectus supplement.
CREDIT ENHANCEMENT
SUBORDINATION
A series of certificates may include one or more classes of senior
certificates and one or more classes of subordinated certificates. The rights of
the holders of subordinated certificates of a series to receive distributions
will be subordinated to the rights of the holders of the senior certificates of
the same series to the extent and in the manner specified in the applicable
prospectus supplement.
Subordination is intended to enhance the likelihood of the timely receipt
by the senior certificateholders of their proportionate share of scheduled
monthly principal and interest payments on the related mortgage loans and to
protect them from losses. This protection will be effected by:
- the preferential right of the senior certificateholders to receive, prior
to any distribution being made in respect of the related subordinated
certificates on each distribution date, current distributions on the
related mortgage loans of principal and interest due them on each
distribution date out of the funds available for distributions on the
distribution date;
- the right of holders to receive future distributions on the mortgage
loans that would otherwise have been payable to the holders of
subordinated certificates;
- the prior allocation to the subordinated certificates of all or a portion
of losses realized on the underlying mortgage loans; and/or
- any other method specified in the related prospectus supplement.
However, subordination does not provide full assurance that there will be
no losses on the senior certificates.
8
<PAGE> 73
OTHER TYPES OF CREDIT ENHANCEMENT
If so specified in the applicable prospectus supplement, the certificates
of any series, or any one or more classes of a series, may be entitled to the
benefits of other types of credit enhancement, including but not limited to:
- special hazard insurance policy
- FHA insurance or a VA guarantee
- mortgage pool insurance policy
- reserve fund
- letter of credit
- over-collateralization
- bankruptcy bond
- limited guarantee
- financial guaranty insurance policy
- surety bond
- cross-support
Any credit support will be described in the applicable prospectus
supplement.
ADVANCES OF DELINQUENT PAYMENTS
If specified in the related prospectus supplement, the master servicer will
be obligated to advance amounts corresponding to delinquent principal and
interest payments on the mortgage loans until the first day of the month
following the date on which the related mortgaged property is sold at a
foreclosure sale or the related mortgage loan is otherwise liquidated, or until
any other time as specified in the related prospectus supplement.
If specified in the related prospectus supplements, the trustee or another
entity will be required to make advances if the master servicer fails to do so.
Any obligation to make advances may be subject to limitations described in the
related prospectus supplement. Advances will be reimbursable to the extent
described in this prospectus and in the related prospectus supplement.
FORMS OF CERTIFICATES
The certificates will be issued either:
- in book-entry form through the facilities of The Depository Trust
Company; or
- in definitive, fully-registered, certificated form.
If you own certificates in book-entry form, you will not receive a physical
certificate representing your ownership interest in your certificates, except
under extraordinary circumstances. Instead, The Depository Trust Company will
effect payments and transfers by means of its electronic recordkeeping services,
acting through certain participating organizations. This may result in certain
delays in your receipt of distributions and may restrict your ability to pledge
your certificates. Your rights with respect to book-entry certificates generally
may be exercised only through The Depository Trust Company and its participating
organizations.
OPTIONAL TERMINATION
If specified in the prospectus supplement with respect to a series, to
effect an early termination of the related trust fund, all, but not less than
all, of the mortgage loans in that trust fund and any property acquired with
respect to the mortgage loans, may be purchased by the master servicer, the
depositor or another person identified in the related prospectus supplement. Any
purchase must be made at the time, in the manner and at the price specified in
the prospectus supplement.
9
<PAGE> 74
Exercise of the right of purchase will result in the early retirement of
the certificates of that series.
TAX STATUS
The treatment of the certificates for federal income tax purposes will
depend on:
- whether a REMIC election is made with respect to a series of
certificates;
- if a REMIC election is made, whether the certificates are regular
interests or residual interests; and
- whether the certificates are interests in a trust fund treated as a
grantor trust
BENEFIT PLAN CONSIDERATIONS
If you are a fiduciary or other person acting on behalf of any employee
benefit plan or other retirement plan or arrangement subject to the Employee
Retirement Income Security Act of 1974, as amended, or Section 4975 of the
Internal Revenue Code of 1986, as amended, you should carefully review with your
legal counsel whether the purchase or holding of certificates could give rise to
a transaction prohibited or otherwise impermissible under these laws.
LEGAL INVESTMENT
Certain classes of certificates that are rated in one of the two highest
rating categories by at least one nationally-recognized statistical rating
agency may constitute "mortgage related securities" under the Secondary Mortgage
Market Enhancement Act of 1984, as amended, for so long as those classes sustain
that rating. Any classes of certificates that constitute "mortgage related
securities" under this act will be specified in your prospectus supplement.
RATING
Certificates of any series will not be offered by this prospectus and a
prospectus supplement unless each class offered is rated in one of the four
highest rating categories by at least one nationally-recognized statistical
rating organization.
- A security rating is not a recommendation to buy, sell or hold the
certificates of any series and is subject to revision or withdrawal at
any time by the assigning rating agency.
- Ratings do not address the effect of prepayments on the yield you may
anticipate when you purchase your certificates.
10
<PAGE> 75
--------------------------------------------------------------------------------
RISK FACTORS
--------------------------------------------------------------------------------
Before making an investment decision, you should carefully consider the
following risk factors and the risk factors discussed in the related prospectus
supplement under "Risk Factors." We believe all of these items describe the
principal factors that make an investment in the certificates of a series
speculative or risky.
LIMITED LIQUIDITY FOR CERTIFICATES MAY AFFECT YOUR ABILITY TO RESELL
CERTIFICATES
The liquidity of your certificates may be limited. You should consider
that:
- a secondary market for the certificates of any series may not develop, or
if it does, it may not provide you with liquidity of investment or it may
not continue for the life of the certificates of any series;
- the prospectus supplement for any series of certificates may indicate
that an underwriter intends to establish a secondary market in those
certificates, but no underwriter will be obligated to do so; and
- unless specified in the applicable prospectus supplement, the
certificates will not be listed on any securities exchange.
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 certificates that receive only payments of principal or
certificates that receive only payments of interest) will experience
illiquidity.
LIMITED ASSETS FOR PAYMENT OF CERTIFICATES
Except for any related credit enhancement described in the applicable
prospectus supplement:
- the mortgage loans included in the related trust fund will be the sole
source of payments on the certificates of a series;
- the certificates of any series will not represent an interest in or
obligation of the depositor, any originator, the master servicer, the
trustee or any of their affiliates; and
- neither the certificates of any series nor the related mortgage loans
will be guaranteed or insured by any governmental agency or
instrumentality, the depositor, any originator, the master servicer, the
trustee, any of their affiliates or, except to the extent described in
the related prospectus supplement, any other person.
Consequently, if payments on the mortgage loans underlying your series of
certificates are insufficient or otherwise unavailable to make all payments
required on your certificates, there will be no recourse to the depositor, the
master servicer, the trustee or any of their affiliates or, except as specified
in the applicable prospectus supplement, any other entity.
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CREDIT ENHANCEMENT IS LIMITED IN AMOUNT AND COVERAGE
With respect to each series of certificates, credit enhancement may be
provided in limited amounts to cover certain types of losses on the underlying
mortgage loans. Under certain circumstances, credit enhancement may be provided
only for one or more classes of certificates of a series.
Credit enhancement will be provided in one or more of the forms referred to
in this prospectus, including, but not limited to:
- subordination of other classes of certificates of the same series;
- a limited guarantee;
- a financial guaranty insurance policy;
- a surety bond;
- a letter of credit;
- a mortgage pool insurance policy;
- a special hazard insurance policy;
- a mortgagor bankruptcy bond;
- a reserve fund; and
- cross-support.
See "Credit Enhancement."
Regardless of the form of credit enhancement provided:
- the amount of coverage will be limited in amount and in most cases will
be subject to periodic reduction in accordance with a schedule of
formula;
- the credit enhancement may provide only very limited coverage as to
certain types of losses, and may provide no coverage as to certain other
types of losses; and
- all or a portion of the credit enhancement for any series of certificates
will generally be permitted to be reduced, terminated or substituted for
if each applicable rating agency indicates that the then-current ratings
will not be adversely affected.
If losses exceed the amount of coverage provided by any credit enhancement
or losses of a type not covered by any credit enhancement occur, the losses will
be borne by the holders of specified classes of the related certificates.
The rating of any class of certificates by a rating agency may be lowered
following its issuance as a result of the downgrading of the obligations of any
applicable credit enhancement provider, or as a result of losses on the related
mortgage loans in excess of the levels contemplated by such rating agency at the
time of its initial rating analysis.
Neither the depositor nor any of its affiliates will have any obligation to
replace or supplement any credit enhancement, or to take any other action to
maintain any rating of any class of certificates.
See "Credit Enhancement."
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REAL ESTATE MARKET CONDITIONS AFFECT MORTGAGE LOAN PERFORMANCE
An investment in securities such as the certificates, which generally
represent interests in pools of residential mortgage loans, may be affected by a
decline in real estate values and changes in the mortgagor's financial
condition. There is no assurance that the values of the mortgaged properties
securing the mortgage loans underlying any series of certificates have remained
or will remain at their levels on the dates of origination of the related
mortgage loans.
Delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry and those experienced in
the master servicer's servicing portfolio, if the residential real estate market
experiences an overall decline in property values large enough to cause the
outstanding balance of the mortgage loans in a trust fund and any secondary
financing on the mortgaged properties to become equal to or greater than the
value of the mortgaged properties.
If losses on mortgage loans underlying a series are not covered by credit
enhancement, certificateholders of the series will bear all risk of loss
resulting from default by mortgagors and will have to look primarily to the
value of the mortgaged properties for recovery of the outstanding principal and
unpaid interest on the defaulted mortgage loans. See "The Trust Funds -- The
Mortgage Loans."
GEOGRAPHIC CONCENTRATION MAY INCREASE RATES OF LOSS AND DELINQUENCY
In addition to risk factors related to the residential real estate market
generally, certain geographic regions of the United States from time to time
will experience weaker regional economic conditions and housing markets or be
directly or indirectly affected by natural disasters or civil disturbances such
as earthquakes, hurricanes, floods, eruptions or riots. Mortgage loans in
affected areas will experience higher rates of loss and delinquency than on
mortgage loans generally. Although mortgaged properties located in certain
identified flood zones will be required to be covered, to the maximum extent
available, by flood insurance, as described under "The Pooling and Servicing
Agreement -- Hazard Insurance," no mortgaged properties will be required to be
insured otherwise against earthquake damage or any other loss not covered by
standard insurance policies, as described under "The Pooling and Servicing
Agreement -- Hazard Insurance."
The ability of mortgagors to make payments on the mortgage loans may also
be affected by factors that do not necessarily affect property values, such as
adverse economic conditions generally, in particular geographic areas or
industries, or affecting particular segments of the borrowing community, such as
mortgagors relying on commission income and self-employed mortgagors. These
factors 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.
The mortgage loans underlying a series of certificates may be concentrated
in certain regions. A high concentration in a region may present risk
considerations in addition to those generally present for similar
mortgage-backed securities that do not have a similar concentration. See
"Prepayment and Yield Considerations."
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UNPREDICTABILITY OF PREPAYMENTS ON ASSETS MAY ADVERSELY AFFECT AVERAGE LIVES AND
YIELDS OF CERTIFICATES
The yield on the certificates of each series will depend in part on the
rate of principal payment on the mortgage loans, including prepayments,
liquidations due to defaults and mortgage loan repurchases. The yield may be
adversely affected, depending upon whether a particular certificate is purchased
at a premium or a discount, by a higher or lower than anticipated rate of
prepayments on the related mortgage loans. In particular:
- the yield on classes of certificates entitling their holders primarily or
exclusively to payments of interest or primarily or exclusively to
payments of principal will be extremely sensitive to the rate of
prepayments on the related mortgage loans; and
- the yield on certain classes of certificates may be relatively more
sensitive to the rate of prepayment of specified mortgage loans than
other classes of certificates.
The rate of prepayments on mortgage loans is influenced by a number of
factors, including:
- prevailing mortgage market interest rates;
- local and national economic conditions;
- homeowner mobility; and
- the ability of the borrower to obtain refinancing.
In addition, your yield may be adversely affected:
- by interest shortfalls which may result from the timing of the receipt of
prepayments or liquidations if the interest shortfalls are not covered by
aggregate servicing fees or other mechanisms specified in the applicable
prospectus supplement;
- if losses on the mortgage loans in the related trust fund are allocated
to your certificates; and
- to the extent of unadvanced delinquencies on the mortgage loans in the
related trust fund.
Classes of certificates identified in the applicable prospectus supplement
as subordinated certificates are more likely to be affected by delinquencies and
losses than other classes of certificates.
See "Prepayment and Yield Considerations."
BANKRUPTCY OF THE DEPOSITOR OR A SELLER MAY DELAY OR REDUCE COLLECTIONS ON
MORTGAGE LOANS
Neither the United States Bankruptcy Code nor similar applicable state laws
prohibit the depositor from filing a voluntary application for relief under
these insolvency laws. However, the transactions contemplated by this prospectus
and by the related prospectus supplement will be structured so that the
voluntary or involuntary application for relief under insolvency laws by the
depositor is unlikely and filings by a seller which is an affiliate of the
depositor from whom the depositor acquires the mortgage loans should not result
in consolidation of the assets and liabilities of the depositor with those of
that seller. These steps include the creation of the depositor as a separate,
limited purpose subsidiary, the certificate of incorporation of which contains
limitations on the nature of the depositor's business and restrictions on the
ability of the depositor to commence voluntary or involuntary cases or
proceedings under insolvency laws without the prior unanimous affirmative vote
of all its directors. However, there can be no assurance that the activities of
the depositor would not result in a court concluding that the assets and
liabilities of the depositor should be consolidated with those of a seller.
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Each seller will transfer its related mortgage loans to the depositor and
the depositor will transfer the mortgage loans to the related trust fund. If a
seller were to become a debtor in a bankruptcy case, a creditor, trustee or the
debtor itself may take the position that the contribution or transfer of the
mortgage loans by the seller to the depositor should be characterized as a
pledge of those mortgage loans to secure a borrowing of the seller, with the
result that the depositor is deemed to be a creditor of the seller, secured by a
pledge of the applicable mortgage loans. If an attempt of this type were
successful, delays in payments of collections on the mortgage loans could occur
or reductions in the amount of payments could result, or a trustee in bankruptcy
could elect to accelerate payment of the obligation to the depositor and
liquidate the mortgage loans.
OWNERS OF BOOK-ENTRY CERTIFICATES ARE NOT ENTITLED TO EXERCISE RIGHTS OF HOLDERS
OF CERTIFICATES
If so provided in a prospectus supplement, one or more classes of
certificates of a series may be issued in book-entry form. These book-entry
certificates will be represented initially by one or more certificates
registered in the name of Cede & Co., the nominee for The Depository Trust
Company, and will not be registered in the names of the owners or their
nominees. As a result, unless definitive Certificates are issued, owners of
beneficial interests in certificates will not be recognized by the trustee as
"certificateholders" under the related pooling and servicing agreement. If you
own book-entry certificates, you will not be able to exercise the rights of a
certificateholder directly and must act indirectly through The Depository Trust
Company and its participating organizations. See "Description of
Certificates -- Book-Entry Form."
CASH FLOW AGREEMENTS ARE SUBJECT TO COUNTERPARTY RISK
The assets of a trust fund may, if specified in the related prospectus
supplement, include agreements, such as interest rate swap, cap, floor or
similar agreements which will require the provider of this type of agreement to
make payments to the trust fund under the circumstances described in the
prospectus supplement. If payments on the certificates of the related series
depend in part on payments to be received under this type of agreement, the
ability of the trust estate to make payments on the certificates will be subject
to the credit risk of the provider of the agreement. The prospectus supplement
for a series of certificates will describe any mechanism, such as the payment of
"breakage fees," that may exist to facilitate replacement of the agreement upon
the default or credit impairment of the related provider. However, there can be
no assurance that any mechanism will result in the ability of the master
servicer or the trustee to obtain a replacement agreement.
EFFECTS OF FAILURE TO COMPLY WITH CONSUMER PROTECTION LAWS
There are various federal and state laws, public policies and principles of
equity that protect consumers. Among other things, these laws, policies and
principles:
- regulate interest rates and other charges;
- require certain disclosures;
- require licensing of mortgage loan originators;
- prohibit discriminatory lending practices;
- regulate the use of consumer credit information; and
- regulate debt collection practices.
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Violation of certain provisions of these laws, policies and principles:
- may limit a servicer's ability to collect all or part of the principal of
or interest on the mortgage loans;
- may entitle the borrower to a refund of amounts previously paid; and
- could subject a servicer to damages and administrative sanctions.
See "Certain Legal Aspects of the Mortgage Loans."
In addition, certain of the mortgage loans secured by mortgaged properties
located in Texas may be subject to the provisions of Texas laws which regulate
loans other than purchase money loans. These laws provide for certain disclosure
requirements, caps on allowable fees, required loan closing procedures and other
restrictions. Failure to comply with any requirement may render a mortgage loan
unenforceable and/or the lien on the mortgage property invalid. There are also
similar risks involved in servicing these mortgage loans (such as the failure to
comply with an obligation to the borrower within a reasonable time after
receiving notification from the borrower) that can result in the forfeiture of
all principal and interest due on the mortgage loan.
See "Certain Legal Aspects of the Mortgage Loans -- Anti-Deficiency
Legislation, the Bankruptcy Code and Other Limitations on Lenders" and
" -- Texas Home Equity Loans."
INCREASED RISK OF LOSS IF DELINQUENT MORTGAGE LOANS ARE ASSETS OF A TRUST FUND
A portion of the mortgage loans in a trust fund may be delinquent when the
related certificates are issued. You should consider the risk that the inclusion
of delinquent mortgage loans in a trust fund may cause the rate of defaults and
prepayments on the mortgage loans to increase. As a result, credit enhancement
for such a series of certificates may not cover the related losses.
--------------------------------------------------------------------------------
THE TRUST FUNDS
--------------------------------------------------------------------------------
GENERAL
The trust fund (the "TRUST FUND") for each series will be held by the
trustee named in the related prospectus supplement (the "TRUSTEE") for the
benefit of the related certificateholders. Each Trust Fund will consist of a
mortgage pool comprised of mortgage loans (the "MORTGAGE LOANS") and/or
mortgage-backed securities (the "MORTGAGE CERTIFICATES" and, together with the
Mortgage Loans, the "MORTGAGE ASSETS") together with payments in respect of the
Mortgage Assets and certain accounts, obligations or agreements, in each case as
specified in the related prospectus supplement. The Mortgage Assets in a Trust
Fund will consist of Mortgage Loans and/or Mortgage Certificates, as specified
in the related prospectus supplement.
The certificates (the "CERTIFICATES") will be entitled to payment from the
assets of the related Trust Fund or other assets pledged for the benefit of the
certificateholders as specified in the related prospectus supplement and will
not be entitled to payments in respect of the assets of any other Trust Fund
established by Banc of America Funding Corporation (the "DEPOSITOR").
The following is a brief description of the Mortgage Assets expected to be
included in the Trust Funds. If specific information respecting the Mortgage
Assets is not known at the time the related series of Certificates initially is
offered (the "CLOSING DATE"), more general information of the nature described
below will be provided in the related prospectus supplement, and final specific
information will be set
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forth in a Current Report on Form 8-K to be available to investors on the
Closing Date and to be filed with the Securities and Exchange Commission within
fifteen days after the Closing Date. A schedule of the Mortgage Assets relating
to the series will be attached to the pooling and servicing agreement delivered
to the Trustee upon delivery of the Certificates.
THE MORTGAGE LOANS
General
The mortgaged properties securing the Mortgage Loans 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.
Payment Provisions of the Mortgage Loans
The Mortgage Loans in a Trust Fund will have monthly payment dates as set
forth in the related prospectus supplement. The payment terms of the Mortgage
Loans to be included in a Trust Fund will be described in the related prospectus
supplement and may include any of the following features or combination of other
features described in the related prospectus supplement:
(1) Interest may be payable at:
- a fixed rate;
- a rate adjustable from time to time in relation to an index;
- 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 these limitations.
Accrued interest may be deferred and added to the principal of a loan for
the periods and under circumstances as may be specified in the related
prospectus supplement. Mortgage Loans may provide for the payment of
interest at a rate lower than the specified interest rate borne by the
Mortgage Loan for a period of time or for the life of the loan, and the
amount of any difference may be contributed from funds supplied by the
seller of the mortgaged property or another source.
(2) Principal may:
- be payable on a level debt service basis to fully amortize the loan
over its term;
- be calculated on the basis of an assumed amortization schedule that is
significantly longer than the original term to maturity;
- be calculated on the basis of 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;
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- have payment terms where payment of all or a substantial portion of
the principal may be due on maturity; or
- include interest that has been deferred and added to the principal
balance of the Mortgage Loan.
(3) Monthly payments of principal and interest may:
- be fixed for the life of the loan;
- increase over a specified period of time; or
- 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.
(4) The Mortgage Loans generally may be prepaid at any time. If
specified in the related prospectus supplement, prepayments of principal
will be subject to a prepayment fee, which may:
- be fixed for the life of any Mortgage Loan or
- decline over time, and
- be prohibited for the life of any Mortgage Loan or for certain
periods.
Certain Mortgage Loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment fee
in connection with any subsequent prepayment. Other mortgage loans may
permit prepayments without payment of a fee unless the prepayment occurs
during specified time periods.
(5) The loans may include "due-on-sale" clauses which permit the
mortgagee to demand payment of the entire mortgage loan in connection with
the sale or certain transfers of the related mortgaged property. Other
Mortgage Loans may be assumable by persons meeting applicable underwriting
standards.
A Trust Fund may contain certain Mortgage Loans ("BUYDOWN LOANS"), which
include provisions allowing the entity that sold the Mortgage Loans to the
Depositor (the "SELLER") or a third party to partially subsidize 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. If this assumption as to increased income is not fulfilled, the
possibility of defaults on Buydown Loans is increased. The related prospectus
supplement will contain information with respect to any Buydown Loan concerning
limitations on the interest rate paid by the 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 contracts for the sale of mortgaged properties or deeds to secure debt
pursuant to which the borrower promises to pay the amount due to the lender 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.
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Mortgage Loans with certain loan-to-value ratios and/or certain principal
balances may be covered wholly or partially by primary mortgage insurance
policies. The existence, extent and duration of any coverage will be described
in the related prospectus supplement. The loan-to-value ratio 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:
(i) the lesser of:
(a) the appraised value determined in an appraisal obtained by the
originator of the 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 determined in an appraisal
obtained at the time of refinancing; or
(ii) the appraised value determined in an appraisal made at the
request of a mortgagor subsequent to origination to eliminate the
mortgagor's obligation to keep a primary mortgage insurance policy in
force.
Mortgage Loan Information in Prospectus Supplement
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 the Trust Fund, including:
- the number of Mortgage Loans;
- the geographic distribution of the Mortgage Loans;
- the aggregate principal balance of the Mortgage Loans;
- the types of dwelling constituting the mortgaged properties;
- the longest and shortest scheduled term to maturity;
- the maximum principal balance of the Mortgage Loans;
- the maximum loan-to-value ratio of the Mortgage Loans at origination or
such other date specified in the related prospectus supplement;
- the maximum and minimum interest rates on the Mortgage Loans; and
- the aggregate principal balance of nonowner-occupied mortgaged
properties.
Single Family and Cooperative Loans
Mortgage Loans will consist of mortgage loans, deeds of trust or
participations or other beneficial interests in those instruments, secured by
first liens on one- to four-family residential properties or other Mortgage
Loans specified in the related prospectus supplement. If so specified, the
Mortgage Loans may include cooperative loans secured by security interests in
shares issued by cooperatives and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling units in the
cooperatives' buildings. These loans may be loans that are not insured or
guaranteed by any governmental agency or loans insured by the FHA or partially
guaranteed by the VA, as specified in the related prospectus supplement.
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The mortgaged properties relating to single family mortgage loans will
consist of:
- detached or semi-detached one-family dwelling units;
- two- to four-family dwelling units;
- townhouses;
- rowhouses;
- individual condominium units;
- individual units in planned unit developments; and
- certain other dwelling units.
The mortgaged properties may include:
- vacation homes;
- second homes;
- investment properties; and
- leasehold interests.
In the case of leasehold interests, the term of the leasehold will exceed
the scheduled maturity of the Mortgage Loan by at least five years, or other
term specified in the related prospectus supplement. Certain Mortgage Loans may
be originated or acquired in connection with corporate programs, including
employee relocation programs. In limited instances, a borrower who uses the
dwelling unit as a primary residence may also make some business use of the
property.
Substitution of Mortgage Loans
Substitution of Mortgage Loans will be permitted in the event of breaches
of representations and warranties with respect to any original Mortgage Loan or
if the documentation with respect to any Mortgage Loan is determined by the
Trustee or a custodian appointed by the Trustee to be incomplete. The period
during which the substitution will be permitted generally will be indicated in
the related prospectus supplement. The related prospectus supplement will
describe any other conditions upon which Mortgage Loans may be substituted for
Mortgage Loans initially included in the Trust Fund.
MORTGAGE CERTIFICATES
A Trust Fund that contains Mortgage Certificates will have either GNMA
Certificates, Freddie Mac Certificates, Fannie Mae Certificates, Private
Certificates or a combination of any of those types of Mortgage Certificates.
The Mortgage Certificates will be acquired by the Depositor from one or more
affiliated or unaffiliated Sellers.
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 from that pool. 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 issuer may issue certificates
representing interests in mortgage loans having characteris-
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tics that are different from the types of mortgage loans described below. The
terms of any Mortgage Certificates that are 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 actual terms of those Mortgage Certificates.
GNMA
The Government National Mortgage Association ("GNMA") is a wholly owned
corporate instrumentality of the United States within the Department of Housing
and Urban Development ("HUD"). Section 306(g) of Title III of the National
Housing Act of 1934, as amended (the "HOUSING ACT"), authorizes GNMA to
guarantee the timely payment of the principal of and interest on certificates
that are based on and backed by a pool of loans ("FHA LOANS") insured or
guaranteed by the United States Federal Housing Administration (the "FHA") under
the Housing Act or Title V of the Housing Act of 1949, or by the United States
Department of Veteran Affairs (the "VA") under the Servicemen's Readjustment Act
of 1944, as amended, or Chapter 37 of Title 38, United States Code or by pools
of other eligible mortgage loans.
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guaranty under this subsection." To meet its
obligations under its guaranties, GNMA is authorized, under Section 306(d) of
the Housing Act, to borrow from the United States Treasury with no limitations
as to amount.
GNMA Certificates
All of the GNMA Certificates (the "GNMA CERTIFICATES") will be
mortgage-backed certificates issued and serviced by GNMA- or Fannie Mae-approved
mortgage servicers. The mortgage loans underlying GNMA Certificates may consist
of FHA Loans secured by mortgages on one- to four-family residential properties
or multifamily residential properties, loans secured by mortgages on one- to
four-family residential properties or multifamily residential properties,
mortgage loans which are partially guaranteed by the VA and other mortgage loans
eligible for inclusion in mortgage pools underlying GNMA Certificates. Unless
otherwise specified in the related prospectus supplement, at least 90% 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 that 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
mortgage loan over the GNMA Certificate pass-through rate. In addition, each
payment to a holder of a GNMA Certificate will include proportionate
pass-through payments to that 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 the 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
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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 the GNMA Certificate. Pursuant to this type of
agreement, the servicer is required to advance its own funds to make timely
payments of all amounts due on the GNMA Certificate, even if the payments
received by the servicer on the mortgage loans backing the GNMA Certificate are
less than the amounts due on the 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 the payment. Upon notification and request, GNMA
will make such payments directly to the registered holder of the GNMA
Certificate. If no payment is made by such servicer and the servicer fails to
notify and request GNMA to make the payment, the registered holder of the GNMA
Certificate has recourse only against GNMA to obtain the 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 the 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 different characteristics and terms will be
described in the related prospectus supplement.
Freddie Mac
The Federal Home Loan Mortgage Corporation ("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 residential mortgage loans or
participation interests in those mortgage loans and the resale of those mortgage
loans in the form of mortgage securities. Freddie Mac is confined to purchasing,
so far as practicable, conventional mortgage loans and participation interests
in conventional mortgages which it deems to be of the quality, type and class
that 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 the
Freddie Mac Certificate is held.
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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 the 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
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 the month
of distribution for the related Freddie Mac Certificate.
Freddie Mac Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of Freddie Mac under its
guarantee are obligations solely of Freddie Mac and are not backed by, nor
entitled to, the full faith and credit of the United States.
As described above, the Freddie Mac Certificates included in a Trust Fund,
and the related underlying mortgage loans, may have characteristics and terms
different from those described above. Any 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,
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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 that holder's proportionate share of the full principal amount
of any foreclosed or other finally liquidated mortgage loan, whether or not the
principal amount is actually recovered. If Fannie Mae were unable to perform
these 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 of those
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 one of its
affiliates. 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 that PC Agreement (the "PC TRUSTEE"). The PC Trustee or its agent, or a
custodian, will possess the mortgage loans underlying such Private Certificates.
The mortgage loans underlying the Private Certificates may be subserviced by one
or more loan servicing institutions under the supervision of a master servicer
(the "PC SERVICER").
The sponsor of the Private Certificates (the "PC SPONSOR") will be a
financial institution or other entity that is or has affiliates that 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 those trusts and selling
beneficial interests in those 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
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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 (this 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 the information is reasonably available
to the Depositor and the Depositor reasonably believes the information to be
reliable:
- the aggregate approximate principal amount and type of the Private
Certificates to be included in the Trust Fund;
- certain characteristics of the mortgage loans that comprise the
underlying assets for the Private Certificates including:
- the payment features of such underlying mortgage loans;
- the approximate aggregate principal balance, if known, of underlying
mortgage loans insured or guaranteed by a governmental entity;
- the servicing fee or range of servicing fees with respect to the
underlying mortgage loans; and
- the minimum and maximum stated maturities of the underlying mortgage
loans at origination;
- the maximum original term-to-stated maturity of the Private Certificates;
- the weighted average term-to-stated maturity of the Private Certificates;
- the pass-through or certificate rate of the Private Certificates;
- the weighted average pass-through or certificate rate of the Private
Certificates;
- the PC Sponsor, the PC Trustee and the PC Servicer;
- 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
the Private Certificates themselves;
- the terms on which the underlying mortgage loans for the Private
Certificates may, or are required to, be purchased prior to their stated
maturity or the stated maturity of the Private Certificates; and
- 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 an account or
accounts (collectively, the "DISTRIBUTION ACCOUNT") for the benefit of the
Trustee and holders of the Certificates of that series for receipt of:
- each distribution or monthly payment, as the case may be, made to the
Trustee with respect to the Mortgage Assets;
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- the amount of cash, if any, specified in the related pooling and
servicing agreement to be initially deposited therein;
- the amount of cash, if any, withdrawn from any related reserve fund or
other fund; and
- the reinvestment income, if any.
The pooling and servicing agreement for a series may authorize the Trustee
to invest the funds in the Distribution Account in certain investments that will
qualify as "permitted investments" under Section 860G(a)(5) of the Code in the
case of REMIC Certificates. These eligible investments will generally mature not
later than the business day immediately preceding the next Distribution Date for
the series (or, in certain cases, on the Distribution Date). Eligible
investments include, among other investments, obligations of the United States
and certain of its agencies, federal funds, certificates of deposit, commercial
paper carrying the ratings specified in the related pooling and servicing
agreement of each rating agency rating the Certificates of that 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.
--------------------------------------------------------------------------------
DESCRIPTION OF CERTIFICATES
--------------------------------------------------------------------------------
Each series of Certificates will be issued pursuant to a separate pooling
and servicing agreement among the Depositor, the Seller (if so provided in the
related prospectus supplement), the Trustee and a master servicer (the "MASTER
SERVICER"). A form of pooling and servicing agreement is filed as an exhibit to
the Registration Statement of which this prospectus is a part. The following
summaries describe material provisions that may appear in each pooling and
servicing agreement. The prospectus supplement for a series of Certificates will
describe any provision of the related pooling and servicing agreement that
materially differs from the description 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 and
servicing agreement and the prospectus supplement related to a particular series
of Certificates.
GENERAL
The Certificates are issuable in series, each evidencing the entire
ownership interest in a Trust Fund of assets consisting primarily of Mortgage
Assets. Unless otherwise specified in the related prospectus supplement, the
Certificates of each series will be issued either in fully registered form or in
book-entry form and in the authorized denominations for each class specified in
the related prospectus supplement. The Certificates of each series will evidence
specified beneficial ownership interests in the related Trust Fund created
pursuant to the related pooling and servicing agreement and will not be entitled
to payments in respect of the assets included in any other Trust Fund
established by the Depositor. The Certificates will not represent obligations of
the Depositor, the Master Servicer, the Trustee or any affiliate of those
parties. 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
Residual Certificates, as well as restrictions on the transfer of 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
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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 that series. Certain
series or classes of Certificates may be covered by insurance policies, surety
bonds or other forms of credit enhancement, in each case as described in this
prospectus 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 of principal and interest. 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 distributions may vary among classes or over time as specified in the
related prospectus supplement.
DEFINITIVE FORM
Certificates of a series that are issued in fully-registered, certificated
form are referred to as "DEFINITIVE CERTIFICATES." Distributions of principal
of, and interest on, Definitive Certificates will be made directly to holders of
Definitive Certificates in accordance with the procedures set forth in the
pooling and servicing agreement. The Definitive Certificates of a series offered
by this prospectus and the applicable prospectus supplement will be transferable
and exchangeable at the office or agency maintained by the Trustee or such other
entity for such purpose set forth in the applicable prospectus supplement. No
service charge will be made for any transfer or exchange of Definitive
Certificates, but the Trustee or such other entity may require payment of a sum
sufficient to cover any tax or other governmental charges in connection with the
transfer or exchange.
BOOK-ENTRY FORM
Certificates of a series that are issued in book-entry form are referred to
as "BOOK-ENTRY CERTIFICATES." Each class of the Book-Entry Certificates of a
series 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 those
Certificates; as those terms are used in this prospectus. No person acquiring an
interest in a Book-Entry Certificate (a "BENEFICIAL OWNER") will be entitled to
receive a Definitive Certificate representing their interest in the Book-Entry
Certificate, except as set forth below. Unless Definitive Certificates are
issued under the limited circumstances described, all references to actions
taken by certificateholders, in the case of the Book-Entry Certificates, shall
refer to actions taken by DTC upon instructions from its DTC Participants, and
all references to distributions, notices, reports and statements to
certificateholders, in the case of the Book-Entry Certificates, shall refer to
distributions, notices, reports and statements to DTC, as the registered holder
of the Book-Entry Certificates 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
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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 (which may
include any underwriter identified in the prospectus supplement applicable to
any series), 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, or a
paying agent on behalf of the Trustee, through DTC Participants. DTC will
forward those distributions to its DTC Participants, which then will forward
them to Indirect DTC Participants or Beneficial Owners. Beneficial Owners will
not be recognized by the Trustee, the Master Servicer or any paying agent as
certificateholders, as that term is used in the pooling and servicing 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, or a paying agent on behalf of
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 and servicing 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 actions with respect to specified voting interests
only at the direction of and on behalf of DTC Participants whose holdings of
Book-Entry Certificates evidence these specified voting interests. DTC may take
conflicting actions with respect to voting interests if DTC Participants whose
holdings of Book-Entry Certificates evidence the voting interests authorize
divergent action.
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 those 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 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
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such coverage is otherwise unavailable, ultimate payment, of amounts
distributable with respect to such Book-Entry Certificates may be impaired.
The Book-Entry Certificates will be converted to Definitive Certificates
and reissued to Beneficial Owners or their nominees, rather than to DTC or its
nominee, only:
- if the Trustee is advised in writing that DTC is no longer willing or
able to discharge properly its responsibilities as depository with
respect to the Book-Entry Certificates and the Trustee or the Depositor,
as specified in the pooling and servicing agreement, is unable to locate
a qualified successor;
- if the Depositor or the Master Servicer as applicable, elects to
terminate the book-entry system through DTC;
- if, after the occurrence of an event of default under the pooling and
servicing agreement, Beneficial Owners representing not less than 51% of
the voting rights of the outstanding Book-Entry Certificates advise the
Trustee through DTC, in writing, that the continuation of a book-entry
system through DTC is no longer in the Beneficial Owners' best interest;
or
- under other circumstances described in the related prospectus supplement.
Upon the occurrence of any event described above, the Trustee will be
required to notify all Beneficial Owners through DTC Participants of the
availability of Definitive Certificates. Upon surrender by DTC of the physical
certificates representing the Book-Entry Certificates and receipt of
instructions for re-registration, the Trustee will reissue the Book-Entry
Certificates as Definitive Certificates to Beneficial Owners. The procedures
relating to payment on and transfer of Certificates initially issued as
Definitive Certificates then will apply to those Book-Entry Certificates that
have been reissued as Definitive Certificates.
DISTRIBUTIONS
Distributions of principal of and interest on the Certificates of a series
will be made on the dates specified in the related prospectus supplement (each,
a "DISTRIBUTION DATE"), and allocated to the classes 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 that are of a certain minimum
denomination, as specified in the related prospectus supplement) or by check
mailed to record holders of those Certificates as of the related record date at
their addresses appearing on the certificate register, except that the Trustee
will make the final distribution of principal only upon presentation and
surrender of each Certificate at the office or agency of the Trustee or a paying
agent 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 a Certificate. If the Certificates of a series are issued
in book-entry form, the Trustee will make distributions on those Certificates,
including the final distribution in retirement of those Certificates, through
the facilities of a depository in accordance with the depository's usual
procedures in the manner described in the related prospectus supplement.
The Trustee will distribute principal of and interest on the Certificates
out of the Distribution Account established under the pooling and servicing
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 and servicing agreement, together with any
reinvestment income (if so specified in the related prospectus supplement) those
funds, and amounts withdrawn from any reserve fund or other fund or payments in
respect of other credit enhancement and required to be deposited, directly into
the Distribution Account. These funds will be available (except for funds held
for future distribution and for funds payable to the Master Servicer) to make
distributions on Certificates of
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such series on the next Distribution Date. See "The Trust Funds -- Distribution
Account" and "The Pooling and Servicing Agreement -- Payments on Mortgage
Loans."
Interest
Interest will accrue on the aggregate certificate principal balance (or, in
the case of IO Certificates, the aggregate notional amount) of each class of
Certificates entitled to interest at the pass-through rate (which may be a fixed
rate or a rate adjustable as specified in the prospectus supplement) during each
interest accrual period specified in such prospectus supplement. The interest
accrual period with respect to any Distribution Date is the period from and
including the first day of the month preceding the month of that Distribution
Date (or, in the case of the first Distribution Date, from the Closing Date)
through the last day of the preceding month, or any other period as may be
specified in the related prospectus supplement. If funds are available for
distribution, the Trustee will distribute interest accrued during each 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 on the Distribution Dates specified in the related prospectus
supplement until the class certificate balance of that class is reduced to zero
or, in the case of Certificates entitled only to distributions allocable to
interest, until the aggregate notional amount of those 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 based on the
notional amount of that 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.
The Trustee will begin distributing interest on each class of Accrual
Certificates only after the occurrence of the events specified in the related
prospectus supplement and, prior to that time, interest will be added to the
class certificate balance of each class of Accrual Certificates. Any class of
Accrual Certificates then will accrue interest on its outstanding class
certificate balance as 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 that class of
Certificates specified in the prospectus supplement, reduced by all
distributions reported to holders of the 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
those Accrual Certificates and (ii) in the case of adjustable-rate Certificates,
subject to the effect of any 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 that 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), to the
extent of funds available for distribution, 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 reduced to zero. The Trustee will allocate distributions of principal
to the Certificates of each class, during the periods and in the order specified
in the related prospectus supplement. Unless otherwise
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specified in the related prospectus supplement, the Trustee will distribute
these funds pro rata among the Certificates of each class then entitled to
receive principal distributions.
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 of that series by reference to the following
categories.
PRINCIPAL TYPES
<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
<S> <C>
ACCRETION DIRECTED CERTIFICATES...... A class of Certificates that receives principal payments
from amounts that otherwise would be distributed as interest
on specified Accrual Certificates. These 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.
COMPANION CERTIFICATES OR SUPPORT
CERTIFICATES....................... A class of Certificates that receives principal payments on
a Distribution Date only if scheduled payments have been
made on specified Planned Amortization Certificates,
Targeted Amortization Certificates and/or Scheduled
Amortization Certificates.
COMPONENT CERTIFICATES............... A class of Certificates consisting of two or more specified
components, 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 CERTIFICATES................. A class of Senior Certificates that is locked out of or is
designed not to participate in or to participate to a
limited extent in, for a specified period, the receipt of
(1) principal prepayments on the Mortgage Loans that are
allocated disproportionately to the classes of Senior
Certificates of the series as a group under a "shifting
interest" structure and/or (2) scheduled principal payments
on the Mortgage Loans that are allocated to the classes of
Senior Certificates of the series as a group. A class of
Lockout Certificates typically will not 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 the principal
payments that it would otherwise receive in the absence of a
"lockout" structure will be distributed in reduction of the
principal balances of other Senior Certificates. Lockout
Certificates are designed to minimize their weighted average
life volatility during the lockout period.
NOTIONAL AMOUNT CERTIFICATES......... A class of Certificates having no principal balance and
bearing interest on the related notional amount. The
notional amount is a hypothetical amount used for
calculating interest distributions.
</TABLE>
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<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
<S> <C>
PASS-THROUGH CERTIFICATES............ A class of Senior Certificates that receives a specified
percentage of the principal payments that are distributable
to the Senior Certificates or a group of Senior
Certificates, other than any Ratio Strip Certificates, in
the aggregate on a Distribution Date and that is not a class
of Sequential Pay Certificates.
PLANNED AMORTIZATION CERTIFICATES OR
PAC CERTIFICATES................... A class of Certificates 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 class of
Planned Amortization Certificates. The Planned Amortization
Certificates in any series may be subdivided into different
categories such as Planned Amortization Certificates I ("PAC
I"), Planned Amortization Certificates II ("PAC II") and so
forth which are derived using different structuring ranges.
A class of PAC Certificates is designed to provide
protection against prepayments occurring at a constant rate
within the structuring range.
RATIO STRIP CERTIFICATES............. A class of Certificates that receives a constant proportion,
or "ratio strip," of the principal payments on the Mortgage
Assets.
SCHEDULED AMORTIZATION
CERTIFICATES....................... A class of Certificates that is designed to receive
principal payments using a predetermined principal balance
schedule but is not designated as a class of Planned
Amortization Certificates or Targeted Amortization
Certificates. The schedule is derived by assuming either two
constant prepayment rates or a single constant prepayment
rate for the Mortgage Assets. In the case of two constant
rates, these two rates are the endpoints for the
"structuring range" for the class of Scheduled Amortization
Certificates and the range generally is narrower than that
for a class of Planned Amortization Certificates. Typically,
the Support Certificates for the applicable series of
Certificates generally will represent a smaller percentage
of a class of Scheduled Amortization Certificates than the
Support Certificates generally would represent in relation
to a Planned Amortization Certificate or a Targeted
Amortization Certificate. A Scheduled Amortization
Certificate generally is less sensitive to prepayments than
a Support Certificate, but is more sensitive than a class of
Planned Amortization Certificates or Targeted Amortization
Certificates.
SENIOR CERTIFICATES.................. A class of Certificates that is entitled to receive payments
of principal and interest on each Distribution Date prior to
the classes of Subordinated Certificates.
SEQUENTIAL PAY CERTIFICATES.......... A class of Certificates that receives principal payments in
a prescribed sequence, that does not have predetermined a
principal balance schedule and that, in most cases, is
entitled to receive payments of principal continuously from
the first Distribution Date on which they receive principal
until they are retired. A class of Sequential Pay
Certificates may receive payments of principal concurrently
with one or more other classes of Sequential Pay
Certificates. 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 Certificate.
</TABLE>
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<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
<S> <C>
SUBORDINATED CERTIFICATES............ A class of Certificates that receives payments of principal
and interest on each Distribution Date only after the Senior
Certificates and classes of Subordinated Certificates with
higher priority of distributions have received their full
principal and interest entitlements.
SUPER SENIOR CERTIFICATES............ A class of Senior Certificates that will not bear its share
of certain losses, after the Subordinated Certificates are
no longer outstanding, for so long as one or more specified
classes of Senior Certificates are outstanding.
SUPER SENIOR SUPPORT CERTIFICATES.... A class of Senior Certificates that bears certain losses
that otherwise would have been allocated to a class of Super
Senior Certificates.
TARGETED AMORTIZATION CERTIFICATES OR
TAC CERTIFICATES................... A class of Certificates that receives principal payments
using a predetermined principal balance schedule derived by
assuming a single constant prepayment rate for the Mortgage
Assets. A class of TAC Certificates is designed to provide
some protection against prepayments at a rate exceeding the
assumed constant prepayment used to derive the principal
balance schedule for that class.
INTEREST TYPES
ACCRUAL CERTIFICATES................. A class of Certificates that accretes the amount of accrued
interest otherwise distributable on the class, which amount
will be added to the principal balance of the class on each
applicable Distribution Date. The accretion may continue
until some specified event has occurred or until the class
of Accrual Certificates is retired.
FIXED-RATE CERTIFICATES.............. A class of Certificates with an interest rate that is fixed
throughout the life of the class.
FLOATING-RATE CERTIFICATES........... A class of Certificates with an interest rate that resets
periodically based upon a designated index and that varies
directly with changes in the index.
INTEREST-ONLY CERTIFICATES OR IO
CERTIFICATES....................... A class of Certificates that receives some or all of the
interest payments made on the Mortgage Assets and little or
no principal. Interest-Only Certificates have either a
nominal principal balance or a notional amount. A nominal
principal balance represents actual principal that will be
paid on the Certificates. It is referred to as nominal since
it is extremely small compared to other classes. A notional
amount is an amount used as a reference to calculate the
amount of interest due on a class of Interest-Only
Certificates that is not entitled to any distributions in
respect of principal.
INVERSE FLOATING-RATE CERTIFICATES... A class with an interest rate that resets periodically based
upon a designated index and that varies inversely with
changes in the index. The interest rate for a class of
Inverse Floating-Rate Certificates typically will vary
inversely with changes in the interest rate on a class of
Floating-Rate Certificates in the same series.
PRINCIPAL-ONLY CERTIFICATES OR PO
CERTIFICATES....................... A class of Certificates that does not bear interest and is
entitled to receive only distributions in respect of
principal.
</TABLE>
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<TABLE>
<CAPTION>
CATEGORIES OF CLASSES DEFINITION
--------------------- ----------
<S> <C>
STEP COUPON CERTIFICATES............. A class of Certificates with a fixed interest rate that is
reduced to a lower fixed rate after a specified period of
time. The difference between the initial interest rate and
the lower interest rate will be supported by a reserve fund
established on the Closing Date.
VARIABLE RATE CERTIFICATES........... A class of Certificates with an interest rate that resets
periodically and is calculated by reference to the rate or
rates of interest applicable to the Mortgage Assets.
</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 may be entitled, 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 that
Distribution Date and (ii) certain expenses, all as more specifically described
in the related prospectus supplement. In addition, after the aggregate principal
balance 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 the 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 those Residual Certificates will be described in the
prospectus supplement. Any qualifications on direct or indirect ownership of
Residual Certificates offered by this prospectus and the related prospectus
supplement, as well as restrictions on the transfer of those Residual
Certificates, will be set forth in the related prospectus supplement. If
Residual Certificates are not so offered, the Depositor may (but need not) sell
some or all of the Residual Certificates on or after the date of original
issuance of such series in transactions exempt from registration under the
Securities Act of 1933, as amended, and otherwise under circumstances that will
not adversely affect the REMIC status of the Trust Fund.
ADVANCES
The Master Servicer may be required to advance, on or prior to any
Distribution Date, from its own funds and/or funds held in the Collection
Account for future distributions an amount up to the aggregate of interest and
principal installments on the Mortgage Loans due and payable on the Due Date in
any month and delinquent on the close of business on the following Determination
Date (each payment, an "ADVANCE"). The Master Servicer may be obligated to make
Advances only if the Advance, in the judgment of the Master Servicer made on the
Determination Date, will be reimbursable from late payments made by borrowers,
payments under any primary mortgage insurance policy or other form of credit
support or proceeds of liquidation. Any Master Servicer funds advanced are
reimbursable to the Master Servicer from cash in the Collection Account if the
Master Servicer determines that any Advances previously made are not ultimately
recoverable from the sources described above.
Advances are made 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 from funds being
held for future distribution to certificateholders, the Master Servicer will
replace those funds on or before any future Distribution Date if funds in the
Collection Account on that Distribution Date would be less than the amount
required to be available for distributions to certificateholders.
The Master Servicer may also be obligated to make Advances, to the extent
recoverable out of insurance proceeds, liquidation proceeds or otherwise, for
certain taxes and insurance premiums not paid by borrowers on a timely basis.
Funds so advanced are reimbursable to the Master Servicer to the extent
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<PAGE> 99
permitted by the pooling and servicing 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, if applicable to that series of
Certificates, among other things:
(i) the amount of the distribution allocable to principal, separately
identifying the aggregate amount of any principal prepayments and,
if so specified in the related prospectus supplement, prepayment
penalties;
(ii) the amount of the 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 outstanding principal balance or notional amount of each class
of the related series after giving effect to the distribution of
principal on that Distribution Date;
(vi) the related amount of the servicing compensation retained or
withdrawn from the Collection Account by the Master Servicer;
(vii) the number and aggregate principal balances of Mortgage Loans (A)
delinquent and not in foreclosure, and (B) in foreclosure, as of
the close of business on the last day of the calendar month
preceding the Distribution Date;
(viii) the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure;
(ix) if applicable, the amount remaining in any reserve fund at the
close of business on the Distribution Date;
(x) the pass-through rate for each class as of the day prior to the
preceding Distribution Date; and
(xi) any amounts remaining under letters of credit, pool policies or
other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Certificate of the relevant class 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 that calendar year a report:
- as to the aggregate of amounts reported pursuant to clauses (i) and (ii)
for that calendar year or, if a person was a certificateholder of record
during a portion of that calendar year, for the applicable portion of
that year; and
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<PAGE> 100
- other customary information as is necessary or desirable for
certificateholders to prepare their tax returns.
--------------------------------------------------------------------------------
CREDIT ENHANCEMENT
--------------------------------------------------------------------------------
GENERAL
Credit enhancement may be provided with respect to one or more classes of a
series of Certificates or with respect to the Mortgage Assets in the related
Trust Fund. Credit enhancement may be in the form of any one or more of the
following:
- limited financial guaranty policy issued by an entity named in the
related prospectus supplement;
- the subordination of one or more classes of Certificates of a series;
- the establishment of one or more reserve funds;
- the use of a cross-support feature;
- use of a mortgage pool insurance policy;
- bankruptcy bond;
- special hazard insurance policy;
- surety bond;
- letters of credit; or
- overcollateralization of one or more classes of the Certificates of a
series.
Unless otherwise specified in the related prospectus supplement, no credit
enhancement will provide protection against all risks of loss or guarantee
repayment of the entire principal balance of the Certificates and interest
thereon. If losses occur which exceed the amount covered by credit enhancement
or which are not covered by the credit enhancement, 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 enhancement 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 enhancement 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. 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
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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 because 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 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 those classes:
- in the order of their scheduled final distribution dates;
- in accordance with a schedule or formula;
- in relation to the occurrence of events; or
- otherwise, as specified in the related prospectus supplement.
SURETY BONDS
If specified in the related prospectus supplement, credit enhancement with
respect to one or more classes of Certificates of a series may be provided by
one or more surety bonds. Subject to certain conditions and limitations, a
surety bond will guaranty payments of all or limited amounts of principal and
interest due. The coverage, amount and terms of any reduction in coverage
provided by a surety bond will be described in the related prospectus
supplement.
MORTGAGE POOL INSURANCE POLICIES
If specified in the related prospectus supplement, a mortgage pool
insurance policy for the Mortgage Loans in the related Trust Fund will be
obtained from the insurer named in the prospectus supplement. Each pool
insurance policy will cover any loss (subject to limitations described in the
applicable prospectus supplement) by reason of default to the extent a related
Mortgage Loan is not covered by any primary mortgage insurance policy. The
amount and principal terms of any pool insurance coverage will be set forth in
the prospectus supplement.
FRAUD WAIVER
If so specified in the related prospectus supplement, a letter may be
obtained from the issuer of a pool insurance policy waiving the right of the
insurer to deny a claim or rescind coverage under the related 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
these circumstances, the issuer of the pool insurance policy will be indemnified
by the Seller for the amount of any loss paid by the issuer of the pool
insurance policy under the terms of the
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waiver letter. The maximum aggregate amount of these fraud losses covered under
the waiver letter and the period of time during which the 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 related Trust Fund from the
insurer named in the prospectus supplement. The special hazard insurance policy,
subject to the limitations described in the applicable prospectus supplement,
will protect against loss by reason of damage to Mortgaged Properties caused by
certain hazards not insured against under the standard form of hazard insurance
policy for the respective states in which the Mortgaged Properties are located.
The amount and principal terms of any such coverage will be set forth in the
prospectus supplement.
BANKRUPTCY BONDS
If specified in the related prospectus supplement, a bankruptcy bond to
cover losses resulting from proceedings under the federal Bankruptcy Code will
be issued by an insurer named in the 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 or interest on a Mortgage Loan or a reduction by the court
of the principal amount of a mortgage loan and will cover certain unpaid
interest on the amount of the principal reduction from the date of the filing of
a bankruptcy petition. Coverage under a bankruptcy bond may be cancelled or
reduced with rating agency approval. The principal terms of any such coverage
will be set forth in the prospectus supplement.
RESERVE FUND
If so specified in the related prospectus supplement, credit enhancement
for a series of Certificates may be provided by one or more reserve funds being
established in trust with the Trustee. The related prospectus supplement will
specify whether a reserve fund will be included in the Trust Fund for a series.
The Reserve Fund for a series will be funded:
- by a deposit of cash, U.S. Treasury securities or instruments evidencing
ownership of principal or interest payments, letters of credit, demand
notes, certificates of deposit or a combination of these instruments in
the aggregate amount specified in the related prospectus supplement;
- by the deposit 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
- in any other manner 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. As a
result, the amount of credit enhancement available to a class of Certificates
against future losses on the Mortgage Loans in which such class represents an
interest may be reduced as the result of losses on a group of Mortgage Loans in
which such class has no interest. The
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related prospectus supplement for a series that includes a cross support feature
will describe the specific operation of such cross support feature.
CASH FLOW AGREEMENTS
If specified in the related prospectus supplement, a Trust Fund may include
guaranteed investment contracts pursuant to which moneys held in the funds and
accounts established for the related series of Certificates will be invested at
a specified rate. The Trust Fund may also include certain other agreements, such
as interest rate exchange or swap agreements, interest rate cap or floor
agreements, or similar agreements provided to reduce the effects of interest
rate fluctuations on the assets or on one or more classes of Certificates. The
principal terms of any such guaranteed investment contract or other agreement
(any of these agreements, a "CASH FLOW AGREEMENT"), including, without
limitation, provisions relating to the timing, manner and amount of payments
thereunder and provisions relating to termination, will be described in the
prospectus supplement for the related series of Certificates. In addition, the
related prospectus supplement will provide certain information with respect to
the obligor under any Cash Flow Agreement.
--------------------------------------------------------------------------------
PREPAYMENT AND YIELD CONSIDERATIONS
--------------------------------------------------------------------------------
The yields to maturity and weighted average lives of Certificates will be
affected primarily by the amount and timing of principal payments received on or
in respect of the Mortgage Loans included in the related Trust Fund. The
original terms to maturity of the Mortgage Loans in a given mortgage pool will
vary depending upon the type of Mortgage Loans in the pool. Each prospectus
supplement will contain information with respect to the type and maturities of
the Mortgage Loans in the related mortgage pool. Mortgage Loans may be prepaid
without penalty in full or in part at any time except as specified in the
prospectus supplement. The prepayment experience on the Mortgage Loans in a
mortgage pool will affect the life of the related series of certificates.
FACTORS AFFECTING PREPAYMENT
A number of factors, including, but not limited to, homeowner mobility,
economic conditions, the presence and enforceability of due-on-sale clauses,
mortgage market interest rates and the availability of mortgage funds, may
affect prepayment experience of mortgage loans.
The Mortgage Loans may be partially or fully repaid at any time. The
Mortgage Loans generally will not provide for a prepayment penalty unless
otherwise specified in the related prospectus supplement. Fixed-rate Mortgage
Loans generally will contain "due-on-sale" clauses that permit the mortgagee to
accelerate the maturity of a Mortgage Loan upon the conveyance of the related
mortgaged property. Adjustable-rate Mortgage Loans generally will permit
creditworthy borrowers to assume a Mortgage Loan upon a transfer of the related
mortgaged property.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the mortgage rates borne by the Mortgage Loans, the Mortgage
Loans are likely to be subject to higher prepayment rates than if prevailing
interest rates remain at or above those mortgage rates. Conversely, if
prevailing interest rates rise appreciably above the mortgage rates borne by the
Mortgage Loans, the Mortgage Loans are likely to experience a lower prepayment
rate than if prevailing rates remain at or below those mortgage rates. However,
there can be no assurance that this will be the case.
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EFFECT OF PRINCIPAL PREPAYMENTS
When a Mortgage Loan is prepaid in full, the mortgagor pays interest on the
amount prepaid only to the date of prepayment. Liquidation proceeds and amounts
received in settlement of insurance claims are also likely to include interest
only to the time of payment or settlement. When a Mortgage Loan is prepaid in
full or in part, an interest shortfall may result depending on the timing of the
receipt of the prepayment and the timing of when those prepayments are passed
through to Certificateholders. To partially mitigate this reduction in yield,
the pooling and servicing agreement relating to a series may provide, that with
respect to certain principal prepayments received, the Master Servicer will be
obligated to pay an amount equal to the lesser of (i) the aggregate interest
shortfall for that Distribution Date resulting from principal prepayments and
(ii) all or a portion of the Master Servicer's servicing compensation for that
Distribution Date, as specified in the applicable prospectus supplement. Unless
otherwise specified in a prospectus supplement, no comparable interest shortfall
coverage will be provided by the Master Servicer with respect to liquidations of
any Mortgage Loans. Any interest shortfall arising from liquidations will be
covered by means of the subordination of the rights of subordinated
certificateholders or any other credit support arrangements.
A lower rate of principal prepayments than anticipated would negatively
affect the total return to investors in any Certificates of a series that are
offered at a discount to their principal amount and a higher rate of principal
prepayments than anticipated would negatively affect the total return to
investors in the Certificates of a series that are offered at a premium to their
principal amount. The yield on Certificates that are entitled solely or
disproportionately to distributions of principal or interest may be particularly
sensitive to prepayment rates, and further information with respect to yield on
such Certificates will be included in the applicable prospectus supplement.
WEIGHTED AVERAGE LIFE OF CERTIFICATES
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
tables setting forth percentages of the initial certificate balance of each
class expected to be outstanding after each of the dates shown in each table.
Any table will be based upon a number of assumptions stated in the 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 specified prepayment model.
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 a table.
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 those mortgage
loans or on the Mortgage Loans included in a Trust Fund, those 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 those mortgage loans
or Mortgage Loans. Conversely, if prevailing interest rates rise appreciably
above the interest rates on those mortgage loans or on the rates borne by the
Mortgage Loans included in a Trust Fund, those 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 those mortgage loans or Mortgage Rates. Other
factors affecting prepayment of mortgage loans and Mortgage Loans include
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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.
The Seller or Depositor, as specified in the related prospectus supplement,
will be obligated, under certain circumstances, to repurchase Mortgage Loans
that have breached representations or warranties, or with respect to which all
proper documentation has not been delivered to the Trustee. In addition, if so
specified in the applicable prospectus supplement, the Depositor or another
person identified therein will have the option to purchase all, but not less
than all, of the Mortgage Assets in any Trust Fund under the limited conditions
specified in such prospectus supplement. For any series of Certificates for
which an election has been made to treat the Trust Fund (or one or more
segregated pools of assets in the Trust Fund) as a REMIC, any purchase or
repurchase may be effected only pursuant to a "qualified liquidation," as
defined in Code Section 860F(a)(4)(A). See "The Pooling and Servicing
Agreement -- Termination; Repurchase of Mortgage Loans and Mortgage
Certificates." Any purchase or repurchase of Mortgage Assets will shorten the
weighted average life of one or more classes of Certificates of the related
series.
SCHEDULED DELAYS IN DISTRIBUTIONS
Upon the issuance of Certificates of a series, the initial purchasers may
be required to pay for accrued interest at the applicable pass-through rate from
the Cut-off Date for that series to the date of issuance. The effective yield to
certificateholders will be below the yield otherwise produced by the applicable
pass-through rate because the distribution of principal and interest that is due
on each due date will not be made until the 25th day (or the next business day,
if the 25th is not a business day) of the month in which that due date occurs.
--------------------------------------------------------------------------------
THE DEPOSITOR
--------------------------------------------------------------------------------
Banc of America Funding Corporation (formerly known as NationsBanc
Montgomery Funding Corp.), 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 in Mortgage Assets or bonds
secured by Mortgage Assets. The Depositor is an indirect subsidiary of Bank of
America Corporation. The Depositor maintains its principal office at Bank of
America Corporate Center, Charlotte, North Carolina 28255. Its telephone number
is (704) 386-2400.
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Neither the Depositor nor any of the Depositor's affiliates will ensure or
guarantee distributions on the Certificates of any series.
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USE OF PROCEEDS
--------------------------------------------------------------------------------
The Depositor will use substantially all of the net proceeds received from
the sale of each series of Certificates either:
- to purchase the Mortgage Assets related to that series; or
- to return to itself the amounts previously used to effect a purchase of
Mortgage Assets, 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.
The Depositor will use any remaining proceeds for its general corporate
purposes.
--------------------------------------------------------------------------------
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 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 that, 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. This means, in general, that lenders providing credit
on one- to four-family properties in those states must look solely to the
property for repayment upon 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
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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.
--------------------------------------------------------------------------------
THE POOLING AND SERVICING AGREEMENT
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Set forth below is a summary of certain provisions of each pooling and
servicing agreement which are not described in other parts of this prospectus.
When particular provisions or terms used in a pooling and servicing agreement
are mentioned in this discussion, you should review those provisions in the form
of pooling and servicing agreement that was filed with the Securities and
Exchange Commission as part of the registration statement of which this
prospectus is a part.
ASSIGNMENT OF MORTGAGE LOANS TO THE TRUSTEE
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, for the benefit of the certificateholders, together with all principal
and interest on the Mortgage Loans, except for principal and interest due on or
before the cut-off date set forth in the related prospectus supplement (the
"CUT-OFF DATE"). The Trustee, concurrently with that assignment, will
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 and
servicing agreement. The schedule will include the principal balance of each
Mortgage Loan, the mortgage rate, the maturity of each mortgage note and other
information.
In addition, the Depositor will deliver or cause to be delivered to the
Trustee as to each Mortgage Loan, among other things:
- the mortgage note endorsed without recourse in blank or to the order of
the Trustee;
- the mortgage, deed of trust or similar instrument with evidence of
recording indicated, except for any mortgage not returned from the public
recording office, in which case the Depositor, unless otherwise specified
in the related prospectus supplement, will deliver or cause to be
delivered a copy of the mortgage together with a certificate that the
original of that mortgage was delivered to the recording office;
- an assignment of the mortgage to the Trustee, which assignment will be in
recordable form; and
- any other security documents as may be specified in the related
prospectus supplement or the related pooling and servicing agreement.
Despite these requirements, a Trust Fund may include Mortgage Loans where the
original mortgage note is not delivered to the Trustee if the Depositor delivers
to the Trustee or the custodian a copy or a duplicate original of the mortgage
note, together with an affidavit certifying that the original has been lost or
destroyed. With respect to these Mortgage Loans, the Trustee may not be able to
enforce the mortgage note against the related borrower. The Depositor will be
required to agree to repurchase, or substitute for, each Mortgage Loan that is
subsequently in default if the enforcement of the related mortgage is materially
adversely affected by the absence of the original mortgage note. The related
pooling and servicing agreement will generally require the Depositor or another
party specified in the
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related prospectus supplement to promptly cause the assignments of the related
loans to be recorded in the appropriate public office for real property records,
except in states in which, in the opinion of counsel acceptable to the Trustee,
the recording is not required to protect the Trustee's interest in the loans
against the claim of any subsequent transferee or any successor to or creditor
of the Depositor or the originator of the loans.
In lieu of the delivering requirement set forth above, with respect to any
mortgage which has been recorded in the name of Mortgage Electronic Registration
Systems, Inc. ("MERS") or its designee, no mortgage assignment in favor of the
Trustee will be required to be prepared or delivered. Instead, the Master
Servicer will be required to take all actions as are necessary to cause the
applicable Trust Fund to be shown as the owner of the related Mortgage Loan on
the records of MERS for purposes of the system of recording transfers of
beneficial ownership of mortgages maintained by MERS.
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 loan documents within a
specified number of days of receipt to ascertain that all required documents
have been properly executed and received. The Trustee will hold the mortgage
loan documents for each series in trust for the benefit of holders of the
Certificates. 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 and
servicing agreement, and any defect cannot be cured within the permitted time
period, the Seller will replace the Mortgage Loan with an eligible substitute
Mortgage Loan (as described in the related prospectus supplement) or repurchase
the related Mortgage Loan from the Trustee at a price generally equal to the
principal balance thereof, plus accrued and unpaid interest thereon. 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 the 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". This substitution/repurchase obligation
constitutes the sole remedy available to Certificateholders or the Trustee for
such a defect in a mortgage loan 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. With respect to any Mortgage which
has been recorded in the name of MERS or its designee, however, no mortgage
assignment in favor of the Trustee will be required to be prepared or delivered.
Instead, the Master Servicer will be required to take all actions as are
necessary to cause the applicable Trust Fund to be shown as the owner of the
related Mortgage Loan on the records of MERS for purposes of the system of
recording transfers of beneficial ownership of mortgages maintained by MERS.
Assignment of Mortgage Certificates
The Depositor will cause each Mortgage Certificate to be registered in the
name of the Trustee. The Trustee or a custodian will hold each Mortgage
Certificate 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 Mortgage Certificate. Each Mortgage Certificate will be identified
in a schedule appearing as an exhibit to the pooling and servicing 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.
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 and servicing agreement or under the mortgage loan sale agreement
between the Seller and the Depositor. Under certain circumstances the Seller may
be required to repurchase or substitute for a Mortgage Loan as a result of a
breach of any such representation or warranty. In addition, pursuant to the
related pooling and servicing agreement the Depositor will assign to the Trustee
its rights with respect to representations and warranties made by the Seller in
the mortgage loan sale agreement.
In the mortgage loan sale agreement or, if a party thereto, the pooling and
servicing 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:
- the information set forth in the schedule of Mortgage Loans is true and
correct in all material respects;
- 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 if the buydown agreement for a Buydown Loan
forgives certain indebtedness of a Mortgagor;
- as of the Cut-off Date, no Mortgage Loan was more than 30 days
delinquent;
- 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;
- if a primary mortgage insurance policy is required with respect to such
Mortgage Loan, the policy is valid and remains in full force and effect
as of the Closing Date;
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- as of the Closing Date, each Mortgage Loan is secured by a first lien
mortgage, a first deed of trust or 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:
- liens for current real property taxes and special assessments;
- 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
- 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);
- as of the Closing Date, each mortgaged property is free of damage and is
in good repair;
- 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
- as of the Closing Date, there are no delinquent tax or assessment liens
against any mortgaged property.
If the Seller discovers a breach of any of its representations or
warranties which materially and adversely affects the interest of
Certificateholders in the related Mortgage Loan, or receives notice of a breach
from the Trustee or the Master Servicer, the Seller will cure the breach within
the time permitted by the related pooling and servicing 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 of a loan, on the terms set forth above under "-- Assignment of Mortgage
Loans to the Trustee" and in the related prospectus supplement. The proceeds of
any 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 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 and servicing 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
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amounts, conditions, exclusions and exceptions in the form and amount specified
in the pooling and servicing 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 an account or accounts
(collectively, the "COLLECTION ACCOUNT") for the collection of payments on the
related Mortgage Loans. Unless otherwise specified in the related prospectus
supplement, the Collection Account must be an account or accounts which are
either:
- 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;
- an account or accounts the deposits in which are fully insured by the
Federal Deposit Insurance Company,
- an account or accounts the deposits in which are insured by the Federal
Deposit Insurance Corporation to the limits established by the Federal
Deposit Insurance Corporation and the uninsured deposits in which are
otherwise secured so that, as evidenced by an opinion of counsel,
certificateholders have a claim with respect to the funds in the account
or accounts, or a perfected first-priority security interest against any
collateral securing those 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
- an account or accounts otherwise acceptable to the applicable 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 in a Collection
Account 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.
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 after the Cut-off Date (other than payments due on or
before the Cut-off Date):
- 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);
- all amounts received by foreclosure or otherwise in connection with the
liquidation of defaulted Mortgage Loans, net of expenses incurred in
connection with the liquidation;
- 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;
- all Advances as described herein under "Description of
Certificates -- Advances";
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- all proceeds of any Mortgage Loan or property acquired in respect of any
Mortgage Loan repurchased as described herein under "-- Assignment of
Mortgage Loans to the Trustee" and "-- Representations and Warranties";
- any Buydown Funds (and, if applicable, related investment earnings)
required to be deposited in the Collection Account as described below;
- 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" below;
- 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
- all other amounts required to be deposited in the Collection Account.
Under the pooling and servicing agreement for each series, the Master
Servicer will be authorized to make the following withdrawals from the
Collection Account:
- to clear and terminate the Collection Account upon liquidation of all
Mortgage Loans or other termination of the Trust Fund;
- 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;
- 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;
- 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;
- to pay to the Master Servicer its servicing fee and to the Trustee its
trustee fee;
- to reimburse the Master Servicer for Advances which the Master Servicer
has determined to be otherwise nonrecoverable; and
- to pay any expenses which were incurred and are reimbursable pursuant to
the pooling and servicing agreement.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer is required by the related pooling and servicing
agreement to make reasonable efforts to collect all payments called for under
the mortgage and to follow the collection procedures it issues with respect to
mortgage loans serviced by it that are similar to the Mortgage Loans. Consistent
with the above, the Master Servicer may, in its discretion:
- waive any prepayment charge, assumption fee, late payment charge or any
other charge in connection with the prepayment of a Mortgage Loan; and
- arrange with a borrower a plan of relief, other than a modification or
extension of the Mortgage Loan, when appropriate rather than recommending
liquidation.
This type of arrangement will be made only upon determining that the coverage of
such Mortgage Loan by any primary mortgage insurance policy will not be
affected.
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Under the pooling and servicing 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 an 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 borrower would remain liable on the mortgage note, or a
substitution of liability with respect to a Mortgage Loan, pursuant to which the
new borrower would be substituted for the original borrower as being liable on
the Mortgage Loan. 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 interest rate borne by the related Mortgage Loan may not be
changed.
The pooling and servicing agreement may require the Master Servicer to
establish and maintain one or more escrow accounts into which borrowers deposit
amounts sufficient to pay taxes, assessments, hazard insurance premiums or
comparable items. Withdrawals from the escrow accounts maintained for borrowers
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 borrower amounts determined to be overages;
- to remit to borrower, 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
The Master Servicer will require the borrower on each Mortgage Loan to
maintain 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. This coverage will be
in an amount at least equal to the lesser of:
- the original principal balance of the Mortgage Loan; and
- the replacement cost of the improvements on 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 borrower in accordance with the Master
Servicer's normal servicing procedures) will be deposited in the Collection
Account.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightening, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers under different state laws in accordance with
different applicable state forms and therefore will not contain identical terms
and conditions, the basic terms are dictated by respective state laws, and most
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policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement, nuclear reactions, wet or dry rot, vermin, rodents,
insects or domestic animals, theft and, in certain cases, vandalism. This list
is mainly indicative of certain kinds of uninsured risks and is not all
inclusive. If any mortgaged property is located in federally-designated special
flood area, the Master Servicer will require that the borrower maintain flood
insurance if it is available.
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 to recover the full amount
of any partial loss. If the insured's coverage falls below this specified
percentage, then the insurer's liability in the event of partial loss does not
exceed the larger of:
- the replacement cost of the improvements less physical depreciation; and
- the proportion of the loss as the amount of insurance carried bears to
the specified percentage of the full replacement cost of the
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. If specified in the related prospectus
supplement, a special hazard insurance policy will be obtained to insure against
certain of the uninsured risks described above. See "Credit
Enhancement -- Special Hazard Insurance Policies."
The Master Servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
cooperative loan. Generally, the cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the cooperative and
the tenant-stockholders of that cooperative do not maintain individual hazard
insurance policies. If, however, a cooperative and the related borrower on a
cooperative loan do not maintain the insurance or do not maintain adequate
coverage or any insurance proceeds are not applied to the restoration of damaged
property, any damage to the borrower's cooperative dwelling or the cooperative's
building could significantly reduce the value of the collateral securing the
cooperative loan to the extend not covered by other credit support.
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 that 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 loan-to-value ratio in excess of 80% will have
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 the Trust Fund, 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 with respect to
defaulted Mortgage Loans. Amounts collected by the Master Servicer on behalf of
the Trust Fund will be deposited in the
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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 and servicing agreement.
RECOVERIES UNDER PRIMARY MORTGAGE INSURANCE POLICIES
The Master Servicer will exercise its best reasonable efforts to keep each
primary mortgage insurance policy in full force and effect at least until the
outstanding principal balance of the related Mortgage Loan is equal to the
percentage of the appraised value of the mortgaged property specified in the
related prospectus supplement. The Master Servicer will pay the premium for each
primary mortgage insurance policy on a timely basis if the mortgagor does not
make the required payments.
The Master Servicer, on behalf of the Trust Fund, will present claims to
the insurer under any applicable primary mortgage insurance policy and will take
necessary reasonable steps to permit recovery under those 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:
- 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
- that those 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 obligated to follow the 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 accrued interest,
certificateholders will realize a loss in the amount of that difference plus the
aggregate of unreimbursed Advances of the Master Servicer with respect to that
Mortgage Loan and expenses incurred by the Master Servicer in connection with
those proceedings and which are reimbursable under the pooling and servicing
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 that represents interest will decline and,
accordingly, 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
borrowers.
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.
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EVIDENCE AS TO COMPLIANCE
Each pooling and servicing 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 will cause a firm of independent public accountants to
furnish a report annually to the Trustee to the effect that the 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 the pooling and servicing agreement which,
in the opinion of the firm, are material, except for items of noncompliance set
forth in the report.
Each pooling and servicing 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 and servicing agreement throughout the preceding year.
CERTAIN MATTERS REGARDING THE DEPOSITOR, THE SELLER AND THE MASTER SERVICER
The pooling and servicing 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, except upon:
- appointment of a successor servicer and receipt by the Trustee of a
letter from the applicable rating agency that the resignation and
appointment will not result in the downgrading of the Certificates; or
- determination that its duties are no longer permissible under applicable
law. No resignation under this clause is effective until the Trustee or a
successor has assumed the Master Servicer's obligations and duties under
the pooling and servicing agreement.
The pooling and servicing agreement will also provide that none of the
Depositor, the Master Servicer or the Seller, or any directors, officers,
employees or agents of any of them 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 of those parties, any subservicer or the Trustee in
good faith pursuant to the pooling and servicing agreement, or for errors in
judgment. However, none of the Depositor, the Seller, the Master Servicer or any
of the parties described above will be protected against any liability that
otherwise would be imposed on one of those parties by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties or by
reason of reckless disregard of its obligations and duties. The pooling and
servicing agreement will provide that each of the parties described above 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 and servicing agreement or the Certificates for a
series, other than any loss, liability or expense related to any specific
Mortgage Loan (except any loss, liability or expense otherwise reimbursable
pursuant to the pooling and servicing agreement) and any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or gross negligence
in the performance of that party's duties or by reason of reckless disregard by
that party of its obligations and duties. In addition, the pooling and servicing
agreement will provide that none of the Depositor, the Seller or 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 and servicing 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 action that it deems necessary or desirable with respect to the
pooling and servicing agreement and the rights and duties of the parties to the
pooling and servicing agreement and the interests of certificateholders. In such
event, the legal expenses and costs of such action and any liability
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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 from the Collection Account.
EVENTS OF DEFAULT
Events of default by the Master Servicer under the pooling and servicing
agreement for each series of Certificates evidencing an interest in Mortgage
Loans will consist of:
- any failure by the Master Servicer to distribute to the Trustee, on
behalf of certificateholders, any required payment which continues
unremedied for a specified time period;
- any failure by the Master Servicer to observe or perform in any material
respects any other of its covenants or agreements in the Certificates or
the pooling and servicing 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; and
- 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 and servicing agreement
remains unremedied, the Trustee or holders of Certificates evidencing not less
than 50% of the aggregate voting rights may terminate all of the rights and
obligations of the Master Servicer under the pooling and servicing agreement.
Upon a termination, the Trustee will succeed to all the responsibilities, duties
and liabilities of the Master Servicer under the pooling and servicing agreement
and will be entitled to similar compensation arrangements and limitations on
liability. If the Trustee is unwilling or unable to act, it may appoint or
petition a court of competent jurisdiction for the appointment of an institution
with a net worth of at least $10,000,000 to act as successor Master Servicer.
Pending any appointment, the Trustee is obligated to act as successor Master
Servicer. The Trustee and the successor may agree upon the servicing
compensation to be paid, which will not be greater than the compensation of the
Master Servicer under the pooling and servicing agreement.
ENFORCEMENT
No certificateholder of any series will have any right under a pooling and
servicing agreement to institute any proceeding with respect to the pooling and
servicing agreement unless the 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 have made written requests to
the Trustee to institute a proceeding in its own name as Trustee and have
offered and provided to the Trustee reasonable indemnity and the Trustee for 60
days has neglected or refused to institute the proceeding. However, the Trustee
is under no obligation to exercise any of the trusts or powers vested in it by
the pooling and servicing agreement for any series or to make any investigation
of matters arising under the pooling and servicing agreement or to institute,
conduct or defend any litigation under the pooling and servicing agreement at
the request, order or direction of any certificateholders, unless those
certificateholders have offered and provided to the Trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be incurred.
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AMENDMENT
The pooling and servicing 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 to:
- cure any ambiguity or mistake;
- correct a defective provision or correct or supplement any provision that
may be inconsistent with any other provision of the pooling and servicing
agreement or the related prospectus supplement;
- make any other provisions with respect to matters or questions arising
under the pooling and servicing agreement which are not inconsistent with
the provisions of the pooling and servicing agreement; or
- comply with any requirements imposed by the Code or any tax regulation.
However, no amendments (except those pursuant to the last clause) will adversely
affect in any material respect the interests of any certificateholder of that
series. Any amendment 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 the certificates that the amendment
will not cause that rating agency to reduce its then-current rating of the
Certificates. The pooling and servicing 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 affected by the
amendment for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of the pooling and servicing agreement or
of modifying in any manner the rights of holders of Certificates of that series.
However, no amendment of this type may:
- reduce in any manner the amount of, or delay the timing of, payments
received on Mortgage Loans that are required to be distributed in respect
any Certificate without the consent of the holder of the Certificate; or
- with respect to any series of Certificates, reduce the percentage of
Certificates the holders of which are required to consent to any
amendment without the consent of the holders of all outstanding
Certificates of the series.
LIST OF CERTIFICATEHOLDERS
If 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 that request a
list of the names and addresses of all certificateholders of record of a series
as of the most recent record date. 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 and servicing agreement for that series, the Trustee will afford
those certificateholders access during business hours to the most recent list of
certificateholders of that series held by the Trustee.
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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 and servicing agreement
will terminate upon the earlier of:
- the maturity or other liquidation of the last Mortgage Loan or Mortgage
Certificate in the related Trust Fund and the disposition of all property
acquired upon foreclosure of any Mortgage Loan; and
- the payment to certificateholders of that series of all amounts required
to be paid to them pursuant to the pooling and servicing agreement.
In no event, however, will the Trust Fund created by any pooling and servicing
agreement continue beyond the expiration of 21 years from the death of the
survivor of the persons named in the pooling and servicing agreement.
The pooling and servicing agreement for each series may permit the Master
Servicer or any other entity specified in the related prospectus supplement to
repurchase all remaining Mortgage Loans or Mortgage Certificates and property
acquired in respect of a Mortgage Loan at a purchase price equal to no less than
the principle balance of the Certificates, together with accrued and unpaid
interest at the applicable pass-through 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 and servicing agreement,
if the purchase price is based in part on the appraised value of any property
acquired in respect of a Mortgage Loan and the appraised value is less than the
principal balance of the related Mortgage Loan at the time of foreclosure). The
exercise of this right will effect early retirement of the Certificates of that
series, but the Master Servicer's or other party's right so to repurchase is
subject to the aggregate principal balances of the Mortgage Loans at the time of
repurchase being less than the percentage of the aggregate initial principal
amount of all Certificates of that series at the Cut-off Date specified in the
related prospectus supplement.
The holders of the Residual Certificates of a series of REMIC Certificates
may have the option to purchase the remaining Mortgage Assets included in the
Trust Fund. This option will be exercisable, in the case of holders of Residual
Certificates, at the time and under the circumstances specified in the related
prospectus supplement. For this type of purchase to take place, the Trustee must
receive 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 REMIC to be treated as an association taxable as a
corporation; and
- will not otherwise subject the REMIC to tax.
For each series, the Trustee will give written notice of termination of the
pooling and servicing 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 Trustee for each series of Certificates will be named in the related
prospectus supplement. The Trustee may have normal banking relationships with
the Depositor, any Seller, any Master Servicer and/or any subservicer.
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--------------------------------------------------------------------------------
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
--------------------------------------------------------------------------------
The following discussion contains summaries, which are general in nature,
of certain legal aspects of mortgage loans. Because these legal aspects are
governed by applicable state law, which laws may differ substantially, the
summaries are not exhaustive, do not reflect the laws of any particular state
and do not encompass the laws of all states in which the security for the
Mortgage Loans is situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans.
GENERAL
The Mortgages Loans will be secured by either deeds of trust, mortgages,
security deeds or deeds to secure debt creating a first lien, depending upon the
prevailing practice in the state in which the mortgaged property is located. A
mortgage creates a lien upon the real property encumbered by the mortgage. It is
not prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording in a
county or municipal office. There are two parties to a mortgage: the mortgagor,
who is the borrower and homeowner, and the mortgagee, who is the lender. Under
the mortgage instrument, the mortgagor delivers to the mortgagee a note or bond
and the mortgage. Although a deed of trust is similar to a mortgage, a deed of
trust formally has three parties: the borrower-homeowner, called the trustor
(similar to a mortgagor), a lender (similar to a mortgagee), called the
beneficiary, and a third-party grantee, called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. A security deed and a deed to secure debt are special types of deeds
that indicate on their face that they are granted to secure an underlying debt.
By executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until the time the underlying debt is repaid. The trustee's authority
under a deed of trust, the mortgagee's authority under a mortgage and the
grantee's authority under a security deed or deed to secure debt are governed by
law, by the express provisions of the document and, in some cases, with respect
to some deeds of trust, 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
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assignment of the proprietary lease or occupancy agreement and the pledge of
corporate shares. See "-- Foreclosure -- 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.
FORECLOSURE
Mortgages and Deeds of Trust
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings sometimes are not contested by any of
the parties. 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 may issue a judgment of
foreclosure and appoint a referee or other court officer to conduct the sale of
the property. In some states, mortgages may also be foreclosed by advertisement,
pursuant to a power of sale provided in the mortgage. Foreclosure of a mortgage
by advertisement is essentially similar to foreclosure of a deed of trust by
non-judicial power of sale.
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
borrower 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 borrower, or any other person having a junior encumbrance on
the real estate, may, during a reinstatement period, cure the default by paying
the entire amount in arrears, plus the costs and expenses incurred in enforcing
the obligation. 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 of record in the real property.
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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
receiver for an amount equal to the unpaid principal amount of the note, accrued
and unpaid interest and the expenses of foreclosure. Subject to the right of the
borrower in some states to remain in possession during the redemption period,
the lender then will assume the burdens of ownership, including obtaining
casualty insurance and making repairs at its expense that are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property. Any loss may be reduced by the receipt of mortgage insurance
proceeds, if any, or by judicial action against the borrower for the deficiency.
See "-- Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations
on Lenders" below.
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 the tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by the
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, if the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate the 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 the 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.
Recognition agreements also provide that upon 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
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the debtor and the method, manner, time, place and terms of the foreclosure.
Generally, a sale conducted according to the usual practice of banks selling
similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to the
reimbursement is subject to the right of the cooperative corporation to receive
sums due under the proprietary lease or occupancy agreement. If there are
proceeds remaining, the lender must account to the tenant-stockholder for the
surplus. Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See
"-- Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations on
Lenders" 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 those 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 simultaneous release of the ground lessee's
liabilities under the new lease; 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 upon a termination.
In addition to the preceeding 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 that clause has not been
established. Without the protections described in the preceding 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 borrower 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 where the right of
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redemption is available, redemption may occur only upon payment of the
foreclosure purchase price, expenses of foreclosure, accrued interest and taxes.
In other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption is to
delay the ability of the lender to sell the foreclosed property. The exercise of
a right of redemption would defeat the title of any purchaser at a foreclosure
sale, or of any purchaser from the lender subsequent to foreclosure or sale
under a deed of trust. Consequently, the practical effect of the redemption
right is to force the lender to maintain the property and pay the expenses of
ownership until the redemption period has run.
ANTI-DEFICIENCY LEGISLATION, THE BANKRUPTCY CODE AND OTHER LIMITATIONS ON
LENDERS
Certain states have imposed statutory prohibitions that 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 borrower following
foreclosure or sale under a deed of trust. A deficiency judgment would be a
personal judgment against the former borrower 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 borrower. Finally, other statutory
provisions may limit any deficiency judgment against the former borrower
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.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement and foreclosure on the
beneficial interest in a land trust. Some courts have interpreted Section 9-504
of the UCC to prohibit a deficiency award unless the creditor establishes that
the sale of the collateral (which, in the case of a Mortgage Loan secured by
shares of a cooperative, would be the shares and the related proprietary lease
or occupancy agreement) was conducted in a commercially reasonable manner.
The Master Servicer generally will not be required under the pooling and
servicing agreement to pursue deficiency judgments on the Mortgage Loans even if
permitted by law.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the Bankruptcy Code, and state
laws affording relief to debtors may interfere with or affect the ability of a
secured mortgage lender to obtain payment of a mortgage loan, to realize upon
collateral and/or enforce a deficiency judgment. For example, under the
Bankruptcy Code, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of a
bankruptcy petition and, usually, no interest or principal payments are made
during the course of the bankruptcy case. Foreclosure of an interest in real
property of a debtor in a case under the Bankruptcy Code can typically occur
only if the bankruptcy court vacates the stay, which is an action the court may
be reluctant to take, particularly if the debtor has the prospect of
restructuring his or her debts and the mortgage collateral is not deteriorating
in value. The delay and the consequences thereof caused by the automatic stay
can be significant. Also, under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a junior lienor may stay a senior lender from
taking action to foreclose.
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A homeowner may file for relief under the Bankruptcy Code under any of
three different chapters of the Bankruptcy Code.
- Under Chapter 7, the assets of the debtor are liquidated and a lender
secured by a lien may "bid in" (i.e., bid up to the amount of the debt)
at the sale of the asset. See "-- Foreclosure."
- Under Chapter 11, a homeowner can reorganize his or her debts through his
or her reorganization plan.
- Under Chapter 13, a homeowner can address his or her debts in a
rehabilitation plan. Chapter 13 is often referred to as the "wage earner
chapter" or "consumer chapter" because most individuals seeking to
restructure their debts file for relief under Chapter 13 rather than
Chapter 11.
The Bankruptcy Code permits a mortgage loan that is secured by property
that does not consist solely of the debtor's principal residence to be modified
without the consent of the lender provided certain substantive and procedural
safeguards are met. Under the Bankruptcy Code, the lender's security interest
may be reduced to the then-current value of the property as determined by the
court if the value is less than the amount due on the loan, thereby leaving the
lender as a general unsecured creditor for the difference between the value of
the collateral and the outstanding balance of the mortgage loan. A borrower's
unsecured indebtedness will typically be discharged in full upon payment of a
substantially reduced amount. Other modifications to a mortgage loan may include
a reduction in the amount of each scheduled payment, which reduction may result
from a reduction in the rate of interest, an alteration of the repayment
schedule, an extension of the final maturity date, and/or a reduction in the
outstanding balance of the secured portion of the loan. In certain
circumstances, subject to the court's approval, a debtor in a case under Chapter
11 of the Bankruptcy Code may have the power to grant liens senior to the lien
of a mortgage.
A reorganization plan under Chapter 11 and a rehabilitation plan under
Chapter 13 of the Bankruptcy Code may each allow a debtor to cure a default with
respect to a mortgage loan on such debtor's residence by paying arrearages over
a period of time and to deaccelerate and reinstate the original mortgage loan
payment schedule, even though the lender accelerated the loan and a final
judgment of foreclosure had been entered in state court (provided no sale of the
property had yet occurred) prior to the filing of the debtor's petition under
the Bankruptcy Code. Under a Chapter 13 plan, curing of defaults must be
accomplished within the five year maximum term permitted for repayment plans,
with the term commencing when the repayment plan becomes effective, while
defaults may be cured over a longer period of time under a Chapter 11 plan of
reorganization.
Generally, a repayment plan in a case under Chapter 13 and a plan of
reorganization under Chapter 11 may not modify the claim of a mortgage lender if
the borrower elects to retain the property, the property is the borrower's
principal residence and the property is the lender's only collateral. Certain
courts have allowed modifications when the mortgage loan is secured both by the
debtor's principal residence and by collateral that is not "inextricably bound"
to the real property, such as appliances, machinery, or furniture.
The general protection for mortgages secured only by the debtor's principal
residence is not applicable in a case under Chapter 13 if the last payment on
the original payment schedule is due before the final date for payment under the
debtor's Chapter 13 plan (which date could be up to five years after the debtor
emerges from bankruptcy). Under several recently decided cases, the terms of
this type of loan can be modified in the manner described above. While these
decisions are contrary to the holding in a prior case by a senior appellate
court, it is possible that the later decisions will become the accepted
interpretation in view of the language of the applicable statutory provision. If
this interpretation is
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adopted by a court considering the treatment in a Chapter 13 repayment plan of a
Mortgage Loan, it is possible that the Mortgage Loan could be modified.
State statutes and general principles of equity may also provide a
mortgagor with a means to halt a foreclosure proceeding or sale and to force a
restructuring of a mortgage loan on terms a lender would not otherwise accept.
In a bankruptcy or similar proceeding of a mortgagor, action may be taken
seeking the recovery, as a preferential transfer or on other grounds, of any
payments made by the mortgagor under the related mortgage loan prior to the
bankruptcy or similar proceeding. Payments on long-term debt may be protected
from recovery as preferences if they are payments in the ordinary course of
business made on debts incurred in the ordinary course of business or if the
value of the collateral exceeds the debt at the time of payment. Whether any
particular payment would be protected depends upon the facts specific to a
particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its
costs and expenses in preserving or selling the mortgaged property ahead of a
payment to the lender. Moreover, the laws of certain states also give priority
to certain tax and mechanics liens over the lien of a mortgage. Under the
Bankruptcy Code, if the court finds that actions of the mortgagee have been
unreasonable and inequitable, the lien of the related mortgage may be
subordinated to the claims of unsecured creditors.
Bankruptcy reform legislation that was under consideration by the Senate
during the 106th Congress would have amended the Bankruptcy Code (this
amendment, the "TILA AMENDMENT") to authorize bankruptcy court judges to
disallow claims based on secured debt if the creditor failed to comply with
certain provisions of the federal Truth in Lending Act. As proposed, this
provision would apply retroactively to secured debt incurred by a debtor prior
to the date of effectiveness of the legislation, including the Mortgage Loans.
However, the provision was defeated in the Senate on November 9, 1999. The House
bill did not have a similar provision. Bills containing general bankruptcy
reform legislation are still under consideration by the House and the Senate.
Legislation similar to the TILA Amendment may be reintroduced in the future. If
the TILA Amendment were to become law, a violation of the Truth in Lending Act
with respect to a Mortgage Loan could result in a total loss with respect to
such loan in a bankruptcy proceeding. Any violation would be a breach of
representation and warranty of the depositor, and the depositor would be
obligated to repurchase such Mortgage Loan.
Various proposals to amend the Bankruptcy Code in ways that could adversely
affect the value of the Mortgage Loans in a trust have been considered by
Congress, and more proposed legislation may be considered in the future. No
assurance can be given that any particular proposal will or will not be enacted
into law, or that any provision so enacted will not differ materially from the
proposals described above.
The Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws include
the federal Trust-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 applicable laws. In some cases, this liability may affect assignees of
the Mortgage Loans.
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TEXAS HOME EQUITY LOANS
Generally, any "cash-out" refinance or other non-purchase money transaction
(except for certain rate/term refinance loans and certain other narrow
exceptions) secured by a Texas resident's principal residence is subject to the
provisions set forth in Section 50(a)(6) of Article XVI of the Constitution of
Texas (the "TEXAS HOME EQUITY LAWS"). The Texas Home Equity Laws provide for:
- certain disclosure requirements,
- caps on allowable fees,
- required loan closing procedures and
- certain other restrictions.
Failure, inadvertent or otherwise, to comply with any requirement may render a
Mortgage Loan unenforceable and/or the lien on a mortgaged property invalid.
Because mortgage loans which are subject to the Texas Home Equity Laws can be
foreclosed only pursuant to court order, rather than non-judicial foreclosures
as is available for other types of mortgage loans in Texas, delays and increased
losses may result in connection with foreclosures of those loans. If a court
were to find that any requirement of the Texas Home Equity Laws was not
satisfied, the court could:
- refuse to allow foreclosure to proceed,
- declare the lien on a mortgaged property to be invalid, and/or
- require the originating lender or the holder of the note to forfeit some
or all principal and interest of the related Mortgage Loan.
Title insurance generally available on such Mortgage Loans may exclude coverage
for some of the risks described in this paragraph.
"DUE-ON-SALE" CLAUSES
The forms of note, mortgage and deed of trust relating to conventional
Mortgage Loans may contain a "due-on-sale" clause permitting acceleration of the
maturity of a loan if the borrower transfers its interest in the property. In
recent years, court decisions and legislative actions placed substantial
restrictions on the right of lenders to enforce those clauses in many states.
However, the Garn-St Germain Depository Institutions Act of 1982 (the "GARN
ACT") subject to certain exceptions, preempts state constitutional, statutory
and case law prohibiting the enforcement of due-on-sale clauses. Regulations
promulgated under the Garn Act also prohibit the imposition of a prepayment
penalty upon the acceleration of a loan under a due-on-sale clause. As to loans
secured by an owner-occupied residence, the Garn Act sets forth nine specific
instances in which a mortgagee covered by the Garn 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 ("OTS"), as successor to the Federal Home Loan Bank Board ("FHLBB"),
is authorized
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to issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized any state to reimpose interest
rate limits by adopting, before April 1, 1983, a law or constitutional provision
which expressly rejects 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.
HOMEOWNERS PROTECTION ACT OF 1998
The Homeowners Protection Act of 1998 ("HOPA") provides for certain
disclosure and termination requirements for primary mortgage insurance. The
termination provisions of HOPA apply only to mortgage loans relating to
single-family primary residences originated on or after July 29, 1999. The
termination provisions govern when a mortgagor may cancel the requirement to
maintain primary mortgage insurance and when the requirement to maintain primary
mortgage insurance is automatically terminated. In general, voluntary
termination is permitted when the principal balance of a mortgage loan is
reduced to 80% of the original property value and automatic termination occurs
when the principal balance of a mortgage loan is reduced to 78% of the original
property value. The disclosure requirements of HOPA vary depending on whether
the mortgage loan was originated before or after July 29, 1999. These disclosure
requirements include notification of the circumstances under which a mortgagor
may cancel primary mortgage insurance, the date when primary mortgage insurance
automatically terminates and servicer contact information. In addition, HOPA
provides that no later than 30 days after cancellation or termination of primary
mortgage insurance, the servicer shall provide written notification that primary
mortgage insurance is terminated and no further payments are due or payable. Any
servicer, mortgagee or mortgage insurer that violates provisions of HOPA is
subject to possible liability which includes, but is not limited to, actual
damages, statutory damages and reasonable attorney's fees.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT AND SIMILAR LAWS
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "RELIEF ACT"), a borrower who enters military service
after the origination of such borrower's Mortgage Loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the Mortgage Loan and is later called to active duty) may not be
charged interest above an annual rate of 6% during the period of the borrower's
active duty status, unless a court orders otherwise upon application of the
lender. It is possible that the 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. Any shortfall
in interest collections resulting from the application of the Relief Act could
result in losses to the holders of Certificates of the related series. 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. As a result, if a Mortgage Loan subject
to the Relief Act goes into default there may be delays and losses occasioned by
the inability to realize upon the Mortgaged Property in a timely fashion.
Certain states have enacted comparable legislation which may interfere with or
affect the ability of the Master Servicer to collect timely payments of
principal and interest on, or to foreclose on, Mortgage Loans of borrowers in
such states who are active or reserve members of the armed services.
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ENVIRONMENTAL CONSIDERATIONS
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to a security
interest may be subject to federal, state, and local laws and regulations
relating to environmental protection. These laws may regulate, among other
things:
- emissions of air pollutants;
- discharges of wastewater or storm water;
- generation, transport, storage or disposal of hazardous waste or
hazardous substances;
- operation, closure and removal of underground storage tanks;
- removal and disposal of asbestos-containing materials; and/or
- management of electrical or other equipment containing polychlorinated
biphenyls.
Failure to comply with these laws and regulations may result in significant
penalties, including civil and criminal fines. Under the laws of certain states,
environmental contamination on a property may give rise to a lien on the
property to ensure the availability and/or reimbursement of cleanup costs.
Generally all subsequent liens on a property are subordinated to this type of
lien and, in some states, even prior recorded liens are subordinated to such
liens. In the latter states, the security interest of the Trustee in a property
that is subject to this type of lien could be adversely affected. Environmental
contamination on a property is likely to have a negative impact on the value of
the property, which may lead to losses on the related series of Certificates.
Under the federal Comprehensive Environmental Response Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party that takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property or undertakes
certain types of activities that may constitute management of the mortgaged
property may become liable in certain circumstances for the costs of remedial
action or cleanup costs if hazardous wastes or hazardous substances have been
released or disposed of on the property. The cleanup costs may be substantial.
CERCLA imposes strict, as well as joint and several liability, for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property, irrespective
of whether those owners or operators caused or contributed to contamination on
the property. In addition, owners and operators of properties that generate
hazardous substances that are disposed of at other "off-site" locations may held
strictly, as well as jointly and severally, liable for environmental remediation
and/or damages at those off-site locations. Many states also have laws that are
similar to CERCLA. Liability under CERCLA or under similar state law could
exceed the value of the property itself as well as the aggregate assets of the
property owner.
The law is unclear as to whether and under what precise circumstances
cleanup costs, or the obligation to take remedial actions, could be imposed on a
secured lender such as a Trust Fund. Under the laws of some states and under
CERCLA, a lender may be liable as an "owner or operator" for costs of addressing
releases or threatened releases of hazardous substances on a mortgaged property
if the lender or its agents or employees have "participated in the management"
of the operations of the borrower, even though the environmental damage or
threat was caused by a prior owner or current owner or operator or other third
party. Excluded from CERCLA's definition of "owner or operator," is a person
"who without participating in the management of . . . [the] facility, holds
indicia of ownership primarily to protect his security interest" (the
"secured-creditor exemption"). This exemption for holders of a security interest
such as a secured lender applies only if a lender seeks to protect its security
interest in the contaminated facility or property. Accordingly, if a lender's
activities begin to encroach on the actual
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management of a facility or property, the lender faces potential liability as an
"owner or operator" under CERCLA. Similarly, when a lender forecloses and takes
title to a contaminated facility or property, the lender may incur potential
CERCLA liability in various circumstances, including among others, when it holds
the facility or property as an investment (including leasing the facility or
property to a third party), fails to market the property in a timely fashion or
fails to property address environmental conditions at the property or facility.
The Resource Conservation and Recovery Act, as amended ("RCRA"), contains a
similar secured-creditor exemption for those lenders who hold a security
interest in a petroleum underground storage tank or in real estate containing a
underground storage tank, or that acquire title to a petroleum underground
storage tank or facility or property on which a underground storage tank is
located. As under CERCLA, a lender may lose its secured-creditor exemption and
be held liable under RCRA as a underground storage tank owner or operator if the
lender or its employees or agents participate in the management of the
underground storage tank. In addition, if the lender takes title to or
possession of the underground storage tank or the real estate containing the
underground storage tank, under certain circumstances the secured-creditor
exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly construed
CERCLA's secured-creditor exemption. The court's opinion suggested that a lender
need not have involved itself in the day-to-day operations of the facility or
participated in decisions relating to hazardous waste to be liable under CERCLA;
rather, liability could attach to a lender if its involvement with the
management of the facility were broad enough to support the inference that the
lender had the capacity to influence the borrower's treatment of hazardous
waste. The court added that a lender's capacity to influence those decisions
could be inferred from the extent of its involvement in the facility's financial
management. A subsequent decision by the United States Court of Appeals for the
Ninth Circuit in In re Bergsoe Metal Corp., apparently disagreeing with, but not
expressly contradicting, the Fleet Factors court, held that a secured lender had
no liability absent "some actual management of the facility" on the part of the
lender.
The Asset Conservation, Lender Liability and Deposit Insurance Protection
Act of 1996 (the "ASSET CONSERVATION ACT") was intended to clarify the scope of
the secured creditor exemption under both CERCLA and RCRA. The Asset
Conservation Act more clearly defined the kinds of "participation in management"
that would trigger liability under CERCLA and specified certain activities that
would not constitute "participation in management" or otherwise result in a
forfeiture of the secured-creditor exemption prior to foreclosure or during a
workout period. The Asset Conservation Act also clarified the extent of
protection against liability under CERCLA in the event of foreclosure and
authorized certain regulatory clarifications of the scope of the
secured-creditor exemption for purposes of RCRA, similar to the statutory
protections under CERCLA. However, since the courts have not yet had the
opportunity to interpret the new statutory provisions, the scope of the
additional protections offered by the Asset Conservation Act is not fully
defined. It also is important to note that the Asset Conservation Act does not
offer complete protection to lenders and that the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that person
or entity may be bankrupt or otherwise judgment-proof. As a result, it is
possible that cleanup or other environmental liability costs could become a
liability of a Trust Fund and occasion a loss to a Trust Fund and to
certificateholders in certain circumstances. The new secured creditor amendments
to CERCLA, also, would not necessarily affect the potential for liability in
actions by either a state or a private party under other federal or state laws
which may impose liability on "owners or operators" but do not incorporate the
secured-creditor exemption.
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Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present with
respect to any mortgaged property prior to the origination of the mortgage loan
or prior to foreclosure or accepting a deed-in-lieu of foreclosure. Accordingly,
at the time the Mortgage Loans were originated no such evaluations were
required, nor were any such evaluations required prior to foreclosure or
accepting a deed-in-lieu of foreclosure. Neither the Depositor nor any other
entity makes any representations or warranties or assumes any liability with
respect to:
- the environmental condition of such mortgaged property;
- the absence, presence or effect of hazardous wastes or hazardous
substances on any mortgaged property;
- any casualty resulting from the presence or effect of hazardous wastes or
hazardous substances on, near or emanating from such mortgaged property;
- the impact on certificateholders of any environmental condition or
presence of any substance on or near such mortgaged property; or
- the compliance of any mortgaged property with any environmental laws.
In addition, no agent, person or entity otherwise affiliated with the Depositor
is authorized or able to make any similar representation, warranty or assumption
or liability relative to any such Mortgaged Property. See "The Trust
Funds -- The Mortgage Loans" and "-- 'Due-on-Sale' Clauses" above.
--------------------------------------------------------------------------------
BENEFIT PLAN CONSIDERATIONS
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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 these employee benefit plans and arrangements. The
following is a general discussion of these requirements, and certain applicable
exceptions to and administrative exemptions from these 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
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 these 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 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."
Before purchasing any Certificates, an ERISA Plan fiduciary should consult
with its counsel and determine whether any prohibition to its 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 its purchase, including whether the required
conditions for the
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exemption would be met, or whether any statutory prohibited transaction
exemption is applicable to that purchase. In addition, an ERISA Plan fiduciary
should consult the discussion under "Benefit Plan Considerations" in the
prospectus supplement relating to a series of Certificates.
CERTAIN ERISA AND CODE REQUIREMENTS
General
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 "Prepayment
and Yield Considerations".
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 of their affiliates might be or might become "parties in interest" or
"disqualified persons" with respect to an ERISA Plan. As a result, the
acquisition or holding of Certificates by or on behalf of an ERISA Plan could
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 those accounts may be deemed plan assets for purposes
of ERISA) are used to purchase a Certificate if, with respect to those assets,
the Depositor, a Seller, a Master Servicer or the Trustee or one of their
affiliates either (a) has investment discretion with respect to the investment
of the assets of the ERISA Plan; or (b) has authority or responsibility to give,
or regularly gives, investment advice with respect to the assets for a fee and
pursuant to an agreement or understanding that the advice will serve as a
primary basis for investment decisions with respect to the assets and will be
based on the particular investment needs of the ERISA Plan.
Delegation of Fiduciary Duty
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
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in the underlying assets of the related Trust Fund. However, it cannot be
predicted in advance, nor can there be any continuing assurance whether the
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 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 plan investments in that 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 that
certificate, but do not, solely by reason of the ERISA Plan's holdings of that
certificate, include any of the mortgage loans underlying that 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
Several underwriters of mortgage-backed securities have received individual
administrative exemptions (each, an "UNDERWRITER'S EXEMPTION") from certain of
the prohibited transaction provisions of ERISA and the Code. These Underwriter's
Exemptions are broader in some respects than Prohibited Transaction Class
Exemption 83-1, which is discussed below. These Underwriter's Exemptions apply
only to mortgage-backed securities that, among other conditions, are sold in an
offering for which the applicable underwriter serves as the sole or a managing
underwriter, or as a selling or placement agent. If an Underwriter's Exemption
might be applicable to a series of Certificates, the related prospectus
supplement will discuss that possibility.
Among the conditions that must be satisfied for an Underwriter's Exemption
to apply are the following:
- 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;
- 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;
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- the Certificates acquired by the ERISA Plan have received a rating at the
time of acquisition that is one of the three highest generic rating
categories from Standard & Poor's, a division of The McGraw-Hill
Companies, Inc. ("S&P"), Moody's Investors Service, Inc. ("MOODY'S"),
Duff & Phelps Credit Rating Co. ("DCR") or Fitch IBCA, Inc. ("FITCH");
- the Trustee must not be an affiliate of any other member of the
Restricted Group (as described below);
- 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 Depositor pursuant to the
assignment of the Mortgage Loans to the Trust Fund represents not more
than the fair market value of the Mortgage Loans; the sum of all payments
made to and retained by the Master Servicer or any Servicer represents
not more than reasonable compensation for such person's services under
the agreement pursuant to which the loans are pooled and reimbursements
of such person's reasonable expenses; and
- 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 of 1933, as amended.
The Trust Fund must also meet the following requirements:
- 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;
- certificates in those 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 the
Certificates; and
- certificates evidencing interests in those 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 the Certificates.
Moreover, an Underwriter's Exemption generally can provide relief from
certain self-dealing/conflict of interest prohibited transactions that may occur
when an 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 Mortgage Assets held in the Trust Fund; provided that, among
other requirements:
- in the case of an acquisition in connection with the initial issuance of
Certificates, at least 50% of each class of Certificates in which ERISA
Plans have invested is acquired by persons independent of the Restricted
Group and at least 50% of the aggregate interest in the Trust Fund is
acquired by persons independent of the Restricted Group;
- the fiduciary (or its affiliate) is an obligor with respect to 5% or less
of the fair market value of the obligations contained in the Trust Fund;
- the ERISA Plan's investment in Certificates of any class does not exceed
25% of all of the Certificates of that class outstanding at the time of
the acquisition; and
- immediately after the acquisition, no more than 25% of the assets of the
ERISA Plan with respect to which that 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.
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An Underwriter's Exemption does 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 5% of the
aggregate unamortized principal balance of the assets in the Trust Fund, or any
affiliate of those parties (collectively, the "RESTRICTED GROUP").
The prospectus supplement for each series of Certificates will indicate the
classes of Certificates, if any, as to which an Underwriter's Exemption should
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 such mortgage
pool, and whether or not such transactions would otherwise be prohibited under
ERISA or the Code.
The term "mortgage pool pass-through certificate" is defined in PTCE 83-1
as "a certificate representing a beneficial undivided fractional interest in a
mortgage pool and entitling the holder of such certificate to pass-through
payment of principal and interest from the pooled mortgage loans, less any fees
retained by the pool sponsor." It appears that, for purposes of PTCE 83-1, the
term "mortgage pool pass-through certificate" would include Certificates issued
in a single class or in multiple classes that evidence the beneficial ownership
of both a specified percentage of future interest payments (after permitted
deductions) and a specified percentage of future principal payments on a Trust
Fund.
However, it appears that PTCE 83-1 does not or might not apply to the
purchase and holding of:
- Certificates that evidence the beneficial ownership only of a specified
percentage of future interest payments (after permitted deductions) from
a Trust Fund or only of a specified percentage of future principal
payments from a Trust Fund;
- Residual Certificates;
- Certificates evidencing ownership interests in a Trust Fund that includes
Mortgage Loans secured by multifamily residential properties or shares
issued by cooperative housing corporations;
- Subordinate Certificates;
- Certificates evidencing ownership interests in a Trust Fund containing
Mortgage Certificates; or
- 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 or 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
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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 preceding 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. As a result, 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 its 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 transferee may be required to provide an affidavit
to the transferor, the Trustee and the Depositor that it is not, nor is it
purchasing a Residential Certificate on behalf of, 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 imposed by ERISA or the Code.
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.
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.
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LEGAL INVESTMENT CONSIDERATIONS
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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 nationally-recognized statistical rating organization
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
and secured by first liens on real estate. As "mortgage related securities,"
these 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 those entities. Pursuant to SMMEA, a
number of states enacted legislation, on or before the October 3, 1991 cut-off
for those 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
this type of legislation will be authorized to invest in the Certificates only
to the extent provided in the 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 in mortgage
related securities, federal credit unions may invest in mortgage related
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 regulations 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. The OTS has issued Thrift Bulletin 13a (December 1, 1998),
"Management of Interest Rate Risk, Investment Securities, and Derivative
Activities," which thrift institutions subject to the jurisdiction of the OTS
should consider before investing in any Certificates.
All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Investment Securities and
End-User Derivatives Activities" of the Federal Financial Institutions
Examination Council, 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. This policy statement sets forth general guidelines
which depository institutions must follow in managing risks (including
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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.
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 those authorities before purchasing any of the
Certificates, as certain series or classes (in particular, Certificates that are
entitled solely or disproportionately to distributions of principal or interest)
may be deemed unsuitable investments, or may otherwise be restricted, under
those rules, policies or guidelines (in certain instances irrespective of
SMMEA).
The proceeding discussion 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.
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FEDERAL INCOME TAX CONSEQUENCES
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The following general discussion represents the opinion of Cadwalader,
Wickersham & Taft or Kennedy Covington Lobdell & Hickman, L.L.P. as to the
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 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 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
real estate mortgage investment conduits (each, a "REMIC") 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 and servicing agreement, and (iii) compliance
with any changes in the law, including any amendments to the Code or applicable
Treasury regulations, each REMIC Pool will qualify as a REMIC. In that 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. Regular Certificates held by a
financial asset securitization investment trust (a "FASIT") will be "permitted
assets" within the meaning of Code Section 860L(c).
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
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held by certain financial institutions will constitute an "evidence of
indebtedness" within the meaning of Code Section 582(c)(1). The Small Business
Job Protection Act of 1996 (the "SBJPA OF 1996") repealed the reserve method for
bad debts of domestic building and loan associations and mutual savings banks,
and thus has eliminated the asset category of "qualifying real property loans"
in former Code Section 593(d) for taxable years beginning after December 31,
1995. The requirement in the SBJPA of 1996 that such institutions must
"recapture" a portion of their existing bad debt reserves is suspended if a
certain portion of their assets are maintained in "residential loans" under Code
Section 7701(a)(19)(C)(v), but only if such loans were made to acquire,
construct or improve the related real property and not for the purpose of
refinancing. However, no effort will be made to identify the portion of the
Mortgage Loans of any series meeting this requirement, and no representation is
made in this regard.
QUALIFICATION AS A REMIC
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 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 after the Startup Date or (ii) in exchange for a "defective obligation"
within a two-year period after the Startup Date. 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 that 90-day period.
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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 requirements described above, the various interests in a
REMIC Pool also must meet certain requirements. All of the interests in a REMIC
Pool must be either of the following: (i) one or more classes of regular
interests or (ii) a single class of residual interests on which distributions,
if any, are made pro rata. A regular interest is an interest in a REMIC Pool
that is issued on the Startup Day with fixed terms, is designated as a regular
interest, and unconditionally entitles the holder to receive a specified
principal amount (or other similar amount), and provides that interest payments
(or other similar amounts), if any, at or before maturity either are payable
based on a fixed rate or a qualified variable rate, or consist of a specified,
nonvarying portion of the interest payments on qualified mortgages. Such a
specified portion may consist of a fixed number of basis points, a fixed
percentage of the total interest, or a qualified variable rate, inverse variable
rate or difference between two fixed or qualified variable rates on some or all
of the qualified mortgages. The specified principal amount of a regular interest
that provides for interest payments consisting of a specified, nonvarying
portion of interest payments on qualified mortgages may be zero. A residual
interest is an interest in a REMIC Pool other than a regular interest that is
issued on the Startup Day and that is designated as a residual interest. An
interest in a REMIC Pool may be treated as a regular interest even if payments
of principal with respect to that 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 that year
and any following year. 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
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relief may be accompanied by sanctions, such as the imposition of a corporate
tax on all or a portion of the REMIC Pool's income for the period of time in
which the requirements for REMIC status are not satisfied.
TAXATION OF REGULAR CERTIFICATES
General
In general, interest, original issue discount, and market discount on a
Regular Certificate will be treated as ordinary income to a holder of the
Regular Certificate (the "REGULAR CERTIFICATEHOLDER"), and principal payments on
a Regular Certificate will be treated as a return of capital to the extent of
the Regular Certificateholder's basis in the Regular Certificate allocable
thereto (other than accrued market discount not previously reported as income).
Regular Certificateholders must use the accrual method of accounting with regard
to Regular Certificates, regardless of the method of accounting otherwise used
by such Regular Certificateholders.
Original Issue Discount
Accrual Certificates will be, and other classes of Regular Certificates may
be, issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any class of Regular Certificates having original issue
discount generally must include original issue discount in ordinary income for
federal income tax purposes as it accrues, in accordance with a constant
interest method that takes into account the compounding of interest, in advance
of receipt of the cash attributable to such income. The following discussion is
based in part on temporary and final Treasury regulations issued on February 2,
1994, as amended on June 14, 1996, (the "OID REGULATIONS") under Code Sections
1271 through 1273 and 1275 and in part on the provisions of the 1986 Act.
Regular Certificateholders should be aware, however, that the OID Regulations do
not adequately address certain issues relevant to prepayable securities, such as
the Regular Certificates. To the extent such issues are not addressed in such
regulations, it is anticipated that the Trustee will apply the methodology
described in the Conference Committee Report to the 1986 Act. No assurance can
be provided that the Internal Revenue Service will not take a different position
as to those matters not currently addressed by the OID Regulations. Moreover,
the OID Regulations include an anti-abuse rule allowing the Internal Revenue
Service to apply or depart from the OID Regulations where necessary or
appropriate to ensure a reasonable tax result in light of the applicable
statutory provisions. A tax result will not be considered unreasonable under the
anti-abuse rule in the absence of a substantial effect on the present value of a
taxpayer's tax liability. Investors are advised to consult their own tax
advisors as to the discussion herein and the appropriate method for reporting
interest and original issue discount with respect to the Regular Certificates.
Each Regular Certificate (except to the extent described below with respect
to a Regular Certificate on which principal is distributed in a single
installment or by lots of specified principal amounts upon the request of a
Certificateholder or by random lot (a "NON-PRO RATA CERTIFICATE")) will be
treated as a single installment obligation for purposes of determining the
original issue discount includible in a Regular Certificateholder's income. The
total amount of original issue discount on a Regular Certificate is the excess
of the "stated redemption price at maturity" of the Regular Certificate over its
"issue price." The issue price of a class of Regular Certificates offered
pursuant to this prospectus generally is the first price at which a substantial
amount of such class is sold to the public (excluding bond houses, brokers and
underwriters). Although unclear under the OID Regulations, it is anticipated
that the Trustee will treat the issue price of a class as to 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
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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 those
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 the
Regular Certificates includes all distributions of interest as well as
principal. Likewise, it is anticipated that the Trustee will treat an
interest-only class or a class on which interest is substantially
disproportionate to its principal amount (a so-called "super-premium" class) as
having no qualified stated interest. Where the interval between the issue date
and the first Distribution Date on a Regular Certificate is shorter than the
interval between subsequent Distribution Dates, the interest attributable to the
additional days will be included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Certificate multiplied
by the weighted average maturity of the Regular Certificate. For this purpose,
the weighted average maturity of the Regular Certificate is computed as the sum
of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included in
the stated redemption price at maturity of the Regular Certificate and the
denominator of which is the stated redemption price at maturity of the Regular
Certificate. The Conference Committee Report to the 1986 Act provides that the
schedule of such distributions should be determined in accordance with the
assumed rate of prepayment of the Mortgage Loans (the "PREPAYMENT ASSUMPTION")
and the anticipated reinvestment rate, if any, relating to the Regular
Certificates. The Prepayment Assumption with respect to a series of Regular
Certificates will be set forth in the applicable 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
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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 that 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 its unpaid principal balance), (a) the remaining
unaccrued original issue discount allocable to the 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 that class
(or the remaining unpaid principal balance of a partially redeemed Non-Pro Rata
Certificate after a distribution of principal has been received) will be
adjusted by reducing the present value of the remaining payments on that class
and the adjusted issue price of that 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
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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 the rate
is subject to a fixed multiple that is greater than 0.65 but not more than 1.35.
The 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, these 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 these 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 of these variable rates
for one or more periods, or one or more fixed rates for one or more periods, and
a different variable rate or fixed rate for other periods, qualifies as a
regular interest in a REMIC. Accordingly, unless otherwise indicated in the
applicable prospectus supplement, it is anticipated that the Trustee will treat
Regular Certificates
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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
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
if initial "teaser" rates cause sufficiently "back-loaded" interest to create
more than de minimis original issue discount. The yield on such a Regular
Certificate 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. This 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
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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 deferred interest expense is, in general,
allowed as a deduction not later than the year in which the related market
discount income is recognized or the Regular Certificate is disposed of. As an
alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Certificateholder may elect to include market discount in
income currently as it accrues on all market discount instruments acquired by
the Regular Certificateholder in that taxable year or following taxable years,
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 this 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, as a result, 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 its Regular Certificate as a
"capital asset" within the meaning of Code Section 1221, the Regular
Certificateholder may elect under Code Section 171 to amortize its premium under
the constant yield method. This election will apply to all debt obligations
acquired by the Regular Certificateholder at a premium held in that taxable year
or following taxable years, 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 this election
with respect to a debt instrument with
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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 following taxable years. 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 tax advisors regarding the advisability of making
this election.
Treatment of Losses
Regular Certificateholders will be required to report income with respect
to Regular Certificates on the accrual method of accounting, without giving
effect to delays or reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans, except to the extent it can be established
that those 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
that loss with respect to principal sustained during the taxable year on account
of any 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 Regular Certificates becoming wholly
worthless. Although the matter is not free from doubt, non-corporate Regular
Certificateholders should be allowed a bad debt deduction at the time the
principal balance of their 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 these 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 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. These
taxpayers are advised to consult their tax advisors regarding the treatment of
losses on Regular Certificates.
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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). This gain will be treated as ordinary
income (i) if a Regular Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Regular Certificateholder's net investment in the
conversion transaction at 120% of the appropriate applicable federal rate under
Code Section 1274(d) in effect at the time the taxpayer entered into the
transaction minus any amount previously treated as ordinary income with respect
to any prior disposition of property that was held as part of the transaction,
(ii) in the case of a non-corporate taxpayer, if the 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) if the 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 its 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 the holder with respect to its
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 the quarter
and by allocating the daily portion among the Residual Holders in proportion to
their respective holdings of Residual Certificates in the REMIC Pool on that
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
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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. If 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 distributions of principal 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 if those 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 this 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 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 the Residual Holder for those
periods in accordance with generally accepted accounting principles. Investors
should consult their 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 the Residual Certificate. The 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
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carried over indefinitely with respect to the Residual Holder as to whom a loss
was disallowed and may be used by that 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. This 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 the 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 this type of a residual
interest to induce the transferee to acquire the interest, and Residual Holders
should consult their tax advisors in this regard.
Further, if 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 its basis until termination of the REMIC Pool
unless future Treasury regulations provide for periodic adjustments to the REMIC
income otherwise reportable by the holder. The REMIC Regulations currently in
effect do not so provide. See "-- Treatment of Certain Items of REMIC Income and
Expense -- Market Discount" below regarding the basis of Mortgage Loans to the
REMIC Pool and "-- Sale or Exchange of a Residual Certificate" below regarding
possible treatment of a loss upon termination of the REMIC Pool as a capital
loss.
Treatment of Certain Items of REMIC Income and Expense
Although the 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 the Trustee 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 those
Mortgage Loans is exceeded by their unpaid principal balances. The REMIC Pool's
basis in 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 the basis is equal in the aggregate to the issue prices of all
regular and residual interests in the REMIC Pool. The accrued portion of the
market discount would be recognized currently as an item of ordinary income in a
manner similar to original issue discount. Market discount income generally
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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 their unpaid principal balances, the REMIC Pool will be considered to
have acquired the Mortgage Loans at a premium equal to the amount of the 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 those Mortgage Loans may be deductible in accordance with a
reasonable method regularly employed by their holder. The allocation of premium
pro rata among principal payments should be considered a reasonable method;
however, the Internal Revenue Service may argue that premium should be allocated
in a different manner, such as allocating 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 that 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 the Residual Certificate
at the beginning of the 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 daily accruals of REMIC income
described in this paragraph for all prior quarters, decreased by any
distributions made with respect to the Residual Certificate prior to the
beginning of the 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 that income as the adjusted issue price of the Residual Certificates
diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including net
operating loss carryforwards, on the 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 the
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 of
REMIC taxable income 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
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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 these 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 that
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. This 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 the transfer is through an agent
(including a broker, nominee or other middleman) for a Disqualified
Organization, the tax would instead be imposed on the agent. However, a
transferor of a Residual Certificate would in no event be liable for such tax
with respect to a transfer if the transferee furnishes to the transferor an
affidavit stating that the transferee is not a Disqualified Organization and, as
of the time of the transfer, the transferor does not have actual knowledge that
such affidavit is false. The tax also may be waived by the Internal Revenue
Service if the Disqualified Organization promptly disposes of the Residual
Certificate and the transferor pays income tax at the highest corporate rate on
the excess inclusion for the period the Residual Certificate is actually held by
the Disqualified Organization.
In addition, if a Pass-Through Entity (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such Disqualified
Organization, and (ii) the highest marginal federal corporate income tax rate.
The 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 the
tax if it has received an affidavit from the record holder that it is not a
Disqualified Organization or stating the holder's taxpayer identification number
and, during the period that person is the record holder of the Residual
Certificate, the Pass-Through Entity does not have actual knowledge that the
affidavit is false.
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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 the 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 this 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 similar 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 the 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 that 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 the 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 the 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 these
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 this information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor would
continue to be treated as the owner of the Residual Certificates and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a noneconomic residual
interest (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person, as defined below under "-- Foreign Investors") is
disregarded for all federal income tax purposes if a significant purpose of the
transferor is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of the transfer, (i) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest federal corporate income tax rate in effect for the
year in which the transfer occurs, and
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(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 that
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 or
partnership (except to the extent provided in applicable Treasury Regulations)
created or organized in or under the laws of the United States, any state or the
District of Columbia, including any entity treated as a corporation or
partnership for federal income tax purposes, 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 the trust, and one or
more U.S. Persons have the authority to control all substantial decisions of the
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 the
Residual Holder in its Residual Certificate at the time of the sale or
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exchange. In addition to reporting the taxable income of the REMIC Pool, a
Residual Holder will have taxable income if any cash distribution to it from the
REMIC Pool exceeds the 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 its Residual
Certificate as a capital asset under Code Section 1221, then it will recognize a
capital loss at that time in the amount of its 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, if the 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 or termination of the REMIC Pool 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 that 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
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permitted to hold, (iii) the receipt of compensation for services, or (iv) the
receipt of gain from disposition of cash flow investments other than pursuant to
a qualified liquidation. Notwithstanding (i) and (iv) of the preceding sentence,
it is not a prohibited transaction to sell REMIC Pool property to prevent a
default on Regular Certificates as a result of a default on qualified mortgages
or to facilitate a clean-up call (generally, an optional prepayment of the
remaining principal balance of a class of Regular Certificates to save
administrative costs when no more than a small percentage of the Certificates is
outstanding). The REMIC Regulations indicate that the modification of a
qualified mortgage generally will not be treated as a disposition if it is
occasioned by a default or reasonably foreseeable default, an assumption of the
Mortgage Loan, the waiver of a due-on-sale or due-on-encumbrance clause, or the
conversion of an interest rate by a mortgagor pursuant to the terms of a
convertible adjustable-rate Mortgage Loan.
Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during the
three months following the Startup Day, (ii) made to a qualified reserve fund by
a Residual Holder, (iii) in the nature of a guarantee, (iv) made to facilitate a
qualified liquidation or clean-up call, and (v) as otherwise permitted in
Treasury regulations yet to be issued. It is not anticipated that there will be
any contributions to the REMIC Pool after the Startup Day.
Net Income from Foreclosure Property
The REMIC Pool will be subject to federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" for a period not exceeding the close of the third
calendar year after the year in which the REMIC Pool acquired the 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 the adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on that 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 this 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
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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 and servicing 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 or the Trustee 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, if those 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 $128,950 for 2000 ($64,475 in the case of a married
individual filing a separate return) (subject to adjustment for inflation in
subsequent years), or (ii) 80% of the amount of itemized deductions otherwise
allowable for that year. In the case of a REMIC Pool, these 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. Investors who hold REMIC Certificates either directly or
indirectly through certain pass-through entities may have their pro rata share
of these expenses allocated to them as additional gross income, but may be
subject to the limitation on deductions. In addition, these expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause these 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,
the additional gross income and limitation on deductions will apply to the
allocable portion of those expenses to holders of Regular Certificates, as well
as holders of Residual Certificates, where the 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
expenses will be allocable to the Residual Certificates. In general, the
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
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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 the 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 the distributions under Code Section 1441 or 1442,
with the appropriate Internal Revenue Service form establishing the
applicability of either of these two exemptions. If this 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 the Non-U.S. Person. In the latter case,
the 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 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 will be effective January 1, 2001. The New Regulations would
require, in the case of Regular Certificates held by a foreign partnership, that
(i) the certification described above be provided by the partners rather than by
the foreign partnership and (ii) the partnership provide certain information,
including a United States taxpayer identification number. A look-through rule
would apply in the case of tiered partnerships. Non-U.S. Persons should consult
their 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 if (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 those 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, those 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 tax advisors regarding the specific tax consequences to
them of owning Residual Certificates.
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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 the Regular
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 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 this information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 with respect to a particular series of Regular
Certificates. Holders through nominees must request this 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 these
holders. Furthermore, under the Treasury regulations, information must be
furnished quarterly to Residual Holders, furnished annually to holders of
Regular Certificates and filed annually with the Internal Revenue Service
concerning the percentage of the REMIC Pool's assets meeting the qualified asset
tests described above under "-- Status of REMIC Certificates."
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FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES
AS TO WHICH NO REMIC ELECTION IS MADE
GENERAL
If no election is made to treat a Trust Fund (or a segregated pool of
assets in the Trust Fund) 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 those Certificates are not designated as
Stripped Certificates, the holder of each Certificate in that 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 the Mortgage Loans, original issue
discount (if any), prepayment fees, assumption fees, and late payment charges
received by the Master Servicer, in accordance with that 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 those
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 $128,950 for 2000 ($64,475 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 that year. As a result, 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 their Certificates with
respect to interest at the pass-through rate or as discount income on their
Certificates. In addition, these expenses are not deductible at all for purposes
of computing the alternative minimum tax, and may cause such investors to be
subject to significant additional tax liability. Moreover, where there is fixed
retained yield with respect to the Mortgage Loans underlying a series of
Certificates or where the servicing fees are in excess of reasonable servicing
compensation, the transaction will be subject to the application of the
"stripped bond" and "stripped coupon" rules of the Code, as described below
under "-- Stripped Certificates" and "-- Recharacterization of Servicing Fees."
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 Sec-
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tion 7701(a)(19)(C)(v), provided that the real property securing the
Mortgage Loans represented by that Certificate is of the type described in
that 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 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
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 FASIT will be considered to represent
"permitted assets" within the meanings of Section 860L(c) to the extent 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 tax advisors
concerning the effects of these arrangements on the characterization of their
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 afterwards.
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 -- Treatment of Certain Items of REMIC Income and
Expense -- 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, original issue discount could arise by the charging of points by
the originator of the mortgages in an amount greater than the statutory de
minimis exception, including a payment of points that is currently deductible by
the borrower under applicable Code provisions or, under certain circumstances,
by the presence of "teaser" rates on the Mortgage Loans. See "-- Stripped
Certificates" below regarding original issue discount on Stripped Certificates.
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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 that 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 Mortgage Loans acquired by a
Certificateholder are purchased at a price equal to the then unpaid principal
amount of those Mortgage Loans, no original issue discount attributable to the
difference between the issue price and the original principal amount of those
Mortgage Loans (i.e., points) will be includible by the holder.
Market Discount
Certificateholders also will be subject to the market discount rules if 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 in those sections 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
that 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 its holder. While certificateholders would still be treated
as owners of beneficial interests in a grantor trust for federal income tax
purposes, the corpus of the 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.
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Applicable Treasury regulations treat such an arrangement as a fixed investment
trust, since the multiple classes of trust interests should be treated as merely
facilitating direct investments in the trust assets and the existence of
multiple classes of ownership interests is incidental to that purpose. In
general, such a recharacterization should not have any significant effect upon
the timing or amount of income reported by a certificateholder, except that the
income reported by a cash method holder may be slightly accelerated. See
"-- Stripped Certificates" below for a further description of the federal income
tax treatment of stripped bonds and stripped coupons.
SALE OR EXCHANGE OF CERTIFICATES
Upon sale or exchange of a Certificate, a certificateholder will recognize
gain or loss equal to the difference between the amount realized on the sale and
its aggregate adjusted basis in the Mortgage Loans and other assets represented
by the Certificate. In general, the aggregate adjusted basis will equal the
certificateholder's cost for the Certificate, increased by the amount of any
income previously reported with respect to the Certificate and decreased by the
amount of any losses previously reported with respect to the Certificate and the
amount of any distributions received on the certificate. 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 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, if the 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 those 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 if 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
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Loan, including the Stripped Certificate's allocable share of the servicing fees
paid to a Master Servicer, if those 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
" -- General," subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
an obligation issued at an original issue discount on the date that the 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 those 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 and
servicing 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 of this 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 discussed in that section, assuming that a prepayment assumption is
employed in the 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),
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"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 the Mortgage Loans
qualify for that 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 the related income. Based in part on the OID Regulations and the
amendments to the original issue discount sections of the Code made by the 1986
Act, the amount of original issue discount required to be included in the income
of a holder of a Stripped Certificate (referred to in this discussion as a
"STRIPPED CERTIFICATEHOLDER") in any taxable year likely will be computed
generally as described above under "-- Federal Income Tax Consequences for REMIC
Certificates -- Taxation of Regular Certificates -- Original Issue Discount" and
"-- Variable Rate Regular Certificates." However, with the apparent exception of
a Stripped Certificate qualifying as a market discount obligation as described
above under "-- General," the issue price of a Stripped Certificate will be the
purchase price paid by each holder, and the stated redemption price at maturity
will include the aggregate amount of the payments to be made on the Stripped
Certificate to the 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 the original issue discount will be either increased or decreased depending
on the relative interests in principal and interest on each Mortgage Loan
represented by the 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
that 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 the
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, those 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 these 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 the Stripped Certificate, as described
above under "-- Federal Income Tax Consequences for REMIC
Certificates -- Taxation of Regular Certificates --
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Sale or Exchange of Regular Certificates." If a subsequent purchaser's purchase
price is exceeded by the remaining payments on the Stripped Certificates, the
subsequent purchaser will be required for federal income tax purposes to accrue
and report that 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 those 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 the
Stripped Certificate's pro rata share of the payments attributable to principal
on each Mortgage Loan and a second installment obligation consisting of the
Stripped Certificate's pro rata share of the payments attributable to interest
on each Mortgage Loan, (ii) as many stripped bonds or stripped coupons as there
are scheduled payments of principal and/or interest on each Mortgage Loan, or
(iii) a separate installment obligation for each Mortgage Loan, representing the
Stripped Certificate's pro rata share of payments of principal and/or interest
to be made with respect thereto. Alternatively, the holder of one or more
classes of Stripped Certificates may be treated as the owner of a pro rata
fractional undivided interest in each Mortgage Loan to the extent that the
Stripped Certificate, or classes of Stripped Certificates in the aggregate,
represent the same pro rata portion of principal and interest on each 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 tax advisors regarding
the proper treatment of Stripped Certificates for federal income tax purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Master Servicer or the Trustee, as specified in the related prospectus
supplement, 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, the information (prepared on the basis described above)
as is necessary to enable those certificateholders to prepare their federal
income tax returns. This 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 or the Trustee 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, this reporting will
be based upon a representative initial offering price of each class of Stripped
Certificates. The Master Servicer or the Trustee will also file the original
issue discount information with the Internal Revenue Service. If a
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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 its 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
If 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 any 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."
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STATE TAX CONSIDERATIONS
--------------------------------------------------------------------------------
In addition to the federal income tax consequences described in "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. Potential investors should consult
their tax advisors with respect to the various tax consequences of investments
in the Certificates.
--------------------------------------------------------------------------------
PLAN OF DISTRIBUTION
--------------------------------------------------------------------------------
The Certificates are being offered in series through one or more of the
various methods described below. The applicable prospectus supplement for each
series will describe the method of offering being used for that series. The
prospectus supplement will state the public offering or purchase price of each
class of Certificates of that series, or the method by which the price is to be
determined, and the net proceeds to the Depositor from the sale.
The Certificates will be offered through the following methods from time to
time and offerings may be made concurrently through more than one of these
methods or an offering of a series of Certificates may be made through a
combination of two or more of the following methods:
- by negotiated firm commitment underwriting and public offering by an
underwriter specified in the related prospectus supplement;
- by placements by the Depositor with institutional investors through
dealers; and
104
<PAGE> 169
- by direct placements by the Depositor with investors.
If underwriters are used in a sale of any Certificates, these Certificates
will be acquired by the underwriters for their own account 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 to be
determined at the time of sale or at the time of commitment for purchase. Firm
commitment underwriting and public reoffering by underwriters may be done
through underwriting syndicates or through one or more firms acting alone. The
managing underwriter or underwriters, if any, with respect to the offer and sale
of a series of Certificates will be set forth on the cover of the prospectus
supplement applicable to that series and members of the underwriting syndicate,
if any, will be named in that prospectus supplement. The prospectus supplement
will describe any discounts and commissions to be allowed or paid by the
Depositor to the underwriters, any other items constituting underwriting
compensation and any discounts and commissions to be allowed or paid to the
dealers. The obligations of the underwriters will be subject to certain
conditions precedent. The underwriters with respect to a sale of any class of
Certificates will be obligated to purchase all of those Certificates if any are
purchased. The Depositor and, if specified in the applicable prospectus
supplement, an affiliate of the Depositor, will indemnify the applicable
underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended.
Banc of America Securities LLC is an affiliate of the Depositor. This
prospectus may be used by Banc of America Securities LLC, if required, in
connection with market-making transactions in Certificates. Banc of America
Securities LLC may act as a principal or agent in market-making transactions.
The prospectus supplement for any series of Certificates offered other than
through underwriters will contain information regarding the nature of that
offering and any agreements to be entered into between the Depositor and dealers
and/or the Depositor and purchasers of Certificates.
Purchasers of Certificates, including dealers, may, depending on the facts
and circumstances of the purchases, be deemed to be "underwriters" within the
meaning of the Securities Act of 1933, as amended, in connection with reoffers
and sales by them of Certificates. Certificateholders should consult with their
legal advisors in this regard prior to any reoffer or sale.
If specified in the prospectus supplement relating to a series of
Certificates, the Depositor or any affiliate thereof may purchase some or all of
one or more classes of Certificates of that series form the underwriter or
underwriters at a price specified or described in the prospectus supplement. The
purchaser may then from time to time offer and sell, pursuant to this
prospectus, some or all of the Certificates purchased directly, through one or
more underwriters to be designated at the time of the offering of the
Certificates or through dealers acting as agent and/or principal. Such an
offering may be restricted in the manner specified in the prospectus supplement.
These transactions may be effected at market prices prevailing at the time of
sale, at negotiated prices or at fixed prices. The underwriters and dealers
participating in a purchaser's offering of Certificates may receive compensation
in the form of underwriting discounts or commissions from the purchaser and the
dealers may receive commissions from the investors purchasing Certificates for
whom they may act as agent (which discounts or commissions will not exceed those
customary in those types of transactions involved). Any dealer that participates
in the distribution of Certificates may be deemed to be an "underwriter" within
the meaning of the Securities Act of 1933, as amended, and any commissions and
discounts received by that dealer and any profit on the resale of Certificates
by that dealer might be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended.
105
<PAGE> 170
--------------------------------------------------------------------------------
USE OF PROCEEDS
--------------------------------------------------------------------------------
The Depositor will use the net proceeds from the sale of each Series of
Certificates for the purchase of the Mortgage Loans serving as security for
those Certificates.
--------------------------------------------------------------------------------
FINANCIAL INFORMATION
--------------------------------------------------------------------------------
A new Trust Fund will be formed by the Depositor for each series of
Certificates. As a result, no Trust Fund will engage in any business activity or
have any assets or obligations prior to the issuance of the related series of
Certificates. Accordingly, no financial statements for any Trust Fund will be
included in this prospectus or in the related prospectus supplement.
--------------------------------------------------------------------------------
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 specified in the related prospectus supplement.
--------------------------------------------------------------------------------
RATING
--------------------------------------------------------------------------------
The Certificates of any series offered pursuant to this prospectus and a
prospectus supplement will be rated in one of the four highest categories by one
or more nationally-recognized statistical rating agencies listed in the related
prospectus supplement.
A securities 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. Each securities rating should be evaluated independently of any other
rating.
--------------------------------------------------------------------------------
REPORTS TO CERTIFICATEHOLDERS
--------------------------------------------------------------------------------
The Trustee or the Master Servicer will prepare and forward to the
certificateholders of each series statements containing information with respect
to principal and interest payments and the related Trust Estate, as described in
this prospectus and in the applicable prospectus supplement. No information
contained in these reports will be examined or reported upon by an independent
public accountant. See "Description of Certificates -- Reports to
Certificateholders."
The Depositor will file, or will cause the Trustee or the Master Servicer
to file, the periodic reports with respect to a Trust Fund with the Commission
as required by the Commission under the Securities
106
<PAGE> 171
Exchange Act of 1934, as amended, and the rules and regulations of the
Commission. The Depositor does not intend to file, or to require filing of,
periodic reports following the expiration of the reporting period required by
Rule 15d-1 under the Securities Exchange Act of 1934, as amended.
--------------------------------------------------------------------------------
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
--------------------------------------------------------------------------------
The Securities and Exchange Commission (the "COMMISSION") allows the
Depositor to "incorporate by reference" information it files with the
Commission, which means that the Depositor can disclose important information to
you by referring you to documents which contain that information. Information
incorporated by reference is considered to be part of this prospectus. Certain
information that the Depositor will file with the Commission in the future will
automatically update the information in this prospectus. In all cases, you
should rely on the later information over different information included in this
prospectus or the prospectus supplement. The Depositor incorporates by reference
any future annual, monthly and special Commission reports filed by or on behalf
of each Trust Fund until the Depositor terminates the offering of the related
Certificates.
At your request, the Depositor will send copies of these documents and
reports to you at no charge. You may contact the Depositor by writing or calling
it at the address and phone number listed under "Where You Can Find More
Information."
--------------------------------------------------------------------------------
WHERE YOU CAN FIND MORE INFORMATION
--------------------------------------------------------------------------------
The Depositor has filed with the Commission, a registration statement
relating to the Certificates. This prospectus is part of the registration
statement, but the registration statement contains additional information.
Copies of the registration statement may be obtained from the public
reference section of the Commission, Washington, D.C. 20549 upon payment of the
prescribed charges, or may be examined free of charge at the Commission's
offices, 450 Fifth Street N.W., Washington, D.C. 20549 or at the regional
offices of the Commission located at Suite 1300, 7 World Trade Center, New York,
New York 10048 and Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661-2511. The Commission also maintains a site on the World
Wide Web at "http://www.sec.gov" at which you can view and download copies of
reports, proxy and information statements, and other information filed
electronically through the Electronic Data Gathering, Analysis and Retrieval (
"EDGAR") system. The Depositor has filed the registration statement, including
all exhibits, through the EDGAR system and therefore such materials should be
available by logging onto the Commission's Web site. The Commission maintains
computer terminals providing access to the EDGAR system at each of the offices
referred to above. Copies of any document incorporated to this prospectus by
reference will be provided to each person to whom a prospectus is delivered upon
written or oral request directed to the Depositor at:
Banc of America Funding Corporation
Bank of America Corporate Center
100 North Tryon Street
Charlotte, North Carolina 28255
Attention: Secretary
Telephone: (704) 386-2400
107
<PAGE> 172
--------------------------------------------------------------------------------
INDEX TO DEFINED TERMS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
1986 Act.................................................... 77
Accretion Directed Certificates............................. 31
Accrual Certificates........................................ 33
Advance..................................................... 34
Asset Conservation Act...................................... 66
Bankruptcy Code............................................. 59
Beneficial Owner............................................ 27
Benefit Plans............................................... 67
Book-Entry Certificates..................................... 27
Buydown Fund................................................ 18
Buydown Loans............................................... 18
Cash Flow Agreement......................................... 39
CERCLA...................................................... 65
Certificates................................................ 16
Closing Date................................................ 16
Code........................................................ 74
Collection Account.......................................... 47
Commission.................................................. 107
Companion Certificates...................................... 31
Component Certificates...................................... 31
Cut-off Date................................................ 43
DCR......................................................... 70
Definitive Certificates..................................... 27
Department.................................................. 68
Depositor................................................... 16, 41
Disqualified Organization................................... 90
Distribution Account........................................ 25
Distribution Date........................................... 29
DTC......................................................... 27
DTC Participants............................................ 28
ERISA....................................................... 67
ERISA Plans................................................. 67
Exempt Plans................................................ 67
EDGAR....................................................... 107
Fannie Mae Certificates..................................... 24
FASIT....................................................... 75
FHA......................................................... 21
FHA Loans................................................... 21
FHLBB....................................................... 63
Fitch....................................................... 70
Fixed-Rate Certificates..................................... 33
Floating-Rate Certificates.................................. 33
Freddie Mac................................................. 22
Freddie Mac Act............................................. 22
</TABLE>
108
<PAGE> 173
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Freddie Mac Certificates.................................... 22
Garn Act.................................................... 63
GNMA........................................................ 21
GNMA Certificates........................................... 21
GNMA I Certificates......................................... 21
GNMA II Certificates........................................ 21
HOPA........................................................ 64
Housing Act................................................. 21
HUD......................................................... 21
Indirect DTC Participants................................... 28
Interest-Only Certificates.................................. 33
Inverse Floating Rate Certificates.......................... 33
IO Certificates............................................. 33
IRA......................................................... 67
Lockout Certificates........................................ 31
MERS........................................................ 44
Mark to Market Regulations.................................. 92
Master Servicer............................................. 26
Moody's..................................................... 70
Mortgage Assets............................................. 16
Mortgage Certificates....................................... 16
Mortgage Loans.............................................. 16
NCUA........................................................ 73
New Regulations............................................. 95
Non-ERISA Plans............................................. 67
Non-Pro Rata Certificate.................................... 78
Non-U.S. Person............................................. 95
Notional Amount Certificates................................ 31
OCC......................................................... 73
OID Regulations............................................. 78
OTS......................................................... 63
PAC Certificates............................................ 32
PAC I....................................................... 32
PAC II...................................................... 32
Pass-Through Certificates................................... 32
Pass-Through Entity......................................... 90
PC Agreement................................................ 24
PC Servicer................................................. 24
PC Sponsor.................................................. 24
PC Trustee.................................................. 24
Planned Amortization Certificates........................... 32
PO Certificates............................................. 33
Prepayment Assumption....................................... 79
Principal-Only Certificates................................. 33
Private Certificates........................................ 24
</TABLE>
109
<PAGE> 174
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
PTCE 83-1................................................... 71
Ratio Strip Certificates.................................... 32
RCRA........................................................ 66
Regular Certificateholder................................... 78
Regular Certificates........................................ 75
Regulations................................................. 68
Relief Act.................................................. 64
REMIC....................................................... 75
REMIC Certificates.......................................... 75
REMIC Pool.................................................. 75
REMIC Regulations........................................... 74
Residual Certificates....................................... 75
Residual Holders............................................ 85
Restricted Group............................................ 71
Rules....................................................... 28
S&P......................................................... 70
SBJPA of 1996............................................... 76
Scheduled Amortization Certificates......................... 32
Seller...................................................... 18
Senior Certificates......................................... 32
Sequential Pay Certificates................................. 32
Servicing Fee............................................... 51
SMMEA....................................................... 73
Startup Day................................................. 76
Step Coupon Certificates.................................... 34
Stripped Certificateholder.................................. 102
Stripped Certificates....................................... 100
Subordinated Certificates................................... 33
Super Senior Certificates................................... 33
Super Senior Support Certificates........................... 33
Support Certificates........................................ 31
TAC Certificates............................................ 33
Targeted Amortization Certificates.......................... 33
Texas Home Equity Laws...................................... 63
TILA Amendment.............................................. 62
Title V..................................................... 63
Trust Fund.................................................. 16
Trustee..................................................... 16
U.S. Person................................................. 91
UCC......................................................... 58
Underlying Loans............................................ 24
Underwriter's Exemption..................................... 69
VA.......................................................... 21
Variable Rate Certificates.................................. 34
</TABLE>
110
<PAGE> 175
(Bank of America Logo)
BANC OF AMERICA FUNDING CORPORATION
Depositor
[SELLER/SERVICER]
Seller and Servicer
$
------------------------
(APPROXIMATE)
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES [ - ]
---------------------------
PROSPECTUS SUPPLEMENT
---------------------------
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. No one
has been authorized to provide you with different information.
The offered certificates are not being offered in any state where the offer
is not permitted.
The depositor does not claim the accuracy of the information in this
prospectus supplement and the accompanying prospectus as of any date other than
the dates stated on their respective covers.
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 the offered
certificates will deliver a prospectus supplement and prospectus until ninety
days following the date of this prospectus supplement.
[BANC OF AMERICA SECURITIES LLC]
[OTHER UNDERWRITER]
[date]
<PAGE> 176
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the Certificates being registered under this
Registration Statement, other than underwriting discounts and commissions:
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 528,000.00
Printing and Engraving...................................... 120,000.00
Legal Fees and Expenses..................................... 400,000.00
Trustee Fees and Expenses................................... 40,000.00
Rating Agency Fees.......................................... 720,000.00
Miscellaneous............................................... 200,000.00
-------------
Total............................................. $2,008,000.00
=============
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Certificate of Incorporation and By-Laws provide for
indemnification of directors and officers of the Registrant to the fullest
extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law provides, in substance,
that Delaware corporations shall have the power, under specified circumstances,
to indemnify their directors, officers, employees and agents in connection with
actions, suits or proceedings brought against them by a third party or in the
right of the corporation, by reason of the fact that they were or are such
directors, officers, employees or agents, against expenses incurred in any such
action, suit or proceeding. The Delaware General Corporation Law also provides
that the Registrant may purchase insurance on behalf of any such director,
officer, employee or agent.
ITEM 16. FINANCIAL STATEMENT AND EXHIBITS
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1** Certificate of Incorporation of the Registrant and all
Amendments thereto.
3.2* Bylaws of the Registrant.
4.1* Form of Pooling and Servicing Agreement.
5.1*** Opinion of Cadwalader, Wickersham & Taft as to legality of
the Certificates.
5.2*** Opinion of Kennedy Covington Lobdell & Hickman, L.L.P. as to
legality of the Certificates.
8.1*** Opinion of Cadwalader, Wickersham & Taft as to certain tax
matters.
8.2*** Opinion of Kennedy Covington Lobdell & Hickman, L.L.P. as to
certain tax matters.
23.1 Consent of Cadwalader, Wickersham & Taft (included in
Exhibits 5.1 and 8.1).
23.2 Consent of Kennedy Covington Lobdell & Hickman, L.L.P.
(included in Exhibits 5.2 and 8.2).
24.1*** Power of Attorney.
</TABLE>
---------------
* Incorporated by reference from Registration Statement File No. 33-87402.
** Incorporated by reference from Registration Statement File Nos. 33-87402,
333-48879 and 333-62301.
*** Previously filed.
II-1
<PAGE> 177
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
(ii) To reflect in the prospectus any fact or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The Registrant hereby undertakes that, for purposes of determining any
liability under the Act, each filing of the Registrant's annual report pursuant
to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in this Registration Statement shall be deemed to be a
new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The Registrant hereby agrees to provide to the underwriter at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE> 178
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Pre-Effective
Amendment No. 1 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Charlotte, State of North
Carolina, on the 16th day of August, 2000.
BANC OF AMERICA FUNDING
CORPORATION
By: /s/ ROBERT J. PERRET
------------------------------------
Robert J. Perret
Senior Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President (Principal Executive August 16, 2000
----------------------------------------------------- Officer)
Michael W. Warden
* Treasurer (Principal Financial August 16, 2000
----------------------------------------------------- Officer and Principal
Neil A. Cotty Accounting Officer)
* Director August 16, 2000
-----------------------------------------------------
Edward J. Brown, III
* Director August 16, 2000
-----------------------------------------------------
William A. Hodges
* Director August 16, 2000
-----------------------------------------------------
William L. Maxwell
*By: /s/ ROBERT J. PERRET
------------------------------------------------
Robert J. Perret
Attorney-in-Fact
</TABLE>
II-3
<PAGE> 179
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
------- ----
<C> <S> <C>
1.1* Form of Underwriting Agreement.
3.1** Certificate of Incorporation of the Registrant and all
Amendments thereto.
3.2* Bylaws of the Registrant.
4.1* Form of Pooling and Servicing Agreement.
5.1*** Opinion of Cadwalader, Wickersham & Taft as to legality of
the Certificates.
5.2*** Opinion of Kennedy Covington Lobdell & Hickman, L.L.P. as to
legality of the Certificates.
8.1*** Opinion of Cadwalader, Wickersham & Taft as to certain tax
matters.
8.2*** Opinion of Kennedy Covington Lobdell & Hickman, L.L.P. as to
certain tax matters.
23.1 Consent of Cadwalader, Wickersham & Taft (included in
Exhibits 5.1 and 8.1).
23.2 Consent of Kennedy Covington Lobdell & Hickman, L.L.P.
(included in Exhibits 5.2 and 8.2).
24.1*** Power of Attorney.
</TABLE>
---------------
* Incorporated by reference from Registration Statement File No. 33-87402.
** Incorporated by reference from Registration Statement File Nos. 33-87402,
333-48879 and 333-62301.
*** Previously filed.
II-4
